New York Proposes Dramatic Reform of Utility Structure
May 7, 2014
On April 24, 2014, the New York State Department of Public Service (PSC) issued a report proposing a radical change to the way regulated utilities in the state are structured and the services they provide. The report, "Reforming the Energy Vision," proposes restructuring the state's utilities such that their focus and means of earning a return is shifted from the procurement and distribution of electricity to the management of distributed energy resources and storage on an increasingly decentralized, complex grid. Through this initiative, the PSC seeks to implement broad regulatory changes to promote energy efficiency, distributed renewable energy, microgrids, energy storage, and the use of more technologically advanced energy management products and services.
Across the country, we are seeing rapid deployment of distributed energy resources: sources of energy located close to load, and in some cases, on the utility customer's side of the meter. Installations of distributed solar, for example, have grown by over 634 percent since the year 2000 on a capacity basis.1 More than half of the 6.3 GW of the currently operating distributed solar photovoltaic installations in the U.S. has come online in the last two years alone, and an additional 11.6 GW is expected to come online by the end of 2016.2 These changes have been spurred by growing interest in reducing greenhouse gas emissions, deploying cleaner sources of energy, promoting energy independence, and increasing grid efficiency, in addition to federal and state incentives aimed at these goals, such as the federal renewable energy investment tax credit, and the exponential market penetration of renewable energy service structures, such as third-party ownership of rooftop solar. As a result of these developments, utilities and their regulators have shifted their focus to management of complexity and reliability on an increasingly decentralized grid, the need for integration of intermittent sources of power such as solar and wind, retail utility rate design, and the fundamental sustainability of the utility business model.
New York Governor Andrew Cuomo requested that the PSC and his Chairman of Energy and Finance, Richard Kauffman, "fundamentally shift" the regulation of utilities in New York in order to address the needs of a decentralized, customer-focused grid.3 In late December 2013, the PSC announced plans to comprehensively reconsider its regulatory paradigm in light of its policy objectives.4 In issuing Reforming the Energy Vision, the PSC enumerated those policy objectives as follows:
- Enhanced customer knowledge and tools that will 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 emissions5
Reforming the Energy Vision reviews the status quo of the utility business model that has been in place for the past century: centralized generation, long-distance transmission and utility ownership, and operation and coordination of this infrastructure. In its report, PSC staff identified inefficiencies and problems with the current structure, such as overprocurement of resources to accommodate very short periods of very high peak demand, reliability concerns, and transmission line power loss. It also reviewed recent changes impacting the grid and energy markets in New York, such as technological developments and the penetration of distributed generation and energy efficiency. Based on these changes, the PSC seeks to implement "fundamental changes in the manner in which utilities provide service."6
Summary of the PSC's Proposal
Under the proposal, New York's PSC seeks to transform the utility business model such that distributed generation, energy efficiency, and demand response would be the primary means of serving energy demand. Existing distribution utilities would become "Distributed System Platform Providers" (DSPPs) whose primary role would be to manage and coordinate these distributed energy resources and provide a marketplace that empowers customers to both provide and be appropriately compensated for the grid benefits provided by their customer-generation, demand response, energy efficiency, and microgrid projects. DSPPs would be responsible for implementing technology (including smart-grid technologies) to facilitate real-time information flow among various market participants and establishing a platform to support these distributed energy markets. Reforming the Energy Vision would place responsibility for monetizing the value of distributed generation, energy efficiency, and demand response, and providing pricing structures for these products and services with the DSPPs.
The report proposes that, when transformed into DSPPs, utilities will serve as local balancing authorities, responsible for forecasting load and dispatching resources on the distribution level to meet demand in real time, and coordinating with the New York Independent System Operator (NYISO) with respect to transmission-level grid planning. The DSPPs would be required to procure and implement advanced distribution management systems that are capable of integrating distributed generation (which is often intermittent in nature), energy storage, demand response, and energy efficiency technologies, and managing the flow of electrons in a bi-directional manner. The proceeding established by the PSC to examine this proposal will also consider the degree to which DSPPs should own, operate, and/or finance distributed energy resources. Reforming the Energy Vision would implement policies that incentivize customers to take an active role in the management of energy usage and the implementation of distributed generation, energy efficiency, and demand response, including expanded access to demand management services and tools, an increased role for energy services companies (ESCOs), and expanded access to energy usage data. More radically, the proceeding will investigate whether utilities should be barred from offering energy commodities and instead require customers to purchase energy commodities from ESCOs.
Reforming the Energy Vision also examines New York's current utility ratemaking process and finds that, despite various reforms such as the de-coupling of utility profits from volumetric electricity delivery rates, utilities are currently incented to maximize capital expenditures and not to optimize efficiency or meet the state's energy policy goals. The report proposes a number of significant changes to the ratemaking structure to address this, including:
- extending the length of utility rate plans to as much as eight years;
- tying utility profits to the delivery of long-term customer value (rather than measurements against the utilities' historical performance); and
- providing positive incentives for superior service and achievement of policy goals.
Additionally, the report examines retail rate design, and the related proceeding will explore the use of variable, time-of-use-based rates with discounts or payments for grid benefits associated with customer actions, such as generating electricity close to load. It also suggests that, with the implementation of these "sweeping changes in regulatory paradigms," net metering may no longer be necessary to incentivize the installation of distributed generation and compensate customer-generators for electricity delivered to the grid.7
The PSC has divided its proceeding on Reforming the Energy Vision into two tracks: the first will be a collaborative process to examine how utilities can better enable deployment of distributed generation, load management, and efficiency, and the second will focus on regulatory changes needed to implement this policy. The PSC will be holding a public meeting on Track 1 on Monday, May 12, as well as a symposium on May 22. PSC staff has asked interested parties to comment on a series of questions relating to Track 2 by June 13, 2014. The PSC expects to issue status reports in July and September of 2014, and decisions on Track 1 and Track 2 in late 2014 and early 2015, respectively.
If you are interested in learning more about New York's proposal, opportunities to provide comment on the proposal, or other energy regulatory developments, please contact Sheridan Pauker, Bob O'Connor, or Todd Glass in the firm's energy innovation and clean technology practice.