Exit, Voice, and LP&L

For many years Lubbock, Texas was the largest or among the largest cities with dual, competing electric utilities. If a consumer was unhappy with utility A, all it took was a phone call and about three days and the consumer would be hooked up to utility B. Standard economic theory suggests that such an arrangement would be unsustainable, but by most accounts electric rates stayed low and customer service was high. Some of this story is laid out in a 1981 Reason magazine article, “Two utilities are better than one.”

The official history once posted on municipal utility Lubbock Power & Light’s website claimed, “All electric customers in Lubbock have benefited from the decision of those early pioneers to begin retail competition.” It is true. A decade ago rising gas prices caught the city by surprise, LP&L tried to raise its rates noticeably higher than competitor Xcel, and consumers simply switched. Rather than simply stick consumers with the bill for their own lack of management savvy, the city and LP&L were forced into a complicated and unpleasant set of deals that diminished management’s role but kept rates low. Consumer exit protected the power consumer’s pocketbook.

Then, a couple of years ago, city powers that be decided two utilities were more trouble than one, LP&L bought out competitor Xcel in the city limits of Lubbock, and the town’s electric service was monopolized for the first time since September 1917. I blogged about the change, and a few locals objected, but the transaction sailed through without much difficulty.

Fast forward to today. The city council has recently approved a rate increase, implemented right before the summer began and accompanied by a massive billing snafu the first month, and now rather than LP&L being one of the cheapest in Texas it has rates near the state average.  Consumers, who no longer have exit as an easy option, are finding “voice” to be a frustrating experience.

Once you could call the competitor, and a few days later you’d be out. Now you can call your city council member, and when that turns out to be less than satisfying, start grumbling about recall petitions and lamenting the loss of the good old days. But pay your bills on time, or at least make billing arrangements in time, or get cut off.

As one Tech student remarked, “Maybe there is a lesson about competition in there.”

[NOTE: I’m not taking a stand for or against the rate increase. Perhaps it is needed given the circumstances, even though consolidation of the two utilities was supposed to yield cost savings, etc. etc. However, had the city still be in competition mode, I suspect the management plan would have been much different.]

Power demand dropping? Must be time to raise prices!

Michael Giberson

News headline reflects the stark difference in pricing strategy between competing businesses and regulated monopolies: “Xcel: Slack demand signals need for rate hike.”

The sub-headline reads, “The utility, which posted a profit increase, will ask Minnesota for approval to raise rates.” Profits are up? Must need to raise prices. Reading the article heightens the feeling that regulated monopolies just think differently.

  • “Xcel Energy Inc. reported a 17 percent jump in earnings per share for the third quarter but warned that electricity sales remain slack and that it will seek a Minnesota rate increase.”
  • “Cost-cutting efforts launched earlier in the year and rate hikes in four states boosted the company’s bottom line in the latest quarter, executives said. Yet the demand for power across the company’s eight-state service area remained slack for a utility long accustomed to growth.” — so the problem is that they’re “accustomed to growth” but don’t see it coming?
  • “Xcel intends to file a request next week with the Minnesota Public Utilities Commission for a 2013 electric rate hike, with an interim increase to be sought on Jan. 1. Madden offered few details, but said higher rates are needed to pay for investments in Xcel’s two nuclear power plants in Minnesota and to cover other cost increases.” — So they want to cover new, higher costs, which is normal…
  • “He said Xcel also will file requests this year for … electric rate hikes in Texas, New Mexico and North Dakota. … Xcel also said it won’t need to invest as much in pollution control equipment at its Texas coal-burning power plants. [Xcel] can now defer $470 million in Texas emission-control upgrades for at least five years.” — And they need a rate hike to cover new, lower costs, too.

Electric power rate reforms needed for smart grid to create value

Michael Giberson

In a white paper released yesterday, the Association of Home Appliance Manufacturers (AHAM) identified three requirements necessary for the smart grid to create value for residential customers:

  1. Pricing must provide incentives to manage energy use more efficiently and enable
    consumers to save money.
  2. Communication Standards must be open, flexible, secure, and limited in number.
  3. Consumer Choice & Privacy must be respected; the consumer is the decision
    maker.

