Regulation of Public Utilities - Essay Example

Regultion of Public Utilities Public utilities re industries in which the right of specil public regultion hs become firmly recognized. It is not necessry to set forth complete list of the vrious industries embrced within the concept of public utilities. For the ske of definiteness, however, we my briefly stte tht the term includes stem rilrods; locl nd inter-urbn electric rilwys; gs nd electric corportions; wter nd stem compnies; telephone nd telegrph compnies. Other industries will redily suggest themselves in which the right of public regultion hs been definitely recognized. I shll use the term in its brod sense, to comprehend ll industries over which the right to regulte hs been estblished nd efforts t regultion introduced. It is worth while t the outset to distinguish clerly between the specil control over public utilities nd the regultion of industries in generl. Under the police power, stte hs the right to regulte ny business. This sort of regultion hs to do with sfety devices, conditions of helth nd well being of employees, nd, with more or less defined limittions, the generl welfre of the public (King, 2000). The regultion of public utilities, however, is of different sort ltogether. It embrces the right to control the very orgniztion nd conduct of the enterprise. It is concerned not only with sfety nd welfre, but with the rtes chrged the public nd the returns or profits relized by the business, s well s with the products or services furnished. In the so-clled unregulted business the right to such interference is not recognized. fter ll resonble provisions for the public welfre hve been mde, ordinry business is still free to furnish such services or products s it desires, chrge such prices or rtes s it is ble to exct, nd conduct its finncil mngement ccording to its own purposes or contrctul rrngements. The right to regulte in the specil sense ws first recognized in the celebrted cse of Munn v. Illinois, decided by the Supreme Court of the United Sttes in 1876. This cse involved the right of the Illinois generl ssembly to prescribe mximum chrges for the storge nd hndling of grin by Chicgo elevtors. The new power ttempted by the stte ws rdicl deprture from existing policy. The ct ws shrply contested nd crried to the Supreme Court of the United Sttes. The power ws upheld, nd the bsis lid for public utility regultion. The principle itself hs never been questioned since. bout the time when the Illinois wrehouse sttute ws encted, there ws widespred legisltion throughout the country, especilly through the newly developed western sttes, for the regultion of rilrods. This ws the period of so-clled Grnger legisltion, when lmost spontneously new sttutes for rilrod regultion were encted. Of the seven Grnger cses decided by the Supreme Court in 1876, ll but the Munn cse concerned rilrods. 1 Thus, ctive regultion t tht time chiefly centered round the rilrods. It finlly resulted in the pssge by Congress in 1887 of n ct to Regulte Commerce, or, s it is clled, the Interstte Commerce ct (Morgn, 2003). During the 1880's serious problems developed lso in connection with other public utilities, prticulrly street rilwys. The rpid growth of cities creted demnd for dequte trnsporttion t resonble rtes. Similrly other services becme importnt, nd demnd for the extension of regultion developed. Consequently, fter 1900, the policy of regultion expnded rpidly, nd in the succeeding decde public utility sttutes with commissions were provided in most of the sttes. The bsis of regultion, s estblished by the Munn decision, nd repeted in ll of the leding cses where the sme question rose, ws the specil public interest in the prticulr industries. It is worth inquiring into this specil interest. Wht re the prticulr qulities, or the extrordinry conditions, which set n enterprise prt from others not subject to regultion Wht constitutes the specil interest which trnsforms business into public utility Vrious nswers hve been mde from time to time to these questions. In court opinions, sometimes one view is reflected, sometimes nother. There hs been, however, frequent tendency to give technicl nswer; prticulrly to find the reson for regultion in the specil privileges grnted to the regulted concerns. It is true tht most of the utilities do hve specil legisltive or public privileges, not enjoyed by other industries. The rilrods, for exmple, re grnted the right of eminent domin, under which they re empowered to condemn privte properties for their needs. The right of wy of the rilrods hs been provided to lrge extent through the exercise of eminent domin, tht is, through the condemntion of privte property. This right hs been enjoyed lso by other utilities whenever privte property hd to be cquired in order to provide the required service. It is used wherever the fcilities must occupy privte lnds in order to connect consumers or to extend the service from one community to nother. Most of the locl utilities hve the privilege of specil frnchise. This uthorizes the grntees to use the streets or other public plces for the loction of their fcilities or for other purposes of opertion. Thus, street surfce rilrods re mostly locted in the streets nd re operted through them. The gs nd electric compnies ly their mins nd cbles under the streets, through which they furnish gs or electricity to the consumers. Writers hve frequently pointed to the specil frnchise s the fct which cretes the prticulr public interest nd upon which the right to regulte is bsed. The sme view hs been indicted in court opinions, lthough it hs not been definitely nd consistently held by the courts s the fundmentl reson for regultion. 