Few expect the nation’s electric utilities to look the same in 20 years as they do now.

The transformation of the power sector is being driven by a revolution on the distribution system. The traditional one-way system of wires and feeders is being complicated by an influx of distributed energy resources from rooftop PV systems to smart water heaters.

Just last week, developments on the grid edge were thrust back into the spotlight as New York regulators moved forward with the Reforming the Energy Vision (REV) docket.

But even for the most committed industry analysts, keeping track of all the changes is daunting. In a nation with 50 states and even more regulatory bodies, how is one supposed to know which regions are pushing the transformation, and which are being left behind?

That is the question that GTM Research took on in its recent report, “Regulating the Utility of the Future: Implications for the Grid Edge.” Author Bentham Paulos, principal at PaulosAnalysis and a consultant for GTM, says that regulating new business models “has been the topic for utility circles for the last couple of years … There’s been really endless talk about it.”

“Every consulting shop has a stitch on it. There are probably ten universities with projects on it, NGOs and so on,” he told Utility Dive in an interview. “What’s happening now is regulators are turning all of that talk into action.” 

Why some regulators are pushing grid transformation

To make sense of the flurry of conversations surrounding utility business models of the future, Paulos selected the five states he says are doing the most to push their utilities toward the business models of the future: California, Hawaii, Massachusetts, Minnesota, and New York.

“Those five states we identified are really the states that are most proactively looking at regulatory changes that would facilitate all of the transformations people are talking about,” he said.

While all the states are going about reforming utility business models a bit differently, they have some things in common. Paulos says all of them are looking at grid transformation as an opportunity to reduce electricity prices, increase reliability and/or reduce emissions. That—or they feel pressure to respond. Hurricane Sandy was one such catalyst for the REV proceedings in New York.

“Superstorm Sandy in New York and Connecticut caused tremendously destructive outages, and now they’re looking at distributed technology to create a more resilient grid, but they need policies that will encourage the distributed technologies to happen," he said. "That’s what’s really behind the REV proceeding in New York. They looked at Sandy and saw this opportunity.”

But pressure doesn’t just come from storms and other reliability challenges. The power of the dollar is just as compelling.

“[Regulators] also frankly just see all of these new technologies, this wave of new IT-enabled distributed technology coming, and they want to take advantage of it,” Paulos said. “They see that it’s not going to succeed if they deal with it with traditional utility regulation and traditional utility business models.”

California confronted by 'every aspect of the utility transformation'

It should come as no surprise that Paulos identified California and Hawaii as the states at the forefront of utility regulation. Beyond simply devising regulatory structures in the abstract, utilities in those states are actively transforming their business models today and deploying the next-generation technologies necessary to do so.

“California is dealing with potentially every aspect of the utility transformation,” Paulos said. “It is deploying new technologies at scale—the storage mandate is a good example of that—whereas the Eastern states are much further behind in terms of deployment.”

The difference between California and the Eastern states has less to do with ideology and more with economics, according to Paulos. The rapid proliferation of clean energy vendors in the Golden State has pushed California utilities to integrate more innovative technologies and deploy them at a large scale. “[Eastern states] don’t really have that commercial pressure that California has,” he said.

“There are so many companies [in California] trying to sell things and so many customers eager to buy things that there’s this tremendous commercial pressure pushing the regulatory process along,” Paulos continued. “So it’s not just that the regulators want things to happen — it’s that things are happening and the regulators are trying to keep ahead of it.”

Other energy policy houses largely agree with Paulos’ assessment. Late last year, the Advanced Energy Economy Institute named California the leading state for alternative energy, noting that the clean energy economy in the state is rapidly approaching 500,000 jobs.

Hawaii dealing with system change 'in real time'

As proactive as California’s utility regulation appears to be, the situation is more pressing in Hawaii. With some electric circuits on Oahu approaching 20% rooftop solar penetration, regulators and the Hawaiian Electric Co. (HECO), the state’s dominant utility, have been forced to think on their feet.

“Hawaii is probably an even more vivid example,” Paulos said. “Electricity prices are so high in Hawaii that customers are eager to do something about it and now that you have affordable solar, and we’re getting affordable storage ... there’s so much consumer demand in Hawaii that it’s creating rapid change and pressure on utilities there.”

Back in November, for instance, HECO announced it was entering into a partnership with SolarCity and the National Renewable Energy Lab (NREL). The reason, HECO said, was to study how to interconnect high penetrations of rooftop solar without sacrificing reliability or safety.

At the time, HECO had more than 3,000 rooftop solar customers on Oahu waiting to connect their systems to the grid, but did not know if they could do so safely. Although testing at NREL of smart inverters and other technology is still ongoing, preliminary results were so encouraging that HECO announced plans to connect the backlogged solar systems.

“In Hawaii, [regulatory and business model reform] is really driven by necessity,” Paulos said. “They have to deal with this because it’s happening in real time. There’s tremendous political pressure to not let the utility stop it because prices are so high that it’s an economic development issue for the state to reduce electric costs. So, I don’t see any slacking of political will in Hawaii.”

Massachusetts aims to mitigate market troubles

Besides New York, the East Coast state that’s making the biggest regulatory strides is Massachusetts. Paulos says the reforms there are motivated more by economic factors than reducing carbon emissions, despite the state’s liberal heritage. 

