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Underregulated, Overregulated, or 'Just Right?'

Is there tangible evidence that U.S. electric utilities are over-regulated in general? Have the current claims that regulations are “bad” or “excessive” been soundly justified when it comes to our industry?

Across our 50 states, cogent arguments against specific “bad” regulations have their place. But is there tangible evidence that U.S. electric utilities are over-regulated in general? Have the current claims that regulations are “bad” or “excessive” been soundly justified when it comes to our industry?

Putting aside the paradox that it would take additional new regulations to undo old bad ones, let’s provide two snapshots regarding the U.S. electric utility industry’s level of regulation. (Spoiler alert: These two snapshots seem to lead to a “no” in answer to both of the questions above.)

Our first snapshot

First, let’s compare a typical utility’s regulatory commission expenses to a typical American’s cost for hiring an accountant to do their Federal and State income taxes. We can use these costs as a way to compare the relative regulatory burdens.

Doing this rigorously, we used the latest data from the Federal Energy Regulatory Commission (FERC) for electric utilities.

Under the documentation known as FERC Form 1, investor-owned utilities and other large electric utilities report their electric revenues and Operations and Maintenance Expenses every year (at the state-wide subsidiary level). And one of the expense items is Regulatory Commission Expenses, which may simplistically be taken as the sum of costs equivalent to what an individual would pay to an accountant to do their taxes.

So who pays more percentage-wise, the typical utility, or the typical wage-earning citizen? It turns out to be close, but the utilities appear to be getting a slightly better deal, percentage-wise.

electric operating revenue chart

Interestingly, at the top of the list of 162 utilities there were four with significantly higher regulatory costs as a percent of their overall electric revenue:

rto iso operating revenue

These utilities show higher regulatory expenses because they are in unique positions. They are four of our regional transmission system operators, and they work under a different mandate, coordinating power exchanges between different entities within and across different states, while not owning/operating large asset bases.

Our second snapshot

Finally, we arrive at our second way of looking at this issue, and it is a disappointing bit of news for those who say we have too much regulation or seem to habitually imply regulators are part of an evil plot to line the pockets of attorneys. The disappointing news for them is that there is no regional correlation between salaries of attorneys and regulatory costs.

Why, you may ask, should there be such a correlation? Due to laws of supply and demand, the factors that have supposedly led to excessive regulatory costs should have also led to higher demand (and therefore higher salaries) for those involved in administering the “extra” regulations.

lawyers mean wage

Despite relatively higher regulatory commission expenses in states like NY and CA where lawyers are paid relatively higher salaries, there are relatively lower regulatory commission expense in other states where lawyers have equally high salaries.* In addition, the reverse situation is also found, with low attorney wages and high regulatory burdens in other states.**

* Lawyers have top wages in Texas and Georgia but those states’ IOUs are in the low range of 0.1% to 0.2% range for their regulatory “burdens.”

** Utilities in NM and ME have low lawyer salaries but are in the higher range of 1% to 2.4% for regulatory “burdens.”

If overregulation were in play, there would be economic fingerprints. But no such fingerprints are evident. It does not matter whether intentional, “malicious” over-regulation, or naively misguided idealism were causing this supposed overregulation. In either case, supply and demand would have shown different results than what we are seeing in these numbers.

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Sources:

Wage data: https://www.bls.gov/oes/current/oes_nat.htm#00-0000
Tax filing costs: https://www.irs.com/articles/tax-preparation-costs-and-fees
Utility regulatory expenses: https://www.ferc.gov/docs-filing/forms/form-1/data.asp

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