The Power Industry in Transition

The Power Industry in Transition

June 11, 2014

The power industry business model in the United States is under stress. Demand for electricity nationwide is growing at roughly a 0.9% annual rate. Rooftop solar, fuel cell and other distributed generators are taking customers and revenue from the regulated electric utilities. The tension had led to disputes between the utilities and distributed generators over whether customers who generate most of their own electricity should pay monthly back-up charges to the utilities and over the prices at which the utilities should credit any spare electricity these customers feed back into the grid through “net metering.”

Independent generators with utility-scale power plants are also affected, since the more growth in electricity demand that is taken up by distributed generation, the less need there is for new central station power plants.

Most discussions about these issues at industry conferences are among utilities or independent generators. However, the most important players in the debate may be the state public utility commissions that regulate the utilities. What do they think?

Members of public utility commissions in five states talked about the pressures on the existing utility business model at an Infocast conference on “transformative energy” in San Francisco in late April. The panelists are Susan Bitter Smith, a member of the Arizona Corporation Commission, Jeffrey Goltz, former chairman and currently a member of the Washington Utilities and Transportation Commission, Anne Hoskins, a member of the Maryland Public Service Commission, Hermina Morita, chairwoman of the Hawaii Public Utilities Commission, and Eric Callisto, former chairman and currently a member of the Wisconsin Public Service Commission. The moderator is Keith Martin with Chadbourne in Washington.

 

MR. MARTIN: Let’s set the stage first by laying out a few basic facts about each of your states. Do utilities in your state merely transmit and distribute electricity, or do they also own power plants, starting with Susan Bitter Smith from Arizona.

MS. BITTER SMITH: Arizona has vertically-integrated utilities, so they are also generators as well as distributors. We are an elected body, so you have five politicians who are commissioners. We are also constitutionally created in Arizona, so we have strict constitutional dictates about what the commission can and cannot do and that may color some of the conversation about regulatory decisions and the challenges that we have.

MR. GOLTZ: Washington has vertically-integrated utilities. We dodged the deregulatory movement a couple decades ago, and we are an appointed commission, thank goodness. [Laughter.]

MS. HOSKINS: Maryland has restructured; it is a deregulated state. We have transmission and distribution regulated companies, but some companies, such as Exelon, have unregulated subsidiaries that are generators.

MS. MORITA: Our utilities remain vertically integrated. The Hawaii Electric Companies are on five islands, and the Kauai Island Utility Cooperative is on Kauai. Most of the base-load and peaking units are owned by the utilities, but we also have a number of independent power plants.

MR. CALLISTO: We are a little of both in Wisconsin. We have municipal utilities and four major investor-owned utilities. They all divested their transmission assets a decade ago. Those are all owned by American Transmission Company. Xcel Energy and our major coop wholesaler are vertically integrated.

MR. MARTIN: Do you allow consumers to choose their retail electricity suppliers, or does the local utility have a monopoly on retail sales, starting with Eric Callisto.

MR. CALLISTO: We do not in Wisconsin.

MS. MORITA: No in Hawaii.

MS. HOSKINS: Yes in Maryland.

MR. GOLTZ: No in Washington state, but we do not have strict service territory boundaries, so it is possible for some customers to opt for different utilities. It is not technically retail choice as we know that term.

MS. BITTER SMITH: We just had the conversation in Arizona. In addition to being the first state in the country to deal with net metering, we also had an open docket on retail competition. The decision of the commission was that retail choice is not allowed under the state constitution, so we do not have retail choice.

RPS Targets and Load Growth

MR. MARTIN: Does your state have a renewable portfolio standard requiring utilities to deliver a certain percentage of electricity from renewable sources and, if so, what is the target, and where are you in relation to that target?

MS. BITTER SMITH: Arizona does. The renewable standard is 15% by 2025. Most of our utilities are ahead of where they need to be and will probably exceed that limit well before the deadline.

MR. GOLTZ: Washington has an RPS of 3% by 2012, 9% by 2016 and 15% by 2020. People in California say that is pretty wimpy, but keep in mind that more than 60% of our electricity comes from hydro, and hydro does not count as renewable energy for reaching these goals. If you add the 15% by 2020 to the amount of hydroelectricity we use, then it is really an aggressive standard. We are past the 2016 goal and are very close to the 2020 goal, so I expect all of our utilities to make it.

MS. HOSKINS: Maryland has an RPS goal of 20% by 2022. We have a small solar set aside and, in a few years assuming the regulations come into play, we will also have an offshore wind set aside.

MS. MORITA: The targets for Hawaii are 15% by 2015, 25% by 2020 and 40% by 2030. The consolidated level for the Hawaii Electric Companies is around 34% today. If you look at where we are today island by island, Oahu is around 19%, Maui a little over 30%, the big island of Hawaii at 40% and Kauai is around 18%, so we have exceeded our 2015 targets and are well on our way toward reaching our 2020 targets.

