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Teleseminar Audio CDs Available

Prior Essays on Effective Regulation
 

The Synthesizing Regulator

Scott Hempling
NRRI Executive Director

“I have been through this wringer. Synthesizing massive amounts of data, intelligence, slants, opinions, tactics, and trying to maintain a strategic big picture was a challenge. You feel it creeping up into your brain like a numbing cold and you just have to choke it down, sift faster, and stay with it. [It’s] challenging, to be sure, but if you practice it, you develop a good tool for the leadership toolbox.”

Navy Captain Richard Severs, quoted in Howard Gardner, Five Minds for the Future (Harvard Business Press 2008) at pp. 46-47.

Daily, weekly, monthly, and yearly, regulators enter and re-enter a similar wringer. Multiple industries (electricity, gas, telecommunications, water, ferries in Hawaii, taxis in Maryland, even grain elevators in South Dakota); hundreds of cases (each one dumping a paper pile high enough for the pole vault); seven professional disciplines (engineering, law, economics, finance, accounting, management, politics); conflicting policy goals (reliability, cost-effectiveness, environmental responsiveness, affordability); multiple pressure points (shareholders, bondholders, consumers, employees, federal and state legislators)—all press for attention. Like Captain Severs, regulators have to “choke it down, sift faster, and stay with it.”

Last month I began a five-part series addressing Dr. Howard Gardner’s five minds for the future—disciplined, synthesizing, creative, respectful, and ethical. This essay seeks to understand synthesis.

In Regulation, Synthesis is Survival

“Sources of information are vast and disparate, and individuals crave coherence and integration.” Gardner at 46. Regulators must synthesize not just to satisfy a craving but to ensure survival. The regulatory universe has atoms and galaxies—individual cases and broad statutory purposes. To master it all, a regulator needs both microscope and telescope—and the synthesizing skills to make sense of it all.

Life inside a rate case can feel microscopic—a revenue requirements spreadsheet with several hundred cells. But a rate case is not just numbers; it is dozens of judgments about prudence, capital structure, CEO compensation, price signals, fuel mix, short-term economic effects and long-term investment strategies, internal performance and external influences—all bound together by two central questions: What is the regulator’s vision for this company’s purpose and performance? How can the regulator shape her decision so that her vision becomes the company’s vision? The atoms form galaxies.

So the regulator must turn from microscope to telescope. Every commission role, from chairperson to first-year accountant, requires its own exercise in synthesis: defining the agency’s mission; establishing utility performance standards; communicating those standards (and the commission’s intent to enforce them) throughout the regulated industries and the practitioner communities, among fellow commissioners and staff, and to adjacent states; recruiting the expertise that fulfills the mission; then molding the interdisciplinary relationships to produce the required results.

“Perhaps the most ambitious form of synthesis occurs in multidisciplinary work.” Gardner at 47 (emphasis in original). This last point deserves emphasis. Multidisciplinary synthesis must occur both within professionals and within organizations. Who has the most influence in regulation? Lawyers who can talk capital structure with the economists, economists who can talk transmission with the engineers, financial analysts who write with the clarity of Ernest Hemingway, chairpersons who can design a tariff one day and sway a legislative committee the next. These leaders model “multiperspectivalism” (Gardner’s admittedly awkward term) for their entire organizations, which in turn must replicate this cross-cultural fluency. The best regulatory orders result not from stapling together each department’s reports, but from the professional toothbrush-sharing that occurs when different disciplines live in each other’s dormitories.

Why is Synthesizing Difficult?

“[A]s a species, we are predisposed to learn skills in certain contexts and to resist—or at least find challenging—their wider generalization and broader application.” Gardner at 47. Synthesizing does not come naturally, for the adult mind is inherently conservative. Gardner echoes the thought (at p.65): “[A]s a species, we evolved to survive in distinctive ecological niches; we did not evolve in order to have correct theories, to master disciplines, or to transfer lessons encountered in one setting appropriately to others.”

Here’s the message for regulation: Synthesis requires active thinking—the regulator’s active thinking. The typical case submitted to a regulator reflects the submitter’s active thinking, rooted in the submitter’s self-interest. Synthesis requires the regulator to (1) create, and articulate, her own vision; then (2) craft a strategy that aligns the submitter’s interest to that vision. And to find the mental and temporal space necessary to carry out this hard work requires yet more synthesis—the synthesis that organizes one’s day, week, and year to ensure that one’s own priorities prevail over the stream of others’ demands. (On that topic, see the chapter “Know Thy Time” in Peter Drucker’s classic, The Effective Executive.)

The “Obligation to Serve” Imposes on States a Unique Synthesizing Role

A utility’s “obligation to serve” is a state law construct. State commissions are the sole enforcers. That role requires a special synthesizing effort, because the federal-state relationship produces many forces that flow in our direction—from non-synthesized sources.

