Like it or not, utilities that rely on coal-fired power plants are facing a perfect storm. The cost of harnessing renewable energy sources is dropping while coal is becoming more expensive at the same time customers and the international community want cleaner energy and more choices. It’s almost inevitable that the monopoly utilities’ old way of doing business, with expensive coal-fired plants, a defined customer base and guaranteed profits, simply will not stand. It is not sustainable in the long term. Last week, we spoke with RENEW Wisconsin Board President Carl Siegrist, a solar energy consultant who spent three decades working in the electric utility industry, about the utilities’ business model and how and why it can change to serve our needs in the 21 century. Here’s a portion of our conversation.
Shepherd: Not many people realize that regulated monopoly utilities are private businesses. What is their current business model?
Siegrist: The traditional model for the electric utility industry recognizes the utility is a so-called natural monopoly, which is regulated to provide service to all its customers within its authorized service territory. It was the right model, in my opinion, when we began building out the electric grid 100 years ago. We needed electricity in this country. We realized that we didn’t want wires strung willy-nilly from house to house and building to building and power plant to power plant.
It was a good, prudent decision on the part of the people who set this regulatory model up 50, 100 years ago, to have natural monopolies because you didn’t want to overbuild generation and you didn’t want to overbuild the grid. It’s served us well. It’s a very complicated system and we don’t have to worry about it. We just flip the switch and pay the bill.
Shepherd: How is that business model being challenged now?
Siegrist: Things are changing because the price has been going up quite a bit for most of us since the beginning of this particular decade, or even the millennium, and people are more and more concerned about the environmental impacts, what it’s doing to the planet, whether it’s fine particulate, whether we have to use fracking to get the natural gas, coal mining issues, certainly burning fossil fuels, global warming, climate change. People are starting to connect the dots on that and they’re asking questions they didn’t ask before.
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And at the same time there’s a lot of new technologies that are allowing people both to tremendously reduce their use of electricity through energy efficiency, which is nothing less than a revolution, and distributed generation such as solar power, which is allowing some customers to generate their own power in many markets at a lower cost than what they’re getting from the local utilities.
So utilities are really experiencing an unprecedented change in their operating environment. I think that requires some kind of reinvention of their business models. I really think we’re on the cusp of a revolution, another revolution, one that’s going to be driven by innovation and customers changing their expectations of what they get in terms of services from the utility and how their electricity is generated. It’s not just a U.S. thing. We’ve seen this globally. These disruptive technologies and all of these market trends are really coming together, so whether the utilities want to change or not they’re going to have to. I think it’s going to be adapt or perish for some of the utilities.
Shepherd: Do you see a possibility of what happened in the phone industry? The new tech just stepped over the monopoly controllers of the landlines and wires, leaving them with the old technology.
Siegrist: That’s a very good analogy. The AT&T of the past really didn’t see the day coming when they would have competition, when people were going to want a different choice. People wanted to make a phone call from their backyard or their car and didn’t want to be tied down to a piece of copper in their wall running off to some central station somewhere. I think the energy services are going to become distributed as well.
Shepherd: As more and more people are going to try to use renewable energy, what about the debt service on these massive dinosaur power plants? It will be put on the smaller customer base and will be too costly. If that will happen, what would follow? Is it a problem that the utilities need to address?
Siegrist: That is the multitrillion-dollar question. When I think about the utility industry and I am having trouble falling asleep, that’s the big elephant in the room. I think it’s a big societal issue that we don’t really talk about.
Who will pay for this? If it’s going to be the stockholders, that’s going to cause a lot of problems for the stockholders. It could be as bad as the situation we’ve seen in the banking industry, the housing industry, because we’re talking trillions of dollars of assets that may turn out to be worthless. But if we expect the customers to pay it going forward, even if the plant is adding no value, i.e. not providing power to customers, that’s going to drive up rates and that is going to have a huge economic impact too because it will take away disposable income from households and make businesses less competitive. It’s not an easy answer.
What I worry about is not only the economic impact of it but I worry that maybe the folks who make the policy decide well, hell, it’s just better to keep burning the coal and we’ll let the next generation worry about the impact of that because we don’t want to have this economic catastrophe on our hands, on our watch. We’ll just let our kids or our grandkids worry about it.
Shepherd: How else are the utilities trying to recover their costs?
Siegrist: Imagine this: Imagine some big Fortune 500 company. They decide that they’re going to expand their retail stores and at some point they realize they overbuilt and people aren’t coming and they’re going to lose money. So what they do is they say, “We’re not going to close those stores, we’re just going to raise our prices and we’re going to ask the government or regulators to guarantee that we still have these customers and they’re going to pay higher prices and in fact we’re going to put an extra charge on, a fixed charge, saying when you walk into the door of our mall or shopping center or department store you have to pay $25 or we’ll sign you up for $10 a month and that gives you the privilege to come in here to buy our overpriced goods and you don’t have a choice because we really want to protect our stockholders who made this bad decision or the executives who made a bad decision for the stockholders.
When I have this conversation with my conservative friends over a beer or a glass of wine and we talk about that, they’re like that would never happen. And I say that’s kind of what we’ve got going on with the current utility business model. They built these big plants and we have to pay for it whether we want to use it or not and if we want to self-generate they want to put an extra tax on us for the right to continue to buy power from them. That’s not really a sustainable thing. When utilities start viewing their customers as their competition that’s not a business I would particularly want to be in.
Shepherd: The Environmental Protection Agency (EPA) is launching its Clean Power Plan, which would toughen up the regulation of coal-burning power plants. Gov. Scott Walker just sent a letter to the president saying that it’s unworkable and expensive. Do you agree with that assessment?
Siegrist: First of all, 49 of the 50 states, including Wisconsin, have plans in place that comply with these EPA rules. The only state that doesn’t have a plan in place is Oklahoma. There’s no question that states that over the last couple of decades have continued to build coal plants, like Wisconsin, are going to be hit with higher utility costs. But that’s not a surprise. Every utility’s model has built some type of carbon price costs into their cost of production models for many years. Gov. Walker may be surprised and he may be shocked and he may say it’s too expensive and maybe that’s news to him but it’s certainly not news to any utility in the country.
Shepherd: What can regulators do to help facilitate the transition to a new business model for utilities or a greater reliance on energy efficiency or renewables?
Siegrist: I think the Public Service Commission should be trying to balance out both the needs of stockholders and consumers. I think they probably ought to be considering the role of competition and how best to do that. I think they ought to be considering ways to incentivize utilities not based on how much more capital infrastructure they can build out and earn a return on but how they can incentivize for providing a higher rate of customer service, perhaps incentivize them for helping their customers use less energy through energy efficiency, maybe incentivize them for how they can help customers generate their own power and build out a truly smart grid with smart meters that feed both directions so the utility knows what’s going on and the customer knows in real time, perhaps, which appliances were using the most energy.
Shepherd: What will the tipping points be that could affect the industry?
Siegrist: I think there will be a state or two that will make some changes and it’s going to have a ripple effect across the country or there will be a utility like Green Mountain Power in Vermont or NRG Energy that will continue down the road [of energy efficiency] and investors are going to want to invest in those businesses because they’re making money in the future. Just like there’s this huge divestment movement around oil companies. Well, we may see a divestment movement around utilities that have 70% reliance on coal.
The first thing readers can do is educate themselves about energy, where it comes from, look at the upstream and downstream impacts, ask questions and take the next step—educate your friends and family and neighbors, and then make their feelings known to policy makers.
