The Erosion of Public Control Over Public Utilities

Sandeep Vaheesan –

Cable Electricity Electrical Energy DistributionSince the 1970s, Congress and federal agencies have replaced regulator-established rates with market-derived pricing in many sectors of the U.S. economy. Electricity and natural gas are two such industries. Congress and the Federal Energy Regulatory Commission (FERC) have abolished regulated rates and instituted market-based pricing in a part of the electricity and gas supply chains. (At a simplified level, both industries have three segments: production, transmission, and distribution. Policymakers generally still treat the transmission and distribution functions as monopolistic.)

These legislative and regulatory decisions are premised on the belief that markets are superior to direct public control of rates and other terms of service. While this process is often described as “deregulation,” the term is a misnomer. This industrial restructuring is a transfer of discretionary authority from public bodies to private actors. Instead of structuring competitive markets in this new environment, the federal courts have defended private market power and helped scale back all public control of sellers and traders of electricity and gas. A case before the First Circuit (in which my Open Markets Institute colleagues and I filed an amicus brief in support of the plaintiffs) illustrates this theme.

In Breiding v. Eversource Energy, New England residents have accused two large utilities of violating antitrust and consumer protection laws by creating an artificial shortage of gas and engineering a chain of events that dramatically drove up the cost of electricity. The district court dismissed the plaintiffs’ complaint and expanded a judicial doctrine intended to protect the integrity of regulator-set rates to also insulate market-based prices from private lawsuits. This decision, which is consistent with rulings by other courts, grants gas producers, power generators, and traders the freedom to engage in exclusionary and other unfair practices. In electricity and gas, the net effect of legislative, regulatory, and judicial choices over the past 40 years has been a dramatic erosion of public control over public utilities.

The class of New England residents accuse two vertically-integrated utilities of manipulating the supply of gas and engineering higher electricity prices. Eversource Energy and Avangrid own gas and electric distribution companies and power generation facilities. According to the plaintiffs, the two corporations in the winter of 2013-2014 abused their usage rights on a major natural gas pipeline and created an artificial shortage of gas, an important fuel for power generation in New England. By raising the price of gas and thereby the cost of generating power, Eversource and Avangrid increased the price of wholesale electricity and ultimately retail electricity prices. The plaintiffs allege that the defendants’ conduct increased their collective retail power bills by more than $3 billion in just one winter.

The district court dismissed the plaintiffs’ complaint on multiple grounds including the “filed rate” doctrine. Courts originally developed this doctrine to protect regulator-established rates from being ignored or challenged in separate judicial proceedings. Consumers cannot attack regulated rates through antitrust or consumer protection suits, and sellers cannot disobey these rates and charge rates in excess of their filed rate. When regulators exercise direct control over rates and other terms, the filed rate doctrine protects regulatory authority over an industry. The court in this case, however, expanded the filed rate doctrine to insulate market prices from antitrust challenge. This decision is in line with the rulings of other lower court decisions, which have widened the filed rate doctrine to protect manipulated market prices from private antitrust, consumer protection, and other claims.

For much of the twentieth century, the federal government and states regulated the gas and electric power industries as monopolies. Starting in the nineteenth century, and accelerating in the 1930s, legislators and regulators directly regulated existing or potential monopoly power where market competition was unworkable. Federal and state regulators set rates based on the “cost of service,” allowing producers and distributors of gas and electricity to recover their costs and earn a “reasonable” rate of return on capital investments.

In the late 1970s, Congress, the Federal Energy Regulatory Commission (FERC), and some states began to restructure the gas and electricity industries. Congress raised price ceilings for natural gas producers in 1978 and eliminated remaining price ceilings in 1989. Starting in the late 1980s, FERC granted power generators the right to sell at “market-based prices” instead of cost-of-service rates. Today, in lieu of comprehensive direct price setting, FERC oversees market structure and conduct in, for example, the wholesale electricity market in which local distribution companies purchase power from generators. Its traditional public utility function is largely limited to enforcing common carriage rules over monopolistic transportation functions and ensuring that buyers and sellers of gas and electricity can use the pipeline and transmission grid, respectively, on non-discriminatory terms.

In these markets, especially in wholesale electricity, corporations have used their private market power to cheat the public. The most notorious episode was in California in 2000 and 2001: After California restructured its electric power industry, five generation companies dominated the in-state wholesale electricity market. Exploiting high demand and reduced out-of-state supplies of electricity, the “Big Five” power generation companies used their position to create an artificial shortage of power and raise prices to astronomical levels. At the same time, El Paso (a major pipeline owner) withheld gas from the California market. The collective exercise of market power transferred billions from Californians to generators’ and gas producers’ coffers, led to rolling blackouts, and drove the main utility serving Northern California into bankruptcy.

This chapter in California was extreme, but not an outlier. Since then, generators across the country have been accused of market manipulation many times.

Through their decisions, Congress, FERC, and the courts have neutered public control over public utilities. Instead of public regulators setting rates, the private discretion of sellers now governs markets for gas and electricity. In most industries, antitrust, consumer protection, and other federal and state laws of general applicability constrain the private exercise of (state-defined and -enforced) property and contractual rights. In gas and electric power, however, courts have created a regulatory environment in which producers and sellers of gas and electricity have the privileges of public utilities without the traditional duties. Due to the judicial expansion of the filed rate doctrine, private parties cannot bring antitrust and other claims to obtain compensation for their injuries and to deter market misconduct.

In antitrust law, which provides for treble damages and one-way fee shifting for successful plaintiffs, “private attorneys general” are the most effective protectors of the public interest. They file the bulk of antitrust lawsuits and protect the public much more effectively than their public counterparts at the Department of Justice and Federal Trade Commission. One of President Eisenhower’s chief antitrust enforcers stated that “[i]f you did away with the triple damages suit entirely and still wanted substantial enforcement in order to have economic freedom you would have to quadruple the size of the Antitrust Division.”

Due to the defanging of private antitrust litigation, market participants in gas and electricity are subject only to the feeble oversight of public antitrust enforcers and energy regulators. The public should have no illusions about the capabilities or zeal of these federal agencies. The Department of Justice’s Antitrust Division has brought one monopolization suit since 2000 and become smaller and even less vigilant against corporate abuse under the Trump administration. FERC often has been a lackadaisical market supervisor and blind to market misconduct.

Given the importance of affordable and reliable energy and the existential threat from climate change, the public must reassert control over public utilities. The urgent need for transforming energy production demands nothing less. As a start, Congress should override judicial expansions of the filed rate doctrine and restore the full application of the antitrust laws in gas and electric power markets. Injured consumers and businesses should have the right to hold corporations to account for market manipulation and deter future misconduct, including the exclusion of cleaner sources of electricity. But this is merely necessary, not enough. The reassertion of public control will require other actions such as reviving public utility rules and replacing private ownership of natural monopolies with public ownership.

Sandeep Vaheesan (@sandeepvaheesanis legal director of the Open Markets Institute.