Utility Regulators Finalize Ratemaking Manual for Distributed Energy Resources

The National Association of Regulatory Utility Commissioners (NARUC) formally adopted a manual this week on the compensation of distributed energy resources (DERs). Despite earlier concerns that the manual could set unfavorable precedents, members of the solar industry praised the final draft as fair and comprehensive.

“Time and again, state public utility commissions and independent researchers have found that distributed solar provides a net benefit to all consumers, and we’re happy to see this more adequately and accurately represented in the final version of this manual,” said Sean Gallagher, vice president of state affairs for the Solar Energy Industries Association (SEIA), in a statement.

“Rate design is not a simple task, and it has far-reaching impacts,” he continued. “The manual recognizes that hard data and evidence is needed before imposing new rate structures on customers, and that imposing class-wide rate design changes when DER penetration rates are low ‘would most likely be a disproportional response.’”

Rick Gilliam, regulatory policy program director for Vote Solar, said he was pleased to see the report acknowledge the economic opportunities that solar and other DERs can bring to all customers. He also commended NARUC for taking a holistic approach to regulating customer-side resources.

“The manual contains a helpful balance between long- and short-term views, an open and more collaborative regulatory process, and a more expansive view of distributed energy resources, which actually include a broad and exciting range of clean technologies that can be deployed to add stability, control and reliability to the electric grid,” said Gilliam.

NARUC’s “Distributed Energy Resources Rate Design and Compensation” manual is not a prescriptive report; rather, it offers a breakdown of various policy options that regulators can adopt when considering how to craft policies around a variety of DERs, including solar PV, wind, combined heat and power, energy storage, demand response, electric vehicles, microgrids and energy efficiency.

A draft of the manual was released in July. The final version approved at the NARUC Annual Meeting on Tuesday is the product of a robust stakeholder process with input from dozens of interested parties.

When the draft manual first came out, rooftop solar advocates expressed concern that NARUC was moving too fast and could adopt a set of policy recommendations that inadvertently undermine the DER market before the market had been fully understood and analyzed. According to Travis Kavulla, Montana commissioner and outgoing NARUC president, the final version of the report allays these fears by emphasizing that regulators should focus on using data to justify rate changes in the territories they serve.

“I think [DER provider] concerns were misplaced from the beginning, and I think the final manual should really assuage them,” said Kavulla, in an interview.

The final draft of the manual includes a new section on the path forward for regulators that outlines specific questions for regulators to ask, such as, “How does a regulator address the asymmetry of information inherent in utility regulation when discussing the grid?” and “If costs arise as a result of DER deployment, will the rate structure ensure that the causer of the cost pays?” Some questions are as fundamental as, “What is the current adoption level of DER in the jurisdiction?”

“It's pointless to try to reform these rates without having accurate data, whether it's the net load profile of rooftop PV customers, or data about what the utilities are actually in a position to avoid in terms of capital investment in a generation plant or distribution facilities,” said Kavulla. “You just need a greater awareness, I think, of all of those things before you start experimenting with rate design reform.”

The report acknowledges that DERs cause economic issues for utilities; these issues include “revenue erosion and cost-recovery issues, as well as inter-class cost shifting apparent in traditional utility rate design and [net metering] discussions.” But it doesn’t assume these are problems for all utilities at the same time.

Language in the manual reminds regulators that their state is unique, said Jamie Barber, energy efficiency and renewable energy manager at the Georgia Public Service Commission, and an author of the DER manual. “You don’t just make a policy change because Hawaii or California is doing it; you need the data to support the action in your state,” she said, in an interview at the group's annual meeting.

The final DER manual also includes several case studies to help regulators better compare and contrast the DER market dynamics in their state versus others.  

Anne Hoskins, chief policy officer for Sunrun and former Maryland commissioner, praised NARUC for taking stakeholders' concerns into account in drafting the DER manual, and for producing a document that encourages thoughtful ratemaking. She pointed to recent compromises in California and Colorado as examples of where regulators fostered compromise and achieved incremental change so as not to disrupt the DER market. Exelon’s proposal in Illinois, however, is the opposite of thoughtful ratemaking, she said.

“The manual says ratemaking is complicated and there are lots of things to consider…and it’s important to have an open procedure,” said Hoskins. Exelon’s new legislative proposal, which would require all residential customers to pay a demand charge, “is a workaround,” she said. “They’re not going through the process; they’re just going to try to use political power to approve this.”

This week, a group of stakeholders in Illinois, including Exelon Generation, ComEd, the Sierra Club, the Natural Resources Defense Council and the Citizens Utility Board, presented and endorsed legislation to extend the life of Exelon’s aging nuclear plants in exchange for new efficiency and renewable energy requirements. While the bill has support from environmental groups, solar companies are likely to fight to strip Exelon’s proposal to introduce demand charges.

According to Hoskins, there are only about 1,000 rooftop solar systems in Illinois today. The state would arrive at a better solution for all players, she said, if Exelon’s proposal were to be properly vetted by regulators the way the DER manual suggests.

In addition to the ratemaking process, Kavulla said the manual also touches on the more fundamental debate over whether DER issues are really a problem of generic rate design, or whether it's a problem that's specific to those resources.

“I think the realization that I've come to is that it's both,” he said. “If you had a really economic rate design for customers, you probably wouldn't need to undertake a DER reform, because you'd already be sending the right price signal to all the customers for the particular type of thing they're consuming.”

“The fact of the matter is, there's an awful lot of fixed unavoidable costs that get expressed in volumetric, per kilowatt-hour rates as it is. We do that for any number of good reasons, and so we need to consider targeted reforms to rate design, like time-of-use pricing or minimum bills,” Kavulla continued. “We also need to consider DER-specific things, like value of resource and value of solar compensation, but it's hard to pull those two things apart because they're really interrelated issues.”

Because the manual isn’t prescriptive, Kavulla emphasized that it’s only as authoritative as state commissions regard it to be. Ultimately, it’s up to regulators in each state to decide which set of policy approaches they want to take. Since each state is its own laboratory of democracy, the outcomes are likely to vary.

from GTM Solar https://www.greentechmedia.com/articles/read/utility-regulators-finalize-distributed-energy-resources-manual-naruc-der

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