ICLE Academic Affiliate Lynne Kiesling was a guest on the The Answer Is Transaction Costs podcast to discuss distributed energy resources (DERs) and the complex regulatory frameworks that shape smart-grid technologies. The full episode is embedded below.

Despite Biden’s attempts to “end fossil fuel” some basic economic analysis indicates his efforts are not in line with what the public wants. If you think back to your Econ 101 class, you’ll probably remember something called revealed preference.

This basic insight of economics says that people’s actions in a market place are a much better indicator of what is going on in their heads than asking them in a poll. Someone might tell you they like Biden’s attempts to kill off reliable, inexpensive energy, but when the rubber meets the road, their purchasing decisions say otherwise.

Read the full piece here.

The unexpected $540 million coming to Portland’s Clean Energy Fund should go back to Portlanders (“Portland’s Clean Energy Fund expected to raise additional $540M over next 5 years,” Dec. 13). Since the tax took effect in 2019, consumer prices have increased by about 20%, straining family budgets. The tax on sales underpinning the Clean Energy Fund worsens this strain. If the projections are correct, the clean energy taxes, including the $750 million that was already anticipated as well as this additional bump, amount to more than $900 a year per Portland household. Commissioner Carmen Rubio suggests spending half of the new windfall to boost the budget of cash-strapped city bureaus. She should send the other half back to Portland families.

My appreciation for our freedom of movement was re-ignited recently when I finished up an engine swap into my rare-but-not-collectable 1995 Ford Thunderbird. It had blown a head gasket and had far more than 200,000 miles on it, so in went a junkyard-fresh 4.6L V8 with only 40,000 miles on the clock, or so said the yard I bought it from.

Read the full piece here.

Executive Summary

California voters passed Proposition 103 in 1988. Since that time, California’s insurance market has struggled to keep pace with national trends and product innovations. The problems with the regulatory regime Prop 103 created most recently came to a head with the Sept. 21 announcement by Gov. Gavin Newsom that he had issued an emergency executive order to stabilize the state’s rapidly deteriorating market for property insurance.

As other states consider the adoption of reforms inspired by Prop 103, it is necessary to revisit the law’s genesis and recent history, as well as to examine the problems that it has fostered.

This paper outlines how the Prop 103 rating system is slow, imprecise, and inflexible relative to other jurisdictions; examines the ways in which the ratemaking system has been rendered unpredictable; and details the form, function, and questionable value proposition of the rate-intervenor system. In so doing, the paper demonstrates that Prop 103 has created an insurance market that struggles to work efficiently even in the best of times and is virtually impossible to sustain in periods of acute stress.

Despite the current problems in California’s insurance market, industry critics argue that other states would be better off with regulations similar to those contained in Prop 103. A clear view of the results from California demonstrate that these arguments are false and misleading. Contrary to claims that Prop 103 saved Californians as much as $154 billion in auto insurance premiums from 1989 to 2015, we find that Californians would have saved nearly $25 billion if they had not passed Prop 103.

The paper concludes with a series of policy recommendations designed to inform both the ongoing implementation of Prop 103 by the California Department of Insurance, as well as other jurisdictions considering elements of a Prop 103 approach.

I.       Introduction

The 1980s were a period of chaotic dislocation in the California automobile-insurance market.[1] The California Supreme Court’s 1979 decision in Royal Globe Insurance created precedent that third parties could bring action against a tortfeasor’s insurer, even if they were not party to the insurance contract in question.[2] What followed was an explosion in insurance-related litigation, as the number of auto-liability claim filings in California Superior Court rose by 82% between 1980 and 1987, and the severity of claims rose by a factor of four.[3] As would be expected, the state’s auto-insurance premiums likewise followed suit, rising 69.8% from $4.3 billion in 1984 to $7.3 billion in 1987.[4]

This crisis in auto-insurance affordability came to a head in 1988, when among the 29 ballot initiatives California voters were presented in that November’s election were five separate questions dealing specifically with insurance issues.[5] Two of these were broadly supported by the insurance industry: Proposition 104,[6] which would establish a no-fault system for auto insurance and limit damage awards against insurers, and Proposition 106, which would set percentage-based caps on attorneys’ contingency fees.[7] Proposition 100, backed by the California Trial Lawyers Association, was proposed as a counter to Props 104 and 106; if it received more votes that those initiatives, it would have canceled the limits on both damage awards and contingency fees, as well as the proposed no-fault system.[8] Proposition 101 would cap insureds’ ability to recover bodily injury damages, paired with a promised 50% reduction in the bodily injury portion of insurance premiums.[9]

In the end, however, only one of the insurance measures was approved in the Nov. 8 election: Proposition 103, also known as the “Insurance Rate Reduction and Reform Act.” Authored by Harvey Rosenfield of the Santa Monica-based Foundation for Taxpayer and Consumer Rights (now known as Consumer Watchdog) and sponsored by Rosenfield’s organization Voter Revolt, Prop 103  carried narrowly with 51.1% yes votes to 48.9% against.[10]

Prop 103’s stated purpose was “to protect consumers from arbitrary insurance rates and practices, to encourage a competitive insurance marketplace.”[11] Proponents of the measure claim they have achieved that, touting $154 billion of consumer savings over the first 30 years it was in effect.[12]

Among the specific changes mandated by the law were:

• California’s insurance commissioner, previously appointed by the governor, was made an elected position, chosen in the same cycle with the other state officers for a term of four years.
• Beginning in November 1988, all automobile and other property & casualty insurance rates were to be rolled back to 80% of their levels as of Nov. 8, 1987, and were to be held at such levels until November 1989.
• Rate increases and decreases were now subject to prior approval of the elected insurance commissioner, replacing the “open competition” system that had previously prevailed for 40 years under the McBride-Grunsky Insurance Regulatory Act of 1947, which required only that insurers submit rate manuals to the California Department of Insurance (CDI).[13] Public hearings were mandatory for personal lines increases of more than 7% and commercial lines increases of more than 15%, while others were at CDI’s discretion.
• The law created a role at these hearings for “public intervenors,” who are empowered to file objections on behalf of consumers, with fees to be paid by the applicant insurance company.
• Prop 103 also established a rate-setting formula for auto insurance that mandated rates be based on an insured’s driving record, number of miles driven, and years of driving experience. While other factors could be considered, the burden would be on insurers to demonstrate they are statistically correlated with risk.
• Drivers with at least three years of driving experience, no more than one violation point during the previous three years, and no fault in an accident involving death or damage great than $500 must be offered a “good driver discount” that is at least 20% below the rate the driver would otherwise have been charged for coverage.
• The business of insurance was deemed subject to California antitrust, unfair business practices, and civil-rights law.

Because the law was subject to immediate and ongoing litigation, some provisions were only fully implemented years after the proposition’s passage. But notable among the law’s other provisions was Section 8(b), which rendered Prop 103’s text extraordinarily difficult to amend:

The provisions of this act shall not be amended by the Legislature except to further its purposes by a statute passed in each house by roll call vote entered in the journal, two-thirds of the membership concurring, or by a statute that becomes effective only when approved by the electorate.[14]

Much has changed in the world, and in California’s insurance industry, since the passage of Prop 103, but the lion’s share of the law remains as it was in 1988.

II.     The Recent History of California’s Insurance Market

The recent story of California’s property & casualty insurance market has been one of uncertainty and induced dysfunction.

Prior to the COVID-19 pandemic, California’s market was saddled by availability issues stemming from a series of historically costly wildfires. California homeowners insurers posted a combined underwriting loss of $20 billion for the massive wildfire years of 2017 and 2018 alone, more than double the total combined underwriting profit of $10 billion that the state’s homeowners insurers had generated from 1991 to 2016.[15] Partly in response to those losses, as well as the inability to adjust rates expeditiously, the number of nonrenewals of California residential-property policies grew by 36% in 2019, and new policies written by the state’s residual-market FAIR Plan surged 225% that same year.[16]

To stanch the bleeding of admitted market policies into the FAIR Plan and the surplus-lines market, CDI in December 2019 invoked recently enacted statutory authority to issue moratoria barring insurers from nonrenewing roughly 800,000 policies in ZIP codes adjacent to specified major wildfires.[17] As of November 2022, nearly 2.4 million policies statewide were in ZIP codes under nonrenewal moratoria, many of them added following additional catastrophic wildfires in 2020.[18]

During the COVID-19 pandemic, CDI instituted a rate freeze in auto insurance and accused the industry of profiteering. In June 2020, California Insurance Commissioner Ricardo Lara took credit for ordering $1.03 billion of premium refunds, dividends, or credits for auto-insurance policyholders, as well as “an additional $180 million in future rate increases that insurance companies reduced in response to the Commissioner’s orders.”[19]

In fact, most of the early rebates were voluntary, in line with similar voluntary rebates that insurers issued across the country.[20] CDI would not publish its methodology for mandatory rebates until March 2021, at which point it declared that, rather than the 9% of premium that California auto insurers returned to policyholders from March through September 2020, they should have returned 17%.[21] In October 2021, the California Court of Appeal ruled in State Farm General Insurance Co. v. Lara that Prop 103 did not actually give the commissioner authority to order the retroactive rate refunds.[22]

CDI was also slow to lift its rate freeze, even as the COVID-19 pandemic abated, and many employers ended work-from-home policies. From May 2020 until October 2022, CDI did not approve a single auto-insurance rate filing, even though more than 75% of the state’s auto insurers filed for an increase during that period.[23] In the meantime, the “motor vehicle repair” component of the Consumer Price Index (CPI) jumped by 19.2% between July 2022 and July 2023, far outstripping the 3.2% hike in overall CPI.[24]

With limited options on the pricing front, insurers have been forced to limit exposure in other ways. While California is a “guaranteed issue” state for private-passenger auto insurance, auto insurers are attempting to limit the policies they take on by, for example, limiting advertising. Insurance rating agency A.M. Best Co. reported that auto insurers cut their advertising budgets nearly 18% in the first half of 2022, compared with the same period in 2021.[25] In other cases, insurers have taken to asking for more premium upfront, instead of allowing consumers to pay via monthly or other periodic installment plans.[26]

Meanwhile, as detailed more extensively in the sections below, the wildfire-driven homeowners-insurance crisis that began before the COVID-19 pandemic has itself grown to epidemic levels, highlighted by State Farm General’s 2023 decision to cease writing new business in the California market. That led the environmental news service ClimateWire to observe:

Experts say State Farm’s decision highlights a flaw in California policies that effectively blocks insurers from considering climate change in setting premiums and discourages them from seeking rate increases sufficient to cover the state’s growing wildfire risk. In addition, the policies have created insurance premiums that are far too low and are forcing insurers to pull back their coverage in California to remain profitable.[27]

California’s political leaders have also acknowledged the crisis. On Sept. 21, Gov. Gavin Newsom issued an executive order noting that insurance carriers representing 63% of the state’s homeowners insurance market had in recent months announced plans to either cease or limit writing new policies.[28] He further announced that he was authorizing Insurance Commissioner Ricardo Lara to:

take prompt regulatory action to strengthen and stabilize California’s marketplace for homeowners insurance and commercial property insurance, and to consider whether the recent sudden deterioration of the private insurance market presents facts that support emergency regulatory action.[29]

For his part, Lara announced an emergency response plan that included:

[T]ransition[ing] homeowners and businesses from the FAIR Plan back into the normal insurance market with commitments from insurance companies to cover all parts of California by writing no less than 85% of their statewide market share in high wildfire risk communities. … ;

Giving FAIR Plan policyholders who comply with the new Safer from Wildfires regulation first priority for transition to the normal market, thus enhancing the state’s overall wildfire safety efforts;

Expediting the Department’s introduction of new rules for the review of climate catastrophe models that recognize the benefits of wildfire safety and mitigation actions at the state, local, and parcel levels; …

Holding public meetings exploring incorporating California-only reinsurance costs into rate filings;

Improving rate filing procedures and timelines by enforcing the requirement for insurance companies to submit a complete rate filing, hiring additional Department staff to review rate applications and inform regulatory changes, and enacting intervenor reform to increase transparency and public participation in the process …[30]

A.      Problems With Rate Regulation Under Prop 103

Prop 103 charges California’s insurance commissioner with applying requirements articulated in the California Insurance Code and the California Code of Regulations to determine whether an insurer’s requested rate change is “excessive, inadequate or unfairly discriminatory.”[31] If the commissioner determines that a request is not “most actuarially sound,” he or she can require a rate reduction or reject a rate filing completely.[32] Here, it should be noted that the “most actuarially sound” standard is unique to California, and is not applied by other states that employ prior-approval regulatory systems for rate review.

The most obvious problem with rate regulation is that it restricts the availability of insurance. As the German economist Karl Henrik Borch put it in a landmark article on capital markets in insurance:

If premiums are low, the profitability of the insurance company will also be low, and investors may not be inclined to risk their capital as reserves for an insurance company. If the government imposes too low premiums, the whole system may break down, and high standard insurance may become impossible in a free economy.[33]

Insurers naturally respond to rate regulation by tightening their underwriting criteria, forcing some consumers to have to turn to the higher-priced residual market for coverage. In extreme cases, rate suppression can lead some insurers to exit the market altogether.

