Regulators as Referees When Utilities and Customers Clash — Episode 173 of Local Energy Rules

Ted Thomas:

That’s why the third parties are important that they experiment with their own money. The utility is a pass through entity. When they experiment, they’re experimenting with rate payer money. So if you have somebody that’s willing to experiment with their own money, let’s let ’em do that. Let’s let ’em do that. Even if there’s some cost shift because you’re gonna get some benefits. Let’s measure the cost shift like we talked about before, but that’s early adopter risk. You don’t want to prohibit early adopter risk or you get no early adopters and you getting no early adopters, you get no innovation.

John Farrell:

The rise of rooftop solar has upended a 100 year relationship between electric utilities and their customers. A disruption that utilities and utility regulators often handle poorly. My guest this week, Ted Thomas, of Energized Strategies was recently chair of the Arkansas Public Service Commission and he saw firsthand the challenge of getting utilities to accept a future in which their customers have more choice over their energy sources. I’m John Farrell, director of the Energy Democracy Initiative at the Institute for Local Self-Reliance and this is Local Energy Rules, a biweekly podcast sharing powerful stories about local renewable energy. So Ted, thanks so much for joining me for this episode.

Ted Thomas:

Thank you for having me.

John Farrell:

I would love to just start off by asking you, you know you’ve served on the Public Service Commission. Can you talk a little bit about what your background was in energy or interest in energy before you were on the Public Service Commission?

Ted Thomas:

Well, I’ve always been interested in public policy. I was a political science major, I went to law school so I’d have a job other than teaching, but I always wanted to do public service related things. I ran for legislature and was elected to the legislature. We had a fairly short term limit during my last term. There was an effort to do retail competition in Arkansas that I got involved with. That was my first involvement with energy. When I left the legislature, I was on governor’s staff and I went from governor’s staff to an administrative law judge position at the PSC. I was there for nine years, then I left and did some other stuff and then in 2015 I became chairman of the Public Service Commission. So I already had nine years of staff experience and a little bit of energy related experience in the legislature and a lot of what I did on staff was FERC litigation. There’s a continuing dispute regarding cost allocation and the Grand Gulf nuclear facility that is shared by Energies operating companies in three states. And so I kind of came in at the FERC level, but to learn it, you learn the retail rate making stuff is, that’s kind of the foundation even of the FERC stuff. So when I came in and that, that’s a huge advantage when you have staff because it’s a very steep learning curve. It’s a very complex industry and having staff time was a big help. So I could hit the ground running.

John Farrell:

You’ve had so many years of experience on staff and been working on any number of different things. Were there particular things that you were interested in, in being elevated to be beyond the commission of like, oh, I would really like to look into this some more or I would really like to tackle this particular issue.

Ted Thomas:

To me, when you wanna do public interest stuff and what you wanna do is, is make a difference, you wanna make a positive difference and the energy stuff touches every single consumer. Everybody gets often more than one utility bill. It’s very important that we get that right because those costs, they go everywhere. They go to people that make a lot of money and they go to people that don’t make much money at all. That’s actually one of the strengths of the system is the broad base. But when you’re dealing with a lot of folks that struggle to pay their bills, it’s very important that you get the bills right and they be as low as possible. It’s a complex area that touches everybody. That’s how I got involved. That was the motivating factor.

John Farrell:

And for a little bit of scoping here, one of the things I find so interesting is that each state has somebody, a public service commission, a public utilities commission that does this kind of regulation in the electricity sector, which is where I spend most of my life. And what I hope we’ll talk more about, one of the things I find fascinating is that some states regulate all utilities, whether they are investor owned like private companies or whether they’re cooperatives or city owned municipal utilities. What was that like in Arkansas? Did you have oversight over all the different kinds of utilities or were there some that were more on their own?

Ted Thomas:

In Arkansas, we have regulation over all investor-owned utilities, which are basically for profit. I mean Arkansas law is regulators not the same level but nearly the same level of authority over cooperatives. And then we have no authority over municipalities. The city council regulates municipalities, but then water, we only have one for-profit water company. And so the other, the water associations, we don’t regulate them. And that’s another thing that varies a lot from state to state. Some states regulate even the smallest of water companies, some states don’t. That’s just a patchwork that comes from random political stuff. But it’s interesting with respect to the cooperatives, because we regulate the cooperatives, they are free to go into other businesses.

