Can More Competition Fix an Outdated Energy System?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

Date: 22 Dec 2021 | posted in: Energy, Energy Self Reliant States | 0 Facebooktwitterredditmail

Electric utility monopolies, once a necessary evil, are time and again failing to meet the challenges of the current moment.

For this episode of the Local Energy Rules Podcast, a rebroadcast from the Building Local Power Podcast, host John Farrell speaks with Chris Villarreal, President of Plugged In Strategies and an Associate Fellow with the R Street Institute. They discuss the electricity market and how it insulates utility companies from competition, even when that competition would green the electricity supply and drive down rates.

Listen to the full episode and explore more resources below — including a transcript and summary of the conversation.

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Chris Villarreal: Interconnection is the process by which those rooftop solar panels can be plugged in to the system safely, into the system. Now, we want to all be done safely, right? We need it to be safely and reliably implemented, but because utility owns the wires, they have perhaps an interest in minimizing or limiting or making it challenging for new things to plug into that system. So interconnection becomes a really important effort to allow rooftop solar or community solar for that matter to successfully intersect with the system.
John Farrell: Welcome to another edition of Building Local Power, a podcast hosted by the Institute for Local Self-Reliance. I’m John Farrell, the director of the Energy Democracy Initiative and one of ILSR’s two codirectors. And today, I’m really excited to be joined by Chris Villarreal. He’s the president of Plugged In Strategies. He’s a fellow with the R Street Institute, a think tank that promotes free markets and limited effective government. He’s got experience at two different state public utilities commissions, so he knows a great deal about what we’re going to talk about which is the market structure and the market sector, the electricity market. If you follow him on Twitter in addition to excellent information about energy, you will also find out that he is a Baylor University grad, a Kansas City Chiefs fan and many other things. Chris, thanks so much for joining me on Building Local Power.
Chris Villarreal: Thanks, John, for having me.
John Farrell: So I feel like I need to start off with knowing that our audience cares about issues, about monopoly and concentration by just saying that the electricity sector is almost like this hidden in plain sight monopoly, that we have lots of conversation in our society today, both sides of the alphabet. Facebook’s a monopoly, especially when they have this big outage. We’ve got Amazon dominating digital commerce, but we have electric utilities who are monopolies as a result of public policy. We made them into monopolies. And in a lot of cases, people are unhappy with the kinds of service they’re getting from these monopolies. So I guess I want to start off with something I think is interesting and that we have a, “Let’s swap monopolies,” campaign being run by a number of folks, whether it’s Bernie Sanders who’s been advocating for a public takeover of power generation to accelerate renewable energy. He’s talking about doing that at the federal level. You’ve got cities like Boulder, Colorado or Chicago, Illinois who have been talking about trying to take over the electric utility. There’s just been this general upswing of interest in public ownership. And I’m curious, what do you think is motivating communities to consider a public takeover? And do you think that public ownership really is going to solve the issues that they’re having with the utilities that they’re complaining about?
Chris Villarreal: Well, thanks, John. That’s an easy question to start with. So I think some of the drivers around the public taking over electric monopoly, investor-owned utility monopolies is the perception that the public can do it “better” than the investor utilities. I think what it really comes down to, of course, is that end of the day, investing utilities have a profit interest, whereas public interest utilities probably don’t have a profit interest. So if only you remove the interest of shareholders to seek profit, then utility would be run a lot more efficiently and effectively and meet the needs of the people that it’s serving. I don’t think, of course, it’s that simple. I think if we look at existing municipal utilities around the country, so we can start with SMUD which serves the city of Sacramento in California, there is relatively progressive goals that that SMUD seeks to serve, but at the same time, they have relatively high rate and pretty difficult policies if you want to put solar on your roof. So it’s not as easy as if we got rid of the profit motivation that this utility now will just automatically turn around and serve its consumers, that easily still has costs it has to recover. And if you are consuming fewer electrons from the utility, regardless of whether it’s a muni or not, there’s still costs that remain undiscovered.

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.

