As distributed energy resources come onto the grid in increasing numbers, the distribution system may need a new level of regulation to ensure new services get delivered efficiently, according to a proposal from Jon Wellinghoff, former FERC chair and current partner at Stoel Rives, and James Tong, vice president of strategy and government affairs at Clean Power Finance. 

Regional Transmission Operators (RTOs) and Independent System Operators (ISOs) have, in partnership with utilities, expanded and streamlined the grid’s electricity markets over the last decade.

Now, utilities need a partner at the distribution system level to do the same for retail electricity, according to the proposal. 

Why the grids needs an Independent Distribution System Operator

In order for solar and other distributed energy resources (DERs) to add more value to the bulk system and cause less stress, Wellinghoff and Tong are calling for the creation of an Independent Distribution System Operator (IDSO) to handle the planning and operations of the distribution network. 

Today, utilities own and rate base transmission system assets while answering to the Federal Energy Regulatory System (FERC) and leaving day-to-day operations to RTOs and ISOs. Under the proposal, they can own and rate base distribution system assets while answering to state regulators and leaving moment-to-moment operations to the Independent Distribution System Operator.

The consolidation of balancing authorities and operational control of the wholesale market system through system operators has proved a much more efficient model, Wellinghoff, co-author of Rooftop Parity: Solar for Everyone, including Utilities, told Utility Dive in an interview.

The proof is a 2009 study by FERC and four Southeastern state commissions that showed Entergy could save a minimum of $700 million over ten years by joining the Midcontinent Independent System Operator, he said.

“Now we have the software tools and computing capability to bring those benefits down to the distribution level,” Wellinghoff said. That will grow the system and give DER entrepreneurs greater visibility into where the value is in technologies like solar PV and storage.  “They will go get that value. And that will benefit customers who use and invest in DERs.”

“And that also will create new incentives for innovation,” added co-author and Clean Power Finance VP James Tong.

What an Independent Distribution System Operator would do

“State commissions will still have complete authority, just like FERC has complete authority over the RTOs,” Wellinghoff said. 

But their role changes slightly, he explained. The IDSO would manage planning and operations. The commission would have ultimate approval authority and be “a market overseer, enforcer of market rules, and creator of market structures, much as FERC does now at the wholesale level.”

An IDSO would: 

• maintain system safety and reliability
• provide open and transparent system access
• implement market mechanisms
• oversee optimal DER deployment and dispatch
• guard consumers’ access to all transactive energy services
• allow regulated utilities, unregulated energy sellers, independent energy and service providers, and electricity customers equal opportunity to meet new electricity consumer needs.

Utilities now do the planning and set values at the distribution level, Tong said. “Because of that, the debates are about net energy metering. But the real threat to the existing utility model is that people are becoming more efficient. The EIA estimates load growth will only be 0.9% per year for the next 30 years.”

The opportunity for utilities

If utilities turn operation of the distribution system over to an IDSO, Tong said, they can focus on the opportunity to offset slowed load growth by investing in DER and DG on the regulated side and opening similar opportunities on the unregulated side.

“In a world that is all monopoly-owned assets, utilities could be effective distribution system gatekeepers,” Tong explained. “But in a world with a lot of DER and customer-owned assets, there is an inherent conflict of interest. It would be, to borrow an analogy, like an air traffic controller that also owns an airline.”

While FERC has begun turning the grid over to system operators, state commissions and utilities can similarly turn moment-to-moment distribution system operations over to IDSOs. That would free utilities, bolster unregulated energy suppliers and independent energy service providers, and empower electricity customers.

An IDSO would eliminate distribution system encumbrances for regulated utilities, the proposal explained, and free them from some reliability burdens. Utilities could then form partnerships with independent generation and service providers. Those businesses could offer profit opportunities in return for utility capabilities like customer outreach, billing, project implementation, local regulatory expertise, and access to capital.

California regulators have acknowledged the need for streamlining distribution system operations in a proceeding to oversee IOU’s implementation of mandated Distribution Resources Plans. California IOUs are mandated to integrate cost-effective DERs into their distribution systems “with the goal of yielding net benefits to ratepayers.”

Where the systems meet

There is an especially important opportunity at the intersection of wholesale transactions on the transmission system and retail transactions on the distribution system, Wellinghoff said.

An example is the recent decision by a D.C. district court that FERC has no jurisdiction over demand response because it is a retail product. “There are 15,000 megawatts of demand response in PJM and that is of tremendous benefit. According to PJM, it drove down capacity prices $12 billion last year,” Wellinghoff said. "If that decision stands, it could exclude all types of retail activities, including distributed generation, storage, and efficiency.”

The only way to prevent the loss of what are extremely valuable assets would be the creation of something like an IDSO, he said. It could aggregate those retail products and allow a market exchange through a wholesale-retail interface with the bulk system. “The states would have jurisdiction over what the court says are retail products and FERC would continue to have jurisdiction over the wholesale products.”

Even utilities that are now opposing the entry of demand response in capacity markets could see benefits. Instead of “frantically doing whatever they can to prevent customers from reducing usage through things like demand response,” Wellinghoff said, “they could be the owners and maintainers of a distribution system platform, upgraded to include demand response on IDSO plans, that they could build and rate base.”

An IDSO also would reduce a utility’s risk in the approval process, Wellinghoff added. The IDSO would do planning through a stakeholder process with the utilities at the table. It would then recommend the selected investments to the regulators. “That is in essence an independent third party recommending to the commission that upgrades be made that the utility could rate base,” Wellinghoff said.