Wellinghoff Nails Net Metering Cross-Subsidization Fallacy

When Jon Wellinghoff was chairman of the Federal Energy Regulatory Commission, he advocated simply horrible policies concerning electric transmission.  Here is just one example.  Since he resigned from FERC, however, Mr. Wellinghoff has become an outspoken champion of sensible electrical policy in the area of new decentralized power.

Mr. Wellinghoff co-authored two excellent articles, here and here, that expand on what I said last week in my post on “cross-subsidization” claims by the electric power industry.  And Jon Wellinghoff knows a heck of a lot more about the electric industry than I do.

Naturally, local distribution utilities feel under-appreciated, if not indignant, when green advocates, tea party activists, and upstart businesses push hard for policies they believe may jeopardize the grid. This utility angst is compounded by declining revenues from waning demand growth and the emergence of disruptive innovations, such as smart thermostats and rooftop solar. Utilities want to slow down change, or at least ensure full recovery of their investments.

Cue the fixed charges

To this end, utilities have been pushing for more fixed charges. Some fixed charge increases simply augment existing “customer charges.” Others are targeted primarily at consumers who choose to install rooftop solar PV systems.

Arguments for these charges tout basic economics and fairness. The basic economics argument contends that since most costs of electric services are fixed, customer fees should also be fixed. Utilities assert that using volumetric pricing, or charging per kilowatt-hour (kWh) consumed, to recover fixed infrastructure and operations costs creates utility risk. Risk raises utilities’ cost of capital and ultimately prices for all customers.

The fairness argument takes aim at solar customers, contending that by significantly reducing the kWhs they consume, they avoid their fair share of the fixed cost. Fixed charges imposed on solar customers, it is assumed, would prevent an unfair shift of cost burdens to non-solar customers.

The reasoning for this shift to fixed charges may seem logical. Utilities are legally entitled to fair compensation for the service they provide. And customers connected to the grid should indeed pay to use it. Both assertions are indisputable. Yet neither proves the need for fixed charges – especially for solar customers.

As we argued in our previous piece, the assertion that solar customers do not pay their fair share is based on a flawed assumption that cost shifters are necessarily freeloaders.

The “economics” argument is equally wrong. As Severin Borenstein, a respected economist and a sharp critic of current solar policies, writes: “…the statement that I have heard a number of times recently that ‘the utility should cover fixed costs with fixed charges’ has no basis in economics when it comes to system fixed costs.” [1] Borenstein accurately notes that fixed-cost recovery can be addressed through smarter, more efficient kWh volumetric pricing that accounts for all cost variations due to timing and location, as well as externalities such as carbon emissions.

Wellinghoff points out that rather than supporting a “free market” and “efficiency” fixed charges on net metered solar producers distort the pricing mechanisms of the electricity market and create incentives for wasted investment.

Utilities have traditionally built enough capacity to ensure peak demand is always met, even during relatively rare moments when every single air conditioner is running at full throttle. But across the nation, peak usage is diverging from average usage (see the graph below). This means that increasingly, much of grid infrastructure is going unused at any given time. In other words, much of what is called “fixed costs” actually represents overcapacity, or waste. And that waste is growing.

Expanding fixed fees does nothing to reduce such waste. In fact, it encourages the opposite. Instead of increasing fixed fees, we need to consider instituting dynamic or time-varying rates that align prices with how and when utilities incur costs. This would both strengthen historical fixed cost recovery mechanisms and reduce investment waste.

Public policy has long resisted time-varying rates for consumers, in large part because they are deemed too confusing for consumers. The expansion of rooftop solar, however, questions conventional wisdom. As Borenstein notes (albeit cynically), the rapid growth of rooftop solar in California is largely attributed to solar installers’ success in explaining the state’s incomprehensible rate structures to consumers. The California experience suggests that, given strong market incentives, third-party providers can effectively assist consumers in understanding sophisticated pricing structures and provide them appropriate options. The goal of policies then should be to develop market incentives consistent with a strong, reliable grid.

Myriad distributed energy resources (DER) offer consumers countless tools to better manage their consumption and reduce grid costs: intelligent communicating devices can enable greater demand response at peak times or automatically start or stop dishwashers and washing machines depending on the high and lows of daily energy prices (see below). Electric vehicles can interact with grid market signals to charge batteries when prices are low and supply grid services when the market allows. And distributed photovoltaic systems can sync with all of the above, deciding when to use generation internally, when to sell it to the market and when to store it locally.

Just as WV legislators are expanding power companies’ monopoly control over net metered customers, other states have been making wiser choices, as Mr. Wellinghoff points out:

The traditional regulated electric utility model is on an unsustainable trajectory – some say a death spiral. Regulators at mission control will need to take creative and likely unconventional measures to guide it back to a safe landing. We commend commissions in New York, Hawaii, Massachusetts, California, and Minnesota for acknowledging the challenge and exploring ways to modernize the grid with DER. We applaud commissions in Idaho, Louisiana, Utah, and others for rejecting proposals for fixed charges on solar customers because of insufficient data.

While other states are moving forward, WV continues to move backwards — which is exactly why Gov. Tomblin needs to veto HB2201.

2 thoughts on “Wellinghoff Nails Net Metering Cross-Subsidization Fallacy

  1. I really enjoyed this piece especially since I have seen Wellinghoff speak on many occasions to solar conferences all over the east coast. I’m glad he has transformed his opinions to where an intelligent grid can be proffered. Now the big question is how can we get this to the WV PSC asap or should I say maybe we can all get together and give the PSC an explicit presentation on this subject post haste in Charleston. Great job Bill as usual, you are spot on my friend.

    • Wellinghoff has done a great service to public education about net metering with these articles. He cuts right through the power company BS. Trying to cover power company fixed costs (power plants, transmission lines, etc.) is to build added waste into the electrical system, raising everyone’s rates. Of course, regulated companies, like AEP and FE in WV, get guaranteed profits for building new power plants, so that’s where they really make their money. As Wellinghoff points out, it is really this wasteful spending to generate power company profits that is the real cross-subsidization – of power companies by their customers.

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