Volume 35, Special Issue
Jim Rossi & Morgan Ricks, Foreword to Revisiting the Public Utility, 35 Yale J. on Reg. 711(2018).[PDF]
William Boyd, Just Price, Public Utility, and the Long History of Economic Regulation in America35 Yale J. on Reg. 721(2018).[PDF]
This Essay investigates the history of “just price” and its influence on the concept and practice of public utility regulation in the United States. It begins with a discussion of the Scholastic understanding of just price and its relationship to commutative justice, with particular attention to the problem of coercion in economic exchange. The Essay then discusses the centrality of just price to broader ideas of moral economy and to economic thought and regulation in colonial America and the early United States. The heart of the Essay shows how the idea of just price influenced public utility regulation as it took shape during the late nineteenth and early twentieth centuries. As the Essay demonstrates, received understandings of just price were fundamental to the public utility idea and were at the center of battles over the proper approach to utility valuation and rate regulation during the first half of the twentieth century. The Essay concludes with a discussion of efforts to restructure formerly regulated industries during the last quarter of the twentieth century, with particular attention to the challenges faced by the Federal Energy Regulatory Commission as it sought to ensure that prices in restructured natural gas and electricity markets were just and reasonable. Although much of the Essay’s purpose is descriptive, several larger points emerge from this study. First, the history of just price reveals that relations of reciprocity and fairness in exchange are at the very core of the public utility idea. When seen from this perspective, public utility represents an important experiment in translating abstract principles of economic justice and fair pricing into working rules for governing key systems of provisioning in a modern industrial society. Second, the history of just price reminds us that prices are more than signals; that they are also relationships and that price relationships can be coercive. At root, the economics of just price is an economics of coercion and, as such, an economics that resonates quite strongly with efforts by Progressive lawyers, legal realists, and institutional economists to develop an approach to law and economics (and economic regulation) that would put coercion at its center. Third, the history of just price shows that competitive markets, when functioning properly, can be powerful instruments for protecting consumers and facilitating fairness in exchange. But it also underscores the importance of taking individual markets on their own terms and recognizing that some markets, and the mechanisms of price formation at their center, are more vulnerable to disruption and manipulation than standard economic models suggest. Finally, at the most general level, the history of just price reminds us that for a very long time—far longer than the lifespan of classical and neoclassical economics—ethical and social concerns have been intimately bound up with conceptions of economy, economic life, and the provision of necessities.
James Ming Chen, Speculative Undertakings: Rate Regulation as a Branch of Corporate Finance, 35 Yale J. on Reg. 779 (2018).[PDF]
The law of regulated industries, particularly the obligation to secure “just and reasonable rates” for regulated services, is a highly specialized application of financial economics. Ratemaking, bluntly put, represents a regulatory exercise in capital asset pricing. As a matter of economics, this Essay describes ratemaking as a variation on the financial theme of uncertainty. As a matter of law, this Essay describes legal principles guiding the regulatory determination of the rate of return on utility property. It analyzes two valuation methods derived from the 1923 Bluefield Water Works decision (“attracting capital” and “comparable earnings”), as well as a third approach based on the capital asset pricing model. Discretionary elements in rate regulation make it impossible to wholly alleviate uncertainty in the pricing of infrastructure. Rate regulation therefore constitutes a speculative undertaking in its own right.
Prasad Krishnamurthy, George Stigler on His Head: The Consequences of Restrictions on Competition in (Bank) Regulation, 35 Yale J. on Reg. 823 (2018).[PDF]
Bank regulation used to be riddled with price, product, entry, and location restrictions. Such restrictions were intended to prevent the recurrence of crises, such as those of the 1930s and 1940s. Over time, however, regulatory acquiescence to technological and institutional innovation undermined their ability to limit competition. An intellectual turn toward valorizing competition also hastened their demise. George Stigler, in particular, provided a trenchant critique of all such regulation as the product of pure rent seeking by private industry.
This Article revisits the role of such restrictions on competition in banking. On the one hand, the public choice account of these restrictions as the outcome of private rent seeking is essentially true. On the other hand, their unintended historical result was to limit banks’ risk-taking incentives and to coopt banks into preventing regulatory arbitrage. Viewed from this perspective, these restrictions provide an important legal, political, and economic (LPE) model for how limits on competition could usefully complement current bank regulation. This model is one in which, to some extent, regulation facilitates rather than frustrates cartel formation in order to maintain a more stable equilibrium.
