Cloud software

This week the National Association of Regulatory Utility Commissioners (NARUC) passed an important resolution that signals a recognition of the value of cloud-software for utilities.

Across the world, major industries, such as healthcare, financial services and government are adopting cloud-based software solutions to run their businesses and operations. According to RightScale, 93% of businesses are using some form of cloud technology. Almost 20 years ago, cloud-based software came into existence. Today, it is a critical part of how businesses, big and small, buy and deploy software. In 2016 Gartner expects the SaaS category to grow 20.3% to 37.7 billion.

But the utility sector has been slow to make the transition into the cloud, still relying on on-premise technology solutions. SaaS has tremendous advantages with the ability to upgrade faster, increased security and scalability, decreased time to ramp up, lower cost to maintain and serve, and more. A major hurdle for utilities is the regulatory accounting rules for cloud-software products. In most jurisdictions, utilities are permitted to earn a rate of return for hardware purchases, but the same rate of return is typically not allowed for operations expenses.

This accounting rule makes sense when considering the difference expensing practices for building a power plant vs. paying staff. However, these rules have created a lopsided incentive structure for utilities considering new software procurements. Under these accounting rules, on-premise systems (e.g. servers installed in the building) is considered a capital expense that earns a rate of return. But purchasing cloud-based software systems (e.g. a subscription for software that is hosted off-site) is treated as an operating expense that cannot earn the same rate of return.

Thankfully, regulators are starting to recognize the issue and update accounting rules to reflect the value that cloud-based software tools can provide to utilities and their customers. Two states have been leading the way on this effort. In New York, the Reforming the Energy Vision proceeding recently made clear that utilities can capitalize cloud-based software products in an order released in May. While in Illinois, the Illinois State Commerce Commission has begun a process to explore this issue and develop modern rules that recognize the changing landscape of software products for utilities.

Now the issue has moved to the national stage. At the recent NARUC annual meeting, regulators from across the country passed a resolution calling on state utility commissions “…to consider whether cloud computing and on-premise solutions should receive similar regulatory accounting treatment, in that both would be eligible to earn a rate of return and would be paid for out of a utility’s capital budget.”

The passage of this resolution marks the first important step towards modernizing utility accounting rules across all 50 states. By using cloud software, utilities don’t have to be burdened with maintaining in-house systems and can rely on trusted technology companies to manage their infrastructure while freeing up resources to improve the customer experience and operations. While the utility industry may have fallen behind in applying cloud-based software tools, regulators are starting to clear the hurdles that will allow utilities to quickly catch up.

By: Jake Oster, Sr. Director, Regulatory Affairs