September 16, 2020

Reenergizing the Private Nondelegation Doctrine

Nicholas Wallace

The role of regional transmission organizations (RTOs) and independent system operators (ISOs) in the energy system has evolved in recent decades. As originally conceived, ISOs were to function like air traffic controllers for the grid, managing transmission infrastructure and the electricity moving through it. But as our energy system has grown more complicated, the Federal Energy Regulatory Commission (FERC) has increasingly relied on ISOs to write the rules that govern energy markets. These rules have enormous political and economic consequences, and today ISOs are in the middle of policy battles involving state and federal regulators, environmental organizations, and every corner of the energy industry.

This quasi-private system of energy-market regulation conflicts with core constitutional principles. In particular, by relying on ISOs to craft important energy industry rules, FERC evades the “accountability checkpoints” that permeate our constitution. In so doing, FERC runs afoul of the private nondelegation doctrine, which prohibits Congress or federal agencies from delegating government authority to private entities. FERC’s delegation to ISOs is particularly suspect because it rests on a thin statutory foundation: the Federal Power Act nowhere contemplates such a broad role for ISOs.

Because ISO policy making has limited statutory support, a court could apply the nondelegation doctrine as a canon of statutory construction—overturning FERC’s rulemaking without questioning the constitutionality of the Federal Power Act itself. By requiring FERC to assume full responsibility for the most important decisions affecting the energy industry today, such a ruling would enhance democratic accountability in the regulation of energy markets.

I.  Nondelegation as a Canon of Statutory Construction

Under the modern nondelegation doctrine, delegations from Congress to other branches of the federal government are allowed so long as they are guided by an “intelligible principle.” Applying this test, modern courts reliably find that Congress has provided a sufficiently intelligible principle. Indeed, on only two occasions—both in 1935—has the Supreme Court struck down statutory provisions as unconstitutional delegations of legislative authority to government agencies. In the words of Justice Scalia, the Court has “almost never felt qualified to second-guess Congress regarding the permissible degree of policy judgment that can be left to those executing or applying the law.”

While modern courts are reluctant to second-guess Congress, however, they have little trouble second-guessing administrative agencies. Which is to say that the nondelegation doctrine “has been relocated rather than abandoned,” and today serves primarily as a check on agencies rather than on Congress. Courts routinely strike down agency rules that raise nondelegation concerns without clear statutory support. Indeed, some number of the modern Supreme Court’s conservative members support a strengthened version of the so-called “major questions doctrine” that would prohibit on nondelegation grounds any major rule lacking clear congressional authorization.

The increased interest in the major questions doctrine is part of a broader revival of the nondelegation doctrine on the Supreme Court today, with at least five justices showing renewed interest in the doctrine. At the heart of that revival is a concern with democratic accountability. In United States v. Gundy, a three-person dissent penned by Justice Gorsuch vigorously argued in favor of striking down a law on nondelegation grounds for the first time since 1935. Justice Gorsuch explained that a central rationale for prohibiting delegations of lawmaking power is to safeguard accountability: “by directing that legislating be done only by elected representatives in a public process, the Constitution sought to ensure that the lines of accountability would be clear: The sovereign people would know, without ambiguity, whom to hold accountable for the laws they would have to follow.”

II.  The Private Nondelegation Doctrine

Democratic accountability likewise lies at the heart of the private nondelegation doctrine that is implicated by ISO involvement in energy regulation. Under the private nondelegation doctrine, private entities “may help a government agency make its regulatory decisions,” but they may not “wield regulatory authority” themselves. While delegations to the executive branch are arguably necessary to exercise Article II authority—and thus acceptable if guided by an intelligible principle—private delegations enjoy, in the words of Justice Alito, “not even a fig leaf of constitutional justification.”

Despite the doctrine’s clear constitutional underpinning, the Supreme Court has found occasion to overturn a statute on private nondelegation grounds just once, in Carter v. Carter Coal Co. The law at issue in that case allowed a subset of coal producers to write labor rules for the entire industry. The Court rejected that provision of authority in no uncertain terms: “This is legislative delegation in its most obnoxious form; for it is not even delegation to an official or an official body, presumptively disinterested, but to private persons whose interests may be and often are adverse to the interests of others in the same business.”

The Court’s hostility toward private delegations of any stripe was not long-lived, and two decisions at the end of the 1930s substantially narrowed the Carter Coal holding. In Sunshine Anthracite Coal Co. v. Adkins, the Court upheld delegation of price-setting authority to industry boards because the proposed prices could be modified or rejected by a federal commission. The Court held that because the industry boards “function[ed] subordinately to the Commission,” Congress had delegated ultimate authority to the Commission, not to any private entity. And in Currin v. Wallace, the Court upheld a statute under which the secretary of agriculture proposed regulations that would only take effect if two-thirds of tobacco growers in an area agreed to the rules. The Court described this private involvement not as a delegation of legislative authority but as a “restriction” upon Congress’s regulation and a “condition” of the regulation’s application. Following those decisions, the Supreme Court and lower courts have reliably upheld private involvement in regulatory processes against nondelegation challenges, even as that involvement proliferated in the second half of the 20th century.

A recent Supreme Court decision breathes new life into the private nondelegation doctrine. In Department of Transportation v. Association of American Railroads, the Court reviewed a D.C. Circuit decision overturning on private nondelegation grounds a statute that provided Amtrak with the authority to write standards for the private freight industry. The Supreme Court’s reversal of that decision did nothing to question the lower court’s thorough private nondelegation analysis; instead the Court rejected the Circuit Court’s premise that Amtrak is a private entity at all. And in Concurrence, Justice Alito fanned the embers of Carter Coal, commenting that “[b]y any measure, handing off regulatory power to a private entity is ‘legislative delegation in its most obnoxious form.’”

Justice Alito’s concurrence demonstrated special concern with the principle of democratic accountability. Private delegations are troubling in Justice Alito’s view because they allow the government to “regulate without accountability . . . by passing off a Government operation as an independent private concern.” The Justice warned that “everyone should pay close attention when Congress ‘sponsors corporations that it specifically designates not to be agencies or establishments of the United States Government.’” And indeed, one of the reasons the majority held that Amtrak is a public entity is because it is subject to certain “accountability mechanisms” imposed by the political branches.

The Supreme Court has yet to consider the constitutionality of an agency rule that implicates the private nondelegation doctrine. But the accountability concerns raised in recent Supreme Court decisions such as Gundy and Amtrak I would seem to be at their zenith where an agency, lacking clear statutory direction, delegates a portion of its authority to a private entity. Indeed, the DC Circuit has noted that the “harm done . . . to political accountability” by a delegation of legislative authority “is doubled in degree in the context of a transfer of authority from Congress to an agency and then from agency to private individuals.” This is precisely the scenario created by FERC’s delegation of policy making authority to ISOs.

III. The Increasing Rulemaking Power of ISOs

FERC’s Order 888 set out the initial conception of ISOs as organizations that would manage flows of energy across interconnected regions of the grid. Utilities could form ISOs collectively and voluntarily, ceding control over—but not ownership of—transmission facilities to an ISO. The reasons for doing so were powerful: providing operational control over a broad area of the electric grid to a single entity would improve the reliability and efficiency of the grid, while freeing up utilities to focus their attention on serving their customers.

The early vision for ISOs limited their role in energy markets to that of a neutral auctioneer. FERC advised that ISOs should “accommodate transactions made in a free and competitive market while remaining at arm's length from those transactions.” To ensure the neutrality of ISOs, FERC encouraged ISOs to have governance structures that included “all types of users of the system” and “prevent control . . . of decision-making by any class of participants.”

Over the past two decades, ISOs have moved beyond the limited, neutral role that FERC initially described in Order 888. Instead, FERC “has relied significantly on ISOs to provide the market rules, the market monitoring, the transmission terms,” and even “resource planning functions.” Indeed, the recent involvement of two eastern ISOs—PJM and ISO-NE—in writing the rules governing one such resource planning policy—forward capacity markets—has thrust these ISOs into policy battles involving state lawmakers, public utilities commissions, and many of the country’s biggest energy companies.

