Stopping the Spread of Monopolies — Episode 195 of Local Energy Rules

Date: 25 Oct 2023 | posted in: Energy, Energy Self Reliant States | 0 Facebooktwitterredditmail

To protect competitive markets, we must quarantine regulated monopolies.

For this episode of the Local Energy Rules Podcast, host John Farrell is joined by Lynne Kiesling, Director of the Institute for Regulatory Law & Economics at Northwestern University and Research professor at the University of Colorado Denver. Kiesling explains why allowing incumbent monopolies into new markets is too big of a risk for innovation and the public interest, particularly in the context of Xcel Energy’s major electric vehicle charging proposal.

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

Lynne Kiesling: If you think that we have gotten to the superior end estate, final be all, end all fabulous, best ever EV chargers that are ever going to exist on the planet, then having the utility be the owner and operator is not going to have as much of a cost. But if you think that there’s going to be more innovation and you think that we have not come to the be all, end all, end state of EV charging technologies, having utility ownership and operation of EV charging will slow down the innovation processes.
John Farrell: Even as solar and wind make the electricity system cleaner and more affordable, electric vehicles and expanding communications technologies are expanding the reach and management of electricity in homes, cars, and appliances. Many incumbent utilities see this expansion as a reason to expand their monopoly power beyond electricity into car charging or energy management. Lynne Kiesling says we have to push back and quote, quarantine the monopoly away from services that can be provided by competitive markets. She’s the director of the Institute for Regulatory Law and Economics at Northwestern University and a research professor at the University of Colorado, Denver, and she joined me in September, 2023 to explain why EV charging, rooftop solar, and other innovative grid services ought not to be the purview of the incumbent monopolies. I’m John Farrell, director of the Energy Democracy Initiative at the Institute for Local Self-Reliance, and this is Local Energy Rules, a podcast about monopoly power, energy democracy, and how communities can take charge to transform the energy system. Lynne, welcome to Local Energy Rules.
Lynne Kiesling: Thanks, John. I’m glad to be here. Thank you for inviting me.
John Farrell: You’re welcome. I love to ask people when I get started here about how you got into this work. So what brought you to issues of competition in the electricity sector?
Lynne Kiesling: It’s funny, I’ve been temperamentally an economist ever since I was a kid, but in terms of the career and academic stuff, I started working on electricity on my senior honors thesis as an undergrad. So it’s been a minute that I’ve been thinking about the electricity industry and regulation, and I’ve always been interested in the field and economics. It’s called industrial organization. I’ve always been interested in industrial organization questions, how do firms compete? What makes firms competitive? What’s the role of government? How should regulation be structured? What can we expect from these real world institutions compared to the kind of blackboard model of perfect competition? And how do we evaluate the behavior of firms and the conduct of firms and the behavior and conduct of regulation and regulators given that that Blackboard model is really just a theoretical construct and that we should neither take it too seriously, nor too literally. But then when I went off to graduate school, I worked in industrial organization mechanism design and economic history, and so I worked on some other topics still relating to technology and then came back to electricity. Ironically enough in 2000, 2001, right when all the California stuff was kicking off and I was working in a public policy job at the time, and I called in on day one. I’m like, okay, what do you want me to work on? And my colleague says, do you know anything about electricity? Well, as a matter of fact…
John Farrell: Yeah. Oh, that’s amazing. What timing!
Lynne Kiesling: Yeah, and it was all that market design and regulation and taking the perfectly competitive benchmark both too literally and too seriously, and using that to inform the flawed market. And then of course the political economy of what we found out after the fact about the influence from Enron. So it was kind of going right into the fire, just skipping the frying pan, going right into the fire. And of course at the time was also in economics in this particular area of economics, there was a lot of really cool, interesting work going on because of the Federal Communications Commission move in the late nineties towards auctions for spectrum licenses to build out wireless networks. And that was really a catalyst for a bunch of really, really good economic thinking and market design thinking. So there was a lot of interesting stuff going on then. And I think there are some good parallels between telecom and electricity in terms of market design and competition policy that I suspect we’re going to get into in a few minutes.
John Farrell: I definitely want to go big and broad, but what I want to start with, if you don’t mind, is a really specific question and sort of what catalyzed me to reach out to you was a proposal in Minnesota by Xcel Energy, which is an incumbent monopoly shareholder owned utility. They have been providing electricity service in a monopoly fashion. They’re vertically integrated monopoly, they own generation, they own the wires, they own the meters, they sell the electricity. And in alignment with the state’s clean energy goals, they decided to make a proposal to provide electric vehicle charging and a broad public network. And they want to spend, I think something on the order of 750 million of money that would be paid by all utility customers to support the development of this network. And I was really blown away because there are some dockets, as someone who follows the Public Utilities Commission in Minnesota, there are some dockets that have a little bit of engagement and some that have a medium amount of engagement, but this one had a lot of engagement. And I was reading names of places, things like the independent service stations or National Federation of Independent Businesses, and I was like, wow, this is really attracting a lot of interest. What’s going on here? And so I guess my first question is why would it be problematic? Why is it drawing so much attention that a big electric utility is proposing to own a whole bunch of public electric vehicle charging infrastructure?
Lynne Kiesling: One reason why it gets so much attention is because there are a lot of dimensions to this question. I think the main question I generally think of is what I call the quarantine the monopoly question. I guess I’ll say the punchline, and then we can work towards the punchline. So the quarantine the monopoly punchline is basically when you think about regulated electric utilities, ever since their origins in the 1890s, they have been vertically integrated. I mean from Thomas Edison, Pearl Street, 1882 Onward, Edison designed the electric grid system as a system, as a fully integrated system from generator all the way through to the lighting fixture in your home. So ever since then, even though the kind of lighting fixture, what in telecom they call customer premise equipment, that got bid off in the 1890s and became General Electric. But ever since then, it’s been vertically integrated, right?

