Page 127 →Public Utilities Commissions and the Regulation of Electric Companies

State public utilities commissions emerged in the early twentieth century as an institutional answer to the issue of ensuring that electric utility companies retain financial viability without gouging consumers (Troesken 2006).129 When electric utility companies first emerged and constructed electricity generation and distribution infrastructure to supply electricity to consumers, oversight of the companies was practically nonexistent; municipal governments had entered into “franchise contracts” with electric utility companies but lacked authority to compel electric utility companies to treat consumers fairly, owing to the belief among state governments that electricity service regulation was not an “essential” function of municipal government (Gormley 1983; Troesken 2006). A consequence of this lack of oversight was that electric utility companies faced few constraints on the prices they could charge consumers and charged consumers exorbitantly high prices for electricity service. A solution to this problem was to allow municipal governments to regulate the activity of electric utility companies, and several states—including California, Florida, and Ohio—enacted laws permitting municipal governments to directly regulate the activity of electric utility companies operating within municipal boundaries.

Direct regulation of electric utility companies by municipal governments ameliorated the problem of companies charging exorbitant prices for electricity service but created the countervailing problem of placing electric utility companies at the mercy of politically minded municipal governments (Troesken 2006). Municipal politicians ran for election promising low electricity prices to voters and would then set low electricity prices once in office, even if the prices were set far underneath the break-even point for electric utility companies (Troesken 1996; Neufeld 2008). Setting artificially low prices is problematic not only for the financial viability of the electric utility companies that are the objects of such regulation but also because artificially low prices can influence the quality of service provision adversely by reducing the monies that electric utility companies have available to maintain and upgrade their electricity infrastructure (Guthrie 2006).

The creation of state public utilities commissions was a compromise Page 128 →solution aimed at balancing the demands of electric utility companies and consumers (Troesken 2006; Parinandi and Hitt 2018). Indeed, in some states (such as Illinois, as relayed in Troesken 2006), electric utility companies themselves clamored for state-level regulation, hoping that placing regulatory authority in the hands of multimember state-level commissions would reduce opportunities for pandering compared to when such regulatory authority is wholly in the hands of municipal governments.130 While electric utility companies recognized that they would face some amount of regulation from state-level commissions, the companies believed that they would receive fairer treatment at the hands of state commissions rather than municipal governments and the regulation of electric utility companies by state-level public utilities commission has persisted into the twenty-first century (Knittel 2006; Neufeld 2008).

Today, state public utilities commissions possess regulatory authority over electric utility companies operating in their states, retain considerable power over the prices that are charged by electric utility companies to consumers—by approving prices directly in regulated states, by setting price caps (which were in place for the bulk of the later part of the time period of this study) and still approving distribution prices in deregulated states, and by controlling access to electricity retail markets in their states.131 State public utilities commissions typically set policy with the goals of balancing electric utility company and consumer price demands while also ensuring access to “safe and reliable electricity” as well as preparing for “the future of the electricity system” in terms of readying electricity infrastructure to meet anticipated changes in demand and the energy mix used to derive Page 129 →supply (Nanavati and Gundlach 2016, 6–7). State public utilities commissions are also considered widely to be experts in the area of electricity regulation and enjoy latitude to set their own policies regarding the regulation, maintenance, and upgrade of electricity service provision (Byrnett and Shea 2019).

Even though state public utilities commissions have latitude to set policy regarding electricity service provision, it is important to note that commissions are expected to chiefly serve as neutral arbiters of electric utility company and consumer interests and are further expected not to overly disadvantage companies or consumers in commission decision-making (White 2018). This expectation of neutrality—which is important so that public utilities commissions have legitimacy with both the companies they regulate and consumers at large—arguably may account for the rareness of regulatory policy feature adoption concerning RPS (since adopting an RPS policy feature opens up commissions to charges of being biased against electric utility companies). It may also account for why public utilities commissions are more likely to invent novel RPS policy when companies are in a less fortuitous position to challenge them.132 Many state public utilities commissions have utilized their regulatory authority and adopted RPS policy features—inventing several of these by making their states the first to adopt them—on the pretext of providing efficient access to electricity and planning for possible disruptions to the supply of energy.133 In table 5 below, I provide a list of states that adopted RPS policy features via public utilities commission rulemaking along with the percentage of a state public utilities commission’s adoptions that are examples of inventing.

The table displays significant breadth across the states in terms of regulatory adoption, with at least one state in each region of the United States adopting a RPS policy feature through public utilities commission decision. The table also shows that most of these states’ public utilities commissions invented and borrowed when adopting their respective RPS policy Page 130 →features. Similar to the strategy used with respect to legislatures in the last chapter, here we can compare how variables relate to regulatory inventing and borrowing and ultimately uncover factors that have unique resonance in explaining when regulatory agencies invent.134 Before doing this and specifically before articulating why sector deregulation corresponds uniquely with regulatory inventing, I review what sector deregulation is and what it has entailed for state public utilities commissions.

