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Building the Next Generation Utility

Fundamental changes require bold strategies.

Fortnightly Magazine - January 2009

This will lead to an estimated 10 percent reduction in consumption. Reduction in electricity requirements will ripple through transmission and distribution as well as generation. An end-to-end approach to any strategy and business case therefore is critical.

Thus, although the business case for smart grid is viable, it requires: 1) continued improvements in technology, specifically around interoperability; 2) an end-to-end perspective from generation to retail; 3) a long-term investment horizon; and most important, 4) a shift in the regulatory framework to ensure shareholders adequately are rewarded for the investment. The business case will vary dramatically from one utility to the next and the sensible way forward lies in a large-scale pilot approach where technology is deployed at a city or municipal level and tested under real-world conditions.

Theme 6: Regardless of which smart technologies are selected, utilities proactively will need to reshape the regulatory compact. The current regulatory compact was created at the beginning of the 20th century with the goal of spurring the construction of a complete and operational electrical grid. It guarantees a rate of return for every dollar of capital investment as well as reimbursement for reasonable expenses associated with operating the infrastructure.

While the societal benefits of reduced energy consumption are clear, utilities will experience a compounding decline in power sales and revenue. Furthermore, a reduction in peak load will reduce both the wear and tear on existing equipment, as well as the need for new infrastructure. Both will reduce the need for capital investment and inhibit the utility’s main avenue for growth. Under the current compact, utilities cannot satisfy their responsibility to shareholders to generate growth while simultaneously embarking on energy efficiency and demand-response programs that destroy demand. In an industry accustomed to 1 to 2 percent annual growth, the impact from energy- efficiency programs that potentially could reduce consumption from existing customers by 10 percent (albeit compensated by new customer growth) will be significant.

To many, the answer is decoupling, already enacted in many states. But decoupling alone will be insufficient as it does not completely address the threat of demand destruction and capital deferral. Along with any decoupling of rates, a provision is needed that allows the utility to recover some of the revenue it stands to lose. Utilities under such a compact would be kept financially whole while being able to aggressively promote measures that address societal demands. This regulatory compact could not last forever because the revenue requirement associated with deferred capital investments is an escalating cost the consumer should not have to bear in perpetuity. Accordingly, this regulatory compact should have a clear expiration that would provide utilities time to transform their operations. Utilities will need to be proactive in shaping this regulatory agenda. While a departure from the current, fairly safe, regulatory compact creates risks and uncertainty, a stalling or delay strategy will create significantly greater risk and be disadvantageous to shareholders.

Theme 7: The implementation of energy efficiency and smart technologies will change the role of the customer from being a price taker to a price setter requiring