TODAY’S STUDY: THE FUTURE OF THE GRID
Phase I Report: Charting a Path to a 21st Century Energy System in Minnesota
December 2014 (e21 Initiative)
A growing and fundamental misalignment exists between the traditional utility business model (and the regulatory framework that supports it), and the realities of today’s marketplace and Minnesota’s public policy goals. This is unsurprising since we have regulated utilities more or less the same way since roughly 1900, when the first state regulation of electric utilities emerged, just 20 years after Thomas Edison established the first centralized electric utility in New York. 1
The e21 Initiative (“e21” stands for 21st Century Energy System) is a highly diverse and collaborative group of Minnesota leaders assembled by the Great Plains Institute to recommend ways to fix this misalignment and update the way we regulate utilities in two fundamental ways:
1) Shifting away from a utility business model that provides customers few options (everyone gets the same grid electricity produced largely with coal, natural gas, or nuclear power at large central stations) toward one that offers customers more options in how and where their energy is produced and how and when they use it; and
2) Shifting away from a regulatory system that rewards the sale of electricity and building large, capital-intensive power plants and other facilities toward one that rewards utilities for achieving an agreed-upon set of performance outcomes that the public and customers want (e.g., energy efficiency, reliability, affordability, emissions reductions, predictable rates, etc.).
In short, new customer expectations, public policy goals, and the changing utility marketplace are driving the need for a modern electric system that can support new ways for electricity to be generated, delivered, and used. These and other drivers will require the electric system to continue to be reliable, as well as become cleaner, more flexible, secure and resilient against attack and natural disaster, and able to empower customers to manage and reduce their energy costs. It will also become more distributed, flexible, intelligent, efficient, real-time controlled, and open to more participants. These technology, market, and policy forces are inexorable and will continue to transform the energy economy and technology landscape, impacting utilities and their customers in profound ways, both in Minnesota and elsewhere.
In the face of this rapid change, e21 presents Minnesota with an opportunity to act in advance of any particular crisis and lead the nation in demonstrating how a new customer-centric, performance-based regulatory approach and utility business model can enable both economically viable utilities and achievement of public policy goals.
Readers should view the consensus recommendations in this Phase I report as a cohesive package of ideas rather than as disparate options from which to pick and choose. In other words, the recommendations relate to and support one another, and only as a package do they reflect the consensus recommendations of e21 Participants.
Together they provide a broad framework, describing the overall arc of change needed, while acknowledging that there are many implementation details to be worked out in 2015 and beyond through stakeholder collaboration, outreach to policymakers, regulators and the public, and legislative and regulatory action.
e21 Guiding Principles
The e21 Initiative established the following consensus principles and e21 participants recommend that these principles guide any regulatory or statutory changes:
• Align an economically viable utility model with state and federal public policy goals.
• Provide universal access to electricity services, including affordable services to low-income customers.
• Provide for just, reasonable, and competitive rates.
• Enable delivery of services and options that customers value.
• Recognize and fairly value grid services and “distributed energy resource” services.
• Assure system reliability, and enhance resilience and security, while addressing customer privacy concerns.
• Foster investment that optimizes economic and operational efficiency of the system as a whole.
• Reduce regulatory administrative costs where possible (e.g., results in fewer rate cases or otherwise reduce the burden of the regulatory process).
• Facilitate innovation and implementation of new technologies.
e21 Consensus Recommendations
e21’s recommendations for a new regulatory framework fall into four main categories:
• Performance-based Ratemaking;
• Customer Option and Rate Design Reforms;
• Planning Reforms; and
• Regulatory Process Reforms.
A new performance-based, more forward-looking approach to ratemaking and incentives. In place of today’s frequent, costly—and by design adversarial—rate cases, e21 proposes that Minnesota provide an alternative option in which utilities that “opt in” are allowed to submit a forward-looking, performance-based business plan covering up to five years. This length of time will provide more predictable rates for customers and give utilities sufficient time to achieve the public outcomes they commit to in the plan.
This approach will also enable Minnesota utilities and stakeholders to work together to envision, plan for, and pay for the electric system they want versus the current framework that assesses, in an audit-like fashion, whether customers are paying the right amount for what utilities delivered (see Text Box 1 below).