The empirical evidence of this effect is manifest. After California ordered mandatory 20% rate rollbacks following the passage of Prop 103 in 1988 (the effects of which were initially somewhat blunted by the courts), the number of insurers writing auto coverage in the state fell from 265 in 1988 to 208 in 1993.[34]

[35]

More recently, Prop 103’s deleterious effects on the availability of coverage have manifested most obviously in decisions by major homeowners insurers to exit the market. In 2019, following the deadliest wildfire season in California history, the state’s homeowners insurers responded by nonrenewing 235,520 policies, a 31% increase from the prior year.[36] In May 2023, California’s largest writer of homeowners insurance, State Farm General, announced it would halt the sale of new homeowners policies in the state.[37] Six months earlier, in December 2022, California’s fourth-largest personal lines writer—Allstate—had likewise announced it would cease writing new policies,[38] while Farmers, the second-largest writer, subsequently said it would limit it, too, would writing of new policies.[39]

While Prop 103 calls for property & casualty insurers to earn a “fair profit” rate of return of 10%, the industry has long reported that it finds it difficult to meet the California Department of Insurance’s requirements to justify rate increases, even when such increases would allow premiums to better reflect true risk.[40] In fact, even after the state’s extreme wildfires in 2017 and 2018, and despite trailing only Hawaii in median home prices,[41] Californians in 2020 paid an annual average of $1,285 in homeowners insurance premiums across all policy types—less than the national average of $1,319.[42]

As noted above, the homeowners-insurance availability crisis has become particularly acute in the wake of those devastating 2017 and 2018 wildfires. Under Prop 103, an insurer must justify its requested statewide premium for future wildfire losses based upon its average annual wildfire losses over the last 20 years.[43] But as demonstrated in Figure I, a look at the data from California’s homeowners-insurance market illustrates why such long-run averages are wholly inadequate to project future losses.

[44]

B. Catastrophe Models and Reinsurance

Insurers have access to tools like advanced wildfire catastrophe models that would allow them to project future wildfire losses in ways that consider both changing climactic factors and a given property’s proximity to fuel load.[45] Such considerations are not currently permitted under California’s Prop 103 system, but nor are they explicitly barred, as such models largely did not yet exist in 1988. Indeed, the California Earthquake Authority uses catastrophe models to develop rates and mitigation discounts; determine the amount of claims-paying capacity the authority needs; and to estimate CEA losses after an event.[46] Moreover, California has begun to take steps in the direction of permitting their use in certain limited contexts, including recent regulations requiring insurers to disclose to consumers their “wildfire risk score.”[47] In July 2023, Insurance Commissioner Ricardo Lara hosted a workshop on catastrophe modeling and insurance, noting in a public invitation that:

For the past 30 years, the use of actual historical catastrophe losses has been the method used for estimating catastrophe adjustments in the California rate-approval process. However, historical losses do not fully account for the growing risk caused by climate change or risk mitigation measures taken by communities or regionally, as a result of local, state, and federal investments. Catastrophe estimates based on historical losses only reflect losses after they occur. As a result of climate-intensified wildfire risk and continued development in the wildland urban interface areas, and recent increased efforts to mitigate wildfire risks, past experience may no longer reflect the current wildfire exposure for property owners and insurance companies.[48]

Prop 103 also probits insurers from using the cost of reinsurance as justification for rate filings.[49] After a long period of “soft” pricing from 2006 to 2016, reinsurance rates for North American property-catastrophe risks more than doubled from 2017 to 2023, including a 35% year-over-year hike in 2023, according to reinsurance broker Guy Carpenter.[50] When combined with prohibitions on the use of catastrophe models, this has essentially meant that California—a state that has long prided itself as being on the leading edge when it comes to its response to climate change—is effectively telling insurers to ignore the science.[51]

Thus, unsurprisingly, denied the ability to charge rates that reflect the future risk of wildfire, admitted-market insurers have pulled back from the most at-risk areas. Ironically, this has meant a migration of policies to surplus lines insurers and to the California Fair Access to Insurance Requirements (FAIR) Plan, both of which are allowed to use catastrophe models in setting their premiums.

From 2015 to 2021, the number of FAIR Plan policies grew by 89.7%, in the process rising from 1.7% of the California homeowners insurance market to 3.0%.[52] With just $1.4 billion in aggregate loss retention and facing the prospect of claims-paying shortfalls in the event of another major wildfire, the FAIR Plan recently filed a request for an average 48.8% increase in its dwelling fire rates.[53]

C. An Inflexible System

Prop 103 is also remarkably inflexible, particularly given provisions that make it exceedingly difficult to amend by legislative enactment. Any changes must not only pass by a two-thirds vote in both chambers of the California Legislature, but they must also be found to “further the purposes” of the proposition. As the 2nd District Court of Appeal wrote in the 1998 decision Proposition 103 Enforcement v. Quackenbush:

Any doubts should be resolved in favor of the initiative and referendum power, and amendments which may conflict with the subject matter of initiative measures must be accomplished by popular vote, as opposed to legislatively enacted ordinances, where the original initiative does not provide otherwise.[54]

But with the bar to amendment set that high, it has proven to be effectively impossible for the law to respond to the enormous political, technological, and business practice changes that the insurance industry has undergone over the past 35 years.

In addition to the emergence of catastrophe models, discussed above, another significant tool that insurers have taken increasing advantage of in the years since 1988 is the use of credit-based insurance scores, particularly in auto insurance underwriting and ratemaking. Today, according to the Fair Isaac Corp. (FICO), 95% of auto insurers and 85% of homeowners insurers use credit-based insurance scores in states where it is legally allowed as an underwriting or risk-classification factor.[55]

But California is one of four states (along with Massachusetts, Hawaii, and Michigan) that does not permit their use,[56] because CDI has not adopted regulations acknowledging credit history as a rating factor with “a substantial relationship to the risk of loss.” This is despite the Federal Trade Commission’s (FTC) finding that, in the context of auto insurance, credit-based insurance scores “are predictive of the number of claims consumers file and the total cost of those claims.”[57]

A similar disjunction between the inflexibility of Prop 103 and the emergence of new technologies can be seen in the development of “telematic” technologies that allow insurers to measure a range of factors directly relevant to auto-insurance risk, including not only the number of miles driven (a required rating factor under Prop 103) but also how frequently the driver engages in sudden stops or rapid acceleration, as well as how often he or she drives after dark or in high-congestion situations.[58]

In July 2009, CDI adopted an amendment to the state insurance code that permitted the use of telematics devices to verify mileage for the purpose of advertise “pay per-mile” rates.[59] But other regulations in the California code limit the ability to use telematics to offer “pay-how-you-drive” products that have become popular in other jurisdictions. For example, insurers are currently prohibited from collecting vehicle-location information, which rules out rating on the basis of driving in congested areas.[60] Moreover, because the regulations do permit rating on the basis of the severity and frequency of accidents in the ZIP code where a vehicle is garaged,[61] identical drivers who spend equivalent time driving in congested areas may be charged different rates, with a suburban commuter earning a discount relative to an urban commuter.

Research by Jason E. Bordoff & Pascal J. Noel finds the status quo is that low-mileage drivers cross-subsidize high-mileage drivers,[62] and that about 64% of Californians would save money if they switched to a per-mile plan.[63] The president of the California Black Chamber of Commerce has also argued that telematics offers a potential solution to problems of bias in underwriting, given evidence that drivers from predominantly African-American communities are quoted premiums that are 70% higher than similarly situated drivers in predominantly white communities.[64]

By voluntarily downloading an app to their smartphone, a driver agrees to allow an insurer to measure data about (and only about) their driving habits. This includes behaviors like hard braking and distracted driving. Based on that data an insurance company can assess how much of a risk the driver poses and offer fair insurance, free of bias and inflation, that the driver may choose to purchase.[65]

III.   Prop 103 Rate Review in Practice

Dynamic aspects of insurance loss events and claim costs impose expenses on insurers if they cannot respond nimbly in matching rate to risk. Prop 103 and similar approaches to price regulation restrain insurers’ ability to adjust to new information, thereby causing an increase in price, a decrease in availability, or both. Rate suppression occurs when regulators deny rate filings that request adequate and non-excessive rates. Examples of extreme rate suppression have rarely lasted very long. Insurers exit suppressed markets, leaving consumers with fewer choices and higher prices.

While the last section examined some of the high-level issues created by the Prop 103 system, in this section, we draw from empirical data and recent legal precedent to demonstrate how the Prop 103 process, as applied by the CDI, has in practice amplified these dislocations in ways that have proven extraordinarily counterproductive.

A. Ratemaking as Market-Conduct Examination

Filing for rates under Prop 103 is a complex and costly enterprise. The discretion that CDI maintains and the ever-present risk of intervention by a third parties means that swift and predictable resolution is the exception, not the rule.

Further complicating ratemaking in California is the intrinsically political nature of the relationship between the insurance commissioner and regulated entities. California’s commissioner is one of 11 state insurance regulators in the United States to face direct election.[66] Thus, particularly in times of market strain or when policyholders are confronted with availability challenges or rate increases, the commissioner faces political incentives to pressure insurers to acquiesce to popular—if not market-based—demands. As a result, the ratemaking process can be misused as a proxy venue for larger ongoing disputes between the commissioner and insurers. Two recent cases highlight this phenomenon.

1.         Rulemaking by ratemaking proceeding

State Farm General (SFG)—a California entity separate from the larger State Farm Mutual, which was established to cover non-automobile lines—sought a rate increase of 6.4% in 2015. Consumer Watchdog intervened, CDI rejected the proposed increase, and the matter went to a hearing before a CDI administrative-law judge. The department’s hearing officer subsequently issued a far-reaching opinion, which was adopted by the commissioner, ordering SFG to retroactively reduce its rates and issue refunds, based on a novel reading of Prop 103 that erased the difference between the balance sheets of a particular insurer and the larger group of which it is a part for purposes of ratemaking.

Faced with a foundational reinterpretation of insurance law created in the process of seeking a rate, SFG appealed to California courts,  where it ultimately prevailed, after a years-long protracted lawsuit and subsequent CDI appeal.[67]

While resolving open questions about a state’s ratemaking process is appropriate fodder for any department to undertake, the broader context in which then-Insurance Commissioner Dave Jones—who launched what would ultimately be a failed bid to be elected California’s attorney general in 2018[68]—pursued the action against SFG speaks to a different motivation. Indeed, SFG had just one year prior sought and received a rate increase using the same formula subsequently rejected by CDI. To wit, the basis of CDI’s resistance was not the degree of the rate increase in question, but was instead premised upon a broader question of law.

CDI has broad rulemaking authority and, when necessary, can seek legislative amendment to ensure that the laws governing ratemaking protect California consumers. But the department also retains substantial leverage to secure acquiescence from insurers when it pursues novel ratemaking interpretations in the context of a particular rate application. This approach may be effective, but it frustrates well-established norms for creating rules of general applicability and deprives the industry as a whole of due process. Worse still, when it engages in facial abuses of its already broad discretion, the CDI undermines the Prop 103 ratemaking system’s ability to prevent dislocation between price and risk.

2.        Corporate governance by ratemaking proceeding

The ratemaking process under Prop 103 is likewise susceptible to being used to direct the behavior of firms beyond the scope of ratemaking itself. Predictably, delays in the ratemaking proceeding on account of nonprice factors trigger the same market-skewing dynamics and due-process issues discussed above. Intervenors like Consumer Watchdog have sought, e.g., to prevent Allstate from receiving a mere 4% rate increase in its homeowners book on the basis of the firm’s decision to limit its exposure to the California market more broadly.[69] In that case, the long-time intervenor alleged that ceasing to sell insurance—an underwriting determination—has an impact on rates and that as a result, the decision to cease offering coverage is itself a ratemaking action demanding review by California Department of Insurance.

To its credit, the department maintained that inactivity by a business does not constitute the use of an unapproved rate. But Consumer Watchdog’s broad reading of the acceptable scope of matters judicable in a ratemaking proceeding is no doubt borne directly of previous experiences in which insurers were made to acquiesce to demands related to business practices more broadly.

B. Prop 103’s Dead Letter Deemer

Rate-approval delays have become a hallmark of the Prop 103 system, as well as the resulting asymmetry between rate and risk. But as originally presented to California voters, the law envisioned that rates would be deemed accepted if no action were taken by the CDI for 60 or 180 days.[70] Indeed, Prop 103 included this “deemer” provision because a reasonable speed-to-market for insurance products also protects consumers.

The law’s deemer provision has been effectively rendered moot in practice because, as a matter of course, the CDI requests that firms waive the deemer. If the deemer is not waived, the CDI has two options: approve the rate or issue a formal notice of hearing on the rate proposal. Because the CDI is unable to complete timely review of filings within the deemer period, it always elects to move to a rate hearing. In effect, CDI turns every rate filing without a deemer waiver into an “extraordinary circumstance.”[71]

In practice, it has proven exceedingly challenging for petitioners to navigate the manner in which rate hearings—the nominal guarantors of due process—are conducted. The administrative law judges (ALJs) that oversee these proceedings are housed within the CDI. The hearings themselves take a broad view of relevance that drive up the cost of participation. Upon ALJ resolution, the commissioner can accept, reject, or modify the ALJ’s finding. There is little practical upside for an insurer to move to a hearing against the CDI.

Wawanesa General Insurance Co. offers a case study in the differences between how Prop 103 was drafted and the way it is currently enforced. After initially waiving the law’s deemer, Wawanesa reactivated the deemer in a 2021 private-passenger auto filing.[72] In so doing, Wawanesa elected to move to a hearing by the CDI. Ultimately, from start to finish, its December 2021 rate filing was not approved until March 2023—15 months after it was brought forward. Ultimately, unable to get the rate it needed in a timely manner, Wawanesa’s U.S. subsidiary was acquired by the Automobile Club of Southern California.[73]

Thus, in practice, insurers are faced with a starkly practical choice. One option is to waive their right to timely review of rates, and hope that they gain approval in, on average, six months. The alternative is to move to a formal hearing and reconcile themselves with the fact that approval, if forthcoming, will take at least a year. The system of due process originally contemplated by Prop 103 simply bears no relationship with the system as it operates today.

