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State Regulators Take New Approaches to Utility Rate Structures, Net Metering

State Regulators Take New Approaches to Utility Rate Structures, Net Metering

   Subject Matter Expert:
Russell A. Feingold, 
   Vice President, 
   Black & Veatch Management Consulting 

State Regulators Take New Approaches
to Utility Rate Structures, Net Metering

Shifting Ground: State utility regulators are grappling with a fast-changing utility landscape driven by technology advancements and new market entrants. Several states have key regulatory initiatives underway reflecting a wide range of approaches to net metering and distributed generation. Some regulatory commissions are viewing this in an incremental way, taking one step at a time, while others are looking at it in a comprehensive manner, recognizing that a variety of issues are interrelated.

Determining what constitutes a “fair” regulatory balance is the challenge. Fundamental questions include:

    • What are “just and reasonable” rates?
    • What are the right price signals for customers?
    • What constitutes a “reasonable” opportunity to earn the allowed rate of return?
    • How should societal objectives be accommodated in rate design?

Dealing with Net Metering: Net energy metering is a hot button issue for regulators, utilities and customers. California is keeping net metering but is shifting more of utilities’ cost recovery away from charges for kilowatt-hour sales by allowing utilities to increase the monthly fixed charge that is part of the standard rate structure. This gives the utility more certainty in recovering fixed costs that do not change with fluctuations in electricity usage. It also effectively reduces the cross subsidy between those customers who have solar and those who do not.

Arizona introduced pricing for customers with rooftop solar, while Nevada regulators voted to phase out net metering at the full retail rate. The Texas municipal utility Austin Energy is employing a value-of-solar concept. Under this approach, customers with solar pay the full retail rate for their total energy use and receive a credit on the bill for the electricity they generate at the predetermined value of solar. Minnesota regulators established a voluntary value-of-solar tariff, although utilities had not yet signed on by early 2016.

All Eyes on REV: The New York Public Service Commission’s (PSC) ambitious effort at rewriting the regulatory script is looking at shifting the utility-customer balance to market incentives from cost-based incentives. The PSC is taking a comprehensive look – called Reforming the Energy Vision (REV) – that examines how the regulation and market rules have to adapt to accommodate changes in the utility business model and shifts in the competitive landscape.

The REV proceeding before the PSC introduces two principle questions for the regulated electric utilities: 1) What role should the distribution utility play in enabling system efficiency, market-based deployment of distributed energy and load management? 2) What changes are needed in the state’s regulatory, tariff, market design and incentive structures to better align utility interests with achieving the policy objectives?

Some utility commissions in other states are wondering if New York’s REV is the blueprint for the future. Some jurisdictions may embrace particular elements of REV, realizing that the way utility stakeholders are affected in New York likely will be seen among their own constituents down the road in other parts of the U.S.

One of the biggest challenges facing the PSC is in trying to figure out if the investments of utilities and their asset base are going to eventually decline. They are also trying to determine what new revenue streams would be available to replace that resulting loss of earnings to ensure that there is continuing investment in poles, wires and other infrastructure. Utilities cannot rely on constantly rising rates caused by a decline in traditional energy sales.

The PSC staff believes there are market-based services that a utility can provide, including fees for services that provide grid-specific information on where distributed energy resources should be located to maximize their benefits. Third-party suppliers are also driving change, examining incremental market opportunities that include the installation of solar systems, development of data exchanges for the marketplace, providing grid modernization equipment to utilities and enhanced communications technology.

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