RateDesignforaDistributedGridRecommendationsforElectricRateDesignintheEraofDistributedGeneration

TechNet,SierraClub,SEIA,VoteSolar,TheAllianceforSolarChoice,CalSEIA,SolarCity

July21,2016

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1. ExecutiveSummary

Inresponsetothegrowingpopularityofrooftopsolarandotherdistributedenergyresources(DERs),1someelectricutilitieshaverecentlybegunseekingratemakingchangesthatwoulddiscouragecustomersfromgeneratingtheirownpowerandotherwisebuyinglesselectricityfromtheirutility.Thesechanges–whichincludehigherfixedchargesandreducedcompensationforexportedenergy–arejustifiedbyapurportedconcernaboutcostsbeingshiftedamongcustomersofthesamerateclass.

Theutilities’ratemakingideasareoftenexpressedbytheEdisonElectricInstitute(EEI),mostrecentlyinaratedesign“Primer”senttotheNationalAssociationofRegulatoryUtilityCommissions(NARUC).2Inthatdocument,EEImakesthreefundamentallyincorrectassumptionsaboutratedesign:(1)thataverylargeproportionofautility’scostsshouldbeconsidered“fixed”costs;(2)thatdistributedgenerationandconservationdonotsubstantiallyreducethose“fixed”costsorprovideotherbenefitsbeyondavoidingtheshort-runenergycost;and(3)thatratesbasedonvolumetricenergyusageandnetmeteringinvariablycausecoststobeshiftedfromlow-usagecustomersandthosewhoself-generatetohigh-usageones.

ThispaperrespondstoEEIfirstbyexaminingtheallegationthatrooftopsolarshiftscostsontootherutilitycustomers.Wepointoutthattheassumptionofacross-subsidyrestslargelyonthepremisethatself-generationprovidesnobenefittotheutilityanditsratepayersotherthanreducingtheshort-runcosttobuyorgeneratepower.Tothecontrary,weshowthatrooftopsolarprovidesawiderangeofbenefits,includingavoidedgeneration,transmissionanddistributioncapacity,lowerwholesalemarketprices,reducedvolatility,andavoidedpollution.

Infact,whenthefullrangeofavoidedcostsandotherbenefitsisconsideredinacompletecost-benefitanalysis,solarnetenergymetering(NEM)–whichprovidesretailcreditforsolarenergyexportedtothegrid–hasbeenshowntoconveynetbenefitstonon-participatingratepayers.Arecentmeta-analysisofnetmeteringcost-benefitstudiesbytheBrookingsInstitutionconcludedthat“netmeteringismoreoftenthannotanetbenefittothegridandallratepayers.”

Next,weoffersomeratedesignprinciplesaimedatachievingbroadratepayerandsocietalbenefits.Goodratedesignempowerscustomerstocontroltheirenergycoststhroughconservationandadoptionofemergingtechnologieswhilesendingpricesignalsthatefficientlyallocatecapitalinvestment,whichcanlowercostsforallratepayers.Ratesshouldnotbedesignedsimplytoprotectutilitiesfromcompetition,andcustomersareentitledtouniversalservice,usage-basedpricing,andfaircompensationforenergyexports.

Finally,weofferaseriesofreformsthatthatcouldbetterintegrateDERsintotheelectricgridandmaximizetheirvaluetoratepayers.Inparticular,DERsshouldbeincludedinlong-termresource

1“DistributedEnergyResources”includerooftopsolar,energyefficiency,demandresponse,smartinverters,batterystorage,controllableelectricloadsandotherenergyresourceslocatedbehindthecustomermeter.2“PrimeronRateDesignforResidentialDistributedGeneration,”EdisonElectricInstitute,February14,2016.http://www.puc.state.pa.us/pcdocs/1423623.pdf

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planningsothatutilitiesarenotbuildingnewinfrastructure,suchaspowerplantsandtransmissionlinesthatcouldbereplacedbyDERsatlowercost.IntandemwithincorporatingDERsintoutilityplanning,regulatorsshouldconsiderchangestotheutilitybusinessmodel–includingrevenuedecouplingandnewratemakingmechanisms–thatwouldmitigatetheutility’sfinancialincentivetochooserate-basedcapitalexpensesovercustomer-ownedresourcesasameanstosatisfyinfrastructureneeds.

