Grid Strategy's Rob Gramlich and Electric Advisors Consulting's Frank Lacey detail the findings of a policy analysis paper they co-authored, Serving Customers Best: The Benefits of Competitive Electric Vehicle Charging Stations.* We also talk with Doug Kantor, general counsel for NACS, the international association for the convenience store industry, which sponsored the policy analysis.
The analysis found EV charging customers will be served best if utilities are not permitted to extend their monopoly into the nascent retail EV charging business. Yet utility regulators in states across the country are already ordering utility investments in public EV charging stations. The lack of proper economic incentives in the utility regulatory model is already becoming clear as reports abound that utility charging stations are often out of commission, in remote areas, or otherwise unavailable to drivers needing to charge their vehicles.
Convenience stores view transportation electrification as an opportunity, not a threat, to the century-old gasoline retailing business, Kantor says. NACS sponsored the policy analysis to highlight the "potholes in the road" facing convenience stores, he says. "The way electricity markets work now doesn't work really well with a competitive business model."
The paper identifies utility regulatory policies that will discourage private-sector investment in EV charging infrastructure and urges policy makers to address these problems now rather than later when the costs to consumers could be much higher.
"We're at the very beginning of this. It will be much more efficient for everybody if we get this right now instead of waiting. If we have to undo things that we've already done, that becomes costly and inefficient and subject to litigation," Lacey notes.
"There's going to be a tremendous amount of investment and [to] achieve the investment needs we have to do it efficiently. And we need to make it work best for consumers," Gramlich says. Utilities have a "key role" to play in electrification and the overall transition to a clean-energy economy, but EV charging should not be part of that, he says. "There are disadvantages to utilities being involved in certain activities ... that could harm service and could raise costs. And we want to get, in this sector like the other sectors, the best service at the lowest cost."
* Energy Markets Podcast Host Bryan Lee is a co-author of the NACS-sponsored EV charging policy analysis paper.
Grid Strategy's Rob Gramlich and Electric Advisors Consulting's Frank Lacey detail the findings of a policy analysis paper they co-authored, Serving Customers Best: The Benefits of Competitive Electric Vehicle Charging Stations.* We also talk with Doug Kantor, general counsel for NACS, the international association for the convenience store industry, which sponsored the policy analysis.
The analysis found EV charging customers will be served best if utilities are not permitted to extend their monopoly into the nascent retail EV charging business. Yet utility regulators in states across the country are already ordering utility investments in public EV charging stations. The lack of proper economic incentives in the utility regulatory model is already becoming clear as reports abound that utility charging stations are often out of commission, in remote areas, or otherwise unavailable to drivers needing to charge their vehicles.
Convenience stores view transportation electrification as an opportunity, not a threat, to the century-old gasoline retailing business, Kantor says. NACS sponsored the policy analysis to highlight the "potholes in the road" facing convenience stores, he says. "The way electricity markets work now doesn't work really well with a competitive business model."
The paper identifies utility regulatory policies that will discourage private-sector investment in EV charging infrastructure and urges policy makers to address these problems now rather than later when the costs to consumers could be much higher.
"We're at the very beginning of this. It will be much more efficient for everybody if we get this right now instead of waiting. If we have to undo things that we've already done, that becomes costly and inefficient and subject to litigation," Lacey notes.
"There's going to be a tremendous amount of investment and [to] achieve the investment needs we have to do it efficiently. And we need to make it work best for consumers," Gramlich says. Utilities have a "key role" to play in electrification and the overall transition to a clean-energy economy, but EV charging should not be part of that, he says. "There are disadvantages to utilities being involved in certain activities ... that could harm service and could raise costs. And we want to get, in this sector like the other sectors, the best service at the lowest cost."
* Energy Markets Podcast Host Bryan Lee is a co-author of the NACS-sponsored EV charging policy analysis paper.
EMP S3E11 Rob Gramlich of Grid Strategies, Frank Lacy of Electric Advisors Consulting, and Doug Kantor of NACS discuss new policy analysis on EV charging
(transcript edited for clarity)
EMP: Welcome to the Energy Markets Podcast. I’m Bryan Lee, your host for this ongoing discussion of how to achieve a clean-energy transition at least cost to consumers. And today’s episode is a bit unusual because our conversation is with two co-authors of a paper on electric vehicle charging that I was privileged to have been a part of. Rob Gramlich of Grid Strategies and Frank Lacey of Electric Advisors Consulting both have been guests on this podcast before and are the lead authors of Serving Customers Best: The Benefits of Competitive Electric Vehicle Charging Stations, a new report sponsored by NACS, the National Association of Convenience Stores. Gentlemen, welcome.
FL: Thanks, Bryan. It's good to be back with you.
RG: Yup, same. Thanks Bryan.
EMP: It’s pretty clear that electrification of transportation is an absolutely essential element of the clean-energy transition, a transition we must make in response to the runaway climate change we are experiencing right now. It’s a big deal. Some estimate it will double electricity demand, so we will have to build vast amounts of not only new clean generation resources but miles and miles of new transmission lines and interconnections – and we don’t even have enough transmission right now for today’s electricity market. So there are huge challenges ahead requiring many billions of dollars in investment. Why should we care about who owns the charging stations that serve those hundreds of millions of future electric vehicles?
