Rates, Regulation, and Policy – August 2014

The ScottMadden Energy Industry Update | August 2014

Just when you thought policy and regulation had begun to settle down, major changes are afoot—or at least proposed. Rules for organized power markets continue to be tweaked as is the LNG export application process. More fundamental changes have been proposed at the federal level, in the form of CO2 emissions regulation, and in at least one state (New York), which is looking at fundamentally changing the role of the local distribution utility. Read more below.


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Some states may be able to increase their CO<sub>2</sub> emissions

  • Organized Capacity and Energy Markets: The Saga Continues
  • Notes: *LMP means locational marginal pricing Sources: RTO Insider; UBS; FERC; PJM; ERCOT; The Wall Street Journal; Van Ness Feldman; SNL Financial; industry news

  • In a New York State of Mind: The Empire States Reforming the Energy Vision Initiative
  • NYPSCs Policy Goals: Enhanced customer knowledge and tools that support effective management of their total energy bill Market animation and leverage of ratepayer contributions System-wide efficiency Fuel and resource diversity System reliability and resiliency Reduction of carbon emissions
  • Notes: *See EPRIs Integrated Grid Vision, at p. 19 of this Energy Industry Update Sources: Reforming the Energy Vision, Case 14-M-101; REV Collaborative Meeting presentations
  • On April 25, 2014, the New York Public Service Commission (NYPSC) commenced its Reforming the Energy Vision (REV) initiative. The public proceeding aims to align electric utility practices and our regulatory paradigm with technological advances in information management and power generation distribution The order included a staff report challenging two traditional assumptions: (1) demand is inelastic and (2) economies of scale make centralized generation and bulk transmission invariably cost effective An NYPSC Staff report details a new business model in which the distribution utility initially functions as a Distributed System Platform Provider (DSPP); other stakeholders may serve in that role at a later time The proposed role of the DSPP is to actively coordinate distributed energy resources (DER) and provide a market in which customers can optimize their priorities while receiving compensation for providing system benefits The proposed model would address many of the operational, technical, and financial challenges cited in the EPRI concept paper* Utility-specific implementation plans are expected to follow stakeholder work groups evaluating energy reforms in two parallel tracks (see table)

  • In a New York State of Mind (Contd): The Empire States Reforming the Energy Vision Initiative
  • Is this the revolution? Under the DSPP model, the distribution utility would expand its functions from primarily being a physical conduit for delivery of electricity to being a transactional platform for the distribution-level market. The anticipated responsibilities of DSPP include: Plan traditional utility investments relating to transmission and distribution (T&D) assets Plan customer-sited generation and demand response resources Manage DER products and services in real time Monetize value of DER products Serve as the local balancing authority, forecasting load and dispatching resources in real time to meet customer needs and maintain reliability What is it worth? Value of benefits (see table at right) are expected to be influenced by location, resource, time of day, resource variability, predictability and visibility, price, and other factors Keeping up with the Joneses. The Massachusetts Department of Public Utilities issued grid modernization orders in June 2014. This plan focuses on combining real-time two-way communication from advanced meters with time-variable pricing. While both states emphasize technology platforms and customer engagement, New Yorks effort is more ambitious as it recasts stakeholder responsibilities What could possibly go wrong? Success will require significant infrastructure investment, diverse and autonomous utilities adopting a single business model, customer participation in a new and complex market, and alignment with other policy initiatives (i.e., NY Energy Plan and NY Energy Highway)
  • Sources: REV, Case 14-M-101; REV Collaborative Meeting presentations; MA Order 12-76-B; MA Order 14-04-B; industry news

  • Existing Source CO2 Emissions Regulation: Dealing with the Muddle
  • Notes: EGU means electric generating unit Sources: EPA; SNL; Bloomberg New Energy Finance; Brattle Group; Inside EPA
  • If these rules are allowed to go into effect, the administration for all intents and purposes is creating Americas next energy crisis. Mike Duncan, president and CEO of the American Council for Clean Coal Electricity This is the beginning of the end of Americas long, dirty power plant era. Sen. Edward J. Markey, D-MA
  • Clean Power Plan released (6/2/14)
  • Comment period ends (9/30/14)
  • Final rule issued (June)
  • State compliance plans due (June)
  • Possible extension period with progress (June)

  • Existing Source CO2 Emissions Regulation: Dealing with the Muddle (Contd)
  • Notes: EGU means electric generating unit Sources: EPA; SNL; Bloomberg BusinessWeek; Bloomberg New Energy Finance; Brattle Group; Van Ness Feldman
  • 2012 Emission Rate = EGU lb CO2 EGU MWh EGU lb CO2 EGU lb CO2 EGU MWh EGU MWh EGU lb CO2 EGU MWh
  • EGU lb CO2 EGU MWh + Nuc MWh + Renew MWh + EE MWh EGU lb CO2 EGU lb CO2 EGU MWh + Nuc MWh + Renew MWh + EE MWh EGU MWh + Nuc MWh + Renew MWh + EE MWh EGU lb CO2 EGU MWh + Nuc MWh + Renew MWh + EE MWh
  • State Goal =
  • Percentage-Based CO2 Cuts: 2030 Reductions vs. 2012 Levels
  • Legend: Darker means greater % reductions Lighter means lesser % reductions or increases
  • Sources: Bloomberg BusinessWeek (citing Bloomberg New Energy Finance)