John Farrell: So it’s not so simple to just change ownership and I think that’s something I’m really grateful for you bringing that perspective to this conversation because there is that perception that if we move to public ownership, it is going to be a panacea for the issues that folks have and the debates that we’re having about accelerating clean energy. So let’s talk a little bit about the structure that we have in the market. So we’ve got this tension between ownership structures and there are, as we know, over 2,000 utilities across the country that are already municipal utilities. Most urban areas are served by investor-owned utilities, as you mentioned. They are private companies. They have shareholders. And then you’ve got a mix in rural areas of these rural electric cooperatives that were a result of both local organizing and stood up by the federal government during the New Deal Era. So one of the things I think is fascinating about the electricity business is that Americans tend to expect that most things they buy are from competitive markets, although some of ILSR’s research shows that’s often less true than we think. Why are we in a situation with electricity markets where we are debating who should own but still debating around this frame of having monopoly ownership of the electricity system.
Chris Villarreal: I’ll try not to get it too dry of the history, though my degree is in history. Sometime long ago when we first started to build electricity systems, it was determined that getting the capital to build a power plant was expensive. And then it was expensive to get the capital to build the transmission system, to get the electrons from generating facility to the consumer. And then it’s expensive to build distribution to make sure that everyone has access to electricity, has a line to their house. So it’s all really extensive. And the early days, a lot of it was just very small generation, very close to consumption to serve electricity. So it was largely the urban areas because that’s where you had economies of scale, because you had more consumers in the urban areas than you have the rural area, so those costs to recover that infrastructure could be collected a lot more quickly, getting more consumers to buy electrons from. Then the technical innovations, they were able to move generators farther away from urban centers and build more power plants and build more transmission lines and build more distribution lines, but it’s all really, really expensive to build. And in order to ensure that, the entity fronting the cost to build all that had a reasonable expectation to recover all those costs, it was decided to grant them a franchise, which means that they are allowed to sell their products, electricity, within a certain geographical footprint with the expectation that they’ll be able to recover their costs. And that worked pretty well because like the power plants are built, are expensive to build, transmission is expensive to build, distribution is expensive to build, everything associated with the operations of the electricity system is expensive to build.

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.

John Farrell: So a lot of people will draw a comparison for example to the telephone industry, right? So similarly, there was a high cost of capital to build out a phone network to customers. And we had similarly monopoly service for landline phone technology which for our younger listeners was when there was a wire to your house and you had a phone on the wall and all it did was make phone calls. And obviously, cellphones really changed things a lot, because all of a sudden, there was something that was competitive and didn’t rely on that network. And in some cases is similar to what’s going on in the electricity business, but the difference, of course, being that the technologies you were talking about like rooftop solar, community solar, energy storage, these things are all plugging into that same grid. So it’s something we actually talk about a lot at the Institute for Local Self-Reliance, that self-reliance does not mean self-sufficiency. We’re not talking about cutting ourselves off from other folks. We’re talking about having the capability to operate on your own, but really preferring to remain interconnected with other people. When we talk about the opportunities for some of these technologies to get into the market, to connect to the grid, we’re often not seeing it implemented quickly or at all on the electricity business. And it’s there’s definitely a lot of variation in different states, California or New York versus Minnesota or Missouri. Who’s at fault there? You mentioned that utilities weren’t necessarily prepared for competition. One would think that there’s an opportunity for them to get into this market, to sell people what they want, why don’t they do that, for example? And then if they’re not willing to do it, what makes it so hard for those competitors who have those different choices to get into the market and to offer them to consumers?
Chris Villarreal: Right. The fun thing about looking at the phones, let’s say the phone companies is that we had one phone company that serves the entire country. The only person who can get the phone from was the phone company as well. But if we look back even beyond that, what the phone company was there to compete against was telegraph, right? We have the telegraph, which was the monopoly. AT&T was original telegraph company. They were the monopoly. And then in come the phone company as a competitor to telegraph. And now no one uses telegraph. The phone company was a monopoly. They got broken up and then we had wireless. So wireless was a new way to communicate that we didn’t need the wire, but we still need a communication network. So the way that we have our electricity market structure now is we have, for investor utilities, they’re regulated by the state TUCs and what that enables is that utility, to recover their capital costs plus a greater return through a capital rate base, which encourages the utilities to act in certain ways, that for the most part of the history of electricity service was beneficial. It allows everyone to have access to electricity at a reasonable cost, relatively low cost, all things considered. And that’s the way it’s been done. And what is going on now is that as new competitors come in, providing not just generation service but can provide energy management solutions to consumers through demand response or energy efficiency or offer other technological solutions that help consumers save money in their bill or provide service back to the system, the way that the electric utility has operative system is now at risk because that was all stuff they used to do. And they are no longer the only one capable of doing. So who is at fault, it’s hard to say because this is a structure we put in place for good reason, a long time ago and it’s probably about time for that structure to evolve in response to technological concerns.

