By William Opalka

The New York Public Service Commission on Thursday approved an overhaul of the way utilities will earn money as the state switches to more distributed and cleaner energy sources.

The so-called Track 2 order in the state’s Reforming the Energy Vision initiative intends to provide a framework for utilities to remain financially sound while offering customers greater choices to interact with third parties (14-M-0101).

The order was contemplated when New York embarked on the REV process two years ago. A part of that initiative continued last summer with the release of a staff white paper that offered a more detailed look at how a utility of the 21st century could operate. (See NYPSC Outlines Reforming the Energy Vision Changes.)

‘Energy and Financially Inefficient’

The current grid was based on utilities earning returns on investments in large, centralized power systems sized to meet peak electric demand that occurs only a few days each year, “an energy and financially inefficient system,” the commission said in announcing the order.

“Cost-of-service ratemaking has allowed regulated distribution utilities to be insulated from the opportunities and the competitive pressures of the modern information economy. As a result, gains in capital productivity remain low and the efficiencies made possible by information technologies and new business models have been slow to materialize in the utility sector.”

The rules will create a new business model with “earnings opportunities for utilities that are aligned with consumer value and with a more efficient and resilient distributed low-carbon electric system,” the 158-page order states.

The NYPSC said the “historic structural reforms” to ratemaking are “unprecedented in its breadth and scope,” an effort to accommodate the digital economy while also transitioning to New York’s clean energy goals of deriving 50% of its energy from renewable resources by 2030. (See Cuomo: 50% Renewables by 2030, Keep Nukes Going.)

“What we want is utilities to start thinking about the ability to use third-party programs, not as something that they have to do because we require them to do them, or they do the minimum to make us happy, but because they want to do this because the earnings they can get from using other resources that drive efficiency can give them as much opportunity as traditional cost of service,” PSC Chair Audrey Zibelman said at the meeting.

“The focus of this decision is to create a modern regulatory model that challenges utilities to take actions to achieve these objectives by better aligning utility shareholder financial interest with consumer interest,” the order states.

‘Transactive’ Grid

The order envisions a two-way “transactive” grid instead of the current one-directional flow.

It builds on traditional cost-of-service ratemaking with the addition of market-based platform earnings and outcome-based earnings opportunities.

The order states there are three principles to ratemaking reform:

• The unidirectional grid must evolve into a more diversified and resilient distributed model engaging customers and third parties;
• Universal, reliable, resilient and secure delivery service must be ensured at just and reasonable prices; and
• System efficiency and consumer value and choice must be improved to achieve a more productive mix of utility and third-party investment.

Platform Service Revenues

Platform service revenues (PSRs) are new forms of utility earnings derived from distribution-level markets. The order contemplates early-stage earnings will come from displacing capital intensive infrastructure projects with non-wires alternatives, such as the Brooklyn-Queens Demand Management Program, which has allowed Consolidated Edison to defer building a $1 billion substation in Brooklyn in favor of less-costly distributed energy resources: solar, batteries and energy efficiency. (See NYPSC OKs Con Ed’s Demand Management Program to Relieve NYC Overloads.)

As markets mature, opportunities to earn with PSRs will increase, the order says. “Earning adjustment mechanisms” are for the design of new incentives earned under several categories:

• System efficiency: Each utility will propose a peak reduction target and a load factor improvement target.
• Energy efficiency: The Clean Energy Advisory Council will develop targets for energy efficiency beyond the existing energy efficiency transition implementation plan and Clean Energy Fund targets.
• Interconnection: A positive earning opportunity will be developed based on satisfaction surveys of DER providers regarding utilities’ delivery of timely and cost effective interconnection approvals. Utilities will be required to meet standardized interconnection requirements (SIR) to earn positive adjustments. The commission will also consider on a case-by-case basis negative earning adjustments for failure to meet benchmarks.
• Greenhouse Gas reductions: Utilities will have earning opportunities tied to reducing the cost of achieving the Clean Energy Standard’s (CES) target of 50% renewable generation by 2030. Those opportunities will be better defined in the CES proceeding. “Utilities will be required to develop a more efficient and cleaner network through retail markets for distributed energy resources such as solar, geothermal, wind, fuel cells, combined heat and power and battery storage, energy efficiency and other advanced energy services,” according to the order.

Unregulated utility subsidiaries are permitted to offer competitive value-added services, provided they create standards of conduct to prevent conflicts of interest.

Time-of-Use Rates

Customer participation in advanced rate design will be encouraged through opt-in time-of-use rates. The state will review successful programs adopted elsewhere and seek to improve promotion and customer education while creating smart-home pilot projects through collaborations with third parties or the New York State Energy and Research Development Authority.

Rate cases will examine the existing demand charges applicable to commercial and industrial customers to determine if they can be made more time sensitive.

Zibelman said an “overarching concern” is that utilities maintain their financial integrity because of the large capital requirements needed for initiatives such as vehicle electrification.

Each of the utilities will be required to file a system efficiency proposal by Dec. 1 to reduce high-cost energy generation during times of peak energy demand.

Implementation, with beginning steps from the utilities mandated to start later in 2016, will take much longer.

“I estimate there are at least 100 policy decisions in this item,” Commissioner Gregg Sayre said. “This is a process that will certainly take years. And if technology and markets continue to change at the same pace that they are changing now, we will never be done. And that’s OK, in fact, it’s even good.”