Naïve Energy Markets

David B. Spence*

Centrifugal forces dominate the twenty-first century American policy process. Ideologically, the two major political parties are more homogenous and further apart than at any time since the advent of the modern regulatory state.¹ Political scientists ascribe polarization in Congress to any number of factors, most of which fall within either of two categories: one focusing on the increasing ideological homogeneity in congressional districts,² and a second focusing on various kinds of institutional factors that affect how parties manage congressional business.³ Legal scholars, for their part, have begun to explore the implications of this ideological split for our understandings of American federalism,⁴ modern American administrative law,⁵ and more.⁶ At the center of these ideological differences lies the fundamental dilemma of the regulatory state: namely, the question of when it is advisable for the state to intervene in the market.⁷ Recent debates over the Affordable Care Act,⁸ financial regulation,⁹ antitrust regulation,¹⁰ and net neutrality,¹¹ for example, divide the parties along this fault line. This “market versus regulation” divide has riven the American polity since Ronald Reagan first began to challenge the New Deal consensus¹² and the cross-party acceptance of the modern regulatory state.¹³

Nowhere is that divide more prominent today than within the field of energy law, a body of regulation that encompasses two basic challenges: (1) the problem of ensuring well-functioning energy markets, and fair energy prices,¹⁴ and (2) the problem of managing the many and varied externalities associated with the production and delivery of energy. American policy has traditionally addressed the former objective through public utility and antitrust law, and the latter objective through environmental health and safety regulation. Both challenges pose the question of how best to allocate the costs and benefits of energy services: that is, when to rely on the market to allocate those costs and benefits, and when to use law to change that allocation.¹⁵ Congressional gridlock over the last twenty years has shifted the battle over these questions from Congress to states, regulatory agencies, the courts, and quasi-governmental and private governance institutions.¹⁶ The push to deregulate price and competition in energy markets has proven particularly successful at the federal level and in some states; the push to deregulate the externalities of energy production, much less so.¹⁷

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© 2017 David B. Spence. Individuals and nonprofit institutions may reproduce and distribute copies of this Article in any format at or below cost, for educational purposes, so long as each copy identifies the author, provides a citation to the Notre Dame Law Review, and includes this provision in the copyright notice.

*Professor of Law, University of Texas at Austin School of Law and McCombs School of Business. The author would like to acknowledge valuable comments received on earlier drafts of this Article from William Boyd, Emily Hammond, Jody Freeman, Sean Meyn, Amy Stein, and Alex Klass.

1 There are a variety of measures used to document this polarization. One of the better known is Keith Poole’s and Howard Rosenthal’s so-called “DW-NOMINATE” data, which places members of Congress on an ideological spectrum based upon their voting behavior. For a thorough explanation of these data and how they document increasing polarization in American politics, see Nolan McCarty et al., Polarized America: The Dance of Ideology and Unequal Riches (2006) and Keith Poole’s webpage, Voteview, http://voteview.com (last visited Nov. 15, 2016). On the subject of polarization generally, see John H. Aldrich, Why Parties? The Origin and Transformation of Political Parties in America (1995); Sean M. Theriault, Party Polarization in Congress (2008); Geoffrey C. Layman et al., Party Polarization in American Politics: Characteristics, Causes, and Consequences, 9 Ann. Rev. Pol. Sci. 83 (2006); Richard H. Pildes, Why the Center Does Not Hold: The Causes of Hyperpolarized Democracy in America, 99 Calif. L. Rev. 273 (2011).

2 Some ascribe this increasing homogeneity to redistricting. See, e.g., Jamie L. Carson et al., Redistricting and Party Polarization in the U.S. House of Representatives, 35 Am. Pol. Res. 878 (2007). Others argue that voters are segregating themselves ideologically. See, e.g., Bill Bishop & Robert G. Cushing, The Big Sort: Why the Clustering of Like-Minded America Is Tearing Us Apart (2008); Jeffrey M. Stonecash et al., Diverging Parties: Social Change, Realignment, and Party Polarization (2003).

3 For a good summary of the institutional explanations of party polarization, see Theriault, supra note 1, at 51–54.

4 See, e.g., Jessica Bulman-Pozen, Partisan Federalism, 127 Harv. L. Rev. 1077 (2014) (describing how states have become loci of partisan conflict over national policy goals); Heather K. Gerken, Dissenting by Deciding, 57 Stan. L. Rev. 1745 (2005) (same); Gillian E. Metzger, Agencies, Polarization, and the States, 115 Colum. L. Rev. 1739 (2015) (exploring the role of state action in cooperative federalist regulatory programs in a polarized political environment).

5 See, e.g., Jody Freeman & David B. Spence, Old Statutes, New Problems, 163 U. Pa. L. Rev. 1, 11–17, app. at 82–93 (2015) (exploring the impact of ideological conflict and gridlock over energy and the environment on federal administrative agencies); Michael S. Greve & Ashley C. Parrish, Administrative Law Without Congress, 22 Geo. Mason L. Rev. 501 (2015) (arguing for less deference to agency decisionmaking in a polarized political environment); Metzger, supra note 4 (exploring the role of state action in cooperative federalist regulatory programs in a polarized political environment).

