The second way in which administrative agencies create rules is through their adjudicative powers, given to them by congressional grants of authority. Adjudication is the administrative equivalent of a judicial trial. Administrative orders have retroactive effect, as contrasted with the prospective effect of rulemaking. In rulemaking, the agency is notifying in advance those under its jurisdiction of what the law is. When an agency opens proceedings with the intention of issuing an adjudicative order, it must eventually interpret existing policy or define new policy to apply to the case at hand. The parties involved do not know how the policy is going to be applied until after the order is issued, giving the agency decision retroactive effect. Adjudicative lawmaking tends to produce inconsistencies because cases are decided on an individual basis. The rule of stare decisis (requiring precedent to be followed, which will be discussed in the context of judicial lawmaking) need not prevail (Feldman, 2016), and the high turnover of top-level administrators often results in a lack of continuity.

Because many agencies have both the power to issue regulations and the power to adjudicate cases, they can choose between the two methods of lawmaking. When an agency believes that the time has come to formulate a policy decision in an official text, it can draft and issue a regulation. But when an agency prefers to wait until the contours of a problem become clearer, it can continue to deal with the problem on a case-by-case basis, formulating a series of decisional rules couched in terms that ensure continuing flexibility. Furthermore, an agency, unlike a court, does not have to wait passively for cases to be brought before it. Its enforcement officials can go out looking for cases that will raise the issues its adjudicating officials want to rule on. And because the agency can decide for itself what enforcement proceedings to initiate, it can choose cases that present the issues in such a way that the court will be likely to uphold the agency’s ruling if an appeal is taken.

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