The adage, “You have to spend money to make money,” wasn’t coined to describe the utility business model, but it sure does describe it well. If I may be allowed to oversimplify the regulated utility business model…
Utilities are expected to make investments that are prudent and in the public interest; in return, they get to recover those costs plus a profit. All the utility investments, operating costs, and profits get pooled together and are reflected in customer utility bills.
Expenditures that aren’t “prudent” and “in the public interest” (two key terms in the industry) don’t get to be recovered. But many utilities have found a way to get around guidelines and force customers to finance fossil fuel infrastructure, lobbying, and power plants that aren’t even built yet.
1. Fossil fuel infrastructure
Florida’s largest utility, Florida Power and Light (FPL), managed to get approval to invest in oil and gas wells in Oklahoma and force customers to pay for the company’s transition to oil and gas speculation.
Other utilities have done this with coal, getting the costs to operate coal mines into the bills of customers.
The utilities were able to get these investments approved under the guise of such endeavors saving customers money, but what it ends up doing is locking utilities into relying–and over-relying–on that fuel source. Utilities that abstain from this practice can shop around and find better deals.
Sometimes they try to hide their fuel preferences through ‘affiliate transactions.’ This is when a utility enters into an agreement with another company even though both companies are owned by the same parent organization. Sound confusing? That’s by design.
Affiliate transactions become a particularly thorny issue when it comes to gas pipelines. Some utilities are buying pipeline companies and investing in major new infrastructure projects that are predicated on the need for new capacity. Thing is, the companies willing to sign contracts for new capacity are subsidiaries of the first company.
These affiliate transactions could end up forcing utility customers to pay for fossil fuel infrastructure for decades rather than allowing markets to help lower costs and shift risks away from customers and onto developers (which is the whole point of markets).
2. Lobbying
Electric utilities are increasingly asking customers like you to pay for infrastructure like this.
If you have a problem with Nike for hiring Colin Kaepernick you can go out and buy a pair of New Balance. Don’t approve of New Balances political contributions? Try Toms…
Thing is, for most Americans, it is a lot harder to switch your electric utility. This is why some regulators have made it illegal for utilities to recover the costs of political contributions or lobbying on legislation. But that hasn’t stopped utilities from spending money on lobbying.
Utility expenditures on lobbying peaked in 2010 with nearly $200 million. Things commonly lobbied against: policies that support rooftop solar and energy efficiency programs.
Presumably, that money shouldn’t be coming from customer’s pockets, but sometimes it does.
The best-documented way that utilities funnel customer dollars to lobby and political activities are through trade associations and memberships, like the Edison Electric Institute (EEI). Utility’s dues to EEI are typically able to be recovered from customers and, as the Energy and Policy Institute detailed in a report last year, that organization regularly fights against renewables. EEI’s troublesome and opaque practices are nothing new, it goes back at least three decades.
3. Power plants that aren’t even built yet
Most utilities enter into power purchase agreements (PPA) in order to buy wind and solar power. In doing so, the utility–and by extension, the customer–only ends up paying for the energy that gets generated.
That isn’t always the case though.
Several utilities have been allowed to start charging customers for power plant projects while construction work is still in progress or “CWIP” (construction work in progress). The economic theory behind CWIP is that it helps reduce the financing costs of large construction progress. This SHOULD save customers money. In practice, it has resulted in huge overruns.
Would you start paying rent for an apartment that was still under construction?
Take for example Mississippi Power, a subsidiary of Southern Company. They wanted to build a coal-fired power plant that could capture carbon emissions. An ambitious project that was financed on the backs of captive customers. The result:
Billions of dollars in overruns and replacing the plans with a gas plant that still produces carbon emissions.
As noted by the NAACP, the money wasted by Mississippi Power would have been sufficient to put solar panels on the roofs of every single residential customer.
Experimental technology (like CCS) isn’t the only technology subject to billions of dollars of overruns. Nuclear power too has regularly cost more money than originally predicted.
The Georgia PSC approved CWIP for the controversial Vogtle nuclear units, payments which were eventually canceled by the legislature after the local community cried foul.
Why we intervene
All the above examples and many that went unmentioned appeared before commissioners that are charged with approving or disapproving which costs utilities can recover from customers. Utility decisions are adjudicated in front of public commissions that are charged with weighing the facts presented to them. In these proceedings, the utilities present their plans to commissioners in hopes to get their business plans approved. If public citizens, or public interest groups, want to have their voice heard during these proceedings, they must intervene in the utility proceeding and provide technical comments. UCS has a staff of technical experts that are equipped to analyze and testify on utility plans. That is why you can expect to see UCS showing up at more and more of these utility proceedings, not just as advocates for science but as experts testifying in hearings about the importance of robust objective analysis.