How Market Power Gives Electric Utilities Political Power

This guest post was written by John Farrell, who directs the Energy Democracy Initiative at the Institute for Local Self Reliance (ILSR). You can find the original on ILSR’s web site.

In the pathway to 100% renewable energy lie electric utilities. Since the time of electrification until the 1990s, every electric utility was a monopoly––it owned everything to deliver electricity from the power plants (and sometimes even the coal mines) to the transmission lines to the substations to the distribution lines to the meter on your home or business). With a market monopoly, utilities have enormous political power to promote or avoid change.

Monopolies in Law and Spirit

Utilities operate under three legal structures: investor-owned, public, or cooperative. Investor-owned utilities were the first, and they focused on serving urban areas with the highest concentrations of customers. Municipal, city-owned utilities followed soon after, serving cities without private utilities or taking over private utilities that didn’t provide high quality, affordable service. Supported by the federal government, member-owned rural electric cooperatives filled in the gaps left by the first two (as shown in the map below).

Monopoly defined all three ownership structures. For private utilities, the early captains of the electric industry realized it would be more profitable if they didn’t have competition. An early industry leader, Samuel Insull, cut a political deal with state policy makers––protection from competition in exchange for public oversight via regulatory commissions, often called Public Utilities Commissions. The first of these was formed around 1905. For public and cooperative utilities, they also retained a monopoly, but with oversight of municipal utilities provided by a city’s voters and elected officials and oversight of cooperatives provided by a board of member-owners elected by customers.

Over time, there were similarities in all three structures. Smaller municipal and cooperative utilities banded together into power agencies to build larger power plants and lower the cost of generating electricity, just as investor-owned utilities did. While it lowered costs, this practice also opened a gap between the local decision makers (elected officials or elected boards) and the place where grid decisions were made. Traditions were established to make decisions in distant boardrooms for the entire grid.

New rules in the 1990s opened the door to competition among investor-owned utilities in building power plants but the playing field is still un-level. Regional organizations (called transmission operators or independent system operators) govern these markets but their business is largely obscured from the public and their governing board dominated by their members, incumbent utilities.

Additionally, in the late 1990s, some states allowed new businesses to compete with the utility to sell electricity to the end user, but because individuals lack buying power, the choices tend to be limited to pricing and not the fuel (wind v. gas, for example) or the location, among other attributes.

The Modern Utility: Unprepared for Change

By 2019, most private utilities are owned by multi-state holding companies with a legal obligation to focus on returns to investors. Public regulators may lack sufficient resources to provide strong oversight, or may be “captured” by the utility, essentially acting as a rubber stamp. And public and cooperative utilities may or may not be as democratically governed as their structure would suggest.

Into this space came distributed renewable energy like solar or batteries. They offer customers a choice regardless of their type of utility company. The technology is improving rapidly and becoming more affordable. It directly competes with utilities by offering an alternative source of energy but also an alternative decision making process (from the bottom up instead of top down). As such, it’s often seen as a threat to public and cooperative utilities (with a tradition of top-down decision making) as much as it is by private utilities, for whom it’s a threat to their market share and revenue.

For more on this reversal of decision making, see ILSR’s 2018 report, Reverse Power Flow

The image below, of customer-sited solar installations in California, illustrates this movement toward decentralized decision making (it comes from this ILSR blog post).

Three Kinds of Utilities: Culturally Backward, Straddling the Fence, Innovators

In 2019, utility attitudes toward 100% renewable energy for all fall along a spectrum. Some continue to harbor an unfounded cultural bias against clean energy. They are so mired in tradition (or deeply invested in the energy sources of the past) that they fight renewable energy at any level, utility or customer-owned. Arizona Public Service has dumped millions into political campaigns opposing renewable energy despite evidence that the clean energy shift would have a largely positive impact on its bottom line.  Rural electric cooperatives like Tri-State in the West and large public power agencies like the Tennessee Valley Authority have joined some of the worst private companies in opposing clean power, often because they’ve made decades-long financial commitments to fossil fuel power plants and even coal mines. Investor-owned DTE in Michigan also owns a gas distribution and pipeline business, for example, a business that stands to benefit from its electric utility’s investment in gas power plants.

