By Kennedy Maize
Has the U.S. got it wrong in the way we finance the poles and wires that bring power to our communities?
Veteran energy economist Severin Borenstein, faculty director of the UC Berkeley’s Haas Energy Institute (and also a member of the California Independent System Operator governing board) says the answer is yes. We should finance the electric distribution system the way we finance roads in the U.S. – through taxes.
In a recent Haas blog post, Borenstein notes that in much of the U.S., what we pay for our electricity is in stark comparison to the “much-lower cost of actually supplying an incremental kilowatt-hour (kWh)….” The common rationale is that the cost difference “is that we pay for the fixed costs associated with electricity distribution – the poles and wires, as well as the costs of reducing the risk of those wires starting fires – through volumetric (per-kWh) charges.”
Why such a difference between two costly service items that seem very similar? “Both roads and electricity lines provide a valuable service by making large fixed cost investments,” says Borenstein. “In both cases, recovering the fixed costs through a usage charge requires a price much higher than the incremental cost of providing the service.”
The difference to the consumer is considerable: “The price you are charged for moving a kWh down a distribution line in your hometown is typically well above zero, averaging about 35% of a customer’s electric bill, even though the cost you are causing with that activity is essentially zero at almost all times.”
As in many other public policy areas, California offers an instructive case, according to Borenstein: “In California and other locations with very high fixed costs of distribution systems – due to wildfire risk, hurricanes, heat, and other factors – electricity rates have been driven so high that it is obvious to most policymakers that they do not reflect the cost of an incremental kWh for most customers at most times.
“Yet, even with these pressures, most roads are free and nearly all electricity distribution is over-priced.”
This price disparity touches Borenstein’s economist soul. “The economist’s preferred solution” he writes, “is to price the service at its social marginal cost (SMC), which includes the cost a user imposes on others through congestion and pollution. Because so much of the cost of roads and electricity lines is invariant to usage, however, such pricing wouldn’t raise enough revenue to cover all those fixed costs.”
What to do then? Borenstein’s answer is to pay for the utility infrastructure through conventional taxes. Some push back against this approach, he acknowledge, arguing that the difference is that the poles and wires are a product of “investor-owned utilities, not local governments.”
That’s a false comparison, he says: “But moving to a tax-based infrastructure revenue model wouldn’t have to change IOU regulation. The IOU would still have its spending scrutinized by a regulator. When the regulator determines that the expenditures are valid it would inform the government revenue authority that these costs should be reimbursed, just as governments do with many road projects.”
The current approach of what are essentially usage fees has become “a significant driver of the affordability crisis.” In response, some have argued for utilities to spend invest less on things such as reducing fire risk to reduce customer bills. For Borenstein, that’s a dangerous dead end. He concludes, “Safety investments should be examined closely to make sure they are cost effective, but they shouldn’t be undermined by a policy process that fails to look beyond the current antiquated funding mechanism.”
The Quad Report, covering energy policy and politics