“To thrive in the future, utilities will need to modernize and transform their business operations. A key element of this is access to state-of-the-art computing capabilities, which are increasingly delivered via a ‘cloud computing’ model.”
These keys words come from NARUC, the National Association of Regulatory Utility Commissioners, in a resolution from November 2016. Six months later, utilities remain hesitant to join the race to the cloud. What’s holding them back?
Let’s examine the misnomers surrounding this continued hesitation, and why it’s time to discard some conventional, yet out-of-date, industry wisdom.
The race to the cloud
The cloud is no longer just an abstract concept. For all its seemingly limitless promises, it has grown, matured and delivered on them. It’s here to stay.
The cloud has changed the very nature of corporate data centers. Enormous server farms host millions of virtual servers, all but eliminating the need that a company build and staff its own. And ultra-high-speed networks mean cloud customers barely notice their computing resources aren’t on premise or even physical machines.
Whether you’re a utility, a bank or just about any other type of company, we needn’t detail the cloud’s every benefit to prove its value. Some of these are:
- Flexibility – Simplifies implementing and integrating new technologies
- Scalability – Adding or removing capacity on demand takes only minutes
- Security – Cloud providers have dedicated security teams
- Costs – Pay for what you use, with no idle capacity, and fewer IT resources and facilities
At the same time, the utility industry is changing faster than it ever has before. New technologies like the Smart Grid and advanced metering infrastructures mean we’re collecting mountains more data than before. The ubiquity of mobile devices and the Internet of Things, not to mention consumer experiences in retail and other service industries, are setting an ever-higher bar for utilities to meet.
The ability of the cloud to help utilities meet these technological challenges isn’t in question. So, if the pace of change in utilities has never been faster, why are public utilities still so slow to adopt the cloud?
Why utilities aren’t joining the race
Let’s start by revisiting a familiar concept: the rate base. Rate base is the value of property on which a public utility is allowed to earn a specified rate-of-return, in accordance with rules set by various regulatory agencies. CAPEx expenses provide the value on which the rate case is based, so utilities are heavily incentivized to maximize CAPEx and minimize OPEx.
One of the cloud’s benefits for many industries is it lets them minimize the capital expenditures associated with large-scale system implementations. That’s the opposite of what the rate case model requires, leading to the notion the cloud cannot be capitalized. And if utilities can’t capitalize technology expenditures, there is no rate of return.
So, given the rules by which they operate, utilities aren’t incentivized to adopt and benefit from cloud technologies.
Things may not be what they seem
But the notion that a cloud CIS cannot be capitalized—or included in the rate base—is simply untrue.
Many major expenses incurred implementing a cloud solution can be capitalized, including:
- Permanent software licenses (a major expense)
- Project implementation and consulting costs
- System upgrades (with new functionality)
The only significant cloud CIS cost you can’t capitalize is the hardware—it’s in the cloud, after all. However, hardware costs of an on-premise CIS are now only three percent of the five-year total cost of ownership (TCO). That means the TCO of a cloud CIS you can capitalize is remarkably similar to that of an on-premise solution.
And the rules of the game may be changing even further in favor of utilities using the cloud.
Just last fall, the National Association of Regulated Utility Commissioners (NARUC) decided to encourage states’ utility commissions to let utilities treat cloud costs the same as on-premise expenditures. If they do, a utility could include its cloud technology investments in its rate base.
Whether utility commissions follow NARUC’s suggestion or not, one thing is clear. Despite the industry’s conventional wisdom, utilities are no longer dis-incentivized from taking advantage of cloud technology. It’s time for utilities to join the race.
Want to know more about the CAPEx myth surrounding the cloud and utilities? Watch TMG’s recent webinar where we share more details on this and other myths about the cloud.