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GTM Squared: Utilities Have a Cloud Computing Problem

Posted by Jeff St. John on Aug 3, 2020

GTM Squared covered the recent Illinois ICC cloud-computing decision and regulatory challenges utilities face with IT investments, quoting AEE's Danny Waggoner and AEE member Oracle Utilities. Read excerpts below and the entire GTM Squared piece here (sub. req.).

Utilities are facing a future that will require massive investment in software. So why are they lagging behind many other industries in tapping the cost, speed, flexibility and scalability benefits of switching from utility-owned and managed servers and software to software-as-a-service and cloud computing alternatives? One reason is the cost-of-service regulatory model that allows utilities to earn a guaranteed rate of return on capital expenditures, or capex, while relegating operating expenditures, or opex, to being a mere cost of doing business...

Among the multitude of unintended consequences of this regulatory incentive structure is a preference for capitalized “on-premises” information technology, versus the opex costs of cloud computing, at least for large-scale IT expenses. Over the past decade, utilities have slowly shifted some computing needs to the cloud despite this disincentive. But the rise of renewable energy and customer-sited distributed energy resources (DERs) is driving an exponential increase in the complexity of utility grid operations, and thus in the computing power they’ll need to manage it...

The [ICC] majority’s order also noted that changes made last year to Financial Accounting Standards Board (FASB) rules allow companies including utilities to capitalize and expense costs associated with cloud computing. But supporters of the Illinois proposal say that’s not enough to solve the existing disconnects between regulation and IT needs.  

The FASB rule ”never contemplated the impacts of cost-of-service regulation on utilities,” Danny Waggoner, a director at trade group Advanced Energy Economy, said in an email. AEE represents companies including Microsoft, Amazon, Oracle, Salesforce and a host of clean-energy software vendors with cloud-based utility offerings.  

Instead, Waggoner said, the FASB only applies to “implementation costs — the costs incurred to be able to use a solution — and not the solution itself. These upfront costs are typically small in comparison to the actual on-premises or cloud-based solution.” The Illinois proposal, by contrast, would have been the first in the country to assert a general principle that utilities have so far only been able to argue on a case-by-case basis, he said. In AEE’s view, the reduced costs, increased speed to deployment and greater levels of technical expertise and scalability of applications offered by the cloud offer significant benefits to utilities and the ratepayers that are ultimately responsible for covering the long-term costs of every utility IT implementation. 

“While accounting rules may allow for some expenses adjacent to cloud computing to be capitalized, that’s not the same as a utility regulator providing ongoing authority to capitalize the cost of a cloud solution itself once it passes regulatory scrutiny," Waggoner said... 

“Alabama now has a precedent," [Marisa Uchin, Oracle Utilities] said. "I think that will perhaps be the more common path forward,” with utilities seeking dispensation through direct appeals to regulators.

But this approach doesn’t pack the precedent-setting punch that Illinois’ proposal would have accomplished, in terms of getting broad stakeholder agreement on how to standardize an approach for all cloud computing investments in the future, she said.

“There were many years of work in Illinois by the commission and its staff, and many stakeholders. It was definitely disappointing to come to this conclusion. That being said, it provided an excellent body of evidence that others can work from.” 

AEE’s Danny Waggoner agreed. “It’s good to just recognize that regulation, however it’s designed, creates incentives. We can make those incentives intentional to drive outcomes we want, or we can live with the unintended consequences of what we have and have suboptimal outcomes for customers...”

Read excerpts the entire GTM Squared piece here (sub. req.).

Topics: United In The News