Should Big Utilities Pay for Their Bad Choices? — Episode 124 of Local Energy Rules

So in 2004, with two kids in college, my husband a teacher, I resigned from my job doing biochemistry research and devoted full-time to climate change. So if you’re care about climate change and you want to actually do something about it and not just study it, then obviously decarbonization, which is now a word that’s widely used, but not wasn’t one that was widely used when I began you, you go there now, a lot of the inventories have been done, but back then we just thought, well, electricity burning coal, all of that is very likely the largest source of greenhouse gas emissions. So while there are literally millions of things we need to do to find a new way to live on this planet, we tried to simplify this as number one, decarbonize your electricity, number two, decarbonize your transportation, and number three, do everything else. And it’s been confirmed over and over and over again that really focusing on decarbonizing electricity is the first, the most cost effective and the most generally effective approach. So I always say in our, all of our endless meetings here in Colorado and I work with people around the country, I’m like, I’m a biochemist ask me about protein structure. I actually know more about that than I know about a lot of these things, but you are forced – And I think that’s one reason these podcasts are so helpful because it can help people realize that we all end up kind of coming to these same realizations, even though we come from many different places. And just watching Jonathan Scott’s power trip. But I, I strongly recommend it because you just see all these people from all these walks of life, coming to these principles, that Institute for Local Self-Reliance has done such a remarkable job of pulling together all these threads, cutting across many sectors of our economy and helping people think about a new vision. And so I just want to thank ILSR for that. So that’s how I got started in clean energy and monopolies and securitization and coal and all of those things.

The assumption tends to be that if the utility has an underappreciated asset, then their customers need to pay it off. And respectfully, only a monopoly would think like that because every other business that has a problem of whatever kind has to pay it off themselves, they have to write it off their books. They have to do all those things that that business is in the competitive world do. And respectfully only in these monopoly controlled utilities where they assume that somehow they can take frankly, the mistakes that they have and make their customers pay for it. And I’ll just there. We can continue on, but the, the bonds in the financial world are referred to as a ratepayer obligation charge bonds, or ROCH bonds. But I think those words, rate payer obligation charge, are important words because not many people…  like me, I’m a mom, right? I balance my checkbook. And after that, I’m, I’m kind of not a financial person. Let’s just say securitization is very, you know, like it’s scary. And that’s one reason I wrote this report is to try to begin the process of demystifying this. I think referring to these as rate payer obligation charge bonds makes it very clear that the end game is to have rate payers pay off the utility’s problem. While that may be a tool that we want to use, we should ask many questions before we think that somehow securitization is the key. And then just to go back, obviously, if you can pay off an underappreciated coal plant, 3 or 4%, instead of 7%, it makes it more cost-effective to do it. If we’re trying to accelerate the retirement of coal plants, that is one possible tool for doing it. There are many other possible tools, including having a utility own the mistakes. They are the ones who’ve made the profits for all these years. They can afford to bear some of the costs of, of this transition that we’re going through. They can more than barely afford to bear it, as we’ll talk about. But obviously we want to reduce, we want to decarbonize. We want to reduce our carbon emissions. I’m fully on board with that. I’m just not fully on board with assuming that rate payers should pay off utility’s mistakes.

