1

THE STRUCTURE AND PROCESSES FOR REGULATION OF THE ELECTRICITY INDUSTRY IN THE UNITED STATES

A Paper Prepared By, Ashley C. Brown Executive Director Harvard Electricity Policy Group John F. Kennedy School of Government Harvard University Of Counsel, Le Boeuf. Lamb, Greene, and MacRae This paper is prepared at the Request of the Planning Commission of India. The effort is funded by The World Bank, whose support is appreciated. To the extent that any opinions are expressed herein, however, they are exclusively those of the author himself, and do not necessarily reflect those of any other person or institution.

2

A. Historical Context The electricity industry of the United States originated on a highly balkanized, local basis, with numerous isolated systems emerging to serve local communities. Over time, through mergers and acquisitions, government programs, legal and regulatory mandates, and policy decisions, the industry has become somewhat less fragmented horizontally. However, it has become, perhaps, slightly more fragmented from a vertical point of view. The ownership of the sector is diversified. Roughly 75% of the load is served by privately owned (although usually publicly traded) companies. The balance is served by government owned (local, state, and federal) entities and by rural electric cooperatives, which are largely, although not always, subsidized by the federal government. The regulatory regime has, to a large extent, tracked the evolution of the industry itself. The earliest electric companies were granted licenses (usually called franchises) by municipalities, to serve city residents and businesses on a monopoly basis. In some cases, rather than granting licenses to private operators, cities chose to establish their own, municipally owned utilities. The rules and regulations, including tariffs, of those early companies were either unregulated or regulated by the city councils. Over time, the utilities expanded their service territories beyond the political boundaries of municipalities, and, therefore, beyond the jurisdictional reach of municipal governments, thereby creating a regulatory vacuum. That vacuum led many states to substitute state level regulation for municipal level regulation. The state legislators themselves often carried out early state regulation directly. The absence of professionalism in regulation, coupled with the exposure of politicization, and often, actual corruption in the relationship between legislators and regulated monopolies, led at the beginning of the 20th century (a period known as the “Progressive Era” to U.S. historians) to a public outcry for reform. The reformers were largely divided into three camps. First were those who wanted to nationalize the monopolies. Second were those who wanted to break them up and develop meaningful competition. Finally were those who were satisfied to retain private monopolies, but only on the condition that they were subject to strong, professional, technically competent, and, of course, honest regulation. The corporate leadership of the utilities originally resisted the call for reform, but gradually came to regard it as inevitable and sought to shape and co-opt it. Of the three streams of thought in regard to reform, of course, nationalization was entirely unacceptable to the corporate leaders. Competition was something which, for a variety of reasons, corporate leaders preferred to avoid. The private utilities, over time, came to view regulation not only as the least objectionable of the options for reform, but also as potentially advantageous for them, because it allowed them to retain both ownership and monopoly status. While some municipalities (e.g. Los Angeles, Cleveland, Sacramento, San Antonio), and one state (Nebraska) did opt for government ownership1, most states chose to create regulatory regimes for electric utilities.2

1 The U.S. powers sector today has mixed ownership. There are more than 2000 municipally owned electric utilities, most of them small distribution companies, a few large hydro generation companies (e.g. Tennessee Valley Authority, Bonneville Power Administration) owned by the federal government, and several hundred rural electric

3

State regulation of electricity was thus born from an unusual political alliance between reformers, seeking to fight corruption and control the power of privately owned monopolies, and private business interests trying to maintain their monopoly and avoid both nationalization and competition. In regard to municipally owned utilities, however, the majority, but not all, of the states, operating on the assumption that municipality owned monopolies were already under the control of public officials, excluded them from the jurisdiction of state regulatory agencies. Many, but not all states, have taken a similar position in regard to customer owned, rural electric cooperatives. In most states, regulatory commissions for railroads, canals, and other natural monopolies pre-existed the electric utility industry. Thus, in the vast majority of states, electricity jurisdiction was simply added to the authority of those agencies. In Ohio, for example, a regulatory agency for railroads had been established in the 1860s. As the electricity, natural gas, motor transport, water/sanitation, and telecommunications industries evolved in the early 20th century, the pre-existing Railroad Commission was simply given the additional responsibility for regulating each of those industries. Ultimately, it acquired the name Public Utilities Commission of Ohio to reflect its multi-sector responsibilities. In a minority of states, entirely new agencies were created, but almost all of the state regulatory agencies are multi-sector in nature. Federal regulation did not appear until the 1930s. The Federal Power Act (FPA) and the Public Utilities Holding Company Act (PUHCA) were both enacted as part of the New Deal reforms of President Franklin Roosevelt. The formation of the Tennessee Valley Authority (TVA), Bonneville Power Administration (BPA), and the National Rural Electrification Act (REA) were also part of the New Deal. The first two statutes created a powerful new regulatory role for the federal government, which simply did not exist prior to those two laws. The last three established a strong commercial presence for the federal government in the generation, transmission, and distribution of electricity. The FPA was the result of a gap in electricity regulation first noted by the U.S. Supreme Court in the Attleboro decision. The case involved the wholesale sale of electricity between two utilities in neighboring states (Massachusetts and Rhode Island). The Court ruled that since the transaction in question involved the sale of electricity across state borders and since the Constitution vests jurisdiction over interstate commerce in the federal government, the state regulators in the two states had no jurisdiction over the transaction. Since there was no federal regulatory system at the time, the effect of the decision was to completely deregulate interstate sales of electricity. Congress passed the FPA, which created the Federal Power Commission (now known as FERC, Federal Energy Regulatory Commission) to make certain that interstate sales did not become a regulatory loophole. The Commission was given jurisdiction over all “sales for resale” (i.e. wholesale) of electricity, and for use of the grid to carry out such transactions.

cooperatives, as well as a number of utilities owned by private investors. The private investors serve about 70-75% of the load in the U.S. 2 It was not until 1975, when Texas, the last state to enact electricity regulation on a statewide basis, created the Public Utility Commission, that all 50 of the states had a state regulatory regime in place.

4

Congress passed PUHCA in 1935 to fill still another regulatory loophole that had led to scandals and bankruptcy in utility finance and self-dealing during the Great Depression. While individual states had been regulating the securities issuances and self-dealings of the utilities they regulated, the formation of multi-state parent holding companies put many of these transactions beyond the jurisdictional reach of single state commissions. Congress filled that gap by imposing rigorous regulatory oversight by the Securities and Exchange Commission (SEC) over all of the affiliate dealings as well as physical and financial structure of the holding companies. The only way to escape very strict regulation was to change the corporate structure in ways that allowed individual states to exercise the full scope of their regulatory authority. The formation of TVA and BPA was carried out in order top promote development in the southeastern and northwestern regions of the U.S. These regions have very significant hydroelectric resources, but, for a variety of reasons, the private investment was either not forthcoming or was less desirable than investment by the government. Because federal law provided preferential access to those resources to government or cooperatively owned utilities, those laws had the very real effect of promoting municipal ownership of utilities in the affected regions. The REA was enacted to promote the electrification of rural parts of the U.S., a mission which many investor-owned utilities seemed very reluctant to take on. From a regulatory point of view, given that most state regulatory agencies lacked jurisdiction over municipal and cooperatively owned utilities, and that federal regulators were not granted jurisdiction over TVA or BPA, the regulatory role was more limited over what it might otherwise been. B. Legal Foundation All U.S. regulatory bodies, both state and federal, are permanent agencies established by primary law3, most of them by statute.4 None are created by such secondary legal instruments such as executive orders or decrees. The state agencies, of course, are creatures of state law, while the FERC exists under federal law. Under the U.S. Constitution, all states are sovereign in their own territories and have the ability to set up their own regulatory regime. To the extent, however, that commerce becomes interstate, the states lose jurisdiction unless the Congress delegates it to them. In regard to electricity, of course, Congress delegated nothing to the states. Rather, it created its own regulatory agency, today’s FERC. The agencies are defined by most state laws as free standing agencies. They are independent and not part of any other agency of the government. They are free to make their own final decisions, subject only to the formal appellate process. In a small minority of the states (e.g. Massachusetts) and in the case of FERC, the agencies are, on the table of organization of the government, a part of another department (The Department of Consumer Affairs in the case of Massachusetts, and the Department of Energy at the federal level). These placements, however, are purely administrative matters and have no bearing on the ability of the agencies to make their own, independent decisions. In some states, although not all, and certainly not at the federal level, the Chairman of the Commission is a member of the Cabinet.

3 Primary law is defined, for purposes of this document as either constitution or formal statute created by legislative action. 4 In a small minority of states, such as California and North Dakota, the regulatory agencies are created in the state constitution rather than by statute.

5

Regulatory agencies in the U.S. are somewhat unique from the viewpoint of legal theory. Governmental powers under the U.S. Constitution, as well as under all of the state constitutions, are divided into three categories, reflected in the three branches of government, legislative, executive, and judicial. Reduced to its simplest form, the legislative branch makes the laws (i.e. basic policy). The Executive enforces and carries out the law. The judicial branch interprets and clarifies the law, and resolves legal disputes. Most agencies of government fall into one of those three categories. Regulatory agencies, however, do not. They have responsibilities that are drawn from all three. They exercise legislative powers,5 such as setting rates and tariffs, defining standards and rulemaking. They exercise judicial powers,6 such as resolving jurisdictional disputes (e.g. consumer complaints) and interpreting regulatory statutes and policy. They also exercise executive powers,7 such as carrying out and enforcing laws, as well as performing administrative tasks (e.g. buying supplies, hiring and firing personnel). Thus, regulatory agencies simply do not clearly belong to any single branch of government or chain of command. Therefore, by strict legal definition, they are inherently independent agencies, accountable in different ways to the legislatures, to the courts, and to the executive authorities, but only partially so to each. Some legal commentators have described regulatory agencies as the fourth branch of government. While regulatory agencies are not a separate branch of government in a literal way, the observation is, from a substantive point of view, not entirely inaccurate. While they are free to make their own decisions, regulators are, nonetheless, creatures of law, who derive their powers from delegations of authority and budgets from legislators; are, more often than not, appointed by and subject to the fiscal supervision of executive authorities; and are kept within the bounds of their delegated powers by the courts. The delegation of authority to regulatory agencies is generally found in statutes which typically spell out the duties, responsibilities, financing, and powers of the agencies. Typically these might include requirements as to agency operations and processes, methodologies to be used in tariff setting, delegation of legislative powers in regard to rulemaking for secondary legislation, methods of financing, scope of jurisdictions, appellate processes, provisions for appointing commissioners and chairmen, and other provisions to fully establish and empower the agency. The details in regard to these functions are spelled out below. C. Powers of Regulatory Agencies The general practice in regard to delegating responsibility to regulatory agencies is to do so in general terms, providing the agencies broad discretion in regard to the exercise of their powers. There are, of course, limitations in the exercise of their discretion. One is that they cannot operate outside of their legal powers. The second is that they cannot violate any Constitutional rights enjoyed by regulated companies or consumers. The Bluefield case involving natural gas regulation in the state of West Virginia was a seminal decision by the U.S. Supreme Court, more than 80 years ago on this topic. This case determined, for example, that setting tariffs so low for

5 Legislative powers may be defined as making decisions are prospective in nature and applicable to all. 6 Judicial powers may be defined as making decisions regarding judgments regarding past behavior, resolving disputes, interpreting the law, and applicable solely to those who are parties to a case. 7 Executive powers may be defined as carrying out the administrative functions of the governments and executing and enforcing the laws.

