The Federal Energy Regulatory Commission finally reached a quorum last week after six months of inaction (and beard growth). Neil Chatterjee has been named interim chairman, while Kevin McIntyre awaits confirmation.
This is significant because FERC will be taking up several clean-energy-related issues at the wholesale level that interact, and possibly conflict, with policies at the state level, including nuclear generator compensation, rules on interconnection, and distributed energy resources market participation.
Tony Clark, a senior advisor at Wilkinson Barker Knauer LLP, former member of FERC, former president of the National Association of Regulatory Utility Commissioners and a former North Dakota regulator, recently wrote a white paper on navigating the evolution of electricity markets. We'll take a look at Clark's paper in this week’s column, followed by a rundown of the latest solar policy developments in Nevada, Rhode Island and Utah.
A brave new world of electricity policy
The 1990s marked the heyday of state electric utility restructuring, driven primarily by the quest for cheap electricity, Clark writes in his paper entitled “Regulation and Markets: Ideas for Solving the Identity Crisis.” Today, regulators are navigating a brave new world where states want more than just affordable power -- they also want fuel diversity, security, carbon-free energy and job creation, among other things that the administrative markets were never designed to accomplish, Clark argues.
The paper categorizes U.S. states in three regulatory models: the traditional bilateral market model, the joint dispatch market model (both of which could be considered "vertically integrated"), and the restructured administrative market model. In recent years, states have retreated from the restructured model, “though the retreat tends to be of the tacit sort,” writes Clark.
“From Illinois and New York, where nuclear generators stand to receive millions of dollars in state-sponsored subsidies, to states in New England and the mid-Atlantic, where massive out-of-market contracts and payments threaten the underpinnings of price formation in both the energy and capacity markets, there is a very real concern and possibility that certain wholesale electricity markets will become so dysfunctional as to undermine the just and reasonable standard that FERC is duty-bound to uphold,” according to the report.
FERC has acknowledged the challenges related to how state-led policies interact with wholesale markets, and held a technical conference in April to explore the issue (Docket No. AD17-11-000).
Clark offers the following recommendations for states as they manage the tectonic shifts in the electricity policy landscape.
1. Distribution rate design is key
With the quickening pace of DER development and adoption, “it is critically important that states assess whether their rate structures adequately reflect the changing landscape and promote fair, equitable and sustainable innovation on the distribution grid,” according to Clark. He specifically notes that retail-rate net metering is popular for those benefiting from it, but is “hardly a sustainable long-term solution.”
In Clark’s view, the soundest approach is for states to accept rate designs that move utilities closer to a straight fixed-variable rate construct. “Not only does this ensure that distribution utilities fully recover the value they provide customers (making would-be arbitrageurs pay their full freight), it has the added benefit of making utilities more neutral to a customer’s choices regarding DERs and energy efficiency,” the paper states.
2. Don’t fall into the “one piece at a time” trap
The old Johnny Cash song “One Piece at a Time” tells the story of a General Motors assembly line worker who wants a Cadillac and steals the pieces from the assembly line one piece at a time over his multi-decade career in order to build his dream car. By the time the vehicle is put together, however, it looks and functions like a Rube Goldberg machine with different parts from multiple model years. Regulators and policymakers must be vigilant that the nation’s electricity public policy superstructure does not take on a similar form, writes Clark.
Depending on the region, states are dealing with a layered mix of energy policies, including some form of wholesale market, a carbon-pricing regime, renewable portfolio standards, renewable energy credits, subsidized demand response or energy storage, zero-emissions credits, production tax credits, investment tax credits, retail net metering, energy-efficiency subsidies, out-of-market direct subsidies and Public Utility Regulatory Policies Act (PURPA) mandates, to name a few. At a certain point, these various initiatives work at cross purposes, which is why it’s critical that policy leaders step back and thoughtfully consider a comprehensive approach, according to Clark.
3. Clearly define your goals
This one is pretty self-explanatory. To prevent states from drifting aimlessly and stacking one public policy on top of another, Clark recommends that leaders consider what their real goal is.
Vertically integrated states:
Clark argues that vertically integrated states can more transparently and thoughtfully use electricity policy to pursue a variety of goals, in comparison to their restructured brethren. But there are still items regulators should be addressing.
1. Consider innovative regulatory models such as performance-based ratemaking, decoupling and price cap regulation
As innovation proliferates at the grid edge, there is a danger, says Clark, that traditional utilities will find themselves consigned to traditional cost of service regulation over a legacy network, and unable to innovate due to legacy state regulatory strictures that punish innovation. “Look beyond simple cost of service regulation, and look to reform methodologies such as decoupling or price cap regulation,” he advises.
