Electricity providers of the future: Not your grandmother's utility

Electricity providers of the future: Not your grandmother's utility

BrightSource Energy
Ivanpah, the world's largest solar farm, was funded largely by Google.

The future of the electricity industry has never been so uncertain.

Similar to the inflection point telecommunications faced several years ago, power players are now trying to determine how — or if — electric utilities will continue to play a central role in our everyday lives.

The telecommunications industry embraced competition, evolving from an industry dominated by AT&T and its Ma Bell black rotary dial phones, to welcoming new innovations such as the internet, broadband, cable and satellite television, iPhones, and Kindles.

The same fundamental question now faces electricity: Will this critical industry be based on monopolies and subsidies – or competition and markets? 

New technologies — particularly modern sensors and smart meters — have allowed competitors like Google, Honeywell, and Walmart, as well as scores of entrepreneurs, to enter the electricity business and provide an array of innovative services.

At the same time, advanced drilling approaches have slashed natural gas prices. A few state regulators, as a result, are discussing new business models that break up the traditional utility monopoly and encourage more investments from new players.  

Utilities, however, increasingly dislike such competition, and they are fighting back. New, more affordable gas plants have threatened many of their coal and nuclear units. Rather than invest in modernizing their operations, these traditional power companies are asking regulators and legislators to subsidize the continued operation of their old and uneconomic facilities.

Ohio-based FirstEnergy is the poster child of utilities clinging to the past. But its actions reflect a greater trend that, if allowed to advance, would disrupt markets and discourage innovation in the U.S. electricity industry.

Over the past two years, FirstEnergy pleaded with Ohio regulators to bail out its obsolete power plants that could no longer compete in regional markets. Despite a $4-billion price tag and opposition from industrialists, consumers, and environmentalists, the Public Utilities Commission of Ohio (PUCO) rubber-stamped the proposal.

Fortunately, the Federal Energy Regulatory Commission (FERC) found the bailout illegally disrupted competitive markets. In an effort to avoid FERC oversight, FirstEnergy recently responded with a new sleight-of-hand proposal, which would still cost customers $4 billion.

FirstEnergy also wants Ohio legislators to overturn the state’s deregulation laws, which opened the door for a competitive energy marketplace, and return the state’s utilities to generation and distribution monopolies. FirstEnergy’s CEO has said he would embrace re-monopolization "in a heartbeat." 

Re-monopolization threatens investment and innovation. A single utility controlling both distribution and generation would limit the access of entrepreneurs and technology giants eager to enter electricity markets.

Since that individual utility would be guaranteed a profit on its now-regulated power plants, why should it invest in efficiency, renewables, and grid modernization — tools that would cause these plants to run less often? The regulated monopoly, moreover, would have an incentive to keep operating old and dirty power plants beyond when the market would have forced their closures.

No doubt utilities hold substantial sway among legislators and regulators, yet selling re-regulation will be tough politically, particularly to conservative lawmakers, who support markets over subsidies and competition over monopolies. On the other hand, opposing re-monopolization — or supporting an open, fair electricity market — would attract a broad coalition, including manufacturers, consumers, environmentalists, and competitive generators.

FirstEnergy’s actions in Ohio reflect the reality that utilities hold more political sway within their states than at FERC.

Fortunately, recent Supreme Court decisions have strengthened FERC’s authority and are blurring the line between federal and state regulation of electricity. The justices, for instance, recently ruled against states trying to subsidize particular power plants in ways that distort competitive interstate markets.

Utilities, regulators, legislators, and other stakeholders hold diverse views on the issue of markets versus subsidies. The ongoing Ohio saga could set a precedent for the evolution of the electricity industry. Will it attract new players, investments, and innovation, or will it revert to monopolies that need public support to continue operating uneconomic power plants? One need only look at our modern, customer-centric telecommunications industry to see the way to the future.