How should the economy be regulated?

Rich Rosen
8 September 2009

New ideas for economic regulation are in the air today. In the wake of the economic downturn, for example, the Obama administration's Treasury Department this summer proposed a panoply of new regulatory agencies, including a consumer financial protection agency, a national bank supervisor, and a council of regulators, in addition to expanded powers for the Federal Reserve. It is not at all clear, however, that creating more agencies based on old regulatory models is what we need, for the financial crisis offers a stark reminder of how outmoded our regulatory structures have become. Very little creative thinking about how to establish public oversight over the economy has occurred for decades. When thinking about how the economy should be regulated more broadly, it is time for a fresh start.

Richard Rosen, Ph.D., is a senior fellow at Tellus Institute in Boston, where for decades he has been an energy consultant, often working with state public utility commissions.

We need new principles for an approach to democratizing the economy so that it serves the needs of the many and not the few. Foremost among these is the principle that private interests should fundamentally serve the public interest. In keeping with this, regulation should not only avoid harms, but should proactively ensure that all business and government activities serve the public interest. A second principle is that regulation should be an instrument for democratic decision-making. This means greater public review of decisions, greater transparency, and a wider range of stakeholder power over both corporate and government decisions.

When put together, these principles point to the fact that more democratic control is needed over a broad range of investment decisions - even those of for-profit corporations. It is investment decisions that shape the world of the future. Contrary to the claims of free market advocates, the public interest cannot be achieved without greater democratic control of the economy.

If this proposal seems radical or impractical, it is useful to recognize that such a model already exists. It is the American model of the public utility commission (PUC). PUCs are best known for rate-setting with respect to energy, telecommunications, and water. But more important is their little-known role in approving all major utility investments, and products for which they set rates. It is this authority that makes the PUC model particularly powerful. PUCs are given this authority because a large part of the cost of utility services provided to the public is the cost of paying off capital investments in plant and equipment.

An attractive feature of well-functioning state PUCs is that all decisions are based on evidence presented to commissioners through formal hearings that must comply with administrative legal procedures. This means PUC decisions can be appealed through the courts. Evidence is supplied by witnesses who testify under oath. While most witnesses are technical experts, non-experts also testify in order to bring a broad range of public input into decisions. Importantly, all witnesses can be cross-examined by attorneys, just as in courts.

In PUC proceedings, all parties are allowed to ask formal discovery questions - that is, to make information requests - of business being regulated. Thus the secrecy that often shrouds corporate and government decision-making is greatly reduced.

A wide range of organizations can be parties in PUC cases, including civil society groups. Sometimes the PUC orders the regulated company to pay the legal costs for stakeholders who lack sufficient income to pay these expenses themselves. This helps to ensure fair representation of all stakeholders. Finally, PUC commissioners can themselves be chosen from a diverse set of stakeholders, further enhancing democratic decision-making.

If the PUC model were to be applied to non-utility companies throughout all sectors of the economy, it would ensure that corporate and regulatory decision-making became more transparent and politically accessible. As it stands now in the U.S., many federal regulatory bodies - including the SEC, the Environmental Protection Agency, and the Federal Energy Regulatory Commission - merely solicit comments on proposals rather than holding evidentiary hearings. Under a PUC-like regime, undemocratic, back-room dealing would be far more difficult because PUCs must write formal orders explaining their decisions. Currently, most corporate decisions are totally opaque.

The public utility commission model could be spread by creating PUC-like industrial regulatory boards (IRBs) in each major industry, with the power to ensure that appropriate financial investments are made that achieve key social and environmental goals, instead of simply maximizing profits. Indeed, given how little time the world has to mitigate climate change, water and food shortages, and the associated human dislocation, it is inconceivable how unregulated and undirected corporate investments could ever put the world on a trajectory toward climate stabilization and sustainable development.

Industrial regulatory boards would work in the following way. Whenever businesses of significant size wanted to invest more than a specified minimum (say, $10 million) in a new production facility, or to create a new product, they would apply to their industry IRB for approval. If commissioners deemed it necessary, they would hold formal hearings to approve such moves.

Such a process might be useful in agriculture, for example, where the social and environmental impacts of genetically engineered seeds have not been deliberated in an open, democratic process. Or imagine how such a process could work in the chemical industry, where thousands of chemicals are manufactured that have never been tested for safety. An industrial regulatory board could make the precautionary principle a reality.

Regulation has long been defined in terms of damage control. In coming decades, this focus should expand to include proactive principles for achieving society's goals. With rare exceptions, all regulatory board proceedings and deliberations should be made public, and should rely on evidence collected broadly from all relevant stakeholders, under the powerful mechanism of administrative law. Civil society participants should be eligible for funding mechanisms, to ensure diverse voices are heard. The guiding principle should be whether or not major new investments or products seve the public interest. This is a simple, powerful framework for how regulating the economy can be rethought from a clean slate.

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