Weconcludethispaperbyofferingthefollowingrecommendations:

Ø Studytheimpactofdistributedresourcesbyconductingarigorousanalysisofthecostsandbenefits

Ø Designelectricityratesthatempowercustomerstocontrolenergycostsandadoptnewtechnologiesthatprovidesystembenefits

Ø Implementtechnologystandardstograduallyincreasethefunctionalityandbenefitsofdistributedresources

Ø Incorporatedistributedresourcesintoutilityplanninginordertodeferorreplacetraditionalinfrastructure

Ø Updateutilitybusinessmodelssothatutilitieshavegreaterfinancialincentivetorelyuponcustomer-siteddistributedresourcestomeetinfrastructureneeds

Ø Implementratechangesgraduallyandincrementally,withgrandfatheringforcustomerswhomadelong-termcapitalinvestmentsonthebasisofpreviouslyexistingrates

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2. BehindthePremiseofCost-Shifting

2.1. EEILargelyIgnorestheAvoidedCostsResultingfromDERDeployment

EEI’sargumentsaboutratedesignrestonthefalsepremisethatsolarNEMcustomers“shiftcosts”ontonon-NEMcustomersbecauseNEMcausestheutilitytoloserevenueinexcessofthecostsavingsresultingfromrooftopsolar.Thisconstructoverlooksthenumerouswaysinwhichsolarandotherdistributedresourcesmaketheelectricsystemlessexpensiveinthelongrun.

Forexample,whileEEIassertsthatasmuchas70%ofautility’scostsshouldbeconsidered“fixed,”3utilitiesoftendefine“fixedcosts”veryloosely,includingshareholderreturn,incometaxes,labor,transmissionanddistributioncosts,andsometimesevensomegeneration-relatedcosts.4Viewedoverthepropertimespan,manyoftheseinfrastructurecostsshouldbeconsideredvariablecosts–andindeedareamongthekindsofcoststhatinvestmentinDERscanavoid.

Thus,EEImistakenlyassumesthatreducingenergyconsumptionthoughconservationorself-generationsavesutilitiesonlytheshort-runwholesale“energy”portionoftheircosts,andnotthecapacityorfixedinfrastructurecosts.Suchaviewpointpresentsanincompletepicturebyfocusingsolelyonshort-runavoidedenergycostandignoringlong-runavoidedcosts.

ContrarytotheopinionspresentedintheEEImemo,inthelongrun,DERscanavoidawiderangeoffixedinfrastructurecosts,includinggenerationcapacity,distributioncapacityandtransmissioncapacitywhileimprovingpowerqualityandreliability.Althoughutilitieshaveafinancialinterestinhavingregulatorsbelievethattheseinfrastructurecostsare“fixed”–sincetheirprofitsaretiedtothoseinvestments–thereisnodoubtthatmanyinfrastructurecostsareindeedavoidableoverthelongtermthroughdistributedsolarandotherDERinvestments.

First,byreducingpeakdemand,rooftopsolarandotherDERsreduceexpensiveenergyandcapacityneeds.Whileitispossibletoreachapointwhereadditionalsolarnolongeraffectspeakdemand–ifthatdemandshiftstopost-solarhours–theexperienceinHawaiiatleastthrough2014wasthatsolarandefficiencyreducedpeakdemands,asshowninFigure1.5

3SeeEEIPrimeronRateDesign,http://www.puc.state.pa.us/pcdocs/1423623.pdf4SeeLazaretal,SmartRateDesignforaSmartFuture,http://www.raponline.org/document/download/id/7680.5HawaiianElectricPowerSupplyImprovementPlan,2014.

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Figure1:OahuSystemLoadProfiles,2006-2014