The generators, the transmission wires, the substation, the distribution wires, the service line to the home, the meter, all of that is owned by single firms. And regulation basically in starting in 1907 with state PUCs and then moving forward has kind of enshrined that vertically integrated business model and put legal boundaries, legal territorial boundaries around them all. And the idea is because this infrastructure is so capital intensive, but it also reduces production costs so much that you have what’s called economies of scale that for a given market, given size of demand, the least cost way to produce electricity was to have a single firm do it. And of course, from a regulatory perspective during the populist era in the U.S., that set off the warning bells of, but hey, then that firm can price like a monopolist and we don’t want that, so we’re going to regulate them.

So regulation is trying to hit that sweet spot of getting that regulated rate that consumers pay to be right at the average cost of the utility. So we start vertically integrated, but then of course, so think of it as you set the timer in 1907 and then roll forward, and as you roll forward, there’s technological change that happens. So our origins in this industry are very large scale and very predisposed economically towards having centralized generation, large scale wires networks. But since the 1980s with the combined cycle gas turbine, and then more recently with rooftop solar and batteries and other smaller scale innovations, technologies are now economical and cost effective and provide different value streams at smaller scales, right? It is not an apples to oranges comparison. They’re very different from the big coal plant, the big hydro plant. And so you get this decentralizing smaller scale technological change.

And then of course in the mid nineties, which we started really implementing in electricity in the mid two thousands, you have the development of digital networks, so digital communication networks, broadband, the internet, wireless and so on. So you put all those together and you have these very strong decentralizing tendencies. And in the case of electricity, where do you still have the economies of scale and scope that characterize what we call a natural monopoly? In economics, it’s in the wires network, but in generation, smaller, all these different scales and different value propositions can compete against each other. And in retail, all these different value propositions can compete against each other. From a regulatory economic efficiency perspective, you want to quarantine the monopoly and not have the incumbent monopolist be able to exert some anti-competitive force in upstream or downstream markets.

And this actually hooks into the reason I mentioned telecom earlier is that this principle showed up in the 1980s in the antitrust lawsuit against AT&T, right? The bell, the breakup of the bell system. And so the assistant attorney general for antitrust at the time, Bill Baxter, so this is known as Baxter’s Law, but it’s also known as quarantine monopoly. He basically said, if you have an incumbent regulated firm and it can have an anti-competitive effect on an adjacent market, don’t let the incumbent firm compete in that market. And this was one of the main analytical justifications for the AT&T settlement. So now let’s take that to things like rooftop solar or EV charging. A few years ago in Florida, the Florida utilities were like, sure, we’re fine with rooftop solar as long as we own it. Like, okay, Solar City and Sunrun and Sunnova would like to have a word because there is an existing market that if you come in and compete against them as the incumbent, that could have very strong anti-competitive effects. And we’ve seen this in the restructured states in the U.S., the states that implemented regulatory restructuring in New England, the mid-Atlantic, Ohio, Illinois, and so on, that the only state that really has implemented good retail competition is Texas because the other restructured states have retained incumbent default service. So you can stay with the incumbent utility or you can go to a competitor, and this is a big entry barrier for retail competition. So now let’s apply that to EV charging where we have a good half dozen growing private innovative entrepreneurs in this industry. What effect would it have for Xcel or other regulated utilities to come in and build EV charging? It’s going to have an anti-competitive effect on a competitive industry that already exists, even though it’s nascent, right? It’s young.

