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DISCO of the future may play more than one tune

Issue 9 and Volume 80.

Kathleen Davis, Associate Editor

It won’t look a thing like Studio 54, but the DISCO of the future may still have a beat you can dance to.

More than one organization has attempted to decipher what the distribution company (often shortened to “DISCO”) may evolve into. Will it be a “pure DISCO” of only pipes and wires? Will it also include metering and billing atop those pipes and wires? Will supply be added in? What about generation? Will the DISCO of the future really move much beyond the traditional regulated model?

Both the Center for the Advancement of Energy Markets (CAEM) and XENERGY have examined the issue in detail. CAEM recently released the final report from its “Distribution Company of the Future Forum.” XENERGY put out “Crossed Wires: Scenarios for the Future of the Electric Distribution Business.”

CAEM’s DISCO

CAEM’s final report is less of a blueprint and more of an “if, then” examination. Gathering approximately 50 stakeholder organizations representing the industry and its regulators, the forum broke down possible evolution scenarios and how they might be accomplished. They then gathered these recommendations into a massive final tome broken down by finance and technology, among other topics.

“Over a year and a half ago, CAEM took a good look at the electric and gas markets and started to get anxious, very anxious,” stated Jamie Wimberly, CAEM president.

“The primary purpose of the forum was to thoroughly examine the issues and challenges facing distribution companies and to make consensus-based recommendations that work to ensure healthy companies and happy customers in the future,” he said. “There is no question much more needs to be discussed and debated, particularly the role of the regulated utility in the provision of new product offerings and services.”

Still, Wimberly feels that the more than 170 pages of CAEM’s final report is a “substantial achievement,” especially since they started with the simple question “What business are you in?” and couldn’t even answer that without breaking it down into the conditions of each individual utility’s regulatory environment.

Among the 100 recommendations that CAEM discusses in the report, the forum gave suggestions ranging from small issues-that regulators should consider requiring a standard form (or a “consumer label”) on pricing and terms and conditions of service for small customers to be provided to customers at the tie of the initial offer (as well as upon request)-to larger ones, including the suggestions that regulators should establish a standard distribution utility reporting format for all significant distribution upgrades and extensions, and that regulated DISCOs should be permitted to recover their reasonable costs for development of grid interface designs and grid interconnect application review.

“The technology exists to support a competitive retail market responsive to price signals and demand constraints,” the report concludes. “The extent to which the market is opened to competition and the extent to which these technologies are applied by suppliers, DISCOS and customers will, in large part, be determined by state legislatures and regulators.”

Wimberly agreed. “The future of DISCOs is very uncertain,” he said. “Whether they will face a boom or a bust period will largely be determined by policy decisions made during the transition toward increased competition over the next few years.”

XENERGY’s DISCO

According to XENERGY, their “Crossed Wires” scenarios “expose the difficult strategic challenges that all utilities will face over the next ten years.” XENERGY’s panel of distribution company stakeholders six forces that will shape a DISCO’s future. The first, regulatory oversight, parallels CAEM’s findings. The other five include earnings growth, investment to replace infrastructure and for expansion, technology change in power delivery and distributed resources, asset management and operations challenges, and pressures related to reliability, power quality and customer satisfaction.

XENERGY developed four scenarios for DISCO’s evolution, based on these forces:

  • Shock absorber. “When there are bumps in the road, it is the regulated utility that must absorb the shocks,” the report stated. “Persistent problems and meager returns result in the disintegration of the business as we know it.”

  • Sam Walton: PUC chair. The concept of “cheaper is better” dominates this DISCO. This version is all about cutting costs, outsourcing and consolidating.

  • Scratch my back. Common interests trump cost-cutting pressures in this DISCO, leading to strong companies with “mutually supporting” stakeholders.

  • Wires.net. New technologies drive this DISCO, leading to growth and consolidation of distribution.

“The future of the electric distribution business may unfold in ways that are far different from today’s regulated utilities,” said Bruce Humphrey, XENERGY vice president and director of the research project.

“Yet, the ability of the companies to address these possibilities and to pursue the opportunities is constrained by the reality of cost pressures, the uncertainties of regulatory oversight and the increased pressure to grow earnings,” he added.

Overall, the bottom line is simple: No one is for sure just what tune a future DISCO will deliver.

More information on XENERGY’s report can be found at www.xenergy.com. Bruce Humphrey can be contacted at [email protected]

To inquire about CAEM’s report, please e-mail Jamie Wimberly at [email protected]