Nice work if you can get it
Wis. utilities want customers to cover all fuel volatility
Wisconsin’s five regulated electric utilities have asked to have fuel increases in gas and coal costs automatically passed along to their customers rather than wait until they can file a formal rate case.
Their regulator said no.
In a bizarre bit of doublespeak, the utilities argued that passing 100 percent of fuel volatility risk along to their customers would be good because:
Executives at several Wisconsin utilities said the changes could benefit shareholders and customers by reducing volatility.
It certainly would reduce volatility for their shareholders. But customers?
Not surprisingly, consumer groups have opposed the measure, again raising the specter of risk-shifting from shareholders to consumers. While they don’t make the link between risk and equity returns, it is the natural next step.
More problematically, one has to wonder why energy efficiency isn’t yet part of this conversation. A utility with 100 percent fuel pass-through and a 30 percent efficient fleet has no more incentive to conserve (nor penalty to waste) than one with a 50 percent efficient fleet. Take efficiency in the most holistic way possible as [total electricity out] / [total fossil fuel in] and this is a snub not just to efficiency, but also to renewables. It’s a logic that only makes sense if there are no opportunities to enhance the efficiency or renewable use in their fleet, which is, of course, nonsense. It is, however, implicit in the regulatory conversation to date.
And the conversation isn’t over:
Utility representatives said they expect more work on the fuel-cost issue to take place in 2009 … We Energies spokesman Brian Manthey said Friday the utility isn’t disappointed that the matter has been delayed until 2009, since the company still expects work to continue on a plan to change how fuel charges can be altered. The company would be more concerned if the commission were backing off altogether from changes to the fuel rules, he said.
Call me naïve, but shouldn’t we be focusing on how to alter fuel use as opposed to fuel charges?
Note: This first appeared on Grist.
Sean,
Please correct me if I misunderstood. Ideally, utility regulators should de-couple fuel charges from the electricity price to create an incentive to use less fuel. Once a utility concentrates on reducing fuel to produce the same amount of kWh, they should be able to still make money.
At what efficiency does the math add up to make it worthwhile for a power plant not to include fuel costs in the electricity rate? Obviously, electricity cannot be the only product as hot water, steam, or cooling can add revenue while increasing fuel efficiency.
Darklamp,
The difference is essentially one of socialism vs. capitalism. In the former (which is our utility model), cost-recovery is guaranteed. The question at hand in the WI hearings is simply whether those costs should be recovered immediately or should first have to wait for a rate case. (The utilities, for obvious reasons, would prefer the former.)
But in non-socialist businesses, cost adjustments are not nearly so automatic. My costs may rise, but that doesn’t necessarily mean I can raise my prices - especially if my competitor is already selling at a higher price. The great benefit of Southwest Airlines after all, is only partially that their fares are low - the bigger story is that they prevent their competitors from raising their prices.
The fact that we don’t have such a model in the electric sector is the direct cause of the stagnant efficiency history of the electric sector. With no incentive to control their costs… they haven’t. So how should we fix this? (a) By giving utilities a way to profit from efficiency, or; (b) By allowing utilities to instantaneously pass along fuel price increases to their customers? The right answer is obvious - but is lost on the modern utility regulatory paradigm.
Does that make sense?
Sure.
In the Southwest Airlines example, they are able to set the bar with their efficient operations, forcing competitors to match them, if they can. Compared to utility regulators setting the bar.
I recall this being a major argument to utility re-regulating, like you have at the PJM, California, or the Ontario system. I do not entirely agree with that system because it makes the utility sector to wild and eventually government control has to guide the market all over again, but in a different form, hurting consumer confidence.
DL,
Good point - and there is a fair question to be asked as to whether a market (as represented by the ISOs of the world) really meets the definition of a capital M market as defined by economics text books. They are certainly farther along the continuum than a utility regulator (and are also closer to that ideal today than they were 5 years ago, as they lower barriers to participation, factor in other services and structures, and become financially mature enough to include strips, hedges and all those financial instruments that are critical, but not implicit in a pure spot-market construct).
But that said, they still have quite a ways to go, FERC definitions of market-access notwithstanding. But that is the subject for another post…
Hi Sean
I only just picked up on the work you guys are doing, and I think maybe the work I am doing may be relevant to you.
