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Generation is very competitive These price of energy sent to customers is controlled by regulators “Increasing cost” means investing in the grid. For example,

Generation is very competitive These price of energy sent to customers is controlled by regulators “Increasing cost” means investing in the grid. For example, to avoid your catastrophic forest fires in CA.

szvsw 2y ago
Consider this hypothetical scenario. Option 1: Everybody in MA installs heat pumps in their homes. Option 2: Everybody in MA installs heat pumps in their homes, as well as re-insulates and enhances air-sealing. Government is deciding how they want to allocate funding for home energy retrofits. If you are a grid operator, which plan would you want the government to support? Keep in mind that you will be negotiating with regulators to set rates which will correspond to a guaranteed rate of return given your CapEx. Obviously you as a utility would pick the scenario which will end with you just spending more money, as that will allow you to justify higher rates to the regulator. Your rate of return would be the same, but your actual profit will be higher. Who actually bares that cost? The consumer. Option 1 above will lead to higher demand and higher peaks than option 2, so it is in the utilities’ interest to advocate for the government setting incentivizes for option 1, as it will allow them to negotiate higher rates, spend more capital, and make more profit. The state/local governments have a responsibility to the constituents IMO to incentivize option 2 over option 1.
- jncfhnb 2y ago
  Kind of an awkward scenario as the utility would have nothing to do with insulation. Option 2 is better, yet both options are still valuable investments for society
  - szvsw 2y ago
    But the utility would have an incentive to lobby for legislation which only allocates funding to heat pump incentive programs, as opposed to programs which couple those incentives with requirements/incentives for deep energy retrofits. They certainly have skin in the game for shaping the legislative/policy outcomes which will affect their ability to negotiate for rates and how they invest in the grid (which is == higher rates and revenue, which in turn == higher profit given the agreed rate of return).
    - jncfhnb 2y ago
      Sure. But they don’t get to choose. It’s not the end of the world if they lobby for heat pumps but don’t lobby for insulation If it weren’t for heavy regulation they would probably lobby against both and raise prices without cause
jjav 2y ago
> “Increasing cost” means investing in the grid. For example, to avoid your catastrophic forest fires in CA. There are multiple instances in history where PG&E lobbied for increases so they can invest in improving the grid and safety. And then turns out the did between barely nothing and nothing and all the money went to executive bonuses.
- jncfhnb 2y ago
  Hope they got fined by competent regulators
  - jjav 2y ago
    LOL. PG&E effectively owns the California government, which we can observe by how they continue to get away with everything and raising rates to infinity (71.3 c/kWhr daytime right now, more increases coming).
thelastgallon 2y ago
> Generation is very competitive It isn't. Its a fiction they sell to naive public. > These price of energy sent to customers is controlled by regulators Regulators approve what the utilities want. Which is increased costs, more profits. They have no incentive to reduce OpEx -- it is pass through. There is no competition to compare alternatives. Both CapEx (increases profits) and OpEx (pass through) keep going up because of perverse incentives. > “Increasing cost” means investing in the grid. For example, to avoid your catastrophic forest fires in CA. They don't invest in maintenance. They are allowed to profit off of capex, not maintenance expenses. Most utilities operate with perverse incentives to increase profits by building more expensive systems than necessary (known as “gold plating”) and by prioritizing capital expenditures like new gas-fired power plants over operating expenses like energy efficiency or demand-side resources (called “capex bias”): https://rmi.org/for-ratepayers-to-realize-savings-from-clean-energy-utility-business-models-need-an-update/ https://rmi.org/for-ratepayers-to-realize-savings-from-clean... The perverse incentive rewards utilities with a profit margin for making capital investments, but not for contracted services that might serve customers better: https://www.utilitydive.com/news/tackling-the-perverse-incentive-utilities-need-new-cost-recovery-mechanism/518320 https://www.utilitydive.com/news/tackling-the-perverse-incen... "But all utility spending isn’t the same: there are two types of expenses for utilities, and they are treated differently. The first is operating expenses: costs for the day-to-day operation of business, which includes things like workers’ salaries, paper to print bills and stamps to mail them, and rent for offices. The second is capital expenses: the physical infrastructure that makes up the electric grid, including things like wires, poles, transformers, and substations. Utilities can collect their spending on operating expenses from you and me, on our bills. In practice, they almost always cover their costs, but they don’t get anything extra beyond what they spent. So, if a utility spends $100 on operating expenses, it collects $100 back, spread out across all the bills people pay to that utility. They don’t profit. But with capital expenses—that is, physical infrastructure, like poles and wires—utilities can collect the money they invested plus an additional percentage they keep as profit. So, if a utility spends $100 on capital expenses, they might collect $110 on our bills, with $100 paying for the wires and poles and $10 going towards profits." https://www.nrdc.org/bio/jc-kibbey/utility-accountability-101-how-do-utilities-make-money https://www.nrdc.org/bio/jc-kibbey/utility-accountability-10... From: Electricity Regulation In the US: A Guide https://www.utilitydive.com/news/inside-the-new-guidebook-for-electric-utility-regulation/426597/ https://www.utilitydive.com/news/inside-the-new-guidebook-fo... Cost-plus regulation was adopted as an effective way to regulate monopoly utilities. That is, by allowing only prudently incurred costs associated with used and useful investments and expenses, the regulator addresses the revenue requirement to arrive at just and reasonable rates. Because there was, by definition, no competitive service provider against which to benchmark prices, price control regulation was not appropriate. And competition itself was seen as inefficient because it would lead to unnecessary duplication of infrastructure. In addition to high investment levels, traditional utility regulation may also encourage excessive operating expenses, because its cost-plus structure means that all approved costs will be passed through to consumers. Although commissions do review operating expenses to determine if they are reasonable before approving them, they may not have the staff adequate for them to really examine them in detail in every rate case. Also, the higher the operating expenses were in the test year, the more the company is allowed to earn in the year after the rate case is resolved, so there is an incentive to “load up” expenses in any year expected to serve as a basis for a future rate case. Incentives to Improve Electric Utility Performance, its a 1985 paper,hard to copy paste from it: https://www.rand.org/content/dam/rand/pubs/reports/2007/R3245.pdf https://www.rand.org/content/dam/rand/pubs/reports/2007/R324...

