OpEd: Why We Should Pity Utilities

on March 22, 2013 at 8:30 AM

It’s time for some compassion for the owners of America’s $374 billion power industry – twenty-two of whose member firms appear on the Fortune 500 list.

While the fate of these companies may not automatically tug at the heartstrings of your average American, it deserves our attention – not least because it’s in our nation’s short-term and long-term best interests. These thousands of powerful companies not only keep our lights on and our iPhones charged; they also stand squarely in the path of our clean-energy future. Their ability to adapt to a bevy of unprecedented challenges will determine how well and how quickly the United States succeeds in weaning itself from fossil fuels. They’ll also play a key role in the $268 billion global clean-energy market.

Right now, however, these companies are caught in a vise: squeezed by simultaneously rising expenses combined with falling demand for electricity. Most of their generation and transmission infrastructure is wearing out and needs replacement, while new environmental rules are also raising their costs, even as new technologies – and new resolve – are helping cost-conscious Americans become more energy-efficient. The Energy Information Administration projects that U.S. electricity use will rise barely 0.7 percent on average through 2040. Compare that to eight percent a year during the power industry’s glory days, circa the 1950s.

The House of Representatives considered the industry’s plight this month with two hearings before a subcommittee of the Energy & Commerce Committee. The second session took place Tuesday.

The old perpetual-growth business model, in which power and utility companies got paid according to how much energy they sold, may well be changing, particularly considering the rapid growth of “on-site” energy, such as rooftop solar panels and wind turbines. And in the wake of Hurricane Sandy and President Obama’s tough talk on climate change in his State of the Union speech in January, utility executives can expect the push for clean, renewable energy to increase – whether they’re prepared for it or not.

Prices for wind and solar power are declining – another major factor indicating that the past can’t predict the future. Last year, for the first time, wind power added more than any other resource to our electricity generation capacity. In fact, nearly half of all new generation capacity came from wind.

Deloitte took on this subject in a recent report titled “The Math Doesn’t Lie.” Our author strongly suggests that by 2020, the successful electric utility company may look very different from the business we know today. The report recommends, among other things, that utilities diversify their marketplace risks, including by providing new ways to help customers use – and save – electricity. Many industry participants say the mindset must change from delivering a commodity to providing a service.

An inspiration here comes from IBM, which, like many of today’s utilities, was born more than 100 years ago. In the early 1990s, the company seemed headed for bankruptcy. The sudden, rapid growth of the personal computer industry threatened the end of its mostly mainframe business. But the company managed to adapt and thrive, mainly by developing its software and services, while capitalizing on assets including expertise and long-term customer relationships.

The power and utility companies’ long-term survival will similarly depend on their capacity for innovation. But federal and state regulators must be just as inventive.

Current regulations might be adapted, for instance, to allow power and utility companies to play a key role in establishing backup microgrids for communities such as some in Connecticut that are looking for alternative power sources in the wake of the power outages caused by the recent superstorms.

More imaginative incentives, meanwhile, might include something like the “Customer Renewable Credit” that’s being proposed by one major energy company looking to cut its carbon dioxide emissions by more than 20 percent by 2020 – even while keeping power prices at or below the national average. Officials from this energy company say that such a credit would help ensure that its customers aren’t stuck with the increasing costs of ensuring the system’s reliability as even more renewable energy is added.

An encouraging view of the future comes from the United States’ first cap-and-trade program for carbon pollution, the Regional Greenhouse Gas Initiative. Under its auspices, nine U.S. northeast and mid-Atlantic states have sent a clear signal to electric power companies – with striking results. In its first three years, RGGI has not only succeeded in contributing to cutting greenhouse gas emissions by 23 percent, but has turned into an economic engine for the region, drawing new investment and creating jobs. Power companies have added more natural gas and renewables, while embracing energy efficiency as never before, offering customers a suite of new rebate products and services.

At the first of the two Congressional hearings this month, federal legislators met with five utility-company officials and the interim executive director of the American Wind Energy Association. The topic was the diversity of the energy supply, and the perspectives were appropriately diverse – including champions for cheap coal, nuclear power, solar, and of course wind. One common theme strongly emerged, however: these companies all want clearer signals and more support from the government agencies that regulate them. It’s a reasonable ask, to be sure, for businesses that make investments built to last thirty or forty years.

The followup hearing, on Tuesday, focused on one of the narrower and shorter-term challenges for the utilities: that of rapidly integrating new supplies of natural gas into the energy mix. Yet Philip Moeller, commissioner of the Federal Energy Regulatory Commission, set the tone in advance, warning that, “Some in the industry believe nothing short of a major blackout will provide sufficient motivation to the various stakeholders to solve the problems facing us. We need the energy industry, regulators, and legislators focused on the range of solutions necessary in the short term, medium term and longer term.”

Even just in the near-term, after all, we can all agree on one thing: it’s important to keep the lights on.

Marlene Motyka is a Principal at Deloitte Financial Advisory Services LLP – and the U.S. Alternative Energy Leader for Deloitte LLP.