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Will a Natural Monopoly Protect Electric Utilities?

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There are some striking similarities between the old Bell Telephone system and today’s regulated electric utilities.  Both were highly regulated, had similar mission-critical mindsets to deliver electricity or dial tone, and did not have to compete for customers given their monopoly status. 

But then, the phone system was deregulated, and we learned that wire services were a natural monopoly because stringing lines is a high barrier to new market entrants.  While there was some competition for long distance service, the real competition for land line phone service came about years later from wireless communications technologies and the internet.   Likewise, Smart Grid-enabling technologies will shape the market forces that impact regulated utilities.  We shouldn’t expect that their existing business models are safe because they are natural monopolies.  And the ability of investor-owned utilities (IOUs) and their regulators to understand policy impacts on lifetime consumer value will shape their responses to new technologies and programs.      

Lifetime consumer value considers the potential revenues from a consumer.  It is a metric that influences corporate decisions ranging from product/service acquisitions to consumer communications for cross-sell and upsell opportunities.  It’s a metric that IOUs and regulators need to adopt because presuming business-as-usual in the Smart Grid age overlooks two significant technology disruptions.  

First, unlike dial tone, electricity can be created and consumed locally.  Distributed generation (DG) is a game-changer for the traditional electric utility business model.  The ability of residential, commercial, industrial, and agricultural customers to generate some or all of their electricity from clean renewables like solar or wind means less reliance on utilities to supply it.  These DG technologies intermediate the traditional utility/consumer relationship.  In other words, they can break the monopoly, depending on how policies inform utilities, and IOUs in particular, to respond to DG. 

The second technology poised to disrupt the existing IOU business model is the growing category of wireless smart phones and tablets.  Just a couple of years ago, some utilities planned to offer dedicated in home devices (IHDs) that would help residential consumers manage their electricity use.  The ability for one device – a smart phone – to be an applications platform is disrupting these plans, and many haven’t moved past pilot stage.  Home energy management doesn’t need a dedicated device, it needs a ubiquitous device.  Telecommunications companies like Verizon and AT&T already bundle voice, internet, and entertainment applications today.  They are piloting home energy services as one more application to increase the lifetime value of their consumers.  These devices make it easy for new entrants to intermediate the utility/consumer relationship. 

Perhaps IOUs will be content to be wires companies.  But there’s a real danger that Wall Street could ratchet down those IOUs’ stock prices.  Why?  Because of the subscription business model.   The real value is not in selling the razor, it is in the blades.  IOUs rely on selling a service that is experiencing downward pressures from ever more ubiquitous energy efficient technologies and materials as well as policies that mandate reductions in electricity use.   Unless changes are made to their business models, they will be selling fewer blades in the future, and their lifetime consumer value will continue to decrease, although their costs of doing business won’t.

Image Credit: gui jun peng/Shutterstock

Christine Hertzog's picture

Thank Christine for the Post!

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Jeff Watts's picture
Jeff Watts on Jun 15, 2012 4:44 pm GMT

“Distributed generation (DG) is a game-changer for the traditional electric utility business model.  The ability of residential, commercial, industrial, and agricultural customers to generate some or all of their electricity from clean renewables like solar or wind means less reliance on utilities to supply it.  These DG technologies intermediate the traditional utility/consumer relationship.  In other words, they can break the monopoly, depending on how policies inform utilities, and IOUs in particular, to respond to DG. “

 

I don’t agree with this statement, nor have you really presented evidence that it’s true. Here is the way I view the situtation:

Distributed generation:

Wind – only economical when deployed at a very large scale, so completely irrelevant to virtually all grid customers

Solar – only useful for a limited time each day and storage is prohibitedly expensive, so I think this will be useful for shaving off expensive peak power, it won’t begin to touch a customers base line load

natural gas – useful for cogeneration with larger commercial or industrial sites, but is already well entrenched and the market is fairly small

In no case, can a residential or commercial customer generate all of their electricity at grid competitive prices and there are very few cases where a large industrial or agricultural customer could. Ergo, they will be completely reliant on the electrical grid for the foreseeable future.

