Our Power, Our Choice

The Government vs. Business Myth

A common argument you may hear about why we shouldn’t have Community Choice Energy is that “government” is inefficient compared to “business” in delivering something we need. This argument is a myth, and here is why: a monopoly utility is not a “business” and a CCE is not the “government.”

The efficiency we associate with business is for commercial companies that compete in a market, with that competition driving cost down and quality up. California investor-owned utilities (IOUs) are monopolies that are regulated by the California Public Utilities Commission (CPUC). They have not had to compete for your electricity dollar. A well-known phrase within the IOUs is, “We only have one customer—the CPUC.”

As for-profit corporations, IOUs are motivated to maximize the financial returns to their shareholders. Mark Hughes, a former IOU employee, has written a wonderful article (see last week’s blog) on how the incentives for an IOU are completely opposite those of a commercial business. In brief summary, his points are:

  • IOUs are paid a guaranteed rate of return on their capital investments, which incentivizes them to build as expensively as possible.
  • IOUs have no incentive to shop around and often purchase overpriced power. Over the last 10 years, SDG&E has typically paid well above market prices for wind and solar power contracts.
  • IOUs know how to grow profits by outwitting oversight. We in San Diego pay the highest rates in California (and some of the highest rates in the nation) while the CPUC complains that oversight is difficult rather than taking the IOUs to task.
  • IOUs have no real incentive to build renewable power rather than fossil fuel power.

The result is that we, the consumers, do not have the power of the market behind us to get the best quality (think clean energy) and the lowest cost. Mark points out that from Jan. 1, 2013 to this year, the Consumer Price Index has risen 6.7 percent, while SDG&E's commercial electricity rates increased between 48 percent to 67 percent, ten times more than the CPI.

On the government side of the argument, let’s recognize first that “government” is a very broad term, encompassing many different functions with many different economics. CCEs are in a category that work similarly to not-for-profit companies. You are already served by some of these, such as the agency that delivers water to your home. These agencies are funded by revenues from the service they provide, not by taxes. They are operated by professional employees and management with expertise in their industry. They are overseen by local elected officials who are accountable to you, their constituents.

We can investigate the efficiency of California electrical utilities and CCEs by looking at actual performance.

One issue that comes up is that IOUs have long-term contracts for power that go back ten years or more when energy prices were much higher than now, while most of the sixteen operating CCEs are only a few years old. However, California has a number of smaller municipal electrical utilities (“munis”) that have been in business for a long time. (IMPORTANT NOTE: a CCE is NOT a muni—a muni buys or generates its power and delivers it through their own local grid; a CCE buys or generates power but it is delivered through the grid of the IOU.) Munis will have a similar history of power purchasing as the IOUs.

The following chart is from the 2017 annual report of the Sacramento Municipal Utility District:

The chart compares typical electric bills for five munis and the three California IOUs as of April 1, 2018. The three IOUs have higher rates than all the munis listed, and SDG&E has the highest rate. This chart gives you some idea of how much of your electrical bill is NOT due to the IOUs’ long-term power contracts.

And of course, you can compare rates and percentage clean energy for the sixteen operating CCEs against their local IOU with our links on the Resources page. You will find that CCEs provide more clean energy at the same or slightly lower rates in all cases. There is no evidence from this that IOUs have an advantage of efficiency.

Speaking to our local interests, the incentives for SDG&E were never for the best possible price for the cleanest possible energy. The government vs. business argument is a myth: it ignores the lack of market incentives for a monopoly like SDG&E, and also is not supported by the performance of municipal utilities and existing CCEs.