Articles by Sean Casten

Why electric utilities like coupling

Writing from the Eco:nomics conference last week, David noted that at least one utility CEO is pretty down on decoupling:

Michael Morris, CEO of American Electric Power ... said "I'm not a decoupler. If my revenues go down, they go down."

David appropriately questioned whether AEP is really so agnostic with respect to falling revenues. But Morris does raise a larger, quite accurate point. Namely, many electric utilities aren't decouplers. Given the prominence that decoupling has come to play in many state and federal policies, it's worth taking the time to understand why.

Decoupling is often framed as a way to get rid of the utility disincentive created by energy efficiency. With large fixed costs, small reductions in revenue can have big impacts on equity returns. This has historically made many utilities work really hard to incentivize inefficient use of their services, from special all-electric rates to exit fees, declining-block pricing schedules, and standby tariffs. (Don't worry about the jargon -- the unifying feature of all of the above is that they penalize any customer who has the temerity to invest in energy efficiency.) It has also made the regulated electricity industry the biggest opponent of sensible energy use.

Eliminate the "coupling" of revenues and equity returns -- so the theory goes -- and you eliminate utility hostility to efficiency.

Carbon pricing does not necessarily cause high energy prices

E&E Daily reports ($ub. req'd) today on efforts in the House to try and determine how to minimize the economic pain of CO2 pricing.

They note:

Government studies conclude that for a new U.S. climate law to work, it must stem the demand for carbon-based energy by increasing prices -- not exactly the most politically popular thing to do during an economic crisis that is being compared to the Great Depression.

All the logical failing of our CO2 policy discussion is nested in this paragraph.

For climate law to work, it must put a price on CO2 emissions. But there is no logical reason why that must imply an increase in energy costs, for the simple reason that energy is not CO2.

A price on CO2 emissions, done right, will facilitate a wealth transfer away from CO2-intensive forms of energy, but to assume that this must lead to higher energy costs is to assume that low costs and high carbon go hand in hand. And no matter how many hearings we hold and policies we develop that implicitly or explicitly make this linkage, it ain't there. Coal is freakin' expensive. Efficiency is cheap. Even solar PV is cheap if you ignore the capital costs (just like coal!).

The idea that charging for CO2 will increase energy costs makes as much sense as assuming that charging for mercury will increase tuna costs.

This persistent idea is both inane and dangerous. Inane because it's wrong. Dangerous because it leads to one of two places:

Duke University's study on the intersection of green jobs and rust belt manufacturing

Check out this report [PDF] from Duke University, completed in conjunction with Environmental Defense Fund and a coalition of labor unions. It is on the economic benefits of energy recycling. This is Chapter 7 of an on-going series on Manufacturing Climate Solutions that is focused specifically on those green technologies that can benefit the U.S. manufacturing sector.

Green jobs, to be sure, but not in the Van Jones sense where the green pulls the job, but in the sense that businesses who seek to be green can boost their profitability and protect existing jobs.

To be sure, there's a fair amount in here about our company, but I think the conclusions are generalizable, as is the political benefit to be gained from "strange bedfellows" of environmentalists and rust belt industries (and their employees). Worth the time to read.

South Carolina misses an opportunity for energy efficiency with Duke's Save-A-Watt program

I recently interviewed a guy who explained his approach to long-term contracting to me as follows: "always structure your contracts to ensure that your counter-party makes money, and you'll never have a bad contract negotiation." It's a great point, too often lost by those who are convinced that all negotiations are zero-sum games.

Lest one think that hard-nosed, selfish negotiating is limited to greedy financial types, I bring you this story from South Carolina, where a change in utility regulation to incentivize energy efficiency was blocked by environmentalists and consumer advocates on the grounds that it would give too much money to utilities. It seems to me that they have made a big mistake.

Regulated utilities have no incentive to invest in energy conservation or generation efficiency. Moreover, they have no incentive to encourage their customers to make investments that would save them money, since the standard guaranteed-return + cost-pass-through pricing model doesn't let them keep the gain.

This doesn't make utility managers bad guys; it just means that they are responding to a bad set of signals. If your parents give your big brother a cookie every time he punches you, your big brother is not entirely to blame for the welts on your arm.

Jim Rogers knows this, and proposed his Save-A-Watt program to give his company, Duke Energy, a financial incentive to encourage their customers to conserve. Consumer advocates and environmentalists opposed, broadly on the basis that we shouldn't pay utilities to do things they're supposed to do anyway. The South Carolina utility commission agreed:

... they objected specifically to the heart of the plan: Duke's request to get a financial return for power plants it doesn't have to build.

To be quite clear, Duke has many flaws. They like expensive coal plants. They've tried to do some things that look an awful lot like gaming carbon markets. And they are a card-carrying, dues-paying member of the BS-machine that is ACCCE.

But that doesn't mean we can't give them credit for trying to reform the rules, so that they can sever (however partially) the disconnect between the interests of their shareholders and their customers (not to mention the environment). It seems a shame to me that those efforts were blocked in the name of the environment and consumer.

Ultimately, this issue is much bigger than Save-a-Watt, Duke, and South Carolina. Our regulatory system desperately needs reform, and effective reform will necessarily create massive wealth transfers away from those who benefit from the status quo. It was ever thus, and is why vested interests are always so conservative. Those who seek reform therefore have four choices: