Why California’s electric utilities need a regulatory overhaul


Every day, we hear about new technologies disrupting businesses all around us. The emergence of profitable new energy technologies is overturning the way California’s electric utilities run our aging electric power system. Increasingly, businesses and families have choices about how they produce and use electricity.  Those choices can help modernize our power system and make it more resilient and reliable in an era where climate change is increasing risks for us and for future generations.

In order to drive innovation in clean energy generation and delivery, California needs to overhaul the way it regulates electric utilities.  PG&E’s recent bankruptcy filing creates an opening to rethink how California can align utility business practices with the public interest.

For more than a century, utilities like PG&E grew and profited by investing in more electric infrastructure – power plants, transmission lines, substations, and distribution poles and wires. In return, customers were guaranteed access to electricity at a reasonable cost.

Regulators were responsible for assuring that investments were prudent and that the electric grid was operated safely and reliably.  This type of government regulation incentivized electric utilities to increase their profits by building things. For every dollar invested, utility shareholders earned a handsome return with very little risk, that is, until recently.  On the other hand, consumers had very little incentive to partner with utilities to improve grid efficiency and lower costs.

The traditional government regulatory model and many utility business practices are now obsolete. Customer investments in solar, batteries, smart appliances, and home energy management systems call out for a new type of regulation.  Heightened awareness of the risk of wildfires and other grid vulnerabilities demand that state regulators prioritize safety, reliability, affordability and environmental sustainability.

To reduce the impacts of the “new abnormal” brought about by climate change, California needs to accelerate the adoption of clean energy technologies distributed across the electric grid. Clean energy technologies can make the electric grid less costly to operate, saving all ratepayers money.

Here’s an example. Let’s assume that a distribution transformer is reaching its capacity due to growing demand. Under the current regulations, the utility could invest in a bigger transformer, passing the costs onto customers and earning a long-term return on the investment.  At the same time, businesses in the area are interested in installing batteries to manage their peak demand and lower their energy bills. The utility could contract with those businesses to share their batteries at specific times and avoid the need for the transformer upgrade.  But under this scenario, the utility would lose an opportunity to increase its earnings.

If regulation encourages utilities to prioritize shareholder profits ahead of customer savings and slows down innovation towards a smarter and more modern grid, then it ought to be changed.

There are alternatives to the standard regulatory model that are being developed in states such as Hawaii, Minnesota and Rhode Island. This new approach is often called performance-based regulation. The idea is to set clear expectations about safety, reliability, environmental performance and customer satisfaction and then to develop performance metrics that reward favorable outcomes and punish poor performance. The key element in this overhaul is to break the link between utility profits and the amount of capital investment they make.

The California Public Utilities Commission (CPUC) has, in the past, adopted strong policies like decoupling profits from sales volume to promote energy efficiency measures. As a result, California has kept its per capita electricity use steady over the past 40 years while the rest of the nation has increased its consumption by 50%.  We have a duty to future generations to build on that success and chart out a cost-effective path to 100% clean energy for California.

Driving the clean energy development needed to protect future generations from climate chaos requires California to overhaul the way it regulates electric utilities. Performance-based utility regulation is a key to reward innovation and lay the groundwork for a clean and resilient twenty-first-century electric system.

This story was originally published on our sister site, Renewable Energy World, and was written by Ed Smeloff