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Science, Law & the Environment Emerging Topics in Environmental Law

Utility Regulation If Global Warming Mattered

Posted in Natural Resources and Environment, Regulatory, Renewable Energy

In Washington, as in most states, privately owned public utilities are regulated by the Utilities and Transportation Commission (UTC). Utility regulation developed beginning in the late Nineteenth and early Twentieth Centuries, and reflected the battles of that era with the monopolistic power of railroads and utilities. As the nation first discovered the power and mobility that came with trans-continental railroads and electric lights, it also learned that consumers could be very much at the mercy of railroads and utilities. They are natural monopolies and, in the absence of regulation, can exercise monopoly power over consumers. And so, over time, both the states and the federal government created agencies to set the rates that these natural monopolies are allowed to charge. Also over time it has become clear that these agencies are not equipped to respond fully and flexibly to new issues that weren’t even on the horizon when these agencies were founded, like global warming.

The basic premise of utility rates in Washington is set forth in RCW 80.28.010. It provides that rates received by any gas, electric or water company “shall be just, fair, reasonable and sufficient.” It also provides that every gas, electric and water company must furnish such service, instrumentalities and facilities as “shall be safe, adequate and efficient, and in all respects just and reasonable.” Similarly any rules or regulations of the utility companies must be “just and reasonable.”

In practice, that standard sets up a two-sided contest, between the utility, which has every incentive to maximize the rates received, and minimize the costs of service provided, and consumers, who have every incentive to minimize the rates paid and maximize the quality of service. There are lots of nuances, but it remains a two-sided contest: utility shareholders versus consumers.

Unfortunately reducing greenhouse gas emissions has a price tag that neither utilities nor their customers want to pay under the current system of regulation.. Electric companies have hundreds of millions of dollars invested in coal-burning and natural gas-burning power plants. They expect a return on that investment, and our utility regulation assures them that if the investment was prudently made at the time it was made, they are entitled to that return. Because they only receive that return by selling electricity from the plant, they have every incentive to maximize the amount of electricity it produces – thereby maximizing its production of greenhouse gas as well. Consumers, and their advocates, want the cost of electricity kept as low as possible. If the lowest marginal cost of electricity production is from increasing the utilization of existing fossil fuel-burning plants, consumers have every incentive to have the utility fully utilize that plant rather than supplying additional energy through higher cost renewable sources. But the impact of that search for the lowest cost power is that start-up sources of renewable power often cannot compete. Burning fossil fuels in existing power plants is the cheapest way to produce electricity. Creation of new renewable sources of energy requires massive capital investment, and if utilities are forced to make that investment, the rates they must charge must increase.

Renewable sources of energy such as wind and solar also are not able to reliably meet peak demands. Even the windiest areas sometimes go calm, and there is no assurance that the calm day won’t occur when a heat wave creates peak demand for air conditioning. (Solar power may have the advantage of more reliably peaking at the same time as electricity demand peaks.) The regulatory scheme demands that utilities provide service that is “adequate,” and utility companies argue with some justification that they must continue to invest in capacity that is reliably available to meet peak demands.

The upshot is that under the current regulatory scheme, it is very difficult to spur development of renewable energy sources to substitute for existing fossil fuel sources. The two-sided contest would have to become a three-sided contest, with the environment and reduction of global warming having an equal priority, in order for regulated utilities to end up creating much of a change to renewable energy sources.

Under the current regulatory regime, a utility may spend more than a million dollars in a single rate proceeding when it asks the UTC to increase its rates. Recognizing the fact that consumers cannot compete with that sort of resources, the Legislature has created a “public counsel” to act as the watch dog for consumer interests. The UTC also has a full-time staff within the Attorney General’s office, and both public counsel and the UTC staff routinely hire experts to testify on their behalf. For the environment and reduction of global warming to have a meaningful role, there would have to be equal resources available to advocate their position in rate proceedings. In other words, the Legislature should create an advocate for the environment to take part in regulatory proceedings.

The Legislature has made some strides at re-balancing the interests at stake in rate making. It has required that utilities meet certain renewable resource targets, and that they pay for some renewable energy through net metering and green tags. But far more would be needed to begin to utilize the potential for renewable electrical energy.

And in the end, that may be the best argument for why a cap-and-trade program is essential. At present, there is no cost associated with a utility burning fossil fuel to produce electricity beyond the cost of the coal or natural gas itself. Indeed, by spreading the initial investment in the plant over greater production, it may be that the more carbon a plant emits, the cheaper its energy becomes. If, on the other hand, each ton of carbon dioxide emitted had a cost associated with it, then burning more fossil fuels would start to be self defeating, for both customers and the utility. There would potentially be both a reduction in the cost to the utility and the rates that consumers must pay if the utility switched to more renewable sources. It might become more feasible to keep the fossil fuel plant to help meet peak demands, but dial it down when adequate renewable sources were available.

In the absence of a cap-and-trade program being in place, if the Legislature wants reduction of greenhouse gases to be an important part of how utilities change their business behavior, it needs to make fundamental changes in utility regulation. “Fair, just, reasonable and sufficient” needs to be changed to “fair, just, reasonable, environmentally sustainable and sufficient.” The Legislature needs to create an “environmental counsel,” akin to the current “public counsel,” who has the resources to be a serious advocate for reduction in greenhouse gas emissions in UTC rate proceedings, and who can speak on behalf of the emerging industries that will supply new technologies if the market rewards them, but which do not begin to have the resources to compete in rate proceedings before the UTC on their own behalf.

  • Nathan

    >"There would potentially be both a reduction in the cost to the utility and the rates that consumers must pay if the utility switched to more renewable sources"…. This is only possible AFTER rates have SKYROCKETED!!! As mentioned in the beginning of the article, if utility companies were forced to start new "green" power generation facilities, and abandon or minimize use of power plants already in place, the consumers would have to pay for both the loss of the current infrastructure, AND the creation of the new facilities. Then, to add insult to injury, the government wants to add another tax on carbon emissions that the consumers would pay. How exactly is this supposed to be beneficial for consumers? And how is this supposed to help the case for a Cap and Trade system?

  • Graham & Dunn

    >Nathan, There is no question but that there is a near-term cost associated with prioritizing use of renewable energy. That is true with any conversion to a new technology. Do you remember what you paid for your first computer and what you got for your money? Will costs "skyrocket"? Probably not, but there will be a cost. That's why I titled the article "if Global Warming Mattered," because if global warming mattered, we would choose to make an investment in sustainability even though it entailed a near-term cost. The difficulty of course is that by avoiding near term costs, we may be subjecting ourselves to far larger long-term costs. But don't lose sight of my larger point, which is that if global warming mattered, there would not be two sides in the debate about electric rates: consumers versus the utility shareholders. There would be three sides, each with a voice; sustainability would be one of the voices. The utilities would have to compromise some as well as consumers compromising some. Elaine