Applying Stakeholder Theory to Utility
Regulation
Inara Scott*
Many in the energy sector are calling for a transformation of the
traditional utility model. However, proposals for “Utility 2.0” typically
maintain the bilateral, adversarial relationship between the utility and its
regulator. This article posits that one of the key flaws in the U.S. utility
regulatory system is this myopic decision-making process, which limits the
potential for consideration of stakeholder interests and more comprehensive
systems thinking. While expanding the interests considered by utilities and
regulators will not solve other problems embedded in traditional utility
regulation, a broadening of the consideration of stakeholder interests will
almost certainly allow for more comprehensive long-term planning, greater
attention to environmental and other stakeholder concerns, and the potential
for transformational policy choices. The article therefore offers a new
governance structure that would bring stakeholder interests to the regulatory
table and allow utilities and regulators to include these interests in key
decision-making contexts.
INTRODUCTION
Many in the energy sector have called for a transformation of the
traditional utility model to accommodate developments in distributed
generation, address declining utility financial returns, and facilitate a transition
to a low-carbon future. 1 These proponents envision this transformation in a
number of ways. Some suggest a shift from traditional cost-of-service
Copyright © 2015 by Inara Scott
* Assistant Professor, College of Business, Oregon State University; J.D., Lewis & Clark Law School.
Professor Scott practiced energy law for more than a decade before joining the faculty at Oregon State
University. She would like to thank Jon White and the staff at Currents for their eagle eyes and
meticulous editing.
1. See, e.g., Michael T. Burr, Reinventing the Grid: How to Find a Future that Works, PUB.
UTILS. FORTNIGHTLY, Mar. 2014, at 20, 21 (noting that each of the various scenarios includes a
decentralized transmission grid and greater service to “localized customer needs”).
1
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ratemaking to more performance-based methods. 2 Others focus on allowing
competition to develop within nascent renewable and micro-grid industries. 3
Still others advocate for a new model in which the utility is a service provider
and integrator of a variety of energy options, rather than a peddler of kilowatt
hours. 4 All of these options appear to maintain one basic paradigm: the
bilateral relationship between the utility and its regulator. More precisely, they
maintain the regulatory paradigm that pits the investor-owned utility—whose
fiduciary duty is to maximize returns to its shareholders 5—against the
regulator—whose goal is to protect the utility’s customers from the utility
itself.
While some state legislative schemes purport to allow utility regulators to
consider environmental impacts and sustainability issues, 6 the jurisprudence
and history of the U.S. regulatory system has essentially locked regulators into
a narrow perspective that requires utility investments and business strategies to
provide only short-term economic benefits to current customers. 7 Within this
restrictive perspective, utility regulators can only consider other interests to the
extent that they do not result in additional costs to utility customers. This essay
posits that one of the key flaws in the U.S. utility regulatory system is its
requirement that utilities and regulators adopt this myopic decision-making
process, which limits the potential for consideration of stakeholder interests and
more comprehensive systems thinking.
As demonstrated in the corporate context, stakeholder orientation can (1)
create value for the firm and improve financial performance, (2) enhance
relationships with customers, employees, and regulators, and (3) improve
corporate image. 8 Research suggests that positive, active stakeholder
relationships are crucial to the successful implementation of environmental
policies. 9 On the other hand, when stakeholders are perceived to lack power,
2. See Charles Goldman et al., Lawrence Berkeley Nat’l Lab., Utility Business Models in a Low
Load Growth/High DG Future: Gazing into the Crystal Ball? 21–25 (Apr. 10, 2013), available at http://
www.westgov.org/wieb/meetings/crepcsprg2013/briefing/present/c_goldman.pdf.
3. See John Slocum, Threat from Behind the Meter: The Case for Utilities to Compete Directly
with Distributed Resources, PUB. UTILS. FORTNIGHTLY, July 2013, at 46–51, 57.
4. See Elisabeth Graffy & Steven Kihm, Does Disruptive Competition Mean a Death Spiral for
Electric Utilities?, 35 ENERGY L.J. 1, 39–43 (2014).
