The New “Three Ds” in Regulation—Decarbonization, Decentralization, and Digitization

17 August 2018
Dr. Jeff D. Makholm

In an upcoming article in the September 2018 issue of the Wiley journal Natural Gas & Electricity, NERA Managing Director Dr. Jeff D. Makholm considers the state of deregulation in the electric utility industry in the new digital, decentralized, decarbonized (the “Three Ds”) world for electric power. Dr. Makholm posits that external events often force a reexamination of the boundaries of what we regulate. The external events inherent in the Three Ds are pressing a reexamination of where and how we regulate the industry. There seem to be two trends afoot in electricity regulation in the era of the Three Ds: (1) efforts to scale back electricity markets—both at the wholesale and retail level, and (2) the push to widen the scope of new types of incentive regulation to try to encourage new ranges of efficient and innovative electricity distribution platform services.

Given those external events, Dr. Makholm concludes that further deregulation of electricity markets will have to wait. Despite the evident successes of deregulation in US interstate gas transport and rail/roadway transport markets, it is evident enough that deregulation does not evolve gracefully or smoothly. Deregulation is an unusual event that requires some external impetus or catastrophic regulatory failure. And even then, deregulation also requires a political push and a regulator willing to shrink their jurisdiction or, more rarely, abolish their agency entirely (as NERA’s Alfred E. Kahn accomplished when President Jimmy Carter appointed him to reform the air transport industry).

The Three Ds do not seem to fall into the category of such external or catastrophic events—but rather the evolution of technologies, preferences, and new concerns about climate change. In these respects, the new regulatory initiatives seek to align utility incentives with behavior to minimize electricity costs and prices, and improve efficiency. For US electricity markets, we seem to be witnesses to the dawn of the era of more persistent and innovative variants of incentive regulation.

Makholm, Jeff D. (2018, September). - The New “Three Ds” in Regulation—Decarbonization, Decentralization, and Digitization. Natural Gas & Electricity 35/02, ©2018 Wiley Periodicals, Inc., a Wiley company.