6

a regulated company that it could not have a reasonable opportunity to recover its prudently incurred costs, constituted an unconstitutional “taking” of private property in violation of the Fifth Amendment to the U.S. Constitution. The following are an overview of how the agencies are typically empowered in certain critical areas of responsibility: 1. Licensing State and Federal laws governing utility regulation set out the criteria regulators are to use in granting licenses for private companies.8 Typically, these criteria are two fold, one financial and corporate structure, and the other performance based. The first relates to the ability of the company to the demonstrated financial and management capabilities of the company to meet its obligations. The second is not as much a qualification to obtain a license as it is one to renew and obtain one. State and federal laws generally provide for specific service obligations of licensed utilities. They include, among other things, providing universal service, meeting all filing and reporting requirements, being in compliance with applicable standards, rules, and regulations, and providing acceptable levels of service at approved rates. The licenses required at the federal level are a prerequisite for participating in the FERC regulated wholesale electricity market, whereas the state licenses are required to serve retail customers. In addition, as was noted earlier, for multi-state public utility holding companies, there are specific approvals required by the U.S. Securities and Exchange Commission. In some states, municipal licenses may be required as well in order to have access to public streets and sidewalks for distribution facilities. Typically, in U.S. regulations, the licenses are simple documents which merely bestow on a company a legal right to engage in the business. The substance of a company’s obligations, terms and conditions of doing business, and regulatory requirements are rarely found in licensing documents. Rather, they are found in law or in the rules, regulations, and decisions of the regulatory agencies. 2. Ratemaking

a. State Level At the state level, traditionally, the basic methodology and principles to be followed in the setting of tariffs is set out in statute. The overriding principle in setting tariffs is that regulated companies and their investors have a reasonable opportunity (not a guarantee), with competent management and efficient performance, to recover all prudently incurred costs they incur in offering quality service to their customers plus a reasonable profit commensurate with the risk undertaken. The dominant methodology has been cost based rate of return regulation:

(Original Cost – Depreciation) x Rate of Return + Operations and Maintenance (O&M) Costs

8 In some states, government and cooperatively owned utilities must be licensed as well, but in many states, only private companies are required to obtain licenses from regulators.

7

In most states, “cost” means the specific costs of the company in question, as opposed to hypothetical or imputed costs. Some states, in the past, have varied a bit from that formula; for example using Replacement Cost instead of Original Cost minus Depreciation. Some states have looked look at O&M costs on a historic basis, while others look at it on a prospective basis, and others, on some mix of the two. All states, in regard to both capital and operating expenses, require that regulators evaluate those costs to make sure that they are actual, verified, and prudently incurred.9 Some states (e.g. Wisconsin) require automatic rate reviews at stated intervals of time. Others simply leave that to the discretion of the regulators or to those who might seek to trigger a rate review in order to either raise or lower tariffs. The tariffs are derived by first determining the revenue requirement of the regulated company and then allocating responsibility for paying those costs among defined classes of customers (e.g. residential, commercial, industrial) based on the cost of actually providing the service to each class.10 Rate design issues are also considered every time rates are considered. These issues include which deciding which costs are fixed and which are tied to consumption, whether rates should be designed to encourage efficient use of energy. Generally, state laws and/or regulatory policy prohibited discrimination among consumers of the same class. The traditional state regulatory tariff setting methodology has come under pressure and criticism. Critics have suggested that it provides the wrong incentives for investors. They suggest, for example, that since the only profit an investor may earn is on capital investment, the formula encourages over-investment in physical plant or “gold plating.” They also note that because regulators set the rate of return11 at levels that will attract new and continued investment, and because poorly managed companies will require higher returns to attract investment, the model rewards poor performers and penalizes good performers. Supporters of the methodology argue that regulatory review of the prudence of investment and the risk of disallowance discourages overinvestment, and that poor performers are not necessarily rewarded because the possibility of disallowance of expenses mean there may be a smaller base on which profits may be earned. The pressure on the traditional system was the result of the emergence of competition. Some customers, particularly large industrials, were able to leverage their market power (e.g. self generation, moving production lines, closing facilities, or political clout) to force utilities to lower their rates by substituting, special contracts for service at below tariff rates. To be effective, these contracts, because they were arguably discriminatory, had to be approved by

9 Traditional rate cases in cost of service regulation are very fact intensive. Typical of the questions are what is the appropriate depreciation schedule for different types of equipment and facilities, whether or not certain costs are allowable for recovery, which costs were actually accrued and which were not, actual inventory levels, the prudence of certain expenditures, and so on. 10Most states isolated fuels costs from other costs and passed those through to consumers through a separate mechanism known as the “fuel clause,” which was periodically (often quarterly) adjusted to track actual costs. Utilities simply passed through those costs on an “as incurred”, not marked up, basis. 11 There are a variety of models that regulators use to set the rate of return, the details of which are beyond the scope of this paper. The most common methodology is discounted cash flow, which focuses heavily on investor expectations. The rate that is set, however, is usually a range rather than a precise number. That rate of return, of course, applies only to the equity portion of a company’s capital structure. Unless there is an issue of prudence regarding the borrowing of money, the cost of debt is simply passed on. State regulators in the U.S. traditionally regulate the securities issuances of regulated companies and pay close attention to their debt/equity ratios. While there is no firm rule on the point and states do differ, as a general rule, a 50-50 debt/equity ration is viewed as desirable.

8

regulators. Thus, in many states, even before retail markets were legally open to competition, most industrial users were being served not on tariffs, but through special contracts, the prices of which were essentially market, not cost, driven. Given the weakening of the monopoly power of the utilities in regard to large customers, about half of the states have moved to retail competition over the past decade. The cost of energy is offered by competitive suppliers, and the only remaining monopoly service is the wires delivering the energy.12 It is very important to note that the decision of whether or not to have retail competition was, in most states, the result of legislative action, not regulatory decisions. While state legislatures usually provide considerable discretion and latitude to regulators on ratemaking and tariff issues, sweeping policy changes, such as from regulated monopoly to competition, are generally beyond the scope of the discretion granted to state regulatory agencies. 13 That being said, however, one should note that in many states the policy inquiry into reforming retail market often began in proceedings at the regulatory agency. Thus, even where regulatory agencies lack specific authority to take certain decisions, they always have the discretion to conduct formal inquiries and make policy recommendations to their legislators and Governors. In California, for example, the Public Utility Commission (CPUC) initiated the process of implementing retail competition and even made a formal proposal for doing so. The CPUC, however, lacked the legal authority to implement the changes on their own, so the actual decision to open retail markets, and the choice of market design, were the result of actions by the legislature and the Governor, not the regulators. Given the catastrophic consequences of those decisions, it is only fair to note that the legislature and Governor explicitly rejected the CPUC recommendations on the market model, and substituted their own. Where there is retail competition, of course, the actual regulated tariff is only a small part of the bill. So, some states have been contemplating changing the ratemaking regime to something simpler, perhaps more incentive oriented, such as price caps. Many, of course, prefer to leave the old regime in place for setting the tariffs. In most states, however, the regulators themselves lack the discretion to change the methodology on their own. Rather, the state legislature would have to enact legislation authorizing such a change.

b. Federal Level In discussing federal ratemaking power, understanding the difference in federal and state jurisdiction is critical. The state regulators have ratemaking authority over sales to end users, including transmission, when it is bundled with generation and distribution. Wholesale rates14

12 The U.S. experience with retail competition, a topic beyond the scope of this paper, has been a mixed one where some customers, particularly large industrial ones, have derived benefits, while many others have not. As of the date of writing this paper, about ½ of the states have opened their retail markets to retail competition. 13 There were a few states, Michigan and New York, for example, where the regulators possessed sufficient legal discretion to implement competition on their own volition, but they are the exceptions. 14 Wholesale rates are those charged in a sale for resale, namely energy transactions between utilities. These transactions are jurisdictional to FERC under the FPA regardless of whether the sales are intrastate or interstate in nature. .

