Can More Competition Fix an Outdated Energy System? — Episode 146 of Local Energy Rules

And so the utility still has an interest in recovering its cost to serve. A, perhaps maybe not exact, parallel is several years ago, so I grew up in California and I moved to Minnesota from California. And California regularly goes through droughts, as it was doing this year. So I was living there and we went through another one of the droughts and one of the water companies that serves the Bay Area are municipal water companies. And so we went through a drought and there was a strong call for conservation which is all really good. We need to conserve our water because if we don’t conserve water, we’re going to run out of water and that’s not good for anybody. So we all conserve water. And at the end of the year, the water company then, which is owned by the city instituted like 100% rate increase. And everyone’s like, “What are you talking about? We did our job. We conserved our water. Why are bills going up?” Well, people did such a good job of serving the water that the utility didn’t recover its costs because it does cost money to operate the system. And by not consuming that product, in this case water, utility under collected this cost to pay for the operation of its system, so I had to increase cost the next year in order to recover that uncollected revenue. So even in a public situation, there is still a need for that utility to recover its costs, which means it still wants people to consume its product, even when we might be trying to conserve it.

So that’s for the better part of 90 years or so that’s how things worked. Then as technological innovation continued to grow, we have 1978 in the passage of the Public Utilities Regulatory Policies Act which provided incentives now for other types of generation, solar, wind, biomass, what have you, things other than coal and gas and nuclear. What that ended up doing is it allows new entrants to come into the market, think people who are not the utility. So now you have some competition trying to show up into the industry. And utilities, whether they’re investor or they’re not are monopolies and monopolies act how the monopolies are going to act, which is it’s their territory and they think it’s their right to serve their territory under this longstanding practice of them being granted exclusive rights to serve electricity in this region. What this runs up against, however, is the equally important economic principle of cost pressure. And competition is a way in which you encourage pressure upon the cost to serve. So you’re right, we can go to different grocery stores to get products that are being procured from different places or perhaps the same places, depending on what type of product they’re getting. And we fly different airlines because we like one or the other, service is better than the other, price is better than the other. So we have a lot more competition in that world because the capital costs can be spread across more people than traditionally electric market scale.

But with the rise of competition in generation first, then under transmission, under FERC Order 1000, new entrants then come in and compete, which if they can do the same service at the same lower price, then that’s good. That lowers costs for everybody without degradation of service. So we have the electric utilities, which for the most part have not been pressured in the same way that other industries have to compete because of our past work of rules between the federal government, the state government, local governments have really been insulated from competition for a long time, except for 13 or so states that allow retail choice. But what I’m hopeful for and what we’re seeing is that with the growth of distributed resources like rooftop solar, community, solar and the like, is that consumers, you and I, have more options now available to us if we so choose. We don’t need to rely 100% on the utility to provide us electricity. We have abilities now to put solar on our roof or participate in a community solar garden project, which introduces competition, which is good because now it should be imparting cost pressure onto the company.

That all being said, it’s my opinion that the electric network that is the poles and wires across the system, while historically had been used for the delivery of electrons from power plants to consumers, that network is incredibly powerful network that has a tremendous amount of untapped benefits because if we were allowed, you and I, as consumers to engage with one another through that network, we can expand the power and value of that network beyond just the simple delivery of electrons. There’s a whole bunch of new things that we could do where you and I could sell to each other electrons or megawatts or whatever terminology you want to use, where you and I can engage in exchange between us to create mutually beneficial solutions where I have excess electricity and you need like electricity and I can offer to you at a price which may be lower than what is otherwise available to you from the utility. So why wouldn’t you want to engage in commerce with me because my excess electricity is going to go to waste otherwise. And so what we’re grappling with now is a system that was designed for a certain type of efficiency, now standing in the way of new types of efficiencies that can be collected or realized, if the economic motivations of that utility was different. So I wouldn’t say anyone’s actually to blame. I think utilities have an interest in maintaining the status quo and being that provider. I think the regulatory structure is structured in such a way that regulators do not have as much authority as they perhaps they should to really address how the utilities should evolve. The legislators who want to get elected and utilities have a lot of money to give to officials to ensure that laws are developed and passed away that protects the utilities in ways that may not be as beneficial to you and I compared to the utility itself.

