From the editor: Entergy’s New Orleans gas plant shows our regulatory model is failing

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Yesterday the New Orleans City Council unanimously permitted Entergy New Orleans to go ahead and build the gas plant that it wants, with a $5 million slap on the wrist.

As I’ve written before, this was a predictable outcome.

The New Orleans City Council has no idea what it is doing in terms of regulating Entergy. It never has. City Council members are not elected on the strength of their knowledge of utility law, regulation, or any other applicable field, and few have any background which relates to their task. The current chair of the Utilities Committee, Helena Moreno, is a former broadcaster.

Instead, the City Council hires consultants who typically have a cozy relationship with Entergy, which just happens to be one of two Fortune 500 companies in Louisiana and the only one in the city.

New Orleans and Louisiana are legendary for political corruption, and when I worked for The Alliance for Affordable Energy we documented the campaign contributions that these consultants were making to council members. This is likely only scratching the surface; in a city with little economy outside of tourism, there are all the makings of a pay-for-play government.

But to say that this is a problem of New Orleans or Louisiana would be misleading. It would be forgetting the kinds of actions that we have seen in other states, where regulators have either demonstrated inappropriate relationships with utilities, or have done the bidding of these companies while acknowledging that they didn’t look at other options.

We need to be questioning how the model of regulating monopoly utilities is working overall in this era of a rapidly changing electricity system. Because from what I have seen, corruption and regulatory capture are far more prevalent than we would like to believe.

 

Regulatory capture

Regulatory capture, according to Investopedia, is “an economic theory that says regulatory agencies may come to be dominated by the industries or interests they are charged with regulating. The result is that the agency, which is charged with acting in the public’s interest, instead acts in ways that benefit the industry it is supposed to be regulating.”

In an article for Emory Law, Attorney Scott Hempling puts a little bit finer of a point on this, noting that regulatory capture is not the same as corruption:

Regulatory capture is neither corruption nor control. Corruption and control are actions of the regulated entity. Regulatory capture is characterized by the regulator’s attitude, not the regulated entity’s actions. A regulator is “captured” when he is in a constant state of “being persuaded”: persuaded based on a persuader’s identity rather than an argument’s merits. Regulatory capture is reflected in a surplus of passivity and reactivity, and a deficit of curiosity and creativity.

It is evidenced by a body of commission decisions or non-decisions—about resources, procedures, priorities, and policies, where what the regulated entity wants has more influence than what the public interest requires. 

And while the “dark money”, improper communication scandals and an FBI investigation around the Arizona Corporation Commission and the actions of former regulators in Wisconsin could be attributed to simple corruption, such capture can be seen in Michigan regulator’s decision to green-light another gas plant proposed by DTE Energy despite evidence of cost savings through deploying other alternatives, with one regulator openly admitting that the body did not take a careful look at other proposals.

 

Overspending on the grid, killing rooftop solar

In my conversations with Michael O’Boyle, the director of electricity policy at Energy Innovation, he has described an “information asymmetry” wherein regulators simply lack the knowledge to be able to determine which utility investments are needed to serve their customers or not, and which allows over-investment by utilities with the aim of achieving maximum returns for shareholders.

This may be far more widespread than any of us realize. According to USA Today’s coverage of a recent report by Brattle Group, an estimated $8 billion in savings could be achieved in five years if major transmission projects were merely opened to competition. But there is also the question of whether all of this transmission is needed in the first place, as shown when distributed energy resources and energy efficiency saved California ratepayers $2.6 billion by allowing new transmission projects to be deferred.

And in many cases, while utilities are overspending on T&D, they are not only keeping retail rates from falling in line with wholesale cost declines, but are also doing their damnedest to kill distributed solar with fixed charges, special fees and a variety of other rate mechanisms. And while regulators typically don’t approve everything that utilities want, the net result is a creep towards rate structures that disadvantage rooftop solar.

 

A political solution is needed

As PG&E’s recent bankruptcy and the increasing volume of blackouts due to severe weather events shows, utilities are increasingly in danger of not delivering on their societal promise to deliver safe, reliable power. But our model of regulating these monopolies is also failing.

There is a lot of work going on now to reform the utility business model in states like New York and Rhode Island, but in these processes the utilities also hold a great deal of sway, including through the aforementioned information asymmetries. And utilities and their shareholders do not want to change; they don’t want to lose their good deal of getting a predictable, safe 8-10% return on capital invested, and more for transmission.

This demonstrates that the field on which this problem must be addressed is primarily not technocratic; it is political, and the realities of what it will take to meaningfully address climate change alone will dictate that we move faster than utilities have supported to date. It is going to take the political will to wrest power away from these economically parasitic monopolies, and it can’t come soon enough.

The views and opinions expressed in this article are the author’s own, and do not necessarily reflect those held by pv magazine.