Reading 15- LOS a ～ Q5－10 agency, regulatory, current, class

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5.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)    participants cannot engage in predatory pricing practices.
B)    no one participant receives excessive monopoly prices.
C)    each participant earns a competitive return on investment.
D)    price equals long-run average cost.

6.In general, regulators of a specific industry are held accountable by three separate interested parties, which includes all of the following groups EXCEPT:
A)    customers of the industry.
B)    legislators.
C)    participant firms.
D)    lobbyists and special interest groups.

7.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.
D)    creative response theory.

8.California Electric’s proposed plan to maintain the current program of passing on gradual price increases to consumers can best be described as:
A)    rate-of-return regulation.
B)    cost-of-service regulation.
C)    social regulation.
D)    natural monopoly regulation.

9.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)    feedback effect.
C)    positive effect of deregulation.
D)    negative effect of social regulation.

10.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)    Unemployment rates will fall as new job openings are created in the industry.
C)    Increased power of unions, providing better pay and working conditions for employees.
D)    An increase in market efficiency due to lower barriers to entry and exit.

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5.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)    participants cannot engage in predatory pricing practices.
B)    no one participant receives excessive monopoly prices.
C)    each participant earns a competitive return on investment.
D)    price equals long-run average cost.
The correct answer was D)
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.
6.In general, regulators of a specific industry are held accountable by three separate interested parties, which includes all of the following groups EXCEPT:
A)    customers of the industry.
B)    legislators.
C)    participant firms.
D)    lobbyists and special interest groups.
The correct answer was D)
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.
7.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.
D)    creative response theory.
The correct answer was C)
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.
8.California Electric’s proposed plan to maintain the current program of passing on gradual price increases to consumers can best be described as:
A)    rate-of-return regulation.
B)    cost-of-service regulation.
C)    social regulation.
D)    natural monopoly regulation.
The correct answer was A)
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.
9.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)    feedback effect.
C)    positive effect of deregulation.
D)    negative effect of social regulation.
The correct answer was A)
A feedback effect occurs when consumers’ behavior is changed as a result of regulation.
10.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)    Unemployment rates will fall as new job openings are created in the industry.
C)    Increased power of unions, providing better pay and working conditions for employees.
D)    An increase in market efficiency due to lower barriers to entry and exit.
The correct answer was D)
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.