The lower costs and increased acceptance of distributed generation, storage, and energy efficiency are changing the hundred-year-old relationship between utilities and their customers. Throughout the last century, utilities generated and distributed power to their customers. The utility was granted a franchise area and an authorized return on any investments in exchange for the obligation to provide power to each customer within the franchise area.
Rapid changes in technology are turning that arrangement on its head. Customers now have the ability to generate and store their own power, often at a lower cost than purchasing power from the utility. Customers are also becoming more efficient in their use of power and may actually sell excess power back to the utility. This has led utility regulators to question whether the regulations of the last hundred years are still appropriate, or whether a new approach is required that allows utilities to generate revenues and profits from services other than traditional investments in generation, transmission, and distribution facilities. The New York Public Service Commission’s Reforming the Energy Vision proceeding is showing how it can be done.
A model for changing markets
In May 2016, the New York Public Service Commission issued an order that adopts a framework for ratemaking and a new revenue platform for utilities. The order builds on a conventional cost-of-service approach and adds market-based and outcome-based earning opportunities. This provides utilities with four ways to achieve earnings:
- Traditional cost-of-service
- Achievement of alternatives that reduce utility capital spending and provide consumer benefit
- Market-facing platform activities
- Transitional outcome-based performance measures
The changes proposed by the Order are based on three fundamental principles:
First, the Commission recognizes that the grid that was designed as unidirectional is becoming more diversified and bidirectional. This will make the grid more resilient and will engage customers and third parties.
Second, the standard of universal, reliable, and secure electricity delivery at just and reasonable prices remains a function of regulated utilities.
Finally, the overall efficiency of the electricity system can, and will, improve by assuring a more productive mix of utility and third-party investments.
Specific measures identify priorities
To move the utility revenue model away from traditional cost-of-service, the Commission proposes near-term changes and longer-term initiatives; however, they note that, with billions of dollars of needed infrastructure improvements, rapid technological advancements, and potential carbon reduction requirements, the historic pace of regulatory change is inadequate. To that end, the Commission has identified and ordered several specific measures. These include:
- Allowing utilities to generate revenues by providing services such as bundled communication offerings, information sharing and partnering with third parties.
- Performance-based incentives.
- Creation of unregulated affiliated companies.
- Establishment of campus tariffs and reliability credits to assure standby tariffs do not create an unnecessary barrier to entry.
- Rate design that enhances time-of-use rates and development of new Smart Home rates.
- Modified rate design to allow more precise price signals. While adhering to basic rate design principles, new rates will be designed to reflect the impacts of distributed generation and smart technologies and to send appropriate price signals. The designs will balance system efficiency with customer class equity and environmental impacts.
The REV proceeding includes a number of safeguards to protect the customer, the utility and third party competitors that fear utilities may use their regulated monopoly position to unfair advantage.
At Cadmus, we are monitoring these changes closely. The forces that are driving the reforms in New York are present throughout the utility industry. They will affect everything from energy efficiency program design and delivery to distributed generation impact assessments to innovative rate design. Watch for updates as REV unfolds and other jurisdictions begin exploring their own regulatory reforms.