Policy makers and power companies around the country are experimenting with different responses to changes in the power sector, creating a range of new utility business models, and a diversity of regulatory structures that support them.
On the minimalist end of the spectrum, the utility can be limited to a role as a “wires company,” maintaining the part of the grid that is a physical monopoly – the wires and poles – while competitive providers supply the rest. At the other extreme is the “energy services utility,” which owns and operates all necessary systems to deliver energy services to consumers. Between these two, a “smart integrator” or “orchestrator” role involves utilities partnering with innovative firms to coordinate and integrate energy and related products and services without utilities necessarily delivering all of them.
Three models to emulate
We have identified three good regulatory models for fostering change and aligning utility operations with the public interest.
First, the UK’s new “RIIO” model is an example of regulation based on a broad-scale performance-based incentives with revenue caps. Utilities file business models to achieve RIIO’s goals: “Regulation for Incentives, Innovation, and Outcomes.” New utility business models, recently filed with the regulator, show how utilities will accomplish a range of public policy outcomes, provide customers “value for money” and measure performance to support incentives. RIIO aims to pay utilities to deliver what society wants going forward, while U. S. regulation tends to focus more on whether society paid the correct amount for what it got in the past.
Second, the “Iowa model” describes a series of settlements entered into by parties and approved by regulators that led to electricity prices in Iowa that did not change for 17 years, even as wind power rose to 25 percent of the generation mix, fuel costs fluctuated, and customer loads grew and changed. The Iowa model shows that stakeholders can negotiate for and settle on a regulatory bargain that works for them to keeps rates stable, and provides for shared earnings and utility profits in a less adversarial process than most. The largest Iowa utility, MidAmerican Energy has announced plans to get to 39 percent wind by 2017, so the approach appears to encourage outstanding movement toward clean energy as well.
The final regulatory model we call the “grand bargain,” which combines elements of the RIIO and Iowa models. Most commissions are trapped in solving particular regulatory issues without any opportunity to look across all the issues and work toward comprehensive and coordinated outcomes. This results in what we term “this for that” regulation and can result in confusing and contradictory outcomes. Each issue eventually comes to resolution, but the whole of the resolved set of issues is less than the sum of the parts. In a “grand bargain” model, a commission would encourage utilities and stakeholders, including commission staff, to negotiate a comprehensive settlement to a range of desired outcomes.
The common thread for all three of these models is that they clearly define the goals and the parameters, call utilities to new and improved levels of performance, and grant the companies the flexibility to achieve them. All three require unprecedented new levels of communication and cooperation, based on recognition that utility and regulatory “business as usual” will not be sufficient to reach solutions for the challenges we now face. Companies and regulators need to experiment and find agreement, outside the traditional adversarial venues of utility regulation.
Utility leaders agree. “I think utilities need to be given a little more flexibility to try new products or new programs in order to take advantage of changes in the marketplace, be it charging electric vehicles, distributed generation or the like,“ says Jonathan Weisgall, VP of Legislative and Regulatory Affairs for MidAmerican Holding Company.
Among the nation’s 3,000 or so electric utilities across 50 states, there are many variations but a fundamental truth: current business models were developed for a different time. A modern electricity grid will require a new social compact between utilities, regulators and the public.
Ron Lehr is an attorney and consultant with energy sector clients, and former chair of the Colorado Public Utility Commission. He wrote Utility and Regulatory Models for the Modern Era for America’s Power Plan. Bentham Paulos is the project manager for America’s Power Plan.
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