Transition away from for-profit utility model and push for utility reform

Today, Public Utilities Commissions (PUCs) have been established to regulate monopoly utilities. However, utilities continue to enjoy profits by a faulty design.

The history of the monopoly electrical system dates back to the 1880s. After only a decade of small lighting systems providing electricity in every city in the nation, big bankers and oil tycoons, such as J. Pierpont Morgan, John D. Rockefeller, and George Westinghouse snatched up all the small electrical providers to consolidate all electrical providers and exert corporate control over the energy system. Morgan set out on a quest to establish only one utility that would be owned by him. These robber barons established an empire and monopolized lighting, power, and trolley systems. Shortly after, grassroots communities revolted, and established their own municipal systems to produce power under public control, excluding monopolies. As soon as 1895, Detroit established its own municipally owned utility (muni). Rates shot down, and soon a number of cities established their own muni. By 1912, a total of 1,737 publicly owned utilities had formed, compared to 3,659 monopoly private utilities. However, Samual Insull created a third model, a public-private combination. Insull formed the National Electrical Association, which would become the business model of modern times. This public-private model publicly regulated all privately owned monopolies, while protecting each company’s territory, thus guaranteeing a return on investment. This model established the current electric regulatory commissions that are controlled by monopoly capitalists. By 1921, almost every state formed a utility regulatory commission. By the 1920s, Insull and 15 other monopoly capitalists owned 85% of the nation’s electricity supply.[1]

During the early 1930s at the advent of the Great Depression, eight of the largest utility companies owned 73% of the investor-owned utilities. Government stepped in and passed the Public Utilities Holding Company Act (PUHCA) in 1935 to address the imbalance in the energy market. As the first attempt at regulation of the energy industry, PUHCA’s goal was to prohibit companies from recovering their expenses twice by allowing ratepayers to pay only the share of common service expenses and prohibiting utilities from artificially raising rates. Through PUHCA, companies divested billions of dollars in assets, and the number holding companies drastically lowered.[2]

Today, Public Utilities Commissions (PUCs) have been established to regulate monopoly utilities. However, utilities continue to enjoy profits by a faulty design. In 1865, the Supreme Court laid out a “regulatory compact” where PUCs determine how much a utility is allowed to invest, how much it can charge, and what the profit margin can be. In exchange, utilities are allowed exclusive rights to sell electricity in a given area. Utilities are allowed a “rate of return” on their assets that drives profits. This rate of return model is still used today and incentivizes unnecessary investments, while deprioritizing good services, environmental outcomes, and benefits to communities.[3] As of July 2019, the largest electric utilities in the nation have a market value of $64.9 billion. This list of most profitable electric utilities includes: NextEra Energy (ranked 1), Duke Energy (ranked 2), Exelon (ranked 5), Xcel Energy (ranked 8), and Pacific Gas & Electric (ranked 10).[4]

However, with the increased demand for clean, renewable energy and the growing movement to transition off of fossil fuels, utilities are concerned about their continued rate of return and the guarantee of profits. As a result, for-profit utilities have engaged in tactics, such as raising the monthly fixed charges of customers. In 2014, utilities charged about $5 to $10 per month for fixed customer charges, but some utilities have proposed raising those rates to $20 dollars per month or more.[5] Some utilities have been found to be responsible for wildfires due to old infrastructure and negligence in wire maintenance, yet these same utilities turn around and pass those costs onto ratepayers. Faulty power lines and poles owned by Pacific Gas & Electric (PG&E) caused the 2015 Butte fire and the 2017 Camp Fire in Northern California—the worst and deadliest fire in California history—resulting in $7 billion in claims.[6] However, PG&E is demanding $20 billion in tax-exempt bonds that would essentially bail them out and prevent them from going into bankruptcy.