5. See, e.g., Kathleen Hale, Corporate Law and Stakeholders: Moving Beyond Stakeholder
Statutes, 45 ARIZ. L. REV. 823, 838 (2003) (describing “shareholder primacy norm,” which presumes
that maximization of shareholder value is the primary corporate objective).
6. See Michael Dworkin et al., Revisiting the Environmental Duties of Public Utility
Commissions (2006), 7 VT. J. ENVTL. L. 1, 2 (2006).
7. See Inara Scott, Teaching an Old Dog New Tricks: Adapting Public Utility Commissions to
Meet Twenty-First Century Climate Challenges, 38 HARV. ENVTL. L. REV. 371 (2014).
8. See Shawn L. Berman et al., Does Stakeholder Orientation Matter? The Relationship Between
Stakeholder Management Models and Firm Financial Performance, 42 ACAD. MGMT. J. 488, 489–90,
503 (1999).
9. Irene Henriques & Perry Sadorsky, The Relationship Between Environmental Commitment
and Managerial Perceptions of Stakeholder Importance, 42 ACAD. MGMT. J. 87, 96 (1999)
(“[S]uccessful environmental policy planning requires industry members to work with community
leaders and look at environmental issues through the eyes of other special interest groups.”).
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STAKEHOLDER THEORY AND UTILITY REGULATION
3
urgency, and legitimacy, their interests become less important to firm
managers. 10 While expanding the circle of interests considered by utilities and
regulators will not solve other problems embedded in traditional utility
regulation, 11 a broadening of the consideration of stakeholder interests will
almost certainly allow for more comprehensive long-term planning, greater
attention to environmental and other stakeholder concerns, and the potential for
transformational policy choices.
Stakeholder Theory in the Corporate Context
In the standard model of corporate governance, most consider the basic
corporate objective to be the maximization of shareholder value. 12 This
principle creates legal barriers that prevent corporate directors and managers
from prioritizing other interests ahead of shareholder wealth maximization. 13 In
contrast, “stakeholder theory” suggests that all corporate stakeholders—broadly
defined as the groups and individuals who impact or are impacted by corporate
decisions—stand in relationship with each other, and no single stakeholder
group should have its interests elevated above all others. 14
Business scholars and economists have studied and debated the adoption
of stakeholder theory from normative and instrumental standpoints, considering
both the efficacy of stakeholder theory for value creation and the ethical
justification for considering a broad range of stakeholder interests. 15 Some
instrumental stakeholder theorists argue that stakeholder theory is consistent
with the maximization of shareholder value, because, inter alia, healthy
communities are necessary for corporate success, and happy employees work
harder and more effectively. 16 In a normative context, stakeholder theory
10. See Ronald K. Mitchell et al., Toward a Theory of Stakeholder Identification and Salience:
Defining the Principle of Who and What Really Counts, 22 ACAD. MGMT. REV. 853, 878–79 (1997)
(“Stakeholder salience will be high where all three of the stakeholder attributes—power, legitimacy, and
urgency—are perceived by managers to be present.”).
11. These problems are substantial and must be addressed. They include: outdated regulatory
incentives tying fixed cost recovery to volumetric sales; punishing utilities for engaging in energy
efficiency projects; a lack of performance-based assessments; and reliance on rising cost of service rates
in an increasingly competitive market.
12. Timothy P. Glynn, Communities and Their Corporations: Towards a Stakeholder Conception
of the Production of Corporate Law, 58 CASE W. RES. L. REV. 1067, 1072–74 (2008).
13. See Anthony Bisconti, The Double Bottom Line: Can Constituency Statutes Protect Socially
Responsible Corporations Stuck in Revlon Land?, 42 LOY. L.A. L. REV. 765, 772–76, 778–80 (2009)
(reviewing fiduciary duties of directors and legal cases requiring the maximization of shareholder
value).
