Thursday, July 15, 2010
Guest Blog by Bill McCamley: Effective Regulation and How To Get It
“In today's regulatory environment, it's virtually impossible to violate rules.” --Bernie Madoff
The word regulation means different things to different people. For some, it sparks immediate disgust as a hindrance to business. For others, the word provokes frustration as regulatory bodies are seen as inept and needing to do more. But what is regulation, and why is it important to New Mexico?
Let's start off with an undeniable fact: capitalism works. Competition incentivizes people to produce more goods and services at cheaper costs. The end of the Cold War witnessed the fall of the last large, state-owned, centrally-planned economies because they couldn’t compete. Even China has come to this conclusion and has gradually implemented policies turning its economy more market-oriented. Furthermore, competition provides accountability; if you don’t run a place that produces a good product for a decent price, possible customers will go somewhere else.
However, there are problems with unbridled capitalism. In the pursuit of larger and larger profits, sometimes companies act irresponsibly and hurt the larger community. For example, the absence of meaningful banking regulation led to the credit binges that enabled both the Great Depression and our more recent mortgage crisis. And either the lack of safety standards or the will to enforce them created problems with Chinese imports and BP’s failure in the Gulf of Mexico.
In response, our nation has placed limited regulations on the economy as a whole (e.g. minimum wage, workplace safety standards) and specialized rules for more complicated areas (like the SEC oversees for the banking industry and the FCC for communications). In addition, some economic cases make competition generally impossible. Take electricity. Electric companies in the US tend to own both the means of production and transmission lines necessary to transport power. A fully competitive electric environment would create huge costs (multiple sets of generators, transmission lines, etc.) that would make prices too high for many people to afford.
Therefore, we allow utility monopolies to exist, but accountability in this system is hard to manage. No market exists to create competitive pressure, and since many utility providers are private corporations administrations respond to attention from shareholders, not ratepayers. Therefore, prices and services are regulated through public entities to make sure that people don’t get exploited. In New Mexico’s case, this body is the Public Regulation Commission.
Problems can occur regularly with people chosen to be regulators, though. The issues involved are extremely complicated. If a regulator doesn’t have a basic understanding of the subtleties of the field they are making judgments on, bad things can happen. Forcing too much reliance on wind energy, for instance, creates transmission problems because the wind doesn’t blow all of the time. And does deregulation of phone companies in urban areas because of more competition from cable and wireless providers hurt their ability to provide affordable service to rural communities?
This leads to another problem; since having someone with knowledge of the regulated area is good, people chosen as regulators generally come from businesses being regulated. This phenomenon is called “regulatory capture.” People indoctrinated into an industry’s culture, however, will be less likely to make decisions that negatively impact a field with which they are familiar and comfortable. Furthermore, since these practices generally occur beyond the media’s attention, it is easy for regulators to develop cozy relationships with industry lobbyists and there is a danger for decisions to be made based on personal friendships rather than the community’s interests.
So what makes a good regulator? First, someone must intensely study the issues and recognize the overall impact of their decisions on the people that they represent, balancing the needs of individuals, businesses, the community, and the ability of the regulated interest to provide quality services. Second, they must use this knowledge to ask tough questions of industries that come before them. Without traditional accountability mechanisms, regulators must get all possible information from as many sources as possible. Third, they have to have the ability to sometimes say no. If this isn’t the case then the regulatory body simply becomes a rubber stamp.
For New Mexico’s PRC to be effective there are two additional issues that must be addressed. Because of the ethical problems recently afflicting many of the Commissioners the PRC has to make ethics reform, not only among the Commissioners but within the organization, a top priority. If constituents cannot trust their officials to follow basic laws then they can’t trust them on the more complicated and important regulatory matters they are supposed to be involved with.
Also, issues that the PRC deals with can be difficult to understand by the general population because they are complicated. PRC meetings are almost always held in Santa Fe and receive little media coverage, and many of the documents used by involved parties are complicated and filled with jargon. Commissioners must seek to increase transparency levels and work as hard as possible to present issues in a way that ordinary people can understand. After all, they’re the ones that have to deal with the decisions that are made.
This is a guest blog by Bill McCamley. To submit a piece for consideration as a guest blog, contact me by clicking on the Email Me link at the upper left-hand corner of the page. To see previous guest blogs, visit our archive. To see previous posts about this PRC race, click here.
Nice analysis, Bill. You've got what it takes to be a good regulator and you've got my vote.
Posted by: Al at NMSU | Jul 15, 2010 12:57:47 PM