“The grid modernization docket is really driven by the economic opportunity of applying new technologies,” Paulos said. “There are a lot of technology companies in Massachusetts, power prices are very high, they have a number of wholesale market issues.”

The unique contours of the Northeastern energy market are pushing the state to consider options beyond new generation and the wholesale markets.

“They are very dependent on natural gas [in Massachusetts], which creates wintertime problems," Paulos said. But far more than volatile gas markets are pushing regulators to look at new opportunities on the distribution system.

“It’s virtually impossible to build anything in New England because transmission lines are hard to site, gas pipelines are hard to site, and wind farms—God forbid,” Paulos said. “So, their wholesale options are very limited and there’s this whole realm of distributed options that are mostly undeployed in Massachusetts. They still don’t really have smart metering deployment, so it’s really an ideal place for smart grid and they have very little of that so I think they want to see that happen.”

Minnesota and beyond: Where grid transformation isn't pressing

If there’s one state that stands out on the list, it’s Minnesota. A fully regulated state in the upper Midwest, Minnesota is “probably the furthest from the transformative pressure on the utility system,” Paulos says. But that doesn’t mean regulators and utilities aren’t already thinking ahead.

“They have proceedings open on solar, on smart grid and other issues,” he continued, “so we took a look at Minnesota really as a representative of states where the issue isn’t as clear or immediate as it is in Hawaii or California but it has a reputation as a thoughtful state for regulators and one that can be proactive.”

Paulos isn’t alone with his sunny outlook for the Land of 10,000 Lakes. Last month, Xcel Energy CEO Ben Fowke predicted that 2015 would be a “transformational year in Minnesota.” As Utility Dive has reported, Xcel is working with regulators in the state to cut its carbon emissions 40% by 2030 and modernize the distribution grid. Fowke said on the company’s fourth quarter earnings call that the performance-based regulatory model under development Minnesota will “better align with the clear direction that customer preferences, federal policies, and state initiatives are moving.”

Of course, innovations to the utility business model aren’t limited to these five states, Paulos reminded Utility Dive. Other states are “looking at fragments of [the transformation], but haven’t consciously said ‘This is what we’re going to do to create the utility of the future.’”

Texas, he said, is one such state. Despite lacking meaningful incentives for utilities to transform the distribution grid, Oncor Electric announced in November that it wants to invest in 3-5 GW of energy storage to help integrate renewables on the grid. Paulos says we can expect more of that kind of behavior in the Lone Star State in the near future, as well as a proliferation of solar projects.

“I think we're going to see a huge amount of utility-scale solar happening in Texas in the next few years,” Paulos said. “They have really extremely bad net metering and distributed generation policy so I’m not sure I see that changing, but it might someday. They really heavily discourage self-generation in Texas and maybe someday customers will wake up to that fact and complain about it.”

Who owns the distribution system?

Moving forward, there are some critical questions each state must answer, Paulos said. The most important will likely be figuring out who owns and operates all the technologies on the distribution system. Whereas in the past a utility-owned gas peaker plant balanced supply and demand on the grid, the industry is entering a future where those functions may be done on the grid through rooftop solar, distributed storage, or another technology beyond the substation.

“In the old model, the gas peaker was owned by the utility and they did that. They got paid for that," Paulos said. "The new model is that these services can be offered by a whole suite of options and they don’t have to be owned by the utility. They can be owned by customers or third parties, and this is a source of huge tension in a lot of these dockets.”

That creates both immense opportunities and daunting challenges for utilities. As Utility Dive’s recent survey of more than 400 U.S. utility executives showed, utilities across the nation see distributed energy resources as their biggest growth opportunity, but many are still not sure how best to monetize the distribution grid.

That question of who should own and operate the distribution grid and the technologies on it is a central question in the conversation about the utility of the future. The solar community, led by SolarCity, would like to see utilities contract with third party providers for distribution grid services. But some power companies — like Duke Energy, with its Coalition of the Willing microgrid project — are exploring ways for the utility to have stronger ownership and operational responsibilities beyond the substation. Others, like former FERC Chair Jon Wellinghoff, would like to see an independent distribution system operator — similar to an ISO/RTO, but for the market beyond the substation.

New York regulators took a big step toward answering that question in their state last week. In a groundbreaking order on the REV docket, the Public Service Commission ruled that the state’s utilities will be responsible for developing and operating Distributed Service Platforms on the grid.

"Each utility will serve as the platform for interface among its customers, aggregators, and the distribution system," the order reads. "Utilities will respond to new trends by adding value, thereby retaining customer base and the ability to raise capital on reasonable terms."

The REV docket aims to construct a system that some have called the “plug-and-play grid,” where the utility operates the distribution system as a platform that supports technologies like rooftop PV, smart inverters, grid-scale and behind-the-meter storage, and much more.

In New York, it appears regulators have decided that utilities are best suited to operate such platforms, but it’s still very much an open question in other states. The decisions regulators make in the coming years, Paulos said, may well determine what utilities look like for decades to come.

“Who will own these solutions? How will it be decided who will own them? … Those are all unanswered questions and I think we won’t know the answers to the questions until they start happening,” he said. “Regulators will ask you to be aware of that and consider how they want the utility system to develop.”