Electricity Sector Deregulation

The deregulation of the electricity sector describes a process that occurred across many of the states in the 1990s and early 2000s (Ka and Teske 2002). With deregulation of a state’s electricity sector, the vertically integratedPage 131 → and quasi-monopolistic positions of electric utility companies were broken up, and new entrants were allowed to sell electricity to that state’s consumers. Prior to deregulation, an electric utility company would typically control all phases of the production and distribution of electricity to its consumers; that is, the same company would be responsible for procuring, producing, and transporting electricity from generation to final use by a consumer. Furthermore, in a regulated system, an electric utility company essentially had monopolistic power within its service area, and this monopolistic power was established through agreement with a state’s public utilities commission.

Under deregulation, the electric utility companies that previously had a vertically integrated monopoly over the electricity supply chain lost this control. Specifically, entrenched electric utility companies—the companies that previously exercised monopolistic control under a regulated sector—lost control over much of their generating infrastructure (sometimes through forced divestment, as is discussed in Kwoka et al. 2010) and had to compete with new entrants that could sell electricity directly to final users (Borenstein and Bushnell 2015). While the entrenched electric utility companies retain full control over distribution infrastructure (distribution refers to delivering electricity to the final user), they have to allow other firms to have access to that distribution infrastructure. This combination of losing control of much of their generation capacity along with needing to accommodate other producers in their distribution networks is what exposed entrenched electric utility companies to retail competition over electricity but not the distribution of it (Borenstein and Bushnell 2015). In fact, under deregulation, a final user might pay two monthly bills for their electricity usage: one to a new entrant firm for the electricity itself, and one to an entrenched electric utility company for distributing the electricity to the final user.135 In the event where an entrenched electric utility company does not have enough generating capacity on hand to meet the demands of consumers—which has occurred commonly in several deregulated states in cases where entrenched electric utility companies lost much of their generating capacity through divestment but only lost small numbers of consumers to other firms—the entrenched electric utility company will Page 132 →need to procure or purchase the demanded electricity from other firms and distribute it over its own network to its consumers.

Follow for extended description

In figure 8, I show a map of the continental United States in which states are grouped according to whether or not they have deregulated their electricity sectors by the end of this study.136 While deregulation seemed like the wave of the future in the 1990s, it has largely stopped diffusing across the states and is concentrated in the Northeast, the West Coast, Texas, and the Great Lakes region (Delmas et al. 2007; Borenstein and Bushnell 2015). California’s experience with severe electricity blackouts in the early 2000s concerned officials in some other states about the reliability of electricity service under deregulation (Borenstein and Bushnell 2015). Nonetheless, a sizeable number of states have pursued and retained deregulated electricity sectors as of the end point of this study. Several of these states (e.g., Texas, New York, Illinois, Pennsylvania, and Ohio) are among the most populous in the United States, suggesting that many Americans receive electricity from deregulated sectors. Moreover, deregulation is Page 133 →probably here to stay given that many states are nearing their third decades under deregulation. While the jury is out in terms of how deregulation has impacted electricity prices (Borenstein and Bushnell 2015), it has arguably influenced how public utilities commissions approach inventing. Understanding how regulatory RPS invention activity differs across states with deregulated versus regulated sectors is consequently worth exploring since it sheds light on how the regulatory environment faced by public utilities commissions can influence policy adoption behavior.

Regulators Invent More under Deregulation

Deregulation of the electricity sector did not just introduce new entrants into a state’s retail electricity market; it has also made public utilities commissions more likely to invent novel RPS policy features. To see why this might happen, it is important to explore two issues: first, why entrenched electric utility companies might oppose RPS policy (and especially oppose novel RPS policy); and second, how electric utility companies in states with regulated sectors could be better positioned to challenge regulatory attempts to promulgate novel RPS policy compared to electric utility companies in states with deregulated sectors. The end result is that public utilities commissions are more likely to invent when the ability of entrenched electric utility companies to challenge their action is comparatively weaker.

Entrenched electric utility companies have generally taken a dim view of RPS programs (Stokes 2020). A key reason why is that these companies incur financial costs in complying with RPS programs. This simply means that entrenched electric utility companies will incur some financial cost to switch from fossil-fuel-based sources to renewable sources to meet an RPS mandate. Scholars (Kim et al. 2016; Greenstone and Nath 2019) have shown that renewable energy is more expensive to produce than fossil-fuel-based energy.137 Given that the price of electricity is an important aspect of energy policy to consumers (Besley and Coate 2003), and given that a major element of the popularity of RPS programs among consumers is that the programs are imposed on electric utility companies rather than directly on consumers (Äklin and Urpelainen 2018), such as an individual Page 134 →carbon tax would be, entrenched electric utility companies will likely face some financial impact in complying with RPS obligations.138 Moreover, entrenched electric utility companies in both regulated and deregulated settings face the financial impacts (Kim et al. 2016): while entrenched electric utility companies in regulated settings may have to upgrade their own infrastructure to comply with RPS obligations, entrenched electric utility companies in deregulated settings (to the degree that they no longer own generation facilities) may have to negotiate costly procurement deals with new suppliers to obtain the renewable energy needed to meet RPS obligations.

