Kevin Stevens
Kevin Stevens
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Regulators stifle innovation, again

Background

On December 6, 2017, the Illinois Commerce Commission (ICC) agreed to consider new standards on cloud computing capitalization for utilities.

Over the next 2.5 years, the commission’s staff, the Advanced Energy Economy Institute (AEEI), and several Illinois utilities worked together to craft a solution which allowed utilities to adopt cloud-based software solutions with certainty while protecting consumer interests.

Yesterday, the ICC not only voted down the latest proposal. It then went one step further and closed the docket on the order all together, despite growing consensus among the working parties.

Proposed Rule

The proposed capitalization structure agreed to by the commissions’ staff, AEEI, and the joint utilities contained these four components at the core:

  1. 80% of costs related to cloud computing could be recorded as a regulatory asset
  2. 20% of costs must be expensed, and thus not included in the rate base
  3. All expenses associated with the implementation of the software such as training and data conversion costs could be included in the split described in points 1 and 2.
  4. All cloud-based expenses are subject to ICC approval before being included in the rate base

Consensus in design

These pillars of the rule were crafted after feedback from the ICC.

Previously, the ICC proposed that all cloud-based solutions must “ensure that each regulatory asset is associated with a specific service contract.” Not only would this have been a nightmare to implement, it likely would not have changed the status quo due to the “undue burden” and overhead incurred by both utilities and software firms, especially small ones.

Instead, the three parties worked together to create a rule that was clear and “negates the need for case-by-case” litigation. The fixed percentages described above would be based on a rolling average of capital costs associated with historical on-premise IT investments.

The beauty of the proposed regulation was in its simplicity. Utilities would have less risk and uncertainty about how they would recover cloud service costs, but just as importantly software companies would understand the direct impact of their solution.

Impact of the rule

Under the proposed rule, if I’m selling an asset monitoring solution to ComEd for $500,000 per year, I now know that 80% of my costs can be potentially recouped as revenue.

As a result, I have to deliver $100,000 of value via reduction in operations and maintenance + some risk-adjusted additional value.

Without the rule, I have to deliver $500,000 of value + a greater risk-adjusted value due to the increased capital expenditure with no top-line potential. I.e. I have to present a much larger savings to the utility - likely in the neighborhood of 5-7X.

Those are two very different value props and sales cycles.

Imagine the potential innovation inside the electricity sector if the hurdle to delivering value can be reduced by a factor of 5-10.

Utilities could take more risks on the types of solutions they are willing to implement at scale.startups would benefit from knowing the potential value they must deliver to gain a customer, and we would all benefit from cleaner, more modern grid.

ICC’s Decision

The ICC’s decision is a combination of lazy and short-sighted.

In the same paragraph the ICC states the following, “cloud computing solutions are undeniably an important way forward for the Illinois utilities to improve reliability and cut costs….the proposed rule doesn’t improve on mechanisms in a way that benefits consumers.”

Ironically, under the guise of “consumer protection,” the ICC has made it more difficult for utilities to adopt cloud-based computing at a faster pace which in turn benefits consumers. Additionally, no consumer protection groups opposed this rule change AND the ICC still would have the final say on rate cases that include software solutions capitalized with the proposed rule.

In a decision full of disappointment, the fact that the ICC closed the rule to further arguments is the most disappointing of all. Citing the rate of technological change (the very reason the rule is needed), no precedents (obviously) and COVID, the ICC will no longer hear arguments despite the consensus that all parties had worked hard to reach.

Why not build on the progress made over the last 2.5 years? As the dissent stated, “the majority fails to explain why any other combination would not suffice.” The ICC has essentially declared, “change is hard and therefore we don’t want to address it.”

Conclusion

Cloud computing will continue to make inroads in the utility sector, the most innovative utilities and software companies have creatively found ways to work together for the common good of grid modernization and customer satisfaction - including lower rates.

However, this proposed rule was a real missed chance to create a win-win-win framework for software, utilities, and consumers. Instead, regulation wins, again.

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