Policymaking by Proposal: How Agencies Are Transforming Industry Investment Long before Rules Can Be Tested in Court

Abstract

The conventional wisdom is that an executive agency’s scope of action and power depends on how easy it is to reverse agency decisions in court. If non-deferential judges provide industry with prompt review of agency decisions, the agency’s power is limited. And if courts are unlikely to second-guess the agency’s interpretations, then private actors have little choice but to comply. But in recent years, agencies have begun to rely on a new weapon in this struggle with courts and industry — the power of proposed rules to achieve regulatory outcomes. When regulations will affect long-term capital investments, companies must set a course for compliance long before a proposed rule is finalized or could be challenged in court. Thus, agencies know that proposed regulations can set the long-term trajectory of industry regardless of whether they would ultimately survive judicial review when finalized.

This article documents how agencies have begun to exercise this power, which it labels “policymaking by proposal,” and shows how it has fundamentally altered the rulemaking process and changed the incentives of agencies and industry. Agencies are now treating proposed regulations more like an opening bid — asking for more than they expect, assuming that the rule will be weakened by the time it is finalized or after judicial review. And counterintuitively, agencies proposals are often particularly aggressive when the proposal’s legal basis is most tenuous. In response, industry is looking for new ways to challenge the perceived legitimacy of rules long before they are finalized. This article concludes that agencies are unlikely to relinquish this unsupervised power to influence industry investments and shows how other stakeholders, such as courts, state policymakers, and Congress, can respond to preserve the balance of power.

Keywords: regulation, energy law, environmental law, regulated utilities, investment law

JEL Classification: K00, K23, K30, K32, K40, K41, P48, Q40, Q48, Q58