Easing the Transition: The Changing Roles of Consumers, Utilities and Regulators Within the Regulatory Compact
Multiple compounding factors are driving national movement toward a more modern electricity grid, one that enables a cleaner energy future. A thought-leading report released today by the Interstate Renewable Energy Council (IREC) offers a unique look at easing that transition, and offers five insightful approaches for state utility regulators who, ultimately, will facilitate this transition through the rules and regulations that govern the electricity system and electric utilities.
A modern grid will allow for increases in the amount of clean energy produced and universal consumer access, including through distributed generation, for example on-site solar or wind power. It must also include integrated resource planning, two-way flow of energy and information, and increased reliability, security and resiliency, according to IREC.
“As states, utilities and regulators face new demands on an aging electricity system and regulatory framework, there is a strong rationale for updating the ‘regulatory compact’ – the theoretical concept that underlies the laws, regulations and rules that govern the electricity system and the utilities that power it,” according to lead author Erica Schroeder McConnell, among several experts who represent IREC in regulatory matters. “The process and results will allow more innovative ideas to flourish, while accommodating technological innovation and modern policy goals,” she adds.
“The relative ease of transition for utilities and the electricity grid to a more distributed and clean energy future will depend largely on proactive and meaningful regulatory reforms,” says IREC Regulatory Director Sara Baldwin Auck. “IREC seeks to provide regulators with some practical pathways for consideration as they address the changing roles and interests of customers and utilities.”
New technologies have emerged on the customer side of the electric system, including distributed energy resources (DER), which includes not only distributed generation, but energy efficiency, electric vehicles, energy storage and demand response technologies. These technologies are allowing growing numbers of energy consumers to decrease their electricity demand, to act as energy producers, and otherwise manage their energy usage.
“At the same time, the public has become increasingly concerned about the environmental impacts of electricity generation, especially its contribution to climate change, and negative air and water quality impacts,” adds contributing author Sky Stanfield, who also represents IREC in state and federal regulatory proceedings. “Consumers and regulators are also looking for ways to improve the resiliency of the electric system during severe weather events, which are becoming more common as a result of climate change.”
“Along with the physical system, the regulatory compact must evolve to accommodate new public priorities, changing consumer interests, economic and environmental risks, and transformative technologies,” says IREC President/CEO Jane Weissman. “By re-evaluating and reconsidering their approach, regulators can help to ensure a smooth transition to a new, more modern grid and can help define the role for electric utilities in this new era.”
“The report offers five approaches for state utility regulators to consider, each of which aims to holistically and expediently move toward our modern grid vision, where local, distributed resources play a greater role,” says McConnell.
Report Highlights: Five Approaches for State Regulators
- Cost Recovery: Adjusting traditional cost-of-service ratemaking affects which investments utilities have incentives to make. Regulators could consider a ratemaking framework that moves away from incentives primarily for large, capital investments, and toward incentives for investments that facilitate more distributed, dynamic, environmentally sustainable electricity systems. Two ratemaking mechanisms that could help regulators to achieve this goal are revenue decoupling and performance-based ratemaking.
- Rate Design: Rate design is a powerful tool. Today it reflects regulators’ and utilities’ judgment regarding the appropriate allocation of costs across customers. Rates can also serve to send price signals to customers to encourage desirable behaviors, such as using tiered rates to encourage energy efficiency and conservation. Therefore they should be based on a transparent and thorough evaluation of the desired functionalities of the products and services utilities provide and customers use. One potential way to send clearer price signals to customers: break out the components of rates and offer customers a menu of service options. Putting the unbundled rate elements and options in attractive, convenient packages might be of consumer interest.
- Utility Strategic Planning: Generally speaking, utilities’ strategic planning ought to evolve over time, as regulators use tools like ratemaking and rate design to better align utility incentives with the public interest. Even so, requiring more explicit strategic plans from utilities is another way for regulators to monitor and encourage the evolution of utilities to meet their customers’ interests in a cost-effective way.
- Access to Data: As the communications infrastructure associated with the electricity grid becomes increasingly sophisticated, utilities will collect more data, which has the potential to transform both management of their systems and their understanding of customer preferences and actions. These data can also be valuable to third-party providers interested in offering consumer and grid services, as well as regulators and other entities interested in monitoring grid operations and evolution. Therefore, it will be important for regulators to consider how to allow appropriate access to grid and consumer data, while ensuring cybersecurity and protection of consumer privacy.
- Grid Access: Many regulators are experienced with issues related to third-party access to the electricity grid. As distributed energy resources become increasingly prevalent, however, both regulators’ understanding of these issues and policies addressing them will need to evolve. In particular, the effective integration of distributed generation into the grid – so the benefits of these technologies are maximized – as well as the appropriate allocation of benefits and costs of DER and associated grid upgrades will be important policy components. Similarly, expansion of access to the grid to a broader range of energy consumers, including renters and lower income consumers, will be a key equity consideration.
“The issues discussed in this paper are merely a subset of the various forces currently affecting the electricity system and industry,” says Baldwin Auck. “For example, also putting pressure on the traditional regulatory compact, and utility regulation and business models, are restructuring and competitive wholesale markets, and policies that support carbon reduction and promote renewable energy more broadly.”