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Building the iUtility

Market forces are transforming the IOU business model.

Fortnightly Magazine - August 2008

command-and-control regulations. Fourth, significant market imperfections occur where energy and environment converge. Most particularly, a clean environment must be recognized as a public good that unregulated competitive markets can’t efficiently provide. And, finally, inaction is unacceptable in the face of the industry’s opportunities and challenges.

In general, rate structures that add layers of incentives and surcharges have the effect of reducing competition in the utility business. Over time, greater regulatory simplicity and freer markets will reduce costs and improve service quality. But in a time of transition, regulators will experiment with a variety of options.

The traditional regulatory compact involved government ratemaking in exchange for the provision of electricity service. Under the terms of the renegotiated regulatory compact, regulators will continue setting the iUtility’s rates in exchange for the provision of energy and financial services. The regulatory demands of renewable portfolio standards (RPS), renewable energy credits (RECs) and disclosure requirements, for example, will be offset with rate relief that enables the iUtility to sell electricity as well as energy efficiency and environmental protection. The new compact will balance consumer interest in rates that are just, reasonable, and nondiscriminatory with shareholder revenue interests by ensuring the iUtility’s energy services and products are sold in either a protected geographic market or to a protected set of customers.

RPS requirements impose a new type of service obligation on the iUtility to provide a specific percentage of its electricity from renewable energy sources such as wind, solar, or bio-energy. The utility can purchase such power in the market, thus reducing its dependence on fossil-fuel generated electricity while stimulating new markets. To date, 28 states including the District of Columbia have enacted renewable electricity standards. Collectively, the state policies apply to roughly 40 percent of the U.S. electricity load, and an RPS of 20 percent by 2020 would have the effect of increasing total renewable energy capacity to 180,000 MW. 3 If the iUtility must saddle the RPS burden, then the regulatory compact must allow the costs to be recovered.

In some part, RECs may be a way to offset the costs by allowing iUtilities to trade RECs both in satisfaction of their RPS obligation and as a part of the iUtility’s revenue stream. In other words, the compact can be written in such a way as to allow the iUtility to profit from REC trading.

Disclosure requirements are another service obligation imposed on the iUtility. Disclosure requirements obligate a utility to provide information to its customers and investors about its fuel sources and emissions profile. Disclosure creates uniform standards to allow consumers to price and compare the resource mix and the energy characteristics of their electricity purchases. Today, over half of the utilities in the United States are subject to disclosure requirements. Through disclosure, customers are provided with information, have increased product choice, and can improve their energy efficiency. Further, uniform disclosure requirements should help rationalize energy markets, make trading more transparent, and help send more accurate price signals.

If the iUtility will be burdened with RPS and disclosure requirements as part of the service obligations