Why regulation protects utilities from politicians

‘All politics is local,’ is the commonly held phrase. This same phrase can be easily applied to energy. ‘All energy is local.’ The evolution of the energy sector is from the bottom up, from the gasification of street lamps to universal electricity service, the electricity and gas sectors are rooted in community and politics. This relationship is essential to understand in the deployment of low carbon technologies and energy efficiency measures.

To steal a headlining grabbing quote, “Prostitution, horse racing, gambling and electricity are irresistible to politicians, says John Rowe, the CEO of the Chicago-based utility Exelon. The interview in the Wall Street Journal with this practical executive provides an important perspective of how the utility industry balances the constant political demands with the understanding that regulations are the industry’s best friend. Not that regulation just protects the industry from the worse excesses that itself engages in, but also from political meddling that interferes and disrupts the long-term planning horizons necessary in the industry.

An effective regulatory environment that accounts for the environmental impact of the utility industry can play an important role in shaping the long term investment strategy of companies.

“What we are trying to do,” Mr. Rowe argues, “partly out of self-interest and partly to avoid sticking our customers with things that are really expensive, is to push for some sort of orderly environmental framework on the markets.” 

An orderly regulatory framework can provide the structure to advance technology (see his quotes against nuclear and carbon capture and storage) to invest in the most economically efficient plants and, presumably, overall technology (grid, smart meters, etc.) that will reduce carbon emissions while meeting the needs of consumers at the least possible costs. Regulations and market efficiency do not have to be separate.

The comparison in how the markets are handled by governments in the US and EU are stark. I won’t go into great detail to highlight their differences, the overall approach, whether federal or multilateral EU-style, does need to be uniform in pushing towards a common direction of low carbon and prompting the investment in new technologies. The EU is better organized in this respect while the US is having to relying on local and state governments to force and incentives the utility sector to change. This is not the most efficient approach when you consider the large multi-state scale of the utility industry and the significant infrastructure investments that need to occur. While small can work, large is can make a significant impact.

I’ve emphasized here the role that regulation, rather than politics, can play to induce change and investments. The politics, as Mr. Rowe points out is intertwined in the types of investments and the types of regulations. While job creation and pandering to votes is the politician’s main job, so should be the longer term vision of an efficient energy system that uses not the most politically favored ‘green’ energy, but technology that costs less and pollutes less. Less is more in the low carbon energy sector.

Energy is as irresistible to politicians as gambling and horse racing