While the financial costs associated with complying with RPS obligations have made most entrenched electric utility companies skeptical of RPS programs, I argue that these companies might oppose novel RPS policy features more than they oppose features that have already been adopted in other states. The reason why is that entrenched electric utility companies could be exposed to greater uncertainty in estimating how novel policy will impact them financially relative to the uncertainty they face in estimating the financial impact of a policy that has already been adopted in another state. A novel policy has never been adopted before, meaning that an entrenched electric utility company cannot use the experiences of other electric utility companies operating under the policy to make opinions about the policy. In contrast, a borrowed policy has been adopted before, meaning that an entrenched electric utility company can draw upon the experiences of other electric utility companies operating under the policy to help form its own judgments about the policy.

Having more information at their disposal about how a policy works in practice matters for entrenched electric utility companies so they can adequately negotiate with public utilities commissions for assistance in defraying some of the cost associated with complying with RPS obligations. Although RPS programs have imposed added costs onto entrenched electric utility companies, public utilities commissions have recognized that entrenched electric utility companies cannot shoulder all of the financial burden of transitioning to the new RPS regulatory regime. Therefore, public utilities commissions have implemented social benefits charges Page 135 →(Rabe 2008) that ameliorate the impacts faced by electric utility companies by making consumers give a subsidy (in the form of the charges) to the electric utility companies. Entrenched electric utility companies have an incentive to not only stretch the amount that this subsidy will cover but also reduce the possibility that unanticipated side effects of RPS policy could harm them financially.

Entrenched electric utility companies may believe that they are better able to pursue both incentives when a policy under consideration for adoption has actually been tested before compared to when the policy under consideration is novel and has never before been adopted. This is because with a borrowed policy, an entrenched electric utility company can use the experiences of how other utility companies fared under the policy to inform its own strategy about how to prepare for the adoption of that policy. Even if an entrenched electric utility company in a state considering whether to borrow a policy faces different challenges from those that were faced by other utility companies in state(s) that have already adopted the policy, the entrenched electric utility company can still extrapolate and exploit lessons from the other companies’ experiences to help it prepare for the policy’s arrival. Assume, for example, that an entrenched electric utility company in a state considering whether to borrow an RPS policy feature has a higher level of fossil fuel utilization compared to the level utilized by utility companies operating in state(s) that already adopted the policy feature when those respective state(s) adopted the policy feature. The entrenched electric utility company in the state considering whether to borrow the policy feature can use its higher utilization level to clamor for a more generous social benefit charge; and it can also use its higher utilization level to more aggressively implement a cost-cutting strategy to transition to the new regulatory environment. The point is that the company in the state considering whether to borrow the policy feature can use other firms’ experiences as reference points to help in formulating its own plans; even if the company does not follow the other firms’ actions, it can still consult those actions and experiences for guidance.

In contrast, with novel policy, the entrenched electric utility company has no other firm-specific reference points it can use to guide its planning and is arguably largely on its own in terms of anticipating how the policy could affect it. This impacts the company by raising uncertainty about whether its chosen strategy could backfire upon adoption of the policy. The company, for example, could advocate for a certain social benefits Page 136 →level but would be doing this without being able to benchmark its strategy against the experiences of firms in other states and might fear that it could incur unanticipated losses as a result. Similarly, the company could employ cost-cutting measures but would be doing this without being able to benchmark its strategy against the experiences of firms in other states and also might fear that it could incur unanticipated losses as a result.139 Ultimately, not being able to benchmark plans against the experiences of peers might increase feelings of uncertainty among company executives and lead to a situation where executives believe that they are unable to effectively manage or adapt to the policy under consideration for adoption. This feeling of a loss of control can generate opposition among company executives toward invention, as executives believe that their companies are being made the objects of regulatory experimentation. Company executives’ dislike of uncertainty (and by extension, of novel regulatory attempts that have not even been tried elsewhere) is not conjecture. A 2015 survey of global business executives by the firm Grant Thornton revealed that executives prefer higher taxes to greater uncertainty in regulation (Lagerberg 2015); this finding is corroborated by academic research (Baker and Raskolnikov 2017) showing that companies generally oppose uncertainty.