 

Joel Brown's picture
Joel Brown on Jun 15, 2012 11:59 pm GMT

Christine, these are interesting issues.  However, there is a reason that it has been difficult to move away from regulatory compacts with local monopoly power utilities.  It is the cost of reliability.  The three North American grids have a fantatic track record in keeping the power on a very high percentage of the time.  Only a few areas – Western Europe, the British Isles, Australia, Japan, some of the Asian Tigers and perhaps the PRC – can match the feat. 

In operational practice this means that there is a class of generating units that can not yield a positive return on investment unless they are subsidized well beyond their sales of power.  They don’t run much, they just hang around ready to run on demand for a very limited amount of time.  Regulated monopoly service could deal with that fact.  In trying to engineer a solution, the drafters of California’s catastrophically failed deregulation attempt created rules that Enron and others used to game the system and extract billions from consumers.  

The cost of reliability during load peaks is a problem that just won’t go away.  Regards, Joel 

Steven Scannell's picture
Steven Scannell on Jun 17, 2012 3:56 am GMT

I posted a long response, a couple of days ago.   Is it still in limbo?   

Nathan Wilson's picture
Nathan Wilson on Jun 18, 2012 4:47 am GMT

Umm Christine, you realize that net-metering is a government policy that only makes sense with regulated utilities (ie. it artifically boost the economic benefit of conservation and local generation)?  In a totally free market, power companies would offer one of two pricing schemes:

1) divide our power bills into a large grid access charge (which might be half of our current bills) and a per kWh charge (about half of our current kWh charge).  

2) the “calling plan analogy” in which we would choose from several packages, each with a fixed number of monthly base kWh for a fixed price.  We would get no benefit from ending the month under our base, and a high charge for going over.  And heavy users would get cheap per kWh prices.

With either one of these free-market pricing plans, there is much less incentive to conserve electricity than we have now.

The Walmarts and Googles of the world can negotiate with power producers and get good deals, but individuals are dependent on regulators to protect our interests.  Because we need more reliability that distributed solar, wind, or CHP can deliver, there will always have to be a way for dispatchable power producers to make a profit, or else there will be a lot of black-outs (including “smart-grid price-outs” in which the instantaneous price is so high that users volentarily turn off their power).

Rick Engebretson's picture
Rick Engebretson on Jun 18, 2012 2:05 pm GMT

Willem, besides disagreeing with most of your assertions, I’ve never seen you propose anything helpful. Most engineers design contributions. You just seem to criticize with many dubious declarations.

As for the intermittency issue; Adaptation to circumstance has been practiced throughout history. Daily cycles, seasonal cycles, weather cycles, etc. have always played a role in human activity and commerce.

Living in a rural area, the weather controls every day. The Indians followed the buffalo, the birds migrate, fishermen knew where/when/how to sail for a catch.

I agree that the windmill monstrosities imposed on the public are not helpful. But simply accepting killing the environment for capricious convenience is not helpful either. And that is what many people are trying to discuss.

Rick Engebretson's picture
Rick Engebretson on Jun 18, 2012 3:45 pm GMT

Christine, you are certainly right about the NEED for agriculture to better integrate into the grid. But I’ve always found my utility very supportive. I got a chance to meet the head of the National Rural Electric Cooperative Association at some convention in Minneapolis when they were trying to better serve internet needs of rural customers. Even before, they were interested in biogas and fuel cell and anything the highly distributed grid could provide for their service. (I showed them where I advertised in the business yellow pages in 1985 pushing a fiber optic internet. And the head understood the combination recycled plastic livestock septic tank.) Before dealing with them, Northern States Power was supportive.

But the burden must fall on the small generator to meet utility standards without utility money. Customers must not undermine mission critical service. The utilities are not baby sitters. And I suspect this is the rub for many; people want to contribute to distributed generation but don’t know how.

Everybody has an opinion. It will just have to go through time tested effort to move in the direction you propose. And most capable people already have too much to do. So electric generation is down the priority list. Keep pushing, and someday you will find you are there.

I look at the many efforts for broader agricultural integration and am impressed at the rapid evolution in 20 years. Farm waste fuel and fertilizer, advanced feed and fuels, consumer protection, electric power security and infrastructure, and high speed internet. Of course 20 years is a lifetime for some, while the blink of an eye to human history.

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