Regulated Utilities, Wall Street, and Smart Grid Investment

Lynne Kiesling

This earth2tech post comments on a presentation from Rich Sedano at the Ceres conference this week in San Francisco. Rich has been working on electricity regulatory issues, demand response, and institutional design for a long time, and his insights as reported here are very important and frequently overlooked:

The way Sedano sees it, the Securities and Exchange Commission, which oversees Wall Street credit rating agencies, and state-level utility regulators have failed to communicate and, by extension, to establish consistent rules and incentives — leaving utilities “waiting for a sign that it’s safe to pull the trigger on an investment and hoping they don’t miss the opportunity to do the right thing.”

Not enough people realize the role that credit rating agencies, and/or a utility’s perception of a credit rating agency’s likely response, play in influencing utility investment decisions. I’ve often argued that the 100-plus year history of regulatory codependency between the regulator and the regulated reinforces a culture of risk aversion and cautious decision-making that stifles innovation and the adoption of new technology. The credit rating agency dynamic reinforces that pattern:

As Sedano noted, when it comes to considering investments, utilities keep credit ratings top of mind — and ultimately their very perception of how credit raters will view different investments can cause them to rule out certain options, thus avoiding or postponing investment in efficiency tools or smart grid technologies altogether. Instead of leading innovation, utilities are waiting for markets to catch up. Meanwhile, state regulators often focus on immediate stakeholders and overlook utilities’ place in the larger financial market.

Plus, he said, there’s a jargon problem — financiers don’t speak electricity, and utility regulators don’t speak Wall Street. Better communication between Wall Street regulators, credit rating agencies and state utility regulators, which control utility rates and investments, could help ease the gridlock.

Hear, hear.

On another note, why is it that conferences like this very cool-sounding Ceres one never include academics? I think academic economists who work on applied institutional design topics would add substantially to this conversation in the technology, investment, and sustainability space. Here I’m thinking not just selfishly, but also of outstanding economists and communicators like David Zetland.


5 thoughts on “Regulated Utilities, Wall Street, and Smart Grid Investment

  1. Lynne — Even before I got to the end (thanks for the plug!), I knew the answer to your question:
    1) Academics gain nothing ACADEMICALLY for attending “industry” conferences. (Academics-cum-consultants may, but I suspect they have little need to market.)
    2) People like me who’d like to attend cannot afford the $700+ registration fee. I am speaking at an upcoming VC-type conf in SF (http://aguanomics.com/2009/04/i-am-speaking-at-pricey-conference.html), but I agreed to waive me fee in exchange for them waiving theirs…
    3) Many academics do “useless” research as far as industry is concerned (I just finished Black Swan; Taleb is deadly accurate…)

    So — have Ceres call me! 🙂

  2. Lynne,

    Equally important to the disconnect which you describe here, IMHO, is the issue of the highly fragmented regulatory structure in the USA creating barriers that limit the speed and scale of any innovation.

    h

  3. Worst of all, a utility operating in multiple states will have to adopt multiple revolutionary business models when implementing smart grid.

  4. Hi Lynne and KP readers
    The Internet is so cool.
    I found myself with my utility regulation focus feeling like a fish out of water most of the time at the CERES meeting. CERES could be a force if it stimulated the dialogue I was talking about, and is devoting new attention to utilities. We’ll see. Very few utilities in attendance (to hear Robert Redford!), which says at least a little something about the sector’s interest in green points.
    I don’t complain that fragmented regulation is a problem. States have distinct interests and that’s our system. I do agree it is a challenge, and think forums that help multiple states work better together will always help. Google MADRI for an example, where PHI is getting benefits in its 4 states.

  5. in res. Zetland:
    1) Academics are just the ticket if pulled-strategy policy (so some strategy remains to the power companies) and the governance (which is supposed to be working ahead of any market) are to work or sync up on metrics and meaning. Pundits can be a little slow and timorous.
    2) X students have to be interested in erm…are we measuring outcomes in green power regulation interest in the masters students? About then, sponsors will be interested in having the high-end extras that could warm the right parts of their market. But not finding hoteliers.
    3) Many bakers work from formula; I didn’t need to hear that.

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