szvsw 2y ago

Consider this hypothetical scenario. Option 1: Everybody in MA installs heat pumps in their homes. Option 2: Everybody in MA installs heat pumps in their homes, as well as re-insulates and enhances air-sealing. Government is deciding how they want to allocate funding for home energy retrofits. If you are a grid operator, which plan would you want the government to support? Keep in mind that you will be negotiating with regulators to set rates which will correspond to a guaranteed rate of return given your CapEx. Obviously you as a utility would pick the scenario which will end with you just spending more money, as that will allow you to justify higher rates to the regulator. Your rate of return would be the same, but your actual profit will be higher. Who actually bares that cost? The consumer. Option 1 above will lead to higher demand and higher peaks than option 2, so it is in the utilities’ interest to advocate for the government setting incentivizes for option 1, as it will allow them to negotiate higher rates, spend more capital, and make more profit. The state/local governments have a responsibility to the constituents IMO to incentivize option 2 over option 1.

jncfhnb 2y ago
Kind of an awkward scenario as the utility would have nothing to do with insulation. Option 2 is better, yet both options are still valuable investments for society
- szvsw 2y ago
  But the utility would have an incentive to lobby for legislation which only allocates funding to heat pump incentive programs, as opposed to programs which couple those incentives with requirements/incentives for deep energy retrofits. They certainly have skin in the game for shaping the legislative/policy outcomes which will affect their ability to negotiate for rates and how they invest in the grid (which is == higher rates and revenue, which in turn == higher profit given the agreed rate of return).
  - jncfhnb 2y ago
    Sure. But they don’t get to choose. It’s not the end of the world if they lobby for heat pumps but don’t lobby for insulation If it weren’t for heavy regulation they would probably lobby against both and raise prices without cause

jjav 2y ago

> “Increasing cost” means investing in the grid. For example, to avoid your catastrophic forest fires in CA. There are multiple instances in history where PG&E lobbied for increases so they can invest in improving the grid and safety. And then turns out the did between barely nothing and nothing and all the money went to executive bonuses.