If you have cooperatives that that are self-regulating, they have to stay in their lane and the only thing they can do is distribution of electricity. So our cooperatives formed a for-profit company way back to build transformers and then have morphed that company into one of our solar providers. Which is interesting because some of the cooperatives are very against our solar policy. Some of the cooperatives embrace it, but they all profit from it because they have this company that’s owned by the nonprofit cooperatives. So the profits that it makes flow back and reduce those folks rates. But if we did not regulate cooperatives, you’d never let an unregulated business get outside of its core area into another business cuz it would create all kinds of problems. So they’ve also been very aggressive and broadband, which is a very big issue in the rural areas, access to broadband. But you have to have the rules if you’re mixing for-profit with regulatory nonprofit, you have to have a separation so the money doesn’t slip over the wall and when something bad happens, you have people without electric service. So our regulatory model has allowed them in some ways to innovate even though some of the cooperatives are pretty fiercely opposed to the innovation, even though I’m sure they cash the checks when they get their share of profits.

John Farrell:

<laugh>, I’d love to talk to you more about that specifically. So when you left the commission recently, as I understand it, it was related to a proceeding with a rural electric cooperative and a dispute about solar. Could you talk a little bit about that?

Ted Thomas:

Well yeah and regulators have a lot of authority that’s given to them by the law and it’s very important that they have that authority because the law also says that other people can’t compete. The reason we don’t regulate hamburgers is because if you don’t like McDonald’s and go across the street to Wendy’s and it kind of takes care of itself. Now we do have food safety regulations for latent defects that you can’t see. But for quality of food, there’s no taster. There’s no regulator taster that says, well this isn’t good enough. We let consumers sort that out because they have a choice. So when we tell the consumer, you have no choice, this is a monopoly, it’s very important that the regulator controls what the price is. One of our cooperatives has been highly resistant to our third party solar program. Even though they only, at one point they had 16 houses out of 90,000 customers that had solar, they would complain and complain and complain about the cost shift through expensive lawyers and litigations such that the lawyer fees, I’m sure far exceeded the amount of the cost shift and it became this ongoing battle.

And then what they did was they found the thing called RUs, which is a federal agency that finances cooperatives. It was part of FDR’S program for rural electrification in the thirties and forties, we’re gonna subsidize the financing so it’s cheaper so you can spread electricity to low population density areas where the economics aren’t the same. And so they tried to say that the loan covenant from their federally backed loan required insurance then required a fee and all of these different things. And then they said the regulation that they cited didn’t say how much insurance. So they just took it upon themselves to decide how much insurance. And of course they decided that residential houses need commercial insurance policies that cost more than the annual electric bill of the customer. Then they just quit interconnecting. So we have like probably two or 300 solar facilities that are sitting out in the sun absorbing solar energy that’s not being used while they remain plugged into the grid paying for electricity that’s generated by natural gas, which right now is very expensive, while their solar panels sit on their roof capturing energy that they can’t use and that’s just 10 outta 10 stupid. That’s what that is.

They say that there’s a federal regulation, but what they don’t understand is there’s also a federal law called the Federal Power Act that divides power between the Federal Energy Regulatory Commission or FERC and the states. FERC who have power over electric energy wholesale and retail is state not because the states say, that’s what the law is. That’s a federal law that expressly reserves that power to the states. The Federal Power Act doesn’t say the Department of Agriculture which administers the cooperative loan stuff gets to set retail rates. It says the state does. Now that doesn’t mean that the state can ignore federal law when the EPA says you gotta put scrubbers on a plant, you have to put scrubbers on a plant and those costs blow through a retail rate case.

Well first of all, they didn’t say what the insurance amount was. They never came to their regulator and said, the feds require us to have insurance. Here’s our proposal. They just took that authority on themselves. And then when people didn’t want to pay more for insurance than their electric bill, they refused to interconnect them. And it’s just a regulated monopoly that wants to be an unregulated monopoly. And I’d before that, if they wanted to take their little service territory and say, okay, we can do whatever we want, well I’d agree with that. If anyone else could then go in there and sell electricity. Because the law prohibits people from selling electricity other than them. They have to follow the rules that their regulator was for and it’s this, this resistance over time. They use legal process to delay and delay and delay. And that was the frustration that led to my departure that if all were gonna do is slog through everything as slow as we can so we can’t get to the other stuff we wanted to do, demand response, all these other things and I wasn’t gonna accomplish what I wanted to accomplish.

