Six Things to Know About Your Electric Utility

An insider's perspective

This is a guest post by Craig Eicher. Craig recently retired after more than 20 years in the regulated U.S. utility industry. Craig’s primary roles included: negotiating and maintaining gas and electric franchise agreements, managing the integration of community stakeholders into large projects, such as transmission service expansions, renewable energy and regulatory proceedings, and leading the wholesale electricity business.

Many years ago, a comedy group posted a video featuring actors as average Americans in a slick faux commercial satirizing coal energy. Turns out the coincident target of this mockery was the rest of us and how little we understand about what powers our lives.

“What if the power to sustain your world was right inside a mountain?” asks the narrator. He continues, “What if you could power an entire city for a hundred dollars?” A man in a hard hat says, “Cheap power is clean power. The future is later.” A woman looks soberly at the camera, “Electricity comes from the walls in my home where I live.”

It’s actually quite funny. Even my former co-workers at an investor-owned utility where I worked 18 years thought it was. But the reality is your electric utility is a bit conflicted on exactly how much esoteric understanding they’d like their customers to have about their business. Of course, it’s good for folks to value energy efficiency and conservation, and how they can be safe around power lines.

But, when it comes to understanding how utilities actually produce and deliver power or make money? Well . . .

The fact is, the world of utilities has changed quite a bit in many ways, and hardly at all in others. It’s an industry that has a natural resistance to change, mostly because what’s often called the world’s largest machine – the electric grid – has served us well for more than a century. It underlays the entirety of our industrialized economy, powering everything. Yet, for a couple decades now, efforts to clean it up and make it smarter have often conflicted with the grid’s primary directive to deliver reliable, affordable, safe power. And today, this conflict remains mostly unresolved.

So, here are six things about utilities that I think everyone should understand:

1. Power for all restricts innovation – and that’s not necessarily a bad thing

Let’s start with a simple concept – you wouldn’t want your electric utility to fail and go out of business. At the same time, that utility must serve any customer within its service area. No choice. This “obligation to serve” often motivates utilities to make their proposals for rate increases quite urgent; it also means a utility is probably not an organization you’d want taking undue risk on unproven new ideas.

In the world of multi-billion-dollar investments, any failure means wasted money from customers’ bills. Some notable examples of near-misses or outright turkeys: smart grid, vehicle-to-grid, microgrids, in-home controls, clean coal, carbon sequestration, smart meters, hydrogen fuel cells, wave energy, offshore wind, and creative pricing strategies. Some of these projects just languished, while others lost billions, but all were pursued with the best of intentions - thanks to regulatory mandates, customer demands, even managerial misjudgment. While many argue our utilities should be investing in R&D, others want to hold their reigns and let them buy only proven technologies, limiting the risk of a bad bet.

2. “BANANA” is the new “NIMBY”

Nothing is more-challenging for a utility than expanding its infrastructure because no one really wants to look at it and live near it. In fact, community opposition has grown so strong and sophisticated that NIMBY – Not In My Backyard – has been rebranded BANANA – Build Absolutely Nothing Anywhere Near Anything.

The people who are responsible for delivering your energy would generally prefer to go about quietly building power plants, stringing wires, and hooking up customers without any complications like regulatory approval, county permitting, and public open houses. But that’s not how it works, because when it comes to spending large amounts of money as a regulated utility does, it must get the okay from countless people at the local, state, and federal levels. Adding complexity is the reality that each group has parochial priorities that might not align with those of the others. For example, FERC, the Federal Energy Regulatory Commission, recently voted to give state utility commissions a larger role in shaping the development and cost allocation of electric transmission systems. Hey, more local control – what’s wrong with that? Well, according to some observers, an individual state could push back on projects they see as benefitting other regions. If states leverage their enhanced involvement to oppose certain projects, this could create hurdles for transmission designed to move electricity across state lines. Communities have historically tried to stop utility-scale projects for fears of EMFs, reduced property values, and interruptions to their mountain views. But ultimately, higher authorities have decided a project’s success mostly based on the greater good. Do we now want this to change?

