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Article Excerpt
Introduction
In 2001, the Colorado Public Utilities Commission (PUC) required the state's largest utility to install a wind power plant near Lamar, Colorado. The PUC operates through a formal, technical process that has usually favored the utility. Therefore, the wind power decision, issued over the vigorous objection of the utility, represented a significant victory for the environmental groups that had intervened in the regulatory process and pushed for the wind plant.
In the world of electric utility regulation, this remarkable outcome appears to be a David-slaying-Goliath story, rare but not unprecedented. However, rare outcomes can sometimes point to important but previously ignored features of policy making, so it is worth investigating why this rare outcome occurred. What makes this case rare is the now commonplace finding within studies of interest groups and regulation that private groups, especially those associated with business, can skillfully use government agencies to further the narrow private interests of the groups rather than the broader public interests that make up the agencies' mandate. The groups use the agencies to exclude competitors and otherwise increase the groups' profits (Lindblom & Woodhouse, 1993; Lowi, 1979; the classic article on "capture" is Stigler, 1971). Empirical work since those classic pieces suggest that businesses do not always get their way when dealing with regulatory agencies (Gordon & Hafer, 2007, and references therein). Nonetheless, the particular case of state-based regulation of electric utilities still shows considerable evidence of regulatory capture (Upadhyaya & Mixon, 1995). The causal mechanisms can be as much sociological as economic; the regulatory agencies depend upon the regulated utilities for much of the data they need, the regulated utilities spend considerable resources attending to the needs of the agency, and both sides employ engineers, economists, and attorneys with similar professional backgrounds who have sometimes worked in both sectors. Add to this situation the great financial and personnel advantages the utility has vis-a-vis its environmental opponents and we see why a conventional interest group analysis would almost never expect the utility to lose. In this case it did, and the reasons for its loss suggest more than a random fluke in the regulatory process.
This case also sits at the intersection of highly consequential practical and theoretical problems. At the practical level, if the reasoning that the PUC employed in this Case became more widespread, that could lead to nothing less than the possible transformation of the electricity system in the United States and beyond. An industry with gross revenues in excess of $300 billion per year (U.S. Department of Energy, Energy Information Administration, 2006a, p. 9) and capital investments greater than that, the electricity system constitutes a significant part of the economic, political, social, and environmental life of the country (e.g., Nye, 1990). Not surprisingly, government policy has been deeply involved in every aspect of the industry's development and operation (Hirsh, 1999). While that policy system has been (also not surprisingly) highly fragmented, its regulatory component has rested on a set of technological, economic, and political assumptions that have remained stable for many decades and across jurisdictions. Though those assumptions have come under diverse challenges in the last 30 years (Hirsh, 1999, presents much of this history), utility regulators still confront a world in which: (1) fossil fuels generate most electricity, (2) regulators ostensibly base their decisions on precise calculations of the prices of competing alternatives, (3) competing interests present their views in a formal, technical policy process at least partly insulated from electoral politics, and (4) the utilities they regulate are their most important source of external technical advice. The Lamar wind case challenges some of these assumptions, which would lead to changes in regulations and, in turn, to the evolution of the electricity system itself.
In the last couple of decades, many states have already changed their system for regulating utilities, moving away from legal monopolies subject to price regulation and toward retail competition among different generators (Hirsh, 1999). This restructuring process varies from state to state and so defies a general description. Twenty-three states have restructured, though eight of those have suspended their restructuring process (U.S. Department of Energy, Energy Information Administration, 2007). Colorado is among the majority of the states that still use the traditional system of a regulated monopoly. Even in restructured systems, states still have regulatory agencies for the utilities and those agencies undertake tasks that require similar cost calculations involved in this case, so the broader conclusions concerning such regulations will apply everywhere.
At a theoretical level, the case develops Kingdon's (2003) notion of "softening up," the idea that advocates of policy change need to state their case repeatedly before policy makers will take them seriously. In this case, I utilize the concept of "participation equity," an idea from one of my case informants, as a variation of softening up, the idea that policy advocates become credible through perseverance and repeatedly making their case to regulators. Participation equity lacks the bludgeoning connotation of softening up and instead conveys a notion of buying into or attaining ownership of a policy process. This case suggests the hypothesis that participation equity, by legitimating new channels of ideas into regulatory institutions, can result in institutional learning among decision makers.