9

and unbundled transmission service are subject to federal regulation. Thus, consumers are directly affected by state tariff regulation, but only indirectly by federal authority. At the federal level, the ratemaking regime, from a legal point of view, was quite different. FERC, unlike its state counterparts, was given more flexibility in regard to ratemaking methodology. The Congress simply required that the rates be “just and reasonable,” and left it to FERC and the Courts to determine what that actually meant. Until the mid 1980’s, FERC carried out its ratemaking obligations along lines very similar to that of the states. Since the onset of wholesale competition, however, FERC has changed course dramatically. The agency is aggressively trying to promote and maintain competition in generation. Hence, it now exercises its traditional approach of cost of service regulation over generators only where it has determined that a generator or generating company has “market power.”15 Where a generator, or generating company, lacks market power, FERC refrains from exercising its power to establish prices and deems that whatever prices result from a viably competitive market, are, ipso facto, “just and reasonable.” Having the flexibility to apply different pricing methodologies to regulated companies in differing circumstances provides the FERC with enormous leverage that may not be apparent from a literal reading of the statutes. A clear example of the effective leveraging of ratemaking power was in transmission access. One power that FERC lacked, however, was the ability to order open access on the transmission systems of the utilities. Thus, regardless of what it did to promote competition in generation, any utility who chose to do so might deny access to a competitor who wanted to use its wires to sell to a customer. In 1992, the Congress enacted the Energy Policy Act, which gave FERC the power to order utilities to provide access to competing generators on a case by case basis. Although the statute provided only for case by case open access, FERC, through effective use of its ratemaking powers was, in a fairly short period of time, able to compel all transmission owning utilities to file generic open access tariffs16. It also had sufficient authority to compel a number of utilities to divest themselves of day to day control of their transmission systems by creating incentives for turning over dispatch and related functions to Independent System Operators (ISO’s). Thus, although Congress delegated only case by case power to the federal regulators, FERC had sufficient discretion and an array of powers, including ratemaking authority, to compel many regulated companies to act in ways that the law did not specifically authorize FERC to mandate. The key power FERC used to accomplish its transmission objectives and advance the cause of competition was to lighten the regulatory burden on the generators of those companies who had functionally unbundled their transmission assets. If a company was in an ISO, FERC essentially presumed that that company had no vertical market power, and in the absence of demonstrated horizontal power, it was free to sell energy at unregulated rates. For companies that did not functionally unbundle, FERC made no such

15 Market power is a situation where a single competitor possesses enough leverage in a defined market to unilaterally establish the prices paid by purchasers. 16 The 1992 Energy Policy Act provisions regarding open access only applied to private and municipally owned utilities. FERC, ironically, has never had ratemaking or transmission access jurisdiction over utilities that are owned by the Federal Government, some of which, TVA and BPA, for example, are quite large and strategically positioned to influence the evolution of competition.

10

presumption and those companies were faced with either the threat or, in some cases, the reality of fully regulated energy rates17 3. Information Gathering Powers Both state and federal regulators are provided with broad powers to collect the information they require to carry out their missions. Typically, regulators have four mechanisms for obtaining information:

a. Voluntary Regulatory agencies, like any other agencies, can always ask for those from whom information is sought to provide needed information voluntarily. Regulated companies comply with such requests more often than not. With regard to unregulated companies or private persons, success in voluntary production is usually dependent on ease of producing, privacy or confidentiality considerations, self-interest in providing information, and or likelihood that production of information will be compelled anyway.

b. Auditing and Inspection Regulatory agencies typically have powers to audit and inspect the books, records, and assets of all regulated companies. Some state laws even have express provisions authorizing regulatory personnel to access the property of regulated companies in order to carry out auditing and inspection responsibilities. Audits and inspections are typically carried out to verify reports or other formal submissions by the companies to the regulatory agency, but they are not necessarily limited to that.

c. Reporting Requirements State and federal regulators have considerable powers to require regulated companies to report required information of a periodic basis, or on the occurrence of a particular type of event, such as a service outage or billing error. Some of the reporting requirements are specifically set out in statute, but many of them imposed by the regulators acting within their lawful powers. Regulated companies typically issue annual and quarterly financial reports, production and productivity information, service outages, consumer complaints, accidents, and other such information. Those reports are submitted to the regulators and are public information.

d. Subpoena Power When the regulators require specific information that they are unable to obtain by other means, they typically have the power to issue subpoenas to compel parties subject to their jurisdiction to produce that information. The subpoenas are fully enforceable by the Courts as long as they are

17 Just how far FERC can go to leverage its ratemaking authority to force regulated companies to restructure themselves is still not entirely clear. Questions of this nature are still being sorted out in the Courts and in debates in the Congress.

11

lawfully issued and as long as the regulators have a legitimate interest in obtaining the requested information. 4. Rulemaking Powers At both the federal and state levels, regulatory agencies have almost identical powers to approve rules and regulations (i.e. secondary/subsidiary legislation) to those possessed by Departments (Ministries). Rules and regulations, of course, can be made to fill in details left vague in primary legislation, to carry out such obligations as articulating service quality standards, procedural rules for decision-making, guidelines and criteria for various types of decisions (e.g. defining market power, criteria for allowing market based rates, approving special contracts), and other such matters. Rulemaking powers are generally exercised when there is a generic need to provide guidelines to regulated companies and to consumers with insight into how the regulators might decide certain questions, or, at least, what criteria they will apply in making decisions. It also provides regulated companies with knowledge of how their performance will be evaluated by the regulators. 5. Adjudicative Powers Both state and federal regulators have the power to adjudicate disputes that fall within their subject matter jurisdiction. Typical examples of cases which regulators adjudicate are consumer complaints (e.g. poor service quality, billing errors, non-compliance with tariffs), price discrimination, territorial disputes between utilities, and allegations of anti-competitive actions/behavior. Jurisdictional adjudications by regulators are legally binding decisions. 6. Enforcement Powers Regulatory agencies have the power to enforce or seek to enforce their decisions. In all states and at the federal level, regulators have the ability to order regulated companies to comply with specific order in regard to how they conduct their business. If, for example, a company is found to have been overcharging customers, the regulators can order the company to cease doing so. If the company fails to comply, it cannot force the customer to pay the overcharges, so its bill, or at least that portion found unlawful by the regulators, is rendered uncollectible.18 If the company continues to engage in behavior that violates an adjudicative decision of the agency, the options open to the regulators vary from one state to another. In some states, the regulators may find the company and/or its personnel in contempt of the agency and seek criminal or civil penalties for failure to comply. In other states, the regulators do not have the power to hold a company or person in contempt, but have to seek an order from a court to enforce their decision. Failure to comply with a court order is a crime. In those states where judicial intervention is a prerequisite for enforcement, the courts are required to give significant deference to regulatory agency decisions in regard to the facts and technical matters,

18 State laws vary widely on what can be done to remedy over-billing or poor quality service. In some states, the regulators can order refunds or order payment of compensatory damages. In others, the regulators lack the power to award damages, although a successful complainant can go to court to seek restitution, and in some states (e.g. Ohio) seek treble damages for poor service.

12

and are generally precluded from revisiting all of the facts and circumstances. Rather, the courts are supposed to simply make certain that proper procedures and relevant laws were followed, and that the regulators acted reasonably and within their lawful powers. 7. Administrative Powers Regulatory agencies are generally provided with the same administrative powers as any other agency of the government. They are also, usually subject to the same fiscal and administrative requirements as other agencies. Simply stated, regulatory agencies in the U.S. generally have the ability to manage themselves much like every other agency of government. D. Differentiation Between Role of Regulators and Role of Line Ministries The different roles played by regulators and line ministries (generally known as Departments in the U.S.). are defined by statute and may vary a bit among the states, and between states and the federal government. In the most general sense, the difference is that regulators apply the laws and policies enacted by their legislative bodies to regulated entities, which are licensed to provide such critical infrastructure services, such as providing electricity. Departments, on the other hand, administer government programs (e.g. low income, rural electrification, conservation and efficiency, research and development, promotion of desirable technologies such as renewable resources), advocate for the government’s agenda and programs in their respective subject areas, and provide policy and technical advice to Governors at the state level, and to the President at the federal level. Although conflicts over their respective roles and responsibilities between line agencies and regulators are common in countries with newly formed regulatory agencies, they have not been common in the U.S., for a variety of historical reasons. One reason is that the departments, with precious few exceptions in the U.S., have never had direct or meaningful responsibility for managing state owned electric companies. So, when regulatory agencies were created, they were not really displacing any department of government with “turf to protect.” Another reason is that the difference between operating programs and regulating industries has been reasonably clear, on both a legal and operational basis, for some time in the U.S. Another reason has been that key interest groups, such as regulated utilities, large and small customer groups, and others, for a variety of reasons, have been very supportive of keeping the lines between regulations and executive department functions separate. While “turf fights” between regulators and executive departments are not common in the U.S., policy differences are not unusual. For example, different parts of state government lobby at the federal level for policies that are in conflict with one another. An example of this occurred in Ohio in the late 1980s. The Public Utilities Commission, which regulated electricity, called for stronger federal protection from monopoly rates charged for moving coal. Meanwhile, the Department of Transportation, which had responsibility for promoting the financial health of cargo railroads, took exactly the opposite position. Numerous other examples of policy differences between departments and regulatory agencies exist. Often, the policy differences are most pronounced when a new administration takes office, but the regulators, because of their

13

fixed terms, hold over, and may be more reflective policy views of the administration which appointed than of the new one. Sometimes, departments, respectful of the differences between their role and that of regulators, actually become formal interveners in regulatory proceedings in order to advance their point of view in an area where the regulators have clear decision making responsibility. A common example is in regard to the promotion of energy efficiency and conservation, where executive departments at both the state and federal levels, in order to promote efficient use of energy, intervene before regulators to push for incentives, rate designs, and other regulatory mechanisms to advance their policies. The role of departments as interveners is also exemplary of the fact that, from a legal point of view, for purposes of regulatory decision making, executive departments are no different than any other intervener, private or public, in terms of their access to and means of communications with regulators.19 Finally, regulatory agencies regularly work together, formally or informally, to coordinate on common interests and policies. This is frequently the case in regard to budgets, conservation/weatherization programs, and low income subsidies, and in other areas where there are overlapping responsibilities, common goals and objectives, and or public interest considerations that require coordination. E. Relationship Between Sector and Competition Regulators The jurisdiction over competition issues, in general, in the U.S is, to understate the point, highly fractured and fragmented. At the federal level, both the Federal Trade Commission (FTC) and the Department of Justice (DOJ) have general jurisdiction over competition. In addition, the Attorney General of every state has anti-trust responsibilities as well. 20 In regard to regulated industries, such as electricity, sector regulators also have competition powers. Depending on the precise nature of the legal issue presented, sector jurisdiction might be possessed by FERC, the SEC, the Nuclear Regulatory Commission (NRC), and perhaps even the Commodities and Futures Exchange Commission (CFTC). Additionally, of course, sector regulators at the state level also may possess jurisdiction. Despite the potential for conflicts between the agencies over anti-trust matters in electricity, jurisdictional fights over competition issue are less frequent than might otherwise be imagined, but they do occur. At the federal level, on electricity issues, a level of informal coordination exists among most of the relevant federal agencies with competing responsibilities. The FTC, while it has no legal obligation to do so, generally defers to the DOJ and FERC on anti-trust matters in electric markets. FERC, although it is not legally required to do so, has generally adopted the DOJ anti-trust guidelines for use in its regulatory proceedings. DOJ, which can only enforce its regulatory opinions on competition through litigation, has, in electricity matters,