Inaddition,distributedresourceslikerooftopsolarreducetheneedfortransmissioncapacity–inspiteofargumentsmadebyutilitiestothecontrary.Forinstance,initsmostrecenttransmissionplanattheCaliforniaIndependentSystemOperator(CAISO),PacificGasandElectricCompany(PG&E)recentlycancellednearly$200millionofplannedtransmissioninvestmentsduetolower-than-expectedloadgrowthresultingfromrooftopsolarandenergyefficiency.6DespitecreditingrooftopsolarwithavoidingtheneedtomakethesemajortransmissioninvestmentsinstatementstoCAISO,PG&EclaimedthatrooftopsolarhaszeropotentialtoavoidtransmissioncostsinseparatefilingsrelatedtonetmeteringattheCaliforniaPublicUtilitiesCommission(CPUC).7Beyondreducingpeakdemandandavoidingcostlytransmissioninvestments,rooftopsolarandotherDERsprovidedirectfinancialbenefitstoutilityratepayersinotherwaysthatarenotcapturedbytheEEIframework.Forexample,becauseithaszerooperatingcost,rooftopsolarreducestheclearingpricesinwholesaleenergyandcapacitymarkets.Infact,theeasternregionaltransmissionorganizations(RTOs)nowaccountforthepresenceofdistributedsolarincalculatingtheRTOs’forwardcapacityneeds,reducingcapacityprocurementcosts.ArecentanalysisbyICFInternationalfoundthatrooftopsolarwillsavecustomersinthethreeeasternRTOs$2billionincapacitycostsin2019.8Furthermore,solarandotherDERsprovidesavingsbyreducingthecostofhedgingvolatilefossilfuelprices.AsEdisonInternationalChairmanTheodoreCraverJr.putitduringarecentEdisonearningscall:“[S]incerenewableshavenofuelcost,customerratesareincreasinglylessexposedtofuturenaturalgaspricespikes.Allofthishelpstokeepourrateincreasesmodestandelectricityaffordable…”9

6“Cal-ISOBoardApprovesAnnualTransmissionPlan.”CaliforniaEnergyMarkets,April1,2016.7PG&E,“CommentsonPartyProposalsandStaffPapers”filedinR.14-07-002,Sept.1,20158http://www.seia.org/blog/dothemath-how-rooftop-solar-will-save-us-billions.9“EdisonEarningDrop,butUtilityHasRosyOutlook.”CaliforniaEnergyMarkets,May13,2016.

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Thus,toclaima“cost-shift”bycomparingtheretailvalueofNEMcreditswiththewholesaleenergyrate,asEEIattemptstodo,istooversimplifytheaccountingofcostsandbenefitsinawaythatisself-servingtotheutilities’interests.Whenthefullsuiteofavoidedcostsofdistributedsolarareproperlyaccountedfor,rooftopsolaroftenprovidesanetbenefittonon-participatingratepayers,evenunderfullretailNEM.

2.2. Studiesshowthatbenefitsofrooftopsolarexceedcoststoratepayers

Whendeterminingtheeffectofapolicyonratepayers,itisimportanttoconsiderallofthecostsandallofthebenefitsofthatpolicyoverasufficientlylongtimehorizon.Fordecades,regulatorshavepromotedconservationprogramsthatmightincreasecostsfornon-participatingratepayersintheshortrunbutreducetotalsystemcostsinthelong-run.Suchpolicieshavegenerallybeenconsideredtobenefitratepayersasawhole,inlargepartduetothesesystem-widecostreductionbenefitsandtheeliminationofrate-increasingcapitaladditionstoserveloadgrowth.10

Thus,inordertodeterminewhethernetmeteredrooftopsolarimposesnetcostsorbenefitstonon-participatingratepayers,itisnecessarytoconductacomprehensivestudyofcostsandbenefits,includingeffectsthatmaybehardtoquantify,suchasthoseconcerningwholesalemarketpricesandvolatility.Suchstudieshavebeenconductedbythefederalandstategovernments,non-profitorganizationsandprivatefirmsacrossanumberofdifferentstatesoverthepastseveralyears.

Thesestudies,whicharecollectedontheSEIAwebsite,11showthatinmostcases,thebenefitsofrooftopsolarexceedthecoststonon-participatingratepayers.Inarecentmeta-analysisconductedin2015,EnvironmentAmericafoundthateightanalysesoutof11concludedthatthevalueofsolarenergywasworthmorethantheaverageresidentialretailelectricityrateintheareaatthetimetheanalysiswasconducted.Thethreeanalysesthatfounddifferentresultswereallcommissionedbyutilities.

