Rethinking Regulation, Reimagining the Utility, and Re-connecting with Customers

Prologue

About a decade ago, after I was done speaking at an electricity conference in Florida, a man approached me privately by asking if I had traveled all the way from San Francisco to just tell the audience how utilities should modernize their rate designs. He was obviously unimpressed with what I had said. I asked: “What were you expecting?” He said I thought you would talk about a future in which every consumer is a prosumer, there is no grid and no utility. I was inclined to tell him to go talk to the bartender. But that would have been impolite.

In the years that have elapsed since, I have seen more and more of my neighbors turn into prosumers. In 2019, I became one myself, and installed 25 solar panels rated at 8 kW and paired them with a 9.8 kWh battery. I also bought an electric car. Of course, the grid was still there, and I still had a utility. But the world of electricity had begun to change. Five of the ten homes on my court had installed solar panels on their roofs. I was the fourth one to install them. But no one else had a battery. Their lights go out during a power outage, and we have had more than a dozen in the past three years. Mine stay on. We also have four EVs and one PHEV on the court. And while California continues to dominate the nation in the sheer number of prosumers and EVs, it is not difficult to imagine a future in which much of the nation will begin to resemble the Golden State.   

 

Introduction

A consumer revolution is underway in the electric utility industry. The signs were evident long before the Great Recession of 2008-09 slowed load growth.  I spoke at Goldman Sachs’ Annual Power Conference soon after that recession ended and made that point. But the facial expressions of the investors in the room told me they were not buying it. I was invited to speak at the same venue two years later. I gave a similar message.

A few years later I spoke at a PJM conference on the future of the grid. This time the message resonated with the technical audience. And two of the three other panelists agreed with me. The fourth insisted an industrial renaissance was underway which would propel growth. The only issue among the panelists who agreed with me was which forces were driving the change. Some said the primary force was utility DSM programs. Some said it was governmental codes and standards. Some said it was the arrival of distributed energy resources. And some said that it was fuel switching away from electricity.

Today, as we stand on the cusp of the third decade of the twenty-first century, the trend is no longer being questioned, probably not even at Goldman Sachs. Over the past decade, consumers have decisively and irreversibly changed the way they think about electricity, how they consume electricity, and when they consume electricity. While more than one forecaster is talking about a reversal in the trend, as electrification kicks in, there is no concrete evidence on how much that will accelerate load growth.

When it comes to customers, we know that no two customers are alike. Even within the same household, husband and wife often differ on how they want to use electricity. Additionally, all customers want a choice of products and services (and potentially retail suppliers). But they only want what they want. And yet utilities often just offer one product to all customers in a “rate class” to avoid being accused of discrimination. A few offer choices but these are often marketed in obscure jargon. There is considerable room for improvement.

When I was going to install solar panels and pair them with a battery, I called the customer service number at my local utility and asked, which rate should I pick? She said to pick such and such a rate (the designation was a complex alphanumeric designation, nothing as simple as Model 3 or iPhone 11) and to ignore all but pages 1 and 3 of the ten pages I would now be getting in my monthly bill.[1] Then I asked if that also would be the best rate for me since I had also bought an electric car. I was told there was no easy answer to that question. It would be best if I waited for another year to figure out my best rate, which of course meant that I may end up paying more in the 12 months that lay ahead of me.

Diversity is the hallmark of customer preferences for consuming electricity, just as it is for any other product or service. Utility consumers fall into several categories. Some want bill stability and are willing to pay more for it. Some want the lowest bill and are willing to shift and reduce load. Some have gone organic in every aspect of their life and want to only buy green power to mitigate climate change. And some are primarily interested in lowering their electric bill.

An all-embracing technological revolution is underway, spurred on by the advent of digital technologies. Just about all customers have smart phones today (even though I have a few friends who still live their lives with the flip phones, and I know one person who does not have a mobile phone of any kind). In the United States, nearly 80% of customers now have smart meters. Whether or not smart price signals are being transmitted through the smart meters is another question.

More and more customers have energy efficient appliances with digital chips embedded in them. In fact, you can no longer buy energy hogging appliances even if you wanted to. Some customers live in highly energy efficient dwellings. And a growing number have solar panels on the roof, with some also installing solar batteries. In Hawaii, with very high electric rates, some 60% of new solar installations are being paired with batteries. Finally, more and more customers are buying or leasing EVs, despite their higher prices and shorter range, and despite the prohibitively higher prices in California and Hawaii.

Disintermediation of utilities is well underway and appears to be unstoppable. Utilities may think they are a regulated monopoly, but customers keep divining creative ways to manage their energy use outside of utility directives. This should not surprise anyone but utilities and regulators. Customers are acting in their self-interest. Their eyes glaze over when utilities and regulators bring up the concept of exit fees, uneconomic bypass and cross subsidies. Customers on the frontier of change want local control and grid independence. Community choice aggregation is taking off like never before in California and is being considered in several other states, such as Colorado and New Mexico. The drivers are many, ranging from a desire to consume green energy, have local control, and lower prices. But the ultimate driver in most cases, as mentioned by a utility executive to me, is anti-utility sentiment.

Furthermore, new entrants include global Tech giants, start-ups with unwieldy names, and home security firms and hardware stores. The customer is no longer the exclusive preserve of the regulated monopoly.

What used to be called the death spiral on the conference circuit has now been upgraded to Armageddon. Whether that is reality, or a chimera won’t be known for another decade but for utilities and regulators to go on doing their business as they have done for the past century is to merely to accelerate the demise of the utility industry.

