Regulating Competition, Both the Forest and the Trees

At the heart of the ideological conflict between the American political parties lies a fundamental disagreement about regulation, and the proper relationship between government and markets. This conflict is two-dimensional: it is partly about the substance of regulatory policy, and partly about the scope of regulatory policymaking discretion. Both of these dimensions are implicated in a series of relatively-obscure disputes before the Federal Energy Regulatory Commission (FERC) that involve seemingly-arcane rules governing electricity markets.  These cases present a fundamental challenge to regulators’ authority to balance market competition with their statutory public interest obligations. The central question in the these cases is whether it is fair and constitutional for the FERC to enforce Federal Power Act prohibitions against market manipulation against the defendants, given that the trading at issue violated none of the specific market rules established by the overseers of the regional electricity market in which the defendants operated--the PJM market.

This essay argues that the fundamental challenge to regulation represented by defendants’ position in these overcharge cases is misguided, both legally and philosophically. It is legally misguided because it ignores established principles of law supporting an agency’s power to enforce broad statutory mandates directly, on a case-by-case basis, even when defendants have complied with more specific market rules. It is also philosophically misguided because it ignores the reasons historically-regulated markets were regulated in the first place: namely, because real world competition often fails to maximize welfare in the ways textbook markets suggest, and because market failures are very difficult for regulators to predict ex ante. In the modern world of light-handed regulation, the central task facing regulatory agencies is to capture the benefits of competition while steering competition toward public interest goals. Given the fluidity and complexity of today’s markets, and the magnitude of the particular changes facing robust, competitive, and decarbonizing electricity markets, that task is Herculean: without the broad authority to use adjudication to enforce public interest mandates, the task becomes Sisyphean. Therefore, unless and until Congress is willing to repeal the public interest mandates under which many regulatory agencies operate, the task of reconciling competitive markets with public interest mandates requires that agencies be able to regulate both the forest and the trees. That is, it requires that regulators be able to enforce both broad statutory mandates and specific market rules simultaneously, because in complex real-world markets the market participants will always be several steps ahead of specific market  rules in ways that defeat important public interest goals.