John Farrell: It is amazing to me how hard it seems for people to wrap their heads around that. And I don’t know if it’s just because they’re so interested in seeing, and especially with something like EV charging where there’s this commonly described as a chicken and egg problem. Will people buy EVs if there’s not enough public charging? Do you need to have that first or do you need enough EVs to justify doing the public charging? And so I think there’s a real hunger for letting the utility do this. Can you talk a little bit more, let’s just say Xcel got that proposal approved. Obviously one of the implications is all the customers of the utility have to pay for this, including people who don’t own cars that can plug into that network. You have as well an issue of the utility is getting paid to build the EV charging infrastructure and maybe doesn’t have a lot of operational experience. And then I guess I’ve also heard that there’s this issue, and I think this is the one raised most prominently by the existing convenience stores and gas stations, which is we are already where people want to stop and fuel their vehicle. Where are you going to build this stuff? So if I’ve missed anything, please fill in. But it seems like there are some things sort of unintended consequences if we go down this road that are not just anti-competitive, but also perhaps going to impact people’s experience being able to access electric vehicle charging.
Lynne Kiesling: And I think that your last point is really important, and when I was reading as this docket was developing and reading what the convenience store owners were saying, I think that’s a really important point that we already have these gas station convenience stores as focal points in our transportation lives anyway. And so there’s a natural, I guess you would call it economies of scope where the convenience store owners can use the properties and that they already have and build EV charging, whether it’s through, and I would expect it would be through contracting with an EV Go or some other company. And I think one reason people have difficulty wrapping their heads around this is I think for a lot of people who don’t eat, sleep, and breathe electricity the way you and I do, you think in terms of it’s the electric company and that if anything’s going to be done, the electric company should do it. And that what we are in the middle of right now because of technological change and economic dynamism is we’re in the middle of that shift to being able to ask, well, should they continue to do that? Or if there is something new to be done, should we just by default expect that they do it? Or are there other parties who can do it differently or better or more cost effectively? I should say also, Xcel made the same proposal in Colorado, and I think the Colorado PUC approved them building EV charging infrastructure in Colorado recently there’s been, I think Xcel has submitted a revision of their plan that is a bit scaled back, and I have not dug into the details there, so I can’t say more on that, but I know that it’s an issue that’s in play elsewhere in Xcel’s territory. But if I were to steel man the proposal, it’s that if the utility builds EV charging, then you have this regulatory accountability overlay that would, at least in theory regulation is meant to be the voice of the public interest.

And of course that’s a deliberately vague concept and has been in the common law for centuries, but at least in the U.S. it’s enshrined in the Munn versus Illinois 1877 or 1887, losing my dates, lawsuit that basically established the legal justification for regulation in the public interest. So I think that’s one argument. There’s of course a whole lot of concern and analysis from public choice economics about the independence of regulatory decision-making with respect to utilities and undue utility influence and maybe if not on the regulators then on state legislators. So there are two different potential focal points for industry influence in a public choice setting. So I would just say that caveat about the regulatory accountability, but one thing that I think would be a reasonable compromise would be because the private EV charging companies are going to want to build out their network in places that are going to be profit maximizing for them.