And that’s still grinding forward. And what what’s really dumb about it in my opinion, is our policy enables rooftop solar at the small scale, but it’s really directed at larger scale because scale, what that is is if it’s bigger, does it cost less per unit? And in a state like ours with low population density, it makes a lot of sense to build it big in a field. And because land values are cheap, I mean if you’re in in Manhattan, you can’t do that. You have to use your roofs in Manhattan because you don’t have hundreds of hundreds of acres that you can put solar on. But in Arkansas where you do, and it’s really driven our economic development, we have US Steel building a 3.5 billion plant driven by their access to scaled solar. And because we have cheap flat land with higher radiance, solar is a good deal here, we wanted to scale it up and drive economic development. So instead of these people thinking about how they can use solar to drive their economic development, they’re trying to figure out how they can zip a retired Vietnam veteran out of the money he spent to put solar panels on his house. By not interconnecting them. There’s no logical review of what they do. They get mad and instead of having their lawyers tell them what the law is, they tell the lawyers what the law is and you just go over the cliff of the that that’s what’s going on.

John Farrell:

I was hoping to talk to you a little bit more about the solar argument that the utility’s making. I mean I think you kind of alluded earlier like the ship is sailed here, people have access to put solar on their own rooftop. It seems very reasonable, at least to me that people ought to be able to do that. But of course the debate is all about how much a customer should be allowed to save on their electric bill, how much they need to still contribute to the grid system that they’re obviously still gonna use cuz it doesn’t produce all. So can you talk a little bit about how you’ve thought about that, just sort of in general, we’ve got these monopoly service territories and all of a sudden you have this technology that’s become very affordable, that lets anybody produce electricity. How do you wrestle with that in a way to ensure fairness but also to take advantage of the fact that there’s all these people willing to put up their own money to build you little power plants?

Ted Thomas:

Yes. The problem at its core is related to fixed costs and how fixed costs work in the economy. Imagine a small town of 10,000 people and they have a school with 10 classrooms and everything’s fine. And if something happens where their population goes to 5,000, they still have a school built for 10, even though they’re only using five classrooms, you can fire five teachers because that’s a variable cost. But the fixed cost, like the cost of heating and air conditioning to the building, the cost of building maintenance, that doesn’t change when it goes down. That’s the key problem. The distribution system and the transmission system and parts of the generation system are fixed cost incurred to serve everybody. And what you do is you divide the usage and we’ll go back to the school example and if you had, say it was a private school and that happened, well what would happen to tuition for the remaining folks? Or you just take the fixed cost and you split them among the remaining customers. So if the customer count goes down by half, what happens to the cost per customer? Well it doubles.

That’s the problem that you have. And the fixed cost, I mean distribution is fixed cost. You put it in there and you pay it over time. So if you can reduce your share of fixed cost, those costs go to other customers. And there’s truth in that. But that doesn’t end the debate because there’s also benefits that you need to measure. So you need to take that cost shift and measure it accurately and then you need to take the benefits and measure it accurately. And to me, how you resolve the situation is you should take the cost shift and divide it out among all the customers and then tell us what it is on a bill impact per month. And the problem with the utilities cost shift argument is even though it’s well grounded in economics in terms of fixed cost, when you divide it in bill impact for other customers, it’s de minimus. Okay, if it’s $10 a month, I care. If it’s 2 cents a month, I’m gonna watch it. I’m gonna let the technology develop, I’m gonna let customers have an option and I’m gonna measure it. So that this is what we told the legislature when they passed this was a cost shift. I said, well I know there’s a cost shift, but we know there’s so little solar right now that it’s minimus, but we need to do was watch it, let people experiment. That’s what the problem is when you cut off innovation, it it’s like in football there’s what they call a coaching tree and it’s, well this coach had these assistants that became head coaches and it just grows.

Ted Thomas:

Ted Thomas:

Ted Thomas:

But if you cut off, innovation does the same thing. You start with this innovation and it comes from this innovation and then it spreads out. That’s the way they call it pre, if you saw one of those limbs, you’re not just cutting that anything that develops from it. So you have a developing storage industry that comes together pretty well with solar. So I’ll take a 2 cent cost shift if I can capture the benefits of experimentation with storage when it’s paired with solar. Now will I take a $10 cost shift? Probably not. $10 is gonna be 10% of the bill. And when you have the non participants or impact, so it’s a dumb argument.

If you have three people have A and B that want to do a transaction that has a negative impact on C, what the utilities are saying is that has a negative impact on C, let’s ban the transaction. Well that’s stupid. Let’s measure the cost impact on A and B and give C the opportunity. What if they pay? What if A and B pay C, you do the transaction that way you keep the economy rolling. What they’re trying to do is take the cost shift to kill the transaction instead of measuring the results. And when they become unreasonable mitigating them.

