Although utilities took a beating during the afternoon of day two of the Gridwise Global Forum (especially as to the question of who will be the losers in the new energy economy), it was the regulatory structure that really got knocked down during one afternoon session.

Utilities are often criticized for being sloth-like organizations that do not know their customers and innovate at the speed of molasses. The criticism is often warranted, but it can also be spread around. The next problem is the regulators, who are also working under outdated structures and often suffering from understaffing.

This chicken-and-egg issue of whether utilities or regulators need to revolutionize their operations to enable the energy revolution that smart grid and renewables offer was on display during the panel “Smart Grid and the Regulatory Landscape: Evolution or Revolution?”

One thing is clear: there is perhaps an evolution, but certainly not a revolution, underway when it comes to regulation.

The best example came from Maureen Harris, Commissioner for the New York State Public Service Commission. The state mandates that dynamic pricing cannot be required for residential customers (not that it matters, since there are not a lot of smart meters delivering granular data in New York anyway). However, before moving forward on many smart grid technologies, Commissioner Harris stated that she “would like to get some hardcore cost/benefit analysis and know [with certainty that] the benefits outweigh the costs.” As someone whose job it is to protect the interest of the public, that is indeed a noble wish.

But what exactly are those benefits? How do you measure the benefits of a technological revolution that enables greater control and visibility into a company, or a homeowner’s, energy use? Perhaps waiting for strong cost benefit analysis, or for customers to clamor for products, is waiting too long.

“The problem is that there needs to be a competitive landscape,” argued Kathy Brown, senior vice president of public policy development and corporate responsibility at Verizon. She said smart grid often feels like something good being pushed down your throat, like a can of spinach that costs twice as much because it’s healthy.  She said the utility is selling smart grid by telling customers, “We’re going to raise your rates when you use less energy because efficiency is good for you."

“Where are the innovators? How can we get them in?” she asked. “How can the customer have choice?” Since no panel on energy and smart grid is complete without an allusion to Apple, Brown offered one here.

She noted that in an open marketplace, Apple put out products like the iPod, iPhone and iPad. It was not because consumers were clamoring for them, it was because there was an open marketplace for people to choose products that were important to their life -- and now they can’t live without them.

Many regulators and utilities scoff at this analogy, because at the end of the day, someone needs to keep the lights on and ensure safety and reliability. But as John Soyring, vice president of industry solutions for IBM, noted on another panel, the utilities could have layers of new services in a deregulated world with an advanced grid. Cash flow does not have to come from selling electrons to keep the grid up and running.

While the PUC commissioners on the panel agreed in theory, they seemed unaware of how to get to this new world. For states, it will likely have to be through legislation. And even though there are more than a dozen deregulated states, there is only one -- Texas -- that operates in the manner Brown is talking about (and even so, many argue innovation is still in its very early days, 10 years into Texas deregulation). One of the major constraints in the other states is that regulators have set rules that ensure certain prices for electricity, practically ensuring that true competition will not take place.

It is no secret that regulation also needs to evolve as the utilities do -- but where to start? “Classic rate regulation is not friendly towards technology,” said Joe Kelliher, executive vice president of regulatory affairs for NextEra Energy. “It’s friendly towards a black rotary phone and 50-year-old coal plants.”

New York’s Harris, who was the most tentative panelist when it came to pushing for technological advancement and consumer options, agreed that the regulation itself is half of the problem. She said both rate recovery and statutory deadlines were long outdated. “There’s a new reality in the regulatory world and marketplace,” she acknowledged.

There were few tangible suggestions on how or when we would see a complete overhaul of the regulatory structure, although there was a palpable feeling in the room that everyone is craving it -- even the regulators themselves.

The one panelist who hails from an industry that has been transformed since its regulated days also had a non-Apple analogy to offer. “I liken this to wine,” said Verizon’s Brown. Just a few years ago, you could only buy from your local wine store in most states, due to regulation. Eventually, a federal law knocked down those barriers, and today consumers in many states can mail-order wine from any location. With energy, “the marketplace still has those borders, and I don’t know if that’s right,” she said.

The question remains whether deregulation will look more like the open marketplace of Texas or the barely competitive Delaware market when the walls come down. 

Tags: innovation, public utility commissions, regulation, regulators, utility