The Regulatory Energy Reform Imperative

Reforming our patchwork of rules directing the electric utility industry is essential. The generation and delivery of electricity is as fundamental to our national prosperity as the air we breathe and the water we drink. Most of us rely on electricity from the moment our alarm buzzes in the morning until we turn out the lights to sleep at night. In the case of regulations affecting our natural resources, we have elected to fight back against their degradation through comprehensive federal, state and local environmental laws and regulations that by comparison to energy rules are clear and effective. By contrast, the current legal framework regulating the electric utility industry is a hodgepodge of reactive rules cobbled together in response to periodic developments in the energy industry.

At their core, electric utility laws grant regulated electric suppliers a monopoly in exchange for a guarantee by the utilities of the supply of reliable power at reasonable prices.  However, the time is long past when we should have tackled the challenges of regulating a constantly evolving utility industry, especially since our overreliance on imported fossil fuels was identified decades ago.  We have discovered new technologies making everything from domestic gas and oil to alternative forms of renewable energy economical alternatives to imported fossil fuels.  In addition, our regulated electric utilities now often compete directly with unregulated power marketers.  As our energy mix changes and as transmission and distribution systems continue to expand and improve, we must upgrade the rules guiding the production, transmission and delivery of electricity.

A Tale of Two Regulatory Frameworks

Our perspective arises from daily participation in two highly regulated development businesses, (i) environmental remediation and restoration of contaminated properties and (ii) development of solar energy generating facilities.  Environmental regulation at the federal and state level is relatively new, with many of the operative rules coming into existence since around 1970.  While environmental regulations and their enforcement are subjects of lively disagreement, the rules are relatively straightforward.  By contrast, utility laws and regulations have been adopted in response to developments in the electricity generation and distribution industry since the late 1800s. 

The electric utility industry historically was a local phenomenon, with communities growing up around central generating facilities, such as manufactured gas plants.  Today, however, local, state and regional energy grids are interconnected physically following the development of alternating current technology that enabled long distance transmission.  The rules adopted in response to the various challenges posed by different technologies have little in common with each other, though many influence competing forms of energy generation.  For example, the Wild and Scenic Rivers Act that limited dam construction, affecting hydropower facilities, preceded by only a few years the creation of the Nuclear Regulatory Commission.

Currently new rules regarding renewable energy in several states are frustrating for both regulated utilities living under the old monopoly arrangements and unregulated power concerns attempting to commercialize new technologies.  This broad concept is frequently illustrated when combining the rules promoting renewable energy with those dictating interconnection to the existing utility grid.  Net metering rules, for example, designed to enable feeding energy produced by an independent generating source back into the grid, vary from state to state, are generally dauntingly complex and an administrative nightmare for those managing the grid. 

In the case of environmental policy and regulation, the regulatory sheriff arrived in town after many of the crimes had been committed. Practices recognized as harmful were made obsolete, and rules for correcting past ills were enacted.  For the electric utilities, however, historically the regulations followed the development of new generating sources as well as evolving transmission and distribution practices.  Provision of power to consumers evolved from an inherently local to a more interstate activity.  Currently utility enterprises are going global as transmission grids expand and electricity storage technologies are finally approaching commercialization.  While the fundamental regulatory bargain, whereby governments granted monopolies and utilities never went down, encouraged reliability, it stifled competition and innovation.  Transmission bottlenecks for economically generated electricity exist within both individual states as well as at some state borders, frustrating the delivery of affordable energy to hungry markets.

With transition from a monolithic fossil fuel-based energy core to a mix of every possible fuel source going forward, regulations need to change to ensure maximum efficiency.  Some policy trial and error is inevitable, but we need to smooth transition so we do not saddle future generations with antiquated electric delivery mechanisms and cede technological leadership to other countries. 

While subsidies for new technologies are crucially important, as they have always been for every emerging energy source, now is the time for a wholesale change to the rules that define our utility industry players.  Subsidies are important in the early stage of adoption of an emerging technology, but they should not be allowed to exist indefinitely following market acceptance of a technology, as they have with fossil fuels.  The federal government historically has imposed rules governing the generation of electricity by different means, such as hydro or nuclear.  With today’s technology, the federal government should also govern grid operations, except for local delivery functions, and also create a uniform system for interconnection requirements for generating facilities of different types.

The Case for Centralized Energy Regulation

So the question remains: what to do about the regulatory morass that has hobbled innovation and efficiency in the domestic electric utility industry?  Many possible answers are available to this complex problem.  One area that can be improved by policy makers for the benefit of all is the delineation and coordination of federal and state authority for electric utility regulation.  Our suggestion is to start from a high level perspective and impose national rules from the top down on our utility assets, affording states the ability to regulate only what happens inside their borders, such as local distribution. 

While over time the FERC, which regulates interstate wholesale electricity sales, has exerted more control at the federal level while states have surrendered some control over electric utilities, we advocate more deliberate control by the federal government in recognition of the steady consolidation of the more successful utilities and their expansion beyond state borders.  The rules should have enough certainty and longevity to provide industry participants guidance on long-term investment decisions, as utility assets generally offer a relatively low, predictable return over a 20-30 year life span.

For renewable energies, the U.S. should enact a national renewable portfolio standard as a baseline that individual states may exceed if their market forces are appropriate.  Recognizing that regionalism still exists to some extent, harmonize the utility practices in neighboring states connected by increasingly intelligent grids and provide electricity that is both reliable and affordable.  In this way we can assess our present and future needs, not merely react to what has happened in the past. 

All will benefit from a deliberate re-tooling of our utility regulatory structure that favors certainty over spasmodic reaction to technological and political developments. We currently need a centralized response to communications technology changes that simultaneously enable smart grids and leave our energy delivery systems susceptible to hackers and even terrorists.  What we have now reflects an attempt to preserve the historic monopoly status of regulated utilities in response to changing generating and transmission technologies that rendered the historic model obsolete.  If we want to encourage innovation and incentivize the development of new technologies that will make many forms of energy more accessible and affordable, we need to muster the political will to elevate our regulatory sights from the local to the national level.  We must foster a modern, facilitative set of rules to guide utilities into the future.

Lead image: Transmission lines via Shutterstock

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Pete Pedersen is managing principal of Renova Partners, an investor and developer of former industrial properties commonly known as brownfields, and Brightfields Development, a developer of solar energy projects on brownfields and closed landfills. Both companies work closely with regulatory agencies and are based in Wellesley, Mass.

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