Now, industrial farms, who have a lot of money, have a lot of availability to go and spend money to lobby legislators and regulators on how to define terms. The small farmer’s market farmer is just having his family growing radishes or beets or growing beef or what have you. They’re busy 24/7 running the farm and they don’t have the ability to go and participate in proceedings for the Food and Drug Administration or the USDA. So as a result, the companies that have the money and the time and the influence are the ones who then write the regulation. And they’re able to write the regulation in a way that benefits them because they have the money and the ability to meet the regulations. So now in order to get organic, you have to go through a certification process.

And now you have a small farmer who isn’t making a lot of money generally over the course of the year, in order to be organic now has to jump through a whole series of hoops that were designed by the large food companies who were participating in the development of the rule because they have the money capability to do that, which then means that most of organics, at least for some period of time, we’re all largely done by large food companies, not necessarily by the small market that you are most likely to buy from. So whether you’re growing lettuce, it means you have to do a bunch of stuff. Although other example I’ve always remembered from the book dealt with raising beef, right? If you want to have organic beef, it has to have a certain food, and it has to be processed in a certain way. And that required refrigeration and big equipment to dealing with how you process the animal. And again, if you are raising 100 heads of beef and you have to have a refrigerated system, that at a certain specification level you don’t have the money to invest in that, but the large food companies have the money to invest in it.

So reading that story and just seeing how large companies are able to manipulate regulation in a way to protect themselves from competition, especially from new and smaller interests, really opened my eyes as to how that works also in the electricity world, or the world that you and I are talking about, because utilities are really big. They have a lot of money. Most of those rebates because we all like the service they provide like electricity. Whether they provide it well enough is a different question, but they have the influence at the regulatory level to participate in all the proceedings that are open for any state commission. Compared to smaller companies like solar companies or storage companies or anyone who wants to get into the marketplace, they have far less resources available to them. They have to pick and choose the things they want to participate in, whereas utilities, they’re allowed to proceed in all of the proceedings. So all the proceedings that have rules they are participants in and then they’re able to develop the rules and policies the way that benefits them because commissions can only act upon things that are the record and showing up and participating in proceedings is how you influence the proceeding. And they’re able to participate in all the proceedings and craft rules and policies to ways that benefit them and not necessarily the benefit of the new entrants, new opportunities and new services.

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So utility down there, Entergy, has operated in such a way to limit the amount of transmission that can be built, limit the amount of new generations that can be built and limited entrants to any new competitive provider, be it building a new generation or building new transmission and then would able to do so in such a way to basically continue to underbuild a system in a way that made their system a lot more fragile in response to weather events like we have with Hurricane Ida where they didn’t enough generation and they didn’t have enough transmission. And so they had areas of New Orleans that were out of power for weeks, over months, because they didn’t have enough infrastructure to get the power back onto those areas because they have been chronically underbuilding our system in a way that at one level was designed solely to keep out competition. And because their focus was so much on keeping out competition, they then didn’t actually build up the system they needed to to respond to system emergencies and weather events.

I want to pivot and talk about another way that this impacts us, especially because it’s around this issue of choice, individual consumer choice. So we talked earlier about you and I could have solar on our rooftop. We could have batteries in our garage. We have the opportunity to participate in the market. We’re in the middle of processing a survey that we did of solar developers across the country, asking them about barriers that they might face in helping customers do rooftop and community solar. So [inaudible 00:34:35] we’ve been processing results of a survey that we’ve been doing of solar developers about the barriers they face in helping customers do rooftop and community solar, so two of these crucial technologies that allow people to choose to rely less on the utility. I’m just curious, I’m going to phrase it this way, what do you imagine that we might find in terms of barriers that are described around plugging those systems into the grid?

So even though it’s using the network of Verizon, as my provider, I’m also accessing the network that the services that that Android is providing me. So now I pay my one-month fee to Verizon and then I get my phone and then anything else I want to do with my phone, I pay basically to Android or to somebody else. So now I’m leveraging the power of the network, the wireless network to do a whole bunch of other things that sit on top of it. And that’s one way that I can conceive of the electricity system evolving is by turning it into a network where you and I or whoever can engage [inaudible 00:42:12] by offering balancing. We can balance our systems against each other, right? Which would be a benefit to the system because it increases the efficiency of the system. It would increase the network value because now we have more and more people connecting to the system. And I discussed it that way because the option, the alternative is we don’t need this network. Why do we need electric utility? We can do it all ourselves, so let’s just create a bunch of islanded microgrids that aren’t connected to anybody else. And I think that is not an economically efficient way to think about the system because now you have a bunch of islands that are operating to each other, so we’re losing the value of a network.

