“Shockingly stupid” electric policy threatens consumers

When the head of a major electric company says today’s policies are “shockingly stupid,” we probably should pay attention.

At the premier annual energy summit, David Crain, CEO of NRG, a company owning more generators than are in all of New England, said, “Think how shockingly stupid it is to build a 21^st-century electric system based on 120 million wooden poles.”

Crain believes people will buy less power, making less use of the electric system.  They use power more efficiently, and more electricity will come more from “distributed generation,” small units serving individuals and local areas.

Not everybody agrees with Crain, but his warning cannot be ignored.  And the market is showing some of what he forecasts is already happening.

All electric utilities own wires.  Customers pay their wires charge for each kilowatthour – the unit of electricity – they use.  If customers use less electricity and utility revenues fall, the wires companies still want to cover the cost of their wires.

Beyond cost recovery, most utilities also collect a profit from their customers.  The state grants electric utilities monopolies, and regulators allow them to set their rates to achieve a specific level of profit.  Most other companies get neither break.

Utilities seek to protect their profits by “decoupling,” which separates their profits from all other wires charges.  In other words, they get to collect the same amount of money to pay to their shareholders even if their wires are used less.  That pushes up their rates, because the profit is spread over fewer kilowatthours.

A utility can make up shortfalls in its revenues to pay for the wires and profits by raising the rates paid by all customers.  Across-the-board increases mean customers who have not cut their usage pay some of the costs left behind by those cutting their purchases.

Or the utility can argue customers cutting their usage may still occasionally place demands on the system, so they alone ought to pay higher rates serving as a sort of insurance premium.  That’s what Central Maine Power is now proposing.

At some point, that approach could encourage some customers to completely drop off the system.

If utilities risk losing sales, their investors will want even higher returns on their investment, pushing rates up.  Fearing rate increases, customers will be discouraged from cutting their purchases of power from the grid.

That looks like a lose-lose situation.  The utilities have a financial obligation to their investors, so they look to customers to pay more.  Customers feel cheated of the promise of efficiency and distributed generation if rate increases are their reward.

Regulators are supposed to strike a balance.  But, in New England, they done just the opposite, piling on wires costs and boosting utility profits, supposedly to get more renewables to the market. 

Customers who want the utility to maintain its wires for their possible use when needed should pay for this insurance.  Perhaps smart meters can help make how they pay more fair.

Instead of charging for wires service by the kilowatthour delivered, as is usually done today, utilities could charge for the maximum demand by each customer, as shown on the new meter.  The customer would pay for the highest amount of wires used each year instead of the amount of power flowing on the lines

That could encourage customers to try to use the grid even less, especially at peak usage times when power costs are high, promoting conservation and distributed generation.  But it might send us into the same spiral of less usage leading to higher rates. 

Maybe it’s time to change the nature of the electric industry.

The country has already made one big change.  Though electric service is a vital necessity, Congress decided that it could be supplied by non-utilities, taking their own risk on building power plants, rather than utilities and their customers taking that risk.

We are no longer stuck with the same old way of generating power.  Should we be stuck now with the same old way of transmitting it?

Today we face a situation just like having customers pay for buggy whips, even though we now have automobiles.  The buggy whip makers had to either change their business or quit.

Electric utilities could get into the unregulated businesses of selling distributed generation or efficiency services.  They would have to move away from their current all-wires business model.

Change is essential unless regulators expect to have people pay more and more for less and less, thus preserving the traditional utility at its customers’ expense.