Economics 【Reading 15】Sample customers, regulatory, 2012, current

JonnyKay

Amelia Andrews, CFA, is the current head of the California Utilities Commission, the agency which has regulatory authority over all utilities providers in the state of California. Andrews has been head of the agency for three years, before which she had spent her twenty year career in various roles at California Electric (CE), the largest producer and distributor of electricity to residential customers in California. Presently, legislators in the state of California are struggling with the issue of how to balance rising consumer demand for electricity with an obsolete production infrastructure that is already producing at levels approaching full capacity. Andrews has scheduled a joint meeting at the Commission’s office with state legislators, consumer representatives, and utilities providers to address the issues.
At the meeting, Andrews greets several of her former co-workers, who are still employed by California Electric. The Chief Executive Officer of CE is Andrews’s former boss and mentor, as well as occasional golf partner. The CEO of CE is at the meeting to acknowledge consumer concerns about rising electricity prices, but also to explain that CE cannot make any price concession because their existing plants are nearly at full production capacity and new, more efficient plants are several years away from completion. CE’s proposal is to maintain the current strategy of passing on gradual price increases to consumers, which will then level off in the next few years as new plants are brought into production. This would allow CE to maintain its current profits margins while still providing excellent service to its customers.
Andrews introduces herself to the representatives of the consumer interest group, which has recently formed in response to the rise in utilities rates. The consumer interest group is represented by three concerned citizens from different cities across the state who volunteered to attend the meeting to voice the opinions of the consumers they represent. Their main goal is to put pressure on the regulatory commission to hold electricity rates constant until the end of the next year, stating that electricity providers have experienced years of profitability and now should be willing to make concessions to the consumers. Also, the representatives will inform meeting participants if consumer demands are not met, consumers are willing to switch to other “alternative” sources of power, even if that means a decrease in the quality of service or a slight increase in price.
Andrews also welcomes to the meeting several California state legislators who are in attendance. One of them, Louis Briggs, has known Andrews professionally for many years and is the person who had originally proposed Andrews for the job as head of the California Utilities Commission. Briggs had sent a note to Andrews before the meeting to say that he would like to help facilitate a smooth negotiation process at the meeting in anticipation of upcoming state-wide elections. He expresses to Andrews that no solution will be attractive to all interested parties, and that each of them should be willing to give up some ground.
After participating in a preliminary discussion among the representatives of the three interested parties and listening to each of their concerns, Andrews proposes yet another possible course of action: deregulation. Andrews argues that some degree of deregulation for the utilities industry in California could have many advantages over the current system. She requests that further discussions regarding the pros and cons of her proposal be held.In an industry in which a natural monopoly may exist, such as the electric utilities industry, regulators generally attempt to set industry prices at a level where:

A) price equals long-run average cost.

B) each participant earns a competitive return on investment.

C) participants cannot engage in predatory pricing practices.

---

There are different methods of rate regulation for a natural monopoly, but the general goal of regulators is to set prices at a level where long-run average costs intersect the demand curve, providing an element of profit for the producer. (Study Session 4, LOS 15.a)

---

In general, regulators of a specific industry are held accountable by three separate interested parties, which least likely includes which of the following groups?

A) legislators.

B) lobbyists and special interest groups.

C) customers of the industry.

---

Lobby groups may be funded by various consumer groups or industry participants in order to protect their special interests, but regulators do not answer directly to them. (Study Session 4, LOS 15.c)

---

The theory that assumes that despite the original purpose behind its establishment, a regulatory agency will be influenced or even possibly controlled by members of the industry that is being regulated is called the:

A) share-the-gains, share-the-pains theory.

B) feedback effect.

C) capture hypothesis.

---

The capture hypothesis assumes that since industry participants have the most expertise regarding their particular industry, they will fill regulatory positions but still have contact or relationships with members of the industry. Regulators will be “captured” by the very industry they were assigned to regulate and be unable to render impartial decisions. (Study Session 4, LOS 15.c)

---

California Electric’s proposed plan to maintain the current program of passing on gradual price increases to consumers can best be described as:

A) natural monopoly regulation.

B) rate-of-return regulation.

C) cost-of-service regulation.

---

CE’s plan is designed to protect its current level of profitability. A rate-of-return regulation approach sets industry-wide prices based upon the cost to produce the good or service plus a reasonable rate of the return to the producer/provider. (Study Session 4, LOS 15.a)

---

If consumers change their electricity consumption in response to the California Utilities Commission’s proposal to increase the rates providers are permitted to charge, it can best be described as a:

A) feedback effect.

B) creative response.

