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IOUs Under Pressure

Policy and technology changes are re-shaping the utility business model.

Fortnightly Magazine - June 2009

and increased supply costs from renewable technologies will, over time, put a massive strain on utilities’ ability to increase customer rates. Customers will look for alternatives, and alternatives will be there. The arc of increasing efficiency and declining cost, present in so many other areas, will not bypass the energy industry, particularly given the current focus on energy-related technologies and the political and social momentum behind energy efficiency, green technologies, and energy independence. Importantly, the pressure for change doesn’t have to be widespread. Change at the margins from customers with the ability and willingness to change will be sufficient to serve as the catalyst.

Utility management, not surprisingly, is accustomed to strategic challenges imposed by legislative or regulatory fiat— i.e., industry deregulation, emissions controls and renewable portfolio standards. But signs point toward market and technology forces providing significant additional impetus toward reshaping the delivery landscape and damping steady increases in transmission and distribution revenue streams.

Change is not necessarily synonymous with deterioration, financial or otherwise. Utilities can do many things to position themselves for success, including: taking a more active and leading role in technology development; making a long-term commitment to becoming IT centers of excellence; rethinking the regulatory compact; offering new, innovative products and services developed with third-party assistance; partnering with numerous, cutting-edge technology companies to better understand technology trends and impacts; enhancing their presence and relationships with key customers; and undertaking the long, but important process of culture change.

There are no easily identifiable or well-trod paths to the future. But as General Shinseki, former U.S. Army Chief of Staff, is reported once to have said, “If you don’t like change, you’re going to like irrelevance even less.”

 

Endnotes:

1. Transforming America’s Power Industry: The Investment Challenge: 2010—2030 ; The Edison Foundation, November 2008, pg. xiv.

2. EEI 2007 Financial Review—Plus 2008 Developments .

3. Energy Information Agency (EIA): http://www.eia.doe.gov/cneaf/electricity/epm/table5_2.html.

4. The Edison Foundation report notes that a direct link between higher investment costs and rate changes is not clear until fuel costs and other expenses are included. The report notes that under certain scenarios, fuel, and presumably supply costs, could be lower. Even if certain fuel cost elements in the supply portfolio decline ( e.g., wind and solar), however, capital cost recovery will still represent a significant cost element.

5. Renewable Energy Data Book ; U.S. Department of Energy, September 2008, p.13 .

6. Direct Testimony and Exhibits of Steven D. Scroggs on behalf of Florida Power & Light in Docket No. 07-0650; October 2007

7. Moody’s: Risks of CO 2 regulation moving closer for power sector ; SNL, March 19, 2009.

8. Miller, Jeffrey et al., “ Goodbye Safe Haven ,” Fortnightly , March 2009.

9. Energy Information Agency: http://www.eia.doe.gov/emeu/steo/pub/contents.html.

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