Furthermore,arecentreportbythenon-partisanBrookingsInstitutionanalyzingallofthemajorcost-effectivenessstudiestodatefoundthatnetmeteringprovidesanetbenefittoratepayers.Thepaperfindsthat:“Inshort,whiletheconclusionsvary,asignificantbodyofcost-benefitresearchconductedbyPUCs,consultants,andresearchorganizationsprovidessubstantialevidencethatnetmeteringismoreoftenthannotanetbenefittothegridandallratepayers.”12

Forthisreason,itisimportantforpolicymakerstolookbeyondthesimplisticframeworkpresentedbyEEIthatcomparesthewholesaleenergypricetotheretailelectricrate.Afullaccountingofthecostsandbenefitsofnetmeteringacrossallcustomerclassesshouldbeundertakenforanyparticularstateorregionbeforeadeterminationismadethatchangesarewarrantedtorectifyunfaircost-shiftingbetweencustomerswithinaclassofratepayers.

10AriPeskoe,“Unjust,UnreasonableandUndulyDiscriminatory:ElectricUtilityRatesandtheCampaignagainstRooftopSolar.”February1,2016.TheTexasJournalofOil,GasandEnergyLaw,2016,Forthcoming.11http://www.seia.org/policy/distributed-solar/solar-cost-benefit-studies12TheBrookingsInstitute:“Rooftopsolar:Netmeteringisanetbenefit,”byMarkMuroandDevanshreeSaha.May23,2016.http://www.brookings.edu/research/papers/2016/05/23-rooftop-solar-net-metering-muro-saha

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2.3. Concernforcross-subsidiesasredherringtostiflecustomerchoice

Inarecentpaperentitled,“Unjust,UnreasonableandUndulyDiscriminatory–ElectricUtilityRatesandtheCampaignAgainstRooftopSolar,”AriPeskoeoftheHarvardEnvironmentalpolicyinitiativeexaminestheutilities’argumentsforratechangesinresponsetorooftopsolar.Inthepaper,Peskoeobservesthat“[Investorownedutilities]havelaunchedanationwidecampaignagainstcrosssubsidies,inthenameofconsumerprotection,”claimingthat“failuretoadopttheirratedesignproposalswouldallowsubsidiesbetweencustomers”andproposingratestructuresthatwould“substantiallyreducecustomers’incentivestogeneratetheirownelectricityorbuylessfromtheIOU.”13

AsPeskoepointsout,however,anumberofstudieshavefoundthat“netmetering’seffectonratesisminimalorthatdecentralizedPVaddssufficientvaluetothesystemtojustifyacompensationmechanismthatdoesnotfocusexclusivelyonutilitycosts.”Peskoeconcludesthatintra-classcrosssubsidiesareanintentionaldistractionandthatunduediscriminationagainstcompetitionshouldbethefocus.“SeveralstatecourtshaveheldthatPUCsshouldalignratedesignwithutilitycosts,butratedesignneednotbelimitedtomatchingrateswithcosts,”saysPeskoe.Furthermore,thepaperstates“theultimatepurposeofregulationistoprotectconsumers,nottheIOU.”

Indeed,theregulatedutilityhasenjoyedacenturyofrelativefreedomfromcompetitiontoservesmall-useresidentialandcommercialcustomers.Monopolyregulationwascreatedinthe19thcenturytoprotectrailroadcustomersfromdiscriminatorypricing,14andtheregulatoryframeworkhashistoricallyservedtoprotectcustomersfrommonopolyabuse.Regulationshouldenforcepricingdisciplineondistributionmonopolies,notstiflecustomers’desiretoinvestininnovativetechnologiesthatwillbothlowertheirbillsandlowersystemcosts,whilecontributingtothecreationofamodern,clean,andreliablegrid.Inweighingpotentialratechanges,regulatorsshouldconsiderthepotentialbenefitscompetitiveenergyproviderscouldbringtothesectorthroughcompetitionandinnovation,andshouldbemindfulofthecustomers’desiretochoosetechnologiesthatallowthemtomanageenergycosts.

3. RateDesignShouldEmpowerCustomers

Bypointingtoasupposedmismatchbetweenthefixedcomponentofutilitycostsandrates,EEIinitsratedesignPrimerimpliesthat“cost-shifting”couldorshouldbeaddressedbyincreasingthefixedcomponentofrates.Thisviewiscontradicted,however,byEEI’sownfinanceexpert,PeterKind,whoinitiallypointedoutthechallengesposedtoutilitiesbyDERs15andmorerecentlyauthoredapaperongridmodernizationthatarguesagainstfixedcharges.Kindwrites:

“Adoptingmeaningfulmonthlyfixedordemandchargessystem-widestillreducefinancialriskforutilityrevenuecollectionsfortheimmediatefuture,butthis

13Peskoe,p.1614Munnv.Illinois,94U.S.113187715PeterKind,“DisruptiveChallenges:FinancialImplicationsandStrategicResponsestoaChangingRetailElectricBusiness,”EdisonElectricInstitute.January2013.