19 While the law requires such communications to be transparent (see further discussion in Section H below), it would be disingenuous to say that Governors or department heads never communicate informally with regulators. Sometimes such communications are benign; at other times they have become scandals of sorts. 20 The term more commonly used in the U.S. to describe competition regulation is “anti-trust.” The two terms are used interchangeably in this paper

14

largely acquiesced to FERC 21being the forum of choice for deciding competition issues in the power sector. This informal set of “understandings” has worked reasonably well in the sense that conflicts among federal agencies about competition in electricity and the sending of mixed signals to market participants has largely been avoided. In recent years, FERC has become the main regulatory driver of competition policy in electricity, for a variety of reasons. One reason is that the electric market, because of its need to instantaneously balance supply and demand, requires real time monitoring, a capability that the competition regulators do not actually possess. While FERC also lacked this capability, it has, in effect, created it by requiring each ISO to have an independent market monitor either on staff or under contract to follow the market on a real time basis.22Those monitors are required to report periodically to the ISO’s and to FERC itself on the state of the markets they are closely following.23The creation of ISO’s and proposed incentives for utilities to spin off transmission into separate companies, and the effort to impose a standard market design (SMD)24on the entire country, have been major initiatives in mitigating vertical market power that only FERC was in position to pursue through its own processes. The fact that FERC, unlike DOJ, for example, has its own processes and very extensive resources devoted to electricity has facilitated FERC in taking the leadership position at present. DOJ, on the other hand, has many industries for which it is responsible and has to rely on the courts to adjudicate and enforce its positions. FERC’s adoption of the DOJ guidelines in deciding whether or not to approve mergers and acquisitions in the electricity industry has also given DOJ some comfort in allowing FERC to take the lead. That has not always been the case historically, and it may yet change again at some point. Nonetheless, there have been, on a few occasions, conflicts among federal agencies. One in the early 1990s was particularly controversial. The case involved a vertically integrated public utility holding company which was buying coal from an affiliated mining company at above market prices. The original transaction had been approved by the SEC in 1958 in the exercise of its powers under the Public Utility Holding Company Act. The SEC had ruled that the company could buy coal from affiliated mines as long as the prices paid were cost based. As those costs 21 A critical problem was that the SEC had approved cost based coal prices, but had failed to either monitor or verify the costs. Wholesale customers, unhappy with the high prices being passed on, and being unable to persuade the SEC to investigate costs, complained to FERC that the company was using its market power to pass on to captive customers above market costs paid to an affiliated mining company. In response, rather than conducting a cost of service rate case investigation, FERC simply decided that the company could only pass on coal costs at or below market prices for coal of comparable quality. In that way, FERC concluded, the company would be unable to extract monopoly rents from its customers. 22 ISO’s exist in several parts of the U.S, particularly in the Northeast, Midwest, Texas, and California. They were created, as noted above in the section on ratemaking, to allow vertically integrated utilities to surrender control over transmission and dispatch without actually having to divest ownership, a transaction which could have significant tax and other unintended consequences. By surrendering control over transmission and dispatch to a completely independent monitor, vertical market power could no longer be exercised. The ISO’s are responsible for large areas encompassing multiple utilities and other transmission owners. 23 The relationship between FERC and the market monitors is still evolving. The U.S. Court of Appeals for the District of Columbia recently ruled that FERC was precluded from meeting privately with a market monitor. It remains to be seen whether that ruling will increase transparency or simply impede effective communication between the monitors and the regulators. 24 It is possible that FERC overreached politically on SMD. There has been strong opposition to it in Congress, especially from powerful Senators from the Southeast, whose utility constituents have been particularly vocal in their opposition toe FERC, and the effort may well be stalled.

15

produced above market prices, the FERC decided that the company could not pass on above market coal costs to its customers. The company appealed FERC’s decision to the courts, and argued, with the full support of the SEC, that the 1958 approval of the transaction precluded FERC from disallowing above market prices paid to an affiliate to be passed on to captive customers. Thus, the Court of Appeals in Washington was presented with the odd spectacle of two federal regulatory agencies suing each other. The Court decided the case in favor of the company and the SEC, ruling that the company’s reliance on the 1958 SEC approval was sufficient grounds to prevent FERC from stopping what it viewed as an anti-competitive abuse of monopoly power. The role of the states in anti-trust is something of a “wild card” for two reasons. The first is that, while federal agencies can only act under federal anti-trust laws, each state, through its attorney general, is free to pursue competition issues either under federal law (e.g. Sherman Anti-Trust Law, Clayton Anti-Trust Law), or under the anti-trust laws of their state25. State attorneys general often lack the same resources that federal agencies have to pursue enforcement of competition laws. They often prefer to act in coordination with federal agencies, but they are not required to do so, and sometimes choose to pursue their own independent course. In electricity, however, because of the existence of competent state regulatory agencies, many attorneys general simply defer to the agency rather than use their own resources. Thus, on competition issues in electricity, the relationship between state and federal sector regulators is more likely to produce difficulties than the relationship between state and federal competition regulators. F. Relationship Between State and Federal Regulators Three basic facts are critical to understanding the relationship between state and federal regulation the U. S. The first is that both sets of regulators derive their powers from the laws of their own levels of government, both of which are sovereign and, to some extent, independent of one another.26 The second is that there has never been any concerted, thought out regime for the relationships between federal and state regulators. The relationship has simply evolved as a result of case law, changing technology, opportunistic maneuverings by participants in regulated electric markets, indirect effect of changes in the FPA, and changing industry practices.27 In short, not only was the relationship never clearly defined, but no serious attempt has ever been made by lawmakers to define it. Third, the relationship has undergone fundamental and accelerating change over the last twenty years from a dominant role for the states and a

25 Most states have their own anti-trust laws which are independent of the federal laws governing competition, and on occasion, quite different. 26 It should be noted FERC has no jurisdiction in two states and very little in a third. Alaska and Hawaii, because they have no interconnections with the rest of the country, are completely independent in terms of electricity regulation. A third state, Texas, is, with some exceptions in outlying parts of the state, also not interconnected to the rest of the country, so FERC lacks jurisdiction there as well. 27 While there has never been a comprehensive legislative review of the relationship between state and federal regulation, the authors of the FPA gave some thought to the potential for conflict because they put a provision in the law allowing FERC to convene a “Joint Board” of state and federal regulators to resolve issue of common interest. For reasons that are not entirely clear, and despite numerous opportunities to do so, FERC has never invoked its powers to convene such a Board. On occasion, FERC has formed ad hoc groups with state regulators to jointly address matters of common interest and they have frequent informal meetings with state regulators, but they have never used the formal mechanism available to them in the FPA.

16

somewhat marginal one for the federal regulators to a preeminent role for federal regulators and a diminished, but by no means marginal, role for the states.28 Very real cultural gaps separate state regulation, in a generic sense, from federal29. Federal regulators rarely, if ever, hear from consumers directly. They deal primarily with disputes among regulated companies and in shaping the markets in which utilities trade among themselves. In short, their work is at a fairly high level and their interfaces are largely with large corporate interests and their lawyers. State regulation, on the other hand, is more grassroots and nitty gritty. While state regulators do deal with large corporate interests and their lawyers, they also interface with neighborhood groups, poor people, and every other conceivable group. They deal at the neighborhood and street level, while FERC operates in a more cosmic sphere. While neither FERC nor state regulators are free from political and social pressures, as noted, those pressures are quite different at the state level than they are at the federal level. Another cultural difference historically between state and federal regulators was that many state regulatory agencies have aggressively promoted energy efficiency and conservation programs, while the FERC focused primarily on selling energy. Thus, while states were adopting integrated resource planning (IRP) models to make certain that utilities pursued least cost resource options, often factoring in externalities in calculating “least cost,” FERC was aggressively pushing for competitive energy markets with no consideration of externalities. Some convergence on these issues has occurred over the years as states have moved away from IRP, and as FERC has recognized that demand side management can play a very important role in competitive markets. However, the legacy of that conflict lingers on, especially in regard to assuring resource adequacy and choice of energy resources. While federal regulators, as a general rule, are more prone to looking at issues on a mostly economic level, state regulators are more likely to temper their economic analysis with social considerations. The electricity industry evolved from a highly balkanized series of vertically integrated, largely self-sufficient electric utilities serving defined geographic areas. It is now a diversified set of players, some vertically integrated, some not, increasingly dependent on trade, and doing business in one form or another on a regional, if not national or international basis. In regulatory terms, the industry has gone from being nicely configured for state by state regulation to one that is often beyond the jurisdictional reach of state regulators. Despite all of the change, the regulatory laws defining jurisdiction have changed only marginally. The statutory legal boundaries between state and federal regulation have been largely unchanged since the 1930s. 28 Perhaps the major reason for the increasing role of federal regulation is that improved transmission control technology has enabled more trading in energy over wider geographic areas. The passage of the 1992 Energy Policy Act with its provision for open transmission access both facilitated and accelerated that trend. Wholesale trading in energy has gone from being a marginal activity to being a central feature of electricity markets in the U.S. 29 While the regulatory cultures have always varied from state to state, twenty years ago the states were relatively united in regard to their views of the relationship with federal regulators. That monolithic dynamic of state regulators vs. federal regulators is no longer true. In general, and there are clear exceptions, the breakdown today is more regional. State regulators in the Northeast and Midwest have been supportive of FERC’s efforts to create a standard market design, even if it means some erosion in the authority of the states, whereas state regulators in the Southeast and Northwest have been bitterly opposed to FERC’s efforts. To a very large degree, those differences can be explained by the fact that, generally speaking, the states in the latter two regions enjoy moderate to low electric prices today and fear that competition will lead to higher prices, whereas the situation and expectations in much of the Northeast and Midwest is exactly the reverse.