RG: Yeah, as you said, Bryan, there's going to be a tremendous amount of investment and to do it, you know, to achieve the investment needs, we have to do it efficiently. And we need to make it work best for consumers. That's the only way anything about the energy transition is going to happen. And in this case, as with many other issues related to the energy transition, the role of utilities becomes very important. They are powerful entities. That's a powerful structure of an electric utility under a state economic regulator and federal regulator. And they have a key role, but there are disadvantages to utilities being involved in certain activities, too, that could harm service and could raise costs. And we want to get, in this sector like the other sectors, the best service at the lowest cost.
FL: Bryan, I think it's important to clarify what we're talking about here. We're talking about the charging station, the unit that plugs into the car, the material that's quote-unquote “behind the meter.” We're not talking about necessarily much of the billions of dollars of investment that you are mentioning, that will be required.
EMP: We spent a lot of time talking about the economic justification for a monopoly, whether it's a natural monopoly, and if the economic conditions aren’t supportive of a natural monopoly, then you should have competition. Do you want to elaborate on that, Rob?
RG: Yeah, sure. That's a really important concept that a lot of people used to talk a lot about back with electricity restructuring in the late ‘90s and early 2000s. It doesn't seem to get much attention anymore, mainly because there isn't a lot of restructuring happening. But there are questions for policymakers, state and federal policymakers, about where monopoly utilities should play and, you know, and where they should not. I've heard some reactions from some potential investors after we put out this report, saying, you know, we're looking at investing in competitive charging stations all around the country and buying up businesses to do that. But if we catch wind that the local utility is going to start, you know, extending their utility monopoly into this space and using all the advantages that come with that, we're going to be very shy about investing in that area. And you can understand that, right? I mean, for a competitive business to work, no player can have a significant competitive advantage over any other. So this is kind of in the antitrust literature as the idea of “quarantining the monopoly.” So it acknowledges that there are certain sectors that are natural monopolies that require standard public utility regulation. But other sectors are more structurally competitive. And so a lot of the analysis that went into the report was to look and see how structurally competitive this sector is and it turns out, these public charging stations are very structurally competitive. You can have any number of players invest in, build and own these public charging stations and there's no reason the utility needs to do that. There's always exceptions to the rule, and we can talk about that too. But generally, this really should be open to the competitive market with significant, if not complete, restrictions on the utility.
EMP: The paper looked at different ownership models. It looked at, you know, allowing the monopoly franchise into the public charging sphere. Frank, why don't you elaborate on that part of the paper there?
FL: Sure. Bryan, I think you know, just segueing from what Rob was just saying, the competitive advantages in the utility model. To understand the differences between the ownership models, we need to look at what are the inherent advantages that a utility might have. First and foremost, their costs are subsidized, right? Their costs are borne by ratepayers through rates that all customers in their service territory will pay. So in other words, if you don't own an EV, you're still contributing to the utility’s cost of building a charging station. Whereas if it's a private build, only the EV customers are going to use that. So they have to recover the costs from the EV customers. But there's also other things like land access. We talked about the Maryland program in the paper. The Maryland utilities were given authority to place chargers, essentially for free, on government properties. So there's land access, they're getting land rights for free. They're getting the rate subsidized, etc. You don't have that in the private ownership model, the nonutility private ownership model. So what else did we look at? We looked at the utility model, we looked at a private nonutility ownership model. We looked at a government ownership model and, you know, really the flaws there are the same as kind of a utility model. There's a lot of cross subsidization going on. And then the fourth one we looked at was like a hybrid. And these models coexist. And I think we, you know, we determined that, really, to have the system work most efficiently, to speed the development and the rollout of charging stations, you really don't want a hybrid model, because as Rob just alluded to, talking to investors, when investors see the utilities involved or governments involved, they're going to slow down, they're not going to put as much money as they would otherwise put into this market.
EMP: Frank, we kind of talked about this on the episode you were on where we were talking about the problems with retail competition in the states that have retail competition. Outside of Texas, the states that have retail competition allowed the utilities to remain a provider of electricity in the retail market, rather than as Rob mentioned, quarantining the utility from the retail market the way Texas did. So a lot of the problems that we're seeing with retail competition would also be in effect for a hybrid model for EV charging, right?
FL: Bryan, they’re very similar issues. It's revealing the cost subsidy. On its face, it might not seem so obvious, but we have all the things that I've just mentioned. But there's also rates, like just the rates that are being charged to the charging station. Those rates are being subsidized. And if we talk about the dereg markets, the utilities are really pushing the envelope in what they're allowed to do, right? In most of the restructured electricity markets, utilities are really not supposed to be offering energy products other than the default service energy product. If they provide default service-priced energy, this was a topic of our last discussion, that default service is heavily subsidized. It's essentially a pass-through of a wholesale cost. It doesn't include any of the costs associated with serving the customer. And I don't mean delivering – I don't mean the wires charge – but the metering, the billing, the call center – all of those things are absorbed into distribution rates for that utility charging station. So the analogies are very, very similar to what we talked about with the retail subsidies when I was on the podcast before.
EMP: And Rob, the report talks about sabotage, the economic concept of sabotage by a monopoly. Do you want to elaborate on that? Because I think that's a factor as well in having the utilities stay in this retail market for EV charging.