C) positive effect of deregulation.

---

A feedback effect occurs when consumers’ behavior is changed as a result of regulation. (Study Session 4, LOS 15.b)

---

According to the theory of contestable markets, Andrews’ proposal of deregulation of the industry should produce which of the following outcomes?

A) A short-term increase in the level of quality of service because of increased competition.

B) An increase in market efficiency due to lower barriers to entry and exit.

C) Unemployment rates will fall as new job openings are created in the industry.

---

A contestable market will operate very efficiently because any excess profits in the industry will attract new entrants, which in turn will increase competition and drive prices back to marginal cost. (Study Session 4, LOS 15.a)

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JonnyKay

Amelia Andrews, CFA, is the current head of the California Utilities Commission, the agency which has regulatory authority over all utilities providers in the state of California. Andrews has been head of the agency for three years, before which she had spent her twenty year career in various roles at California Electric (CE), the largest producer and distributor of electricity to residential customers in California. Presently, legislators in the state of California are struggling with the issue of how to balance rising consumer demand for electricity with an obsolete production infrastructure that is already producing at levels approaching full capacity. Andrews has scheduled a joint meeting at the Commission’s office with state legislators, consumer representatives, and utilities providers to address the issues.
At the meeting, Andrews greets several of her former co-workers, who are still employed by California Electric. The Chief Executive Officer of CE is Andrews’s former boss and mentor, as well as occasional golf partner. The CEO of CE is at the meeting to acknowledge consumer concerns about rising electricity prices, but also to explain that CE cannot make any price concession because their existing plants are nearly at full production capacity and new, more efficient plants are several years away from completion. CE’s proposal is to maintain the current strategy of passing on gradual price increases to consumers, which will then level off in the next few years as new plants are brought into production. This would allow CE to maintain its current profits margins while still providing excellent service to its customers.
Andrews introduces herself to the representatives of the consumer interest group, which has recently formed in response to the rise in utilities rates. The consumer interest group is represented by three concerned citizens from different cities across the state who volunteered to attend the meeting to voice the opinions of the consumers they represent. Their main goal is to put pressure on the regulatory commission to hold electricity rates constant until the end of the next year, stating that electricity providers have experienced years of profitability and now should be willing to make concessions to the consumers. Also, the representatives will inform meeting participants if consumer demands are not met, consumers are willing to switch to other “alternative” sources of power, even if that means a decrease in the quality of service or a slight increase in price.
Andrews also welcomes to the meeting several California state legislators who are in attendance. One of them, Louis Briggs, has known Andrews professionally for many years and is the person who had originally proposed Andrews for the job as head of the California Utilities Commission. Briggs had sent a note to Andrews before the meeting to say that he would like to help facilitate a smooth negotiation process at the meeting in anticipation of upcoming state-wide elections. He expresses to Andrews that no solution will be attractive to all interested parties, and that each of them should be willing to give up some ground.
After participating in a preliminary discussion among the representatives of the three interested parties and listening to each of their concerns, Andrews proposes yet another possible course of action: deregulation. Andrews argues that some degree of deregulation for the utilities industry in California could have many advantages over the current system. She requests that further discussions regarding the pros and cons of her proposal be held.In an industry in which a natural monopoly may exist, such as the electric utilities industry, regulators generally attempt to set industry prices at a level where:

A) each participant earns a competitive return on investment.

B) participants cannot engage in predatory pricing practices.

C) price equals long-run average cost.

---

There are different methods of rate regulation for a natural monopoly, but the general goal of regulators is to set prices at a level where long-run average costs intersect the demand curve, providing an element of profit for the producer. (Study Session 4, LOS 15.a)

---

In general, regulators of a specific industry are held accountable by three separate interested parties, which least likely includes which of the following groups?

A) legislators.

B) customers of the industry.

C) lobbyists and special interest groups.

---

Lobby groups may be funded by various consumer groups or industry participants in order to protect their special interests, but regulators do not answer directly to them. (Study Session 4, LOS 15.c)

---

The theory that assumes that despite the original purpose behind its establishment, a regulatory agency will be influenced or even possibly controlled by members of the industry that is being regulated is called the:

A) share-the-gains, share-the-pains theory.

B) feedback effect.

C) capture hypothesis.

---

The capture hypothesis assumes that since industry participants have the most expertise regarding their particular industry, they will fill regulatory positions but still have contact or relationships with members of the industry. Regulators will be “captured” by the very industry they were assigned to regulate and be unable to render impartial decisions. (Study Session 4, LOS 15.c)

---

California Electric’s proposed plan to maintain the current program of passing on gradual price increases to consumers can best be described as:

A) natural monopoly regulation.

