The Fairness Criterion in Public Utility Regulation : Does Fairness Still Matter ?

The concept of "fairness" is deeply rooted in the 120-year history of public utility regulation in the United States. Indeed, the word "fair" appears in numerous regulatory concepts and propositions, for example, a fair rate of return, fair value, fair and reasonable rates, and full and fair evidentiary hearings. Also, the idea that utilities should be compensated for and recover only those capital investments that are "used and useful" and that are "prudent" is fairness based. So is the prohibition against undue discrimination in rates and service. While the idea of fairness is elusive and perceptions differ, it clearly is a potent force in regulation, as indicated by the vehemence with which participants complain when they feel they have been treated unfairly. James Bonbright (1960) ranked fairness as one of the three most important of his eight criteria for a sound rate structure in utility regulation. Administrative law by which the actions of regulators are controlled is predicated on fairness considerations and has evolved from a preoccupation with control (i.e., assuring that decisions conform to the mission of the regulatory agency) to an emphasis on procedural fairness (Breyer 1982). For its part, economics usually counterposes the efficiency criterion with fainless (Zajac 1978, 1995) and recently has often found in favor of the former. We herein examine three hypotheses. The first hypothesis is that the salience of the fairness criterion that has traditionally pervaded public utility regulation has less-