As discussed in a previous post, new technologies — such as distributed generation, electricity storage, and digital control and communications — are making steady inroads toward transforming the traditional role of electric utilities and their relationship to customers.  The future transformed utility is sometimes referred to as “Utility 2.0.”  While integrating new technologies into the grid presents technical challenges, policy makers must focus on another challenge as well: “Regulation 2.0.”

Utility executives and regulators at a recent conference addressed some of the fundamental regulatory issues that must be addressed to foster the new utility paradigm.  “We agree today we will no longer write another report [referencing the] ‘utility of the future.  What we need now is ‘regulation of the future,'” said Lawrence Jones, vice president of utility innovations and infrastructure resilience at Alstom.

Rates are an important Regulation 2.0 issue.  For example, customers want customized services, such as different levels of reliability, and new technology allows customized services.  Of course, this means different levels of costs.  But universal service at non-discriminatory rates is a fundamental part of  regulatory policy now.  Michael Champley, a commissioner at the Hawaii Public Utilities Commission, noted that non-discriminatory rates “is a universal practice…But you can question whether it’s appropriate for regulation 2.0.”  Theodore Craver, chairman, president and CEO of Edison International said the utility industry’s non-discriminatory regulatory model is creating barriers for the integration of new technologies.

Another example is volumetric rates.  Utilities recover their costs through rates based on the amount of energy (i.e., kilowatt-hours) used.  But when customers install on-site generation, such as rooftop solar panels, energy taken from the grid goes down and so does the revenue used to cover the cost of maintaining the grid.  The impact is exacerbated where the customer sells some of its unneeded power back to the utility.  New rate designs are needed.

Adopting standards for connecting new distributed resources to the grid is another challenge for regulators.  According to the National Renewable Energy Laboratory, some distribution system components were not designed to coordinate with bidirectional power flows produced by distributed generation, such as photovoltaic solar, and could require modification of protection schemes and additional distribution equipment.  Hawaii Commissioner Champley noted that “(i)t’s great you can plug in, but it’s the rules and terms and conditions of how you play that makes the difference.”

Of course there are many other issues that policy makers need to consider as the regulatory framework is adapted.  Are there appropriate guideposts to help policymakers?

In 2013, the Advanced Energy Economy Institute (AEEI) and MIT’s Industrial Performance Center (IPC) hosted a forum to identify the barriers and opportunities for redesigning regulatory and utility revenue models to enable innovation and allow for flexibility and responsiveness to changing market conditions.  According to a summary of the conference (21st Century Electricity System CEO Forum Summary), the following five points were repeatedly emphasized throughout the discussion:

• Regulatory and policy goals and objectives must be clearly defined and well understood before redesigning the regulatory framework.

• Regulation must evolve to allow innovative business models to emerge and take advantage of opportunities presented by new technologies and changing customer needs.

• Several different business models may be capable of enabling innovation in the electricity distribution sector.

• Understanding the changing role of the utility is critical to identifying and capitalizing on the opportunities created by technological change.

• Developing new business models for distribution utilities and technology providers requires a clear understanding of customer needs.

Regulators in New York appear to be thinking along these lines. The New York Public Service Commission has embarked on a major restructuring of its retail electricity markets that is proceeding along two tracks.  Under the first phase, the commission adopted a comprehensive policy framework for a reformed retail electric industry that is aimed at increasing distributed energy resources and dramatically changing the role of utilities.  The reformed electric system will be driven by consumers and non-utility providers, and will be enabled by utilities acting as Distributed System Platform providers.  With the major policy and objectives now set, the second track will focus on the needed regulatory changes and ratemaking issues.

New York seems to have comprehensively addressed both Utility 2.0 and Regulation 2.0 issues in one initiative. Other states may take a more measured approach. Regardless of the approach, transformative technologies are here and regulatory policies need to adapt to them.