From: greentechgrid
A new report calls for regulations to change so utilities can innovate—and protect customers along the way.
Utilities are in a “death spiral,” trapped in a “vicious cycle,” and are exploring “profound transitions” to fight for their continued survival. These are the kinds of headlines that have dominated the discussion of how utilities, facing sagging demand for energy amidst the rise of green-powered, energy-independent customers, are struggling to adapt to a new business paradigm.
Amidst all this talk of transformation, however, it’s important to remember that utilities — at least, the U.S. electricity distribution utilities that have been largely left out of the deregulation that’s swept over the energy industry over the past few decades — are mostly stuck doing things the same way they’ve always done them.
It’s called cost-of-service regulation, and it leaves little room for innovation or risk-taking. But innovation, and the risks and rewards that come with it, are just what is called for in this new energy era, argues a report out this week from GE Digital Energy and The Analysis Group.
“The overarching approach in the past is to focus on the least-cost solution,” David Malkin, a co-author of the report and GE Digital Energy’s deputy director of government affairs and policy, said in an interview this week. “We ought to flip that equation on its head and ask, ‘What is the approach that delivers the greatest long-term value to customers?’”
Under the regulatory models that have evolved over the past century of mass electrification, utilities get to charge just enough to build and maintain the infrastructure to deliver safe and reliable power to all comers, and receive a specified rate of return on those investments via what they charge their customers.
Any new spending plans that deviate from those past cost and profit figures can be challenged by multiple parties, from customer advocates fighting for low energy rates, to third-party power producers worried that distribution utility gains will lead directly to zero-sum losses on their side of the equation.
But that leaves utilities in a bind when it comes to justifying investments in smart grid technologies, which by definition are doing something that hasn’t been done before. Nor does it account well for investments to ensure reliability amidst an unprecedented growth of intermittent renewable energy coming onto the grid, or to mitigate the risks of cyber-attacks, or to support grid strengthening and resiliency to deal with extreme weather events, which are all new problems.
The question, as always, is how to come up with new regulatory models that free up distribution utilities to take risks and reap the rewards that can come from it — while also ensuring that their customers, who don’t get to choose who they buy their power from, don’t end up paying an unfair share for any missteps and mistakes.
The Fundamentals of Results-Based Regulation
Just what this new “Results-Based Regulation” model, as the report’s title terms it, might look like is a broader question. But we are seeing some promising ideas emerge from regulators in states across the country, as well as from overseas examples like the U.K.’s RIIO (“Revenue set to deliver strong Incentives, Innovation and Outputs”) model, Malkin said.
“I think there are a couple of defining attributes,” he said. “One is a mechanism whereby utility revenues are set based on an assessment of future costs, rather than current costs. There are a couple of ways to do that. Probably the easiest, or the most tried and true way, is to set a revenue plan, that’s spread over a couple of years, and based on a regulator’s review” — one that allows adjustments to rates based on changing business needs to occur on an incremental basis, rather than in the multi-year rate cases that now govern most utility spending plans.
“The second piece, which flows directly from that first piece, is a strong incentive for utilities to hold down their costs, and to pursue efficiency gains during that multi-year investment cycle,” Malkin continued. “The most immediate way to do that is to allow the utility to capture some portion of the savings that they might realize if their actual costs fall below their projected costs in their business plan — and conversely, if their actual costs exceed their projected costs, then their shareholders would be on the hook to foot at least a portion of those overruns.”
That may sound like simple common sense — but today’s regulatory frameworks actually discourage utilities from saving more money than expected, he said. “In general, when you have a rate case every couple of years, and a utility reduces its operating costs, that forms the cost basis for when they go in for the next rate review, so they have every incentive not to do that,” he said.
Leave a Reply