The Wonk Room

The Economic Recovery Plan’s Bold Move To Repower America

The Obama economic recovery plan makes a bold investment in the modernization of our electricity infrastructure, in order to transform an often-overwhelmed patchwork of balkanized regional networks into a national “smart grid” based on Internet-like technology. Without a smart grid, the goal of independence from fossil fuels is impossible to reach. Repower America, Al Gore’s campaign to have America use 100% renewable electricity in ten years, explains that a national smart grid “will save money, increase reliability and protect consumers from outages, and make possible a clean electricity system.”

Building a smart grid requires both new technology and regulatory policy. In addition to a $20 billion investment in smart grid deployment, the recovery plan offers $2 billion in grants to promote a subtle but key shift in electric utility regulatory policy:

Policies that ensure that a utility’s recovery of prudent fixed costs of service is timely and independent of its retail sales, without in the process shifting prudent costs from variable to fixed charges.

Translating for normal people, electric utilities traditionally make higher profits when they sell more electricity to consumers. The key problem is that this discourages utilities from promoting conservation and efficiency — instead, the more wasteful their consumers are, the better. So demand goes up, utilities build new, expensive, and polluting power plants, and still costs rise. Utility shareholders’ interests are pitted against the rest of society.

Therefore, several states have implemented policies that decouple profitability (”recovery of prudent fixed costs of service”) from demand (”retail sales”), by using public funds and rate adjustments to guarantee an expected annual profit for the utility company and to subsidize investment in energy efficiency.

Obama’s economic recovery package contains $2 billion in state-level block grants that will be released “only if the governor of the recipient State notifies the Secretary of Energy that the governor will seek, to the extent of his or her authority, to ensure” that decoupling and energy efficiency incentive programs will occur.

Because our electrical infrastructure is a vital public resource, the profits of utility executives and shareholders must not be put above the public good. As Public Citizen warns, decoupling for unregulated utilities can lead to “windfall profits for the industry.” The California electricity debacle exposed the great failure of the experiment of utility deregulation, and the recovery package does not go far enough to bring utilities back under control.

As President Obama, Secretary of Energy Steven Chu, and legislators like Sen. Jeff Bingaman (D-NM) recognize, our entire nation needs to move to a low-carbon economy as rapidly as possible. That means modernizing our grid through both new technology and new regulatory policy. The economic recovery plan includes crucial language to allow that to happen.

Full decoupling language in the House-passed economic recovery package (HR 1):

SEC. 7006. ADDITIONAL STATE ENERGY GRANTS.

(a) In General- Amounts appropriated in paragraph (6) under the heading ‘Department of Energy–Energy Programs–Energy Efficiency and Renewable Energy’ in title V of division A of this Act shall be available to the Secretary of Energy for making additional grants under part D of title III of the Energy Policy and Conservation Act (42 U.S.C. 6321 et seq.).
The Secretary shall make grants under this section in excess of the base allocation established for a State under regulations issued pursuant to the authorization provided in section 365(f) of such Act only if the governor of the recipient State notifies the Secretary of Energy that the governor will seek, to the extent of his or her authority, to ensure that each of the following will occur:

(1) The applicable State regulatory authority will implement the following regulatory policies for each electric and gas utility with respect to which the State regulatory authority has ratemaking authority:

(A) Policies that ensure that a utility’s recovery of prudent fixed costs of service is timely and independent of its retail sales, without in the process shifting prudent costs from variable to fixed charges.
This cost shifting constraint shall not apply to rate designs adopted prior to the date of enactment of this Act.

(B) Cost recovery for prudent investments by utilities in energy efficiency.

(C) An earnings opportunity for utilities associated with cost-effective energy efficiency savings.