In the Harvard Business Review, Ted Levitt wrote an iconic article way back in 1960, “Marketing Myopia.” It began ominously:

“Every major industry was once a growth industry. But some that are now riding a wave of growth enthusiasm are very much in the shadow of decline. Others that are thought of as seasoned growth industries have actually stopped growing. In every case, whenever growth is threatened, slowed or stopped is not because the market is saturated. It is because there has been a failure of management.”

He specifically cited the example of Railroads who forgot they were in the transportation business, not just the railroad business. And he cautioned oil companies about the advent of electric vehicles and electric utilities about the advent of rooftop solar panels. And he said all that in 1960! It’s time to re-read his article. [2]

In the meantime, utilities and regulators are moving slowly, indeed one might even say ponderously, through rate cases. Regulatory lag is breaking records, often running into years. The slowest moving drama in history is being played in hearing rooms.

While discussing rate design reform in a large state that abuts Mexico, a former commissioner told me to wait for another five years because the legislature was new. I said I have been hearing that for the past four decades. He said, let’s chat offline.

In a northwestern state, after having testified for five hours spread over two days, a staff member walked out with me to my car and said, “Thanks for coming. But I think I should tell you that they are going to just kick the can down the road.”

In a large Middle Eastern kingdom, while presenting the final results of a project designed to promote energy efficiency in the country to the C-suite of the electric utility, one of the vice presidents asked me why I kept using the word customer over and over again. The tone was testy. I was not sure what to make of that remark since all the work that I had done for them was designed to encourage the customer to invest in higher efficiency equipment. It could not have been a language problem because he spoke fluent English. So, I answered: “Because the customer is the king.” And then their faces blanched. I had threatened His Majesty. I began to fear for my life until one of them rescued me by saying that customers were writing letters to the editor of Arabic newspapers complaining about the poor customer service of the utility.

In the US, when I talk to utility executives, they often tell me that regulators are frozen in time. And when I talk to regulators, they often tell me that utilities are frozen in time. The blame game continues unabated, often at the same conference, whether in colonial Williamsburg or San Francisco or New York, and sometimes on two sides of the same room.

After sharing some thoughts about rate design reform with a senior utility executive in the Mid-Atlantic region, I recommended what I thought was the most forward-looking rate design. He picked the least forward-looking rate design and said that’s the one he was going to go with. I must have looked very disappointed because he said: “I am not stopping you from writing your articles and giving your talks. But this is my company, and I will do what I think is in the best interest of the company.”

In a Canadian province, I shared several ideas about moving to innovative rates to help utilities stay in step with their customers. I was told that the Board retained the right to preserve the status quo. I said I am seeing electric cars on the road here and I am sure customers are buying energy efficient appliances. That’s why it’s time to modernize the rate. But, of course, the Board retains the right to live in the twentieth century and let the world pass it by.

For all practical purposes, utilities think of the regulator as their main customer. The end use customer is almost an after-thought, consigned to being a “ratepayer” or a “meter.” Whatever innovations take place in the customer’s premises are called “Behind the Meter.” Imagine how Nordstrom’s would thrive if it refused to consider what happens “Behind the Cash Register.”

And the regulators often think of the legislature or the governor as being their main customer. The elected officials have their eyes on the next election and their final customer, the American voter, is the utility’s customer and that’s how the circle is completed.

As we all know, emotion trumps logic when it comes to winning votes, and often leads to unsustainable energy policies and unrealistic timetables. The elected officials change every few years and the regulators often change every few years. And depending on the frequency of the crises that routinely afflict utilities during these tempestuous times, utility CEOs often change after every crisis, with one company having as many as 5 CEOs in 10 years. That’s chaos theory in action.

It used to be said that rate design is more art than science. In fact, a few years ago, that question was put to me in a recent regulatory hearing while discussing the case for demand charges. I said it is mostly politics.  The whole room broke up in unstoppable laughter. Earlier I had been grilled for 90 minutes by one of the commissioners. After the cross-examination ended, a person came up to me and said you should write a book about these encounters. I said I have certainly had my share, trying to push regulators and utilities to listen to their customers. He said you should write a book. When I hesitated, he said I would buy it.

When I was a freshman in economics at the University of Karachi, I happened to read the Economics text by Paul Samuelson. Every chapter began with a quote. The one that has stayed with me is from Lewis Carroll:

The time has come, the Walrus said, To talk of many things: Of shoes – and ships –and sealing wax—Of cabbages –and kings; And why the sea is boiling hot; And whether pigs have wings.

For us in the electric utility industry, the time has come to rethink, reimagine, and reconstruct regulation. It won’t happen overnight. But the journey must begin today.

The best way I can think of beginning the journey is to make customer centricity the guiding principle. This means leaving the past behind and focusing on the future. That does not simply mean creating a new website or sending frequent text messages to customers. Nor does it mean just engaging in social norming to shape customer behavior. It means changing the culture of the industry, reimagining utilities as service providers, hiring staff with an open mindset and new skills, reaching out to customers to understand their changing needs, and developing new products and services to meet those new needs.  

This journey will involve finding new ways to engage with customers and of observing them in real time as they make their energy buying decisions. Unless these steps are undertaken, the customer is going to leave both the utility and the regulator behind in the dust.

 

Epilogue

Back in 2019, I was chatting with a senior executive of a large utility in the Midwest and mentioned the conversation I had had in Florida a few years ago. I thought he would dismiss the scenario that the skeptic had laid out. Surprisingly, he said I am finding myself more and more in that camp. Economic history tells us that no industry has remained a natural monopoly forever. We must change our ways to survive.