Do regulated monopolies still have to compete?

'New' ideas and their upshots for utilities, explained

Phil Carson | Apr 29, 2012


Today's column will be an essay—an attempt, in the old-school definition of the word—at connecting the dots, composed of several recent columns.

Perhaps a better notion than the clichéd "connecting the dots" is to discern "the upshot"—the relevance—of recent columns, and get the week off to a brisk start.

Herewith are the top ideas articulated in April and the "upshot," appropriately launched from the hip. Guess I'll just "fire away," if you'll excuse the overreliance on martial figures of speech.

In "Connecticut: In Search of Microgrids" it became clear that investor-owned utilities will need to develop policies regarding power alternatives employed by states and cities, because that trend is accelerating as you read this.

Don't take it from me: we're talking the governor of Connecticut, who has called for combining state agencies to more effectively shape the state's energy future. The IOUs serving the state will have to collaborate or cooperate; resisting an effort that high-profile doesn't seem to be an option. The collaborative model offered by San Diego Gas & Electric (local IOU) and the University of California San Diego (microgrid) would seem to point the way toward the benefits of synergy. (See "Big Picture Thinking: Lab to Market.")

In "California's Energy Storage Policies," the upshot appeared to be that clear-cut policies are difficult to enact in a jerry-rigged system. As "the free market" when it comes to power is hamstrung in myriad ways—the "regulated monopoly" model is somewhat akin to Gulliver, pinned down by a thousand tiny strands—it is difficult to move any single piece without moving others. The stakeholders in the status quo, centralized power industry and in the energy storage debate all have ideas on where this topic should go. Procurement targets in California are out, for now, and cost-effective, specific applications—particularly if they directly benefit customers—are in. But what are those applications? I'm guessing that neighborhood-level batteries could become temporary solutions to improve reliability on capacity-constrained feeders, deferring capital investment where appropriate. Still, the critical question lingers: Who pays? (See some nitty gritty background on AEP Ohio and its work in community energy storage.)

In "Ameren Missouri: From CSR to 'Energy Advisor,'" we explored how Ameren Missouri is trying to deliver truly knowledgeable customer service to customers by moving customer service  reps into energy advisor roles with the goal of raising customer satisfaction and lowering costs. That would seem to qualify as a proverbial "win-win" proposition. But it occurs to me that when CSRs become knowledgeable energy advisors they also become eligible to work for energy auditing companies, contractors and, well, columnists. (Although that column-writing work, like repairing high voltage lines, is a very, very dangerous job!) As with data analytics practitioners, many new roles at power utilities will need to be compensated in a manner that effectively competes with other verticals. (See "Data Analytics: Start 'In the Middle,'" which noted that First Choice Power lured Lloyd Tokerud, senior manager for analytics, from PepsiCo.)  

Finally, a pair of columns, "Utilities Race to Reach the Customer" and "Accenture on Utilities and Customers," posited a theory and provided some data. We all know the utility-customer paradigm of the past was a passive one. Astonishment reigns when the factoid is cited  that most utility customers spend less than ten minutes per year interacting with their utility—outages and blood pressure-spiking bills being the main driver. And with the do-it-yourself tailored applications of Web-based music and other entertainment, bundling and grocery store points counting at the gas pump, the general public is swiftly concluding that utilities are laggards. Meanwhile, anyone with a hammock and a partly cloudy day can dream up a thousand ways to offer value to serve both parties. That's the point of the second column, in which Accenture's global survey found that utility customers are open to offers, should utilities furnish them.

Ah, the upshot: as in all other aspects of life, you can expect some utilities to "get it" and keep pace with digital consumerism, others will "muddle in the middle" and yet others will be consigned to running infrastructure alone. Look to the competitive markets for a taste of the future.

