Many Roads to the Public Interest: Utility Scandals Signal a Need to Reevaluate Energy Regulation

By Colorado Law Student Conor J. May

Public utilities occupy a unique position in the American economy. This unique position is currently the subject of fresh scrutiny, and various reformers propose radically divergent visions for the future of the electricity sector. This renewed scrutiny comes in the wake of that age-old herald of political upheaval: scandal.

High-profile scandals have rocked many electric power utilities in recent years. In 2017, the Puerto Rican Electric Power Authority (PREPA), which has a long history of problematic behavior, found itself embroiled in numerous controversies in the aftermath of the devastation wreaked by Hurricane Maria. In 2019 Pacific Gas & Electric (PG&E) filed for bankruptcy amid a storm of criticism about the mismanagement that caused deadly wildfires Paradise, California. Around the same time, a trade association supported by some of nation’s largest power companies was investigated by the Congress for using customers’ utility bills to fund EPA lobbying activity. The run of bad press for utilities has picked up in 2020, with federal investigations into South Carolina’s SCANA Corporation and Dominion Energy, Ohio’s FirstEnergy, and Illinois’s Commonwealth Edison (ComEd). These investigations involve various charges of bribery, racketeering, and misuse of public funds. Such scandals are certainly not unique to the utility sector. Any line of commerce as old and ubiquitous as electricity has no doubt faced its share of accusations. But after the wave of fresh fiascos, old critiques are resurfacing. These critiques question whether the unique niche utilities occupy, somewhere between the free market and public administration, isn’t a breeding ground for cronyism and regulatory capture.

The legal concept of public utilities in the United States is rooted in 19th century jurisprudence. Chief Justice Waite perhaps described it best: “Property does become clothed in the public interest when used in a manner to make it of public consequence, and affect the community at large.” Quoting Lord Hale, he noted that “when private property is affected with the public interest, it ceases to be juris privati only.” When a private company provides an essential piece of public infrastructure (such as water, power, telecommunications, or gas) the company can be subject to additional layers of oversight and regulation.

Public utility thinking also grows out of the economics of natural monopolies. As Richard Posner describes, “under competition, we need little worry about a firm’s incentives to minimize its costs, and to innovate.” But the classic utilities – water, power, telecommunications – have traditionally been thought of incompatible with free-market competition. Natural monopolies tend to arise when a good or service can be supplied at lowest cost by one company, rather than by multiple competitors. In the utility sectors, the initial cost of infrastructure was often thought to render local competition inefficient. One need only look at pictures of 19th-century cities to realize the problems that arise from numerous competing power grids.

Hence the unique position of the regulated utility: a private company whose rates and service are overseen by government regulators. In lieu of the competitive pressures of the market, regulators step in to make sure the public gets reasonable service at a low price. However, this model comes with its own problems. For example, what happens if, either by legal or clandestine means, the regulated company wields undue influence over the regulators? As the proponents of public choice theory are quick to point out, when regulation delivers diffuse benefits to the public but has major consequences for one group, that group is likely to expend disproportionate effort to influence over the regulatory process. This brings us full circle to the recent scandals, which involved for-profit companies, supposedly “clothed in the public interest,” mismanaging public funds or using bribery to increase profits. In the case SCANA and Dominion, the utilities “deceived investors, regulators, and the public over several years about the status of a $10 billion.” And illicit behavior is only one side of the coin. Legal scholars have documented many perfectly legal methods that utilities have to influence those overseeing them. Wherefore then serveth the public interest?

Proposals for how to fix the system abound. But while we do not lack for suggestions, many of these suggestions pull in opposite directions.

Some advocates argue for competition in lieu of regulation. The electric lines overhead may be a natural monopoly, but generating the power in those lines is increasingly ripe for competition. Competitive restructuring first became popular late in the 20th century, but has resurfaced in recent years. Solar, wind, and other distributed forms of generation make it less costly to break into the power biz. “Smart” technologies and improved control systems give us greater ability to manage and monitor power usage. In light of these technological changes, many energy reform advocates see decentralization and competition as the best cure for what ails the electric industry.

Legal scholar William Boyd wonders if we should be so quick to abandon the publicly regulated utility. He points out that the model enables planning, coordination, and funding for innovation and experimentation. These characteristics will be critical for achieving a low-carbon future. The free market may be unable to deliver the kind of rapid, systemic change that we need. Boyd is not starry-eyed about the problems afflicting the regulated utility sector, but argues that the current model is worth repairing. In his eyes, the “key task is to recover the public in public utility” and to revitalize our conception of public interest regulation.

Others, meanwhile, look in the opposite direction from market competition, and ask if an publicly-owned electric utility might be better situated to serve the public interest. There are many examples around the country of successful government-run water, electric, and even telecom utilities. In the wake of PG&E’s wildfire scandal and ensuing bankruptcy, both the California and the city of San Francisco have both considered taking over all or part of the company as a wholly public enterprise. Motivated by concerns about climate change, Boulder, Colorado has long been engaged in an effort to replace its service from a for-profit Xcel subsidiary with a municipal power authority. Proponents of public power point argue that it provides more accountable local control, keeps more money local, and gives citizens a say over whether to use greener power sources.

Still others suggest a middle way. Community choice aggregation, which incorporates aspects of both local control and customer choice, has recently become popular in various states. This model leaves the current utility structure in place but allows communities to select who generates their power. Meanwhile, a coalition of California mayors expressed interest in turning PG&E into a customer-owned private cooperative. Such distribution cooperatives have a long history of reliably serving underserved constituencies in the rural parts of the U.S.

What are we to do with this broad array of choices? Fortunately, most utility regulation takes place at the state level, so the future of power provision is an ideal test case for states as the “laboratories of democracy.” Technical, financial, and environmental factors vary from region to region, so a one-size-fits all approach is likely unworkable. Instead, different states and cities can and should try different models in an effort to find the public interest anew. Because, while reformers may disagree about the best path forward, the recent scandals clearly highlight a major weakness in the status quo. If a regulated monopoly cannot be safeguarded against corruption and capture, it will be subject to both the bureaucratic inefficiency ascribed to government regulation and the profit-seeking whims of the private sector. In short, such a system will provide the worst of both worlds.

Conor J. May is a rising 3L at Colorado Law