A Time of Challenges & Opportunities.

Sponsored by Warren Wood, VP, External Affairs & Communication, Ameren Missouri.
Written by Tom Byrne, Senior Director Regulatory Affairs, Ameren Missouri. 

Tom Byrne

In 2016 providers of electric service as well as their regulators and customers stand at a critical cross-road, unprecedented in the period since electricity was first provided for public consumption.  The challenges facing the electric utility industry are numerous and difficult to resolve: customer expectations for reliable service in the digital age are higher than ever.  In addition, customers’ demand for service options including “greener” sources of generation, customer owned solar and other forms of distributed generation, electric vehicles, energy efficiency programs and conservation opportunities increase every year.  At the same time, electric utilities face the need to replace large swaths of aging infrastructure built to serve the increasing loads of previous decades, but there is currently little or no growth in load to pay for this bow wave of facility replacements.  Moreover, the capital requirements needed to meet increasingly stringent environmental regulations and renewable portfolio standards compete for the limited pool of dollars available to electric utilities to maintain and replace their existing facilities.  Also, electric utilities face very real threats from cyber-security and physical security breaches, and finally, approaching grid parity poses an existential threat to traditional integrated electric utilities.

But a glass half empty is also half full.  In 2016 the electric utility industry also has an unprecedented opportunity to rebuild and modernize its infrastructure, improve reliability, materially enhance service to customers and options afforded them, and be an agent for economic development in the regions in which they serve.  The prevailing low interest rates create the opportunity for electric utilities to replace aging infrastructure at a low cost of capital.  Improvements in the technology of electric utility equipment mean that modern facilities can provide better reliability and improved service for customers.  For example, “self-healing” distribution facilities can promptly repair some types of outages without human intervention.  Advanced meters allow customers to monitor their usage to facilitate conservation and participation in energy efficiency programs.  And distribution systems can be designed to facilitate interconnection with customer-owned solar facilities and other types of distributed generation, all to the benefit of customers.  In addition, as fossil-fired generating facilities reach the end of their lives; electric utilities have an opportunity to diversify their generation portfolios to cleaner and more renewable sources of generation.

Electric utilities can also be a catalyst for economic development in the regions in which they operate.  This is not only due to the impact of infrastructure improvement projects, which can add thousands of direct and indirect jobs to a region, but it can also be facilitated by properly designed economic development riders, which encourage industrial, commercial and/or residential growth in a utility’s service territory through a reduced electric rate.  Particularly when implemented in conjunction with other programs offered by governmental agencies, electric utility economic development riders can have a meaningful impact on the local economy, and help re-invigorate blighted neighborhoods.

In some states, the primary obstacle to taking advantage of these many opportunities is a regulatory structure developed a century ago to address issues that are far different than those facing the electric industry today.  Specifically, in the early 1900s electric utility regulation was primarily designed to award exclusive territories to electric utilities that were engaging in destructive competition with each other, facilitate the provision of electric service to meet the exploding demand for this new product, and prevent electric utilities from over-charging their customers.  Rates were based on historic costs, but there was little risk that utilities would lack the funds necessary to construct their systems to meet the rapidly increasing demand.  In the early 1900s setting rates based on historical costs was appropriate because deflation was just as likely as inflation.  And in any event, rapid load growth provided funds to build the facilities needed to serve new customers.  The challenges electric utilities face today could not have been conceived at the time the original regulatory frameworks were developed, and the concept of providing customers with choices regarding their electric service was not on anyone’s radar screen.

Today, where outdated regulatory frameworks stand as an obstacle that prevents us from taking advantage of the opportunities that are available to upgrade and modernize the electric grid and provide better service to customers, those statutes and regulations need to be changed.  Most significantly, policy makers must recognize that in an environment of little or no load growth, setting rates based on past costs, and the regulatory lag engendered by that process, creates a powerful disincentive for electric utilities to ramp up investment needed to replace and modernize their facilities.  If modern-day challenges are to be met this disincentive must be reduced or eliminated.  There are a variety of ways that some jurisdictions have addressed this issue, from infrastructure riders and trackers to setting rates based on projected costs to permitting interim rates during the pendency of a rate case. But in any event, regulatory lag must be addressed by some means.