The economic calculations that undergird utility regulation pose immense difficulties and so highlight the importance of credible sources of data and analysis for the regulatory agencies. The contested nature of this knowledge in turn points to the strengths and weaknesses of an institutional learning framework for understanding and addressing those difficulties. Regulation in this case confronted problems that we can reasonably expect to continue cropping up in future cases because of the the growing political and technological dynamism in the field.
Changing the Electricity System
American utilities use coal to generate about half of their electricity, followed by natural gas and nuclear power, which generate a little less than one-fifth each. The rest comes from large dams, oil, and about 2.3 percent comes from nonhydro renewables (U.S. Department of Energy, Energy Information Administration, 2006a, p. 1). The current fuel mix for the investor-owned utility in Colorado is similar, with about 57 percent coal and 37 percent natural gas, no nuclear, and the rest coming from hydro and wind (Xcel Energy, 2008). Renewable energy advocates, now joined by environmentalists concerned with global warming, have long argued for replacing a large fraction of the conventional sources of electricity with renewable sources such as wind, solar, geothermal, and biomass. Because those sources make up so little of the existing generating capacity, advocates have confronted the problem how to make such a significant change in a huge system. The proposed wind farm in this controversy was for a 162 MW facility in eastern Colorado, near the town of Lamar, a rural, high-plains area.
Renewable energy advocates use a two-part narrative to describe a transition away from fossil fuels (this schematic is a distillation of typical high-profile sources of renewable energy advocacy, such as ASES, 2005; AWEA, 2005; Bradford, 2006). First, in the short term, government policy must promote renewables by mandating their use, subsidizing them, or both. Second, the policy-driven use of these technologies will provide renewable energy firms with greater manufacturing experience that, combined with government and industry-funded research and development will push the prices of renewable energy steadily lower so that they will soon outcompete fossil fuels based on price alone. At that point, simple assumptions concerning market efficiency imply that utilities will accelerate their shift to renewables and steadily replace their fossil fuel generation.
This scenario is neither merely special pleading nor as far-fetched as it might seem. All conventional energy sources have enjoyed extensive subsidies, ranging from the tens to hundreds of billions of dollars, depending on how one does the calculation (Goldberg, 2000, especially p. 16). Renewable energy has just as good a claim to such largess as coal or natural gas, and perhaps better, given the environmental benefits that renewables provide.
Experience is also confirming the prediction of lower prices for renewables over time, with utility-scale wind turbines by tar the most successful. The cost of electricity from wind dropped by more than a factor of five, to around 4-6 cents/kwh by 2005 (Aabakken, 2006; AWEA, 2005). The precise cost of wind power depends on the quality of the wind resources at a specific site, complicating general statements concerning its costs. Despite those uncertainties, wind power is clearly getting into the cost range where it is plausibly competitive with more expensive fossil fuel generators, such as natural gas plants when natural gas prices are high.
Assumptions concerning market efficiency suggest that as wind drops below some break-even point, utilities in states that still have traditional regulated monopolies will, with the PUCs' blessings, quickly shift all their marginal investments to wind. The Lamar wind power case demonstrates the flaws in such assumptions concerning market efficiency and PUC decisions. Simply put, straightforward concepts like the cost of electricity from wind or natural gas turn out to be contested numbers. The problem is not just one of uncertainty. It is instead rooted in the complexities of how one counts costs, who has the credibility to present relevant data and analyses, and how partisans on both sides argue and negotiate all these factors in a highly structured and formal policy process.
The PUC regulatory process does, of course, come to a conclusion concerning these numbers, and the broad trend of costs plays a significant role in that decision. If wind power still cost about 50C/kwh, all the disputes over methods of calculation, described below, would make no difference to the PUC decision, and wind would lose. However, once the price of wind comes close to that of fossil fuels, the PUCs have to make more fine-grained judgments concerning quantitative claims that partisans contest aggressively. While the final decision rests, on the surface, on simple claims of cost, the process of getting to that decision...
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