A federal policymaker sees a transmission shortage, so he creates, or exercises, new federal powers to stimulate transmission. Another sees a broadband shortage, so she sends money to states to stimulate broadband penetration. A third worries about water quality, so the EPA sets new standards. Each example produces demands on the state-level synthesizing mind.

Consider: For transmission construction to be cost-effective and politically acceptable, state commissioners must synthesize state policies on land preservation, environmental effects, aesthetics, and cost-effectiveness (in light of multiple transmission, generation, and demand-side options); and they must mitigate political tensions by offering consolation (and compensation) to the offended. To make effective use of federal broadband money, the state decisionmaker must address physical infrastructure, assess citizens’ sophistication, and determine the quantity and quality of commercial entrants, all while determining what type of governmental agency will best craft and execute the penetration strategy. The change in water quality standards will require an assessment of water company managerial capability, rate structure and rate levels, and infrastructure readiness.

These examples demonstrate the uniqueness of state-level synthesis. Utilities have no federal legal obligation to serve. The legal obligation to serve is sourced in state law. To enforce that obligation, state commissions must satisfy multiple objectives: reasonable cost, environmental compatibility, utility financial health, infrastructural adequacy, minute-by-minute physical stability, prompt customer service, and competent outage management, not to mention the customer education necessary to ensure that the citizenry’s expectations remain realistic. Each of those objectives in turn demands inputs from the multiple professional disciplines that populate regulatory agencies.

This link between our utilities’ “obligation to serve” and our state commissions’ “obligation to synthesize” brings the focus back to the purpose of regulation: ensuring utility performance. State regulators must integrate the disparate federal decisions into a coherent set of expectations about utility performance, and a coherent set of regulatory signals that induce that performance. That challenge is what makes state utility regulation unique—and so demanding of the synthesizing mind.

*     *     *

Synthesis in Action: NARUC Winter Committee Meetings Next Week

Speaking of synthesis: This month’s NARUC conference in Washington, D.C. will epitomize the flow of federal forces—among them environment regulation, the stimulation of “clean” coal solutions, and renewable energy stimuli that states must struggle to synthesize. Featured speakers include The Hon. Lisa Jackson, Administrator, U.S. Environmental Protection Agency; The Hon. Kristina Johnson, Undersecretary, U.S. Department of Energy; The Hon. Jim Douglas, Governor, Vermont; The Hon. James Markowsky, Assistant Secretary for Fossil Energy, U.S. Department of Energy; The Hon. Patricia Hoffman, Principal Deputy Assistant Secretary and Assistant Secretary Nominee for Electricity Delivery and Energy Reliability, U.S. Department of Energy; and Julius Genachowski, Chairman of the FCC, who will speak at the Tuesday morning session. For more information, click here.
 

Learn about NRRI Knowledge Communities at the NARUC Winter Committee Meetings

Visit the NRRI table at the NARUC Winter Committee Meetings, pick up copies of the half-dozen new NRRI research reports published since January 1, and explore in a hands-on demonstration how NRRI Knowledge Communities makes it easier and simpler for state regulators to share ideas, insights, and best practices on effective regulation. For more information about NRRI Knowledge Communities, please contact Joe Hecker by email at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it or by phone at 301-588-5385 ext. 306.

Upcoming NRRI Teleseminars

Free to Members!
Don’t miss this week’s NRRI teleseminar:

How to Persuade Customers to Use Energy More Efficiently:
The Pros and Cons of Potential Rate Design Options

February 11, 2010, 2-3:30 p.m. Eastern Time

Register Now

Featuring

Adam Pollock, Research Analyst, NRRI
Evgenia Shumilkina, Research Analyst, NRRI
William B. Marcus, Principal Economist, JBS Energy, Inc.
Richard E. Morgan, Commissioner, District of Columbia PUC

Last year, the federal government approved $3.4 billion in grants for 100 “smart grid” projects. Most of these projects include the deployment of advanced meters, making it easier for utilities to implement a wide range of efficiency-inducing rates (EIRs) that can help consumers reduce their peak or total energy consumption and get the most out of smart grid investments.

EIRs can vary by time, condition, or customer behavior. When you align rates with electricity costs, you encourage your customers to use electricity when it costs less. EIRs have their own unique advantages, disadvantages, and design choices, so deciding which ones are right for your customers can be a challenge.

Find out how to design rates that promote energy efficiency when you register to attend the latest NRRI teleseminar, “How to Persuade Customers to Use Energy More Efficiently: The Pros and Cons of Potential Rate Design Options,” on Thursday, February 11, 2010. (Register now or learn more.)

Free to Members! Save the Date!