RG: Sure. Yeah, sabotage is a strong word. But it's what they use for whatever reason in the economic literature about this idea of a franchise monopoly in one sector exercising market power in an upstream or downstream sector. And, I mean, you can imagine just why that would happen. This is, you know, a dynamic that happens in many, many industries. But in this case, the incentive of a utility, let's say it's a distribution monopoly utility and there are two public charging stations trying to interconnect to that distribution network. One is their affiliate, the utility company itself trying to do its charging station, and another as an independent, let's say a convenience store, or a 7-11, or a Shell, or something else. Well, I mean, the natural incentive is to, you know, sort of subtly favor the utility affiliate. And there are all sorts of little decisions and policies that go into the interconnection rules, the timing, the costs of upgrades that are assigned, the level of service, etc., or you know, willingness to interconnect at one place versus another place. There are just so many things that it's really hard to police if you're the, let's say, you're the state regulator. So, you know, the economics profession has always been very skeptical of kind of rules-based enforcement of things like that. If the incentives are so strong, and there's so many subtle ways that are not really policeable, or enforceable, then you really should have the structural separation. And, Bryan, you and I worked together at FERC years ago and we used to get, you know, a steady series of comments from the Department of Justice and Federal Trade Commission about right and wrong ways to restructure the industry. I always thought those were very, very helpful. They were always providing lessons from different industries. So that you know, the structural separation is really important to prevent, again, what the economics literature calls sabotage. So it's the, you know, resulting, of course, in the inefficient harm to competitors and to competition. We're worried about competition as a process. And so if the utility has an incentive to favor its own affiliate over competitors, then that that leads to inefficiency and hesitance for third-party investors, as we discussed a minute ago.
EMP: Yeah, so the paper talked about structural separation versus behavioral regulation. FERC in Order 888 opted for behavioral regulation, whereas the antitrust regulators, DOJ and FTC, had argued for structural separation. And as the paper noted, behavioral regulations are difficult to police. Structural separation is a much more elegant way of doing it.
RG: That's right, and, you know, catching these issues early in an industry that's really just starting, or is at an inflection point ready to grow dramatically is, you know, has got to be the easiest time to do this, rather than, you know, going back 10 years later after everybody has already invested and they own and they have businesses running. So it's a really key moment to address this issue.
EMP: And, Rob, you talked about how allowing utilities to extend the monopoly into this space would harm consumers and raise costs. Do you want to elaborate on that?
RG: It's really about competition as a process. And if you have many developers, do the facts indicate we do, many willing investors in public charging stations, then they will actively compete both on price and services. And, you know, we're already seeing, I think, around the country a lot of charging stations where you can go there, usually have fast-charging capability, and you know, there are other services you can get there while you're there and you know, to longer you know, more of a like a 20-minute stay than a five minutes or whatever it takes to put gas in your tank. So there's, you know, more services and things you can do and they're, you know, aligning with other things that people would be spending their time on at these stops. Whereas the other anecdote I'm getting, after we released the paper, is some consumer advocates around the country sort of wrote to me and said, yeah, our, our utility-owned charging stations are really not performing well. They're underutilized. They're in the wrong place, etc. And if you kind of think about the incentive, again, and not trying to demonize any, you know, any company, even any business model, or even, or certainly the people who work at any of these businesses, but you know, if the incentive structure is such that you invest capital in something and you earn the same return whether people use the thing or not, you know, in other words, you make a good or a bad investment you still get the same money back, that's just destined for failure. You know, maybe not always, but in many cases. And so that's what, that's what we're hearing anecdotally about, you know, if you have general rate-based cost recovery by a monopoly utility in public charging stations that the level of service to customers is going to be worse.
EMP: There's been all kinds of media coverage about downtime for charging stations. So where is the incentive to maintain the charging unit if you're just going to get your money back for it, regardless if customers use it, right? That's what you're saying?
RG: Yeah.
EMP: Utility regulators are already making decisions right now about EV charging, the placement of charging facilities, and customers supporting these investments. Frank, let's talk a little bit about the tariffs and rates and the other issues that the paper suggests policy makers should reevaluate. We have tariffs and then we have rates, right?
