Background on Utilities

This is part 1 of a series on disruption of electric utilities.

Disruption of Electric Utilities

1.  Background on Utilities

2.  Why Utilities have Avoided Disruption Thus Far – Reliability

3.  Why Utilities have Avoided Disruption Thus Far – Financial Metrics

4.  Community Choice Aggregation is a Red Herring Disruptor

5.  Distributed Solar is the Real Threat - Trends

6.  Distributed Solar is the Real Threat - The Difficult Position of Utilities

7.  A Survival Strategy for Utilities

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The electric utility industry has long appeared immune from disruption.  Investor owned electric utilities follow the same business model today that they used in 1907.  In that year, Samuel Insull released a policy paper on the electric power industry.^[1] Insull, a protégé of Thomas Edison, conceived the idea of private electric monopolies that would be regulated by the states.  The policy paper caught on as the dominant approach to establish electric utilities.  State regulation created a stable legal and economic framework for utilities as natural monopolies, which enabled the rapid growth of electricity service in America.  Insull went on to become President of Commonwealth Edison, the utility serving Chicago.

A natural question becomes, why have electric utilities been able to resist change?  A common argument is that electric utilities are monopolies protected by the government and therefore highly defensible businesses.  The industry is also highly capital intensive.  However, powerful monopolies in other capital intensive industries, such as Standard Oil, AT&T, and U.S. Steel, have all been disrupted by some combination of competition and anti-trust legislation.  I will argue instead that electric utilities have been more resistant to disruption for two reasons: 

1. Utilities do an excellent job solving real customer needs.
2. Utilities as regulated businesses are evaluated on unusual financial metrics which coincidentally encourage utilities to fight new entrants to a greater extent relative to other business.

In my next post I will examine further the reasons why utilities have successfully avoided disruption.

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[1] Ed Smeloff and Peter Asmus, Reinventing Electric Utilities (Washington, DC: Island Press, 1997), pp. 10-11.