Comments Off on Utilities Want to Provide EV Fleet “Advisory Services.” Should Regulators Approve?
As the electrification of vehicle fleets goes mainstream, fleet owners are facing a gauntlet of challenges, starting with engaging their electric service provider. The utility response of providing “advisory services” is both creative and presents new challenges for utility and air regulators.
Advisory services, whether offered by utilities or third parties, are designed to educate and enable fleet managers. The goal is to fill the gap between what fleet managers already know about transportation and what they need to know about electric transportation.
RAP recently facilitated a conversation on this topic, inviting a representative of a school district, a utility company, and several third-party transportation service providers to discuss their perspectives and better understand the challenges.
From my perspective as a former utility commissioner, I was asked to serve as the “respondent” and identify the pertinent regulatory issues.
Reviewing Advisory Services Proposals
At first glance, the expansion by utilities from offering a commodity to offering professional services may seem unprecedented. But actually, advisory services are a more visible form of what utilities used to refer to as “marketing key accounts,” a focus that utilities regularly had that helped them stay in touch with sizable commercial and industrial customer segments, and for which they were allowed to recover reasonable expenses.
The point here for regulators is not that this is different, but instead that this is more overt, and coming at regulators in a more robust and comprehensive manner. Advisory services also have a component of market development, a similar quality found in demand-side management programs. Note that third-party support to help utilities better serve fleets is not so different than the energy auditing support that contractors provide energy efficiency programs.
So what have we learned from those experiences, and how do we apply what we’ve learned in this context? This history can help regulators understand how to proceed when a utility says it wants to engage in these ways, that it will incur costs for which it wants recovery, and possibly even that it seeks earnings on those costs.
What is the right regulatory construct to apply here and what needs to change? The slide below provided by Xcel’s Jason Peuquet, does a good job of illustrating the range of comfort to discomfort of the regulatory process in this context. On the right-hand side, regulators are comfortable with rate design. We’ve had a 100-year history with that. Advisory services the new phenomenon over on the left about which we are less certain. The pieces in the middle come with a different levels of comfort.
Costs and Benefits
Electrification means that a utility is creating new load. But the regulator still has a key role to determine the answers to two questions: Is the utility proposal creating the kind of load that is appropriate? And is the load being managed effectively from a system benefit perspective? The regulator needs to ask:
What is the utility aspiring to do or become?
How does this new service change the utility’s current role as a public service?
Does investment in advisory services align with existing regulatory principles — i.e., are these investments just and reasonable? And are they least cost?
How should costs be allocated — i.e., who pays for them, and why?
Do today’s costs deliver future societal benefits, however difficult they may be to quantify?
A narrow interpretation would focus on who is the cost causer and what they should pay. That would put all the burden back on the fleet services. That is fine, and internally consistent in a narrow framework.
But recognizing that we are working in a broader arena, we acknowledge that we are not just making investment to help fleets. We are doing “demand creation.” This puts the regulator in a position to look at today’s costs that are known and knowable, and at future benefits that are speculative and uncertain — although we know they are out there. How do we get comfortable matching today’s costs with future benefits? Those benefits range from consumer savings, to lower-cost grid management, to the many societal benefits like reduced air emissions and improved health outcomes.
21st Century Load Forecasting
At the same time regulators need to recognize that doing this work — letting utilities build load through advisory services — ushers in a new aspect of load forecasting. Fundamentally, the regulator-utility relationship will need to further evolve. Effective regulatory oversight of load forecasting requires greater engagement of the utility, with lines of inquiry such as:
Will advisory services requests be strategic and narrow, seeking only to develop certain types of load?
What kind(s) of load do you want?
Do you just want maximum growth, no matter where it comes from?
Where on your system do you want it?
At what time of day do you want it?
Requests for approval of advisory services will bring with them a new complexity about understanding load. So, this is not only an inquiry into costs and benefits (both short- and long-term); it is also a challenge into understanding how the utility is changing its relationship with certain customers — from the traditional provision of a commodity, a blended commodity and service-based relationship. The regulator is confronted with understanding that this service-based customer engagement is interwoven into utility decisions concerning capital asset investments in infrastructure. For it is through effective advisory services that these capital assets become viable and reasonable assets.
Finally, in this world where the utility has the onus to make and justify these proposals, it is the regulator’s role to ensure that the utility is clear in what it aspires to become. And this will require even more questions for regulators to raise:
How does this service fit in the utility’s portfolio?
What is the utility’s longer-term sense of itself as a commodity and service provider?
Is the regulatory called to assist them and nudge them on their way? Or on the contrary, is your task to “keep them in their lane?”
How am I going to manage the commission’s relationship with that utility into the future?
One way or another, transportation electrification represents a new set of evolutionary forces upon the utility-regulator relationship. Awareness and preparation will make the ride more enjoyable.