FL: Yeah. Well, there's one big one. We recommend that regulators and legislatures actually they have to consider what the definition of a utility is. A lot of that is based in statute, or in a place like Maryland, the restructured markets, what an electric supplier is. There are lots of requirements, statutory and regulatory, placed on utilities and suppliers. If Walmart, Marriott, convenience stores, traditional gas stations, all of a sudden have to be regulated as utilities or electric suppliers, it's going to be a long time before we build out this network of needed EV charging, right? So that at a very high level, policymakers have to look at that definition. Typically, it involves some kind of, we're providing electrons to a retail customer – a charging station is providing electrons to a retail customer. Is that a utility? Is that a competitive supplier? So I think that needs to be looked at – in all jurisdictions, 50 states and D.C. – so that we can get a comprehensive definition of who's being regulated and how. Pricing. When I say pricing, I mean the price of the unit of power that comes out of the charging station. Some states say it has to be related to the regulated tariff costs, some states say it can't be regulated. It can't be related to a kilowatt-hour charge, for example. Which might be great. If you're a hotel chain, you might want to just, you know, include it in your overnight parking rate. If you're a restaurant, you might want to bundle it with a meal. If you're a traditional kind of convenience store on the Interstate, you might just want to do something that's a kilowatt-hour basis, but you might also want to bundle it with a lunch, or you know, something. So I think the regulation of rates is problematic. That's the rate for the electricity, not necessarily the delivery. We talk about demand charges in the paper. We make a recommendation that demand charges, if a charging station is separately metered, that demand charges should not be applied. Demand charges in general are typically tied to weather. They're to capture a cost at peak. Every utility is slightly different, but they're typically designed to capture a cost during peak usage times, which are typically related to weather. Charging is not going to change based on the weather. So it’s just like fueling today of vehicles is not really exacerbated, like, you're not getting more fueling when it's 100 degrees out than you are when it's 70 degrees out. People fuel, in fact, you might get less fueling, less charging when it's 100 degrees out because people are less likely to want to be sitting idle for half an hour or an hour somewhere. But there's no link to weather and charging or today weather and fueling. So I think there's a strong case to be made to eliminate demand charges. Demand charges have a huge impact on a vendor's electric bill at the end of the month. So, without demand charges, you can predict what your expenses will be and you can create a reasonable price for the end-use consumer based on that knowledge. With demand charges, you don't even know when you're going to get hit with demand charges because you don't know when the peak hour is going to be. You don't know if it's four o'clock on the day that it's a 105 or five o'clock on the day that it's 104. And so you can't predict with any degree of certainty as you're setting prices when the demand charge will be applied. Summer monthly. Summer annual. It just complicates things. And then you have different levels of demand charges across rate classes, across service territories. And you know, if you get into, especially in the Northeast, service territories are relatively small. Like I drive between three electricity service territories daily because I'm right on the Pennsylvania/Delaware border. So I'm in DelMarVa’s territory, I'm in PECO’s territory, and I'm in PP&L’s territory almost every day. Every day I'm out in my car I mean all three of those right? And if they have different demand charge models, prices for delivery of electricity to the charger can be vastly different and that will drive inefficient placement of EV charging.
RG: Bryan, if I could add on to Frank’s comment there. There's a good description in the report about that demand charge issue as Frank describes. But also just want to just shout out to a lot of the folks we cited because others have worked on this before. We cited the Great Plains Institute on that. I think RMI and IREC show up a few times here. So I don't think anything we're saying is brand new maybe, but I'm not sure anybody put it together on this this exact question. And we’ve got 114 footnotes in here citing a lot of different reports from different areas to kind of focus on this particular question.
FL: Thanks for adding that ,Rob. That's a great point.
EMP: On a recent trip to Missouri we stopped at a rural grocery store, kind of like a general store. They had invested in fast-charging facilities anticipating electrification of transportation and seeing it as a niche, as an ancillary service that they could provide to enhance their revenues. And so I started talking with the store owner and he said, yeah, demand charges are just killing the business. I can't do it with demand charges. Maybe that'll maybe that'll provide an incentive for storage along with EV charging, I don't know, but it certainly is an impediment to investment right now.
FL: Bryan, the storage is an interesting concept, but you still have the problem of not knowing when the peak is going to happen. And, you know, if you look at the network of fueling stations, today, they clearly don't have the expertise to be predicting, you know, four o'clock tomorrow is going to be a peak hour. That's a pretty niche service that has been of no need for them for that industry, forever. Now, that's going to become extraordinarily important if you don't eliminate the demand charges. And that service is just going to add to the cost of the charging. So even if you have storage you don't know that you need to deploy the storage today, right now. And you won't know that until the end of the month. You're like, oh, shoot, I should have used the battery at 4 o'clock that afternoon instead of when I used it at, you know, 5 o'clock the day before, whatever. Like you won't know until the end of the month when you should have deployed the battery.
RG: Yeah, if I could add too. Energy storage is going to provide so many services in so many parts of the electricity chain. We have a growing storage business, and we should, but it's not necessarily helpful to anybody just to have storage for the basis of kind of arbitraging regulatory policy. Like, if it's just there to avoid a rate design that doesn't have to be designed that way, that's not that's not the most useful thing we can do with the battery.
EMP: So Frank talk a little bit about the tariff changes that the report recommends state utility regulators to consider.
FL: I think specifically we talk about the demand charges. We talk about, you know, freedom of rate choice for a charging station. And we don't want to tie it to kilowatt-hours, or make it not related to kilowatt-hours, which can be equally as constraining from a charging station product development standpoint. We talk about incentivizing, not necessarily on rate side, but incentivizing the utilities to properly invest in interconnections and interconnection teams internally. We recommend that the utilities should really focus on the things that utilities are expert in, and that really only the utilities can do by virtue of their monopoly. I think those are the biggest ones.
EMP: I've exhausted my notes. I don't know if there are other things that the two of you would like to add that we haven't discussed?
FL: Bryan, I think Rob hit on this a little bit earlier but it's worth reemphasizing. We're at the very beginning of this. It will be much more efficient for everybody, if we get this right now, instead of waiting. If we have to undo things that we've already done, that becomes costly and inefficient and subject to litigation and blah, blah, blah, blah, blah. We actually do make a recommendation in the report that utilities basically divest of the chargers that they've already invested in. We believe that a public process will yield the fair market value for the charging stations. In some places, it might be more than what the utility paid. In some places it might be less than what the utility paid. But that's a sunk cost from the utility’s perspective, so it's best to move forward now, instead of making this problem bigger and bigger and bigger. And if the network isn't built out efficiently, it will prevent people from buying EVs. People will say, you know, I can't go pick up my kid at school in an EV efficiently. So I'm not going to get one. I'm going to write I'm going to stick to what works. So if we want to get this enacted, if we want to move to an EV model, we have to lead on EV charging. It's not really a chicken and egg. We know that there is range anxiety, that's a term that is very common. It's very real. And until that range anxiety is diminished, we're not going to roll out EVs as fast as we otherwise should be or could be. The utilities will delay that process. Utility ownership of EV charging will delay that process and will exacerbate range anxiety and will just slow the process down.
