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Rethinking Regulation: Twelve propositions

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  1. A consumer revolution is underway in the electric utility industry. The signs have been evident long before the Great Recession of 2008-09 slowed load growth.  I spoke twice at Goldman Sachs’ Annual Power Conference soon after the Great Recession ended and made that point but the facial expressions of the expert audience told me they were not buying it. A few years later I spoked at a PJM conference on the future of the grid. This time I connected better with the audience. Two of the three other panelists agreed. The only issue was what forces were driving the change, with some saying the primary force was utility DSM programs, some saying it was governmental codes and standards, some saying it was distributed energy resources and some saying that it was fuel switching.
  2. But now the trend is no longer being questioned. Over the past decade, consumers have changed the way they think about electricity and how they interact with electricity.
  3. Diversity is the hallmark of customer preferences for consuming electricity, just as it is for any other product or service. Electricity is no exception. Utility consumers fall into several categories. Some want bill stability and are willing to pay more for it. Some want the lowest bill and are willing to shift and reduce load. Some have gone organic in every aspect of their life and want to only buy green power to mitigate climate change. And some are primarily interested in lowering their electric bill.
  4. An all-embracing technological revolution is underway, spurred on by the advent of digital technologies. Just about all customers have smart phones today. One of out of two have smart meters. More and more customers have energy efficient appliances with digital chips embedded in them. Some customers live in highly energy efficient dwellings. And a growing number have solar panels on the roof, with some also installing solar batteries. In Hawaii, with very high electric rates, some 60% of new solar installations are being paired with batteries. In California, where planned safety power shutdowns are being carried out, the same can be expected. Finally, more and more customers are buying or leasing EVs.
  5. Disintermediation of utilities is well underway and is unstoppable. They may be a regulated monopoly but customers keep divining creative ways to manage their energy use outside of utility directives. They are acting in their self-interest. The concept of uneconomic or economic bypass does not interest them. Nor does the concept of creating subsidies. They want local control and grid independence. The new entrants are well on their way of make the utility customers their customers. It’s premature to say that Armageddon has arrived but to pretend as if nothing has changed is to live in denial and accelerate the arrival.
  6. In the meantime, utilities and regulators are moving slowly, indeed one might even say ponderously, through rate cases. Regulatory lag is running into years at times.
  7. Utilities are often heard saying that regulators are frozen in time. And regulators are often heard saying that utilities are frozen in time. The blame game continues unabated.
  8. For all practical purposes, utilities think of the regulator as their main customer. The end use customer is almost an after-thought, consigned to being a “ratepayer” or a “meter.”
  9. And the regulators often think of the legislature or the governor as being their main customer.
  10. The elected officials have their eyes on the next election and logic often takes a back seat when it comes to winning votes, and this transfers to the energy policies that are enunciated.
  11. It used to be said that rate design is more art than science. Now it has become mostly politics.  
  12. The best way to Rethink Regulation is to make customer centricity the guiding principle. This means leaving the past behind and focusing on the future. That does not simply mean creating a new website or sending text messages and emails to customers. Nor does it mean just engaging in social norming to shape customer behavior. It means changing the culture of the industry, reimagining utilities as service providers and developing new products and services to meet the changing needs of customers. This journey has to begin by finding new ways to engage with customers and to observe them in real time as they make their energy buying decisions. Unless these steps are undertaken, the customer is going to leave both the utility and the regulator in the dust.

[1] This article is based on remarks that I made at the APPrO 2019 conference in Toronto, Canada on the 21st of November. I benefited from the comments made by the moderator, Ian Mondrow, Partner, Gowling, WLG, and my fellow panelists, Robert Dodds, vice chair of the Ontario Energy Board and Gordon Kaiser, CEO of the Alberta Market Surveillance Administrator and a former vice chair of the Ontario Energy Board. The views expressed here are entirely mine.

    Ahmad Faruqui's picture

    Thank Ahmad for the Post!

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    Matt Chester's picture
    Matt Chester on Dec 3, 2019 5:28 pm GMT

    For all practical purposes, utilities think of the regulator as their main customer. The end use customer is almost an after-thought, consigned to being a “ratepayer” or a “meter.”

    And the regulators often think of the legislature or the governor as being their main customer.

    This is pretty powerful to point out, Ahmad. I think it definitely shows the state of the sector and how the utility industry really is so unique compared with others out there. Are there leaders within utilities and regulators that are recognizing this and pushing to change it?

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