Washington state regulators approved a settlement last week between Microsoft Corp. and their monopoly utility, Puget Sound Energy Inc. (PSE), to enable Microsoft to buy its own wholesale energy or develop its own supply. The agreement represents a more cordial approach amid a widespread trend of large customers seeking alternative power suppliers, but underscores the inherent choice-constraining limitations of the monopoly model, even with favorable amendments.

The monopoly model, premised on a single power provider with captive customers, does not easily accommodate customer preferences. However, a glimmer of choice has emerged recently. Microsoft is just one of many corporate customers to pursue third-party purchases or direct-access policies that enable one-off customer choice within a monopoly footprint.

Spurred by less expensive alternative suppliers and corporate commitments to clean energy, corporations have procured more than 6 gigawatts of wind and solar in the last two years alone. In 2016, Microsoft and Amazon led the pack in corporate clean-energy procurement. Based on public commitments, this trend looks likely to continue, with the likes of Google, Apple, Johnson & Johnson and more committing to source all of their consumption from renewables.

At a time when climate and clean-energy policy too often reverts to a culture war, voluntary clean-energy procurement by corporate leaders marks a refreshing intersection of the conservative and green agendas. Bill Hogan, a Harvard professor and electricity markets expert, emphasizes that customers spending their own money to contract for green power is consistent with market principles. He clarifies that the “problem comes when governments spend other people’s money, using their power to mandate, that is a public policy concern.”

This may blossom into the new chapter of voluntary environmentalism, which has roots in the kinds of conventional pollution reduction (beyond legal requirements) that preceded today’s amplified climate discussion. For some companies, the reputational or branding benefits of contributing to a cleaner environment can provide substantial incentives. It appears those benefits are magnifying at the same time that the cost of renewables has fallen, spearheaded by merchant wind developers providing very competitive power purchase agreements.

Some have voiced concerns that an exodus of big customers from monopoly service may leave other customers with higher bills. A large customer’s departure could create stranded costs for the utility, which it will shift to other customers if permitted by regulators. To cover these costs, regulators may require customers seeking to leave the monopoly to pay exit fees. Companies like Microsoft might even go beyond the exit fee by pledging support for local community programs.

Proper exit fees can prove technically challenging to calculate. In addition, monopoly utilities often leverage those fees to impose a regulatory barrier to exit. In particular, they frequently will underplay the benefits to their remaining customers of the reduced costs and expanded opportunities to sell excess power.

Litigated exit fee cases have proven contentious and inefficient. In Nevada, numerous cases have led to prolonged regulatory battles and deterred some companies (e.g., Las Vegas Sands Corp.) from seeking to buy power on the open wholesale market. In a recent filing before the Nevada Public Utilities Commission (PUC), Wynn Las Vegas argued the exit fee imposed by the PUC—whose staff changed their methodology from the one applied to the previous exit request of the data storage company Switch—was unfair and discriminatory.

In fact, Switch incurred regulatory headaches of its own. The PUC rejected its initial proposal to switch to an alternative provider in 2015. Other Nevada resorts and casinos, including Caesars Entertainment Corp., are either considering or already have applied to leave monopoly service, with the MGM Grand agreeing to pay an $87 million exit fee.

Even with direct access, regulatory delays and inflated exit fees can serve as chronic limits to customer choice, not to mention that clinging to the monopoly model results in an underdeveloped market for alternative suppliers. Even the Microsoft settlement revealed differences between the customer and the utility over how to calculate the exit fees. In its initial testimony, Microsoft argued that its departure would provide a net benefit and estimated that, using generally accepted rate-setting standards, the utility would compensate Microsoft between $15 million and $35 million to leave (the two sides differed over the timeframe used to calculate the useful life of the utility’s assets and market value of excess generation).

However, in the end, Microsoft agreed to pay an inflated $24 million exit fee. The settlement represents a deal between numerous parties that is likely more efficient than prolonged litigation. Such a collaborative approach may serve as the preferred interim model in monopoly states (i.e., negotiated special contracts), short of a new customer tariff that would streamline the process.

Despite the niceties of settlements, such agreements retain undertones of the fundamental rift between increasingly heterogeneous customers and the choice-constraining monopoly model. In restructured or “retail choice” states, customers choose their power provider freely, and large customers often negotiate contract terms tailored to their unique profile.

Restructured states present a big advantage for corporate consumers, and policymakers increasingly have noted this advantage for retaining and attracting businesses. Enabling third-party service or direct access is certainly not the “end game” regulatory structure, but it offers a great incremental step to introduce customer choice, with benefits both for customers and for the environment.


Image by Katherine Welles

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