Now we come to the fun part. If you could build a dream spouse, what would he or she look like? Describe their personality, sense of humor, and relative similarity to Kelly LeBrock.

It’s fun to think about, and utterly unrealistic. So too with the question we now build to. If you were king, had a clean sheet of paper and were completely unconstrained by politics, how would you design our energy and environmental policy to eliminate the existing barriers to clean energy?

This type of politically-unconstrained question is too often dismissed as naïve. It isn’t. As Yogi Berra said, “If you don’t know where you’re going, you might get there.” Energy policy has historically been promulgated in fits and starts, with patches on patches and damned little holistic review. Not surprisingly, it doesn’t all fit together very nicely. Idealistic, politically impossible energy policy may be naïve, but it is a far greater sin to steer a policy vehicle this big and with this many economic and environmental consequences without having some sense of where we’d like to go.

I’m starting to feel a bit Douglas-Adams-ish with this now the 5th part of the trilogy. Nonetheless, in the interest of brevity, I limit this post only to utility policy, with more parts of the trilogy to follow.

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Ideal utility reforms

  1. Eliminate all power generation monopolies. A case can be made that the power grid is a “natural monopoly,” neither conducive to nor benefitting from competitive pressure. Generation, on the other hand, is a different story. All generation assets sell a commodity that is differentiated only by its location. Moreover, since fuel selection and energy efficiency contribute overwhelmingly to the cost of power and its CO2 signature, it is quite appropriate to expect generator investors to select technologies based on their expectations of future market pricing and CO2 regulation. So long as generation remains regulated, antiquated, otherwise-uncompetitive plants get built and maintained in the name of capital recovery, while competitors who would otherwise steal their market share are held at bay. Fix this by immediately eliminating all generation monopolies, and shift the state’s regulatory oversight from one of rate recovery to one of anti-trust enforcement.

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  3. Require regulated wires monopolies to bear the cost of all generator interconnections. A grid without generation is useless. So long as the wires companies retain the obligation and liability to ensure grid stability and safety, it is appropriate for them to specify the specific hardware and controls paradigms for the interconnection of any generator to their grid. However, it is inappropriate for a wires company to specify capital equipment that others must pay for — even though this is current practice for any generator not owned by the wires monopoly. This creates an innate conflict of interest, with one party bearing liability for failure and the other bearing the cost — made all the worse by the fact that the utility monopoly often has a vested commercial interest in keeping the non-utility generator from coming into operation. Fix this once and for all by mandating that the costs of all generator interconnections, regardless of owner are borne by the wires utility and added to their ratebase.
  4. Establish Independent System Operators (ISOs) across the country, with responsibility for grid management and the creation/oversight of markets for grid services. We must eliminate the fiction once and for all that the costs, insurance requirements, transaction fees, and electrical characteristics of the power grid change when one crosses a state border. FERC began the process of creating regional transmission organizations (RTOs), but while some (like ISO-New England) have taken this directive seriously, many parts of the country remain beholden to state-specific variances. So long as the current system stays in place, we will lack both a coordinated system and a transparent way to establish the price, supply and demand of necessary grid services. These ISOs should be tasked — following ISO-NE and PJM examples — to establish markets for energy (MWh), capacity (MW) and all relevant ancillary grid services (power factor correction, voltage support, etc.) with transaction costs structured to ensure maximum participation by all generators, location-specific price differences and complete separation of market oversight/market participation functions to ensure transparency.
  5. Put the responsibility for Wires-company regulation at the regional (ISO/RTO) level. Our national power grid is dominated by companies (Southern Company, National Grid, Duke, AEP, etc.) that span multiple states, but have their rates and responsibilities set at the state level. Electrons know nothing about state boundaries, but the rules relating to their production, distribution, and coordination change at every state borders. In addition to the technical inanity of this approach, it has created a culture of jurisdiction shopping, where utilities that don’t like a decision in one regime can try to shift it or otherwise temper it by a decision in another. (It also means that reforming national utility regulation today requires coordinated action by 51 separate regulatory bodies.) Since ISOs are all FERC — and therefore, federally — jurisdictional, this would once and for all consolidate utility regulation under a single roof. It’s time to get rid of state-level wires regulation, and move it to the level where it belongs.
  6. Establish uniform grid-wheeling fees, based on distance travelled, allow private entities to enter into private transactions to sell power and eliminate the ban on private wires. Today, unless you are a regulated electric utility, you cannot sell electricity directly to an electricity consumer unless you are (a) inside their facility, selling power that does not flow out across their meter to the grid; (b) not resident in one of the dozen states where only a regulated utility can sell electric power; and (c) willing to pay the wheeling charge imposed by the electric utility who moves your power. In the more restructured markets like ISO-NE and PJM, this latter charge has been largely standardized, but elsewhere the rules are far less consistent. Meanwhile, while you can run a wire from your generator to your factory so long as you stay within your own property lines, you cannot run a wire from your generator across the street to your neighbor. These laws are dumb, and increasingly anachronistic. In Alberta, Canada, any generator can sell power to any customer anywhere in the province subject to a standard grid “wheeling” charge, based on distance. Similar rules exist in Mexico. Mexico goes one step further and allows any generator to build their own wires to connect up to 50 distinct customers, to the degree that it is more cost-effective to build those wires than to pay the wheeling charge. Few take this option, but its presence serves to keep the utility honest when they calculate their wheeling fees. In both cases, the result is to allow buyers and sellers to meet and negotiate price — a basic principle of market economics that remains stubbornly absent in U.S. power markets.

  7. Set Wires-utility rates of return based on the fossil-efficiency of their service territory. Today, utilities have their rates set by commissions who determine a “fair” return on invested capital for all their investments, and pass along operating costs without profit. This predisposes utilities to expensive capital projects, makes them agnostic on efficiency and makes them hostile to anyone who makes an investment (efficiency, local generation, etc.) that reduces the revenue earned on their system. Fix this by providing an explicit linkage between utility returns for the purposes of rate setting and the fossil efficiency of their customers (e.g., fossil energy consumed per MWh of electricity consumed, so as to provide an incentive for conventional renewables, conventional efficiency and anything else that increases the ratio of MWh to fossil energy input). This would immediately give those utilities a vested financial interest in actions that increase the efficiency and/or renewability of their service territory, and bias them in favor of new clean sources in a much more direct way than RPS mandates and feed-in tariffs ever could.
  8. Finally, nationalize any monopoly utility that fails to show demonstrable, steady progress in increasing the fossil-efficiency of its territory. A for-profit monopoly tends to provide the worst of both worlds — profit-seeking behavior without competitive pressure to keep them honest. It is not at all clear that such entities make sense; if it did, we ought to give a profit-incentive to the local fire department and eliminate anti-trust laws in the name of creating more for-profit monopolies. That said, the case is often made that attracting quality people in today’s market requires the potential for financial gain only possible in a private company. Whether true or not, this measure would put that to the test. A utility engaged in profit-seeking behavior under these guidelines would be steadily reducing the amount of fossil energy consumed on its system. A utility that is failing to accomplish that goal is one that is failing to invest in profit-seeking behavior, and is demonstrating by its actions that the profits paid to shareholders are simply a tax on social welfare. This rule creates the incentive to do good, with the balancing penalties for falling asleep at the switch.

That’s it for ideal electric utility policy reforms. Next up: ideal environmental policy reforms.