NGA Policy Institute for Governors' Energy Advisors: Emerging Ideas to Modernize Utility Business Models

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1 NGA Policy Institute for Governors' Energy Advisors: Emerging Ideas to Modernize Utility Business Models By Janine Migden-Ostrander, Principal Regulatory Assistance Project September 12, 2013 The Regulatory Assistance Project Home Office (US) 50 State Street, Suite 3 Montpelier, VT Phone: web:

Assistance Project September 12, 2013 The Regulatory Assistance Project Home

2 The Regulatory Assistance Project (RAP) We are a global, non-profit team of experts focused on the long-term economic and environmental sustainability of the power and natural gas sectors, providing assistance to government officials on a broad range of energy and environmental issues. 2

sustainability of the power and natural gas sectors, providing

3 About RAP US RAP provides technical and policy support at the federal, state and regional levels, advising utility and air regulators and their staffs, legislators, governors, other officials and national organizations. We help states achieve ambitious energy efficiency and renewable energy targets and we provide tailored analysis and recommendations on topics such as ratemaking, smart grid, decoupling and clean energy resources. RAP publishes papers on emerging regulatory issues and we conduct state-by-state research that tracks policy implementation. 3

We help states achieve ambitious energy efficiency and renewable energy targets and we provide tailored analysis and recommendations on

4 WHAT S THIS ALL ABOUT? NEW TECHNOLOGY CUSTOMER EMPOWERMENT/CHOICE NEW SERVICES AND COMPETITION PROTECTING THE UTILITY FINANCIAL INTEGRITY AS THE BACKBONE OF THE GRID DESIGNING RATES THAT INCENT CUSTOMER EMPOWERMENT, PROTECT THE HAVE-NOTS AND ALLOW THE UTILITY TO RECOVER ITS COSTS PLUS A REASONABLE RETURN RETHINKING THE TRADITIONAL UTILITY PARADIGM

UTILITY FINANCIAL INTEGRITY AS THE BACKBONE OF THE GRID DESIGNING RATES THAT INCENT

5 CUSTOMER EMPOWERMENT Customers have increasing resources to reduce reliance on utility-provided services and the amount of electricity purchased from utilities: Energy Efficiency Demand Response Self-Generation such as solar panels and CHP, etc.

of electricity purchased from utilities: Energy Efficiency

6 The Balancing Act Three important public policy objectives need to be carefully considered and accounted for in the new modernized utility era: Allow utilities an opportunity to obtain sufficient revenues to ensure grid reliability and a reasonable return; Ensure that new pricing mechanisms do not dampen or prevent the development of customer distributed generation (DG) and energy efficiency ; and, Protect have not customers from assuming a disproportionate percentage of the rate burden. 6

reasonable return; Ensure that new pricing mechanisms do not dampen or prevent the development of customer distributed

7 CAUTION: SOLUTIONS MAY VARY! Impacts and solutions may vary depending on whether the utility is vertically integrated and owns generation or is restructured and operates as distribution-only utility. 7

8 POTENTIAL TOOLS Create new rate designs that fairly allocate costs, considers social justice concerns and provides the right signals to customers to engage in DSM and DG Change the utility business model to create new sources of revenues through engagement in related businesses Other?

customers to engage in DSM and DG Change the utility business model to

9 RATE DESIGN 9

10 Rate Design Policy Considerations Redesign rates to separate sales from revenues without sabotaging incentives to conserve or be more efficient, i.e. decoupling. Note this will help in early years where utility is experiencing only some revenue erosion. Design rates that encourage those that can, to move towards becoming Clean-Energy Consumers. 10

Note this will help in early years where utility is experiencing only some revenue

11 Potential Rate Design Options Decoupling to help stabilize revenues; Bi-directional rates that charge DG customers for use of the T&D system; Utility purchase of PV Renewable Energy Credits (RECs) to offset new customer fees for using the distribution system. 11

of the T&D system; Utility purchase of PV Renewable Energy

12 Rate Design Considerations Address more nitty-gritty issues such as impact on load-factor for large customers engaged in Distributed Generation and how those changes effect the utility s ability to manage its system. More critical issue for vertically integrated utility. 12

Generation and how those changes effect the utility s ability to

13 Regulatory Incentives for Utilities Decoupling with reconciliation credits to low users and surcharges to high users. Tiered Incentives For restructured distribution-only utilities, comprehensive EE with incentives creates new profit center (they are no longer concerned with generation sales). 13

Tiered Incentives For restructured distribution-only utilities,

14 UTILITY BUSINESS MODEL 14

15 Rethinking the Traditional Utility Business Model Are their mechanisms to create new profit centers for the utilities either through their core utility business or through the creation of deregulated subsidiaries? If through the latter, how do we assure a level playing field with independent service providers and the enforcement of codes of conduct?

the creation of deregulated subsidiaries?

16 Rethinking the Traditional Utility Business Model Importance of not allowing utility to use distribution monopoly for competitive advantage. Weakens competition Can result in deregulated monopoly While policymakers may not regulate price in a competitive market, they can regulate terms and conditions of service. 16

Weakens competition Can result in deregulated monopoly While policymakers may

17 Rethinking the Traditional Utility Business Model If the utilities engage in these related businesses as part of its core business, how should the profits be allocated between the shareholder and the consumer? Could some of the profits be used to off-set the cost of grid modernization for example? Where is the investment money coming from? Customers? Investors? Shareholders? Under this model, there should be at least functional separation and codes of conduct 17

Could some of the profits be used to off-set the cost of grid modernization for example?

18 Rethinking the Traditional Utility Business Model Utility changes mindset to be more entrepreneurial and offer competitive services to create profit centers: o Subsidiary of Utility- If each subsidiary within a holding company needs to account for profits as a stand-alone entity, while offering a competitive service helps the holding company, it may not help the Distribution Utility. 18

If each subsidiary within a holding company needs to account for profits as a stand-alone entity,

19 Rethinking the Traditional Utility Business Model Codes of Conduct Issues: Separate employees and offices No intra-company sharing of information Any sharing of equipment/services based on market value Use of name and logo Fair and reasonable operating rules governing utility interactions with DG/EE businesses 19

20 Potential Market Sources of Utility Revenue Allow vertically integrated utilities to sell excess power in the market or bilaterally, keeping a percentage of the profit and being made whole for under-recoveries. Encourage nationwide the ability to sell energy efficiency into the wholesale market as a source of revenue to offset utility costs with incentives designed for utilities that participate 20

21 Conclusion Options for utilities will vary based on whether it is restructured or vertically integrated. Regulators need to be prepared to look at new ways of pricing services to balance interests of utilities, DG customers and non-dg customers. A combination of new profit centers with sharing of benefits between utilities and customers as well as new cost allocations should be explored. Utilities can look towards getting more entrepreneurial but enforcement of codes of conduct will be critical and it is not guaranteed that increasing a holding company s revenues will benefit the distribution utility. 21

22 About RAP The Regulatory Assistance Project (RAP) is a global, non-profit team of experts that focuses on the long-term economic and environmental sustainability of the power and natural gas sectors. RAP has deep expertise in regulatory and market policies that: Promote economic efficiency Protect the environment Ensure system reliability Allocate system benefits fairly among all consumers Learn more about RAP at

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