And that’s what we’re trying to do is okay, so we say okay, we’re gonna watch and measure and then we say, okay, we’re gonna have a grid fee. If you guys say there’s a cost shift, if you in the utility world say there’s a cost shift, file it, bring the commission your data and we’ll impose a grid fee on solar customers to mitigate, we’ll let them do what they want. But some of the economic benefits we’re gonna spread to the non participants if the cost shift is unreasonable. And we did that in June of 2020, there has yet to be a grid fee filing, they won’t put their data on the table. And I suspect that it’s because even though they can demonstrate there’s a cost shift, it’s so small in per customer effort. If you went to a legislative committee and you’re pounding the table about cost shift and then you have to go in there and they say, well how much cost shift 4 cents a month, the legislature’s gonna say, why the hell are we wasting our time on 4 cents a month out of $115 utility bill? They never filed it. They still haven’t. Nobody’s filed for a grid fee.

And then finally we have a session coming up, we at the commission said, okay, just give us your data if you don’t wanna file for a grid fee, we just wanna see where we’re at. We know there’s some cost shift that’s getting bigger as solar ramps up and we wanna measure it and if it becomes unreasonable, we wanna mitigate it. They filed a motion to dismiss and say, you don’t have authority to ask for cost shift data, even though they’ve been over legislature saying cost shift, cost shift, cost shift. And I, I clobbered among that at the legislature. So we set up a grid fee, file your data and then they’d say, we, we filed our data, we’ll give them any data they want. And then we ask for the data and then they move to dismiss. And, and that’s, I mean there’s a gray area where reasonable people can differ. Everybody’s not gonna look at at at everything exactly the same and that’s fine. But when that’s what you’re doing, you’re not in the gray area. It’s just stupid. And in the meantime we got a 3.5 billion US steel investment because of our solar policy. And these people are fiddling around with some retired Vietnam veteran solar panels on his house, which has a de minimus impact on a small co-op and a microscopic impact on the state as a whole. That’s what they want to fight about. Instead of looking at the opportunity and saying How can we get the next U.S. Steel deal because we have a solar cost advantage there.

Some the cheapest solar in MISO, which is the, the regional market that goes all the way from Manitoba Canadian province to the city of New Orleans in the middle of the country and we’ve got the cheapest solar resource in that area. We got Amazon and General Motors built solar facilities here to offset their load in Detroit and St. Louis. And of course Amazon is scattered all around. We have a cheap solar resource because we’re south, flat, and we’ve got the delta, particularly in the south, is some of the worst poverty in our whole country. And it depresses land values. Well those depressed land values because it’s flat and higher radiance, it drives investment to the place we need it the most and the delta. So we have a policy that’s working and then we have these people that, you know, they don’t debate the policy, they don’t debate the economic development. They’re trying to wallow around in the administrative rules, delaying, delaying, delaying. We can’t act unless we have a hearing. We have to do all of this stuff. So they do something stupid knowing it’s gonna take us 15 months to go through all the process stuff and what they’re trying to do, which is rage inducing. They don’t care about that Vietnam veteran solar on his house. They’re trying to punish that person so his neighbor doesn’t want to put solar on his house. That’s what’s going on and that’s what’s really irritating.

John Farrell:

I’m really curious, you know, you mentioned one of the, your frustrations in leaving the commission was getting stuck having to deal with the litigation around, like you said, this one Vietnam vet that wants to do solar on his rooftop for such a small cost shift. And you mentioned some of the things like demand response that you were interested in. It seems like solar not only could be an economic development tool, which I, I really like to also the way you describe this like tree of innovation, right? There are other things that we could discover we can do if we let this grow a little bit. I guess I’m interested in following that thread a little bit further here because it seems so my experience with a lot of utilities is they’re so used to doing something in a certain way with the expectation that the grid was set up and we were the monopoly. It means that we’re gonna be the one generating and selling all the power. And so this idea of a cost shift is sort of born out of the fact of like, well this is the way we do business now and so this is how we’re gonna account for that. And I guess I, it feels like it stifles the chance to reimagine how an energy system might work with a lot of different participants.

Ted Thomas:

It does, but the challenge there is the long life of assets. When you’re looking at a phone with an app, it might have an 18 month life cycle, but when you’re looking at these utility assets that are then generation assets 25, 30, 40, 50, 60 years, when you start innovating, once you build something it’s gonna last for 40 years. It’s costing you in 40 years on innovation and for the wires. I mean you can look at pictures from the early 1900s and you see the pole with the cross and the wires, it looks almost the same now it’s better in a lot of different ways, but it’s basically the same. And you have to pay for all of that stuff. When the state tells somebody they gotta build something like a regulated utility, they get their money. So you have to be careful because of the long life cycle.

