By Nate Larsen,
Energy Fellow
In
its April 24, 2014 Reforming
the Energy Vision (REV) straw proposal, the New York Department
of Public Service (DPS) identified an array of comprehensive policy reforms
geared toward facilitating distributed energy deployment in the state. DPS
staff had three broad objectives in drafting its report: enable the
modernization of the distribution system and create entities to manage that
system; facilitate engagement by customers and third-party energy services
companies; and revise the state’s ratemaking regulations to align with those
policy goals. I discussed the proposals to create
distribution system managers and engage customers and third-party energy
services companies in previous posts. This post addresses the DPS staff’s proposed
regulatory reforms discussed in the REV,
which can be broken down into ratemaking reforms and rate design reforms.
Ratemaking: New York’s
Current Model and Proposed Reforms
The traditional rate-of-return ratemaking model allows a
utility to recoup expenses while earing a profit on the utility’s capital investments.
In that model, a utility’s revenue requirement is set annually in a contested
rate case before the public utilities commission. Traditional rate of return
regulation ties utility profits to capital expenditures, and encourages utility
resistance to non-utility owned distributed generation and efficiency. For that
reason, the rate-of-return regulatory model in New York has evolved
incrementally over the years from the traditional rate-of-return model to a new
model incorporating modern policy goals.
New York’s current ratemaking model encourages multi-year
rate plans, which allow a utility to benefit from improved efficiency. The
model also uses negative incentives to adjust a utility’s revenue downward for
failing to meet standards relating to outage duration, customer service,
safety, etc. DPS staff recognized the need to adopt a more comprehensive
approach to reforming the ratemaking model in order to achieve the state’s
policy objectives. The New York DPS staff therefore proposed a variety of reforms
to the state’s existing rate-of-return model, including 1) long-term rate plans,
2) outcome (or results-based) ratemaking, 3) symmetrical incentives, and 4) revenue
decoupling mechanisms.
First, the REV includes
a proposal to extend the rate plan period up to eight years. Long-term rate
plans provide a degree of certainty, reduce expenses related to contested rate
cases, and encourage a utility to find ways to reduce expenses. Long-term rate
plans also benefit customers by including earnings sharing mechanisms, which require
a utility to distribute a portion of its earning above the approved rate of
return among its customers. The utility would also be required to meet certain
standards in the first year of the rate plan—a so-called “gateway review”—in
order to continue operating under the terms of that plan.
Second, the REV
proposed outcome or results-based ratemaking. Rather than incentivizing the
utility’s inputs, i.e. capital investments, outcome-based ratemaking would
reward the utility for achieving targets designed to create long-term customer
value. For example, those targets may be established in the context of
resiliency, renewable energy integration, and carbon emissions reductions,
among other categories.
Third, the REV proposed symmetrical incentives. These would
establish positive incentives for a utility that provides high-quality service
or otherwise achieves policy goals, while retaining some of the negative
incentives designed to limit outage durations and discourage poor customer
service and utility safety. The idea behind symmetrical incentives would be to
provide the utility with a carrot for providing good service, in addition to
the negative incentive stick.
Fourth, the REV includes a discussion of revenue decoupling
mechanisms, which detach electricity sales volumes from utility revenue. Rather
than basing a utility’s ability to earn its revenue requirement from
electricity sales, a decoupling mechanism ties utility revenue to other components
of the utility’s service. In so doing, decoupling removes the conflict between a
utility’s need to earn a profit and policy goals that encourage distributed
generation and energy efficiency. The REV,
however, points out that while revenue decoupling mechanisms might remove a
utility’s incentive to resist distributed generation and efficiency, they do
not directly incentivize utility support of those resources.
DPS staff did not provide specifics regarding the outcomes
it would promote, nor the types or level of incentives that it would consider
in the REV. Instead, DPS staff
allowed that it would work with stakeholders to make those decisions later in
the reform process, with the next straw proposal expected
to be released in the second quarter of 2015.
Rate Design: New
York’s Current Model and Proposed Reforms
DPS staff recognized the need to reform New York’s rate
design model to reflect its vision for the future of the distribution system. The
REV contemplates a two-way
transactive distribution grid, where the utility serves not only as the provider
of electricity products and services, but also the purchaser and aggregator of
customer-generated power and demand response capacity. Under that model, the
distribution utility will essentially operate a market in which customers and
third party energy services companies will both consume and provide discrete
electricity products and services based on their needs.
New York utility customers generally pay bundled rates for
their electricity. Those rates include the embedded costs of producing,
balancing and delivering power based on peak demand. The REV ultimately envisions a new rate design regime, where individual
utility products and services are unbundled and individually marketed based on
customer needs. Allowing customers to pick and choose among utility products
and services in a cost effective manner based on their system needs facilitates
customer investment in distributed energy resources.
In addition to providing electricity services, the utility,
as distribution manager, will purchase and aggregate the output of customers’
distributed energy resources. Rates for those customer-supplied products and
services will need to reflect both their value to the grid in terms of resiliency,
flexibility, low-carbon power, and avoided transmission costs, and their costs
in terms of reserve capacity required to balance variable resources. While DPS staff discussed the need for rate
design reforms, it also stressed that those reforms should not impact
customers’ access to universal service at reasonable rates.
The specific values and costs assigned to various
distributed energy resources are uncertain, yet these costs will go a long way
in determining customers’ value proposition in adopting those technologies. As
is the case with ratemaking reforms, DPS staff will begin to flesh out the
specifics of its rate design reforms with its Track Two proposal later this summer.
Conclusion
The REV provides a
glimpse of how New York’s DPS staff envisions reforming the state’s ratemaking
and rate design models. While the specifics of those reforms will ultimately
determine their success in achieving the state’s policy objectives, it is
encouraging to note that DPS staff appears committed to making sweeping changes
to New York’s regulatory paradigm to facilitate the development of distributed
energy resources.
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