Public Policy Consulting
The eLab report on new business models shows convincingly why new business and regulatory models are needed in the utility sphere. I offer a few complementary thoughts.
First, the paper’s analogy between today’s regulatory universe and Ptolemaic astronomy is helpful, but it understates the problem with regulation. The patches and fixes appended to standard rate of return regulation make the result worse than merely complicated: they render it unable to achieve one of regulation’s major tasks – to induce efficient behavior in utilities. Among other roles, regulation of monopoly utilities should be a substitute for the discipline provided by the crucible of competition in non-monopoly markets. As practiced today, regulation fails badly in this regard.
Closely related, utility regulation today provides almost no meaningful inducements for utilities to innovate, to generate creativity of the sort described by the economist Joseph Schumpeter. Regulation needs to shift from its backward-looking focus on costs, to a forward-looking emphasis on value and desired societal outcomes. In this regard, the “value for money” regulatory model in the United Kingdom, with its emphasis on incentives and outcomes, might profitably be adapted for use in the United States.
Another problem with current regulation is the regulatory process. The quasi- judicial, adversarial process may be suitable for resolving disputes among contracting parties, but it is no longer up to the task of solving the challenges presented by energy today. Regulation’s methods need to be much more collaborative and aimed at problem solving, not merely focused on solving past claims. In short, regulation must become a more legislative (as opposed to judicial) process.
Finally, the paper wisely chooses “constellation” to describe the relationship among the supply and demand elements in the energy future. But we should be agnostic about the ultimate role that distributed resources will play going forward. Undoubtedly, there will be a significant amount of decentralized resources in our energy future. On the other hand, nothing can offset the economies of scale and scope available to larger clean energy resources. The economics of large and small resources, close and distant ones, and flexible and inflexible resources are subtle and complicated; the equilibrium state is hard to predict.
Ron Binz is a principal at Public Policy Consulting, specializing in energy and telecommunications economics and policy issues. Until April 2011, Ron was the Chairman of the Colorado Public Utilities Commission, appointed in 2007 by Colorado Governor Bill Ritter. As Chairman, Ron led the Colorado PUC in implementing the many policy changes championed by the Governor and the Legislature to bring forward Colorado's "New Energy Economy."
Ron was an active member of the National Association of Regulatory Utility Commissioners, serving as Chair of NARUC's Task Force on Climate Policy. He is a member of the Harvard Electricity Policy Group, and served on the Keystone Energy Board and the Advisory Council to the Electric Power Research Institute (EPRI).