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.

John Farrell: So I’m just thinking about this challenge that we have. What I find so fascinating is that we have a marketplace that all of a sudden is much more competitive. And I feel like there’s probably a million different examples out there of how this would work and none of them are quite sufficient to describe how the electricity system is different, but you could take for example something like classified ads used to just be in the newspaper, right? And then thanks to the internet, Craigslist allows us to post ads to one another. We don’t have to use the newspaper anymore in order to do that. So we can fundamentally change how that system works. Obviously, the newspaper’s interest was in maintaining that communication medium, but they couldn’t because the internet was out of their hands. And I think what’s so interesting here as you talk about you and I want to be able to transact, right? Maybe I have energy storage that you want to be able to buy, backup power for me as a neighbor and you have solar and I want to be able to store your solar energy on my property in the batteries that I own. Well, the utility still owns this network. And like you said, they’re regulated, so they don’t own it and can’t manage it entirely the way they want. They’re subject to regulation. And then of course, the legislature can influence how that regulation works. But we’re held back in a way in the sense that the technologies are allowing us to have a lot more choices all of a sudden. It’s like the shopping options are there. People can go out and find things. The utility and the regulators still have a great deal of power over how the system works and those rules don’t always allow us to move as quickly as we might like or to do the things that we might like. So right now, living in Minnesota, if we were neighbors, I have no way that I could actually be buying solar energy from you in an approved way. Maybe we have some sort of Bitcoin, blockchain, under the table transaction going on that is very clever, but it wouldn’t be something that we could do through that system. Let’s touch on a couple of things here. The first thing I’m thinking about is a tweet I saw from you yesterday about the rule of regulators and you had a really interesting mention about reading The Omnivore’s Dilemma. So I’d like you to share about that because I think it’s interesting in terms of thinking about the role of regulation over this sector. And then let’s try to get back into and talking about what we think could be done a little differently. So can you share what that tweet was that you had about reading Michael Pollan’s Omnivore’s Dilemma and how it opened your mind to a different way of thinking about how we regulate big industries?
Chris Villarreal: Sure. Omnivore’s Dilemma, you’ll see the list of what are the five books that changed your life the most. And then in mind, Omnivore’s Dilemma is one of those top two books in my list that changed my life the most. There’s a couple of sections in the book, Michael Pollan in Omnivore’s Dilemma, is Michael Paul is a writer in Berkeley, who tries to follow five different meals that he’s having, and from growing, slaughtering to consuming and what’s the pathway to the food cycle from getting from point A to point B to the dinner table to his plate. And one of the examples, [inaudible 00:20:30], but I’ll focus on this one, one of the things samples he gives is talking about organics and how organic definitions came about because there was, again historically, small farms that did things on their own that then sold at farmer’s markets. Some of them are organics. Others probably use pesticides, but the point being that you would go to farmer’s markets that you had some relationship with the market. And then over time, the large industrial food companies came in and saw that the term organic had a meaning among the public, that if he saw the word organic, then that meant something. It meant that that food was better grown, that that was better for you. And in an effort to ensure that the word organic meant the same thing, you needed rules. You needed regulation to determine what does the word organic mean and how things were grown, how things were processed, what needs to be done to ensure that this food was actually organic. So that resulted in regulations being written by the regulator, the federal regulator.

