Kansas conversations on utilities and efficiency
Check out this article from Energy Central. A workshop in Topeka, Kansas has been trying to figure out how to incentivize Kansas utilities to embrace conservation. The local regulated utility summarizes the problem:
“We are totally committed to energy efficiency,” said Chris Giles of Kansas City Power and Light, “as long as we can have the same level of return we would earn and prohibit the loss of profit margins.”
Step one in the 12-step process is, after all, admitting that you have a problem, so I take this admission as a necessary (if not a sufficient) step in the right direction.
The sexy way du jour to address this is via decoupling, which — through some mathematical rate manipulation — enables utility revenues to be maintained even when their kWh sales fall. Needless to say, the Kansas hearings are investigating that, but as they do so, they’re exposing some rather interesting problems with the theory. For instance:
… David Springe, director of the Citizens’ Utility Ratepayer Board … noted that utilities already have succeeded in moving much of their risk — fuel costs, transmission costs, environmental costs — onto consumers. Now utilities are asking that even more risk be assumed by the consumer.
“We’ve moved just about everything that is volatile to the customer,” Springe said. “We have removed all of the risk. All that’s left is, how do we give them more money?”
This idea was echoed later:
John Perkins, a consumer advocate from Iowa, said the idea that utilities’ profits ought to be protected at all costs is wrong.
“It doesn’t matter why our revenues are down,” he said, offering a paraphrase of utilities’ position. “Just give them back to us.”
These are pretty compelling arguments, and ones that go to the heart of the so-called “regulatory compact.” The state granted a monopoly and in return expects the utility to manage the grid and bear a certain (albeit limited) degree of risk. Consistently shifting that risk off of the utility and onto the customer ultimately breaks the compact or at least compels us to ask whether we ought to revisit our base assumptions.
At which point things get interesting.
Utility regulators have an obligation to ensure that utilities earn profits on their capital investments that are high enough to attract capital to their business, but not so high as to earn unfair profits for the utilities on the backs of their captive customers. Defining this magic return is hard, but it is guided by a general principle as follows:
A public utility is entitled to such rates as will permit it to earn a return equal to that generally being made at the same time and in the same general part of the country on investments in other business undertakings which are attended by corresponding risks and uncertainties.
In other words, the utility regulator needs to figure out how risky the utility investment is, find other folks making comparably risky investments (and attracting capital) and then give the utility a comparable return. In theory, that’s easy. In practice, it’s really hard — for the simple reason that there are no unregulated businesses that face the same level of de minimus risk faced by a regulated monopoly. The difficulty of that calculation however, doesn’t diminish the fundamental link between risk and return. Since decoupling lowers the risk faced by utility investments, logic suggests that it ought to also be coupled to a reduced rate of return. In non-utility speak, that means that decoupling should lead to lower electricity rates.
No utility is likely to remind their regulator of this linkage. But it has come up in this case, again from the Citizen’s Utility Ratepayer Board:
[Springe] said that the justification for guaranteeing profits is that utilities assume risk when they make their investments, and thus deserve to be rewarded.
“Return on equity compensates them for risk,” he said. “We have to have a substantial return on equity reduction.”
Legally, he’s spot on. Politically, that is of course a hard fight, but it’s sure to be an interesting one.