6 See, e.g., Cynthia R. Farina, Congressional Polarization: Terminal Constitutional Dysfunction?, 115 Colum. L. Rev. 1689 (2015) (analyzing the causes of congressional polarization); Hari M. Osofsky & Jacqueline Peel, Energy Partisanship, 65 Emory L.J. 695 (2016) (arguing that energy policymakers can circumvent partisan gridlock by focusing on policy subsets over which there is less disagreement, and by making policy in arenas other than Congress).

7 Political scientists describe the ideological divide captured by their data as one centered on the role of government intervention in the economy. See, e.g., McCarty et al., supra note 1, at 11.

8 The Affordable Care Act actually refers to two separate pieces of legislation—the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, 124 Stat. 119 (2010) (codified as amended in scattered titles of the U.S.C.) and the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152, 124 Stat. 1029 (codified as amended in scattered titles of the U.S.C.). Congressional Republicans’ antipathy to the legislation, which they call “socialism,” has been well documented. See, e.g., Michael McAuliff, House Passes 56th Anti-Obamacare Measure, Huffington Post (Feb. 4, 2015, 5:12 PM), http:// www.huffingtonpost.com/2015/02/03/repeal-obamacare_n_6607080.html.

9 This debate centers on the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010) (codified as amended in scattered titles of the U.S.C.), which has endured repeated attacks from Republicans in Congress since its passage. See, e.g., Zach Carter, Second Verse, Same as the First: Republicans Prepare Another Dodd-Frank Attack, Huffington Post (Jan. 13, 2015, 9:24 PM), http://www.huffing tonpost.com/2015/01/12/republicans-dodd-frank-attack_n_6459722.html.

10 A growing debate over merger policy in antitrust lies on this same fault line. See, e.g., Maureen K. Ohlhausen, Comm’r, U.S. Fed. Trade Comm’n, Remarks at Hogan Lovells, Hong Kong: Does the U.S. Economy Lack Competition, and If So What to Do About It? (June 1, 2016), https://www.ftc.gov/system/files/documents/public_state ments/952273/160601doesuseconomylackcomp.pdf.

11 The D.C. Circuit recently vacated portions of the Federal Communication Commission’s rule on net neutrality in Verizon v. FCC, 740 F.3d 623 (D.C. Cir. 2014). In 2011 the House of Representatives had voted to repeal the FCC order, but the Senate did not. See H.R.J. Res. 37, 112th Cong. (2011).

12 Richard Hofstadter is sometimes credited with this description of bipartisan acceptance of the regulatory state after World War II. For a description of Hofstadter’s role in popularizing this idea, see David S. Brown, Richard Hofstadter: An Intellectual Biography (2006); Iwan W. Morgan, Beyond the Liberal Consensus: A Political History of the United States Since 1965, at 12–20 (1994).

13 For a compelling account of how and why the idea of “the market” spread throughout policy and academic circles in the mid- to late twentieth century, see Daniel T. Rodgers, Age of Fracture 41–76 (2011) (“In an age when words took on magical properties, no word flew higher or assumed a greater aura of enchantment than ‘market.’”).

14 The justification for this kind of regulation is sometimes traced back to the seminal case of Munn v. Illinois, 94 U.S. 113 (1877), which merely recognized a historical truth: that the law permits price regulation of businesses that are “affected with a public interest.” Id. at 126 (internal quotation marks omitted) (quoting Lord Matthew Hale, De Portibus Maris, reprinted in 1 A Collection of Tracts Relative to the Law of England 1, 78 (Francis Hargrave ed., Dublin, Lynch et al. ed. 1787)). Modern American public utility law grew out of state and federal legislation acknowledging the need for price regulation in the gas and electricity industries using this rationale. See generally Joel B. Eisen et al., Energy, Economics and the Environment: Cases & Materials (4th ed. 2015).

15 The question of when government ought to intervene is conceptually distinct from the question of which government institution (legislative or bureaucratic, state or federal) ought to intervene. The exploration of these governance questions is beyond the scope of this Article. For recent treatments of these issues in the energy policy context, see for example Bulman-Pozen, supra note 4; Hari M. Osofsky & Hannah J. Wiseman, Dynamic Energy Federalism, 72 Md. L. Rev. 773 (2013); Jody Freeman, Network Federalism (Nov. 18, 2013) (unpublished manuscript), http://papers.ssrn.com/sol3/papers.cfm?abstract_id= 2356380 (exploring the division of authority both horizontally and vertically in electricity markets).

16 See Jim Rossi, “Maladaptive” Federalism: The Structural Barriers to Coordination of State Sustainability Initiatives, 64 Case W. Res. L. Rev. 1759, 1762 (2014); see also Freeman, supra note 15. For an explanation of the logic of congressional gridlock, and why members of Congress find it increasingly difficult to cobble together legislative majorities, see Freeman & Spence, supra note 5, at 11–17, app. at 82–93.

17 See infra notes 78–132 and accompanying text.