Figure II shows the average number of days between submission and resolution of rate filings in each state (including the District of Columbia as a state, for these purposes). With a five-year average filing delay of 236 days for homeowners insurance and 226 days for auto insurance, California ranks 50th in each category, responding more slowly than all states except Colorado. Although the average delay is affected somewhat by extreme-outlier observations, California’s rank is unchanged if we instead use the median delay.[74]

Another troubling aspect of California’s sluggish regulatory system is that it appears to be getting slower over time. Obviously, California has been relatively slow to resolve rate filings since Prop 103 took effect. In recent years, however, the average delay has increased, as wildfire losses and market conditions (e.g., inflation and the cost of capital) have increased the cost of providing insurance. Figure III shows the annual average number of days between filing and resolution of rate changes for homeowners insurance in California. The average delay from 2013 to 2019 was 157 days. For the last three years, the average delay has increased to 293 days.

C. The Intervenor Process

CDI’s ability to review rate filings in a timely manner is further constrained by Prop 103’s intervenor process. Intervenors are granted petitions to intervene, as a matter of right, on any rate filing. Personal-lines filings that request a rate increase of 6.9% or more (or 14.9% or more in commercial-lines filings) are subject to mandatory hearings, if requested, while the decision to grant hearings for those filings below 6.9% (or 14.9% for commercial lines) are at the commissioner’s discretion. Naturally, many personal lines insurers opt to file below that threshold, even if they actually require rate increases substantially in excess of 6.9%, simply to avoid dealing with intervenors (although many rate filings at or below 6.9% do also have intervenors).

The intervenor process has proven both costly and time-consuming. According to CDI data, since 2003, intervenors have been paid $23,267,698.72, or just over $1 million annually, for successfully challenging 177 filings.[75] While the process results in CDI receiving more filings to review than it otherwise would, the total number of filings it must review is significantly less than other jurisdictions (see Figure IV).

Intuitively, we can assume that states cannot change rates as frequently when rate filings take longer to resolve. Figure IV confirms this assumption, demonstrating the average number of rate filings made per-company in each state for homeowners and automobile insurance from 2018 to 2022. Over the last five years, California ranks 49th in the number of homeowners-insurance rates filed, and 50th in the number of auto-insurance rates filed.

D. Rate Suppression Under Prop 103

While a slow regulatory system limits the efficiency of insurance markets, a system that suppresses rates will also inhibit deployment of capital, ultimately reducing the number of insurers who choose to participate.

For example, if an insurer’s rate analysis indicates that a 40% increase is required for rates to be adequate, and the regulator instead approves only a 15% increase, the effect of rate suppression is (40%–15%=) 25%. In this category, California again ranks 50th, approving rates that are, on average, 29% (homeowners) and 14% (auto) less than the actuarially indicated rate supported by the analysis in the filing.[76]

Figure V, which measures the difference between the actuarially indicated rate and the rate approved by regulators, demonstrates that California’s regulatory system under Prop 103 is suppressive. Although it is common for insurers to request rate changes below the indicated rates for strategic reasons, the measure would not differ consistently across states in the absence of suppressive rate regulation.

Similar to the growing chasm of filing delays observed in Figure III, Figure 7 shows that rate suppression in California homeowners insurance has risen in response to the unprecedented wildfire losses incurred in 2017 and 2018. Although the level of rate suppression moderated somewhat in 2022, the average level of regulatory rate suppression for 2013 through 2018 was 18%, while the average for 2019 through 2022 is 30%. Moreover, at 14.5% in 2022, California is more than one standard deviation (3.6%) above the mean (9.8%) and ranks 45th among the 50 jurisdictions reporting data.

In summary, the rate-filing data clearly show that California’s regulatory system under Prop 103 is expensive and slow, and that it is currently causing unsustainable rate suppression, especially in the homeowners line.

IV.   The Impact of Prop 103 on Other States

Some of Prop 103’s effects have arguably spilled over to other jurisdictions, either directly—via states adopting similar regulatory regimes—or indirectly. Recent research by Sangmin S. Oh, Ishita Sen, & Ana-Maria Tenekedjieva suggests that there is a significant indirect effect in the form of rate suppression in California and other “high-friction” states leading to cross-subsidies among policyholders of multi-state insurers and, ultimately, “distortions in risk sharing across states.”[77]

First, rates have not adequately adjusted in response to the growth in losses in states we classify as “high friction”, i.e. states where regulation is most restrictive. Second, in low friction states rates increase both in response to local losses as well as to losses from high friction states. Importantly, these spillovers are asymmetric: they occur only from high to low friction states, consistent with insurers cross-subsidizing in response to rate regulation. Our results point to distortions in risk sharing across states, i.e. households in low friction states are in-part bearing the risks of households in high friction states.[78]

In other cases, the impact of Prop 103 has largely taken the form of political influence. As demonstrated in the previous section, states like Colorado, Maryland, and Hawaii have followed California’s model of extended rate-review processes that significantly slow product approvals.

Among the first states to respond to Prop 103 with its own similar regulatory system was New Jersey, which in 1990 passed the Fair Automobile Insurance Reform Act. Under terms of the law, effective April 1992, every admitted writer of automobile insurance in the state would be required to offer coverage for all eligible persons, with only a select group of motorists—including those convicted of driving under the influence or other automobile-related crimes, those whose licenses had been suspended, those convicted of insurance fraud, and those whose coverage had been canceled for nonpayment of premium—deemed ineligible.[79]

While the law nominally permitted insurers to earn an “adequate return on capital” of 13%, several companies would sue the state on grounds that the New Jersey Department of Banking and Insurance did not approve rate requests sufficient to meet that threshold.[80] In addition, the state assessed surcharged on insurers to close a $1.3 billion funding gap for the state’s Joint Underwriting Authority.[81]

As in California, New Jersey saw the exit of 20 insurers the state’s auto-insurance market in the decade after the Fair Automobile Insurance Reform Act’s passage. When the state later liberalized its regulatory system with passage of the Auto Insurance Reform Act in June 2003, the number of auto writers more than doubled from 17 to 39 and thousands of previously uninsured drivers entered the system.[82]

A similar effect was seen in South Carolina, where a restrictive rating system in the 1990s had forced 43% of drivers into residual market policies undergirded by a state-run reinsurance facility.[83] After adopting a liberalized flex-band rating law in 1999, as in New Jersey, the number of insurers offering coverage in South Carolina doubled,[84] the residual market shrank (it is, today, only 0.007% of the market),[85] and overall rates actually fell.

Even in Massachusetts, which retains a fairly restrictive rate-approval process, reforms passed in April 2008 to allow insurers to submit competitive rates (they were previously set by the commissioner for all carriers) had a notable impact. Within two years of the reforms, rates had fallen by 12.7% and a dozen new carriers began offering coverage in the state.[86] Because it is still a very regulated state, Massachusetts still has a relatively large residual market. According to data from the Automobile Insurance Plan Service Office (AIPSO), in 2022, 3.38% of Massachusetts auto-insurance customers had to resort to the residual market, the second-highest rate in the nation.[87] But before 2008, Massachusetts’ residual-market share was routinely in the double digits.

While those states that have opted to copy the California model have largely lived to regret it, others continue to explore the imposition of Prop 103-like regimes. Oregon lawmakers, for example, have repeatedly put forward legislation that would place the insurance industry under the state’s Unlawful Trade Practices Act, granting customers the right to sue for damages beyond even the face value of their policies, and third parties to bring private rights of action against insurers with whom they have no contractual relationship.[88]

But perhaps the most notable recent proposal to shift to a Prop 103-like system is Illinois’ H.B. 2203,[89] which would effectively transform the state from the most open and competitive insurance market in the country to one of the most restrictive. If approved, the legislation would require every insurer seeking to offer private passenger motor-vehicle liability insurance in the state to file a complete rate application with the Department of Insurance, which once again would be empowered to approve or disapprove rates on a prior-approval basis. The bill also would prohibit insurers from setting rates based on any “nondriving” factors, including credit history, occupation, education, and gender.

As in California, the measure would also create a new system for public intervenors in the ratemaking process, stipulating that “any person may initiate or intervene in any proceeding permitted or established under the provisions and challenge any action of the Director under the provisions.”[90]

Illinois is currently somewhat of an outlier in effectively having no formal rate-approval process at all. In 1971, the Illinois General Assembly neglected to extend legislation enacted a year earlier to create “file-and-use” system, and the state has continued on without any insurance rating law for more than half a century.[91]

V. Estimating the Cost of Prop 103 in California and Other States

For the last two decades, proponents of Prop 103 have asserted that the ballot measure saved Californians as much as $154 billion in auto-insurance premiums from 1989 to 2015. Further, they claim that other states could have saved nearly $60 billion per-year over the same period by adopting insurance regulations similar to Prop 103.[92] As David Appel has noted, the analysis supporting these claims is flawed.[93] In the 20 years since industry critics began making this claim, however, no one has performed the correct analysis. Here, we perform an object analysis and draw dramatically different conclusions.

The analyses performed and cited by Prop 103’s proponents assume that insurance premiums are a function of the prior year’s premiums.[94] This approach is invalid, because insurance premiums are instead a function of expected losses. For example, if a policy covering a $200,000 house has a lower premium than a policy covering a $500,000 house, that alone would not tell us whether the first policy is a better deal than the second. Equivalently, we cannot tout the value of automobile insurance without comparing premiums to losses.

Figure VII shows that premiums in California and in other states (USX) largely follow losses. Moreover, when insurance companies make rate filings asking state insurance departments to approve new rates, regulators evaluate them based on their similarity to past losses and loss trends. Therefore, a more appropriate method of creating a counterfactual comparing the results obtained under one state’s regulatory approach to the insurance premiums that would be generated in other states is to apply the ratio of premiums to losses from one state to the losses of the other states, as in Equation 1:

Where USX PremiumCA is the estimate of USX premiums if we impose the effects of California’s price controls on the rest of the country.

Figure VIII shows the results from solving Equation 1. In stark contrast to claims made by proponents of Prop 103, we find that if the rest of the country (USX) had passed Prop 103 in 1989, consumers would have paid more than $218 billion in additional auto insurance premiums. Likewise, results from solving Equation 2:

Where CA PremiumUSX is the estimate of California premiums if we remove the effects of Prop 103 on California, indicate that Californians would have saved nearly $25 billion if they had not passed Prop 103. In light of these findings, regulators should be appropriately skeptical of claims that price controls reduce insurance premiums.

VI.   Recommended Reforms

It is difficult, but not impossible, to amend Prop 103. Indeed, many reforms may be enacted by updating administrative interpretation alone. What follows is, first, a list of reforms that CDI could champion (some of which are included, in varying forms, in Commissioner Lara’s emergency plan) to improve speed-to-market, procedural predictability, and rate accuracy. Second is a list of structural reforms that would require legislative approval.

A. Interpretive Reforms

1.       Fast-track noncontroversial filings

As discussed above, Prop 103 grants CDI discretion on whether to convene public hearings on rate changes of less than 7% for personal lines or 15% for commercial lines. When the commissioner grants such hearings, it adds expense, administrative burden, and delays to very modest changes in product offerings. Not only is this problematic as a matter of substance, we have shown that the data on delays in rate-filing approvals demonstrate that CDI is routinely violating the explicit text of Prop 103, which requires that “a rate change application shall be deemed approved 180 days after the rate application is received by the commissioner” unless the commissioner either rejects the filing or there are “extraordinary circumstances.”[95] CDI not only can, but must act to uphold this provision of the law.

To do so, the CDI should entertain adopting a rate-approval “fastlane” premised on firms submitting filings that use actuarial judgments that embrace consumer-friendly assumptions. That is, if a filing is made on the basis of the least-inflationary or least-aggressive loss-development assumptions, CDI should undertake a light-touch review focused on rate sufficiency to expedite the approval process. This approach has the benefit of increasing both the predictability and speed of the ratemaking process.

2.       Refocus rate proceedings

If CDI were to adopt a narrower reading of the universe of rate-related issues appropriate for adjudication in a ratemaking proceeding, it would have the important benefit of limiting the universe of issues susceptible to controversy. In so doing, insurers and the department will better be able to focus on the resolution of rate applications in a timely manner that allows price to reflect risk. Relatedly, the department should continue to constrain intervenors from conflating rate-related and non-rate-related issues in the service of broader policy objectives.

3.       Transparency

There is no single cause for California’s substantial delay in approving  rates, but it is clear that the state’s unique intervenor system shapes both insurer and CDI behavior in ways that were not immediately cognizable when the law was adopted. One way to ensure that speed-to-market improves over the long term is to better understand the value that intervenors offer, and to ensure that intervenor engagement is both efficient and effective.

At the moment, CDI publishes quantitative data concerning intervenor compensation and rate differentiation in intervenor proceedings.[96] But while this is helpful in conveying the scope of intervenor efforts, the data fail to capture the value actually provided by intervenors in the ratemaking process. The qualitative contribution made by intervenors is obscured by the fact that none of their filings appear publicly on SERFF. Not only is this an aberration relative to other proceedings before the CDI, but there could be significant value in getting greater transparency from the intervenor process, given the delays and direct costs related to intervention.

For one, allowing the Legislature and the public to assess the substantive value of intervenor contributions would ensure not only substantial due-process protections for filing entities, but would also ensure that consumers are afforded a high level of representation in proceedings. For instance, such transparency would function as a guarantor that intervenor filings are not otherwise duplicative of CDI efforts. It would therefore allow the public to assess whether intervenors are diligent in their efforts on their behalf.

