Unjust, Unreasonable, and Unduly Discriminatory: Electric Utility Rates and the Campaign Against Rooftop Solar

Abstract

The century-old technology and business model for electricity distribution is under threat. Decentralized technologies and services now allow consumers to buy less power from their local monopoly provider and customize the timing and price of the electricity they do buy. In response, investor-owned utilities (IOUs), which distribute power to 75% of U.S. homes, are urging state utility regulators to take action to protect the incumbent paradigm.

This paper is intended to be a primer on the regulation of electricity distribution, the disruptive potential of decentralized PV, and the IOUs’ arguments against its deployment. First, the paper examines the creation of IOUs to identify how and why they enjoy de facto monopolies over electricity distribution. Next, the paper explores the ratemaking process and concludes that it is imbued with false precision, and that so-called subsidies between ratepayers are a feature, and not a flaw, of utility rates. For IOUs, competition in the business of electricity distribution is unusual but not unprecedented. The paper then surveys previous competitive threats to the IOUs’ distribution monopolies that arose in the 1930s, 1950s, and 1970s. The historical overview concludes with summaries of recent ratemaking proceedings that address IOUs’ arguments about ratemaking subsidies.

Based on this review of the industry’s structure and history, the paper concludes that opening up the monopoly-controlled distribution system to new technologies and services provided by non- IOU entities is consistent with the history and purpose of state regulation. State regulators have understood that, while aligning rates with utility costs is a fundamental ratemaking principle, the ultimate purpose of regulation is to protect consumers, not the IOU. That public interest goal allows regulators to enable competition by requiring IOUs to provide technology and service providers with non-discriminatory access to the IOU ratepayers and IOU-owned distribution infrastructure.

Keywords: electricity, solar energy, energy, electricity regulation, regulation, monopoly, rooftop solar

JEL Classification: K23, K32, L50, L43, L94, N72