Richard S. Markovits, “Public Utility” Regulation: Some Economic and Moral Analyses, 35 Yale J. on Reg. 875 (2018).[PDF]
This Essay analyzes various economic and moral issues that relate to the actual/alleged unregulated conduct of public-goods producers, public utilities, and “businesses affected with a public interest” (including businesses engaged in common callings and common carriers) as well as to government regulation of these categories of businesses. It begins by criticizing the conventional definitions of “public goods” and “public utilities” and explaining why, on its original definition, “businesses affected with a public interest” were not simply “businesses whose decisions affected the public interest.” It then explains why the fact that one or more of the goods that an otherwise-Pareto-perfect (oPp) economy could produce were “public goods” would result in economic inefficiency. Next, it analyzes how the economic efficiency problem posed by public goods and the economically-efficient response to them are affected by the reality that the relevant economy is not oPp. The Essay proceeds to explain why “fair-rate-of-return public utility-pricing regulation” renders it profitable for regulatees to make otherwise-unprofitable decisions and delineates the variety of such inherently-unprofitable choices that such regulation renders profitable. It then discusses how these so-called Averch-Johnson-Wellisz (AJW) effects of such pricing-regulation complicate the task of public-utility regulation and raise the possibility that government production of the goods produced by public utilities may be more desirable than the public regulation of private production of these goods. This Essay comments on the way in which the fact that the relevant economies are not oPp affects the economic efficiency of the various AJW effects and complicates the task of regulating public-utility pricing. After that, it provides short accounts of the different types of moral analysis that are relevant to the assessment of the moral character of the choices made by the types of businesses traditionally perceived to require regulation and of various regulatory responses that government could make to such businesses. It uses these accounts to assess various moral criticisms that have been made of such businesses and the moral desirability of the government’s regulating such businesses in different ways. The Essay concludes by listing some of the most important reasons why actual government business-regulations are less than optimal and outlining various policies that might improve the quality of government regulation of business.
K. Sabeel Rahman, Infrastructural Regulation and the New Utilities, 35 Yale J. on Reg. 911 (2018).[PDF]
From too-big-to-fail financial firms to net neutrality to internet platforms and the water crisis in Flint, Michigan, we now face a variety of legal and public policy problems which all share a common structure. While covering vastly different subject matter areas, these disputes are similar in that they all involve the same root problem: how should law and public policy operate to prevent the arbitrary and unaccountable control over basic infrastructure? Water, finance, internet access—these are examples of goods and services which are foundational and infrastructural. They are the basis upon which much economic and social activity is built. As a result, arbitrary, exclusionary, or unfair governance of these services poses a particularly troubling problem for individuals, businesses, and communities. This Essay draws on the historical and legal tradition of public utility regulation to develop a generalized framework for regulating these kinds of infrastructural goods and services. While the history of public utility regulation has at times been fraught with some controversy, this Essay (and this symposium as a whole) suggests that the public utility tradition offers some valuable normative, legal, and institutional design insights which can be adapted for a range of contexts in today’s economy.
The Essay develops a portable method of analysis and regulation that can be applied to a wide range of contemporary contexts. This proposed, modernized framework of “infrastructural regulation” has three elements. First, I argue that infrastructural regulation should be applied to goods that are infrastructural, in that they are defined by the conditions of scale, necessity, and vulnerability. Second, such infrastructural goods should be subjected to a mix of regulatory oversight, “firewalls,” and public options, which together can assure fair and equal access to those infrastructural goods. Finally, the Essay suggests that the regulatory oversight of such infrastructural goods must itself be constituted in more democratically-accountable ways.
Daniel Schwarcz, Ending Public Utility Style Rate Regulation in Insurance, 35 Yale J. on Reg. 941 (2018).[PDF]
Many property-casualty insurers are subject to an elaborate state-based regulatory regime that enforces prohibitions against “excessive” and “unfairly discriminatory” rates. Extensive economics research suggests that this regulation is not in the public interest. Building on this literature, this Essay suggests that insurance rate regulation evolved out of a set of market and regulatory conditions that no longer prevail in most property-casualty insurance markets. The persistence of traditional insurance rate regulation in many states thus represents a failure of these jurisdictions to evolve along with the markets
they oversee. In developing this argument, the Essay shows how insurance rate regulation emerged out of the view that property-casualty insurance markets share key characteristics with natural monopolies. In both settings, unique market conditions were understood to “naturally” stymie socially-beneficial competition. And in both settings, states tolerated these naturally-occurring anticompetitive market conditions, but subjected firms in these markets to extensive rate regulation designed to prevent excessive or unfairly discriminatory rates. Despite these parallels in their development, modern-day insurance markets no longer resemble natural monopolies. Insurers can, and do, compete vigorously in ways that promote social welfare and do not rely on plausibly anti-competitive practices. Preserving public utility style insurance rate regulation makes little sense in light of these shifts in insurance market structure, even if insurance rate regulation oriented towards broader social goals like privacy and social mobility remain sensible.
Christopher S. Yoo, Common Carriage’s Domain, 35 Yale J. on Reg. 991 (2018).[PDF]
The judicial decision invalidating the Federal Communications Commission’s first Open Internet Order has led advocates to embrace common carriage as the legal basis for network neutrality. In so doing, network neutrality proponents have overlooked the academic literature on common carriage as well as lessons from its implementation history. This Essay distills these learnings into five factors that play a key role in promoting common carriage’s success: (1) commodity products, (2) simple interfaces, (3) stability and uniformity in the transmission technology, (4) full deployment of the transmission network, and (5) stable demand and market shares. Applying this framework to the Internet suggests that common carriage is not particularly well suited as a basis for regulating broadband Internet access.