FEUR #8 Webinar Utility Incentives for Grid Modernization ... · •Webinar housekeeping items ... master’s degrees in financial economics and quantitative methods from the University

Future Electric Utility Regulation Advisory

Group Meeting

March27,2014

FutureElectricUtilityRegulationSeriesReport#8:RegulatoryIncentivesandDisincentives

forUtilityInvestmentsinGridModernizationMay31,2017

SteveKihm – SeventhwaveJaniceBeecher– InstituteofPublicUtilities,

MichiganStateUniversityRonaldLehr– attorneyandconsultant

LisaSchwartz,BerkeleyLab,ProjectManager

Agenda

• Abouttheseries• Webinarhousekeepingitems• Threeperspectivesonregulatoryincentivesanddisincentivesforutilityinvestmentsingridmodernization(15min.each)– Financialanalyst– SteveKihm– Institutionalframework– JaniceBeecher– Publicpolicy– RonaldLehr

• Q&A(25min.)

EnergyAnalysisandEnvironmentalImpactsDivision 2

FutureElectricUtilityRegulationSeries(1)• A series of reports from Berkeley Lab taps leading thinkers to grapple

with complex regulatory issues for electricity • Unique multi-perspective approach highlights different views on the

future of electric utility regulation and business models and achieving a reliable, affordable, and flexible power system to inform ongoing discussion and debate

• Expert advisory group provides guidance and review • Primary funder of initial six reports: U.S. Department of Energy’s Office

of Electricity Delivery and Energy Reliability - Electricity Policy Technical Assistance Program

• Office of Energy Efficiency and Renewable Energy’s Solar Energy Technologies Office is co-funding new reports under DOE’s Grid Modernization Initiative

feur.lbl.gov


FutureElectricUtilityRegulationSeries(2)1. Distributed Energy Resources (DERs), Industry Structure and Regulatory Responses2. Distribution Systems in a High DER Future: Planning, Market Design, Operation and

Oversight3. Performance-Based Regulation in a High DER Future4. Distribution System Pricing With DERs5. Recovery of Utility Fixed Costs: Utility, Consumer, Environmental and Economist

Perspectives 6. The Future of Electricity Resource Planning7. The Future of Centrally-Organized Wholesale Electricity Markets8. Regulatory Incentives and Disincentives for Utility Investments in Grid Modernization –

Today’s topic9. Value-Added Electricity Services: New Roles for Utilities and Third-Party Providers

(underway)

• Additional reports forthcoming: feur.lbl.gov• Expert advisory group (next slide) provides guidance and review


AdvisoryGroup• CommissionerLorraineAkiba,HawaiiPublicUtilitiesCommission• JaniceBeecher,InstituteofPublicUtilities,MichiganStateUniversity• DougBenevento,XcelEnergy• AshleyBrown,HarvardElectricityPolicyGroup• PaulaCarmody,MarylandOfficeofPeople’sCounsel• RalphCavanagh,NaturalResourcesDefenseCouncil• SteveCorneli,consultant• TimDuff,DukeEnergy• PeterFox-Penner,BostonUniversityQuestromSchoolofBusiness• ScottHempling,attorney• ValJensen,CommonwealthEdison• CommissionerTravisKavulla,MontanaPublicServiceCommission• SteveKihm,Seventhwave• ChairNancyLange,MinnesotaPublicUtilitiesCommission• LoriLybolt,ConsolidatedEdison• Sergej Mahnovski,EdisonInternational• KrisMayes,ArizonaStateUniversityCollegeofLaw/UtilityoftheFutureCenter• JayMorrison,NationalRuralElectricCooperativeAssociation• DeliaPatterson,AmericanPublicPowerAssociation• CommissionerCarlaPeterman,CaliforniaPublicUtilitiesCommission• SonnyPopowsky,FormerconsumeradvocateofPennsylvania• KarlRábago,PaceEnergy&ClimateCenter,PaceUniversitySchoolofLaw• RichSedano,RegulatoryAssistanceProject• PeterZschokke,NationalGrid


Webinar Housekeeping Items

• We’re recording the webinar and will post it on our web site.

• Because of the large number of participants, everyone is in listen mode only.

