[BETA] Fortnightly

MANY STATES ARE CONSIDERING THE IDEA OF opening billing and metering to competition at traditional distribution companies. %n1%n Electric utility executives can no longer assume that a regulated monopoly distribution company, or "disco," will retain control of both the "wires" function and billing and metering services. %n2%n

This new prospect raises questions: Should a disco seek to retain billing and metering as a regulated monopoly, complete with the obligation to serve all customers requesting electric connections? Or should the company ask its legislators and regulators to remove the burden of the obligation to serve and allow the utility to compete freely for profitable segments of the retail billing and metering market?

Utilities should evaluate these questions in terms of achieving long-term profitability for stockholders: What's the best environment to boost disco profits and enhance the brand image or customer loyalty? Whichever the future (em whether billing and metering services are regulated or deregulated (em distribution utilities will face potential advantages and disadvantages. A few simple guidelines can help a disco choose whether to abandon markets for billing and metering services, or to retain and grow that share.

If the disco is risk-averse and inefficient in providing billing and metering services, then rate-of-return regulation offers the best probability of protecting profits. Or, if the disco is efficient in billing and metering (but still risk-averse), then performance-based pricing regulation might offer a chance to increase profit share. Conversely, if the disco is a risk-taker, and there's a fair playing field, deregulation of billing and metering might help the company increase profits. However, without a level playing field, the disco might consider selling off its billing and metering operations altogether.

I recommend no fixed path, but it's certain that the firm that dominates billing and metering markets will win control of links to the customer.

Regulated Metering: Points at Issue

Continued regulation in billing and metering will guarantee an increasing revenue stream. However, the utility may find itself overwhelmed by a flood of transactions for direct-access service and forced to serve uneconomic customers.

INVESTMENT NEEDS. When retail choice becomes available, many electric retail customers will be on hourly billing to take advantage of the competitive generation pricing market. This change could force regulated discos to install hourly energy meters or extract usage data from customer load profiles. Billing operations will have to become more sophisticated to accommodate time-of-use generation pricing, which most likely will involve multiple suppliers. %n3%n

Is the disco savvy enough to take on such investment? If so, the decision could lead to an expanding rate base, even in times of a stagnated connection market, since customers will require new meters or retrofits.

CHOICE OF MODEL. How the disco is regulated in the future may strengthen or weaken the economic advantages of retaining regulated billing and metering services. If the disco operates under traditional fair-rate-of-return regulation, expansion of metering and billing services will generate additional distribution rate base and ultimately extra income (em assuming regulators perceive the investment as prudent. This traditional regulation reduces the risk of recovering costs to expand assets to