1. THREE PRINCIPL PURPOSES OF REGULTION The principl purposes of regultion s expressed or implied in public utility lws re three-fold: (1) Resonble rtes; (2) proper service; nd (3) finncil stbility. The most importnt minor purpose, incidentl nd necessry to the mjor, is the control of ccounting methods (Stevenson, 2000). Historiclly the strongest force for regultion ws undoubtedly the demnd for resonble rtes including the prevention of discrimintion. The originl Interstte Commerce ct delt with rtes lmost exclusively. Likewise, lrge proportion, if not the bulk of the effort, of commissions nd courts hs been directed towrd rtes. Moreover, the chief difficulties of ll regultion, including tht of service, finnces nd ccounting, hve been due to the fct tht effective principles nd methods hve not been estblished in connection with rte mking. The min purpose of this work will be to set out the difficulties in existing rte mking prctice, nd to show how effective rte regultion my be mde prcticlly self opertive. But this nlysis will of necessity involve ll the other purposes of regultion, becuse the success or filure of rte mking determines lmost directly the corresponding success of regultion in other respects. The considertion of rte mking will be deferred to succeeding chpters. This chpter will be devoted to the other objects of regultion. The second principl purpose of regultion is proper service. This, however, is intimtely connected with resonble rtes. Often the single sttement is mde tht the public is entitled to proper service t resonble rtes. The two ides re inter-dependent. While they my be considered seprtely, their close reltionship must not be overlooked. Merely to mintin or estblish low rtes is of doubtful dvntge to the public, if the corportion is thereby prevented from furnishing service which would meet the requirements of every dy life. lmost invribly people re willing to py the necessry cost of dequte nd proper service. The power of requiring public utilities to provide service hs been firmly estblished in most respects. The more importnt phses of this power re the regultion of (1) qulity nd quntity of service, (2) extension of service, (3) improvements nd renewls of property, nd more economicl processes of opertion (Spur, 2001). In reference to the first phse, the power to regulte is, within brod limits, bsolute. The regultory uthorities my prescribe the stndrds of service, both s to qulity nd quntity, to be provided by the corportions. This spect of service regultion tkes the form, for exmple, of prescribing the stndrds of gs supply. Gs must be delivered t firly constnt pressure t ny time of the dy. It must lso conform to specified illuminting or heting qulities. In street rilwy trnsporttion the commissions hve the power to require service ccording to the shifting trvel during the dy. The compnies re required to increse the number of crs operted s the volume of trffic increses, nd re permitted to reduce the number s the volume diminishes. Commissions hve lso uthority to prescribe regultions s to heting, ventiltion, clening, sfety devices, nd other conveniences resonbly required for the welfre of the trveling public. Qulity nd quntity of service to lrge extent re inter-dependent. Sometimes one view predomintes, nd sometimes the other. For the most prt, however, they re treted together. The power of requiring n extension of service is not so bsolute or so clerly defined s the right to prescribe stndrds of qulity nd quntity. But for the most prt the legisltures nd, in turn, the commissions, do hve the right to require extensions of opertion for the convenience of the public. The right to require extensions must be regrded from the stndpoint of whether they re within the limits of the compny's frnchise or extend beyond such limits. In the first cse there is no doubt tht the commissions my order the compnies to extend their service wherever resonbly needed within the region covered by the frnchise. The sitution, however, is mterilly different when the requirements involve service outside of the frnchise re. But even in such cses, extension requirements my be mde bsed on the theory tht the frnchise relly covers the municiplity s whole. This is possible prticulrly where single compny opertes within municiplity but hs specified frnchises only through certin streets or prts of the city. The third phse of service regultion includes