Jun 13, 2024
On June 13, The Capitol Forum’s Teddy Downey spoke with John Farrell, co-director of the Institute for Local Self-Reliance and director of the Energy Democracy Initiative, about his recent report entitled “Upcharge: Hidden Costs of Electric Utility Monopoly Power.” The full transcript, which has been modified slightly for accuracy, can be found below.
TEDDY DOWNEY: Good afternoon, and welcome to our conference call on “The Hidden Costs of Electric Utility Monopoly Power”. I’m Teddy Downey, Executive Editor here at The Capitol Forum. Today’s guest is John Farrell, Co-Director of the Institute for Local Self-Reliance and Director of the Energy Democracy Initiative. Today, we’ll be discussing John’s new report titled “Upcharge: Hidden Costs of Electric Utility Monopoly Power”, which delves into the problems associated with the hundred-year-old business model granting private companies exclusive power over their public resource of electricity. And in the report, he calls for some structural reforms to restore competition. And we’re going to get into all that shortly. But, John, thank you so much for doing this today.
JOHN FARRELL: My pleasure. Thanks for having me.
TEDDY DOWNEY: And really quickly, just on the format, I’m going to interview John. Then we’ll open it up to questions. If you have questions, please email us at: editorial@thecapitolforum.com. Or you can just plug it into the questions pane of the go‑to webinar control panel on your computer. And so, John, really interesting report. It would be great if you could start out by telling us what caused you to write the report, what caused you to do this research and then would love to get into some of the highlights from the report.
JOHN FARRELL: Yeah, I appreciate you asking that, because it really has been sort of an interesting trajectory. I’ve been working at ILSR for over 15 years on how we can capture, how communities can capture, more of the economic value of clean energy investments. I cut my teeth on ethanol—which I am glad I’m not here to talk about today—the farmer‑owned ethanol plants, and then worked on wind power and solar power.
But even like a decade ago or so, in the aftermath of the economic crisis in 2008, 2009, the federal government briefly enabled cash grants for investments in community-owned clean energy. ‑And at the time, wind was one of those really interesting things. And we saw these—I’m thinking about green energy partners—it was this farmers collective in Iowa. It was like a handful of farmers invested together to buy seven wind turbines and to put it up, supply that clean electricity to the grid, created jobs in the community and offset some of the risks from commodity prices. And then it kind of disappeared.
And then with the rise of cost-effective solar, we saw it grow and become much more persistent. Then all of a sudden, there were all these opportunities to generate electricity in ways that weren’t controlled by the incumbent utilities and at the distribution level. And in some ways, the utilities saw this before I did. They published a report—the Edison Electric Institute, which is the trade organization of the electric utilities, had a report they published in 2013 that famously used the phrase “death spiral” to discuss what it meant to their business model if their customers started investing heavily in things like rooftop solar.
So, they knew that this was a problem. And I think maybe a little naively, myself and many other people who are really boosters of localizing the economic opportunities around clean energy felt like, well, there’s plenty of room for everybody here. Like utilities can invest in big assets. We can invest in small things. And the two will complement one another. Local solar serves unique purposes. It can deliver power right where we use it, at the time that our air conditioners are cranking away. And utilities can build their large-scale wind and solar projects and everything will work well together.
And it was in like the mid-2010s that you started to see utilities act on that warning in their report and figure out how do we cut compensation for rooftop solar? How do we make it harder for our competitors to compete in this market?
And then increasingly, I started hearing stories from folks, especially like community solar developers. I’m based in Minnesota ‑and talked to a lot of folks here about our kind of nation-leading program of community solar development. And they started talking about how it was getting harder and harder to get their stuff on the grid. They were getting stalled doing interconnection. They were getting bad information from the utility. They might be told, oh, the interconnection costs will be $50,000. And then all of a sudden, there’s a revision. It’s like, actually, it’s going to be $500,000, making those business decisions, those investment decisions, really risky for them.
And completely different, of course, when a utility wants to build a power plant, they propose it to the Commission. They get a guaranteed rate of return from their captive customers. And so, the experience, of course, being very different.
I think the thing that really kicked it off for me though was actually reading a piece called “Is the Utility Transmission Syndicate Forever?” by Ari Peskoe, who’s at the Electricity Law Initiative at Harvard University. Because it was at that moment that I realized this issue of monopoly power didn’t just apply to competition at the local level on the distribution grid, but that we were facing it at the transmission level as well. Because before that, I had seen it as there was this sort of contest in the climate and energy community between folks who said, well, big scale is the way to do things and that’s what’s going to happen fastest and solve our climate problem. And small scale might be nice, but it’s not going to go quick enough to make things work. And the evidence, for one, has been the opposite. If you look at California, two thirds of their new solar additions over the past few years are actually small-scale stuff, not big stuff. It’s just that it adds up really fast when you have tens of thousands of homeowners doing it.
But the other thing that I realized in reading Ari’s work was that utilities fight transmission expansion, and therefore opportunities to build clean energy at large scale just as much as they fight it on the small scale. Because a lot of times a transmission line might mean giving access to a competitor’s power plant that will undercut the economics of their utility-owned power plant. That happened with Entergy, in particular, in Louisiana recently. They built a gas plant, square in the middle of where a new transmission line is being proposed and completely undercut the economics of that regional line, because it was going to threaten the economics and the financial stability of their utility-owned assets.
So that’s kind of what got me started on this. And my goal with it was to say, okay, a lot of people understand the political corruption issues in utilities, just like they do among other big corporations. You’ve probably heard of Pacific Gas and Electric and its problem with wildfires and its bankruptcy. You’ve probably heard about the first Entergy scandal in Ohio, where they bribed public officials in order to get House Bill 6 passed and get massive subsidies for their power plants that had been moved into competitive markets and then were failing. And so, they got subsidies to protect them then from those captive ratepayers when they were supposed to be competing on the merits.
