“It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.”
– U.S. Supreme Court Justice Louis Brandeis in New State Ice Co. v. Liebmann
Such an experiment is underway in the State of New York where, earlier this year, the New York Public Service Commission began proceedings to fundamentally reconsider the regulation of electricity utilities in the State. These proceedings have the potential to shift the State away from the ‘cost-of-service paradigm’ that has governed electricity ratemaking for decades in favour of different incentives and could see the State moving incrementally towards a more decentralized system that is dominated by smaller “distributed” generation stations. Because the issues raised in the proceedings are not unique to New York, it is expected that the proceedings will reverberate beyond the State’s borders.
The Commission is considering these changes in an effort to address the following issues, which will be familiar to many Canadian jurisdictions:
- Cost pressure caused by the need to replace aging supply and delivery infrastructure;
- Increased customer reliance on reliable and high-quality electricity;
- The need to reduce carbon emissions and the associated costs and threats to infrastructure posed by increasingly severe climate events;
- Technology developments in distributed generation and information systems, which challenge incumbent systems and present opportunities for transformation of those systems; and
- Electric price volatility caused by increasingly greater dependence on natural gas as a primary generation fuel source.
A report prepared by the Commission forms the basis of the proceedings. In it, the Commission is proposing to transform the utility business model in the State by making energy efficiency, demand management, and distributed generation ‘primary tools’ in the planning and operation of the State’s power grid. More particularly, under its proposal, distribution utilities would function as “Distributed System Platform Providers” who would be responsible for managing and coordinating distributed generation, such as wind complemented by storage, through smart-grid technologies to balance localized load and production in real time. It believes that this approach presents a viable, and a potentially more effective and economic, method to achieve reliability than the current ‘forecast peak demand plus a substantial reserve margin’ approach that sees the system underutilized for much of the year and more susceptible to extreme weather events and price volatility.
In the proceedings, the Commission also proposes to examine the State’s ratemaking practices in order to establish regulatory and incentive platforms that will support such market transformations. In its report, the Commission finds that traditional ‘rate of return’ regulation “provides very little incentive for the utilities to improve performance” and that such regulation “may also encourage the utility to over-invest in capital spending”. The approaches that the Commission is considering include: (1) long term rate plans (as long as eight years), (2) shifting the focus of regulation from the reasonableness of historically incurred costs to long-term customer value, and (3) using more “positive incentives” instead of relying primarily upon “negative incentives” such as revenue adjustments.
Interested parties are currently in the process of commenting upon questions raised in the report. The Commission expects to have policy decisions on the proceedings by the first quarter of 2015.