3. AI and data are eating us alive

Every time you text a selfie to a friend, that photo is duplicated among multiple data centers in acres of solid-state computers, cooled around the clock. And now, artificial intelligence – which can write a term paper or produce a movie in seconds – is generating record surge in demand for electric power, which utilities are struggling to meet. Not only is the generation not there, but also in short supply are transmission engineers who are needed to perform complex grid studies to serve the load. AI is driving new demand in some regions to the point where they are contracting for nuclear power, which produces an enormous amount of energy at a near fixed cost in a relatively small size.

And this reality leads us to #4.

4. Net Zero policies are easy; it’s the physics that aren’t

Take a utility energy trader out for a beer and ask him how he feels every time a coal plant is retired from his fleet and replaced by a wind farm. I promise an alarming conversation. Net Zero by 2030 on a global scale is fantasy, and by 2050 only likely in some regions. And this not the fault of your utility. Electricity cannot be easily stored at scale yet, even though batteries are getting better and cheaper. At hundreds of megawatts in size, they are helping balance supply and demand during peak periods and extreme weather. But they aren’t yet ready to provide dispatchable power for longer durations. Small microgrid projects have demonstrated a battery tied to a solar system can provide enhanced reliability, but at considerable expense, lead-time, and at just that location. Numerous new technologies for power storage are being tested, from sodium-ion batteries to flywheels, but there is not one “silver bullet” ready to solve the challenge. When you hear your utility wants to build natural gas plants along with wind, solar, and batteries, this is why.

5. Fuel is fuel

Green-energy critics like to argue renewables are more expensive, and that your monthly bill is more than it would have been if we’d just continued burning coal. First of all, just continuing to burn coal has its own costs: environmental impact, aging infrastructure, and health effects. But, while utilities resisted renewable energy mandates at first, they soon realized they could earn on renewable investments, and then, treat them simply as a cost-lowering fuel source. Looking at it in this way allowed them to price out their options every hour of every day – burning fossils when there is no wind or sun, and then switching to wind/solar when those sources are abundant and cheaper. Now, we’re not looking at the impact those technologies have on your federal tax bill – that’s a matter between you and your congressional representative. We’re simply accepting that the delivered cost of renewables is often much cheaper to the utility than traditional sources – and that has been a benefit to customers.

6. Don’t like profit? Its everybody’s price of admission

If it weren’t for those money-grubbing shareholders, my electric bill would be lower! Actually, the difference between “for-profit” and “not-for-profit” utilities is less than you might think. All utilities, regardless of who owns them, must borrow large amounts of cash to operate and build infrastructure. The investor-owned utility (IOU, and for-profit) gets about half its cash from investors, while non-profit, publicly-owned utilities (municipal and rural cooperatives) get their funding by issuing bonds. People like to argue which form is “best,” often on the bases of rates, reliability, and control – fair criteria. But usually, people have a conviction that an IOU’s shareholder profit is evil. What they don’t realize, however, is that profit is built into the operating structures of each one of these utilities – not only the IOU.

Profit is simply a word describing “the cost of capital.” While a utility may be structured as “non-profit,” the cash it borrows, the contract labor it hires, and the power and materials it buys, are provided by for-profit entities. IOUs issue stock, while public power agencies issue bonds. There are differences in interest rates and risk, but in both cases, the issuers of that cash – generally pensioners looking to retire someday – expect a rate of return on their investments: profit. 75 percent of the US electric demand is supplied by IOUs.

Final point

The global demand for energy will continue to rise, and no single technology is the answer. Utilities are compelled to pursue multiple priorities: serving customers reliably at a cost that’s affordable, while building and maintaining increasingly expensive infrastructure and lowering environmental impact. Any policy aimed at pressing on one of those priorities will affect the others, and not always positively.

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