  • Competitive Transmission: Why Is This So Hard?
  • Order 1000 is introducing competition to the transmission portion of the electrical grid and substantially changes the landscape for transmission development RTOs will have to manage open, transparent processes by which qualified bidders compete to build projects Transmission owners and developers will have to compete to build new transmission
  • The RTOs are developing by which various entities will compete to build transmission The entities proposing to plan and build the transmission system are now a very mixed group The RTOs have set very different thresholds for competitive projects; rules are evolving differently across the country As the RTOs are stakeholder driven, there is significant work to incorporate the perspectives of increasingly diverse stakeholders States have responded in dramatically different ways. Some have put in place their own ROFRs, and others are welcoming competition According to FERC, states ROFRs need to be considered in the RTO planning processes All of the potential competitors have to learn how to manage the new environment Incumbent utilities have to build new competencies to compete with new entrants. Internal organizational structures, governance, and affiliate rules can all stymie the development of necessary competencies New entrants have to learn the grid to compete against the incumbents; transmission planning capabilities will be key All parties have to learn the new rules of the road
  • Notes: Projects in states with state ROFR can be considered earlier in the regional-planning process instead of at the evaluation stage per FERC Order on Rehearing and Compliance issued May 15, 2014, in dockets ER13-198, ER13-195, ER13-90; all public policy projects must be competition-eligible Sources: SNL Financial; Gibson Dunn; Brattle Group; regional compliance filings

  • Latest in Regional Competitive Processes under Order 1000
  • Projects Eligible
  • Recent Developments
  • Notes: Projects in states with state ROFR can be considered earlier in the regional-planning process instead of at the evaluation stage per FERC Order on Rehearing and Compliance issued May 15, 2014, in dockets ER13-198, ER13-195, ER13-90; all public policy projects must be competition-eligible. NYTOs means New York transmission owners Sources: SNL Financial; Gibson Dunn; Brattle Group; regional compliance filings

  • LNG Exports: Application Reshuffling and More Studies, But Development Continues
  • Notes: *FTA means countries with whom the United States has a free trade agreement Sources: Industry news; FERC; DOE; SNL Financial; ScottMadden analysis
  • Price Declines Do Not Discourage…Yet: Landed LNG prices have declined in some regions, but gas producers continue to look at supply overseas demand. As of late June 2014, proposed U.S. LNG export capacity had expanded to just over 41 BCF/day, up from almost 33 BCF/day proposed as of December 2013 DOE Reprioritizes: In late May 2014, DOE proposed changing its review prioritization for long-term non-FTA* export applications DOE considering where applications are in FERC environmental review process Stated focus is on more commercially advanced projects New process explicitly makes FERC an application bottleneck Another Economic Impact Study: DOE has commissioned a study of potential impacts, including on domestic natural gas prices, of exports of up to 20 BCF/day of natural gas House Turns up the Heat: Amid debate about the strategic and economic benefits and risks (including climate impacts) of exporting U.S. natural resources, specifically LNG, the U.S. House of Representatives passed H.R. 6, which calls for speedier disposition by DOE of non-FTA export applications (within 30 days of environmental review) Other Dynamics in Play: As regulators, policymakers, and industry participants gradually advance LNG exports, other factors are playing a role in those market dynamics, including: Pace of pipeline capacity to move gas to proposed LNG liquefaction facilities Emergence of Qatar as a major global LNG supplier Increased attention of LNG exports as a geopolitical tool (e.g., Europe)
  • World LNG Estimated Landing Prices
  • Legend:
  • Red number indicates price decline, green means price increase (vs. Oct. 2013)

  • Current Regulatory Landscape: You Cant Always Get What You WantBut Can You Get What You Need?
  • Sources: ScottMadden; SNL; RRA; EEI
  • The Downward Trend in Returns Allowed by Regulators Continues
  • Adding to Rate Base: Utilities are increasingly concerned about treatment of new rate base items New capacity, including renewables New delivery infrastructure, including system-hardening investments required by regulators To File or Not to File: Utilities are faced with a dilemma. They can either: File a new rate case to address their increasing O&M and capital expenditures, or Maintain their current (likely higher) ROEs Predictability Elusive: While predictability continues to be a principle concern, commissions have been reluctant to approve rate increases while the economy is still in the midst of recovery Room for Improvement: Utilities were only awarded 60% of their requested increases in rates, suggesting that opportunities exist to improve regulatory outcomes
  • Median = 10.9%
  • Median = 60%
  • Most Recent Electric and Gas Rate Case Decisions by Utility
  • Utilities never get 100% of requested increases, but a sound approach to rate case management can help increase the odds of success.

  • Current Regulatory Landscape: Authorized Returns Have Declined, But Actual Results Are Improving
  • Notes: Earned ROE is FY2013 return on average common equity for the relevant operating company; Authorized ROE is the most recent ROE approved by the state PUC Sources: ScottMadden; SNL; RRA
  • Gap between Earned and Authorized Returns Has Narrowed
  • A Combination of Different Initiatives Are Being Pursued by Most Utilities to Improve Rate Case Outcomes Alternative cost recovery: future test year and multi-year filings, pass-throughs, riders, and trackers to reduce regulatory lag Improved rate design to minimize cross-subsidies and increase recovery of fixed costs: higher customer charges, decoupling, and migration to rate parity Re-energized regulatory relationships: working more cooperatively with commissions and interveners to address concerns
  • Median earned ROE as a percentage of authorized ROE results have improved in the past two years 2013 Electric = 92% 2013 Gas = 95% 2011 Electric = 91% 2011 Gas = 87% Though authorized returns have been consistently between approximately 9% and 12%, earned ROE as a percentage of authorized ROE varied widely Electric utilities ranged from 39% to 155% Gas utilities ranged from 15% to 141%

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