But when as you get closer and closer to the 21st century, business, uh, the role of a business person, man, or woman, is to look ahead and to understand and to think about how markets are changing. And of course, when you’re a monopoly, you don’t do that as much because you’ve got this captive audience. And so I think it’s part of this discussion over securitization has also this discussion that Institute Local Self-Reliance has done such a great job of helping us think about monopoly and near monopolies and, and how that goes. So, yeah, I think it’s very important that citizens and advocates feel empowered to ask what did the utilities know? And when did they know it? And they could have known about climate change in 1850, so 1856. So, uh, and even a little earlier, actually. So, uh, but the closer it gets in time, the more responsibility they have. Um, and again, they’ve reaped the power. When we have regulated monopolies – investor owned utilities, they’ve reaped the profits from these capital expenditures known as coal plants, they’ve earned their 7%. So on a billion dollar coal plant the first year they got about 70 odd million in profits for having built a coal plant. That’s accelerating the destabilization of the climate of the only planet we know. I mean, how, I mean, it’s unconscionable to be making profits destroying the only home we know of. So, and, and this has been increasingly clear, I’d say by the early 1990s, it was really, really clear if you read the science. Now we all know the stories of what the utilities and the oil companies and everybody else did to obfuscate this, or we know some part of those stories, but what they knew or what they should have known when they knew it, they should have known it a long time ago. And many of them did know it a long time ago. The reports on What Exxon Knew, David Pomerantz’s report and What Utilities Knew from the Energy Policy Institute, are all important resources as, as citizens and advocates ask is key question that you’ve identified. What did they know? And when did they know it?

MIDWAY PITCH

So what if George Washington had given up and the King was still in charge? But he didn’t give up. And that’s an amazing story. Again, I encourage your listeners to go back and remind themselves what they all did and, you know, freezing in the, you know, in Valley forge and all of that. So I believe we need to continue on and yes, we fail. We did not take advantage… The obvious argument back then was, yeah, you could do solar, but that was solar thermal on the White House. And solar is too expensive. It’s 40 or 50 cents a kilowatt hour. And we can do coal for three. So you wouldn’t want to do something stupid, like make more people pay for expensive power. So those were those arguments back then, I think now we can see that again, the planet is priceless and we should have understood that because when you destabilize the climate of the planet, you destabilize everything, including government civil society. This is the most profound consequence of all, which is that we lose the ability to maintain stable states, which people all over the world already live with that problem. But when you start to think about, you know, the industrialized north, all of a sudden, not being able to maintain a stable government, stable society, and what that means is just profound. And we should have at least had a more profound conversation, but again, I’m either an economist in our time machine, so we can’t turn it back, but we can go forward.

And we do have another moment now in history where we can use this moment to ask the questions that you’ve just asked about the 1970s, and why I think securitization is one of the important kind of threads to pull on is because the way it’s presented and the response we’ve written, that you’ve mentioned, as a response to a report by the Rocky Mountain Institute, I have a lot of respect for the Rocky Mountain Institute, but in this case, I feel like they didn’t think deeply enough or broadly enough about where we are and this point in time and what our opportunities are. And in a sense, what are, it’s not just an opportunity, but it’s really an imperative to come up with a different structure. That’s both more equitable for customers and the providers, and also has a different topology, which brings us back to the local power story that Institute for Local Self-Reliance has told so often. And so well, when we rely on the big grid, we end up with big problems. Most recently, right before this podcast was recorded, we had a big snow storm in the Northeast and at least 200,000 people without power. We’ve had fires in California, fires in Colorado, fires in Oregon, and, you know, floods… the big grid is an amazing contraption, but it’s also a very, not very stable. You know, when squirrels can bring down the grid, you know, there’s a problem – to say nothing of fires and floods and massive snow storms. And as we move into this century with more and more extreme weather, I think it’s important that we consider that just continuing on and on and on with the big grid, big power plants, several hundred miles away from where you live, bring the electricity to your refrigerators and computers and TVs over big power lines that when the snow falls or the trees fall, or those big tornadoes or hurricanes or whatever, all of a sudden people are sitting in the dark. And obviously there’s another model kind of sprouting up underneath it. It’s often referred to as sort of a micro grid model, a more decentralized model where you’ve got solar panels somewhere, either on your roof, or on the school down the street, or on the grocery store or whatever, you’ve got some storage built in. And when the big grid goes down, these micro grids are often the one place where you can actually go and charge your phone, while the food rots in your refrigerator or whatever.

