Bypassing Federalism and the Administrative Law of Negawatts

• Author: Sharon B. Jacobs
• Position: Associate Professor of Law at the University of Colorado Law School
• Pages: 885-945

Bypassing Federalism and the Administrative Law of Negawatts Sharon B. Jacobs  ABSTRACT: Presidential unilateralism has become a defining feature of the executive branch. But a related and equally important phenomenon has been largely ignored: federal agency efforts to circumvent statutory federalism boundaries. This move, which the Article calls "bypassing federalism," involves using existing jurisdictional authority to work de facto, rather than de jure, reallocations of power. The Article explores agency bypassing through the lens of the Federal Energy Regulatory Commission’s (“FERC’s”) promotion of demand response in electricity markets. Demand response refers to customer sales of negative watts, or “negawatts,” back to the electrical grid. FERC, eager to promote demand-side management programs but stymied by the jurisdictional limitations in the Federal Power Act of 1935, recently adopted a strategy that bypasses these federalism boundaries by setting up demand response programs in wholesale markets, which are under its control, to parallel state and local programs. Although the strategy has boosted demand response program participation, the Article ultimately concludes that bypassing is an insalubrious administrative innovation. While it allows agencies to further national objectives without challenging jurisdictional boundaries head on, the strategy has significant downsides. First, statutory constraints may limit an agency’s options in a way that results in the promotion of second-best over first-best policies. Second, even de facto jurisdictional adjustments raise federalism questions that we might prefer be addressed through the legislative process. Third, bypassing can be a costly strategy to the extent that it creates animosity between federal agencies and their state counterparts and fails to head off judicial showdowns. Finally, by making a dysfunctional statutory scheme workable, bypassing threatens to delay legislative solutions.  Associate Professor of Law at the University of Colorado Law School. I would like to thank Seth Davis, Jake Gersen, Michael Morley, John Nagle, Seth Stoughton, Phil Weiser, and the participants at the University of Washington Young Environmental Law Scholars Workshop and the Vermont Law School Colloquium on Environmental Scholarship for valuable input. All mistakes are my own. 886 IOWA LAW REVIEW [Vol. 100:885 INTRODUCTION ............................................................................. 887 I. THE ELECTRIC GRID AND DEMAND RESPONSE .............................. 891 A. A S HORT H ISTORY OF E LECTRICITY R EGULATION ..................... 891 B. T HE R ISE OF D EMAND R ESPONSE .............................................. 894 1. Demand Response Programs ....................................... 896 2. Benefits and Costs of Demand Response .................... 900 II. THE ADMINISTRATIVE LAW OF NEGAWATTS .................................. 904 A. S UB -F EDERAL R EGULATION ...................................................... 905 B. F EDERAL L EGISLATIVE E FFORTS ................................................ 907 C. B YPASSING F EDERALISM ........................................................... 912 III. EVALUATING BYPASSING ................................................................ 916 A. S ECOND -B EST S OLUTIONS ........................................................ 918 1. Uniformity Within Demand Response ........................ 918 2. Crowding Out Energy Efficiency ................................. 924 a. Conservation Trade-Offs ............................................ 924 b. Environmental Trade-Offs ......................................... 926 B. F EDERALISM C ONCERNS ........................................................... 931 C. T HE C OSTS OF B YPASSING ........................................................ 938 D. P OSTPONING L EGISLATIVE S OLUTIONS ..................................... 940 CONCLUSION ................................................................................ 944 2015] BYPASSING FEDERALISM 887 INTRODUCTION The exercise of unilateral executive authority is well-studied, but until recently, the focus has been almost exclusively on the President’s foreign affairs power. 1 Increasingly, however, federal agencies are addressing gaps between statutory authority and present realities on their own initiative. In some cases, they are doing so by circumventing statutory federalism boundaries to promote favored programs in the face of state, rather than congressional, intransigence. In these efforts to “bypass federalism,” agencies themselves may be the drivers of policy rather than the White House. This Article analyzes this growing phenomenon through the Federal Energy Regulatory Commission’s (“FERC’s”) regulation of consumer demand for electricity. Specifically, it focuses on FERC’s efforts to promote demand response programs in electricity markets. Demand response refers to a retail customer’s reduction of energy consumption in response to a price signal or incentive payment. 