A Streetcar Named De$ire

Check out the collision of ideas in a recent edition of the Energy Law Journal.  Oh, it's really not as boring as it sounds, but the authors sure do know how to belabor a point.  You'd think they were being paid by the word...

First, take a look at DOES DISRUPTIVE COMPETITION MEAN A DEATH SPIRAL FOR ELECTRIC UTILITIES? by Elisabeth Graffy and Steven Kihm.  It's one more take on the idea that how we produce and use energy is moving on, and utilities that don't get ahead of the curve by offering products that consumers want are going to end up like streetcars, land line phones, and beanie babies.

Traditional utility response to the proliferation of widely distributed rooftop solar has thus far been limited to attempts to lock in a future revenue stream to pay for what may become a stranded investment in centralized generation and transmission.  Early efforts in this regard have been soundly rebuffed, not only by the owners of these small-scale generators, but regulators as well.

Strenuous efforts to mitigate rather than innovate seem likely to increase vulnerabilities by generating public and customer backlash, motivating market competitors, and instigating potential legal challenges.

The article compares and contrasts the responses of two companies facing innovation/technology challenges in their respective industries.  It examines how the cable TV industry remade itself when facing competition from satellite TV companies -- it began offering new products that increased its value to consumers by bundling TV with phone and internet service. 

In contrast, much is made of the fate of Market Street Railway, a regulated streetcar company whose response to competition from buses and automobiles was to increase rates to cover its costs while relying on regulation to maintain its monopoly.

This story has significant implications for electric utilities facing increasing and especially disruptive competition that may shift their risk position from the zone in which regulation is effective to one in which it is not. That Market Street responded to disruptive competition by simply requesting rate increases from its regulator reveals denial that their economic woes were due to fundamentally changed circumstances that required new organizational strategy, not just regulatory intervention. Market Street, while fully understanding the existence of threats to its viability, showed no real signs of innovation or adaptation in this regard, but rather continued a reliance on conventional cost-accounting-based utility ratemaking practices to the bitter end.

And that's exactly what utilities seem hell bent on doing in the other ELJ article, REGULATORY FEDERALISM AND DEVELOPMENT OF ELECTRIC TRANSMISSION: A BREWING STORM?

This article, by James Hoecker, advisor to WIRES, the "Voice of the Electric Transmission Industry!!!" wanders on for 29 pages of transmission building advocacy.  Build, build, build!  It doesn't seem to matter whether there will be any consumers left to pay for it all, as long as the federal government takes control of electric transmission permitting and siting today by "collaborating" with states in order to usurp their authority.  It even goes so far as to push the CSG's interstate siting compact bad idea.

So, what will it be?  Transmission or innovation?

Building more traditional transmission using eminent domain to acquire new rights of way will NOT work.  The public has had enough!  Transmission opposition has become increasingly sophisticated and its methods are becoming more effective at cancelling and delaying most new proposals.  This pitched battle has both sides spinning its wheels, but delay is the opposition's friend.  And the more the industry nibbles away at state authority, the closer it pushes state regulators toward permit denial.

Does this mean that we can stop building transmission altogether?  No, but we can stop building transmission stupidly.  Smart transmission uses existing rights of way to rebuild existing lines to increase their capacity.  In some instances, the public actually welcomes a responsibly managed rebuild, especially when presented as an alternative to new transmission.  In other instances, the public welcomes smartly designed new transmission projects, like Atlantic Grid's New Jersey Energy Link.  This project is buried for its entire length, avoiding the expense and time delays of opposition to traditional overhead transmission projects.  But perhaps its best selling feature is that it is designed to be useful long into the future -- moving conventionally generated power to markets that need it today, but also there to move offshore wind to load as it is developed.  If only they get rid of that insulting "NIMBY" word...

But old habits die hard for the big energy conglomerates, who wish to continue operating their streetcar named De$ire.  Instead of creating an exciting and profitable new market for themselves, Ohio's Tweedledum and Tweedledee have hung their hopes (and plopped their "transmission spend") on investing in more transmission. 

You can lead a company to knowledge, but that doesn't necessarily make it any smarter.

Oooooh!  Shiny object!

In the end, the electric utility as an institutional form has not exhausted its relevance. Claims that utilities are in a certain death spiral seem premature. However, those predictions seem disturbingly grounded in tacit assumptions that utilities are too hidebound by their past to be able to adapt in a timely or agile way to rapidly changing conditions. If so, utilities will find themselves to be brittle rather than resilient when confronting disruptive competition in a sector that is central to social, economic, security, and environmental necessities and, therefore, cannot remain static. All signs point to the reality that utilities must change. The open question is whether they will change by embracing and, indeed, leading value creation or be changed by others in the market who embrace it first and more firmly.