Cities and Utilities: What's the Problem?

Advocates of team-based problem-solving claim that 80% of getting to a good solution is correctly defining the problem. The rest is just tapping the wisdom of the team in a step-wise process that takes practice and good facilitation.

So, let’s consider what may be the problem preventing effective city/utility collaboration in the development of local clean energy resources. We could start with the four dimensions of organizational performance, i.e. tasks, people, culture and structure. For the sake of argument, let’s ignore the first three for now. Is there a structural problem?

Come to think of it, how is the city/utility relationship structured? There are two basic models. At the risk of over-simplifying, they involve “in-sourcing” and “out-sourcing”. Municipal utilities generally involve either one or the other. In-sourced utilities are staffed with public employees organized in familiar though perhaps diverse structures. Governance is generally by elected bodies accountable to the local community.

The other case involves for-profit companies operating in the framework of a franchise granted by the local jurisdiction. In some cases, e.g. waste collection or distribution of energy imports, the utility’s prices, or “rates” (per volumetric unit of service), are regulated locally. In other cases, e.g. energy from vertically integrated systems of wires and pipes, prices and rates are regulated by US state agencies.

The latter case has become problematic because it is now economically feasible to generate and store fuels and electricity on a much smaller scale than before. This creates an opportunity for local economies and local energy users, but on the flip side it poses a threat to the regional utility’s business model.

A related threat is to the state’s ability to implement its policies through its regulatory authority over cost recovery and utility profitability.

Simply put, the opportunities are expanding. They are a result of global market/industrial development and trade, which neither the utility, the local jurisdiction, nor the state can effectively influence. These stakeholders can, however, deal with the problem...by first defining it.

For the sake of discussion, let's suggest that the problem is not merely structure but rather derives from inflexibilities in the current structure. What are they?

The relationship between regional utility and city is typically structured via a legal agreement that grants the utility a “franchise”, i.e. long-term agreement to sell its product to local energy users. The utility’s service depends on a significant investment in the local infrastructure that it owns. In this case ownership is power. Unless the city is prepared to undertake responsibility for a service that is well beyond its competency to provide, it has no leverage in franchise agreement negotiations with the utility.

Meanwhile, the utility is under political, economic and regulatory pressure to “standardize”. Its obligation to state regulators to serve all customers in its franchise area can be interpreted as a requirement that all customers receive the exact same service regardless of differences in costs incurred under diverse local circumstances.

So, the stakeholders, state, local and utility, are all in a mutual bind that precludes local innovation, economic optimization and resilience. There are emerging, partial and potential long-term work-arounds, e.g. Community Choice. Will Community Choice programs engage with their member jurisdictions regarding local clean energy resource deployment? It doesn’t seem to be happening yet. The jury is out. It is a possibility, not a trend.

Meanwhile, what might loosen the mutual bind? What exactly is the problem? What is the biggest symptom of inflexibility?

When the world around you is changing dramatically, and you can’t make any adjustments, you have a problem. The appropriate vehicle for adjustments in the relationship between utilities and cities is obviously the franchise agreement.

The franchise agreement between giant grid owners and local jurisdictions is essentially non-negotiable for the reasons cited. What about making it negotiable in specific appropriate aspects? For example, the state could do this through legislation. State intervention could be designed to address the escalating economic sub-optimizations that are extremely costly not only to local economies already but to state economies longer term.

For example, if a city has a local retail solar industry and consumer interest in on-site solar and storage, why not allow on-site systems to be sized to both serve the site and/or deliver surplus electricity to the local grid? Current either/or policies intended to optimize local grid economics severely penalize the economics of on-site solar, especially in cases where the site owner has invested in energy efficiency measures and decarbonizing fuel substitution measures. To the extent they penalize on-site solar they will also penalize on-site energy storage. Together these two local energy investments are key to local energy resilience.

In an era of big data, the trade-off between local economic optimization and utility system-wide optimization can be readily informed by data-driven economic analysis. There is no motivation to do the analysis now because no adjustments are possible. But if local energy franchise agreements were mandated by the state to consider the possibility of city/utility collaboration on local economic and carbon footprint reduction goals, the parties would be motivated to engage.

In California, state regulators are starting to assert jurisdiction over Community Choice business planning, citing the need for consistency between the supply plans of all energy service providers. Does this solve a real, on-going problem?

Maybe. But it does place further emphasis on the old electric supply business model which is premised on every local jurisdiction importing every bit of its electricity. Why not instead, or at least in addition, have a process to drive consistency between a giant utilities’ participation in local clean energy resource development and a city’s? The current lack of consistency and the limited flexibility to address it is the real problem.

As a modest first step toward a solution, why would the state not encourage, or even require, cities and their energy service franchisees to meet once a year to determine how well aligned the service is with the city’s energy resilience and decarbonization goals?