Wellinghoff and Tong: A common confusion over net metering is undermining utilities and the grid

'Cost-shifting' and 'not paying your fair share' are not the same thing.

Editor's Note: The following is a guest post written by Jon Wellinghoff and James Tong. Wellinghoff is the former chairman of the Federal Energy Regulatory Commission and is currently a partner at law firm Stoel Rives LLP. Tong is the vice president of strategy and government affairs for Clean Power Finance, a financial services and software firm in the residential solar market. This article is the first in a series from Tong and Wellinghoff looking at issues surrounding utilities, distributed energy resources, and the grid. Tong and Wellinghoff's joint proposal to create an independent distribution system operator was covered in Utility Dive here.

Correction: A previous version of this post said a report by the California Public Utilities Commission (CPUC) found that net energy metering (NEM) customers in the state were paying 106% of the full cost of service. The report was, in fact, a draft. The final report found California NEM customers were paying 103% of the full cost of service. 

Public discussion on net energy metering (NEM) has gone from heated to downright nasty. It started as an arcane and seemingly innocuous policy: solar customers get a one-for-one bill credit from their utility for each kWh they produce and send to the grid. NEM has become a full-blown wedge issue.

Critics assert NEM customers use the grid but do not pay their fair share of the costs. They say that NEM shifts grid costs to non-solar ratepayers, especially lower-income households and minorities. They invoke phrases such as “regressive tax”, “reverse Robin Hood,” or even “robbin’ the hood,” to suggest that solar customers – purportedly far wealthier and whiter – are getting a free ride at everyone else’s expense.

“Nonsense,” reply NEM advocates. “NEM critics don’t care about ratepayer fairness – they care about protecting profits and monopolies for utilities that have never faced competition.” They contend that, far from shifting costs, NEM customers create net value to the grid and all grid users. One only need look to a study commissioned by the neutral Nevada Public Utility Commission that shows NEM customers provide a net present value benefit of $36M to non-NEM customers in Nevada.

However, both arguments miss the point. That is because both use “cost-shifting” and “not paying the fair share” interchangeably. This understanding is wrong – critically wrong. And it is resulting in needlessly fractious debates and bad policies, including arbitrary fixed fees on solar customers.

A telling example: In 2013, the California Public Utilities Commission (CPUC) published a study that projected a cost shift of $1.1 billion per year by 2020 due to NEM policy. NEM critics, including the American Legislative Council (ALEC), Americans for Prosperity, and even some academics cited the study as proof that NEM customers were not paying their fair share. So they pushed harder for fixed fees for NEM customers, a policy that various states, including Wisconsin, Arizona, Kansas, and Oklahoma, have since either explored or enacted.

But critics (as well as NEM advocates) overlooked that the same CPUC report also found that NEM customers as a whole “appear to be paying slightly more than their full cost of service” – 103% of their costs, to be precise. In other words, NEM customers were not zeroing out their bills and “free-riding:” on average, they were paying more to utilities in fixed-cost recovery than non-NEM customers.

Why do so many policy wonks on both sides consistently conflate cost-shifting with not paying one’s fair share? It could be that explaining these concepts is difficult and doesn’t make for good sound bites. Or it could be that few people understand the arcane subject of utility rate design or are willing to admit that the prevailing utility regulatory model is highly redistributive to begin with.

According to the CPUC study, before going solar, all NEM customers (commercial and residential) had paid 133% of their full cost of service. The residential segment alone paid 154% of its cost. By going solar, NEM customers were mitigating or reversing the subsidies they had traditionally been paying to support the grid. This is the crux of what is called cost-shifting.   

Cost-shifting should not be ignored. But the focus on NEM customers dangerously obscures more critical problems with the utility model, namely slowing demand, escalating costs, and disruptive innovations. In such an environment, any technology that reduces sales of electrons will challenge traditional practices of cross-subsidization.

For example, the energy economist Catherine Wolfram estimates that adoption of LED lighting may shift costs as much as the adoption of distributed solar. Does this mean we should condemn LED users for cheating the system, or charge them fixed fees? Or should we fix the system in which the mere adoption of LED lighting can hurt the poor?

Vulnerable customer segments should not bear more cost when others adopt distributed energy resources (DERs), such as rooftop solar or efficiency technologies. But all customers – not just solar or DER customers – need to address the potential equity issues that new technologies, however promising, may raise.  The Regulatory Assistance Project’s concept of a minimum bill – which utilities and solar advocates in Massachusetts had agreed to before getting stuck in the legislature – can ensure that all grid users pay their fair share. While imperfect (we advocate for more comprehensive reforms), the concept is more efficient and fairer than a sweeping fixed fee that singles out one technology with almost no regards of its benefits and costs to the grid.

The recent push for fixed fees is problematic for many reasons; for one, it does not rely on actual data or results, but rather on the faulty assumption that users of technologies that shift costs are necessarily not paying their fair share. This fallacy will handicap the deployment of all promising DERs, which, by virtue of being distributed, will necessarily create uneven benefits and costs. Even worse, it may ultimately harm those ratepayers that NEM critics are trying to protect.

Separate analyses from the Rocky Mountain Institute and Morgan Stanley show that grid defection will soon be economically viable, and that levying more fixed fees would accelerate defection.  Even if “mass defection” is unlikely, defection by a small group will probably have an outsized impact. Utilities rely disproportionately on heavy users, who tend to be more affluent and thus more economically capable of going off-grid. If these users do start defecting en masse, then we really will have an unprecedented problem of cost-shifting from the “haves” to the “have-nots” – but we can’t blame the “haves” for not paying their fair share for a grid they aren’t using.

Let us hope that we never have to face this calamity to finally understand the distinction between cost-shifting and not paying one’s fair share.

Filed Under: Solar & Renewables Regulation & Policy
Top image credit: San Jose Inside