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Markets and Government in Energy Policy

Written by: Tom B. Getz

Published in NH Business Review (3/12/2021)

Legislative debates over energy policy often reflect fundamentally differing beliefs and biases about the efficiency of free markets relative to the effectiveness of government in bringing about desired outcomes.  Some policy makers have faith that enlightened self-interest is sufficient for sound decisions by businesses and individuals in the energy marketplace but question the ability of government to play a constructive role.  Other policy makers question the sufficiency of price signals for achieving energy policy goals but have faith that government can fashion incentives for sound decisions by businesses and individuals.

The dichotomy of beliefs concerning the roles of markets and government in energy policy is currently playing out with respect to energy efficiency in a proceeding before the New Hampshire Public Utilities Commission (PUC).  There appears to be little debate among key actors that supporting energy efficiency is good public policy but there is significant dispute about how one arm of government, the PUC, should exercise its judgment.

Due to the Legislature’s restructuring of the electric industry over twenty years ago, electric bills in New Hampshire contain a System Benefits Charge (SBC), which, in part, supports energy efficiency programs delivered by utilities.  Restructuring reflected the belief that electric costs for all consumers could be reduced “by harnessing the power of competitive markets” (RSA 374-F:1) and, concurrently, that electric rates should “fund public benefits related to the provision of electricity” (RSA 374-F:3, VI).  In effect, the Legislature saw value in both the invisible hand of the market and the guiding hand of government.

The energy efficiency portion of the SBC was relatively flat until 2016, at which time the PUC changed course, deciding to set the SBC rate to fund particular energy efficiency goals.  In 2018, the rate increased from 1.8 mills per kWh (approximately $1.17 per month for typical residential customers but much more for commercial customers depending on usage) to 2.75 mills per kWh, or roughly 50%.  In the current case, the new rate, now differentiated for residential and commercial customers, would more than double overall if approved.  As a result, annual charges to ratepayers for energy efficiency programs could potentially grow to more than $100 million.

On December 29, 2020, the PUC indicated that additional time was required to resolve issues related to the statewide energy efficiency plan, which themselves are complex but were made more so by competing comments from two sets of legislators.  A group of Republican lawmakers asked the PUC to postpone indefinitely a rate increase because of the impact of COVID-19 on ratepayers.  The Business and Industry Association also weighed in, saying that the increase for some businesses could be as high as $500,000 a year.  A group of Democratic lawmakers, however, urged the PUC to approve the energy efficiency plan because delay would be a more costly course.  More recently, some Republican legislators sponsored legislation that would advance the timing for legislative approval over increases to the SBC.  

The PUC’s dilemma aside, the policy dispute among the legislators can be framed as one group focusing on the short term economic impact of a rate increase on individuals and businesses, and the other group focusing on the long term economic and environmental effects on the State as a whole.  Similar dynamics have played out in the context of policy decisions regarding renewable energy, including net metering and wood-fired generators, where the disputes revolved around how much to promote solar installations and whether to support the timber industry by increasing electric rates for energy sold to utilities by wood-fired generators.

The operative question from a policy-making perspective is whether there is a way to bridge the gap between well-meaning groups when individuals start from different places, hold different beliefs, and exhibit different biases.  One possible avenue is to explicitly identify the underlying beliefs and biases, and break the policy dispute into its components, working through a series of questions.            

For instance, with respect to energy efficiency, is there a policy goal worth pursuing?  On the face of it, the parties appear to agree that there is, although there are some who take the position that if energy efficiency were so beneficial then individuals would make such investments on their own.  Others, however, hold the position, arguably reflected in the existing SBC law, that there are structural barriers to such investments that are best overcome by government involvement. 

Secondly, how important is the policy relative to other goals and values?  There is a host of issues underlying this question.  Here, the focus has been placed on the impact on individual utility ratepayers during a time of economic uncertainty versus the lost opportunities to the state as a whole if the SBC decision were suspended.  In that context, are policy certainty and continuity important to achieving energy efficiency goals?  It may also be fair to venture that the opposing positions not only reflect different views about the efficiency of markets versus government, but different views about the exigencies of climate change. 

Finally, if the realization of all cost effective energy efficiency is a shared goal, can we get there and how?  The Legislature concluded years ago that it was appropriate to fund public benefits through electric rates and it delegated to the PUC the authority to set rates that would fund investments in energy efficiency.  Should decisions about means and impacts (including identifying what may be gained and what may be lost under various approaches) be left in the hands of the PUC with its expertise and judicial methods, or reclaimed by the Legislature as a political matter?  Lastly, what will be the impact of a new state Department of Energy on energy policy?   

Decisions about the best means for implementing energy policies are issues on which reasonable people can disagree, and it is seldom the case that there is a single, objectively correct policy choice.  As a starting point, however, because the issues are so fact-intensive, it is critical for informed decision making to examine and reconcile underlying premises about the capacity of markets and government in order to understand whether such premises hold up in any particular case.  

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