So they want to build in places where there’s a lot of traffic, there’s a lot of circulation, lots of people who have cars, who have EVs, and you can already see the way Tesla has built it out where they’re at big box stores and hotels. And I think that that’s a good indication of the kind of places in addition to existing service stations where you would expect to be able to see a build out of a private charging network. And it was funny, about three years ago, the first time somebody raised this question to me, and I hadn’t really thought about it very deeply, and it has I think just developed ever since, is the question of equity, energy justice questions, right? That if you’re a for-profit firm, are you as likely to build EV charging infrastructure in low-income neighborhoods where people may not necessarily yet have EVs, but you have the chicken and egg problem of do you build the infrastructure first or do you have the car ownership first? And we had this with the build out of gasoline stations in the early 20th century as well. The chicken and egg problem is unavoidable and they have to, they’re going to interact and evolve in co interaction. So one compromise can be allowing the utility to build EV charging infrastructure and put those assets in their rate base in neighborhoods that are identified as low-income energy justice focus locales. And that seems to me to be in keeping with the regulatory mission of serving the public interest but without harming competition.

John Farrell: It’s interesting. I was curious if you would have a suggestion about how you could still have competitive provision and serve some of those areas. I was thinking in particular, I think there’s a lot of overlap in terms of low income neighborhoods, people who are renters, people who probably don’t have access to off street charging. So I have an EV, but I park it in my driveway and I can plug it into my garage. So that’s kind of the issue that we’re trying to address here. Do you think there’s an incentive model that would, as you put it, quarantine the monopoly but motivate private EV developers to do EV charging in places where it might not otherwise be as profitable? Or do you really think that this is one of those places to fall back on the utility?

I guess what I’m thinking about is, it’s interesting because the way you described it, you’re like, well, these for-profit companies are going to be profit maximizing. And I’m like, well, the utility is a for-profit company too, so they’re going to be profit maximizing but in a different way. So the private EV provider is going to profit maximize by being somewhere where they can capture as much charging revenue as possible. So they’re going to want to make sure they build in a good location and that their uptime is really good so that they’re available for people to charge the utilities incentives on the other hand are I build it and then I get my rate of return on it. And so my concern is yes, they would build charging in places we might need it, but would those chargers be working? How do you deal with some of those kinds of incentives? And so few utilities I think are really motivated on the customer service side.

Lynne Kiesling: I’m glad you mentioned the maintenance question because it’s a growing issue to the extent that we think of EV charging as part of the electricity infrastructure more broadly, we want to have some kind of reliability targets for the EV charging because the last thing you want to do is to roll up to some EV charger in Fruitvale Colorado where you need to get all the way back to Denver and you got another five hour drive and the charger’s not working and you’re stuck. That’s not good. So I think having some quality in the economics of regulation, this would get categorized as having some kind of quality standard. And that can apply not just to utilities as part of their regulatory footprint, but I think it’s entirely with justifiable. You don’t even have to have recourse to regulation to justify this. You can just have recourse to common law to say as part of our expectation of your provision of a quality product that you say you’re going to provide, that you’re going to maintain these things and that when I plug in it’s going to work.

That is a really important aspect of building out the EV charging network and doing the investment and planning the investment and thinking about the return on investment that you’re going to get. One interesting thing to do is to do international comparisons of this. I was recently in the UK and in a large city like London, everybody parks on the street, but basically every other lamppost has a charger in it now and there are quite a few electric vehicles. I mean, it’s still in the single digits in terms of percentage of the market, but it’s a growing share. So I think the maintenance question is really important regardless of who the provider is. And utilities probably have less of an incentive, but I would for me, since I kind of steelman the utility ownership argument, now I’m going to go back to the private market argument, which is where I would argue we should be. The biggest argument against utility ownership of EV charging infrastructure or anything else that is around the edge of the distribution network is for me, the dynamic innovation argument.

Because if the utility is going to own the asset, typically the regulatory process defines the asset, defines the quality of the service, encases that in amber and then implements, the utility has to implement that and they’re held accountable for that. So if you think that we have gotten to the superior end state, final be all end all fabulous, best ever EV chargers that are ever going to exist on the planet, then having the utility be the owner and operator is not going to have as much of a cost. But if you think that there’s going to be more innovation and you think that we have not come to the be all end all end state of EV charging technologies, having utility ownership and operation of EV charging will slow down the innovation processes because of the restrictions that regulation puts on them. It’s much easier for a Tesla and an EV Go and all of the different companies to be rivals in developing their technologies and trying to figure out what is it that’s really useful, where can we put these that would be the most useful because for them to make a profit from doing it, they have to put themselves in the mindsets of their customers in a way that utilities don’t necessarily.

