The following is a contributed article by Todd Glass and Heather Curlee, partner and of counsel, respectively, with Wilson Sonsini Goodrich & Rosati, P.C.

We now face a once-in-a-generation opportunity to transform the U.S. power grid. If we fail to push forward decisively, we will be locked into the past model of vertical-integration for another 30 years and will lose the opportunity to bring substantial innovation and transformation to the electric industry.

Renewable generation has accelerated down cost curves to become competitive with thermal power on an unsubsidized basis. In a recent analysis of its own fleet, PacifiCorp laid bare the fact that coal generation is no longer the most economic form of electric generation in the United States.

This foundational change is not unique to PacifiCorp.

Utilities and policymakers across the United States are assessing whether they should now retire these uneconomic coal and aging nuclear plants. New business models, brought about by cost efficiencies, digitalization and other technological innovations, have introduced new competitors into the market who are offering consumers greater choice in their electricity supply both in front of and behind the utility meter.

The question we must answer is who should be responsible for developing, owning and operating the energy resources that replace uneconomic coal and nuclear generation: rate-regulated utilities or independent, competitive developers?

Consumers will be better served through more competition, as private capital investors will drive innovation and lower costs in the electric power sector.

It is our belief that a renewed focus on deregulating the remaining monopoly-controlled wholesale and retail markets across the country will deliver the products and services that consumers desire, while delivering the investment and innovation necessary to bring about the utility of the future.

Competition leads to innovation and the deployment of emission-free technologies

Private sector actors, as opposed to regulated utilities that are guaranteed a rate of return on legacy investments, are naturally incentivized to innovate — without asking captive ratepayers to shoulder the risk. Yet, in many wholesale and retail markets, such private actors are foreclosed from competing due to outdated regulatory structures.

Fuel-less resources, including wind and solar generation, are the most rational replacement source — not only because they do not emit greenhouse gas emissions, but also because they are becoming the cheapest form of electric generation. When paired with the capabilities of grid-connected energy storage, these resources are capable of providing the same level of service as thermal plants, but at a fraction of the price and without associated emissions.

According to Lazard's most recent Levelized Cost of Energy Analysis, the unsubsidized, levelized cost of wind and utility-scale solar resources have dropped to $29 and $36/MWh, respectively, compared to $41/MWh (natural gas) and $60/MWh (coal). Independent power producers have the lion's share of the experience with developing, deploying and operating emission-free technologies — hard-won experience gained over a two decade period in which most U.S. utilities were resisting change rather than exploring it.

Realizing the opportunities presented by competition, choice and innovation

The declining costs of renewable energy, the need to replace aging and uneconomic sources of generation, the increased digitalization of the grid and increasing customer demand for greater choice in generation type and provider, present once-in-a-generation opportunity to transform the utility business model.

The following three regulatory policy tools will ensure we make the most of the opportunity.

Competition

Monopolies are going to monopolize. It is economically rational for regulated electric utilities to preserve market share and extract returns from legacy assets and captured customers, but such an approach fails to take advantage of the technological innovation of the past two decades.

Under the current regulatory regimes, monopoly utilities maximize their returns on equity by owning generation and/or transmission assets and maintaining or growing the existing ratebase. What is lost when the utilities take care of everything for consumers — like they have in most parts of the U.S. for the past 100 years — are the benefits of competition.

Real competition through an open market of many buyers and many sellers provides downward pressure on the cost of producing and distributing energy.

A recent study by Retail Energy Supply Association revealed that, from 2008 – 2018, competitive retail markets created a 25.7% favorable difference (lower cost to customers) in the annual weighted average prices than those in vertically integrated markets with little or no choice.

Retail Price of Energy – 2002-2018 (based on EIA data) Retail Energy Supply Association

It should not be overlooked that competition also shifts risks away from utility ratepayers to independent developers.

We posit that the ratepayers in South Carolina would be in a better position if the failed V.C. Summer Nuclear Station's project costs were borne by independent developers and financiers rather than the utilities who seek to pass the billions of dollars in cost overruns onto their ratepayers.

