The utility industry has never lacked complexity or dynamism. Reliably generating, transmitting and distributing the electricity society requires to function is enough of a feat that the National Academy of Engineering ranked electrification at the top of its list of 20th-century engineering achievements — ahead of cars, airplanes, computers, the internet and even spacecraft.
In recent years, however, the power grid and the utility industry that emerged long ago to make electrification possible have experienced dramatic change. Some of that change is the result of age. The American Society of Civil Engineers’ most recent infrastructure report card gave the U.S. energy system a D+, highlighting the challenge utilities face in providing the uninterrupted service their customers expect.
Other dramatic changes have included the rapid and ongoing emergence of cost-competitive distributed energy resources, such as rooftop solar — which has turned millions of homes and businesses into minigenerators and increased two-way flows of electricity — as well as the widespread deployment of sensors and smart meters that generate huge volumes of data.
Is the cost-of-service model outdated?
This rapid transformation is fundamentally shifting the traditional service model that utilities have long relied on to plan investments and make money. “The model that has served for so many decades is the cost-of-service ratemaking model. It is basically putting capital assets into the ground and getting a rate of return on those assets that is authorized by state public service commissions,” said Jerry Cavalieri, managing director of regulatory reporting at Houston-based Utegration, LLC, a full-service SAP consulting company. “That model is under attack because regulators want more oversight on reliability, outage management, customer service, green power initiatives and goals. These are not the drivers of the traditional cost-of-service model.”
That means the way utilities are regulated and make money is increasingly disconnected with a more distributed electricity landscape and changing customer expectations. And that disconnect poses some profound challenges to utilities. For example, utilities understand that aging infrastructure and increasingly two-way power flows demand investments to maintain the safety and reliability society demands from the power system. Yet under the cost-of-service model, it’s often unclear how utilities earn money by making those investments. Another example: While many utilities understand the importance of improving energy efficiency, initiatives to pursue that objective can often run counter to a service model that rewards large capital expenditures on new power plants and other utility infrastructure.
Even as utilities contend with rapid change and a regulatory environment that is often misaligned with how they increasingly need to operate and invest, utilities also face greater scrutiny than ever before. In fact, a recent survey of utilities by Utegration and Informa Infrastructure Intelligence found that about 63% of respondents experienced an increase in regulatory filings — in itself a significant drain on human and financial resources — and 71% reported that their filing process was at least somewhat inefficient. In addition, an unprecedented number of interveners — including environmental and ratepayer advocacy groups — are playing a role in the regulatory process.
A move to performance-based ratemaking
Things are quickly changing on the regulatory front — changes designed to better align how utilities invest and make money with the priorities of customers, policymakers and society as a whole. At least 19 states have discussed or are implementing what is known as performance-based ratemaking. “We are seeing an uptick in interest in changing the model of how utilities get compensated based on how they perform,” said Cavalieri, who formerly was a principal FERC accountant at California’s Pacific Gas & Electric utility. “For example, let’s say a commission decides to compensate a utility based on its reliability and establishes a metric to measure it. As a utility, you’re going to take action to modernize or harden your assets in order to meet your metric. I think that is a good alignment between state and federal regulators, utility companies and with ratepayers.”
Illinois is one of the pioneers in performance-based ratemaking. In 2011, the state passed the Energy Infrastructure Modernization Act, which established a mechanism enabling the utilities Commonwealth Edison (ComEd) and Ameren to invest more than $2.5 billion in grid modernization. The result: ComEd says 11 million customer outages had been avoided over six years, $2.1 billion in “societal savings” had been reaped and in 2019, ComEd proposed a rate decrease for the fourth time. Besides Illinois, New York’s Reforming the Energy Vision incorporates performance-based ratemaking, as do efforts in states from Massachusetts to Oregon to Hawaii.
Even though performance-based ratemaking takes on different flavors depending on the unique circumstances of each state, there are common requirements necessary for utilities to meet their obligations efficiently and effectively. “Performance-based ratemaking requires more data to understand how your business is running. It’s not just ‘how much capital did you put into the system’ and calculating a rate of return,” Cavalieri said. “You have to have metrics that quantifiably tell you how your service reliability or customer service are performing. For that, you need much more granular data.”
A system for a 21st-century service model
For utilities, though, it’s not just a matter of collecting that data regulators need to see to evaluate a company’s performance. For all that information gathered by systems across a utility to be of much use, it must be stored in one location so that it can be easily accessed and analyzed. “Increasingly, you need a central repository to bring all this information together. It usually starts with the transaction servers that reach throughout the edges of the organization,” Cavalieri said. “Once you have collected a lot of your data in your transaction systems, like SAP, you have to make sense of that and interpret this data using business intelligence tools.”
The idea of having a central repository where data collected from disparate systems can be analyzed is a straightforward concept. But actually implementing it can be a challenge — one that Utegration helps utilities solve. “If you have disparate systems gathering data, it creates issues for business intelligence,” Cavalieri said. “It creates reconciliation issues, it creates different numbers, and there’s no single version of the truth. Sometimes utilities falter at this, and they need a partner who can really help them through that transition to an integrated solution.”
As the momentum for performance-based ratemaking increases, the importance of utilities to continually assess whether they have the capacity to respond to regulators quickly and accurately becomes more and more pressing. “In some ways, I think it’s good there’s more scrutiny and oversight. But I think ultimately utilities have to be ready for that and ask these questions: Do we have the systems in place and business applications in place to provide the information that is being asked by regulators now and into the future?” Cavalieri said. “The utilities that have a system that can evolve will be in a good position to navigate inevitable changes.”
