Is Iowa solar power ruling a camel’s nose into electric utility’s monopoly tent?

Michael Giberson

Eagle Point Solar, a for-profit solar power installer and operator, proposed to build a solar PV array on a Dubuque, Iowa municipal building under a long-term contract with the city. Under the contract, Eagle Point would own the solar array and sell power to the city in a “behind the meter” arrangement.

The local electric utility, Interstate Power and Light Company (IPL), challenged the arrangement as infringing on its exclusive service territory. In April of 2012, the Iowa Utilities Board agreed with IPL that the retail electric sales contract would require Eagle Point to be an electric utility and it would thereby be prohibited from providing service in IPL’s assigned exclusive electric service area.

Eagle Point appealed and in March 2013 the Iowa District Court for Polk County overturned the Iowa Utilities Board ruling. Eagle Point was declared not to be a public utility and therefore not in conflict with IPL’s assigned exclusive electric service area. Kari Lydersen at Midwest Energy News summarized key parts of the ruling:

The ruling emphasized that since there is no state statute defining what it means to sell to the public, the utility board should have relied on a decision in a 1968 Iowa case involving the state commerce commission and a natural gas company. Based on a series of tests outlined in that case and actually drawn from a previous Arizona case involving a natural gas company, the court decided that Eagle Point would not meet the definition of either a “public utility” or an “electric utility.”

Among other things, Schemmel noted, Eagle Point would not be able or required to meet all requests for service and it would not be competing with Alliant or creating a monopoly of its own.

Schemmel also pointed out that the solar panels would not meet all of the building’s electricity needs, hence the building would still be hooked up to the grid and buying electricity from Alliant. The building’s demand for electricity from the grid would be reduced, but this would be equivalent to the demand reduction created by energy efficiency measures like weatherization, Schemmel found.

The court also considered a state law declaring it “the policy of this state to encourage the development of alternative energy production facilities” as balancing against the public interests in the law granting monopoly territories to electric utilities.

A significant factor in this case was the ability of for-profit companies like Eagle Point, but not non-profit entities like city governments, to access numerous federal and state subsidies for solar power installations. If the deal was just about power supplies the city could have simply bought the solar array from Eagle Point. But this angle is actually less interesting that the broader possibilities of the precedent to support distributed generation.

The Iowa Utilities Board could appeal the decision to the state’s Supreme Court. But at least until that happens, or if the Supreme Court affirms the district court rules, behind-the-meter distributed power systems appear to be legal in Iowa (at least if they are “alternative energy” based generators, and if they don’t result in entirely removing a customer from electric utility service).

Small renewable providers and cogenerators, start your engines.

Eagle Point Solar: Dubuque City Operations Center

Eagle Point Solar: Dubuque City Operations Center

The city council puts Lubbock’s new municipal electric monopoly to use

Michael Giberson

Are monopoly municipal electric utilities supposed to be treated like piggy banks by city councils?  For over 90 years Lubbock Texas has had two electric utilities serving the town – one regional state-regulated investor-owned utility (Xcel) and a municipal utility (LP&L). Both ran wires throughout the city and most customers could switch between the competing utilities on a few days notice. For the most part LP&L stayed competitive by charging a slightly lower rate as Xcel. The LP&L website once trumpeted the benefits to consumers from the competition. Not any more.

Last November the city and the announced that city-owned LP&L would buy out Xcel’s distribution service and customer accounts in the city, making LP&L the monopoly electric power provider in town. The deal is expected to be completed in October.

Already the city council is beginning to treat the utility budget like a basketful of unattended Halloween candy. The deal is not even done, but the current city budget proposal for next year has LP&L customers picking up the $3 million tab for street light power and maintenance costs.  The budget also tags LP&L with a $1.46 million payment in lieu of property taxes. (Not clear from the news story but I think LP&L already pays a percentage of gross revenue into the city budget.) One of two council members objecting to the plan said LP&L customers ought not to be tapped to support city-provided services.

Council members supporting the transfer assure us that “it was not council’s intent to tap the utility for more than the street light program it once supported.” Slippery slope arguments are overblown, they say. Sure the city council drained funds from LP&L in the past, almost pushing the utility into bankruptcy when it got caught by rising fuel costs a decade ago. “None of us on this dais would do that again — would start putting them into any kind of financial trouble again,” a city councilman said. “That is not what we’re after. That is not what we want to do in any way.”

Feel better?

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Matt Welch on monopoly: Joseph Schumpeter, call your office!