We are used to seeing the world in absolutes: in black and white “either/or” alternatives.
So in terems of financial capital, this means EITHER “Public” = State OR “Private” = “owned by a “Joint Stock Limited Liability Corporation”.
EITHER Socialism OR Capitalism, and so on.
I am observing that it is not a question of “either/or” at all, since there is a new generation emerging of what I call “asset-based” (as opposed to “deficit-based but “asset-backed” secured loans) quasi Equity financing which uses frameworks based upon partnership and trust law, not Company law.
So we have seen “Income Trusts” and “Royalty Trusts” in Canada - and in Australia before that - where Corporations unitise and sell off to pension investors part of their GROSS revenues - who LOVE getting their hands on corporate revenues before the management does….
Then there’s Real Estate Investment Trusts (”REIT’s); Exchange traded Funds (”ETF’s”, often invested in energy; hedge funds whuch use Limited Partnerships and so on.
I advocate DIRECT quasi Equity investment in energy by using a US LLC or UK LLP as a “Framework” for investment where output is “unitised” either:
(a) through the creation of non-redeemable proportional “Equity shares” eg to an “Operating Partner”; or
(b) Units redeemable in (say)Mega Watt Hours or 10 Kilo Watt Hour Units, which may be “sold forward” to investors.
In the UK - where I am based - we observe that if we sell 30 to 40% of the future “Pool” of production to Investors in this way, then the average wind turbine is funded.
Because we are selling for value now, something that will cost us nothing to redeem.
Similarly, it’s possible to “unitise” and therefore “monetise” energy savings (”NegaWatts”)such as those you guys are delivering.
The “Pool” simply makes an interest free dollar loan at $x per Unit, and the user of the investment pays back the investment by buying back the Units he’s been loaned at the market price.
It’s not Rocket Science is it?
And before you write me off as a crank, I used to be a Director of the International Petroleum Exchange in the UK,and recently gave evidence to the UK parliament’s Treasury Select Committee in relation to oil market regulation.
If you are interested in learning more, please drop me an e-mail…
Chris,
Given as we are set up as an LLC, I certainly don’t take any disagreement with your observation on the advantages of non-traditional corporate structures where partners are more closely aligned and (dare I say it?) where goofy accounting rules don’t drive managerial decisions based on random definitions of “earnings”. Cash makes a heck of a lot more sense to me, but maybe it’s only because I’m a simple guy!
That said, I’m not sure I see how this affects the utility socialist vs. capitalist issue. The profit incentive (and bankruptcy threat) is a powerful model to encourage innovation and deliver steady societal gains, provided it exists in the context of a competitive market. On the other hand, an enlightened and well-intentioned government can do an exceptional job at creating social benefit in those sectors that are not amenable to the creation or maintenance of competitive forces. The strict socialist position that all goods are best provided by the government is no more intellectually robust than the strict capitalist argument that all goods should be privatized.
From your arguments, I suspect we agree on that point. (I would no more rather have the government running my local bakery than I would like to have a for-profit business running my local fire department - although extremists on both sides may disagree.)
The problem with a for-profit, government-backed monopoly is that it contains the worst of both worlds, and the best of neither. They are not allowed to fail, and have no incentive to achieve greater profits through cost-control, and therefore become bloated bureaucracies, worthy of the worst stereotype of government inefficiency. On the other hand, their for-profit nature and obligations to shareholders gives them an economic reason to act in many ways that are contrary to the public interest, from blocking energy efficiency to blocking competition, all to support their ability to distribute dividends which - in the absence of a competitive market - are nothing more than a tax on their cost of service.
So this is the crux of the issue. If we believe that the electric system (or some part thereof) simply cannot tolerate competitive pressure, then let’s nationalize it, get rid of the tax and let the government run it as a public good. If we believe, on the other hand, that market discipline is healthy, then let competitors into the space, give utilities a profit incentive where they can benefit from cost-control and - critically - let them go bankrupt if they can’t compete in the new environment. For 100 years, we have instead chosen to do both, to the great detriment both of energy consumers and air-breathers (both of whom pay a direct cost when we burn too much fuel to generate a kWh).
This fundamental, half-pregnant issue is true whether the for-profit entity is a corporation, trust, partnership or any other structure.
Make sense?