14. Tara J. Radin, Stakeholders and Sustainability: An Argument for Responsible Corporate
Decision-Making, 31 WM. & MARY ENVTL. L. & POL’Y REV. 363, 382–86 (2007).
15. See, e.g., Thomas M. Jones, Instrumental Stakeholder Theory: A Synthesis of Ethics and
Economics, 20 ACAD. MGMT. REV. 404, 432 (1995) (synthesizing ethical and economic theories and
arguing that stakeholder management can improve business performance); Thomas M. Jones & Andrew
C. Wicks, Convergent Stakeholder Theory, 24 ACAD. MGMT. REV. 206, 206 (1999) (proposing
“convergent stakeholder theory” to bring together normative and instrumental theories previously found
in distinct bodies of stakeholder literature).
16. R. EDWARD FREEMAN ET AL., STAKEHOLDER THEORY: THE STATE OF THE ART 11 (2010).
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suggests that businesses have moral responsibilities to stakeholders, and that
business decisions and ethics are inescapably intertwined. This “integration
thesis” asserts that all decisions have an implicit or explicit ethical view and
will benefit or harm some stakeholder parties. 17 It is therefore essential to
consider the impacts that business decisions have on people and
communities. 18
In the legal literature, debates over stakeholder theory always begin with
the question of whether corporate actors can legally pursue such a strategy,
given that the notion of fiduciary duty has been interpreted to run narrowly to
shareholders. 19 In response to a series of hostile corporate takeovers, in which
the drive for corporate profits resulted in harsh consequences for employees
and communities, states passed constituency, or stakeholder, statutes in the
1980s and 1990s. These statutes were intended to give corporate directors and
officers greater freedom to consider non-shareholder interests. 20 More recently,
academics in both business and legal realms have begun to apply stakeholder
theory to environmental protection and sustainability issues, examining the
responsiveness of corporations to environmental stakeholder concerns. 21
This Is Not Your Grandmother’s Electric Utility
The original utility regulation model—”Utility 1.0”—sought to provide
safe, reliable, low-cost utility services as widely as possible. 22 Utilities were
seen as natural monopolies, meaning that significant economies of scale in the
generation and distribution of energy would lead to lower rates. Therefore,
governments would need to protect, rather than dismantle, utility monopolies. 23
Regulators were expected to be a substitute for competition, acting to protect
customers in a market in which utilities were granted exclusive service
territories. 24 As part of the classic “regulatory compact,” the utility agreed to
serve all customers, including the unprofitable ones, in return for the
opportunity to earn a fair return on its investment, comparable to firms with
similar risk or industry profiles. 25 The higher expense of serving non-profitable
17.
18.
19.
20.
21.
Id. at 7. [16]
Id. at 6–8. [16]
See Bisconti, supra note 13.
See Hale, supra note 5, at 831–32.
See, e.g., Kristel Buysse & Alain Verbeke, Proactive Environmental Strategies: A Stakeholder
Management Perspective, 24 STRATEGIC MGMT. J. 453 (2003) (providing empirical evidence of links
between environmental strategy and stakeholder orientation).
22. See EDWARD EYRE HUNT, POWER COMMS., THE POWER INDUSTRY AND THE PUBLIC
INTEREST 3–4, 17, 35 (Edward Eyre Hunt ed., 1944); JOHN BAUER, EFFECTIVE REGULATION OF PUBLIC
UTILITIES 12-13, 16 (1925) (noting that entitlement to service and the establishment of reasonable rates
are intertwined); CHARLES F. PHILLIPS, JR., THE REGULATION OF PUBLIC UTILITIES: THEORY AND
PRACTICE 172–73 (1988) (describing goals of public utility regulation).
23. See James K. Hall, Regulation of Public Utilities, 206 ANNALS AM. ACAD. POL. & SOC. SCI.
92, 93–94 (1939) (describing monopolistic characteristics of public utilities).