Lynne Kiesling

Matt Welch channels his inner Joseph Schumpeter (and his inner Lynne, while we’re at it …) in his post this morning about the evanescence of monopoly. The grit in Matt’s oyster is yesterday’s NYT oped from former Microsoft vice president Dick Brass bemoaning Microsoft’s lack of an innovation-facilitating corporate culture. As someone who studies an allegedly monopoly industry in which the government-protected monopoly status has outlived the actual underlying economic justification for that status, this statement of Matt’s particularly resonated with me:

I’m more interested in a macro fact about monopolies: Namely, unless they’re either run or locked into place by government, they do not last. And even government-run monopolies produce mass consumer defections. … Companies that grow bloated on profits squeezed from a seemingly captive audience end up panicking when those consumers wriggle free to buy and even create competing products. Meanwhile, corporate cultures in (temporarily) uncompetitive industries are the very definition of non-innovative, even in technology companies.

This “macro fact” is one substantial reason why regulated electric utilities are fighting so hard to retain their retail market monopolies, because reducing the entry barriers to those captive customers would enable us to wriggle free. Removing that regulatory shield from Schumpeter’s “gale of creative destruction” would mean they would actually have to, you know, like, … come up with and market customer-focused value propositions so they could actually compete.

Vero Beach Florida could become a hothouse of dynamic competition in retail electric power

Michael Giberson

Vero Beach, Florida, could become a hothouse of dynamic competition in retail electric power, if only the city would follow the recommendations of economist Dom Armentano.

According to the Vero Beach [Florida] Electric Utility, they aim to provide “reliable, cost competitive electrical energy and services to our customers in a manner that exceeds their expectations.”  They aren’t meeting this standard.  Dom Armentano reports that his local municipal power monopoly offers rates that are “an incredible 58 percent” higher than rates available from the state-regulated monopoly serving the surrounding area.

Most of this economic nonsense started back in 1979 when state and federal agencies stopped a referendum-authorized city sale of the electric utility to [Florida Power & Light]. Then in 1981 a notorious “territorial agreement” was crafted to divide up the electric grid between the city and FPL. Finally, in 1983, the state Legislature removed the bulk of the PSC’s regulation of Vero’s electric system, including rates.

Since then, customers of the city’s utility (61 percent of whom live outside the city) have been at the mercy of whatever service and price structure the utility determines is appropriate. As one could predict, this has proven to be a recipe for inefficiency and price gouging.

Armentano recommends several possible ways forward:

One way is to simply require that the city of Vero Beach sell its utility operations to any willing buyer. A second alternative would be to force the city utility to charge “competitive” rates or, third, allow customers to switch to a competitor. This latter proposal would create “competition” between utility providers and would tend over time to lead to lower rates generally.

In addition, in order to encourage non-traditional suppliers of electric power, any and all supply restrictions on the sale of electricity in Indian River County should be removed.

The first option would likely result in a sale of the utility to FPL and prices equal to that available in the surrounding area.

The second option would likely gain the same lower price level, but leaves the city with significant cost management issues.

The third option, depending upon just how it is implemented, could result in FPL competing for customers by building new distribution wires, eventually producing duopoly like Lubbock, Texas; or, by unbundling the city’s wires and power supply businesses, could allow for a “retail choice” environment.  I’m not aware that anyone has tried retail choice in such a small market.  Even many large states pursuing retail choice have had difficulty finding the right mix of policies. But the city’s current rates do offer a lot of “headroom” for potential competitors, so maybe this approach could work.

Armentano’s last suggestion is most radical and offers the most potential for consumer benefits.  Simply by removing “any and all supply restrictions on the sale of electricity,” Vero Beach would become a hothouse of dynamic competition in retail electric power. FPL could wire neighborhoods to offer duopoly distribution capability.  Retailers could negotiate for delivery of power over city or FPL wires (though negotiating with monopolies is fraught with dangers).  Most importantly, local businesses or real estate developers could invest in microgeneration and bypass the city grid, likely contracting with the city for backup power or building a wire out to FPL.  Likely, several distributed power businesses would link up to self-supply backup power capability.  Obviously, smart grid-based coordination would be vital to such an effort.

Even though these developments may take some time to emerge, the very possibility of competition emerging would motivate the city to reduce costs and cut rates.

Moves in this direction would be strongly opposed by both state-regulated and municipal power utilities.  The prospects of significant consumer value are likely no match for the status quo political interests that would rise up to defeat it.  Still, it would be interesting, even educational, to watch the parade of industry lobbyists pretending to be the consumer’s friend even as they argue against giving consumers the ability to escape monopoly suppliers.  I’m in favor.

Origins of state electric utility regulation: Was it protection of quasi-rents not creation of monopoly rents?

Michael Giberson

There is by now a fairly established body of economic history work that challenges what might be called the mainstream view of the origins of state regulation of electric utilities and offers as an alternative a nakedly public choice view that state regulation was all about creation of monopoly rents. The mainstream view asserts that electric utilities were natural monopolies – therefore competition was wasteful – and state-level rate regulation was desirable to limit the economic harms that would otherwise accompany monopolization.

