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Achieving Regulatory Equilibrium

The shift to a distributed renewable driven grid

In the electric utility business, structural change is afoot.  If you are watching this all unfold in the regulatory hearing room, legislative chamber or the trade press you are familiar with the players in this drama.  You have the "technarians at the gate", SolarCity and its cousin Tesla Motors, numerous other residential solar suppliers and advocates calling for the shift to a distributed renewable driven grid.  On the other side is the establishment, the investor owned utilities who own and operate the electric grid that serve the masses.  The technarians seem to be the more modern, with the times contingent while the utilities are viewed as stodgy, unwilling to change and obstructionist.

Like most characterizations there are oversimplifications and the truth lies somewhere else.  You see for a century essentially the utility business was a quiet but important part of the infrastructure, utilities were natural monopolies that provided all facets of service to all customers in their territory.  And for decades business was very good, the economy post WWII was expanding rapidly, revenues expanded so much so that the cost of serving customers came down.  Since those days more and more of the business has been parsed out to independent power producers, later restructuring, and now the era of customer self supply (solar).  And we are now very much an energy efficient driven society and it has stamped demand for electricity considerably.  For many the policies of the recent decades are positive developments to protect the environment, diversify the resource base, and that is absolutely true, but there is more to the story.

The problem is that for the utilities they make a living selling and delivering electrons and operating the physical plant.  If the revenue continually erodes their viability erodes with it.  So if we want the utility compact, or as is in vogue, "business model" to be different, i.e., sell less product but don't degrade service, then the regulatory framework must be altered accordingly.  This issue is simple math, less revenues to cover given fixed costs becomes an issue sooner or later.  So far the solution has been to allow the utilities to still collect what they need by the trick of "rate decoupling".  The utility is kept whole in terms of the revenue they need to cover costs and return something to their shareholders.  But to apply decoupling means the unit rate must be increased and as that has continued customers have increasingly found solutions like rooftop solar to be attractive. Enter the heinous "death spiral".

So the new regulatory model needs to respond to the structural imbalances in the system, less focus on volume sales, more fee for service and per connection tied to capacity of the pipe borrowing somewhat from the fiber industry.  We are transitioning to the Grid of Things" where utilities will be valued more for their ability to interconnect than to sell electrons and rational rate setting and incentive mechanisms to encourage highly functioning networks will make all the difference.

More Stories By Forrest Small

Forrest Small is vice president of Grid Reliability at BRIDGE Energy Group, a consulting and systems integration solutions company focused on improving utility operational performance.

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