The Utility as a Distribution System Platform: NYPSC Issues Order in REV Proceeding to Establish A New Paradigm for Utilities, Customers, and Distributed Energy Resources

In an important order (“Order”) issued on May 21, 2016 in its Reforming the Energy Vision (“REV”) proceeding, the New York Public Service Commission (“NYPSC”) announced the details of a new paradigm to govern the relationship among utilities, customers, and distributed energy resources (“DERs”).[1] In this new framework, utilities are to play an important role in stimulating the development of DERs, and empowering customers to become more involved in the management of their energy consumption, to develop a modern power system that is “clean, efficient, transactive and adoptable to integrating and optimizing resources in front of and behind the meter.”  Essentially, utilities will become the distribution system platform (“DSP”) on which this new relationship between DERs and customers will be built. The NYPSC is creating a new regulatory model under which utilities will have established (e.g., cost-of-service ratemaking) and new sources of revenue and earnings, including:

• earnings tied to the achievement of alternatives that reduce utility capital spending and provide definitive consumer benefit;
• earnings from market-facing platform activities; and
• earnings from transactional outcome-based performance measures.

In creating this new regulatory paradigm, the NYPSC was guided by three essential principles:

• first, the uni-directional 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; and
• third, and the principle that the NYPSC observed was “critically important” to the 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.

Specific Ratemaking Proposals

1. Earnings

Under the new regulatory framework, and in addition to cost-of-service arrangements, utilities can earn revenue through the following arrangements:

• Platform Service Revenues (“PSRs”)

PSRs are new forms of revenues utilities will earn from displacing traditional infrastructure projects with non-wires alternatives. They include: (i) services that the NYPSC will require the utility to provide as part of market development; (ii) voluntary value-added services that are provided through the DSP function that have an operational nexus with core utility offerings; and (iii) competitive new services that can be readily performed by third parties, including non-regulated utility affiliates, and should not be offered by regulated utilities. In the Order, the NYPSC noted that its staff had provided examples of PSRs that could generate revenue for utilities, including: (i) customer origination via on-line portal; (ii) data analysis; (iii) transaction and/or platform access fees; and (iv) engineering services for micro-grids.  This list is not mean to be exhaustive, as the NYPSC believes PSRs will evolve over time as the DER market matures.  Additionally the Order provides standards for evaluating and approving PSRs.  Finally, the NYPSC noted that a portion of the revenue related to PSRs should be allocated to utility earnings in order to provide an incentive to optimize the use of the DSP.

• Earnings Adjustment Mechanisms (“EAMs”)

Unlike PSRs, EAMS are directed to performance-based incentives.  EAMs include incentives for:

• peak load reduction and load factor improvement;
• energy efficiency;
• customer uptake and engagement;
• interconnection; and
• service affordability

The NYPSC expects EAMs to be developed primarily in rate proceedings and to be tailored to a utility’s specific circumstances.

• Greenhouse Gas Reductions

In a separate proceeding, the NYPSC is considering a Clean Energy Standard (“CES”) to achieve the State’s target of 50% renewable generation by 2030. Utilities should have earning opportunities tied to reducing the overall cost of achieving the CES goal. The specific nature of opportunities will depend on policy and implementation decisions that will be made in the CES proceeding. Utilities will also be encouraged to propose programs to accelerate the conversion of transportation and building end uses to efficient electric alternatives.  Such conversion programs could serve the purposes of system efficiency and carbon reduction.

2. Competitive market-based earnings

Unregulated utility subsidiaries are authorized to engage in competitive value-added services. To engage in these activities the utilities must have in place standards of conduct to avoid affiliate abuse, to be monitored by the NYPSC.

3. Data access

The conditions under which utilities may charge for individual customer usage data are established. Standard reporting of aggregate customer data is provided for. Certain basic levels of information will be free of charge, while utilities may charge a fee for provision of more refined data or analysis.

4. Claw back reform

During a rate plan, utilities will be encouraged to displace capital expenditures with third party DER investment where cost-effective. Utilities would be allowed to retain authorized capital project funding for DER that replaces a capital project.

5. Rate Design

The NYPSC proposes some incremental changes but is requesting additional study before making changes in the “mass market” (residential) customer rates.

• Opt-in rate design - Voluntary participation in advanced rate design will be encouraged in two ways:
• Opt-in time of use rates - Each utility will examine its existing Time of Use (“TOU”) rates with reference to other jurisdictions that have higher participation; each utility will also develop improved promotion and education tools. Nationwide, TOU opt-in rates have a 25% penetration compared to less than 2% for most NY utilities.  The NYPSC is requiring the utilities to enhance TOU promotion.
• Smart Home rates - Utilities will collaborate with NYSERDA and 3rd parties to develop Smart Home Rate pilots. These rates would incent such measures as energy efficiency and electric vehicle charging.  They are time variable rates with full value compensation for customer generation.  The utilities are required to establish demonstration projects.
• Large customer demand charges - Rate cases will examine existing demand charges applicable to C&I customers to determine if they can be made more time-sensitive or if determinants such as the peak-to-off-peak ratio can be changed to influence customer decisions.
• Residential rate design - Staff will work with stakeholders and report to the NYPSC regarding bill impacts of opt-out variable rate scenarios, including TOU rates, demand charges, and peak-coincident demand charges.

9. Standby service:

Utilities will establish campus tariffs and reliability credits, and will begin a process to modernize the calculation of standby tariffs to ensure that they do not create an unnecessary barrier to entry.

• Current standby rates are designed to reflect the full cost of delivery under the assumption that customers’ on-site generation will not be available during peak time periods. Greater levels of DER mean that the risk that all standby demand will occur simultaneously is lower.
• Current contract demand charges should continue to apply to the customer’s maximum annual demand of each individual building on the campus. This does not preclude alternate rate designs that may include a demand charge to campuses that is applied to coincident demands with a corresponding cost allocation.
• Each utility must make a filing, within 60 days, that describes its cost allocation methodology for current standby rates. It should discuss: (a) a rate that rewards customers that engage actively with the utility to provide system value; (b) a reduction in the percentage of costs allocated to the contract demand with a corresponding increase in the allocation of costs to the daily as-used demand charges; (c) a potential distinction between new load and existing load, with a phase-out period for new load status; and (d) a method which first identifies the marginal cost-of-service and then applies an adder for non-capital related cost recovery.
• The NYPSC adopted Con Edison’s tariff provision that provides that a customer’s performance during each summer period will exclude up to three outage events, regardless of the cause of such events, comprised of no more than five 24-hour weekday periods.

Scorecard metrics A non-exclusive list of scorecard measures is adopted, and a collaborative process will be conducted to establish metrics for each measure.  The metrics are designed to measure the success of utility implementation of the NYPSC policy initiatives, including customer satisfaction measures.

11. Implementation

Generally, the NYPSC’s directives are intended to be implemented in utility rates cases, though some measures may be implemented earlier, and in which case the NYPSC is allowing deferral accounting and reporting requirements to monitor activity until rates are reset. The Order and the general REV proceeding are being closely monitored across the country.  New York is one of the handful of states that is seriously considering a fundamental shift in the manner in which traditional cost-of-service utilities operate in an evolving, cooperative world of innovative solutions and services for maintaining, grid reliability, and resilience and responsiveness.  We will continue to keep you apprised of developments in the REV proceeding and in related proceedings (e.g., the CES proceeding).  

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  [1] In the REV proceeding, the reference to DERs includes arrangements involving energy efficiency, demand response and distributed generation.