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approachhasseveralflawsthatneedtobeconsideredwhenassessingalternatives.Fixedcharges:

Ø donotpromoteefficiencyofenergyresourcedemandandcapitalinvestment

Ø reducecustomercontroloverenergycostsØ haveanegativeimpactonlow-orfixed-incomecustomers;andØ impactallcustomerswhenselectcustomersadoptDERsandpotentiallyexit

thesystemaltogether,ifhighfixedchargesareapprovedandtheutility’scostofserviceincreases”16

Kindgoesontosaythat“itisclearfromtherecentregulatoryactionsreconfirmingsupportforDERsandnetenergymeteringthatpolicymakersareinterestedinDERdevelopmentandcustomerswanttheoptiontochoosetheirownenergysupply.”

Inaddition,stateregulatorycommissionshavehistoricallyrejectedthenotionthatthecostsofmaintainingtheutility’sdistributionsystemshouldbeincludedinthemarginalcostsattributabletoindividualcustomersforratemakingpurposes.AstheWashingtonUtilitiesandTransportationCommissionstatedina1989decision,includingthecostsofa“minimum-sized”distributionsystemincustomer-relatedcostswould“leadtothedoubleallocationofcoststoresidentialcustomersandover-allocationofcoststolow-usecustomers.”TheCommissionconcluded:“Costssuchasmeterreading,billing,thecostofmetersandservicedrops,areproperlyattributabletothemarginalcostofservingasinglecustomer.Thecostofaminimumsizeddistributionsystemisnot.”17

Indeed,manyeconomistssharetheviewoftheWashingtonCommissionthatonlythecustomer-specificmeteringandbillingcostsshouldbeconsideredtrulyfixedandthusrecoveredthroughfixedcharges.“[T]hemereexistenceofsystem-widefixedcostsdoesn’tjustifyfixedcharges,”saysUniversityofCaliforniaProfessorSeverinBorenstein.“Weshouldusefixedchargestocovercustomer-specificfixedcosts.”18

Althoughthispaperdoesnotrecommendaparticularratedesignorstructure,ratesthatempowercustomerstocontroltheirenergycostsandadoptnewtechnologieswhilesendingpricesignalsthatreducesystemcostscanprovidebenefitstoallratepayers.Forexample,inCalifornia,time-of-use(TOU)rateshavebeenadoptedasafeatureofanewNEMtarifftoincentsolarcustomerstoshiftloadtotimesofpeakdemand.Likewise,PeterKindrecommendsTOUasanimportanttool“inoptimizingsystemcapacityandmoderatingincrementalcapitalinvestmentinelectricenergyinfrastructure.”

16PeterKind,“Pathwaytoa21stCenturyElectricUtility,”Ceres.November2015.17CauseU-89-2688-T,ThirdSupp.Order,P.7118SeeBorenstein,“What’ssoGreataboutFixedCharges?”EnergyInstituteatHaas,November3,2014.https://energyathaas.wordpress.com/2014/11/03/whats-so-great-about-fixed-charges/

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Ontheotherhand,whileEEInotesthatdemandchargeshave“beenwidelyusedintheindustry”andsuggeststheymaybeappliedtoresidentialcustomers,19thereislittleevidencethatdoingsowouldproducebenefits.Unlikeindustrialcustomers,residentialcustomershavediverseloadsthatimposedistributionsystemcostsonlyinaggregate.ArecentpaperbytheRockyMountainInstituteconcluded:“Ourreviewfindsthatthereiscomparativelylittleindustryexperiencewithmass-marketdemandchargesrelativetotime-basedrates,”thereportsaid.“Limitedempiricalevidenceisavailabletoprovideinsightontheefficacyorimpactofdemandchargesonanydesiredoutcomebeyondcostrecovery.”

Inconsideringratedesignprinciples,weencouragecommissionerstoreviewtheRegulatoryAssistanceProject’s2015handbook,“SmartRateDesignforaSmartFuture,”whichincludesthefollowingprinciples:

1. UniversalService:Acustomershouldbeabletoconnecttothegridfornomorethanthecostofconnectingtothegrid.

2. Usage-basedPricing:Customersshouldpayforgridservicesandpowersupplyinproportiontohowmuchtheyusetheseservicesandhowmuchpowertheyconsume.

