Whether or not utilities, their boards and their regulators keep up with drastic changes in the electricity market depends on the utility ownership model.
Investor-owned utilities (IOUs) provide electricity service for a majority of electricity consumers in the U.S., and their commissions can use performance-based regulation to align incentives with customer values.
But another important segment of the population is served by publicly owned utilities (POUs), nonprofit entities directly governed by a democratic body. These utilities must also adapt to new customer demands and market forces, and this transition is just as challenging for public utility management and their boards.
Very few resources exist on how POUs can improve performance, but a new set of case studies and lessons, titled Maximizing Performance of Public Power Utilities, illuminates examples of how POUs can deliver the outcomes desired by their customer-owners through high-level performance management.
Other changes to rate design -- as summarized in the 51st State submissions from the American Public Power Association and the National Rural Electric Cooperative Association -- also remain important levers for improving POU performance.
The world of a publicly owned utility
POUs serve about one-quarter of all U.S. utility customers, but their governance and ownership structures are diverse and their constituencies range from large cities to sparsely populated rural areas. POUs fall into three main categories:
Cooperatives (co-ops are private, nonprofit entities owned by their customers and governed by a customer-elected board)
Municipal utilities (munis are owned by a city and governed either by a city council or an appointed board)
- Public utility districts (PUDs are government agencies designed to fill a utility role, either within an existing government agency or in their own jurisdiction)
Though they have diverse governance structures, these three kinds of POUs possess commonalities that justify examining them together.
POUs can be pulled in many directions beyond strict utility concerns, including stimulating local economic development and collecting new revenue for municipal funds or co-op dividends. Many POUs are also challenged by lack of capacity in small jurisdictions without the financial and technical resources to stay current with new technologies or broader market trends.
Here, we lay out three steps for public power governing boards to consider.
Step one: Take “no regrets” actions
POUs can take several low-cost, no-regrets steps that include collecting diverse perspectives (customers and other local interests), working with important parties to define desired outcomes, and developing repeatable metrics to measure performance against those outcomes.
This takes some work, but existing resources can help (including this initial list of metrics from Synapse), and the upfront effort is worth it. The process can improve operational efficiency and help utilities take advantage of modern technologies to deliver customer needs.
For example, Toronto Hydro, a large municipal utility, took the first step toward improving performance by engaging a diverse set of local interests to prioritize performance categories and reach consensus on desired outcomes. In 2013-2014, Toronto Hydro surveyed the city of Toronto, including customers, contractors, suppliers, industry associations, public interest organizations, government, academia and employees.
Since completing its first survey, Toronto Hydro has begun tracking performance by compiling “scorecards” in four categories: customer focus, operational effectiveness, public policy responsiveness, and financial performance. The scorecard reports quantitative metrics to indicate whether performance has been achieved and whether the utility is continuously improving.
Simply having a conversation with local interests about what they really want out of the electric system can foster important alignment, particularly for POUs considering a wider range of policy objectives. Associated quantitative metrics should be repeatedly measured and recorded to improve POUs’ ability to deliver customer value.
Performance metrics should not be developed in isolation. Instead, to maximize performance in each of the measured areas, POUs that own generation resources can integrate performance metrics into their integrated resource plans (IRPs). Public IRP processes shed light on potentially divergent performance goals and create a forum for utilities, board managers, and other local interests to reach consensus on the best way forward before major investments are undertaken.
In 2014, the Austin City Council adopted a resolution, which set a 65 percent renewable energy goal for 2025 and capacity targets for solar, wind and storage, forcing Austin Energy (a large muni) to update its 10-year IRP. At the same time, the council also mandated that rate increases remain below 2 percent annually. Austin Energy’s first analysis found the resolution would raise rates an average of 6 percent annually, so the muni instead proposed a cost-saving plan to reach 50 percent renewables by 2025.
City councilmembers and environmental advocates were dissatisfied with the lower renewable energy target, so Austin Energy further revised its proposal to include innovative mechanisms to reach 55 percent renewables -- including demand response and energy efficiency, reverse auctions to minimize the costs and risks of renewable power procurement, new thermal and battery storage technology, and biannual planning updates.
Through a public IRP process with clearly reported metrics, Austin Energy solicited feedback that ignited innovation and identified a set of outcomes that worked for everyone, allowing the utility to keep rates below the Texas average while setting country-leading clean energy standards.
Step two: Explore evolutions in governance
If customers still see value left on the table after taking the “no-regrets” actions, government agencies, cities and communities can work to enhance board governance. Two examples demonstrate how evolutions in governance can improve overall utility performance.
In 2002, the Sacramento Municipal Utility District (SMUD) board had become disconnected from utility executives’ decision-making process. To remedy this disconnect and improve governance, the board and executive team recognized the board must redefine its role and clarify its strategic direction, while giving utility executives sufficient leeway to accomplish the city’s goals.
SMUD’s board implemented 12 “Governance Process Policies” requiring it to set and measure utility achievement of performance goals to ensure board governance supports utility performance. The new policies essentially clarified that the board should focus on defining high-level outcomes for the utility, and utility executives should be free to decide how to accomplish those high-level objectives.
As a result, SMUD’s board regularly revises its goals in response to public policies and changing market conditions. According to SMUD’s annual report, this has helped make it California’s top-rated electric utility in customer satisfaction, while beating comparable utilities on average residential electric bills and keeping pace with state renewable energy targets. In addition, self-evaluations by the board and utility management team indicate board effectiveness increased dramatically from 2002 to 2012.
Optional step three: If performance lags, consider more drastic measures
If utility governing boards are further interested in keeping utility management focused on core strengths after implementing the changes described in steps one and two, they can consider a more drastic option -- bringing in a third-party to take on a subset of utility goals.
Vermont Efficiency Investment Corporation (VEIC) is a publicly owned nonprofit spin-off serving POUs and the IOU in Vermont, and its sole function is to pursue energy efficiency, demonstrating how utility functions can remain publicly owned while a nonprofit third-party improves performance.
Since 2000, VEIC has saved customers 13.7 million megawatt-hours, meeting or exceeding many efficiency performance metrics. This singular focus on efficiency allows sophisticated customer outreach and data-driven identification of the best opportunities for energy savings, making Vermont a national leader in efficiency, according to the American Center for an Energy-Efficient Economy.
VEIC’s board also adjusts the utility’s compensation by up to 3 percent based on performance, which gets passed through directly to employees. This further incentivizes good performance by “increasing cash reserves, improving the credit rating and keeping costs of debt low; mitigating risks during economic downturn; and maintaining a culture of continuous improvement and competition.”
Though not exhaustive, these steps can help POUs and their governing bodies improve performance and meet new power-sector goals.