But then I really also wanted to look at this question of how are utilities exercising the power that they have over the grid? In the transmission system, there ostensibly is competition. There was actually a recent FERC order that is kind of addressing some of those ongoing issues. I don’t want to talk too much about them because it’s a little bit further afield for me.
But on the distribution level, we can see very clearly that utilities are the only game in town. If you want to participate in the marketplace of the electric grid, you have got to go through the utilities’ interconnection process. You have got to deal with the compensation policies that utilities will lobby on before legislatures, before regulators, that they obviously have a lot of influence in selecting. And that is going to significantly endanger the success of public policies at the state level and the Federal Inflation Reduction Act and the Infrastructure Act to be successful at lowering costs for consumers, getting more clean energy on the grid and reducing pollution, capturing the health benefits, et cetera.
So, the arc of the report then is to try to help people understand what’s going on. So, I spent some time documenting the really high costs of the continued use of a monopoly framework in a system that is technologically and economically very competitive otherwise. We talk about how those costs fall disproportionately on communities of color, both in terms of health impacts and in terms of costs, much more cost burden. We talk about the damages to people and to property, ‑as with the wildfires in California, ‑driven by the pollution from these fossil fuel power plants that utilities have invested in and then lied about the role of their power plants in contributing to climate change.
And then I talk specifically about how are utilities exercising that monopoly power in ways that reinforce both the costs to consumers and the benefits and profits to their shareholders? I do talk about the political corruption issues because I think they’re intertwined. And I think it’s especially important for us to recognize that utilities have this privileged place of they don’t just get to lobby like any other business for things that benefit them from our politicians, but they often get to do that with the money from their captive customers and are allowed to even charge it directly to their captive customers in many states.
And so, customers are in this unique situation of I can’t go shop somewhere else and boycott Xcel Energy or Exelon, who provides me my electricity, because I don’t have anywhere else to go shopping for my electricity. And so, when utilities are able to take the profits of their business from captive customers and invest it in lobbying that directly opposes those customers, they’re in a ‑unique situation in our politics when sort of the freedom of speech of our consumers is taken away by the fact that these monopoly utilities are able to use the profits from those captive customers to make these investments.
So, in the end, I sort of borrow from lots of other wonderful people who have done this work before and talk about remedies. But I think the most important thing is to just drive straight at the problem, that what we really need in this system, what we really need from a fair electricity system, is an unbiased and nondiscriminatory operator of the grid system. And what we have right now is exactly the opposite. We have an entity in charge that has significant conflicts of interest financially in terms of the profits for their shareholders, and that encourages them very rationally to try to act in anti-competitive ways to prevent them from losing market share, to prevent them from losing out on investment opportunities that would profit their shareholders.
And so, we need to separate the function of operating the grid from the functions of providing electricity or managing electricity use or doing energy efficiency services. And the entity that’s in charge of that needs to have more public oversight, preferably by being a nonprofit or a public entity itself. And from there, we then need to develop robustly competitive and well-regulated markets for the other services that would be provided, such as making sure that there’s energy from solar panels available in the late evening when the sun has gone down, but air conditioners might still be running. Or managing an electric vehicle charging network so that we are charging vehicles at times when we have the most access to clean energy resources, like wind power that’s stronger at night. And then if we do those things successfully and make sure that our policies are aimed at remedying past harms, we will create a system that is better for consumers, is better for the creation of independent businesses, creates more jobs and is more likely to meet the climate goals that are expressed in public policy. And we need to make sure that we spend our investments, like the Inflation Reduction Act, well and effectively.
TEDDY DOWNEY: And one thing that I’m familiar with is the story of how antitrust laws were sort of weakened in the 70s, 80s, really for generations, in unregulated markets. But utility markets, they do have monopoly regulation, right? Did you get into the history? Can you talk a little bit about the history of how those rules ‑were put in place? People did recognize that discrimination, vertical integration, in the utility space was a problem. And what happened? How did we get to where we are now? Your report shows how fraught all of these markets are with conflicts of interests and self-‑preferencing and things like that.
JOHN FARRELL: I think it’s useful to sort of turn the dial back to the early 1900s when we were first seeing services from electric power plants. The first power plant was serving three blocks and was powering like 400 light bulbs. And now you have power plants that can power 400,000 homes, just a single power plant.
So, the scale of the industry is vastly different from what it was back then. And I think it’s important to understand that like that build up and that expansion of this into universal service really required some form of monopoly in order to be effective. It would have been prohibitively expensive to have multiple sets of wires going to every home and business. We really only need one grid. And it’s a remarkable engineering achievement that we have it at all. And I think remarkable, in part, because we were able to set up the system that helped get it built out to reach everybody.
And it had its holes. I think one of the things to keep in mind is I’m pretty sure (‑I can’t get back in the heads of folks like Samuel Insull, who was one of the masters of the early utility holding company and of the negotiations with state officials over having regulated monopolies) but I imagine at the time, he looked at the sort of wild west of the electricity markets, new investors coming in, building power plants, selling light bulbs, giving away light bulbs even. Actually, that was a very common practice by utilities in the early days to juice up electric demand. He probably looked at this and said this is like capitalism to a “T”. And it also means I have a lot of uncertainty and I would much rather have lower risk and lower competition, but very healthy, profits than have very high risk and really intense competition.
And so, I can imagine that there is rationality to why we set things up the way we did. But also like some motivated reasoning on behalf of those early utility leaders, realizing that the opportunity was here to rake in pretty good profits with captive customers, to not have to deal with that whole issue of competing with other entities.
And the competition was sort of twofold. Just to be clear, it was not only like many different potential people or entities being utilities, but they were actually competing with cities. So, in the early days, cities were often competing with private companies to provide this essential public service. And so, utility regulation was also protection from that kind of competition, from the public sector, as well as protection from other private sector actors. And there is some pretty interesting case law. And I talk about one particular case, Otter Tail, in the 1970s in the report, that kind of highlights how there were still antitrust concerns within that regulated system.