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.

John Farrell: We’re going to take a short break. When we come back, we explore a little known concept called “right of first refusal” that utilities use to stiff arm competition, we talk about access to grid data, and how we can rethink utilities as network operators instead of owners. You’re listening to a Local Energy Rules interview with Chris Villarreal, President of Plugged In Strategies and Associate Fellow at the R Street Institute.

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John Farrell: So you’re pretty intimately familiar with a few ways that utilities can exert their monopoly power to stave off competitive pressures. We’ve talked about a couple already. There’s the fact that as captive customers to the utility, they tend to have money available that they can use to influence the legislative process, whether by donating to candidates or having lobbyists. As you just mentioned, with the Public Utilities Commission, decisions are made by based on who can show up and participate in the proceedings. Utilities have the resources to participate in everything that goes on there. In fact, they’re often compelled to participate, so they can use the money that we have to hire their regulatory analysts and folks that will show up to do that. There’s also some, I think, more hidden things, one of which I’ll talk about in a minute about plugging into the grid with those rooftop solar systems, but [inaudible 00:26:08] chance to elevate something that you talk about on Twitter, among Energy Twitter. And hopefully, we can bring it down to a level where most other folks can understand it, but it’s abbreviated ROFR or right of first refusal and I think it’s important for people to understand because it can help explain in part why things like recent events like hurricane Ida left so many folks in Louisiana without power for so long, that there’s some connection here between how the rules are written and how utilities behave then and the fact that we actually then suffer more significant impacts from power outages or in terms of the cost of our energy. So can you explain ROFR and I’m asking this as someone who’s in this industry, looking for a way that I can more simply explain to people how this works and why it’s a problem.
Chris Villarreal: I will do my best. ROFR is example of things that our industry suffers a lot from which is acronyms. So ROFR is a legal term. It stands for right of first refusal. And what that largely means is that there’s a need to build a new transmission system and transmission line. And because utility is already the incumbent who serves that reason, they have a right of first refusal to build that new line, regardless of the costs. What that means is that up here in the Xcel territory, if there’s identified a need to build a new transmission line that is inside the region or across the region, whatever applies to the service of Xcel, any new transmission line, Xcel has exclusive ability to determine that they are the ones that are allowed to build it before anybody else could come in and build it. Now the challenge with that is, I mentioned earlier, FERC Order 1000 declared largely transmission construction is a competitive service and require the removal of right of first refusal language that we’re existing in our RTO tariffs. So the RTO that serves our region, the Midwest, Midcontinent intensive moderator previously had right of first refusal laws in their tariffs. FERC said, “You have to get rid of those. Those are anticompetitive. They are protecting a monopoly and Order 1000 says we need competition because it’s our competitive resource, so we want new entrants to come in to compete against the utilities to the construction of the transmission as we need new transmission in our area because there’s a lot of wind.” So shortly after Order 1000 was passed, some utility got passed very quickly thereafter in the Minnesota State Legislature, a bill taking the ROFR language that was previously declared, impact competitive and put into the Minnesota State Statute, so now the utilities in Minnesota all have right of first refusal protection for new transmission projects across the state.
John Farrell: Let me just cut in real quick here to summarize for people who aren’t necessarily familiar with all these terms here. So previously, decades ago, if there’s a transmission line being built, the utility that’s the monopoly gets to build it. They’re making all the decisions. For issues, this Order 1000, the Federal Energy Regulatory Commission, so the federal regulator says, “Actually power transmission, those big trends, high voltage lines you see in your highways, that’s competitive now. Everybody should be able to participate.” And they said, “In these places across the country where we have organized markets, wholesale energy markets, you have to remove those rules that were preventing people from bringing in competitive powerline construction.” And right after that happened, the utility went running to the legislature at least in Minnesota and in some other states and said, “We want to get that power back to blackout competition,” and they got it. So it’s a law on the books now that despite the federal regulator’s efforts, they still are retaining this right of first refusal.
Chris Villarreal: Yes and I guess that’s seven states who all have right of first refusal language in their state laws, largely the Midwest. So Minnesota, North Dakota, South Dakota, Iowa and Texas all have right of first refusal laws on the books in their states. Now what that means then is because of this right of first refusal language that’s in state statute now, it becomes incredibly difficult for competition to take hold in these states for the construction of new transmission lines. In fact, it exacerbates regional planning difficulties because if you had a combative developer who wanted to build a line from North Dakota through Minnesota through Wisconsin down to Illinois, because North Dakota and Minnesota have right of first refusal laws, each one of those individual utility territories they go through, each individual utility could say, “No, we have a right of first refusal to building a transmission line.” So what ends up happening then and we saw this in the CapX2020 project is rather than have one long line being built, we had multiple utilizing little lines being built from service territory to services territory to service territory in order to protect their right of first refusal responsibility. And so, as it applies now to what happened in Louisiana, Entergy also has right of first refusal language in their Texas territory. And what that means is that new transmission is very difficult to build unless it’s being built by the utility.

