Page 2: How to forestall regulatory constraints >>

By Jesse Berst

 

The new business areas made possible by the smart grid are both opportunities and threats. The opportunities include better ways to serve customers, greater customer satisfaction, improved reliability and new revenue streams. The threats are also diverse. They include:

·         Regulatory constraints

·         Disintermediation

·         Hollowing out

 

These issues would be challenging enough on their own. But they are even more

taxing because of the way they interact and combine. In this article, we'll discuss how regulatory constraints may prevent many utilities from reaching their potential, to the detriment of its employees, shareholders and customers.

 

Our future is coming into focus

We are moving into an era that will be marked by:

• Rapid technology change
• Fast-paced innovation from many different sources
• Third-party companies eager to siphon away value
• Global competition that will increase the pace and up the stakes

Yet many utilities work under a regulatory compact that limits their ability to respond quickly and effectively to these changes. That's why getting regulation right may be the single most important smart grid task. After all, what is a utility to do if regulatory mandates increase at the same time its market power (and revenues) decrease? If it wishes to retain market power by launching new services, how will it earn money on those services?

We face hurdles ahead

Even those utilities with the foresight and the capacity to be proactive about the smart grid may face significant regulatory hurdles. The concern is that regulators will continue to try to apply traditional regulatory policies to an industry being rapidly reshaped by technological change.

 

For one thing, the "traditional" regulatory model thinks of asset life in terms of decades, as was typical of last century's electromechanical gear. Many of today's digital devices have lives measured in years, not decades. The "traditional" mindset often fails to incentivize – and sometimes even penalizes – utilities that take technology risk.

 

That regulatory compact, which was so important to utility growth and progress in the last century, may impede utilities in this one. Like it or not, the smart grid wave will wash over virtually all utilities sometime within the next decade. When it does, they will find themselves with lots of potential competitors. Yet, because of the limitations set by current regulation, many of them will be restricted in their response to that competition.

Page 2: How to forestall regulatory constraints >>

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Old Habits Die Hard

Jesse Well said. The regulatory construct is seriously outdated and unworkable for the reality and benefits of smart grid. I say old habits die hard because it is both regulators and utilities that are slow to change to a new paradigm. Yes utility managers need to "chance the arm" and reach out and start the conversation regarding alternative approaches. Some utilities have done hard work here such as ComEd and Ameren in the SG Collaborative in Illinois. That process brought a lot of people together and achieved much greater common understanding. While there were many political haymakers thrown in the veto override fight that ensued, the legislative support was first established by virtue of the collaborative. While regulators have been cynical about some elements of SG or worried about issues such as cyber security, they are entirely correct to expect a clear and convincing argument around consumer value. Making that pitch is out of the ordinary new substation petition utilities are accustomed to. As I have wrote regarding the SG Inflection Point, utilities have to come forward with tangible, measurable benefits that can be made real by their SG platforms. Further they have to be willing to have their performance measured and paid accordingly. Much like other sectors of the economy that have adopted digital technology.

David O'Brien - 05/15/2012 - 06:40

Time to Attack the Utility Business Model

Great viewpoint - We need to think of the challenge ahead in this way: If I was to start an electric utility company today, how would I construct a viable business model that would add value to the public while providing great opportunity for those investing in the business. We probably would decide the best approach would be to do EVERYTHING to become as efficient as possible. Certainly, conservation would be top of mind as would be comfort, choice and alternatives, flexibility, etc. I would argue that selling kWh would not necessarily be the only measure but a part of this business. A few years ago the energy industry experienced a renewed push to add significantly more intelligence to the system - the term Smart Grid was born. At the time, there was also a push for increased use of renewable energy and discussions of distributed generation and its benefits became more active. At the time, I spoke with a utility executive about looking at the current business model and start thinking about a business model that might make more "sense". Immediately, I was met with the challenge of dealing with regulators. I answered by saying that perhaps it is up to the utilities to prove a new model would work. I further suggested the utility might consider testing the model internally to develop the necessary "proof" for regulators, consumers and other stakeholders. I believe it will be necessary for utilities to think outside the box as much as the many companies that are looking to benefit from a more intelligent system and the new energy economy it can create. It is time to put on the thinking hats, look for the entrepreneurial spirit within the industry and tap into it to create a more viable and applicable business model.

Luis G. Vargas, Jr., PE - 05/15/2012 - 07:12

New Business Models

Suggesting utilities need to preserve their "market power" is a bad idea because it's going to provoke strong reactions from new players. However I agree that utilities and regulators need to think hard about the current regulatory and business models because they were designed for another era. I'm personally not a fan of continuing the utility monopoly except for the business of building and running wires, and even there the wires operator should not have the right to impose onerous conditions on self-generators. Monopolies have no incentive to innovate. Others need to be able to play so that everyone will be forced to focus on customer needs.

Jack Ellis - 05/15/2012 - 07:55

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