- New York Public Service Commission Energy Market Restructuring May Be Framework for Changes Nationwide
- July 22, 2016
- Law Firm: Duane Morris LLP - Philadelphia Office
- The New York Public Service Commission ("PSC") issued a groundbreaking order on May 19, 2016, under its Reforming the Energy Vision ("REV") initiative. The REV’s overarching goal is to empower customers to determine their energy future by increasing the level of distributed energy resources ("DER") and by modernizing utility services. The PSC anticipates that a more distributed and diversified electricity grid will foster greater competition among energy sources and services, reduce energy costs for consumers, increase reliability and resiliency, and lower greenhouse gas emissions. The PSC initiated the REV proceeding in 2014, and other dockets have been established to address the many related topics that have arisen from the original case.
The PSC's order provides a framework for the role state electric utilities can play in the future, as energy markets transition to incorporate more DER. Through the framework, markets and utilities will spur the use of solar, wind, cogeneration and fuel cells, while providing a platform for microgrids, battery storage, energy efficiency and load reduction. New York’s electric utilities are expected to develop into platform service providers that support innovation and an economically efficient mix of resources (more distributed generation and customer-focused services).
One significant challenge to the implementation of the framework is ratemaking, i.e., utility revenues. Through this order, "Order Adopting a Ratemaking and Utility Revenue Model Policy Framework," the Commission puts forth a new regulatory model. The model aims to reduce existing ratemaking biases while modernizing regulatory principles by combining traditional cost-of-service rules with contemporary market-based rate concepts. In broad terms, the model encourages a shift away from large-scale utility capital investment to increased earnings through performance and services.
In order to accomplish its goals, the PSC envisions a grid modernization. The unidirectional grid will become bidirectional, enabling diversification of distributed resources and a more productive and efficient mix of utility and third-party investment. Nonetheless, utilities will continue their role as monopoly providers, retaining the obligation to provide universal, reliable delivery services at just and reasonable prices.
Under the new framework, utilities can earn revenues through two proposed business models: Platform Service Revenues ("PSRs") and Earnings Adjustment Mechanisms ("EAMs"). PSRs represent a new paradigm for utility revenues associated with operation or facilitation of distribution-level markets. The order does not provide a rigid definition for PSRs because the PSC expects PSRs to evolve over time. The PSC, however, has established criteria by which to evaluate and approve a proposed PSR. In contrast, EAMs offer performance-based incentives geared toward new utility service expectations. EAMs are intended to encourage utilities to achieve the policy objectives of the REV, such as peak reduction, energy efficiency, interconnection, and greenhouse gas reduction, while helping utilities transition from cost-of-service ratemaking. The PSC expects that EAMs will be developed and approved using rate proceedings that will evaluate the utility’s specific circumstances, the policy objective, and the actions needed to achieve the objective.
The PSC also found that current rate design practices fail to provide adequate incentives and price signals suitable to a modern electric system. It further held that more granular rates must be designed to encourage price-responsive behavior to advance the policy objectives of the REV. In addition, utilities are required to examine and revise standby service rates to reflect the likelihood that not all DER will fail at peak, as current rates now assume, to adopt campus offset tariff provisions, and to enhance optional time-of-use tariffs that enable customers to choose more granular rates that provide price-responsive signals.
The REV initiative is being followed closely by other states, including California, Minnesota and Hawaii, where similar proceedings are underway. Duane Morris will continue to provide updates as utilities in New York comply with the PSC’s order and as other state commissions take further action.