Month: October 2021

Let’s get this upfront right away: Central Maine Power Company (CMP) metrics and reputation for reliability and customer service are less than desirable.[i]  CMP has created such enmity among its customers that some legislators in Maine would rather forego reducing greenhouse gas emissions by blocking a vital CMP transmission line as well as attempting to take the utility over to form a “consumer-owned utility”. CMP operates i accordance with the rules it is given. Maine’s PUC and its legislature can fix this problem, and the easiest solution to fix this problem is in their hands: performance-based rates.

Rate Regulation

A bit of history first. Electric utilities began to be regulated as monopolies early in the early 1900’s and what evolved was what is now called “cost of service” regulation. Essentially a utility is allowed to charge an amount that recovers its allowable expenses as well as a fixed return on its investment. This model encouraged new investment by utilities to grow their systems while keeping rates down by limiting their profits. It worked quite well through the 1980’s, spurring economic growth throughout the country. Beginning in the ‘80s deregulation began, opening up competition at both the retail and wholesale level. Some utilities took advantage of this hybrid of deregulation and the cost-of-service (COS) model, such that misguided investments were made with the belief that they would automatically be recovered in rates, and at the same time, customer service and reliability began to drop in some areas. Several states began to enact “incentive-based ratemaking” or “performance-based ratemaking” to counter this problem.

Performance Based Ratemaking

Currently 16 states have some form of advanced PBR.

Source: Navigant Consulting

The basic differences between traditional regulation and PBR are shown in the table below.

Source: Advanced Energy Economy

Performance incentive mechanisms can be designed to assess safety and reliability, customer satisfaction, facilitating customer owned generation and adopting of energy efficiency programs.

Hawaii

Hawaii is the latest and most advanced version of PBR in the US. Hawaii’s implemented its version of PBR last June. It illustrates one way this approach can work to end the COS “spend money to make money” model.[ii] Hawaiian Electric Company is required to submit a 5-year plan that begins with fixed rates the first year and limits annual rate increases to three factors: inflation; unforeseen events; and a “productivity factor.” The productivity factor is based on how Hawaiian Electric does in terms of customer experience, utility performance and desired societal outcomes. See chart below.

Source: State of Hawaii Public Utility Commission

If Hawaiian Electric reduces its costs beneath the annual limits, it can keep the difference; if its costs exceed the limits it takes a loss.

Maine

Let’s go back to the J.D. Power study. 4 of the 6 utilities that scored above average in CMP’s category (East Large) all operate in states where some form of PBR exists. So what about Maine? Maine has no performance standards, none. Maine’s regulatory structure is an anachronism and follows last century’s cost of service model. Is it any wonder that CMP’s performance is as poor as it is?

Empty Excuses

You’ll here two major objections to fixing CMP with PBR: we tried it and it didn’t work; and the Hope Supreme Court decision prevents us from penalizing CMP. They are nonsense.

Maine experimented with a very rudimentary form of PBR twenty years ago. Poorly constructed and not having the advantage of today’s technology, it was deemed a failure.

A Supreme Court case, FERC v. Hope Natural Gas, is frequently cited by opponents of PBR as prohibiting a penalty on utilities that threatened a reasonable rate of return. Washington State, Virginia, Florida, and Minnesota have all successfully navigated the precedent of this case to implement PBR multi year rate plans.

Bottom Line

A long time ago while working for a utility, a friend quipped “The number one core competency of investor-owned utilities is to make sure no one changes the rules.” CMP behaves the way it does because that’s what the rules allow it to be, and it has been very successful making sure they do not change.

Change the rules and the behavior will change.

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[i] https://www.jdpower.com/business/press-releases/2020-electric-utility-residential-customer-satisfaction-study. 

[ii] https://puc.hawaii.gov/wp-content/uploads/2019/05/PBR-Phase-1-DO-1-Page-Press-Release.05-23-2019.Final_.pdf

Watched a fascinating YouTube video on climate change and personal responsibility. It is well worth the 15 minutes or so to watch all the way through (URL at the end of this article) but if you don’t have the time, let me summarize it for you. In a nutshell, while taking personal responsibility for actions to mitigate greenhouse gas emissions (GHGE) is laudable, too much focus on individual actions can distract us from what really needs to happen.

But let’s take a step back and establish the context. Most people are aware that nearly everything we do to make our lives more comfortable – eat, wear clothes, drive vehicles, condition the air, using electricity, build buildings and roads – is destructive to the environment. We know that the big sources of GHGE are building heat, internal combustion engines, power plants. But many of us lack perspective on how much influence taking action on one front affects the other. Consider that the emissions resulting from making one new electric car is equivalent to that resulting from building 6 feet of roadway. So if we continue to build roads, switching to electric cars is not going to have a huge impact.

We need to also consider the sources of these emissions and the divide between rich and poor. Just having the richest nations cut back on their lifestyles is important, but the fact is that 63% of global GHGE comes from low to middle income countries. They are not living extravagantly, and, in actual fact, many are trying to simply escape poverty and become middle class. So, telling them to reduce emissions looks a lot like trying to keep them from improving their lot in life.  And telling countries to build solar and stop burning wood when they cannot meet basic needs doesn’t help. Consider this- a cheap and easy way for developing countries to build affordable housing is by using concrete. But concrete manufacture accounts for 8% of global GHG emissions. For some of these countries, more GHGE is a good thing.

Right now, the global population is nearly 8 billion and will exceed 10 billion by the end of this century. Animal based food production constitutes 57% of global GHGE, using 40% of the world’s habitable land. Eating less meat alone won’t stop climate change, but we can’t stop climate change without eating less meat.

Here’s where the personal responsibility discussion comes in. We’ve all heard the exhortations for everyone to do their part. Eat less meat, buy an electric vehicle, double glaze your windows, use heat pumps, turn off lights when not in use – the list goes on. We don’t appreciate the scale of the problem when this happens. During COVID most of the world’s population did many of these things, yet the total reduction in GHGE in 2020 was 7%.

The personal responsibility argument has been one of the most effective and sinister attempts to distract us from the reality of the situation. Few know that this argument about reducing your carbon footprint originated in 2005 when it was popularized by the oil producer, BP. The fact is that if a person eliminated all GHGE over a 70 year lifespan it would amount to 1 second of emissions from the global energy sector.

The best you can do is deal with the realities of the situation. You can promote your priorities through your behavior. If you choose to eat less meat or drive an electric vehicle and can afford to do so, great. But don’t do it because you feel guilty by not doing so. Do it because you will be doing your tiny, tiny part for systemic change we need.

What this means is that we need to appreciate the magnitude of this problem and focus on systemic change in technology development, politics, and the economy. Major investments and incentives in technological solutions are necessary. And as more people direct their purchasing to items that play a role in reducing GHGE, their costs will come down. Significant progress can be made by influencing those large levers in that system – politicians, technologists and industries – by people at the ballot box and by voting with their buying power.

So do your part with lifestyle changes AND make sure to elect the right people to pull the levers!

Kurtzgesagt YouTube video: https://www.youtube.com/watch?v=yiw6_JakZFc&t=318s