Electric The Energy Utility System: Where Has It Been & Where Is It Going?

The Energy Utility System:
Where Has It Been and Where Is It Going?
Pamela Morgan
Graceful Systems LLC
October 9, 2014

2
The energy utility system today
WHERE
is everything
going????
© 2014 Pamela Morgan

3
WHERE
has everything
been????
The road to what we
(participants in the energy utility system)
experience today

4
Shared beliefs,
expressed in norms,
practices, decisions,
regulations, and
statutes, have a
profound effect on
the outcomes of the
energy utility system.
These beliefs form
over time and, thus,
it is useful to look
back to see where
we’ve been even as
we speculate about
where we are going.
A tiny bit of systems thinking

Early Days
5
Electricity service was SMALL
• Small number of customers
• Small sources of generation
• Small geographic footprint
And sometimes things were messy
There were no utilities as we know them.
And entrepreneurial

Early Days
6
CITIES were in charge
• Granted non-exclusive
franchises and rights of
way
• Set rates
• Dealt in graft and
corruption . . .
Then STATES took over
• Insull’s “Blue Ribbon” panel
 Obligation and exclusive right
to serve
 Rates set by independent state
regulator to allow fair return
on investment
• A popular solution
 Wisconsin and New York first
to adopt in 1907
 Within 7 years, 43 states had
adopted
Beliefs formed:
• Competition, particularly in distribution, is bad
• Monopoly makes sense within a service territory
• Cost of service regulation works

7
The 1920’s
Got BIGGER:
• More customers (prices dropped, uses
rose)
• Larger generating stations (costs
dropped)
• Greater areas covered with transmission
and distribution (costs dropped)
• Larger, and more complex, organizations
Electric
Utility
Holding
Company
Stock
Certificate
Beliefs formed:
• Economies of scale are great
• Electricity is more necessary than dangerous
Utilities, as we know them, came
into being and . . .

8
Effective
Holding
Company
Regulation
Abuse produced RESPONSE
• Public Utility Holding
Company Act
• Securities regulation: the
‘33 & ‘34 Acts
• Federal Power Act (gov’t
hydro and more)
• The rise of public power
The 1930’s
Beliefs formed:
• Investor-owned utilities can be bad
• Electricity is increasingly necessary to modern living

9
The 1940’s – 60’s
0.00
0.50
1.00
1.50
2.00
2.50
3.00
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1955
1957
1959
1961
1963
1965
1967
1969
AverageResidentialRate
Gwhrs
Utilities recovered and THRIVED
• Generation continued to get bigger
and costs to fall
• The nation became fully electrified
• Sales rose 5-10%/year, while rates fell
• The “big” debate was original cost rate
base versus fair value rate base –
Supreme Court decided methodology
doesn’t matter, only end result
Beliefs formed:
• This is how it is supposed to work: add more customers, more load, watch rates fall
• More electricity use = higher quality of life
• Contested cases are a fine process to set rates
Energy
efficiency?
Bah
humbug!
U.S. Average Real (2005)
Retail Electricity Prices

10
ExpectedElectric
Load
MWsunder
Construction
Inflation
Employmentand
Economy
The 1970’s
Promising beginning, bad end
• Rosy load forecasts and ambitious utility
managements collided with stagflation and the
rate increases began
• Stirrings of environmental concern and interest
in efficiency
• Oil and gas crises, Three Mile Island nuclear
accident shook trust and faith

11
The 1970’s
New federal legislation and
regulations
• Public Utility Regulatory
Policy Act
• Natural Gas Policy Act
• Fuel Use Act
• Environmental and nuclear
power regulation
State regulation changed
• Dramatic increase in adverse public
attention to utilities
• Utility financial woes led to ratemaking
complexity:
o CWIP (and anti-CWIP)
o Interim rates
o Fuel adjustment clauses
• Early energy efficiency programs began

12
ActualLoad
RATES
The 1980’s
Bad beginning . . .
• Massive surplus and
utility financial stress
caused revenue
requirement
disallowances and plant
cancellations
• Rate increases continued
into mid-decade
. . . promising end
• Rates stabilized; some utilities began
decade-long base-rate freezes
• No utility went bankrupt; many had piles of
cash and needed to invest it somewhere
(S&Ls, ESCO’s, IPP’s, real estate)
• First stirrings of deregulation – in natural gas
• Least cost planning began; energy efficiency
programs developed

