New Ratemaking Order Revamps Conventional Cost-of-Service Ratemaking for New York Utilities:
The State is Seeking to Align Utility Business Models With REV Policy Objectives
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Summary: On May 19, 2016, the New York Public Service Commission adopted an order setting forth a new model framework for ratemaking and utility revenue (Ratemaking Order) within the Reforming the Energy Vision program. The Ratemaking Order provides nine measures that the Commission expects will help utilities and other stakeholders transition to the new framework. This alert highlights two of the nine measures and provides key upcoming deadlines established by the Ratemaking Order.
On May 19, 2016, the New York Public Service Commission (the Commission) adopted an order setting forth a new model framework for ratemaking and utility revenue (Ratemaking Order) within the Reforming the Energy Vision (REV) program. The order builds on the 2015 Framework Order, which adopted a regulatory policy framework for REV, and, as articulated in the agency’s 2016 Order Authorizing the Clean Energy Fund Framework, advances one of REV’s four major pillars by moving away from the current conventional approach to ratemaking. The Commission drew on three principles articulated in the Framework Order:
First, the unidirectional grid must evolve into a more diversified and resilient distributed model engaging customers and third parties. Second, ensuring universal, reliable, resilient, and secure delivery service at just and reasonable prices remains a function of regulated utilities. Third, and critically important to this order, the overall efficiency of the system and consumer value and choice must be improved by achieving a more productive mix of utility and third-party investment.
With these principles in mind, the Ratemaking Order delineates boundaries for a “modern regulatory model” that augments conventional cost-of-service ratemaking by adding outcome-based incentives. The new model aims for increased efficiency, transparency, and resiliency, as well as greater engagement with customers and third parties, while creating financial incentives to utilities that pursue REV activities such as Distributed Energy Resource (DER) integration and grid modernization. Drawing on experience in other sectors, competitors may accomplish these goals through “coopetition” – or by undertaking joint efforts under a reconfigured service platform that facilitates shared earning opportunities. Specifically, the Ratemaking Order provides nine measures1 that the Commission expects will help utilities and other stakeholders transition to the new framework, two of which are highlighted here.
First, the Ratemaking Order initiates two key forms of earning opportunities: platform service revenues and earning adjustment mechanisms.
- Platform service revenues (PSRs) are “new forms of utility revenues associated with the operation and facilitation of distribution level markets.” Utilities initially may generate revenues by replacing traditional infrastructure with “non-wires alternatives” (e.g., demand side management programs), and eventually adding new services that can be performed by third parties. The Commission recognized that revenues from PSRs must be shared, and established as presumptively “reasonable” an allocation of 80% to ratepayers and 20% to the utility’s shareholders; this allocation is a starting point that may be revisited. The Commission also streamlined the tariff review and approval process for PSRs.
- Earning adjustment mechanisms (EAMs), which can be viewed as near-term measures to be undertaken to complement the development of PSRs, aim to increase energy and system efficiencies and further engage customers in efficiency efforts. EAMs will be framed around outcome-based incentives that encourage innovation. The Commission identified specific EAM opportunity areas that utilities should pursue such as “ambitious” peak reduction and load factor improvement targets, and energy efficiency measures.
In another proceeding, the Commission is also considering a Clean Energy Standard (CES) under REV to achieve greenhouse gas reduction targets, and utilities should have future earning opportunities “tied to reducing the cost of achieving the CES goal.”
Second, the Ratemaking Order explored rate design improvement opportunities. For example, large commercial and industrial customers are already subject to demand-based rates for delivery, and hourly rates for commodity service. The Commission has directed utilities to evaluate reforms that make these rates more peak-sensitive or by changing the determinants such as peak-to-off-peak ratios that influence customer decisions.
The initiatives set forth in the Ratemaking Order are being tested by Con Edison, in partnership with SunPower Corp., with the unveiling of a “Virtual Power Plant.” The Virtual Power Plant is an integrated solar and storage plan consisting of residential solar/battery installations, that offers an alternative tariff structure and has been offered to 300 homeowners in New York. Con Edison would be able to draw power from the Virtual Power Plant to supply power to the grid during periods of peak demand. It is an experimental program that aligns the Ratemaking Order measures with the REV goal to achieve greater resiliency and renewable energy sources.
The Ratemaking Order has established the following deadlines:
- August 1, 2016
- Utilities other than Con Edison to file revisions to for standby tariffs
- Utilities other than Con Edison to file interconnection survey process and EAM
- September 1, 2016
- Utilities other than Con Edison to file progress report on aggregated data reporting efforts
- October 1, 2016
- Clean Energy Advisory Council will propose metrics and targets
- Utilities other than Con Edison to file review of standby rate allocation matrix with proposed revisions
- December 1, 2016
- Utilities are to file system efficiency proposal
- February 1, 2017
- Utilities other than Con Edison to file one or more Smart Home Rate demonstration proposals
- June 1, 2017
- Utilities other than Con Edison to file revisions to voluntary time of use rates and promotion and education tools (by June 1, 2017 for utilities with rate plans that expire after January 1, 2018 or in next rate filing)
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1 The nine measures are: (1) earning opportunities; (2) competitive market-based earnings; (3) data access; (4) clawback reform; (5) standby service; (6) opt-in rate design; (7) large customer demand changes; (8) scorecard metrics; and (9) mass-market rate design.