To meet growing customer expectations, utilities should invest capital in their infrastructure. But to get their capital plans over the line, they need to step up and drive collaborative solutions with their regulators.
The status quo is tricky, and the stakes (increasingly) high….
In our experience, utilities are great at day-to-day operations—serving customers, pricing fairly and providing reliability, all of which create ongoing ROI.
However, to maintain and improve these service levels, not to mention evolve the grid for emerging demands (renewables, electric vehicles, etc), utilities need to invest significant capital, and that means re-evaluating how to engage with regulators to get capital plans approved. It’s harder than it sounds: different layers of oversight (state, federal, etc.), ever-expanding complexity via rulemaking, and an increasingly engaged collection of stakeholders. Tensions are growing between regulators and utilities around how to evaluate potential investments which are progressively innovative but hampered by risk-averse scepticism of the unique and unproven. Broad societal benefits are frequently championed, yet quantification can be nebulous. And when you add new areas of regulatory interest, such as environment or data transparency, the effort becomes unwieldy.
It’s not uncommon for capital plans to get rejected by regulators. And that’s a big deal for utilities—with direct knock-on effects for earnings, stock prices and compensation, and huge implications for what they can offer the customer. But the stakes are actually a lot higher, even: an average deployment of Advanced Metering Infrastructure (AMI) for a US utility can run into the hundreds of millions, and if we’re talking about grid modernization, we’ll be in the $ billions. If these capital plans are rejected, the economy at large suffers considerably: think about equipment manufacturers, people on the ground undertaking installation, and a myriad of other ancillary services. The ripple emanates throughout the supply chain—and all because of a breakdown in engagement with regulators.
But there’s reason to be optimistic! Many utilities have taken steps over the past decade to test the waters and find ways to drive change for their customers. These “best practice” examples of regulatory engagement provide a playbook for utilities to apply new approaches to their staid regulatory relationships.
So what do you (utilities) do about it?
Utilities need to take a new, proactive approach to educating and collaborating with regulators—and nurturing the relationships that de-risk the capital planning process. Think holistic, and build a stakeholder engagement capability that’s highly valued by your organization, well-resourced with the right people (which may include “non-traditional” utilities people) and ultimately enables you to professionalize engagement with regulators.
It’s also about managing those relationships in the context of the capital planning cadence—whom do you need to engage, in what way, at what stage, and for what outcome? And it’s skilled work, with multiple stakeholders to consider (society and consumers as well as regulators).
Ok, so getting down to brass tacks…
Baseline and build relationships: Understand staff, commissioner, legislator and stakeholder priorities—are those relationships at the right levels, resourced effectively, and (crucially) empowered to shape the direction of engagement?
Design your proactive engagement approach: Determine your future ambition and set in motion the best way to obtain regulatory certainty. At the simplest level, that means asking: What do you want to accomplish strategically? How can your regulatory team advance those objectives? How can you best define a clear plan of action (including identifying allies, or creating pilots to build credibility for expansion)? And around all this, a wrapper of engagement and positioning: how do you frame your initiatives in a way that aligns with legislative priorities and makes sense to the regulator? Often it’s about making messages clear and resonant for the right stakeholder audience, for example how you inform customers to build understanding and positive response. It’s classic communications and change management—but its importance is amplified like never before.
Be proactive about the regulatory lifecycle: When policy agendas are being shaped, make sure you’re at the table early and in the right ways. For instance, how do you engage in the early stages of policy development to input your perspectives, and stay involved optimally throughout the stakeholder process? And when policies are formally published, how do you make sure you’re first in line to understand their implications and requirements, and best positioned to understand the impacts associated with compliance?
And when it comes to formal engagement (formalized filings, testimony or stakeholder collaboration): Think about how you present options in the spirit of support and collaboration. Specifically, how you do highlight the benefits to customers, stakeholders and society?
Outcomes: Don’t relax too soon. Once each proceeding is finalized, make sure you know how to monitor outcomes to assess what follow-on activities are needed. And be holistic: for instance, how are you going to engage when the result is an unfavorable outcome for you? Have a plan for when that’s the case (because it’s bound to happen at some stage).
To grow, utilities have to re-think and re-value their regulatory engagement capabilities. It’s the only way to shore up the future of capital investments! Contact us to find out more about how.