EMP: And the cost could be considerable if we're requiring the utility to replicate the land acquisition and other costs that are already in place for our liquid fuels distribution system, right?
FL: A phenomenal amount of money if they if the utilities tried to replicate what is there for liquid fuels, the cost would be astronomical.
EMP: And that's what caught my attention at the NARUC meeting this past February here in Washington. They had a session on EV charging. And it the whole premise that, as I understood it, the whole premise of the discussion was to identify areas of the grid where the interconnection will be least cost, not that's going to be most effective for the charging customer. And I think that’s kind of we're looking through the wrong end of the telescope here.
FL: Bryan, I think we see that a lot. Even go back to demand charges, wires demand charges, or demand charges are there for a utility to manage its cost and manage its infrastructure expenses and build out. Really, customers don't care about that. We hear about what the utility wants with respect to DER siting, kind of a different topic. You know, we could really use DERs over here. We're going to incentivize that. And that only works if that customer in that location where you need the DER wants a DER. Customers are going to act in their own best interest. And it frequently does not align with what's in the utility’s best interest. But that's okay. We don't all need to be unified in what our best interests are. The utility as a service organization should respond to its customers and what its customers need. It should not force its customers to live with what it needs. No, no business works that way.
EMP: And just to clarify, for our listeners, DER is distributed energy resources.
FL: Thank you. Yes.
EMP: That could be rooftop solar, it could be a battery storage device, etc. Rob, do you have anything to add there?
RG: One other point on this sort of business model issue, which is that utilities will have a big role. I'm certain personally of that, because the networks for distribution and transmission need to be expanded to accommodate all this additional load. And those networks are so tied in together, they are indeed networks, there's so many in the technical parlance, or network externalities, between all of the different assets on that network distribution system that it makes sense to operate as a network. And significant economies of scale such that investing at a higher capacity is cheaper per delivered kilowatt-hour. So a lot of the sort of standard public utility, natural monopoly dynamics do play out in the distribution system and the transmission system. So we're going to have, you know, some people, I think, go pretty far with the whole, you know, changing utility role. There used to be this theme about the utility death spiral. I don't see that happening anywhere, really. So there's going to be a significant need for utilities, but since they are a monopoly franchise, like literally there's public policy that says this entity gets to operate this business, you know, that's a significant privilege, and it should not you know, that any entity that gets to do that should not be able to use that privilege to advantage their business in an upstream or downstream sector like this one.
EMP: That sounds like a good place to leave things to me. Gentlemen, thank you very much for your time. Now we're going to turn the conversation over to the sponsor of the EV charging policy paper, NACS, the National Association of Convenience Stores, although I guess it's an international association at this point. Doug Kantor is general counsel for NACS. Doug, welcome to the podcast.
DK: Thank you for having me.
EMP: Your website says NACS aims to, quote, “ensure the competitive viability of its members’ businesses.” Is that what prompted NACS to sponsor this policy analysis?
DK: That is a big piece of it. Look, we all know electric vehicles are a big part of the future of the country. Our industry, the convenience store industry, has built itself on serving American motorists for just about 100 years and wants to serve them for the next 100 years. And it's worked out really well for American consumers. They've got people on just about every street corner fighting each other to save you a couple of pennies per gallon. Electric vehicle drivers ought to have that same advantage and the businesses ought to have the same opportunity to serve people that they've had.
EMP: Do your members view electrification of transportation as an opportunity or an existential threat to their business?
DK: It is an opportunity. Now there are real potential potholes in the road, so to speak, because the way electricity markets work now doesn't work really well with a competitive business model. But there's no question our folks see it as an opportunity. Not a threat, but something to be worked out so that market economics can work for the benefit of businesses and consumers.
EMP: Well, with the utility regulatory model, you're not talking about market dynamics, you're talking about ratepayers and sunk costs and cost recovery. That’s a difficult business to compete against. Your locations are already determined basically by market forces but wouldn't a utility monopoly EV charging system have to replicate all of that investment?
DK: Look, a utility model could not and will not replicate all of that investment. It's too much. There are over 150,000 convenience stores across the country. It just, one, can't happen, and, two, they can't possibly do it as well. You know, one of the big problems with the utility model is it's not very consumer friendly, frankly. When all of us get our electricity bills – and you may be much more expert at this than I am – but for me and most people I know you look at that and you have no idea what it means, why it says what it says. Pretty much all you know is, I'm going to throw up my hands and say, well, I have to pay it. So why don't I just do that and quit worrying about it. By comparison, we all understand dollars and cents per gallon. It's really straightforward. And we've got this amazing choice where you can say, oh, I’ll pull in over here and pay $2.50 or whatever it is on a given day, or maybe across the street it's a couple cents less. But also maybe across the street, they have a better cup of coffee. They have cleaner restrooms. And this is the kind of problem you get into with the utility model, where even if they could replicate the investment, which is just too much money, they're not going to be in places where people want to be, where people drive, and they're not going to have all of the amenities around it that people expect and should expect from the restroom to the cup of coffee to the sandwich – you name it. In fact, a few years ago as we were really getting into this some more, a congressman from Utah at that time, Congressman Nick Adam, Democrat, a good guy, really concerned about all of these issues, told us a story about how he very proudly bought an electric vehicle. He and his wife, they made a considered decision to do it. And he looked up all the places where he could charge in his community. And so he drove right over, plugged in his car, and he was in the distant back of a parking lot of a post office, which wasn't even open at that time of the evening. And he plugs in the car feeling great about himself and looks around and says, well, what in the world do I do now? I can't go use the restroom. I can't get a cup of coffee. This is terrible. That's the problem you're going to run into with a utility-driven model.