Public utilities commissioners ostensibly know that companies oppose invention, and this might explain why regulatory invention is so rare (with only 36 instances of it occurring in the time period analyzed). Despite the rarity of regulatory invention, however, I argue that public utilities commissions are more likely to invent under sector deregulation compared to regulation. There are arguably two reasons for this. First, in states with regulated sectors, entrenched electric utility companies possess vertical integration along with a monopoly over electricity provision in their respective service areas. Having singular control over the entire electricity provision process may put utility companies in states with regulated sectors in a comparatively strong position to challenge RPS policy invention. This is because full control over the entire supply chain gives companies an ability Page 137 →to more authoritatively speak to how the novel policy will adversely impact their assets. For example, a utility company in a state with a regulated sector could use the fact that it controls its own generation to pinpoint how the novel RPS policy (through requiring a greater procurement of electricity from renewable sources) impacts its own generation infrastructure. Being able to pinpoint effects might give companies greater clarity in their own arguments and consequent confidence to oppose the novel RPS policy.

In contrast, in states with deregulated sectors, entrenched electric utility companies do not have singular control over the entire supply chain and particularly do not have full control over generation, as many utility companies procure electricity in the wholesale market and then distribute it to end-use consumers. This lack of full control may limit the ability of entrenched electric utility companies in states with deregulated sectors to speak authoritatively about how novel RPS policy could adversely impact them. For example, an entrenched electric utility company in a state with a deregulated sector could be told by regulators to simply search for new wholesalers if the company argues that the novel policy will substantially raise costs with its current wholesalers. And regulators may be making this suggestion out of the belief that entrenched electric utility companies are desirable purchasers of electricity (by virtue of still possessing a monopoly on the distribution of electricity) and should be able to negotiate favorable terms with wholesalers even in the presence of the novel regulation. In this deregulated scenario, having the choice or flexibility to purchase its own electricity arguably diminishes the ability of an entrenched electric utility company to authoritatively advocate for how novel RPS policy could impact them adversely and suggests that peer utility companies in regulated states (who possess singular control over vertically integrated structures) may comparatively be able to more effectively push back against novel RPS policy.

There is a second reason why entrenched electric utility companies in deregulated states may be less willing to push back against novel regulatory invention, and it boils down to the idea that entrenched electric utility companies in deregulated states have already lost monopoly power and adopt a conciliatory approach vis-à-vis regulators to preserve the advantages that they still retain. Losing much of its generation assets, for example, may make a formerly monopolistic electric utility company engage in loss prevention to reduce other threats to its dominance. For instance, a formerlyPage 138 → monopolistic electric utility company may still want to be declared the default electricity provider within its service area.140 Furthermore, the same entrenched electric utility company may want to preserve its control over the distribution of electricity. Given its desire to forestall future losses to its position, the entrenched electric utility company might act in a conciliatory manner toward regulators to build a positive reputation among those regulators. One manifestation of this conciliatory approach could be reduced opposition toward novel regulatory policy-making.

Under sectoral regulation, on the other hand, an entrenched electric utility company might believe that opposition is a better option than conciliation. This opinion is not just because of the argument that I put forth earlier—that monopolistic control of the entire supply chain places entrenched electric utility companies in regulated states in an advantageous position from which to challenge novel regulatory policy attempts. Rather, it is also because entrenched electric utility companies operating in regulated settings could think that losing their status through something like deregulation is extremely unlikely, thereby leading the companies to believe that challenging novel regulatory policy is a worthwhile strategy.

One explanation for why the practice of allowing an electric utility company to acquire vertical integration over the electricity supply chain and then granting that company a monopolistic presence over a geographically defined service area has endured for so long over a majority of the American states is that this arrangement provides for regulatory simplicity and gives the affected companies ample opportunity to build clout. By regulatory simplicity, I am referring to the idea that regulators might have fewer firms to oversee under sector regulation compared to deregulation. This is because restrictions to competition under sector regulation reduce (compared to deregulation) the number of firms with which regulators must interact. Working with a smaller number of firms could allow regulators to spend more time with each firm and could represent a strength of sector regulation (from a regulatory standpoint) insofar as regulators may be able to avoid overextending themselves across a large number of firms.

The other aspect of sector regulation is that it allowed for electric utility Page 139 →companies to amass a sizeable amount of influence in their respective states of operation. Companies not only received exclusive authorization to be the sole purveyors of electricity in their service areas but were also typically granted this authorization several decades ago (Troesken 2006). Not having to share the spotlight with rival firms as a consequence of being the sole purveyor of electricity, combined with having the opportunity to broadcast their interests over a long span of time, arguably gave electric utility companies broad influence with stakeholders in their respective states of operation. These companies, for example, created long-standing working relationships with regulators and may have enjoyed increased influence with regulators as a result of having formed such working relationships (Stigler and Friedland 1962; Olson 1965; Stigler 1971; Dal Bo 2006; Stavins 2006; Thornton et al. 2008). These companies further had ample opportunity to cultivate influence with members of state legislatures, and they also had ample opportunity to communicate directly with consumers in hopes of convincing the latter that company and consumer interests are congruent.

