Utilizing the nation’s economy stressed, politicians are pressuring regulators to make utility service “affordable.” This picture has three problems.
The regulator identifies prudent costs, computes a revenue requirement to cover those costs, then designs rates to produce the revenue requirement under embedded cost ratemaking. Rate design makes each customer category bear the costs it causes. None among these cost that is steps—prudent, revenue requirement computation, cost allocation—involves affordability. Affordability becomes a factor only if we jigger the numbers—if we lower rates when it comes to unfortunate by raising rates for other individuals. Achieving affordability through rate design means compromising cost causation to redistribute wealth. It resembles taxation of one class to profit another, using this exception: With taxation, citizens can retire representatives whose votes offend; but with utility service, captive customers are stuck using the rates regulators set.
As opposed to shifting costs between customer classes, regulators might redistribute wealth in a different way: by “taxing” shareholders, i.e., reducing shareholder returns underneath the otherwise level that is appropriate. But taxing shareholders is no more the regulator’s domain than is taxing other customers. And it’s really likely unconstitutional: Having invested to serve the public, shareholders expect “just compensation,” undiminished by a forced contribution for affordability.
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After the introduction come the body paragraphs. They often use up most of the essay.
Paragraphs contain three sections that are main
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