24. See PHILLIPS, supra note 23, at 163–65.
25. See id. at 110 [24]; Bluefield Water Works & Improvement Co. v. Pub. Serv. Comm’n of W.
Va., 262 U.S. 679, 692 (1923) (“A public utility is entitled to such rates as will permit it to earn a return
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STAKEHOLDER THEORY AND UTILITY REGULATION
5
customers was folded into system-wide costs, embedding a system of costsharing and subsidies into utility rates. Of course, such a system worked
because profitable customers had no other options for service. If they had other
options and could seek out alternative, lower-cost providers, they would simply
leave the system.
Figure 1: In the traditional bilateral regulatory model, the regulator, typically a public
utility commission (PUC), represents customer interests in having low rates and adequate
services, while the utility is expected to maximize returns to its shareholders. The
regulatory compact, in which the utility agrees to serve all customers at reasonable rates
in exchange for regulated monopoly status, underlies this model.
While the classic rate-setting formula, which ties utility profits to invested
capital, creates a significant incentive for utilities to make capital
investments, 26 it also makes utilities wary of significant investments that may
not be deemed prudent. And it reduces the incentive for utilities to invest in
research and development, because utility regulators, which focus on certainty
and predictability in creating customer benefits, are unlikely to deem risky new
technologies to be prudent. 27 Even if a utility received approval to invest in
new technologies, it would only earn back the cost of the investment plus its
normal rate of return. Thus, pursuing new technologies not only costs the utility
its time and effort, but also yields no additional return. Given these built-in
disincentives, it is both predictable and somewhat unfair for critics to lambaste
utilities for being too conservative and risk-averse. 28 Indeed, the system has
been structured to make them so.
on the value of the property which it employs for the convenience of the public equal to that generally
being made at the same time and in the same general part of the country on investments in other
business undertakings which are attended by corresponding, [sic] risks and uncertainties . . . .”).
26. The seminal study by Harvey Averch and Leland Johnson argues that rate-of-return regulation
has resulted in the overcapitalization of the utility industry. See Harvey Averch & Leland J. Johnson,
Behavior of the Firm under Regulatory Constraint, 52 AM. ECON. REV. 1052 (1962) (describing the
phenomenon now known as the “Averch-Johnson effect”).
27. “The rate of utility spending on research and development is less than one-tenth the average
rate for all sectors of the U.S. economy and a much smaller fraction of the rate in the most productive
sectors.” David Malkin & Paul A. Centolella, Results-Based Regulation, PUBLIC UTILS. FORTNIGHTLY,
Mar. 2014, at 28, 35.
28. See, e.g., Brian Sheets, The Smart Grid Movement: A Different Perspective, ENERGY CENT.
(May 29, 2013), http://www.energycentral.com/articles/article/2641 (“[T]he utility world is seen as
conservative, cautious, stuffy, slow-to-change, and risk-adverse. In today’s climate, this is a recipe for
failure.”).
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When utility infrastructure was first developed, this regulatory structure
made sense. Utilities were encouraged to invest in their systems and all
customers received service on a non-discriminatory basis. The regulatory
compact maintained the pretense of a market-based system and limited utility
profits while ensuring universal access. The system also kept interest rates low
for utilities that needed significant infusions of capital, because of the certainty
of cost recovery for items included in the rate base. 29
However, in the century since the creation of the regulatory compact,
electric utilities and their role in society have transformed. As late as 1907,
only 8 percent of United States households had electricity. 30 Thanks to Utility
1.0, that picture changed rapidly. By 1940, that number had grown to 85
percent. 31 In 2014, electric utilities are, quite simply, essential to the basic
functioning of our society. We rely on the utility grid for everything from
national security to the treatment of drinking water. 32 Damage to the electric
grid could “create disruptions of a scale that was only hinted at by Hurricane
Sandy and the attacks of Sept. 11.” 33
Initially, utilities developed as separate entities, confined primarily to
single cities or, at most, regions. Today, the situation could not be more
different. The interconnected nature of the utility grid means that the actions of
any single utility can affect millions of people. 34 The scale of this potential was
realized in 2003, when mistakes made at a small utility provider in Ohio
resulted in a massive blackout along the East Coast that affected over fifty
29. See DIVISION OF RATEPAYER ADVOCATES, CAL. PUB. UTILS. COMM’N, DOCKET A.12-04-015:
REPORT ON THE COST OF CAPITAL FOR TEST YEAR 2013, 2-7 to 2-16 (2012), available at
http://www.ora.ca.gov/uploadedFiles/Content/Energy/Customer_Rates/Cost_of_Capital/Report%20on%
20the%20Cost%20of%20Capital%20for%20Test%20Year%202013%20%28Exhibit%20DRA01%29.pdf (explaining the calculation of cost of capital, risk premium, and why utility cost of capital is
low relative to other industries based on reduced investment risk). The Report notes, “the cost of equity
capital for utilities is among the lowest of all industries in the U.S.” Id. at 2-16.
