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Utility Accountability: How Do Utilities Make Money? [1]
['J.C. Kibbey']
Date: 2024-07
The way we generate and use electricity is changing fast. The transition in how we generate electricity is being driven in large part by the growing share of increasingly cheap renewable energy. Compared to twenty years ago, the U.S. generates 66 times more wind energy and 144 times more solar energy.
New technologies are also radically changing the way we use power: electric vehicles, energy storage, super-efficient electric heating and cooling systems, and software that can manage energy use in real time. These technologies can not only save us money and make us more comfortable; they’re also cleaner. To avoid catastrophic climate change, we need to scale them up as quickly as possible. That means changing the way we think about the system that gets electricity from the place it's generated to the plug in your home: the electric grid, or simply "the grid."
Developing a Modern Electric Grid
All these advances mean we need to continue to develop our electric grid. Fifty years ago, the grid sent power in one direction, from point A to point B: from big, centralized fossil fuel power plants to homes and businesses. Today, rooftop solar panels have turned homes and businesses into thousands of little power plants, selling electricity they don’t use back to the grid to supply their neighbors. Smart appliances let us to dial our energy use up and down to manage demand and save money. Batteries can store electricity when it's plentiful (like the middle of the night) and use it later when it's scarce.
It's like the difference between listening to the radio and using the internet. On the radio, information flows in one direction—from the radio station to you, who can only passively listen. That's like the old-school electric grid. On the internet, you might listen to a song on YouTube, leave a comment about it, text it to a friend, then share it on Facebook; you can do all this on multiple devices at home and at work. Information is constantly flowing back and forth between many users. If one server goes down, traffic is instantly rerouted around it to keep your connection going. Our electric grid has the potential to work more like the internet: distributed, resilient, and responsive.
But our grid hasn’t kept up to its potential—and it's holding back our development of clean energy and the deployment of the innovative, clean technologies. Too often, utilities are incentivized to build too much of things we don’t need and not enough of things we do need.
What’s Holding Us Back
Why? In part, because the way utilities are regulated and paid has hardly changed in a hundred years.
Here’s the basic idea behind this century-year-old utility business model: utilities make profit by investing in the infrastructure, like pipes and wires, that provide energy services to customers.
In some states, utilities own and operate power plants too, but in Illinois power plants are required to be owned by different companies from the poles and wires that bring electricity to your house (although power plant owners and utilities in some cases are both subsidiaries of the same company, as is the case with ComEd and Exelon).
Utilities are regulated monopolies, meaning they’re the only companies legally allowed to deliver electricity or gas to people within a geographic area. In Illinois, electric utilities are required to deliver reliable electricity that’s as clean and low-cost as possible—in the words of the law, “adequate, efficient, reliable, environmentally safe and least-cost public utility services”. In exchange, utilities are allowed to recover their costs, plus a profit.
How the Process Works
The regulators at the Illinois Commerce Commission (ICC) are charged with reviewing and approving these costs to make sure utilities’ spending is “prudent and reasonable.” If the ICC finds that their spending meets this standard, utilities are granted a “reasonable opportunity” to collect it back from us on our bills. If that spending isn’t prudent and reasonable, utilities aren’t allowed to collect it on our bills. (These rules apply to investor-owned utilities like ComEd and Ameren; municipal utilities and rural cooperatives operate differently).
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[1] Url:
https://www.nrdc.org/bio/jc-kibbey/utility-accountability-101-how-do-utilities-make-money
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