3. FairCompensation:Customerswhosupplypowertothegridshouldbefairlycompensatedforthefullvalueofthepowertheysupply.

4. UtilityBusinessModelReformisFoundationaltoRateDesign

Unlikeunregulatedindustries,wherecompanieshaveafinancialincentivetoreducefixedcostsinordertomaximizeprofitsinthefaceofcompetition,regulatedutilitieshavetheoppositeincentive:themorefixedinfrastructuretheutilitiesbuild,themoreprofittheirshareholdersearnfromtheirratepayers.This“cost-of-service”ratemakingstructurewaswell-suitedtosolvingthechallengesofanearliertimeintheindustry’shistory,whenitwasimperativeforutilitiestobuildoutinfrastructureandexpandessentialandreliableserviceacrosstheirterritories.

Nowthatuniversalservicehaslargelybeenaccomplished,however,itisclearthatthetraditionalcost-of-serviceratemakingisatoddswithanumberofimportantpolicygoals.Forexample,whilepolicymakersmaywishtoencourageconservationtokeeptotalelectricsystemcostslow,cost-of-serviceratemakingmotivatesutilitiestocontinuouslyseeknewinfrastructureinvestmentsandtocentralizeallenergyinvestmentwithintheutility.ThistypeofperverseincentivecanresultinthetrendshowninFigure2,whereutilityratebasecontinuestoincreaseevenasconsumptionremainsflat.

Inaddition,thetraditionalbusinessmodelmightdolittletoensureothergoals–includingimprovedcustomerservice,reliability,andsafety–aremet.Inlightoftheemergenceofnewtechnologiescapableofreducingenergyconsumptionandprovidinggridservicesonthecustomersideofthemeter,regulatorsnowneedtoconsiderwhetherthetraditionalutilitybusinessmodelshouldbeadjusted.

19SeeEEIPrimerSectionIIa.

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Figure2:TrendsinratebaseforCaliforniainvestor-ownedutilities20

4.1. DERsShouldbeIncludedinLong-TermPlanning

Rooftopsolar,smartinverters,batterystorage,controllableappliances,networkedEVchargers,andotherdistributedenergyresourcesarequicklyformingthebasisofamodern,interconnectedelectricgrid.Theseresourcesnotonlyprovidevaluetotheirowners,buttheyalsohaveenormouspotentialvaluetotheelectricgridiftheyareappropriatelyincorporatedintogridplanningandoperations.

Ratherthanseekingtosuppresscustomers’demandforcustomer-sitedDERsthroughratesthatpurporttoreflectcost-causation,utilitiesshouldincorporatethemintotheirlong-termplanningactivities.Ifcorrectlyplannedforandincentivized,DERscanfilltheneedforbothgenerationanddistributionsysteminvestments,potentiallycreatingsignificantcostsavingsthatcanreduceelectricitysystemcostsforallratepayers.

Moreover,DERsmightbebettersuitedtomeetsomegridneedsthantraditionalutilityinvestments,whichoftenhavethequalityofbeing“lumpy,”meaningasinglelargeinvestmentismadenowtomeetfutureprojectedloadgrowthgoingoutdecades.Iftheloadgrowthdoesnotmaterialize,thatinvestmentcanbecomeastrandedcostbornebyallratepayers.Eveniftheloadgrowthdoesmaterialize,asinglelargeinvestmentmadetodaytomeetaneedthatmaynotarriveforadecadeimposesaninter-generationalsubsidyoncurrentratepayers.

Bycontrast,customer-siteddistributedresourcesare“modular,”meaningtheycanbedeployedgraduallyinverysmallunitsandgeographicallytargetedtomeetneedsastheyarise.Notonlydoesthisreducetheriskofstrandedassets,butitalsoavoidsthelosttime-valueofmoneyassociatedwithlargelumpyinvestments.JustastheVermontPublicServiceBoardestablishesgeographicalemphasisforenergyefficiency,aforward-thinkingregulatormayconsidergeographicalemphasisforotherDERs.