Therefore, CDI should consider requiring intervenors to have their filings reflected on SERFF. Doing so would cost virtually nothing and would redound to the benefit of all parties. And it should be noted that, as this paper was going to press, CDI had started to post intervenor filings (Petitions to Intervene and Petitions for Hearing) for public access.

And beyond simply making intervenor contributions more transparent, CDI should exercise its discretion to reduce and sometimes reject fee submissions due to the lack of significant or substantial contribution. The department has long rubber-stamped fee requests, thereby creating incentives for unnecessary and costly delays in reviews and in actuarially justified rate increases.

4.       Embracing catastrophe models

Another reform that may be possible to enact via regulatory action is allowing the use of wildfire catastrophe models to rate and underwrite risk on a prospective basis. As mentioned above, there is precedent for such interpretation, as the FAIR Plan and the California Earthquake Authority already use catastrophe models for similar purposes. The Legislature could contribute to this process by appropriating funds for a commission to formally review the output of wildfire models, much as the Florida Commission on Hurricane Loss Projection Methodology (FCHLPM) does for hurricane models.[97] A formal review process could also provide insurers with the certainty they would need to justify investing in refined pricing strategies without fear that regulators will later reject the underlying methodology.

B. Legislative Reforms

The following proposals would require one of the exceptional legislative processes outlined above. Under the most common, a bill would have to clear both chambers of the Legislature by a two-thirds majority, and courts would ultimately be called on to rule in any challenges (and there will be challenges) whether the measure “furthers the purpose” of Prop 103.

But there is another option. The Legislature could also, by simple majority vote, opt to pass a statute that becomes effective only when approved by the electorate. This path has largely been eschewed by past would-be reformers, who have considered the odds long that the voting public would choose to make changes to Prop 103.

That may once have been obviously true, but as the California market continues to struggle, and as banks and property owners find it impossible to secure coverage at any price, it is difficult to say with certainty what voters would do. Prop 103 itself passed narrowly, against the backdrop of an insurance market crisis. As we find ourselves in yet another such crisis, anything may be possible.

1.       Insurance Market Action Plan

One option to address availability concerns and shrink the bloated FAIR Plan would be for the Legislature to revive the Insurance Market Action Plan (IMAP) proposal that the Assembly passed by a 61-3 margin in June 2020.[98]

Similar to the “takeout” program used successfully to depopulate Florida’s Citizens Property Insurance Corp., under IMAP, insurers that committed to write a significant number of properties in counties with large proportions of FAIR Plan policies would be allowed to submit rate requests that considered the output of catastrophe models and the market cost of reinsurance. In addition, FAIR Plan assessments should be applied as a direct surcharge, not subject to CDI approval, to ensure that there is no unfair subsidization of the highest risks, as well as to guard against the burden of assessments contributing to the insolvency of private insurers.

IMAP filings would also receive expedited review by the insurance commissioner, which could alleviate the speed-to-market issues highlighted in Section III.

2.       Telematics

There has also been some legislative interest in broadening the availability of telematics. In 2020, Assemblymember Evan Low (D-Campbell) and then- Assemblymember Autumn Burke (D-Marina Del Rey) co-authored an op-ed in which they called telematics “a sensible and fair approach” and encouraged CDI to continue to explore the issue with stakeholders.[99]

Prop. 103 was passed in an age before cell phones, GPS Navigation and many other technological advancements. Its interpretation does not allow companies to rate customers on their driving behavior. Prop. 103 relies heavily on demographic factors, rather than basing your rate on how you drive.

VI.   Conclusion

As demonstrated in this paper, claims about Prop 103’s savings to consumers[100] must be taken with an enormous grain of salt. Prop 103’s suppression of property-insurance rates in the private market has contributed to an availability crisis and the shunting of policyholders into the surplus-lines market and the California FAIR Plan, both of which will inevitably have to raise rates accordingly to be able to meet their obligations. This displacement into what are intended to be mechanisms of last resort also deprives consumers of the protections ordinarily offered in the admitted market.

[1] W. Kip Viscusi & Patricia Born, The Performance of the 1980s California Insurance and Liability Reforms, 2 Risk Manag. Insur. Rev. 14-33 (1999), available at https://law.vanderbilt.edu/files/archive/201_The-Performance-of-the-1980s-California-Insurance-and-Liability-Reforms.pdf.

[2] Royal Globe Ins. Co. v. Superior Court, 23 Cal. 3d 880 (Cal. 1979), 153 Cal. Rptr. 842, 592 P.2d 329.

[3] David Appel, Revisiting the Lingering Myths about Proposition 103: A Follow Up Report, Milliman (Sep. 2004), available at https://www.namic.org/pdf/040921appelfinalrpt.pdf.

[4] Viscusi & Born, supra note 1, at 18.

[5] Jerry Gillam & Leo C. Wolinsky, State’s Voters Face Longest List of Issues in 66 Years; Nov. 8 Ballot to Carry Maze of 29 Propositions, Los Angeles Times (Jul. 7, 1988), https://www.latimes.com/archives/la-xpm-1988-07-07-mn-8306-story.html.

[6] PROPOSITION 104 No-Fault Insurance, Los Angeles Times (Oct. 10, 1988), https://www.latimes.com/archives/la-xpm-1988-10-10-mn-2779-story.html.

[7] Gillam & Wolinsky, supra note 5.

[8] Kenneth Reich, Prop. 100 Evokes Unrestrained Claims From Insurers, Lawyers, Los Angeles Times (Sep. 14, 1988), https://www.latimes.com/archives/la-xpm-1988-09-14-mn-1907-story.html.

[9] Kenneth Reich, Prop. 101: It’s ‘Not Perfect,’ Measure’s Sponsors Concede, Los Angeles Times (Sep. 21, 1988), https://www.latimes.com/archives/la-xpm-1988-09-21-mn-2241-story.html.

[10] Steve Geissinger, Californians Approve Auto Insurance Cuts, Insurer Files Lawsuit, Associated Press (Nov. 9, 1988).

[11] Text of Proposition 103, Consumer Watchdog (Jan. 1, 2008), https://consumerwatchdog.org/insurance/text-proposition-103.

[12] Press Release, 30 Years and $154 Billion of Savings: California’s Proposition 103 Insurance Reforms Still Saving Drivers Money, Consumer Federation of America (Oct. 17, 2018), https://consumerfed.org/press_release/30-years-and-154-billion-of-savings-californias-proposition-103-insurance-reforms-still-saving-drivers-money.

[13] Cal. Ins. Code §1850-1860.3.

[14] Stats. 1988, p. A-290.

[15] Eric J. Xu, Cody Webb, & David D. Evans, Wildfire Catastrophe Models Could Spark the Change California Needs, Milliman (Oct. 2019), available at https://fr.milliman.com/-/media/milliman/importedfiles/uploadedfiles/wildfire_catastrophe_models_could_spark_the_changes_california_needs.ashx.

[16] Data on Insurance Non-Renewals, FAIR Plan and Surplus Lines (2015-2019), California Department of Insurance (Oct. 19, 2020), available at https://www.insurance.ca.gov/0400-news/0100-press-releases/2020/upload/nr104Charts-NewRenewedNon-RenewedData-2015-2019-101920.pdf.

[17] Matthew Nuttle, California Blocks Insurance Companies From Dropping Residents in Fire-Prone Areas, ABC 10 Sacramento (Dec. 5, 2019), https://www.abc10.com/article/news/politics/insurance-non-renewal-moratorium/103-40050393-6915-41c4-a6f0-0e525990cce7.

[18] John Egan & Amy Danise, Many California ZIP Codes Get Protection From Home Insurance Non-Renewals, Forbes Advisor (Nov. 22, 2022), https://www.forbes.com/advisor/homeowners-insurance/california-policy-non-renewals.

[19] Press Release, Commissioner Lara’s Actions Lead to More Than $1.2 Billion in Premium Savings for California Drivers Due to COVID-19 Pandemic, California Department of Insurance (Jun. 25, 2020), https://www.insurance.ca.gov/0400-news/0100-press-releases/2020/release056-2020.cfm.

[20] Ron Lieber, Some Insurers Offer a Break for Drivers Stuck at Home, The New York Times (Apr. 6, 2020), https://www.nytimes.com/2020/04/06/business/coronavirus-car-insurance.html.

[21] Ricardo Lara, Bulletin 2021-03, California Department of Insurance (Mar. 11, 2021), available at https://www.insurance.ca.gov/0250-insurers/0300-insurers/0200-bulletins/bulletin-notices-commiss-opinion/upload/Bulletin-2021-03-Premium-Refunds-Credits-and-Reductions-in-Response-to-COVID-19-Pandemic.pdf.

[22] State Farm General Insurance Company v. Lara et al. (2021) 286 Cal. Rptr. 3d 124.

[23] June Sham, California Rate Filing Freeze Starts to Thaw, Bankrate (Dec. 1, 2022), https://www.bankrate.com/insurance/car/california-rate-filing-freeze-causes-unrest.

[24] Consumer Price Index for All Urban Consumers (CPI-U): U.S. City Average by Detailed Expenditure Category, U.S. Bureau of Labor Statistics (Aug. 10, 2023), https://www.bls.gov/news.release/cpi.t02.htm.

[25] Anthony Bellano, Where’d the Gecko Go? Auto Insurance Advertising Sees Dip, Best’s Review (Oct. 2022), available at https://bestsreview.ambest.com/edition/2022/october/index.html#page=82.

[26] Ricardo Lara, Bulletin 2022-10, California Department of Insurance (Aug. 8, 2022), available at https://www.insurance.ca.gov/0250-insurers/0300-insurers/0200-bulletins/bulletin-notices-commiss-opinion/upload/Insurance-Commissioner-Ricardo-Lara-Bulletin-2022-10-Changes-to-Premium-Options-Without-the-Prior-Approval-of-the-Department-of-Insurance.pdf.

[27] Thomas Frank, Calif. Scared Off Its Biggest Insurer. More Could Follow, ClimateWire (May 31, 2023), https://www.eenews.net/articles/calif-scared-off-its-biggest-insurer-more-could-follow.

[28] Gov. Gavin Newsom, Executive Order N-13-23, Executive Department, State of California (Sep. 21, 2023), available at https://www.gov.ca.gov/wp-content/uploads/2023/09/9.21.23-Homeowners-Insurance-EO.pdf.

[29] Id.

[30] Press Release, Commissioner Lara Announces Sustainable Insurance Strategy to Improve State’s Market Conditions for Consumers, California Department of Insurance (Sep. 21, 2023), https://www.insurance.ca.gov/0400-news/0100-press-releases/2023/release051-2023.cfm.

[31] Cal. Ins. Code §1861.137(b)

[32] Prior Approval Rate Filing Instructions, California Department of Insurance (Jun. 5, 2023), available at https://www.insurance.ca.gov/0250-insurers/0800-rate-filings/0200-prior-approval-factors/upload/PriorAppRateFilingInstr_Ed06-05-2023.pdf.

[33] Karl Borch, Capital Markets and the Supervision of Insurance Companies, 31 Journal of Risk and Insurance 397 (Sep. 1974).

[34] Dwight M. Jaffee & Thomas Russell, The Regulation of Automobile Insurance in California, in J.D. Cummins (ed.), Deregulating Property-Liability Insurance: Restoring Competition and Increasing Market Efficiency, American Enterprise Institute-Brookings Institution Joint Center for Regulatory Studies (2001).

[35] Id.

[36] Katherine Chiglinsky & Elaine Chen, Many Californians Being Left Without Homeowners Insurance Due to Wildfire Risk, Insurance Journal (Dec. 4, 2020), https://www.insurancejournal.com/news/west/2020/12/04/592788.htm.

[37] Leslie Scism, State Farm Halts Home-Insurance Sales in California, Wall Street Journal (May 26, 2023), https://www.wsj.com/articles/state-farm-halts-home-insurance-sales-in-california-5748c771.

[38] Ryan Mac, Allstate Is No Longer Offering New Policies in California, The New York Times (Jun. 4, 2023), https://www.nytimes.com/2023/06/04/business/allstate-insurance-california.html.

[39] Sam Dean, Farmers, California’s Second-Largest Insurer, Limits New Home Insurance Policies, Los Angeles Times (Jul. 11, 2023), https://www.latimes.com/business/story/2023-07-11/farmers-californias-second-largest-insurer-limits-new-home-insurance-policies.

[40] Rex Frazier, California’s Ban on Climate-Informed Models for Wildfire Insurance Premiums, Ecology Law Quarterly (Oct. 19, 2021), https://www.ecologylawquarterly.org/currents/californias-ban-on-climate-informed-models-for-wildfire-insurance-premiums.

[41] Median Home Price by State, World Population Review, https://worldpopulationreview.com/state-rankings/median-home-price-by-state (last updated May 2022).

[42] Dwelling Fire, Homeowners Owner-Occupied, and Homeowners Tenant and Condominium/Cooperative Unit Owner’s Insurance Report: Data for 2020, National Association of Insurance Commissioners (2022), available at https://content.naic.org/sites/default/files/publication-hmr-zu-homeowners-report.pdf.

[43] Cal. Code Regs. Tit. 10, § 2644.5.

[44] Xu et al., supra note 15.

[45] Robert Zolla & Melanie McFaul, Wildfire Catastrophe Models and Their Use in California for Ratemaking, Milliman (Jul. 21, 2023),

[46] Glenn Pomeroy, Use of Catastrophe Models by California Earthquake Authority, California Earthquake Authority (Dec. 17, 2017), available at https://ains.assembly.ca.gov/sites/ains.assembly.ca.gov/files/CEA%20Use%20of%20Catastrophe%20Models%20-%20GP%20Statement.pdf.

