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What does “don't just rely on a fixed rate of return for capital spent” mean precisely?

• diafygi 7y ago
  In exchange for providing an essential service to everyone, utilities are typically given monopoly protections and regulated by their local jurisdiction (e.g. a public utility commission). This means the business model for privately owned utilities must be pre-approved. Up until now, the typical pre-approved business model was where the utility would go to the commission and say they needed to build something (e.g. a new substation), the commission would approve it, and the utility could then charge their customers for the cost to build plus a fixed rate of return (e.g. $300m + 7%). However, that business model breaks down when you start moving away from a centralized grid, since customers are able to start using alternatives to your infrastructure (e.g. solar on their roof and batteries in their garage). So, commissions are trying to figure out new business models that will ensure the continued operation of utilities while still imcentivizing reduction of carbon emissions. One way being explored in Hawaii is called "performance-based ratemaking" but is still being figured out. However, the interesting going (to my company, at least) is the increasing need for software and communication in these new business models. For performance-based returns to happen, you need to measure performance, which means software. Anyway, it's a very interesting time in the utility sector, and I think there's a lot of opportunity for the tech sector to come in and have a big part of it. Unfortunately, most tech entrepreneurs are allergic to regulated sectors.