Is It Time to Rethink Utility Ownership Models?
by Bob Shively, Enerdynamics President and Lead Facilitator
Recent events in the utility industry are causing regulators in multiple states to reconsider utility ownership models. Events potentially causing a rethink include:
- Hawaii’s plan to move from primary fossil fuel electric generation to 100% renewables;
- PG&E’s wildfire-induced bankruptcy in California;
- and the New York state industry restructuring driven by the Reforming the Energy Vision (REV) regulatory process.
The Hawaii State Energy Office recently released a study titled “Evaluation of Utility Ownership and Regulatory Models for Hawaii”
that took a comprehensive look at alternatives for Hawaii’s utilities. Let's review the alternatives considered in the study to provide an overview of future utility ownership possibilities.
Utility ownership models
The Hawaii project team reviewed eight utility ownership structures:
- Investor-owned Utility or "IOU" (example: DTE Energy) — A for-profit company owned by shareholders. Shares can be publicly traded or privately held. Utility management reports to a board of directors whose primary responsibility is to maximize shareholder value. Legislators and regulatory agencies in the utility’s jurisdiction set rules for oversight of pricing and operational practices.
- IOU with Parent Company or “New Parent” (example: ComEd as the utility and Exelon as the parent) — Same as pure IOU model, but instead of being a standalone company, the utility is owned by a larger corporate parent company. Utility management reports to the management of the parent company, which in turn reports to the board. Regulation is similar to the pure IOU model, where legislators and regulatory agencies have jurisdiction over the utility but they additionally have jurisdiction over some relationships between the utility and the parent company.
- Municipal Utility or "Muni" (example: Austin Energy) — A non-profit company owned by a municipality or other local government entity. Utility management reports either to the city council, a local board that is a branch of city government, or an independent board. In most jurisdictions, regulation is performed by the city council or board with limited or no state oversight.
- Cooperative or “Co-op” (example: Kauai Island Utility Cooperative) — A non-profit company owned by members who are also customers. Utility management reports to a board elected by the members. In most jurisdictions, regulation is performed by the board, but in some states there is state oversight.
- Hybrid, Majority Government-owned (example: Hydro One - Ontario) — A for-profit company that is partially owned by shareholders and partially owned by a state or federal government. May be regulated by legislators and regulatory agencies like an IOU or may be regulated by a government agency.
- Integrated Distributed Energy Resources or “IDER” (no example yet but the six IOUs in New York state will implement this model under the REV proceeding) — A utility whose function is to create a platform for delivery and trading of services. The platform may include transmission and distribution wires plus necessary communications, data management, and product offerings. May be implemented under the IOU, municipal, co-op or hybrid models.
- Single Buyer (example: Tenage Nasiona Berhad Electricity Retail Division - Malaysia) — An independent not-for-profit purchasing entity, transmission system operator, or a division of a utility with sole responsibility for buying power from multiple providers and supplying it to customers. Regulated by legislators and/or regulatory agencies.
- Grid Defection/Dispersed Ownership (example: Rural communities in Alaska) — Customers utilize distributed energy resources and no longer rely on the grid. Generation ownership is diverse, and power is delivered through private or locally owned microgrids and/or is self-generated by users. Regulation no longer applies.
In the U.S., utility ownership is currently dominated by three models: IOU (including with a parent company, which is most common); municipal utility; and co-ops. Most of Hawaii is served by IOUs with a local parent company (Hawaiian Electric Industries), with the exception of the island of Kauai, which is served by a co-op. In many other regions such as Europe, Asia, and Latin America the hybrid model is common. Each model has pros and cons as indicated by the following table from the Hawaii study:
The Hawaii study looked at six key criteria, and came up with the following rankings:
The report recommended further analysis of four models:
- Single buyer inside the utility
- Single buyer outside the utility
Needless to say, changing utility ownership models is a monumental task. The New York REV process intended to move the New York utilities to the IDER model. It began in 2014 and still has many years to go as of 2019. In many cases, regulators will prefer to keep ownership in place but modify regulatory models with, for instance, movement to performance-based rates. But it may be necessary in the long run to change ownership models so that utilities can remain viable in a changing energy marketplace. For all in the industry, it will be important to keep watch over the various initiatives that arise as the energy marketplace evolves.
Want a better understanding of how the future of the gas and electric utilities industry may change? Enerdynamics’ live seminar Future of the Utility Company explores the challenges and opportunities facing utilities including alternative power solutions, new utility technologies and evolving customer demands. Call 866-765-5432 ext. 700 or email firstname.lastname@example.org for more details or to learn about other electric and gas utility training or utility regulation training options.