the power to require importnt renewls nd improvements in plnt nd equipment, s well s the introduction of more economicl processes of opertion. These fetures re treted together becuse in lrge sense they involve the sme generl principle of obtining service for the public t minimum cost. s mtter of public policy, the commissions should hve the right to require ny improvements both in physicl fcilities, nd in orgniztion nd mngement, which will work for economy nd reduction in cost. It is well to stte here, lthough this mtter will be specilly considered in lter chpter, tht public utilities re not subject to the norml forces tht work for improvements in ordinry competitive nd unregulted business. They re ble to plce prcticlly ll costs upon the public nd re not directly penlized for inefficiency. For this reson they re not constntly spurred to better mngement, nd tend to mintin unprogressive stndrds of opertion. To counterct this condition, the commissions should hve direct power to set stndrds nd to require ll such improvements s my be resonbly necessry for the public service. Wherever costs cn be reduced by improvements in fcilities or by chnges in processes of opertion, the commissions should hve the power to issue the requisite orders. Where resonble improvements re necessry within the frnchise re, the commissions do hve the right to require their instlltion. This pertins prticulrly to physicl fcilities which will provide greter convenience to the public. The power, however, to require the instlltion of more economicl plnt nd equipment is not quite so cler. For exmple, in the production of electricity it is not t ll certin whether commission could order compny to instll improved generting equipment where sufficient units of poorer type lredy exist. For the purpose of economy of opertion, with corresponding possible decrese in rtes, the commissions should hve power to require such improvements. But this power hs not been definitely estblished. But where the power to regulte service, both in the nrrower nd broder spects, hs been recognized, it is, for the most prt, bsolute, nd does not depend upon the finncil condition of the compny. Proper service is recognized s fundmentl requirement, viewed from the stndpoint of the public needs, without regrd to finncil expediency or to the question of rtes. The bsic principle is tht rtes follow service, not the reverse. It is the duty of the commission first to determine whether the services or improvements under considertion re resonbly required. If they re, the commission hs the power to issue n order without regrd to existing rtes or the finncil sttus of the compny. If fter the improvements hve been provided the costs exceed the revenue, there is then question of proper rte djustment upon the bsis of the service tht hs been declred necessry by the commission (Lyndon, 1999). This principle is undoubtedly sound nd should be even more firmly fixed. To be sure, there must be limit to rbitrry power; commission should not be ble to require unresonble service or unjustified fcilities nd chnges in methods of opertion. There should lwys be the right of judicil review of commission's orders. For the most prt, however, within wide limits of reson, whtever service nd improvements re firly needed should be required, nd the question of finncil bility should be tken up subsequently in connection with rte djustments. The two questions, however, my well be considered simultneously, nd often re so treted lthough officilly they my be decided seprtely. Closely relted to the principle tht service requirements must stnd on their own merits, without immedite regrd to rtes or finncil bility, is the generlly recognized right of the regultory body to order compny to furnish prticulr service even if by itself this is not remunertive. The compny is entitled to fir return on ll of its opertions. If it relizes such return, it is treted justly, even though on some of the business the rtes re not profitble. s frequently expressed, utility must tke the "len with the ft." While it provides some unpro itble but necessry service to the public, it recoups the loss from the profits of other opertions, nd obtins fir verge return from the combined business. This is ptly illustrted by street rilwy which opertes some very profitble lines, nd others t loss, but relizes fir return from ll the opertions together. It is not permitted to discontinue the unprofitble routes so long s the service is resonbly needed. It is compelled to blnce the losses ginst wht would otherwise pper s excessive returns from the other opertions. The duty of combining unprofitble with profitble service ppers in the cse of ll utilities where uniform rtes, or the sme rte, must be mintined throughout municiplity or lrge district, in spite of vritions in the cost of service in different prts of the community or different times of the dy or seson, or other shifting conditions (Cooke, 2003). This sitution ppers prticulrly with street rilwys, which in the fce of ll prcticl considertions cn hrdly do otherwise