EMP: Well, the “C” in NACS stands for convenience. You deal with customers. Utilities deal with faceless ratepayers that they're not even necessarily answerable to unless the commission makes them. But there's also technology evolution, and technology that will ultimately become obsolete. With a utility model the utility is going to be able to pass that cost off to the customer and not have to worry about it. They can leave the obsolete technology there. They're still going to get paid for it. And so, you know, there are things like battery swapping that aren't even on the radar right now, but which companies are pursuing. And so if the economics show that a different technology is warranted, your members are going to be better placed, better positioned to respond to that, because they're more steeped in the vagaries of the competitive marketplace than a utility.
DK: That's exactly right. I think there's a couple things there. One is, you’re right, these utilities, ride obsolete equipment and machinery for a very long time. Frankly, it's caused a lot of problems, especially in California, where infrastructure has gotten old and outdated. For our folks, when there's a profit margin there, they buy new fuel dispensers, for example. They buy new equipment inside the store, new refrigeration units, all the time. They build beer caves right in their stores. Where just to say, hey, I've got the next best thing. I'm going to attract customers and make more money. And so not only did they invest in that new technology and try to beat their competitor, but really importantly, and this has been a huge problem already in electric vehicle charging, is they make sure that equipment works. If you're dependent on your livelihood that people can fill up their car with gas, or in this case plug it in and get electricity, you're going to make sure that equipment works. There's a huge problem with electric vehicle charging equipment not working when people drive up to it. And a part of that is both a combination of, one, this utility model, and the fact that people aren't making money on this right now. So who cares if it's not working? If you're losing money when people actually plug into it, that's not a great incentive.
EMP: Well, they make money whether people plug into it or not.
DK: Exactly.
EMP: it doesn't matter if it works to them. So a lot of states right now are already pursuing the utility model. That's why this report, this paper, came to fruition. There was a recent NARUC meeting here in February, the National Association of Regulatory Utility Commissioners, and they had a session on EV charging infrastructure development. And I'll just read from the description that was in the agenda. I didn't take notes. I wish I had. It says that transportation electrification, that's TE, they already have an acronym for it, has the potential to be a source of downward pressure on rates. In other words, they're looking at this infrastructure development to serve TE load siting it strategically to avoid locations that will require costly upgrades to support additional load. In other words, they're eyeing it from the wrong end of the telescope, in my opinion. They're looking at how we can develop this at least cost but probably at least convenience to the consumer. But it does have a nod to that. They say ratepayers paying for all or part of this infrastructure should get the most benefits for their cost. But why should ratepayers be developing this? Your members are ready to do it without taking any ratepayer money.
DK: That's exactly right. And frankly, ratepayers are not a monolithic entity, and we need to recognize that. There's lots of Americans, ratepayers, who whether they're elderly or on a fixed income or lots of other circumstances, low income and can't afford it, they're not going to drive electric vehicles. They shouldn't be paying for somebody who is driving a Tesla to fuel up their Tesla. What our industry does is charge the people who are using that equipment. And we all think that's fair, right? Certainly in the gasoline context we do. None of us would want to pay for our neighbor to fill up their giant SUV just because they want to drive that vehicle. That's up to them. And great. There's folks who will charge them for it and it all works out. And it should be the same way on electricity. You know, that is precisely why you do need to look at it through this sort of customer-facing lens. What do the people who are actually engaging in this activity, driving electric vehicles, want and need, who's going to best serve them? And what we know from all kinds of markets across the United States is, a monopoly provider is never as good. They're never as good on cost. They're never as good on service. Now the reason we do it for electricity is the cost of providing and building infrastructure to fixed structures, homes, offices, etc., is prohibitive. You don't want to duplicate it. So fine, you set up the system that we have. But by their very essence these vehicles can move around and you don't have that problem. Right. You can have multiple providers. You're not duplicating infrastructure, and you can serve them much better.
EMP: So we've already got a very strong camel’s nose under the tent, if you will, in terms of utility-based EV-charging infrastructure development. In the paper we talk about economic sabotage by utilities – or by monopolies in general. But utilities, I know from my experience as a journalist covering the industry for decades that, utilities are expert at sabotage and using the regulatory process to thwart competition. I can cite a thousand examples. Are you ready to compete with that? Or will you throw in the towel and just let them have the monopoly?