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.

John Farrell: I remember seeing one analysis of it, talking about as well that one way that they dealt with this issue of competition was that the threshold for the competitive market is above a certain voltage. So if you build a very high-powered transmission line which can move a lot of electricity, it would be subject to competitive rules. But if it was under a certain threshold, it wouldn’t be. So they built lots of lower power lines, which were not as effective at keeping the system reliable as the higher power ones might have been in terms of the amount of capacity they had in order to avoid that competitive pressure. And actually it reminds me, speaking of monopolies of, I think, it was Amazon that has their delivery vans that they were buying and there are federal commercial trucking regulations that apply to trucks above a certain size. And so Amazon deliberately undersized their delivery vehicles to fall right under that threshold of regulation. Perfectly legal obviously, but yet, it ends up being this perverse outcome where customers can potentially be underserved. Maybe in the case of Amazon, those vehicles are less safe to operate because they’re still very large, but they fall right into that threshold. In the case of the transmission here with Louisiana, you had lots of customers in New Orleans out of power for a lot longer than they needed to be because Entergy was interested in protecting its monopoly more than serving its customers effectively.

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?

Chris Villarreal: I suspect that the biggest barrier will be things associated with interconnection. And interconnection is the process by which those rooftop solar panels can be plugged in to the system safely, into the system. Now, we want to all be done safely, right? We need it to be safely and reliably implemented, but because utility owns the wires, they have perhaps an interest in minimizing or limiting or making it challenging for new things to plug into that system. So interconnection becomes a really important effort to allow rooftop solar or community solar for that matter to successfully intersect with the system. Utilities raise a whole slew of barriers into that marketplace that makes it challenging for systems to interconnect, especially larger systems. They’ll raise things like technical constraints or it’s not available, capacity of that area to put new solar in, which then delays the development of those projects and increases the costs. Now ways to address that would be to make more information about the system available to the public or at least developers, but developers knew where are areas across this territory that would have a greater likelihood of successfully interconnecting. But that transparency means that the public has more information about the distribution system, and again, the better part of 100 years, no one has asked the utility to talk about that. It’s always been, “Utility, your job is to keep the lights on and maintain the distribution system. You do what you need to do and we will largely give you cost recovery.” But now when we have competition and new entrants coming into for the last realm of distribution, monopoly serviced the distribution system, there is quite an effort underway by the utility to minimize how much information they have to make available to the public because this is the last area that has been there for a long time. And by providing more information to the public, they’re introducing new parties to provide service that historically they’ve been the only one to provide. [inaudible 00:37:24] the first one is going to be the biggest one you’re going to hear about.
