Investor Owned Utilities and Spending

There are 4 major types of utility in the US, Cooperatives, Municipals, Federal Power Districts, and Investor Owned Utilities (IOU). They each have different regulations and rules. I am going to focus on the IOUs in this article and ignore the others because what and how is very different.

IOUs were created to provide the capital that was not available from the government at the beginning of the electric age. Markets were used to raise capital to electrify much of the world, instead of raising taxes. In return for an exclusive franchise the IOUs had to promise universal service, and in turn the franchised territory could not be served by anyone else. Franchises had an end date, but in most cases those franchises were for 100 years. Without these agreements, likely we would not have universal service or it would have taken decades longer to provide electricity to everyone.

Also IOUs agreed to economic regulation of their services as a monopoly. So IOUs can not go about raising rates without regulatory approval (or changes in laws), and they can’t spend money without pre-approval if they want to be promised their approved rate of return on the investment (they can take a risk and spend money on their own and hope that those improvements eventually are accepted by the regulators for inclusion in the “rate base” (the assets they are authorized to earn money on).

In the 1980s, much of the infrastructure in distribution was in reasonable shape, and regulators wanted to hold price of power down, so they cut pre-approvals for spending, and the utilities did so, by 1995 the rate of replacement spending was under 1%, according to FERC data (Form-1) meaning that replacement were done on average of once in a century. When markets (PJM and others) were created and the power price was deregulated, the regulators had further worries and FERC data shows that by 2005 the average utility was allowed to invest 0.7% of the asst value in distribution, in some cases the investments were in replacing poles every 87 years and replacing conductor even 139 years.

Automated Meter Reading (AMI) caused a jump in investment from 2005 to 2011, but the underlying infrastructure saw little to no additional investment. If you review dockets filed with commissions, you will see rulings that cut from 20-90% of distribution investment requests from 2005 to 2020. Interveners from state’s attorney generals to low-income advocates argued for even deeper cuts in most rate cases.

If you want to understand why the grid is aging, one only need to review the requests for permission since 1980 and the results of the dockets to understand. You can dislike the utilities and call it all their fault, but there were a lot of parties that played into the rate cases, mostly looking for short term relief, now the bill is coming due.