The Utility Preapproval Mess: Socialism Republican Style
By Roger Koopman
When Travis Kavulla and I were still serving on the PSC, we often made the point that protected utility monopolies like NorthWestern Energy were dedicated to “privatizing their profits by socializing their risks.” Profit — based on efficiency, performance and hard work — is a very good thing, that incentivizes every competitive and free enterprise. But “profit” based on risk avoidance, protectionism and gaming the government system is the opposite of free market economics, and like socialism in general, rewards failure and punishes the consumer.
HB 99, currently before House Energy, Technology and Federal Relations Committee, would go a long way to fix the perverse, socialistic system of utility monopoly regulation that currently holds sway in Montana, by repealing a terrible, monopoly-coddling process that provides preapproval by the PSC of the generation assets NWE seeks to purchase. This aspect of utility regulation law literally turns incentive-based market economics on its head, and passes all the financial risk of a utility’s bad decisions and over-payments onto the ratepayer. Worse, current law actually rewards utility monopolies like NorthWestern for knowingly paying too much for an asset, by providing approximately 10 percent net profits for every extra dollar of cost the PSC allows in preapproval. There is no going back.
Most utilities across the nation do exactly what any private enterprise is expected to do: make prudent, business-smart decisions on their acquisitions, based on an extensive process of analysis and due diligence. They then live with those decisions on a risk/reward basis. But not NorthWestern Energy! Before they buy anything, they are guaranteed that there will be no risk attached to their decision. The PSC’s preapproval ensures that all bad outcomes will fall on the ratepayer, while the utility will continue to have its customers cover all costs plus 10 percent. So where is the incentive for NorthWestern to choose wisely and buy low? The answer: there is none.
Preapproval is an ancient relic from “deregulation” days, when Montana Power couldn’t own power plants and was getting all its electricity from outside sources. It has no relevance to the post-deregulation energy marketplace, and yet NorthWestern’s lobbyists have been able to successfully keep it in statute for 14 years since deregulation ended. The company has become weaker, not stronger, as a result of being artificially insulated from normal business risk. They continue to successfully socialize the risk through the power bills they send to all ratepayers, while reaping windfall profits on their bad decisions. Tragically, there are numerous examples of this.
The reason this anti-market, anti-consumer, socialistic statute remains on the books is not because the liberal Democrats embrace it, but because the purportedly conservative, free market Republicans do! Republicans just don’t get it when it comes to market-based, incentive-based regulation of state-sponsored monopolies like NorthWestern Energy. For years now, GOP legislators have labored under serious misconceptions about utility regulation and the fundamental difference between risk-overcoming competitive enterprises and risk-avoiding, protected monopolies.
I keep wondering when the light will go on, and these otherwise conservative Republicans will start reminding themselves of what they say they believe in, regarding freedom versus socialism. I keep hoping that in the “next session,” Republicans will finally leap over the chasm they created between their free market beliefs and the way they swaddle NorthWestern Energy in a blanket of risk-shifting protectionism.
HB 99 is that opportunity for Republican legislators to take a stand for good, market based economics that not only serves and protects the interests of captive NWE consumers, but also prompts the utility itself to operate as a proud, confident and self-reliant enterprise, willing to assume its own business risks and become stronger and more efficient in the process. On the energy utility front, it’s time to replace the lose-lose of socialism with the win-win of freedom.