Nearly a year ago, the New York Public Service Commission (Commission) initiated a groundbreaking effort, called ‘Reforming the Energy Vision’ (REV), to overhaul the longstanding electric utility business model. In the months since starting the REV proceeding, the Commission has sought advice from Department of Public Service staff, industry stakeholders, and environmental non-profits, among others, quietly refining its vision while largely refraining from big pronouncements about the progress of the proceeding.
That changed late last month when the Commission issued its ‘Track 1’ order establishing the ‘vision’ component of the REV proceeding. We are now starting to get a better sense of what sort of future electric marketplace the Commission anticipates and what role utility companies would play in this new marketplace. We can also begin to assess the extent to which this new marketplace will lead to the improved environmental outcomes stated as a goal of this proceeding.
Transformation is a messy business, and transformation of a complex system that cannot take a day off – that is, the electric system – is particularly messy. It is a perfect example of the adage about rebuilding a jet plane while flying it. The Commission has attempted to make the task more manageable by dividing the proceeding into two tracks, with Track 1 laying out the vision and Track 2 outlining regulatory changes that support the vision.
Some of the clearest pronouncements in this order concern the role existing electric utility companies will adopt in a new electric marketplace. Electric utility companies have been granted the role of Distributed System Platform Provider (DSP), which would provide a technology platform and marketplace allowing distributed energy resources, including demand response (a practice allowing customers to modify use of power from the grid in exchange for compensation), energy efficiency, storage, and on-site generation, to compete fairly with the utilities’ own distribution infrastructure. When deployed at scale, distributed energy resources could help avoid conventional grid upgrades.
In their capacity as DSPs, the electric utilities will have three sets of responsibilities: integrated system planning, grid operations, and market operations. The order indicates the DSPs are to be compensated for how well they play this new role, but exactly how is a Track 2 question – and an extremely challenging one that goes to the heart of the REV proceeding.
However, the order did answer a central question about the design of the new marketplace. The Commission does not envision electric utilities owning distributed energy resources other than in some specified situations.
Market power concerns
The separation of the DSP function from ownership of distributed energy resources, which are to be integrated into the power grid, responds to concerns voiced by many parties, including Environmental Defense Fund (EDF), about the outsized market power potentially wielded by a utility functioning as the DSP while also in the business of owning distributed energy resources. Such an entity would have the greatest information on where distributed energy resources were needed most, while standing to benefit financially from meeting those needs. This potential conflict situation is avoided by disallowing ownership when operating as the DSP. Not only will the utilities be prevented from playing in the distributed energy marketplace, they will also be required to provide enough information about the grid to allow third parties to compete most effectively.
The Commission could have responded to concerns about market power through intense regulation and oversight of electric utilities to keep them from stymying competition, but opted instead to separate control of the platform from the opportunity to sell distributed energy resources. Separating these functions makes the DSP more strongly resemble the Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs), entities that perform a similar platform function in the bulk power sector. However, there are still wrinkles to be ironed out. Whereas all the RTOs and ISOs are non-profit entities that do not own infrastructure assets, the electric utilities that are going to take on the DSP roles are investor-owned, and will continue to own distribution assets. As such, the compensation issues will need to be addressed.
While the separation of the DSP and ownership of distributed energy resources roles is a crucial aspect, the order has many other moving parts. A subsequent blog will consider some of the environmental implications of this market structure, as well as other aspects of the order.
To learn more about New York’s ‘Reforming the Energy Vision’ (REV), please join us on March 31, 2015 in New York City for the forum, “On the REV Agenda: the Role of Time-Variant Pricing,” which Environmental Defense Fund is co-hosting with the New York Department of Public Service and the Institute for Policy Integrity at New York University School of Law. The forum will focus on the role electricity pricing plays in New York’s ongoing utility reform efforts. To register and learn more, click here.