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Razing the Regulatory Compact

Smart-grid technologies will dismantle the regulated utility business model, says economist Lynne Kiesling.

Fortnightly Magazine - September 2007

When consultants start talking about creating new service models, the eyes of utility executives and regulators tend to glaze over. After all, transformation has been predicted before—loudly and insistently—many times. Many so-called “transformative” technologies have come and gone. And despite many qualitative changes in the way utilities run their networks, most U.S. consumers still buy and use electricity in more or less the same way they have for about 100 years.

But that is destined to change, according to Lynne Kiesling, a Ph.D. economist and senior lecturer at Northwestern University. The primary reason: smart metering.

“Loads will behave differently in a distributed network with price responsiveness,” Kiesling says. “We’ve never had that potential before, and it may well be a paradigm shift for the industry.”

Kiesling spoke to Public Utilities Fortnightly about the long-term implications of that shift. In short, she predicts new technologies will prompt the industry to revamp its regulatory structures and business models over the next 20 years.

Fortnightly: People have talked about transforming the utility industry for more than a decade, and it hasn’t happened. What makes smart metering and the smart grid truly transformational?

Kiesling: Digital communications technology is bringing the ability to achieve more decentralized control, and I think this means a transformation that is different from what we’ve seen in the past.

Historically, from its inception, electricity has been perceived as a dangerous service. As a result, the industry’s technology and regulatory institutions have evolved to provide top-down, centralized control. The physical and economic models we use to understand the industry are very top-down and centralized, because of the historical safety concern, and because of supposed natural-monopoly features of the network.

Now, the long-term vision for a smart grid describes a highly distributed industry, both in terms of operational control, as well as the ability to satisfy diverse customer preferences with innovative products and services, focused on supply and demand. Digital communications technology changes the network from being command-oriented to being transaction-oriented, and allows for the aggregation of distributed intelligence.

For example, the GridWise Olympic Peninsula test-bed project included grid-friendly appliance-controller cards that could sense frequency excursions and automatically change the behavior of appliances to help bring frequency back in line. Appliances and thermostats were programmed automatically to be price responsive.

Those technologies create the potential for distributed control—taking advantage of distributed knowledge about the network and customer preferences and behavior. Loads will behave differently in a distributed network with price responsiveness than they do in a network with centralized control and dispatch and without price responsiveness. We’ve never had that potential before, and it may well be a paradigm shift for the industry. That’s why it makes a lot of incumbents in the industry nervous.

Fortnightly: Many utilities and regulators are skeptical about the idea of innovative services and business models. How are these new models different from the retail-choice initiatives many people view