Kiesling and the Transitional Gains Trap

At Knowledge Problem, Lynne K. asks a question that's been burning a hole in my head for a couple of weeks now: should regulated utilities be allowed to participate in the household PV market? In particular, I'm wrestling with a Lucas Critique response to this:

I want to step back and ask why the regulated distribution utility should be involved in the residential solar market at all. The growth of producers in the residential solar market (Sungevity, SunEdison, Solar City, etc.) suggests that this is a competitive or potentially competitive market.

Professor K lists 4 vital premises of the regulated model here. At its heart, electricity delivers comforts to hearth and home. With the technology available at the time of mass electrification, the best way to do that was to have regional plants, distribution grids, and household meters. The grid got lumped in with the generation as the "supply side" rather than as what it really is: a middleman, a mancgere if you will. As technology has been changing, the regulated model is growing less salient.

But that doesn't by itself imply that the legacy companies (NOVEC in my neck of the woods) should be barred from participating. They tend to have not only good physical capital, but they're large employers of linesmen and electricians. If you want to contact someone with the specific knowledge in space and time about the grid, you can't do any better than calling your local utility. This competence, as well as the relatively low cost of physical capital, is extremely valuable to the end customer.

Then again, regulated utilities also have a comparative advantage in currying, securing, and protecting political favor. The Lucas Critique bit that has me buffaloed is this: does the present discounted value of all the marginal technical expertise and physical capital possessed by utilities outweigh the marginal risk of giving the keys to the solar clubhouse to guys who've proved (Enron) more than capable of navigating the halls of the several state legislatures already?

In trade economics, there's something called the "infant industry" argument. The gist of the claim is this: new firms are at a natural disadvantage when competing with incumbents, since they go bankrupt faster in a price war. Or perhaps they need some time to establish trade relationships to get over an initial start-up hump. These might be reasonable claims, but as we're seeing right now this very moment, the big barriers to entry for, say Uber, airbnb, and Lyft have nothing to do with technological hurdles and everything to do with regulatory and legislative opposition. But here's the pickle (I hope you like pickles): the grid complicates the story. Legacy taxi companies don't also conduct road maintenance and new construction. Regulated utilities do string new cable and tend to substation maintenance. Because of their political influence, my idea of separating generation and distribution into distinct entities is very probably not much more than a silly pipe dream.

The division of labor is limited by the extent of the market. Home PV generation expands the notion of what counts as the "market" for electricity distribution. If splitting distribution and generation is politically unrealistic, then at least keeping the regulated utilities focused on their core competencies seems reasonable. Were it not for the great threat of the utilities petitioning government officials for special treatment in home generation, I'd happily welcome more competition. My prior belief however is that the existing utilities would act more like local taxi cartels and would think nothing of using their already considerable political clout to elbow rivals straight out of the market. This does not seem to be in the best interests of the end customer.

Lynne asked:

The regulated distribution utility’s main objective is, and should be, reliable delivery of energy. The existing regulatory structure gives regulated utilities incentives to increase their asset base to increase their rate base, and thus when a new environmental policy objective joins the exiting ones, if regulated utilities can acquire new solar assets to meet that objective, then they have an incentive to do so. Cost recovery and a guaranteed rate of return is a powerful motivator. But why should they even be a participant in that market, given the demonstrable degree of competition that already exists?

I'd also ask: why should they even be a participant in that market, given their proven advantage at shutting down the competition that already exists?

Mine's more of a public choice question, so perhaps it'll be of less interest to the folks who actually get to make these sorts of decisions. As for the typical constituent, to the extent that they even care about these issues, it'll probably end up being framed as an issue of trust. I can easily imagine appeals to brand loyalty and trust showing up in the rhetoric. "The alternatives to having clean, reliable energy delivery are too awful to bear, so why not stick with the name you trust?" Electricity is not euvoluntary.