With New York’s REV initiative making headlines across the nation and California utilities busily preparing their distribution resource plans, a nagging question for the utility sector is in the limelight: Who should operate the distribution grid beyond the substation?

In the vast majority of states, the question hasn’t really come up yet. Utilities typically own and operate the distribution grid, right up to where the line enters your home or business. Third parties, like rooftop solar installers, can go and place their technologies in the home, but they must be connected to the utility grid, which isn’t always thrilled to host them.

But now, with the proliferation of smart grid technologies, the explosive growth of rooftop solar, and new efficiency and reliability demands on utilities, regulators in a few states are starting to rethink the traditional ownership and operation model for the distribution grid — much like in the 1990s, when certain state and regions created wholesale markets at the generation and transmission level. Today, New York is looking to transform utilities into distributed system platform providers, allowing them to own and operate the grid, but effectively prohibiting them from owning distributed energy resources (DERs).

Other states looking to modernize and monetize the distribution grid are taking a different approach. In February, California regulators directed the state’s investor owned utilities to develop distribution resource plans, telling them to come up with programs that allow for two-way energy flows, enhanced customer choice for DERs, and increased opportunities for DERs on the grid edge. State regulators aim to "begin the process of moving the IOUs toward a more full integration of DERs into their distribution system planning, operations, and investment.”

While utilities are largely prohibited from owning DERs today, the dynamics may change. Two Arizona utilities' rooftop solar programs have drawn the industry's attention, while other utilities consider whether to make similar moves. 

California utilities are actively attempting to move into DER ownership with plans to own electric vehicle charging stations. Some, like the Sacramento Municipal Utility District, have told Utility Dive that they are considering moving into rooftop solar ownership as well.​

“Utilities need to get into [the rooftop solar] space,” Ted Reguly, San Diego Gas & Electric’s (SDG&E) former director of customer programs and projects, told Utility Dive last year. But “there needs to be a change in our regulatory construct” that allows utilities to own and operate residential solar systems.

SDG&E, for its part, has no plans for rooftop solar ownership according to spokesperson Hanan Eisenman, but is working to integrate DERs such as battery storage and electric vehicles onto its grid.

Other states making moves to modernize the grid include Hawaii, Massachusetts, and Minnesota, GTM Research noted in a recent study. But none of those states have yet proposed significant changes to the utility’s incumbent role as the owner and operator of the distribution system.

On the other side of the spectrum are proponents of an independent distribution system operator (IDSO), led by former FERC Chairman Jon Wellinghoff, currently a partner at law firm Stoel Rives. They argue the distribution system should be owned by utilities, but operated and regulated by an outside entity, similar to an RTO on the transmission grid. No states have yet adopted this model, but some industry watchers say the proactive ones are inching toward it, and the industry could see an IDSO soon enough.

The IDSO model

Under the IDSO model, utilities would still own the poles and wires on the distribution grid — as they do on the transmission system — but would turn over operations to the IDSO. The IDSO would be under the jurisdiction of the state utility regulators and would operate and plan for the distribution system.

[The utility] will be a stakeholder in the planning process and in the operational process of the independent entity like they are at the RTO level,” Wellinghoff told Utility Dive in an interview, “but they won’t operate the system and ­they won’t plan for upgrades to the system. That will be done independently.”

This arrangement would allow utilities to enhance investments in DERs, according to IDSO backers. With a neutral arbiter taking over moment-to-moment operation of the grid, the thinking goes, utilities could form partnerships with third party DER providers. Those businesses could offer utilities new revenue opportunities in return for capabilities like customer outreach, billing, project implementation, regulatory expertise, and access to capital.

As Wellinghoff puts it, utilities on the distribution grid should have the same role as they do in transmission. Once they are a competitive entity on the distribution grid, they cease to be a utility in the traditional sense.

"A utility is the owner of a monopoly asset that the state has decided for reasons of efficiency should be retained as a monopoly asset," he said. "We decided that for transmission lines, at the bulk transmission level ... So if we want to maintain those utilities; then we maintain them as the owners of [T&D] assets and entities, who maintain and invest in those assets, and that’s their only function."

“If somebody wants to become competitive, if they want to provide competitive services like distributed generation, battery storage, and other advanced technologies … Then let them go out and be competitive with everyone else,"  Wellinghoff said, "but don’t call them a utility because they’re not a utility.​”

The IDSO model differs from New York, where utilities will still operate the grid and DER ownership will be the “exception, rather than the rule,” according to regulators. Under the new REV order issued earlier this month, utilities would be barred from owning DERs except in specific circumstances where “markets have had an opportunity to provide a service and have failed to do so in a cost-effective manner.”