John Farrell: More than 75% of our survey respondents said that it’s their number one issue in terms of what the problem is and it is. I think it’s important to help explain too. So when we talk about this monopoly challenge or the grid ownership challenge that’s going on in the utility sector, you mentioned earlier, it doesn’t even matter what kind of utility, what ownership structure we have, right? The utilities are trying to recover their cost of service. And as other entrants come into the market, they are, of course, looking for some market share. They’re going to take some of the revenue that that utility would have. It’s a particular problem for investor-owned utilities, of course, because they have shareholders and they’re determined to make sure that they’re bringing a benefit to their shareholders as they’re legally obligated to do. And the rules of the system really encouraged them to act in this way as well too. I think that’s the other thing that I find most helpful to explain to people is that it’s not that utilities are necessarily bad actors, although they certainly don’t act in good faith from time to time, as you and I have both seen, but they’re rewarded for doing this in the sense that the incentives that they often have, because of the way that they can make money in the case of an investor and utility, are to keep out competition. Can you talk a little bit more about that? And I guess maybe what would be helpful here is, are there other industries that we can learn from as we think about how to confront that challenge, where maybe where competition did end up flourishing to the benefit of everybody because we changed the rules, changed the incentives? Is there a good example out there of how we could do this differently?
Chris Villarreal: So I have to think about the last one, but you’re right. The rules that we have in place today encourage the utilities to act the way they act. There are other options that are being discussed across the country, something like performance-based ratemaking where you take a portion of their revenue requirement or what they’re allowed to recover through rates and make that subject to performance. So if they perform in certain ways, the way they’re designed that they not only get that money, but they also get an incentive on top of that, their revenue plus some incentives. The flipside is that if they perform worse, then they might have a penalty on top of that earning that money.
John Farrell: And that would be for things like more clean energy or more energy efficiency, outcomes that we want to see from our electricity system.
Chris Villarreal: Right, energy efficiency has pretty much been in place for decades now. That’s the type of performance-based incentive that we’ve been using. To me, the way to keep this going forward is to really rethink the way that the distribution system and the utility itself earns money. And that is by thinking about it more than network where they become a network operator rather than just the provider of electricity. Because as we get more and more solar on the system, as more electric vehicles go out of the system, as we basically just get more services and resources that are going to show up at the end of the system, [inaudible 00:40:38] places of work, what have you, the value of the grid of a network is going to expand. And that means their opportunity to recover costs rather than on a per kilowatt hour basis that we’re paying our bill today, you could see access fees, which I suspect you have your feelings about access fees, but there are other ways that the utility could recover their costs other than through kilowatt hour usage. So if we think about … “This is always a bad analogy, but I think it’s useful, our cell phones, right? So our cell phone is on a certain network, mine is on Verizon network. So I go to a Verizon store and I buy a phone, but the phone is not a Verizon phone, right? It’s Motorola or you buy Apple. And then Apple and Motorola. So Apple has their system and mine’s an Android phone, on the Google system.

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.