jncfhnb 2y ago
Hope they got fined by competent regulators
- jjav 2y ago
  LOL. PG&E effectively owns the California government, which we can observe by how they continue to get away with everything and raising rates to infinity (71.3 c/kWhr daytime right now, more increases coming).

thelastgallon 2y ago

> Generation is very competitive It isn't. Its a fiction they sell to naive public. > These price of energy sent to customers is controlled by regulators Regulators approve what the utilities want. Which is increased costs, more profits. They have no incentive to reduce OpEx -- it is pass through. There is no competition to compare alternatives. Both CapEx (increases profits) and OpEx (pass through) keep going up because of perverse incentives. > “Increasing cost” means investing in the grid. For example, to avoid your catastrophic forest fires in CA. They don't invest in maintenance. They are allowed to profit off of capex, not maintenance expenses. Most utilities operate with perverse incentives to increase profits by building more expensive systems than necessary (known as “gold plating”) and by prioritizing capital expenditures like new gas-fired power plants over operating expenses like energy efficiency or demand-side resources (called “capex bias”): https://rmi.org/for-ratepayers-to-realize-savings-from-clean-energy-utility-business-models-need-an-update/ https://rmi.org/for-ratepayers-to-realize-savings-from-clean... The perverse incentive rewards utilities with a profit margin for making capital investments, but not for contracted services that might serve customers better: https://www.utilitydive.com/news/tackling-the-perverse-incentive-utilities-need-new-cost-recovery-mechanism/518320 https://www.utilitydive.com/news/tackling-the-perverse-incen... "But all utility spending isn’t the same: there are two types of expenses for utilities, and they are treated differently. The first is operating expenses: costs for the day-to-day operation of business, which includes things like workers’ salaries, paper to print bills and stamps to mail them, and rent for offices. The second is capital expenses: the physical infrastructure that makes up the electric grid, including things like wires, poles, transformers, and substations. Utilities can collect their spending on operating expenses from you and me, on our bills. In practice, they almost always cover their costs, but they don’t get anything extra beyond what they spent. So, if a utility spends $100 on operating expenses, it collects $100 back, spread out across all the bills people pay to that utility. They don’t profit. But with capital expenses—that is, physical infrastructure, like poles and wires—utilities can collect the money they invested plus an additional percentage they keep as profit. So, if a utility spends $100 on capital expenses, they might collect $110 on our bills, with $100 paying for the wires and poles and $10 going towards profits." https://www.nrdc.org/bio/jc-kibbey/utility-accountability-101-how-do-utilities-make-money https://www.nrdc.org/bio/jc-kibbey/utility-accountability-10... From: Electricity Regulation In the US: A Guide https://www.utilitydive.com/news/inside-the-new-guidebook-for-electric-utility-regulation/426597/ https://www.utilitydive.com/news/inside-the-new-guidebook-fo... Cost-plus regulation was adopted as an effective way to regulate monopoly utilities. That is, by allowing only prudently incurred costs associated with used and useful investments and expenses, the regulator addresses the revenue requirement to arrive at just and reasonable rates. Because there was, by definition, no competitive service provider against which to benchmark prices, price control regulation was not appropriate. And competition itself was seen as inefficient because it would lead to unnecessary duplication of infrastructure. In addition to high investment levels, traditional utility regulation may also encourage excessive operating expenses, because its cost-plus structure means that all approved costs will be passed through to consumers. Although commissions do review operating expenses to determine if they are reasonable before approving them, they may not have the staff adequate for them to really examine them in detail in every rate case. Also, the higher the operating expenses were in the test year, the more the company is allowed to earn in the year after the rate case is resolved, so there is an incentive to “load up” expenses in any year expected to serve as a basis for a future rate case. Incentives to Improve Electric Utility Performance, its a 1985 paper,hard to copy paste from it: https://www.rand.org/content/dam/rand/pubs/reports/2007/R3245.pdf https://www.rand.org/content/dam/rand/pubs/reports/2007/R324...