All Electrons Are Created Equal
In my last post, I talked about how the role of the electric utility is rapidly changing and corresponding regulatory compacts evolving. With a new administration in the White House, many have become apprehensive of regulatory change coming to another utility we rely on daily?—?the Internet.
The last time net neutrality came to the fore was in late 2014 when FCC Chairman Tom Wheeler considered allowing so-called internet fast lanes, enabling internet access providers to differentially price and preferentially forward internet traffic. At that time, Hemant Taneja and I wrote a piece entitled Regulation of Telecom and Electric Power: Divergent History, Common Future, in which we drew parallels between evolving regulatory models for electric power and telecom. Given the recent attention to Net Neutrality, this blog revisits some of the salient aspects of this topic, and how a similar debate may soon be coming to the electric grid.
At the heart of net neutrality is the concept of a Common Carrier, an entity that is fit, willing, and able to provide transportation of goods or people for the benefit of the general public, and in an open, transparent, and non-discriminatory manner. Airlines, railroads, postal carriers, taxis, (though not Uber outside of Pennsylvania), and hotels (though not Airbnb) are all regulated as prototypical common carriers. Historically, common carriers have operated in markets that tend toward monopoly resulting from high capital investment barriers to entry, thus necessitating some degree of regulation to ensure open and non-discriminatory service. Indeed, for these reasons, electric utilities and telephony providers have been regulated as common carriers since the mid 1930s.
The fervency and frequency of debate over net neutrality derives from the fact that the Internet has become virtually ubiquitous in its accessibility, essential to the efficient and competitive operation of most businesses, fundamental to the US consumer’s ability to live in an increasingly virtualized world, but also acutely reliant on an oligopoly of broadband service providers. The net neutrality debate is simply about whether common carrier principles should apply to broadband internet access.
The Role of the Network is to Fairly Deliver Content and Nothing More
Though one of the least controversial figures in the new administration, Ajit Pai’s appointment as FCC Chairman has drawn recent attention, owing to his historically strong opposition to Net Neutrality, his former role as associate general counsel to Verizon, and the implied conflicts of interest that may exist therein. But let’s first provide some historical context.
The Telecommunications Act of 1996, the first major regulatory change since the Communications Act of 1934, created a clear distinction between telecommunication providers and information service providers, legally absolving the latter from common carrier requirements. It is particularly worth noting that broadband service providers that happen to leverage their own telecommunications infrastructure are categorized as information service providers under this Act. In classifying service providers in this way, the architects of deregulation were simultaneously visionary and unknowingly myopic.
By absolving information service providers of common carrier requirements, customer demand and competition were allowed to drive rapid market evolution without reliance on regulatory clairvoyance, creating the ubiquitous Internet we rely on today. However, by categorizing service providers based upon the highest level service they offer, irrespective of other lower level services they may internally rely on or independently offer, a subtle but powerful financial incentive was created for telecommunications providers to vertically integrate information services into their offering in order to extricate themselves from common carrier regulation. Indeed, despite the original intentions of the 1996 Telecom Act to foster competition among local exchange providers, persistent industry consolidation has rendered at best regional duopolies in wired broadband access, and worse yet, vertical integration across multiple Internet and content services. A particularly pathological example of this is Comcast’s majority stake in NBC Universal and Comcast Sports Ventures’ ownership of the Philadelphia Flyers?—?talk about vertical integration!
Most can agree that a consumer’s ability to access any content, independent of its source (subject to certain obvious legal constraints), is absolutely essential to the sustainable growth of Internet services?—?and let’s be clear; it is innovation in Internet services that we should endeavor to incentivize.
Broadband service is merely the means of accessing Internet services, and thus now plays a supporting, albeit still important role in the ecosystem. Broadband access has become what plain old telephony service was?—?basic service, and the deregulation that was once beneficial to the proliferation of broadband access now threatens to undermine society’s right to unfettered and fair access to information. Allowing so-called Internet fast lanes only exacerbates this threat, explicitly allowing for commercial discrimination amongst consumers or producers of content. ISPs that double as content generators and distributors already have a fundamental financial advantage over third-party content providers owing to their vertical integration, but allowing them to differentially price service based upon prioritized forwarding of packets within their networks only amplifies this advantage and strengthens their oligopoly. Just imagine if a broadband service provider could legally enter into a content distribution agreement with a news network favoring one political party over another, and that can further legally block or substantially cripple the flow of content from such competing news networks.
