When conservation puts a squeeze on utilities

Consumer advocates fear that utility regulators will overcompensate the companies for their lost business

The citizens of Claremont showed what they thought of their local water company's rates last November, when they voted overwhelmingly to let the city seize the private company and begin the process of converting it into a municipal utility.

Measure W, the first step in converting the company into a municipal utility, passed overwhelmingly, 71%-29%. One key issue in the Measure W campaign was the water company's practice of collecting higher rates from residents when they used less water, as allowed by the state Public Utilities Commission. "If we conserve," Mayor Joe Lyons said, "we don't benefit."

The conflict in Claremont over how to compensate utilities when customers reduce their usage, and therefore the firms' revenue, is being replicated across California and nationwide, and over electric rates even more than over water. Regulators and consumer groups are grappling with how to force utilities to encourage their customers to conserve, even though it means less income, while also ensuring that customers see the benefits of conservation via lower bills.

"The conversation about what's happening to utilities, and are they going to continue to exist, and what's the future look like, has moved so fast in the last couple of years," says Elisabeth Graffy, a senior scientist at Arizona State University's Global Institute of Sustainability.

What's driving the conversation is the surging growth of rooftop solar technology. Some states, including California, have "net metering" rules requiring the utilities to pay homeowners or businesses for their rooftop generation.

The terms of the debate are already clear. Consumer advocates fear that utility regulators will overcompensate the companies for their lost business, and the utilities fear that they'll be left without enough income to support their past investments in power plants and the electrical grid.

The utilities have raised the specter of a "death spiral" — as more consumers shift to solar, those left behind will face higher rates to pay off the old plants, which will drive more of them to solar. The last holdouts won't be enough to cover a utility's fixed costs, and the utility perishes.

The industry's preferred remedy is to seek higher fixed rates from regulators — that is, collect a higher proportion of their rates from all consumers, regardless of their electricity purchases, leaving a smaller proportion tied to meter readings. A Wisconsin utility proposed one of the more aggressive plans: increase the fixed-rate portion of its monthly bills from $10.50 to nearly $70 over three years, a step local consumer advocates charged was designed to "stifle customer use of energy efficiency." The utility eventually agreed to pare its request to $20 for 2015 and hold off on further increases.

Such a draconian increase in the fixed rate wouldn't be possible in California, where no more than $10 a month can be fixed, thanks to a 2013 law. The PUC is currently pondering how much to allow each of the state's major utilities — Southern California Edison, Pacific Gas & Electric and San Diego Gas & Electric — as a fixed rate. A ruling is expected as early as this summer, along with a decision on other changes to utility rates prompted by the 2013 law.

Environmentalists and other solar advocates assert that even a $10 monthly charge would cut deeply into solar installations by cutting the savings high-volume electric users could reap by moving to solar. Customers would have to pay at least $120 a year to their local utility no matter how much electricity they consumed, which could lead to a 42% drop in solar installations, the Sierra Club calculated.

That could threaten California's position as the nation's biggest solar state: As of 2013, California had installed almost as much solar capacity as the next five states combined. But there still is plenty of room to grow: Solar accounted for less than 2% of all power consumption and 2.15% of all electricity generation in the state.

Whether the death spiral is a real possibility or merely a utility-industry boogeyman is hotly debated. "The death spiral is a myth the utilities are using to support their huge requests for rate increases," scoffs Marcel Hawiger, an energy expert at the California consumer group Turn. Even in California, where per-capita energy consumption has remained flat for decades, consumption is still growing along with population. At least through this decade, he says, "reports of the utility industry's death are greatly exaggerated."

There's less doubt that traditional utility economics are on their way out. The firms are granted monopolies, and awarded a set rate of earnings on their capital investments. The idea is to guarantee them enough profit to reward them for economically risky capital investments in new plants.

"The utilities feel, for good reason, that they made a deal with society," says Graffy of the Global Institute of Sustainability. "They'd provide reliable energy, and in exchange they'd have a reasonable amount of stability," which is necessary to attract outside investors with capital.

"That regime works well when demand is growing fast and costs are declining" through economies of scale, says Galen Barbose, an energy policy expert at Lawrence Berkeley National Laboratory and coauthor of the lab's 2014 report on the implications of the solar transition. "Then they get to sell an ever-increasing amount of kilowatt-hours at higher per-unit prices than what they're paying to produce them. But sales are not increasing as they once were."

The report calculated that solar adoption rates reaching even 2.5% of utility sales could begin to erode shareholder returns significantly. Rate-setting tools exist to maintain utility profitability, the report observed.

California has been trying to strike a proper balance for years. In 1981, the state adopted "decoupling," which eliminated the direct link between utilities' profits and the amount of electricity they sell. In 2007, regulators instituted "decoupling plus," which allowed the utilities to earn incentive payments when consumption fell below projections — in effect, sharing the gains from efficiency with their customers.

Those initiatives have made the utilities unhostile to conservation, says Mike Campbell, project manager on electric pricing at the PUC's Office of Ratepayer Advocates. But the arrangement isn't perfect. "It's a point of raging debate at the PUC whether utilities should receive incentive payouts for energy conservation" by their customers, Campbell says.

The experience of Claremont's water users may be the canary in the coal mine. California's water utilities are small and local, so the impact of declining demand on them and their customers is magnified compared with that on the state's three electricity behemoths and their millions of ratepayers. But changes in how and where electricity is generated in the state — less from massive fossil-fuel power plants and more from their rooftop solar panels — as well as how much homes and factories use, will inevitably change the business and billings of the big utilities. Customers will be along for the ride, and whether they get cut-rate tickets isn't clear at all.

Michael Hiltzik's column appears Sundays and Wednesdays. Read his blog, the Economy Hub, at latimes.com/business/hiltzik, reach him at mhiltzik@latimes.com, check out facebook.com/hiltzik and follow @hiltzikm on Twitter.

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