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Building the iUtility

Market forces are transforming the IOU business model.

Fortnightly Magazine - August 2008

At a Wall Street briefing earlier this year, EEI’s David K. Owens used the “t” word—“transformation”—to describe the current state of the U.S. electric utility industry.

“What is happening in our industry is the beginning of a transformation,” he said. “And much of this transformation is the result of the need to address the issue of global climate change.” 1

A couple of weeks later, FERC Chairman Joseph T. Kelliher weighed in on the same topic. At the opening of a FERC technical conference, Kelliher said, “In my view, the central challenge facing the Commission today is finding the best possible mixture between competition and regulation.” 2

Kelliher and Owens both recognize that the industry’s current transformation will require electric utilities to reformulate business plans, and will require government agencies to reinvent their regulatory regimes. But how do we get there from here?

Historically, electric utilities were driven by one concern and one concern only—sell electricity. IOUs have been supported by a regulatory compact between government and industry. Just as utilities must change their business to one which sells energy services and products—not just electricity; government regulation must change to promote the public good of a cleaner environment—not just a healthy energy economy.

The iPhone serves as model and metaphor for the new electric utility—the iUtility. The iUtility no more resembles a smoke-belching power plant than the iPhone resembles the heavy black rotary dial telephone of the past. Rather, the iUtility, like the iPhone, is technologically sophisticated—and also is adaptable, transparent, competitive and responsive to changing market demands.

The iPhone is not attached to any wall or desk. It’s small-scale, customizable, personalized, and customers use it to access music, videos, maps, photos, the Internet and their daily agendas. Telephony is largely a by-product. Similarly, the iUtility will sell various energy and financial services and products, and might resemble the iPhone more than it does today’s IOU. Someday, the iUtility might operate free of all regulatory constraints and might even compete in some of the same markets as the iPhone.

But first things first.

Transformation from today’s IOU into tomorrow’s iUtility will occur through two regulatory changes. First, the traditional regulatory compact will be renegotiated. Second, the traditional rate formula will be reinterpreted.

Renegotiating the Regulatory Compact

The traditional regulatory compact served the U.S. utility industry well until the infrastructure was completed, utility plants reached scale, and new producers entered the market with lower-cost electricity. Consequently, our electricity future, and the iUtilities that will succeed in that future, require a new set of assumptions and a new regulatory compact.

We can assume, first, that consumers prefer affordable, reliable, and clean electricity without a significant change in lifestyle. Second, private investment will continue to realize new market opportunities, capture opportunity costs, and promote new technologies. Third, competition and market-based regulations are preferable to heavy-handed or