This week we have a guest post for readers. The following article was written by S. Michael Holly, the Chairman of Sorgo Fuels & Chemicals, Inc. Sorgo has developed technology for the production of ethanol, electricity and protein from sweet sorghum. Mike was formerly an alternative energy engineer and business analyst with the Minnesota Department of Energy and Economic Development. He holds masters degrees in chemical engineering and business administration from the University of Minnesota.
My standard disclaimer applies: Publication of a guest post does not imply endorsement. Rather it indicates that I think the subject matter is worthy of debate and discussion. However it is clear the the US government discriminates against various energy sources. Among renewable electricity producers, some receive higher tax credits and subsidies than others. This has long been the case with biofuels as well. Governments preferentially subsidize certain pathways that in many cases have little chance of commercial success, yet they have allowed themselves to be fooled by vested interests.
U.S. Renewable Energy Industry Dominated By Monopolism and Cronyism
S. Michael Holly
More than 40 world governments, including the EU and China, require electricity monopolies to offer non-discriminatory electricity prices to independent power producers whose generation qualifies for the meeting of renewable energy mandates. Prices for so-called “feed-in tariffs” (FITs) are set at the typical costs of the technology (e.g., wind, solar, biomass, geothermal and small hydro) and low enough to discourage over-production. Just that simple.
In contrast, the U.S. has made renewable energy mandates an option for the states, who in turn have almost all given control of the mandates to their electricity monopolies (e.g., utilities). Typically, these monopolies use subsidized wind power either by building the generation themselves or conducting informal or formal bidding that is readily rigged to favor higher-cost bids from themselves and cronies. For example, Northern States Power (NSP) selected four $300 million plus wind projects last year: two owned by themselves and two led by a former NSP employee.
The U.S. is subverting its own federal and state laws that require utility monopolies to offer non-discriminatory prices to ALL independent power producers, especially those using renewable energy and cogeneration. In 1973, the U.S. Supreme Court ruled the Sherman Antitrust Act required utility monopolies to provide competitors with access to essential transmission and distribution lines. The 1978 U.S. Public Utility Regulatory Policies Act (PURPA) requires utility monopolies to pay qualifying facilities (QFs) using renewable energy or cogeneration at the utility’s cost of adding generation (i.e., “avoided cost”).
The U.S. cedes control of retail electricity markets to the states, who allow their monopolies to control prices. Regulated states allow utility monopolies to low-ball prices paid to QFs by claiming they don’t need more capacity. If the QF contests the price offer from the utility, regulators force them into expensive and utility-biased regulatory hearings. Sometimes regulators set avoided costs with discriminatory bidding. Since the 1990s, 17 states deregulated their electricity industries while repealing state PURPA laws. But politically-connected utilities like Enron were allowed to rig the deregulation rules. Utility spinoffs formed deregulated monopolies. The U.S. has done little to reform the deregulation rules.
The U.S. Congress has even tried to repeal federal PURPA law for utilities in regulated states (without adding anything to replace it for QFs). This could leave QFs with legal rights to only the 17 deregulated markets. Congress has to know from the 2000 California Energy Crisis that these markets are dysfunctional. Our biomass company led a protest with cogeneration interests during the writing of the Energy Policy Act of 2005. However, Congress still used the bill to gut PURPA by allowing utility monopolies in regulated states to circumvent paying QFs anything at all, if they shipped the generation to one of the deregulated states.
The U.S. allows the states to decide whether they use renewable energy at all. Renewable energy mandates can be rationalized by the failure of states to create sufficient regulation or competition needed to encourage monopolies to build or purchase even low-cost renewable energy. Some 33 states have renewable mandates, including virtually all of the 17 deregulated states, but only about half of the 33 regulated states. Most states without renewable energy mandates are in the southeast. In 2012, most renewable energy was added by just four deregulated states and six regulated states.
The U.S. has favored mainly wind power for meeting state renewable energy mandates and natural gas to back up the wind. In 2012, wind turbines captured 45% of U.S. capacity additions at a capital cost of over $30 billion (although the intermittent generation can only produce about 15% of new electricity). Natural gas was second at just over 40% of new capacity at a capital cost of about $10 billion. More recently, homeowners in California and Arizona have been adding solar photovoltaic (PV), and utilities in the southeast have been building their own biomass power plants.