Policy recommendations

Shift away from for-profit investor owned utilities. Although the monopoly utility model is a deeply embedded model, energy policies must shift away from this for-profit model to one that is publicly-owned and controlled. Instead of accepting a pro-profit, investor-owned utility model, advocates should:

  • Promote Publicly Owned Utilities (POUs). POUs have an ownership structure that is locally governed and/or owned by customers/members. They are non-profit entities that are managed by local elected officials and public employees. Rates are set by each POU governing body or city council. The mission of the POU is to optimize benefits for local customers.[7] Although there is a long history of creating POUs to shift away from the monopoly utility model, POUs must also be held to higher standards to fully meet the mission of benefiting customers. Two-thirds of public power systems buy their power on the wholesale market. Whether they self-generate or purchase power, they are as concerned as their for-profit counterparts about regulatory changes and their potential effect on reliable, affordable power.[8]
  • Promote Community Choice Aggregation (CCAs). CCAs are a new type of utility that enable communities to make decisions themselves about what kinds of energy to purchase rather than relying on traditional investor-owned utilities (IOUs). CCAs are created by cities, counties, or joint powers authorities (made up of municipalities), which enable them to be more reflective of distinct community preferences than the regional IOUs. Community members have direct input into CCA decision-making through their boards of directors, which are comprised of local elected officials. Through their CCAs, these communities have thus far revealed strong preferences for renewable energy. Some CCAs have specifically focused on developing local electricity generation from renewable energy.[9]
  • Promote Energy Cooperatives. Energy co-ops have voluntary membership, democratic member control, and transparent economic participation. Co-ops operate under seven principles including, voluntary membership, democratic member control, member economic participation, autonomy and independence, education and training, cooperation among cooperatives, and concern for the community.[10] Energy co-ops are appealing in the transition to local distributed energy system. The challenge is energy co-ops need to reach the scale necessary to be competitive. And, as service territories are already fixed, consumers do not necessarily have a choice about where they get their electricity.

Reform the current utility system. Although the shift away from a monopoly investor owned utility system is the ideal pathway from communities, the reality is that many BIPOC and frontline communities still must operate within the existing IOU model. The recommendation is to transition away from the for-profit IOU model, while simultaneously reforming the current utility system. The following are a suite of policy recommendations to reform the current utility system:[11]

  • Revenue decoupling—where utility profits are no longer tied to the quantity of energy sales— is an important regulatory foundation that encourages energy efficiency. Instead of higher fixed charges, the following approaches should be used:
    • Demand charges are based on each customer’s contribution to the peak demand, such as on a hot summer day when many people are running air conditioners at the same time.
    • Time-of-use rates are those that make the usage rate we pay for electricity lower during times of low demand, such as in the middle of the night, and higher when there is more demand.
    • Minimum bills apply to the small number of customers below a certain low threshold of usage and guarantees the utility a minimum annual revenue from these customers.
  • Performance based regulation. Seek to align utility mission with environmental and social goals, instead of capital investments. Such environmental and social goals may include:
    • Environmental performance: Utilities should shift their model from one of profits for shareholders to environmental performances. IOUs must set aggressive targets of emissions reductions, particularly in BIPOC and frontline communities. They should focus on distributed energy resources and energy efficiency, particularly in BIPOC and frontline communities.
    • Resilience: Resilience is the ability to prepare for and respond to extreme climate events. Utilities must implement resilience tools to protect communities through extreme weather, without imposing onerous costs.
    • Expanded Choice: Utilities must transition off fossil fuels, such as coal and gas, and offer communities a variety of energy choices with the goal of community control and ownership. Utilities must promote local solar, storage, efficiency, and demand response, particularly in BIPOC and frontline communities, which are impacted first and worst.
    • Innovation: Utilities must look to new technologies that are cleaner and more cost effective. They must pursue innovation that provides grid benefits and the best services to customers.
  • Inclusion of an “Environmental Justice Adder.” Utilities can be required to consider the full cost of environmental impacts and pollution in their planning. An “Environmental Justice Adder” is a concrete way to capture the value of including environmental justice in setting tariffs. Through an Environmental Justice Adder, 100% regenerative policies may account for economic values, improved health outcomes, reduced indoor air pollution, housing security, and energy affordability.
  • Distributed energy resources planning. Utilities should be required to create a plan for establishing and managing a network of distributed energy generation, including how to connect distributed energy resources into the grid, maximize data flow throughout the grid between consumers and generators, and resolve technical barriers to increased distributed energy generation.
  • Shared/community solar. This is a model of distributed renewable generation that allows customers to opt in to a local solar project without having to install their own system, thus making it more accessible to renters and households that cannot afford to install their own solar system. Community solar projects are directly owned by participants, while shared solar projects are usually owned by a third party, such as a utility.

