Why your utilities bill is backwards

March 21, 2012: 12:02 PM ET

It's hard to teach an old industry new tricks, but utilities in the U.S. need a change.

FORTUNE -- We'd all like a lower electric bill. To get one now, we have to use less energy -- only run the air conditioner at night, turn off the lights.

But ultimately, if we want to become more energy efficient overall, this model will not work. That's because many utilities companies base their businesses on the premise that people will continue to consume more.

This is especially problematic because the American utilities industry is approaching a breaking point. Not only is the payment model dated, but the infrastructure -- the towers and lines and pipes that keep the lights on in America -- is breaking down. "We really are operating these industries on the investments made by our grandparents," says Andy Roehr, a partner with PwC's utilities practice. According to the Energy Information Administration, 51% of all generating capacity in the United States was at least 30 years old at the end of 2010.

There's also pressure on the industry to become more efficient, both from customers and government mandates in certain states. And yet the industry faces a tremendous challenge. It's not as if the utilities industry can shut things down for a while to make major repairs. In fact, now more than ever, the economic health of the country depends on a steady stream of power.

"I've never met anybody in this industry who says to change for change's sake," Roehr says. "Our motto is 'safe, economical, reliable power.' You tattoo that on your eyelids when you get into this business."

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Until the late 1960s, the utilities industry had been focused on spreading across the country. But while the industry expanded its geographic reach, electricity producers started using more efficient equipment, decreasing the overall cost of energy production. So it made sense for the industry to charge its customers based on the amount of energy used, and encourage people to use more.

Today, the pricing model for utilities varies state by state. But many states still run off of the old model; they have completely regulated systems that profit when customers use more energy.

Moving forward will be tough. "You have to change the regulatory model and the business model together, which is actually very, very hard," says Peter Fox-Penner, a principal consultant with a specialization in environmental policy and electric regulation for The Brattle Group. He names four crucial groups with different needs: customers who want reliable, affordable electricity; Wall Street, which wants to make a profit in investments in the companies involved; the utilities companies providing and transporting power; and finally, regulators.

"You've got five, six, seven different factors you need to take into account," says Michael Valocchi, IBM's vice president of global energy, "and let's face it, not all of them need to go in the same direction."

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But the relationship between utility providers will need to grow more nuanced for the industry to survive. Some states have taken it upon themselves to follow the model set in the UK and deregulate the utilities industry.Texas has been completely deregulated since 2002, and Pennsylvania deregulated last year.

Deregulating the industry allows companies to compete. It can also involve a process called decoupling, which means separating the groups that produce electricity from those that transport it, and a third group, those that sell it. This enables people to choose from different electricity retailers instead of plugging in to a monopoly.

That step will be key for industry growth, says Roehr. As far as growth is concerned, the utilities industry has flat-lined, and, according to the EIA, over half of the country's utilities providers are investor-owned. A decline in demand, or even slow growth, will turn off those investors with enough financial backing to upgrade the grid.

"I think there is a huge role in the energy industry for a lot of the innovative technology companies to help," says Valocchi. His own company, for example, is heavily involved in the legwork for preparing the U.S. for the "smart grid," which, loosely, means a kind of digital technology that would allow electricity consumers and suppliers to exchange energy usage information. Early efforts to deploy it have met limited success.

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That's partially because customers, even the most informed ones, have trouble understanding the complexity of the utilities industry. An IBM (IBM) report called "Knowledge is Power," released this year, surveyed 9,000 people across 15 countries. "When asked if they understand the standard pricing unit for consumption (for example, cents or euro per kWh), over 30 % of consumers reported that they had never heard of the unit or do not know what it means," it said.

And, of course, the thing people care most about is lowering their energy bill. So will these changes actually help? It's hard to say. There's evidence to suggest that people with more information about their energy use and pricing will choose to use less. But there are tremendous hurdles before the grid gets the upgrade it needs and consumers become comfortable with a deregulated industry. "We're not in the position right now to rip and replace, that would take billions of dollars," Roehr says.

In the meantime, electricity, arguably the greatest human invention, will have to run mostly on its tired old wires. Changing the electricity infrastructure will have to happen, sooner better than later, but everyone agrees that our national grid is better dumb than unreliable or off.

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About This Author
Shelley DuBois
Shelley DuBois
Writer - Reporter, Fortune

Shelley DuBois writes on management issues for Fortune.com. Before joining Fortune, she was a producer for National Public Radio's Science Friday and worked for Wired. Shelley has a graduate degree in science, health and environmental reporting from New York University. She lives in Brooklyn.

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