The Change for Energy: A Call to Regulators (pt.2)
In our previous installment, we took a brief look at the customer’s view of the utility along with how the consumer’s view of energy has changed. This shift in self-generating devices, home generation, and new options in storage puts the Utility in a predicament: how to keep customers who have a desire to consume energy cheaply and with low environmental impact. This is where the regulators, specifically the Public Utility Commissions can assist with this business model transition for Utilities.
With customer increasing demand for efficient electronic devices, the growing prevalence of sensors and electronic monitoring (Internet of Things), as well as demand for clean renewable energy, brings new pressure on a Utility to support the customer in a changing environment. The current regulatory model falls short of embracing the need for a more agile Utility. I’ll simplify the interaction in order to create a basis for discussion: Utilities receive their revenue from customers paying bills, but whose rates are decided on and approved by the Public Utilities Commission. So revenue is pretty flat for a Utility unless there is a population increase in the service territory. In order to invest in their own business, Utilities raise capital by asking the PUC whether they can raise their customer’s rates. The PUC looks at the validity of the infrastructure improvements planned along with the Utility’s customer satisfaction levels, and then decides whether the Utility can raise capital by raising a customer’s rates. Customers are charged more so a Utility can make energy more efficient, reliable, and more plentiful, something the customer is demanding. But here is where it falls down. What happens to customer satisfaction when a Utility raises their rates? It goes down of course. What happens the next time the Utility asks for a rate increase? It’s a harder fight for them to get capital for efficiency and infrastructure improvements, which also decreases customer satisfaction. If you take this structure and add to it the speed and agility in which the energy economy is moving, a Utility has one hand tied behind their back.
This regulatory structure forces utilities to find profit in the internal cost saving discipline: the Operations and Maintenance budget. Running their business with less overhead seems like a great philosophy, and it is. But the adverse effect is that they are less likely to invest capital in internal efficiency gains because efficiency improvement isn’t always considered a capital investment. They often are not able to account for depreciation as they would an asset, on an efficiency investment which hits their operating budget. For example, the investment in technology to gain operational efficiency needs to be tied to a physical asset to gain depreciation value. This approach does not live well with subscription-based services like Cloud computing which can drive real value and efficiency within the organization. So a Utility is less likely to invest internally at workforce improvements, making them less efficient in the long term.
A point of healthy discussion and debate would be to demand the local PUC award rate increases based on the efficiency of their customers. Sounds counterintuitive at first but, the award must be invested in renewable generation and grid optimization. This gives a Utility a stake in how efficient they and their customers are, not an adversarial relationship with energy efficiency. This would incent the Utility through the local PUC, to invest in renewable generation with specific auditable metrics. This award of a rate increase would affect the consumer negatively at first, but would cause them to have a greater incentive to reduce their usage. If the consumer uses less energy in the home, then give the customer a Federal tax break directly when these efficiency metrics are met to balance the rate increase. This approach requires a strong Federal or State role, but a current lack of cohesive strategy isn’t keeping up with the agility demands of the market. Of course these are just a few ideas for discussion. Today’s energy environment calls for more flexibility, not necessarily less regulation, but more strategic regulation with the end goal being reliable, renewable, and safe energy.