2. Consider ways to give consumers more choice, but within the context of a vertically integrated utility
Monopoly utilities should be creative in thinking how to provide not just electricity but value to various types of consumers, including the price-conscious, the early adopters, those with a preferences for certain types of generation, and those demanding stability. Regulators also need to be open to creative thinking, and not slipping into a one-size-fits-all mentality that tends to dominate the cost-of-service regulated space, the paper says.
3. Get ahead of the PURPA curve
Clark is not a fan of how PURPA is being applied today. The federal law has facilitated some level of generation competition, but PURPA is “just as often used to undermine rational, competitive integrated resource-planning decisions made by utilities and utility regulators,” he writes. Reforming PURPA is predominantly a prerogative of Congress, and to a lesser extent FERC. But states can influence how the law is used by “proactively ensuring their avoided-cost rates are set at a level that does not encourage gaming the system by heavily subsidizing resources that are in no way the equivalent of (and are often inferior to) resources that are part of a well-thought-out integrated resource plan,” Clark writes.
Renewable energy developers, of course, would strongly disagree with Clark’s point of view. PURPA reforms in Montana, North Carolina and several other states are viewed as unwarranted attacks on the solar industry.
Recommendations for restructured states
For Clark, it’s imperative that restructured states avoid straddling the merchant market while simultaneously exercising state sponsored market resource selection. So it’s no surprise his first recommendation is:
1. Stay true to your model
A restructured state can be like Texas and fully restructure; it can be like California and have vertically integrated utilities within an organized market; or it can be like Florida and maintain its organization as a vertically integrated state with a bilateral market. “But no state should choose to be Texas, California and Florida all at once,” said Clark.
2. If you cannot stay true to your model, at least be deliberate and own up to the responsibilities of your choice
“There are legitimate ways a state could fulfill its desire to be more active in selecting resources while bringing certain market forces to bear,” the paper states. “Competitive long-term PPA procurement and bilateral contracting could be one likely scenario.”
Clark specifically expresses concerns over proposed changes in ISO New England territory, where regulators are looking to reform the ISO’s capacity market to integrate larger amounts of subsidized generation while seeking to preserve price signals for unsubsidized resources. “Layering even more auctions, set-asides and carve-outs onto the current construct may ultimately tumble the house of cards,” he wrote. “I would encourage a more direct approach for states to 'take ownership' of their resource choices.”
States should be honest about the impact of their resource procurement decisions. In doing so, this may lead restructured markets to look more like “joint dispatch” ones.
“Regulation and Markets: Ideas for Solving the Identity Crisis” is the latest in a series of Wilkinson Barker Knauer reports on electricity markets. The first examined state efforts to address the exit of coal and nuclear-powered baseload generation from organized markets. The second examined the loss of natural-gas baseload. The third, produced in collaboration with the Power Research Group, describes a bleak economic future for merchant generators.
NV Energy proposes fixed fees
NV Energy filed proposed rates earlier this month to comply with AB 405, landmark legislation passed in June that restored net metering for rooftop solar and opened the door for more distributed energy storage. With the latest filing, however, NV Energy proposed increasing the fixed charge on all residential customers in Nevada by 40 percent and decreasing the volumetric rate -- which makes the net metering compensation negotiated in AB 405 effectively worthless, solar advocates say. The rate change for all Nevadans comes outside of the utility’s currently open Nevada Power rate case.
Rhode Island Governor signs bills supporting clean energy growth
In March, Governor Raimondo announced a goal to increase Rhode Island's clean energy output tenfold by 2020, supporting 20,000 clean energy jobs in the process. This month, this governor signed a series of bills aimed at meeting that goal.
- Provides a 10-year extension of the renewable energy growth program: H5274A, S112A
- Establishes a streamlined statewide solar permitting application process: H5575, S562
- Streamlines process of connecting renewable energy installations to the grid: H5483B, S637A
- Allows farmers to install a renewable energy system on no more than 20 percent of their total farm land acreage: H6095Aaa, S570A
- Expands virtual net metering for renewable project development: H5618Aaa
Utah regulators delay Rocky Mountain Power's net metering hearings to allow for settlement talks
On Friday afternoon, the Utah Public Service Commission granted a delay on proposed solar policy changes, honoring a request by a coalition of industry and environmental advocates, as well as state and local government representatives. Rocky Mountain Power, the utility seeking the changes, has also added its name to the motion, which was filed late Thursday.
Participants in the confidential talks say they prefer an an alternative suggested by the state Office of Consumer Service and the Division of Public Utilities to Rocky Mountain Power’s proposal, released last fall, the Salt Lake Tribune reports. Opponents say the utility’s proposal will dramatically increase electricity bills for residential solar customers. The involved parties hope to finalize a settlement by the end of the month.