DK: We better be ready to compete with that because I think the future of this market depends on it. But if you look at it, states have begun to figure this out. The state of California last year, put forward a grant program and said, wait a minute, with these grants we're going to favor the private sector and we don't want utilities to participate, or at least going to make it much harder for them to participate, because we're seeing this problem. California has led on this infrastructure, and they see that this utility model is problematic. Just this year, both Georgia and Texas passed legislation saying, no, we're going to have the private sector putting in electric vehicle charging. The utilities are only going to be able to get that where there's no private-sector company willing to take on that investment and take the risk and try to do it. And it also told the utilities, hey, you better go back and look at your rates and look at things that are problematic, like demand charges that don't work for this market, to make sure that the private sector can get into this. So I think we're starting to see some recognition of what the reality really is on the ground when you have a monopolized market versus the potential for a private market. And so I think we'll see more states follow the lead of California and Georgia and Texas, which are very different states, obviously, but all of them saying, hey, just going down the road of inertia in the way we've always done electricity is going to be a problem.
EMP: Let's talk about the problems that your members face in trying to get a toehold in this business, because you mentioned demand charges. We cite that in the paper. You know there's an anecdotal example out of Colorado with an NACS member, Kum & Go. That company is actually choosing their EV charging sites based on demand charges because the demand charges can be a business killer for this. Talk about the challenges that your members face here.
DK: Yeah, so I do think the demand charges number one, just because it can be such a huge hit to these businesses. And often when they first get into this, they don't understand how big a hit it is because these fast chargers create a huge rapid demand for power from the grid. And unlike when the demand charges really were first conceived, the thought process was, well businesses can curb their behavior in certain ways, right? You can manufacture at different times of day and try to deal with the load factor in ways that are helpful and so the demand charge is there to curb behavior. But if we're being consumer friendly, and there's no other way to be if you're in this business, you can't tell people, hey, it's it is a high-demand time of day, come back and charge another time, right. The guy who's trying to get home from work is not going to be real happy to say, hey, I might run out of power before I get home. They're going to charge when they charge. So it doesn't fit with the consumer-side model. But the other piece is when you're, as you pointed out, when you're dealing with a monopoly provider who is essentially your wholesaler of electricity, and if they're also the retailer of electricity, they can do a lot of things to mess around with your competitiveness. They can make their own cost structure much cheaper than yours by charging you more, by charging themselves less, you name it, there's a lot of strings they can pull there. And that's not right, because, ultimately, we know from other monopolized markets, that's going to raise prices for everybody. And, and so that you've got to watch out for. As you point out, there's an interconnection piece of this that they can monkey with in terms of the cost of it, etc. I worry a little less about that, frankly, only because, hopefully, if the utilities are acting in their own interest, them creating those connections and selling more electricity, even if it's at wholesale, is still better for their business. And they should recognize that and hopefully there's some political pressure that they not disadvantaged people trying to put in more electric vehicle charging in that way. But we'll see. You know, the scary thing is that a monopoly provider holds all the economic levers and so that's why a big part of the paper, as you referenced, says, gee, the best thing might be to say, hey, don't have utility in the retail part of the market, then you don't have to worry about them pulling any of those strings and disadvantaging the folks who are in the retail part of the market.
EMP: Yeah, that's why the paper concluded that it's best to quarantine the utilities from this business. When I was at Exelon probably 15 years ago there was a proposal in California before the CPUC, a company wanted to get into the EV charging business. And so this set off alarm bells with member companies at the Edison Electric Institute, and I found myself pulled into a meeting with company reps over at EEI’s building and they were hair-on-fire concerned about competitors getting into the business of selling electricity. I'll never forget the rep for a southern utility saying, “This is ours.” That’s the utility mentality that you're up against.
DK: Yeah, and look, we just disagree with that mentality entirely. Folks in our industry, or really any part of retail that serves American consumers, those folks, those businesses go out of business all the time. Right. They compete with each other hard and there is no guarantee they will make money. It can be risky from that perspective. But new ones always pop up too. And, and that very dynamic market is good for consumers. Like I said, it means everybody fights really hard to serve them best. It means everybody fights really hard to get them the best cheap deal they can. Somebody saying, hey, this is ours, we own it, always works out badly for the customers of that entity. And we just think it is the wrong model. It will lead to all kinds of problems. It will lead to underinvestment. It will lead to higher prices. It will lead to bad service. You know, one really telling example here is the other leading utility, over our lifetimes anyway, in American history, is telecommunication. We had AT&T dominate and monopolize phone service in the United States. It was a big problem. In fact, in the 1980s, the Federal court broke up AT&T to try to deal with it. And we then had a model very much like the utility model now, which is regional Bells that just monopolized their own regions on telephone service. And it didn't do anybody any good. In the 1990s Congress passed the 1996 Telecommunications Act and at that time long distance service was well over $1 a minute for a phone call.
EMP: Yeah, we’d wait until 11 o'clock at night to make a long-distance call.
DK: That is exactly right. When Congress said, oh, you have to let any competitive provider ride over that telephone line and compete for a consumer’s business, if you'll probably recall, we both have a few gray hairs, there were commercials that would have a giant dime on the screen and say, hey, we'll only charge 10 cents a minute for your long-distance phone call. That's a pretty big reduction from the dollar-plus-a-minute that we were paying. And we've seen huge dynamism in that market since then. Cheaper and cheaper calls, you know, now we walk around with the cell phones where most of us have unlimited calling, right? You have a monthly plan, and you can talk on the phone all day long. Doesn't cost you anything more. That would have been completely unheard of to the monopoly provider AT&T. It never would have happened.