13
The 1970’s and 80’s
Beliefs formed:
• Regulatory (and internal utility!) process is critical and more is usually better
• Utilities may experience financial pain but regulators won’t let them go broke
• Still, utilities can’t fully trust regulators and vice versa
• Utility diversification is a mixed blessing (at best) and many pursuits don’t work out
• The whole energy landscape is more complicated than anyone thought a while ago
but it is still possible to optimize electricity resources in planning and operations
• Energy efficiency is good (but industrials would rather not pay for it . . . )

14
The 1990’s
Let’s all do the de-reg!
• Natural gas prices plummeted
• IPP gas plants + expensive
embedded cost utility plants =
industry wanted out (to
choose)
• Deregulation fever swept
regulators at the federal level
and some states
• Almost no utilities “needed”
power and energy efficiency
dwindled to near nothing
When the music stopped, 24
states had restructured their
retail electricity markets and
FERC had authority to
“deregulate” IPPs and order
transmission services

15
The 1990’s
DISCO/
Standard Offer
Vertically-
Integrated
Energy Retailer
?
Beliefs formed or let go:
• Formed: Energy efficiency programs are vulnerable to the need for resources and
fossil fuel prices
• Formed (but not universal): competitive generation markets will lead to lower
commodity prices
• Let go (primarily in Texas): customers should always have an option to buy electricity
on a bundled basis and most will choose their utility/won’t choose someone else
• Formed: utilities need to be paid for any transition away from a monopoly status
(stranded costs)

16
The 2000’s
Regulators (and sometimes legislatures
or Congress) . . . regulated:
• Rates: retail, transmission etc.
• Service: transmission, retail access
etc.
• Market structure and behavior:
retail and wholesale
• Energy efficiency, renewables, smart
grid mandates and incentives
• Reliability
• And more . . . .
Utilities . . . embraced being utilities
• Filed rate cases with fervor
• Wanted to make rate base
investments but with increasing
levels of assurance of recovery
• Tried to say “customers” and not
“ratepayers”
Retailers . . . shook out
and grew
• What to sell
• How to sell it

17
The 2000’s
Beliefs in question:
• Loads will always rise and we understand all of the relationships between the
economy, demographics and load.
• This is a predictable business except for government regulation.
• Safe and adequate utility service at just and reasonable rates works for everyone.
Questions ruled. But activity was frantic and
left little time to engage with the questions.

18
The 2010’s
Hotbeds of
regulatory
activity . . .
ISSUES EVERYWHERE
• Microgrids
• Demand response
• Transmission
• EVs
• Electricity Storage
• Smart grid
• CO2 regulation and climate change
• New nukes
• Technology – IT and other
• EE Cost-effectiveness
• Net metering and the death spiral
• Your favorite

19
Is this where we are????
What beliefs do youthink:
• Are forming?
• Are expiring?
• Are in question?

20
THIS is what we have.
Big Questions.
THIS is what we’d
like to have.
But don’t.
And won’t.

21
IF we are clear on the
important questions,
we will more easily be
able to make
observations of events
that pertain to those
questions.
IF we make
observations of events
that shed light on the
questions, we might
ultimately be able to
discern patterns.
IF we discern patterns
and explore why those
patterns are occurring,
we might begin to
understand the major
reasons for what we
see.
IF we understand
those reasons, we
may be able to
FORESEE what is
coming.

22
Policy?
Infrastructure?
Pricing?
Services?
The Four Big Question Categories

23
Services?
Why start here? Because
services are about helping
a person. Who is trying to
do something. For a
reason. And who would
be interested in a service
that is designed to help do
that something
better.

24
Businesses in the energy utility system often start with “what service do we sell” and,
underneath that, is their assumption that the center of the universe is, in fact, assets:
what they use to provide service. This is inside-out.

25
The center of the service universe must be the customer, the
decision-maker, the doer. This is outside-in.

26
The Job-To-Be-Done
The
result
EmotionalSocial
Functional
The
experience
UsingPurchasing
The
integration
Features
Retailing
Technologies
Packaging
Support
and
Service
Advertising

27
The Services Question Is Big
What do we mean
when we name
something an
“energy service?”
What are the
criteria for
monopoly? Who
is asking this
question?
What do we mean
by utility service?
Does that mean
monopoly?
Which energy
services are utility
services?
If the service is
not monopoly,
who else can offer
it?
Are those
changing?
What/what else is
providing any of
those capabilities?
What are the
characteristics
and capabilities of
current utility
services?
Where can we
look to see new
ones that
emerge?
What are the
energy services
we are aware of
now?
Are there any
rules or
restrictions on
providers?
If it is monopoly,
must the service
be “service-
territory-wide?”