But that’s also another reason not to make a real long commitment. Part of the purposes of our solar deal is we have all these prices that are going crazy, we have environmental regulation, we have changing policy and I’m supposed to figure out how it’s gonna be 40 years from now, make a 40 year commitment. I don’t want to do that If I’ve got a business that wants to make a 20 year commitment to take that risk on themselves, a 20 year commitment on solar, you’re giving them the freedom to manage their own risk and you’re taking it off the administrative procedure and the regulator, you’re spreading out your risk and you’re allowing people to manage for themselves the problem that you have. If you do solar today for 20 years and this fusion thing works and it’s cheap five, 10 years from now, you might wish you hadn’t done it but we gave you the option, you got to make that decision for yourself.

And of course when people started making these decisions, natural gas was $2, well now it’s $8. Everybody that made the decision to do the solar is saving a ton of money on natural gas prices. And in the legislative committee that was given by me as the number one reason why we were doing this, to give customers options to hedge natural gas prices. And I know a lot about this stuff and the utility people know a lot about this stuff. But if you take me and the president of the biggest utility and put us in the room and say you figure it out and we let thousands and thousands and thousands of people try to figure it out for themselves in their own life, I know it’s gonna have the better result. It’s gonna be the market.

That’s all the market is is individuals trying to figure it out themselves. Sometimes they’re wrong, sometimes they’re right but on average that system works. You take all the dump transactions and all the smart and you put ’em in one pound and average ’em, it works pretty good. So we wanted to bring that into the utility space. It’s harder to innovate because of the long life but you still want to do that. No, by the way, I don’t wanna afford your commitment on a gas plant. There gotta be a better way cuz if I commit my rate payers now they’re gonna be writing checks for that gas plant 40 years from now. I don’t want to take that risk, that risk exists but I want businesses or groups of individuals through community solar to be able to figure out what they wanna do with that risk. So far it’s worked out pretty good because gas prices took off.

John Farrell:

We’re going to take a short break. When we come back, we discuss why utilities struggle to innovate within the monopoly model, how competition and grid services is important and how Ted would’ve approached the net metering debate in California. You are listening to a Local Energy Rules podcast with Ted Thomas of Energized Strategies about the intersection of choice and monopoly in the electric utility sector.

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John Farrell:

It’s so interesting you making this point again and again about making those long-term commitments cuz we just had a resource plan process wrap up in Minnesota with Xcel energy, one of the largest electric utilities certainly in the state of Minnesota but I know they have subsidiaries in a few other places, Colorado and down in New Mexico. And it was really interesting cuz the commission basically made the same argument there which was we are not gonna give you permission to build a gas plant. There’s so many other things happening right now. It doesn’t make financial sense for our customers to let you do that. I guess one of the things I’m curious about is opening the door to solar is like one small piece of kind of the realm that a utility manages. You mentioned like demand response is another thing you had been interested in. Are there other places where we really ought to be sort of cracking the door open to more customer choice that you think would really enable innovation and maybe avoid some of these long-term decisions that could lock us into problems?

Ted Thomas:

Uh, a couple of points. First they ask for a 40 year gas plant. What they really want is a 40 year commitment and they don’t care what it is.

John Farrell:

<laugh> right.

Ted Thomas:

Now they did some study that says what’s special, I mean they might like a gas plant. What they love is a 40 year commitment cause that’s their business model and that model has worked pretty well. There’s a whole lot of risk in that. And what we do is we say okay, we’re gonna take that risk and we’re put on the rate payers and we’re gonna flatline the utilities return, which makes utility stocks a granny stock because they’re low risk and that’s what enables you to do these long-term investments. There’s a lot of good in that but that model struggles when the prices start moving, when the technology starts moving and the federal policy starts moving and then you have an enhanced risk and risk is a cost that’s gonna be assigned to somebody and it’s gonna be compensated or you don’t get the investment. So having said all of that you speak, the key is demand response.

The weakness of solar and wind is that they’re variable scaled up. And every technology starts expensive. The first home that was electrified was JP Morgan’s house. That’s cuz he was the only one that could afford it. But if you’d have killed it then because that’s a toy for the rich and it’s not fair, look what you have. But every technology – electric vehicles start out that way. Every technology starts out as really expensive. So it’s a toy for the rich but when it scales up the cost come down and wind has scaled up where the cost come down, solar has scaled up where the costs come down, storage is starting to scale up. That hasn’t happened with that but that might be next. So we have wind and solar that are now inexpensive even though they started out as expensive like everything does when you scale up manufacturing, the price comes down.