• Please use the chat box to send us your questions and comments any time during the webinar. You may want to direct your question to a specific author.

• The report authors will each have 15 minutes to present.

• Moderated Q&A will follow, with the report authors responding to questions typed in the chat box.

• The report and webinar slides are posted at feur.lbl.gov


AbouttheAuthors(inorderofpresentation)

SteveKihm isprincipalandchiefeconomistatSeventhwave,athinktankinMadison,Wisconsin,andseniorfellowatMichiganStateUniversity’s(MSU’s)InstituteofPublicUtilities.Hehasworkedinthefieldofutilityregulationfor36years,including 21yearsattheWisconsinPublicServiceCommission.Hehasappearedasanexpertwitnessinutilityproceedingsacrossthecountry,publishedreportsandjournalarticles,andisco-authorwithJaniceBeecherofthebook,RiskPrinciplesforPublicUtilityRegulators(MSUPress).Kihm holdsabachelor’sdegreeineconomicsandmaster’sdegreesinfinancialeconomicsandquantitativemethodsfromtheUniversityofWisconsin.HeisaCharteredFinancialAnalyst.

JaniceBeecher hasservedasDirectoroftheInstituteofPublicUtilitiesatMSUsince2002,bringingmorethan30yearsofappliedresearchexperiencetotheposition.Herareasofinterestincluderegulatoryinstitutions,governance,andpricing,andshespecializesinthewatersector.Sheisafrequentauthor,lecturer,andparticipantinprofessionalforumsandEditorofUtilitiesPolicy. ShepreviouslyheldpositionsatOhioStateandIndianaUniversitiesandtheIllinoisCommerceCommission.BeecherhasaPh.D.inpoliticalsciencefromNorthwesternUniversityandfacultyappointmentsinMSU’sCollegeofSocialScience,whereshehastaughtgraduatecoursesinpublicpolicyandregulation.

RonaldL.Lehr practiceslawandconsultsforclientsonenergyregulationandbusinessmattersonavarietyoftopicsrelatedtoincreasingtheamountofcleanenergyinelectricsystems,includingsystem,operations,integrationandtransmissionplanningfortheWesternInterconnectionandnewutilitybusinessmodelsandregulatoryreformsthatsupportthem.Heservedforsevenyears(1984to1991)asChairmanandCommissioneroftheColoradoPublicUtilitiesCommission.Hehasservedoncorporateandfoundationboardsofdirectorsandboardsofadvisors,includingasPresidentoftheDenverBoardofWaterCommissioners.


Please use the chat box to send us your questions and comments any time during the webinar. You may want to direct your question to a specific author. We’ll address as many questions as we can following the presentation.

The report and webinar slides are posted at feur.lbl.gov


IncentivesandDisincentivesforUtilityGridModernization:FinancialAnalystPerspective

SteveKihm,CFAPrincipalandChiefEconomist

Seventhwave

May31,2017

9

Overview

• Canutilitiesraisecapitalforgridmodernization?Yes

• Doutilitymanagersseevalueforshareholdersingridmodernizationprojects?Maybe

• Shareholdervalue(stockprice)– risk,returnandscale

This is the relevant question.


Properframingoftheproblem


CreditSuisseDistributingCashtoShareholders

Cost of equity for S&P 500


Long-termROEabovecostofequity(Iagree)

Xcel EnergyBeyond 2019, we assume a system wide normalized 10% average allowed ROE and 0.5% average annual long-term usage growth. We assume a 7.5% cost of equity in our discounted cash flow valuation. This is lower than the 9% rate of return we expect investors will demand of a diversified equity portfolio. A 2.25% long-term inflation outlook underpins our capital cost assumptions. Our cost of capital assumption is 5.9%.


Whomakesinvestmentdecisions?

Capitalallocationisaseniormanagementteam’smostfundamentalresponsibility...Theobjectiveofcapitalallocationistobuildlong-termvaluepershare.

Mauboussin,M.,etal.2016.CapitalAllocation:Evidence,AnalyticalMethods,andAssessmentGuidance.CreditSuisse.