thn chrge uniform fre throughout city, without regrd to length of ride, density of trffic, pek lod conditions, or other fctors ffecting the cost of trnsporttion. The sme sitution previls to greter or less degree with most utilities. Rtes cnnot be vried minutely ccording to cost of service, but to considerble extent must be bsed on verge cost. But the principle of tking the "len with the ft" (Igntius, 2001) hs its own nturl limittions, nd must be pplied with reson. It does not men tht desirble rte clssifiction should not be mde where costs cn be seprted ccording to clsses nd where the different rtes cn be stisfctorily dministered. Nor does it men tht losses must be continued for the ske of few individuls, where they re not justified by considertion for the community s whole. It is prob lem of resonbleness, which must be left lrgely to the commissions for determintion in individul cses. 1 The point here is tht resonble service must be provided even if it is directly unprofitble. fter the requisite service hs been furnished, the question of rtes my be considered; whether chrge for prticulr service is dequte or whether the rtes s whole need djustment. The third mjor purpose of regultion is to mintin the finncil stbility of the business. This is crried out principlly through the control of security issues. Where there is such control, public service corportion wishing to rise funds through the issue of bonds or cpitl stock, must first obtin permission from the regultory body, to prevent unnecessry burdens ginst the properties nd to sfegurd the investors ginst undesirble or improper securities. Prior to the institution of ctive regultion, roughly before 1900, there ws no direct control over security issues. 2 The compnies were free to issue securities ccording to their own finncil purposes, limited only by the loose restrictions of the generl corportion lws. s consequence there ws extensive overcpitliztion, or stock wtering. This ws brought bout not only through direct over-issues, but lso in connection with the consolidtion of smller properties, where securities of one compny were exchnged for those of nother, without regrd to resonble csh investment. It ws further incresed through filure to provide for replcements out of operting expenses. s plnt or equipment hd to be replced the cost ws often pid out of funds derived from new cpitl issues insted of out of prior ernings. s result, the securities of mny compnies were pyrmided fr beyond the investment, nd excessive fixed chrges hd to be borne by the properties ctully used in opertion. This burden becme intolerble nd inevitbly brought bout demnd for regultion. Thus the public service sttutes in number of sttes empower the commissions to regulte security issues. New issues re llowed only for the purpose of cquiring dditionl properties, or for the refunding of previously existing obligtions, or the reimbursement of the compny's tresury for expenditures lredy mde for the properties. nd specil provisions re mde ginst the issunce of securities to py for the renewls of property. Besides the direct regultion of new security issues, limits hve been plced upon the trnsfer of existing cpitl stock, prticulrly between compnies or groups of compnies, where substntil trnsfer of ownership from one corportion or group of interests to nother is involved. The sttutes sought to prevent future overcpitliztion either directly or indirectly. For new security issues the bsis ws to be definitely ctul investment without infltion through the grnt of bonuses, or the sle t lrge hidden discount, or over-vlution of property purchsed or cquired through consolidtion or reorgniztion. Moreover, the expenditure of cpitl funds re sometimes plced under specil ccounting control of the commission, with regulr reports s to expenditures nd unexpended blnces (Morgn, 2003). While the regultion of security issues hs prevented further gross mnipultion nd hs hd very slutry influence, the broder nd more fundmentl objects hve been obtined only to limited extent. It is true tht the sheer wtering of stock hs become ll but n impossibility, nd the mnipultion of operting costs, with the object of rising or depressing the mrket prices of the securities, is no longer common every dy occurrence. Nevertheless regultion hs not been s thoroughgoing s it ought to be. serious defect is tht the commissions for the most prt hve direct jurisdiction only over the operting compnies, with little or no control of holding compnies. But the ltter hve been used to lrge extent s the finncil gencies of the properties, nd evded rel control of security issues. nd in specil cses they hve been employed lso for the continunce of finncil mnipultion, to crete the desired chnges in security prices. The finncil control by the commissions should be extended over the holding compnies to protect the public interest in the sme mnner s over operting corportions. nother difficulty hs been tht with the estblishment of regultion nothing ws done with the previously outstnding security issues to bring them into