Delegation’s Critics Should Be Careful What They Wish For

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The history of the intelligible principle test warrants caution in reviving the nondelegation doctrine.

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In the last year, five U.S. Supreme Court justices have stated their intention to reinvigorate the nondelegation doctrine by announcing a test that is more demanding than the intelligible principle test that the Court has applied for nearly a century.

Those statements have inspired scholars to write scores of meticulously researched and well-reasoned articles in which they either applaud or criticize the stated intention of the justices. But in the debate over the nondelegation doctrine scholars and justices too often overlook the rich history of a ubiquitous statutory standard that has proven to be remarkably difficult to define—the requirement that all rates charged by regulated firms must be “just and reasonable.” That history suggests that, while regulation implemented through reliance on broad delegations of power can have bad results, regulation implemented through application of clear congressional mandates is likely to be even worse.

The just and reasonable requirement is contained in the Interstate Commerce Act, the Natural Gas Act, the Federal Power Act, the Communications Act, and other state and federal regulatory statutes. The Supreme Court held long ago that the just and reasonable standard satisfies the intelligible principle standard even though it has been interpreted to have a wide range of inconsistent meanings.

For centuries, common law courts in England used the just and reasonable standard as the basis for determining the rates that common carriers and innkeepers were permitted to charge. The first U.S. Congress authorized the U.S. Secretary of the Treasury to modify any “fine, penalty or forfeiture” based on “such terms as he may deem reasonable and just.” When railroads began to carry freight and passengers in the United States, common law courts followed the lead of the English courts and used the just and reasonable standard as the basis for determining the rates that railroads could charge. That practice produced unacceptable and widely varying results because of the lack of ratemaking expertise of common law judges.

State legislatures responded to the problems created by judicial applications of the just and reasonable standard by enacting statutes that created regulatory commissions that were instructed to apply the just and reasonable standard to the rates that railroads were allowed to charge. Colonial and state legislatures also instructed state commissions to apply the just and reasonable standard to the rates charged by innkeepers and common carriers in the eighteenth century and to the newly created electric utilities, natural gas pipelines, and telephone and telegraph companies in the nineteenth century.

Over time, most important transactions became interstate. The Supreme Court held that states could not regulate interstate transactions. Congress responded by creating federal commissions to perform that function. Each of the federal regulatory statutes that were enacted between 1887 and 1938 instructed newly created federal regulatory agencies to regulate all rates charged by federally regulated railroads, electric utilities, natural gas companies, and providers of communications services to ensure that they are just and reasonable.

Agencies and courts have always struggled in their attempts to give meaning to the just and reasonable standard. The Supreme Court finally provided a definition in Permian Basin Area Rate Cases. The Court held that a rate must fall within the “zone of reasonableness” to satisfy the just and reasonable standard.

The zone of reasonableness standard is procedural in nature. Any rate that an agency can explain to the satisfaction of a court falls within the zone of reasonableness. Courts have upheld as within the zone of reasonableness rates that were based on a wide variety of inconsistent methods of determining the cost of a regulated product or service. They have also upheld an agency’s approval of unregulated market-based rates in circumstances in which the agency convinces a court that it has restructured the market in ways that provide the opportunity for sellers to compete effectively with each other.

The just and reasonable standard, defined with reference to the zone of reasonableness, created a national crisis in the context of regulation of the rates charged by producers of natural gas. The Federal Power Commission (FPC)—later renamed the Federal Energy Regulatory Commission (FERC)—used hearings that the Supreme Court characterized as “nigh interminable” to set just and reasonable rates applicable to each producing area for each multi-year period in which a source of gas was first marketed. The rates were so far below the market price of gas that they produced a large and growing national shortage of natural gas in the 1970s. That shortage, coupled with an unusually cold winter, forced the shutdown of many manufacturing plants in 1977.

Congress responded to the economic crisis created by the gas shortage by enacting the Natural Gas Policy Act (NGPA) in 1978. The NGPA created over 20 categories of natural gas, depending on factors such as the date when a source was first produced and sold, the location of the source, the depth of the well from which the gas was produced, and the volume of gas that the well was capable of generating. Each category was subject to a different price ceiling. The ceilings varied from 25 cents per unit to three dollars per unit. Some categories—“high-cost” gas and imported gas—were not subject to a calculated price ceiling.

