The constitutionalism of Electricity Restructuring: A Case Study in Statutory Reinterpretation

Abstract

Since 1935, shortly after the Supreme Court held that state regulation of interstate electricity transactions violated the Dormant Commerce Clause of the U.S. Constitution, the federal government has been the primary regulator of wholesale electricity generation. The Federal Power Act (FPA), which was passed to remedy the regulatory “gap” created by the Supreme Court’s holding, has received significant amendments in 1978, 1992 and 2005. Nonetheless, the basic crux of the Act, a requirement that federal regulators ensure “just and reasonable” rates and prevent “undue discrimination” or “undue preference,” has remained relatively unchanged since 1935. Yet the regulatory structures created to enforce those obligations would be unrecognizable to one of those early regulators. Indeed, federal electric utility regulation has evolved from a classic New Deal model based on “the cost of service” to a market-based regime premised on vigorous competition. Throughout the first fifty years of the FPA’s history, electricity generators filed tariffs with government technocrats who, at the request of an affected party, could review the generator’s cost to produce the electricity to determine whether the rates in the tariff were “just and reasonable.” Today, the rate of return on most sales of electricity is determined by market competition. Rather than scrutinizing a utility’s books, regulators ensure that rates are just and reasonable by maintaining a healthy market. This “revolution” in electricity regulation occurred during a twenty-year period between 1980 and 2000. Surprisingly, given the scope and significance of the reforms, the changes were initiated largely through rulemaking and adjudication by the Federal Energy Regulatory Commission (FERC or “the Commission”), rather than congressional legislation. Although Congress ratified the Commission’s changes to the regulatory structure in both 1992 and 2005, Congress did not play a leading role in restructuring the electricity industry. Instead, the changes were the result of FERC’s reinterpretation of what was permitted and required by the basic standards in the 1935 version of the FPA —“just and reasonable” and “undue discrimination” or “undue preference.” This paper argues that electricity restructuring provides an excellent example of politically legitimate Administrative constitutionalism or statutory reinterpretation. By acting pursuant to its delegated authority, within its established jurisdiction, and in a way that reflected Congressional preferences commission, the Commission exercised its authority in a politically legitimate fashion. Moreover, by doing so incrementally, it promoted deliberation, both within the Commission and with stakeholders in industry and Congress, about how its regulations should evolve. Of course this deliberation cannot give the agency the power to do what a statute says it cannot. But where a statute is vague or unclear, a robust dialogue and the involvement of outside stakeholders mitigate the concern about agencies “run amok.” Indeed, combining robust agency deliberation with its experience and expertise should promote effective regulation that is responsive to the needs of industry and the policy preferences of Congress. This type of regulatory change is a desirable means of addressing statutory ambiguity and should be accepted, both by courts and in the scholarly understanding of the administrative state.