EEIcommentingonlowerFERCROEsfortransmission

AsEEIexplains,“theseprojectsalsocarrythemostupfrontdevelopmenttime,longerconstructionschedules,andoverallrisk.”However,withoutasufficientROE,electricutilities arelikelytochoose short-term,morelocalprojects,insteadofriskier,morestrategicoptions.(Emphasisadded.)

Kuzika,L.S.2013,June17.EEIUrgesFERCtoReformitsROEMethodology.Energy&EnvironmentalLawAdviser.


Returnonequity>costofequity


Thevalueproposition


Thevalueproposition

How does the policy affect the utility’s systematic risk?

How does the policy affect the expected return on equity?

What are the scale differences betweenthe utility’s resource

options?


Togetthefullpriceimpactyouwouldusesuchamodel


TheValueLineInvestmentSurvey

2016 2017 2019-21


TheValueLineInvestmentSurvey

2016 2017 2019-21


Highreturnsonequitydon’tattractmorecapital


Newinvestorsexpecttoearnaboutthesamereturnonallutilitystocks


Highreturnscreatevalueforpresent investors

For every dollar investedAlliant creates more valuefor present shareholders


Butdonotbenefitnewshareholders(pricing)

Stocks are priced so thatthose providing new capitalto either company expect toearn about the same return.


Incentiveexample

Can we provide an incentive to invest in the two-way flow project?

Here the project with the larger scalewill create more value per-share for investors.


Returnonequitycansometimesdrivetheresult

Now the project with the higher returnwill create more value per-share for investors.

Yes, if we set thereturn high enough.


Butnotalways

10.5% $14,000,000

Now the project with the lower returnwill create more value per-share for investors

(scale again dominates).

But not any higher return will do the trick.


Don’tconfusetheshareholdergroups

10.5% $14,000,000

New shareholdersprovide all of this

capital

Present shareholderscapture the valuegain as a windfall

New shareholdersearn the cost of equity based on

what they paid for the stock


Thecurrentstockpriceimpoundsfuturevalue

Notethatanopportunitytoinvestinaprojectofferingmorethanthecostofcapitalgeneratesanimmediatecapitalgainforinvestors.Thisisawindfallgain,sinceitisrealizedexante.Myers,S.1972.TheApplicationofFinanceTheorytoPublicUtilityRateCases.TheBellJournalofEconomicsandManagementScience.


Incentivesforgridmodernization?

It’s all about the details.There are no general answers.


Dotheseregulatorypoliciescreateanincentivetomodernizethegrid?

• Differentratesofreturnandcostsofcapitalfordifferentutilityassets(itdependsonr,k,andI)

• De-riskingcertainresourcetypes(itdependsonr,k,andI)

• Providingratebasetreatmentforcertainexpenseitems(itdependsonr,k,andI)

• Formularates(itdependsonr,k,andI)• Pricecaps(itdependsonr,k,andI)• Earningssharingmechanisms(itdependsonr,k,andI)


Contactinformation

Steve KihmPrincipal and Chief Economist

[email protected]

608-210-7131





InstitutionalPerspectiveTheRoleofIncentivesinPublicUtilityRegulation

JaniceA.Beecher,Ph.D.,DirectorInstituteofPublicUtilitiesMichiganStateUniversity

May31,2017

35

Thesis


• Inthecontextofgridmodernization,thereisastrongimpulsetodaytoprovideutilitieswithpositiveincentivesundera“newparadigm”

• Allregulationisincentiveregulation– thedichotomybetween“traditional”and“incentive”regulationis(mostly)false

• Thetraditionaleconomicregulatoryframeworkcanaccommodatenewutilitybusinessmodelsandpricing

• Theuseofincentivesraisesissuesofwealthtransferandactivismthattakeeconomicregulationbeyonditsremit

• Whatmaybeneededtodayisnotanewparadigmbutanewprudence– andprudenceearnsfairbutnotextraordinaryreturns

• Thisisnotadefenseofthestatusquoforeitherinfrastructureorregulation

Factorsaffectingutilityperformance

Endogenous forces

Operations

Management

Shareholders

Economic regulation

Standards

Incentives

Accountability

Exogenousforces

Environmental

Economic & technological

Political & policy


• Guidingparadigmforregulationcentersontheconstructofasocialcompact– Howthecompactisviewedisamatterofperspective– Theviewtakenhereisfromtheperspectiveoftheempoweredstate– Independenceoftheregulatorasanarmofthestateispresumed

