Critics have long accused regulated electric utilities of gold plating their investments—buying Rolls-Royces when Fords would do. But what if the problem is more perverse than that? What if utilities are buying Fords that cost as much to manufacture as Rolls-Royces?
Manufacturers respond to the demands of their customers. In competitive markets, buyers continually pressure manufacturers to standardize products, simplify designs, improve productivity, and lower costs. But regulated utilities don't face the same competitive discipline. When they insist on specialized equipment or fail to reward cost-reducing innovation, their suppliers adapt accordingly.
The consequences could extend well beyond inflated utility capital spending. A century of distorted buying incentives might have shaped the entire equipment manufacturing industry, discouraging the standardization and production innovations that have transformed so many other sectors.
Perhaps the problem isn't simply that electric utilities spend too much. Perhaps the way they are regulated has made the entire electricity supply chain more expensive than it needs to be. CRE could provide a practical opportunity to test this hypothesis. Under CRE, independent providers serving voluntary customers on electrically separate systems would have stronger incentives to minimize their total cost of supplying electricity, including equipment costs, reliability, maintenance, and replacement.
That could influence manufacturing in several ways:
Standardization. A CRE provider building a portfolio of similar facilities could choose a limited set of equipment designs rather than maintaining utility-specific product requirements.
Manufacturing partnerships. A CRE provider could work directly with manufacturers to develop repeatable equipment packages, with costs and performance optimized together.
Innovation. CRE providers could experiment with modular equipment, different architectures, or shorter replacement cycles when those alternatives offer better lifecycle economics.
Competitive benchmarking. If CRE providers consistently obtain equivalent performance at lower lifecycle equipment costs, their results could provide useful benchmarks for regulated utility procurement.
A CRE provider facing the financial consequences of its decisions has stronger incentives to discover what equipment and manufacturing arrangements are actually worth their cost. Regulated utilities have lesser incentives. And they’ve had lesser incentives for a century. It’s hard to imagine that hasn’t undermined the cost and reliability of our nation’s grids.
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