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Warning: What the Boulder mess says about investor-owned utilities

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By: SGN Staff

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By Kenneth Skinner, Ph.D.

 

Kenneth Skinner has over 20 years’ experience in risk measurement research. He has significant experience in economic analysis and modeling, having worked as an energy consultant with Financial Times (FT) Energy and PHB Hagler Bailly and as the Derivative Structuring Manager for Sempra Energy Solutions. Today he is Vice President at Integral Analytics.

 

I thought you would enjoy reading his insider analysis of the Xcel Energy - City of Boulder drama. Dr. Skinner believes Boulder holds a warning for all investor-owned utilities. - Jesse Berst

 

Have you been able to catch some of the ongoing drama in Boulder Colorado lately? I was able to catch the city council live web cast on July 23rd – compelling late-night reality TV. Just to recap (spoiler alert), Boulder, famous for becoming the first “smart grid city,” is now proceeding with a plan to municipalize its electric system. In essence the plan requires Boulder to purchase Xcel Energy’s distribution system and meet certain performance objectives including:

·         Charging rates that do not exceed those charged by Xcel Energy at the time of acquisition;

·         Charging rates sufficient to pay the operating expenses and debt payments, plus an amount equal to twenty-five percent (25%) of the debt payments;

·         Maintain reliability comparable to Xcel Energy; and

·         Include a plan for reducing greenhouse gas emissions and other pollutants, and a plan for increasing the use of renewable energy.

 

The city says they can meet these objectives. The voter-passed provision allowing for the creation of an electric municipality required an independent review of the city's conclusions. On July 23rd’s web cast, the independent consultant concurred with the city, that in fact the performance objectives can be met. So it appears the city will move forward, with or without Xcel Energy’s cooperation, to form its own electric municipality.

 

Under the hood of the Boulder plan

There is a lot of interesting stuff here. We could pick apart the plan, look and the strengths and weaknesses and try to better understand what Boulder is getting itself into. But more importantly I believe, is the implications for other investor-owned utilities actively involved with smart grid or AMI infrastructure upgrades. It seems that in some way the combination of making Boulder energy smart, and failing to deliver on the promised smart grid enabled energy independence, may have led to an outright revolt! In effect, Xcel Energy educated the consumers to the point where they expected more from the utility and came to the conclusion that they could do Xcel’s job better themselves.

 

Perhaps we are witnessing one of the perils of the new smart, efficient, environmentally conscience consumer, empowered by distributed energy options and efficient end use technologies.

 

Two key lessons

I believe there are two important lessons from the Xcel experience. First, Xcel failed to demonstrate real benefits from their smart grid investments. I’m reminded of a joke that was going around a smart grid conference EPRI hosted a few months ago. Numerous utilities were represented as well as smart appliance manufacturers and representative of the US EPA. Although the vision of a consumer-enabled smart grid was clearly articulated, it became apparent that the regulated utilities were not incentivized to move forward with a smart grid business model. The utilities were happy to install smart meters, because those could be rate based. But the applications for the smart grid were nowhere to be found… That was the joke – we have the technologies, we now need the apps.

 

Second, the Boulder experience highlights the importance of a level of consumer engagement that may not be possible in the regulated utility business model. Several times during the July 23rd Boulder City Council meeting, the proponents of municipalization pointed to the qualitative benefit of building an electric system that is responsive to the renewable energy priorities of the community. “If we take over the utility, the concept behind SmartGridCity – of consumer information, consumer choice, and consumer communication – would be a huge part of what we would do,” said Sarah Huntley, a City of Boulder communications manager. “It’s one of our fundamental reasons why we want to get involved: to let people know enough about their energy use and be empowered to make choices about how to reduce use.”

 

In a recent paper entitled “The Paradox of Leading Industry Transformation,” Eric Woychik of Strategy Integration points out that “Utilities need new regulatory incentives, a new structure, and new business models if they are to prosper in the clean energy future.” “Utilities face increasing regulatory and public pressure to shift to clean energy options and in response have significantly increased the use of these resources. To date only incremental change in policy has occurred and the utility industry seems paralyzed by the countervailing positions of regulators and stakeholders resulting in stasis. As shown in other industries when incumbents face the threat of disruptive change, slow response and indecision ultimately lead to major decline and exit from the market.”

 

The solution is better regulation

So what is the solution? How can energy utilities overcome regulatory, structural and competitive forces to achieve positive transformation and tap the massive potential represent by the new energy paradigm? It is our belief that the solution must in part be driven by changes in regulatory policy. First, regulators must empower utilizes to innovate at the speed of the market. In short, utilities need the flexibility to enable third party innovation in new demand side technology, in response to the needs of the energy consumer. Second, regulators need to encourage specific rate designs to both encourage investment in alternative energy models and provide cost recovery of utility capital investment. Third, regulators must accept decoupling provisions that specifically allow the utility to profit if the investment provides overall system wide benefits and reduced sales volumes, thus making the utility indifferent to selling less product and improving the ability of conservation and distributed renewable generation to operate within the utility environment.

 

The bottom line is that utilities that see value in conservation and renewable distributed energy need to be proactively incentivized to participate in these markets, rather than the backward-looking view of reacting to lost sales, and the slow decay of the traditional rate base. Finally, forward-looking utilities need to be encouraged to diversify into unregulated businesses positioned to supply energy services to those moving away from the centralized utility.