The one reason I think we want to have these questions asked now, at this moment in history, is that to continue the big centralized monopoly controlled structure is not only inequitable from an economic point of view, It’s also not wise. As we move into a new century, that’s going to be just characterized by one narrow way. You know, how many times have you heard on the news “we’ve never seen, we’ve had floods, but we’ve never had a flood like this; we’ve had fires, but we’ve never had a flood, a fire like this in Colorado.” It used to be a big deal to have a fire above 10,000 acres. This summer, we had three fires above 100,000 acres and one was above 200,000. That’s not going up linearly. That’s going up more exponentially. We have no idea how big the fires will be in 2030, 2040, 2050. And not only is that devastating from both, all the people who’ve lost their homes and all the animals who’ve lost their hair habitat, all the forests that we will lose, but the power goes out. And if we haven’t rearranged our electric system in a way that’s much more, the term is resilient, ability to continue to function in the face of these extreme weather events, I don’t even know how to think about it. What about when the fires are three and 400,000 acres all over Colorado and, and floods in the Midwest are just way beyond the floods that you and I remember from when we were kids. I think, yes, if we made that change in the seventies, we’d be in a different place, but I can’t turn the clock back, but this is now 2020. And it’s very important that people ask these fundamental questions. And securitization is one, because if we just securitize, we in a sense support the existing monopoly power structure with large centralized generation, and we will miss another amazing opportunity.

You know, in this particular case, the securitization report for Rocky Mountain Institute, utilities have a stranded asset. Customers pay a hundred percent of it off. And what I’m trying to advocate for is we should not start at that place. Securitization may be a tool. It may not be a tool. We could also pay off the plant and the utilities commission could say, we’ll pay it off, but we’re only going to pay you the cost of debt, which has maybe three or 4%. You don’t have to do the whole bonding securitization pathway. So there’s lots of options. But the first step is to ask that question. When the utilities have a stranded asset, what is the whole array of options we have, let’s not start with the assumption that customers, and of course this will fall disproportionately on low income customers, middle and upper income customers are often getting solar. So they’re much more insulated from this. So basically we’re saying utilities have a problem and poor people and small businesses will pay it off. And that just intensifies the economic inequities in our society.

Scott Hempling, who has also been on the ILSR podcast – It’s a great podcast for those that haven’t listened to it yet – And Scott Hempling, who had been involved in utility regulation for a long time, also took a look at the regulatory compact and he says it even more succinctly, the bottom line: repetition does not create truth. There is no regulatory compact. So what do utilities want us to think as well? We have regulation the regulators approved. And so now we get cost recovery and our customers have to pay and use these rate payer obligation charge bonds known as securitization, or they have to pay us our full weighted average cost of capital 7%. And you know, they have a lot of attorneys and they’ll say that. So I think those two resources, they are the Peskoe paper and the Scott Hempling analysis on regulatory compact, are important. You can also ask, just show me where in the laws of my state is the regulatory compact exists. And you, I tried that with several powers to be in Colorado. And I asked at least 15 times, and never got an answer because it doesn’t exist.

But even, you know, people who I respect, attorneys that have been around this for a long time in Colorado, like, Oh, there’s a regulatory compact. I’m like, I respect you, but there is not such a thing. There’s a concept. It’s a rhetorical device. Scott Hempling says just because they repeated a lot, doesn’t mean it exists, but it does exist in the minds of a lot of regulators and certainly a lot of utility attorneys and all of that. So feel free to push back. And again, that Ari Peskoe paper, as well as Scott Hempling’s analysis are very helpful.