John Farrell: I want to ask you about rooftop solar and some of the other stuff on the grid edge here, battery storage, things like that. What’s interesting to me is I just want to highlight, there’s a difference, right? Utilities generally aren’t trying to own the same scale of clean energy infrastructure. They’re thinking if we want to do it, we want to own it bigger, more in keeping with their tradition of doing centralized power generation, whereas you have in the market a lot of innovation at the smaller scale, like on the customer property, it’s solar panels on a house or on a business, battery storage, demand control, energy efficiency resources, all of that kind of thing. Do you feel like there’s still a parallel even though the utility’s not trying to do the same thing, that there’s a parallel here between the participation of the utility in providing those services and doing generation for example, or demand response and electric vehicle charging where we need to be careful of how the utility has a role?
Lynne Kiesling: Yes. Well, and I will say just upfront that your question gets us into talking about regulatory restructuring and in a state like Minnesota where you’re still fully vertically integrated, and sure Xcel participates in the MISO wholesale power market, but Xcel still owns generation. And I think given what we’ve seen in terms of technological change and given what we’ve observed in places like Texas and Alberta and Australia and slightly less the UK, that having the vertical unbundling that wholesale power markets are now competitive can be competitive, the technologies exist to make them competitive. And so at some level, vertical integration from generation to wires to retail is a historical artifact. And I think it’s a historical artifact that a lot of people are cautious to want to change because it feels like having that vertical integration with regulation provides control that gives you safety, reliability, affordability.

But at the same time, it also has some implications on the trajectory of innovation and technological change. And so I think if you want to enable technological dynamism that the economics of the regulatory restructuring are the way to go. So I would say my preferred model is the Texas model where you’ve quarantined the monopoly in the wires and you’ve got competition on both sides. So the wires is the regulated things sandwiched in – I should caveat all of that to say of course, the past two years have been fraught Texas for the mid-Atlantic states with winter storms and then obviously in the plains states and then down into Texas with summer challenges. So all of this is not to say that take the Texas, the Texas restructuring as implemented in 1999, encase it in amber, that’s what we should do. No, it’s take the Texas restructuring that we did in 1999 and recognize the fact that that model itself is also not perfect and really needs to the market design and the market rules and the regulation have to be able to evolve to changing conditions.

And I think with the reliability challenges that we’re seeing in markets as well as in vertically integrated states, we’re seeing that both market designs and regulatory institutions have not evolved to account for some of the reliability challenges associated with more wind and solar on the grid. So to answer your question, I think utility scale solar in my ideal world would not be owned by utilities. It would be like in Texas where you have big independent companies and then they transact in the wholesale market. You have retailers who buy from them, and a lot of what they do is on long-term contracts. And that is what gives you the assurance and the affordability for the customers of those retailers. And so it’s a both and for me that you can have the large scale, but that the rooftop is actually, again, it’s an apples and oranges because a lot of people say, well, why are we even having rooftop solar? Because utility scale is so much cheaper. I’m like, that least cost mindset is completely the regulatory mindset, whereas rooftop is actually giving you something different from a value and preferences perspective. So on the demand side with consumer preferences, it’s giving you something different and maybe they’re willing to pay for it.

The cost-based argument against rooftop solar is kind of like saying, well, why do we all have smartphones? Because my princess phone back in 1987 was cheaper. It’s not a direct analog obviously because phones have evolved, but the value proposition of distributed resources is different from the centralized resources. And that doesn’t mean that we only have one or the other. It just means that we should draw some pretty clear regulatory lines between them. And for me, that means vertical unbundling.

John Farrell: We’re going to take a short break. When we come back, I ask Lynne about the failure of market regulation in Texas, and we talk about a shift from asking permission to standards-based interconnection for the electric grid. You’re listening to a Local Energy Rules podcast with Lynne Kiesling, director of the Institute for Regulatory Law and Economics at Northwestern University and a research professor at the University of Colorado Denver.

