Marshal the Power of Utilities

The United States is in a new energy crisis. Ballooning electricity demand—driven largely by data centers but also by manufacturing and electrification—is straining the grid’s affordability and reliability.¹ Aggressive and geopolitically incoherent military actions, first in Venezuela and then in Iran, have exacerbated the situation by causing spikes in oil and gas prices. Domestically, this new energy crisis has raised difficult questions for energy regulators, including how to manage surging grid interconnection requests, who should pay for new infrastructure, and whether regional electricity markets’ designs can accommodate the pressures they face.

What does all of this mean for climate change? The answer is complex and underdetermined: Swelling electricity demand has increased plans to build new gas-fired generation,² but gas turbine shortages and rising gas prices make renewable energy appear an ever more affordable choice.³ In another give-and-take, Congress’s repeal of solar and wind energy tax incentives and the Trump administration’s antipathy to renewable energy render their project financing more precarious, but fossil fuel price surges and data centers’ need for near-term power could bolster demand for renewables and energy storage.

It is thus a critical time to reevaluate the tools we have to manage the electricity system—most centrally, public utility regulation. Decisions made by public utility regulators regarding how to respond to today’s energy crisis will shape the future of the US electricity grid for decades to come. If we manage it poorly, we may lock in fossil fuel infrastructure in ways that make planetary climate stability ever more elusive. But if we manage it well, this piece argues, public utility law presents a potent yet underappreciated avenue for accelerating climate progress. Given shared jurisdiction over electricity in the United States, a collaborative effort to reorient federal and state regulation will be necessary to transform the field.

The American Model of Public Utility Law

The US electricity sector has long been regulated predominantly through public utility law, which emerged in the late 1800s as a distinctly American answer to the question of how to regulate large infrastructure monopolies.⁴ Since that time, this body of law has sought to control access to and prices for vital services including energy, water, transportation, and telecommunications through commission regulation of state-sanctioned monopolies’ prices and practices.⁵ Over its century-plus of existence, the public utility model has faced critiques that it is inefficient, ineffective, and prone to capture.⁶ In the latter part of the 20th century, these critiques resulted in substantial deregulation of certain sectors, including transportation, fossil fuels, and telecommunications.⁷

However, for electricity—a vital good that requires second-by-second balancing of supply and demand—deregulation proved elusive.⁸ Although the deregulatory era prompted the integration of market constructs into the electricity sector, the public utility regulatory framework has remained basically unchanged. Federal and state commissions still oversee the rates and practices of utilities: The federal government ensures that transmission planning processes and wholesale electricity markets produce “just and reasonable” outcomes, and the state commissions ensure that retail rates and planning and payments for the distribution system remain “just and reasonable.”⁹

How to Redeem Public Utility Law

What does this public utility model have to do with green statecraft? Although utilities are occasionally addressed as an impediment to the clean energy transition,¹⁰ more often the literature on industrial policy and political economy sidelines public utility law. These fields give substantial attention to modes of derisking, coercive regulation, and ownership models, but little to the generative possibilities of public utility regulation.¹¹ This inattention is likely due in large part to a century of accretive—and often quite fair—critiques of the model.¹²

Yet in a moment of sectoral pressure and the need for significant infrastructural transformation, public utility holds considerable untapped potential. As energy law scholar William Boyd has argued, public utility at its core is “a collective project aimed at harnessing the power of private enterprise and directing it toward public ends.”¹³ How to direct this power toward new public ends like climate change is a central question worth interrogating.