[47] Press Release, Commissioner Lara Announces New Regulations to Improve Wildfire Safety and Drive Down Cost of Insurance, California Department of Insurance (Feb. 25, 2022), https://www.insurance.ca.gov/0400-news/0100-press-releases/2022/release019-2022.cfm.

[48] Invitation to Workshop Examining Catastrophe Modeling and Insurance, California Department of Insurance (Jun. 7, 2023), available at https://www.insurance.ca.gov/0250-insurers/0500-legal-info/0300-workshop-insurers/upload/California-Department-of-Insurance-Invitation-to-Workshop-Examining-Catastrophe-Modeling-and-Insurance.pdf.

[49] Cal. Ins. Code §623.

[50] Guy Carpenter U.S. Property Catastrophe Rate-On-Line Index, Artemis, https://www.artemis.bm/us-property-cat-rate-on-line-index (last accessed Aug. 8, 2023).

[51] R.J. Lehmann, Even California Leaders Fail to Grasp Climate Change, San Francisco Chronicle (Jan. 10, 2018), https://medium.com/@sfchronicle/even-california-leaders-fail-to-grasp-climate-change-b960d7038fc7.

[52] FACT SHEET: Insurance Policy Count Data 2015-2021, California Department of Insurance (Dec. 2022), available at https://www.insurance.ca.gov/01-consumers/200-wrr/upload/CDI-Fact-Sheet-Residential-Insurance-Market-Policy-Count-Data-December-2022.pdf.

[53] Jeff Lazerson, FAIR Plan Seeks Nearly 50% Premium Hike from California Department of Insurance, Orange County Register (May 19, 2023), https://www.ocregister.com/2023/05/19/fair-plan-seeks-nearly-50-premium-hike-from-california-department-of-insurance.

[54] Proposition 103 Enforcement Project v. Charles Quackenbush, 64 Cal. App.4th 1473 (Cal. Ct. App. 1998), 76 Cal. Rptr. 2d 342.

[55] Clint Proctor, Do Insurance Companies Use Credit Data?, MyFICO (Oct. 21, 2020), https://www.myfico.com/credit-education/blog/insurance-and-credit-scores.

[56] Deanna Dewberry, Got a Bad Credit Score? You Pay Much More for Car Insurance in New York, News10 NBC (Apr. 27, 2023), https://www.whec.com/top-news/consumer-alert-got-a-bad-credit-score-you-pay-much-more-for-car-insurance-in-new-york.

[57] Credit-Based Insurance Scores: Impacts on Consumers of Automobile Insurance, Federal Trade Commission (Jul. 2007), available at https://www.ftc.gov/sites/default/files/documents/reports/credit-based-insurance-scores-impacts-consumers-automobile-insurance-report-congress-federal-trade/p044804facta_report_credit-based_insurance_scores.pdf.

[58] Daniel Robinson, What Is Telematics Insurance?, MarketWatch (Aug. 4, 2023), https://www.marketwatch.com/guides/insurance-services/telematics-insurance.

[59] 10 CCR § 2632.5.

[60] 10 CCR § 2632.5(c)(2).F.5.B.

[61] 10 CCR § 2632.5(d)(15-16)

[62] Jason E. Bordoff & Pascal J. Noel, Pay-As-You Drive Auto Insurance; A Simple Way to Reduce Driving-Related Harms and Increase Equity, Brookings Institution (Jul. 25, 2008), https://www.brookings.edu/articles/pay-as-you-drive-auto-insurance-a-simple-way-to-reduce-driving-related-harms-and-increase-equity.

[63] Jason E. Bordoff & Pascal J. Noel, The Impact of Pay-As-You-Drive Auto Insurance in California, Brookings Institution (Jul. 31, 2008), https://www.brookings.edu/articles/the-impact-of-pay-as-you-drive-auto-insurance-in-california.

[64] Edwin Lombard III, Telematics: A Tool to Curb Auto Insurance Discrimination, Capitol Weekly (Feb. 18, 2020), https://capitolweekly.net/telematics-a-tool-to-curb-auto-insurance-discrimination.

[65] Id.

[66] Insurance Commissioner (State Executive Office), Ballotpedia, https://ballotpedia.org/Insurance_Commissioner_(state_executive_office) (last accessed Aug. 16, 2023).

[67] State Farm General Insurance Company v. Lara et al. (2021) 286 Cal. Rptr. 3d 124.

[68] Jeff Daniels, Becerra, Incumbent California Attorney General and Legal Thorn to Trump, to Face GOP Challenger Bailey in Fall General Election, CNBC (Jun. 6, 2018), https://www.cnbc.com/2018/06/06/becerra-california-attorney-general-to-face-gop-rival-bailey-in-fall.html.

[69] Harvey Rosenfield, Allstate’s $16M Homeowners Rate Hike Approved Despite Company Secretly Ending Sales of New Home Insurance in California, Consumer Watchdog (Jun. 13, 2023), https://consumerwatchdog.org/insurance/allstates-16m-homeowners-rate-hike-approved-despite-company-secretly-ending-sales-of-new-home-insurance-in-california.

[70] CIC Section 1861.05.

[71] CIC 1861.065(d).

[72] SERFF WAWA-133081408.

[73] Press Release, Auto Club to Acquire rhe U.S. Subsidiary of Wawanesa Mutual, Wawanesa Mutual (Aug. 1, 2023), https://www.wawanesa.com/canada/news/auto-club-acquires-wawanesa-general.

[74] The median delay for homeowners rate filings in California is 198 days. For auto insurance rate filings, it is 185.5 days.

[75] Data are drawn from Informational Report on the CDI Intervenor Program, California Department of Insurance, available at  https://www.insurance.ca.gov/01-consumers/150-other-prog/01-intervenor/report-on-intervenor-program.cfm (last accessed Aug. 15, 2023).

[76] Data from Florida are not available for this measure; therefore, California ranks 50th out of 50 jurisdictions.

[77] Sangmin S. Oh, Ishita Sen, & Ana-Maria Tenekedjieva, Pricing of Climate Risk Insurance: Regulation and Cross-Subsidies, SSRN (Dec. 22, 2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3762235.

[78] Id. at 1.

[79] N.J. Admin. Code § 11:3 app A, available at https://casetext.com/regulation/new-jersey-administrative-code/title-11-insurance/chapter-3-automobile-insurance/subchapter-33-appeals-from-denial-of-automobile-insurance/appendix-a.

[80] High Court Upholds N.J. Surcharges on Insurers, A.M. Best Co. (Mar. 19, 1996).

[81] Anthony Gnoffo Jr., NJ, Insurers Near Deal to Close State Fund Gap, The Journal of Commerce (1994).

[82] Sharon L. Tennyson, Efficiency Consequences of Rate Regulation in Insurance Markets, Networks Financial Institute, Policy Brief No. 2007-PB-03 (March 2007), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=985578.

[83] Martin F. Grace, Robert W. Klein, & Richard W. Phillips, Auto Insurance Reform: The South Carolina Story, Georgia State University Center for Risk Management and Insurance Research (Jan. 15, 2001), available at https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&doi=bae61c3c10a95b535a11c83094abea0be16fa05a.

[84] Tennyson, supra note 10.

[85] Residual Market Size Relative to Total Market, Automobile Insurance Plan Service Office (2022), available at https://www.aipso.com/Portals/0/IndustryData/Residual%20Market%20Size%20Relative%20To%20Total%20Market_BD040_2021.xlsx?ver=2022-08-11-133511-543.

[86]  Jim Kinney, Massachusetts Auto Insurance Deregulation Brought Variety, Lower Prices, National Association of Insurance Commissioners Says, The Republican (Jan. 18, 2012), https://www.masslive.com/business-news/2012/01/massachusetts_auto_insurance_deregulatio.html.

[87] AIPSO, supra note 13.

[88] Nigel Jaquiss, Oregon Lawmakers Will Try Again to Bring Insurers Under the State’s Unlawful Trade Practices Act, Willamette Week (Mar. 1, 2023), https://www.wweek.com/news/2023/03/01/oregon-lawmakers-will-try-again-to-bring-insurers-under-the-states-unlawful-trade-practices-act.

[89] Motor Vehicle Insurance Fairness Act, H.B. 2203, Illinois 103rd General Assembly.

[90] Id.

[91] Jon S. Hanson, The Interplay of the Regimes of Antitrust, Competition, and State Insurance Regulation on the Business of Insurance, 4 Drake LR 767 (1978-1979), available at https://lawreviewdrake.files.wordpress.com/2016/09/hanson1.pdf.

[92] J. Robert Hunter & Douglass Heller, Auto Insurance Regulation What Works 2019: How States Could Save Consumers $60 Billion a Year, Consumer Federation of America (Feb. 11, 2019), available at https://consumerfed.org/wp-content/uploads/2019/02/auto-insurance-regulation-what-works-2019.pdf

[93] David Appel, Revisiting the Lingering Myths About Proposition 103: A Follow-Up Report, Milliman Inc. (Sep. 2004), available at https://www.namic.org/pdf/040921appelfinalrpt.pdf; David Appel, Analysis of the Consumer Federation of America Report ‘Why Not the Best’, Milliman Inc. (Dec. 2001), available at https://www.namic.org/pdf/01PolPaperAppelCFA.pdf; David Appel, Comment on Chapter 5 in Deregulating Property Liability Insurance, J. David Cummins (ed.), Brookings Institution Press (Oct. 2011), available at https://www.aei.org/wp?content/uploads/2011/10/deregulating property liability insurance.pdf.

[94] Dwight M. Jaffee & Thomas Russell, Regulation of Automobile Insurance in California in Deregulating Property Liability Insurance, J. David Cummins (ed.), Brookings Institution Press (Oct. 2011), available at https://www.aei.org/wp?content/uploads/2011/10/deregulating_property_liability_insurance.pdf;

92. Robert Hunter, Tom Feltner, & Douglas Heller, What Works: A Review of Auto Insurance Rate Regulation in America and How Best Practices Save Billions of Dollars Consumer Federation of America (Nov. 2013), available at http://consumerfed.org/wp-content/uploads/2010/08/whatworks-report_nov2013_hunter-feltner-heller.pdf; see also Hunter & Heller, supra note 92.

[95] Consumer Watchdog, supra note 11.

[96] Informational Report on the CDI Intervenor Program, California Department of Insurance, https://www.insurance.ca.gov/01-consumers/150-other-prog/01-intervenor/report-on-intervenor-program.cfm (last accessed Aug. 16, 2023)

[97] About the FCHLPM, Florida Commission on Hurricane Loss Projection Methodology, https://fchlpm.sbafla.com/about-the-fchlpm (last accessed Aug. 9, 2023).

[98] A.B. 2167, California Legislature 2019-2020 Regular Session.

[99] Evan Low & Autumn Burke, Modernize the Way We Price Auto Insurance – Telematics Is a Sensible Approach, CalMatters (Aug. 19, 2020), https://calmatters.org/commentary/2020/08/modernize-the-way-we-price-auto-insurance-telematics-is-a-sensible-approach.

[100] Consumer Federation of America, supra note 12.

In our recent issue brief, Geoffrey Manne, Kristian Stout, and I considered the antitrust economics of state-owned enterprises—specifically the local power companies (LPCs) that are government-owned under the authority of the Tennessee Valley Authority (TVA).

While we noted that electricity cooperatives (co-ops) do not receive antitrust immunities and could therefore be subject to antitrust enforcement, we didn’t spend much time considering the economics of co-ops. This is important, because electricity co-ops themselves own a large number of poles and attaching to those poles at reasonable rates will be important to effectuate congressional intent to deploy broadband quickly in the rural areas those co-ops generally serve.

Read the full piece here.

I.       Introduction

As part of the Infrastructure Investment and Jobs Act (IIJA), signed by President Joe Biden in November 2021, Congress provided $42.5 billion for broadband deployment, mapping, and adoption projects through the Broadband Equity, Access, and Deployment (BEAD) program, with the stated goal of directing the funds to close the so-called “digital divide.”[1] But actions by pole owners—such as refusing to allow broadband companies to attach their lines on reasonable and nondiscriminatory terms—threaten to slow broadband deployment significantly.

In a recent letter to Assistant Attorney General Jonathan Kanter, Sen. Mike Lee (R-Utah) put forth the argument that the U.S. Justice Department (DOJ) should take action to address abuses of the pole-attachment process by local power companies (LPCs) regulated by the Tennessee Valley Authority (TVA).[2] His concern is that such abuses threaten to slow broadband deployment, especially to rural areas served by the TVA and the LPCs.[3] Among the abuses he details are:

• Delaying or refusing to negotiate pole-attachment agreements with competitive broadband-service providers, including when the TVA LPC provides broadband service (itself or through a joint venture agreement) or is interested in doing so;
• Initially refusing to negotiate pole-attachment agreements that would enable competitive broadband-service providers to obtain permits in sufficient time to meet federal grant deadlines;
• Refusing to review pole-attachment applications on a scale or at the pace necessary to complete broadband projects in a timeframe required by federal grant programs;
• Refusing to follow the standard industry practice of approving a contractor to process pole-access applications in a timely manner when the utility’s staff is insufficient to do the work, even when the broadband-service provider is willing to pay the entire bill for the contractor; and
• Refusing to process pole-attachment applications at all, and failing to respond to provider outreach regarding the processing of applications for months on end.[4]

Section 224 of the Communications Act exempts municipal and electric-cooperative (“coop”) pole owners, such as the LPCs, from oversight by the Federal Communications Commission (FCC).[5] At the same time, the TVA’s authority over pole attachments is not subject to oversight by state governments.[6] This loophole means that it is the TVA, not the FCC, that sets the rates for pole attachments. The TVA’s rates are significantly higher than those of the FCC, [7] and the TVA’s LPCs often are able to avoid the access requirements that states and the FCC typically require.[8]

But avoiding state and FCC regulatory oversight is not the only loophole that the TVA and its LPCs can exploit: the TVA and the government-owned LPCs also may not be subject to antitrust law. These entities hold a resource critical for broadband deployment, while it is essentially impossible for private providers to build competing pole infrastructure. In situations like this, government entities that participate as firms in the marketplace—known in the literature as “state-owned enterprises” (SOEs)—should be subject to antitrust law in order to ensure access by private competitors.

