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Chapter III: Modernizing the Electric Grid
As the complexity of the grid increases, states are working to develop policies that incorporate new services
and technologies in a manner that maintains affordability and reliability. The unique circumstances of each
state have resulted in a diverse set of responses across a range of issues confronting the electricity sector. For
example, many states have adopted policies to support utility investments in energy efficiency. There are at least
three different regulatory approaches being used: decoupling, lost revenue adjustment mechanism, and a broad
set of methods to allow performance incentives (see Figure 3-5). These efforts create a regulatory model that
rewards utility shareholders for effective energy efficiency efforts that lower ratepayer bills in the long term.
Another example of state innovation is the cost-allocation scheme member states in the Midcontinent ISO
and Southwest Power Pool negotiated among themselves for the funding of large region-wide transmission
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upgrades for each of their regions, which was then approved by FERC.
Different Industry Structures and Business Models Rule Out
“One-Size-Fits-All” Solutions to Challenges
The grid is financed, planned, and operated by numerous entities that cross states, regions, and countries. It
provides valuable services and includes a variety of industry types and a range of business models that often
reflect regional differences in resource mix.
Policies designed to provide consumers with affordable and reliable electricity in the future must take into
account the variety of business models for investing, owning, and operating grid infrastructure. The nature of
the entities that comprise the grid has changed and will continue to do so. The earliest model of electric service
delivery was the investor-owned, vertically integrated utility, namely the Edison Illuminating Company that
used the New York City Pearl Street Station generator in 1882 to begin serving customers. Following, in the late
1880s and 1890s, was the establishment of public power utilities, which were also vertically integrated, in small
towns to also serve local loads with generation. Now, as shown in Table 3-2, the basic functions of the vertically
integrated utility are performed by a wide variety of entities with different ownership structures, pursuing
different functions.
The variety of ownership and scope of the entities that comprise the grid leads to a complex set of motivations
and decision drivers. The reliable operation of the grid is a testament to the integration of these different
interests. There are five different predominant ownership types: (1) investor owned; (2) cooperatively owned,
owned by their member customers; (3) publicly owned, such as by municipalities, states, public utility districts,
and irrigation districts; (4) Federally owned; and (5) merchant companies that are competitive entities in
generation, transmission, or retail supply.
3-20 QER Report: Energy Transmission, Storage, and Distribution Infrastructure | April 2015