Effective Regulation of Public Utilities

Dear Colleagues,

Readers of my monthly essays know that for the period February 2020 through March 2021, each month’s essay will digest a chapter from my forthcoming book, Regulating Mergers and Acquisitions of Public Utilities: Industry Concentration and Corporate Complication. It seemed right, however, to offer this month a reprint of an essay I wrote several years ago, about utilities’ and regulators’ responsibility to make our industries diverse and nondiscriminatory—not just economically but societally.

We may have all come on different ships, but we're in the same boat now.

— Rev. Dr. Martin Luther King, Jr. (1929–1968)

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          When utility regulators talk about diversity and discrimination, they usually mean fuel types, supplier mix, and transmission access.  But it also means societal relations.  As our nation becomes more diverse, so do the customers of our regulated utilities.  What is a utility's responsibility to reflect this diversity in its employees and contractors?  What is the regulator's role?

          There are many voluntary utility efforts, some encouraged through the admirable Utility Market Access Partnership under the auspices of the National Association of Regulatory Utility Commissioners.  But voluntary means voluntary—non-mandatory, if I care enough, when I get around to it, if it doesn't cost too much.  If the goal is to eliminate the gap between utility workforce diversity and societal diversity, "voluntary" isn't enough.  The gap, I'm told, persists.  Suppose we made the question tougher:  Should diversity be mandatory?  Should a utility franchise—a government-granted, government-protected, government-supported right to operate a profitable business free of competition—include an obligation to create a diverse work force and contractor base?  And an even tougher question:  Does that obligation exist already?  Does a commission's traditional legal authority include any authority to mandate particular efforts or results?

          Thirty-six years ago, the U.S. Supreme Court examined a toenail on this question—answering it mostly negatively.  The National Association for the Advancement of Colored People (the “NAACP”) had asked the Federal Power Commission (“FPC,” FERC's predecessor) to issue a rule prohibiting utilities from discriminating against their employees based on race.  Their proposed rule would have required the Commission to "(a) enumerate unlawful employment practices; (b) require regulatees to establish a written program for equal employment opportunity, which would be filed with the Commission; and (c) provide for individual employees to file discrimination complaints directly with the Commission" (as summarized in Chief Justice Burger's concurring opinion).

          Citing the Federal Power Act and Natural Gas Act, the NAACP argued that (a) the FPC's substantive statutes declare the businesses of selling electricity and natural gas to be "affected with a public interest," and (b) racial discrimination by utilities conflicts with the public interest.  The FPC therefore was both authorized and obligated to bar racial discrimination by its licensees.

          The FPC rejected the request, saying, in effect, "Not our department."  Both the Court of Appeals and the U.S. Supreme Court upheld the FPC.  As the Supreme Court explained:

"[T]he use of the words 'public interest' in a regulatory statute is not a broad license to promote the general public welfare.  Rather, the words take meaning from the purposes of the regulatory legislation. ... [T]he principal purpose of those Acts was to encourage the orderly development of plentiful supplies of electricity and natural gas at reasonable prices.  ... The use of the words "public interest" in the Gas and Power Acts is not a directive to the Commission to seek to eradicate discrimination, but, rather, is a charge to promote the orderly production of plentiful supplies of electric energy and natural gas at just and reasonable rates."

National Association for the Advancement of Colored People v. Federal Power Commission, 425 U.S. 662 (1976).  Sympathetic to the Petitioners' purpose, the Court stressed that if a utility's discriminatory practices triggered fines, backpay awards, litigation fees, or "illegal, duplicative[,] or unnecessary labor costs," the Commission should disallow them when setting "just and reasonable" rates.  Those actions fell within the agency's domain; regulating employment practices did not.

          Are diversity-promoters limited to voluntarism, or does the decision leave room for mandates?  (Technically the opinion binds only FERC, but its reasoning could resonate with any regulatory statute.  We need some workarounds.)  Here are some thoughts . . .