All Commentary
Friday, September 1, 1978

Law of the Jungle vs. the Jungle of Law


Mr. Semmens is an economist for the Arizona Department of Transportation and is studying for an advanced degree in business administration at Arizona State University.

The problem of uncertainty is endemic to any business venture. The more uncertainty there is, the greater the risk for the would-be entrepreneur. A rational response to such uncertainty is to seek to reduce it through either an improvement of one’s knowledge about, or an increase in one’s control over, the conditions pertaining to a prospective field of endeavor.

This urge to rationalize the vagaries of the business environment has frequently been manifested in a resort to law as a means of controlling uncertainty. With laws to regulate the prices and supplies of a good or service and with the vast information-gathering resources of the government at hand, the number of uncontrolled or unknown variables in the uncertainty equation ought to be reduced.

Reasoning like this inspired the creation of the Federal Power Commission (FPC) in 1930. Its objective was to control various aspects of the energy industry and thereby promote business prosperity and social justice. The agency was given a broad grant of authority to insure its capability for a flexible response to changing conditions. Its rulemaking was restricted only by the proviso that its actions be “just and reasonable.”

With all this “logic” going for it, it should come as no surprise that the government’s venture into energy regulation has been a disaster. Rather than the certainty promised by the imposition of deliberated policy upon the erstwhile fluctuations of free market “jungle,” the resort to regulation has piled confusion on uncertainty with a result that is often incomprehensible.

If the market treats you “unfairly,” there’s not much you can do about it. If you can’t make a profit in your present trade, you change your occupation. You don’t petition to have the law of supply and demand set aside. Such impersonal “injustice” has no remedy. One might as well complain about the law of gravity. However, let the “injustice” come at the hands of an agency of the government such as the FPC and we have a whole new ballgame on our hands.

The “injustices” made by law can be unmade by law as well. The avenues open to the “victims” in these instances include recourse to all three branches of government. First, the “wronged” party can go to the legislature and get the law changed. This is, at best, a long-range option. While it cannot be neglected, it is not as promising as efforts to influence the decisions of the Commission itself. This may prove more effective on a cost/benefit basis, but it, too, is future-oriented. The most immediate avenue to relief is our third option: appealing the decision to the next echelon of government officials, in this case, the courts.

Reliance upon the judicial system to “right” the “wrongs” of the FPC has been largely misplaced. The erratic gyrations of the Commission’s attempts to grapple with forces of supply and demand have been matched by judiciary inconsistency. The jurisdictional issue, to take just one area of concern for those interested in what to expect in the way of energy regulation, has been “decided” three different ways since World War II. In 1946, the court settled on concurrent federal and state jurisdiction.’ By 1963 the courts had shifted to a position upholding a doctrine of federal supremacy.2 It was only two years later that the whole question was unsettled once and for all by a declaration that the precise boundaries between state and federal jurisdiction could only be adjudicated on a case-by-case method.³

This unfortunate course of events has effectively multiplied the uncertainties faced by business firms attempting to deal in services regulated by the FPC and various state agencies. Whenever the rules promulgated by these competing regulatory authorities differ, the prospect of litigation in order to resolve the jurisdictional boundary is virtually inevitable.

The potential for confusion is by no means limited to disputed jurisdiction. The history of judicial interpretations of FPC powers is not of a nature to relieve business anxieties over what rules will be applied even in situations clearly within the realm of federal control. As the law now stands, the FPC may (1) modify existing contracts when it deems such action to be in the public interest,4 (2) make rate revisions retroactively,5 (3) change its policy at its own discretion,6 (4) define the phrase “just and reasonable” in different terms on different occasions,’ (5) decide who shall bear the burden of proof in any given case,8 (6) require individual companies to suffer losses.9

It should be apparent by now, that the attempt to supplant the “chaos” of the unregulated market with a system of “just and reasonable” man-made rules has produced disconcerting consequences for businessmen, investors, and ultimately consumers. In the less than 50 years since the creation of the FPC, the courts have bestowed their blessings on at least eleven different pricing formulas for natural gas.

None of this has been very helpful in solving our energy “problem.” In place of the law of supply and demand (which a court declared nonbinding on FPC policies¹º), we have instead a shifting collage of rules and regulations. Far from reducing the number of uncontrolled variables in the uncertainty equation, this collage has added new dimensions of unpredictability to the basic task of meeting consumer needs with scarce resources.

The ambiguity of the initial enabling legislation must bear some of the blame for the resultant mess. The vague grant of power bounded only by the undefined structure that its exercise be “just and reasonable,” is an invitation to contentious wrangling.

A more fundamental error, though, is the mistaken belief that the problems of material sustenance can be overcome by legislative fiat. The energy problem is the product of, on the one hand, resource scarcity and the technical difficulties of coping with such scarcity, and, on the other hand, the usefulness of energy products in satisfying ever-increasing human wants. In short, it’s the same old supply and demand problem that has confronted mankind from the beginnings of the species. The only way it has been adjusted to our satisfaction has been through production. And, disappointing as it is, the invention of law isn’t, hasn’t been, and never will be a substitute for hard work.

 

—FOOTNOTES—

‘Memphis Natural Gas Company v. McCanless, 194 S.W. 2d 476.

²Northern Natural Gas Company v. State Corporation Commission of Kansas, 83 S. Ct. 646.

³People of the State of California v. Lo Vaca Gathering Company, 85 S. Ct. 386.

United Gas Pipeline Company v. Mobile Gas Service Corporation, 1956, 76 S. Ct. 373

5Mississippi River Fuel Corporation v. Federal Power Commission, 1960, 281 F 2d 919.

6Atlantic Seaboard Corporation v. Federal Power Commission, 1968, 404 F 2d 1268.

7City of Chicago v. Federal Power Commission, 1971, 458 F 2d 731.

°Commonwealth of Pennsylvania v. U.S., D.C. Pa. 1973, 361 F Supp. 208.

Federal Power Commission v. Texaco, D.C. 1974, 94 S. Ct. 2315.

¹ºSouthern Louisiana Area Rate Case v. Federal Power Commission, CA Tex, 1970, 428 F 2d 407. 


  • John Semmens is a research fellow at the Independent Institute and research project manager in the Arizona Department of Transportation Research Center.