Utility and Regulatory Models for the Modern Era

By Ronald Lehr, former Colorado Public Utilities Commissioner

  • View the policy recommendations from New Utility Business Models.
  • Download the executive summary [PDF].
  • Download the full New Utility Business Models paper [PDF].
  • View the version printed in Elsevier’s Electricity Journal.

Related Resources:

  • View the announcement about our paper on performance-based ratemaking.
  • Download the full New Regulatory Models paper [PDF].

The Situation

The U.S. electric power industry is changing fast. For a century, vertically integrated monopolies built power plants, strung transmission and distribution lines, billed customers, and were rewarded with a predictable return on investment. But now, consumers and businesses are demanding more control over the energy they use. Innovative power companies and technologies are rising to meet this demand, introducing new technologies, from smart control systems to rooftop solar panels.

Under the current regulatory system, these market trends constitute a considerable threat to traditional utility business models.  According to the Edison Electric Institute, which represents investor-owned utilities, disruptive technologies like renewables, efficiency, distributed generation and new storage innovations, will lead to declining power sales and therefore declining revenues. “As the cost curve for these technologies improves, they could directly threaten the centralized utility model.”

Much of the country still operates under this centralized vertically integrated monopoly model.  But with rapidly proliferating new technologies, the old model is increasingly at risk. Utilities are facing declining sales, a shrinking customer base and potentially stranded assets.

In some parts of the country, new business models are already in effect. In deregulated states, policy-makers have “unbundled” the functions of the utility, opening parts of it to competition.  Some regulated states are turning to “performance based regulation” where power providers earn more by keeping costs low, improving efficiency and maintaining reliability, rather than getting a profit based on their capital costs or volume of sales.

Unfortunately, some utilities are simply circling the wagons, trying to protect their revenues from the forces of consumer demand and technological innovation. This is a losing battle, and runs counter to the public interest.

Market trends require new business models and new regulations that spur innovation instead of stifling it. America’s Power Plan provides a policy toolbox – designed to help utilities work with state and local decision makers to meet consumer demand, harness innovation and overcome barriers to more efficient cleaner energy future. Its goal is to ensure that consumers and producers alike thrive as our country undergoes profound shifts in the electricity sector.