By Casey Freeman
First article in our series about microgrids
Xcel Energy and Black Hills Energy are Colorado’s two regulated electric monopolies. Xcel is the larger of the two and provides retail service to the greater Denver Metro Area, Greeley, and Grand Junction, while Black Hills services Pueblo and the surrounding area. These utilities operate in a regulated market with no competition and provide power to a combined customer base of approximately 1.5 million. Both are Colorado Public Utilities Commission (PUC) regulated, for-profit corporations and award annual dividends to their shareholders.
As Colorado public policy including renewable mandates and fuel switching have driven up electricity rates, there has been substantial concern over how these utilities treat ratepayers, and not without cause. In 2010, Black Hills raised its rates 13 percent, and from 2012 to 2017, increased them an additional three times. Around 7,000 people per year were receiving disconnect notices, and to reconnect, customers must pay the missed bill in full along with a fee and a three-month deposit. The cost can end up being higher than $2,000, which is devastating for the residents of cities like Pueblo where the median household income in 2016 was $35,770 compared to a statewide average of $62,520.
While a reconnecting fee alone is a difficult hurdle to overcome, loss of electricity carries with it much heavier problems like social services breaking apart families, forfeiture of public housing, and the inability to preserve perishable goods. A remedy Black Hills offers is the Black Hills Energy Assistance Program or BHEAP, a program for low-income households in which customers who meet specific income requirements can receive a deduction of $60 from their monthly bill. However, this assistance is at the expense of other customers who are charged a monthly fee to sustain the program.
For ratepayers in Colorado, there is no other option but to endure the service of their electric provider since a regulated market prevents customers from choosing a different company.
Certainly, giving consumers the freedom to choose their own provider is better than being forced into a monopoly utility. But deregulation isn’t without its own problems. For example, the 2002 Texas State Legislature passed a law that deregulated the energy market and allowed competition between electricity providers. It was meant to address the detriments of a regulated energy market. Then Governor George W. Bush summarized his support saying: “Competition in the electric industry will benefit Texans by reducing rates and offering consumers more choices about the power they use.”
Market manipulation in the form of subsidies for preferred energy sources has made the reality of deregulation a bit different than originally hoped. Consumers do enjoy a wider range of choice in energy suppliers, but rates have been more volatile and subject to dramatic increases. Subsidies for renewable energy from both the state and federal government have artificially depressed wholesale intermittent energy prices. As a result, baseload power sources are becoming uneconomical and closing, causing a scarcity in energy supply. This is damaging to ratepayers because in times of scarcity, power providers will raise electric retail rates to prepare for surging wholesale electric rates.
And in the summer of 2018, this was especially problematic. Three coal-fired power plants closed in the spring just ahead of Texas experiencing record-breaking temperatures that caused a dramatic increase in electricity demand during the summer. Wholesale pricing averaged $200/MWh during peak hours, which was a $150 increase from the previous year, and in May, wholesale prices spiked to $1,500/MWh.
Simply put, when power producers chase subsides, baseload power sources close and wholesale electricity prices are more than likely to surge, ultimately increasing retail electric rates and hurting ratepayers.
Does Texas’ failure at deregulation indicate a regulated market structure is the only alternative then? The short answer is no. In addition to the issues that many Colorado ratepayers have to contend with, Dr. Lynne Kiesling, an accomplished author and professor of Economics at Purdue University, believes a regulated energy market “stifles innovation.”
Kiesling makes a compelling argument that America has been using the same business model for over a century, which she believes has resulted in a sector devoid of new ideas on energy generation and usage. Beyond lousy service and rising rates, consumers have little incentive to become personally involved with their energy consumption, and the lack of competition incentivizes utilities to chase bad investments because they’re more profitable than innovation that save ratepayers money.
According to Kiesling, the regulated market has dulled both parties, the customer and the utility, which now seem content with mediocrity.
Currently, there are two options for ratepayers: a regulated or deregulated business model. But as regulated utilities continue to gouge customers and manipulate the market, and wholesale deregulation only seems to offer another bleak outlook, it’s time to look beyond the status quo and embrace innovation.
Could microgrids be the answer? Maybe. Colorado already has experimented with them. Stay tuned for the next article in this series.
Casey Freeman is an intern in the Energy & Environmental Policy Center at the Independence Institute. She is pursuing a bachelor’s degree in political science with a focus on legal studies from the Metropolitan State University of Denver.