Now if you limited their penetration they would always be cheap. They get expensive not because their per unit cost. They get expensive when you have massive deployment and then the cost is dealing with scaled intermittency, that’s where the cost comes from. So you have a runway where it’s cheap and you should just build it as fast as you can and we’re still in that runway in my opinion. But you have to be looking down the road, what are we gonna do when we get so much of it because it’s cheap that the intermittent risk and then when the intermittent risk gets tied to extreme weather, that’s when you get really negative outcomes. And we can project, we can predict the wind within 2% like 90, 95% of the time, which is an awesome use of big data. You just big data record the wind output and big data record the weather patterns and then you use that to project. But it’s that 5% outlier like winter storm Uri that it’s a winter risk.

The limitation with solar is when the sun goes down and load stays up, you need about four hours in today’s battery technology can cover you in the summer. In the winter you still have a huge risk because you might get four days without sun and you have no solar for four days, you got four hours of storage and extreme cold like extreme heat is also life-threatening. So to me the best way to deal with intermittent resources at scale is to have intermittent load at scale and give people flexibility. Who can do that and who wanna do that, who get paid for due load to be able to have their load respond to the generation. But if you’re gonna scale intermittent, you need to have intermittent load as the best way to respond to it.

And to me the third parties, that’s why the third parties are important that they experiment with their own money. The utilities are a pass through entity: when they experiment, they’re experimenting with rate payer money. So if you have somebody that’s willing to experiment with their own money, let’s let ’em do that. Let’s let ’em do that. Even if there’s some cost shift because you’re gonna get some benefits. Let’s measure the cost shift like we talked about before, but that’s early adopter risk. You don’t want to prohibit early adopter risk or you get no early adopters and you’re get no early adopters, you get no innovation. So if you have third parties willing to do that and there’s a thing called aggregation that’s really important and that’s grouping people together.

Now I’m an energy nerd. I would sit around and play around and try to manipulate my load to save $5, not for the $5 i’d I’d keep the $5 but to experiment. Well most people don’t do that. What you need is an automated deal that uses technology and then you group a bunch of people together or you get averaging. Some people won’t turn down their thermostats, some people will. Well if you try to do a program where each individual has to do it by themselves, you bump into the edges all the time. What you need is an averaging. And aggregation allows you to average like like a retailer, like a Kroger grocery store. If they got 20 stores, instead of trying to figure out how much load they can move at each store and get penalized, if they don’t move it they can take their 20 store and average it and then have a a standard they have to meet for all 20 stores. Or if this one’s a little short and that one’s a little long, they still hit the target cuz they average.

So it’s not just residential, it’s businesses that are co owned. Well I’ll use Target cuz they’re a Minnesota company. Let Target combine all its targets. But if you’re Joe’s hardware store, let Joe and Jill and Tom and Mary that have one hardware store, combine all theirs the way that Target does and get the same advantage of averaging then the store at the, at the residential level too. That way you can see, I mean we have these Google thermostats out there. I mean some people will pay to give somebody the right to change their temperature two degrees if they have to. Some people won’t. Well let’s figure out who those people are by having an entrepreneur test demand because that’s what they do best. If before the iPhone somebody who come did a poll and said do you want to take your telephone and combine it with a camera? Who would’ve said yes to that? Well nobody, the entrepreneurs figure out demand that you don’t even realize is there. Let’s give them the opportunity to do that and drive innovation.

John Farrell:

So one of the things I really find fascinating about this is, and we’re wrestling with this actually in Minnesota, so the, in the last resource plan for Xcel, which is back in like 2018 or 19, the commission ordered the company to get demand due to more demand response of this nature, right? So I can’t remember how many megawatts it was might of even been up to as much as like 400 megawatts, which is fairly significant and the utility hasn’t gotten it basically. And I remember the filing that they essentially put in saying you know, well we’ve tried but it was too hard or we’re not gonna make it essentially not, not terribly apologetic either. As I recall. And I guess one question I have is, you alluded earlier to the utilities, like these fixed investments, right? Maybe it’s not a gas plant, they just like that long term commitment because that’s how they make money, right? They put out a billion dollars for a plant and they recover that then they earn their rate of return. Do you think that we can rely on orders from regulators to utilities to do this? Or what I’m getting at here is like is the culture of a utility such that it can really do that kind of innovation or aggregation or do you need to like let somebody else do that outside of that and who manages that market? Who makes sure that people play by the rules that people who promise demand reduction actually deliver it or whatnot? Is the utility the right entity for that?

Ted Thomas:

Yeah, that’s a really good question. With respect to these long-term investments, okay, if you invested, like we have a large nuclear unit that was built before three mile island. It was a huge investment but it’s some of the cheapest carbon-free scaled 24/7 power in the entire world. That was the great investment. 100% of the benefits of that investment flowed through the rate payers. The utility gets the same rate of return, whether it’s a great investment like that or a really bad investment, they get the same rate of return. There’s good in that because it keeps it stable. That’s how we use private investors to build out all this infrastructure and places where you don’t do that, they usually don’t have that much infrastructure. That’s one point and I’ll hit the utilities on innovation and I’ll hit ’em again here in a minute in direct answer to your question.

But what they’re good at is they’re engineering this system. They designed a system that takes power and puts it in almost every house in this country, which is really, really hard to do and they’re really, really good at that. But that’s an iterative engineering process and that’s figuring out how to do it best and keep doing it that way and improving it a little bit at a time, which is an iterative engineering process that doesn’t work as well when you need innovation and when prices go crazy, policy’s changing and the technology’s changing, it doesn’t work very well. But it’s a regulatory process. It’s not just the utilities, it’s also the regulators. The cell phone technology existed in the sixties and seventies. Well why wasn’t it deployed. Well regulators didn’t want the regulated telephone monopoly to engage in speculative investment and add it to their phone bills.

The regulators don’t want the utility to engage in speculative investment. The utility really doesn’t want to do that either because if Xcel energy invented the perpetual motion machine that produced unlimited energy at no cost with rate payer money, well the rate payers would benefit from that, right? The value of that innovation would stick with the rate payers. You innovate differently when somebody else is gonna benefit from it from you and you. That’s just human nature, right? That’s why markets work. So what you need to do is keep those things in mind and how do you get innovation? Well to me you get the third parties competing with the utility at the utility, couldn’t get 400 million to demand response and you’ve got a third party standard where that says, oh I think I can do it, let’s give them a try, let’s let them try to do it.

Now when you have small entities, the regulatory authority of the utility commissions is directed at the utility and it’s a large institution or if they screw something up, they’re gonna have the money to fix it. There’s some degree of risk when you bring in smaller players that have a future commitment because that’s what demand responds is I’m gonna pay you now, but if I need you later, you’re gonna be there. Well that’s like insurance, right? And we know that insurance is regulated because if I send somebody money for life insurance for 30 years and when I kick the bucket they don’t have any money, well that’s a problem. So there, there’s some things you have to do and the statutes aren’t really designed. You need some consumer protections but at the same time you need a little wild west where you really drive innovation and you really get experiment and you need to watch the crazy go on and there’s gonna be some abuse in the crazy that’s human nature and then corral it in. Once it starts directing, you rationalize it on the back end instead of put people on a straight jacket and tell ’em that he can’t do, let ’em do anything for a little while and then start to reign them in. That’s a way that to me is more consistent with getting innovation.

But what’s really frustrating sometimes the utilities is they’ll say if you offer something we should do demand response. The utility will say, well we should be the only ones that do that. Then my response is to why the hell aren’t you doing it? Go do it because I got other people that say they can risk their money and do it and you’re telling me I said tell them no. And then you come back to me and say you can’t do it. Let the person with their own money take that risk and try to do it and then to keep them accountable, let the utility do it. Then you’ve got two offerings. That’s we, we’ve got green tariffs that our utilities do. They use that to compete with our third party solar. They elevate their game too when you’ve gotten the third parties and what drives it all consumer choice. That’s what should drive it all.

John Farrell:

I want to ask you one last question that’s sort of big in scope. So we’ll just see how you wanna deal with it. In California, the Public Utilities Commission is deciding today on revisions to net metering. And so this gets into that issue of the cost shift and obviously California is much further along than Arkansas and most other places with regard to solar, maybe only Hawaii has been the regulatory environment they’ve had to deal with this. Without getting into the weeds, cuz there’s a lot of weeds in that decision, I’m kind of thinking big picture as you said, like that cost shift would not be a big deal at 4 cents, but maybe it is at $10. Obviously it’s gotten to some level, I presume, at least that the utilities commission out there has gotten filings from the utilities documenting the amount. Although to be truthful, I actually haven’t seen that, but I’m, I’m gonna presume that it’s bigger. What do you see as like the big principles that you think ought to be applied to that kind of decision? What should the commission be trying to accomplish writ large in terms of protecting customers who may not, you know, have the wherewithal to go solar, but also like you said, not cutting off the limb of the innovation tree?

