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May 11, 2018
Understanding the ideal regulatory regime for your distribution business
By: Eduardo Balbis

As a utility, what kind of regulatory construct would allow you to further optimize your distribution system? It’s a tough question, and not surprising if you find it difficult to answer off the top of your head. Reason being, at least in my view, it’s the wrong question to start off with.

Why? First, let me provide some context.

As we all know, multiple market and technological shifts are converging to reshape the current energy ecosystem. To survive and thrive in this new and evolving environment, utilities need to develop new capabilities that, once developed, can meet the goals and objectives of customers and other stakeholders. Current regulatory models do not encourage or allow utilities to effectively move forward. A model is needed that incentivizes you to run your system at peak efficiency and effectiveness, and develop win-wins for your shareholders and customers.

So, what does a regulatory regime that enables this look like? Since every utility is unique—different networks, customer bases, generation mix, investment profile—the answer will be different in every case. There’s no one-size-fits-all and each utility must determine the appropriate model components to match not only its current ecosystem, but also what the future holds.

The first step toward this direction involves determining what key changes are likely to occur. This means identifying a set of seven to 10 “signposts” that will characterize and shape different futures: things like levels of electric vehicle (EV) adoption, housing starts, energy usage, policy changes, renewable and distributed generation deployment, among others.

These signposts can be grouped into various potential scenarios. Scenario A might include relatively low EV adoption, mid-level housing starts and high demand for renewable energy. Scenario B might have a higher level of EV but low economic growth. And so on.

When you create and model these scenarios, you can then decide which is most likely to come about. This opens the door to the next step—deciding on the goals you and your stakeholders want to achieve in the future you’re envisioning. What components of the system should you optimize? What outcomes do you want to achieve? What technologies do you think will give you a competitive advantage?

Equipped with this clear view of the future, what you want to achieve in it and how, you’re now ready to look at the most favorable kind of regulatory construct. For example, you might want a regime that offers incentives to encourage total spend optimization, while layering in performance objectives. You can then create a roadmap for the capabilities needed to win in this kind of regulatory environment—and also go out to influence people to help make sure it comes about.

The message? When you’re thinking about what kind of regulation will help you optimize your system in the future, don’t begin with the regulation itself. Instead, start at the other end, by understanding your capabilities, what the likely future holds, and how your business will succeed in it. Everything else will flow from that. If you haven’t done this yet, maybe it’s time you did.

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