Rate and Regulatory Developments – Fall 2015
The ScottMadden Energy Industry Update | September 2015
In this section, we examine New York’s Reforming the Energy Vision regulatory proceedings and FERC’s recently approved metrics to measure transmission investment policy effectiveness.
Key highlights include:
- New York’s REV: Working Through the Details of NY Grid Transformation
- New York’s REV: PSC Staff Envisions Significant Ratemaking Reforms
- FERC “Moneyball”: FERC Approves Metrics to Measure Transmission Investment Policy Effectiveness
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RATE AND REGULATORY DEVELOPMENTS
NEW YORK’S REV: WORKING THROUGH THE DETAILS OF NY GRID TRANSFORMATION
The New York PSC seeks details on a new market construct, but progress is halting.
Details Being Sorted Out by Various Working Groups
- New York’s “Reforming the Energy Vision” (REV) initiative is setting the stage for increased promotion of distributed energy resources (DER) and energy efficiency
- Market Design and Platform Technology Working Group (MDPT) report identified and framed design and technology issues focused on distributed resource deployment
- In early June, the PSC created a separate docket to consider policy options for large-scale renewables under REV, including (among other things) bundled procurement of RECs and energy by utility competitive solicitation
Some Important Questions Are Still to Be Addressed
- How large and at what “level” will the REV market be, and how fast can or will it be created?
- What will REV implementation cost?
|Some Key REV Activities and Policies|
|Distribution System Implementation Plan (DSIP)|
|Small Resource Interconnection Streamlining and Enhancement|
|REV Demonstration Projects|
NY utilities and the Commission will look at implications of REV.
Getting a Clear Idea of REV Costs and Benefits Is Now a Priority
- NYPSC has said that energy efficiency should go beyond “dollar-for-dollar” savings and MW/MWh reduction, but should also be judged on contribution to “market transformation” and move beyond “ratepayer contributions through system benefits charges”—it is unclear on how these programs will be paid for
- PSC Staff issued the Benefit-Cost Analysis (or BCA), which is a framework by which utilities will assess DER vs. traditional infrastructure to address system needs. The PSC has stated that a formalized benefit-cost analysis will not be definitive in every instance. A description of those proposed criteria is shown on the next page
Utilities and Regulators Must Understand Practical Implications of the Proposed REV Model
- How quickly can REV be implemented given the industry’s experience with wholesale energy markets?
- Exactly how big is the potential “transactive energy market” that this is trying to serve?
- What is the financial case for a distribution-level market?
NEW YORK’S REV: PSC STAFF ENVISIONS SIGNIFICANT RATEMAKING REFORMS
NYPSC Staff releases a white paper (and an alphabet soup of acronyms) proposing fundamental changes in the utility business model and rate paradigm.
Foundational Principles for Staff’s Proposals
- Align earning opportunities with customer value
- Maintain flexibility
- Provide accurate and appropriate value signals
- Maintain a sound electric industry
- Shift balance of regulatory incentives to market incentives
- Achieve public policy objectives
Three Categories of Suggested Reforms
- Utility business model reforms, including opportunities for market-based earnings
- Incremental ratemaking reforms to the utility revenue model
- Rate design reforms to reflect the needs of the evolving energy marketplace
PSC Staff’s Position on Key Ratemaking Issues
The Ratemaking Construct
- Deems traditional cost-of-service approach to ratemaking “insufficient” to realize the NYPSCs vision of a multi-sided platform (like Amazon)
- In a platform model, buyers, sellers, and the platform provider each interact with two or more parties (vs. a linear transaction system between buyer and seller)
- But because market investments could displace utility investments, PSC Staff believes utilities may have a disincentive to encourage an efficient market and use lowest-cost funding
- Advocates gradual changes in rate design, phasing carefully to assess bill impact, and using earnings impact mechanisms (EIM) as a temporary transition toward more market-based earnings (MBE) and less rate-base earnings
- Indicates ratemaking treatment should vary between that derived from utilitymonopoly functions and from competitive functions
- Recommends earnings sharing mechanisms (ESMs) (between utilities and customers), currently being used in NY, be adapted to outcome-based ratemaking (not a cap on earnings)
The Role of Market-Based Services
- Provides for MBEs for value-added services
- Expects utilities to derive increasing share of earnings from MBEs from value-added services
- Expects that a primary vehicle for MBEs will be platform service revenues (PSR) such as microgrid engineering, data analysis, platform access fees, and enhanced power quality
- Believes that MBEs and PSRs should supplant EIMs in a fullscale market
Changing the Utilities’ Incentives
- Promotes net energy metering as successful tool and advocates expansion for use with DER
- Calls for review of net plant reconciliation mechanism (also known as “clawback”)
- Makes utilities indifferent between a rate-based approach (utility capital) vs. third-party capital or operating expenses
- Encourages the most cost-efficient approach to investment
The Implementation Challenge and Adaptation over Time
- Recognizes implementation issues such as ratepayer impact, degree of utility control over outcomes, novelty of metrics proposed, and impact on utilities’ financial opportunities
- Favors long-term rate plans (three to five years) with possible extensions (two years)
FERC “MONEYBALL”: FERC APPROVES METRICS TO MEASURE TRANSMISSION INVESTMENT POLICY EFFECTIVENESS
Commissioner Clark compares the effort to statistics-driven baseball decision making.
FERC Seeks Tangible Measures of Policy Effectiveness
People…operate with beliefs and biases. To the extent you can eliminate both and replace them with data, you gain a clear advantage.
– Michael Lewis, Moneyball: The Art of Winning an Unfair Game
- In April, FERC Staff proposed, and all Commissioners supported, six metrics to assess FERC transmission policy effectiveness
- Metrics focus on timeliness and cost effectiveness of transmission investment and will compare performance before and after Order 1000
- These are different from those proposed by staff in 2014 to measure reliability, operations, and market performance
- Staff has yet to report on these 2015 metrics and will use its initial assessment for industry outreach, refinement of analysis, and consideration of other metrics
- Given differences in territory, local siting rules, costs, and markets across the country, deriving a true “apples-to-apples” transmission-effectiveness comparison from standardized metrics could prove challenging
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