17

The basic concept of the jurisdictional split between federal and state regulators is that FERC regulates wholesale transactions, unbundled transmission, and, since 1992, access to the transmission grid. The states regulate retail markets and rates, site and license new generating plants and transmission lines, oversee utility planning, and provide consumer protection. The conceptual border between state and federal regulation is considerably more blurred than the preceding paragraph appears, and there have been innumerable conflicts between state and federal regulators over them. The conflicts are not simply “turf fights” that some cynics have suggested. In many cases they represent very real differences on policy issues, on different approaches to competition and markets, diverse ideas on consumer equity and protection, and the very different regulatory cultures. Those different views can become quite problematic and can result in confused signals to investors and market participants, the creation of impediments to implementing coherent policies and incentives, inequities to consumers, and make change not only difficult, but perhaps traumatic. The full scope of the problem is illustrated by the fact that all market participants are, to varying degrees and in various ways, subject to both state and federal regulation. Distribution companies are entirely subject, for revenue purposes, to state regulation. They are, however, mostly subject to FERC regulation for energy purchases and the terms and conditions of accessing the grid. Transmission companies are entirely subject to FERC for revenue purposes and access policy, but entirely subject to the states for siting, licensing, and the exercise of eminent domain to acquire right of way. Independent power producers and other generating companies are jurisdictionally in the identical position as transmission companies, with the additional fact that state oversight of retail markets and distribution companies can influence their ability to sell their energy and capacity. Vertically integrated companies, by virtue of being in the transmission, distribution, and generation businesses are in the identical situation of stand-alone transmission, distribution, and generating companies. In addition, since they sell electricity to end users on a bundled basis, they also are subject to having their transmission and generation revenues subject to both state and federal regulation. While the list of problems encountered in the relationship between federal and state regulation is virtually endless, the following two current actual examples are illustrative: 1. Transmission Pricing and Expansion Most of the transmission assets in the U.S. are owned by vertically integrated companies, who have historically passed on one hundred percent of the costs of those facilities to their captive, mostly retail, customers. To the extent that non-captive customers used that transmission, the revenues from those transactions was credited back to captive ratepayers, thereby offsetting the costs they were required to bear. Thus, consumers have borne the residual revenue requirement of the grid owners. Two problems have arisen from this arrangement. The first problem relates to the question of priority of access to the grid in times of constraint. From the perspective of state regulators, if captive customers bore all of the residual financial risks of building and maintaining the grid, then they should have priority rights to access the grid

18

in case of constraints. FERC, however, with its focus on promoting competition, saw this as a way of maintaining market power by incumbents in certain geographic areas. FERC further believed that transmission pricing should be reflective of constraints and priority of access should be determined by who was willing to pay the most. While those states who favor competition have come to accept FERC’s view, many states have not and the battle rages on. The second problem is that as FERC develops incentives for investment in transmission, the states, unless they alter their rate treatment of bundle sales, are in position to cancel out the very incentives that FERC puts in place. The reason is that, in the case of vertically integrated companies, the states impose one hundred percent of the revenue burden on the captive retail customers. The incentive FERC is offering can, legally speaking, apply only to unbundled use of the grid. Since revenues from the unbundled use of the grid, under state regulatory practice, are returned to the captive customers to reduce their obligation to pay for one hundred percent of the costs, the incentive FERC is offering investors in transmission never reach the investors. In short, state and federal regulation cancel each other out. Moreover, since the transmission owners receive one hundred percent of their revenue requirement from inefficient use of their transmission assets and precisely the same from efficient use of the assets, they have absolutely no incentive to increase productivity. The third problem is that the federal regulators have absolutely no role in licensing and siting new transmission lines.30 Only the states have that authority and most state laws require a showing of necessity within the state in order to gain approval. Since many, and sometimes even the preponderance of the benefits of transmission lines are felt in other states, regulators in those states where licenses are sought have two reasons to be parochial in issuing licenses. The first is that most proposals for building new transmission attract a great deal of opposition from residents who may have many legitimate reasons to oppose the proposed new line, but if nothing else, simply do not want such an unsightly facility located near them. Thus, approving a new line is usually a very unpopular thing to do, and when there are no offsetting local benefits, it is even more difficult to approve it31. In short, disequilibrium exists between who suffers injury and who reaps benefits that encourage states to be very parochial. That incentive is, of course, compounded if the consumers in the state where the line is to be built are asked to bear the residual revenue requirements for a facility from which they may only derive marginal benefit. 2. Resource Adequacy Although certainly not universal, concerns that simply relying on the competitive market to assure the adequacy of energy supply is too risky are widespread. As a result, many states have been requiring the companies they regulate to come forward with plans that assure sufficient energy supply for the foreseeable future. Some states have expressed a strong preference for the companies they regulate to build new power plants, based on their belief that that is the best way

30 There is legislation pending in Congress to give FERC “backstop” authority to site and license needed new lines in case the states fail to do so, but as of the date of writing this paper, the legislation is still pending and its ultimate passage is very uncertain. 31 While some states have been notoriously parochial in their decisions regarding the licensing of new transmission lines, others have not been particularly parochial at all. From a legal and political perspective, however, the problem is that there are strong incentives to be parochial and the legal means to be so are readily available.

19

to assure that the plant is built and ready when needed. FERC, however, while not necessarily rejecting the need for assuring revenue adequacy, is also concerned that if incumbent utilities build more capacity in their service territory, they will acquire more market power and will harm the competitive balance in that region. As a result, some utilities are caught in a bind where there state regulators are telling them to build generating plants, and FERC is suggesting that if they do so, because of their increased market power, they may become subject to more onerous regulatory requirements than they are at present. In effect, a regulatory stalemate is in place that can only be resolved on a case by case basis on separate proceedings at FERC and at relevant state regulatory agencies, a very inefficient and costly way to make sure that new capacity gets built. G. Regulatory Agency Funding, Budgets, and Fiscal Controls The budgets of regulatory agencies are determined in very much the same way that the budgets of all other government departments are determined. The agency submits its proposed budget for the coming fiscal year (biennium in some states), and it is reviewed and perhaps revised in that process. The proposed budget is then submitted to the legislature for approval. Legislators often require public hearing at which the Chair and/or Commissioners are required to attend and defend their proposed levels of spending. The legislature then ultimately passes and sends to the Governor, or President at the federal level, an approved budget. If the Governor signs it, the budget is set. If he/she vetoes the budget, it goes back for further consideration. Ultimately, a budget is approved. As a practical matter, regulatory agency budgets are usually not very controversial. There are two basic reasons for the lack of controversy. The first is the most obvious. Spending on regulatory agencies is minuscule compared to all of the other government programs. One legislator described it as an “invisible pimple on the body of a whale.” Budget officials and legislators, in looking at government spending, naturally tend to focus their attention on “big ticket” items, and regulatory agency budgets are simply not one of them, and therefore, as a rule, draw little attention. The second reason they tend to avoid controversy is because of how the funds spent on regulation are derived. Regulatory agency funds, at both the state and federal levels of government, are, with some exceptions, derived from regulatory assessments or fees paid by regulated companies. Those fees are, by law, passed through to customers.32 The amounts of the fees are usually calculated on sales units (e.g. kwh) and are derived by simple arithmetic. The agency’s budget is approved and the fees are calculated by dividing the total amount by anticipated sales units. Since regulatory fees are derived from a revolving account and not fungible (i.e. cannot be used for any other governmental purpose), the effect of reducing the budget is to reduce fees, not to free up money to be spent elsewhere. Thus, the only question in regard to regulatory budgets for legislators and other budget officials is to spend the money or to

32 The automatic pass through, of course, is only guaranteed in a monopoly setting. For competing generators, the pass through may or may not occur, depending on the price derived in the market. All generators, however, have to pay the same regulatory fees, so the obligation to pay them does not skew the competitive balance. It is simply a cost of business common to all generators.

20

reduce fees. The pressure for the latter is almost non-existent since the fees themselves are very small (e.g. .27% of the average utility bill in Ohio, which is somewhat typical). Some controversies have occurred, occasionally, over regulatory programs. They are not common, but when they have occurred, they were usually the result of one of three scenarios. The first is where some legislator, acting either on his/her own, but more likely at the behest of some interest group which is disgruntled over a particular decision or policy, decides to use the budget as leverage to force the regulators to do something. The second scenario is when the government moves into an austerity mode and cuts the budget across the board and feels that it cannot politically exclude regulators from the cutbacks that other parts of the government have to endure. While the effect of cutting the agency’s budget is to simultaneously reduce the government’s budget, thus making the cutback a zero sum game, the optics of not forcing regulators to “share the pain” often overcomes logic and fiscal reality. The third area is where other entities are collecting regulatory fees and want to take a bigger share of them for themselves.33 An example of this occurred in Ohio, a couple of years ago. The Office of Consumers Counsel, the agency charged with defending the interest of residential consumers, tried, unsuccessfully, to persuade the legislature to take away all of the PUC’s budget for directly taking consumer complaints and assign that job exclusively to itself, in essence reallocating regulatory fees from the Commission’s account to its own. Regulatory agencies do, on occasion, also derive revenues from other sources beside regulatory fees. For some functions, particularly those related to safety, agencies will receive funding from the general revenue, or in the case of some functions (e.g. pipeline and railroad safety), state regulators will receive federal funding. In addition, for the performance of some special and costly function (e.g. licensing and approving the siting of a new generating plant or transmission line), regulators are sometimes allowed to charge fees for service to cover the cost of processing such a case. Finally, in some states, where it is necessary for the regulator to retain the services of special consultant(s) to assist them,34the regulators have the power to order the regulated companies whose actions or circumstances led to the need to engage the consultant(s) to pay for the services out of their own funds.35 Despite the uniqueness of their funding, regulatory agencies are generally treated identically with other parts of the government for fiscal control purposes. For such activities as procurement of goods and services, personnel expenses, travel, and accounting, regulatory agencies are subject to the same constraints and possess the same discretion as all other parts of the government. Government auditors have the same power to examine the books and records of regulatory

33 There have been, historically, very few other recipients of regulatory fees. Consumer advocacy agencies in a few states have received them. In several states that opened up for retail competition, they created “stranded benefit funds” to allow for continuation of programs such as low income subsidies and promoting energy efficiency, that had depended on monopoly rents for financial sustenance, once the monopoly disappeared. 34 Examples of where special consultants have been used were to review the prudence of the costs incurred in building nuclear power plants, or to conduct management audits at particularly troubled regulated companies. 35 Typically, those costs are passed on to the consumers. The pass through might not, however, be permitted, if the regulators decided that the costs were the result of misconduct or imprudence by the company. In that case, the services would have to be paid out of shareholder money.

