For Scott Hempling, a veteran electric utility regulatory critic, recent activities suggest only a lip-service dedication to capitalism on the part of investor-owned utilities undercut by industry developments. For Branko Terzic, a former state and federal utility regulator and a consultant to investor-owned utilities, current trends suggest that IOUs are need help from regulators as they face stranded assets resulting from distributed energy resources and other industry trends.
Their views, although not directly in opposition, present an interesting contrast on what are, and perhaps should be, the responses of state regulators to changes occurring in the electricity business.
First, Hempling, a long-time Washington-based legal practitioner in regulatory law and former head of the National Regulatory Research Institute. In his May commentary, “The Committee of Inconsistent Capitalists: Is Your Utility a Member,” Hempling writes, “As customers, utilities favor capitalism. Needing underwriters to market their bonds and their shares, they select these competitors competitively. But when they seek new customers, their commitment to capitalism weakens.” In these circumstances, he argues, the utilities “want regulators to channel capital not to the most productive actors but their own favored ventures. It’s back to the 1950s –choosing the boss’s kid over favored ventures.”
Hempling cites five examples:
* An Illinois law that “requires utilities to create a specified number of jobs, whose cost ratepayers must fund. The new workers will build smart grids and other infrastructure, the profit from which ratepayers must also fund.”
* State commission approvals of mergers and acquisitions conditioned on “agreement to construct headquarters buildings, build hiking trails and construct large-scale solar farms…all outside the utility’s obligation to serve (otherwise these things would be happening without the mergers).”
* Allowing utilities to control electric vehicle charging stations, not necessarily from the “most efficient producer.” Many utilities “expect to get that new profit stream automatically, through regulatory approval rather than competitive merit.”
* Avoiding penalties for poor, or even felonious, performance, as when Pacific Gas & Electric, convicted of crimes related to the San Bruno gas pipeline explosion, “sought leniency [from the California Public Utilities Commission] to protect its profitability.”
* When distribution system providers, such as storage, distributed generation, solar and wind, EV batteries, and demand management offer “paths to low-cost, renewable, non-pollution power,” and “some utilities expect to receive, and profit from, the new job without competing for it. That’s not capitalism.”
Hempling commented that it’s not the task of regulators to protect the regulated entities from changes in the markets. “I once heard a state commission chair criticize Germany’s solar energy policies. ‘Their utilities lost one-third of their value. We can’t let that happen here,’ she said, as if protecting private share value were a government’s primary responsibility.”
Terzic, managing director of the Washington-based Berkeley Research Group, a former Wisconsin state regulator and former member of the Federal Energy Regulatory Commission, doesn’t take on Hempling directly. But in a paper written before Hempling’s latest regulatory essay, Terzic make a case for incumbent utilities recovering economic damages caused by competition from new entries in the electric utility market.
He focuses in his April Linkedin article on “stranded assets,” utility assets left behind when market forces overtake them. He cites telecom issues in the 1970s and 1980s when competition came to the long-lived telephone monopoly and the breakup of AT&T, and the 1990s when electric restructuring brought competition to the generation of power.
Today, says Terzic, developments in distributed energy resources, site storage, and independent, non-utility grids threaten investor-owned utilities with a new round of stranded assets. Reporting on the 50th annual meeting of the Society of Regulatory and Utility Financial Analysts, Terzic identifies four sources of future stranded electric utility assets.
* Rate-based generation assets, challenged by electricity storage, demand-side management, and “other developments that could cause curtailment or use or redundancy of peaking power plants.”
* Transmission assets, as “distributed generation could cause the underutilization or redundancy in some transmission assets including transformers and lines.”
* Local distribution substations or transformers may not be adequate to serve the increase in electric vehicles or “retired early due to DSM and aggregation impacts.”
* Current smart metering technology. “New technologies and new functional requirements may make even the newest meter obsolete in a few years.”
While some may say that these assets rendered uneconomic in the marketplace should be a problem for the utility’s shareholders, not its customers, Terzic says these potential developments represent a need for a regulatory response. He calls for “early recognition that the economic life of the assets is shortened by these developments and appropriate adjustments in depreciation rates and policy must be made. For that to happen, both utility management and regulators must act in concert.”
— Kennedy Maize