Commissioner Emeritus: Practitioners of Scientific Regulation

By
Branko Terzic

Those of us who have had the honor, pleasure and, sometimes,  frustration of serving on state regulatory agencies – public service commissions - sometime forget the unique position an independent regulatory agency has in the structure of government and the rationale for independent regulation.

The first three independent regulatory agencies in the USA to regulate the new “public service” companies: electric, gas and telephone utilities, were established in 1907 in California, New York and Wisconsin. All three states had earlier established “Railroad Commissions” to regulate intra-state railroad operations with interstate regulation of railroads was under the Interstate Commerce Commission.  The impetus for state regulation, to replace the then common practice of regulation by numerous municipalities, came from the emerging electric and telephone “public service” companies. Political support came from a combination of Progressives, the new regional electric holding companies and the nationwide behemoth the American Telephone and Telegraph Company.

For the Progressive movement one of the principal proponents of this state regulatory movement was Governor (later U.S. Senator) Robert “Fighting Bob” La Follette of Wisconsin. A national leader in the Progressive Movement of the Republican Party La Follette was a proponent of “The Wisconsin Idea” whose central feature was the use of “experts” in government and the concepts of “scientific management” also called “Taylorism”, were then in vogue..

La Follette wrote later in his autobiography (University of Wisconsin Press 1963, first published in 1911 and 1913) that to insure the application of a “scientific” approach that he had “…contended all along for an appointive rather than elective commission…that the state should have the best experts in the country…“and he further noted that “…the best equipped by study and experience…might…prove very poor campaigners…for these reasons I have always strongly advocated the appointive method of filing all places requiring the services of trained experts.”

A few years later  La Follette observed that “…both the people and the investors in public utilities have been so greatly benefitted by this regulation…. Simply because it has been scientific.” He gave the example of the reduction of electric rates in 1910 in Madison Wisconsin from 16 cents to 14 cents per kilowatt-hour. (Compare those prices in real terms to today’s average US retail electric rate in the 10 cents per kilowatt-0hour range.)

Did everything work out the way Fighting Bob had hoped it would?

Not always. In 1925 John Bauer writing in Effective Regulation of Public Utilities (The MacMillan Co. New York) observed

“One the chief difficulties with our existing machinery of regulation has been the character of commissions. With competitively few exceptions, commissioners have been appointed because of political considerations, with little regard for their suitability for the positions….seldom have newly appointed commissioners had any understanding of the problems which they confronted…whatever their native ability they have not brought a background of broad training and requisite expertise…”

Dr. Bauer’s opinion in 1925 was that “After nearly a quarter of a century devoted to active regulation, we still find that a large proportion of the commissioners do not understand even primary principles.”

Others, I am sure, did not share Bauer’s opinion of state regulators in 1925.  Excellent work had been done in a number of states by commissioners establishing and setting national standards for accounting, “fair value” rate base, depreciation expense and rate-of-return methodologies.

Today, the question of suitability of appointees still resides with the governors and the legislatures at the state level and the President and U.S. Senate at the federal level. My personal observations over the past 50 years is that appointments have improved.  Newly appointed or elected regulators have been of outstanding quality, for the most part, and a well-established consumer advocacy institutions have emerged in almost every state to insure complete records with multiple views presented.

Scientific regulation has been proven to work. May it continue to do so.