Sen. Lee is correct that the DOJ should examine the practices of the TVA and its LPCs under antitrust law. Antitrust clearly applies to those LPCs that are private coops, which have no immunities. But Congress should clarify that the TVA and government-owned LPCs are likewise subject to antitrust law when they act according to their “commercial functions” or as “market participants.” They should also consider bringing the TVA and all of its LPCs under the purview of the FCC’s Section 224 authority over pole attachments.

II.     The Law & Economics of State-Owned LPCs and Rural Electrical Cooperatives (RECs)

A.    The Competition Economics of State-Owned Enterprises

SOEs’ incentives differ from those of privately owned businesses. Most notably, while a private business must pass the profit-and-loss test, SOEs often are not subject to the same constraints. This difference may manifest through setting up legal SOE monopolies against which no other firm can compete; exempting SOEs from otherwise generally applicable laws; extending explicit subsidies to SOEs, whether in the form of taxpayer-financed appropriations or government-backed bonds (which the government explicitly or implicitly promises to repay, if necessary); or cross-subsidies from other government-owned monopoly businesses.

As a result, SOEs do not need to maximize profits (with Armen Alchian’s caveat that private market participants may be modeled as profit maximizers even if that isn’t their true motivation[9]) and can pursue other goals. In fact, this is exactly why some supporters of SOEs like them so much: they can pursue the so-called “public interest” by providing ostensibly high-quality products and services at what are often below-market prices.[10]

But this freedom comes at a cost: not only can SOEs inefficiently allocate societal resources away from their highest-valued uses, but they may actually have greater incentive to abuse their positions in the marketplace than private entities. As David E.M. Sappington and J. Gregory Sidak put it:

[W]hen an SOE values an expanded scale of operation in addition to profit, it will be less concerned than its private, profit-maximizing counterpart with the extra costs associated with increased output. Consequently, even though an SOE may value the profit that its anticompetitive activities can generate less highly than does a private profit-maximizing firm, the SOE may still find it optimal to pursue aggressively anticompetitive activities that expand its own output and revenue. To illustrate, the SOE might set the price it charges for a product below its marginal cost of production, particularly if the product is one for which demand increases substantially as price declines. If prohibitions on below-cost pricing are in effect, an SOE may have a strong incentive to understate its marginal cost of production or to over-invest in fixed operating costs so as to reduce variable operating costs. A public enterprise may also often have stronger incentives than a private, profit-maximizing firm to raise its rivals’ cost and to undertake activities designed to exclude competitors from the market because these activities can expand the scale and scope of the SOE’s operations.[11]

Here, entities like the TVA and many of the government-owned LPCs that sell the electricity it produces are simply not subject to the same profit-and-loss test that a private power company would be. But even more importantly for the discussion of broadband buildout, many of these government-owned LPCs also provide broadband services (or intend to), effectively using their position as a monopoly provider of electricity to cross-subsidize their entry into the broadband marketplace. Moreover, LPCs often own the electric poles and control decisions about whether and at what rates to rent them to third parties (subject to TVA rate regulations), including to private broadband providers that may compete with the LPCs’ municipal-broadband offerings.

This raises two significant issues for competition policy:

• Because government-owned municipal-broadband providers focus on speed and price, rather than profitability, they can sometimes offer greater speeds at lower prices than private providers, deterring private buildout and competition using what, in other contexts, would be referred to as “predatory pricing” (e., the government can use its unique monopoly advantages to indefinitely set prices too low)[12]; and
• LPCs that offer municipal-broadband services can raise rivals’ costs by refusing to deal with private broadband providers that want to attach equipment to their poles (an “essential facility” or “critical input”) or by offering access only on unreasonable and discriminatory terms.

In Verizon Communication Inc. v. Law Offices of Curtis V. Trinko LLP,[13] the U.S. Supreme Court explained the reasoning behind a very limited duty to deal under antitrust law:

Compelling… firms to share the source of their advantage is in some tension with the underlying purpose of antitrust law, since it may lessen the incentive for the monopolist, the rival, or both to invest in those economically beneficial facilities.[14]

In sum, a private market participant is constantly looking to acquire monopoly power by innovating and better serving customers, and temporary monopolies—acquired through a legitimate competitive process—are not unlawful. If successful, this process provides incentive for more innovation and competition, including incentives for competitors to build their own infrastructure.

But this is not so when it comes to SOEs, which can prevent competition in a way that private market participants cannot, due to their special access to legal mechanisms like eminent domain, taxes, below-market-rate loans, government grants of indefinite monopolies, and cross-subsidies from their own monopolies in adjacent markets. As a result, SOEs possess both special ability and incentive to raise rivals’ costs through refusals to deal or predatory pricing.

Ironically, the lack of a profit motive may make SOEs uniquely positioned to harm competition. Thus, it may make sense to impose on SOEs a duty to deal on reasonable and nondiscriminatory terms when it comes to pole attachments.

B.     The Economics of Co-Ops[15]

According to the National Rural Electric Cooperative Association, the trade association for rural electricity co-ops (RECs):

• Co-ops serve 56% of the U.S. landmass and 88% of the nation’s counties, including 93% of the 353 persistent poverty counties.
• They account for roughly 13% of all electricity sold in the United States.
• More than 90% of electric co-ops serve territories where the average household income is below the national average. One in six co-op consumer-members live at or below the poverty line.
• Cooperatives serve an average of eight consumer-members per-mile of electric line, but this average masks the extremely low-density population of many co-ops. If the handful of large co-ops near cities were removed, the average would be lower.
• More than 100 electric cooperatives provide broadband service and more than 200 co-ops are exploring the option and conducting feasibility studies to do so.[16]

There are some important differences between electric co-ops and investor-owned power companies. Most importantly, co-ops are owned by their consumers. Economics helps explain why this form of organization could be pro-competitive in some situations, but the history of RECs suggests that government support and corporate rules particular to co-ops are the main reasons that we continue to rely on co-ops to distribute electricity in rural areas of the United States. As a result, RECs—especially those that distribute electricity generated and transmitted by the TVA—have incentives more like those of state-owned enterprises (SEOs) than private firms.

In other words, RECs also have the incentive and ability to act anticompetitively—e.g., by refusing to deal with private broadband providers who wish to attach to the poles they own.

1.       Why Do We Have So Many RECs?

The classic law & economics examination of firms’ choice of business organization comes from Henry Hansmann, in his book The Ownership of Enterprise.[17] He explained that the choice of ownership for any firm is driven by costs. The form that is chosen by a particular firm is that which “minimizes the total costs of transactions between the firm and all of its patrons.”[18] These costs include both transaction costs with those patrons who are not owners, and the costs of ownership, such as monitoring and controlling the firm.

Hansmann argued that the form of consumer-owned co-ops predominates in the distribution of electricity in rural areas because it is a response to the threat of natural monopoly, where high barriers to entry and startup costs suggest that one firm is likely to dominate.[19] This is particularly true in geographic areas with low population density, because the costs of building out infrastructure is extremely high per individual consumer. As such, consumers would likely be subject “to serious price exploitation if they were to rely on market contracting with an investor-owned firm.”[20] Thus, the choice is among rate regulation of an investor-owned utility, municipal ownership, or consumer ownership through a co-op.

Hansmann argued that consumer co-ops best align “the firm’s interests with those of its consumers” because they have lower overall costs than other forms of ownership in rural areas.[21] This is because electricity is a “highly homogeneous [commodity] with few important quality variables that affect different users differently.”[22] Moreover, relatively stable farm and nonfarm residential households account for the overwhelming majority of the membership and demand for electricity in rural areas, “creating a dominant group of patrons with relatively homogenous interests.”[23]

As a result, the costs of monitoring and controlling these natural monopolies are relatively lower for the consumers as owners than they would be as citizens overseeing a public utility commission in charge of regulating an investor-owned utility, or a board in charge of a municipally owned utility.

On the other hand, the history of RECs suggests that their formation and persistence may be more due to government intervention than as a market response to consumer demand. As Hansmann himself recognized, RECs received significant public subsidies in the form of below-market loans from the Rural Electrification Administration (REA), though he argues that these loans were not significant subsidies for the first 15 years); exemption from federal corporate income tax; and preferential access to power generated by the TVA.[24] On top of that, the REA essentially organized many co-ops in their early days.[25]

Nonetheless, Hansmann argues:

These subsidies have undoubtedly been important in encouraging the formation and growth of cooperative utilities, and therefore the great proliferation of rural electric cooperatives does not provide an unbiased test of the viability of the cooperative form. Evidently, however, the federal subsidies have not been critical to the success of cooperatives in the electric power industry. Even before the federal programs were enacted, there already existed forty-six rural electric cooperatives operating in thirteen different states. Also, as already noted, there was no net interest subsidy to the cooperatives for the first fifteen years of the REA. And in its early years, the REA also offered low-interest loans to investor-owned utilities that wished to extend service into rural areas, but found little interest in these loans among the latter firms.[26]

In an excellent 2018 law-review article, however, Debra C. Jeter, Randall S. Thomas, & Harwell Wells systematically detail the great lengths to which the REA went to organize co-ops in rural areas.[27] The authors convincingly argue that the co-op model was not adopted as a market response, but primarily due to the REA’s organizational efforts and the subsidies bestowed upon them.

Even if RECs were a market response to natural monopoly in rural areas at the time of their adoption, that does not mean that they would necessarily continue to be the most economically efficient model. At a given point of time, economies of scale and high costs of entry may mean that the market can only support one firm (i.e., natural monopoly). But over the last 80-90 years, underlying conditions that may have made co-ops the most efficient model may have changed. As we argued in a 2021 white paper:

[I]n any given market at a given time, there is likely some optimal number of firms that maximizes social welfare. That optimal number—which is sometimes just one and is never the maximum possible—is subject to change, as technological shocks affect the dominant paradigms controlling the market. The optimal number of firms also varies with the strength of scale economies, such that consumers may benefit from an increase in concentration if economies of scale are strong enough… And it is important to remember that the market process itself is not static. When factors change—whether a change in demographics or population density, or other exogenous shocks that change the cost of deployment—there will be corresponding changes in available profit opportunities. Thus, while there is a hypothetical equilibrium for each market—the point at which the entry of a new competitor could reduce consumer welfare—it is best to leave entry determinations to the market process.[28]

In fact, as Jeter, Thomas, & Wells go on to argue, rules particular to the co-op model make it nearly impossible to change the form of ownership through merger or acquisition.[29] These rules—adopted as part of the model acts promoted by the REA—prevent what the great Henry Manne called “the market for corporate control” that would otherwise discipline co-op managers.[30]

As has been noted by even the strongest supporters of the co-op model[31]—and seemingly undermining Hansmann’s assessment that consumer-ownership is the most effective form of organization for these entities—RECs suffer from a lack of oversight by consumer-owners, with very few ever showing up to even vote for their board of directors:

[32]

This lack of oversight from the ownership means that the board of directors can engage in all kinds of abuses, as detailed extensively by Jeter, Thomas, & Wells.[33]

Without sufficient incentives for oversight by consumer-owners or a functioning market for corporate control, there is no basis to conclude that RECs remain the best business model for distributing electricity. Their ubiquity is more due to the REA’s organizational efforts and ongoing government benefits—in the form of subsidies, tax exemptions, and preferences from the TVA—than market demand.

2.       The Competition Economics of RECs and Pole Attachments

Due to the privileged position enjoyed by RECs, particularly those that distribute electricity from the TVA, they have a unique ability and incentive to act anticompetitively toward broadband providers that want to attach to the poles they own.

Much like municipally owned electricity distributors, RECs are not motivated solely by profit maximization. RECs also have similar advantages, like access to eminent domain, below-market loans, tax exemptions, and the ability to cross-subsidize entry into a new market (like broadband) from its dominant position in electricity distribution.

On the other hand, unlike municipally owned electricity distributors, RECs can go out of business, and thus must earn sufficient revenues to remain a going concern. This means that the incentives for RECs to act anticompetitively are at least as strong as those of investor-owned firms, and may be even as strong as those of state-owned enterprises. This is especially notable, when so many RECs either have entered or are planning to enter the broadband market.

In such cases, there are strong incentives for RECs to refuse to deal with private broadband providers that are trying to deploy in—and introduce competition to—their rural areas, as Sen. Lee’s (R-Utah) recent letter to the U.S. Justice Department suggests, many of these co-ops have done exactly that.[34]

The economic logic that drives a limited duty to deal under antitrust law is that enforced sharing rarely makes sense because it reduces the incentives to build infrastructure. [35] But creating new rural infrastructure (like poles) is cost-prohibitive—at least, without the same subsidies, eminent-domain power, and other advantages that RECs have historically enjoyed. Thus, RECs may rightfully have a duty to deal with broadband providers on a reasonable and nondiscriminatory basis.