Before considering the role of the ISOs in those disputes, it is important to understand the particular policy at issue. A forward capacity market (FCM) is a mechanism for ensuring the reliability of the grid on those days when demand for electricity is at its highest. Rather than the electricity itself, the service exchanged through an FCM is the option to use electricity (and the promise to generate it) on those peak demand days at some point in the future. Generators post offers: the price at which they are willing to promise availability of electricity when it is needed. On the demand side, load serving entities (LSEs) do not pay for capacity directly; instead, the ISO determines a total capacity requirement for the market and purchases shares of that total on behalf of the LSEs. The market settles through a reverse auction, with the price falling and the number of offers decreasing until the capacity supplied meets the capacity requirement.

Recent policy battles over forward capacity markets concern an apparent flaw in this design: some entities can exercise market power to manipulate prices in their favor. For instance, utilities that own some amount of generation can submit low offers in order to drive down the market price for the capacity they will have to buy. To block such market-rigging behavior, ISO-NE and PJM instituted a minimum offer price rule (MOPR), which established a floor on offer prices for various sources of energy based on the cost to those sources of entering the market.

The devil of the MOPR is in the details. To which resources does it apply? How are minimum prices for a given resource established? Does it apply only to resources that are controlled by states and utilities? And are demand response and energy efficiency aggregators affected by the rule? The answers to these questions determine the fate of the market, with multibillion-dollar consequences. And FERC has largely left the job of answering them to the ISOs.

For instance, in a recent order, FERC determined that “subsidized resources distort prices in a capacity market” and ordered PJM to apply the MOPR to any resource receiving state subsidies. FERC’s definition of “subsidy” was vast, including not just direct subsidies, but any “indirect payment, concession, rebate, subsidy, non-bypassable consumer charge, or other financial benefit” acquired through state-sponsored programs. As noted in the dissent to FERC’s order, that definition was so broad as to theoretically include property tax breaks, cap-and-trade programs, and other “idiosyncratic regulatory regimes.”

Precisely which state programs must fall under the rule, and how to account for those programs, are critical policy questions with major implications for how states approach energy development. But FERC left those determinations in the hands of PJM. In the words of the dissenting Commissioner Glick, the Commission “provide[d] almost no guidance on how its sweeping definition of subsidy will work” and gave PJM “only 90 days to work out a laundry list of changes that go to the very heart of its basic market design.”

PJM’s response to FERC’s broad instructions was that of a regulatory body seeking to create a policy that balanced the interests of various constituencies. PJM “heard and thoroughly considered the views of all stakeholder[s] and representatives of states,” eventually filing a 536-page compliance proposal that “attempted to balance all of the competing views on these various issues.” One of the key features of PJM’s proposal was a mechanism by which generators can petition to lower their minimum offer price. FERC’s order suggests no such mechanism, but it helped to assuage concerns that the expanded MOPR would block wind and solar from accessing capacity markets. If PJM were a regulatory agency, we might call this mechanism a laudable example of reasoned decision-making. But PJM is not a regulatory agency; it is a private entity that lacks any constitutional foundation for exercising such power.

IV. Reining in ISO Policy Making under the Private Nondelegation Doctrine

FERC’s reliance on ISOs to develop policies like the MOPR would raise serious private nondelegation concerns even if it had clear statutory support. Applying the Supreme Court’s private nondelegation decisions, we would first ask whether the ISOs “function subordinately” to FERC. While FERC can almost always reject policies proposed by an ISO, FERC’s authority to modify proposals is constrained in many circumstances. When reviewing policies proposed by an ISO, FERC cannot “impose a new rate scheme of its own making without the consent of the [ISO] that made the original proposal.” This consent requirement places FERC and the ISOs on something closer to “equal footing” than the agencies and private entities in Adkins and Schecter Poultry. But ISO policy making still falls short of the scheme that was overturned in Carter Coal, in which no agency had veto power over the private entity’s proposed rules.