2 This commitment not to consume has been described as a sale of negative watts, or “negawatts,” back to the electrical grid. 3 While utilities and regulators have experimented with energy efficiency since the oil crises and resulting energy price spikes of the 1970s, demand response programs are a relatively recent innovation. Only in the last decade have advances in energy metering and communications technologies made 1. See, e.g. , JACK GOLDSMITH, POWER AND CONSTRAINT: THE ACCOUNTABLE PRESIDENCY AFTER 9/11 (2012) (identifying a long-term trend of expanding executive power and arguing that this expansion has preserved balance within the federal government); ERIC A. POSNER & ADRIAN VERMEULE, THE EXECUTIVE UNBOUND: AFTER THE MADISONIAN REPUBLIC (2010) (concluding that a strong executive is a modern necessity); Curtis A. Bradley & Martin S. Flaherty, Executive Power Essentialism and Foreign Affairs , 102 MICH. L. REV. 545 (2004) (challenging, on both textual and historical grounds, the idea that the Vesting Clause bestows broad unenumerated powers on the President); Eric A. Posner & Cass R. Sunstein, Chevron izing Foreign Relations Law , 116 YALE L.J. 1170 (2007) (arguing that the court should defer to executive interpretations of ambiguous statutory provisions even where those interpretations are inconsistent with the comity doctrine). Comparatively less attention has been paid to the executive’s authority to accomplish domestic agendas without the aid of new legislation. For examples of recent treatments with a domestic focus, see Jody Freeman & David B. Spence, Old Statutes, New Problems , 163 U. PA. L. REV. 1 (2014); Richard J. Lazarus, Howard & Katherine Aibel Professor of Law, Harvard Law Sch., Chair Lecture: Environmental Lawlessness (Apr. 10, 2013). More recently still, Daphna Renan has suggested that the executive can enlarge his or her unilateral policymaking authority through the manipulation of administrative structures. Daphna Renan, Pooling Powers , 115 COLUM. L. REV. (forthcoming 2015). 2. For a more detailed definition of demand response, see U.S. DEP’T OF ENERGY, BENEFITS OF DEMAND RESPONSE IN ELECTRICITY MARKETS AND RECOMMENDATIONS FOR ACHIEVING THEM: A REPORT TO THE UNITED STATES CONGRESS PURSUANT TO SECTION 1252 OF THE ENERGY POLICY ACT OF 2005, at 6 (2006) [hereinafter 2006 DOE REPORT]. 3. Credit for coining the term “negawatt” generally goes to physicist and energy policy expert Amory Lovins. Amory B. Lovins, Saving Gigabucks with Negawatts , PUB. UTIL. FORT. Mar. 21, 1985, at 19. 888 IOWA LAW REVIEW [Vol. 100:885 widespread deployment of demand response programs possible. 4 Properly implemented, demand response programs can prevent electricity price spikes, enhance reliability, and produce environmental benefits. For these reasons, FERC believes that demand response is an essential component of a “smarter” energy policy. 5 While there is a significant economics literature on demand-side management and demand response, 6 legal commentators have paid much less attention to demand response programs. 7 More attention is warranted, however, for three reasons. First, demand response programs are already widespread and will only grow in importance as enabling technologies continue to develop. The programs are increasingly being touted as a solution to such diverse problems as integrating more renewable resources into the grid and the Texas energy market’s thin reserve margins. 8 Demand response might also be used to comply with the Environmental Protection Agency’s (“EPA’s”) proposed limitations on carbon pollution from existing power plants. 9 4. See Marc Lipski, Demand Response—Technology for the Smart Grid , ELECTRICITY TODAY, May 2011, for a discussion of the relationship between demand response and its enabling technologies. 5. FERC maintains that effective demand response “can help reduce electric price volatility, mitigate generation market power, and enhance reliability.” See, e.g. , Fed. Energy Regulatory Comm’n, Demand Response , http://www.ferc.gov/industries/electric/indus-act/demand-response. asp (last visited Jan. 19, 2015). 6. See, e.g. , Robert Borlick, Paying for Demand-Side Response at the Wholesale Level: The Small Consumers’ Perspective , ELECRICITY J., Nov. 2011, at 8; Hung-po Chao, Price-Responsive Demand Management for a Smart Grid World , ELECTRICITY J., Jan.–Feb. 2010, at 7; William W. Hogan, Demand Response Compensation, Net Benefits and Cost Allocation: Comments , ELECTRICITY J., Nov. 2010, at 19. 7. Three exceptions are Joel B. Eisen, Who Regulates the Smart Grid?: FERC’s Authority over Demand Response Compensation in Wholesale Electricity Markets , 4 SAN DIEGO J. CLIMATE & ENERGY L. 69 (2012–2013) (defending FERC’s Order 745 and the participation of aggregators in demand response programs); Richard J. Pierce, Jr., A Primer on Demand Response and a Critique of FERC Order 745 , 3 GEO. WASH. J...