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Wellinghoff to utilities: Time to rethink your business model

<p>Former top U.S. energy regulator Jon Wellinghoff explains why the vertically integrated power paradigm of electric utilities&nbsp;is about to disintegrate.</p>

I first interviewed Jon Wellinghoff almost a decade ago — shortly after the well-known energy law attorney authored Nevada’s Renewable Portfolio Standard (RPS). That was just before President George W. Bush appointed him to the Federal Energy Regulatory Commission (FERC), where, under President Obama, he eventually became the commission’s longest-serving chairman.

Since vacating his post late last year, Wellinghoff has been busy advancing a more competitive, more distributed and more efficient U.S. power grid as co-chair of Stoel Rives’ energy team. In this interview from Stoel Rives’ office in downtown San Francisco, Wellinghoff explains why utilities’ “entire model will be transformed.”

Garrett Hering: The last time we spoke, you had just helped to craft Nevada’s Renewable Portfolio Standard. That was shortly before you moved on to FERC, where you focused on making the U.S. power grid cleaner and more efficient. What are you doing for an encore?

Jon Wellinghoff: Well, I’m trying to move beyond policy to a point of actually implementing policy, implementing structures that I hope can be models for the new platforms of energy delivery services that we need to provide to customers. So I’ve got a number of clients. Some of them are large solar developers, for example, but not large in the sense of large systems, utility-sized systems. Mostly they develop distributed commercial and residential systems, but they’re very large companies. They’re interested in trying to collaborate with distribution utilities to develop new advanced models of those distribution platforms in ways to optimize the amount of distributed energy that would go on the platform.

So I’m working with them to see if we can first conceptualize what that model would look like and then sit down with distribution companies — whether they be municipal utilities or co-ops or investor-owned utilities — and see if we can collaborate with them to cooperatively develop this model. And we will do that, if need be, with the regulator, whether it be a state regulator or whomever, to see how these platforms can be optimized not only for distributed generation but also for the improvements in efficiency in those systems.

Hering: You’ve referred to demand response as the killer app of the smart grid. What do you mean by that exactly?

Wellinghoff: Basically, I mean that consumer loads are resources that are almost totally untapped. As we start to have — and as we now do have — controls, control strategies and technologies that are so cost effective that all of these consumer loads can, in fact, be communicated to and controlled, then they become a huge resource for the grid. They become a resource for providing all types of grid services including energy, capacity and ancillary services that can be complimentary to traditional supply-side resources.

Once you have the ability to change the operation of your refrigerator or the freezer cases at Walmart, or the lighting in the local post office, you then have the ability to do many things that can make the system operate much, much more efficiently.

Hering: This is what you are working on together with the Advanced Energy Management Alliance?

Wellinghoff: Yes. That was my next point. We have a group that has been put together by a number of individual companies that is growing rapidly.

Hering: Big companies, too.

Wellinghoff: Very big companies. Walmart, one of the biggest companies in the world, is a member. There’s a number of big companies looking at joining, including Microsoft and others, and we also have big companies that do control work and demand response work, including Johnson Controls and EnerNOC and Comverge, and major people who are involved in the demand response service space are part of this group, as well.

The purpose of the group is to advocate for more advanced use of demand response throughout markets in the country and to work with both state regulators and the federal jurisdictional entities — the ISOs [independent system operators] and the RTOs [regional transmission organizations] that operate independent wholesale markets — and try to increase the amount of opportunities for consumer participation in those markets. It’s really very much a consumer-based organization.

The alliance only started in February, but we’ve got a very strong group. We’ve already met with PJM [the RTO for 13 mid-Atlantic states] and their upper management. We’ve met with the commissioners at FERC. We’ve met with members of Congress and Congressional committees. So we’ve really gotten the word out there that we are there to represent the demand response industry in providing information and assistance and expanding the opportunities for consumers to participate in markets.

Hering: How serious are competitive threats like battery-backed distributed solar and demand response to the U.S. electric utility industry that is generating nearly $400 billion in annual revenues?