Moreover, many RECs receive little oversight from rate regulators when it comes to pole attachments. And when they do, like those RECs that distribute electricity from the TVA, the formula allows for much higher rates than the FCC would allow.[36] As a result, pole costs are much higher for broadband companies dealing with poles owned by co-ops and municipalities that are not subject to the FCC’s authority (see Figure II).[37]

III.   The Complicated Nature of Antitrust Immunities

There is, however, a complication. In his letter to the DOJ, Sen. Lee rightly complains that:

TVA’s regulatory practices enable such behavior: there is no reason why TVA’s regulation of the pole rental rates charged by its LPCs requires TVA to somehow exempt those LPCs from generally-applicable rules that protect competition by requiring pole owners to provide pole access to third parties on reasonable terms. TVA should be using its authority over LPC distribution contracts to require LPCs to offer reasonable, non-discriminatory, and prompt pole access to third-party broadband providers (particularly recipients of taxpayer-funded broadband grants) in unserved areas, rather than giving its LPCs a free pass from those requirements.[38]

Unfortunately, while Lee’s letter is addressed to the DOJ’s antitrust chief, it isn’t clear whether antitrust laws even apply to the behavior he observes. This is primarily because of two legal doctrines: federal sovereign immunity from lawsuit and state-action immunity from antitrust.

A.    Federal Sovereign Immunity and the TVA

Normally, the federal government is immune from lawsuit under the ancient (and deeply flawed[39]) doctrine of sovereign immunity, except where explicitly waived by statute. The TVA is a wholly owned corporate agency and instrumentality of the federal government. Thus, federal courts have typically found that the TVA and other federal entities operating in the marketplace are exempt from antitrust.[40] This is despite the fact that the TVA’s enabling statute states:

Except as otherwise specifically provided in this chapter, the Corporation… may sue and be sued in its corporate name.[41]

There is, needless to say, nothing in the chapter that actually says the agency can’t be sued for antitrust violations. The older cases finding the TVA to be exempt from antitrust are likely to be found wrongly decided under the logic of the U.S. Supreme Court’s most recent case dealing with TVA’s immunity from suit. In 2019, the Court took up Thacker v. TVA,[42] which asked whether the TVA was immune from lawsuits for negligence. The Court rejected the lower court’s reasoning that the TVA was immune for torts arising from its “discretionary functions,” substituting a new test as to whether the TVA was acting pursuant to its governmental function or a commercial function. As the Court stated:

Under the clause—and consistent with our precedents construing similar ones—the TVA is subject to suits challenging any of its commercial activities. The law thus places the TVA in the same position as a private corporation supplying electricity. But the TVA might have immunity from suits contesting one of its governmental activities, of a kind not typically carried out by private parties.[43]

The Court also gave examples to help distinguish the two:

When the TVA exercises the power of eminent domain, taking landowners’ property for public purposes, no one would confuse it for a private company. So too when the TVA exercises its law enforcement powers to arrest individuals. But in other operations—and over the years, a growing number—the TVA acts like any other company producing and supplying electric power. It is an accident of history, not a difference in function, that explains why most Tennesseans get their electricity from a public enterprise and most Virginians get theirs from a private one. Whatever their ownership structures, the two companies do basically the same things to deliver power to customers.[44]

The test to be applied, therefore, is “whether the conduct alleged to be negligent is governmental or commercial in nature… if the conduct is commercial—the kind of thing any power company might do—the TVA cannot invoke sovereign immunity.”[45] Here, that arguably means that, when the TVA is acting pursuant to its commercial function, it should not receive immunity from antitrust suit.

On the other hand, Congress gave the TVA broad ratemaking authority and contractual powers. One federal court (previous to Thacker) rejected an antitrust challenge to the TVA’s ratemaking formula because it was a “valid governmental action and [therefore] exempt from the antitrust laws of the United States.”[46]

As noted above, some LPCs have entered into the municipal-broadband market and act as competitors to private broadband companies who want to attach to poles owned by LPCs. Thus, even though competition economics would suggest that LPCs would have a greater incentive to raise rivals’ costs by charging a monopoly price, the TVA would likely argue that it is acting in its government function when it sets those rates.[47] If courts agree, then antitrust law would not be able to reach that problem.

Consistent with the Court’s reasoning in Thacker, however, courts could find that antitrust law reaches agreements between wholesalers (like the TVA) and retailers (like the LPCs) to charge certain rates for pole attachments to competitors in an adjacent market. This would arguably be an example of the TVA acting as any other power generator would, pursuant to its commercial function, through some type of price-maintenance agreement. As it stands, it isn’t clear which way the courts would go.

Congress should strongly consider clarifying that the TVA is not exempt from antitrust scrutiny when it acts pursuant to a commercial function, including when it sets anticompetitive rates for pole attachments that would slow broadband buildout. This clearly affects the market for access to LPC-owned utility poles.

B.     State Action Immunity and the LPCs

Even if the commercial versus government distinction is clarified with respect to the TVA, there is a further wrinkle as it relates to antitrust scrutiny of LPCs. This concerns how the TVA’s actions interact with state-action immunity in antitrust law.

Grounded in the 10th Amendment, the Supreme Court has found there is immunity from antitrust laws for conduct that is the result of “state action.”[48] This doctrine has been interpreted to immunize anticompetitive conduct pursuant to state and local government action from antitrust claims, so long as “the State has articulated a clear … policy to allow the anticompetitive conduct, and second, the State provides active supervision of [the] anticompetitive conduct.”[49] When it comes to municipalities, however, the Court has found that “[o]nce it is clear that state authorization exists, there is no need to require the State to supervise actively the municipality’s execution of what is a properly delegated function.”[50]

The Supreme Court has also left open the possibility of an exception to state-action immunity when government entities themselves are acting as market participants.[51] In one case dealing with a local municipally owned power plant in Louisiana, the Supreme Court did not grant broad immunity from antitrust laws, in part because:

Every business enterprise, public or private, operates its business in furtherance of its own goals. In the case of a municipally owned utility, that goal is likely to be, broadly speaking, the benefit of its citizens. But the economic choices made by public corporations in the conduct of their business affairs, designed as they are to assure maximum benefits for the community constituency, are not inherently more likely to comport with the broader interest of national economic well-being than are those of private corporations acting in furtherance of the interests of the organization and its shareholders.[52]

While there are a few cases applying this distinction in lower federal courts,[53] there is no Supreme Court caselaw determining how to differentiate when, for the purposes of state-action immunity, municipal corporations act as market participants versus when they act as government entities. Jarod Bona and Luke Wake have proposed applying a test similar to the one the courts use in dormant Commerce Clause cases.[54] The distinction made by the Supreme Court in Thacker and discussed above may also be applicable.

Government-owned LPCs are creatures of states or municipalities. As such, they would certainly argue they are immune from antitrust scrutiny, even when they refuse to deal with private broadband providers with whom they compete while withholding a critical input (i.e., the ability to attach to their poles). But there are two problems with this argument.

First, it seems unlikely that the LPCs could argue that they are acting pursuant to a clearly articulated policy of displacing competition when they refuse to deal with broadband providers. As Sen. Lee pointed out in his letter, there are state laws that would impose a duty to deal on reasonable and nondiscriminatory terms, but for any exemptions to that authority due to the TVA.[55] For instance, North Carolina and Kentucky require all pole owners not subject to FCC Section 224 authority to offer nondiscriminatory pole access.[56]

On the other hand, they could appeal to the TVA’s contract authority,[57] in addition to the TVA’s stated policy that its purpose is “to provide for the … industrial development” of the Tennessee Valley.[58] But even if this grants the TVA authority to regulate rates for pole attachments, it doesn’t mean the TVA has enunciated an articulable policy of displacing competition in refusing to deal with broadband providers. It also would appear to be contrary to the purpose of promoting industrial development to forestall broadband deployment in the Tennessee Valley because LPCs that also have municipal-broadband systems don’t want that competition. In other words, their refusal to deal is not protected by an appeal to any articulable policy to displace competition, either by a state or the TVA.

Second, under the caselaw that does exist, government-owned LPCs are market participants that should not receive antitrust immunity. For instance, in one case, a private arena owner challenged under antitrust law an exclusive contract between a municipal-arena owner and LiveNation.[59] The court held that state-action immunity was “less justified” because the municipality’s “entertainment contracts” reflected “commercial market activity,” not “regulatory activity.”[60] Here, the LPCs’ actions as both power companies and municipal-broadband providers reflect commercial-market activity more than regulatory activity. They shouldn’t be able to claim immunity from antitrust for this refusal to deal, any more than a private broadband provider could.

In sum, the LPCs’ anticompetitive refusal to deal appears to be separate from the rates set by the TVA pursuant to its ratemaking authority or contractual powers. They should be subject to antitrust law. But due to uncertainty in this area, Congress should clarify that LPCs are not immune from antitrust scrutiny, and consider codifying the market-participant exception to state-action immunity in antitrust statutes.

IV.   Section 224 of the FCC Act

In his letter, Sen. Lee noted that, under Section 224 of the Communications Act, “Congress determined that poles and conduits are essential facilities that lack a viable market-based alternative, which led it to require utilities to extend nondiscriminatory access to utility poles to cable operators and competitive telecommunications providers.”[61] While acknowledging that TVA distributors are not subject to Section 224, Lee argued that “the congressional conclusion that poles are essential facilities that lack a viable market-based alternative holds for all poles.”[62] Lee further noted that the “TVA’s regulation of its LPCs’ pole attachment rates also impedes competition by setting rates well above the rates set by the FCC and deemed compensatory by the U.S. Supreme Court, inflating the cost for competitive broadband providers unaffiliated with TVA LPCs to offer service.”[63]

Theoretically, government-owned LPCs and cooperative LPCs are subject to some oversight when they run services like municipal broadband, either from voters or member-owners. But it is implausible that such oversight can be truly effective, given that these pole owners are not subject to normal market incentives and have their own conflicts of interest that encourage hold-up problems. Combined with their ability to cross-subsidize operations in broadband from their electricity customers, it should be clear that these entities pose a host of potential public-choice problems.[64]

Indeed, as FCC Commissioner Brendan Carr has noted:

I continue to hear concerns from broadband builders about unnecessary delays and costs when they seek to attach to poles that are owned by municipal and cooperative utilities. Unlike what we are doing in today’s item, there is a strong argument that Section 224 does not give us authority to address issues specific to those types of poles. Therefore, I encourage states and Congress to take a closer look at these issues—and revisit the exemption that exists in Section 224—so that we can ensure deployment is streamlined, regardless of the type of pole you are attaching to.[65]

We echo both Sen. Lee’s and Commissioner Carr’s sentiments here. The FCC’s important work on this matter stands to benefit millions of Americans trapped on the wrong side of the digital divide. The co-op and municipal loophole poses a major obstacle to achieving these ends. Insofar as Congress prioritizes quick and efficient broadband buildout, the TVA and its LPCs should not be able to thwart these goals through anticompetitive rates and refusals to deal. Congress should revisit this issue and grant the FCC jurisdiction over these types of pole owners.

V.     Conclusion

Sen. Lee’s letter to the DOJ highlights issues that are extremely important to closing the digital divide. Broadband deployment could be harmed as a result of the practices by the TVA and the LPCs. If DOJ Antitrust Division chief Jonathan Kanter is serious about taking on gatekeeper power,[66] he should start here: with public entities granted a truly unassailable gatekeeper position over private markets. But even more importantly, Sen. Lee’s letter highlights the need to reform antitrust immunities that apply to SOEs. Economics suggests government monopolies are a greater harm to competition than private ones. Antitrust law should reflect that reality.

Appendix A: Sen Mike Lee Letter to DOJ

[1] 47 U.S.C. § 1702(b) (2018).

[2] See, infra, Appendix A [hereinafter “Lee Letter”].

[3] Broadband Assessment Report, Tennessee Valley Authority (Dec. 2022), https://www.tva.com/energy/technology-innovation/connected-communities/broadband-assessment-report.

[4] See Lee Letter, supra note 2, at 1-2.

[5] See 47 U.S.C. § 224(a)(1) (2018) (“The term ‘utility’ means any person who is a local exchange carrier or an electric, gas, water, steam, or other public utility, and who owns or controls poles, ducts, conduits, or rights-of-way used, in whole or in part, for any wire communications. Such term does not include any railroad, any person who is cooperatively organized, or any person owned by the Federal Government or any State.”).

[6] See Lee Letter, supra note 2, at n.2.

[7] Pole Attachment Fee Formulas Adopted by TVA and the FCC, Tennessee Advisory Commission on Intergovernmental Relations (Jan. 2017), available at https://www.tn.gov/content/dam/tn/tacir/commission-meetings/january-2017/2017January_BroadbandAppL.pdf.

[8] See Lee Letter, supra note 2, at n.4.

[9] See Armen A. Alchian, Uncertainty, Evolution, and Economic Theory, 58 J. Pol. Econ. 211 (1950).

[10] See, e.g., Jonathan Sallet, Broadband for America’s Future: A Vision for the 2020s, at 50-51 (Oct. 2019), available at https://www.benton.org/sites/default/files/BBA_full_F5_10.30.pdf.

[11] David E.M. Sappington & J. Gregory Sidak, Competition Law for State-Owned Enterprises, 71 Antitrust L.J. 479, 499 (2003).

[12] See Ben Sperry, Islands of Chaos: The Economic Calculation Problem Inherent in Municipal Broadband, Truth on the Market (Sept. 3, 2020), https://truthonthemarket.com/2020/09/03/islands-of-chaos-the-economic-calculation-problem-inherent-in-municipal-broadband.