Congress could not reach agreement with respect to the price ceiling that should apply to one category of gas—sales of gas by intrastate pipelines—but Congress nonetheless believed that these sales should continue to be subject to a price ceiling of some kind. As I saw when working as a lobbyist on Capitol Hill, Congress considered instructing FERC to use the traditional just and reasonable standard as the basis for the price ceilings it applied to that category. Congress, however, rejected the use of the just and reasonable standard.

Through application of the zone of reasonableness test that the Supreme Court had created in its attempt to give meaning to the just and reasonable standard, FERC’s predecessor—the FPC—had approved rates as low as 25 cents per unit and as high as about two dollars per unit. Representatives of producer interests considered the 25 cents rate far too low, while representatives of consumer interests considered the two dollar rate far too high. To avoid the risk of price ceilings that were considered to be either too high or too low, Congress instructed FERC to use a new standard—the “fair and equitable” standard—as the basis for its decisions to approve or disapprove the prices that intrastate pipelines proposed to charge.

Like the just and reasonable standard, the fair and equitable standard has a rich history. The first Congress created a three-member board to resolve the most important controversies that the new nation confronted at the time—decisions about how much of the total cost of the Revolutionary War each of the states must pay. Congress instructed the board to make those momentous decisions “according to the principles of equity.”

But the fair and equitable standard had no established meaning in the context of the ceiling price applicable to sales of natural gas. Indeed, that lack of established meaning was the characteristic of the standard that made it attractive to Congress. Congress rejected the just and reasonable standard because it disliked the results of the application of that standard to the process of establishing ceiling prices applicable to sales of natural gas.

We will never know what meaning FERC would have given the fair and equitable standard or how courts would have reacted to FERC’s efforts to define that standard. The NGPA was repealed before FERC or the courts could perform those tasks. Still, the NGPA had effects that can only be characterized as disastrous. The widely varying price ceilings Congress mandated in the NGPA interacted with constantly changing market forces to create bizarre situations. For instance, there was an understandable shortage of old gas that was subject to a price ceiling of 25 cents. That shortage forced pipelines to purchase large quantities of high-cost gas and imported gas. Gas in those categories was readily available because it was not subject to any price ceiling. The shortage of cheap, old gas forced pipelines to pay as much as seven dollars per unit to buy high-cost gas and gas imported from Algeria.

This story has a happy ending. The series of debacles that created chaotic conditions in the natural gas market from 1971 until 1985 encouraged FERC to restructure the natural gas industry in ways that greatly reduced the need for price regulation and allowed a competitive market for natural gas to evolve. That, in turn, allowed FERC to deregulate most parts of the natural gas market with the approval of the courts and Congress. The restructured and deregulated natural gas market has performed far better since 1985 than it did when it was subject to any of the price ceilings created by Congress, the FPC, FERC, or the courts.

I derive three lessons from this history. First, we must be careful what we wish for. Many proponents of reinvigoration of the nondelegation doctrine want to encourage Congress to substitute detailed statutory commands for broad grants of power to agencies. Yet, detailed regulation of a market by a Congress that has little understanding of the market and no ability to predict the future performance of the market can have effects that are far worse than those created by actions of an agency that implements a broad grant of delegated power.

Second, any effort to engage in detailed regulation of a market is fraught with danger attributable to the one law that always applies—the law of unintended consequences. Once FERC restructured and deregulated the natural gas market, it performed far better than it did when Congress, the FPC, or FERC attempted to achieve laudable goals by engaging in detailed regulation of the market. That contrast in efficacy explains why most economists favor adoption of a large tax on carbon to replace the complicated maze of regulatory mandates and subsidies that we are now using in our expensive but largely ineffective efforts to mitigate anthropogenic climate change.

Finally, it is dangerous to generalize about the quality of performance of regulatory agencies. The FPC performed so poorly in the 1960s that it created a shortage of natural gas of crisis proportions in the 1970s. Yet, the same agency—then renamed FERC—performed extraordinarily well in the 1980s by completely restructuring the natural gas market in ways that have caused it to perform well for decades. That dramatic difference in performance was attributable primarily to the quality of the leadership of the agency. The agency’s leadership in the 1960s had no understanding of the basic principles of economics, while its leadership in the 1980s had a sophisticated understanding of the way that markets perform. The quality of the people that the President appoints to head regulatory agencies is the most important determinant of the quality of the agency’s regulatory decisions.

Richard J. Pierce, Jr.

Richard J. Pierce, Jr. is the Lyle T. Alverson Professor of Law at the George Washington University Law School.