21

agencies as they do any other branch of government. Finally, the agency has no ability to collect regulatory fees itself. Those fees are collected by the government treasury and retained in a special account. All disbursements by regulatory agencies are similarly made from the Treasury. H. Regulatory Processes, Transparency, and Public Participation The system for making regulatory decisions in the U.S. is very process heavy for three basic reasons. The first is that the process is deliberately designed to be as transparent as possible. That necessitates meaningful notice of the business being conducted and providing all parties who desire to do so, a full opportunity to participate in regulatory proceedings. A second reason is that regulatory decisions are subject to review by the courts. Over the years the courts have demanded a full public record as an evidentiary basis for decisions which were taken and have compelled regulators to follow very strict procedural requirements before making final decisions. Some cynics have suggested that such requirements were the inevitable result of the fact that judges are lawyers, and as such, while they may not understand substance, certainly understand process. A third reason is that legislative bodies, over the years, in exchange for the substantial delegation or power and independent discretion in using it, have imposed many process restrictions, in order to impose discipline on regulatory agencies. The process heavy nature of U.S. regulation has made it costly, cumbersome, lawyer dominated, and sometimes difficult to negotiate. On the other hand, the procedural requirements have made the process more transparent, more accessible in some ways, and more comprehensible to those who follow it. There are essentially two types of regulatory proceedings: quasi-adjudicative and quasi-legislative. The processes followed for the two types are quite different, although they are conceptually similar. The quasi-adjudicative process is used to decide matters where there are discreet, identifiable, often quite adversarial parties, where there are factual and perhaps legal disputes, and where findings of fact must underlay the decision of the agency. Examples of the types of decisions requiring quasi-adjudicative proceedings are rate cases (where tariffs are set), consumer complaints, territorial disputes between monopoly licensees, and specific allegations of anti-competitive behavior. Quasi-adjudicative cases are ones that require some sort of resolution and decisions. Quasi-legislative procedures, on the other, hand, are used when the regulators want to adopt or modify rules or make broad policy pronouncements, or perhaps simply to stimulate debate. Unlike quasi-adjudicative matters, they are not matters which necessarily require formal resolution. Examples of the types of case where quasi-legislative proceedings are used would be quality of service standards, market design, and competition standards. There are some requirements that are common to both types of proceedings. Any information and/or evidence of any sort used by, or in the possession of the regulators in the decision-making process, with a few narrow exceptions, is considered a public record and must be available for public inspection if anyone seeks it.36

36 While the laws vary from state to state, typical exceptions to the open records requirements would include personnel record, material used by the regulatory agency in preparation for litigation to which it is a party, legitimate trade secrets, security issues, and working drafts of decisions being used prior to the decision being publicly announced. The exceptions are never a reason for withholding information from the regulators, or for denying

22

One other characteristic is common to both types of decision-making processes at the federal level and in most, although not all, of the states. Regulators are subject to what are called “sunshine law restrictions.” “Sunshine laws” are statutory prohibitions of any non-public meetings by a majority of the Commissioners to discuss matters pending before the agency.37 Thus, if there are five commissioners, any meeting of three or more can only occur in a public meeting, the time and place of which are publicly announced in advance. If an agency has only three Commissioners, none of them can meet in private to discuss pending business. “Sunshine” restrictions are designed to be another tool for assuring transparency, but critics have suggested that, in fact, the restrictions actually impede the effective communications and discussion between and among decision-makers. One critic summed it up with the criticism that “sunshine actually clouds good decision-making.” 1. Quasi-Adjudicative Proceedings38 The quasi adjudicative process bears a very close resemblance, as one might expect, to the judicial process itself. A formal case is opened and public notice of it is given. The case may be initiated by a regulated company, by a consumer complaint, or perhaps by the regulators themselves. Once the case has been filed, it becomes a matter of public record and parties with a stake in the outcome have the right to formally intervene as parties to the case. Perhaps the best way to illustrate the quasi-adjudicative process is to use an application by a regulated company to increase its rates. The company is required to give public notice (e.g. through public advertisement in a newspaper of general circulation) and then files its case with the regulatory agency. Most state and federal regulatory have standard filing requirements that specify the form of the application, the supporting documentation, and information supporting it. The agency then reviews the filing to make sure it is sufficient. The review at this stage is purely perfunctory and non-substantive to simply make sure that standard filing requirements are met. The agency then either rejects the application as insufficient and states its reasons, or it accepts it for filing and sets a schedule for deciding the case. The schedule, at a minimum, includes the dates for interveners to file their petitions to be full parties to the proceeding39, the date when the applicant must submit all of the evidence it intends to use in the case, the dates when discovery may commence and when it must be concluded40, and the dates when intervener must have all of

adverse parties access to the information or documents that are useful in a pending case, but they do constitute grounds for preventing wider distribution or circulation of the information or documents.. 37 The term “sunshine” is derived from the notion that all meetings should be conducted out in the open (i.e. in the sunshine). 38 The federal and most, if not all, state governments have Administrative Procedures Acts (APA) which govern how both quasi-adjudicative and quasi-legislative processes are to be conducted. In some states (e.g. Ohio) the regulators are not required to follow their state’s APA. If they choose not to, however, they must publish administrative rules defining their procedures and must follow them. 39 Rate cases attract numerous interveners. Representatives of different customer classes and types (e.g. industrial, commercial residential, low income, agricultural, transport customers), local governments, departments of state and federal governments, and environmental groups are typical of the groups that are often found in rate cases. Some intervene just to be heard on one or two issues of particular importance to them, while other are full participants on all issues. 40 Discovery is the process within a case where the parties exchange all documents, information, and evidence of any sort which they intend to use at the public hearing in a matter. The process is designed to make it possible for

23

their evidence, documents, and other information submitted, and, finally the dates for public hearings to begin. Once all of the pre-hearing matters are complete, the hearing is conducted. The burden of proving it case is on the applicant41, who must demonstrate by “the preponderance of the evidence” that it is entitled to a tariff increase. The hearing is conducted in public and is presided over either by the Commissioners themselves (either all of them or some of them), or by an Administrative Law Judge (known as Hearing Officers in some states). The proceeding looks very much like a trial with adversarial parties, direct and cross examination of witnesses, who are testifying under oath. All sides have the opportunity to offer their own sworn testimony and to cross examine the witnesses for the other parties. At the conclusion of the case, the presiding official takes the case under advisement and proceeds to write a decision. Where Administrative Law Judges (ALJ) hear the cases, they issue a public recommended decision. All parties then have a specified period of time to file their comments on the recommended decision, supportive or critical, to the Commissioners for their consideration before rendering a final decision.42 Where the Commissioners themselves hear a case, the interim step of a recommended decision is often dispensed with. The Commissioners and ALJ’s, in quasi-adjudicative cases, operate under strict rules regarding ex parte communications. They are strictly prohibited from any discussion or exchange of information regarding a pending case with a party to that case without all parties having been put on notice and having had the opportunity to be there. In most states and at the federal level, the penalties for violating the ex parte rules are quite severe (e.g. criminal penalties or removal from office). The principle is that no party should be able to have access to decision makers that all parties do not also enjoy. The Commissioners and ALJ’s are also precluded from using information or evidence in deciding a case that is not part of the public or official record. The decisions in quasi-adjudicative proceedings must be not only articulated, but the rationale fully explained. Typically quasi-adjudicative decisions by regulatory agencies are comprehensive documents which follow the outline below:

a. Background and History of Proceeding b. Statement of the Issues to be Decided c. Summary of the Arguments Made by Various Parties d. Findings of Fact e. Conclusions of Law f. Statement of Decision and Specific Orders

all parties to be fully prepared to make their bets arguments in the public hearing and avoid the types of surprises that might interfere with “getting at the truth.” It is a process designed to make judicial proceedings more substantive and focused and less theatrical and tactical. 41 In a few states (e.g. Ohio), the staff actually conducts an investigation of the application prior to the discovery process and issue a report and recommendation. The staff, participating as a party to the case, must defend its recommendation, so that the burden of proof is actually shifted from the applicant to the staff. 42 In a few states (e.g. Ohio) the recommended decision is not made public. Only the Commissioners see it before they make a decision. Usually when that process is followed, however, a Commission decision is not made final until parties are given a reasonable period of time to petition the regulators for reconsideration.

24

Many quasi-adjudicative matters never get to the Commissioners for decision because the parties are able to negotiate an agreed upon settlement of all or, at least, some of the issues. U.S. regulators often encourage the parties to settle their differences rather than fully litigating them at the agency. To be binding orders, however, settlements have to be approved by the regulators. While proposed settlements are often politically difficult to reject, the regulators are not required to accept them, and, on occasion, do reject them and send the parties back to either come forward with an alternative settlement that is acceptable to the regulators, or return to hearings for further proceedings and ultimate resolution by the Commissioners. 2. Quasi-Legislative Proceedings Quasi-legislative proceedings follow a different process than do quasi-adjudicative ones. These proceeding are typically opened by the regulators themselves, although sometimes they are prompted to do so by either legislative action or by stakeholders. The proceedings are usually opened in one of two methods. In the first method, known as a Notice of Inquiry (NOI) or Commission Ordered Investigation (COI) the regulators open an inquiry into a particular subject by putting out a “white paper” or proposing a series of questions. Parties are asked for their responses to the questions or reactions to the “white paper.” They are also asked to provide input into their view of what course of action or policy direction the regulators should take. The second way that such proceedings are begun is generally more specific and more focused. The regulators, in a Notice of Proposed Rulemaking (NOPR) publish a policy paper or proposed rules and regulations they are contemplating for adoption and ask for comments on the proposal from interested parties. In both types of proceedings, the regulators study the comments, and sometimes even seek a second round of comments or rebuttal remarks. They take the feedback and use it to assist them in deciding what to do. NOI’s are usually an effort to stimulate debate and help the regulators think through difficult issues. They may never result in a formal decision, or sometimes they simply progress from a broad NOI to a more focused NOPR. Other times, formal decisions are made in the NOI. Similarly, NOPR’s could reach any of the same results, although, because they are more carefully focused, they are more likely to lead to a formal decision being made than are NOI’s. In both types of proceedings, the comments are generally sought in writing, although occasionally regulatory agencies also use oral hearings as well. The proceedings, however, are less formal than quasi-adjudicative proceeding and only rarely involve witnesses testifying under oath and being subject to cross examination. In addition, at the federal level and in many, although not all states, the ex parte rules as well as the restrictions on where and how the decision makers obtain information they use in deciding, are more relaxed than in quasi-adjudicative proceedings. The “sunshine” restrictions, however, are the same. 3. Opportunities for Public Participation In addition to the quasi-adjudicative and quasi-legislative proceeding, or perhaps in the context of those two, regulatory agencies, especially at the state level, have public hearings that are not