• Compactisaliving andevolvingcharterbetweentheinstitutionalstateandtheregulatedpublicutility

• Underthecompact,regulationprovidesaconditionalproxyforcompetition– Regulationimposesdisciplinetopromoteeconomicefficiencyand

“economicequity”– Regulatorsalsoconsider“legalequity”(justandreasonablestandard)– Otherinstitutionsarelargelyresponsiblefor“socialequity,”including

environmentalanddistributivejustice• Compactdoesnotguaranteeinvestmentopportunitiesorreturns,shield

themfromloss,orensuretheirsurvivalinperpetuity

Theregulatorycompact


Threerisk-basedincentivetoolsusedbyregulators

Incentive returns:for innovation

(active and used sparingly)

Prudence reviews:for efficiency

(reactive and used selectively)

Regulatory lag: for cost control(passive and used on an ongoing basis)


Incentivesundertraditionalregulation

Inves

tmen

t

Performance

Cost

contr

ol

Efficie

ncy

Innov

ation

Return on investment Premium embedded in the fair return to promote infrastructure investment

✓

Financial accounting and reporting

Transparency in capital and operating expenditures and performance

✓

Cost recovery Disallowance of imprudent capital or operating expenditures

✓

Regulatory lag Time period between cost incurrence and an authorized rate adjustment

✓

Prudence reviews Sound managerial decisions based on knowable information

✓

Financial audits Detailed review of general or project-specific financial indicators

✓

Management audits Detailed review of general or project-specific management practices

✓ ✓

Price freezes or caps Extension of regulatory lag to a multiyear rate period

✓ ✓

Certificate of public convenience

Review of planned capital expenditure to ensure its necessity

✓ ✓

Integrated resource planning Balanced consideration of supply-side and demand-side management options

✓ ✓

Performance standards Specified terms of service to ensure acceptable performance

✓ ✓

Incentive returns

Bonus above fair return tied to performance to promote innovation

✓


Regulatorylag:potentialtrendsbetweenratecases


• Mucheffortisdevotedtoreducingregulatorylag– butnotalllagisregulatory• Utilitiesmaylaginstrategicmanagement

– Forecastingcostsandsalesrevenues– Accountingforpriceelasticities andotherfactorsinrateproposals– Makingtimely,complete,andconvincingregulatoryfilings

Efficiencytrendbetweenrateadjustments

Increasingoperationalefficiency

Decreasingoperationalefficiency

Costandsalestrendsbetweenrateadjustments

Fallingcostsand/orrisingsales

Achievingreturnsislikely

Achievingreturnsispossible

Risingcostsand/orfallingsales

Achievingreturnsispossible

Achievingreturnsisunlikely

Incentivesundertraditionalregulation:parsingregulatoryfactandfiction

• Incentivesthatfavorcapitalexpenditures– Thespendingpropensity

• Incentivesthatfavorratebasetreatment– Thetechnologyneutralityissue

• Incentivesthatfavorsellingoutput– Thethroughputmotive

• Incentivesthatfavorhighfixedcharges– Therate-designdilemma

• Incentivesthatfavorcentralizedtechnologies– Theprosumerproblem

• Incentivesthatfavorthestatusquo– Theinnovationchallenge


Incentivesaswealthtransfer


• Incentivescanalsobeunderstoodassubsidiesthattransferwealth– Long-standingcritiqueofeconomicregulation

• Subsidiessupportedbyutilityratesarearegressiveformoftaxation– Low-incomehouseholdsaredisproportionatelyaffected

• Directionofsubsidizationmatters– Subsidiesforincentivesintendedtochangethebehaviorofutilities,their

investors,ortheirratepayersaredistinctfromthosetoadvancethegoalsofuniversalservice

Incentivesandactivism

• Economicregulationisoneofmanypolicydomainsaffectingutilities• Regulatorsareincreasinglyaskedtoactbeyondtheirremit

