Posted by: marilynshowalter | June 28, 2007

Putting the Toothpaste Back in the Tube

Restructuring enthusiasts like to say “You can’t put the toothpaste back in the tube,” “You can’t put the genie back in the bottle,” or “There’s no going back,” usually in an attempt to preclude as futile any discussion of re-regulation. But how should these metaphors apply? It’s true that assets that have been fully divested as part of restructuring are now gone from the regulated asset base and cannot be returned without a voluntary sale or contract at a fair-market price. So if a fully divested asset is the “toothpaste,” the aphorism is apt.

You can, however, put the statutory toothpaste back in the statutory tube. Legislatures can and have restored utilities’ obligation to serve, in a prudent manner, with self-build and contract options, all as overseen by a regulator to be “fair, just and reasonable” and “in the public interest” (or similar phrases). As a matter of legislative drafting, cost-based economic regulation of utilities is relatively simple and simple to restore. (The politics and related vested interests are a different story.)

If a fully restructured state were to put the statutory toothpaste back in the tube—i.e., re-regulate as a legal matter—utilities would have to secure the most prudent mix of resources (including conservation and environmental requirements) to serve their customers, and the regulators would set rates based on the prudent conduct of the utilities.

In practice, this might mean a mix of power contracts in the short run, and the gradual acquisition of more owned assets or long-term contracts in the longer run—if that were forecasted to be the lowest-reasonable-cost way to meet load. Alternatively, a utility could try to demonstrate to its regulator that passing on the wholesale rates of an organized market would produce the best balance of price and risk for its customers. As with traditional regulation, these choices would be laid out in an integrated resource plan, reviewed by the regulator, and implemented by the utility. Unlike utilities that have always been regulated, however, the re-regulated utilities and their customers would be building their portfolio from scratch. The cost of acquiring resources might be high, but would have to be compared to the price of not acquiring resources and relying instead on the wholesale market.

As an economist might say, actions in the past are “sunk costs.” The question is what to do going forward. The toothpaste tube and the toothpaste are still on the counter.

Please feel free to leave a comment. Name and email address are optional.

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