30. See RICHARD MUNSON, FROM EDISON TO ENRON: THE BUSINESS OF POWER AND WHAT IT
MEANS FOR THE FUTURE OF ELECTRICITY 43 (2005).
31. HUNT, supra note 22, at 3.
32. See Nicholas C. Abi-Samra, One Year Later: Superstorm Sandy Underscores Need for a
Resilient Grid, IEEE SPECTRUM (Nov. 4, 2013), http://spectrum.ieee.org/energy/the-smarter-grid/oneyear-later-superstorm-sandy-underscores-need-for-a-resilient-grid (noting various impacts from
Superstorm Sandy, including disruption of drinking water supplies). Presidential Directive 63, signed by
President Clinton in 1998, identified electric power as critical infrastructure necessary for the nation’s
security and economy. See KARL A. SEGER, UTILITY SECURITY: THE NEW PARADIGM 4 (2003). The
United States military is reliant on commercial power for continued operations at 99 percent of its
facilities. Matthew L. Wald, As Worries Over the Power Grid Rise, a Drill Will Simulate a Knockout
Blow, N.Y. TIMES, Aug. 17, 2013, at A11, available at http://www.nytimes.com/2013/08/17/us/asworries-over-the-power-grid-rise-a-drill-will-simulate-a-knockout-blow.html?pagewanted=all.
33. See Wald, supra note 32, at A11.
34. In 2012, mistakes by a utility technician in Southern California resulted in a blackout affecting
about nine million people in the region. See Matthew L. Wald, Combination of Errors Led to Power
TIMES,
May
2,
2012,
at
B4,
available
at
Loss
in
San
Diego,
N.Y.
http://www.nytimes.com/2012/05/02/science/earth/power-failure-in-west-is-tied-to-combination-oferrors.html?_r=0.
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STAKEHOLDER THEORY AND UTILITY REGULATION
7
million people and caused damages that have been estimated between $4
billion and $10 billion. 35
New technologies and the push for the reduction of greenhouse gases have
created profound environmental and privacy issues associated with utilities. In
2010, the energy sector created 87 percent of greenhouse gas emissions in the
United States while electricity generation alone accounted for 42 percent of
total U.S. carbon dioxide emissions. 36 Tackling climate change will clearly
require innovation within the electric utility system. The “smart grid,” which is
essential to the integration of distributed generation, allows utilities to collect
massive amounts of energy usage data that may be as granular as when
customers used a particular appliance, and for how long. 37 While creating the
potential for significant improvements in energy efficiency, the smart grid also
raises significant privacy issues. 38
Today’s utilities thus have a complex and far-ranging web of stakeholders
with deep interests in the way utilities are operated. Yet due to the operation of
the current regulatory structure, utilities are precluded from considering the
input of any stakeholders beyond current customers.
35. The blackout of 2003 is widely attributed to cascading failures that began with an outage in
Northern Ohio caused by tree limbs coming into contact with transmission wires. See JR Minkel, The
AM.
(Aug.