Wellinghoff: Well, there’s no question that it will transform their models. They will be forced to transform them into these distribution platforms that are primarily receiving revenues through a fixed fee, much like the cable companies that provide cable services to homes and businesses. So I think the entire model will be transformed. I think it will be a much more competitive model with competitive services on both sides of that platform.

On the supply side, there’ll be competitive services and competitive retail providers that will be acquiring energy from central station wind farms and other central station resources. Wind right now can be contracted for in Oklahoma at less than 3 cents a kilowatt-hour. It’s the least expensive central station resource that’s available on the grid bar none — on an incremental, new-resource basis. So there’ll be certainly people who will want to purchase power at those kinds of rates and then pay some incremental fixed fee for transmission and distribution delivery charges.

But the whole model of the utility as a vertically integrated entity, I think, will break down completely. I think the vertical integration will go away because there are no efficiencies in it anymore. The efficiencies are really in the competitive and distributed model — distributed in the sense of having separate parts and also the distributed options that consumers will have, including the ability to put solar on their house and also incorporate storage of some kind.

Those options will become very cost competitive. They are cost competitive now in Hawaii and California and other parts of the country. And that will only continue as the cost of those systems is driven down and electric prices for central station power continue to go up, as it’s delivered through a transmission and distribution system that continues to need more investment and more improvement. So I just foresee that the current central station and vertically integrated for-profit model for utilities will go away.

Hering: Do you see resistance to change out there among the more than 3,000 electric utilities in this country?

Wellinghoff: Oh, sure. Absolutely. I think most utilities, most utility executives, are fairly blind to the level of acceleration of these technologies and these changes that are occurring. I think they’re unaware of it. The only time they become aware of it is when they go out and do their load forecast and they keep seeing that the rate of load growth is decreasing and they keep saying to themselves, "Okay, is this a trend that’s going to change?" No, it’s not a trend that’s going to change. The level of rate of load growth is going to continue to decrease. It will get to zero at some point in time, but it will start going negative when you’ve got enough distributed generation put in.

Hering: So what do you do if you’re a utility? Can you innovate out of this crisis in your business model?

Wellinghoff: Well, you have to start rethinking what your business model is. No. 1: Do you want to maintain yourself as a platform operator of the distribution system? That’s one part of a business model. If you want to start providing additional services to your customers beyond that platform, then you're going to have to think about what those services are and figure out how those services are of value to your customers, and then start working on separate business lines that can develop that value.

Are you going to compete with the companies that are experts in putting in distributed solar around the country? I don’t think so. I don’t think you’re going to beat SolarCity or SunRun or Sungevity or the next 10 companies behind them. They have taken it down to a science. They can deliver a solar system like you deliver a FedEx package. I don’t think there’s any utility in this country that can touch the delivery expertise and the distributed solar marketing expertise that these companies have.

Hering: How do you view the current battles over net-metered rooftop solar that are playing out in states such as Arizona, California and Colorado?

Wellinghoff: Well, most of those battles the utilities have lost. They won a very small victory in Arizona, where they actually set the precedent for the ability to charge a subclass of residential customers — i.e., those residential customers who have solar on the roof — a specific separate charge for having that system installed. But the charge ultimately authorized was very small. I think there’ll continue to be those battles to the point that the utilities try to sort of beat back the inevitable. But at the end of the day, I think those battles will turn around to ones that are more rationale — which comes down to changing the rate structure by which utilities recover their costs for distribution asset investment.

Hering: We’re really just still at the beginning of this energy transition. Are you optimistic we’ll carry it through?

Wellinghoff: Oh, yeah, because the markets are so powerful that you can’t stop it. Look at Hawaii. Hawaii’s going through a lot of stops and starts over how much solar you put on the distribution system, et cetera. But ultimately all that’s going to be resolved in ways that will favor the markets and market solutions, and the market solution in Hawaii is to put solar on your house. This is the cheapest thing to do. So people are not going to let policy and regulation get in the way of a market solution.

 In the video below, Wellinghoff talks at a GreenBiz VERGE event from 2012. 

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