Planning in Public Utilities

Three functions of public utility law give it potential as a tool of climate progress. First, the systematic coordination needed for the electricity grid makes planning central to the public utility model. At the federal level, regulators oversee regional planning processes for building and paying for new transmission infrastructure and managing “queues” for resources that want to interconnect to the grid.¹⁴ Concurrently, states often engage in “integrated resource planning” to determine the right mix of generation resources to build to meet anticipated future demand.¹⁵

Scholars and policy analysts have critiqued current regional and state planning processes for failing to produce socially optimal outcomes, as plans often reflect biases for fossil resources and local transmission investments grounded in incumbent utility preferences.¹⁶ But revamped planning processes and enhanced regulatory scrutiny could transform utility-sector planning into a potent climate tool. Indeed, studies have found that good transmission planning alone could save consumers billions of dollars while significantly accelerating clean energy deployment.¹⁷

A priority federal planning reform should be to establish a National Grid Planning Authority charged with selecting a suite of interregional and large regional transmission lines to anchor the US grid’s expansion in clean and affordable directions. While legislation establishing such an authority would be the cleanest and most robust path forward, existing public utility legal frameworks also offer federal regulators the ability to exert far more control over the shape of federal grid planning.¹⁸

Derisking Public Utilities

Second, public utility is not only a planning tool but also a muscular derisking tool. When regulators approve utilities’ planned additions to the grid, these investments gain a presumption of prudence. This presumption, in turn, guarantees the utility the ability to recover its expenditures plus an established rate of return from customers, absent later negligent behavior by the utility.¹⁹

The reason that Georgia, a traditionally regulated state, built the only new nuclear power plant in the United States this century has everything to do with this guaranteed cost recovery: The utility made it clear that it would not construct the plant without legislation enshrining a supercharged version of the presumption of prudence into law.²⁰ The results of Georgia’s experiment—a projected $14 billion plant that ultimately ballooned to $36 billion—suggest that staking ratepayer money to fund new infrastructure must be done with caution, so as not to overburden captive customers with long-term costs.²¹

Nevertheless, public utility is able to stimulate investment where markets often cannot. This ability could be deployed to great benefit to launch promising technologies to address climate change. For example, at the federal level, regulators could revamp efforts to offer enhanced rates of return on priority investments such as long-distance transmission lines and transmission optimization infrastructure. At the state level, regulators could incentivize both experimental central-scale technologies like advanced nuclear and geothermal and more dispersed technologies, including distributed storage and virtual power plants. Federal tax incentives and loan guarantees could again help steer states toward certain preferred categories of investments by rendering the economics of certain technologies more favorable, just as they helped spur Georgia’s nuclear investment.²² These strategies—if deployed thoughtfully and with appropriate oversight—could help marshal additional green finance outside the tax base.

Managing Energy Affordability

Third and finally, public utility law holds potential as a tool for managing affordability through the clean energy transition because of its ability to control and allocate costs. Recent attention has focused on how utilities under public utility regulation are earning outsize profits on their investments—but bold regulators can equally use the model to rein these in.²³ Federal and state regulators have approval authority over utilities’ capital structures and can bring down the costs of infrastructure financing through tools including greater debt-to-equity ratios, lowered returns on equity (especially for nonpreferred projects), and the use of public financing authorities.²⁴

Public utility law can also address the concern that data centers are causing significant price increases for residential electricity users and thereby slowing electrification.²⁵ Coordinated federal and state rate structure reforms are critical to ensure that data centers and other large users pay for the costs they put on the grid, as well as help respond to the reliability strain they create.²⁶ Indeed, if planned and managed well, data center–induced demand growth could actually cause residential ratepayers’ portion of infrastructure costs to fall in the coming years, as the costs of the grid are spread over a wider pool.

Conclusion

Public utility law has a set of core characteristics that could be revamped into a potent strategy for achieving an affordable, just, and faster clean energy transition. Public utility tools could help federal and state regulators plan a better system, secure commitments from utilities to build priority resources, and balance energy transition costs among system users. One critical first step in this direction will be to ensure adequate federal and state commission capacity, capable of scrutinizing utility filings and independently analyzing key information, to drive forward creative solutions and push back against incumbents that would stand in the way of climate progress. With revamped capacity and a renewed sense of purpose, a new administration can and should make public utility law a core tool of green statecraft.