A more dynamic approach to grid modernization.
David Malkin is the director of government affairs and policy for GE’s Digital Energy business. Paul A. Centolella is a vice president with the Analysis Group, and formerly was a commissioner on the Public Utilities Commission of Ohio.
Today's electric distribution companies face a dilemma. Increasingly, they are expected to modernize their networks: replace aging infrastructure, improve resilience during severe weather, integrate distributed and variable renewable generation, and secure systems against cyber and physical attacks. Yet these expectations arise at a time of slow-growing, flat, or even declining sales - a trend that discourages capital investment.
This problem is rooted in an outdated cost-of-service model of regulation that reviews costs as if the functions and activities of the modern distribution utility were little changed from those of yesterday. This model of regulation can slow the pace of innovation and defer investment that could otherwise deliver significant net benefits to customers. Yes, cost-of-service regulation helped support the 20th-century expansion of electric service, but it did so largely during periods of falling costs and increasing sales.
Building a 21st-century power system that's affordable, resilient, and environmentally sustainable will require a regulatory model that enables investment in new technologies and supports business models that deliver greater value to customers. However, cost-of-service regulation offers little incentive for utilities to improve performance beyond minimum levels required by regulators and may delay the pace the grid modernization.