Should regulated utilities be prevented from owning EV charging assets?

The default presumption should be to quarantine the monopoly

Electric systems, like telephone systems before them, are vertically-integrated technology networks for delivering services that are inputs into our production and consumption actions. And like telephone systems, electric systems are experiencing substantial technological changes in diverse forms. Since the 1980s, innovators have been creating generation technologies at different scales and with different fuels – combined-cycle gas turbines, wind turbines, solar PV with improved energy efficiency, small modular nuclear reactors. Battery storage and electric vehicles do not generate electricity, but they provide valuable intertemporal smoothing of production and consumption as the value of electricity changes over the course of the day and with changes in weather and other variables. EVs also provide transportation services. Consumers (and prosumers) around the edge of the grid have access to an unprecedented array of digital technologies to access, manage, and automate their relationship with electricity; these technologies can create value for them that wasn't even contemplated 35 years ago when I was studying vertical integration in depth for the first time in graduate school.

And yet the vertically-integrated, regulated utility remains an economic, legal, political, and cultural artifact, despite the dynamic changes that, in the absence of legal barriers, would lead to the formation of new markets and the evolution of the regulated utility footprint. Many of these innovations, from smaller-scale generation to storage to digital devices and networks, reduce transaction costs and reduce the economic justification for vertical integration. The development of wholesale power markets in the 1990s and the unbundling of generation from vertically-integrated utilities in the 15 states + DC that went through regulatory restructuring did change the regulatory footprint. But in the other states, and at the distribution grid/retail edge, vertical integration remains more persistent than economic theory would suggest it should be.

This is why the "quarantine the monopoly" issue that I introduced last week is, in my opinion, the essential question in electricity regulation in the early 21st century. In a vertically-integrated, regulated industry, when there is a downstream market that's competitive or potentially competitive, can the regulated utility leverage its regulated status into anti-competitive participation in that downstream market? This is the restatement of the Bell Doctrine from the 1980s AT&T divestiture settlement, in which AT&T purchased phones ("customer premise equipment" or CPE) only from its affiliated downstream company Western Electric despite the presence of several independent CPE manufacturers. In addition to refusal to purchase from other firms, accounting evidence demonstrated that AT&T was able to allocate its fixed costs onto other business units so Western Electric could charge lower prices to non-AT&T consumers. AT&T was required to divest Western Electric in addition to the more widely-known breakup of the wires portion into Regional Bell Operating Companies.

I used this set of ideas to analyze incumbent default service in restructured states in a 2014 paper, Incumbent Vertical Market Power, Experimentation, and Institutional Design in the Deregulating Electricity Industry, arguing that allowing the incumbent regulated utility to continue to offer default service to residential customers created an entry barrier that made it costly for retail service providers to enter and acquire customers. In these states – Connecticut, Delaware, District of Columbia, Illinois, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island – retail competition has been lackluster and has not delivered the anticipated cost savings or product differentiation and innovation to residential customers. Several of these states have experienced complaints about door-to-door retailers trying to get customers to switch, and I'm convinced that this costly entry barrier is one reason why these sketchy market entrants have been the predominant form of entry. Only one restructured state in the US – Texas – did not retain incumbent default service and developed their institutional framework to promote retail competition as a mechanism for customer value creation and consumer protection.

Applying the Bell Doctrine to EV charging

The quarantine the monopoly question predominates in one high-priority investment and policy topic right now: EV charging infrastructure. The EV charging industry is young but has been growing as EVs become more popular and their market share grows. Tesla is the most visible and extensive firm in this industry, but they themselves are vertically integrated batteries -> cars -> chargers, and until recently they have not agreed to interoperability charging standards to enable other vehicles to use their stations (and only recently have done so for 10% of their stations as a way to qualify for funded participation in the federal government's national charging network initiative, its EV Charging Action Plan). Consider other firms in this industry, such as ChargePoint (founded in 2007), EVGo (founded in 2010), Blink (founded in 2009), or Volta (founded in 2010), which was acquired by Shell in 2021. Entry into this new market took place and expansion has ensued as EV market share has increased, although the financial road has been bumpy. This evolution has the hallmarks of a dynamic, contestable (competitive or potentially competitive) market.