I guess the other thing to understand too is that we’ve had an interesting evolution. So, in the early days of expanding the electric grid, you had increasing economies of scale from building things bigger. So, like the bigger the power plant, the increasing scale economies and the lower the cost of electricity. So, the story of electricity from 1900 to the mid-1950s was lower unit costs every year. Utilities were making all these huge investments. We were getting better service, more reliability, and we were paying less for every kilowatt hour throughout that timeframe. And that all started to break down in the 1960s and in the early 1970s. And our regulation had to play catch up. And I talk about that very briefly.
But number one, we had inflation spike really high and interest rates. And all of a sudden, these huge investments in power plants became even more prohibitively expensive, huge cost overruns. You also lost scale economies. They had reached the limit of how big you can make a coal plant or an oil plant or a gas plant or a nuclear plant and still get those returns to scale because the technology wasn’t able to keep up with that. And so, what we learned, at that moment, was we have this system changing. And in the late 70s, we actually invited in, thanks to PURPA, the Public Utility Regulatory Policies Act, this opportunity to have a look at what could independent producers provide? And the lesson was they can provide electricity cheaper than the incumbent utility.
So, we had that first opportunity to question whether or not this system really makes sense anymore. And the last 40 to 50 years have basically been like one long, slow move to realize that the technology has moved completely past where the regulatory system is at this point. At that time, you were talking about, oh, a few discrete, large scale, independent producers wanted to get on the grid. We need to address how they can get permission to connect and sell that power and use the transmission system. And some of the early regulations from FERC in the 80s and 1990s reflected that.
But now we’re talking about not just like a few dozen or a few hundred independent producers. We’re talking about millions. I mean, there are 7 million small scale solar arrays deployed in California alone on rooftops of homes and businesses. And in those households, you also have potentially other electric devices, smart thermostats, smart water heaters, electric vehicle chargers, et cetera, that can all be controlled, independently as well. And so, the scale of the regulatory challenge has increased remarkably. And the technology has completely changed the idea of what is competitive or not.
And so, where we’ve come to today is that we have a system that’s still very much oriented around the idea that meeting the needs of the grid, whether that’s new power generation or balancing load or whatever, the system is set up as though you need one central entity to do that. But the reality of the situation is that we can much more cost effectively do that with many independent participants in a system that need to be well coordinated and coordinated in a way that is unbiased, and that allows for these other entities to participate.
And to get back to your question—sorry, I covered a little bit more of the sort of technology history there. ‑ ‑About antitrust law in particular, the public regulators are not only sort of outgunned from a resource perspective by utilities that have emerged to become these like multi-state entities and holding companies or even international entities. They’re also really not educated in looking for this issue of anti-competitive behavior. They will evaluate utility proposals on the basis of whether or not they’re prudent investments. They will evaluate them on whether or not they’re cost effective.
But they will not necessarily–‑and don’t necessarily even have the skill set—to look at a utility proposal and say, oh, what impact will this have on the competitive market for rooftop solar? What effect might this have on the competitive market for electric vehicle charging, which is itself a really potent example of something that was never an incumbent monopoly utility service. There’s no reason for it to be. Like the initial development of the chargers was done by companies other than utilities. And now utilities are trying to use their existing monopoly to expand it and say, oh, well, we’re happy to make investments in electric vehicle charging infrastructure and to rate base it and to earn that generous rate of return on it. And that’s the danger is that I don’t think our regulators are set up to even understand—at the state level in particular—are equipped to understand and to parse through these issues of anti-competitive behavior. And so, they give the stamp of approval to things that utilities do, not even realizing that by undercutting competitive opportunities from other providers, that there might be much cheaper options out there for consumers, much more reliable options for electricity grid and often much better from a climate and clean energy perspective.
TEDDY DOWNEY: So, we’re getting into some of the technological and sort of intellectual issues. But have the state laws changed in ways that make that more possible? I mean, my history on utility law is not strong. But I remember particularly when they were public utilities, there were a lot of rules prohibiting certain types of behavior, certain types of ownership structures. It really didn’t seem feasible that utilities would own, would sort of vertically integrate the way that they ultimately did and perform all these different functions. Was that a change in law? Or was that never there? And nondiscrimination practices, things like that. Am I misremembering my history? I just feel like some of those laws were actually in place. And I’m curious if they got relaxed or overturned or what have you, from a legal standpoint.
JOHN FARRELL: Yeah, I can talk a little bit about sort of like the system structure. I don’t think we’ve seen a lot of changes in state law around antitrust and competition. I think that most of that litigation and case law is federal not state. And ‑this is all with a caveat and the asterisk that you might hear from an attorney before they represent you. Like this is not formal legal advice. I am not an attorney. I am not an expert in antitrust law. So, I won’t be able to give you the kind of precision and understanding of how antitrust law interacts here. But I can say a couple of things about it.
You have Supreme Court decisions in the 1940s that established what was called the state action doctrine, that said, essentially, that if the state is regulating utility behavior, then they are exempt from federal antitrust scrutiny in general. It wasn’t a universal blanket get out of jail free card. In the 1970s, Otter Tail Power in Minnesota, in my home state, lost a case in the Supreme Court because there were communities within their service territory that wanted to take over the distribution system, and they wanted access to wholesale power from entities other than Otter Tail. And Otter Tail essentially told them, you can’t have it. You can’t use our transmission system to bring in power from anywhere else. Which would mean that, of course, these cities would have to build their own new transmission lines in order to access third-party providers or build their own power plants and have their own miniature grids, which is generally prohibitively expensive. Like there’s huge network benefits to be connected to the grid. It’s like one giant battery supporting everything that happens in one community to the next.
And that case made it pretty clear that they can’t, for the sole purposes of hindering their competitors, ‑‑in this case, public power entities,‑‑ do things like that so that they would have to allow these cities to have access to the transmission system. And one of the other features of that fight was that Otter Tail was also basically threatening these communities with lawsuits over their municipal organization campaigns, knowing that the communities didn’t have the financial resources to fight them in court.
