Why the Smart Grid Needs Utility Regulators & Wall Street to Make Nice

Updated with clarification from Richard Sedano: Utilities are stuck between two sets of agencies that could make the road to a smarter grid much shorter — if they would only get together and talk. That’s according to the Regulatory Assistance Project’s Richard Sedano, who spoke at today’s 21st Century Utility panel during the Ceres conference in San Francisco. The way Sedano sees it, the Securities and Exchange Commission, which oversees Wall Street credit rating agencies, and state-level utility regulators have failed to communicate and, by extension, to establish consistent rules and incentives — leaving utilities “waiting for a sign that it’s safe to pull the trigger on an investment and hoping they don’t miss the opportunity to do the right thing.”
The communication gap has held back the proper financial incentives needed to nourish the smart grid, Sedano believes. In particular, he said, “local interests don’t fit snugly into financial models” used by credit rating agencies such as Standard & Poor’s (whose director of utilities, power and project finance, Swami Venkataraman, also appeared on today’s panel). For example, at the local level, it might make sense to reduce energy demand through investments in efficiency, but with utilities’ revenue tied to energy consumption, that would seem to be a financial misstep. It would be a different story if the SEC set rules for the credit rating process such that smart long-term investments in efficiency would actually buoy utilities’ ratings. UPDATE: Sedano, however, thinks utility regulators and Wall Street credit rating agencies can work out their differences without having to involve the SEC. It’s the rating agencies themselves, he said in an email, that effectively regulate “the behavior and options of utilities.” Rating agencies are concerned about quality, he said, adding, “They can actually influence credit quality if they take a somewhat more active role in communicating what can affect credit quality and enterprise risk.”

As Sedano noted, when it comes to considering investments, utilities keep credit ratings top of mind — and ultimately their very perception of how credit raters will view different investments can cause them to rule out certain options, thus avoiding or postponing investment in efficiency tools or smart grid technologies altogether. Instead of leading innovation, utilities are waiting for markets to catch up. Meanwhile, state regulators often focus on immediate stakeholders and overlook utilities’ place in the larger financial market.
Plus, he said, there’s a jargon problem — financiers don’t speak electricity, and utility regulators don’t speak Wall Street. Better communication between Wall Street regulators, credit rating agencies and state utility regulators, which control utility rates and investments, could help ease the gridlock.
Of course, utilities aren’t simple victims here. According to Venkataraman of S&P, they’ve had it pretty good for years. He pointed out that utilities, on average, have ratings “substantially above the rest of industrial America.” Why? According to Venkataraman, it’s because utilities have tremendous regulatory certainty. “They could invest money and be guaranteed a rate of return by investors,” he said. The trick now is that concerns about climate change and energy independence issues have converged, planting a whole lot more cooks in the policy kitchen. “It doesn’t really matter what policy is chosen,” Venkataraman said, “but whether they safeguard that regulatory compact [certainty].” If that goes away, he warned, expect to see the ratings of utilities fall to the same level as the rest of industrial America.