A Framework for Organizing Current and Future Electric Utility Regulatory and Business Models

Many regulators, utilities, customer groups, and other stakeholders are reevaluating existing regulatory models and the roles and financial implications for electric utilities in the context of today’s environment of increasing distributed energy resource (DER) penetrations, forecasts of significant T&D investment, and relatively flat or negative utility sales growth. When this is coupled with predictions about fewer grid-connected customers (i.e., customer defection), there is growing concern about the potential for serious negative impacts on the regulated utility business model. Among states engaged in these issues, the range of topics under consideration is broad. Most of these states are considering whether approaches that have been applied historically to mitigate the impacts of previous “disruptions” to the regulated utility business model (e.g., energy efficiency) as well as to align utility financial interests with increased adoption of such “disruptive technologies” (e.g., shareholder incentive mechanisms, lost revenue mechanisms) are appropriate and effective in the present context.

A handful of states are presently considering more fundamental changes to regulatory models and the role of regulated utilities in the ownership, management, and operation of electric delivery systems (e.g., New York “Reforming the Energy Vision” proceeding). The proposed fundamental changes and future electric utility regulatory models have, to date, been presented conceptually across many studies, papers, and other documents (Eto et al., 1994; Moskovitz et al., 2000; Nimmons and Taylor, 2008; Cappers et al., 2009; Fox-Penner, 2010; Satchwell et al., 2011; Lacy et al., 2012; Aggarwal and Harvey, 2013; Hanelt, 2013; Kind, 2013; Lehr, 2013; Newcomb et al., 2013a; Newcomb et al., 2013b; Richter, 2013a; Wiedman and Beach, 2013; Costello and Hemphill, 2014; EPRI, 2014; Graffy and Kihm, 2014; Hanser and Van Horn, 2014; Rickerson, 2014; Satchwell et al., 2014).

In this study, we focus more attention on the link between regulatory/utility business models and the end goals of policymakers; a topic that in our view has received insufficient attention in the previous literature. A more holistic assessment and consistent framework for depicting utility profit motivation and profit achievement aligned with public policy goals and customer technologies may be useful to industry stakeholders in order to provide a lens through which to evaluate specific proposed changes to current practices. Additionally, the implications of changes to existing regulatory paradigms and business models should be included in assessing the viability of new approaches.

To help frame such discussions, we developed a framework to represent the broad spectrum of regulatory paradigms and utility business models that exist today and may develop in the United States over the next 10 to 20 years. Our framework is based on two fundamental utility business model characteristics: profit motivation (see Figure ES-1) and profit achievement (see Figure ES-2). While these are the characteristics of any profitable enterprise and are thus not particular to regulated electric utilities, we use the terms to describe a spectrum of attributes for different regulatory approaches.