Fortunately, the FCC’s Open Internet Rules that went into effect on June 12th, 2015, explicitly disallow internet fast lanes, and indeed strengthen core net neutrality principles through three mandates: No Blocking, No Throttling, and No Paid Prioritization (No Fast Lanes). Legally, this was accomplished by reclassifying Broadband Internet Access Service as a common carrier telecom service under Title II of the Communications Act of 1934, but without the baggage of regulated pricing and administrative oversight. Unfortunately, however, these rules may now be up for reconsideration by Pai and his fellow commissioners, two of which are still to be appointed. We don’t want some electrons to become more equal than others.
The Question of Network Neutrality in the Electric Grid
Net neutrality is fundamentally about fairness, and fairness becomes a more acute issue under resource constraints. When congestion occurs in the internet, network stability is ensured through a combination of packet dropping on bottleneck links and reliance on back-off mechanisms at the onset of observed packet loss. These schemes are intrinsically fair because packet dropping is done in an indiscriminate way (at least within each service class), and the back-off mechanism (TCP) is distributed and implemented in the end-points (users) of the network. In essence, network stability is maintained through adaptiveand distributed management of quality of service?—?i.e. flow control.
In contrast, the electric grid of today offers essentially an all-you-can eat service, akin to a buffet that charges you in proportion to your food’s weight. Supply is modulated to meet demand in order to maintain system stability, and accurate forecasting is heavily relied upon to do so. However, in the rare circumstances when supply substantially deviates from demand, catastrophe occurs?—?total loss of service; blackouts. In this sense, the electric grid is intrinsically neutral and non-discriminatory in its operation (even during blackouts!) because its capacity is over-dimensioned to ensure that congestion is rare. Indeed, today’s regulatory model financially incentivizes capacity investment to ensure safety and reliability.
As described in a prior post, customer adoption of distributed generation and electric vehicles (EVs) are creating higher peak to average loads in the system, exacerbating the need to over-dimension the grid to maintain system stability. All this comes at a cost which customers must ultimately cover, and under today’s utility revenue model, these costs are socialized across all customers which in itself can be unfair to those who don’t have rooftop solar or an EV. As such, the utility revenue model is evolving, through regulatory proceedings launched in multiple states, to incentivize capital efficient solutions to address customer demand, not just through existing administrative oversight, but through financial reward.
Utilities are responding through demonstrations of active DER management, including dynamic DG curtailment, market-driven demand response and explicit load scheduling of electric vehicles to name a few.
Fundamentally, these mechanisms are the equivalents of flow control in the internet, and issues of fairness will arise?—?when congestion or capacity constraints occur, who’s consumption or production should be modulated? Should EVs be charged on a first-come first-serve basis? Should those who pay more be charged first, or perhaps faster? Who’s solar should be curtailed during times of over production? What if one customer’s distributed energy resources impact the power quality delivered to neighbors? These questions can all be addressed in a unified way by applying network neutrality principles, providing a simple and consistent framework for new policies that will govern the evolving utility-customer interface.
The telecommunications and electric power industries are fundamental to sustained growth of the US economy?—?power is critical to the physical, while telecom is critical to the virtual.
Communications and computing are evermore dependent on reliable and high quality power, while the efficient and reliable distribution of power is increasingly dependent on communications and computing, creating a virtuous cycle of innovation and the potential for strong industry growth for decades to come. Evolving the regulatory environment to foster such growth is essential, but maintaining common carrier principles is paramount.
Given that the final state of regulation is difficult to predict across 50 states, and indeed for other countries that face a similar dilemma, a principle we’ve adopted for our business is to make sure our first product solution set provides immediate and tangible business value while providing a platform that is flexible for virtually any eventuality. Easier said than done. But this is what keeps us energized on the path forward.
