A resolution passed on November 16, 2016 by the National Association of Regulatory Utility Commissioners (NARUC) at its 2016 Annual Meetings in La Quinta, California, encourages State regulators to consider whether cloud computing and on-premise solutions should receive similar regulatory accounting treatment.
The organizatiońs Resolution Encouraging State Utility Commissions to Consider Improving the Regulatory Treatment of Cloud Computing Arrangements recognizes that electric, gas, and water utilities faced with how best to respond to modern customer expectations, technological innovation, and new regulatory drivers may need to modernize and transform their business operations. A key element of this may be access to state-of-the-art commercial cloud computing services, which is increasingly delivered via a “cloud-based” or “software-as-a-service” model.
NARUC notes that highly regulated industries such as financial services, healthcare, telecommunications, and auto insurance use commercial cloud computing services and are delivering a superior customer experience and outperforming utilities in customer satisfaction rankings, according to surveys from J.D. Power and Associates. Federal government agencies, including the Departments of Treasury, State, and Defense, are rapidly transitioning to commercial cloud computing services and cloud-based solutions as well, through a federal requirement to “evaluate safe, secure cloud computing options before making any new IT investments.”
The NARUC resolution recognizes that, in addition to enhanced security, commercial cloud computing services can provide increased reliability and flexibility, while allowing frequent and easy updates with minimal business disruptions.
But, as NARUC also notes, commercial cloud computing services and traditional on-premise software currently have different business models and payment streams, with the former involving periodic payments for the services consumed, versus a large up-front payment and a regular maintenance fee for the latter. And while a utility may classify investments in legacy hardware and supporting on-premise software as a capital expense on which it can receive a rate of return, it must typically treat an investment in cloud-based technologies as an operating expense on which it does not receive a rate of return.
Due to the current disparity in accounting treatments between these two software approaches, NARUC is concerned that a regulatory incentive exists for utilities to invest in on-premise software solutions, creating unintended financial hurdles that hinder utilities from realizing the benefits other industries are experiencing with cloud-based software. The organization therefore recommends that cloud computing and on-premise solutions be regulated such that both would be eligible to earn a rate of return and would be paid for out of a utilitýs capital budget.
Leave a Reply
Want to join the discussion?Feel free to contribute!