What’s funny about that whole decision, though, is that the state law in Minnesota, about how communities municipalize, was changed in the very next year to make it harder for cities to municipalize. And I think that’s kind of an important lesson here, is that, yeah, we have had decisions that are meant to allow for appropriate scrutiny of anti-competitive behavior by utilities. But because they are so powerful politically in states and influential with the regulators, they can get things changed in ways that make it really hard to do that. And so, there’s not been a new public power entity formed in Minnesota in the 50 years since that law was changed in 1974, immediately after the Otter Tail Supreme Court case. And I think that’s illustrative of how this plays out in other places is that we just can’t expect that, certainly at a city level, you can fight in utilities, even at a state level that regulators are going to be equipped to deal with that.
Now, there has ‑‑been federal action around this issue. So, we saw vertical integration of utilities from the early days. At the time, of course, there’s a lot of economic rationality behind that, as I mentioned, like electricity was getting cheaper every year. It was working great. As long as you didn’t care about the environmental impacts,—which for those decades we really didn’t pay much attention to, ‑‑everything about the electricity sector looked like it was going well. Investors were profiting. Customers were getting cheaper electricity. I don’t think there was a lot of questioning of how the system worked. And it’s these different shocks to the system that have sort of exposed the problems.
So, you had, in the 70s, a really significant undermining of utilities being the only game in town for generations, realizing that it was really expensive. Because they had made huge bets on giant power plants. They had big expectations, essentially, that power demand would grow continuously forever. And they were wrong. Because the oil crisis led people to start to conserve more and be interested in energy efficiency. And frankly, that has always been cheaper than building new power plants. But we haven’t successfully addressed that problem writ large.
So, in the 70s, we had the shock. The federal government passed some legislation introducing competition for the first time. But it was only to the extent that an independent power producer would sell electricity to that particular utility where their power plant was located. They couldn’t use the transmission system to sell elsewhere.
In the 1990s, we saw sort of two things happen at the state level. You started to see restructuring where you did break apart ownership of power plants from operation of the grid. But you didn’t separate asset ownership from operation. ‑‑California is a great example. The utilities there don’t own power plants anymore, but because they do own the power lines and the substations and they profit from building those out, they’re much more invested in trying to figure out how we build large scale power generation that requires big investments in new distribution and transmission infrastructure than they are in helping to make the grid run as efficiently as possible. And so, restructuring at the state level didn’t fully address the issue that we have about anti‑competitive behavior.
And then the restructuring at the federal level that we saw around transmission did guarantee more nondiscriminatory access to the transmission system. But the sort of sticky problem for the last 30 years is that utilities still have so much control over the planning process for building out the transmission system, that it’s very difficult to lower prices by interconnecting different regions. It’s very difficult to bring on more new power generation by building out transmission that would allow for more competitive generation to be constructed, because utilities have a vested interest in protecting, in many cases, the vertically integrated ones, their own generation. Or sometimes in other cases, they just want to protect their monopoly to build the transmission themselves.
So just as another illustration of this, when the federal government said when we do transmission planning, we need to be open to independent ownership of transmission lines, eleven Midwest states all of a sudden got laws on the books giving utilities a right of first refusal to own any new transmission line that was built in their service territory.
So again, it’s just like a game of Whac-A-Mole trying to manage their anti-competitive behavior and realizing that if you do it successfully in one place, it pops up somewhere else. And you may not have the resources in that place to deal with it. And, in fact, only one of the states that originally had that policy has actually overturned it. And it was a court case that did it. It wasn’t legislators reconsidering that policy. So, there’s still an uphill fight, unfortunately. And we haven’t really seen a successful and comprehensive way in which a state’s regulatory system is really looking at this issue of anti-competitive behavior.
TEDDY DOWNEY: And so, in your paper, you talk about changing antitrust law or revising it. I kind of want to do two things. One is kind of have you talk about what are all the solutions that are needed to get this to work? And then maybe we could go potentially a little bit more of a granular way. Are there tools in the toolbox that are being used now that could be used to do some of this? But maybe best to kind of get an overall sense of like all the things that need to be fixed, like how you would fix them. Just because it sounds like you’re pretty pessimistic about like local law changes, which to sort of reorient the incentives at the local level. So, I would love to kind of talk through some solutions from your perspective.
JOHN FARRELL: Yeah. I mean, let me just put a pin real quick in like what I think we want out of this system in the end. What we want is an operator of the electricity system whose responsibility is what the utilities currently have today, which is matching supply and demand every second of every day. That is what keeps the lights on. But that doesn’t have any asset ownership of any of the equipment that’s on the grid or any financial incentive to prefer any particular way of accomplishing that goal.
And that goal of reliability, of course, then is supplemented by state level goals articulated in general over that kind of monopoly service, that we want it to be reliable. We want it to be affordable. And increasingly, we want it to be pollution free or low pollution, whether it’s carbon or sulfur dioxide or whatever else. Because we have the technology to do it in a cost-effective way.
So, we need that independence in order that that operator then can seek out what the most cost-effective solutions are. And right now, the problem is that we can never get there. Or we can always be suspicious of the decisions that are being proposed because the incumbent has financial incentives to want to do things in a particular way. And sometimes those are inertial preferences. It’s just this is how we’ve always done it. We don’t really know how to do it differently. And sometimes it really is driven by the financials. And it is done in a way to drive that particular profit margin or those benefits up.
So, I think there’s a lot of ways that we can address this. So, pardon my initial pessimism about it. I think there are lots of incremental steps that we can take that get us there, along the way to sort of like what is the necessary solution.
For example, we are hearing more about bills being passed, often called things like the Ratepayer Protection Act, for example, that address issues around utility accountability. So, they make sure that utilities are not allowed to charge their lobbying costs to customers. They won’t be able to charge their trade association costs to customers. Because, for example, the Edison Electric Institute develops lobbying resources for utilities to fight clean energy laws and to fight things like rooftop solar. There’s also a third thing kind of in that bucket, and I can’t remember it now. And I apologize, but that I talk about it in the report.
