Since the 1920s, utility regulation has helped provide the U.S. with “universal access” to electricity, Jim Rogers, former CEO of Duke Energy, recently noted. Utilities were tasked with building out the power grid – “the single greatest engineering achievement” of the 20th century, Rogers called it – and delivering power to their customers, reliably and affordably.

But that is no longer enough. 

One week before Hawaii regulators announced one of the most significant shifts in utility regulation in recent years, New York did something similar. 

How New York is 'Reforming the Energy Vision'

New York has been at the leading edge of changes in energy regulation for some time.

The state initiated revenue decoupling in the early 1990s, established competition in the wholesale electricity market a few years later, and recently established a “Green Bank” to finance clean energy initiatives.

But on April 24, the state may have made its biggest move yet when Gov. Andrew Cuomo announced the state's new vision for its energy future.

The New York Public Service Commission (PSC) drew up an ambitious proposal called Reforming the Energy Vision (REV), which sought to change the way the state’s electricity is procured, distributed, and regulated. Under the proposed model, traditional utility business models and cost-of-service regulation could quickly become obsolete, while individual consumers are set to become active participants on the grid.

Several factors spurred the state to act. New York’s current infrastructure will require $30 billion of investment to improve the grid over the next 10 years, according to the PSC. Power outages are becoming more frequent and costly as the grid loses supply resources it depended on to meet growing peak demand.

The increasingly severe weather -- Hurricane Sandy, hot summers and this year's harsh winter -- has put these problems in focus, New York PSC Chair Audrey Zibelman told Utility Dive.

In response to these uncertainties, the benefits of integrating distributed energy on the grid look increasingly attractive to regulators. But guaranteeing reliable electricity for the whole state requires a more uniform approach, Zibelman said. 

The REV’s goal is to reconfigure utility regulation to promote energy efficiency, increase the penetration of renewables and grow distributed energy resources.

But the point of the restructuring “is not intended to replace central generation, but rather to complement it in the most efficient manner, and to provide new business opportunities to owners of generation and other energy service providers,” according to the REV.

New York is in a position to take on these challenges, Zibelman explained. The architecture of the grid makes it “technically feasible” to fully integrate energy storage solutions, demand-side management technology and generation from small-scale providers.

Only New York, Texas, and California have fully self-contained electricity generation, transmission and distribution, meaning it is one of three states where contained experimentation is even possible.

Similar to the way independent system operators coordinate wholesale power markets, the PSC has directed the state's utilities to effectively become operators of the distribution network. 

“Business as usual just doesn’t cut it anymore,” Zibelman said. 

Utilities to become 'Distributed System Platform Providers'

While utilities are “responsible for providing reliable service at reasonable cost,” the “business-as-usual approach” needs to change, the PSC stated in the REV report.

Two assumptions of the traditional paradigms are being questioned by state regulators: the assumption "that there is little or no role for customers to play in addressing system needs, except in times of emergency; and that the centralized generation and bulk transmission model is invariably cost effective, due to economies of scale.”

The PSC proposes a new model wherein utilities will plan and operate the distribution grid, integrating distributed energy resources and providing a market where consumers can optimize their energy generation, management and delivery options. Utilities will assume a "pivotal role" as Distributed System Platform Providers (DSPP), according to the PSC, acting as the interface between consumers and the bulk power system.

Consumers take center stage

Central to the utilities’ changed role and future business model is the creation and establishment of a new market where consumers have greater access to energy resources.

“The DSPP will create markets, tariffs, and operational systems to enable behind the meter resource providers to monetize products and services that will provide value to the utility system and thus to all customers," the PSC said. This will “provide customers and resource providers with an improved electricity pricing structure and vibrant market to create new value opportunities.”

Providing opportunities for customers is key to the success of these reforms, PSC Chair Audrey Zibelman told Utility Dive. Much like Hawaii’s recent PUC filing, the REV directive positions customers as “prosumers” -- generators and end-users of electricity. 

Big questions for utilities to answer  

DSPPs will be tasked with making capital investments in the state’s aging grid infrastructure to aid the transition to a distributed energy-centric model. DSPPs will have to plan for and accommodate customer-generated electricity and demand response onto the grid.

With these responsibilities, utilities will have to answer some key questions: How will DSPPs judge the value of different generators' electricity, and how will they judge the value of the supporting technology? The PSC has largely left answering these questions up to the utilities.

Consolidated Edison, New York's biggest utility, said location will be key to determining the value of system investments. The company will pay more for distributed generation, energy storage or demand response in congested areas of the grid, Stuart Nachmias, VP at ConEd, told the New York Times. But "if the wires are fine and there’s capability, it’s not going to help us,” he said. "If it’s a nighttime peaking area, solar isn’t going to help us.”

Although utilities will ultimately have to answer these questions, the PSC has provided them with a little direction. Key considerations are: 1) the type of resource (i.e., how variable and distributable it is); 2) the level of control that can exercised over the resource; 3) how fast it can respond to demand; and 4) if it is customer-controlled, how well it has performed historically and what technologies, if any, are needed for support.

The PSC was quick to note that ensuring any changes are incremental, and not forced, will be critical to managing these challenges. Changes will take time and, to some extent, require trial and error, the PSC explained.

But this much is clear: the utility of the future will need to be flexible enough to integrate distributed energy, demand response, and any new, emerging technologies quickly and efficiently onto the grid. The overall goal is to align utilities and their business models with consumer preferences.

Wanted: Regulatory reforms

The state's utilities currently lack the “incentives and the capability” to directly follow the PSC's vision, according to the REV. 

Today, rates are set on a yearly basis and designed to pay for the previous year’s expenditures. Instead, ratemaking needs to look ahead, the PSC said, with a focus on long-term, desired outcomes.

Ratemaking changes should give the utilities the carrot they need to meet the REV's goal, the PSC said, as well as the reassurance they needed that their profits will not suddenly nosedive. An extended ratemaking process should help utilities make lasting investments for the future, rather than simply determining next year's rates based on last year's investments.

“The existing ratemaking structure falls far short of the pace of technology development that defines many parts of our economy," Zibelman said.

The issue of transparency will be key, Zibelman explained. If customers are to take a starring role in the future of New York’s electricity generation, they will need more access to information about demand response, energy efficiency, distributed generation and what this all means in terms of their utility bills.

New York takes first steps

Currently, the PSC is investigating what the new “rules of the road for utilities” will be, with the hope of publishing their initial findings within a year.

The first task will be to define what role distributed energy, demand response, and other energy management and storage technologies should have, and what role utilities are expected to fulfill. The second will be to determine what changes in regulation and policy are needed to bring utilities’, customers’ and regulators’ objectives in line with each other. In-depth reports on how to achieve these tasks are expected by September 2014 and the end of the first quarter of next year, respectively.

The hurdles that the PSC will need to overcome are not small. Regulators must redefine the utility model, the electricity market, and themselves. Incentives must be put in place to spur utilities to adopt the REV's proposals. A transitional period must be accommodated for.

Encouragingly, Zibelman told Utility Dive, a recent public meeting with utility representatives, consumers, and interest groups was attended by hundreds of stakeholders. If this level of collaboration keeps up, she said, then the PSC’s goals should be achieved.