B) cost-of-service regulation.

C) rate-of-return regulation.

---

CE’s plan is designed to protect its current level of profitability. A rate-of-return regulation approach sets industry-wide prices based upon the cost to produce the good or service plus a reasonable rate of the return to the producer/provider. (Study Session 4, LOS 15.a)

---

If consumers change their electricity consumption in response to the California Utilities Commission’s proposal to increase the rates providers are permitted to charge, it can best be described as a:

A) creative response.

B) positive effect of deregulation.

C) feedback effect.

---

A feedback effect occurs when consumers’ behavior is changed as a result of regulation. (Study Session 4, LOS 15.b)

---

According to the theory of contestable markets, Andrews’ proposal of deregulation of the industry should produce which of the following outcomes?

A) A short-term increase in the level of quality of service because of increased competition.

B) An increase in market efficiency due to lower barriers to entry and exit.

C) Unemployment rates will fall as new job openings are created in the industry.

---

A contestable market will operate very efficiently because any excess profits in the industry will attract new entrants, which in turn will increase competition and drive prices back to marginal cost. (Study Session 4, LOS 15.a)

JonnyKay

A recent heat wave in the Southern United States has significantly increased demand for electricity by consumers. At the same time, utilities providers have experienced higher costs associated with the production of electricity because of inefficient and obsolete methods of production. Which of the following statements is most likely accurate?

A) According to the theory of contestable markets, regulators will allow new entrants into the industry to provide additional capacity.

B) According to the share-the-pains, share-the-gains theory, utilities regulators will allow the providers to pass some of the increased costs to consumers over the next two years.

C) According to the premise of social regulation, utilities regulators will not allow any cost increases to be passed to the consumer because electricity is considered to be a basic necessity of life and must remain affordable.





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Under the share-the-gains, share-the-pains theory, regulators cater to three separate groups: industry participants, legislators, and consumers. Therefore, regulators will have utility providers and consumers each absorb some of the price increase.

JonnyKay

In accordance with the share-the-gains, share-the-pains theory of regulators’ behavior, which of the following scenarios is most likely to occur?

A) Regulators form policies that are in favor of the special interest lobby of the industry being regulated.

B) The head of a regulatory agency agrees to discuss future price increases with both industry representatives and a consumer group, but in separate meetings.

C) Regulators allow a portion of an unexpected increase in commodity prices to be charged to consumers.

---

The share-the-gains, share-the pains theory would anticipate that regulators allow industry participants to pass only a portion of rising commodity costs on to consumers, and then perhaps over a period of time.

JonnyKay

The theory of behavior where industry participants are able to exert influence over regulators employed by a governmental regulatory agency is called the:

A) share-the-gains, share-the-pains theory.

B) constituency theory.

C) capture hypothesis.

---

Regulators frequently have experience in the industry they are regulating, and are likely to have ties to others remaining in the industry. The capture hypothesis contends that regulators may be “captured” by the special interests of the industry because they are former industry participants.

JonnyKay

Which of the following statements regarding regulation is least accurate?

A) Regulators are impartial and their actions are not influenced by industry participants.

B) Regulation has often been advantageous to industry participants because of increased profitability and decreased competition.

C) Regulation has often been disadvantageous to consumers because of higher prices and less product choice.

---

Regulators should strive to be completely impartial, but in reality are not because most of them are former industry participants that are likely to still have some ties to the industry. Regulators must be knowledgeable about the industry they are regulating, so naturally the pool of qualified candidates comes from those with experience in the industry.

JonnyKay

Which of the following statements regarding social regulation is least accurate?

A) Some form of social regulation currently exists in all industries in the United States.

B) The benefits of social regulation are easily recognized and can be accurately quantified.

C) Two of the primary goals of social regulation are increased product quality and improved workplace conditions.

---

It is difficult to measure the benefits of social regulation because they may be qualitative rather than quantitative in nature, and the benefits may be spread out over time.

JonnyKay

All of the following are negative consequences associated with social regulation EXCEPT:

A) a decline in industry competitiveness.

B) higher production costs.

C) increased unemployment.

---

While some aspects of social regulation may increase a company’s expense per worker, increased unemployment is generally not associated with social regulation.

JonnyKay

All of the following are benefits associated with social regulation EXCEPT:

A) a less polluted environment.

B) lower consumer prices.

C) safer, higher-quality products and services.

---

Increased regulation tends to causes consumer prices to rise, because producers will generally pass any expenses associated with compliance on to consumers in the form of higher prices.