On April 24, 2014, the New York State Public Service Commission (“NYPSC”) staff released a report and proposal (“Proposal”) that calls for a shift away from the traditional utility model of centralized generation, toward a more decentralized electric grid that relies increasingly on energy efficiency, demand resources and distributed generation. As reflected in the Proposal, this shift would be accomplished by (1) making energy efficiency and distributed resources a primary factor in energy planning, and (2) revising the NYPSC’s ratemaking framework by improving incentives and removing disincentives for distributed generation. The NYPSC staff Proposal expanded on a December 26, 2013 NYPSC order which announced a fundamental reconsideration of regulatory paradigms and markets.
The Proposal is part of a greater NYPSC initiative entitled “Reforming the Energy Vision” or “REV,” which calls for an overhaul of the utility business model to achieve five objectives: (1) increasing customer knowledge and providing tools that support effective management of their total energy bill; (2) market animation and leverage of ratepayer contributions; (3) system-wide efficiency; (4) fuel and resource diversity; and (5) system reliability and resiliency. The Proposal recommends that utilities alter their operations to become Distributed System Platform Providers (“DSPP”) in order to meet these objectives. As a DSPP, a utility would actively manage and coordinate distributed energy resources, or generate power from many small resources and bring them to the system.
The Proposal recommended further examination of the possible changes to the utility model and ratemaking paradigm through two separate but simultaneous phases. In the first phase, the Proposal recommends focusing on developing the duties and functions of the DSPPs. These include system planning, pricing, impacts on wholesale markets, and opportunities for customer engagement and interaction, among other functions. In furtherance of the first phase, the Proposal requests that utilities submit a DSPP proposal based on its specific system requirements and resources, as well as on customer needs. Based on this information, the Proposal will form new recommendations and proposals for DSPPs for NYPSC consideration.
Under the second phase, the Proposal recommends addressing NYPSC ratemaking and regulatory changes. Many of the Proposal’s recommendations in this phase are based on similar, recent changes made in the United Kingdom. Some of these recommendations for the second phase included (1) potentially extending the length of a rate plan to a maximum of eight years, which could result in benefits such as better planning, more certainty, and fewer rate cases; (2) shifting from an input-based ratemaking to output-based ratemaking, reasoning that a results-based model shifts the focus of regulation from the reasonableness of historically incurred costs to the pursuit of long-term customer value; and (3) symmetrical incentives, which would involve a shift from one-way negative-only revenue adjustments to a symmetrical incentive approach that would reward the utility with additional earnings if it achieves superior results in areas such as innovation and customer service. Finally, the Proposal recommended examining changes to traditional rate design structures. These recommendations included flat rates, inclining block rates, and declining block rates as potential new rate design structures under the DSPP model.
On April 25, 2014, the NYPSC issued an order to examine the recommendations made in the Proposal. The order also adopted the recommended two-phase schedule as outlined in the report, and requested a staff update on the first phase on July 10, 2014, and a proposal for ratemaking changes in mid-July 2014, with an update on September 4, 2014. The NYPSC also stated that it should reach a generic policy determination on issues relating to regulatory change and ratemaking in the first quarter of 2015.