Examples

Example of public utility model: Nebraska is the only state where all residents receive electricity from a community owned utility, as opposed to a for-profit utility. In 2015, 121 publicly owned utilities, 10 cooperatives, and 30 public power districts provided electricity to a population of around 1.8 million people. As a result, residents now have some of the lowest electricity rates and reinvest any revenue to guarantee reliability and affordability.[12] Of course, this publicly-owned model should also be coupled with the use of clean renewable energy sources, and not coal and gas.

Example of an Environmental Justice Adder: New York Lawyers for the Public Interest advocated for an Environmental Justice Adder in a case that determined the value of distributed energy resources. The primary objectives of this Environmental Justice Adder are:

  1. targeted air pollution reduction;
  2. significant utility bill reduction for low-income individuals living in environmental justice communities;
  3. participation in community solar projects as owners, members, and/or subscribers by low-income individuals living in environmental justice communities;
  4. supporting workforce development and local hiring within environmental justice communities;
  5. supporting sponsorship of community solar projects by member-based and community representative organizations in environmental justice communities;
  6. supporting energy efficiency upgrades and overall energy burden reduction for housing units that serve low-income individuals in environmental justice communities.[13]

References

  1. Wasserman, Harvey. The Last Energy War: The Battle Over Utility Deregulation. Seven Stories, 1999.
  2. Timeline and History of Energy Deregulation in the United States.” Electric Choice. Accessed 29 Aug. 2019.
  3. Girouard, Coley. “How do electric utilities make money?Advanced Energy Economy, 23 Apr. 2015. Accessed 2 Aug. 2019.
  4. Wang. T. “Largest gas and electric utilities in the U.S. as of April 2019, based on market value.” Statista. Accessed 3 Sep. 2019.
  5. Nowak, Seth. “Some utilities are rushing to raise fixed charges. That would be bad for the economy and your utility bill.” American Council for an Energy Efficient Economy, 4 Dec. 2014. Accessed 3 Sep. 2019.
  6. California utility PG&E to pay $1 billion to local governments for a series of wildfires.” CNN, 19 Jun. 2019. Accessed 4 Sep. 2019.
  7. Differences Between Publicly and Investor-Owned Utilities.” California Energy Commission. Accessed 4 Sep. 2019.
  8. Public power and IOUs: The Same Yet Different.” POWER, 1 Jul. 2015. Accessed 4 Sep. 2019.
  9. DeShazo, J.R., et al. “The Promises and Challenges of Community Choice Aggregation in California.” UCLA Luskin Center for Innovation, 2017.
  10. What is a co-op?National Cooperative Business Association. Accessed 3 Sep. 2019.
  11. Nowak, Seth. “Some utilities are rushing to raise fixed charges. That would be bad for the economy and your utility bill.” American Council for an Energy Efficient Economy, 4 Dec. 2014. Accessed 3 Sep. 2019.
  12. Community-Owned Energy: How Nebraska Became the Only State to Bring Everyone Power From a Public Grid.” Yes! Magazine, 30 Jan. 2015. Accessed 29 Aug. 2019.
  13. “Case 15-E-0751 – In the Matter of the Value of Distributed Energy Resources.” New York Lawyers for the Public Interest, Inc, 2017.