November PoV

Written by: Doug Scott Vice President, Strategic Initiatives, Great Plains Institute and former Chair and Commissioner, Illinois Commerce Commission

Doug Scott

Doug Scott

You hear this a lot at energy-related conferences:  “If Alexander Graham Bell returned today, he wouldn’t recognize the telephone system he helped create; but if Thomas Edison came back to the U.S. today, he’d say about the modern electrical system, “This looks familiar.” While that may be a bit overstated, most would agree that there is more than a little truth in it.

In the world of phones, we have largely replaced a system of poles, wires and landlines with smart phones, cell towers, and a range of technology options unfathomable to the telecommunications industry just a few years ago. But on the electric side, a system of large, centralized power generation moving power through a system of wires to end users is still the dominant model, just as it has been since the beginning of the electric industry. But this is beginning to change in a number of ways throughout the country.

In its most basic form, electric utilities make money in a couple of ways: by building power plants and other capital assets, and by distributing and selling power. But in many places in the country, demand for electricity is flat or declining, due to energy efficiency, and/or the effects of the recession at the end of the last decade. In addition, because of reliability fears, some electricity users have decided to “go off the grid” by generating their own power (though often not literally disconnecting from being able to use the grid sometimes). And still others are finding that because costs are declining for renewable energy, it makes sense to put up solar panels or install a geothermal system.

These trends will only become more prevalent as time goes on. Appliances will continue to become more energy efficient and building codes will require more energy efficiency; consumers will take advantage of more options to control their energy use and costs. These trends clearly have implications for distribution utilities, and for the regulators who oversee electric distribution.

The system as we know it has developed as a trade-off. In exchange for the opportunity to operate a monopoly, distribution utilities are regulated by state commissions, who balance the cost of service to ratepayers with the statutory requirement of compensating utilities for the costs they incur in building and operating their systems, plus a fair authorized “profit” on top of those costs. However, the emerging trends described above are putting new strains on this utility and regulatory model, posing difficult questions for both ratepayers and utilities under a business-as-usual scenario.

If the power company is required to maintain and reinvest in the electricity grid but is building less and selling less to cover those costs, do they just raise rates to compensate for their losses? Wouldn’t that act as an inhibitor to further energy efficiency? If folks leave the grid and generate their own power, should they be compensated for any excess power that they sell back to the grid? And if so, at what rate? Should there be a special charge for those home power generators for having the ability to come back onto the grid if they choose? And if losses for customers leaving the grid are made up by the remaining customers, does that mean that those who can’t afford solar are subsidizing those who can?

These are only a few of the myriad questions being asked in public utility commissions and utility offices all over the country. The proceedings are as different as the number of states looking into the issues, and they are called various things, from “utility 2.0” to “utility business model of the future,” but they are all designed to answer questions about how utilities will operate going forward, how they will be compensated, and what benefits customers may derive from the new business models.

For their part, utilities take varied approaches. At one extreme are utilities who don’t want large scale changes, but just want the public utility commission to find a way, through rate cases, to compensate them for their losses. At the other extreme are utilities who see opportunities in being able to use their infrastructure to offer new products or services to their customers, with the chance to use new revenue streams to offset the losses as customers use less energy or generate their own power.

The question of course is how to reconcile all of these competing interests in ways that are fair and serve the public interest. States are tackling these issues in very different ways. And, because the issues are becoming more prevalent with technology advances, it’s likely that this discussion will be coming to your state soon, if it hasn’t already.

Where it’s already emerged, the discussion has arisen through different processes. In some states, it has come about through rate cases, where the utility has asked the public utility commission to increase their basic customer charge, or their demand charge, which may vary, depending on usage. In states that have seen a noticeable increase in customers putting solar panels on their property, utilities have gone to the commission or to their legislatures asking for a special charge for these customers, in an attempt to reduce the amount the solar power producers are paid for selling the excess power generated by their solar panels.

A handful of states are working to get ahead of these changes in a more comprehensive way.

New York, for example, has been working through a special process called Renewing the Energy Vision (REV), which seeks to alter the utility business model and regulatory approach by—among other things–instituting more performance-based metrics for their utilities and asking utilities to maintain and coordinate the electric distribution grid as an open platform that both consumers and energy service providers can use.

In Minnesota, the e21 Initiative is an ambitious effort that has been convening utilities and other key stakeholders since February 2014. It issued consensus recommendations to the Commission in December 2014 and is now working to develop the details of how a more customer-centric, performance-based utility business model and regulatory framework will work in practice. Many other state utility commissions either have, or will begin to have, their own studies and discussions regarding the future of their distribution systems.

This barely scratches the surface of these discussions. As society uses energy more efficiently, renewable energy prices continue to fall, cost-effective electricity storage comes on line, and consumers continue to demand more and different options, we can begin to see the emergence of a new electricity paradigm taking shape that operates more like the Internet or today’s phone network. Edison might not recognize it but would likely applaud the innovation that’s bringing it about.