For more than one hundred years, states have relied on ratemaking to ensure that electric utilities deliver affordable and reliable power to their customers. This process helped keep costs down, but it also produced an electricity system that is a cause of, and vulnerable to, some of the most pressing challenges now facing society: climate change, catastrophic wildfires, extreme storms, and air and water pollution.
This Article argues that risk regulation is an alternate legal foundation for interpreting bedrock principles of ratemaking, such as prudency, reasonableness, least cost, and the public interest. The traditional economic regulator view of ratemaking evaluates these principles in financial terms, generally focusing on near-term rate impacts and the utility’s financial viability. This often excludes consideration of options with far lower risk of health and environmental harms if those options would result in higher costs for ratepayers.
Ratemaking does not require public utilities commissions (PUCs) to wait for catastrophic events to occur, or regulations to change, before addressing risk. A state PUC’s authority is often quite broad, and courts recognize that each rate case is unique. The discretion granted by statutes and the courts allows PUCs to proactively manage risk without requiring new legislation. PUCs could improve social and environmental outcomes by focusing on a wider range of a ratemaking decision’s potential impacts and a longer time frame during which the impacts may occur. A more robust approach to risk management could also help the PUC achieve its traditional mandates of affordability and reliability.
This Article proposes a novel framework—precautionary ratemaking—to unlock the risk governance potential of the PUC. The Article begins with an overview of the ratemaking process and focuses on two guiding principles for a PUC’s approach to risk: least cost planning and the public interest. The Article points to the U.S. Supreme Court’s 1944 decision in Federal Power Commission v. Hope Natural Gas as a turning point that limited PUCs’ public interest considerations. The Article then reframes ratemaking as risk governance, demonstrating how the process mitigates, allocates, and creates risk among utilities, ratepayers, and the general public. The discussion explains how these categories relate to electricity rates and therefore fall within the general jurisdiction of a PUC. The Article concludes with a framework for shifting ratemaking from a least cost to a least cost-least risk approach that is rooted in the precautionary principle.