A raging controversy regarding Oncor Electric Delivery's application to have customers pay $93 million for nearly 1 million "smart" meters purchased in 2004 and 2005, which do not meet the state's new smart meter standards, shows one of the biggest benefits to customers from competition in the electric industry -- customers don't have to pay for unwise or plain dumb decisions made by electric companies.
First, some background. In Texas, part of the electricity industry is open to competition, which means that companies are no longer guaranteed a "rate of return" on their investments as was the case under monopoly regulation. Specifically, the generation part of the industry is open to competition, and so is the retail portion.
However, the delivery of electricity, which is the business Oncor is in, remains regulated, in the same way it was 100 years ago. In general, that means Oncor is entitled to recover its prudently incurred costs, and must earn a mandatory rate of return on all its investments, even if the investments turn out to be bad decisions, in some cases.
In 2004 and 2005, Oncor (known as TXU Electric Delivery back then) bought 898,000 remote-control meters in a bid to create a "smart" electricity system. However, at that time the state had not finalized rules governing the minimum functional requirements for smart meters. And, it turns out Oncor's 898,000 meters now fail to meet those final standards, meaning the meters can't be used to deploy a smart grid to residential customers.
However, Oncor still wants customers to pay $93 million to recover the costs of the archaic smart meters, arguing that buying the meters even before final standards were adopted was a prudent business decision designed to save customers money. Oncor said it had no idea the meters would be rendered useless for residential customers in only three years.
The Staff of the Public Utility Commission and several other groups are opposing Oncor's request to make customers pay for the outdated meters.
But the key fact is if Oncor were not a regulated utility, it would not even have the ability to ask for $93 million to cover its poor choice.
In other parts of the Texas electric market, customers don't pay for bad decisions, because competition shifts risks from customers and places it on investors. That's because under competition, electric companies don't have any guarantee of cost recovery, or a mandated rate of return. If businesses in competitive market don't run their business soundly, they simply lose money -- they can't stick their hand out and expect customers to foot the bill.
Consider, for example, something very similar to the Oncor situation, except relating to the Texas retail market, where competition exists. Although Texas retail energy providers do not offer smart meters (since companies like Oncor handle that), retail companies do offer several similar smart grid applications -- things like smart thermostats, in-home electric usage monitors, and other devices that interact with the smart grid. Like smart meters, these technologies may become obsolete over time depending on how fast technology evolves.
Imagine that a hypothetical retail electric company, called Imaginary Power, spent $100 million giving its customers smart thermostats to attract customers and help them save money. Then, suddenly, changes in how the smart grid works made the smart thermostats obsolete (perhaps by using a new, different communication method), meaning customers could no longer use the smart thermostats to save on electricity.
Because of competition, Imaginary Power would have no right to try and recoup its cost for the $100 million spent on the obsolete thermostats. While it could try and recover costs through higher prices, customers would be free to move to a competitor with lower prices, and customers would not be saddled with paying for a dumb business decision.
The same is true when it comes to power generation, which is open to competition. Thirty years ago, when generation was still a monopoly with no competition, customers paid billions of dollars to regulated utilities to pay for abandoned nuclear power plants, many of which were stopped and scrapped in the middle of development because, after Three Mile Island, nuclear power fell out of favor. But even though the plants weren't finished, customers paid billions to utilities for the costs of the plants.
That could not happen today, at least not in Texas where there is competition. And the comparison could not be more timely as the federal government debates climate change, which could make some types of power plants obsolete.
For example, if the government does end up regulating carbon emissions, building a coal plant right now will end up being a dumb decision, because it will cost too much money. However, if the coal plant is built under traditional regulation, customers will be stuck paying for an unwise investment in coal, because utilities have the right to recover costs, even if carbon regulation makes the coal plant a white elephant.
But under competition, the risk that the coal plant would become uneconomic lies with the generator, not the customers. If a generation developer decides to build a power plant in the wrong area, or decides to use the wrong fuel (like picking coal just before the government decides to place a tax on greenhouse gas emissions), it's the company that pays the price, and customers are shielded from any bad decisions. Under competition, a generator can't make customers pay to compensate it for building an obsolete coal plant; shareholders have to foot the bill.
While Oncor's $93 million request for archaic meters will have to be adjudicated according to the rules of a regulated system, Texas customers can at least know when it comes to generating and retailing power, they are shielded from such imprudent costs thanks to competition.