Interconnection Animus: Do Regulatory Procedures Create a “Tragedy of the Commons”?

By Scott Hempling

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Facility-and-Party-Centric Litigation Means a Procedural “Tragedy of the Commons”

Once a proposal reaches the cost allocation stage, prudence is presumed. Prudence means that over a time horizon sufficiently long, or over a geographic territory sufficiently wide, the benefit-cost ratio is sufficiently positive to justify the investment relative to alternatives. The only question remaining should be, “How do we allocate the net benefits so that no one is worse off and everyone is better off?”

In proposal-specific Litigation Land, that optimistic approach is a rarity. Narrow proceedings mean that even if the proposal is part of a net-benefits package, a party has a right to oppose it if, for that project and that party, the benefit-cost ratio is negative.

This right to a hearing, project by project, is the source of much waste and distraction. There is an expectation that every proposal must have a positive outcome for every party, that a proposal is “bad” if it makes anyone worse off. How logical is it, how useful, to slice-and-dice regulatory decisions into a series of win-lose polarities?

No clear-thinking citizen (that is, one uninfected with regulatory experience) would insist that every public policy benefit him personally. Otherwise, we would:

Cease funding for multiple sclerosis because not everyone contracts it.

Eliminate the local crossing guard because not everyone crosses there.

Close the Air and Space Museum because not everyone goes there.

End every program for which the cost bearers differ from the benefit receivers.

Oddball examples? Not so. They do not differ logically from oppositional responses to cost allocation proposals for utility infrastructure. These oppositions, each one rational individually, draw out regulatory proceedings, delay benefits, add costs, and kill projects. Under our regulatory procedures, the sum of individually rational litigation decisions yields a socially irrational result.

Welcome to the regulation’s “tragedy of the commons,” where the commons is not Garrett Hardin’s pasture but the “right to a hearing” for every cost-causing project. We slice proposals so narrowly that someone always has a reason—and a right—to oppose them. The sum of all these individual rights, vigorously and expensively exercised, creates policy gridlock, Hatfield-versus-McCoy animus (“you won last time so I need to beat you this time”), and lost opportunities.

Hardin points out that “the commons, if justifiable at all, is justifiable only under conditions of low population density. As the human population has increased, the commons has had to be abandoned in one aspect after another.”

This reasoning applies to regulatory procedure. When administrative litigation was simple—buyer and seller arguing over rate levels—there was sufficient aural and temporal space to air all concerns.

That simplicity is gone. A typical transmission case has more than a dozen parties, arguing about total cost, allocated cost, need, alternatives, rate design, intergenerational equity, environmental effects, and more. As with Hardin’s pasture, the problem grows geometrically, because (a) there are multiple cases simultaneously and (b) every party’s “right to be heard” begets a counter-right in that party’s opponents. These factors shrink the supply of problem-solving resources: time, money, and goodwill. The result is Hardin’s tragedy of the commons.

So regulators call for “consensus” and “cooperation.” This reliance on voluntary restraint, on what Hardin calls “conscience,” produces a Darwinian result: The victorious are the holdouts— the ones who resist consensus and cooperation. As Hardin concludes, “Conscience is self-eliminating.”

Solution: Broaden Proceedings’ Scope So That Benefits Exceed Costs

To save our regulatory commons, we must break out of zero-sumsmanship (one wins and one loses, in classic game theory). We need proceedings whose substantive scope ensures that total benefits exceed total costs.

A transmission system benefits not only the generation and loads it connects but also the regional economy it supports. But “just and reasonable” ratemaking does not count that broader benefit. Ratemaking merely identifies a revenue requirement and the rate levels necessary to produce it. There is no mention of employment growth, industrial location attractiveness, or environmental values, even though the right transmission proposal can enhance all three.

It is this singular focus on revenue requirement and rate levels that produces zero-sum thinking. As any attendee of regional transmission organization “settlement” discussions will testify, calls for “consensus” do not work well in a zero-sum-game context.

Ratemaking’s confines need not condemn us to endless cost allocation disputes. The key is to broaden the decisional context. There is usually some combination of transmission proposals, covering broader geographic areas or long time horizons, for which total benefit exceeds total cost. By replacing zero-sum proceedings with positive benefits proceedings, the parties can fight over benefits rather than cost. The result: more cooperation, more speed, more results.

—Scott Hempling, a frequent contributor to MANAGING POWER, is the executive director of the National Regulatory Research Institute, based in Washington, D.C. A version of this commentary originally appeared on that organization’s website.

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