20“ElectricandGasUtilityCostReport:PublicUtilitiesCodeSection747ReporttotheGovernorandLegislature”,CaliforniaPublicUtilitiesCommission,April2015;and“EnergyAlmanac,”CaliforniaEnergyCommission,2005-2014

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IntegratedResourcePlanningactivitiescanbeagoodwayforutilityplannerstoidentifyspecificlocationswheredistributedresourcescandeferplanneddistribution,transmission,andgenerationinvestments.Concernsaboutcost-shiftingcanbegreatlyreducedifutilityregulatorstakeanactiveroleinusingdistributedresourcestoreducetotalsystemcosts.Nevertheless,regulatoryplanningexercisesarelikelynotsufficientalonetoovercometheutility’sinherentbiastowardinfrastructurethatcanbeownedandrate-based.

4.2. RevenueDecouplingCouldbeImplemented

Revenuedecouplingisaratemakingtechniquethathasbeenusedforseveraldecadestopromoteenergyefficiencyandconservationby“disconnecting”electricitysalesfromutilityshareholderprofits.Sofar,15stateshaveimplementedrevenuedecouplingforelectricutilities,andeightmoreareconsideringit.21

Instateswhererevenuedecouplinghasnotbeenimplemented,utilityrevenuethatislostthroughenergyefficiency,conservationorself-generationdirectlyreducesutilityshareholderprofits,andutilitiesinthesestatesaremuchlesslikelytopromotesuchmeasures.Forexample,inNevada,whereelectricdecouplinghasnotbeenimplemented,theincumbentmonopolyutility,NVEnergy,successfullylobbiedthestatePUCtoimplementdraconianchangestonetmeteringthathaveevisceratedthestate’srooftopsolarindustry.22Thus,asafirststeptoaligningtheutilities’profitmotivewithpublicpolicygoalspromotingefficiency,conservationandself-generation,policymakersmayconsiderrevenuedecouplingforutilityratemaking.

4.3. Cost-of-ServiceRatemakingShouldbeRe-Examined

Utilityregulatorshavelongbeenawareoftheutilities’perverseincentivetosellmoreelectricity,whichoftenclasheswiththegoalsofkeepingutilitybillslowandreducingpollution.Inordertobetteralignenergypricingwiththebroadersocietalandratepayergoals,regulatorshavesoughttoimplementpoliciesthatincentcustomerstoconserveenergyandreduceutilities’incentivestosellmorepower.Thesemeasuresincluderevenuedecoupling,volumetricenergypricing,incliningblocktieredrates,utilityenergyefficiencyincentives,andprohibitionsonutilityownershipofgeneration.Allofthesepoliciescanbenefitthepublic,butallruntheriskofadverselyaffectingutilityearningsunlessappropriatechangesareembracedintheregulatoryframework.

TheadventandcommercializationofDERslikerooftopsolar,batterystorage,smartinverters,andotherconnecteddevicescreatesanevengreaterimpetustoreevaluateandadjusttheutilitybusinessmodel.Thepossibilityofresourceslocatedonthecustomersideofthemeterthatcanprovideenergy,capacity,ancillaryservices,transmissionanddistributiondeferral,andothervaluescreatestheneedforanewutilityrevenuemechanismthatremovesthenaturalpreferenceforutility-ownedinvestmentsovercustomer-ownedresourcesthatcanprovidethesameserviceatapotentiallylowercost.

21BrookingsInstitute:“Rooftopsolar:Netmeteringisanetbenefit,”byMarkMuroandDevanshreeSaha.22Ibid.

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ItisforthisreasonthatNewYorkandCaliforniahavebothopenedproceedingstoexaminetheutilitybusinessmodelandexplorewaystoreducesystemcostsbyusingcustomer-sitedresourcestodeferutilityinfrastructureinvestments.Althoughdifferingintheirapproach,bothstates’effortsseektoanswertheprimaryquestionfacingregulatorsinlightoftheriseofDERs:

Howcantheutilitybeproperlyincentedtorelyoncustomer-sitedresourcestomeetinfrastructureneedsininstanceswheresuchresourceswouldbelessexpensivetoprocurethantraditionalutilityinvestments?