More typically, utilities are increasingly investing in renewable energy at the utility-scale because it is the most affordable new source of electricity generation, but not at a pace to meet the needs of the climate crisis. Notably, a number of utilities have embraced 100% carbon-free or clean energy goals by 2050 but are also doubling down on investments in big gas plants, hoping to secure big rewards for shareholders before public regulators realize these power plants may never pay off for customers.

Semi-innovative investor-owned utilities have gone deep into renewable energy, but still fight customer-owned energy. Michigan’s Consumers Energy and Indiana’s NIPSCO have both dumped coal, forgone gas, and plowed investment into wind and solar but advocated against customers owning their own power generation.

A few utilities have embraced renewables from top to bottom, such as the Burlington, Vt., municipal utility, Kauai Island Electric Cooperative and Farmers Electric Cooperative, and investor-owned Green Mountain Power. But these are rare exceptions where inspired leadership has led to policies that support both top-down and bottom-up solutions. Even in these cases, racial and economic equity are often not part of the calculus. The most promising outcomes may be from the rise of community choice programs, most notably in California, where communities are choosing their power supply along with wide-ranging goals for local jobs and economic development.

The Political Power of Utilities

Securing a 100% renewable energy future for all in this environment requires acknowledgement of the challenge and understanding of how utilities work. For private utilities, the rules of the game mean they make money for shareholders when they build things they own. Thus, customer-owned energy is a threat both to their monopoly market share as well as their intent to build new things, because the more rooftop solar is built, the less the demand for utility-owned power plants and power lines. For public or cooperative utilities, it’s more about overcoming inertia and existing contractual commitments.

Utilities are also politically powerful. Municipal utilities provide significant revenue to city budgets, causing elected officials and boards to be cautious with change. Rural electric cooperatives are community institutions and board members are often well-respected leaders without significant expertise to question management. Investor-owned utilities have built a political machine since the 1920s, when they organized to oppose publicly-owned power systems. These utilities use their monopoly profits to hire lobbyists, support political action committees, give to political campaigns, provide paid junkets for lawmakers and regulators, sponsor policymakers’ conferences, contribute to state chambers of commerce, and even buy the support of nonprofit organizations with donations from their related foundations.

The starting point for action is to understand the type of utility serving your community. For municipal utilities, find out how elected officials provide oversight and start talking to them about how they can exercise that oversight power.

For rural electric cooperatives, check out the New Economy Coalition’s Rural Electric Cooperative Toolkit, recognizing that the power lies in the utility’s elected board (even if it often surrenders that power to others).

For an investor-owned utility (and for other utilities as well), all of the following strategies can help in pushing for 100% renewable energy for all:

• Municipalization efforts to take over the utility (see Boulder or Minneapolis)
• Ask candidates for state and local office not to take campaign contributions or accept gifts from monopoly utilities, (see how it has scarred politics in Virginia)
• Ask city elected officials (or candidates) to adopt 100% renewable energy commitments (see Sierra Club’s Ready for 100 campaign, ILSR’s Voices of 100 podcast series)
• Ask elected officials to support policy that refuses to allow utilities to charge customers for new fossil fuel infrastructure, such as power plants or pipelines

A crucial strategy is to build relationships with low-income groups because they are a key target of the utility political machine. Utilities often argue that it is better to prohibit or limit distributed solar rather than make it more accessible to low-income folks and people of color.

Utilities stand between communities and 100% renewable energy, but they don’t have to. With the right tools, communities can use their power to align the utility’s interests with their own.

Learn more:

• To better understand rural electric cooperatives, check out ILSR’s Re-Membering the Electric Cooperative and the New Economy Coalition’s Rural Electric Cooperative Toolkit, as well as news coverage of the Tri State generation and transmission cooperative by the Energy and Policy Institute.
• For an illustration of the tension between shareholder and customer for a relatively pro-renewable utility, check out this coverage of Xcel Energy’s community solar program.
• To see how city-owned utilities can fail in their public service charge, see news about the Jacksonville, Fla., utility and its plans to do nothing for energy efficiency.

This article originally posted at ilsr.org. For timely updates, follow John Farrell on Twitter, ILSR’s energy work on Facebook, or sign up to get the Energy Democracy weekly update.