It’s also part of our Community Power scorecard. It’s an annual scorecard that we do on state laws, and we include both policies that support more kind of community-focused and state-based economic development, clean energy policies, as well as policies for utility accountability.
It includes some other things as well. Like, for example, the Georgia nuclear power plants that recently came online something like three times over their original budget. Utilities have been charging customers for those power plants for over a decade before they even started producing electricity. And one of the laws‑ in particular is often called like construction work in progress. And so, we talk about not having laws like that on the books that allow utilities to grab customer money for a long period of time into investments that can often be enormously more expensive than they were forecast originally.
So, those kinds of rules, they don’t solve the structural problem, but they do start to weaken the utility’s political hold on decision makers by making sure that they can’t charge those costs to customers. And frankly, even just by having the discussion about those policies, people realize, oh, I didn’t even know that my utility was charging its lobbying costs to me. I didn’t maybe even know that there was a monopoly utility. I just kind of knew, like when I moved into my house, I signed up for electricity service and this was it. And I didn’t even realize that I could have had a choice or that might have been a possibility. So that’s sort of like getting in the door.
The second thing we can do is focus on the financial incentives of the utilities. So obviously, one of the driving problems we have here is we do have some inertia. But we also have very direct financial incentives that vertically integrated utilities want to own as much as they can. Because the bigger their ratepayers, the bigger the profits for their shareholders. And so, can we change those incentives? And states have sort of nibbled at that.
So, we have energy efficiency performance standards that might say, oh, a utility has to spend a certain amount of money on energy efficiency. And depending on how successful they are, they might even get part of that back as like increases to their profits. So, allowing them to get profits from selling less energy as opposed to only profits from selling more or from building infrastructure.
So, there are some ways to handle that. The danger, of course, if you just do that and nothing else, is that the utility is still going to seek profit maximization, but they’re also still going to have all of the political power that they have. And one of the advantages in the structural reform I talk about is that by breaking apart the utility functions into smaller pieces, you reduce its ability to abuse its political power, the political power of its monopoly, to hinder its competitors. And that’s the part that worries me about trying to just push policies that change the financial incentive, is that those by themselves are great if we can win them, but we will be fighting uphill against the utility’s political investments. But they won’t stop the utility from having that power.
And the good example of this I talk about in the report is in Hawaii, a couple of years ago, they completely rewrote the compensation scheme for the investor-owned utility there, which is a monopoly, Hawaiian Electric Company. And it’s now based on things that are in alignment with the public’s goals around clean energy, affordability, resilience. It includes supporting more distributed solutions like rooftop or community solar. But then the utility was running this very popular energy storage program, which served this dual purpose of helping people have onsite storage. It also meant that the solar that people were investing in would be more valuable, because you could store that energy at midday and then use it into the evening. And the utility decided just to stop doing that program, even though it was hugely popular.
And so, again, like there’s this issue of do we know why they did that? Was it because there was an issue with profit? Was there an issue with the program itself? When the utility is still in charge of that, and they still have these mixed incentives, when they still have this inertia, it’s challenging to know if we’re going to get the outcomes that we want.
Just the last thing I would add is that we’ve already done some of this work in those states that have restructured previously in the 1990s. And in that period, it was often called deregulation, which I think is a terrible name and a terrible premise. We don’t want to deregulate the electricity system. We want it to be well-regulated in a different structure.
So, they did part of the work. They broke apart the generation side of the business from the operation of the grid, but they let those grid operators maintain asset ownership. So, a good place to start might be to go to those states that have those restructured markets, often in like the northeast, and say, we’re going to go to the next step and we’re going to have you divest your assets, your grid assets, and you’re just going to be a grid operator. Or you’re going to go off and be the asset owner. And we’re going to create a new nonprofit or publicly ‑owned entity that will do that grid operator function and handle things like grid connections for the independent producers.
So, I think there are some good incremental steps here. We don’t have to start from let’s just bust up the utilities and completely rewrite the structure of the system in the 35 states with vertically integrated monopolies. But I think we need to get a‑ system that’s going to ensure that we don’t have the sort of self-preferencing and gatekeeping that we’re seeing.
TEDDY DOWNEY: I know FERC has a lot of power, and in particular, I think they have a public interest threshold for allowing mergers. And there’s been massive consolidation in both transmission and utilities in the past 20 years. What’s your view on like more aggressive merger enforcement and also what FERC can do? I know FERC has a lot of authority. I don’t really know exactly what they can do about this type of thing. But do they have tools in the toolbox that could be helpful?
JOHN FARRELL: I think certainly I’ve talked a little bit about the transmission side of things. And FERC is slowly, incrementally, moving in the right direction of trying to reduce the ability for utilities and transmission owners to self-preference and to exert control over the system. I would defer to the work of folks like Ari Paskoe in terms of his recommendations. I think I have a section where I kind of list the recommendations he has from a subsequent piece of research to the one I mentioned earlier about FERC reforms. That includes both governance of the regional transmission organizations that do the grid planning and that manage the cost sharing for regional transmission, as well as some of the requirements for the utilities in terms of data sharing.
So, there are some pieces there that are clearly under FERC jurisdiction, which is generally the high voltage interstate transmission system. I remember reading something recently that said like, where is the line between what is controlled by what is under FERC jurisdiction and local jurisdiction? I can’t even explain it well and I work in this sector and understand what they mean when they talk about differential voltage levels and substations. There’s a lot of caveats.
So, it is a little messy. But what I would say about it is that most of the problems that we are incurring—or maybe that’s not the right way to put it. There are plenty of problems at the transmission level that we’re having still around monopoly power. But the significant balance of unaddressed problems is actually under state jurisdiction currently, like intrastate problems. And so, I don’t think FERC can help as much there. This is where I think the FTC or the DOJ and the antitrust stuff comes in.
