This is part of Utility Dive’s ongoing “FERC in Focus” series where we explore trends, challenges and other significant developments affecting the commission.
In his dissent from the Federal Energy Regulatory Commission’s landmark transmission planning and cost allocation rule issued last month, FERC Commissioner Mark Christie said the 2-1 decision was the result of political pressure and lobbying by special interest groups.
“In the chapter on ‘regulatory capture’ in future economics textbooks, today’s final rule should be a featured case study,” Christie said.
Regulatory capture occurs when a governmental agency that is supposed to act in the public interest works instead to benefit the industry it oversees, according to a definition cited by Christie.
“‘Regulatory capture’ is a ringing phrase, too casually used. But because it is a hyperbolic phrase, it is too readily dismissed,” Scott Hempling, a FERC administrative law judge and an adjunct law professor at Georgetown Law School, said in a 2014 paper.
“Attempts at regulatory capture are unavoidable; everyone does it,” he said in the paper, citing Cole Porter’s Let’s Do It, Let’s Fall in Love: “Birds do it, bees do it, even educated fleas do it … Some Argentines without means do it; I hear even Boston beans do it.”
Even if regulatory capture is a constant risk for an agency, it is avoidable, in part by consistently seeking to advance the public interest, according to Hempling.
Has FERC avoided capture?
FERC’s transmission planning and cost allocation rule — Order 1920 — is a “clear cut” example of an agency placing special interests ahead of the public’s interest, according to Travis Fisher, director of energy and environmental policy at the Cato Institute, a libertarian think tank.
The rule, for example, requires transmission planners to include corporate clean energy goals in their scenario planning, which will lead to private power purchases benefiting from the socialized cost of transmission, said Fisher, a former FERC economist and economic advisor.
“Order 1920 is a good example of [regulatory capture] because it goes a little farther than usual, but it really is an everyday thing” at FERC, Fisher said.
Other agency experts, however, don’t see signs of regulatory capture in FERC’s transmission planning and cost allocation decision, or more broadly by the power sector. Even so, FERC is heavily deferential toward the sectors it regulates, they say.
Order 1920 was crafted in response to “facts on the ground,” according to Shelley Welton, a professor of law and energy policy at the University of Pennsylvania’s Kleinman Center and Carey Law School.
“There was widespread agreement that the current transmission planning process is broken, that utilities are spending a lot of money, but they’re spending it on small parochial lines and not building the big, regional and interregional lines that tons of modeling suggests would actually save consumers a lot of money,” Welton said. “I do not in any way think that this rule reflects some capture of the majority of the commission by the clean energy industry or clean energy states. I think the rule is firmly grounded in changes that will save consumers money.”
FERC’s transmission planning rule reflects the realities of the transition towards renewable energy, partly driven by the Inflation Reduction Act, according to Tyson Slocum, director of Public Citizen’s Energy Program.
“Are renewable project developers a powerful constituency? Of course they are,” Slocum said, pointing to companies like private equity firm Brookfield Asset Management, BP and Shell. “But characterizing this as some sort of renewable energy cabal isn’t accurate.”
Further, the interests of transmission-owning utilities — the part of the power sector FERC directly regulates — weren’t particularly advanced by the agency’s Order 1920, according to Ari Peskoe, director of the Electricity Law Initiative at the Harvard Law School’s Environmental and Energy Law Program.
“There are elements of the rule that I think are beneficial to utilities, and some of those are just sort of the trade-offs that happen in any rulemaking process,” he said.
Typically, FERC seeks compromises, especially in its rulemaking processes, according to Slocum.
“It is seeking to accommodate different perspectives and tries to come up with some sort of compromise between everybody that weighed in on the proceeding and all the competing interests,” he said. “That compromise — trying to thread the needle — can sometimes look like regulatory capture.”
Joshua Macey, assistant professor at the University of Chicago Law School, said, “It’s very hard for me to think that FERC has been captured in any meaningful sense.”
Deference for incumbents
Macey said his larger concern is that FERC is generally a reactive agency, responding to proposed rates and rules that are heavily influenced by incumbent utilities. “That doesn’t mean FERC is captured, but it means that the rules that emerge from [regional transmission organizations] and non-RTO regional transmission planning entities consistently happen to favor the incumbents that have outsized influence in governing those organizations,” he said.
The way RTOs are governed may give incumbent utilities significant influence in deciding how markets are designed and who’s eligible to participate in them as well as in transmission planning, according to Welton.
“But that’s a pretty far cry from what Christie is suggesting in terms of regulatory capture,” Welton said. “If anything, I would say the system skews towards incumbent interests and not towards some green energy agenda.”
FERC’s near universal approval of natural gas pipeline and liquefied natural gas projects doesn’t necessarily mean the agency has been captured by the gas sector, according to Welton and Slocum.
“You might say that’s a product of the standard that [FERC is] supposed to apply,” Welton said, adding, however, that the agency’s standard when making gas decisions under the Natural Gas Act may be incorrect. “I think there are questions about whether or not FERC has on the whole been overly friendly to natural gas,” she said.
“I continue to resist folks that say, ‘Oh, FERC is a captured agency that just does whatever industry wants,’” Slocum said.
However, in day-to-day agency business, FERC generally defers to the companies it regulates, according to Slocum, who has represented Public Citizen at the agency since 2001.
“FERC continues to have a tendency to defer to market participants in proceedings,” Slocum said. “FERC relies very, very heavily, almost exclusively, on firms self reporting, on firms coming to the table and saying, ‘Here’s what’s going on and here’s what we’d like to do.’ … FERC doesn’t do a ton of independent due diligence.”
Some people take that deference as a sign that FERC has been captured by industry, but Slocum said he thinks it is more a reflection of the agency’s culture.
Also, FERC faces lobbying by the companies it regulates while consumers, who the agency is supposed to protect under the Federal Power Act, are generally not active in commission deliberations, according to the Cato Institute’s Fisher.
“By the nature of the beast, you hear from the folks who have the most at stake, and those are not the individual consumers that you’re supposed to be serving,” he said.
But, Slocum contends FERC is becoming more open to the public. “I think that culture is very slowly starting to adjust a little bit by having different types of stakeholders in its proceedings,” he said, pointing to the work of FERC’s Office of Public Participation, set up in 2021.
As a result, FERC is doing a better job in getting diverse perspectives in its decision-making processes, according to Slocum.
“It certainly helps ensure that outcomes are more fair,” Slocum said. “It provides us with a much better, comprehensive view than just what industry is telling us.”