– Inparticular,thereissomepressuretomergeeconomicandenvironmentalroles

• Rationaleforregulatoryactivisminthecontemporarycontextoftencenterson:– Thepotentiallydireconsequencesofexternalities– Thelaxnessofotherinstitutionsinaddressingthem

• Taxpayersshouldbearthecostsandrisksofpoliciesthatbenefitsociety– Includingpositiveandnegativeexternalities– socializationofcosts– Electrificationofthefleetandvehiclechargingprovidesacasestudy

• Regulationcanbeunderstoodasaconstrainedoptimizationproblem– Thejoboftheeconomicregulatoristo“getusthereprudently”– Regulatorsshouldbeactivewithintheirpolicydomainandcommunicate

withothers


Anewparadigmoranewprudence?

• Newbusinessandpricingmodelsdonotconstituteanewregulatoryparadigm• Regulatorsmayneedanewandobligatoryprudence

– Basedonenforceablestandardsandgenerallyacceptedpractices– Bothcanbestrengthenedinlightoftechnologicaladvancesandopportunities

aswellasdynamicsupplyanddemandconditions• Legalstandardforprudencebasedon“knownandknowable”remainscore

– Variousregulatorytoolscanbeusedtoenforceprudencewithintheparadigm– Certificatesofneeddonotensureprudenceorcostrecovery

• Prudencetodayisnotjustaboutefficiencybutaboutoptimizationunderdynamicsupplyanddemandconditions,facilitatedbynewtools– Toolsforenhancingutilityperformance– Toolsforenhancingregulatoryenforcement

• Burdenofproofremainsontheutility– Ifnot,whynot?– Utilitiesmustmakethecase– notvendorsorotherstakeholders


Anewprudence:toolsforenhancingutilityperformance


managementplanning

capitalcontrol

adaptive analysis asset bidding competitive comprehensive

construction contingency cyber decision design development

digital diversification dynamic ecological engagement firm forecasting gis imaging

infrastructure integrated intelligence load

mapping market modeling

modular operating options outreach portfolio

pricing resilient resource rs scada security services spatial storage supply-chain systems

technologies threats

Anewprudence:toolsforenhancingregulatoryenforcement


rules

empiricalimprovement

management metricsperformanceplans

service

analysis audits benchmarking bonuses codes comparative compensation compliance

comprehensive contracts cost design development education

evaluation franchising

informed interconnection interoperability

investor market

model monitoring penalties

prevention procedures process productivity professional programs protection providers

rate satisfaction sizing standards

statistical systems targets technical technological uniform

• Incentive-orientedregulationshouldbepurposeful,targeted,andconsistentwithpolicymandatesandmeasurableperformancecriteria

• Theuseofincentivesshouldbelimitedintimeandscope,withtheultimategoaloflettingmarketforcesandpricesworkassoonaspractical

• Incentivemechanismsshouldbesymmetrical,presentingthepotentialforbothupside(rewards)anddownside(penalties)consequences

• Incentivesshouldbecloselymonitoredandrigorouslyevaluatedintermsofintendedandunintendedconsequencesaswellasinteractiveeffects

• Evaluationmethodsshoulddisentangletheeffectsofincentivesfromotherendogenousorexogenousfactorsaffectingutilityperformance

• Theregressiveimpactsofrate-supportedincentivesshouldbeconsidered,aswellastaxpayersubsidiesorcorrectiveratedesign,toprotectdisadvantagedhouseholds

Incentivedesignprinciples


Conceptualframeworkforconsideringincentives


Concludingobservations


• Therushtoreplacetheparadigmmaybeafunctionofinstitutionalmemoryloss• Regulatorshavealsolostindependenceandtechnicalcapacity(preemption)• Failureoftheparadigmmaybelessafailureoftheorythanofimplementation• Utilitieshavebecomerisk-averseandpolicymakershavebecomeconflict-averse• Utilitiestodaymightactuallyfacenottoomuchrisk,buttoolittlerisk• Realincentiveproblemmightactuallyberegulation’sgreatlymodifiedform• AnewlydesignedsystemtomotivatemodernizationmightlookalotlikeRBROR• Gridmodernizationcombinedwithregulationprovidespowerfulincentives• Regulatoryprocessescanbeimprovedandnewcapacitiesmaybeneeded• Ifregulationnolongerservesthepublicinterest,itsinstitutionaltimemaybeup

