Constrained Regulatory Exit in Energy Law

Abstract

In recent years, the federal government’s efforts to open up competitive electricity markets have transformed how we think about the regulation of energy. In many respects, the Federal Energy Regulatory Commission’s (FERC) broad “deregulatory” efforts, which commenced in the 1990s, might appear to be a case of paradigmatic regulatory exit as defined by J.B. Ruhl and Jim Salzman. But our case study of FERC’s restructuring of wholesale electricity markets reveals some important institutional features that make exit in federalism contexts, and under federal statutory duties, a rich and difficult problem. In the context of energy, exit from one regulatory sphere can create regulatory gaps. This has led FERC, which largely exited the regulation of wholesale electricity rates, to increase regulation in other spheres. It has also invited forms of intergovernmental exchange, as states have emulated or otherwise responded to FERC’s regulatory modifications in the areas in which states have jurisdiction. In this sense, the transition to competitive energy supply markets has involved constrained exit characterized by a hydraulic back-and-forth between regulators and institutions in an effort to ensure that statutory duties are fulfilled and other public needs are met.

This assessment of regulatory exchange has a prescriptive implication: a federal regulator seeking to exit specific forms of conventional regulation needs to proactively develop strategies to facilitate regulatory exchange, while simultaneously preserving its authority over important substantive values related to its regulatory mission. Attention to “offsetting” regulations is often necessary to ensure that problematic regulatory gaps will not arise. In the energy context, these strategies might also include the use of mechanisms that give other institutions a voice in implementing exit strategies, as well as better ex ante regulatory planning for market enforcement that will continue after partial exit. We argue that it is not only a good strategy for federal regulators to recognize this hydraulic feature of exit, but that cooperative federalism statutes such as the Federal Power Act often require them to do so.