13,
2008),
2003
Northeast
Blackout—Five
Years
Later,
SCI.
http://www.scientificamerican.com/article/2003-blackout-five-years-later/; ; see also U.S.-CANADA
POWER SYSTEM OUTAGE TASK FORCE, FINAL REPORT ON THE AUGUST 14, 2003 BLACKOUT IN THE
UNITED STATES AND CANADA: CAUSES AND RECOMMENDATIONS 45 (2004), available at
http://energy.gov/sites/prod/files/oeprod/DocumentsandMedia/BlackoutFinal-Web.pdf;
Bobby
McMahon, Ten Years Later, Electric Grid Faces More Complex Challenges Despite Post-Blackout
Gains, INSIDE FERC (Platts, McGraw Hill Fin.), Aug. 19, 2013, at 1.
36. See U.S. ENVTL. PROT. AGENCY, INVENTORY OF U.S. GREENHOUSE GAS EMISSIONS AND
SINKS:
1990–2010
3-1,
3-11
(2012),
available
at
http://www.epa.gov/climatechange/emissions/usinventoryreport.html.
37. See Lauren Reilly, Automatic Consumer Privacy Rights Embedded in Smart Grid Technology
Standards by the Federal Government, 36 VT. L. REV. 471, 473–77 (2011).
38. See PETER FOX-PENNER, SMART POWER: CLIMATE CHANGE, THE SMART GRID, AND THE
FUTURE OF ELECTRIC UTILITIES 40–45 ,47 (2010) (discussing the advantages of, and resistances to,
dynamic pricing over traditional time-of-use pricing).
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Figure 2: The current regulatory model requires the PUC to make decisions based solely
on the economic interests of current customers, effectively precluding it from considering
the interests of other stakeholders. In turn, the utility is prevented from considering
stakeholder input because its decisions must be approved by the PUC. Regulation Must
Evolve to Consider This Web of Relationships
For decades, utilities were considered among the most stable and reliable
of investments. Because they regularly returned dividends to their investors,
they were considered “widow-and-orphan” stocks, meaning that they were a
good choice for those needing a certainty of returns, even if they were never
wildly profitable. 39 However, utility credit ratings have dropped significantly
since 2001. 40 In May 2014, Barclays downgraded the entire bond market rating
for the U.S. electric utility sector. 41 A number of factors have led to this
declining financial position, including: (1) the growth of distributed generation
39. See John Waggoner, Investing: Utilities May Ease Some Stock Shock, USA TODAY (Sept. 23,
2011),
http://usatoday30.usatoday.com/money/perfi/columnist/waggon/story/2011-09-22/utilitystocks/50518996/1.
40. “In 2001, 32 percent of electric utilities earned an A- or higher credit rating. By the end of
2012, only 19 percent of electric utilities earned a rating of A- or higher. The lower rating of BBB- and
below has increased from 19 percent in 2001 to 29 percent in 2012.” George Fisher, Electric Utility
ALPHA
(Jun.
11,
2013),
Credit
Ratings
Are
Deteriorating,
SEEKING
http://seekingalpha.com/article/1492952-electric-utility-credit-ratings-are-deteriorating.
41. Herman K. Trabish, Barclays Downgrades Entire US Electric Utility Sector, UTIL. DIVE (May
26,
2014),
http://www.utilitydive.com/news/barclays-downgrades-entire-us-electric-utilitysector/266936/.
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STAKEHOLDER THEORY AND UTILITY REGULATION
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and the degradation of the regulatory compact, (2) falling load growth, and (3)
an increased need for investment. 42
The inability of utilities to respond to many stakeholders has arguably
exacerbated this situation. For example, utilities have been roundly criticized
for their hostility toward the spread of distributed solar generation in their
service territories, and have almost certainly alienated customers in the
process. 43 Yet this response is hardwired into the regulatory system. As part of
the regulatory compact, utilities are required to serve all customers on a nondiscriminatory basis, and the cost of serving more expensive, less profitable
customers is spread across the lower-cost customers. If those customers leave
the system and generate their own energy, costs to other customers rise and,
due to the way traditional cost-of-service rates are calculated, utilities may not
be able to recover their fixed costs. Moreover, because utility profits are tied to
capital investments, if the opportunity to make new generation investments is
limited by the growth of distributed renewable resources, utilities lose a key
aspect of their value proposition. Unless changes are made to the way utility
rates are calculated or utility programs are developed, utilities should be
fighting solar projects—their fiduciary duty to their shareholders requires it.
