By Jon T. Brock, President Desert Sky Group, LLC

July 16, 2010

Is Duke Energy converting its business model from selling a commodity to selling a service?  That was the question I posed to Jim Rogers at a roundtable discussion held shortly after his keynote address at the Smart Grid Road Show earlier this year in Cincinnati.  He was preparing to head to Washington D.C. for the release of the Kerry-Lieberman Climate and Energy bill and was gracious enough to give several energy media/analysts 60 minutes of his valuable time.  The question gave him pause, as he contemplated how to best describe one of North America’s largest electric utility’s business in a changing industry. 

To put the changing industry in perspective, he asked us to go back to Thomas Edison and the Pearl Street power station.  The power station on Pearl Street went into operation in 1882 in New York City and is considered to be the world's first central electric generating station. It was built and operated by the Edison Electric Light Co., founded by Mr. Edison.  The purpose behind this innovation was not to provide the Internet, MRIs, air conditioning, refrigeration, televisions, radios, gaming consoles, and the like.  It was a rather simple purpose.  The main purpose was to provide lighting, as the name of the company infers.  Rogers then asked us to consider where we are today with the smart grid and what the key benefits are in 2010.  Whatever those benefits may be, outage avoidance & restoration, avoiding truck rolls, providing consumers the flexibility in controlling energy use, or shaving peak load, we cannot quantify what the smart grid will enable in the future because we simply do not know what it will enable. 

One of the other analysts in the room asked the question we all wanted to ask but hadn’t.  It was one of regulatory recovery and approval of smart grid investments.  Rogers stated that he was old fashioned in that he puts full responsibility of getting regulatory approval upon the shoulders of the electric utility industry itself.  His position is one of working with the technology providers to create a narrative of sorts that will sell the benefits of smart grid to the regulator.  It will not be an easy road since we do not know the full benefits yet but is one that is not impossible.  He went on the state the challenge in a different way.  The electric generation fleet in the United States is aging and will need to be replaced in the next 30 years.  Couple that fact with new transmission/distribution investment and a potential carbon tax and you have rates that are going to increase.  Knowing that electric rate increases are coming, we need to get the regulatory regime right and invest in energy efficiency while putting into our consumer’s hands the ability to control usage first.  If we do that as an industry then the consumer’s level of frustration can be somewhat minimized as opposed to having no control over usage.

So back to the question.  Does Duke sell a commodity or a service?  After careful thought and background, Rogers replied that Duke is in the business of optimizing the use of electricity.  To be more precise, the electric utility’s purpose is to provide kilowatt hours in such a way to optimize the consumer’s usage in order to invest in productivity gains in their usage.  How we as an industry optimize the system within new boundaries being set by the smart grid will lead to productivity gains in the usage of electricity.  We have to define this new business to the regulators and educate our consumers.  It is no small task but is also not impossible.