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Utility Dive (opinion): Make or buy for utilities: Putting services and capital investments on a level playing field

Posted by Danny Waggoner on Jul 16, 2018

This Utility Dive Opinion by AEE's Danny Waggoner, senior manager, regulatory transformation, addresses how the power sector can successfully transition to a 21st Century Electricity System.  Link to the full article here. Excerpts below:

Not every company can be the best at everything. Companies specialize in certain functions and in doing so are able to perform those functions more efficiently, with better quality and at lower cost. The economy at large runs more efficiently when companies specialize and sell their expertise to other companies as a service. Utilities have tremendous expertise in distribution planning and engineering, but should we also expect them to be equally proficient at operating, updating and securing IT systems? How about developing and running demand response programs, or making sure energy storage systems are operating at peak efficiency? Yet, this is what utility regulations push them to do.

Cost-of-service regulation, which is what we have today, allows utilities to collect earnings as they put money into long-term capital investments — a model developed to encourage utilities to expand and upgrade physical infrastructure in a context of growing demand for electricity. Services that utilities procure do not earn them the same rate of return. Rather, utilities may earn or lose money on services depending on how their operating expenditures match up with expenses projected in rates approved by regulators.

It doesn't have to be this way. Several states are working to provide utilities with the freedom to choose the best solution for customers without sacrificing their own financial performance. Illinois is in the middle of a rulemaking on cloud computing services (which replace utility capital investments in IT hardware and software) while New York and California both allow utilities to earn on distributed energy resource (DER) services that reduce the need for utilities to invest in their distribution systems. Other states are allowing utilities to pre-pay for cloud computing services and earn on them as if the costs were invested capital.

While the performance of regulatory options can vary, if a service solution is a more cost-effective way to meet a need, regulators should ensure that customers can benefit from it without punishing utility investors.

It can be done. For the sake of an electric power system that meets the needs of consumers as technologies evolve and innovate, they must.

Link to the full UD Opinion here.

Topics: AEE In The News