Will Ratepayers Be Stuck if the Landscape Changes?

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Public electric utilities: These legal monopolies get to be the only show in town in exchange for having regulators set their prices. In turn, the regulators are supposed to set fair rates that are affordable to customers and compensate power companies enough to incentivize them to do business.

Public electric utilities: These legal monopolies get to be the only show in town in exchange for having regulators set or approve their prices. In turn, the regulators are supposed to set fair rates that are affordable to customers and compensate power companies enough to incentivize them to do business.

The job of regulation can be a tricky balance (combined with temptations to cater to special interests) and even more so when deciding on how much to charge customers for long-term power projects. More recently, a new dimension has been added as new forms of power have begun to compete with the traditional electric grid.

Liam Denning writes in the Wall Street Journal:

“The death-spiral thesis runs thusly. Subsidies and falling technology costs are making distributed solar power—panels on roofs, essentially—cost-competitive with retail electricity prices in places like the southwestern U.S. As more people switch to solar, utilities sell less electricity to those customers, especially as they often have the right to sell surplus power from their panels back to the utility.

The result: Utilities must spread their high fixed costs for things like repairing the grid over fewer kilowatt-hours, making solar power even more competitive and pushing more people to adopt it in a vicious circle.”

In addition to increased competition from solar panels, Denning notes that greater efficiency cuts down on the demand for power. Machines that can burn natural gas for power in one’s own home are another developing challenger.

While Denning doesn’t see a big switchover in power supply happening just now, it’s a market with potential for a quick change.

If this is the case, regulators have an extra caution to consider when deciding to approve large, long-term electricity projects. If the new power projects end up being overshadowed by other forms of energy, then the customers will be locked into a bad bargain. It’s another conundrum that highlights the potential power and high responsibility of public utility regulators—and the importance of not being captured by special interests.

How will they do?

>>Source: Denning, Liam. “Lights Flicker for Utilities.” Wall Street Journal. 22 Dec. 2013.

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