“The Challenges of New Electricity Customer Engagement for Utilities and State Regulators,” Energy Law Journal, Vol. 38, No. 1, 2017.

Original Posting 

Kenneth W. Costello,
Law Journal
Volume 38, No. 1
2017
(https://www.eba-net.org/wp-content/uploads/2023/02/16-49-80-Costello-FINAL.pdf)

Synopsis: Growing customer engagement has been a driving force behind transformation of the U.S. electric industry. It has triggered actions by both electric utilities and their regulators. The combination of technology, public policies and economics should stimulate additional customer engagement in the future, although the jury is still out on how fast it will grow in retail electricity markets over the next several years. After all, the overall enthusiasm over electric customer empowerment may be “more noise than sound.” To date, the vast majority of
residential customers have exhibited much inertia, whether it is participating in retail competition programs or a new pricing scheme like time-varying pricing.
Even with the hype over rooftop solar, an extremely small percentage of U.S. households have taken advantage of this technology. In any event, utilities will increasingly operate in an environment with a distinct line between engaged and traditional customers. They will face additional costs and risks. The major challenge for state utility regulators is to protect traditional customers while encouraging utilities to serve engaged customers. Regulators have various tools to achieve these objectives.

Table Of Contents
 
I. Customer Bifurcation … 50
A. Traditional Customers … 51
B. Engaged Customers … 51
1. Increased Expectations of Some Utility Customers … 51
2. Engaged Customers Want Different Things … 52
C. The Trend Toward Bifurcated Customers … 54
D. Caveats … 55
II. Essential Elements of Customer Engagement … 56
A. The Rationality of Customer Behavior … 56
B. Value-Added Products and Service … 57
C. Adequate Information … 58
D. Enabling Technologies … 59
III. Challenges for Utilities and Regulators with Customer Bifurcation … 59
A. Relatively Few Engaged Customers Can Trigger New Utility and Regulatory Practices … 59
B. Sticking to First-Order Regulatory Objectives … 61
1. Continued Relevancy of Core Principles … 61
2. Dual Objectives for Engaged and Traditional Customers … 61
C. Increased Demands on Utilities    62
D. Broad Concerns … 63
E. Ratemaking … 64
1. Concerns in a Customer Bifurcated World … 65
2. Recovery of Costs for New Investments Dedicated to
Engaged Customers   … 66
F. New Utility Obligations and Functions …  67
G. A New Utility Business Model … 68
1. Rationales    … 68
2. Features of a Business Model Serving Both Traditional
and Engaged Customers … 68
H. Exploiting Differences in Customer Preferences … 69
I. Encouraging Innovation   …  70
1. The Benefits of R&D   … 70
2. The Effect of Public Utility Regulation … 71
J. Removing Artificial Obstacles … 72
IV. The Path Forward …  72
A. An Argument for Incremental Action … 73
B. Question of Future Customer Engagement … 75
V. Conclusion … 75 
 

CUSTOMER BIFURCATION
This article examines the profound implications for a wide range of utility and state regulatory practices that arise from the growth of “engaged” electric consumers compared to “traditional” consumers. “Engaged” consumers include those who actively seek out opportunities to manage their electric consumption for reasons that may range from simply cutting costs to environmental activism.1 “Traditional” customers are those more likely to be comfortable with the status quo, and who may have little desire or incentive to seek out alternatives to the existing rate structure or utility provider.

One source classifies customers into three broader categories: traditional, active, and prosumers. ONT. ENERGY BD., STAFF DISCUSSION PAPER EB-2015-0043, RATE DESIGN FOR COMMERCIAL AND INDUSTRIAL ELECTRICITY CONSUMERS: ALIGNING THE INTERESTS OF CUSTOMERS AND DISTRIBUTORS 12 (2016). Prosumers benefit from consuming cleaner electricity, reducing their utility bill, receiving satisfaction from producing their own electricity, and receiving payments from their utility for unused power. To avoid confusion with customer activism observed in regulatory proceedings, this article combines and re-labels active customers and prosumers as “engaged” customers.

Kenneth W. Costello is the Principal Researcher, Energy and Environment, at the National Regulatory Research Institute. His major clients are state public utility commissions. Mr. Costello has conducted extensive research and written widely on topics related to the energy industries and public utility regulation. His research has appeared in books, technical reports and monographs, and scholarly and trade publications.