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March 28, 2018
Agustin Ros Examines Grid Modernization's Impacts on Regulation and Business Models in Electricity Journal Article

Brattle Principal Agustin J. Ros has co-authored an article published in the March 2018 issue of The Electricity Journal that discusses the evolving utility business model based on the future of the electric grid, as well as the alternative regulatory platform that will need to develop to ensure that the business model reaches its full potential.

Grid modernization, led by significant technological advances in the form of smart infrastructure and increased competition from distributed energy resources (DERs) and other sources, will require significant investment in physical assets, hardware, software, and support systems. Regulation will also play a fundamental role in the process, including: determining which entities make that investment; identifying the timing of such investments; assessing how to treat economic surpluses generated; and ensuring fair competition and the fair treatment of utility customers. The goal of the regulations, as the authors point out, is to ensure that regulation is strong yet flexible to ensure that all market participants have the proper incentives to fully meet customers’ evolving electricity needs, and at the same time, provide the same historic role of properly regulating the natural monopoly elements of the network.

The article presents a framework for examining the changing landscape of the electric industry that begins with conceptualizing the business model as a set of assumptions concerning monetization of utility infrastructure. The authors point out that in the past, the simple single-sided market model worked well to describe the system of electricity production and consumption, and with that, the monetization and regulation of the industry. With the advent of grid modernization, especially the ability to capture, analyze, and quickly disseminate information, the assumptions behind the traditional utility business model may be changing. Understanding the implications of this change for both utilities and for the regulation applied in the future can help determine the path and speed with which new value can be unlocked for consumers.

The article also discusses how new products and services will need to be designed in order to minimize the transactions’ costs of exchange. With that, regulatory reform, both in its framework (such as moving toward incentive- or outcome-based regulation) and in its application (most notably in pricing reforms and new rules for pricing future services) need attention. Of course, these reforms will have implications for the choices consumers face and the rules for competition in the new electric services industry, including who ultimately takes the risk for the investment needed.

The article, “The Future of the Electric Grid and its Regulation: Some Considerations,” is co-authored by Professor Carl Peterson of the University of Illinois, Springfield.