SeeAppendixatendofthisslidedeck




PublicPolicyPerspective:RegulatoryIncentivestoSupportGridModernization

RonaldL.LehrMay31,2017

CostofServiceRegulationUnlikelytoCaptureGridModernizationBenefits

• Utilityfinancialincentivesmisalignedwithpublicpolicies– Equityearningincentivesforcapitalinvestments

oCAPEXincentivesnottargetedforgridmod– Incentiveslackingforexpensesthatsupportoperatingchanges,consumerengagement

– Innovation,R&D+D&DnotfocusedoninCOSR– Relianceonlitigatedcaseprocesses

o Lackofconsensus,poorcommunicationsandrelationships


Incentives,Disincentives,andJudgmentCalls

• Financialincentives– Efficiencyincentives– Couldsomeoftheseapproachesbemodifiedto

supportgridmodernization?

• Financialdisincentives– Imprudenceanddisallowances– Regulatoryrisks

• Monopolyincentives• Monopsonyincentives• Incentivesinratemaking• Judgmentcallsinaccountingandallocations

– Jointcostofproduction problem


PlanningandPerformanceRegulation

• Planningtoidentifyopportunities,managerisks,R&D, D&D

• Providesinformationfordecisionmakers• Buildsconsensustohelpmanageregulatoryrisks

• Performancestandards• “Werecorrectamountspaidforwhatwegot?”• “Whatdowewantandhowdowepayforthat?”


Formal,InformalDueProcess

• Fiveelementsinadministrativedueprocess– Notice,hearing,record,fairdecisionmaker,appeal

• Litigatedcaseprocedures— quasijudicial– Findfactsbasedonexpertwitnesstestimony– Drivestoextremes,informationimbalance

• Quasilegislativeprocedures— noticeiskey– Rulemaking,policiesforfutureapplication– Policydialogue,informationmeetings– Driveforconsensus,buildsharedbenefits


PublicandPrivateDecisionMakers

• Publicapprovals— recordevidence

• Privatedecisions— investment“duediligence”

• Decisionmakers’inquiry:questionsuntilreadytovote“yes”or“no”

• Whatquestionsdodecisionmakersneedtoaskaboutgridmodernization?


Contact

[email protected]


Questions?

?Please use the chat box to send us your questions and comments. You may want to direct your question to a specific author.



AppendixforBeecher’spresentationAppendixforJaniceBeecher’spresentation


Incentivesthatfavorcapitalexpenditures–thespendingpropensity

• GiventhestrongincentivesforcapitalinvestmentundertheRBRORmodel,theinsinuationthatitmaystandinthewayofgridmodernizationseemsabitdisingenuous

• Threespendingpropensities– Capitalinvestmentgenerally– Averch-Johnsoneffect(capex overopex)– Temptationtogoldplate


Deathspiral?Industryfinancesandinvestment(EEIdata)


Incentivesthatfavorratebasetreatment

• Ratebasetreatmentisasolutioninsearchofallproblems• Generallyacceptedaccountingprinciples(GAAP)aresometimesseen

asabarrier– butregulatoryaccountingsupersedesGAAP• Cloudcomputingprovidesacasestudy

– NARUCresolution(2016)maintainsaprudentinvestmenttest– “Regardlessofhowcloudcomputingistreatedforregulatory

accountingpurposes,regulatorswillstillexaminewhethertheinvestmentisprudent…”


Incentivesthatfavorsellingoutput

• Isthereathroughputincentive?– Utilitiesenjoyhighersalesbutcandolittletoeffectthembutunderprice– Betweencases,theywillfocusmoreonwhattheycancontrol– costs

• Decouplingismeantto“neutralize”thethroughputincentive– Largelyreactiveandcompensatory– utilitiesarenot“revenue

maximizers”– Shieldsutilitiesfromtheeffectsofvariouschanges– includingchanging

consumerpreferencesandeconomicconditions– Asacounterpoint,waterusagehasfallendramaticallylargelywithout

decoupling• Theoreticalissues

– Disconnectingoutputfromprices– Economistscritiqueofrevenuecaps– Overwhelmedbyinvestmentincentive(r>k)


