Thursday, March 04, 2010
Legislators could do more about rates, efficiency
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Richard Hirsh
Hirsh is a professor at Virginia Tech who does research on energy history and policy.
Customers of Appalachian Power Co. understandably feel distressed by the higher bills they have recently received. Cold weather and increased rates translate into bills that make life more difficult in already harsh economic circumstances.
But before they heap all the blame on Appalachian or Virginia's State Corporation Commission, which allegedly hasn't done enough to limit rate increases, they need to understand how electricity regulation works in the commonwealth. They should also appreciate the role that their legislators can play to encourage energy efficiency as a way to reduce bills.
Early in the 20th century, government gave electric utilities status as natural monopolies -- businesses that operate more cheaply and efficiently in a noncompetitive market. To prevent utilities from charging excessive prices, states created regulatory bodies that oversaw rate requests and service issues.
But most people don't realize that the bodies also served another purpose -- to ensure that utilities received rates high enough to maintain good credit ratings, enabling them to obtain funding from investors to build new facilities.
By doing so, regulators guaranteed that utilities remained viable entities that provided socially and economically vital services. In short, regulation plays a dual role, protecting both customers and utilities.
For decades, Appalachian's electric rates had been lower than those offered by other electric companies in the state and stood below the national average. Since 2006, however, Appalachian has requested higher rates because it incurred greater costs for fuel and for installing environmental equipment and transmission facilities. According to traditional regulatory practice, these costs must be recovered from customers. Hence, the SCC approved higher rates.
This simple explanation (and apparent defense of Appalachian) doesn't mean that nothing can be done to help customers.
Supporting their constituents, legislators have decried the price increases, and the governor recently signed a law retracting an interim rate boost. But the legislators should also reconsider provisions of a 2007 law they passed limiting the ability of the SCC to challenge utilities' requests for rate increases.
The regulatory body, for example, must follow specific rules that allow power companies to earn as much (or more) on their investments as do utilities in neighboring states. It also must give special financial treatment to companies when planning to build new facilities and for doing their jobs especially well.
Meanwhile, our political leaders should think seriously about encouraging more robust energy-efficiency programs.
Because efficiency reduces consumption of power, it enables customers to lower their bills and still enjoy high levels of comfort, lighting and other services.
While the 2007 law sets goals for reducing energy use, it provides little incentive for utilities to help customers buy energy-saving appliances or to weatherize their homes.
In general, regulatory law says that utilities can earn money when they sell power, but not when they unsell it. They therefore have a natural disincentive to encourage too much efficiency, which would reduce consumption.
Not surprisingly, Virginia ranks below average, when compared to other states, on a respected energy-efficiency scorecard.
To eliminate the disincentive, legislators can adopt measures that give utilities greater returns on their investments in efficiency than those they make for generation, transmission or distribution facilities.
Alternatively, our lawmakers could create an energy-efficiency utility -- a separate organization that finances and manages efficiency improvements in homes, businesses and industries. Such entities already operate elsewhere (such as in Oregon and Vermont), using funds obtained by a small surcharge on electric bills, and they effectively serve customers in ways that traditional utilities could not.
Outside of the regulatory regime, energy efficiency could be encouraged by laws requiring more stringent building codes and appliance-efficiency standards. Legislators could also require landlords, for example, to provide information to potential tenants on the efficiency of their rental housing, thus creating a market incentive for owners to install more energy-stingy appliances.
The approach would help eliminate the situation in which landlords resist installing new, efficient appliances, which cost them money, because tenants pay the electricity bills, no matter how high.
These and other measures (many of which are recommended in the 2007 Virginia Energy Plan) could help customers cut their electricity consumption and lower their bills. And because energy efficiency reduces the long-term demand for power, it would reduce Appalachian's need to install new facilities to serve customers, thus reducing pressure to raise rates in the future.