Ted Thomas:

It’s all about that single metric. What’s the cost expressed in terms and I would take whatever mitigation measures that wouldn’t limit innovation, that would give me a reasonable decision. The problem with my blue state friends is they love the political popularity of rooftop solar. This has to be driven by economics In California, when you do a scaled project, they calculate the system impact of the fixed costs that you won’t be paying and they hand you a bill and say you can do solar, here’s your bill. The political popularity shouldn’t drive the economics. Now my red state friends, here’s their problem. Instead of embracing markets like they should, they get too cozy with the incumbents. The reason markets work is cause innovators challenge the incumbent. But if you’re cozy with the incumbent, then the incumbent wants to prohibit innovators, <laugh>, you get the same problem. Let the economics drive it.

If it’s cheaper to do it on roofs, do it on roofs. If it’s cheaper to put it in a field and let people do it as a group, do it like that, but identify the metric, how much does it cost in other people and have rigorous examination of that. Not this is what the utility says, this is what the utility says and this is what experts that disagree say when they have full access to the data and then come up with a region conclusion. They’re probably gonna have to tap the brakes because they have so much of it. But then, then when they tap the brakes, they shouldn’t tap the brakes on the bigger scale. Once you get it to where there’s no cost shift, you can floor it without regard to consequence until you get scaled intermittence problems and then you gotta deal with that.

Now that’s closer in California, they’re already seeing some of that, but in most of the rest of the country, I mean we can floor it in solar if we can mitigate the cost to keep that reasonable. But I don’t see that metric floating around. I suspect, I know in Arkansas they hate that metric because the number’s really, really low. And so they’re using the cost shift, which there’s some legitimacy because of the economics of fixed cost, to protect their monopoly. That’s what they’re doing. They’re using that as the tip of the spear when their real motivation is on the other end of the deal. But because of that, you don’t wanna get in a situation when it’s scaled and it becomes, begins to become unfair to the non-participants. But that’s a data thing and if it’s $5 and you ask a hundred people, you’re gonna get some different opinions. Of course, the higher it gets, the more opinions are gonna shift one way and the lower it gets, the more opinions gonna shift the other way. That’s why they hide the metric here. And I haven’t seen that metric in California. I followed like through the trade press, which isn’t that far in the weeds, but if I were arguing for change in that metering, I would grab that metric and I would put it out there. That hasn’t happened, so I don’t know what that number is. I hope that was responsive to your question.

John Farrell:

It certainly is, and I don’t envy your colleagues and the California Public Utilities Commission trying to make a good decision here with all the pressures coming at them from different angles.

Ted Thomas:

But if you make the best decision that you can put your data out there, explain why, said this is what we did, this is why we did it. Put the public and the legislature and the governor in your seat and explain why, and then not pretending. Then if they wanna do a different thing over in the legislature, they can do it, but they need to have all the information that’s vetted by a vigorous process where everybody has access to the data and you have a debate among experts and then you make your decision. I used to tell the legislature that I make these decisions, they impact your rate. The reason the commission exists is so you don’t have a bill setting people’s electric bill that you have to vote on. Do you want that? None of ’em want that. They all understand that they want somebody else to be responsible for that. If the commission will make a decision and explain why and try to set the person, whether they’re a rooftop solar owner or a business person or a legislator or the governor or a governor staffer, just put them in their chair and say, okay, here, here’s all the experts. They’ve been vetted through rigorous cross-examination. Where do you put it? And when you do that, you’re as safe as you can be as a regulator.

John Farrell:

Absolutely. Well Ted, thank you so much for your long service to Arkansas rate payers and for joining me to talk about solar and cost shifts and all of these complexities.

Ted Thomas:

And one final thing there is an aggregation docket in Minnesota. I’m working with an entity called Recurve, which I regard as the leader of the pack on demand response because they start with AMI data and they baseline it and they want to use actual values of electricity in their demand response programs and energy efficiency programs. And we’re gonna be participating in that Minnesota docket. So I’ll be paying attention to that one.

John Farrell:

Sounds great. I look forward to seeing you in there. I will hopefully also be in there. Well thank you again, Ted. I really appreciate your time. Thank

Ted Thomas:

You as well. Have a good one.

John Farrell:

Thank you so much for listening to this episode of Local Energy Rules with Ted Thomas of Energized Strategies where we spoke about the intersection of utility monopolies, public regulators, and customer owned power like rooftop solar. On the show page, look for links to Ted’s Recusal letter from his last proceeding at the Arkansas Public Service Commission, which was the inspiration behind my asking him to join the show. I’ll also provide links to the recent net metering decision in California. On the website of the Institute for Local Self-Reliance, you can also find additional Local Energy Rules conversations about the tension between utility monopoly and rooftop solar, including my discussion of the value of solar with Professor Gabriel Chan and my interview with Chris Villareal, president of Plugged in Strategies, as well as comments I filed in Minnesota’s value of Solar Public Utilities Commission proceeding. 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.