NARUC Urges State Regulators to Allow Utilities to Include Investments in SaaS in Rate Base, Unlock the Potential of Cloud Computing

Cloud computing’s myriad advantages, including reduced costs, more frequent updates, and greater flexibility/mobility, are part of the reason why Software as a Service (SaaS) solutions are experiencing rapid growth in many industries. However, for most regulated utilities, the current regulatory/accounting treatment of investments in cloud-based computing solutions discourages their deployment. Unlike in-house software solutions that are typically classified as capital investments and eligible for inclusion in rate base, cloud-based computing is typically considered an operating expense. Given the disparate accounting treatment, there is an incentive for a utility to select an in-house software solution that may be more costly and less beneficial for the customer, simply because it can be included in rate base.

The National Association of Regulatory Utility Commissioners (NARUC) recently issued a resolution encouraging state utility commissions to consider improving the regulatory treatment of cloud-computing arrangements (i.e., change their classification to a capital investment that can be included in rate base). The resolution also outlines several of the advantages cloud computing offers and highlights how the disparity in accounting treatment between in-house and cloud-based software solutions creates barriers to the selection of the software solution that best serves the customer.

Key Details

  • There are several advantages to cloud-based software for utilities, many of which center on providing greater flexibility and lower costs
    • SaaS provides the ability to quickly scale up and expand capabilities, especially in areas that are not traditionally addressed by in-house IT developers
    • Economies of scale reduce costs for servers/data storage compared to on-site assets
    • Cloud-based software can more easily be updated, allowing for more frequent updates at a lower cost
  • Transitioning to cloud-based software does not come without risks
    • Lack of “hands-on” control of security for sensitive data such as system information or customer data may create apprehension among regulators (though this concern exists across all industries that use cloud computing – several recent high-profile security breaches will surely increase cyber-security concerns among regulators)
    • Cloud-based software that has a real-time impact on system operations could create additional vulnerabilities by virtue of its reliance on connectivity. Therefore, utilities may want to keep software dealing directly with reliability, system operations, and outage management in house
  • In addition to the NARUC resolution, there have been some states, notably Illinois, that have already begun proceedings to determine if cloud-based computing software should be classified as a capital investment

Implications

Increased deployment of distributed energy resources (DER), advanced metering infrastructure, smart appliances, etc. is rapidly changing the way that utilities operate. Utilities will increasingly be looking to employ additional software capabilities that will enable them to better monitor their systems, compile and utilize customer/system data, and better integrate DER through the aggregation of behind-the-meter resources. The costs, in terms of both dollars and time, of developing, testing, and deploying an in-house software solution to address these needs is a significant departure from the typical in-house solutions developed by utilities in the past. Increasingly, utilities will find that cloud-based software solutions may provide a timely and cost-effective option for collecting, storing, and analyzing data. If cloud-based solutions are not eligible for inclusion in rate base, utilities and their customers may miss out on the potential advantages they provide.

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This report is part of ScottMadden’s Regulatory Minute series. To view all featured Regulatory Minutes, please click here.

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Contributing Authors

Eric Hanson

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