At best, then, we could say that ISO policy making occupies the constitutional gray area between Carter Coal and Adkins. But what distinguishes the ISOs’ role in energy markets from the schemes evaluated in Adkins, Schecter Poultry, and Carter Coal is that ISO policy making has almost no statutory basis whatsoever. Consider first the detailed provisions of the Bituminous Coal Act of 1937 that were at issue in Adkins. Part I of that Act provided a system for setting up regional industry boards, while Part II explained what powers those boards would wield. Most importantly, the Act specifically authorized the boards to propose minimum coal prices—the specific power the Supreme Court later upheld in Adkins.

In contrast, the Federal Power Act (FPA) has little to say about ISOs. The FPA defines an ISO as “an entity approved by the Commission . . . to exercise operational or functional control of facilities used for the transmission of electric energy in interstate commerce; and . . . ensure nondiscriminatory access to the facilities.” The FPA does not invite ISOs to establish markets for the exchange of electricity or generating capacity. It does not suggest that they should write market rules, such as the MOPR, that involve important and difficult policy decisions. Indeed, the provision of the FPA on which FERC has relied in requiring ISOs to rewrite industry rules—section 206—specifically states that FERC itself “shall determine the just and reasonable . . . rule, regulation, practice, or contract . . . and shall fix the same by order."

Thus, to find that the involvement of ISOs in writing rules for the energy industry violates the private nondelegation doctrine, a court would not need to strike down any portion of the FPA. Instead, applying nondelegation as a canon of statutory construction, a court could find that FERC’s interpretation of the FPA is impermissible.

The accountability concerns raised by the Supreme Court in other nondelegation cases invite such a result. In general, private delegations impair democratic accountability by allowing political branches of government to “deflect blame for unpopular policies by attributing them to the choices of a private entity.” This is all the more true where a private delegation has no clear statutory authorization. Congress cannot be held responsible for rules written by an ISO when no statute encourages or even permits the ISO’s involvement in designing energy regulations. At the same time, FERC can dodge accountability by passing the buck to the ISO itself. This is precisely the scenario Justice Alito warned of in Amtrak I: a regulatory agency that “pass[es] off a Government operation as an independent private concern.”

The ISOs themselves have little incentive to supply democratic accountability on their own; indeed, “[n]either the states nor the federal government have demonstrated the ability to hold [ISOs] accountable to the public.” Rather, ISOs are, by design, accountable to their voting members: “predominantly for-profit companies in the electricity industry.” Placing regulatory authority in the hands of such an organization can “lead to abuse and exploitation, because the financial incentives of private companies and organizations often run counter to the public interest.” Some have raised precisely this concern with regard to the minimum offer price rule, which prioritizes “investor confidence” over other policy objectives, such as clean air and public health.

A person who wishes to change an unpopular energy market rule might wisely target her efforts at the ISO itself. This is precisely what appears to have occurred during the PJM MOPR rulemaking described in Part III, above, wherein PJM’s meetings with state officials and other stakeholders led to a policy more friendly to renewable resources than the broad structure suggested by FERC. An ISO’s responsiveness to such pressure is a form of accountability, but it is not democratic accountability—and it certainly is not the type of accountability protected by the Constitution.

V.                  Conclusion

ISOs undoubtedly have a critical role to play in managing an increasingly dynamic and interconnected energy system. But they can fill that role without exercising significant policy making authority. Indeed, a court decision that requires FERC to assume full responsibility for writing the rules governing energy markets would allow ISOs to focus their attention and resources on the complex but critical job of managing the grid. At the same time, such a decision would enhance democratic accountability within energy regulation—an urgent objective given the energy system’s increasingly important role in the national response to climate change.

    Nicholas Wallace

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    Nicholas Wallace is a 3L at Stanford Law School, where he is also pursuing a master’s degree in environmental science.