A Utility Monopoly Rights Racket
States are empowering utility corporations at the expense of customers.
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Most people don’t have much of an affinity for their local utilities. While these providers of electricity, heat, water, and the like are, in theory, supposed to exchange tight regulation for their government-granted monopolies — monopolies that make a certain level of sense, since having competing sets of power lines or water pipes would be a mess — in practice, they are often able to use their power, influence, and resources in the form of campaign donations to capture the regulators and legislators who oversee them, enabling them to enrich their investors and executives at ratepayer expense.
Indeed, in recent years there have been a spate of scandals, from Florida to Ohio to Maine, revealing that private utility corporations — known as investor-owned utilities, since they are either owned by private concerns or issue stock — abused their power for political and therefore financial gain.
One under the radar way this problem manifests is in a spate of bills across the country that go by the awful acronym ROFR. Meant to make your eyes glaze over, these bills are actually really important and illustrate how monopoly utilities in the electricity space take advantage of the political system to increase their profits and hike costs on local residents.
ROFR stands for “right of first refusal,” and the bills in question do exactly that: Give incumbent electricity utilities the right of first refusal when states are looking to build out new transmission lines. Having a ROFR law in place means incumbent utilities have to pass on new construction before a state can look for other — potentially cheaper — companies to handle it. Incumbent utilities get to call “dibs,” essentially, even if doing so results in a worse deal for the public.
Who builds out transmission lines is, at the moment, an even more important question than normal, because the Biden Administration’s Bipartisan Infrastructure Law and Inflation Reduction Act include substantial amounts of money for bulking out the U.S. power grid, including connecting it to new wind and solar projects — $30 billion, to be exact. That’s some serious cash, even in a sector that has seen quite a bit of it in recent years.
So far, 12 states have ROFR laws on the books, with Mississippi being the latest to join this year. Several other legislatures considered or are considering bills to create ROFR laws during this year’s state legislative session.
For example, a ROFR bill is advancing through the Wisconsin legislature right now, having already cleared a committee in the Assembly. Illinois only didn’t join the ROFR ranks this year thanks to a veto from Gov. J.B. Pritzker. (In contrast, a Minnesota bill that didn’t make it through the process this year would have repealed that state’s ROFR law.)
The alternative to having a ROFR law is having a competitive bidding process for new transmission construction, where incumbent utilities have to bid against other outside companies for construction projects. According to a 2019 study, this competitive bidding lowers construction costs by 20 to 30 percent.
Interestingly, that 2019 study was only able to exist because, in 2011, the Federal Energy Regulatory Commission, or FERC, eliminated a federal rule, under something known as Order 1000, that required right of first refusal for incumbent utilities on federal projects.
That elimination opened the door to competitive bidding, even though states were able to pass their own ROFR laws to replace the federal rule. But on the tiny sliver of projects that were not subject to ROFR rules post-federal repeal, there were substantial savings.
To be clear, it’s not that I think competition is some magic elixir or that the government contracting process, which is necessary in the absence of a ROFR law, doesn’t create its own host of problems, including simply taking longer.
But monopoly utilities have special incentive to jack up costs during transmission construction — or, more charitably, to at least not do very much to keep costs down. This is because they can engage in cost recovery from consumers, ensuring them of the ability to charge to cover their spending, plus a certain profit granted to them by regulators. Their incentive, then, is not to keep costs low, but just the opposite, since they can get it all back and then some from consumers.
Passing ROFR bills into law should, according to the data and common political sense, be politically toxic. Again, nobody really loves their utility provider, and there’s a long history of politicians successfully and rightly vilifying these monopolies for taking advantage of consumers and standing in the way of progress, all the way back to the New Deal. Add in numbers showing these bills can hike rates and you should have something that doesn’t pass the smell test.
And yet. Utilities can and do spend significant money on the political process, and the movement to prevent them from playing politics with ratepayer money is promising, but still new, with real effects a few years out.
Case in point: The 37-1 spending disparity on a ballot referendum in Maine to turn two of the state’s investor-owned electricity utilities into public utilities, which was unsuccessful despite those utilities being widely loathed. Maine has passed a law to restrict utility monopoly participation in the political process, but it hasn’t gone into effect yet.
So the utilities are making headway on these ROFR bills through heavy spending, obfuscation, and the knowledge that utility contracting is an under the radar issue.
Still, legislators in states where these ROFR bills are being considered need to stop them cold, and those in the dozen states where they are on the books already should work to get them off. Doing so certainly wouldn’t solve all of the long list of problems associated with the way we treat monopoly utilities, but it would be a really good start.
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— Pat Garofalo