Will a Natural Monopoly Protect Electric Utilities?

There are some striking similarities between the old Bell Telephone system and today’s regulated electric utilities.  Both were highly regulated, had similar mission-critical mindsets to deliver electricity or dial tone, and did not have to compete for customers given their monopoly status. 

But then, the phone system was deregulated, and we learned that wire services were a natural monopoly because stringing lines is a high barrier to new market entrants.  While there was some competition for long distance service, the real competition for land line phone service came about years later from wireless communications technologies and the internet.   Likewise, Smart Grid-enabling technologies will shape the market forces that impact regulated utilities.  We shouldn’t expect that their existing business models are safe because they are natural monopolies.  And the ability of investor-owned utilities (IOUs) and their regulators to understand policy impacts on lifetime consumer value will shape their responses to new technologies and programs.      

Lifetime consumer value considers the potential revenues from a consumer.  It is a metric that influences corporate decisions ranging from product/service acquisitions to consumer communications for cross-sell and upsell opportunities.  It’s a metric that IOUs and regulators need to adopt because presuming business-as-usual in the Smart Grid age overlooks two significant technology disruptions.  

First, unlike dial tone, electricity can be created and consumed locally.  Distributed generation (DG) is a game-changer for the traditional electric utility business model.  The ability of residential, commercial, industrial, and agricultural customers to generate some or all of their electricity from clean renewables like solar or wind means less reliance on utilities to supply it.  These DG technologies intermediate the traditional utility/consumer relationship.  In other words, they can break the monopoly, depending on how policies inform utilities, and IOUs in particular, to respond to DG. 

The second technology poised to disrupt the existing IOU business model is the growing category of wireless smart phones and tablets.  Just a couple of years ago, some utilities planned to offer dedicated in home devices (IHDs) that would help residential consumers manage their electricity use.  The ability for one device – a smart phone – to be an applications platform is disrupting these plans, and many haven’t moved past pilot stage.  Home energy management doesn’t need a dedicated device, it needs a ubiquitous device.  Telecommunications companies like Verizon and AT&T already bundle voice, internet, and entertainment applications today.  They are piloting home energy services as one more application to increase the lifetime value of their consumers.  These devices make it easy for new entrants to intermediate the utility/consumer relationship. 

Perhaps IOUs will be content to be wires companies.  But there’s a real danger that Wall Street could ratchet down those IOUs’ stock prices.  Why?  Because of the subscription business model.   The real value is not in selling the razor, it is in the blades.  IOUs rely on selling a service that is experiencing downward pressures from ever more ubiquitous energy efficient technologies and materials as well as policies that mandate reductions in electricity use.   Unless changes are made to their business models, they will be selling fewer blades in the future, and their lifetime consumer value will continue to decrease, although their costs of doing business won’t.

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