Reporting the Effect of Wind on Consumer Costs—A Subtle Averch-Johnson Effect

On 2011 November 18, I received a link to a reply commentary published in Echo Press, The Official Newspaper of Douglas County, and then sought out the original commentary.  The two are

  • “Commentary – State energy policies should reflect market realities” by Mark Glaess, manager, Minnesota Rural Electric Association, Maple Grove, MN and
  • “Commentary – Wind energy isn’t increasing costs” by Beth Soholt, executive director, Wind on the Wires, St. Paul, MN, which is the reply.

 These commentaries were driven by a Minnesota requirement that utilities report on the effect that wind is having on the cost of electricity to consumers.  The reports filed in Minnesota PUC Docket No. E-999/CI-11-852 showed mixed results.  A quick read of some of the reports left me with the impression that the cooperatives bought wind power and found that the wind power increased their costs while the investor owned utilities owned wind generators and claimed a reduction in the wholesale cost of electricity.

I am reminded of the Averch-Johnson thesis that rate regulated investor owned utilities have an incentive to gold plate their facilities, in that the allowed return on investment is often slightly above their actual cost of money.  This thesis supports the current trend of utilities to invest in transmission systems that are regulated by FERC on an incentive basis, the incentive being an extra 1% in the allowed return versus the returns that FERC would otherwise allow the utility.

Might the Averch-Johnson effect have led the Minnesota investor owned utilities to a decision to own wind generators instead of buying their output?  Might the Averch-Johnson effect have led the investor owned utilities to choose an analytic method that showed tended to minimize the cost effect that wind has on rates, to the extent that the minimization led to numbers less than zero?

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