Electricity is the lifeblood of America. Automotive manufacturing in Detroit, server farms in Silicon Valley, the heating and cooling of our homes, and the charging of our smart devices all depend on the availability of affordable and reliable electric service. Electricity, in other words, is as vital to our economy and lifestyle as the air we breathe is to our survival. At the same time, the way we generate, transmit, and use electric power directly impacts, often adversely so, the quality of our air and water, exacerbates global climate change, and causes deadly wildfires, among other societal impacts. Given the complexity of the electric grid and its many interactions with social welfare and the public interest, one might expect Public Utility Commissions (PUCs) to provide comprehensive oversight to address and regulate these interactions. Most do not.
In his excellent new article, Precautionary Ratemaking, professor Jonas Monast makes a compelling case for PUCs to become more proactive regulators of the wide-ranging risks associated with electric utilities’ actions. The article urges utility commissioners to interpret their regulatory mandate beyond the traditional confines of economic regulation and least-cost electric service to include risk analysis and management according to the precautionary principle that underpins much of modern environmental law.
The “economic and political balancing act” (P. 530.) of ratemaking goes back more than a century, to the early days of electrification. To promote the build-out of electric infrastructure, state policymakers granted monopoly utilities exclusive service territories. In exchange for this protection against competition, the utility became subject to rate regulation by the state PUC. Electric utilities remained private enterprises, albeit “clothed with a public interest” (Munn v. Illinois, 94 U.S. 113 (1876)). How this notion of public interest should be interpreted lies at the heart of professor Monast’s argument. According to him, most PUCs set utilities’ rates based on the narrowly construed public interest principles of “affordability, reliability, nondiscriminatory access, and financial viability of the utility.” (P. 534.) But, Monast argues, a more expansive interpretation of “public interest” would be more appropriate.
The article presents the 1944 Supreme Court decision in Federal Power Commission v. Hope Natural Gas, 320 U.S. 591 (1944), as the fork in the road where the Court’s majority led the nation’s PUCs astray when it established the “end result” test by which a utility’s rate should be judged. According to Professor Monast, this test “elevates cost minimization as the primary measure of the public interest, often to the detriment of other social considerations.” (P. 536) Yet dissenting opinions by Justices Frankfurter and Jackson demonstrate an understanding of electric utilities as private enterprises meant to serve society, thereby suggesting a broader interpretation of the public interest.
Having established the doctrinal possibility of a more expansive public-interest analysis by PUCs, Professor Monast wastes no time highlighting the necessity of replacing today’s least-cost myopia with a wide-angle lens of risk assessment and management. High-profile incidents like wildfires and coal-ash spills persuasively illustrate the influence of PUC ratemaking, such as approval of coal-fired power plants or insufficient funding for transmission maintenance, on social welfare and the public interest. Beyond this energy-environment disconnect, the author cautions that the prevailing emphasis on least-cost ratemaking is poorly suited to accommodate, let alone facilitate, the electricity sector’s ongoing transformation. From solar panels to electricity storage, most disruptive technologies command a price premium when they first enter the marketplace. When PUCs prioritize near-term costs, they therefore protect the status quo and create path dependencies that are especially hard to break in an industry where an asset’s useful life tends to be measured in decades, not years.
Against this background, Professor Monast proposes a risk-based governance model to help “counterbalance the PUC’s focus on cost and reinvigorate its public interest role.” (P. 559.) A combined “least cost, least risk” approach, the article convincingly argues, would allow regulators to consider a utility decision’s environmental and other social impacts, while also taking into account how that decision affects the utility’s rates. A longer planning horizon and better longitudinal balancing of costs and benefits, meanwhile, would allow PUCs to justify near-term cost increases with future savings, including through mitigation of environmental and other risks.
In a neat doctrinal twist, the article connects the PUCs’ advocated risk governance to the precautionary principle that underpins many modern environmental statutes and is commonly understood to require the exercise of caution in the face of risk and uncertainty. Precautionary ratemaking might even shift the burden of proof for potential harms from opponents of an action, such as a utility’s ratepayers, to the actor proposing the action, in a rate case proceeding most likely the utility.
PUCs are products of our federalist system, with divergent rules and mandates across jurisdictions and commissions. At the extreme ends of the spectrum, a few states have passed laws requiring their PUCs to consider environmental and other social impacts when setting utility rates, while at least one state has expressly prohibited its PUC from considering environmental externalities in its ratemaking process. But the vast majority of PUCs is not subject to express guidance from its state legislature that would stand in the way of adopting Professor Monast’s least cost, least risk framework. And that’s what makes this article so special. Legal scholars love calling for Congressional action to solve the problems they identify, knowing full well that federal legislative action is unlikely to be forthcoming in the vast majority of cases. In contrast, Precautionary Ratemaking leverages in-depth analysis of legal precedent and empirical evidence to make a compelling case that a viable and legally defensible solution to many of the electricity sector’s pervasive problems may already be within our grasp. The risk of including risk management in utility ratemaking, in other words, is lower than most PUCs think.
