Virginia Should Create Better Incentives for Utilities to Serve Customers

COMMENTARY Climate

Virginia Should Create Better Incentives for Utilities to Serve Customers

Mar 5, 2018 3 min read
COMMENTARY BY

Former Research Fellow

Katie Tubb was a research fellow for energy and environmental issues at The Heritage Foundation.
According to the State Corporation Commission, the freeze has locked in higher prices, such that Virginia customers have overpaid somewhere between $221 million and $426 million. bkindler/Getty Images

Key Takeaways

When it comes to electricity policy reform, conservatives and liberals may have more in common than one might think.

True competition, customer choice, and disciplined government could put a number of Virginia’s problems to rest.

So long as Virginia maintains a political incentive structure rather than a customer-centric one, these problems will continue cropping up.

When it comes to electricity policy reform, conservatives and liberals may have more in common than one might think. Look no further outside the Beltway than Virginia. Here, a contentious debate over a rate freeze and ratepayer refunds has united some unusual allies.

The debate this winter involved an ongoing rate freeze the legislature passed in 2015, allegedly to protect ratepayers in the face of potential sweeping changes due to the now challenged Clean Power Plan.

According to the State Corporation Commission, the freeze has locked in higher prices, such that Virginia customers have overpaid somewhere between $221 million and $426 million. Bills passed through the House and Senate this month were a half-hearted attempt to return some of that to ratepayers.

The case is interesting if for no other reason than it has divided some — such as Democratic Gov. Ralph Northam and Attorney General Mark Herring — and united others, the Virginia chapters of the Tea Party and the Virginia Poverty Law Center among them. But it also offers a worthwhile object lesson.

Virginia has two monopoly utilities that serve 82 percent of Virginians. In theory, these are regulated by the State Corporation Commission, which reviews rates, determines how much profit the utilities can collect, and approves infrastructure investments.

The General Assembly routinely intervenes through laws, with measures such as a voluntary renewable portfolio standard and the current rate freeze.

In other words, Virginia has created a system where a utility profits less by understanding and meeting customer needs and more by influencing politics in the State Corporation Commission and legislature. It’s the outlines of an approach to electricity services that is all too common across the U.S.

This latest debate in Virginia’s legislature has tried the toleration of a growing number across the political spectrum. Earlier this month, the Huffington Post ran an intriguing article on why some Virginia Democrats are opposing their fellow colleagues and joining unconventional allies calling for better accountability.

In an effort to correct old wrongs, the gut response may initially be to use the force of government to tighten the leash on utilities and more strictly regulate prices.

But this is an approach that routinely fails as political discipline softens over time. Virginia has had this and similar battles with its utilities before for decades. How many more times will it — and other states — hit the replay button?

Keeping the general outlines of the current system in place — government-sanctioned monopoly power providers allegedly supervised by an independent regulator — is itself the problem.

Looking to be re-elected, far too many politicians are bought off with short-term promises for infrastructure upgrades, underground transmission projects, or green-energy programs. Utilities have little incentive to innovate beyond what it takes to keep regulators and politicians happy and pacify the loudest opponents.

The solution is to create an environment where incentives are properly aligned to counteract such behaviors as rent-seeking and regulatory capture, which in the end hurt consumers.

True competition, customer choice, and disciplined government could put a number of Virginia’s problems to rest. In Texas, thishas reduced prices, encouraged innovation in grid infrastructure and customer service, and driven environmental benefits.

But so long as Virginia maintains a political incentive structure rather than a customer-centric one, these problems will continue cropping up.

This piece originally appeared in the Richmond Times-Dispatch