Dive Brief:

• The Illinois Commerce Commission (ICC) has rejected a change in regulatory accounting rules proposed by its staff and the state’s utilities, which would have allowed the partial recovery of contracting costs for cloud-based data processing through higher customer rates.
• The proposal would have allowed utilities to treat at least part of the cost of cloud-based computing services as infrastructure investments just as if they had purchased computer hardware and software and hired staff. Current rules treat cloud expenses as operating expenses which cannot be included in a utility rate base.
• The rationale for the proposal, which the ICC began to study in 2017, was that electric utilities struggling to build smart grids would be incentivized to use more efficient and less costly cloud-based services rather build them in-house if accounting rules would allow them to treat the cloud services as capital investments rather than operating expenses.

Dive Insight:

Coming changes in the electric power grid, as renewable energy production continues to increase, will require increasingly sophisticated controls.

Utilities will need the ability to predict and react to power supply as well as to new sources of demand. They will need the ability to instantly analyze enormous amounts of data, and that will require ever-increasing data processing power.

Paying for cloud computing services is an issue regulators and utilities have been considering in many states.

Renewable energy advocates more than a year ago recognized that Illinois regulators were in a cutting-edge debate and urged the ICC and Illinois lawmakers to make the change in the accounting treatment of cloud computing expenses.

“As representatives of the renewable energy industry, we are strong proponents of policies that allow utilities to modernize computing systems and employ technologies that allow them to manage large amounts of data quickly and cost effectively to foster more rapid deployment of renewables on the electrical grid,” wrote the chief executives of The American Council on Renewable Energy, the American Wind Energy Association and the Solar Industries Association in an April 2019 letter to a state legislative committee reviewing an early version of the commission’s rule changes.

“The grid is now accommodating the two-way flow of electrons and increased interconnections across the distribution system. All of these new technologies are creating large amounts of data and require advanced data management,” their letter argued.

As negotiated since then by the ICC staff, utility representatives, and renewable and clean energy advocates, the proposed accounting rule changes would have allowed utilities to treat 80% of cloud service expenses as if they were a capital investment while absorbing the remaining 20% as a normal operating expense.

In a split 3-to-2 vote reflecting at least in part the concerns of lawmakers about the impact on customer bills if utilities were able to more easily pass on the cost of cloud-based data services, the ICC decided to end further discussion and leave current accounting rules in place.

The decision was a shock to some of the parties that had participated in nearly three years of discussions about the change.

At least one utility, Commonwealth Edison, took the setback in stride.

"We appreciate the initiative taken by the Illinois Commerce Commission throughout the cloud-based computer services docket.  While we are continuing to review options with the other stakeholders, we know the Commission saw this as a potential opportunity to drive innovation and value for customers, and that remains our priority. We will continue to evaluate both on-premise and cloud-based solutions to ensure that the path chosen is best suited for the needs of the utility and its customers," the company said in a statement

“We were surprised and disappointed that the ICC voted down the cloud-computing accounting rule proposal, given the unanimous vote to move forward with the proceeding last fall, the consensus reached by utilities, ICC staff and advanced energy companies on a simplified rule, and the absence of any objection in the recent record," said Danny Waggoner, director at Advanced Energy Economy, in a prepared statement.

Dissenting commission members were bitter about the development and said so before three members of the five-member commission voted to end the proposed rule changes.

Commissioner Maria Bocanegra, who voted against the majority, said the decision to walk away from making any changes meant the effort to modernize the regulations “has dwindled down to nothing more than a circular and futile exercise in failed logic.”

The decision, she said, means “that we are essentially denying the technological process that our systems and our society will need and will depend on more and more” in the future.

“Illinois has consistently worked to develop processes that allow utilities to experiment with new technologies and not delay innovation necessary for grid modernization. That is, until now,” Commissioner Sadzi Oliva said before voting against the majority. “The majority decision today sets Illinois back as a state progressive in its approach to innovation.”

Commission Chair Carrie Zalewski said the decision to leave current regulations as they are does not prevent a utility from asking the agency to consider the cost of cloud data processing services in its next rate case.

She argued that the proposed rule changes as negotiated by the commission’s staff and utilities did not really level the playing field for cloud-based services compared to in-house computing.  She said the changes, if adopted, could hurt consumers because the proposed language “lacks a necessary consumer protection mechanism" previously suggested by lawmakers.

“I think cloud-based solutions are the future for this industry and will transform the utilities’ day to day operations and cost structure in a way that we cannot even predict today,” Zalewski said. “We need to let technology and markets thrive by getting out of the way.”

That is not how Mishal Thadani, director of market development and policy at the artificial intelligence company Urbint, sees the commission’s decision.

"Utility investment in cloud-based software is critical to addressing the safety and reliability challenges of today and tomorrow," Thadani said. "Adopting specific rules that clarify the capitalization of these investments would close a gap in the regulatory framework, creating cost-efficiencies and making it easier for utilities to unlock the value of emerging technologies for their consumers."

“If not for the order closing the proceeding, this would have been a groundbreaking measure for utility innovation,” he said.