The New York State Public Service Commission approved significant structural reforms to electric utility regulations on Thursday aimed at better aligning utility shareholder financial interests with consumer interests.
The new financial mechanisms will serve to transition the New York power system away from large, centralized power plants, to a network that is increasingly clean, transactive and able to integrate and optimize resources in front of and behind the meter.
The order lays out the steps that have been taken as part of New York’s Reforming the Energy Vision (REV) proceeding, which calls for the use of markets and new regulations to achieve increased system efficiency, carbon reductions and customer empowerment (14-00581).
"This order incents utilities to drive forward the REV vision, by tying together customer and shareholder outcomes," said Walter Rojowsky, an energy and utilities expert at PA Consulting Group. "It brings important REV objectives such as system efficiency and energy efficiency into the core business of the utility. Until now these important functions and many others like it have not been a central focus of utilities. This is all about to change.”
The REV process supports New York’s mandate to generate 50 percent of the state's electricity needs from renewable energy by 2030. This most recent order codifies the proposals that were laid out in Track 2 of the REV proceeding.
“New York is taking a new direction today by creating the most-advanced and forward-thinking business model for electric utility rates anywhere in the country,” said Public Service Commission Chair Audrey Zibelman. “By aligning utility profits with market-enabling activities, residential and business customers can lower their energy bills through advances in digital technology and power-saving systems built for private homes and apartments, as well as entire neighborhoods.”
The order notes that regulated distribution utilities have been largely insulated from the competitive pressures of the modern information economy, which have already upended other industries. In many other sectors, the traditional service provider’s role has evolved into a platform service model that enables a multi-sided market, where the platform operator collects payment for providing market services. This approach improves capital efficiency and improves customer value. In the utility industry, gains in capital productivity remain low.
Under the new order, New York utilities will continue to operate as natural monopolies, and will make investments with an opportunity to earn a fair return. However, the order states that utility revenues must be increasingly tied to consumer value. At the same time, utilities have to operate systems that are supportive of third parties and adaptable, in order to respond to changing consumer demands.
“New earning opportunities will be a combination of outcome-based performance incentives and revenues earned directly from the facilitation of consumer driven markets,” according to the order. “In this manner, regulation will ensure that the utilities have the opportunity to align with the interests of their customers and embrace, instead of resisting, the rapid innovation that is occurring in the sector.”
Utilities will have four ways of achieving earnings:
- Traditional cost-of-service earnings
- Earnings tied to achievement of alternatives that reduce utility capital spending and provide definitive consumer benefit
- Earnings from market-facing platform activities
- Transitional outcome-based performance measures
"The Commission's order provides significant guidance on the revenue implications which will be encountered through realizing REV's objectives -- most significantly highlighting the near term balance between traditional cost-of-service earnings and a future state based on platform service revenues and earnings adjustment mechanisms," said Zach Pollock, an energy and utilities expert at PA Consulting Group.
With respect to transitional measures, the PSC established earning adjustment mechanisms (EAMs) that are intended to help build new markets. But these incentives are expected to be removed as markets mature and market-based revenues are available at scale. The PSC did not set a time limit on the EAMs and acknowledged they may change over time.
The four earning adjustment mechanisms currently are:
- First is system efficiency, defined as a combination of peak reduction and load factor improvement. Each utility will be required to propose a system efficiency targets, with a strategy to achieve it, a demonstration of cost-effectiveness, and an earnings incentive.
- Second is energy efficiency. EAMs will be tied to targets recommended by the Clean Energy Advisory Council (part of the new Clean Energy Fund), that are above and beyond the currently approved targets. Metrics will be based on system-wide outcomes.
- Third is interconnection, encouraging better cooperation between utilities and developers ofsolarand other renewable power projects by providing a positive incentive tied to developers indicating satisfaction with utility responses.
- Fourth is customer engagement. This is a critical area for the success of REV. Utilities are encouraged to propose EAMs tied to customer uptake in specific innovative programs.
With respect to alternatives, utilities will be encouraged to displace capital expenditures with third-party DER investment where cost-effective. These non-wires alternatives are intended to make the electrical system cleaner and more efficient with the adoption of advanced energy resources such as solar, efficiency, combined heat and power, battery storage and others.
Con Ed’s Brooklyn-Queens Demand Management Program, which leveraged DERs to defer the construction of a $1 billion electrical substation in Brooklyn, is one example that is already underway.
In response to Thursday’s order, each major New York electric utility will be required to file an “overall system efficiency proposal” by December 1, 2016 that will address how to to reduce high-cost energy generation during times of peak energy demand. Before that, however, the distribution utilities will file their distributed system implementation filings on June 30, the major document that will outline how they intend to manage the transformation to platform providers to support distributed energy markets.
Other earnings opportunities addressed in the order include competitive market-based earnings through a utility’s unregulated subsidiary, a data access fee, standby tariffs and demand charges for large customers.
The PSC wrote that utilities should also receive financial rewards for achieving greenhouse-gas reductions, such as investments in electric vehicles, and for reducing the overall cost of achieving New York’s Clean Energy Standard -- the initiative to meet half of the state’s energy needs with renewable energy resources by 2030.
Want to learn more about the grid modernization concepts behind REV that are spreading across the country? Come to GTM's Grid Edge World Forum for deep discussion and analysis of the future electric system.