The smart grid comes in both industrial-sized and consumer-sized packages.  Electric utilities can use sophisticated electronics for communication and computation to improve control and reduce their costs of operation.  This utility-side smart grid can and will proceed without consumer rate reform, but these incremental changes in ways of doing business will bring relatively modest benefits.

The consumer-oriented smart grid is where the revolutionary action will be, as consumers gain better control over their electric power use.  That better control will allow consumers to more completely reveal where and when electric power has more value, and the electric power industry will become more efficient at delivering power where and when it is most wanted.

Obviously, it will take consumer buy-in to get the revolutionary ball rolling.  As the AHAD white paper notes, only a small number of customers will adopt smart appliances because of the environmental benefits that come from better control over power use.  Most consumers will require economic incentives to participate.

However, it isn’t the case that each retail customer need to face real-time rates all of the time.  Rather, each customer just needs a contract with a retail supplier that divides up the price and quantity risks in a mutually agreeable fashion.  Those contracts could be real time rates, or fixed-term time-of-use rates, or critical peak pricing rates, or whatever.  Real-time rates have nice theoretical properties, it is true, but most of the potential benefits can be achieved with relatively few consumers on real-time rates.

AHAD writes:

With the proper tariffs in place to incentivize actions, the consumer can reduce costs and manage energy without significant behavior changes. Truly dynamic pricing combined with Smart Appliances will not require large changes in consumer behavior to realize a reduction in peak load. Unfortunately, tariffs that would encourage widespread adoption of these practices are currently not in place.

AHAD recommends the development of model tariffs and rate structures, presumably with the goal of adoption for use in state regulatory proceedings.  I predict this effort will happen, and over time model smart grid tariffs will gain adoption by many state regulatory commission.

Also, I predict the consumers in the competitive retail portions of the Texas power market will have “smart grid compatible” contract offers available from at least three separate companies within three months after (a) the customer has a smart meter and (b) ERCOT has rolled out its new wholesale settlement system for the customer’s distribution utility footprint.  The Texas retail power market will get better and better as the state becomes the leader in end-to-end smart grid integration.

Texas power rates are already dropping due to low natural gas prices, wind power pressure on prices, and temporarily moderated demand due to economic conditions.  While I’m in a predicting mood, I may as well predict that when the economy rebounds and natural gas prices are next over $8/mmbtu for a sustained period, we’ll see a much different Texas power market: more resilient, more efficient, and offering reasonably-priced power relative to neighboring states.

Arizona commissioners’ views on a non-jurisdictional utility’s cost-cutting plan

Michael Giberson

The Salt River Project is, among other things, a fairly substantial electric utility serving customers in the state of Arizona. As it is a state-chartered entity, not an investor-owned utility, it is not subject to regulation by the Arizona Corporation Commission. But that didn’t stop a couple of Arizona state commissioners from opining against the SRP’s consideration of a plan to outsource 40 or 50 computer services positions.

Commission Chairwoman Kris Mayes said that because SRP doesn’t have to report to her commission like other state utilities, the company faces less scrutiny over such decisions.

She would be concerned if one of the utilities under her oversight outsourced, “particularly in this down economy,” she said.

… when the commission approved an emergency rate increase for [regulated utility Arizona Public Service] in December, commissioners directed the utility to cut at least $20 million in expenses and do it without layoffs.

“I would be very concerned about (outsourcing) at APS, TEP or UniSource (Energy Services),” Commissioner Gary Pierce said. “There would be quite a grilling over that. It would be very hard for the folks we regulate to outsource.”

Pierce, at least, was quoted as being willing to first consider if a state law or commission policy could be changed to reduce cost and eliminate the need for the company to outsource, and added that he felt a duty to ratepayers to ensure that the rates they pay are as low as possible.

Mayes is not quoted as admitting of any tradeoffs or other limits to her “concern” about outsourcing.

HT to Scott Gustafson at Arizona Economics; quote is from the Arizona Republic.

(And what’s this about an emergency rate increase? Fuel costs are down all over, right?, and demand is down as well. And rates are going up??? What sort of crazy regulatory logic justifies… Oh never mind.)