Some utilities are seeking regulators' preapproval of massive grid modernization projects, including advanced metering functionality. Near-term preapproval to invest in broad grid-modernization projects will not occur unless utilities focus on developing — jurisdiction by jurisdiction — the most critical requirement for regulatory preapproval: a compelling business case.

Regulators are not typically the entity making investment decisions. Traditionally, utility executives make investment decisions. Later, regulators allow cost recovery in rates if investments can be shown to be prudent and used and useful (among other requirements). This system provides essential ratepayer protection, but the risk of disallowance can render utilities reluctant to make capital-intensive investments.

Due to the nature of grid modernization investments — expensive, hard-to-quantify benefits, rapidly changing technology, complicated in function — utilities are understandably reluctant to take on the burden of proof in an after-the-fact review that these investments were prudent and are used and useful. By asking for some form of pre-authorization, utilities are shifting the risk of their investment decisions away from shareholders and onto regulators, and ultimately, the ratepayers.

Regulators should, at a minimum, review these requests like prudent potential business investors, not like innovators.

High expectations

There is broad enthusiasm (and high expectations) for grid modernization and its potential to deliver a more flexible, reliable, resilient, secure and sustainable electric system. Observing all this enthusiasm, utilities might think that regulatory approval of grid modernization investments would come easily. Meanwhile, stakeholders may be frustrated by regulatory processes and principles they perceive as unsuitable and standing in the way of an advanced electric grid that will help achieve our most important policy goals.

As a consumer, I'm excited about the potential of grid modernization and frustrated by how difficult it is to advance. As a regulator, I am steadfast in what I need to conduct my duty.

Enthusiasm and frustrations will not reduce the need for the evidence regulators require before approving billions of dollars in investments to be recovered in monopoly rates. Utility regulators cannot be sold on visionary rhetoric that is better suited for other forums. Regulators need what any prudent investor needs: a clear, complete and well-evidenced business case.

Here are the key components of a utility's business case to its regulators: need, value and accountability.

Utilities must establish that there is or will be an unmet need for the investment. Will the investment solve a power system problem, address a statutory requirement, or meet customer demands? The business case should describe the functionalities the utility seeks, the options considered, and justify the preferred solution. The centerpiece of this case should be a clear and reasoned rejection of the "do nothing" scenario. 

When faced with a request for preapproval, regulators will be keenly aware they are making an investment decision with someone else's money and resources. If the business case leaves regulators believing that doing nothing is a viable and prudent decision, utilities and stakeholders should expect many regulators to choose that path.

Demonstrating value

To demonstrate the value of the investment, the business case should provide what the regulators consider a full and appropriate benefit-cost analysis.

The surest way to convince me an investment has value is to provide quantitative evidence that the proposed investment will reduce the cost of the power system and save customers money on their electric bills. My jurisdiction also considers benefits and costs outside the power system, such as the societal costs of greenhouse gas emissions. These benefits and costs are important to consider, but they are only part of demonstrating value, which is only part of a business case.

Utilities and stakeholders should not expect that projects will be approved primarily or solely on the strength of societal benefits. If the value of an investment is predicated on societal benefits, utilities may require a stronger needs case to gain regulators' approval. Otherwise, if an investment provides no power system value and meets no power system need, of what use is it to ratepayers?

Importantly, the business case should explain what is within the utility's control and where the utility can and cannot be held accountable. A good business case should present transparent and meaningful accountability for the success of what is within the utility's control. If regulators are going to step in the shoes of the investor, preapprove investments, or relax post-investment reviews, there must be an equal trade-off with predetermining the responsibility for certain outcomes and the consequence if these outcomes are not provided.

In fairness to ratepayers, the model of preapproving utility investments should come with preapproval of firm, meaningful accountability. Here is where there is work for stakeholders; rather than aid the utility in selling grid modernization to regulators, stakeholders should independently make sure the utility's plan will meet their expectations on a reasonable timeline. Otherwise, ratepayers may not get what they paid for.

Grid modernization has the potential to create a more reliable and sustainable power system, and it carries the risk that customers are left paying for a gold-plated system that doesn't deliver on its promises. The stakes are too high for regulators to take bets on grid modernization; a business case should eliminate concern that a vote to preapprove an investment plan is a gamble.

The bottom line is that regulators should not let the utility off the hook to demonstrate that their investment plan is prudent and investments will be used and useful. Just as importantly, if the recovery mechanism shifts investment risks from the utility to the ratepayers, regulators should hold the utility accountable to the promises of a modern grid. A good business case will demonstrate these requirements to regulators.