How Monopoly Utilities Abuse Their Power — Episode 216 of Local Energy Rules

John Farrell:

This week we’re taking a bit of a detour thanks to Tropical Storm Debbie, which washed out the internet service of my planned guest from Solar United Neighbors to talk about their solar help desk. We’ll be back in a future episode to talk about that, but instead you’ve got me, John Farrell, your host, to talk about Upcharge: the Hidden Costs of Electric Utility Monopoly Power. It’s a major report that ILSR released in May of 2024, and it really goes into a deep dive of the underlying and fundamental problems with the a hundred year old model granting private companies exclusive power over the public resource of electricity.

Why should you care about this report? Well, if you work on clean energy, if you work on climate policy, the report explains why you’ll continue to have an uphill struggle against the incumbent utility because of their market power, because of their political power, unless we address that fundamental issue. What we find and what we discuss in the report is that utilities exercise their market power in ways that inhibits interconnection of local solar and inhibits expansion of high voltage transmission. It inhibits alternatives to infrastructure that can lower electricity costs. There are just a multitude of ways in which utilities have acted and will continue to act in opposition to our climate and clean energy goals unless we wrestle with the fundamental market structure problems. I want to start with a little bit of the backstory, just a brief history of investor-owned utilities and the reason that we have monopoly utilities.

And the issue is that way back in the early 1900s as electricity was first expanding, investor owned utilities quickly adopted the language of economists to seek protection from competition. So they were basically saying like, oh, it’s economically inefficient to build lots of sets of wires to all these different properties. We should just have one grid, we should have a monopoly. So they argued that it would be more efficient. And what was sort of buried in that, in addition to that economic argument, was that they were also experiencing, these private companies were experiencing competition from cities that wanted to have public ownership of the system. So giving into public regulation wasn’t just a way for utilities to make the argument that it was economically more efficient. It was also protecting them from competition, both from each other as private competitors and from the public. And unfortunately, public regulation hasn’t worked as well as people might’ve hoped for a long time.

We’ve always had an issue with environmental consequences being concentrated in communities of color and marginalized communities. So there have always been places that have suffered more because of the insufficient nature of public regulation. And of course, rural residents didn’t get electricity service at all until the federal government stepped in to fill the gaps where the for-profit utilities weren’t willing to expand infrastructure. The for-profit utilities also used that monopoly power in ways that were extremely abusive, including getting involved in many risky and unrelated and unregulated industries in the 1920s that inflated the value of their stock in ways that actually helped contribute to the crash of the stock market. And the subsequent great depression. The utility behavior at that time actually did result in some federal action, an investigation by the predecessor to the Federal Trade Commission and a congressional law called the Public Utilities Holding Company Act of 1935 that established more robust oversight and essentially rescued the regulated private utility companies from themselves.

For a while, we had some peace and quiet, and in the 1970s, utilities again tested the bounds of their monopoly privilege. In this case, lulled by a false sense of security and ever rising electricity demand and falling rates, they made big bets on big power plants that became extremely expensive for American electricity customers with electricity rates rising by 55% when accounting for inflation between 1970 and 1983. In part because utilities failed to recognize the impacts of the oil crisis on electricity demand and the impacts of inflation on these large projects that would take many years to construct and therefore accrue enormous debt load due to the inflationary pressures. Once again, utilities had to be rescued from themselves with additional oversight in terms of state regulation like through integrated resource planning and the federal government stepping in with the Public Utilities Regulatory Act of 1978, kind of cracking the door open to competition in power generation for the first time.

So these periods of relative calm in the US electricity system have kind of masked the truth that behind the scenes utilities have begun a long-term divergence from the public interest that continues today in their pursuit of profits, in their investments in fossil fuels and the damage it does to our communities, our health and our climate, and that these consequences are being amplified by the growing size of utilities as they’ve been merging to create giant multi-state entities that are undercutting the ability of regulators to hold them accountable. So that’s where we are in terms of the history of investor owned utilities and this divergence from the public interest, and there’s lots of evidence that we cover in the report about utilities then are slowing climate progress, they’re inflating energy costs. Utility reliance on fossil fuels is killing Americans due to damage to health and the environment. Utility disasters and the corruption that they’ve engaged in are eroding faith in public oversight. Utilities have under-invested in grids where vulnerable people live and utility mergers have reduced accountability and suppressed competition.

A lot of this you might’ve heard before, whether from listening to this podcast and the guests on this podcast or because you follow news about the corruption and behavior of monopoly utility companies. But what’s really novel about ILSR’S report is the way that we tried to build the case to talk about how utilities are abusing their market power specifically, not necessarily political corruption, although we do talk about that as well. So I want to explain a little bit about that focus on market power and why it’s so important and how it ties into other areas of the US economy where we’ve been investigating the power of corporate concentration. And the key to understanding utility market power and the exercise of it is that we need to understand how utilities make money.