The U.S. hides the full costs of the wind power behind large complicated subsidies (while hiding the full societal costs of natural gas behind environmental exemptions). The Federal “wind energy” tax credit and five-year accelerated depreciation (based on the time value of money) were designed with help from Wall Street to surreptitiously reduce the costs of capital-intensive wind power by about 60% to about four cents per kilowatt-hour while providing complicated tax shelters for the passive income of the wealthy (Note: the tax credit expired last year, but the wind industry is lobbying for renewal). In addition, the Federal Energy Regulatory Commission doesn’t require the price of wind to include the additional transmission and integration costs needed by the grid to compensate for intermittent output.
The U.S. discriminates against low-cost base-load renewable energy, like biomass, geothermal and small hydro, and also cogeneration by undercutting the prices with large subsidies favoring wind, and sometimes states even mandate wind specifically. Moreover, utilities practice predatory pricing by offering lower prices to large consumers, especially those that threaten to use cogeneration, and then charging higher rates to smaller customers.
The U.S. is also discriminating against potential new base-load disruptive technologies (e.g., cold fusion), not only by reducing the costs of wind and gas, but also by promoting monopolism and cronyism. Risk investors are discouraged by the need to compete with subsidized wind prices as low as three cents and know electricity monopolies could block them from the market at any time (especially since patents often offer limited protection). The U.S. spends less on research and development of electricity technologies than dog food. Technological innovation, the key to increased productivity and economic growth, is low in the industry.
The U.S. allows states to let electricity monopolies satisfy renewable energy mandates and needs for gas generation by just building it themselves at their own discretion without any competition from independent power producers. For example, Warren Buffet’s Iowa utility MidAmerican Energy has been building thousands of megawatts of wind power capacity with billions of dollars of ratepayer money and without any competitive bidding (under protest from independents).
The U.S. also allows states to let electricity monopolies satisfy needs for generation through bidding that discriminates against lower-cost competitors. In the 2008 report “Competitive Procurement of Retail Electricity Supply: Recent Trends in State Policies and Utility Practices,” the National Association of Regulatory Utility Commissioners said “the utility’s own investment in a new generating resource may compete against offers from third-party power suppliers.” When wind developers and other independent power producers (e.g., Electric Power Supply Association) are able to politically pressure the state and monopolies to issue informal or formal requests for proposals, the monopolies can just rig the bidding to favor higher-cost bids from their affiliates or cronies by giving extra credit for arbitrary non-price criteria.
The U.S. has created a conflict of interest by allowing states to rely on the integrity of monopolies while judging the arbitrary non-price factors of their competitors during bidding. Examples of non-price factors include the integrity and credibility of ownership and management, track record, uncertainties involving project development, project operation and environmental impacts. Bidding proponents argue subjective non-price criteria are necessary to weed out insincere bids that would often result from competitive bidding that awards bids by low price. But bidding doesn’t work fairly either way.
The U.S. doesn’t require that state regulators actually regulate. Generally, regulators don’t even monitor utility purchases unless the utility is purchasing supplies from its own production affiliate and even these purchases are not challenged. Some states create a conflict of interest by allowing the bidding to be monitored by consultants hired by the utilities themselves. So-called “independent monitors” serve those that pay their fees (e.g. like Enron hired Arthur Anderson). In addition, consultants admit they cannot gain access to all of the decision making, especially that inside the minds of the utility bid writers and evaluators.
The U.S. use of rigged bidding introduces the potential for corruption and collusion. Both public and private bidding of other products has resulted in payoffs and firms conspiring to take turns being the winning bidder (even while most continue to bid). The American Wind Energy Association (AWEA) has been a suspicious venue for cooperation between wind developers and utilities. Instead of seeking feed-in tariffs for all renewable energy, AWEA has supported a combination of mandates and subsidies for wind energy combined with monopolies for utilities, including the repeal of PURPA. This arrangement only makes sense if the independent AWEA members making the deal are benefiting from bidding by utilities.
The U.S. use of self-building and rigged bidding violates federal and state antitrust and PURPA laws because it allows the monopolies and their cronies to receive more opportunity and higher prices. Since most independent competitors receive less opportunity and suffer more expensive losing bids, they are pressured to bid even lower and cannot compete over the long term. Moreover, the high cost of bidding favors large companies. The “wind energy” tax credit violates at least the spirit of antitrust and PURPA laws.