Incentivesthatfavorhighfixedcharges

Recovering more costs from fixed charges

(static world view)

Recovering more costs from variable charges

(dynamic world view)Enhances revenue stability

(less sales revenue risk)Reduces revenue stability(more sales revenue risk)

Weakens price signals and customer control

(less resource efficiency)

Strengthens price signals and customer control

(more resource efficiency)Less affordable for low-income

households (more regressive)

More affordable for low-income households

(less regressive)Encourages self supply and grid

defection(higher total cost)

Preserves grid supply and participation

(lower total cost)Possible advantage for combined

households (one customer charge)Possible stability from first blocks

(relatively inelastic usage)


Incentivesthatfavorcentralizedtechnologies

• Assumptionsaboutscalearechanging– Prosumerism appearstobeontherise– Otherdemographictrendsmaycontradict

• Utilitypricingmustconsiderbothefficiencyandequityfordifferentcustomers– Interclassandintraclass– Programparticipantsandnonparticipants

• Alternativemethodsofratedesigncanbeaccommodatedbythetraditionalparadigm

• Netmeteringprovidesacasestudy


• Innovationhasalwaysbeenachallengeforpublicutilities– Innovationisnotnecessarilyincompatible

withgrids,monopoly,orregulation– Utilitieswillbenefitfrominnovationthat

reducescostsbetweencases– Modernizationwillinvolveinvestmentin

innovativetechnologies• Modernutilitiesareoptimizersunderdynamic

supplyanddemandconditions• NewYork’sREVandUK’sRIIOascasestudies

Incentivesthatfavorthestatusquo


Anewprudence:toolsforenhancingutilityperformance

• Real-timedigitalintelligence&communicationplatforms,big-datastorage,analytics• Decisionsupport(e.g.,construction,supply-chain,project,andriskmanagement)• Comprehensiveandintegratedresourceplanningandportfoliodiversification• Capitalassetandecologicalplanning,management,andcontrolsystems• Contingencyplanningandsecurityprotocolsforphysicalandcyberthreats• Optimizationmodelingforcapitalandoperatingoptions• Dynamicloadandcongestionmanagementtechnologiesandcontrols• Spatialimaging,mapping,forecasting,andanalysis(e.g.,RS,GIS,andSCADA)• Marketmechanisms(e.g.,competitivebiddingandtime-variantpricing)• Consumerinformation,services,outreach,andengagement• Researchanddevelopmentandpilotstudies(firmandindustry)• Flexible,adaptive,modular,andresilientinfrastructuredesign

• Uniformtechnicalstandards,codes,andrules(e.g.,franchising,siting,sizing,interconnection,interoperability,andsoon)

• Statisticalbenchmarkingandcomparativecompetitionwithmetricsandtargets• Certificationofalternativeserviceprovidersandmodelcontracts• Informedandconsistentrulesforcostandriskallocationandratedesign• Technological,structural,andmarketneutralityinplanningandapproval• Empiricalanalysisofproductivityandotherperformancemetrics• Outcome-basedcompensationmechanisms(e.g.,managementorinvestorbonuses)• Comprehensiveempiricalevaluationofprograms,services,andcustomersatisfaction• Managementandperformanceauditsandimprovementplans• Transparentanddata-drivencompliancemonitoringandreportingsystems• Consumerprotectionrules,procedures,andpenalties(e.g.,fraudprevention)• Processimprovement,organizationaldevelopment,research,professionaleducation

Anewprudence:toolsforenhancingregulatoryenforcement

ForMoreInformationontheSeries

LisaSchwartzElectricityMarketsandPolicyGroup

LawrenceBerkeleyNationalLaboratory(510)486-6315

[email protected]

Join BerkeleyLab’sElectricityMarketsandPolicyGroupmailinglist(https://emp.lbl.gov/mailing-list) andstayuptodateonourpublications,webinarsandotherevents.FollowtheElectricity

Markets&PolicyGrouponTwitter@BerkeleyLabEMP


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FEUR #8 Webinar Utility Incentives for Grid Modernization ... · •Webinar housekeeping items ... master’s degrees in financial economics and quantitative methods from the University