We’re all connected! Regulating Contracts for Electricity — Aditi Bagchi

Post by Aditi Bagchi

The Supreme Court has agreed to review a federal appellate court decision overturning demand response regulation from the Federal Energy Regulatory Commission.  The issue on appeal is not one of private law but of federal jurisdiction.  The federal agency has authority to regulate the wholesale market but states retain authority over retail markets.  The problem is that there is no clear line between those markets.  The FERC regulation is designed to reduce wholesale prices but it does so by way of rebates for reduced retail demand.  The question is whether the regulation technically governs wholesale sales (whose prices are reduced) or retail sales (that don’t happen as a result of its incentives).

The jurisdictional lines in the Federal Power Act force the analytically unfortunate question of whether FERC Rule 745 governs wholesale or retail markets.  But the exercise of jurisdictional line-drawing may offer a lesson for common law regulation of contract as well.

Public regulation of markets invariably turns on the interdependency of sales.  Transactions are not meaningfully considered as single events, with terms set by parties in isolation.  State actors cannot successfully regulate a transaction or transaction-type without addressing related transactions.  The boundaries of the right to regulate a transaction cannot be strictly limited to the conduct of parties to that transaction or else the regulatory effort will fail important public policy goals.

There is a lesson here for how we think about the right to set the terms of individual transactions, and how courts adjudicate disputes arising from those privately-set terms.  Parties deciding the terms of their particular transactions do not choose those terms in isolation.  It is not just that their terms have externalities for third parties.  The terms only make sense in the context of markets, i.e., other people’s terms.  Rather than appearing on the periphery to explain trade usage or, more rarely, to justify nonenforcement, third parties are essential to the formally bilateral relationship of contract.

Just as it is odd to think a federal agency should undertake regulation of wholesale electricity markets without attention to the effects of retail consumption on the wholesale market, it is odd to think that legal treatment of other contracts should proceed without systematic attention to how those contracts affect others.  This need not entail ad hoc introduction of public policy concerns into the adjudication of every contract dispute.  But it does imply that, whatever the private morality of promise and agreement, the legal rules that should govern private agreement depend on its public consequences.

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