25

adversarial in nature. They are simply designed to provide interested members of the public with an opportunity to provide feedback to the regulators. They are typically used in cases of general public interest and impact, such as rate cases. Other times they are used by regulators to get feedback from consumers on such matters as quality of service, responsiveness of regulated companies to consumer concerns, and other such matters. These types of proceedings may have public relations value as a credibility building demonstration of sensitivity to public demands, but they also often have practical value as well. They allow the Commissioners or their staff to directly access the public and find out what their greatest concerns are. Public hearings of this sort have often allowed regulators to discover service quality problems of which they had not previously known, or generate new ideas for consideration. In California, for example, an elderly woman stood at a public hearing and complained about premature “late charges” being added to her telephone bill. Her comment led the regulators to investigate the matter and to discover not only was she correct, but found that thousands of other customers had to pay unwarranted late charges as well. The company was ordered not only to stop the wrongful billing practice, but to pay very significant penalties for its wrongdoing. In another case, this time in Ohio, a clergyman a public hearing on low income subsidies offered some new ideas for a subsidy program. The regulators investigated his suggestion and ultimately adopted his ideas in the creation of a far reaching program of energy and heating subsidies for low income households. I. Handling Consumer Complaints and Consumer Education 1. Consumer Education State regulatory agencies spend a fair amount of effort trying to educate consumers on a variety of issues related to electricity and to overseeing the efforts of regulated companies to do the same. The scope of these educational issues range from safety, to promoting the efficient use of energy, to advising consumers of their rights, to letting consumers know where to go if they have complaints regarding their service. Among the tools regulators typically use to educate consumers are advertisements, ordering regulated companies to print information on the bills they send to customers or requiring that inserts be put in the envelope along with the bills, news releases, conducting seminars, coordinated efforts with community and civic groups, programs in the schools, and public speaking. In many of the states that have opted for retail competition, the agencies have stepped up their efforts to assist customers in navigating the new market options. In fact, state legislatures in some of those states have boosted the budgets of regulatory agencies quite substantially in order to provide the resources for massive efforts to help consumers understand the market and to encourage them to take full advantage of it. Many state agencies, in fact, offer websites and do mailings comparing the prices and services that vendors are offering. Those websites are designed to try to make sure that customer both understand what is being offered and how to compare them. They also advise customers how to evaluate bona fide suppliers from “fly by night” operations. One way they do this is to publish lists of qualified licensees. The agencies also maintain files on suppliers and records of complaints, much of which, at least in aggregate form, is available to customers who ask for it.

26

2. Consumer Complaints The handling of consumer complaints is exclusively a function of state regulators who have jurisdiction over retail markets. There is a complaint process at FERC, but given the nature of FERC’s legal responsibilities, complainants are almost never end users. As a result, the discussion of how complaints are handled is largely a discussion about regulation at the state level. Complaints are received by regulators in a variety of ways. Most state regulatory agencies maintain toll-free telephone numbers and websites to enable customers to quickly and easily ask questions or make complaints. Regulated companies are required to maintain the same types of facilities. In addition, of course, complaints may be received by mail or e-mail. State agencies maintain staffs which are dedicated to handling consumer complaints and questions. Most of the calls and other communications received from consumers are questions rather than complaints, but the staffs in most agencies maintain a database of the types of inquiries and complaints, sorted by subject matter, company, geography, and perhaps other ways as well. These communications from consumers is supplemented by data received from reporting required on a periodic basis from regulated companies. Typically, companies are required to report all calls from customers sorted in the same ways that agency staff sorts data43, all outages (including information on location, number of customers affected, and duration), and a variety of other incidents. The staff periodically reviews and analyzes the data looking for patterns. The discovery of a disturbing pattern may lead to the opening of a formal or informal investigation, which, if warranted, could result in sanctions against a regulated company. There may be some variations among the states as to how they handle complaints, but, generally, they have two components: an informal one and a formal one. They are often, but not always, pursued sequentially. On an informal level, when a complaint is received by an agency, the customer is asked if he/she has contacted the company. If the customer has not done so, he/she is asked to do so to see if the matter can be sorted out at that level. The customer is advised to call back, if they cannot work it out with the company. If the customer calls back, the agency staff will try to mediate the matter. Most cases get settled at one of these two levels. If the matter cannot be resolved informally, then the staff of the agency decides whether to open a formal case for adjudication, or whether to advise the customer that there is insufficient merit to his complaint for the staff to pursue it. Although, the customer is also advised that he/she has the right to seek formal adjudication even if the staff found no merit to the complaint44. If either the staff or the customer seeks formal adjudication, the case is set for hearing and the process is very much like it would be in a court, with witnesses testifying under oath and subject to cross examination. The process is somewhat similar to that described above in Section H, in regard to a rate case. Ultimately, the Commissioners will render a final decision.

43 Most state quality of service standards have mandated response times to phone calls (e.g. 6 rings) to make certain that companies are responsive to consumer inquiries and complaints. 44 In fact, the customer always has the right to bypass the informal route entirely and pursue the formal adjudicative right to proceed immediately. Similarly, if the staff is troubled by the gravity of the situation complained of, it also has the discretion to dispense with any efforts to informally resolve the case and move quickly to formal adjudication.

27

The remedies available to a successful complainant under the law vary widely from state to state, but they might include compensatory damages, refunds, injunctive relief, attorneys’ fees, and perhaps even punitive or treble damages. In some states, the regulators themselves can provide the relief. In other states, the Commissioners can only assign liability and the determination of what the relief should be is left to the courts. J. Appellate Processes All decisions of regulatory agencies, state or federal, can be appealed to the courts by a competent party. Competent party is defined as a party who is impacted by the decision, who formally participated in the regulatory proceeding at which the decision was made, who argued the issue(s) being appealed, and who met all applicable deadlines for filing. If a party fails to meet any aspect of that standard of competency, he/she lacks “standing” to pursue the appeal. One other criteria for appealing is that the decision must be a final one. Appeals to the courts while the matter, or any aspect of it is still pending before the regulators are very rarely even considered by the courts. The mere filing of an appeal to the courts does not suspend the effectiveness of decision of the regulatory agency. In fact, the opposite is the case. The decision is, with one exception considered valid and binding until it is reversed by the courts. The only exception to that rule is when the appellant persuades either the regulatory agency itself or the court hearing the appeal to suspend the effectiveness of the agency decision pending appeal. The standard for getting such interim relief from an agency decision is quite high. To succeed, an appellant must convince the court or agency that: 1. It will suffer irreparable injury if the decision is not suspended pending appeal; and 2. It is substantially likely that the appeal will ultimately be successful. The courts to which appeals can be directed are defined in law. In some states, appeals may be made to any court of general jurisdiction. In others, appeals my only go to the appellate courts, and in some (e.g. Ohio), appeals may only be take to the Supreme Court of the state. At the federal level, appeals go to Circuit Court of Appeals (CCA) for the location in which the parties are located, or, more commonly the one serving the District of Columbia, where FERC is located.45 There are eleven CCA’s in the U.S. and they are the second highest courts in the country, below only the U.S. Supreme Court. A party who loses at the Court of Appeals level has a right to appeal to the Supreme Court, but unlike the Appeals courts which must hear every appeal by a competent party, the Supreme Court is free to, and often does, refuse the case. Appeals of regulatory agency decisions are not a repeat of the same process that occurred at the regulatory agency. Rather, the Court does not consider any new evidence or information which was not presented to the regulator during the agency’s consideration of the case. Nor does the court decide if it agrees or disagrees with the decision. Courts are required to give great

45 Lawyers will sometimes “forum shop” for the CCA they believe is most likely to be sympathetic to their client, so while the CCA for Washington, DC is the most likely forum for appeals, it is not necessarily the one that appellants choose.

28

deference to the factual and policy determinations of the agency. Thus the agency’s decision should be upheld if it meets the following criteria: 1. The agency acted within the scope of its legal powers; and 2. The agency followed all relevant procedures and laws in handling the case; and 3. There was a sufficient evidentiary basis for the agency to have reasonably arrived at its

decision. If the appellate courts reverse the decision of the agency, they can follow one of two courses of action. The first, and most common, is for the court to fully explain the error it believes that agency made and then remand the case to the agency to reconsider the case consistent with the guidance provided by the court’s decision. The less common course is to simply reverse the agency decision and substitute one of its own. K. Appointment and Removal of Regulators The most common process for selection of regulatory commissioners46 is for the Governor to appoint the person and he/she then be subject to approval of the State Senate. At the federal level, the process is the same, except, of course, it is the President, not a Governor, who makes the selection. In some states the appointee may serve unless the Senate rejects the nominee, while in other states, and at the federal level, the appointee may not serve until the Senate approves the appointment. The gubernatorial appointment is used in thirty-seven states.47 In eleven states, the commissioners are popularly elected, six in statewide elections, and five on the basis of electoral districts.48 In two states, Virginia and South Carolina, commissioners are selected by the legislature. Commissions at the federal level, including FERC, have five commissioners. Many states also have five, although several have only three, and two, North Carolina and South Carolina, have seven. The laws governing the selection of commissioners often have provisions designed to assure the independence and non-political status of regulatory agencies. In those states where the gubernatorial appointment process is followed, for example, there are some limitations placed on gubernatorial discretion. In many states and on the federal level, there are limits on the number of commissioners who can be members of the same political party. At FERC, for example, no more than three of the 5 commissioners may be of the same political party. Commissioners are appointed to fixed terms which are not coincident with the term of the Governor, or with that of the President on the national level. The terms are usually staggered, so that terms expire at different times, thereby inserting gradualism into the turnover of commissioners. In many states, 46 “Commissioner,” while not always the legal term for members of the governing boards of regulatory agencies, is the most common term used in the U.S. to describe the position. All state and federal regulatory agencies with electricity responsibilities are headed by a multi-member board. The last state to have a single regulator, rather than a board, was Oregon, but in the late 1980s, it too finally created a board. 47 Thirty-eight jurisdictions, if you include the fact that the Mayor of Washington, D.C. appoints the members of the District of Columbia Public Service Commission. 48 Commissioners are elected by district in Louisiana, Nebraska, Mississippi, South Dakota, and Montana. They are elected statewide in Georgia, Alabama, Arizona, Oklahoma, North Dakota, and Tennessee.