So, for example, are there opportunities to litigate around anti-competitive behavior by utilities, and, with documentation, showing that essentially like the public record of how a Commission made a decision really didn’t address competition issues at all. And I can tell you from my experience doing state level regulatory intervention, it’s not in there, like there is not discussion about competitive impacts of the decisions reflected in the documents that commissions publish as ways to defend their decision and the record, in most cases.
So, I think there’s a robust opportunity here for federal antitrust authorities to look at whether or not that kind of scrutiny is showing up at the state level. And this is where I’m not enough of an antitrust attorney. I’ve talked to enough of them to understand it’s really an uphill battle because of the general protections that there are for state regulated utilities. But I think there could be an opening there. And I think that’s something that I would love to see explored more deeply. Because it’s an area where even the presence of DOJ or the FTC in some of these state level dockets could change utility behavior by letting them know that somebody’s looking in a way that nobody’s been looking before.
Right now, there’s me and a few other organizations that talk about anti‑competitive impacts. There’s actually some great activity around electric vehicle charging. I actually recorded a podcast with someone from the National Association of Convenience Stores—which is someone I never expected to talk to about electricity policy—because they’re very interested in making sure that their members, which have fuel pumps, can fuel electric vehicles and have fair access to connecting those to the grid and getting fair prices that they pay for providing that service to consumers. But that’s such a rare situation that you see those kinds of conversations about competition in utility dockets. It really is often just narrowly focused on is this prudent? Is this cost effective?
So, I’m hopeful about that as a venue. I also think Congress has the power to legislate around this issue of the antitrust protections. I think it’s particularly worth asking is it fair to treat a public entity, like a state or a city, the same as a private entity, like an investor-owned utility, when it comes to antitrust immunity under the state action doctrine? And so, I couldn’t tell you how to write the policy differently. I can just say to me it feels different. One of them protecting a private for-profit entity and the other one protecting state action, given that our level of control over that private entity is much more in question.
And that actually, in a way, gets back to your discussion of mergers, which is I do think much more merger scrutiny would be well merited. I’m a huge fan of Scott Hemmings’ work on mergers. He’s got a great book out. He was on my podcast a number of years ago. And what he essentially argues, that I think is really important for folks to understand, is that utilities have essentially monetized the public asset that we gave them for private benefit. Their grid monopoly, that franchise that we give them, is public. But when they merge, they don’t merge on the basis of the cost of the value of those assets, which they do on their accounting books have to say very clearly is like this thing is the amount we paid minus the depreciation over the past ten years, et cetera. Like that’s a very well-known accounting practice thing. But the premiums that are paid when utilities merge are way in excess of that, and they’re not paid in ways that result in benefits to consumers. They’re paid to those private shareholders.
So, I think we are paying two huge costs with utility mergers. One is enormous monopoly rents to shareholders. The second one is that we’re reducing the relative power of our regulators against these entities. Because they get what ‑I like to describe as like economies of lobbying. If I’m a utility and I’m fighting the same fights in multiple states, but I am a multi-state utility, I can have the same expert lobbyist, expert witness, that I bring into all these different state regulatory forums to argue my case for me, and often in a way that these state commissions don’t have the same level of resources that the utilities do. They get their funding from the legislature. Whereas, the utilities bill it directly to customers. And so, this is, I think, another one of those places where merger scrutiny, I think, could be really helpful in making sure that the states, to the degree they continue to be regulating these private entities, would be aided greatly.
TEDDY DOWNEY: We’ve got a couple questions from the audience. I want to get to these. If you have a question, again, email us at editorial@thecapitolforum.com. Or put them in the question pane here on the control panel. First question here is how does the proliferation of data centers, artificial intelligence ‑‑and I would say cloud computing ‑and their demand for power factor into your analysis?
JOHN FARRELL: Oh, that’s a really good question. And I know it’s one that’s on a lot of people’s minds. There’s a few things to think about here. One is I’ll just say that I am a believer that energy efficiency in AI and cloud computing is going to make this less of a problem than it seems like right now. So, I think Nvidia just announced they have a new chip for their like AI computing that’s 25 times as energy efficient as the previous iteration. So, the data center’s cost driver is electricity. They’re going to figure out how to reduce the cost of that as much as they can.
So, one way will be to buy more efficient equipment. And the other way they’ve done that is by moving around the country to find the places that have the cheapest electricity. Of course, the problem that we have then is we have this continual tension here, that if that utility that serves that new data center is an investor-owned utility, it will make money for all the infrastructure that it builds to support that. And it will charge it to captive customers who may get no benefit from the data center. I mean, they might get some benefit. We don’t know. But it’s a very diffuse benefit. Where it’s a very concrete and specific benefit to the investor-owned utility.
So, I think it sort of aggravates the problem to the degree that the load growth that comes from those data centers would aggravate the existing problems that we have of the gap between the utilities and profit motive and the benefits for consumers.
The other thing, though, is that what we really ought to be doing anytime a data center is built is requiring them to build as much onsite generation as is possible. It’s probably not enough to serve that entire load. It’s incredibly energy intensive. And if you put solar panels across the roof of an entire data center, maybe it only serves like a third or a quarter of the total energy demand, but that’s a lot better than nothing. And that proportion that can be served that way can significantly reduce the amount of infrastructure that’s required to serve that data center. And the issue, of course, is that the utility is generally not interested in building stuff onsite for a customer or may be prohibited in some cases. That’s one of the few places we’ve seen states take action is not approving that kind of investment behind the customer meter as like that’s the customer side.
But the rules can be really complicated. It’s probably harder to get permission to put the solar panels on a data center than it is to pull the initial permits to build it. Solar permitting in this country and solar interconnection is much more challenging than it is in other countries. And much more challenging than it ought to be, in part because utilities don’t have a big incentive to make it work well. There’s also, to be fair, an entire side of that that is like local cities and townships and communities that have the zoning and permitting authority around solar, which is the subject of an entirely different call. But I think data centers, to the degree they are going to remain an issue, there are going to be those challenges.
