Unraveling the Metaphors of Utility Evolution

The utility business model is clearly under siege—does a telecom parallel exist?

Photo Credit: What Indie Nights cc

The utility business model is clearly under siege, driven by a potent mix of distributed generation deployments and customer conservation efforts taking load (and revenue) off the grid.

Utilities risk a well-documented “death spiral” of lost revenue from DG customers, increased calls by regulators for spending on grid modernization and resilience, and rates for remaining ratepayers rising to the point that they decide to adopt DG to better control their energy spending. In the end, costs overwhelm revenues and the utilities perish under the weight of their antiquated structure. 

In describing this present and possible future, a few metaphors commonly arise: the utility as dinosaur (Bad! Your intransigence will drive you to extinction) or the utility as telecom operator (Good! You will innovate, add services, grow revenues).

First, let’s give dinosaurs some credit here -- they didn’t see the comet heading for the Gulf of Mexico. They had no political system in which they could debate market mechanisms to halt the inevitable consequences of climate change, or subsidize an orderly migration to warmer climes. And, most importantly, this metaphor ignores the fact that dinosaurs sprouted feathers. And wings. And eventually took flight and became warm-blooded birds.

That does not make for a supportable metaphor of stubborn inflexibility in the face of necessary change.

The utility, with the benefit of seeing its attackers coming (legions of homeowners and businesses mounting solar panels on their roofs and, eventually, storage systems in their basements), is far better off than any dinosaurs were and has, in its corner, time and guaranteed rate of return on investments with which to adapt.

But, to take on the next metaphor, are utilities really in the position that telecom carriers were in the 1980s and '90s? Looking back, the large, dominant Regional Bell Operating Companies (after the breakup of Ma Bell) did find themselves under attack by competitive access providers (CAPs) and, eventually, by competitive local exchange carriers (CLECs) that built fiber-optic networks into major metropolitan markets in the U.S. and cherry-picked large business customers by offering them lower prices for voice and data services. That created a virtuous cycle of innovation and lower prices for telecom services: lots of optical fiber got deployed, competitors rolled out new services to stay differentiated and ultimately drove equipment prices down to levels where residential customers benefited as well. 

But here’s the thing: for telecom operators, competing was easy. You buy some rights of way, access to building basements and telco central office switches and you’re off -- salespeople up and down the elevator asking tenants if they’d like to save on long distance, then local, then private data networks, then internet, then mobility, cloud, etc. Think about how long that list is. Then think about the equivalent list for utilities. 

Utilities should be as lucky as CLECs were in 1995. 

CLECS came into the market taking advantage of openings in the regulation of telcos that allowed new operators to offer services while guaranteeing them access to the incumbent operator’s network for a modest fee. While happily building out their footprint with easy money from private and public markets, along comes a series of technical innovations that opened up new service opportunities that their customers would pay more for. The average customer’s telecom bill has steadily gone up for the last two decades, not because telcos are raising rates to pay for somewhat intangible benefits like network resiliency, but because customers are demanding new services.  

First, they wanted to pay less for voice calling, and that was the way in for a CLEC, but with the happy coincidence of the development of the internet, mobile telephones, and fiber optic networks -- now customers were more than willing to pay more for services because they saw a real value in adopting them. The same has been true for the residential consumer. Breaking up Ma Bell got them lower-priced long-distance services and some new features for their local telephony (caller ID made the incumbent lots of money in its day), but ultimately, consumers have been more than willing to see their average communications bill rise from $35 monthly to over $200 if it comes with mobility, internet, and video.

Is it possible that utilities will face the same circumstances? 

Clearly, customers would like to see their electric bills go down and are willing to adopt distributed generation and energy management to get there, but what comes next? Will customers ultimately pay their utility more for enhanced energy services? It’s hard for me to imagine, despite plenty of writing on the topic, that consumers actually want more from an energy service provider other than the basics -- lower prices and reliability. 

If the pot of potential revenue is to remain fairly stable, then utilities clearly have something to be afraid of: a zero-sum game where every win by a competitor, from SolarCity to NRG, registers as a net loss to the incumbent utility.

While this revenue erosion occurs, utilities will find themselves not looking to telecom operators as a benign analogy for success in a transforming market, but as yet another new competitor, one that is already offering up energy management services to consumers across America. 

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Scott Clavenna is the CEO and co-founder of Greentech Media. He's on twitter: @sclavennaGTM