The second step on the road to utility transformation is to determine if you are going to be a utility leader or a utility follower. Leading or following have some obvious advantages and disadvantages. The utility industry has historically been extremely risk averse, which the industry has shown by being very slow/cautious about adopting new ideas and methods. Paraphrasing one utility executive, ‘our R&D is watching what other utilities do, and adopting the stuff that works five years later.’ This risk aversion has served a slow-moving industry very well, resulting in generally low electric rates and reasonably (though not world-leading) high grid reliability.
But two things have happened. First is that the historically slow-moving utility industry is beset with a quick-changing environment. Distributed electrical generation, enhanced demand response, efficiency, and control technology, as well as demand profiles, are changing on single year time scales instead of decadal time scales. Secondly, there is almost no one to follow right now, as the entire industry is racing to understand and determine direction.
While a couple hand full of companies might be said to be “progressive” utilities, there are probably only three who could be described as real “leaders” in the field. NRG Energy is the best known, and only operates in unregulated markets. (With a strong desire to not enter regulated markets.) In regulated markets, two small utilities, Hawaiian Electric Industries (HEI, the holding company for three Hawaiian regulated utilities, just purchased by NextEra) and Green Mountain Power (GMP, Vermont) are leading. While HEI has been forced into a leadership position by the regulators, both GMP and NRG have adopted their positions based on internal business reasoning. Interestingly, all three utilities have broadly accepted renewable energy as an important part of their power mix, and have encouraged more solar penetration instead of fighting solar and other renewables.
In terms of deciding to follow one of these three companies, scant is known about their internal plans. Other than vague commits to certain levels of renewables or carbon reductions, their roads are not yet visible to outsiders. However, given that the planning process is a year plus for significant decisions, perhaps this is enough to at least help determine direction for those who have a strong desire to follow.
Conversely, for companies that would rather lead, the paucity of current leaders, and the lack of information on their plans, gives ample room for additional leaders to move forward. A utility still has the ability to go to their regulators with an untested plan and find approval, since both business practice and regulatory case law are weak in the new areas. A utility which is able to envision a different future for itself is more likely able to get that future enshrined in regulation without precedent now than it will be in three or five years.
Of course, the central question for utilities, thinking from within existing utility culture, is ‘what is the lower risk path? Lead or follow?’ I suggest that the lower risk path is to lead, based on the following items:
- Once regulatory precedence is set in other states, it will become increasingly difficult to justify and obtain different regulatory structures in new states.
- Working within new structures determined by others will be more difficult. Each utility and service territory in fact has unique characteristics and needs best served by a unique solution. Driving forward as a leader will allow a utility to set these parameters to maximum benefit instead of fighting the parameters set in other states.
- Policies more beneficial to utilities may be set first, and then eroded by additional consumer power or choice. Gaining regulatory certainty earlier may result in a much more favorable regulatory environment than what may be achieved later. Especially if more than one transition is required along the road to the future, gaining the best regulatory advantage at each stage may well be the difference between winning and losing.
However, one thing good leaders do is keep an eye on other leaders, and change their plans when they see a better plan. So while I suggest you don’t follow another utility, I do suggest that you gather the best current knowledge and modify plans as appropriate based on the latest information.
Next we will look at where we are going, and what are the key obstacles in our path.