The motivation to separate utilities from DER ownership, whether in an IDSO model or the REV, is to ensure fair competition. Distributed energy vendors worry that utilities will not be neutral arbiters if they both own and operate the distribution grid, and are allowed to own DERs on it. Indeed, that’s the conclusion many industry watchers take from solar-utility battles in Arizona, Wisconsin and elsewhere.

If utilities make DER investments “under the guise of being a utility, providing those services in a structure that allows them to rate-base those investments," Wellinghoff said, "then they’re acting in an anti-competitive manner.”

The utility perspective

The enthusiasm for breaking up the current utility arrangement on the distribution grid isn’t shared by everyone. In particular, many utilities see themselves as the entity best prepared to make the necessary investments on the distribution system and value them correctly.

“Fundamentally, you can have a distribution system operator that’s different than the owner and the operator of infrastructure — the utility — or that it’s somehow the same entity,” said Doug Kim, director of advanced technology at Southern California Edison. “Of course, we like that [latter] model.”

Kim explained to Utility Dive why it’s so difficult to monetize the technologies and services on the distribution grid. He says no one has quite figured out how to value the diverse set of DERs on the market today, because their costs and benefits can vary so widely based on location, weather, and countless other factors.

Kim says those technical difficulties would make it difficult to set up an IDSO, even if it were the optimal entity to operate the distribution grid.

“I think we’re getting a little ahead of the game to say we ought to set up an IDSO right now when in fact even the technology to enable these things is just getting there,” he said. “Don’t go make up a market or have a regulatory construct unless you have the technology that can support it.”

The technology that Kim is referring to is effective distribution system modeling and control tools — software that can help utilities or an IDSO better plan for DER investments and allow disparate devices on the grid to act as a unified whole. That technology, Kim told Utility Dive at the ARPA-E conference last month, would greatly assist in valuing distribution grid investments. Without it, setting up markets will be difficult.

“That’s going to take longer, because that’s really complex,” Kim said. “But I would strongly argue that unless you have a system like that, that can really control all of these distributed resources in an optimal way, setting up a market that presupposes a value of all these different things and then creating some sort of a pricing mechanism, I would say that’s devoid of what’s really possible.”

Change need not hurt utilities

Wellinghoff stressed to Utility Dive that electric utilities need not fear market reforms at the grid edge. While it would be a meaningful change from the current business model, he says a distribution grid operated by an independent entity could actually reduce risk to utilities.

“The reason I suggest the [IDSO] model is most attractive to [utilities] is because it lowers their risk,” he said. “It will lower their risk of their investment … by making more transparent and independent the choices as to what new investments are made.”

Under the model, any new investments in grid infrastructure would be made based on planning done by the IDSO, rather than the utility, according to Wellinghoff. Approval of these rate-based investments would be all but assured, he said, because the proposal would be coming from an independent entity, rather than the utility itself. But the utility would still own the distribution grid infrastructure, so it and its shareholders could reap the return on the investments.

“Approval is virtually assured, and their recovery is assured, and so their risk of recovery is lowered substantially,” Wellinghoff said.

States moving forward

Wellinghoff predicts that an IDSO model would enhance DER investments from both utilities and third party vendors by providing a neutral grid arbiter. He says that to sell states on the idea, supporters must educate regulators and legislators of the success of the RTO/ISO model on the transmission system.

In particular, the former FERC chair singled out Texas, Hawaii, and New York as states with the greatest opportunities to transform their distribution markets first. Texas, he said, has done a particularly good job with its almost fully deregulated market.

“Texas is probably closest to this model than any other place in the country because we have retail competition there,” Wellinghoff said. “The distribution entities still do the planning and operation of the local distribution systems, but they are much more cabined off in Texas probably than they are anyplace else.”

Hawaii could soon look to reform the utility’s role due to its high penetrations of rooftop solar, proliferation of smart grid technology, and unique market situation as an islanded energy ecosystem.

“Hawaii is a place where they are stepping back and looking at all their alternatives for running their distribution systems to minimize total costs for consumers and maximize choice,” Wellinghoff told Utility Dive. “They have a real opportunity to look at alternative [distribution] platforms.”

While Wellinghoff said he would rather see an IDSO model today in New York, he thinks they may well move toward it in the future.

While three states may seem like a drop in the bucket in terms of U.S. energy policy, the former FERC chair says this is only the beginning. The reforms that catch on in the proactive states will soon enough trickle into the slower ones.

“Utilities are going to be forced to change the model,” he said. “They will have no choice.

Editor's note: This post has been updated to reflect comments from SDG&E spokesperson Hanan Eisenman.