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John Farrell: I mean, what was striking to me as someone who had really not paid much attention to Texas in the Winter Storm Uri and the other struggles they’ve had recently is how, to me, Texas looks like a problem not of having a market, but of having a market that really wasn’t regulated very well, that you had, for example, an experience, I don’t know, is it a decade ago with a similar winter storm impact, and they basically decided not to go ahead and require the utilities to insulate infrastructure against it getting cold again, and they decided not to because they weren’t mandated to. And it seems like that would’ve been a very easy public interest regulation to apply to those companies that would’ve largely gotten rid of that risk. And I think they penciled it out and just said, well, we prefer not to regulate. And I’m curious if you feel like that was ideological or actually the economics bore that out that it was going to be terribly expensive to do that. And if you think that there is a sort of a role for better market regulation, I think the issue here, it’s not about a difference, and this is one of the things that frustrates me sometimes when we talk about restructuring, the first thing utility says is that’s deregulation. And it’s like, no, no, no. We’re not saying nobody’s watching the market. We’re saying actually that we’re going to watch the market in a different structure. So I dunno. I’m curious if you have any reflections on that. And then I would love to talk to you about the telecom comparison.
Lynne Kiesling: I think in general, we are finding that because regulation has not been evolving with the technologies and with the underlying economic dynamism, and so we aren’t necessarily regulating the right things. We’re regulating things that were kind of right 50, 60 years ago and that we need to evolve more. So that’s number one. But number two, with respect to Texas particularly, the primary issue there, I think, and this is based on expert analysis from the FERC NERC post-event report from some really excellent analysis that has been done by some folks at the University of Texas, a group of former regulators, Pat Wood, Allison Silverstein, Robert Gee and so on, wrote a paper where they basically made this argument that the problem is electric gas interdependence. That when we built out natural gas infrastructure in the 50 sixties and because of in my mind, excessive regulation, natural gas was used primarily for home heating.

And so it was at a much smaller scale just to residential customers and so on. And then with the combined cycle gas turbine invention in the 1980s and some regulatory changes at FERC, at the federal level, natural gas was now a very economical and appealing fuel for generating electricity. And then add on top of that, the fact that it’s got half the carbon footprint of coal and so compared to coal, gas is like winner, winner chicken dinner on both economics and environment. And so you get this massive investment due to restructuring in the nineties in gas infrastructure, but that means that you now have a gas system and an electric system that have more interdependencies than A, they were built for and then B, they had historically. And then you add on top of that in Texas, and I usually am not this frank, but I’m going to be frank in this case, you have a big case of regulatory capture, which is the Texas Railroad Commission, and the stated mission of the Texas Railroad Commission is to support and develop the interests of the natural gas industry in Texas.

So their mission is to do what is good for the natural gas industry. And after the 2011 storm weatherizing, the gas production and delivery infrastructure was not something that the gas industry wanted to invest in because it’s a boom bust industry. Some years they have very small margins. Some years they have negative margins. The other thing that there’s not a lot of natural gas storage in Texas because it’s usually whenever anyone wants it, we can just pull it out of the ground and send it. And so if a gas company and electric generator have a firm contract for firm delivery, it’s usually not a problem. So we’re talking, this is really, really far out in the tail of the distribution, but it’s a problem and it’s something that I think there are a lot of policy conversations going on about how to deal with this interdependence, especially when you don’t have the regulatory oversight in one part of the interdependent systems that the other part of the interdependent systems needs to be able to rely on.

John Farrell: That’s helpful. It was interesting to look at some of the early post games, the social media post games, but it’s nice to get a fuller picture of what was going on there. I want to talk about telecom really quick. So the question I had teed up about, it wasn’t actually about telecom at all, but was about this issue of, again, that tension between climate advocates who are thinking we’ll get faster reductions if we just let incumbent utilities do things and about what the trade-offs might be. We already touched on this a little bit because you talked about this issue of innovation that if you have a lot of technological change, a lot of innovation happening, the regulatory process is really slow to keep up with that because they’ll approve something and then the utility will be like, well, we’ll just keep doing something because it’s what they’ve told us that we can do. And it sort of locks things in amber. It also just makes me think of, a few years ago I would talk about how weird it is in telecom. We take it for granted that we’ll let the utility build and own the things that it provides to us. And yet when it comes to telecom, it’s not AT&T that built me a good smartphone. It was like Apple or Samsung or Google or it was somebody outside the industry that came in and said, this telecom thing is bonkers. We could make a way better phone. So nobody’s buying their phone from Verizon or whatever. Those aren’t the producers. And I feel like that’s not translating to the electric sector very well, even though I think there’s some powerful lessons there. So maybe that’s not where you were going to go with it, but I guess the context for this is those people who are thinking, we’re going to get to emissions reductions faster if we just rely on the incumbent utility. Why are they wrong and what can we learn maybe from other sectors?
Lynne Kiesling: I completely agree. I think that’s exactly the way I think about it, and it’s definitely, this is a kind of deep foundational piece of economics is of course specialization and where do you draw the line in terms of what are the boundaries of the firm in terms of what you specialize on and what are the transaction costs that if there’s really high transaction costs and it’s hard for us to write contracts, then sure, Verizon should produce the phones, but is really easy for Samsung, Google, Apple to write contracts with a whole bunch of different people for all of the various tasks that go into building a smartphone. But the other piece, the biggest conceptual insight that needs more traction in electricity is the idea of standardization of interfaces and interoperability. The sb port, the standardization of communications on TCP, IP protocols, all of the kind of nuts and bolts of the communications network and the internet layer on top of it all mean that the digital network is very interoperable, it’s very modular. And so I can plug my phone in and it’ll charge, obviously I can put on a wireless network that’s a standard I can get anywhere on it. And I think having more of that thinking and more of that design in the architecture of the grid would help. And so one place to start, and there’s been quite a bit of work on this, so we’ve made some progress over the past 15 years, but we need more is standard interconnection.