28
Prices?

29
This is monopoly ground
Nice
even
rows
Clear
rules for
who goes
in what
row
Component
and cost
based
This looks good . . .
If you happen to be a blade of grass

30
This is competitive ground
Niches,
nooks
and
crannies
What the
market
will bear
Judgment
based
This looks scary . . .
But welcoming for people with
different jobs-to-be-done

31
The Prices Question Is Big
How will costs be
allocated among the
monopoly services?
Will pricing still be
cost of service?
How to design the
prices? What are
the consequences of
various designs?
Revenue decoupling
to constrain “profit”
within certain
bounds?
Will pricing stay
“postage-stamp?”
MONOPOLY SIDE
What pricing/business
models are companies
pursuing?
What are the rules if the
company providing
monopoly services also
wans to offer services
on this side?
Standard business
rules/laws or
special ones for
“energy”?
COMPETITIVE SIDE

32
Infrastructure?
MY STUFF IS
MOST
IMPORTANT!!
NO!!!
MY STUFF IS
MOST
IMPORTANT
Whose STUFF will WIN?
IS that even the RIGHT question?

33
Yes,
BUT
. . .
No,
BUT
. . .
The “UTILITY” Death Spiral
Total monopoly
The grid is gone

34© 2014 Pamela Morgan
At first, we had these
And these
Now we have these
And these
But these
are still
around!
And you can
probably find
some of these
What can we learn
from what
happened in
telecomm?

35
Organizations . . . Reorganized
Stocks . . . Assets . . .
changed hands got re-valued

The Infrastructure Question Is Big
What would Sam Insull do?

37
Policy?
CENTRAL CONTROL

From Utility Dive 10/31/14
Energy
utilities
are all
alike
Energy utilities have never been
100% alike and the differences have
been growing.
Federal . . .
Market-based . . .
Centralized . . .
New
organizations
are entering
the energy
services
space

39
THE SOLUTION TO
THE PROBLEM? NOT
MAKING SPACE FOR TRIAL AND
ERROR AND TRIAL . . . YES
The Policy Question Is Big

40
Mental models and beliefs
will largely drive the answers
that emerge for these
questions. So, let’s review:
Early Days’ beliefs formed:
• Competition, particularly in distribution, is bad
• Monopoly makes sense within a service territory
• Cost of service regulation works
1920’s beliefs formed:
• Economies of scale are great
• Electricity is more necessary than dangerous
1930’s beliefs formed:
• Investor-owned utilities can be bad
• Electricity is increasingly necessary to modern
living
1940’s – 60’s beliefs formed:
• This is how it is supposed to work: add more
customers, more load, watch rates fall
• More electricity use = higher quality of life
• Contested cases are a fine process to set rates
1970’s – 80’s beliefs formed:
• Regulatory (and internal utility!) process is critical
and more is usually better
• Utilities may experience financial pain but
regulators won’t let them go broke
• Still, utilities can’t fully trust regulators and vice
versa
• Utility diversification is a mixed blessing (at best)
and many pursuits don’t work out
• The whole energy landscape is more complicated
than anyone thought but it is still possible to
optimize electricity resources in planning and
operations
• Energy efficiency is good
1990’s beliefs formed or let go:
• Formed: Energy efficiency programs are
vulnerable to the need for resources and fossil fuel
prices
• Formed (but not universal): competitive
generation markets will lead to lower commodity
prices
• Formed: utilities need to be paid for any transition
away from a monopoly status (stranded costs)
• Let go (primarily in Texas): customers should
always have an option to buy electricity on a
bundled basis and most will choose their
utility/won’t choose someone else

41
2000’s beliefs in question:
• Loads will always rise and we understand all of the relationships between the
economy, demographics and load.
• This is a predictable business except for government regulation.
• Safe and adequate utility service at just and reasonable rates works for everyone.
What will the energy
utility industry do with
its beliefs in the
2010’s?
And will it be the
industry’s beliefs that
guide the answers or ?

42
The energy utility system today
WHERE
is everything
going????

43
What do YOU think?

Electric The Energy Utility System: Where Has It Been & Where Is It Going?

Recommended

Recommended

More Related Content

What's hot

What's hot (15)

Viewers also liked

Viewers also liked (9)

Similar to Electric The Energy Utility System: Where Has It Been & Where Is It Going?

Similar to Electric The Energy Utility System: Where Has It Been & Where Is It Going? (20)

Recently uploaded

Recently uploaded (20)

Electric The Energy Utility System: Where Has It Been & Where Is It Going?