The point is that electric utility companies operating under sectoral regulation were able to develop substantial influence and consequently may have come to believe that losing their structural advantages via deregulation was unlikely. The expectation among firms that accumulated influence with stakeholders should help protect the firms against drastic losses to their market positions is central to economics and political science and forms much of our understanding of why firms try to build influence in the first place (Leech 2010). It is not unreasonable to further assume that companies operating under sector regulation—which due to a lack of competition enjoy the ability to advocate for their own interests without worrying about the arguments made by rival firms, and which have also had ample time to build networks of influence—might think that they have relatively unfettered access and influence among stakeholders that gives added protection against moves like deregulation, which would result in losses in market position. These companies’ capacity to use their advantages under sector regulation to amplify arguments against deregulation—that it introduces added complexity for regulators, that it could lead to disruptions in electricity service, and that it could lead to volatility in electricity pricing (Smith 2002)—may augment their belief in their ability to forestall deregulation.

If electric utility companies believe that deregulation is unlikely, they Page 140 →might feel emboldened to oppose attempts by regulatory agencies to adopt novel policy. This is because freedom from the fear of deregulation arguably opens up avenues of action that may be closed absent such freedom. This suggests that electric utility companies that operate under sector regulation and believe that deregulation is unlikely—which may predominantly be the case for companies operating under sector regulation given their opportunity to cultivate clout—may be willing to oppose novel regulatory action. This is less likely to be the case for entrenched electric utility companies operating under sector deregulation. These firms lost their vertically integrated positions, must now compete with potential rivals for the attention of stakeholders, and could deduce that maintaining a conciliatory approach with regulators is an effective way to preserve their market power.

Regulators are adept at navigating the power dynamics in their relationships with other actors (Potter 2019) and seek to minimize conflict with the companies they regulate, not only to avoid expending energy dealing with conflict that could be spent attending to other aspects of their work but to also reduce the chance that they could face accusations from the companies and affiliated interests of overstepping their bounds by crafting novel regulation rather than engaging in implementation. Regulators ostensibly prefer to avoid facing such accusations, as accusations can bring unwanted attention upon regulators and lead to demands to investigate regulatory behavior, change regulatory personnel, and even redefine regulatory responsibilities (McCubbins and Schwartz 1984). Insofar as regulatory agencies contemplate adopting novel regulation, they are consequently more likely to do so when electric utility companies are less willing to challenge the adoption, which is more likely to occur under sector deregulation. This expectation is formalized in the following hypothesis.

One question that might remain pertains to why electric utility companies operating under sector regulation might not challenge regulatory borrowing to the extent they challenge regulatory invention. My answer for why this is the case centers on the idea that even under sector regulation, electric utility companies need to foster some level of cordiality Page 141 →with regulators and therefore will not challenge everything that regulators attempt to do. The relationship between regulators and regulated entities is not one-off but rather iterative. An implication of the iterative nature of this relationship is that electric utility companies have to deal with regulators in the future and therefore do not want to overly antagonize those regulators. This means that electric utility companies need to pick and choose when to challenge regulators. Electric utility companies operating under sector regulation will choose to challenge more uncertain novel policy more than they challenge borrowed policy. In contrast, entrenched electric utility companies operating under sector deregulation will be hard-pressed to challenge regulatory policy-making regardless of whether it is invention or borrowing.

Evaluating Regulatory Invention and Borrowing RPS Policy Feature Adoption Data

Here, I test my theoretical expectation by evaluating whether public utilities commissions are more likely to invent with respect to RPS policy features under sector regulation compared to sector deregulation. Although regulatory invention is the main theoretical focus, it is important to also explore regulatory borrowing so that we can see how variables may differentially influence regulatory invention and regulatory borrowing. While my strategy in chapter 5 was to extract all instances where state legislatures invent or borrow policy features and then combine these instances with state nonadoption of policy features to formulate the datasets used to evaluate the likelihood of legislative invention and borrowing, my strategy here is to extract all instances where state public utilities commissions invent or borrow policy features and combine these instances with state nonadoption of policy features to formulate the datasets used to evaluate the likelihood of regulatory invention and regulatory borrowing. As is discussed in chapter 3, here a state public utilities commission does not have the opportunity to adopt a policy feature—and hence, invent or borrow—if another institutional actor in the same state has already adopted the same policy feature. Similarly, a state public utilities commission loses the opportunity to invent with respect to adopting a policy feature once two years have passed since the policy feature was first adopted by any of the U.S. states (regardless of the institutional actor doing the adopting); and a state public Page 142 →utilities commission only gains the opportunity to borrow with respect to adopting a policy feature once two years have passed since the policy feature was first adopted by any of the U.S. states (again regardless of the institutional actor doing the adopting). Also consistent with the discussion put forth in chapter 3, state public utilities commissions gain the opportunity to invent with respect to policy feature adoption starting in 1983, when Iowa was the first state to adopt a prototypical RPS program.