The development of new technologies, including the smart grid, provides
another good example of the impact of the blinders placed on utility regulators.
Spending money on research and development is unlikely to return a financial
benefit to current customers, so it is rarely approved, in terms of cost recovery,
by utility regulators. As a result, the firms with arguably the greatest expertise
in the retail energy market are precluded from engaging in significant research
and development. Even if new technologies are developed, utilities cannot
invest in them until their cost is equivalent to or less than other resource
options. This problem was illustrated when Virginia’s utility commission
rejected a utility proposal to develop a carbon capture and sequestration project
because the technology was too expensive and had not been sufficiently
demonstrated. 44 Utility regulators have rejected proposals for smart grid
projects—which are essential to the evolution of distributed generation and
improvements in energy efficiency— simply because they do not return
benefits to current customers. 45
42. See Fisher, supra note 40; Malkin, supra note 27, at 29–31.
43. See, e.g., Editorial, The Koch Attack on Solar Energy, N.Y. TIMES, Apr. 27, 2014, at SR10,
available at http://www.nytimes.com/2014/04/27/opinion/sunday/the-koch-attack-on-solar-energy.html
(“This campaign [against renewable energy incentives] is really about the profits of Koch Carbon and
the utilities, which to its organizers is much more important than clean air and the consequences of
climate change.”).
44. Jonas J. Monast & Sarah K. Adair, Completing the Energy Innovation Cycle: The View from
the Public Utility Commission, 65 HASTINGS L.J. 1345, 1371–74 (2014).
45. See, e.g., Baltimore Gas & Elec. Co. Smart Grid Initiative, Case No. 9208, Order No. 83410
(Md.
Pub.
Serv.
Comm’n
June
22,
2010),
available
at
http://webapp.psc.state.md.us/Intranet/Maillog/orders_new.cfm (enter “83410” in “Enter Order
Number” text box) (final order denying authorization for proposed smart grid initiative).
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Policy makers have attempted to address these problems through
piecemeal legislation that prioritizes certain projects, technologies, or
resources, such as renewable portfolio standards or feed-in tariffs. 46 Yet, by
their nature, piecemeal solutions often fail to place utilities within a larger
policy context, address interrelated project impacts, or consider the impacts of
various policy initiatives on unrepresented stakeholder parties. I suggest that,
just as there was a call for stakeholder statutes in the 1980s and 1990s, we
should be calling for utility stakeholder statutes, in order to begin to address
this regulatory failure and improve the functioning of our utility system.
A Proposal
While the concept of adopting a stakeholder statute for utilities sounds
relatively straightforward, the regulatory structure, in fact, makes it quite
complicated. If regulation were to permit a utility to consider other
stakeholders, rather than utility customers alone, when making resource
acquisitions, numerous questions would need to be answered. What criteria
should the utility commission use when determining if that resource acquisition
is prudent? Should the utility be able to include the cost of that investment in its
rates? How should the utility prioritize stakeholder interests? In a competitive
industry, market prices for the cost of competing goods and services put natural
limits on the ability of a company to incorporate stakeholder interests. In the
utility sector, there is no significant competitor to provide those limits, and the
PUC (public utility commission) would have to decide whether to allow utility
customers to pick up the bill for stakeholder initiatives.
Though challenging, this concern should not preclude the development of
a utility stakeholder statute. First, the PUC could develop a new prudence
standard that does not rely solely on considerations of customer benefits. This
could be addressed by creating a stakeholder board to approve utility initiatives,
either by a majority or unanimous vote. Initiatives approved by the board
would be deemed prudent.