The U.S. allows regulated states to force independent power producers through the following convoluted, expensive and discriminatory regulatory process controlled by the utility monopolies:
(i) spend (waste) up to millions of dollars developing power projects (while knowing the process is rigged),
(ii) wait up to years for the utility to admit they need to add capacity and specify the type, and for regulators to approve the need for the generation,
(iii) lobby the state to require the utility to request bids and not just build the generation themselves,
(iv) spend (waste) about a half million dollars on a transmission study and connection fees and some more money submitting a bid,
(v) wait up to years for the utility to rig the bidding with arbitrary non-price criteria in favor of bids from themselves and cronies,
(vi) wait up to years for regulators to finish acting like they are regulating before giving approval to what the utility wants, and
(vii) decide not to file a lawsuit against the utility and regulators since the state allows both to charge their legal defense to ratepayers.
Examples of monopolism and cronyism can be provided by NSP, the Minnesota regulated utility of Xcel Energy. Xcel has been the number one wind energy provider in the U.S. for the last ten years and a member of AWEA, which named them its “Utility of the Year” for two of the last five years. NSP supported a 2007 Minnesota law that violates PURPA by requiring the utility to purchase virtually all additional renewable energy from wind. NSP owns almost a third of their wind power and has selected many bids from cronies.
For example, NSP selected four wind bids late last year: two from RES Americas that were wired for future ownership by the utility, and two from Geronimo Wind Energy that were represented by Betsy Engelking, a former senior manager in Xcel’s resource acquisition department.
In 2011, Geronimo won a bid from NSP where Ms. Engelking worked at the time and soon after hired her as Vice President. Ms. Engelking also worked for the Minnesota Public Utility Commission (PUC) and represents just one of many who have benefited from the revolving door between regulators and utilities.
Since utility bidding is confidential, it isn’t publicly known if any of the winning bids had the lowest prices. However, it was clear the utility and Minnesota PUC ignored state laws requiring a determination of the full costs of the winning bids, especially transmission and integration costs, during the 2013 bidding.
Our biomass company, which has been kept out of the U.S. electricity market for 20 years, complained to the PUC with no response and was unable to raise enough money to sue NSP and the PUC for ignoring the state laws. However, a group of small established Minnesota wind developers that also tried to complain to the PUC to no avail, is now litigating in the courts against NSP for ignoring other state laws required by the regulatory process.
NSP admitted they favored the bids on an “ownership perspective.” It is not surprising that NSP believes they and their cronies are better owners, but it is conflict of interest for the state to allow them to judge the ownership of the competing bids. Moreover, NSP has proven itself to not be the best judge of character since one of their favorite bidders between 1997 and 2004 was former AWEA board member Greg Jaunich, who was sent to prison twice for overcharging the utility and defrauding wind project investors.
Recently, our company took another look at the bidding by Minnesota’s largest utility after 15 years of avoiding the state’s bidding. In 1997, we had complained to the PUC about regulator tolerance for NSP’s unethical practices:
- The PUC allowed NSP to deny a $200,000 conservation project to St. Paul Neighborhood Energy Consortium in 1994 even after the Department of Public Service ruled that an NSP employee had threatened to reject their bid if they opposed the utility’s nuclear waste storage bill.
- The PUC ignored a complaint against NSP by Minnesota Windpower, who also was an opponent of NSP’s nuclear waste storage bill, after the wind company had initially won NSP’s first wind bid for $25 million in 1994, but NSP rebid the project to a California developer, who then had problems adapting windmills to Minnesota’s cold weather and went bankrupt.
- The PUC ignored a 1994 complaint by one of about ten losing bidders for NSP’s only cogeneration bid claiming that the utility allowed the winning bidder to sign the final contract after legislation favored the project with a $6 million per year Minnesota property tax exemption.
- The PUC ignored a losing wind bidder’s 1995 complaint that NSP had awarded the utility’s second wind project of $100 million to Zond, even though Zond used a wind turbine design that had not been proven on any commercial scale. The contracts were never made public or examined by the PUC, fueling concerns that NSP may have allowed only Zond to bid low by holding ratepayers financially responsible in the event of failure.
