Green Energy

New York’s REV: Regulatory Reforms

By Nate Larsen, Energy Fellow

In its April 24, 2014 Reforming the Energy Vision (REV) straw proposal, the New York Department of Public Service (DPS) identified an array of comprehensive policy reforms geared toward facilitating distributed energy deployment in the state. DPS staff had three broad objectives in drafting its report: enable the modernization of the distribution system and create entities to manage that system; facilitate engagement by customers and third-party energy services companies; and revise the state’s ratemaking regulations to align with those policy goals. I discussed the proposals to create distribution system managers and engage customers and third-party energy services companies in previous posts. This post addresses the DPS staff’s proposed regulatory reforms discussed in the REV, which can be broken down into ratemaking reforms and rate design reforms.

Ratemaking: New York’s Current Model and Proposed Reforms

The traditional rate-of-return ratemaking model allows a utility to recoup expenses while earing a profit on the utility’s capital investments. In that model, a utility’s revenue requirement is set annually in a contested rate case before the public utilities commission. Traditional rate of return regulation ties utility profits to capital expenditures, and encourages utility resistance to non-utility owned distributed generation and efficiency. For that reason, the rate-of-return regulatory model in New York has evolved incrementally over the years from the traditional rate-of-return model to a new model incorporating modern policy goals.

New York’s current ratemaking model encourages multi-year rate plans, which allow a utility to benefit from improved efficiency. The model also uses negative incentives to adjust a utility’s revenue downward for failing to meet standards relating to outage duration, customer service, safety, etc. DPS staff recognized the need to adopt a more comprehensive approach to reforming the ratemaking model in order to achieve the state’s policy objectives. The New York DPS staff therefore proposed a variety of reforms to the state’s existing rate-of-return model, including 1) long-term rate plans, 2) outcome (or results-based) ratemaking, 3) symmetrical incentives, and 4) revenue decoupling mechanisms.

First, the REV includes a proposal to extend the rate plan period up to eight years. Long-term rate plans provide a degree of certainty, reduce expenses related to contested rate cases, and encourage a utility to find ways to reduce expenses. Long-term rate plans also benefit customers by including earnings sharing mechanisms, which require a utility to distribute a portion of its earning above the approved rate of return among its customers. The utility would also be required to meet certain standards in the first year of the rate plan—a so-called “gateway review”—in order to continue operating under the terms of that plan.

Second, the REVproposed outcome or results-based ratemaking. Rather than incentivizing the utility’s inputs, i.e. capital investments, outcome-based ratemaking would reward the utility for achieving targets designed to create long-term customer value. For example, those targets may be established in the context of resiliency, renewable energy integration, and carbon emissions reductions, among other categories.

Third, the REV proposed symmetrical incentives. These would establish positive incentives for a utility that provides high-quality service or otherwise achieves policy goals, while retaining some of the negative incentives designed to limit outage durations and discourage poor customer service and utility safety. The idea behind symmetrical incentives would be to provide the utility with a carrot for providing good service, in addition to the negative incentive stick.

Fourth, the REV includes a discussion of revenue decoupling mechanisms, which detach electricity sales volumes from utility revenue. Rather than basing a utility’s ability to earn its revenue requirement from electricity sales, a decoupling mechanism ties utility revenue to other components of the utility’s service. In so doing, decoupling removes the conflict between a utility’s need to earn a profit and policy goals that encourage distributed generation and energy efficiency. The REV, however, points out that while revenue decoupling mechanisms might remove a utility’s incentive to resist distributed generation and efficiency, they do not directly incentivize utility support of those resources.

DPS staff did not provide specifics regarding the outcomes it would promote, nor the types or level of incentives that it would consider in the REV. Instead, DPS staff allowed that it would work with stakeholders to make those decisions later in the reform process, with the next straw proposal expected to be released in the second quarter of 2015.

Rate Design: New York’s Current Model and Proposed Reforms

DPS staff recognized the need to reform New York’s rate design model to reflect its vision for the future of the distribution system. The REV contemplates a two-way transactive distribution grid, where the utility serves not only as the provider of electricity products and services, but also the purchaser and aggregator of customer-generated power and demand response capacity. Under that model, the distribution utility will essentially operate a market in which customers and third party energy services companies will both consume and provide discrete electricity products and services based on their needs.

New York utility customers generally pay bundled rates for their electricity. Those rates include the embedded costs of producing, balancing and delivering power based on peak demand. The REV ultimately envisions a new rate design regime, where individual utility products and services are unbundled and individually marketed based on customer needs. Allowing customers to pick and choose among utility products and services in a cost effective manner based on their system needs facilitates customer investment in distributed energy resources.

In addition to providing electricity services, the utility, as distribution manager, will purchase and aggregate the output of customers’ distributed energy resources. Rates for those customer-supplied products and services will need to reflect both their value to the grid in terms of resiliency, flexibility, low-carbon power, and avoided transmission costs, and their costs in terms of reserve capacity required to balance variable resources. While DPS staff discussed the need for rate design reforms, it also stressed that those reforms should not impact customers’ access to universal service at reasonable rates.

The specific values and costs assigned to various distributed energy resources are uncertain, yet these costs will go a long way in determining customers’ value proposition in adopting those technologies. As is the case with ratemaking reforms, DPS staff will begin to flesh out the specifics of its rate design reforms with its Track Two proposal later this summer.

Conclusion

The REV provides a glimpse of how New York’s DPS staff envisions reforming the state’s ratemaking and rate design models. While the specifics of those reforms will ultimately determine their success in achieving the state’s policy objectives, it is encouraging to note that DPS staff appears committed to making sweeping changes to New York’s regulatory paradigm to facilitate the development of distributed energy resources.

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