EMP: Yeah, and you're focusing mostly on the economic aspect, but the technology aspect of this is what I find most interesting. We talked about technology obsolescence a little bit ago. But these cell phones that we're walking around with have more computing power than the Apollo astronauts had when they landed on the moon. And we're still operating the grid on 90% of the technology would be recognized by Edison if we were to bring him back from the grave.
DK: That's exactly right. And look, folks in our industry, you know, one of the biggest issues that it is out there with respect to electric vehicle charging is that it can take a long time to charge your vehicle. Especially when you compare it to filling a traditional car with gasoline and how long that takes. Our members already who are in this are investing in the next-level technology, higher kilowatt chargers, to make that faster and faster. For two reasons. One is you attract more customers. Look, if you can tell people, hey, it's only going to take you 10 minutes to charge, rather than 20 or 30, that's a gigantic advantage that's irrespective of price that people will pay for frankly. The other is, for our members, getting more people through the site faster, where they might not only charge, but buy that cup of coffee or a sandwich or something, is a huge benefit as well. And so it's really going to drive that investment in whatever that next technology – you mentioned battery replacement before. Our folks are working with Ample and folks like that who do the battery replacement rather than the charging. Who knows what technology is ultimately going to win here. But you know, one thing’s sure, if we don't have any reason to innovate, we're never going to find out what the best technology would have been.
EMP: That's well said. Interstate highways and rest stops. If you're on an Interstate highway and it's not a toll road, you're going to pull into a rest stop. There are going to be picnic tables. There's going to be restroom facilities and maybe a handful of vending machines. You're not going to find somebody selling you gasoline there. That was a conscious choice on the part of Congress, right?
DK: That's exactly right. And there's a couple big reasons for it. One is those Interstate exits are some of the most dynamic and profitable markets in communities along the Interstates in the United States. Often the restaurant, gas station, hotel, at those Interstate exits are the largest taxpayers to those local communities, the biggest economic drivers. If you put stuff at the rest stop, you kill off that local economy. And in fact, what studies have shown is you get fewer and more expensive services at those rest stops. Because you don't have the competition. The rest stop just says here, here's one provider, boom, we'll have a burger place. And you can get gas, you can get a burger, whatever. But you go to that Interstate exit and you may have five, six of those providers to choose from. And so, one, that's a big deal. The second big deal about that is, actually, Congress, in a really smart move, gave a preference. Those vending machines at the highway exits, there's a preference they are serviced by blind-owned businesses. And that is a tremendous program for the blind across America servicing vending machines at Interstate rest stops. And it's not one that they look kindly on folks taking away what is a really important business.
EMP: I had a private conversation with someone who is integral in one utility’s statewide electrification effort. I won't identify him because it was a private conversation, not necessarily for the record. But apparently his company eyes Interstate highway rest stops as an opportunity for EV charging infrastructure investment. Again, investment of ratepayer dollars. I want to emphasize that. They apparently would like to change the law to permit EV charging at Interstate highway rest stops and see NACS as a major opponent of their effort. Is this an issue in Congress right now? Do you want to elaborate on that?
DK: So it is an issue in Washington. The last time it came up, came up in Congress for a vote, there were more than 80 senators who voted against commercializing those Interstate rest stops. The actual data on this is overwhelmingly clear that putting businesses at Interstate rest stops is a losing proposition. It's bad economics. It's bad for customers. So yes, we know that some utilities and others are eyeing those, those rest stops as a potential place to put charging. But it is going to mean, again, less services than you would get otherwise, less competition than you would get otherwise, because anybody who then has a business at the Interstate exit near those rest stops is going to say, well, I'm not doing that. I'm not putting in chargers because everybody's just going to go to the rest stop. And that is a bad dynamic and most members of Congress do recognize that. Unfortunately, at times, folks at the Department of Transportation have entertained these ideas. We do our best to dissuade them of it, but the studies are really, really clear that you get bad outcomes.
EMP: Well, you talked about the economic benefit that this provides. Jobs. That's what congressmen care about is jobs. I mean, just look at Breezewood, Pennsylvania. That's a clear example. The Congressman back in the recesses of history made sure that everybody got inconvenienced by being dumped off of 76 and 70 into Breezewood.
DK: Yeah. You'll get some very strong opinions about Breezewood, but there's no doubt you've got a lot of choices for where you want to eat and stop when you get there.
EMP: Well, I've pretty much exhausted my notes, Doug, I don't know if there's anything else you want to add for the good of the record here. I always invite our guests to elaborate that way.
DK: I mean, I think we've covered it, you know, the one thing I might add is just that
there's, I think there's no denying the fact that if we care about building out electric vehicle charging infrastructure, having a vibrant private market is by far the most effective way to go. There's just never going to be the dollars, whether it's utility-based that ratepayers have to pay, or public money that governments put out, to replicate what you can get if you just let people serve customers and compete with each other and make a profit. We've seen that in industry after industry. It's what built the country the way it is. Why wouldn't we use the same dynamics that built up the entire fossil fuel industry, right? As well as all our other industries in a successful way. Trying to fight against all of that is a losing battle.
EMP: I thank you for the opportunity to play a role in this and to, hopefully, change some people's perspectives on the future of the electric industry.
DK: Well, thank you. It's an important conversation and we're happy to be part of it with you.
EMP: Doug Kantor, general counsel for NACS.
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