29

the salaries and benefits of commissioners cannot be altered during their term, unless it is by pre-designated indexing (e.g. same increase in salary as given to other state employees). Preset, unalterable salaries and benefits are designed to insulate commissioners from retaliatory actions or improper incentives that might compromise the agency’s independence.49 Two states, Ohio and Indiana, have nominating boards that screen candidates for qualifications and competence and send the Governor a list of possible nominees from which he must select an appointee. The Ohio law is particularly interesting. All nominees must have professional qualifications in relevant fields (e.g. law, economics, accounting, engineering, environmental science, finance) and must possess specific expertise in one of the industries the Public Utilities Commission regulates (i.e. energy, transport, telecommunications). The candidates are screened by a statutorily created Nominating Committee composed of twelve members, seven of whom are members by virtue of their position (e.g. Presidents of the Bar Association, Engineers Society, Accountancy Board, Municipal League), three appointed by the Governor, one appointed by the president of the Senate, and one appointed by the Speaker of the House of Representatives. The Committee sends four names to the Governor and he/she must select one of the four or reject the entire list. If he/she does the latter, the Committee sends the Governor a new list and the nominee has to be one of the eight names sent to the Governor. Once the Governor makes the appointment, the nominee still must be submitted to the Senate for approval, although the person selected may begin service immediately upon appointment unless the Senate rejects him/her. The choice of the Commission Chair is another matter where relevant law varies from one government to another. In most states and at FERC, the Governor (the President in the case of FERC) designates one of the Commissioners to serve as Chair. In those situations, the Chair serves in that position at the pleasure of the appointing authority. He/she can be removed at anytime as Chair, although, as noted in the following paragraph, the removal applies only to that person acting as Chair. He/she, absent a showing of “good cause” for removal from office, retains his/her seat on the Board until he/she resigns or the person’s term as a Commissioner expires. In such a case, the Governor or President will have to designate another sitting Commissioner as Chair. In a minority of states (e.g. California), the Chair is elected by the Commissioners themselves for a fixed term (e.g. one year). As suggested by the preceding paragraph, Commissioners enjoy another degree of political insulation because, while they can, of course, resign at any time, they cannot be removed from office in the middle of a term without a showing of “good cause.” “Good cause” is generally defined as malfeasance of nonfeasance (i.e. actual wrongdoing of a criminal or unethical nature or failure to perform duties). In most states, “good cause” must be found to exist by a neutral finder of fact (e.g. a competent court of law). The mere allegation of wrongdoing is insufficient to remove a commissioner; actual proof is required. Mere disagreement with or the unpopularity of certain decisions does not constitute legal grounds for removal of a commissioner from office. L. Regulatory Agency Structure and Organization 49 Generally speaking, Commissioners are paid salaries and benefits at the same level as cabinet or sub-cabinet officials.

30

1. Commission Level At the Commissioner level, the regulatory agencies can function quite differently. With the exception of two small states, Vermont and Delaware, where the Commissioners are part-time, all state and federal commissioners are required to devote full time to their responsibilities.50 Nonetheless, they do not all necessarily share the same workload. The interaction of Commissioners, from an institutional point of view, can best be divided into two categories: administrative and substantive. The nature of the decision making process can vary widely at the same agency depending on whether the decision being taken is administrative or substantive. On administrative matters (i.e. personnel, contracting, setting and managing the agenda etc.), U.S. regulatory agencies usually use one of two models. Some operate on a completely collegial basis, where all major administrative decisions are made collectively, or, in the absence of consensus, by majority rule. Other agencies have a strong Chairman who controls the day to day management of the agency and may even control the agenda. A third, rarely used, model exists, where commissioners divide administrative issues and different commissioners take the lead in different areas. On substantive matters, at all of the state and federal regulatory agencies, all decisions are made by majority vote and each commissioner, including the Chairman has an equal vote.51 Thus, substantive decisions have to be made by majority vote. That sometimes means that commissioners will have to negotiate not only decisions, but also the precise wording of each decision must be agreed upon. This task is particularly difficult at agencies which have to operate under “sunshine” laws and the entire Commission can only meet in public sessions. In those cases, the actual wording is often worked out in serial meetings of commissioners (less than a majority), or through staff personnel and advisers working as intermediaries. Sometimes the precise wording is worked out in public meetings. There are, of course, cases where the commissioners cannot agree. In those cases, a majority will have to come to agreement, but one or two commissioners, depending on the size of the commission, may disagree. In such circumstances, more than one opinion is written. There will be majority opinion, which is the actual decision, but there may also be a dissenting opinion (perhaps even more than one if more than one commissioner disagrees) from a minority of the commissioners expressing a different point of view. On some occasions, the commissioner will agree on a result, but disagree on the reasoning. In that case, the majority will approve the majority opinion and decision, and a minority will write a concurring opinion, agreeing with the outcome, but disagreeing with the reason for it. All decisions at U.S. regulatory decisions are made by formal voting in public meetings, the time and place of which were made publicly known in advance.

50 Actually, in Vermont, the Chairman is fulltime, but the two commissioners are part-time. 51 In some agencies, California’s, for example, individual commissioners are given lead responsibility for making sure that specific cases are processed correctly and on schedule, but, when the time comes to vote on the final decision, the lead commissioner on the case has just one vote, as do his/her colleagues. It is also common that some commissioners take more interest in particular subjects than do the others, thus effectively being in the lead on that subject, but, once again, that commissioner can only cast a single vote.

31

2. Staff Level There is no uniform table of organization for regulatory agencies in the U.S. For a variety of reasons, having to do with different legal mandates, different scopes of responsibilities52, different procedural requirements, vast differences in size53, and different histories. For that reason, and for purposes of this paper, one can only generalize on this topic. Obviously, every regulatory agency has administrative staff to run the agency on a day to day basis, to maintain records, and the like. The focus of this section, however, is to discuss the organization for carrying out the substantive mission of regulatory agencies. Multi sector state agency staffs, especially at the larger agencies, are generally organized both horizontally (i.e. by industry), and vertically (i.e. by profession). Technical personnel, such as engineers, are generally assigned to horizontal units (e.g. Electricity Bureau, Telecommunications Bureau, Water Bureau, etc.). The work they engage in, such as inspections, determining depreciation schedules, safety related issues, service quality, evaluating inventory levels, or environmental compliance, requires industry specific knowledge and familiarity with technology, equipment, and operations. Other professions, such as economists, lawyers, and accountants, are generally found in vertical units which can put their professional skills to use across industry lines.54Indeed the legal, economic, and accounting issues are, while perhaps not identical, certainly similar in all infrastructure industries. As a result, bureaus exist within different agencies known as “Accounts and Audits,” “Legal,” and “Economics and Finance.” In some commissions, ad hoc task forces from the various horizontal and vertical units are organized to work on specific cases or issues. In those agencies, such as FERC, and a few of the states, the staff has to be sub-divided in still another way: trial staff and advisory staff. The trial staff are the ones who actively participate in the public hearings at the agency as witnesses or advocates. In many states and at FERC, the ex parte rules are applied to them55. When the time comes for the commissioners to actually decide 52 State agencies are, for the most part, multi-sector, while federal agencies are not. Even among state agencies, some have broader responsibilities than others. Most have jurisdiction over electricity, natural gas, water, telecommunications, and ground transport. Some have jurisdiction over government and cooperatively owned utilities and some do not. In Virginia, the agency not only regulates utilities, but insurance and financial services as well. 53 The difference in staff sizes is enormous. FERC has more than 2000 people on staff. California has more than 1000. At the other end of the spectrum is Vermont with just 13, and Wyoming with only 15. Needless to say, the larger the staff, the more likely that personnel will be specialized, and, conversely, the smaller the staff, the greater the need for staff to be generalists. 54 Many prefer vertical organization of commission staff because personnel get wider exposure to a variety of issues and circumstances. That broader perspective can be a prophylactic against what is known as “regulatory capture,” where the regulators and the regulated come to view the world through the prism and begin to think alike. Exposure to different industries allows staff to see broader patterns and currents and to be better positioned to ask needed questions and not resist change. Others, of course, hold a different view, and worry that generalists will lose sight of the basics of the regulated business. 55 While ex parte rules are virtually universal at regulatory agencies, the application of those rules to agency personnel is not always done. In Ohio, for example, while the staff participates in the hearings, they are viewed as non-interested parties, in the sense that they have no financial interest in the outcome, as opposed to interested parties who have a very real financial stake in the outcome. Ex parte prohibitions, as a result, are applied only to the latter and not top the former.

32

the case, they are prohibited from talking to the trial staff. As a result, two staffs effectively exist: one to make a record at the hearing to give the commissioners a solid evidentiary base for making decisions, and the other, to assist and advise the commissioners in making final decisions. The advisory staff is sometimes a group of people assigned to the Commission as a whole, or may consist of the personal staffs of each commissioner. Lawyers have an additional layer of complexity because they play four very different and sometimes conflicting roles. They may represent the trial staff at the agency’s hearing. Furthermore, they may sit as ALJ’s hearing cases and making recommended decisions. Moreover, they may be advising commissioner of final decisions. Finally, they may have to defend agency decisions in the appellate courts. As a result, many agencies have more than one legal bureau. Finally, at most regulatory agencies, staff personnel, other than those who serve as personal staff to a commissioner, are considered civil servants. They are paid and accorded the same job protection as other members of the civil service.