A contrary view drawing on public choice and new institutional economics asserts that state utility regulation was a special interest effort in the creation of monopoly rents. This line of thinking may start with Stigler and Friedlander and Demsetz and culminate in the work of Jarrell, who found that the advent of regulation in states was associated with higher electric power prices and slower growth compared to the periods before state regulation. A central implication of this line of work is that state regulation is a negative-sum game in which powerful concentrated interests are able to capture political benefits through regulatory processes at the expense of dispersed, unorganized consumer interests.

In the December 2008 Journal of Economic History, John Neufeld presents an alternative explanation for the emergence of state regulation, which also draws on insights from public choice and new institutional economics. A key point of his article is that state regulation can be seen as a positive sum activity instead of a purely negative-sum rent-seeking exercise. (You might say that the earlier line of thinking emphasizes public choice concerns, while Neufeld’s alternative emphasizes new institutional issues.) In the abstract for “Corruption, Quasi-Rents, and the Regulation of Electric Utilities,” he says:

Was the adoption of state utility regulation the result of a negative-sum competition among special interest groups vying for the monopoly rents created by regulation or a positive-sum elimination of corruption arising from appropriable quasi-rents? Previous empirical studies of the adoption of regulation have assumed the former. Using discrete hazard analysis, this study considers the latter and finds the data more consistent with the positive-sum protection of quasi-rents than the negative-sum creation and appropriation of monopoly rents.

In Neufeld’s telling, the problem with municipal franchising with private utilities – the dominant practice prior to state utility regulation – was that post-contractual investments by the utility created appropriable quasi-rents, and it was difficult to prevent the municipality from reneging on contractual commitments in pursuit of those rents. In this environment, utilities preferred the relatively stability promised by state regulation.

I like Neufeld’s view, but it doesn’t seem to address one very important issue: Why did state regulation seem to necessarily entail imposition of a state-enforced monopoly? Couldn’t the state offer effective protection from municipal predation to competing electric utilities? Also, what features of state-level regulation protected utilities from state government appropriation of the quasi-rents?

Maybe Neufeld addressed these points and I just missed them.* In any case, he presents a good case for considering the role of appropriable quasi-rents in the story of electric utility regulation.

CITATION: John L. Neufeld (2008). Corruption, Quasi-Rents, and the Regulation of Electric Utilities. The Journal of Economic History, 68, pp 1059-1097. doi:10.1017/S0022050708000818

*I don’t have an electronic version of the document handy for reference, the article is only available online to subscribers. I’m working from memory from yesterday’s trip to the library. (Yes, I actually had to bike over to the library to read a journal article! It felt so old fashioned.)

Russia and Ukraine natural gas disputes illustrate the bilateral monopoly problem

Michael Giberson

At the Streetwise Professor, Craig Pirrong writes that the periodic interruptions in natural gas flows from Russia across Ukraine present a “classic bilateral monopoly situation.”

Bottom line–there are no saints involved in this episode.  There is a classic bilateral monopoly situation.  Each side is using its leverage to try to extract as much from the other as possible.  There is a substantial rent to be had, and Ukraine and Russia/Gazprom are using every lever they can to get the lion’s share of that rent.

More:

In essence, Ukraine is using the market power inherent in its control of the pipeline between Russia and Europe in exactly the same way Russia/Gazprom has used the market power inherent in its (government granted) monopoly over the pipeline between Turkmenistan and Europe.  And which it also uses, by the way, to stifle competition from other Russian producers of gas.

His prognosis:

This conflict is inherent in the dysfunctional market structure upstream and midstream.  State mandated monopolies over transportation in Russia and Ukraine, with no system of open access and common carriage, distort markets.  When these monopolies are back to back, rent seeking battles are inevitable.

Absent some regime of open access, or common carriage at regulated rates, the distortions in the Eurasian gas market will persist.  The second best alternative is to create additional pipeline routes connecting other sources of gas (Turkmenistan, Kazakhstan) with consumers downstream.  Importantly, these additional routes must not be in control of the incumbents–notably Gazprom–so Nord Stream and Blue Stream South Stream don’t help.  An additional, non-Gazprom pipeline would create additional competition (though far from anything resembling perfect competition) both for the gas, and for the transport of gas.

This is not likely to happen anytime soon, given the difficult economics of Nabucco, the dynamics of the new Great Game in Central Asia (and Russia’s strong strategic hand in that game, and its ruthlessness in playing it), and the pathetic dithering of the Europeans.  Which means that the gas wars will remain as regular a New Years event as the Rose Bowl and hangovers.