The time-honored discounted cash flow method for determining appropriate utility returns falls short when interest rates are low. Inadequate ROEs ultimately increase cost of capital and wipe away...
The Transformation Myth
Telecom-style revolution is beyond our reach.
innovative telephones, with new features and designs, offered in a rainbow of colors that Ma Bell wouldn’t have approved. Then came Internet service, with AOL bringing the Web within reach of every phone line, and thousands of Internet service providers subsequently turning dial-up and DSL access into a new consumer service business. The market exploded with Web 2.0-based online applications, and next came cell phones, smart-phone apps and ultimately the wireless operating-system wars (Apple iOS vs. Google Android vs. RIM Blackberry etc.). As I write this, I’m using my Sprint HTC Evo as a wi-fi hotspot; an inconceivable idea before telecom deregulation.
Now try to imagine an equivalent for any of this in the electric power industry. Even if Congress were to impose a national regulatory model that opened every utility territory to retail competition—a heretical idea in today’s context—what could we possibly create that allows consumers to use electricity in a fundamentally new way? How could electricity service deliver entirely new value that didn’t exist before? What’s the electric-industry equivalent of an iPhone?
It’s not demand response, dynamic pricing, or even energy management, because those things don’t add a speck of value to the utility service. Rather, they’re tools for managing the service that utilities have been delivering for decades. Smart metering and time-of-use pricing are important advancements, but will they improve the customer’s life? No, and if we’re being honest, we must acknowledge they might worsen customers’ lives, by requiring them to do something extra in order to keep the electricity coming as reliably and cheaply as it did before.
Utilities are struggling to come to grips with this fact, even as they try to educate and engage customers in the smart grid transition. As Itron’s Tim Wolf told Fortnightly in this month’s cover story, “[Customers will ask] why do things need to change? The answer might be that things need to change in order to remain the same. If you want energy resources to be efficient, affordable and reliable … then we have to put more intelligence into the system and run it more efficiently.” (See “ Growing Pains .”)
We might argue that intelligence itself adds value, particularly to the degree it allows consumers to do things like automate the operation of various appliances in their homes. However, home automation is enabled by network communications—not generating plants and power lines. So really it’s just another telecom service that happens to connect with some utility systems, and perhaps the utility company can offer it as part of a retail service. This might be interesting and profitable as far as it goes, but it’s hardly a transformational change.
So what does that leave?
There’s one innovation in this industry that can be called truly transformative: smart charging for electric vehicles (EV).
EVs represent an entirely new way to use electricity, and already we’re seeing competition among various players to figure out the best ways to deliver recharging services. EV charging raises a host of questions and challenges that must be resolved, and each solution could spawn new products