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Pressure to increase electric power rates in West Virginia continues. Per the Energy Information Administration, West Virginia’s regulated electric rates remain “middle-of-the-pack” for business and industry, despite the fact that West Virginia is a net exporter of electricity. That irony has everything to do with the fact that West Virginia remains a vestige of big-government, pro-utility/shareholder monopoly regulation without free-market competition and customer choice within the electric sector.
What We Need: All of the Above
Although West Virginia has done a great job in attracting new business to the state, there has been virtually no effort to provide relief for, or to address retaining, existing manufacturing and industry, despite the historic and consistent investments of those companies in West Virginia jobs. The upshot is that it will make no net difference if West Virginia attracts new business only to have existing business leave the state. Existing manufacturing and industrial consumers of power need an all-of-the-above array of electric power options that includes expanding the applicability of West Virginia’s Micro-grid Bill (which currently ignores existing business and industry), allowing bilateral contracts with non-utility generators, expanding self-generation and co-location opportunities, and pragmatically opening up customer choice in the existing regional market for power known as “PJM.”
Both of the monopoly utilities in the state need more power to meet capacity needs, so all of these options would allow others to secure that capacity rather than having the monopolies buy or build that power and then charge their captive ratepayers for it with a guaranteed return.
Some will likely monger the fear that these expanded power options for business will result in stranded costs and that it will increase costs for the customers who remain on their systems, but that does not have to be true. First, all customers would still pay the utilities for their transmission and distribution service. Second, if those customers accessing power from other sources cause the utility to avoid the cost to buy or build a new power plant, then all customers are better off in the long run. Last, if we do nothing about power pricing, and existing manufacturing and industry shutter their operations or shift production to other states, then we will guarantee that all other customers will be worse off because those that have departed will be contributing nothing for the cost of distribution, transmission, or generation supply service.
50-by-50 and Natural Gas Power Production
It makes economic sense for West Virginia to invest in and build as much electric power generation as the market will bear. It does not make sense to assume that West Virginia’s two monopoly electric utilities should be the ones to build it. It is a given that in the 13-state PJM region in which West Virginia resides more power plants are needed to meet growing electric demand. It also means that existing coal-fired power plants will be needed for a long time. But the best solution for new growth is to allow competitive wholesale developers of generation build those plants to serve the market. In the short run, those free market driven, non-utility developers will undoubtedly turn to West Virginia’s abundant supplies of natural gas and key location within the electric transmission grid; West Virginia should do all it can to promote that.
What About the Monopoly Utilities?
They can function just fine without investing in new generation plants. They can continue to operate their existing coal plants and other assets and acquire what they need from a more robust competitive wholesale market for power. If West Virginia navigates these issues deftly – promoting non-utility investment in new power plants, on-site and third-party generation, and customer choice for those willing to assume the risk – then the two monopolies will still be whole. But if we assume that only the monopoly utilities can build new power plants, then they will recover the cost of that investment plus a return from their captive customers for years to come, entrenching command and control regulation and monopoly rates.
Investors Should Pay for Building New Power Plants, Not West Virginia Ratepayers
It is almost a certainty that if the utilities propose to build their own power plants, then they will seek to shift the risk of that investment away from their shareholders and onto their captive customers. This is called Construction Work in Progress or “CWIP” ratemaking. As a WVU professor recently noted, this effectively operates as a tax. It allows the utility to recover costs from ratepayers as they expend them, even before the investment is providing a service. In other words, West Virginia ratepayers would start paying for a power plant before it ever produced a single kilowatt hour of energy.
History is replete with examples of utilities getting CWIP cost recovery and then failing to complete the power project on time (or at all) and having massive cost over-runs. Non-utility project developers operate in a competitive market, which protects customers by placing the investment risk on the investors, where it belongs. If West Virginia incentivizes non-utilities to build power plants in the state, then all the same benefits from construction, taxes, and long-term jobs will accrue, but without the inequity that will flow from financially safeguarding monopoly utilities and their shareholders at the expense of captive ratepayers. West Virginians should not be taxed to finance new power plants in a state with such abundant natural gas and other energy resources.
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