New York Grid Modernization Reforms Present Utilities with New Earnings Opportunities
New York State is in the midst of radically reforming its utility regulatory landscape— and eventually markets—to accelerate the integration of distributed energy resources (DERs) into the grid. DERs, like solar photovoltaics (PV) and energy efficiency, create opportunities for customers to manage their energy usage, improve power quality and resiliency, and help meet state clean energy and environmental goals. The radical reform all started in 2014 with the Reforming the Energy Vision (REV) initiative, which “aims to reorient both the electric industry and the ratemaking paradigm toward a consumer-centered approach that harnesses technology and markets.”
The Public Service Commission tasked with REV implementation has been considering a number of regulatory options to advance REV goals over the past two years. Earlier this year, the Commission held a technical conference focused on performance incentive tools – Earnings Impact Mechanisms (EIMs) and Market-Based Earnings (MBEs.)
Earnings Impact Mechanisms
Earnings Impact Mechanisms reward or penalize utilities for their performance with regard to certain targets, such as energy efficiency and peak demand reduction. The speakers noted that the mechanisms are one of the most effective and low risk regulatory tools and are crucial to achieving New York’s climate goals, but numerous questions remain about the exact EIM structure.
Clear guidelines and an adequate level of utility incentives are necessary for the EIMs to be effective, but at the same time, the mechanisms are meant only as a transition device to a future utility business model envisioned in REV and must not foster continued dependence.
The regulators should ultimately consider how EIMs fit into an overall utility revenue framework. If a utility hits an EIM performance target, it could earn a lump sum cash award or receive an adjustment to return on equity (ROE) basis points.¹ The former scheme is preferable according to the panel as an EIM tied to ROE is in direct conflict with the state’s strive to eliminate utilities’ incentive to favor capital expenditures. The EIMs must ultimately encourage utilities to utilize customer and third party capital to advance REV goals rather than grow their rate base. To further this objective, the Commission has also proposed a modified claw back mechanism that allows utilities to keep earnings on unspent capital as long as the reduction in capital spending is attributed to a distributed energy resource (DER) solution. In the absence of this provision, any reduction in capital spending would cut into utilities’ profits.
Besides the EIM design, the list of policy goals suitable for EIMs hardly gathered unanimous support from the panel. Joint Utilities argued that only metrics within utility control should have symmetrical as opposed to positive-only earnings impact – for instance, peak demand is subject to factors independent of utility actions, such as weather and economic activity in the service area. Joint Utilities also emphasized the need for revenue certainty and continued access to capital markets that may be jeopardized if utility earnings are at risk.
Market Based Earnings
Market Based Revenues represent an innovative revenue source for the utilities that offer services beyond their basic electric or gas service obligations. The discussion around MBEs focused on the composition and pricing of the utility value-added services. The Commission expects the utilities to earn platform service revenues (PSR) by virtue of serving as a distributed system platform (DSP) provider, an intermediary between consumers and third party DER sellers, as well as additional service-based revenues, such as advertising fees or engineering fees, for services that are available from either the utilities or third parties. The exact make up and structure of MBEs remain uncertain however and are largely explored through ongoing utility demonstration projects.
Panel participants proposed separate pricing approaches for PSRs and competitive MBEs. Considering utility’s monopoly position as a platform provider, using cost-based ratemaking for platform service fees to ensure nondiscriminatory and transparent rates is most appropriate. Conversely, competitive products and services that may be offered either by the utility or a third party should be market value priced upon comprehensive stakeholder input. In addition, consumers who choose to engage and take full advantage of the platform value-added services should bear the extra cost to prevent cost shifting to ratepayers who choose to limit their engagement with the platform.
Going forward Acadia Center will continue to closely monitor these discussions.
¹ The adjustment to basis points represents a change in the regulator-approved rate of return or profit a utility is allowed to earn on its rate base comprised primarily of its capital investments in long-term assets, such as transmission lines or power generation facilities.
Irina Rodina works as Staff Counsel for Acadia Center focusing on grid modernization and utility reform in New York State. Irina has extensive experience in environmental and energy policy, including renewable project development and market issues, community energy development, sustainable agriculture, and climate change.