How “Public-Interest” Utility Regulation is Changing the
Decisionmaking Elements of Authority

February 25, 2010, 2-3:30 p.m. Eastern Time

Registration opens this week!

Featuring

Robert Stumberg, Director, Harrison Institute for Public Law
Eric Filipink, Policy Analyst, Harrison Institute for Public Law
Betty Ann Kane, Chair, District of Columbia Public Service Commission

For much of the twentieth century, utility regulators focused on setting rates and establishing standards of service. But no longer.

Today, statutes mandate that regulators must also consider how to protect the interests of the public when developing new policies. As regulation expands to cover the environmental and economic needs of the public, how are utility companies responding?

Find out how the public interest is changing the dynamic between regulators and utilities and what the long-term impact will be on utility regulation when you attend the latest NRRI teleseminar, “How ‘Public-Interest’ Utility Regulation is Changing the Decisionmaking Elements of Authority” on Thursday, February 25, 2010.

Watch your e-mail for more information and your chance to register for this very exciting teleseminar!

Upcoming NRRI In-Person Seminars

Electricity Law, Energy Efficiency, Renewable Energy, and Smart Grid Technology

March 17-19
Columbia, SC

Featuring Scott Hempling, Executive Director, NRRI

This 15-hour seminar focuses on the changing fundamentals of electricity law, methods of encouraging renewable energy, and the intersections of renewable energy policy with traditional regulation. In addition, it offers an overview of electric utility supply and demand, its goals, program options, cost-benefit analysis, provider options and performance, and utility cost recovery, as well as smart-grid advanced metering infrastructure.

Watch your email for registration information and further information about this all-new, cutting-edge seminar!

The Changing Fundamentals of Electricity Law

April 12-13, 2010
Silver Spring, MD

Featuring Scott Hempling, Executive Director, NRRI

Save the date for NRRI’s intensive two-day seminar for practitioners and decisionmakers whose effectiveness depends on mastering the legal principles underlying the electric industry’s transition.

Whether you're an attorney, economist, engineer, commissioner, legislator, or manager of a public or private entity—beginner or veteran—this seminar will help you gain the insights you need to better grasp the industry’s ever-changing landscape.

This seminar covers market structure, power sales, transmission service, corporate structure, and more—make sure you take advantage of the opportunity to explore these subjects in depth. You’ll also have a chance to share ideas, build your network, and find out what your colleagues are doing—or will do—as they anticipate and adapt to the changing electric industry.

Watch your email for registration information and more details about this important and informative seminar!

Teleseminar Audio CDs Available

Making the High Cost Fund Decision: How to Assess Your State’s Needs

Teleseminar CD now available! Order yours today!

This teleseminar was originally presented on January 27, 2010.

Distinguished Panel:

Peter Bluhm, Consultant, Rolka, Loube, Saltzer Associates
John D. Burke, Board Member, Vermont Public Service Board
Lorraine Kenyon, Chief of the Common Carrier Section, Regulatory Commission of Alaska

For almost two decades, high cost funds have been helping state commissions provide consumers with ubiquitous telephone service at affordable rates. More than 20 states have created these high cost funds, which are primarily supported by surcharges on intrastate telecommunications services.

Several recent competitive and regulatory developments have put conventional telephone companies at risk. While millions of customers have abandoned their landline service, new wireless and VoIP competitors are gaining substantial market share in areas overbuilt for cable and other broadband facilities. At the same time, traditional access revenues have declined and federal universal service subsidies are being criticized. These trends make it increasingly difficult for local exchange providers and call into question the survival of landline voice service in high-cost areas. The result has been an increased interest in state high cost funds.

If you work for a state commission, you know that the problems you face are more critical than ever before. While these changes have increased the need for state high cost funding, Congress, the FCC, and the federal courts have limited your ability to raise funds for universal service. They’ve even imposed restrictions on how that support can be spent.

So where do you go from here?

Find out what’s next when you purchase the CD of NRRI’s latest teleseminar, “Making the High Cost Fund Decision: How to Assess Your State’s Needs,” which originally aired on January 27, 2010. Get the tools you need to help your state commission decide whether or not you need a fund. Our experts offer proven strategies for designing and managing your own fund—and how to use that funding to achieve your goals. Click here to order this audio CD or for more information.
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Understanding FERC Transmission Incentives: What to Know Before You Apply or Intervene

Teleseminar CD now available! Order yours today!

This teleseminar was originally presented on January 21, 2010.

Distinguished Panel:

Adam Pollock, Research Analyst, NRRI
Scott Hempling, Executive Director, NRRI
Thomas B. Getz, Chair, New Hampshire Public Utilities Commission
Larry Chaset, Senior Attorney, California Public Utilities Commission
Scott H. Strauss, Partner, Spiegel & McDiarmid LLP

FERC’s Order 679 provides transmission owners with potential incentives designed to encourage transmission investments. These incentives represent an opportunity for utilities but threaten to raise costs for consumers. As a utility, how can you take advantage of these incentives? And as a state commission, how can you intervene to keep customer costs down?