John Farrell: So this brings me in mind of a question, which I imagine is a big one for what I anticipate will be the last question I ask you here, Chris, but it gets at this network value thing, because I’m thinking about this sort of two different ways right now. There’s two examples of networks. I’m thinking of that highlight different routes we could go here. One would be the network of roads we have. So I find it useful sometimes to explain to people like the road network is largely a public network. It’s paid for through taxes and through user fees and it essentially has open access, right? And package delivery is what I always like to use as an example, right? There’s FedEx, there’s ups, there’s DHL, there’s the Postal Service. They’re all out there using this network. There’s rules, there’s speed limits, there’s signage, there’s stop signs, there’s all sorts of things about how you use the network. There’s rules for vehicles and their size and weight and all that kind of stuff, but everybody can use that and transact in whatever way they want. And I think what’s interesting is that … And that’s a public network, right? So it is generally nondiscriminatory, although the way we pay for it may not be perfectly equal between all the different users because of the structure of the mix between user fees and taxes. And then in contrast, we have, and this is obviously something that we’re litigating in public space right now, is Amazon’s commerce network where it’s a private network. But small businesses, large businesses feel compelled to sell their products on Amazon to participate in their market. And Amazon has taken advantage of that to sometimes set rules that are discriminatory, that say, “Well, if you want to use our network, you need to put your stuff in our warehouses. You need to use our shipping services, etcetera. And so they’re raising their rents and you talked about access fees earlier. What makes me nervous about the idea of keeping this as a private network is that it could allow the utility to continue to extract monopoly rents on participants in the same way that they’ve been making it difficult to get into the market now by keeping information to themselves, but it’s not a given, right? Just because it’s public doesn’t mean it’s going to be run well. Just because it’s private doesn’t mean it’s going to be run poorly. It really all is in the rules. I guess what I’m curious about is if you had a choice, how would you do it or how would you solve that? What are the elements that are crucial to us thinking about like, “How do we create that network that has the best opportunity to capture all that uncaptured value from customers and that prevents big players from taking advantage of everybody else”?
Chris Villarreal: I think that really has been the question that this industry has been trying to address price since the first connection was connected to a house is, “How do we best regulate the system, especially now going forward with increasing amounts of new insurance as a home loan?” And it’s a question that I’ve been thinking about a lot. One way to help address, of course, is through regulation, which is why we have regulators to do all this stuff, which is also imperfect because … Unless it’s owned by the government, like roads arguably are, and everyone has access to it and the federal government and state government, local governments all issue the rules as to how we use it. And then you have the private network, as you pointed out, Amazon where there’s little regulation on how it’s worked. What that middle ground, middle ground probably is regulation, but I think it’s important to note that we have regulation and regulation provides a really valuable opportunity for the public to participate in ways on how that network can operate. But they need to be able to enforce that open access, that equitable open access so that everyone who wants to have access that system is able to access it equitably and fairly. And I think that’s really the challenge going forward is how do you ensure that equitable and fair access to the network so that the owner of the network is not extracting rents beyond what they should be and that they are not favoring affiliates or other preferred actors over their network?

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.

John Farrell: It’s a good reminder though, I think no matter what our good intentions are from a legislative or regulatory perspective, it’s hard to avoid doing that sometimes because people are going to innovate and be creative. And they’re going to notice that variance in tax rate or they’re going to notice that qualification regarding keyboards and they’re going to mess with it if there’s an incentive to do that. Hard for me to imagine that the productivity impact of sticking someone on an ABC keyboard [inaudible 00:51:47] QWERTY keyboard was worth it, but that’s hilarious.
Chris Villarreal: There’s a whole roomful of foreign operators all on ABC keyboards.
John Farrell: I didn’t even know they made those. My goodness, I just want to thank you a lot for taking the time to chat with me about utility platforms and regulation and ROFR. I’m hopeful that we can put that little segment about ROFR all over the internet, so people understand what’s going on with that. That’s really interesting to delve into all these little hidden corners of this missing monopoly conversation and to think about how we can, with the right regulators, as you say, restructure this market to work it a little bit better for everybody. So thanks again for joining me for this conversation.
Chris Villarreal: Anytime, John. Really appreciate it.
Thank you so much for listening to this episode of Local Energy Rules, with Chris Villarreal, President at Plugged In Strategies and Associate Fellow at the R Street Institute, discussing the need for market reforms to allow electricity customers to take advantage of rooftop solar and other technological innovations in clean energy.

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.

The Market Is Not Designed for Competition

Villarreal explains how electric monopolies were given “franchises,” or contracts to exclusively serve everyone in their service territory, in part to guarantee that they recovered the costs of building an electric grid. Since the foundation was laid, new technology has introduced smaller electricity providers and competition to the market. Competition is good for the consumer, since it drives prices down, but it cuts into utility profits.

We have the electric utilities, which for the most part have not been pressured in the same way that other industries have to compete… [they] have really been insulated from competition for a long time.

The rules maintaining the electricity market are relics of the past. Regulators often have little power to make change, or no desire to, and utilities pay policy makers to maintain the status quo. Villarreal references a parallel scenario explained in The Omnivore’s Dilemma: as organic produce gained popularity at local farmer’s markets, federal regulators began developing the rules for organic certification. Large commercial producers then used their influence with the regulators to make the certification process more cumbersome.

