Joshua A. Basseches is a postdoctoral research fellow at the Ford School of Public Policy at the University of Michigan. His research focuses on the politics of state-level climate and renewable energy policy design. Previously, he worked in the Massachusetts state legislature.
Now that we’ve had a couple weeks to process all that went wrong in Texas, people are paying more attention to the national electricity landscape, how it functions, and who’s in charge. And with Joe Biden and a Democratic Congress in power, there is a real possibility of establishing long-lasting legislative climate and energy policy. But as someone who has spent the last several years researching how climate legislation gets designed in blue states where governors are among its biggest proponents and Democratic legislative majorities are much wider than they are in D.C., I have three words of warning: investor-owned utilities.
Thanks to an early-20th-century deal between private utility executives (most infamously, Samuel Insull) and state legislators, utility companies hold enormous structural power over policymaking — they are allowed to operate as private monopolies providing a public service. That means climate-policy advocates essentially have two options: Win them over, or reduce their power.
Nationwide, 72 percent of us receive electricity from these corporations. We cannot shop around: With electricity, there’s only one game in town. If you live in Detroit, it’s DTE. In San Francisco, it’s Pacific Gas & Electric. In New York City, it’s Con Edison. There are more than 160 of these companies across the U.S., but most are owned by a handful of larger “holding companies,” such as Berkshire Hathaway Energy, Exelon, Duke, Southern Company, and American Electric Power. Together, these five own more than 30 utilities in 31 states; in 2019, according to Fortune, they earned combined revenues in excess of $347 billion and held combined assets worth more than $1.1 trillion.
Research increasingly shows how effective investor-owned utilities, or IOUs as they’re often called (fitting, perhaps, given how they’ve used our money to finance their remarkable growth), have been getting what they want, primarily through lobbying, making enormous campaign contributions, and controlling access to the data that state regulatory commissions rely on to approve rates. It’s a perfect example of what watchdogs call “regulatory capture.” A recent ProPublica investigation illuminated some of their sneaky tactics, like saddling electricity customers — you and me — with extra costs to increase profits.
Don’t be fooled by the fact that some IOUs set lofty, voluntary climate goals; they often demonstrate little to no intention of meeting them. They enjoy an unmatched track record getting climate and renewable energy policies designed to benefit them financially, sometimes at the expense of any effectiveness in reducing greenhouse gas emissions or promoting renewable energy.
The good news is that about one-third of states have adopted policies that take IOUs out of the business of generating energy. These utilities still own the wires and transmission systems that keep the lights on. But give them reliable, renewable electricity at the right price, and they are more than happy to go green. Under the right conditions, IOUs have proven their willingness to go from being the most powerful opponents of climate and renewable energy policy to being among its most forceful cheerleaders.
My research shows that this is exactly what happened in California, widely considered the nation’s leading climate-policy state. IOUs there divested from fossil-fuel generation years ago, then policymakers enabled them to profit through energy-efficiency incentives. The state’s biggest utilities — PG&E, Southern California Edison, and San Diego Gas and Electric — supported the landmark climate law, AB 32, adopted in 2006. The story in other leading climate-policy states, like Massachusetts and Oregon, is similar: Ambitious climate and renewable energy policies passed with IOUs’ support.
These private utilities are extremely powerful political actors. They largely designed the electricity system as we know it, and they have made it work very well for themselves. Typically, they favor market-based approaches, like cap-and-trade programs, that tend to draw the ire of environmental justice advocates and that some have argued should be abandoned.
But policymakers are not powerless. They can, for example, make rate-structure adjustments that incentivize IOUs to ditch coal and gas plants more quickly and invest in renewables. They could even get more creative by, for example, imposing progressive rates that require the rich to pay more than people struggling to pay their bills. One way or another, these companies will need to recover costs in order to support strong climate policy. Essentially, they are going to want us to bail them out, not unlike the big banks in the financial crisis of 2008.
There is another option: We can push our federal representatives, who are likely just months away from considering major climate and energy legislation, to begin reining in the political power of IOUs so we no longer have to negotiate on their terms. Congress and the Federal Energy Regulatory Commission could take back some of the power they delegated to states in the early 1900s, possibly by taking steps to nationalize the grid. Given the deep, structural sources of these companies’ political power, this will not be easy or quick. These massive structural changes will likely require more than a Democratic president and a 50-50 Senate.
Ideally, though, we would not battle these companies on a city-by-city or state-by-state basis. Many of them are larger than state boundaries; no single state has the power to reform them. And returning utilities to public control has been an often fruitless endeavor in cities that have tried, like Chicago and San Diego; likewise for attempts to pass measures to increase transparency and accountability, as in Illinois recently.
Reducing the power of investor-owned utilities will require our federal representatives to become the experts in energy policy that the IOUs currently are. They’ll need help from climate and consumer activists to master these issues. We must become fluent in the technicalities of how the electric grid works, and how state regulators calculate rates and make determinations about cost recovery. We need to rethink not only our climate policies, but the political economy of energy provision.
IOUs will not be silent bystanders to the legislative work that lies ahead; they will be right in the middle of it. We need to make sure they aren’t the smartest people in the room.
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