So most utilities still make money today the way they did a hundred years ago, which is they build something with their capital and debt, some sort of infrastructure, power poles, power wires, power plants, and state regulators give them a guaranteed rate of return on that infrastructure. And what that means is if you spend a hundred million dollars on a power plant and the rate of return is 10%, you earn 10% return or $10 million in the first year of that power plant, you depreciate the value of that power plant and the next year it’s worth $96 million and you earn a 10% return again and you get $9.6 million and so on and so forth. And that earnings continues for the life of that resource, which can be 10, 20, 30, or even 40 years. And because our regulatory system has remained complicit with the utilities interests, it means that utilities continue to want to invest their money in infrastructure whether we need it or not, and to own that infrastructure in order to maximize the return to their shareholders.

So the problem that we have is that not just that utilities have this profit motive that runs a thwart of the public interest, but that because utilities also control the distribution of electricity through the poles and wires and the way that other competitors can connect to that grid through things like interconnection, utilities ultimately act as gatekeepers to competition and gatekeepers to the grid in a way that is having all of the consequences that we mentioned previously for climate and affordability and equity. For example, utilities control the interconnection process to the grid, which governs how like a rooftop solar project, a community solar project or any wind or solar project can connect to the grid that’s owned by a third party. And what we find is that in addition to there being terrible state laws covering this process, is that utilities take advantage of ambiguities in those rules and the deference that regulators give to them in order to make it more and more difficult for projects to connect to the grid.

They can impose unnecessary or discriminatory fees in the way that they manage the connection to the queue. They can introduce very long timelines and make it very difficult for projects to be connected. They can hide the costs of interconnection in ways that makes it hard for projects to secure financing, and they can also weaponize reliability and safety, arguing that it will be dangerous to the grid to allow competitors to connect too much power to the grid. In the report, I provide a number of different examples as well as specific examples of those kinds of behaviors. But what it really creates is sort of a game of whack-a-mole between regulators and utilities where utilities are always a few steps ahead of the regulator. And regulators are basically just chasing after all the different ways in which utilities are out of compliance with state interconnection laws or trying to thwart their competitors from getting connected to the grid.

Adding to the difficulty of holding utilities accountable is that public regulators are often outgunned by utilities who have more information about the system who have more money than the regulators in order to contest with them the different regulatory proceedings. And you also have this issue where the very entities that suffer from the monopoly abuses of the utility, the solar companies, the solar installers, may often be unwilling to speak up because if they do so publicly, they fear retribution by the utility in their access to the grid. Utilities are also experts at hiding access to data that can be crucial to their competitors to bringing on more clean energy to the grid system. For example, very few states require utilities and utilities do not voluntarily provide what is called a hosting capacity or integration capacity analysis. They would provide more information about where are the best spots to connect to the grid that would have the highest value.

They also have not been very willing to comply with their own promises to provide data to customers about their own energy use that’ll allow them to work with third parties to reduce energy consumption and save money on their bills. Utilities have even withheld information from communities that are pursuing municipalization saying that it is a trade secret, the information about the grid system that a community might want to buy from them in order to have public ownership and the utility withholds that information, and at least in one case in Iowa, then lies about what information was available, in order to undercut that public campaign for public ownership. Utilities also exercise market power in another way as a buyer of electricity. When they do procurements of new wind and solar projects, often at utility scale, they can make very complicated bidding process requirements. They may in some cases refuse to disclose certain portions of the contract to bidders making it much more difficult for other participants to bring in competitive options for the utility to select in that process.

And very often we find that utilities end up picking their own bid to supply that energy, which we know has the biggest benefit to the utility and its shareholders. So utilities exercise a lot of market power over their competitors in a way that inhibits the ability of wind and solar developers and in general of the public interest of deploying more clean energy in order to address climate change and to lower costs. One of the things that was kind of surprising to me in doing this research was that this actually plays out in the high voltage transmission system as well, and we’re starting to see more discussion of that publicly, which is wonderful. I have to just thank before I say anything else, Ari Peskoe from Harvard’s Electricity Law Initiative because he wrote an amazing piece about the utility transmission syndicate that helped to educate me about this issue.

But essentially the problem is that there’s a regional planning process in many parts of the country to develop transmission that ostensibly would result in more transmission to support more connection of clean energy resources to the grid. And utilities undercut this process, they undercut independent planning. By withholding data, they often undercut the construction of regionally beneficial transmission lines that might lower costs and allow more clean energy to connect because it threatens their own power plants, which might be operating economically but be benefiting because there’s grid congestion that’s not allowing additional power to reach that area. They evade federal oversight by flexing state political power and getting states to pass laws that favor them owning new transmission lines even when federal rules had prohibited the practice. And they often can keep prices artificially high for customers by essentially avoiding technologies that could enhance the capacity on the transmission system even without building new transmission lines, such as dynamic line ratings or reconductoring existing transmission lines.