And one way that you put this was essentially, and again, this is a telecom analog that you need permission to connect stuff to the grid. The way the bell system operated was the same way that you needed permission to connect stuff to the grid, and there were a whole bunch of lawsuits in the 1950s challenging AT&T for basically saying you can’t put a cup over the phone handset to concentrate your voice. That’s an illegal attachment. Like what? That’s crazy. And so this idea of a standardized set of interconnections and that if you meet the technical standard for interconnection, you don’t have to ask permission, making the grid more plug and play. And that’s going to be more challenging because with digital bits, and it’s easier to queue because it’s essentially a direct current type system. So you can use switches and stuff more readily in an alternating current system that just plug and play has some more engineering challenges, and I know we can work those out, but that’s just going to mean it’s going to take some time.

But small generator interconnection, I know it has been a focus for like 20 years. Other device interconnection, the IEE has done a lot of work on things like digital inverters, plug your rooftop solar into an inverter because the solar panels produce direct current, but you have to connect it to the grid, which is alternating current, so you need an inverter. But having a digital inverter that’s basically plug and play. So we’re making progress on those, but I think it’s the mindset. It’s the mindset of interoperability and modularity and interconnection. That is something that would really help us make some more progress.

John Farrell: We talked earlier and you said about in terms of your vision of how you might restructure the industry, that vertical integration is really a problem, right? Having utilities that own generation, that own wires, that provide retail service. If we were successful at restructuring, in some places we have been, so we have these wires only utilities. Do you think they’re at a point where they are thinking innovatively about how to move to a standards-based system? Is there more we need to do? I argued in a recent piece that actually I think public or independent ownership or nonprofit ownership of that sector would be important to doing that. Sort of like the way we have with roads. Not that there’s lots of innovation. I mean, there’s innovation in mobility around scooters and e-bikes and stuff. So roads are maybe not the greatest example, but at least around transportation infrastructure. What more might we need to do to get to that standards-based system? Certainly I hear, I would assume restructuring for vertically integrated utilities, but is there more we even need to do with wires only utilities that would motivate them to be wanting to push this along?
Lynne Kiesling: I think some changes in the regulatory mindset and regulatory practice would probably help retaining that public interest focus and that mission, because regulators, I think, view themselves not as policy makers, but as policy implementers, but they have discretion in how they implement that, some discretion, some have more than others. So having the awareness of this idea of a standards-based interoperable grid and changing the, changing the expectations that they set for the utility, I think that would help. One thing that I think to your point about public power, and this is not so much about public power, but it made me think that some of the most innovative utilities that we see, they’re still vertically integrated, but they’re innovative, are some co-ops and I’ll call out in particular, largely just owning my bias because I’ve working relationships with them, have worked on projects with them. Holy Cross Energy in Colorado and New Hampshire Electric Cooperative in New Hampshire, both of whom are focused on digitizing their grid and a very active engaged, consumer focused value proposition.