Comments Off on Securing Benefits from Transportation Electrification
In a presentation for the New Mexico Public Regulation Commission’s Transportation Electrification Summit, David Farnsworth discussed the value of electrification as a flexible grid resource as well as the benefits from data tracking and use of advisory services.
Comments Off on Evaluation Methods for Grid Investments and DERs
In a webinar for the New Mexico Public Regulation Commission, John Shenot explored cost-effectiveness methods and the increasing applicability of benefit-cost analysis for grid modernization investments and distributed energy resources.
Comments Off on Electricity Pricing: Drivers, Practices and Pitfalls
At the Financial Research Institute’s Advanced Electricity Seminar on Utility Rates and Pricing for the Future, Carl Linvill explored smart rate design fundamentals and exposed some common policy pitfalls.
Comments Off on A Song in the Key of E: Emissions, Efficiency, Equity, and Electrification
A lot of folks out there (including we at RAP) have, for the last four decades, been devising ways to make utilities more economically efficient, their customers more energy-efficient, and the power system cleaner, sustainable, more equitable, and non-emitting. But now they have a problem: the world has changed, and suddenly we need more of that thing that they for so long tried to constrain. Now that the time has finally come to make the leap that has to be made if our climate crisis is to be solved, we’re like the proverbial deer in the headlights — if only for a moment. The prospect of wild load growth in electric demand is a bit hard to swallow at first. It’s both frightening and, well, electrifying.
Efficiency has been the central theme of electric sector reform for nearly a half century. It is the recognition that meeting a society’s energy needs is not simply a matter of “more is better” but rather of “no more than is necessary (and it’d better be as environmentally benign as possible).” This insight meant that we should not use energy when it was cheaper and more valuable to save it. And it meant that the traditional business model of the monopoly electric utility had to change—that profitability could no longer be linked to growth in commodity sales but to the least-cost provision of energy service and achievement of express public policy objectives.
So what’s the problem?
Well, it turns out that we need more, lots more, of a particular kind of energy — electricity from non-emitting resources — if we’re going to decarbonize as much of the economy as we possibly can. We need clean electricity for transportation, heating and cooling, agriculture, and industry. Are the regulatory reforms that we’ve advanced in the past thirty-odd years — in particular, integrated resource planning, revenue decoupling, and systems of performance-based rewards and penalties — appropriate to a vision that calls for a great expansion in our use of electricity and therefore a sea change in how we produce and deliver it?
The answer is yes, and it shouldn’t surprise us. It follows directly from an approach to economic analysis and policy — aimed at maximizing the net societal benefits of energy use — that we’ve relied on for decades. Thirty years ago, given the costs, expectations, and constraints we faced, the analyses pointed us in certain directions. Today, given different costs, expanded expectations, and more urgent constraints, they point us in new directions. In both cases, they told us how to minimize the costs — that is, maximize the benefits — of our desired path.
At a conceptual level, the problem isn’t daunting. It’s time to truly look at the energy system in its entirety, not just the electric system. How do we minimize the total costs of energy production and use, while meeting our climate, economic, and social goals?
It’s simple. The least-cost path is characterized by massive fuel-switching — from fossil fuels to clean, emissions-free sources, primarily electricity. But it’s not that simple. It doesn’t relieve us of the duty to make sure those new loads are as efficient as possible and are managed as efficiently as possible — indeed, it insists upon it, since any waste only increases costs. It isn’t right simply to say “Electrify!” How we electrify matters.
The good news is that our planning tools and regulatory methods are up to the task. We know how to think about the problem, consider alternatives, test uncertain futures. We know how to change course when circumstances dictate. And we know that utilities and market actors respond to the forces that act upon them, which means that we should still care deeply about whether their private financial incentives align with the public interest. We want these players to be successful by doing the right things.
So what does this mean for the utility business model? For the “wires” sides of the business — transmission and distribution — in both vertically integrated and competitively restructured markets, there’s still every reason to remove the “throughput incentive.” Whether load is growing or not, a utility whose revenues and profits are a direct function of kilowatt-hour sales (that is, of kWh deliveries) has a very powerful incentive to encourage usage, even if that usage is inefficient. We shouldn’t think that, simply because the electricity is clean, we have license to be profligate. The recent decision of the Massachusetts Department of Public Utilities to scrap Eversource’s decoupling regime, on the grounds that good ol’ fashioned price-only regulation will encourage the company to promote electrification. Probably it will, but, alas, it won’t give the utility much, if any, reason to care whether the electrification is in the best interests of society.
Revenue decoupling remains a critical element of a regulatory regime that aims for least-cost investment in, and operation of, the grid. It keeps the regulated monopoly focused on efficient operations. But, by itself, it doesn’t guarantee utility enthusiasm for preferred outcomes. Legal and regulatory obligations go a long way to solving that problem, but there’s a place for carrots and sticks too. Performance measures, with achievement rewards and penalties, overlaid on a decoupling mechanism, are powerful drivers of policy objectives.
