Accidents of Federalism: Ratemaking and Policy Innovation in Public Utility Law

Abstract

Decarbonizing the electric power sector will be central to any serious effort to fight climate change. Many observers have suggested that the congressional failure to enact a uniform system of electricity regulation could stifle the transition to a low-carbon electricity grid. This Article contends that the critique is overstated. In fact, innovation is occurring across different aspects of the electricity system and across different types of states in ways one would not expect to see under a single, national approach. As the Article demonstrates, this innovation stems in part from Congress’s failure to enact a single, national approach to electricity regulation, which has given states the ability to choose whether and how to participate in restructured electricity markets. This ability to opt into or out of wholesale and retail competition has resulted in three regulatory models now operating across the country, combining different approaches to wholesale and retail regulation. Under each of these models, a number of state public utilities commissions (PUCs) are using their powers to set utility rates in surprisingly innovative ways and are targeting different aspects of the electricity system in a manner that will help transition to an electricity grid that is greener, less carbon-intensive, more efficient, and more distributed than the current system. The Article claims that the diversity of policy innovations occurring across these different models, and the system-wide benefits they are producing, are unexpected outcomes of the distinctive structure of federalism that continues to animate the U.S. system of electricity regulation and the limited reach of policies to promote competition in the sector. When combined with specific federal policy nudges and subsidies to encourage state experimentation in ratemaking, the three-model system is producing significant and underappreciated benefits as the United States confronts the challenges of decarbonizing the electricity grid. While the current system may not be ideal, it is the system we will likely be working with for some time to come. As a result, understanding the nature of these ratemaking experiments, and the innovations they enable, will be key to the successful implementation of EPA’s Clean Power Plan or any other federal effort to cut greenhouse gas emissions from the power sector.

Keywords: federalism, policy innovation, public utility, regulated industries, electricity regulation, energy law, climate change, decarbonization

JEL Classification: K23, L22, L50, L51, L52, L94, L97, O38