Weeks after setting in motion one of the most significant regulatory overhauls in the history of the U.S. utility industry, Audrey Zibelman, chair of the New York Department of Public Service (DPS), told the National Town Meeting on Demand Response and Smart Grid last week that the state’s ambitious proposal was born out of the needs of energy consumers.

In the past, “we’ve lacked the pull of consumers,” Zibelman said. “We’ve been pushing — now we need the pull.”

When New Yorkers were without power — some for weeks — in the wake of Hurricane Sandy, communities "wanted to be grid-independent," Zibelman said. Communities in the state “got together and made the decision of where they were going to focus” their efforts and decided they wanted to allow for more distributed energy resources, Zibelman explained, citing Governor Cuomo’s Community Rising initiative.

Consumers, Zibelman said, are the “disruptive force that’s going to change things."

Why New York is forging a new path

The main problem with New York’s electrical infrastructure, according to Zibelman, is that it has been designed to meet the state’s superpeaks of 33,000 MWhs – something that happens for only a few hours a year. The normal load for New York is around 25,000 MWh, but the cost of meeting the superpeaks alone is around $450 million per year to the consumer, she said.

After examining these problems, the DPS made a policy determination late last year that energy efficiency and cleantech “should no longer be considered on the periphery of the utility industry.” Rather, Zibelman said, “we have to think about how it becomes central.”

And so the REV was created. The point of the order is drive certain outcomes, including a “much more consumer-powered grid,” Zibelman explained.

The distribution utility “can no longer just be the wires company,” she said. The new path forward is about “the alternative of just using wires and how you use distributed resources as primary resources to plan and manage the grid.”

New York did not want to drive these outcomes through mandates. “The technology is there” to make electricity more affordable, Zibelman explained — it’s just a matter of getting private capital into the system.

“Our customers are starting to invest in distributed resources, load control, and things like that,” Zibelman said. “We wanted to leverage the ability of consumers to be active participants in the market” and “maximize the value of that capital by integrating it into the operations of the system to drive system-wide efficiency.”

In New York, utility revenues are decoupled from electric sales to ensure utilities are neutral on energy efficiency. “But we realized that’s not the answer,” Zibelman said. “What we need to do is make sure our distribution utilities are economically advantaged” to drive greater energy efficiency.

The DPS wants to give utilities “the opportunity to drive additional revenues from innovation,” she said, opening the door for utilities to go beyond the meter and offer valuable, non-traditional utility services to consumers.

“It’s a matter of carrots, as opposed to just penalties,” Zibelman said.

Is New York a model for other states?

Shortly after the DPS issued its ambitious REV proposal, Hawaii announced its own overhaul of the utility business and regulatory model.

Despite the unusual nature of the island region’s isolated and self-contained electrical grids, Zibelman pointed to Hawaii as “the example of where we are all headed.”

“We’re moving away from a centralized grid where everything is solved at the level of the bulk power system,” Zibelman said, explaining that utilities must transform into “market-makers” who solve problems at the edge of the system. “The ability to manage load is the solution, not the problem,” she said.

PSEG CEO Ralph Izzo, who sat on the panel with Zibelman, said he is not sure that the utility industry is heading in that direction. “But if we are going there,” he continued, “we do need some pause and ask ourselves – how are we getting there?”

If the market comes up with customer-sited technologies that are more efficient than the electrical grid, “then so be it,” Izzo stated. But if regulatory systems “are violating one of the fundamental premises that electric utilities have been under for a century – universal access – then we need to rethink it.”

Izzo noted that distributed energy resources are far less efficient than the grid, calling rooftop solar’s load factor “fairly pathetic.” The current subsidies for rooftop solar may be creating “enthusiasm for potential over-generation” and placing a greater burden on lower-income utility customers, Izzo observed.

“If the owners [of rooftop solar systems] are high-disposable income people benefiting from market mechanisms called solar renewable energy credits or investment tax credits,” Izzo said, “I would just tell you we are driving the system to one of the most highly regressive, poorly designed social solutions to a nonexistent problem.”

Despite Izzo's concerns, Lisa Frantzis, who has put together a working group of utilities and advanced energy companies as the senior vice president of strategy for Advanced Energy Economy (AEE), told Utility Dive that New York’s REV proposal is “the beginning of many other states soon coming on board to do something similar."

The need for resiliency, adaptability, environmental sustainability and greater customer control is driving utility regulators to consider orders such as the REV, Frantzis said, on top of challenges such as aging infrastructure, flat or declining load growth, and renewables integration. “All that is coming together throughout the U.S.,” Frantzis said. “A lot of states are looking for solutions.”

Frantzis told Utility Dive she believes the Northeast and California are “poised” to look at these issues next. “I don’t think [New York’s REV order] is at all in isolation,” she said.

Is the REV a threat or opportunity for utilities?

After being directed to become Distributed System Platform Providers, the role of the electric utility is “up for grabs,” Frantzis said.

“Utilities see [the REV] as a business opportunity,” Frantzis said. Besides basic utility service, value-added services “that customers would be willing to pay for — be they added reliability, microgrids or ancillary services from a distribution level” — are emerging, Frantzis said.

Utilities could “provide just the distribution system platform to allow others to come and play,” Frantzis said. But “in the groups we were in, the utilities were saying, ‘Why can’t we play in that space, too?’”

While Frantzis highlighted that “there’s a lot of opportunity” for utilities, there is also “a little risk.” “The details are not fleshed out yet,” she said.

Izzo, whose company owns PSEG Long Island (formerly known as LIPA), was bullish on the utility’s role as a market-maker.

“I would hazard to bet that if we went to all of the vendors out there today and said the utility will be tasked with greater energy efficiency, more distributed resources in highly constrained load pockets and basically became your sales channel – would you be interested in that?” Izzo said. “I can tell you absolutely that the CEO of Honeywell and the CEO of GE have both said, ‘I would love to see that happen.’”

If the regulations are set up correctly, Izzo said, utilities “have the ability to make [energy efficiency and value-added services] happen for all the customers.”

NY DPS Chair Audrey Zibelman said utilities should be “economically rewarded for achieving outcomes that are much more aligned with consumer interests,” arguing that the REV is an opportunity — not just a challenge — for utilities.

Despite acknowledging the REV is “ambitious” and couldn’t have been done 10-15 years ago,  Zibelman said she now thinks it is “eminently doable.”

“This is not a question of whether we should do it. We honestly have to do it. And we now have the capability do it,” Zibelman explained. “So why wouldn’t we?”