What about the commodity side of the business? Again, in both vertically integrated and restructured markets, investment has been and will continue to be propelled in significant measure by policy requirements, such as renewable portfolio standards and emissions reductions requirements (e.g., cap-and-invest programs). These have been effective in transforming our resource portfolios and, moreover, have helped drive deep cost reductions in clean energy technologies, so that now the relative costs begin to favor the preferred investments. Important wholesale market reforms are still needed, but the outlook is good.
In those places where utilities remain vertically integrated, the question of how power costs should be recovered is of acute interest, especially where price risk has been shifted to consumers by means of fuel adjustment clauses and power-cost pass-throughs. How these mechanisms, intended to insulate shareholders from the volatility of global energy prices, distort management imperatives to manage power costs and investment for the long-term good of both consumers and shareholders has been well understood for decades. It’s time to revisit these tools, to consider whether and how they can be reformed to better align private incentives with the public good. Utilities and other load-serving entities possess the comparative advantage for bearing price, climate, and other market risks. Some simple fixes to power-cost recovery mechanisms will go a long way to reordering those risks and creating the environment in which clean, reliable electricity flourishes.
By all means, let’s let utilities and other market actors make money providing the energy and energy services we want. And that includes where increased load is societally most efficient—which is to say, the least-cost means of meeting demand for reliable, equitable service and, among other things, our climate goals.
Stay tuned for more blogs in this series. We’ll dig into some of the knottier regulatory challenges that large growth in load raises and try to answer the question: “Just what does a regulatory scheme look like that promises to achieve these ends?”
I’m learning how to surf. For my birthday, my kids got together and bought me a surfboard. One day last summer I spent about three hours in the waves off of Popham Beach in Maine trying to figure things out. After about 60 attempts — no kidding — trying to catch a wave, I finally caught one. But I had help. I got tips from my kids, and from other surfers about things, like when to paddle hard and where to place myself on the board. When I finally caught that wave, all that paddling and the soreness in my neck and shoulders faded away. I was lifted and carried forward at easily three times the speed while the others alongside me and I were effortlessly propelled forward toward the shore by the energy of that wave.
I was recently reminded of my first day surfing as I read an order from the North Carolina Utility Commission (NCUC) in which it recognized that it too could use a little help better understanding the implications of the wave of federal funding — $1.2 trillion over eight years) — that is about to reach the states.
The Infrastructure Investment and Jobs Act of 2021 (IIJA) makes available billions of dollars for investment in utility infrastructure, including support for electric vehicle charging, smart distribution grid improvements, energy storage, and water system resilience and security. Referring to the IIJA, the NCUC opened its order with a “preliminary conclusion”:
It is in the public interest for the public utilities of this State to fully and carefully consider taking advantage of these available federal grants and loans, in order to promote adequate, reliable, and economical utility service to the citizens and residents of the State.
The order poses basic questions like:
Which federal programs could assist utilities in meeting their obligations?
What actions does the NCUC need to take to facilitate access to the funds?
What other organizations will utilities need to coordinate with?
What actions are other state agencies taking or considering?
More than a dozen utilities and others provided comments to the NCUC in this docket. The order not only brought together these parties, encouraging their insights and testing their ideas, but it also created a larger public conversation about the best ways to spend federal dollars for utilities in North Carolina. It is the Commission’s role to ensure that the power sector develops in a manner that promotes the public good, and the NCUC recognizes that responses to the questions posed in the three-page order will enhance its expertise to best promote that public good.
Other states should consider taking a page from the NCUC’s playbook. It will create the opportunity to be more informed and better positioned to make decisions you very likely will need to make. Why wait until you are constrained by limitations associated with having to review a filing in a contested case? After all, who would be better situated to render a decision: a commission that has reviewed diverse comments and participated in discussions regarding the best ways to use federal dollars for the benefit of its state prior to having to review an actual proposal, or a commission that hasn’t?
Riding a wave requires help. Adopting the North Carolina approach will better position your utility commission to ride the oncoming wave of federal funding for the benefit of your utility sector and state economy.
The term “transition” implies moving away from one thing and toward something else. The energy transition in the United States has challenged utility regulators to ensure that the movement away from fossil-fuel-dominated resources, and the adoption of lower-carbon resources in their place, will not put at risk the economic benefits, security, and reliability associated with our current energy system.
As part of this transition, states across the country are exploring ways to lower the emissions associated with a particular energy demand: building heat. In a webinar discussion, panelists took a closer look at a variety of these efforts under way. Policies adopted or being considered by Northeast and Western states illustrate how cleaner heat does not need to be an “either/or” proposition, but instead can provide everyone — suppliers, consumers, and grid operators — with choices and a path toward a lower-carbon future.
Get Our Newsletter
Sign-up to receive information about RAP’s publications, webinars, and news.