My dependent variables of interest are regulatory invention and regulatory borrowing. As in the previous chapter, I employ logistic regression to determine what makes regulatory invention and regulatory borrowing more likely. My main independent variable is deregulated, which is a binary variable that takes a value of 1 if a state has restructured its electricity market to allow new entrants to sell electricity to consumers in the retail sector and a value of 0 otherwise. Importantly, this variable takes a value of 1 if a state allows for electricity providers to compete in the retail sector by selling electricity to any combination of commercial, industrial, and residential consumers; I make this modeling choice to reflect the idea that mobilization among any of these three kinds of consumer—commercial, industrial, or residential—could have caused a state to embrace sector deregulation. The identities of states that have deregulated or regulated their retail electricity sectors (based on a given state-year) come from Delmas et al. (2007) with supplementation from www.ElectricChoice.com, a website set up to facilitate shopping for electricity providers in states that have undergone deregulation. Since this variable is captured at the state-year level, it also accounts for states that chose to deregulate only to later fully reregulate.

I account for a number of competing possibilities by including several control variables. The most prominent control variable is whether a state’s public utilities commissioners are directly elected by voters or instead appointed by a governor subject to legislative confirmation. Much of the work about electing public utilities commissioners (Primeaux and Mann 1986; Boyes and McDowell 1989; Kwoka 2002; Besley and Coate 2003; Gormley and Balla 2018; Parinandi and Hitt 2018) focuses on the idea that voters take minimal interest in regulatory issues while regulated entities (e.g., here, electric utilities companies) take great interest in regulatory issues. The differential interest showed by voters compared to regulated entities concerning regulatory issues opens up the possibility that elected public utilities commissioners might be less willing compared to appointed Page 143 →colleagues to challenge regulated entities through adopting RPS policy features. Alternatively, direct election may give commissioners the leeway to challenge electric utility companies by allowing the commissioners to sell policy proposal ideas directly to the public (Alessina and Tabellini 2008). Appointees, on the other hand, are accountable to governors and legislative leaders and may be considered to be overstepping their role if they sell policy proposal ideas directly to the public (Weingast 1984; McCubbins et al. 1987; Epstein and O’Halloran 1999; Huber and Shipan 2002; Volden 2002a; Miller 2005; Parinandi 2013). The same appointees, moreover, may even choose to limit how much they sell policy proposal ideas to governors and legislative leaders in order to avoid being accused of being unfavorable toward regulated entities by legislators (and potentially even governors) whose interests are aligned with the regulated entities. This suggests that elected commissioners may be more likely to adopt RPS policy features compared to their appointed colleagues.

I include the price of energy (measured in 2011 dollars per million British Thermal Units) to account for the possibility that energy pricing trends could spur regulatory policy adoption. I also include a state’s average annual daily solar radiation level (measured by the National Renewable Energy Laboratory and in units of kilowatt-hours per square meter per day); I include this variable since some of the states (e.g., Arizona and New Mexico) that have been prolific regulatory adopters of RPS policy features have high solar energy potential, which could have spurred policy feature adoption.141 As in the previous chapter, other notable controls include a state’s per capita income; a state’s percentage of energy that is produced from fossil fuel sources; and a state’s citizen ideology (where, like before, the ideology of a state’s citizens is measured on a 0–100 scale where 0 is perfectly conservative and 100 is perfectly liberal).142

Page 144 →I also include four variables for both the regulatory invention and regulatory borrowing models that capture how conditions across the other institutions of a state’s government might influence regulatory decision-making. Unified Democratic government is a binary variable that could influence when regulators feel more comfortable adopting RPS policy features. Government ideology comes from Berry et al. (1998) and captures whether regulators are operating in conservative versus liberal arena (where conservatism to liberalism is measured on a 100-point scale, where 0 denotes pure conservatism while 100 denotes pure liberalism).143 Legislative term limits is a binary variable receiving a value of 1 if a state imposes term limits on its legislators (it is possible that term limits reduce legislative capacity and thereby make regulatory policy adoption more likely).144 Finally, I include legislative median incumbent vote share from the most recent election (analogous to what was included in the previous chapter) to capture the possibility that regulators could be influenced by the anti-incumbent mood displayed toward legislators.145 As in the previous chapter, I utilize separate logistic regressions for each dependent variable and cluster standard errors at the state level to reflect the idea that decisions within a state are correlated.146

Page 145 →Results in table 6 reveal preliminary support for the Deregulation Invention Hypothesis, as the deregulation variable is positively and statistically significantly associated with regulatory invention. A reason for this could be that deregulation disrupts the ability of entrenched electric utility companies to fight back, leading to a scenario where public utilities commissioners are more likely to adopt novel RPS policy under deregulation compared to sector regulation. That the same result in terms of statistical significance and magnitude does not carry over to regulatory borrowing suggests that public utilities commissions operating in regulated and deregulated settings approach borrowing in the same way.

