“The two greatest enemies of free enterprise in the United States … have been, on the one hand, my fellow intellectuals and, on the other hand, the business corporations of this country.”
– Milton Friedman, “Which Way for Capitalism?” Reason, May 1977, p. 21.
Power markets are badly distorted by government intervention. Ratepayer welfare and economic efficiency are routinely sacrificed. Protected companies under public-utility regulation have a me-first ratebase mentality. The worst often get on top, with the real entrepreneurs elsewhere.
In place of more competition, innovation, and growing volumes, political incentives are deciding the what-when-where-how much questions of electricity generation, transmission, and sales. Political pressures in the name of the environment (“saving the planet,” etc.) are now guiding state-regulated utilities to meet state and federal regulation.
The coming of efficiency and climate policies have given the monopolists new territory, particularly as the commodity side of their business has been taken away (such as in Texas). The bootleggers and Baptists found and loved each other. They are winning, as can be seen in the decline of the Intercontinental Exchange (ICE) volumes at almost all major venues. (ICE is the most important market for short-term electricity contracts, facilitating liquidity and price discovery; less trading where actual producers, consumers, and their representatives build their information into prices means distortion a la Hayek.)
Instead the regulated scheme suppresses prices or uses artificial ones based on historical cost that are a lot less likely to end up allocating economic resources to their most valuable uses. Trading is less useful, and has poorer long-term prospects, because policy is increasingly characterized by interventions that render short-term energy prices less useful as measures of scarcity.
There are now markets for stuff called capacity, which largely exist because markets for power are often suppressed. There are requirements for investment and operation of renewables and “efficient” sources whose prices are themselves distorted by operating rules. The plethora of artificial market components makes them unlikely to produce risk management techniques and financing schemes that bear at best superficial relationships to economic scarcity.
Peter Fox-Penner: Political Electricity
For documents that confirm these suspicions, check with the consultants at the Brattle Group. A few years ago their Principal and Chairman Peter Fox-Penner published Smart Power: Climate Change, The Smart Grid, and the Future of Electric Utilities (Island Press 2010, revised 2014). My discussion below borrows from summary presentations that can be found online.
Implicitly, Brattle understands that utilities’ mastery of the regulatory system (and regulation itself) makes them uniquely able to respond to what Brattle sees as epochal changes in the industry’s economics and politics. Utilities understand complexity and government, and they will have fewer problems than other industries in coordinating their activities and obtaining low-risk funding.
Brattle stresses that the time to act is now for such strategies as the preemption of markets and regulations. (In case you didn’t notice, Washington State recently gave its utilities the green light to rate base their electric vehicle charging stations, on efficiency grounds of course.) Brattle tastelessly headlines a PowerPoint slide of the related costs with “Hey Rate Payers, Can You Spare a Trillion, ” as if the situation were voluntary and ratepayers had alternatives.
The solutions to crises mentioned in Brattle’s earlier slides? They mention:
 “national climate policy,”
 “choos[ing] leadership and capital source for energy efficiency – government or utilities,” (sic) and
 “Re-purpos[ing] utilities and regulation.” (The identities of the capital sources and repurposers are not further discussed.)
Brattle sees two possible organizational choices here. First is a “smart [grid] integrator” that will be a distributor, wires owner (probably) and supply organizer. Energy efficiency is not its “natural role” (natural?) but “could be added on.”
The second is an “energy services utility,” which unlike the integrator is incentivized to get into the efficiency business and produce or acquire and distribute power. Brattle sees the details of what the utility will control as open questions. One alternative is “less integration [and] more competition” where regulators “unload commodity risk… onto deregulated suppliers/consumers.”
This puts “less capital pressure on utilities,” who for unknown reasons apparently deserve the break. The second more integrated model has “intracompany hedging of nega- and mega-watts as well as more traditional risks.” How the company’s performance will be measured and rewarded is unstated, but we can be pretty sure that regulators turn up somewhere.
As always happens in crises the necessary changes will require “more resources now.” Which if any will go to non-utilities we can’t tell. There must be “[a]n extremely difficult simultaneous transition of business model, regulatory laws, and industrial architecture.”
You know, just like the smooth transition to competitive wholesale markets and open access with hardly any politics. And yes, it has to happen. “The status quo is not an option – unless prices shock us by staying low!” (exclamation point in original)
Thank heavens for Brattle’s plan, which virtually ensures that prices won’t do that. And politics? Brattle says that even without a federal law this is a “nationwide movement.” Accordingly funds must be obtained for “state policy-maker and regulator dialogue” as well as strong energy efficiency and climate policies.
That’s Brattle’s utility business model. Where is the consumers? Their model has nothing at all to do with us, who may at best become specialists in a dying fringe quite distant from the real action. Living without a model was manageable when all we traded was soybeans.
It’s time for us to formulate one that faces Brattle’s version of reality.
The two documents quoted are The Brattle Group, Electric Utility Business Models of the Future, (July 15, 2010):