There are few state responsibilities more important — or more challenging — than how the state exercises its constitutional authority over the electric utilities that serve us.
- For consumers, a utility bill is one of our largest monthly obligations.
- For our environment, utilities and the grid are among the most critical leverage points if we are serious about combating climate change.
- For our economy, a utility can unleash entrepreneurs, innovation and green jobs while ensuring reliable service.
Fortunately, the General Assembly, with the prompting of our great nonprofit environmental leaders, understands the key role our utilities play in our climate emergency. The Maryland Clean Energy Jobs Act puts the state on a path toward 50 percent renewable energy by 2030. To his credit, the governor allowed it to become law notwithstanding his misgivings, and more surprisingly, committed publicly to forward legislation next year that would put our state on a path to zero carbon emissions by 2040.
But what is even more challenging is changing the way utilities make their money.
In simple terms, utilities forever have earned their financial returns on the money they invest in infrastructure. In essence, they make their money by spending money. Not surprisingly, this leads utilities here and everywhere else to spend a lot of money. Can you think of anything more perverse or anti-consumer? Indeed, no other industry in America is rewarded on the basis of how much it spends. Every other industry in America is rewarded – or not — by how well they meet the needs of their customers.
And that is exactly how a coalition of parties last week asked the Maryland Public Service Commission to regulate our state utilities. The commission is now re-examining how it regulates electric utilities in large measure because of the almost successful legislative push the utilities made to require the commission to do it the way the utilities want. But having opened that door, a number of us accepted the invitation from the commission to advise it on how other forward-looking states are thinking about rate regulation today.
This re-examination comes at a time when the industry is really at a truly transformational inflection point. There was a time not that long ago when we needed utilities to build build build to meet the growing demands of our communities. There was a time when power only flowed one way through the wires. There was a time when the utility was the only provider of power. There was a time when consumers were basically powerless in the equation.
None of that is true anymore. Demand is flat or falling; power flows back and forth through the grid; third parties, from community solar to wind farms, offer consumers choices; consumers can reduce their usage through smart devices, install solar and storage batteries, and sell their own power; and entrepreneurs and tech-savvy companies can use utilities as a platform for providing innovative services, while utilities focus on the wires.
Bottom line: the world utilities encounter today is almost 180 degrees different from what it was when our current regulatory regime was put in place. And that is why this is the ideal time to bring about fundamental changes in how we regulate them.
It is impossible to overstate how important regulating them the right way is. Investor-owned utilities not surprisingly have their first obligation to their … investors. Indeed, it has been said that you will learn a lot more about a utility during an earnings call with Wall Street than before their regulators. So, if you reward a utility for spending money, they will spend money. But conversely, if you tell them they will make a greater profit if they perform better, chances are they will perform better. That has certainly been the case when it comes to the critical issue of reliability in our state.
There was a time not too long ago when Pepco totally failed to meet its most fundamental obligation – keeping the lights on. It was in the lowest quartile nationally for five years in a row. Our people were without power for days, weeks. It was totally unacceptable. That is not true today. It is not true in large part because we passed a law that said to the utilities, if you don’t perform better, you will face a financial penalty. That they understood.
We need to adopt that approach across the board. Pick our top priorities for what we want from our utilities, set a target for their performance, reward them when they exceed our expectations and penalize them when they fall short.
For some of us, the list of priorities would include, among many, how well the utility advances carbon reduction through distributed energy, energy efficiency and conservation; empowering consumers; using third parties to provide innovative, less costly solutions; holding down rates; and creating green jobs. And that’s just a short list.
This way of regulating utilities is called performance-based rates and it is being implemented in a growing number of states. It is what Maryland should do. It is the right thing to do. It is logical, pro-consumer, pro-environment, pro-economy and tested in Maryland. And it has broad support.
Exelon, owner of Pepco and BG&E, is subject to performance-based rates in its home state of Illinois, and Pepco is filing for performance-based rates in the District of Columbia in its next rate case. The state’s leading solar company, Sunrun, and the Maryland, DC, Virginia Solar Industries Association support it. And perhaps most importantly politically, the governor’s Maryland Energy Administration also testified in favor of performance-based rates.
The Maryland Public Service Commission has a great opportunity to put Maryland on a path to a better energy future with rate regulation right for the 21st century. Let’s hope it seizes it because all of us have a huge stake in the outcome.
The writer is the managing partner of DMV Strategic Advisors LLC and lead counsel for the Coalition for Performance Incentive Mechanisms before the Maryland Public Service Commission.
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