Rate-regulated utilities should not be allowed to simply replace one set of rate-based generation assets for another set of utility-owned assets, all of which have 30-year operating lives. Rather, as one important means of ushering in the energy future, a new era of deregulation should direct utilities to give up on their monopolies remaining in the wholesale and retail markets in favor of real competition by truly independent players.

Energy from independent power is cheaper than utility-owned generation, and competitive transmission developers are able to construct projects for less than regulated utilities. Consumers should not bear risk that can be borne by independent project developers and owners.

Choice

Whether cellular service, internet service or electric power service, modern customers like to have the opportunity to choose which supplier can provide the best service and the desired attributes, at the cost point that each customer chooses. Digitalization, miniaturization and mobility have created business and residential consumers who no longer view transportation, communication and power as one-size fits all commodities provided by monolithic backbone infrastructure.

Due to rapid technological advancements, and associated cost declines, consumers increasingly have access to data and information that allows them to be more educated and informed on their energy usage. Equipped with that information, industrial, commercial and residential customers want service options. Yet in much of the United States, customers have no choice in their electrical supplier and are restricted from accessing desired services provided by independent market actors.

In vertically integrated electric service territories, customers have no choice at all. Buying electric service in these places is no different than telephone service in the 1970s; without even the option to choose the white phone, the black phone or the princess phone.

Choice — in both service and provider — would enhance competition and sound decision making: consumers should be allowed to choose a supplier that provides the options, attributes and price point that matches each individual customer's preference.

Many "marquis" commercial and industrial customers of U.S. utilities are grappling with falling commodity prices and shareholder pressure to reduce carbon footprints, and have met substantial resistance when working with their utilities to meet these challenges. As a result, they are turning to a variety of alternatives, including "virtual" power purchase agreements, community choice aggregators and community solar.

In an era of rapid technological innovation and falling commodity prices, customers must not be locked into all the long-term generation decisions that the utility has made in order to satisfy its paramount fiduciary duty to earn profits for its shareholders. If commercial and industrial customers are capable and empowered to make choices about nearly all commodity inputs for their businesses, why not electric service? Why should they remain captured by the local utilities simply because of where they are located?

All customers should at least be able to make the affirmative decision to remain with the incumbent utility or buy elsewhere. This choice should also include the right to build on-site generation and install storage and other advanced technologies, including smart lighting and algorithmic energy management.

Innovation

The technological innovations of the past 40 years have revolutionized nearly all sectors of the U.S. economy from retail shopping to banking and telecommunication. We believe that the electric industry is at a similar inflection point.

With the exception of automatic payment systems, some digital meters and internet-based outage information, there has been little technological innovation in the utility and customer relationship, particularly for customers served by vertically-integrated utilities. Like the telecommunication industry, where customers have transitioned from purchasing a monthly landline service to enrolling in subscription plans for data and messaging services, the electric utility industry has the potential to deliver innovations in service that have heretofore been unimaginable.

Distributed energy resources (DERs), such as behind-the-meter solar generation, battery systems and electric vehicles, should be embraced as assets to enhance the flexibility and resilience of the grid, rather than viewed as a competitive threat to the utility. As thousands of new 5G cell towers are installed across the country over the next few years and ubiquitous sensors allow for more sophisticated management of electric load and accommodation of innovation, the "Internet of Things" has the power to revolutionize the electric industry.

We encourage the electric industry and its federal and state regulators to take advantage of the confluence of factors in the industry, including the retirement of uneconomic coal units and the need to refocus attention on aging transmission and distribution infrastructure, to pursue innovations that benefit customers and increase the quality of electric service. Bringing about fundamental change in the industry will lead to stranded assets, and we suggest that the time to address the issue is now — before utility customers are locked into the legacy system for another 30 years.

We support SDG&E's recent announcement, calling for utilities to focus on "a glide path out of the energy procurement space." The confluence of factors we are now experiencing provides utilities, regulators and legislators with the opportunity to reassess the need for monopoly electric service, and instead implement policies that are founded in the realities of today's electricity markets and technological realities.

We encourage regulators and policy makers to embrace innovation and competition found in new private capital business models and technologies both in front of and behind the meter. The policies we put in place today will define the electric grid of the future.