So it’s great that if your neighborhood is able to island and respond to emergency, that’s not the issue, the issue is physically disconnecting from each other so that if we are physically disconnecting, I’m in [inaudible 00:43:07] and you’re in Minneapolis, if I can’t have an interconnection with you, John, then I can’t sell you my product and you can’t buy mine to create a more efficient optimized system. Because we have power to network, you and I are able to talk over this medium. We’re able to talk over the internet and thinking about the utilities of the network and how do we transition, manage it to conceptualize new earnings opportunities, if one, they get out of the way of innovation, and two, figure out ways to leverage the innovation that private actors or you and I are willing to pay for, that could unleash a lot more value out of the system at a lower cost, as we’re now able to leverage and make the system more efficient. Because we are going to need greater amounts of flexibility and anything that you or I or any anyone who’s listening can do on their own system or at their location, you have value that probably is not being captured. And if only we had the ability to capture that value organically and societally, I think that’s where we get a lot more value out of systems. I think that’s where a future for the electricity system could go.

I think that’s really the challenge for regulation, is to balance that. One thing I want to make clear from what I say on Twitter is that when I talk about the market, and if we only had better market access, I don’t mean to equate market with no regulation. I think that’s a misnomer. So how does the role of the regulator as it applies to overseeing electric system evolve along with it? And I think that might be the bigger challenge, is ensuring that the pace of regulation changes in such a way that these network effects and network benefits are enabled and are not just simply repackaged from old ways of regulating, putting the old ways of regulating on top of new systems. And how we address that I think is going to be the bigger challenge and how do we get utilities to evolve with it because utilities will evolve. [inaudible 00:49:22] interest to evolve. But whether the regulator evolves along with it to ensure fair and equitable [inaudible 00:49:30] access to these systems, I think that’s going to be a bigger challenge and that’s where groups need to come together to ensure that the regulators that get appointed to these positions understand the transition and are prepared to evolve along with it. I was going to add that their perverse incentive is all over the place, especially in tax code, right?

So two examples. One, my mom was a 411 operator for Pacific Bell, and her keyboard was not a QWERTY keyboard, it’s the ABC keyboard. The QWERTY keyboard got paid, was categorized as a secretary at a certain pay rate and Pacific Bell doesn’t want to pay all their 411 operators at a secretary rate, so they created a new keyboard that could categorize them as a different worker class. The second example, a decade ago, so I was reading an article about delivery trucks. The majority of delivery trucks like the big Mercedes van delivery trucks, at least 10 years ago, because of the way tariffs are written, they actually came to US as passenger vans because passenger vans were taxed at a lower rate than the delivery trucks. So the companies would buy all these passenger vans, [inaudible 00:50:42] in the United States, they got off the boat there, they were taxed, they pay the tariff and they’re driven like a mile to the next place and all of the seats are ripped out and turned into delivery trucks. Because Mercedes was building all these big white vans, they are all passenger vans in the Europe, but in the US, they are great delivery trucks. But because passenger vans were taxed at a lower rate, they all came there and it was worth the effort to just remove all the seats and turn them into delivery trucks. The perverse incentives are all over the place and how you feel about that, I guess, depends on the issue that you’re interested in.

On the show page, look for links to ILSR’s coverage of PURPA, the federal government’s original competition policy, our recently released solar developer survey, and the Omnivore’s Dilemma. On our website, you can also find ILSR’s interactive Community Power Map, showing the states with the best market rules for encouraging individual and collective action for clean energy. 

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Local Energy Rules is produced by myself and Maria McCoy, with editing provided by audio engineer Drew Birschbach. Tune back into Local Energy Rules every two weeks to hear more powerful stories of communities taking on concentrated power to transform the energy system. Until next time, keep your energy local, and thanks for listening.