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Business Utility Model Essay

1937 words - 8 pages

Introduction
Electric utility companies are facing an increasing threat from consumer generated power. Most, if not all, utility companies are regulated by the government, whether it is on the state or federal level. As such electric utility companies are required to incur costs associated with regulatory statutes, electric energy generation, environmental statutes, and procuring energy from alternative sources. In addition most electric utility companies that have the ability to generate power via plants have high fixed costs and debt associated with such infrastructure. Variable costs of electricity generation can also fluctuate with the cost of energy, such as coal and natural gas. ...view middle of the document...

Customers who produce their own energy do not provide overall revenue to the utility. As a result the potential exists for costs, in the form of rate increases, to be shifted to non-energy generating consumers. However, the utility still has a government mandated responsibility to provide electric service to customers who are energy neutral or potentially energy independent. In the latter case the utility must still have the infrastructure in place to provide electricity to energy independent consumers.
Background
Most utility companies are regulated monopolies. Under the guidance of a public utility commission (PUC) they are able to set rates that provide shareholders a reasonable rate of return. This model does not at all follow free market thinking and thus discourages competition. Madison Gas and Electric (MG&E), based in Madison, WI, is an investor owned public utility. MG&E produces and purchases energy to meet the needs of approximately 140,000 customers in the Madison metropolitan area. MG&E produces electricity via coal and gas/oil power plants and via renewable resources including wind farms. Under the regulation of the Public Service Commission of Wisconsin (PSC), MG&E has the responsibility to serve all customers.
How Pricing Works. MGE&E is a state regulated monopoly. In order for MG&E to change its rate structure it must make a formal request for a rate change which is reviewed by the PSC. The PSC considers normal operating expense, return on capital investments, and shareholder rate of return capped by the PSC (Public Service Commission of Wisconsin, n.d.). This pricing model does not guarantee a return for shareholders, but it does encourage the utility company, in this case MG&E, to generate and sell as much electricity as possible. This pricing model is thus at odds with the consumer generated electricity. If MG&E’s customer base shrinks so does the rate of return for shareholders. This holds true unless the MG&E petitions the PSC for a rate increase based on the new size of the customer base.
Infrastructure. MG&E maintains infrastructure in order to produce and deliver electricity to its customer base. This infrastructure comes as capital costs and operational costs. Capital costs include power plants, wind farms, solar panels, etc. Operational costs include labor and fuel (coal, natural gas, etc.). Rate structures are based on these factors, especially capital costs, and rates will reflect desired return on capital investments. With the potential for increased consumer electricity generation these capital costs must be recouped which will most likely take the form of increased rates.
Literature Review
The complications that electric utility companies are facing are numerous and complex. The existing utility model, i.e. regulated monopolies, has the potential to discourage energy efficiency, new technologies, and a distributed electric grid. Most discussions center around three attributes of the...

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