The New York State Public Service Commission is on a path to move away from traditional cost-of-service regulation for electric utilities. This is good news for New York consumers who might be looking to lower their electric bill or reduce their reliance on the power grid. In fact, the policy move is motivated by advances in energy technology, increased concerns about the environmental impact of fossil-fuel generation, and consumers’ interest in having more direct control over their electric service. The ongoing, multi-step restructuring aims at changing long-standing regulatory rules to give power producers, utilities, and consumers the flexibility to make choices based on changes in supply and demand – just as participants in unregulated markets do.
The FTC staff supported early deregulatory steps in the NY PSC’s “Reforming the Energy Vision” proceeding, which required a fresh look at the one-size-fits-all approach usually associated with traditional monopoly utility regulation. Under that approach, local power companies were designed and operated as an extension of the larger transmission system, the final step in delivering power to homes and businesses from large (and often distant) generators, all owned and operated by heavily regulated monopoly utilities. But now, new technologies – including small-scale generators, renewable generation, energy storage devices, and electric vehicles – have opened new opportunities for competition between distant power generators and local sources connected to the distribution system (but often installed on the customer side of the meter).
One key development that is driving change in electric power markets is Distributed Energy Resources (DERs) – small-scale generation facilities that are typically not owned by a utility. DER technologies include roof-mounted solar panels, cogeneration facilities, wind turbines, and back-up generators, as well as new types of energy storage devices. This includes new technology batteries, but even electric vehicles connected to the grid can help balance supply and demand locally. DERs work best with “smart meters” that allow consumers to shift power consumption to avoid higher prices during peak usage hours or whenever the grid is stressed. These new technologies promise significant benefits for consumers: power generated nearby by DERs can not only lower electricity costs but also improve reliability of service and reduce the environmental impacts of electricity consumption.
The challenge for policymakers is how to adjust existing rules and rates to encourage efficient investment in new power sources – production facilities that could compete with the utility’s own generation, transmission, and distribution assets and could reduce demand for transmission and distribution services. Specifically, traditional cost-of-service regulation can cause utilities to favor their own expansion projects or create obstacles for unaffiliated projects – even more efficient ones – to connect to the grid. This type of discrimination against unaffiliated service providers is a known risk of moving from monopoly regulation to a regime that permits competition for some services (including generation) previously provided only by the utility.
In the NY PSC’s most recent call for comments, the NY PSC staff proposes to move electric distribution utilities from a cost-plus revenue model to one that creates a level playing field for new power projects. Proposals on the table would create new sources of revenue for a utility that (1) assisted DER projects or (2) improved system performance through efforts such as peak load reduction, energy efficiency, customer engagement and information access, affordability, and interconnection. In comments filed last week, FTC staff supports this latest effort to clear the way for new DER projects, encourages the NY PSC to consider additional changes that would counteract incentives to discriminate against firms that provide services to DER projects, and urges the NY PSC to expand the criteria for measuring successful performance. For instance, a simple comparison of the time required to process DER connection applications could measure performance more easily than data-heavy quantitative measures. Such monitoring also could reveal if the utility was delaying approval of independent DER projects while moving ahead on similar projects in which it had an interest.
The NY PSC staff also proposes to fast-track changes in rate design that would give consumers more accurate and timely information so they could directly manage their power usage based on day-ahead pricing information. This so-called Smart Home Rate could help consumers take advantage of onsite DER generators, smart appliances, and more advanced in-home energy management systems. Consumers eager to take advantage of available technologies, including clean energy options, could opt in to this new rate. FTC staff notes that timely and accurate pricing information can help consumers reduce monthly power bills quickly, as well as plan for longer-term savings by taking steps to reduce usage.
If pursued, these reforms have the potential to reduce the cost of electricity by allowing consumers (and others) to invest in lower-cost power generation while minimizing the risk of anticompetitive behavior by the local utilities. In some cases, utilities may find that relying on DERs is a lower-cost substitute for their own local distribution investments. Changes in local utility regulation are likely to produce results similar to those seen over the past 25 years due to transforming the regulation of wholesale power markets: opening the markets to competition can help make the distribution system more efficient, transparent, and reliable.