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Clearing Up / Bearing Down

[October 13, 2017 / No. 1821]

Utility Business Models, Regulation Must Adapt

SUMMARY: As a number of trends influence the electric industry -- among them technology, environmental issues, customer engagement, big data and lack of load growth -- both the utility business model and utility regulation need to adapt, writes contributing columnist Phil Jones.

As a Washington UTC commissioner for 12 years and a president of the National Association of Regulatory Utility Commissioners, I was privileged to be in the catbird's seat to observe many trends in the energy industry and utility regulation over the past decade.

Some trends or "movements" are transitory and can be considered a "topic du jour," such as a new gadget or unproven technology, a new regulatory tool, or a new idea for a new public-private partnership. But others can persist beyond a couple of years and have enduring impacts.

Some of these certitudes, or inexorable trends in the utility and energy sector, are exogenous to what state commissions do in their daily bread-and-butter work of adjudicating rate cases and creating rules. Commissions in the West and the Northwest need to respond in a constructive, proactive way to these trends.

Here is a brief description of these trends:

  • Technology: Both the pace of innovation and type of technologists impacting this sector (namely, many more computer scientists and cybersecurity experts, rather than traditional electrical engineers) have accelerated. Lower prices per megawatt-hour for solar and wind technologies as well as more efficient natural gas-fired combined-cycle plants have been a strong trend, and such declining price trends are enabling more potential for energy storage and distributed technologies.
  • Environmental Imperatives: This is called many things -- deep decarbonization strategies, for example, or promotion of clean-energy technologies. Regardless of what happens with DOE Secretary Rick Perry's request that FERC provide extra compensation to baseload generation such as coal and nuclear, state mandates, rules and policy guidance for cleaner energy sources and deeper GHG reductions are for real and will not be easily reversed, in my view. The utility sector, broadly speaking, has gotten on board with this and will not turn back.
  • Customer Engagement: We are seeing more residential-customer involvement in energy in our region, such as solar rooftop systems, in what some term a trend toward "prosumers" (e.g., production and consumption in one), either for environmental or cost reasons. We are also witnessing rapid growth in large renewable purchases by corporations (such as Microsoft) that have adopted corporate sustainability goals of 100-percent renewable energy or a similar aspiration. So, the level of consumer engagement is strong and persistent, whatever the goal and motivation.
  • Big Data: The enormous strides in computing power and data storage, as well as the explosion of Internet of Things (IoT) devices, are creating copious data that can be stored for long periods of time in cloud computing. In addition, the synchrophasors and phased measurement units on high-voltage lines of BPA and other transmission owners in the West are producing large amounts of data.
  • Load (Lack of) Growth: Based on the load and resource balance in their integrated resource plans, the "new normal" for most utilities in the Pacific Northwest is load growth under 1 percent and close to zero. The Great Recession of 2008-2009 had a material impact on gross domestic product growth and energy usage, but it is nearly certain that state energy-efficiency mandates (such as Initiative937 in Washington) as well as utility portfolio energy-efficiency policies will continue to suppress load growth.

Besides these inexorable trends exogenous to utilities and transmission owners, certain other strong trends are apparent in the industry.

Industry sectors that were previously standing apart with separate business and regulatory models are increasingly being merged.

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Transportation electrification is the most obvious example of this, in which the environmental imperatives of reducing carbon emissions are merging with the innovation interests of automobile and electric-bus manufacturers in both increasing efficiencies and building connected, autonomous and shared vehicles.

The deployment of electric-vehicle infrastructure poses an emerging but vital challenge for utilities and state commissions to address in the near future, along with a host of third-party providers and myriad stakeholders, advocates and potential EV owners.

As I have argued before, in terms of cybersecurity, the IT and the OT (Operations Technology) divisions within a utility, previously separate, have converged for operations of SCADA, dispatch of electric power, and enterprise computer and data systems (CU No. 1803 [10]).

So what are the options for our region's utilities and commissions, and what are the best paths forward in this increasingly dynamic environment?

First, we need to recognize that both the business model of utilities and the regulatory paradigm (orregulatory compact) developed over the last 100 years need to change.

I admire Samuel Insull, an acolyte of Thomas Edison and an immigrant from England at age 22 in 1881, who developed a powerful and durable utility model and regulatory structure in the 1920s in the Chicago area. It was straightforward and powerful -- it allowed utilities to develop as regulated monopolies, regulated by a state commission, and with low-cost financing from Wall Street, enabling them to take advantage of decreasing costs of generation and scale, providing customers with great benefits.

Electric streetcars, failing at the time, were purchased by Insull's holding companies and brought into the fold of the utility structure. Certain political imperatives had to be achieved, notably including the provision of universal service to all socioeconomic classes and that commission proceedings to set just and reasonable rates would be reasonably transparent. The utility was thus provided a legal and regulatory structure in which to build a sustainable revenue-producing business in its exclusive service territory, and allowed a legally required opportunity to earn a commission-determined return on equity. The investment community bought into this idea and, with reasonable regulatory orders by commissions, provided huge amounts of capital to build out our nation's energy infrastructure.

At the same time, utility stocks (IOU's only) provided a stable flow of revenues both for the utility and its shareholders. Over time, utility stocks became known as a "grandmother" stock providing stable and high dividend yields that gave peace of mind to retirees and others in their later years.

Unfortunately, we have to put a stake in the muscle (note that I did not say "heart," which implies a sudden and unpredictable death) of this paradigm developed by Insull and others. The model is simply unsustainable over time, and probably undesirable, given all the change factors I have cited above. Accordingly, utilities and commissions should not play a game of pingpong in trying to say the other party is responsible for changing either the "utility business model" or the "regulatory compact."

So, what to do and what models are out there for Northwest commissions to follow? In a future column, Iwill focus on Illinois and Oregon, two states stepping forward in a process -- albeit not quick and easy -- thatwill address these issues. [Phil Jones]


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