There was a time when the phone company—ATT, or Ma Bell as it came to be known—delivered two types of telecommunications service over its network—local and long distance telephony—likely on plain Jane telephones that it leased to its customers. It was a good business, times were good, but with the advance of digital technology, the times caught up with this venerable blue chip company. In 1984, Judge Green issued his now-famous decision breaking up the phone company into the Baby Bells for local service and ATT for long distance. The Baby Bells, one by one, fell victim to a wave of consolidation until only three were left standing: two giants—SBC in the Southwest and Verizon in the Northeast—and one company with challenging territory out in the West that nobody seemed to want to acquire—Qwest. Having run out of Baby Bells to acquire, SBC turned around and bought ATT, now a shadow of its former self, and quickly rebranded its new company with its old name. SBC, now ATT, and Verizon grew strong on new services like DSL (internet service provider), cellular wireless (including long distance telephony), even video entertainment. Now ATT and Verizon are information technology and communications (ITC) behemoths that offer a variety of services largely free from regulation. They transformed themselves over nearly 30 years by shedding the protection of monopoly status to become highly competitive companies, moving from providing the commodity of dial tone to providing a variety of valuable services, creating new markets along the way.
Do events in the recent history of the telecom industry presage what we may see over the next decade in the electricity industry? Certainly, there are many reasons to shed the role of commodity kWh provider in exchange for becoming an energy service provider, which we will explore in a minute. I believe utilities need to go the way of the telecom industry by transitioning from commodity provider to energy service provider, but some would challenge me on this thesis. Granted, telecommunications is different than electricity, and managing the grid requires a balancing act not seen in telecommunications. But telecom has its own complexities. And ATT grew into a relatively unchallenged nationwide giant, while electric utilities grew into a fragmented industry organized for local and regional operations. The industries are different, but the forces acting on them, and the risk of disintermediation by new technologies are similar.
In the Pecan Street Project in Austin in Spring 2009, we worked these issues over in our quest to discover what a distribution utility could look like if it were designed as an energy internet. We came to the conclusion that distributed energy resources (DER)—solar PV, electric vehicles, energy storage, etc.—would in time become increasingly competitive and would offer energy consumers a compelling alternative to grid power, as I discussed in my last IssueAlert article, Technology Challenges to Grid Power. And as that happens, electric utilities will begin to lose revenue while their costs remain the same, eroding their margins until they are forced to raise rates to remain solvent, which only compounds the problem and makes DER that much more competitive.
Given the relatively slow pace of reform at the state and federal regulatory level, a bottom-up, emergent challenge of new technologies to the monopoly status of grid-delivered kWhs is more likely to drive utilities to consider new business models than any top-down change governmental directive. Adding new energy services to complement grid power need not be rapid or disruptive change—it may be accomplished in incremental fashion, giving utilities time to warm up to new ways of doing business. While transforming into an energy service provider may be a bridge-too-far for more conservative utilities, for those who are more innovative and open to new ideas (or for those whose backs are already against the wall with pressure from new market entrants in their service territory), such organizational and process change may well provide the spark needed to rejuvenate a traditional utility culture.
Likewise, a transition to a Smart Grid represents significant change to business processes and organizational structure. Delivering commodity kWhs requires a focus on system operations and reliability, and upgrading to a Smart Grid suggests an opportunity to introduce new energy services to meet newly recognized customer needs. The marketing required to achieve a Smart Grid vision and provide energy services requires both consideration of customer use cases to determine appropriate Smart Grid architecture, and development of marketing expertise to stay in touch with customer needs and provide competitive offerings. Partnering with vendors may offer utilities an easier path to augmenting their service offer beyond provisioning reliable grid power. Utilities may choose to become distributors and system integrators of new energy technologies, gaining new revenue sources to offset the revenue lost when customers substitute DER for grid power. When it comes to moving beyond reliable, commodity kWh provisioning, utilities will do well to re-examine their core competencies, realign with new market realities, reform their business processes, and restructure their organizations. As the telecom companies have shown us, the path to recreating a company is not easy, but there is a light at the end of the tunnel and a pot of gold at the end of the rainbow, for those companies that are willing to do what it takes to reinvent themselves.
John Cooper, co-author of The Advanced Smart Grid, has recently joined the team at UtiliPoint and its sister company, Consonus, to further the goals and realize the vision he developed over the last 15 years as a smart grid pioneer and innovator, captured in this compelling and highly useful new book. John may be reached directly by e-mail at jcooper@utilipoint.com.
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Is electricity truly a commodity?
http://powerencounter.blogspot.com/2006/05/is-electricity-truly-commodity.html