This NRRI teleseminar gives you the most up-to-date information on FERC’s standards and evaluation practices. Listen as our panel of experts explains how you can determine application results—and intervene effectively to minimize consumer cost increases. You’ll even learn about policy alternatives that could help you improve predictability and reduce some of these costs.

What case law is available to clarify the application of these incentives? How do applicants demonstrate that they should get these incentives? And how can FERC improve the policy so that it doesn’t unfairly burden ratepayers?

Get answers to these questions and more when you purchase the CD of the latest NRRI teleseminar, “Understanding FERC Transmission Incentives: What to Know Before You Apply or Intervene,” originally broadcast on January 21, 2010. Click here to order this audio CD or for more information.

New NRRI Papers and Publications

How to Induce Customers to Use Energy Efficiently: Rate Design Options and Methods

Click here for this NRRI Report.

What rates can induce customers to efficiently consume electricity by reducing peak or overall consumption? This report describes options, associated design decisions, and their implications and secondary consequences. It examines inclining block rates, seasonal rates, time-of-use rates, critical peak pricing, and real-time pricing. The report, authored by NRRI Research Analysts Adam Pollock and Evgenia Shumilkina, also guides regulators step-by-step through the process of crafting seasonal and time-of-use rates, which will enable commissions to design rates or scrutinize utility rate proposals. Contact Adam at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it and Evgenia (Zhenya) at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it .

State High Cost Funds: Purposes, Design, and Evaluation

Click here for this NRRI Report.

Universal service remains a concern of state legislatures and commissions as policy makers seek to maintain ubiquitous and affordable basic telephone service. One strategy is to establish a high cost fund to provide support for carriers serving high cost areas. This report, authored by Peter Bluhm, Phyllis Bernt, PhD, and Jing Liu, focuses on these state funds, analyzing the steps involved in establishing and maintaining them. The report, which is intended for state commissions and state legislatures that are considering adopting a fund, explains why these funds typically have been created and discusses how those varying purposes are reflected in support mechanisms. The report is also intended for states that already have such funds but are considering changes to improve their function or effect.

Renewable Energy Prices in State-Level Feed-in Tariffs:
Federal Law Constraints and Possible Solutions

Click here for this NRRI/NREL Report.

State legislatures and state utility commissions seeking to attract renewable energy projects are considering arrangements called “feed-in tariffs.” These tariffs would obligate retail utilities to purchase electricity from renewable producers under standard arrangements specifying prices, terms and conditions. This standardization simplifies the purchase process, provides revenue certainty to generators, and reduces the cost of financing generating projects.

States’ decisionmakers have encountered arguments that state-level feed-in tariffs are preempted by federal law. These arguments arise because the transaction resulting from a feed-in tariff is a wholesale sale of electricity, from renewable seller to retail utility. A wholesale sale of electricity triggers one of two federal statutes—the Public Utility Regulatory Policies Act of 1978 (PURPA) or the Federal Power Act of 1935 (FPA). Each of these statutes does in fact limit the discretion of state-level tariff designers.

State utility commissions, in conjunction with the National Association of Regulatory Utility Commissioners (NARUC), asked the National Renewable Energy Laboratory (NREL) to explore how states can lawfully implement feed-in tariffs. In response to that request, NREL hired the National Regulatory Research Institute (NRRI) to be the lead author of this report and to provide the needed legal expertise. NREL participated as a coauthor to clarify the current renewable energy policy and markets.

This report, authored by Scott Hempling, Carolyn Elefant, Karlynn Cory, and Kevin Porter, seeks to reduce the legal uncertainties for states contemplating feed-in tariffs by explaining the constraints imposed by federal statutes. This report describes the federal constraints, identifies certain transaction categories that are free of those constraints, and offers ways for state and federal policymakers to interpret or modify existing law to remove or reduce these constraints. This report explains options for how these federal statutes could be revised.

This report is solely a legal analysis that responds to NARUC’s and NREL's requests. It is not an endorsement of state-level feed-in tariffs or of any of the alternative paths or statutory amendments described here.
 

Statistical Methods of Measuring Utility Performance: Indexing, Econometrics, and Data Envelopment Analysis

Due out in February 2010

This paper, authored by NRRI Research Analyst Evgenia Shumilkina, discusses how regulators can use statistical methods to measure utility performance. The paper focuses on the three most widely used methods: indexing, econometrics, and data envelopment analysis. For each of the methods the paper provides background information; explains the implementation steps; discusses the advantages, disadvantages, and necessary data; and offers examples of their application in regulatory practice. Contact Evgenia (Zhenya) at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it