CaliforniaPublicUtilitiesCommissioner(CPUC)MikeFloriosummarizedtheproblemandtheneedforutilitybusinessmodelreforminarecentCPUCrulingthatproposestocompensateutilitieswhentheyuseDERstodefertraditionalinfrastructureprojects.23“IftheutilitydisplacesordeferssuchinvestmentsbyinsteadprocuringDERservicesfromothers,itearnsnoreturnontheassociatedexpenditures—suchoperatingexpensesaremerelyapass-throughinrates,”Floriowrote.“Thus,askingtheIOUstoidentifyopportunitiesforsuchdisplacementsordeferrals,aswearedoinginthisproceedingandthe[distributionresourceplanningproceeding],setsupapotentialconflictwiththecompany’sfundamentalfinancialobjectives.”

5. Conclusion

DistributedEnergyResourcesbringmuchneededtechnologicalinnovation,competition,andcustomerengagementtotheutilitysector,andthebenefitsoftheseresourcestobothparticipatingandnon-participatingratepayersislikelytobesubstantial.Thus,regulatorsshouldnotadoptaone-size-fits-allapproachtoratedesign,butshouldinsteaddevisesolutionsthatareappropriateforratepayersandalsoappropriatelyreflectstateandfederalenergypolicygoals,including:

• Studyingtheimpacts:Statesshouldconductarigorousindependentcost-effectivenessstudytodeterminewhetherdistributedsolarundercurrentratestructuresimposesanetbenefitoranetcostonalloftheirratepayersandhowdistributedsolarimpactstotalsystemcosts.Policymakerscanplayanimportantrolebyseekingtostandardizewhichcostsandbenefitsareconsideredandhowtheyareevaluated.

• Modernizingutilityplanning:RegulatorsshouldseekwaystoincorporatesolarandotherDERsintoutilityplanningsothattheseresourcescanbeusedtodefertraditionalinfrastructureinvestmentsandreducetotalsystemcosts.IntegratedResourcePlanningandDistributionResourcePlanningprocessescanbeaneffectivewaytoaccomplishthis.

• Updatingutilitybusinessmodels:Statesmayconsiderimplementingrevenuedecoupling,inadditiontomoreextensivechangestoutilitybusinessmodelsandrevenuemechanismsinordertoprovideanincentiveforutilitiestorelyuponcustomer-sitedDERstomeetinfrastructureneeds.

23“AssignedCommissioner’sRulingIntroducingaDraftRegulatoryIncentivesProposalforDiscussionandComment.”CaliforniaPublicUtilitiesCommission,May4,2016.http://docs.cpuc.ca.gov/PublishedDocs/Efile/G000/M159/K702/159702148.PDF

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• Implementingtechnologystandards:Statesmaywishtoconsiderimplementingtechnologystandardsdevelopedbynationalorinternationalstandards-makingbodies,programs,andbestpracticestoenhancethevalueoftheresources.Forexample,at5%solarPVpenetration,astatemaywishtomandatesolarsmartinvertersthatcanprovidereactivepowerandvoltagecontrolasaconditionofinterconnectingundertheNEMtariff.

• Encouragingchoice:Regulatorsshoulddesignelectricratestoencouragecustomerstochoosedistributedgenerationandfosteremergingtechnologiesthathavethepotentialtoreduceelectricitycostsandenvironmentalimpacts.Forexample,time-of-useratescanencouragecustomerstoadoptenergystorageorload-shiftingtechnologiescapableofreducingtheneedforcentralgeneratingcapacityanddistributionsystemupgrades.

• Gradualism,grandfathering,andpredictability:Ratechanges,ifdeemednecessary,shouldbeintroducedgraduallysothatsellersofretailenergyserviceshaveastablebusinessclimateinwhichtooperate.Existingcustomersshouldbegrandfatheredintopre-existingratessoasnottodestroythevalueofsystemsalreadyinstalledandanynewratesshouldbestableandpredictabletoensurethatcustomerinvestmentscanlock-invalueforthelifeofthesystem.

Finally,regulatorsshoulddesignrateswithaneyetothebenefitsofemergingtechnologyandcompetitionintheutilityspace.Withlittlecompetitionoverthepast100years,monopolyutilitieshavehadlittleincentivetoinnovate,andthetechnologiesusedtogenerateandtransmitelectricityhavechangedlittleduringthattime.Theemergenceofdistributedenergyresourcesoffersthepromiseofacleanerandmorecompetitiveelectricindustry,providingconsumerswiththebenefitsofinnovationandefficiencythataccompanycompetitivemarkets.Regulatorsshouldresistallowingincumbentmonopoliestouseratedesignasameanstosquelchinnovationandstiflecustomerchoice.