Second-Guessing the Regulatory and Judicial Rules for US Energy Markets

06 October 2021
By Dr. Jeff D. Makholm

In an article in the November 2021 issue of the Wiley journal Climate and Energy, NERA Managing Director Dr. Jeff D. Makholm starts with a story about Alfred E. Kahn, one of NERA’s founders, who popularized the principle of “marginal cost pricing” among US regulators with his famous book The Principles of Regulation (Wiley, 1970–71). Professor Kahn later came to be disgusted by the misapplication of such economic principles through costly and unproductive “propensities to micromanage” in parts of the deregulated telecommunications and energy industries. Dr. Makholm uses that history to comment on two similar examples of regulatory micromanagement appearing in two deregulated parts of US energy markets in 2020–21. 

First, the collapse in oil and natural gas prices in early 2020 led to a number of natural gas producer bankruptcies—leading to a novel fight between the Federal Energy Regulatory Commission (FERC) and the US Bankruptcy Courts over who would deal with the consequences of bankrupt shippers holding transport contracts on FERC-regulated interstate gas pipelines. Second, the sharp spike in Texas electricity prices during the February 2021 Texas energy debacle has led to second-guessing the regulatory rules by which Texas organized its power market. These examples of micromanaging and second-guessing highlight the fragility of the deregulated parts of traditional electric and natural gas utility businesses, which can be greatly impacted by unforeseen economic forces.

In conclusion, Dr. Makholm notes that the way in which US legislatures and the Supreme Court worked in the 20th century to perfect reliable means of assessing regulated costs and prices are national treasures reflecting deep economic and judicial scholarship. The rules they developed gave investors the confidence to pour funds into privately-owned, regulated US energy infrastructure enterprises throughout the 20th century. Investment has continued to flow into competitive energy enterprises in the 21st century in the deregulated parts of US energy markets, to the great benefit of US energy consumers. But those gains evidently need constant tending and support before regulators and in the courts.

Makholm, Jeff D. (November, 2022). “Second-Guessing the Regulatory and Judicial Rules for US Energy Markets,” 38/4, ©2022 Wiley Periodicals, Inc., a Wiley Company