Moving to some of the controls from table 6, results regarding the Page 146 →elected variable are worth discussing. Recall that the elected variable captures whether commissioners are selected by voters or through gubernatorial appointment subject to legislative confirmation and oversight. The positive association between election and regulatory invention is fascinating since it suggests that being free from gubernatorial and legislative oversight gives commissioners the ability to take policy-making proposals directly to voters, a path that is arguably closed to appointees, who potentially may be castigated by governors and legislative leaders sympathetic to electric utility company interests. At the same time, the even larger association between the elected variable and regulatory borrowing suggests that, like their legislative counterparts, elected public utilities commissioners may also emphasize the observable aspects of policy insofar as they can credibly tell voters that they are trying to replicate successes seen elsewhere (Kogan, Lavertu, and Peskowitz 2016). Another implication that can be drawn out from the elected variable is that appointees are less likely to either invent or borrow. A takeaway from this is that we should perhaps not expect invention to come disproportionately from appointees.147

Page 147 →Another result worth discussing concerns the government ideology variable. Recall that this variable captures the broader governmental ideological environment in which regulators operate, as the variable is derived from legislator behavior. The negative and statistically significant relationship between government ideology and regulatory invention warrants explanation, and here, I believe this finding is an artifact of sizeable regulatory invention activity that took place in the state of Arizona. During the 1983–2011 time span of this study and based on mean government ideology scores, Arizona has been one of the most conservative states in the United States (with a mean government ideology score of 27.89, where 0 denotes pure conservatism while 100 denotes pure liberalism).148 Despite the state’s conservative profile, Arizona’s public utilities commission—officially called the Arizona Corporation Commission—invented with respect to adopting several RPS policy features and did so out of an attempt to capitalize on the state’s ample solar energy potential.149 This is confirmed by the Arizona Corporation Commission’s decision in 1996 to adopt an RPS program dedicated wholly to developing the state’s solar electricity industry (Arizona Corporation Commission 1996).150

Dropping observations corresponding to Arizona and re-estimating the analysis removes the association between government ideology and regulatory invention, providing a measure of support for the idea that the finding linking conservative government ideology to regulatory invention was driven partially by invention on the part of Arizona.151 The possibilityPage 148 → that the finding linking government ideology to regulatory invention is uninformative—not only because government ideology is constructed from legislator behavior and does not map neatly onto regulatory behavior, but also because the result could be driven by regulators in a conservative state (Arizona) inventing to take advantage of solar energy potential—raises the issue of how much we should even expect the ideology of public utilities commissioners (to the extent that this can actually be measured) to play an influential role in commissioner decision-making. The nature of the work that public utilities commissions perform—managing the relationship between electric utility companies and rate-paying consumers to make sure that the interests of both sides are represented fairly in decision-making—militates against ideology playing an overt role in public utilities commission decision-making. The Arizona Corporation Commission, for example, publicly states that a central goal in its oversight of utilities operations involves trying “to balance the consumers’ interest in affordable and reliable utility service with the utility’s interest in earning a fair profit” (Arizona Corporation Commission 2020).

Insofar as a pure liberal regulatory agenda would entail adopting more regulations to constrain firm behavior while a pure conservative regulatory agenda would entail removing regulatory constraints on firm behavior (Potrafke 2010), public utilities commissioners are limited in terms of how much they can infuse ideology into their decision-making while still conforming to their roles as arbiters of firm and consumer interests. If a public utilities commission of a liberal orientation (assuming that the ideologicalPage 149 → comportment of public utilities commissioners can actually directly be measured) were to aggressively embrace a pro-regulatory agenda, it could expose itself to being accused by firms of not upholding its regulatory mission. Similarly, if a public utilities commission of a conservative orientation were to aggressively embrace an antiregulatory agenda, it could expose itself to being accused by consumers of not upholding its regulatory mission. Inasmuch as a public utilities commission wants to avoid facing such accusations—which is likely considering that the commission must expend time and energy defending itself, may need to respond to litigation, and may even face calls for its powers to be modified—that commission will strive to appear neutral in decision-making, and this striving for a neutral appearance should temper the role that ideology plays in regulatory decision-making.