So you asked, John, about how do we use this kind of, if we’re going to save money, if we’re going to pay off these coal plants and either the utility writes it off, or we pay for less of it at three or 4% instead of 7%, that can lead to some savings in Colorado. The bill that authorizes securitization here slices off 15% of those savings to use for just transition for fossil fuel workers in their communities. And I just want to say, I have profound sympathy if you’ve ever been through job change, you know how terrible it is, millions and millions and millions of Americans have been through that process. So I’m very profoundly sympathetic, but it’s very important for the fossil fuel workers to understand this is not a political issue. Fossil fuels are nonrenewable when it comes to both coal and natural gas. The two I know, well, the ones that can be to reproduced at a profit are long gone. They’re now carbon dioxide and methane in the atmosphere. So this is not just, get a new president or get a new governor or get a new whatever, and you’ll get your job back. You’ve got to face the reality. These are non-renewable resources and it’s time to pivot as millions and millions of Americans have done. I get that. That’s very difficult. I would like to have support. I would like to have training. I’d like to have transitioned payments for these workers, given that millions and millions of Americans have had to do it, including my husband and millions and millions of Americans have had to do it more than a few times without any support of any kind.

So then of course, the other thing that I’m very interested in is opening up the market to more competition, to more innovation, to more decentralization, to a different typology for our electrical system. Relying on the big grid in the 21st century, it’s already led to very, very big problems. And as we go through year after year, decade after decade, it’s going to become increasingly obvious that making your power 200 miles away and putting on transmission lines is a very brittle, unstable way to run the system. So put those solar panels on your schools and on your churches and on your grocery stores or on your roof. The wires create a little micro grid, build in some storage, start to envision a different decentralized mode. Just as when I was in college, all the computers were centralized. Now we all carry around a massive amount of computing power in our briefcases or purses or whatever. And we have these little black things in our pockets that we call phones, but I really do 200 or 300 other things. And then we want to come through the same kind of revolution in electricity. But we, the first thing we have to do is to not accept that the 20th century structure is the proper structure for the 21st century, whether it was proper for 20th or not, we could discuss a long time… but it is not going to be the best solution for the 21st century. It’ll stifle innovation and it’ll make us very vulnerable to these extreme weather events, as well as cyber attacks and a whole lot of other things, and squirrels, that destabilize the grid. And we’re very dependent on it. So it’s a big problem when the big grid goes down.

And as part of this, I did a little reading on the history of the monopoly game monopoly, cause I’m like, so not an economist. So I encourage everybody to kind of read that and realize that actually was a woman who designed the game in the early 1900s, uh, uh, Lizzie, I wrote it down and I lost it… Lizzie Magie. And she designed it to, because you wanted people to understand that when you had a few people controlling all the property, this was a problem. And so this is 1903 and it’s great fun when you’re a monopoly, we all know from know those long summer afternoons or whatever, when you have the monopoly, it’s really fun. Cause you just get to suck all the money out of everybody else and then you win. But as it turns out, and this is my PhD in economics at work, no, I’m just kidding. As it turns out, if you don’t have the monopoly, it’s not a lot of fun. And again, our utility here in Colorado, our investor owned utility Public Service Company of Colorado, 578 million of after-tax net income in 2019 alone. Many of those profits driven by their investments in fossil fuel infrastructure. So making profits out of destroying the only planet we know of that supports life is there. The people are fine, but this system it’s, it’s unconscionable to have this sort of thing still going on. And it’s the misery all over the planet that we’re contributing to – the mudslides in Guatemala and the hurricanes in Nicaragua and the floods in Asia and the dying of the coral reefs. And as Americans, we have an outside share. We have the largest per capita emissions and the largest cumulative emissions.

So it’s well past time that we did what you suggested maybe we could have done in the 1970s, in addition to passing that PURPA act, public utility regulatory policy act. In addition to PURPA, we could have done many other things, but we can’t turn the clock back, but we can now in what’s coming to be the third decade of the 21st century, take a hard look at the system we built last century and ask very hard questions about whether it’s really the right system. Is it going to bring us the optimal solutions, the balance of big grid and micro grid sorts of things? Is it gonna allow people, is it gonna allow more equitable distribution of income instead of so much going to the monopoly, right? And how do we do this in the most just and equitable way and the most resilient way.