- The PUC ignored a losing biomass bidder’s 1995 complaint that NSP had rejected their lower price bid on a technicality and awarded the first biomass bid to a $260 million alfalfa project that used technology developed by NSP. The alfalfa project, which was rumored to have a bid price greater than 13 cents per kilowatt-hour, later got special tax breaks and sought to hold state taxpayers financially responsible for the unproven technology because they said they couldn’t find private investors at their bid price.
These examples of bid rigging are likely just the “tip of the iceberg” since they are only the obvious cases that our company found through the grapevine. We followed only the bidding of NSP and only from 1994 to 1997 and after 2012. NSP is only one of 3000 or so electric utilities in the U.S. But rigged bidding has went on elsewhere since the Wisconsin Public Service Commission had to make bidding reform their highest priority after a utility chose its own generation bids for the top three spots in the late 1990s.
The bid rigging documented in these cases also likely “barely scratch the surface.” Bidding of electricity supplies is left to the proprietary discretion of utility monopolies. Because the bidding is subjective and clandestine, it is very difficult to get much information to uncover all of the abuses. The public could obtain a court order to examine the bids but only under a confidentiality agreement. The bids could be analyzed during rate cases but everyone including the losing bidders has moved on by that time. It would be a waste of time anyway since it would be nearly impossible to challenge a discretionary and subjective scoring system in regulatory proceedings.
The utilities use political lobbying financed with ratepayer money to manipulate politicians, regulators and the media into ignoring abuses. NSP has set state records for both legislative and administrative lobbying expenses and carries the most lobbyists of any company. Utilities donate campaign contributions and volunteer help to the state party caucuses, energy committee legislators, the state’s attorney general, and governors who appoint regulators. Utilities control the media with multi-million dollar annual advertising budgets using television, newspapers and radio.
In 1997, the Minnesota Legislature voted down our company’s amendment that would have allowed public scrutiny of the bidding. The Chairman of the Minnesota House Energy Committee Loren Jennings, who was later sent to prison for pressuring NSP to invest in a company that he partly owned, cut short the presentation of the amendment in committee. The Chairman of the Minnesota Senate Energy Committee Steve Novak, who blocked the amendment, received campaign contributions and other support from Xcel and other utilities during his political career (that has also included unsuccessful runs for Governor and Congress).
Minnesota legislators offer to rig the bidding for first-time non-wind renewable energy projects (probably because they know the developers are getting cheated). For example, legislators singled out Itasca Power for a biomass power contract from Xcel in a 2001 statute. However, the politicians offer no guarantee that future projects won’t get thrown back into rigged bidding by the utilities. One-time bid rigging might work for proven technologies but not new technologies, whose risk investors need assurances that products can be sold at future plants (i.e., not just the first plant) or they require a prohibitive cost of capital.
Unlike most utilities, NSP offers contracts to small power producers without bidding, but what the monopoly “giveth, they can taketh away.” Utilities claim independent power can be sold in wholesale markets, but investors will not invest if the utility and their cronies can be awarded higher prices. Many independent power producers that relied on wholesale pseudo-markets went bankrupt when electricity prices crashed in the early 2000s.
In 2012, the Republican majority in the Minnesota Senate and House ignored our proposed bill that would have required the PUC to obey PURPA law by setting avoided costs (which can be considered a form of feed-in tariff). Regulators in California have calculated avoided costs for independents. The Republicans said the other party have to be the ones to support renewable energy, but Democrats support mainly only wind and solar. (Republicans receive more support than Democrats from utility monopolies and fossil fuel interests, especially Big Oil.)
In 2013, the Democrat chair of the House energy committee Melissa Hortman refused to even consider a feed-in tariff bill for all renewable energies introduced by Democrat Representative David Bly. Instead, she pushed through legislation intended to add externality values for only expensive distributed solar PV. (Democrats are supported mainly by government workers, Wall Street, high tech, environmental groups, and wind and solar interests).
Representative Hortman claims feed-in tariffs in the Bly bill violate PURPA by offering prices greater than avoided costs. Perhaps, but she is violating PURPA by not requiring the PUC to calculate avoided costs and instead allowing utilities to set the costs with rigged bidding.