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The Rotten Political Incentives of the Utility Industry

The Rotten Political Incentives of the Utility Industry

The monopoly electric utility business model is rife with problems. Chief among them is the regulatory capture it invites.

Monopoly utilities tend to reflect the political environment in which they are situated. This is no accident. They know where their bread is buttered and are more than happy to play along with the ambitious energy policy goals of climate-minded elected officials when doing so can be quite lucrative. All the while, concerns over the financial and physical wellbeing of ratepayers fall by the wayside.

The ongoing Maui wildfire disaster is a prime example.

A new Wall Street Journal investigation found that Hawaiian Electric, tantalized by state renewable mandates and generous federal subsidies, neglected its investments on wildfire prevention in favor of lavish spending on new wind and solar buildouts while closing the last of its coal facilities.

“Looking back with hindsight, the business opportunities were on the generation side, and the utility was going out for bid with all these big renewable-energy projects,” Doug McLeod, a consultant, and former Maui County energy commissioner, told the Journal. “But in retrospect, it seems clear, we weren’t as focused on these fire risks as we should have been.”

That “lack of focus” amounted to a measly $245,000 spent between 2019 and 2022 on wildfire prevention projects on the island, the Journal reported.

The result? At least 111 people–including children–dead and more than 2,000 homes and businesses burned to the ground by wildfires thought to have been caused by improperly maintained power lines.

Unfortunately, the Maui catastrophe is not unique.

California’s 2018 Camp Fire killed 84 people and obliterated the town of Paradise. The utility PG&E filed for bankruptcy after poorly maintained equipment was found to be at fault. A shared challenge for both PG&E and Hawaiian Electric is the need for overinvestment in wind and solar to meet 100 percent renewable energy mandates.

Colorado’s monopoly utility Xcel Energy is in a comparable situation, having faced its own wildfire-prevention scandal for similar reasons. Despite being placed under a “Wildfire Mitigation Plan” by the Colorado Public Utilities Commission in 2019, for which the utility claims to have invested $375 million to date, an improperly maintained powerline owned by Xcel was found to have been the proximate cause of the 2021 Marshall Fire. That blaze claimed two lives and burned nearly 1,000 homes.

While a $375 million investment in wildfire prevention is not insignificant, and certainly beats the $245,000 pittance spent by its Hawaiian counterpart, it pales in comparison to the monopoly utility’s recent spending spree chasing renewable energy mandates:

  • $8 billion to prematurely phase out its entire coal fleet, substituting it with large-scale renewable sources.
  • $3 billion to distributed renewable energy and storage projects
  • $1.7 billion to construct transmission lines for channeling these new renewable resources to the grid.

Even these costs are overshadowed by the more than $600 billion Coloradans are projected to pay for Governor Jared Polis’s comprehensive decarbonization and electrification strategy, as our research shows. Notably, this sum does not include wildfire prevention. Given these expenditures, it is doubtful the Bank of Ratepayers will have adequate reserves for maintenance and risk mitigation.

These recent catastrophes expose the problems with the monopoly utility business model and its cozy relationship to the political whims of elected officials. Policymakers entice utilities to follow their green political agenda with the promise of risk-free profit in return. In states like Colorado, California, and Hawaii, that means ratepayer money is spent chasing weather-dependent renewable energy initiatives at the expense of grid reliability and public safety.

While it is easy to critique profit-seeking utilities, policymakers and regulators deserve their fair share of the scrutiny for enabling such imbalances in the first place.