HIDDEN VALUE TRANSFERS IN PUBLIC UTILITIES

This Article describes strategies vertically integrated electric utilities use to transfer value from rate -regulated a ffi liates to non -rate regulated a ffi liates. First, regulated utilities directly subsidize non -regulated a ffi liates by entering into favorable contracts with a ffi liates that participate in competitive markets. These contractual value transfers include favorable purchase agreements such as long-term contracts to buy coal at above -market prices and cross -a ffi liate debt guarantees that allow nonrate regulated a ffi liates to borrow at a discount. Second, utilities receive regulatory authorization to pass costs incurred by their non -rate regulated a ffi liates onto captive ratepayers. Examples of regulatorily approved value transfers are fuel adjustment clauses that authorize recovery of fuel costs from captive ratepayers and self-insurance that forces ratepayers to bear wild fi re risk and transmission outages (even when insurance requirements are supposed to protect them from those risks). Third, utilities make investment decisions in rate -regulated markets that favor their non -rate regulated a ffi liates. For example, utilities may invest (or refuse to invest) in transmission capacity to protect the market power of their generation assets-not to reduce energy prices, improve grid reliability, or connect to low -carbon energy sources. Utility value transfers thus make the grid less e ffi cient, less reliable, more di ffi cult to supervise, and more resistant to policy instruments that should encourage decarbonization.