proper reltion with resonble investment or the vlution upon which the ernings would be supported under the system of rte regultion. Consequently, future limittion of dditionl issues could serve only indequtely to estblish thorough finncil stbility in the business or to protect the investors in the erning power through the rtes uthorized by the commissions. Unfortuntely overcpitliztion hd been widely prevlent. It existed prcticlly in every lrge property which hd been brought together through successive consolidtion of previously existing smller properties. In such cses there were lrge vrieties of different grdes of bonds nd stock in the hnds of investors. The totl of such securities fr exceeded the resonble investment or vlution for rte purposes, nd under strict rte regultion could not possibly be supported by the erning power uthorized by the commissions (Spur, 2001). The result in ll such cses ws necessrily tht the new securities, uthorized nd sold under commission control nd bsed upon definite dditionl investment, were nevertheless ffected s investments by the previously existing overcpitliztion. This hs been one of the outstnding difficulties in rte regultion during the pst fifteen yers, nd will continue to hmper progress until it is frnkly met by the estblishment of cler public policy to meet the sitution. The point here emphsized is tht the regultion of security issues for finncil stbility of the enterprise should be linked with the policy of rte regultion. The two things go together. The control of new securities is rther futile without prior djustment of the existing securities to the uthorized erning vlue of the properties, or the rte bse. Moreover, comprehensive control of securities would serve s the most stisfctory mens by which the bsis of rte regultion could be definitely estblished nd constntly mintined. This mtter will be further discussed in Chpter XII. nother purpose of regultion set forth in most of the sttutes is tht of proper ccounting. This, how ever, cnnot be regrded s primry purpose of regultion; it is only mens, or mchinery, by which the prime purposes cn be crried out. The point of view mintined throughout this work is tht most of the fcts required for stisfctory nd effective regultion must be shown by the ccounts. These should be constructed so s to show the ctul results of opertion. If they re honestly nd scientificlly kept, they furnish the mens by which control cn be bsed upon redily vilble fcts, so tht guess work cn be prcticlly eliminted from regultion. n importnt criticism of the ccounting control is tht it hs been too often treted s thing for itself, nd hs not been definitely coupled with rte mking nd the other purposes of regultion. The sttutes lmost throughout give the commissions power to prescribe uniform systems of ccounts for the vrious clsses of corportions under their jurisdiction. The ccounting systems, when formlly dopted, hve the force of lw nd re binding upon the corportions. For the most prt, the provisions hve been excellent nd represent perhps the best work ccomplished or pproved by the commissions. The difficulty, however, is tht they hve not been sufficiently integrted with the primry purposes of regultion, nd the commissions hve not hd dequte power, or hve not exercised it, to compel the compnies to follow the requirements of the ccounting systems. In conclusion, in order to hve n effective public utilities regultion, it is needed n ction under dequte legisltive uthority. This is not mtter for the courts. ll the ltter cn do is to stte clerly by wht stndrds the constitutionlity of legisltive ction would be mesured, nd the Supreme Court hs indicted the ultimte limittion upon the legisltive prerogtive. For utomtic public utilities control, it is needed first of ll n pprisl of existing properties used in the public service to determine once for ll resonble nd definite sums entitled to future return. When such vlutions hve been mde, the results in ech cse should be tken upon the books of the compny. Subsequently ll dditionl investments should be dded to the initil vlution. Thus, the rights of the investors nd the obligtion of the public would be t ll times shown by the ccounts. Bibliogrphy: 1. COOKE, M. L., (2003) Editor, Public Utility Regultion, Ronld Press, New York, contributed to by number of uthorities. 2. IGNTIUS, M. B. (2001). Finncing of Public Service Corportions, Ronld Press, New York. 3. KING, C. L., (2000). Editor, Regultion of Municipl Utilities, ppleton, New York, contributed to by vrious uthorities. 4. LYNDON, L. (1999). Rte Mking for Public Utilities, McGrw-Hill, New York. 5. MLTBIE, WM. H. (2001). Theory nd Prctice of Public Utility Vlution, McGrw-Hill, New York. 6. MORGN, C. S. (2003). Regultion nd Mngement of Public Utilities, Houghton Mifflin, Boston nd New York. 7. SPURR, H. C. (2001). Guiding Principles of Public Service Regultion, Public Utility Reports, Rochester, N. Y.,. 8. STEVENS, D. L. (2000). Bibliogrphy Municipl Utility Regultion nd Municipl Ownership, Hrvrd Univ. Press, Cmbridge. Read More