Should utilities still be monopolies?

The 2020 General Assembly Session saw a record number of energy bills, many aimed at changing the way our electric utilities operate. One, in particular, would have completely changed the energy monopoly paradigm in Virginia. This raises an age-old question here in the Commonwealth: do we need our electric utilities to have a monopoly over their respective regions?

History

Many investor-owned utilities, like Dominion Energy and Appalachian Power here in Virginia, are “vertically integrated.” This means they produce the electricity, transmit it, and distribute it to the end-user all themselves. The vertically integrated structure largely comes from the historic rise of power plants and the needs of the time.

First, when electricity was just beginning to have practical applicability, and some were considering the ability to provide it to buildings and residences, a number of factors resulted in the prevalence of alternating current (AC), instead of direct current (DC). AC is capable of carrying power much greater distances. Second, steam turbines were more readily used because of their production capacity. Steam turbines are very large, and combined with the ability to carry electricity further, power plants got much bigger and were built further away from the population centers they were powering.

In order to deal with these larger, more distant power plants, a vast infrastructure of transmission and distribution lines needed to be built. The combination of these factors created two structural conditions for the electricity market: a high barrier to entry and enormous economies of scale. These two components tend to create a natural monopoly. However, regulators were wary of splitting up these monopolies because of the desire for reliable and readily available energy, which could only be met by one of these energy behemoths. The compromise was a regulated monopoly. In the energy space, a regulated monopoly can’t profit, but it can charge what is deemed “reasonable” for its costs and returns for investors. This structure provided cheap and expansive energy for the whole country.

Electricity Monopolies Today

Many argue that, while this structure was historically necessary, the model no longer works. The rate structure of a regulated monopoly removes any outside competition. Rates are set by regulators, not by the market. Utilities have little incentive for innovation because of the guaranteed returns, the expansive bureaucracy created by regulatory agencies, and the significant sunk costs.

Further, technology is reducing costs in a few different ways. New technology surrounding energy generation, like solar and wind, can significantly lower fuel costs. On the demand side, new technologies like smart meters and energy-efficient appliances can ease costs by reducing demand. The advent of net-metering also allows for the possibility of a multidirectional grid. Investment into innovations like these is crucial to advancing the electric grid to provide power more efficiently, reliably, and inexpensively. It remains to be seen if utilities will continue to drag their feet on modernizing, or if the threat of change will be enough to move the needle.

HB 1677

Delegate Keam introduced a bill to begin shifting this model.  HB 1677 would have replaced the Virginia Utility Regulation Act and allowed consumers to purchase electricity from the retail provider of their choice. The bill would have accomplished this by abandoning the vertical integration structure and requiring all incumbent investor-owned utilities, municipal power producers, and electric cooperatives to separate their distribution, transmission, and power generation functions. According to the proposed legislation, this can be achieved by creating separate companies or selling assets to a third party. This would allow customers to select their retail provider and allow the remaining (and new) companies to sort out the energy supply chain in a competitive environment. The bill was continued to 2021, which means there is hope that it will be discussed with some sincerity next year.