The Failure of Regulators – Why deregulation is failing
4.29.03 Rick Devaney, Freelance Strategy, Marketing, and Sales Consultant
Six years ago, I wrote an article entitled “19th Century Regulation in the 21st Century”. In it, I wrote that I believed that a new dynamic was needed for 21st century regulation. Simple continued application of “return on used and useful assets” wasn’t going to work in the world of deregulation. Unfortunately, I was right and deregulation is failing. One of the principle reasons is that when you extract all of the value in wires and pipes with “return on used and useful assets”, there is nothing left for the competitive market to operate on. Without making excuses, this lack of return is what led to many of the abuses by so-called unregulated energy marketers. If you doubt this, then answer this question: Why are these marketers going under when they can’t game the system and cook the books? Surely, if there were a viable competitive market in energy, someone would step up and make significant financial returns on their foray into such a market. The fact is that even the best and the brightest could find no money in these deregulated markets without cheating.
So, why have these deregulated markets been structured for failure? Why have public service/utility commissions allowed the markets to fail? I believe that it is principally because the commissioners are not knowledgeable in the very industries they are supposed to regulate. Below, I will give you some information that is available from public sources about the backgrounds of these powerful people who set the agenda for deregulation, but first, an anecdote. I once spoke to the Public Law Section of the New Jersey Bar Association. My topic was, surprise, surprise, deregulation. I asked all those in attendance to turn to the person on their right and explain a very common swap that currently in vogue in the natural gas industry (a so-called “Gas Daily” swap –the swap of a daily variable price for a fixed monthly price). No one said anything. These were the lawyers that wrote the energy unbundling law in New Jersey. These were the lawyers for the BPU, the marketers, and the utilities. Yet, no one understood or could explain a simple swap that a junior trader could have explained to them in 60 seconds. Given this ignorance of our business is it surprising that regulation and deregulation fails? Let’s look at some specifics of commissions that don’t work and one that does and see if there is any difference in the competency of the commissioners.
I think that we can all agree that the United State Security and Exchange Commission works. We may not agree with all of the SEC rules, but we really don’t think that we are dealing with regulators who do not understand the industry that they regulate. There are five commissioners who backgrounds include: 1) a former CEO of a private investment firm, 2) a former employee of the Federal Reserve and Treasury Department, 3) an endowed chair law school professor who also chairs the American Law Institute’s Committee on Securities Regulation, 4) a former SEC staff member and former paid advisor on securities compliance, and 5) a former securities lawyer and Federal prosecutor. Do you, the American public, or American corporations really believe that these ladies and gentlemen, Democrats and Republicans, know securities law? I think that we all can agree that they do. I think that, given their backgrounds, we can also assume that they know the financial and monetary markets that they regulate. Now, let’s contrast that with the California and New York Public Service/Utility Commissions.
California has five commissioners, just like the SEC. Their backgrounds include: 1) a former executive of Southern California Edison, whose more current history includes being the President of a failed energy marketing company, 2) a career government employee whose last position was the governor’s Director of Planning and Research, 3) a career union activist, who credentials include leading a coalition of unions to oppose energy deregulation in California, 4) a former Executive Director of the California Democratic Party and aide to one of California’s U. S. Senators, and 5) the former head of the Public Defenders office in San Francisco. With the possible exception of one commissioner, these people, on their qualifications alone, are unqualified to understand and regulate the energy industry in California (or anywhere else). Is it surprising that a group such as this could make mistakes structuring competitive markets or be duped by competitors or utilities into making policy that favors one side or the other?
Well then, surely New York, that bastion of East Coast financial markets and home to the best minds in the country, has a more qualified group than California. Right? Well, New York’s five commissioners’ backgrounds include: 1) a former Assistant U. S. Attorney for Western NY and assistant to two New York State Assembly Minority Leaders, 2) a New York City Deputy Commissioner and former Western Union executive, 3) an attorney who is the CEO of a Holiday Inn (I’m not making this stuff up) and is a former town supervisor and councilman, 4) a former state judge, and 5) a former stone and asphalt executive. Did you notice any energy experience in this Commission? Me, either.
I could go through each state commission in the United States with the same story, but since California and New York are the most populous states and thought of as opinion leaders in energy deregulation, I though that they would make my point. Clearly, current state public service/utility commissions are political bodies and require no experience in the industries that they regulate. They are filled by politicians (both public and corporate) and not by industry experts. For those who say that commissioners don’t need to be experts, that is the staff’s function, I would say the proof is in the pudding. The SEC Commissioners are principally knowledgeable experts in the very field that they regulate and the commission that they make up is generally well regarded and has made no mistakes on the scale of California’s electricity deregulation. On the other hand, both California and New York’s forays into de-regulation has been less than successful, to put it mildly. What are the odds that it is simply chance that qualified commissioners lead successful commissions and unqualified commissioners lead unsuccessful commissions.
If the parties involved in the deregulation of energy in the U. S. want to see that deregulation move forward, it will take qualified and knowledgeable commissioners, not politicians and career bureaucrats. Until the state commissions become true regulatory bodies and not political bodies, until commissioners are appointed for their expertise and not their politics, de-regulation in this country is, at best, stalled and, at worst, going backward.
It hasn’t changed in the six year’s since I wrote the first article and I wouldn’t bet my house that it will change any time soon.
Copyright 2003 CyberTech, Inc.
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I don't usually pay much attention to this stuff but from scanning this op-ed piece it looked interesting. Figured I'd throw it up on the wall here for possible discussion by the FERC & Cal. reg. junkies. |
