New joint paper on the regulatory treatment of cloud computing services for utilities identifies paths to regulatory modernization

AEE and EEI report identifies regulatory roadblocks and offers solutions to transitioning to cloud computing.

WASHINGTON, D.C., March 3, 2022 – Today, Advanced Energy Economy (AEE) and the Edison Electric Institute (EEI) released a new paper about the regulatory reforms needed to modernize the information technology (IT) systems that utilities depend on to provide safe, reliable, and efficient operations. “Reaching for the Cloud: Solutions for Regulatory Parity for Cloud Services for Utilities” details how regulations in place for nearly a century are delaying utilities’ transition from on-premises systems to cloud computing services, which is happening across other industries. The impacts are far-reaching and affect all regulated utilities, including electric, water, and natural gas companies. “Reaching for the Cloud” explores avenues for placing all IT solutions on a more similar regulatory footing, with the goal of unlocking cost savings and greater benefits for customers while supporting utility efforts to meet higher expectations for reliability, resilience, and clean energy.

“Modernizing the regulatory treatment of IT services to encourage the use of technology-based applications would allow more utilities to seek cloud solutions, which have the potential to unlock greater customer savings and benefits,” said Shelby Linton-Keddie, senior director of regulatory policy at EEI. “Unfortunately, many unnecessary obstacles remain in place, and this paper identifies key regulatory solutions to help unlock the benefits of cloud computing services for all utility customers.”

“One of the goals of regulation is to ensure that what is good for customers is also good for utilities, but prevailing regulatory practice is, in this case, doing the opposite,” said Danny Waggoner, regulatory policy director at AEE and a co-author of the paper. “By taking advantage of the regulatory options identified in the report, regulators can take the thumb off the scale in favor of on-premises, capital-intensive IT solutions and instead promote a fairer, merit-based evaluation of all solutions so that whatever is best for customers wins out.”

The paper identifies four potential options for utility regulators to consider to address current disincentives:

• Prepay for cloud solutions and amortize the prepayment in the same manner as an upfront investment in an on-premises system or other plant in-service. While this method provides similar financial outcomes to an on-premises system, it limits the flexibility of cloud solutions and introduces risk associated when predicting anticipated needs years in advance.
• Pay for costs periodically over time, commensurate with cloud usage, and amortize each payment from the point the cost is incurred to the end date of the cloud service. This avoids the need to predict cloud needs far in the future, preserving the flexibility of cloud computing. The method also reduces return relative to the prepayment method or an on-premises system of the same cost due to the shortened amortization period for payments made closer to the end date of the service.
• Combine the two approaches above to balance the strengths and weaknesses of each. A utility could use a prepayment for a minimum expected usage level and then pay for additional usage as needed with periodic payments. That approach may provide the necessary flexibility, while keeping financial impact closer to what would be experienced with an on-premises system.
• Provide a modest adder to the recovery of cloud computing expenses and retain common operating expense treatment for cloud solutions. This adder would attempt to replace the opportunity cost associated with choosing cloud over an on-premises system. This option would retain the full flexibility of cloud-based solutions and would be relatively easy to implement in terms of accounting.

“Alignment of utility and customer interests is an essential part of the regulatory compact,” notes the joint AEE and EEI paper. “Resolving this regulatory-induced conflict will produce more positive outcomes for customers and utilities by supporting the capabilities needed to enhance grid reliability, integrate an increasing renewable power mix, and manage cybersecurity, all while maintaining affordable energy access for customers.”

A PDF of the paper is available to download here.

Interested in exploring the regulatory treatment of IT services and how more utilities can seek cloud solutions? Join us March 16, 2022 for AEE and the Edison Electric Institute's joint webinar.