Yet regulated utilities have incentives to enter this contestable market. If their regulators allow them to rate-base the EV charging assets (that is, to count them towards the assets on which the utility earns its regulated rate of return as well as recovering its costs), they have incentives to propose building EV charging infrastructure in competition with these independent firms. If they enter this downstream contestable market, they could have anti-competitive effects by competing directly on price, again by allocating its fixed costs across business units in a way that enables them to underprice the competing firms that don't have that advantage. A recent example was a 2022 rate case in Entergy Texas (vertically-integrated and not part of ERCOT) where Entergy argued in front of the Public Utility Commission of Texas for utility ownership of EV charging infrastructure, while independent EV charging companies argued that Entergy's market entry would be anticompetitive:

The question of EV charging station ownership was not originally included, but Commissioner Jimmy Glotfelty said it will be important as more vehicles and infrastructure “proliferate in our communities.”

“Is it appropriate for an electric utility in a vertically-integrated area to own vehicle charging facilities or other transportation electrification and charging infrastructure? Or should the ownership of such facilities be left to competitive providers?” he asked during the meeting. ...

[Entergy states that]“More specifically, the offer involves a non-residential customer (retail store, school, hospital, multi-family housing, etc.) having Entergy Texas install, own and maintain EV charging infrastructure on the customer’s property; the offer includes an option where the customer can own and maintain the charger if they so choose. The customer also determines the type of EV charger and its features as well as who will have access to use the EV charger (the customer’s employees, tenants, visitors, etc.) and whether or not users of the equipment have to pay the customer. 

“In return for having the EV charger and related equipment on their property for their use, the customer will pay a fixed amount to Entergy Texas on their electric bill for up to 10 years,” Entergy Texas said. 

Retailers, including gas station and convenience store owners, have warned that the ability of regulated utilities to own charging facilities in some states will keep private investment sidelined — and they say they are watching the Texas rate case.

Even more recently, proposed legislation in Minnesota would allow Xcel Energy to own EV charging infrastructure, similar to Xcel's EV charging ownership that was approved in both Colorado and New Mexico. Independent EV charging companies oppose the legislation on anticompetitive "quarantine the monopoly" grounds.

How do we assess the complicated welfare effects in deciding whether to quarantine the monopoly from EV charging markets? Utilities can argue that they can provide EV charging at lower cost, but given history, utility accounting, and the Bell Doctrine, are they truly lower costs, or are they a consequence of a vertically-integrated utility being able to allocate fixed costs away from EV charging when its competitors can't? And the argument about least-cost provision is a limited, static argument that overlooks the important dynamics that arise from market competition, particularly product differentiation and innovation. Under regulation, how much incentive do utilities have to innovate in EV charging, a technology space in which innovation proceeds more quickly than regulated depreciation schedules and the "used and useful" doctrine recognizes? If these investments were extremely long-lived, sunk costs, that could provide some justification, but I think the analytical weight of the argument is on the side of generally preventing regulated utilities from entering the existing, contestable market for EV charging.

A more nuanced approach to this question is possible due to the spatial nature of the market. EV charging location matters, and the independent charging networks in cities are primarily located in densely-populated commercial areas (as in this example in Boston). Those investment and siting decisions are consistent with firm profit maximization and should be encouraged, as profitability is an indication of how well they serve consumers (resources flowing to their highest-valued uses). But is there an economic justification for allowing utilities to build EV charging in other areas? The question of access to infrastructure in underserved neighborhoods is getting some attention. I think combining economic and equity arguments can provide a justification for utility ownership in other areas, but again we have to beware of static thinking: what happens as neighborhoods change over time but the utility still owns the EV chargers? Transaction cost economics provides an alternative: what if rather than the utility owning the charging assets they contract with one of the independent firms to build the chargers? The utility doesn't earn its rate of return since it doesn't own the assets (so the contract costs are a pass-through that would require diligent oversight), but the contract can be more flexible and regulators could monitor changes in usage and neighborhood economics to assess whether what's essentially subsidized chargers should still be subsidized or not as conditions change.

This dynamic point is one of the most important reasons the default presumption should be to quarantine the monopoly, and to allow monopoly EV charging involvement through contract rather than ownership. Such contracts would preserve the incentives facing EV charging firms to innovate, and innovate they do. Blink announced five new products at the 2023 Consumer Electronics Show, including integrating chargers with a variety of different digital payment platforms for consumer convenience. ChargePoint and others are improving their charging speeds. And they are innovating in their own contractual arrangements – EVGo and Amazon announced an Alexa-based partnership at CES 2023 (note how this will also benefit Amazon's business with their fleet of Rivian delivery trucks), ChargePoint and Stem have an EV charging-storage deal, and Schneider Electric has purchased charging company EV Connect. Another equity-oriented innovation is this creative financing idea from Amperage Capital to lease parking spots at apartment buildings to build EV chargers, so Amperage retains the business risk rather than the property owner. All of these forms of innovation in product and in contracts and financing are much more likely to arise from market competitors than from a regulated utility.