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The Widening Technological Divide

Increased business and regulatory challenges have utilities lagging in investments to meet energy demand a decade from now.

Fortnightly Magazine - April 2005

A primary rationale behind the restructuring of the electric utility industry 10 years ago was that competitive markets manage supply and demand, incent innovation, and allocate investment more effectively than centrally regulated monopolies. While fundamentally sound in principle, the policy implementation of this rationale has not adequately reflected either the unique physics or the public entitlement characteristics of electricity. The consequence has been a breakdown in the traditional public/private partnership built around the obligation to reliably serve, and upon which the electricity sector's value and reputation was built.

In short, the electricity enterprise has tended through restructuring to become a victim of its historic success in maintaining universal service reliability at ever-lower cost. The essential foundation for restoring enterprise vitality in the coming decade is rebuilding this fundamental public/private partnership, based on technology innovations that can increase the value of electricity service, including providing higher levels of reliability and security. This transformation of the traditional electricity supply network into tailored, multi-functional service networks should result in significant new business growth opportunities, reinforced by greater consumer satisfaction.

Impediments to Progress

The impediments that must be overcome in the next decade revolve around four themes:

Figure 1 - Cost Pressures on the Electricity Sector

1. Lack of Appropriate Public Policies. The electricity enterprise must deal with numerous conflicts among various federal and state policies and regulatory bodies that undermine the achievement of a confidently stable regulatory regime. Short of a crisis, resolution of these conflicts within the current sector leadership structure could take a very long time. In the meantime, the enterprise is trapped in a continuing period of turmoil in which its shared vision of the future has fragmented, its stakeholders have become polarized, and its commitment to long-term development has eroded. The expectation that competition would somehow fix this "broken wheel" has thus far failed because it lacks the essential foundation on which successful markets depend—that is, adequate infrastructure and consistent, enforceable rules.

    2. Insufficient Investment Incentives. Adequate investments in infrastructure continue to be deferred due to the financial risks of policy uncertainty and inadequate compensating return for investors. Until these risks and rewards are confidently rebalanced, neither existing entities, nor new players, are likely to make the system investments needed. As a result, the U.S. power-supply system remains dependent on aging, analog electromechanical technology, developed in the 1950s or before. This technology legacy can neither keep pace with the steady growth in the quantity and quality of electricity demand, nor effectively support an open access competitive electricity market structure.

      3. Difficulty Communicating the Rationale for Improvement. Participants in public policy debates face severe competition from advocates of many other causes. In such an environment, it is difficult to hear and understand even the most compelling public policy arguments. Effectively communicating the rationale for