As its name suggests, a performance-based approach would tie a portion of a utility’s revenue to achieving an agreed-upon set of performance metrics (e.g., measuring such things as energy efficiency, customer service, environmental sustainability, affordability, and competitiveness) so that utilities have a natural financial incentive to produce the outcomes customers want.
Both are explained in more detail in the full report, but in brief the Business Plan would describe the investments the utility needs to make in order to operate effectively, how it will accomplish the agreed-upon performance metrics, and how costs will be allocated and recovered over the plan’s term. It would also outline how the utility will modernize the grid, plan for and manage the addition of Distributed Energy Resources (e.g., solar PV, demand response, electric vehicles), optimize the system’s overall efficiency, and the expenditures required to do so.
The proposed Integrated Resource Analysis (IRA) would replace the current Integrated Resource Plan (IRP). Still looking out 15 years or more (as with the current IRP), the IRA would capture all the informational benefits of the traditional IRP, but improve the process by fundamentally changing the way all parties to the regulatory process use the information the IRA contains. Instead of adjudicating every detail of the IRP (as is done now), the IRA would guide the five-year Business Plan and focus everyone’s time and resources on getting that right, rather than arduously perfecting a 15-year IRP that is often out-of-date by the time state regulators finally approve it. The shift from preparing an Integrated Resource “Plan” to producing an “Analysis” may seem subtle, but the overall idea behind the IRA is to make resource planning more useful to regulators, utilities and intervenors, reduce overall regulatory burden and cost, and tie resource decisions more closely to the actual costs of maintaining the electric system and achieving the agreed upon performance outcomes.
Customer Option and Rate Design Reforms
e21’s recommendations support a shift to a more customer-centric framework that meets growing expectations of customers regarding service, product, and technology options by enabling:
• Delivery of services and options that customers value, while providing universal access to affordable service.
• Rate design reform, such as a review and adjustment of time-varying rates.
• Flexibility for utilities to offer tailored rate and service options that respond to unique customer needs and interests.
• Pilot programs or other methods to test, evaluate, and bring to market more quickly new service options, products, and technologies for customers.
Reforms to Regulatory Processes
In order to transition toward a performance-based regulatory framework, Minnesota regulators will need sufficient authority, resources, and tools. This includes, but is not limited to, exercising more fully their existing quasi-legislative authority where appropriate, engaging stakeholders in more collaborative and forward-looking processes, and initiating generic dockets on issues of statewide concern. e21’s recommendations for reforming the regulatory process are intended to support more nimble and flexible decision-making that allows regulators to:
• Put forth policy solutions that are not entirely one party’s position or another;
• Encourage proactive exploration of critical and emerging issues; and
• Support the development of forward-looking solutions through more collaborative stakeholder processes in advance of the quasi-judicial hearings that most often characterize regulatory proceedings and that will remain necessary for making official decisions and ensuring due process rights.
Planning for a Modern & Efficient Grid
e21’s first phase raised many questions yet to be answered. One is how best to modernize Minnesota’s electric grid, particularly the distribution system (as opposed to the bulk transmission system), since that is where many new technologies, such as solar, energy storage, and electric vehicles, will plug in.
The current electric grid—with its large centralized power plants and miles of transmission and distribution lines—relies on many technologies that originated more than a century ago with Edison and Westinghouse. The rapidly emerging modern grid looks much more distributed and decentralized, with many actors on the system sending electricity and data back and forth.
Proactively planning for an intelligent, flexible, nimble, efficient, open, and secure distribution system over the next several decades that can handle new distributed energy technologies and the complexity of many more actors on the system will require a coherent strategy. To develop this strategy, e21 recommends that Minnesota establish a distribution planning and grid modernization stakeholder process much like e21 itself. Such a process will help us understand where on the electric system new distributed energy technologies can provide the most value, how best to coordinate which technologies get put on the distribution system and when, and which distribution management systems and advanced control and communications technologies we will need to enable seamless integration and interoperability of a wide variety of energy technologies and systems.
Desired Outcomes of the e21 Recommendations The e21 recommendations presented in this report should position Minnesota to fix the misalignments described above and address key challenges, enabling our state to better achieve a wide range of desired outcomes.