The final thing I’ll talk about, and this is kind of a transition to this broader issue that we have with utility power over the platform of delivering electricity, is that utilities are using a loophole in antitrust oversight to exercise their monopoly power. So generally speaking, if any kind of entity that has market power, whether it would be a utility or a platform like Amazon or a social media platform like Facebook, are exercising their power in a way that inhibits their competitors, they’re subject to antitrust scrutiny. And we’ve actually seen a lot of recent federal cases against these kinds of companies for exercising their market power in anti-competitive ways, and that harm consumers. Utilities are protected from that kind of behavior under what’s called the state Action Immunity doctrine. And what that says is that as long as the state is overseeing utility behavior through these public regulatory commissions at the state level, that utilities cannot be prosecuted and held accountable for their anti-competitive behavior.

There’s one particular example I have in the report of how utilities, the one time they were held accountable, managed to go back to the state government then and to get more protections for their business. So they lost a case called Ottertail Power in front of the Supreme Court in 1973, an investor owned utility had been artificially inhibiting cities that wanted to become public utility systems rather than privately owned utility systems. Ottertail Power lost that case and was shown to have anti-competitive behavior, but then went to the state legislature and got them to erect additional barriers to communities forming publicly owned utility systems. I also talk in the report about something that’s probably more familiar to people who have followed utility issues about utility, political corruption and political influence. And I think something that is just sort of understood a little more easily for people who are residents of the United States and see the ways in which corporations exercise political power all the time.

But the important part about it to understand about utilities is that it’s different in two ways. One is that because utilities have monopolies, they are using the money from captive customers to do their lobbying and their political speechmaking. And unlike any other industry in which I would be able to as a consumer say, well, I don’t agree with how this company is spending money or acting politically and I can choose to have another one, customers are captive. The second thing, of course, is that utilities are spending money to curry favor with the very folks who decide how much money they will make, whether that’s state public regulators who might be publicly elected or may be appointed by a governor, to whom utilities can give campaign contributions either through a PAC or directly or they lobby on legislation that can directly impact both the access their competitors have to markets as well as how much profit that they might make.

So utilities do exercise political power much like other corporations, but in a uniquely anti-public way, both through the captive nature of captive customers and the fact that their profits depend so heavily on the actions of those public regulators and legislators. So given the history that has led to these monopoly private companies controlling our public resource, given the market power they exercise, given the political power they exercise, how do we actually solve the problem and create a utility system that is aligned with the public interest? And my argument in Upcharge is that this is a structural problem and it requires restructuring. That what we really need to do is restructure the grid and create independent operation of the grid system, that the poles and wires and the distribution of electricity needs to be in independent hands. It ought to be a nonprofit or a public entity, and its charge should simply be to maximize the access of anyone.

It could be a utility company, a private company, a nonprofit, an individual to bring clean energy resources onto the grid that serve public purposes, such as addressing climate change, reducing costs, and increasing resiliency and reliability. And if the public entity as independent from the utility company that makes its money by building power plants or building other infrastructure, it will no longer have that bias, both in terms of its political activity or that bias in terms of exercise of market power and gatekeeping against its competitors. This idea was first put forward by former FERC chairman John Wellinghoff and James Tong in some papers they wrote about 10 years ago. So I can’t take credit for the concept, but can say that I think it is the only solution that actually addresses the overall structural problem. The second thing we need to do is to restore robust antitrust enforcement against anti-competitive behavior of utility companies.

There was a great piece by Michael Wara in the New York University Environmental Law Journal in 2017, in which he talks about some ways that Congress could change the law or change its approach to utility regulation in order to close the loopholes that utilities have used to avoid antitrust scrutiny of their anti-competitive behavior. And the third thing that we need to do is that we need in the creation of this independent entity and in the exercise of anti-monopoly power to be focused on repairing historic harms. So we know that the folks who have suffered the most are people who are low income communities of color, other marginalized communities, rural areas where power companies have sited dirty power plants, polluting power plants, and the communities around them have suffered the health and environmental consequences and the financial consequences of those decisions for years and years. And so our clean energy policy, our restructured grid should be focused on how do we reverse those harms by both dismantling the fossil fuel infrastructure that is causing the harms are continuing to cause the harms, and also prioritizing for reinvestment those communities that have suffered the worst.

That does it for a summary of Upcharge. You can read the report freely on ILSR’S website. I encourage you to reach out to me if you have questions about the report or are interested in collaborating on how do we address the problems of utility monopoly power. I thank you very much for listening to this solo edition of Local Energy Rules. As always, 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 how we can take on concentrated power to transform the energy system. Until next time, keep your energy local and thanks for listening.