New York PSC enacts new revenue models for utilities in REV proceeding

Dive Brief:

The New York Public Service Commission (PSC) on Thursday approved landmark reforms in how utilities make money, opening new avenues for revenue generation while preserving the traditional cost-of-service model as an option.
The order comes as a part of the state's Reforming the Energy Vision (REV) proceeding, which aims to convert regulated utilities into distribution system platform providers. Key to that mission, regulators said at the outset, would be aligning utility profits with key energy goals such as reducing demand, avoiding costly infrastructure projects, and encouraging distributed generation.
Under the new model, utilities could make money through traditional cost-of-service investments, earnings tied to the deferment of capital investments, earnings from market-based platform activities and market-based performance measures.

Dive Insight:

Today, the vast majority of U.S. utilities still make money in the traditional way — earning their regulated rate of return on costly capital projects they finance through ratepayer dollars.

That model served the sector well for over a century, but the twin challenges of climate change and the proliferation of distributed energy have led regulators in some states to rethink their utility regulation.

In New York, regulators launched REV in 2014, aiming to convert its utilities into "Distribution System Platform (DSP) Providers” — akin to air traffic controllers who facilitate the deployment of various distributed energy resources (DERs) on the grid.

The idea, at its base, is to reform the utility business model and practices so that integrating DERs from third party providers is a central focus, and to ensure that utility companies are incentivized to consider DER solutions as an alternative to traditional grid investments.

Central to that goal is reforming the utility revenue model. While power providers today can earn a regulated rate of return from investing in a transmission line or central station power plant, no such incentive exists for meeting the same needs with distributed generation, demand-side management, or other alternative resources.

Just how to fix that discrepancy has been the subject of nearly two years of deliberations, with over 200 stakeholders involved in the REV docket. On Wednesday, the PSC released new revenue rules, diversifying the ways power providers can make money.

Beyond usual investments, utilities will now be able to earn returns tied to achieving alternatives to traditional options, such as using customer PV and demand management to meet power needs instead of new central station capacity.

They will also be able to earn revenues from "market-facing platform activities" — grid services the utility provides to DER developers to facilitate deployment and interconnection. Examples of such services could include bundled communication offerings, information sharing with DER providers or partnering with third parties to finance home energy technologies.

Finally, utilities will also be able to earn "Earning Adjustment Mechanisms" — near-term performance-based incentives meant to "transition toward mature markets that won’t need directed incentives." The EAMs will focus on four areas:

Efficiency, "defined as a combination of peak reduction and load factor improvement." Each utility will propose and file "a system efficiency targets, with a strategy to achieve it, a demonstration of cost effectiveness, and an earnings incentive."
Energy Efficiency "tied to targets recommended by the Clean Energy Advisory Council (part of the new Clean Energy Fund), that are above and beyond the currently approved targets."
Interconnection, which focuses on improving utility-solar cooperation "by providing a positive incentive tied to developers indicating satisfaction with utility responses."
Customer engagement, which encourages utilities "to propose EAMs tied to customer uptake in specific innovative programs."

Though the new revenue options could represent a sea change for utility operations in the future, they are unlikely to present a major disruption in power company finances in the near term. Throughout the proceeding, utilities argued for the inclusion of traditional cost-of-service ratemaking alongside any new revenue models.

As a part of the order, the PSC directed utilities to file plans by Dec. 1 to "reduce high-cost, energy generation during times of peak energy demand."

Utilities must identify new, more efficient ways to deliver power by promoting the deployment of smaller, cleaner power systems and enabling more control for customers in managing their energy bills," regulators said.

While still a work in progress, the REV docket has helped spur a number of other state regulatory initiatives aimed at reforming utility business models. In Chicago, for instance, Commonwealth Edison is pushing reforms it says would help convert it into a platform provider similar to the REV model, and California regulators recently proposed reforms to allow utilities to earn a regulated rate of return on efficiency and DER investments.