[13] 540 U.S. 398 (2004).

[14] Id. at 408-09.

[15] This section is adapted from Ben Sperry, Broadband Deployment, Pole Attachments, & the Competition Economics of Rural-Electric Co-ops, Truth on the Market (Aug. 16, 2023), https://truthonthemarket.com/2023/08/16/broadband-deployment-pole-attachments-the-competition-economics-of-rural-electric-co-ops.

[16] See Brian O’Hara, Rural Electrical Cooperatives: Pole Attachment Policies and Issues, at 2, NRECA (Jun. 2019), available at https://www.cooperative.com/programs-services/government-relations/regulatory-issues/documents/2019.06.05%20nreca%20pole%20attachment%20white%20paper_final.pdf.

[17] Henry Hansmann, The Ownership of Enterprise (2000).

[18] Id. at 21.

[19] See id. at 169.

[20] Id.

[21] Id. at 170.

[22] Id.

[23] Id.

[24] See id. at 173

[25] See id.

[26] Id.

[27] See Debra C. Jeter, Randall S. Thomas, & Harwell Wells, Democracy and Dysfunction: Rural Electrical Cooperatives and the Surprising Persistence of the Separation of Ownership and Control, 70 Ala. L. Rev. 316, 372-395 (2018).

[28] Geoffrey A. Manne, Kristian Stout, & Ben Sperry, A Dynamic Analysis of Broadband Competition: What Concentration Numbers Fail to Capture, at 28, 32 (ICLE White Paper – June 2021), available at https://laweconcenter.org/wp-content/uploads/2021/06/A-Dynamic-Analysis-of-Broadband-Competition.pdf.

[29] Jeter et al., supra note 27, at 419-39.

[30] See Henry G. Manne, Mergers and the Market for Corporate Control, 73 J. Pol. Econ. 110 (1965).

[31] See John Farrell, Matt Grimley, & Nick Stumo-Langer, Report: Re-Member-ing the Electric Cooperative, Inst. For Local Self-Reliance (Mar. 29, 2016), https://ilsr.org/report-remembering-the-electric-cooperative/#Missing%20Members (“More than 70 percent of cooperatives have voter turnouts of less than 10 percent [] including Wilson’s Jackson Energy Cooperatives, which averages just under 3 percent turnout.”).

[32] Id.

[33] Jeter et al., supra note 27, at 397-400.

[34] See Lee Letter, supra note 2, at 1-2.

[35] See Trinko, 540 U.S. at 408-09.

[36] See Pole Attachment Fee Formulas Adopted by TVA and the FCC, supra note 7.

[37] See NCTA, Pole Attachments, https://www.ncta.com/positions/rural-broadband/pole-attachments (last accessed Sept. 4, 2023).

[38] Lee Letter, supra note 2, at 2.

[39] See Ben Sperry, When Violations of the Law Have No Remedy: The Case of Warrantless Wiretapping, Competitive Enterprise Institute (Aug. 8, 2012), https://cei.org/blog/when-violations-of-the-law-have-no-remedy-the-case-of-warrantless-wiretapping.

[40] See, e.g., Webster Cty. Coal v. Tennessee Valley Authority, 476 F.Supp. 529 (W.D. Ky. 1979) (finding the TVA is exempt from antitrust law); Sea-Land Serv. Inc. v. Alaska R.R., 659 F.2d 243 (D.C. Cir. 1981), cert. denied, 455 U.S. 919 (1982) (finding the Alaska Railroad exempt from antitrust law).

[41] 16 U.S.C. §831c(b) (2018).

[42] 139 S. Ct. 1435 (2019).

[43] Id. at 1439.

[44] Id. at 1443-44.

[45] Id. at 1444.

[46] City of Loudon v. TVA, 585 F.Supp. 83, 87 (E.D. Tenn. Jan. 30, 1984).

[47] The TVA could also argue that the rate formula for pole attachments that it sets is subject to the filed rate doctrine and thus exempted from antitrust scrutiny. The filed rate doctrine does not allow courts to second-guess agency determinations of rates. See Keogh v. Chicago & Northwest Railway Co., 260 U.S. 156 (1922). While the original case on the filed rate doctrine dealt with the literal situation of regulated entities filing rates which were approved by a regulator, courts have extended the doctrine to other situations where a regulator uses its authority to set rates. Cf. Wortman v. All Nippon Airways, 854 F.3d 606, 611 (9th Cir. 2017) (“While the filed rate doctrine initially grew out of circumstances in which common carriers filed rates that a federal agency then directly approved, we have applied the doctrine in contexts beyond this paradigmatic scheme.”) The unique situation with the TVA is that there is no clear statutory ratemaking authority over pole attachments, but they have asserted the ability to do so under their contract powers, raising the same issue of whether this is a governmental function or market function. See TVA Determination of Regulation on Pole Attachments 2 (Jan. 22, 2016), available at https://tva-azr-eastus-cdn-ep-tvawcm-prd.azureedge.net/cdn-tvawcma/docs/default-source/about-tva/guidelines-reports/determination-on-regulation-of-pole-attachments-7-12-2023.pdf. Even if the filed rate doctrine applies, though, it would not stop an enforcement action aimed at an injunction or declaratory relief by the DOJ, just treble damages sought by a private litigant. See Keogh, 260 U.S. at 162 (“[T]he fact that these rates had been approved by the Commission would not, it seems, bar proceedings by the Government.”).

[48] See, e.g., Parker v. Brown, 317 U.S. 341 (1943) and its progeny.

[49] North Carolina State Bd. of Dental Examiners v. FTC, 574 U.S. 494, 506 (2015) (internal citations omitted).

[50] Town of Hallie v. City of Eau Claire, 471 U.S. 34, 47 (1985).

[51] See, e.g., City of Columbia v. Omni Outdoor Advertising Inc., 499 U.S. 365, 379 (1991) (“We reiterate that, with the possible market participant exception, any action that qualifies as state action is ‘ipso facto… exempt from the operation of the antitrust laws…’”); FTC v. Phoebe Putney Health Systems Inc., 568 U.S. 216, 226 n.4 (“An amicus curiae contends that we should recognize and apply a ‘market participant’ exception to state-action immunity because Georgia’s hospital authorities engage in proprietary activities… Because this argument was not raised by the parties or passed on by the lower courts, we do not consider it.”).

[52] City of Lafayette v. Louisiana Power & Light Co., 435 U.S. 389, 403 (1978).

[53] See, e.g., Edinboro Coll. Park Apartments v. Edinboro Univ. Found., 850 F.3d 567 (3d Cir. 2017); VIBO Corp. v. Conway, 669 F.3d 675 (6th Cir. 2012); Freedom Holdings Inc. v. Cuomo, 624 F.3d 38 (2d Cir. 2010); Hedgecock v. Blackwell Land Co., 52 F.3d 333 (9th Cir. 1995).

[54] See Jarod M. Bona & Luke A. Wake, The Market-Participant Exception to State-Action Immunity from Antitrust Liability, 23 J. Antitrust & Unfair Comp. L. Section of the State Bar of Ca., Vol. 1 (Spring 2014), available at https://www.theantitrustattorney.com/files/2014/05/Market-Participant-Exception-Article.pdf.

[55] See Lee Letter, supra note 2, at 2.

[56] Id. at n.4; N.C. Gen. Stat. § 62-350(a) (requiring all pole owners to offer non-discriminatory pole access); 807 Ky. Admin. Regs. 5:015 § 2(1) (same).

[57] 16 U.S.C. § 831i (2018) (“Board is authorized to include in any contract for the sale of power such terms and conditions, including resale rate schedules, and to provide for such rules and regulations as in its judgment may be necessary or desirable for carrying out the purposes of this Act”).

[58] 16 U.S.C. § 831 (2018).

[59] See Delta Turner Ltd. v. Grand Rapids-Kent County Convention/Arena Authority, 600 F.Supp.2d 920 (W.D. Mich. 2009).

[60] Id. at 929.

[61] Lee Letter, supra note 2, at n.5.

[62] Id.

[63] Id. at n.3.

[64] See Vincent Ostrom & Elinor Ostrom, Public Goods and Public Choices, in Alternatives for Delivering Public Services: Toward Improved Performance (1979) (“[I]nstitutions designed to overcome problems of market failure often manifest serious deficiencies of their own. Market failures are not necessarily corrected by recourse to public sector solutions.”).

[65] Accelerating Wireline Broadband Deployment by Removing Barriers to Infrastructure Investment, WC Docket No. 17-84, Second Further Notice of Proposed Rulemaking (March 16, 2022) (Statement of Commissioner Brendan Carr), available at https://docs.fcc.gov/public/attachments/FCC-22-20A3.pdf.

[66] See, Assistant Attorney General Jonathan Kanter Delivers Opening Remarks at the Second Annual Spring Enforcers Summit, U.S. Justice Department (Mar. 27, 2023), https://www.justice.gov/opa/pr/assistant-attorney-general-jonathan-kanter-delivers-opening-remarks-second-annual-spring (“Gatekeeper power has become the most pressing competitive problem of our generation at a time when many of the previous generations’ tools to assess and address gatekeeper power have become outmoded.”).

QUESTION PRESENTED

Whether the court should overrule Chevron v. Natural Resources Defense Council, or at least clarify that statutory silence concerning controversial powers expressly but narrowly granted elsewhere in the statute does not constitute an ambiguity requiring deference to the agency.

INTEREST OF AMICI CURIAE

The Manhattan Institute for Policy Research (“MI”) is a nonpartisan public policy research foundation whose mission is to develop and disseminate new ideas that foster greater economic choice and individual responsibility. To that end, MI has historically worked sponsored scholarship and filed briefs supporting economic freedom against government overreach.

Richard Epstein is the Laurence A. Tisch Professor of Law at New York University. He also serves as the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution and the James Parker Hall Distinguished Service Professor of Law emeritus and a senior lecturer at the University of Chicago.

Todd Zywicki is George Mason University Foundation Professor of Law at George Mason University Antonin Scalia School of Law and a research fellow of the GMU Law and Economics Center.

Justin “Gus” Hurwitz is a senior fellow and academic director of the Center for Technology, Innovation, and Competition at the University of Pennsylvania Carey Law School.

Geoffrey Manne is the president and founder of the International Center for Law and Economics and a distinguished fellow at Northwestern University’s Center on Law, Business, and Economics.

This case interests amici because it involves an agency regulation that was not explicitly authorized by statute. Indeed, it gives the Court a chance to revisit Chevron—either overruling it or clarifying that statutory silence does not require judicial deference.

SUMMARY OF ARGUMENT

Family-run fishing businesses face a fraught and competitive environment even before the intrusion of burdensome regulations. Here, the National Marine Fisheries Service (“NMFS”) promulgated a rule for certain classes of herring boats that sweeps in most such businesses, as portrayed in the Oscar-winning movie CODA. If a vessel needs a monitor and has not already been assigned one under a federally funded program, it must pay for one itself. The cost for most herring boats exceeds $710 per sea day.

Petitioners, four family-owned and -operated fishing companies, contend that the industry-funding requirement which is not explicitly authorized by statute—will have a devastating economic impact on the herring fleet and will disproportionately impact small businesses, destroying historic communities.

The district court ruled for the government, finding that various provisions of the Magnuson-Stevens Fishery Conservation and Management Act (“MSA”) together conferred broad authority on the NMFS to implement regulations to carry out fishery management plan’s measures. Without any analysis, the court also found that, even if the statute were ambiguous, the government’s reading would be reasonable under Chevron Step Two and thus worthy of judicial deference. A divided panel of the D.C. Circuit affirmed, reasoning that the MSA’s authorization for the placement of monitors, through silence on funding, left room for agency discretion. This Court granted certiorari to determine whether the Court should overrule Chevron U.S.A., Inc. v. NRDC, 467 U.S. 837 (1984), or at least clarify that statutory silence concerning controversial powers expressly but narrowly granted elsewhere in the statute does not constitute an ambiguity requiring deference to the agency.

The Court should now take this opportunity to overhaul the Chevron-deference regime, because this experiment in rebalancing the relationship between administration and judicial review has failed. It has led to agency overreach, haphazard practical results, and the diminution of Congress. Although intended to empower Congress by limiting the role of courts, Chevron has instead empowered agencies to aggrandize their own powers to the greatest extent plausible under their operative statutes, and often beyond. Congress has proved unequal to the task of responding to this pervasive agency overreach and now has less of a role in policymaking than in the pre-Chevron era. Courts, in turn, have become sloppy and lazy in interpreting statutes. It’s a vicious cycle of legislative buckpassing and judicial deference to executive overreach.

Chevron deference rests on the presumption that Congress won’t over-delegate and that agencies will be loyal agents. But the past 40 years have shown that Congress loves passing the buck and agencies are actually principals who pursue their own interests. The time has more than come for the Court to revisit Chevron, whether it chooses to overrule it explicitly or keep it nominally under a newly restricted standard. Cf. Kisor v. Wilkie, 139 S. Ct. 2400 (2019) (preserving Auer deference but reworking it so completely that both Chief Justice Roberts, who joined Justice Kagan’s majority opinion, and Justice Kavanaugh, who joined Justice Gorsuch’s effective dissent, noted that there wasn’t much difference between the two).

 

The International Energy Agency (IEA) is either woefully economically ignorant or intent on misleading world governments with respect to the so-called net zero energy transition. This much is clear to me, as an economist, after reading the recent report from the RealClearFoundation and the Energy Policy Research Foundation (EPRF) on the IEA’s net zero scenario.

Read the full piece here.