All of the Above: One Way State Regulatory Frameworks Impact the Utility of the Future

Abstract

As utilities anticipate the adoption of distributed energy resources (DER) and regulators implement performance-based regulatory schemes, it will become increasingly important for utilities and regulators to agree on the anticipated rate and scale of DER adoption. Traditionally, regulated utilities are measured and incented (often through penalties) by the traditional metrics associated with reliability and customer satisfaction. During the transition period that will in all likelihood last the next 5-10 years - and even longer in some U.S. states due to the lack of markets - utilities will feel the need to request capital investment plans that both maintain their existing infrastructure and anticipate future needs, including both infrastructure needs associated with anticipated future growth/demand and investment in future oriented systems and capabilities to enable their emerging role as an integrator and optimizer of DER at scale.

This scenario is the very definition of the need for legal regimes that can respond to new circumstances and uncertainties in modeling or planning for the electricity mix of the future. This situation is very real today in states such as New York and California. For example, in New York, Consolidated Edison filed a new rate case in January 2016, to be effective January 2017, including capital spend exceeding their historical average as they invest to maintain their aging infrastructure, continue their investment in storm hardening due to climate change, anticipate future infrastructure needs associated with load growth, and invest in the new capabilities that are necessary for them to play the role of the Distribution System Platform (DSP) as required by the Reforming the Energy Vision (REV). There is significant uncertainty regarding the anticipated adoption rates of DER, and therefore, the capital required for future load growth. In today's environment, regulatory frameworks do not effectively allow for this uncertainty, encouraging Consolidated Edison to take a conservative position based on their requirement to maintain performance relative to the traditional metrics of reliability and customer satisfaction. A more innovative and flexible legal regime would quickly incorporate elements of a new performance-based regulatory scheme, both incenting the adoption of DER at an accelerated pace and providing legal and financial limits of liability in the case of lower adoption rates and a resulting impact on reliability and customer satisfaction. The regulatory scheme must also provide guidance regarding the deployment of private capital versus rate-based capital. However, due to customer and stakeholder engagement constraints, this guidance should not be developed through traditional ratemaking, Integrated Resource Plan (“IRP”), or avoided cost proceedings.

Keywords: ratemaking, utility, distributed energy, regulatory framework

JEL Classification: K23, L43, L94, L98, Q48