The stakeholder statute could also incorporate by reference state energy
policies, such as a reduction in carbon emissions or the development of
distributed generation technology, that would have to be achieved by utility
programs but do not directly benefit utility customers. The statute could include
a cost cap, as is the case with many renewable portfolio standards, 47 permitting
the utility to acquire resources or pursue other programs only in the event that
its decision did not raise rates more than, for example, 10 percent above the
utility’s costs absent the resource or program.
Lastly, states could form regional stakeholder groups to create energy
policy plans that would be adopted and implemented at the state level. Creating
46. See Scott, supra note 7, at 402–406.
47. For a list of states with cost caps in their renewable portfolio standards, see Jocelyn Durkay,
State Renewable Portfolio Standards and Goals, NAT’L CONF. ST. LEGISLATURES (Jan. 16, 2014),
http://www.ncsl.org/research/energy/renewable-portfolio-standards.aspx.
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STAKEHOLDER THEORY AND UTILITY REGULATION
11
regional plans and policy goals, such as the adoption of time-of-use rates, the
acquisition of smart grid technologies, and the implementation of a carbon
capture and sequestration project, would create the potential for regional cost
sharing of new technologies and the implementation of controversial new rate
structures across similarly situated utilities.
Significantly, the implementation of such stakeholder statutes would
require a directive demanding the PUC to adopt programs or approve recovery
for resource acquisitions that were deemed prudent under the new policy. If
such a directive were not implemented, the PUC would continue to be bound
by existing jurisprudence, which limits prudence to only the initiatives that
return a financial benefit to current customers. Of course, the PUC would have
to be included as one of the stakeholders on a regional policy taskforce or
stakeholder board, in order to ensure that the PUC’s experience, foresight, and
skills are brought to the table.
Conclusion
Energy usage in general, and electric generation in particular, are integral
parts of the current climate-change crisis and are key to the mitigation of future
carbon emissions. Working Group III of the Intergovernmental Panel on
Climate Change noted that scenarios limiting global temperature increases to
2°C require “more rapid improvements of energy efficiency, a tripling to nearly
a quadrupling of the share of zero- and low-carbon energy supply from
renewables, nuclear energy, and fossil energy with carbon dioxide capture and
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storage (CCS), or bioenergy with CCS.” 48 Additionally, the first stage in
President Obama’s plan to reduce U.S. carbon emissions focuses on cutting
emissions from existing power plants. 49 Yet, progress toward environmental
goals is regularly stymied by the utility regulatory system, which cuts off
considerations of environmental impacts not directly and financially affecting
current utility customers.
As noted above in Figure 1, in a traditional regulatory scheme, the utility
acts in the interest of its shareholders, and the regulator acts to protect utility
customers and to simulate the forces of competition. This regulatory structure
limits creativity and innovation and drives short-term decision making that fails
to take into account the diversity and complexity of the utility stakeholder web.
Until the regulatory structure recognizes the value and importance of
stakeholders beyond the immediate utility customer, the system will not evolve
to address the environmental and technological challenges that it faces. The
application of stakeholder theory is only one piece of a broader revolution in
utility governance, but it is an essential part of this much-needed
transformation.
48. INTERGOVERNMENTAL PANEL ON CLIMATE CHANGE, Summary for Policymakers, in CLIMATE
CHANGE 2014: MITIGATION OF CLIMATE CHANGE, CONTRIBUTION OF WORKING GROUP III TO THE
FIFTH ASSESSMENT REPORT OF THE INTERGOVERNMENTAL PANEL ON CLIMATE CHANGE 13 (Ottmar
Edenhofer et al. eds., 2014), available at http://report.mitigation2014.org/spm/ipcc_wg3_ar5_summaryfor-policymakers_approved.pdf.
49. Climate Change and President Obama’s Action Plan, THE WHITE HOUSE,
http://www.whitehouse.gov/climate-change (last visited Oct. 8, 2014).