United States: New York Creates The Utility Of The Future

Last Updated: April 13 2015
Article by Bernice I. Corman

The New York State Public Service Commission (NYSPSC) issued a 133-page  Order pursuant to Track One of New York's  Reforming the Energy Vision (REV) Initiative on February 26, 2015. The Initiative, launched in the spring of 2014, was spurred by concerns with the rising costs of energy, extreme weather events, and the age of the electricity grid (not to mention the age of the regulatory mechanisms that govern the grid's use). In particular, the REV Initiative seeks to integrate distributed energy resources, or DER – which include small-scale energy sources such as on-site wind turbines, rooftop solar, electric vehicle battery storage and demand response, all of which occur mostly on customers' premises – into the existing grid, which was built mainly around centralized assets such as power plants located far away from customers.

New York is out in front of several other jurisdictions such as California and Maryland, which are also redefining their legal and regulatory regimes so they may seize the opportunities afforded by distributed electricity generation. For more than a century, the regimes assumed that single entities would provide both generation and distribution of electricity within specified service areas. (In exchange for an obligation to serve all customers at reasonable rates, the regulatory framework was designed to provide these single entities with the ability to raise the significant capital required for the system.) Beginning in the 1990s, the deregulation of electricity generation fundamentally altered this paradigm. Now, new technological advances and rapid declines in the costs of DER, especially solar, are leading policy-makers to question whether they should similarly deregulate the single entity distribution model.

Approaches to Integrating DER into the Grid

The jurisdictions examining the issue seem to be coming down squarely on the side of leaving utilities still at the center of distribution, at least for now. Indeed, last summer, NYSPSC put New York's utilities on notice in its  Track One Straw Proposal that they should be prepared to transition themselves into distributed system platform providers (DSPPs). Thus, in Track One, the NYSPSC indicated that it would at least initially be looking only to the incumbent utilities to track, trade, forecast, and incorporate DER into their plans to meet system and customer needs. Eventually, the utilities' status as long-term DSPPs would be subject to performance reviews; and ultimately, if the utilities fail to meet REV objectives, then third-party platform providers might also be possible. In Track Two, the NYSPSC will focus on the regulatory reforms needed to tie utilities' earnings to the success of REV markets, rather than to increasing their own capital investments.

The February NYSPSC Order requires that utilities file their plans by December 15, 2015 for integrating their DSPP role and functions into their existing utility planning processes. The Order also sets a deadline of May 1, 2015, for parties to file comments on the configurations for owning and operating microgrids that may be presumptively permissible.

Attaching a Value to DER

Additionally, February's Order directs PSC staff to prepare a Track Two white paper or Straw Proposal by June 1, 2015 on how to value distributed energy and energy efficiency, particularly, how these energy sources affect utility expenditures. This is to address the concern that the decentralizing of power generation, transmission, and distribution, coupled with a customer's ability to "island," or detach from the grid, would leave the remaining customers with sole responsibility for paying for the grid and needed improvements to it. The NYSPSC is seeking to resolve that dilemma by attaching values to the social and economic services customer-generated energy (such as microgrids) provide, so that those services can be built into customers' rates and recovered by the utilities. By monetizing DER, customers and utilities can evaluate whether DER can compete with centralized energy options. And by rewarding utilities for the efficient integration of DER into their systems, utilities can become indifferent when choosing between traditional and non-traditional solutions to offset or eliminate the need for building traditional utility infrastructure.

Examples of Utility-Centric DER Efforts in New York

Some New York utilities have already begun implementing this approach. For example, in response to prompting by the NYSPSC, ConEd  sought and obtained approval to delay building a new $1.1 billion substation to satisfy growth in Brooklyn and Queens, and to invest instead in demand response, solar procurements, energy storage, microgrids, and energy efficiency. With Demand Response programs, utilities pay customers to modify their use of grid power, typically to reduce their consumption during periods of high demand. The theory is that it costs less for utilities to pay customers to, e.g., refrain from using their washing machines during "peak" hours, than it does for the utilities to ramp up production from "peaker plants."

In the same vein, Central Hudson Gas & Electric  proposed a ratemaking proceeding that included the utility's establishing microgrids in areas with critical facilities and in remote regions of its service area. In its proposal – which clearly treats microgrids as a business opportunity – willing customers would form a microgrid by agreeing that Central Hudson would design, build, own, and operate generating capacity to meet critical power needs during an outage. Central Hudson would recover its costs from the microgrid subscribers by tacking a fee onto their utility bills. Central Hudson's proposal appears to be the first to seek to establish the worth of a microgrid, and the portion of a microgrid serving community needs that may be rate-based.

Developments in Other Jurisdictions

California has embarked upon a journey similar to New York's. In July 2014, California launched a rulemaking proceeding to require investor-owned utilities to develop distribution resource plans (DRPs) to better integrate DERs into the existing grid. And in 2013, as part of its Utility 2.0 efforts, then-Governor Martin O'Malley created a Maryland task force to examine microgrids. The Task Force concluded that under current Maryland law, the Maryland PSC may allow, and it may even require, incumbent utilities to construct and operate microgrids; and further, that some portion of public-service microgrids could be rate-based. The Task Force also concluded that third party owned and operated microgrids are not currently feasible under Maryland law.

On March 2, 2015, bids were due in response to a call from the District of Columbia's Department of the Environment to conduct a microgrids study. It remains to be seen whether the District will follow New York and California, and seek to evolve utilities into traditional "wires companies" as well as DER market enablers; or whether it will pursue a different model for reforming the retail electric system.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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