Villarreal Explains the Right of First Refusal

One consequence of how things stand comes from a utility’s “right of first refusal.” Essentially, when a new transmission line is needed, the utility serving that territory gets first dibs at building it. Not only is this potentially more expensive, since there is no competitive bidding process, but it is inefficient — developers cannot build transmission lines across multiple utility territories. Altogether, the right of first refusal “exacerbates regional planning issues,” says Villarreal.

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

The Federal Energy Regulatory Commission ruled against the right of first refusal, acknowledging that it was anti-competitive. However, in response to the federal order, a utility in Minnesota successfully put the right of first refusal into the state statute. Six states followed suit, says Villarreal, including Texas.

Entergy Corporation serves electric customers in Arkansas, Mississippi, Louisiana, and Texas. Because of its right of first refusal in Texas, Entergy has staved off any regional competition in the transmission sector. The company then under-invested in generation and transmission infrastructure. Entergy’s monopoly effectively made the grid vulnerable, says Villarreal, and unable to respond to Hurricane Ida.

Interconnection Becomes the Ultimate Battleground

In the states that enable net metering, utilities must ensure that customer-owned solar systems are safely, reliably plugged into the electric grid. Here lies the grey area. Developers and customers benefit from transparency (like a public hosting capacity analysis), but utilities resist providing more information about the grid. In general, home solar systems provide an alternative and competing source of electricity — one that utilities have no incentive to interconnect to their system.

There is quite an effort underway by the utility to minimize how much information they have to make available to the public… by providing more information to the public, they’re introducing new parties to provide service that historically they’ve been the only one to provide.

The rules encourage this stubborn utility behavior, says Villarreal.

Most respondents to our Local Solar Developer Survey listed interconnection rules as the barrier that caused the most unexpected costs and delays.

Changing the Rules

One way to eliminate perverse incentives is to evaluate utilities based on performance. Traditionally, regulated utilities are guaranteed to earn back what they invest in the grid plus an agreed-upon rate of return. Under performance-based regulation, utilities still earn a profit, but that rate of return depends on the utility’s success in meeting various objectives.

In 2020, the Hawaii Public Utilities Commission adopted performance-based regulation for the state’s investor owned utility. Listen to our Local Energy Rules podcast interview with Isaac Moriwake, managing attorney of the EarthJustice MidPacific/Hawaii office and intervener in the case.

Villarreal hopes the utility will become more like a network operator, with utilities less dependent on the revenue from selling electrons. He compares this framework to cell phone networks: individuals can buy any kind of phone that they want and then pay a fee to use the network. Farrell, in contrast, sees risks to private networks. An example of where private networks go sour is Amazon’s seller platform. Amazon sets the rules for its own private network, profiting off of seller fees, while sellers are forced to use the monopoly platform.

Still, public takeovers are often unsuccessful and public networks have their own drawbacks. Whether it is public or private, a utility needs to recover its costs and needs people to consume the product. The challenge, says Villarreal, is enforcing equitable and fair access. Regulation is needed, but it must evolve.

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.

Episode Notes

See these resources for more behind the story:

For concrete examples of how towns and cities can take action toward gaining more control over their clean energy future, explore ILSR’s Community Power Toolkit.

Explore local and state policies and programs that help advance clean energy goals across the country, using ILSR’s interactive Community Power Map.

This is the 146th episode of Local Energy Rules, an ILSR podcast with Energy Democracy Director John Farrell, which shares powerful stories of successful local renewable energy and exposes the policy and practical barriers to its expansion.

Local Energy Rules is Produced by ILSR’s John Farrell and Maria McCoy. Audio engineering by Drew Birschbach.

This article originally posted at For timely updates, follow John Farrell on Twitter, our energy work on Facebook, or sign up to get the Energy Democracy weekly update

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Maria McCoy is a Researcher with the Energy Democracy Initiative. In this role, she contributes to blog posts, podcasts, video content, and interactive features.