Second, the regulatory process must change to accommodate evolving customer needs and desires.  To this end, performance-based rates can be implemented to incentivize (or penalize) electric utility performance.  Optional tariffed services, such as time of use rates, energy efficiency programs, back-up service for customers with their own generation, and other options should be offered to customers.  Electric utilities and regulators should push the envelope in this area—service offerings must keep pace with millennial customers’ evolving needs and desires.

Pricing for services offered by the electric utility should also be designed recognizing the options that customers have today and the impact that those options have on electric utilities.  Fixed utility costs should be recovered through fixed utility charges to the extent possible, and customers with distributed generation options should still be required to pay their fair share of the cost of the electric grid that serves them.

Most significantly, the regulatory framework should be re-designed with the primary goal of serving the customers’ long-term interests.  Regulation should encourage electric utilities to provide very reliable service through up-to-date facilities, at reasonable rates.  Electric utility tariffs should afford customers the ability to take advantage of the many options that technological advancements make available to them today.  And regulators should ensure that electric utilities are able to remain financially sound to provide necessary services in the future to meet customers’ needs.

Should the energy industry be partying like it’s 1999?

Written by: Commissioner Scott Rupp, Missouri Public Service Commission

Commissioner Rupp

Do you like excitement? Then being in the telecom industry in the 1990’s would have been heaven for you. Ups, downs, turns, corkscrews… Between the dot-com crash, corporate scandals, and massive innovation, the industry went through some exciting and turbulent times.

The famed economist Joseph Schumpeter, in his work entitled Capitalism, Socialism and Democracy (1942), described a “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. He called this process “Creative Destruction”.  We saw this transformation happen in telecom during the rapid deregulation process as we watched the internet forever alter telecom as new consumer demands required the industry to change.

I wonder if the energy industry is on the verge of a similar evolution? The coal industry which had a long established dominance in the US power generation market is currently feeling bankrupting effects of government regulation, economic pressures, and technological innovations. Advances in the drilling industry have transformed the energy sector’s desire for more natural gas. And further yet even nuclear power plants are being scheduled for decommissioning due to economic pressure.  A growing mix of renewables are becoming more economically viable thanks to government subsidies and new technology. Consumer demand for renewables is altering the generation mix, the economics of the energy sector as well as deliberations in regulatory bodies. To Schumpeter’s point, we are watching industrial mutation which is revolutionizing the energy industry’s structure from within. Some are being destroyed, while others are emerging from the ash pond.

One must then ask the question, are we creating a “green” bubble in the energy industry? Some analysts believe we are pointing to the fact that if you slap a green sticker on anything companies will want it and investors will buy in. In order for a bubble to exist there must be significant government involvement designed to focus attention and capital on the specific industry — and clearly that’s already happening. But other things need to come into play to create a financial bubble other than focus and capital spending on a specific industry. The creative destruction is usually technologically and/or policy driven, but does not always a bubble create. Successful companies have a history of creating business models that evolve and leverage technology, public policy and investment, and do it well to obtain long term growth and market share.

If we look at the telecom industry in the early 2000’s it was no longer an industry of rainbows and unicorns. To quote an article by Paul Star in the American Spectator (2002), “The dimensions of the collapse in the telecommunications industry during the past two years have been staggering. Half a million people have lost their jobs. In that time, the Dow Jones communication technology index has dropped 86 percent; the wireless communications index, 89 percent. These are declines in value worthy of comparison to the great crash of 1929.” In other words, there was a bubble, and it burst. Yet there were still companies that survived, and have balanced their business models and evolved to find long term growth. The most amazing thing about bubbles is that they can only be recognized in hindsight.

Technological advances and innovation happening on the periphery of the grid is exciting and full of promise. Greener energy is setting the stage for a massive transformation of the energy industry. It’s driving the train of financial investment, policy change and regulatory reform. Consumers want to take more active control in the management and use of energy inside their homes and businesses, and that level of consumer demand will continue to drive market forces in this industry.  We will once again get to witness creative destruction in all of its destructive glory.  Will a financial bubble be created? We won’t know until the party is over. So while it is happening, we should keep partying like it’s 1999.

Comm. Scott Rupp has been on the Missouri Public Service Commission since 2014.  You can follow him on Twitter @Scott_Rupp, or read his weekly blog at www.scottrupp.com