And I guess the final thing I would say is there are often cases where utilities give preferential electricity prices to large customers like that. And so, my concern is that residential customers, small businesses, are going to pay more for electricity to subsidize a data center that profits the utilities shareholder and has a very minimal incremental benefit to them. So, I do think it’s a problem. I do think it’s something that can exacerbate this issue of monopoly power. I hope it ends up being smaller than it seems like right now in terms of efficiency, but it’s definitely something we have to deal with.
TEDDY DOWNEY: We did a call with a public interest group in Virginia, really interesting, that’s been very influential in electing state officials that are skeptical of the utility, Dominion. I think it’s Dominion. And it was funny. Because at the end of the call, I asked a similar question about this data center. And they were like, well, yeah. Amazon has been super helpful in getting these state officials elected to overturn the utility power. But then they’re asking for all these other deals. And you’re just sort of like you’ve got another political issue, which is like then you’ve got these—I guess it’s good to be taking on the entrenched utility power, but not so good if you’re just trading one monopoly for another when it comes to doing favors for another big business or giving them preference, preferential treatment.
I think a lot of the data centers in Virginia, to your point, are just trying to avoid dealing with the utility at all, just cut a separate deal with the state and just have their own power going to the data center. So, I think Virginia is an interesting place to watch for that in particular.
We’ve got another question here. What is the implementation path to public ownership? I guess you kind of addressed that a little bit on you sort of forcing divestiture, sort of breaking the utilities up from having these conflicts of interest and having a public entity take over one layer in the stack. What are your thoughts on how to achieve that?
JOHN FARRELL: If you don’t mind, just on that last question about strange bedfellows and the electricity anti‑monopoly movement, like the one antitrust case I’ve heard about was carried by Tesla against SRP in Arizona. So, it was just a perfect illustration of sometimes you need a big friend in order to pick these fights.
On the public ownership question, I mean, I’m not old enough to have been doing this work back when we were doing restructuring in the 1990s. But I think legislation is probably the right path to do restructuring in the electricity sector, at least initially to set up the intention of how we want the grid to be structured. And then there’s that process of divestiture and creating the different entities.
I think there’s a lot of options for how you set up the ownership over the future system. I mean, one of the things is I work with a lot of people who are public power advocates. So, they’re trying to get cities to take over investor-‑owned utility infrastructure within a particular city and provide public power as a vertically integrated utility, but that’s publicly owned. And one of the lessons from there is that in the campaign over that, ‑there’s inevitably a campaign that‑ incumbent utility will often have a lot of scare tactics about like, well, you’re threatening grid reliability. Or your costs will double or whatever.
And I think it’s really funny because we have over 2,000 municipally owned public utilities in the country already. We also have public power agencies, like the Tennessee Valley Authority or what have you, that are publicly owned. I won’t go too far into the fact that the governance structure of that entity is pretty problematic from a democracy standpoint. But at any rate, we have plenty of experience running utility infrastructure with public entities.
So, maybe the way you would do it is say, okay, we’re going to rent some folks from LA Department of Water and Power, the largest municipal utility in the country. And they’re going to come in and help advise us on this. Or we’re going to hire former utility people as contractors to come in and operate a grid that’s now under public ownership.
So, I don’t know. Maybe it’s a little too hand-wavy, but my belief is that you can always find people who can come in and do the work. It’s just setting up the correct governance structure that is the hard part. And to make sure that we feel like we’ve done it in a way that’s publicly accountable.
So, it could be one where like a governor is appointing people to the board that controls the state-owned distribution operator. I think the smaller the grid, actually, the better. I mean, this is one area in which I’m also decentralized. So, I think city scale distribution systems are probably better. And then they network and coordinate together. Which also, I think, helps the information load be smaller. As I was talking before about all these electric devices that we need to control, like let’s make the problem more manageable by making those distribution utilities more scalable and smaller. So, I don’t know if that fully answers the question because I know that it is an issue. But I’m a believer that it’s a solvable problem.
TEDDY DOWNEY: One of the things that comes up a lot in our work is, at the end of the day, this is really about people. You mentioned some of the people are just not inclined to know or treat competition as an important thing at the state and local level. But are there places where there are specific people or specific campaigns or initiatives throughout the country where you’re like, this could be a model for how to do it right? You know, usually there’s sort of the states and localities can be kind of good laboratories for creative solutions. Are we at Ground Zero? Are we nowhere yet with any of this? Or are there certain places where they’ve gotten it at least somewhat right in terms of supporting rooftop solar?
I have friends in both the utility space, but also the rooftop solar space. And it seems like they get in these massive battles annually with either legislation or voting initiatives at the ballot initiatives. I’m curious if there are any that we should be tracking, looking at, as like, all right. These are signs that these ideas that you have are gaining traction already.
JOHN FARRELL: I think, funny enough, where we’ve seen the most innovation is actually from entities that already have nominal public control, which is rural electric cooperatives, in terms of this idea of being a nondiscriminatory operator.
So, you have the New Hampshire Electric Cooperative created what they call their transactive energy rate. And basically, the idea is that this is a price that they will pay for any kind of electricity or demand reduction that a customer can deliver. So, whether it’s adjusting your electric vehicle charger to use less energy than it was going to use or producing power from a solar array and associated energy storage, they wanted to facilitate how can their consumers basically provide services to them? And I think it’s even adjusted on like the particular time of day, as well. So, it helps like, they can dial up the price when they have more need and they can dial down the price when they don’t.
We’re also seeing similar innovation from Holy Cross Energy, which is in western Colorado, which is also kind of looking at this idea of how do we facilitate our customers providing more of the services that we’ve traditionally provided as a monopoly? And then of a recognition too that the capital for a co-op comes from its members anyway. So, if they can get individuals to invest their own capital and pay them an appropriate price, they also make it easier on the co-op, which then doesn’t have to go out and have as high of a debt load on behalf of those consumers or have to raise more capital from those consumers.
