When re-opening the Jobs and Energy bill, lawmakers should remove any changes to how public utilities set multiyear rate plans
As lawmakers reopen and reconsider the three bills Governor Dayton vetoed last week, a seemingly innocuous energy provision in the Jobs and Energy bill needs to be removed. Leaving it will almost certainly lead to higher electricity rates across the state.
Generally, utilities must go back to the Minnesota Public Utilities Commission (MPUC) any time they need to adjust their rates due to any substantial change in the cost of their business operations—such as to pay for large capital investments or adjust to changes in customer demand. In recent years Minnesota utilities have needed to adjust rates far more frequently, which is not ideal.
The Jobs and Energy bill would expand on the opportunity for public utilities to implement multi-year rate plans. Setting multi-year rates may be a good idea because it can lower regulatory costs by eliminating the need to constantly go back to the MPUC for adjustments and gives utility customers predictable bills. However, after trying them, as is happening now, they might turn out to be a bad idea. We’ll know more with more experience.
Though multi-year rates aren’t necessarily a bad idea, a very bad idea to modify multiyear rate plans found its way into the jobs and energy bill Dayton vetoed. Specifically, the bill adds the following language:
The commission [MPUC] may also require the utility to provide a set of reasonable performance measures and incentives that are quantifiable, verifiable, and consistent with state energy policies.
…
The commission may initiate a proceeding to determine a set of performance measures that can be used to assess a utility operating under a multiyear rate plan.
On its face, the language might seem to be an improvement. Who doesn’t want to measure performance and hold folks accountable for performance? Indeed, American Experiment supports establishing performance metrics for state public programs to establish whether taxpayers are getting value for all that state spending.
What could be wrong here?
The problem here has three parts:
- Performance is not necessarily measured on how well utilities serve their customers, but performance is specifically linked to “state energy policies.” These days the MPUC and the Department of Commerce focus almost exclusively on state policies to promote energy efficiency, renewables and greenhouse gas reductions. All of this is pursued without much regard to cost or impact on jobs, despite the fact that most state energy policies are couched in terms requiring “cost effective” approaches.
- The MPUC is given the power to require the performance measures. With the power to require performance measures, the MPUC has the power to go beyond the specific conservation and renewable programs already established in state law and require additional activities to meet state policies, such as the state goal to reduce greenhouse gas emission by 80 percent by 2050.
- Utilities can set up incentives to reward themselves for meeting performance goals. Utility customers, of course, will pay for these incentives. This means customers will be hit with higher rates for both the new activities utilities implement to meet performance goals and the incentives paid for meeting those goals. If the MPUC requires these new activities and incentives, then electricity rates will rise substantially. And public utilities will profit. Remember, it’s the utility tasked with establishing the performance goal and the incentives they get to extract from their customers. They will be the winners.
To better understand how this will work, just look at the state’s Conservation Improvement Program (CIP). The CIP requires utilities to spend a certain percentage of revenue on energy conservation and to then work to meet specific energy savings goals. Though the Department of Commerce and the MPUC provide oversight, the utilities generally self-report performance and recommend their own incentive payment they then extract from their customer base.
Though environmentalists, investor-owned utilities like Xcel, and regulators celebrate the program, the CIP ends up being very expensive with huge incentive payments and the claimed performance achievements just don’t add up. Xcel and other utilities are just doing what regulators tell them—and profiting from it. With utilities happy and regulators happy and environmentalists happy, no one else is there to effectively step into the regulatory process and question whether the performance metrics accurately measure performance and whether the incentives are fair.
The result: A very expensive program that does not perform.
Xcel spent $88 million on electric energy conservation in 2014 and is requesting another $40 million incentive payment because it spent all that money so wisely. That’s nearly a 50 percent bonus payment. Not many workers get a 50 percent bonus. When American Experiment published the energy chapter to the Minnesota Policy Blueprint last year, Xcel regulatory filings showed that the cost of the CIP represented 5 percent of the average residential customer’s bill. That’s a lot of money coming out of customer bills each month.
What does it buy? Not much.
You’d expect Minnesota would start reducing electricity usage relative to other states. But over the last twenty years (1994 to 2013), Minnesota‘s rank for electricity usage per customer has not improved a bit. Residential electricity sales per customer ranked 19th in 1994 and 19th again in 2013. Nonresidential electricity sales per customer actually dropped from 30th in 1994 to 43rd in 2013.
Despite these numbers, the state’s CIP is widely celebrated as a success. Xcel goes so far as to brag on residential customer pamphlets that conservation reduced the need for five medium-sized power plants. Yeah, right.
No doubt a multiyear rate plan with these performance provisions will include performance measures and incentives that utilities, regulators and environmentalists will all be able to jointly celebrate, just like the CIP. All at a substantial cost to utility customers and to Minnesota jobs. Conveniently, the cost will be hidden from customers. And as years pass it will be nearly impossible to draw the connection between Minnesota’s rising electricity rates and these new programs, making it very hard to repeal them.
Minnesota rates have already risen by 12.4 percent since 2007 when Minnesota passed the costly Next Generation Energy Act. By comparison, rates dropped by 1.6 percent nationally.
Minnesota lawmakers should not be adding fuel to ignite even higher rates and should instead eliminate the MPUC’s power to require performance measures when they repass the energy and jobs bill in a special session. In fact, to be safe lawmakers should eliminate any change to the multiyear rate plan until we have more experience under the current law.