Politicians and state PUCs must shape energy policy together

 

Historically, states have delegated responsibility for establishing and implementing their energy policy to a public utilities commission (PUC). During most of the 20th century, state PUCs operated with relatively little interference from state legislators. In California, for example, the PUC, created by the state constitution, was vested with the broad authority to independently regulate nearly all aspects of electricity service. To help protect its independence, the legislature purposely based the PUC in San Francisco—safely distant from the political machinations in Sacramento.

Over the past decade, however, state legislatures have been more assertive about setting energy policy. In the late 1990s, for example, elected officials in California and dozens of other states passed laws that deregulated many aspects of electricity supply and delivery with the expectation that the "invisible hand" of the free market would result in greater efficiency and lower costs. This trend of active legislative "participation" is now in full flower in the Golden State, as exemplified by energy-efficiency rules for appliances, mandatory renewable portfolio standards for utilities, and limits on greenhouse gas emissions.

Having legislators, rather than specialized administrative agencies, set energy policy should not, by itself, frustrate long-term policy objectives. This shifting of responsibility, however, must be recognized as a significant change in the formulation and implementation of energy policy whose consequences warrant greater scrutiny.
 

Fresh faces, new ideas, but . . .

Increased legislative activity, especially in states with term limits, can facilitate the development of better energy policies. Because new legislators are not burdened by the past "failures" of incumbents, they are freer to explore new ideas and more willing to embrace novel approaches.

Case in point: In California, the reinstatement of retail choice would have little chance of success if the same legislators who suspended "direct access" in response to the electricity crisis of 2000–2001 were still in office. Had they been reelected, those politicians would now hold positions of leadership commensurate with their seniority and be in a position to block efforts to lift the suspension.

Counterintuitively, increased involvement by "rookie" state legislators in energy policy may serve to limit their effectiveness. The need to become an instant expert in the field may prove too much of a burden for a new state senator or assemblyperson. Often, the overwhelmed new legislator becomes overly reliant on staff and lobbyists for "short cuts" to understanding a complex energy issue. The result, in this case, is an increase in the relative influence of the unelected.
 

Expertise is essential

The idea behind creating a PUC and giving it responsibility for energy policy is to form an administrative body with expertise in this technically complex field. Legislators, with small staffs and responsibilities that extend far beyond energy policy, cannot be expected to have the same collective and relevant knowledge as the members of a dedicated PUC. Term limits further challenge the ability of legislators to learn what they must know to regulate the industry wisely. In the current California legislative session, seven of the 12 members on the Assembly Committee on Utilities and Commerce are first-term legislators, with little or no experience setting energy policy.

The core concept that energy policy is best set by bodies with specialized knowledge remains sound. Most often, energy policy is best advanced by evolutionary changes that benefit from the "trial and error" approach of the regulatory process. Micro-legislating every nuance of energy policy hampers the flexibility needed to make midterm adjustments in new programs. For instance, many blame the California electricity crisis of 2000–2001 on the original deregulation legislation, which prevented the state PUC from responding quickly to growing gaps between supply and demand and skyrocketing wholesale price spikes by outlawing retail rate increases by the state’s three investor-owned utilities.

Crafting sound energy policy also requires a "long view" because it can take nearly a decade to develop, permit, and build a new power plant. Political realities, however, often dictate that legislators focus more on short-term trends and fads that may be at odds with long-term goals. Whether true or not, the perception that legislators’ energy policy decisions are poll-driven engenders uncertainty in the markets and makes Wall Street nervous. A predictable, if not stable, regulatory climate is essential for attracting the billions of dollars of investment in infrastructure needed. Energy policies initiated and administered by PUCs tend to be more consistent and stable than those sponsored by legislators, for whom Job One must always be reelection.
 

Coordination is critical

The best way to accommodate more-active legislative participation in setting energy policy is to mandate that lawmakers coordinate more closely with PUCs to ensure consistency in policymaking and long-term stability of markets. That collaboration will be easiest to realize in states without term limits. There, the mere passage of time does not deny energy consumers the benefits of their representatives’ acquired industry expertise.

Steven F. Greenwald leads Davis Wright Tremaine’s Energy Practice Group. He can be reached at stevegreenwald@dwt.com. Jeffrey P. Gray is a partner in the firm’s Energy Practice Group. He can be reached at jeffgray@dwt.com.