The only other one I would mention is Green Mountain Power in Vermont. It’s actually the only investor-owned utility that I ever generally talk about when I talk about utilities doing good things. I think it’s notable they’re also the only benefit corporation, utility that is a benefit corporation. So, they have a completely just different philosophical approach. And Mary Powell, who was the CEO there when they started making this transformation, is now at Sunrun. And kind of like I think she successfully changed the culture at that utility before they started doing anything else. And I do think, when you talk about people, like there’s a situation in which it was one person in a leadership role saying, we’re going to figure out a different way to do this. We’re going to, for example, pay for solar or pay for energy storage batteries on customer’s property. And we’ll lease it to them. And we’ll let them use it as backup power. But we’ll also retain the right to use it to benefit the grid system, to tap it when we have really high energy demand or when there’s a threat, a reliability threat. I don’t love the idea that an investor-owned monopoly does all of that kind of investing. I think the tension there in terms of ownership and benefit is still there, but they’re at least trying. And I appreciate that.
TEDDY DOWNEY: Yeah, my parents did that in Vermont. It sounded pretty interesting when they were doing it. Because otherwise, those batteries can get pretty expensive. And then last question here. I know we’re out of time. This is a very specific question. I’m not sure exactly what it’s getting at. But I’d love to go into details regarding any econometric analysis performed to validate the claims. Not really sure what claims they’re talking about, but did you do any econometric? Have you looked at any analysis that would be relevant to this question?
JOHN FARRELL: I’ve done a lot of work in my career looking at the relative economics of distributed energy generation and centralized energy generation, and there’s a lot of evidence that it is at least as cost effective to do it locally. And I think one of the driving aims that I have had in my work is also to help people understand that once we go to a system in which we are not making decisions in a centralized fashion, we can also make those decisions on the basis of other values than just reliability and affordability from a central perspective. Which isn’t to say that the grid operator should all of a sudden not care how expensive something is. But we have an opportunity to set up a regulatory structure where we prioritize things we care about.
For example, states have clearly legislated in many, many cases, we want more clean energy because we understand that in the existing business model, utilities treat that as an externality. And so, we’re paying a high cost in health. We’re paying a high cost in environmental issues. We’re paying a high cost in natural disasters by allowing this stuff to be shoved off onto customers.
And the same thing is true, I think, with this issue of tapping distributed resources, that they can play a particular role in communities. It can be a way to give apprenticeships and job training to folks in underserved, historically underserved, communities. It can reduce energy burdens and make sure that energy is more affordable. It can be a source of resilience, like has happened in Puerto Rico, where the grid is unfortunately significantly unreliable. And these distributed systems are providing access to electricity to charge phones or to serve medical devices in times when the larger grid goes down.
So, post-pandemic, there was kind of a similar look at this issue of supply chains and a recognition that sometimes you might pay more to have something built here or to have like a redundant factory here or multiple producers of it. But sometimes that’s a function that we need. And it’s not something that we evaluate very closely or have evaluated very closely in a monopoly system.
So, econometrics? No, I have not done an econometric analysis of all of this. But we have looked at a lot of different pieces of it. And it’s pretty clear that having the development of clean energy be done in a more distributed, decentralized fashion is very cost effective and very beneficial to communities. And that we can’t do it effectively when the incumbent has the ability to gatekeep and protect their own way of doing things.
TEDDY DOWNEY: But I think another way of saying what you’ve laid out today is, look, this is a big structural problem, conflicts of interests, consolidated political power. I mean, in a lot of ways it just sounds very similar to the stuff you hear about Big Tech. It’s just the utilities, you know? And again, that’s why people are saying, hey, Big Tech is a utility.
So, I mean, it just seems like there is a lot of the ideas of, look, in order to do this well, you don’t want to have ‑problems with conflicts of interest. I mean, the FTC and DOJ leadership talk about conflicts of interest all the time, self-preferencing, and consolidated political power, buying off Senators by hiring their kids or using lots of lobbying money or what have you.
So, a lot of what you’re saying sounds very familiar. It’s an industry I’m not nearly as familiar or expert in. But the solution, the analysis, is not necessarily a micro level one, but an assessment of the problems that you’re seeing and sort of taking a holistic approach to solving them structurally. I mean, is that a fair way to kind of talk about what you’ve said today? I don’t want to put words in your mouth, but that’s kind of how I think about what you said. I’m looking at your solutions right now. They’re pretty familiar solutions when you’re talking about different types of utilities.
JOHN FARRELL: I mean, I think if one, if just one, outcome happens from writing this report is that people who have traditionally been paying attention to this issue of monopoly power and competition in the tech sector start to look at the electricity sector with more scrutiny, it will be worth it. Because one of the things I have found is that, in the climate and energy space, a lot of our really motivated advocates who want to see clean energy deployed are either afraid of or not interested in looking at these questions of power. Because they’re thinking to themselves, our climate problem is too urgent. We just need to go, go, go. And they don’t understand the way in which the monopoly power structure is inhibiting our progress.
So, I guess two things. I would love two things. I would love to see anti-monopoly folks come out of the tech sector and say, hey, this looks familiar. And I would love for climate and energy folks to say, oh, maybe we can’t get there as quickly if we ignore this issue. Maybe we actually do need to pay attention to it.
TEDDY DOWNEY: I think it would be really funny if Amazon starts lobbying for all these rules on this Virginia utility. That would be the funniest outcome here from my perspective. But, I mean, humor aside, this was super interesting. Maybe The Capitol Forum needs a few more beat reporters on the ground at some of these PUCs out in the country. So, I’ll look into that for you. But I really appreciate you doing this. The report’s amazing. I’m excited for,‑‑ as we talked before the call, Sandeep’s book on this. I think there’s a lot of really interesting energy around this issue right now, and especially all the things that you mentioned, data centers, electric cars. It’s an interesting time. Solar rooftops. It’s like an inflection point, really, in how cities, municipalities and the country and federal law enforcers can take a crack at this.
JOHN FARRELL: Absolutely. Thank you so much for having me.
TEDDY DOWNEY: Yeah, thanks again for doing it. And thanks to everyone for joining us. This concludes the call. Bye-bye everyone.
