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Clearing Up / Bearing Down

[March 2, 2018 / No. 1840]

RMI Offers Framework for Considering Utility Future

SUMMARY: A new report from Rocky Mountain Institute takes on a big energy issue—the future utility structure—and provides a valuable framework for considering it, under the premise that utilities need to modernize, based on new economic and policy objectives. From this arises a "fundamental question" about the appropriate scope of utility functions in the emerging environment.

A new report offers a thoughtful framework to consider a fundamental energy issue: the future utility structure.

It avoids a prescriptive approach, which I like here, because an issue this big and complex does not lend itself to standard solutions.

The report, "Reimagining the Utility: Evolving the Functions and Business Model of Utilities to Achieve a Low-Carbon Grid," comes from Rocky Mountain Institute, and authors Dan Cross-Call, Rachel Gold, Leia Guccione, Mike Henchen and Virginia Lacy.

It begins with a basic premise. "Electric utilities must modernize to serve new economic and policy objectives, including managing an increasingly distributed and decarbonized power system." And that raises a "fundamental question" about the appropriate scope of utility functions relative to those provided by a competitive market.

The context includes decarbonization, growing electrification, technology advances and more distributed generation. "The challenge for utilities and regulators is to address these needs and harness opportunities on the urgent timeline required to meet greenhouse gas abatement targets, while not abandoning long-standing requirements for affordable, universal energy supply andgrid reliability," it said.

"Reimagining" notes changing expectations for utility functions, starting in the 1970s, away from a natural monopoly. "More than anywhere else on the grid, new functions and capabilities are needed for the distribution system," it said. "The previous utility roles of forecast, plan, and build distribution infrastructure need to evolve to a more integrated and robust set of functions for planning, operations and market facilitation. This requires a deeper reflection on the functions required at the distribution level."

The report outlines two "extremes" of a potential utility future spectrum: expanded monopoly services "with utility ownership or financing of all new assets," including distributed energy resources; and a transformed platform operator "where the utility serves as a neutral asset integrator and host for market activity."

Arguments for expanded monopoly services include utility economies of scale and scope; big balance sheets and low capital costs; existing customer relationships and roles for data management and grid operations; expertise in grid operations; and regulated status (presumably meaning for investor-owned utilities) to foster the public interest.

‘More than anywhere else on the grid, new functions and capabilities are needed for the distribution system.’

One cited example: Vermont's Green Mountain Power marketing, financing and facilitating installation of customer-sited batteries, appliances and energy-efficiency upgrades. Another example is competitive affiliates of utility holding companies, which the report calls a "compelling pathway for the modernization and financial viability of utilities," but also "raises significant concerns regarding the potential for unfair advantages by utility affiliates."

The transformed platform operator is essentially a neutral role to integrate and coordinate energy services, recognizing "natural-monopoly and economy-of-scale conditions may no longer exist for many areas of the electricity value chain (orcan be eliminated through appropriate reforms)." Itcould be a state-regulated for-profit entity or a distribution system operator akin to an ISO.

However, this model faces "a substantial challenge" in the "tremendous inertia of the current utility business and the reality that a vast majority of utility earnings derive from rate-based assets." And while this structure could provide new revenue opportunities for utilities, it's unclear whether this model could serve as "core financial engine" for utilities, given their multibillion dollars of infrastructure ownership.

RMI acknowledges "it may not be appropriate for utilities to fully occupy either of these extremes." A pure expanded utility monopoly could thwart innovation and lead to inefficiencies, while limiting utilities to a platform role could create market failures such as inequities and reduced service to vulnerable populations.

Enter the prospect of four "hybrid" models:

  1. Utilities buying third-party solutions (e.g.Southern California Edison partnering with Nest on smart-thermostat installations and aggregated demand response);
  2. Splitting roles by product or activity scope (e.g. California PUC's evolution on utility ownership of electric-vehicle charging infrastructure, from an initial prohibition to a case-by-case determination);
  3. Utility competition with third parties (e.g. Green Mountain Power customers buying a Tesla Powerwall viathe utility or purchasing storage from other companies); and
  4. Utility-hosted microplatforms (e.g. Avista Utilities' "shared energy economy" pilot, allowing buildings to exchange various DER and utility services, as part of its Urbanova venture).

"Reimagining" also touches on the imperative of continuing regulation in the utility future, and avenues to "support desired outcomes from the sector." Those include policy choices on utility role boundaries; more performance-based regulation (with an example case study from Great Britain's RIIO [Revenue=Incentives+Innovation+Outputs]); guaranteeing fair access for third-party competition; and modernized market monitoring and oversight.

In its concluding section on "The Path Forward," RMIsuggests: "Accepting that the future will be different, utilities and their regulators should proactively consider what utility structure they seek, and then begin to align new programs and revenue sources in a manner that builds operational and business experiences with those," as New York and Hawaii have done.

For example, the report said, a regulatory agency need not decide at once on all-or-nothing utility ownership of distributed resources.

The report also offers "key decision variables" for considering utility proposals and market reforms, involving spectrums of asset ownership and control, customer relationship, revenue streams, utility earnings and risk sharing.

RMI offers a case study on New York's Reforming the Energy Vision (REV), which "has attracted attention from around the world for its broad ambition and transformative vision to modernize the utility sector." REV is mainly a utility-as-platform model, with customers and third parties actively participating in markets. Although REV envisions utility market- and platform-based earnings will eventually grow to compare to conventional cost-of-service revenues, RMI noted a practical challenge of "meaningfully changing the cost-of-service revenue model," because utilities are infrastructure-based enterprises with rate-based assets.

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Defining clear targets and resistance to changes in risk for utility rates of return are among other challenges that have slowed REV's transition, "Reimagining" finds. However, it also said New York has made substantive progress on non-wires alternatives, innovative demonstration projects and work toward new pricing mechanisms for distributed solar.

As RMI notes, the application of these utility-of-the-future ideas will vary depending on a utility's current structure. I would also suggest that electric rates, resource portfolios, political and regulatory climates, andinnovation cultures are among other factors influencing the pace and scope of considering future utility business models. There are valid reasons whyNewYork, California and Hawaii are in the
vanguard of this evolution.

In our region, Oregon is exploring this issue under SenateBill978, passed into law in 2017, which according to the OregonPUC website requires the agency in a public process to "investigate how developing industry trends, technologies, and policy drivers may impact the existing electricity regulatory system. The Commission is also required to investigate the obligations of and benefits to electric companies and customers under the existing regulatory system; and the current use of regulatory incentives. Any changes explored to accommodate developing industry trends and support new policy objectives should do so without compromising affordable rates, safety, and reliable service." A report on findings is due to the Legislature by Sept.15.

I think RMI is spot-on in framing "Reimagining" as relevant to all U.S. electric utilities. Real change is not only coming to the industry; it's here, at least initially, and it's here to stay. [Mark Ohrenschall]

Bearing Down is excerpted from Energy NewsData's Clearing Up publication. If you aren't a current subscriber, see for yourself how NewsData reporters put events in an accurate and meaningful context -- request a sample of Clearing Up.

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