Utility Regulators Play the Cloud Catch-Up Game

Regulation is an important hurdle for utility executives to clear when looking to make investments in new processes and technologies. Many executives feel regulation holds back innovation and hampers their ability to react and adapt to new circumstances by employing state of the art tools and technologies that are readily available to enterprises in other industries. Over the past decade, these kinds of tools and technologies have had a broad impact on customers’ expectations and behaviors. Utilities are often seen as a staid, risk-averse and conservative, but many utility executives are eager to innovate and adopt emerging, cloud-based technologies to keep their businesses relevant and competitive. Regulation plays a big role in their ability to do so.

Utility regulators appear to have woken up to the reality and the possibilities of cloud computing and As-a-Service technology delivery. They are rethinking how they should manage and oversee industries, finally catching up to the fast-changing world.

Rates and the basis for determining them remain highly regulated for US electricity distribution utilities. Those regulations are designed to ensure reliable and cost-effective service, aimed at protecting the consumer. This cost-of-service regulation and the regulatory accounting principles that accompany it have had unforeseen and unanticipated side effects when it comes to the adoption of cloud computing by regulated utilities. The Illinois Commerce Commission has recognized this and is currently consulting stakeholders in a “Notice of Inquiry on the Regulatory Treatment of Cloud-Based Solutions,” stating:

“…To discuss technology advancements in energy analytics and cloud computing arrangements, including the regulatory accounting treatment of such arrangements as capital expenses versus operating expenses.  According to current accounting principles, utility investment in on-premises software is treated as a capital expense, which is included as part of the utility’s rate base on which it is allowed a return. Contrastingly, utility investment in a cloud-based solution is treated as an operating expense, which does not earn a rate of return.”

Treating cloud-based solutions as operating expenses has discourages cloud investment. Utilities are asset-driven and lean toward solutions that are capital intensive. So utilities are left in a bind: The new energy era calls for innovation and the risks and rewards associated with it. Investments in smart grid technologies are inherently tied to cloud-based architectures.

Regulators are now asking themselves:

• Is the investment in cloud prudent?
• Would levelling the playing field for cloud and on-premises solutions encourage utilities to make the most cost-effective investments?
• Would it improve customer service, cyber security and generate greater value for customers
• Are there additional regulatory barriers that hinder cloud adoption?

As utilities and regulators prepare for grid modernization, they are realizing that the smart, flexible and reliable grids of the future need emerging technologies and a regulatory model that supports their adoption.

This realization is good news for utilities and service providers. Cloud computing and As-a-Service models are bringing new opportunities to help utilities into the 21st century—enabling them to find strategies to play in a new energy era. Customers will also win because utilities will finally be able to become as customer centric as some of them already claim to be, with processes and technologies supporting the ways customers expect to be served.

A decade or more into the cloud movement, regulators are waking up to this new reality in 2016. There is a gap between this first step and real momentum in the adoption of cloud. Regulators need to step up because cloud computing is a battle that has already been won. The new frontiers for utility innovation and competition are automation, robotics, drones, digital workers, advanced analytics and big data, Internet of Things and cognitive computing. Utilities can’t wait to start integrating these emerging technologies into their businesses. Regulators should not stand in the way. They should create a regulatory environment that stimulates innovations for the benefit of the consumer they are protecting while ensuring reliable energy delivery.