Phil Carson
Intelligent Utility Daily

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Interesting points, John.  I

Interesting points, John.  I use the telco parallel often when looking forward on utility approach to services and customers.  The one thing I struggle with, however, is the tie that electricity has to fixed infrastructure.  The phone companies really didn't start to innovate quickly until wireless technology broke the strangehold on delivery infrastructure.  Prior to wireless, innovation was limited to re-packaging local and long distance service.  The first dial-up ISPs were the most creative in figuring out how to tap into the monopoly infrastructure and create a new business model.

I don't see a day yet when electricity gets delivered wirelessly at commercial scale.  So the tie to the monopoly infrastructure appears strong to me.  Innovators will wrap cool services areound that core, wired offering, but nothing that will be a game changer like wireless telecommunications that threatened the very need for hard wired service from the phone company.  What are your thoughts on that?

The Coming Hybrid Energy Economy

Moving beyond the wireless and wireline duality, let's talk instead about innovation and the transition away from commodity "dial tone" electricity to a variety of energy services, using the grid and using distributed resources, which was the intent of my earlier telecom analogy.

First, while it may hurt to recognize this fact, most energy consumers care little about the grid, they hardly even see it anymore when they survey the landscape - and they are unlikely to want to pay much  more than they do now, so the question becomes, where will the $2 trillion dollars needed to upgrade the grid come from, if there is no suppport for grid modernization (i.e., Smart Grid)?  Setting that thorny issue aside though, let us recognize that customers do care about power, and that they harbor  a general resentment that they have to deal with only one company to get this essential commodity. Energy services hold great promise to improve on the electricity experience, but utilities are less likely to provide such innovation than are third parties, who will likely leverage distributed energy resource technologies to get there (solar PPAs, EVs, etc.).Utilities have great potential to work with third parties as intermediaries, however.

The hybrid energy economy, in my view, will be comprised of grid-delivered power for intensive loads and for low-cost reliable electricity. Expensive peak energy will likely be the area that energy service companies pursue. I foresee a day when we get bulk energy for industrial/commercial loads, reliability service from the grid, and custom energy services from third parties, either through the utility or through other channels.

Game Changer

I'll answer Phil's question.  It's likely to be solar PV, especially in areas of the country with high electric rates and lots of sunshine (California).  For residential consumers with spas, pools and/or air conditioning, PV is competitive for at least a portion of their needs today, and the utilities know this.  For commercial consumers, there are also many cases where PV makes sense.

The impact of rapidly falling PV prices could be quite dramatic in California, as the wealthier and more profitable residential consumers who are paying in excess of 35 cents per kWh during summer peak periods start looking at cleaner, cheaper options.  Inexpensive storage will only accelerate this trend.

Jack Ellis, Tahoe City, CA

Two World Views

As long as regulated utilities view electricity as a commodity to be delivered over a grid, they will struggle with new buisness models that are likely to appear in the next few years. The analogy I've used in my public speaking lately is to compare commodity kWh delivery to the provisioining of dial tone by ATT in 1982. After the breakup of ATT iin 1984, the competitive market began to influence telecom and retail services led us to the emergence of the iPhone and Android smart phones, and the iPad and other smart tablets.

Similarly, in Texas today we see competitive Retail Electric Providers (the product of a government-mandated unbundling) moving away from "dial-tone" electricity provisioning to offer service bundles, which has a number of attractive features: they can differentiate on something besides price discounts, tailor their offers to specific market segments, and enjoy longer term service contracts that raise switching costs.

As you conclude, Phil, some utilities will take on the mantle of energy service competitors, change their business model, hire from other industries and aggressively defend their territories. On the other end of the spectrum, other utilities will hold on to their "low risk" rate-of-return business. where they will either shrink and become targets for acquisition, or seek mergers and growth to lower costs and risks. And of course, there will be those in the middle who remain muddled, who will likely then be acquired at some point.

Remember, in the 1984 ATT breakup, we started with seven Baby Bells and one long-distance carrier. Now ATT (SBC) and Verizon are left standing and monopoly dial tone revenue has been replaced by a variety of services focused on data and mobility.

John Cooper, Ecomergence and NextWatt Solutions