When utility regulation fails, democracy fails

The utility failures in the Lone Star State last week cascaded into a disaster when extreme weather hit an isolated electrical grid.* But more than a natural or engineering catastrophe, the disaster that unfolded in Texas was a regulatory failure. The institutions that govern utilities did not function as they should, and the resulting debacle was literally deadly. That institutional failure will reverberate in political memory long after electricity and water are restored; where essential services like energy and water are concerned, regulatory failure undermines legitimacy of government itself.

Utility regulation & the Texas disaster

With their high fixed costs, significant barriers to entry, and huge economies of scale, utilities are natural monopolies. The trouble with monopolies is that they are not subject to market competition, and so producers can get away with selling lousy products and charging absurdly high prices. To get around this problem, states rely on Public Utilities Commissions (PUCs) to ensure quality, reliability, and fair pricing for utilities. Commissioners and their staffs of professional engineers, economists, lawyers, and other experts act as checks against monopoly abuses by setting rules for utility service quality and limiting pricing.

The disaster in Texas last week is a vivid illustration of what can happen when regulators shirk that responsibility. The PUC considered strengthening weatherization rules for energy producers following cold weather events over the past decade. But energy producers resisted weatherization rules due to compliance costs, and regulators ultimately did not force producers to weatherize adequately. The PUC’s timidity might be a case of “regulatory capture,” but it also could be that the Commissioners simply decided that weatherproofing wasn’t a high priority. The state’s regulatory regime also fostered incentives that emphasized short-run pricing over system resilience. These decisions may have led to lower overall energy prices in the Lone Star State**, but they also left the state’s energy grid less resilient and more vulnerable to extreme winter weather.

When an arctic blast hit, energy production faltered. Energy failures cascaded into water system failures, as pipes froze and pumps and treatment systems failed. More than a week after the cold snap hit, many Texas communities are still struggling to get water systems functioning properly, to say nothing of the countless homeowners whose pipes burst as temperatures plunged. None of these problems was unforeseeable or beyond engineers’ ability to manager; they were all preventable.

Water, energy, and legitimacy

The legitimacy of any government rests on its ability to secure its people’s basic needs—and it doesn’t get any more basic than a warm home and safe drinking water. There is more at stake in utility regulation than efficient investment or fair pricing: basic services are cornerstones of political legitimacy.

A few years ago, I worked with Texas A&M’s ISTPP on a national public opinion survey that asked standard questions about trust in government, and later about people’s experiences with tap water. We found that people who experience bad-tasting, dirty, or low-pressure tap water service were significantly less trusting of their local government—even after adjusting for partisanship, gender, race, ethnicity, age, income, and home ownership:

These findings are hardly surprising, but underscore just how central water is to the health of the Republic. When basic services fail, citizens understandably lose faith in the officials responsible for protecting the public. In that sense, the PUCs and other obscure technocratic agencies that regulate basic services are bulwarks of democracy. In a moment when mistrust of government is rampant and the nation’s political fabric is frayed, getting basic services right is more important than ever.^†

*I moved to Madison from Houston six months ago. Who would have guessed that my first winter in Wisconsin would have been easier to manage?

**Maybe. Kind of. Energy pricing is complicated.

†I just completed a book manuscript with Samantha Zuhlke & David Switzer that uses Americans’ drinking water choices to explore the ways that basic services shape consumer behavior and citizen trust in government; the graph in this post is a sneak preview. More on that project in the months ahead...