by Jon Sanders
Research Editor and Senior Fellow, Regulatory Studies, John Locke Foundation
The importance of affordable electricity used to be obvious and nonpartisan. It has been subsumed by the perceived importance (also nonpartisan) to politicians of currying favor with big, cash-rich electrical monopolies. This cronyism is playing out in several states.
The utilities are given monopoly over electricity supply, meaning their customers have no choice. Call it a Hobson’s choice, call it "my way or the highway," resort to explicit creek names, whatever, but ratepayers have no say in the matter of their electricity rates unless they decide to "go North Korea" in protest.
That being the case, the utilities have no incentive to serve their customers’ interests, but they do have strong incentives to serve their shareholders’ interests. They also have impressive political action committees with huge purses to induce politicians into having strong incentives to serve their shareholders’ interests. It’s a very cozy relationship supported on the backs of captured ratepayers.
A recent spate of states forcing ratepayers to pay extra for nothing is the ne plus ultra of this despicable cronyism. Thanks to Gov. Pat McCrory and the General Assembly’s (bipartisan) proud opposition to energy reform in North Carolina, ratepayers here are in danger of joining them.
"Hey, elected clowns! Thanks for passing a law forcing Duke Energy customers to pay up to $1.5 billion in higher rates for a long proposed nuclear power plant in Levy County that will not be built." So writes Tampa Bay Times business columnist Robert Trigaux in describing the disaster of Construction Work in Progress (CWIP) financing of a nuclear power plant that will never come on line.
CWIP essentially shields utilities and their shareholders from the small remainder of financial risk not covered by loan guarantees in the bipartisan Energy Policy Act of 2005. In theory, CWIP will prevent future rate hikes from recovering the cost of construction after the plant comes on line; in practice, CWIP raises rates immediately, even if the plant fails to come on line. Such failure is only a problem for ratepayers, since shareholders are protected. So what if it’s a "black eye" to the utility? Where are ratepayers going?
Imagine the utility’s platoon of Tallahassee lobbyists back then [in 2006]. They are waving campaign contributions in one hand and, in the other, a scripted defense of advance fees for their lapdog politicians to parrot.
But that image is spot on. Gouging Floridians with advance fees throughout one of the worst recessions in modern history? What leadership.
Ever since, legislators and their gelded Public Service Commission continue to lip-synch the same, lame excuse for ripping off Floridians in the name of nuclear power plants. Charging rate payers now, they clamor, means nuclear plants can be built for less money than if a power company had to borrow money in the private sector like everybody else.
Huh? The real reason the witless sheep in Tally let this happen is that power companies wanted to shift both the cost and the risk of building a nuclear plant on to its customers and off of its shareholders.
The other shoe drops (or kicks, as it were) at the end of the piece, when Trigaux writes about how Duke now seeks "to change the rules in Florida so that any type of big power plant can be charged in advance to its customers."
Duke wants the same policy in North Carolina, too:
The newly installed chief executive officer of Duke Energy Corp. wants to change how the utility is regulated in the Carolinas and Florida so that America’s largest electric company can more easily pass along the cost of big power plants a little at a time.
The company’s desire to get consumers to start paying for big-dollar projects with price tags that could run into the billions is high on the agenda of Duke Energy CEO Lynn Good, who stepped into the company’s top job Monday.
"Duke Energy, which last week canceled the contract for a new nuclear plant in Florida, has spent nearly $350 million on a South Carolina plant that might also never be built," reports The Charlotte Observer, adding that "Duke would seek to also bill Carolina customers for the pre-construction costs of the Lee plant in Cherokee County, S.C., even though Duke hasn’t decided whether to build it."
The report explains:
What the Carolinas and Florida have in common are laws that let utilities collect from customers the costs of nuclear plants as they’re being developed, even if the plants are not built.
The argument for such laws is that they reassure investors, save on financing costs and can lower the overall price of power plants. Critics say they shift the risks of building new nuclear plants from the utilities to customers. …
North Carolina allows pre-construction costs to be recovered only as part of general rate cases, which are complex, monthslong proceedings. Duke has lobbied to simplify the law to allow cost recovery without going through rate hearings.
As ratepayers forced to prop up the demonstrably unsustainable solar industry in North Carolina already know, the dangers of lawmakers making ratepayers bear the costs of a politically favored source of electricity isn’t limited to nuclear. Just ask poor ratepayers in the next state.
"Duke Energy’s ‘green’ initiative to gasify coal for allegedly ‘cleaner’ burning at its Edwardsport, Ind. power plant has already been vilified for cronyism, corruption, conflicts of interest, cost overruns, delays, waste, and mismanagement," writes Paul Chesser for the National Legal and Policy Center, "but at least it became operational in June. For six days."
Chesser writes about how "construction costs soared from an estimated $1.985 billion in 2006 to $3.5 billion," frustrating then-Gov. Mitch Daniels (R) who eventually offered up "Well, green is not cheap." Such a sentiment was apparently confirmed by Duke, which obtained $460 million in federal, state, and local subsidies. Concerning that, The Wall Street Journal‘s Holman W. Jenkins Jr. opined that
One could even say the regulatory process made the Edwardsport blunder possible. Without regulators around to guarantee a return on such a risky and pioneering investment, Duke likely would have sat on its hands and let rising electricity prices take care of any gap between demand and supply while waiting for the country to make up its mind about global warming.
Be that as it may, Chesser compiles an exhausting tale of cronyism and missteps in the Edwardsport fiasco. The upshot for ratepayers (who in their role as taxpayers have already helped fund the mess) is a keen, 14.5 percent rate increase so far.
"So far" because, as Chesser writes,
now that the plant has opened "officially," additional costs for fixes and maintenance no longer have to be contained within the original construction agreement. Those expenses can now be recovered, pending approval from the IURC, from customers with likely even greater rate increases to come.
"This has nothing to do with whether the plant is operational," said Kerwin Olson, head of Citizens Action Coalition, to the Star, "and everything to do with Duke Energy bilking ratepayers for costs they should not be able to recover."
According to the Indy Star story, Duke’s reports with the IURC revealed a "long list" of problems at the plant this year including cracked pipes, broken drive shafts and failed pumps.
It’s no wonder these flops are occurring in an environment where utility executives and shareholders are completely insulated from the real risks of their projects. It might as well be a video game to them: a risk-free fantasy land where major decisions can go wrong without the decision maker suffering any negative repercussion other than having to start over. They still need money to pay the designers — the legislators — but they’ve got ratepayers to give them that. Where are they going to go? They’re trapped in the game.
Click here for the Rights & Regulation Update archive.