New York PSC Issues Order to Re-shape the Utility Business Model

On May 19, 2016, as part of the Reforming the Energy Vision (REV) proceeding, the New York Public Service Commission (PSC) issued an order to the New York investor-owned utilities regarding further instruction to modernize the utility business model. The Order Adopting a Ratemaking and Utility Revenue Policy Framework, or the as it is commonly referred to as the “Track 2 Order,” outlines the near-term requirements for utility compliance and long-term vision for REV markets.

Key Details

The Track 2 Order is a foundational element of the REV proceeding and aims to change how utilities will be compensated for building and operating the infrastructure to support distributed energy resource (DER) integration. The genesis for the Track 2 Order is summarized in as follows:

“Cost-of-service ratemaking, while it will remain applicable to conventional utility investments for the near future, inhibits innovation in general and discourages numerous activities that utilities need to undertake to implement REV. …Utility revenue opportunities must be expanded to more closely align utilities’ financial interests with the consumer benefits from these elements of a modernized electric system.”[1]

At its core, the Track 2 Order addresses rate design and recognizes the need for expanded revenue opportunities for utilities aligned with benefits that customers will realize from a modernized electric system. Earnings will be derived through four primary means: (1) traditional cost-of-service earnings; (2) earnings tied to the reduction of utility capital spending; (3) earnings from market-facing platform activities; and (4) traditional outcome-based performance measures.

To prompt near-term action and support Distributed System Platform functions, Earnings Adjustment Mechanisms (EAMs) will be used to create customer savings and prompt utilities to take immediate steps in their efforts to develop market-enabling tools. Several categories of incentives are discussed in the Order and include:

  • System Efficiency – Each utility will propose a peak reduction target and a load factor improvement target
  • Energy Efficiency – Positive earning opportunities will be developed for utilities to achieve and exceed targets developed by The Clean Energy Advisory Council
  • Customer Engagement – Utilities will be able to propose positive incentive opportunities based on customer uptake in innovative engagement programs
  • Interconnection – A positive earning opportunity to be based on satisfaction surveys of DER providers regarding utilities’ interconnection processes

EAM guideposts have been provided, such that no more than 100 basis points can be earned from the total of all new incentives. The value of individual EAMs may vary based on the underlying activity, its anticipated cost, value to customers, and relative degree of opportunity in the particular utility territory.

As markets mature, new utility revenues associated with the operation and facilitation of distribution level markets will be introduced in the form of Platform Service Revenues (PSRs). In the early stages, PSRs will be used to provide utilities revenue opportunities by displacing traditional infrastructure projects with non-wires alternatives. As markets mature, opportunities to earn with PSRs will increase, as will potential service offerings. The Order establishes a process to facilitate the approval of products and services that could generate PSRs, the pricing of those services, and the allocation of revenues between ratepayers and shareholders.

With regard to rate design, policy direction is provided to ensure the development of more granular rate design to engage customers efficiently in multi-sided DER markets. Suggested rate design principles, for example, should:

  • Address cost causation, including embedded costs and long-run marginal and future costs
  • Provide stability in customer bills even if underlying rates include dynamic and sophisticated price signals
  • Reflect long-term approach to price signals and the ability to build markets independent of any particular technology or investment cycle

Rate design proposals were divided into near-term specific recommendations and long-term directional proposals:

  • Utilities should file voluntary smart-home tariffs
  • Opt-in time of use rates should be improved and promoted
  • Rates for large customers should be examined to improve their time variability
  • Low-income discounts should be located within a basic usage block
  • Standby rates should include a reliability credit and a campus tariff

Although the Commission stopped short of ordering utilities to develop long-term rate plans, they did leave the door open to “well-structured,” long-term agreements among parties as the industry progresses beyond the transitional period of REV.

To understand the scope and feasibility of rate reform, the Commission has directed staff to undertake a study to analyze the potential impacts of a range of mass-market rate reform scenarios. The study will consider time variable rates that support customer response and efficient cost recovery; consequences of customers participating in DER, non-participants, and low-income customers; and prerequisites to implementation (e.g., advanced metering, outreach, education, and enabling technologies). Findings from this study will be reported to the Commission in October 2017.

Implications

While the principle of gradualism underpins the Track 2 Order, the PSC has clearly signaled its priorities in changing incentive structures. The REV proceeding will continue to be instructive for the rest of the industry as novel approaches to incentives and rate design are attempted and evaluated.

For utilities in New York, this order requires no less than eight individual filings in 2016, in addition to the significant Track 1-related activities already underway.

More Information

State of New York Public Service Commission: New York Public Service Commission – Order Adopting a Ratemaking and Utility Revenue Model Policy Framework

SNL: New York PSC Adopts Policy Framework on Ratemaking and Utility Business Models in REV

Utility Dive: Little Less Talk: With New Revenue Models, New York Starts to Put REV into Action

This report is part of the Grid Minute series. To view all featured Grid Minutes, please click here.

[1] See Case 14-M-0101 – Proceeding on Motion of the Commission in Regard to Reforming the Energy Vision, Order Adopting a Ratemaking and Utility Revenue Policy Framework, issued May 19, 2016, p. 23

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Contributing Authors

Dave Adams Director

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