The same desire for conflict avoidance compels public utilities commissions to pay attention to power asymmetries vis-à-vis regulated electric utility companies in the rare event that commissions invent with respect to RPS policy features. Sector deregulation matters in this context since entrenched electric utility companies are in a weak (compared to companies operating under sector regulation) position to challenge regulatory invention, suggesting that commissions in deregulated settings might be better able to invent without facing protracted conflict over the policy change.

In figure 9, I display the difference in the predicted probability of regulatory invention when a state’s electricity sector is regulated compared to deregulated. When calculating predicted probability, I set continuous variable controls at their medians and set binary variable controls at their most frequently occurring values. The large dots correspond to the “main” predicted probabilities while the smaller dots correspond to the upper (if above) and lower (if below) bound predicted probabilities based on a 95% confidence interval. The main takeaway from the figure is to notice that the predicted probability of regulatory invention occurring in a state with a deregulated electricity sector is almost three times higher (0.0002691 for a deregulated sector versus 0.0000972 for a regulated sector) than the predicted probability of regulatory invention occurring in a state with a regulated electricity sector. One explanation for the difference in the predicted probabilities between regulation and deregulation offered here is that a public utilities commission, whose mission requires that it not discriminate against electric utility companies in its decision-making, is more Page 150 →likely to adopt novel RPS policy when electric utility companies are less willing to claim that they are the targets of discrimination. This behavior by public utilities commissions comports with the idea that regulators primarily see themselves as administrators and referees rather than lawmakers, and this behavior harkens back to the Weberian ideal (Weber 1978) in which regulators derive legitimacy from being seen as impartial in their decision-making. Inventing when firms are less willing to challenge policy is thus a way for commissions to reduce appearances of partiality.

Follow for extended description

Similar to the previous chapter, I also show results where similar rates and thresholds have been combined; these results, shown in table 7, substantively mirror the results in table 6.152 I include other robustness checks Page 151 →in the analysis. In table A11 of the appendix, I include a variable accounting for whether a state allows for policy to be adopted via direct ballot initiative and find that substantive results do not change. Similarly, in table A12 of the appendix, I substitute mean incumbent vote share for median incumbent vote share and find that substantive results do not change.153 In tables A13 and A14, I respectively drop combinations and drop rates or thresholds from my analysis. In each of these analyses, the deregulation variable is no longer statistically significant, although it retains a larger influence with respect to invention compared to borrowing when rates Page 152 →or thresholds are dropped from the analysis. One thing to bear in mind is that dropping combinations results in an extremely low number of cases of regulatory invention (16), representing a more than 50% reduction in the number of cases of regulatory invention (36) appearing in the main regulatory invention dataset.

Conclusion and Discussion

In this chapter, I eschew the traditionally legislature-centric focus of U.S. state-level studies of policy-making and instead use the RPS policy experiences of state public utilities commissions to evaluate when regulatory agencies are more likely to invent novel policy during policy feature adoption. State regulatory agencies are key players in crafting and managing policy environments in their respective areas of jurisdiction; omitting an analysis of their policy adoption activity would lead to an incomplete picture of when state governments are likely to invent.

What emerges is a view of regulatory behavior that is perhaps best characterized as cautious. Not only is engaging in policy feature adoption (and even more so, invention) scarce among public utilities commissions, but invention tends to occur when commissioners face a lower probability that the objects of regulation (here, entrenched electric utility companies) will attempt to challenge regulatory action. Regulators appear to take seriously their role as arbiters and executors of policy and sparingly advance new policy directives when they believe that they can do so safely from the vantage point of not inviting unwelcome attention from the targets (as well as allies of the targets) of those new policy directives.

There are two broader takeaways from this finding, and each takeaway has different implications based on what one believes regulatory agencies should do with respect to inventing policy. If an observer believes that regulatory agencies should serve primarily as the managers of existing policy rather than the wellsprings of new policy-making, that observer might find reassurance in the sparseness of regulatory policy feature adoption and especially regulatory invention. While the same observer might find discomfort in the idea that public utilities commissions are more likely to invent new policies when electric utility companies have lost vertically integrated monopolistic power, the very fact that commissioners must take the power of such companies into consideration in choosing to invent suggestsPage 153 → that regulatory agencies face limits on their authority and that they are not subjecting their respective states to copious inventing.

On the other hand, if a different observer believes that regulatory agencies have an obligation to use their managerial “on-the-ground” position to craft myriad novel solutions to a whole host of pressing social challenges, that different observer might find disappointment, not only in the scarcity of regulatory invention but also in the revelation (based on the sector regulation versus deregulation finding here) that invention may not take place in large areas that could benefit normatively from it.154 The behavior of state public utilities commissioners regarding RPS policy feature adoption suggests that those desiring greater invention perhaps should not look to regulatory rulemaking to serve as a substitute for legislative decision-making. In the next chapter, I move on to case studies that further explore the dynamics discussed in this and the previous chapter.