The Tail that Wags the Dog: Investor-Owned Utilities and the Future of Solar

There’s been a lot of talk lately about the implications of the spread of solar energy for the future of investor-owned utilities. Simply put, as more people generate their own power – and as they increasingly take advantage of programs such as net metering that compensate them for the energy they supply to the grid – utilities lose profit opportunities and there are fewer customers left to bear the costs of the grid.

Nathanael Greene of the Natural Resources Defense Council (NRDC) takes up the issue in a fiery blog post here (posted on the occasion of the release of a tepid NRDC/Edison Electric Institute joint statement on distributed generation here), and we explored how decisions regarding the allocation of grid costs can be a make-or-break issue for the future of residential solar power in our report last fall on net energy metering in California.

Much of the discussion about solar energy and the future of the utility “business model,” however, seems to me to start from the wrong place. Before we can determine the appropriate role of investor-owned utilities (IOUs) in building the electricity system of the future, we first need to recall exactly why we have investor-owned utilities in the first place.

Investor-owned electric utilities are not ordinary businesses – they exist solely as a result of a bargain made with the public. Historically, that bargain has looked like this: We, the public, give you, the utility, the right to be the sole supplier of electricity in a given area, to recover your costs in supplying that electricity, and to obtain a reasonable rate of return on your investments. You, the utility, will marshal the capital to build out the grid, make only prudent investments, and operate the electricity system in ways that are safe, reliable, provide universal access and deliver electricity as cheaply as possible.

IOUs, in other words, are a tool for accomplishing a job that is important to society. They are not the only possible tool for that job – across the country, publicly owned utilities do the job of supplying electricity to their residents just fine. It has long been understood that society has recourse in cases when IOUs fail to meet the obligations put on them by the public. Governments can make shareholders, rather than ratepayers, eat the cost of IOU investments that run afoul of the regulatory bargain, and even have the right to convert the utility to public ownership.

In a speech on the campaign trail in 1932, Franklin D. Roosevelt issued a reminder of who was the boss in the public/IOU arrangement, saying, “I might call the right of the people to own and operate their own utility something like this: a ‘birch rod’ in the cupboard to be taken out and used only when the ‘child’ gets beyond the point where a mere scolding does no good.” (Anachronism alert: a birch rod was something parents used to hit kids with back when such a thing was socially acceptable.)

In FDR’s view, therefore, the public is the parent, the utility is the child. The public decides upon the societal aims that it wants the electricity system to serve – Do we want to make sure everyone can hook into the grid? How reliable do we want it to be? How green? – and turns the job over to the utility to achieve those goals (guaranteeing the utility a really nice return on investment in the bargain).

For many, many reasons, America needs to move toward an electric grid that is more reliant on clean, renewable power, is more flexible in matching demand for electricity with supply, and is sustained by a balanced, resilient mix of distributed and large-scale power sources. It is up to us – the public – to envision what that electricity system should look like, much as FDR and leaders of his time dreamed of an America in which every household had access to reasonably priced electricity from the grid. Then, we need to direct the utilities to go forth and make it so. If they fail, or refuse, there is always a birch rod sitting there in the cupboard.

To be fair, utilities do deserve to recover the costs of the investments they have already made in the grid. And it is far easier to achieve sweeping changes with the support of politically wired utilities than it is to do so over their opposition.

But as the fight over net metering and other policies that enable solar energy continues to spread, it’s worth remembering that we, the people, are the dog that wags the tail of the investor-owned utilities, not the other way around. If we want a cleaner, more resilient electricity system in the future, it’s going to be up to all of us to harness our power to make it a reality.