New Hampshire Electric Cooperative has introduced this year a transactive energy tariff that their customers can sign up to, and it’s a prices, two devices, transactive tariff, so it’s what we call a type one transactive tariff where NHEC will take the ISO New England price and push it to the people who are on the transactive rate, and they can choose what their trigger price, what they’re willing to respond to. I am working with my co-author at Slack, Dave Chapen at Slack National Laboratory, and with the Post Road Foundation, we have a DOE Connected Communities grant to work with New Hampshire Electric Cooperative to introduce a kind of type two transactive system where devices can bid, in addition to being able to respond to prices, that devices can bid in their willingness to pay if they’re a consumer, or if you’re a battery, you can set a willingness to pay price and a willingness to sell price.

And so you can charge and discharge out of your battery to help both to sell energy to other people, but also to help with grid services. So I think there are a lot of insights you can get from the co-ops. Some of them can be extremely innovative because they don’t have this additional regulatory layer, and so they can be a little more nimble. And so that’s, I guess my challenge to regulators is to ask yourselves, how can you be more nimble and how can you help your utilities be more nimble in the service of the public interest?

John Farrell: Those are great examples, and I just have to mention that I have interviewed folks from both of those for Local Energy Rules already, so just folks want to hear more about that transactive energy rate and about the stuff that Holy Cross is doing. Those are both among my favorite interviews, and that’s been one of the fascinating things about covering this industry is you have some co-ops where it’s so hide bound and so moving with inertia and locked into long-term contracts, and then you have these other co-ops that are just on the cutting edge of what is happening. So I think really powerful illustrations of what happens when we have that ability to innovate and to change. Well, Lynne, thank you so much for joining me to talk about all of these different pieces of everywhere from the economic theory to the specific implementation of things like EV charging rooftop solar. It’s really great to get some perspective on how we should be thinking as folks who work in clean energy to get to outcomes that we want to see and sort of what some of those stumbling blocks may be.
Lynne Kiesling: Thanks, John. I really enjoyed our conversation.
John Farrell: Thank you so much for listening to this episode of Local Energy Rules with Lynne Kiesling, director of the Institute for Regulatory Law and Economics at Northwestern University and Research Professor at the University of Colorado Denver. On the show page, look for links to the two Local Energy Rules podcasts that were mentioned during the show, one with Brian Calnan at the New Hampshire Electric Cooperative and the other with Brian Hannigan at Holy Cross Energy in Colorado. You can also find a link to my commentary in the American Prospect describing how private monopolies fuel the climate crisis and public corruption. Local Energy Rules is produced by myself and Maria McCoy with editing provided by audio engineer Drew Birschbach. Tune back into Local Energy Rules every two weeks to hear how we can take on concentrated power to transform the energy system. Until next time, keep your energy local and thanks for listening.

An Electric Utility’s Bid for Electric Vehicle Charging

Earlier this year, Xcel Energy proposed spending nearly 200 million dollars to own and operate hundreds of electric vehicle chargers across Minnesota. Electric vehicle charging, however, is currently a competitive market. Xcel’s proposal launched a debate over giving a regulated monopoly such a large slice of the emerging market.

Kiesling takes the listeners back to the origins of regulated monopolies; they were an attempt to capture economies of scale, while not allowing the monopoly to artificially inflate prices. She explains why there is a need to “quarantine the monopoly” to areas of the market that benefit most from scale.

From a regulatory economic efficiency perspective, you want to quarantine the monopoly and not have the incumbent monopolist be able to exert some anti-competitive force in upstream or downstream markets.

While there is some concern that private, competing entities will only build out electric vehicle charging where it is most profitable, granting Xcel Energy a regulated monopoly over the electric vehicle charging market will stifle innovation, says Kiesling.

Vertical Integration is a Historical Artifact

Farrell and Kiesling then apply the same logic to the electricity industry more broadly. Advanced technology has allowed for decentralized electricity generation, killing the so-called “natural monopoly.” Regulated utilities, however, are exerting anti-competitive influences over rooftop and community solar.

​​Should they continue to do that? Or if there is something new to be done, should we just by default expect that they do it? Or are there other parties who can do it differently or better or more cost effectively?

Kiesling makes the argument for restructuring and retail electricity competition, as was done in Texas. However, she emphasizes that no model is perfect. Since restructuring, Texas has failed to evolve with changing conditions, says Kiesling.

My challenge to regulators is to ask yourselves, how can you be more nimble and how can you help your utilities be more nimble in the service of the public interest?

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 194th episode of Local Energy Rules, an ILSR podcast with Energy Democracy Director John Farrell, which shares stories of communities taking on concentrated power to transform the energy system.

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.