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Does ratepayer advocacy stifle innovation?

Posted by Chad O'Connor  March 16, 2013 11:00 AM

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Innovation involves risk: when doing something new you cannot always know whether it will work. In other words, many efforts in innovation may end up in a dead end, and one might argue that such effort is a waste. And yet, without such risk-taking, innovation cannot take place.

Many cleantech companies have come up with brilliant new technologies and products. Residential customers can now imagine managing their energy consumption with an app, maybe turning on the washing machine at night only when the price of electricity dips below a certain threshold, or maybe charging the electrical car from their own solar panels.

Managers of the grid can imagine a solution to our current problem: that expensive power plants stand idle all year except for the peak usage during hottest few hours of summer – a crazy expense that we all pay for through our electricity rates. Modernization in the grid could arguably save money over time. And reduce our carbon footprint.

But to arrive at this imagined future, we would need innovation. The new technologies would have to be tested on the grid, and this would involve risk. Because when you innovate, not everything works the first time, or indeed the second or the third. Who would pay for the failed experiments on the grid? In the first instance the utility, and if allowed they will pass on this cost to the ratepayers.

What is the acceptable risk to ratepayers? I do not think we have a sensible answer to this question. Zero risk stifles innovation. But is it fair to ask ratepayers pay for gambles by utilities whether they succeed or not?

The Massachusetts Department of Public Utilities has initiated a discussion on modernizing the grid, a discussion which will end in few months with suggestions for how to regulate. One of the main players in this discussion is the Office of Ratepayer Advocacy (ORA), which is within the office of the Attorney General.

The statutes describing the ORA's role are vague:

The “office of ratepayer advocacy may intervene, appear and participate in administrative, regulatory, or judicial proceedings on behalf of any group of consumers in connection with any matter involving rates, charges, prices and tariffs of an electric company ... doing business in the commonwealth”.
In other words, the ORA is to represent ratepayers, but what ratepayers want or need is not even mentioned. Maybe it is because this has historically simply been low rates. Throughout the 20th century, regulators squeezed operational efficiency out of utilities that were given a monopoly. Without such a squeeze, utilities would have been free to overcharge ratepayers. So it made sense, as long as investments were of a well-known kind (should a new coal-fired power plant or a new transmission line be built or not?), that ratepayer advocacy meant advocacy for low rates.

The problem is that if we continue to interpret the statutes thus, innovation is stifled. The modernization of the grid requires investment in new and un-proven technologies, with significant risk. Low rates lead to low investments lead to low innovation.

Were the ORA to reconsider its historical role, it would have to address some difficult dilemmas:

  • How high can rates today be if the benefit is harvested only by future ratepayers?

  • How should the ORA balance the interests of current and future ratepayers?

Worryingly, striking such a balance involves assessing the risk of new technologies, something which even the supposed experts, venture capitalists, frequently fail at spectacularly. And the ORA is arguably even less well equipped to assess risk. There are no easy answers.

Arne Hessenbruch is a Danish expat and the founder of Muninsight, helping Northern European companies navigate the US energy market.

This blog is not written or edited by or the Boston Globe.
The author is solely responsible for the content.

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