MR. CALLISTO: Wisconsin has not only the lowest RPS among my colleagues here, we also have the lowest RPS in the Midwest. Our goal is 10% by 2015, and we are already essentially in compliance with that. It has been in place for a couple years. We also may be one of the only states — perhaps with Minnesota as the exception — that counts Canadian hydroelectricity as a renewable. [Laughter.]

The Canadian hydro piece is for new dams built in the future, so it is not part of our current RPS compliance, but our utilities are signing contracts with Manitoba Hydro in part to meet the requirements.

MR. MARTIN: Let’s move to load growth. How rapidly is demand for electricity growing in each of your states?

MR. CALLISTO: Load growth is what the person asking wants it to be. If you are a utility asking for a rate increase, then load growth is down. Looking through the murky haze, the most recent data suggests that demand for electricity in Wisconsin is growing at 0.5% to a little more than 1% a year on self-reported data. Electricity demand in the Midwest as a whole is essentially flat with a slight increase in industrial demand.

MS. MORITA: There has been no load growth for our utilities because of rooftop solar and aggressive efficiency programs. Hawaii has an energy efficiency portfolio standard whose goal is a 30% reduction by 2030.

MS. HOSKINS: Maryland expects a 1.2% compound annual growth rate. We also have a very aggressive energy efficiency target, but the estimate takes this into account.

MR. GOLTZ: We have three investor-owned utilities, but the majority of the load is served by municipal utilities. For the three IOUs, it depends on where you are. They are expecting 2% annual load growth over the next 15 years in the western part of the state. Projected load growth in eastern Washington is less than 0% to 1%.

MS. BITTER SMITH: I am glad Eric Callisto went first because his answer is also true for Arizona. It depends whether there is a rate case pending and what the utility wants you to think. That being said, load growth in Arizona is flat. New housing starts are down in Arizona, and more and more homeowners are installing rooftop solar, which reduces utility load growth.

Effects of Rooftop Solar

MR. MARTIN: Is there a way to quantify the effect of rooftop solar?

MS. BITTER SMITH: I think most of you are familiar that the majority of the Arizona Corporation Commission decided to let Arizona utilities impose a charge of about $5 a month for the average customer with rooftop solar. We are now monitoring what is happening with rooftop solar deployment as result of that decision. The number of new rooftop customers was down in January as one might expect because we had grandfathered anyone who installed rooftop solar by the end of 2013, so December was a boom month for new solar installations and January was not such a great month. New installations were back up again in February. We are just getting the March numbers, so it remains to be seen whether the monthly charge will have a huge impact. My guess is that there will not be.

MR. GOLTZ: There is no way to quantify the effect of rooftop solar in Washington state. I might add as an aside to Susan’s point that our family went to watch spring training baseball games in Arizona a couple weeks ago.

MS. BITTER SMITH: We appreciate that.

MR. GOLTZ: We had dinner with some old friends who have solar panels and they are really ticked about the $5 fee. I just want to let you know that. [Laughter.] Totally unfair, they said. It was a case of having only a couple hours for dinner, so there was not time to explain the whole scenario. [Laughter.]

MS. BITTER SMITH: I’m getting the phone numbers after this. [Laughter.]

MR. GOLTZ: We are watching what is happening in other states and are trying to get ahead of the issue. We have an open docket on this topic. It is pretty clear to me that the way to address the issues is not through a contested case or adjudication. We saw the Arizona case was front-page news in the Wall Street Journal and New York Times. Idaho had a big controversial proceeding that was acrimonious. We are trying to tackle the issues in a more deliberate way. We do not have much distributed generation at this point, although I have to say that if you were to move to eastern Washington, the sun really does shine there an awful lot.

MS. HOSKINS: We are not seeing the rooftop solar debates in Maryland at this time. Our state policy encourages net metering, and we are prohibited by a state statute from allowing differential assessments. We may see these issues arise in utility rate cases in the future.

I am very interested in this topic. It is one of the issues I worked on when I was a senior research fellow at Princeton before joining the Maryland commission. I am watching with interest what Minnesota has done, which is a value-of-solar proceeding where cost and benefit information is carefully collected and analyzed. To understand the actual impact of increased amounts of distributed generation, we need to look in detail at the potential effects on the network as well as the potential benefits to the network. At times, it seems like advocates are heading to their corners without offering the details that regulators need to make informed decisions.

MS. MORITA: Rooftop solar has seen exponential growth in Hawaii since 2010 due to two factors. One is the generous state tax credit, and the other is leasing programs. Putting the growth into context, at least 10% of customers have rooftop solar. I understand there is a waiting list of about 6,000 applications. Another way to look at this is the system peak for Oahu is about 1,300 megawatts, and there are about 235 megawatts of rooftop solar installed currently.

MR. CALLISTO: We have little residential rooftop solar in Wisconsin, but a little more commercial rooftop. The state is in a grey area on third-party ownership. Most utilities believe that third-party ownership is illegal. A bill was introduced in our state legislature to try to rectify that, but I think that it has no chance of getting through.

Let me speak for myself and not for the rest of my colleagues on the Wisconsin commission. I think there is a need for every state that does not have an open docket or an already established policy to have a discussion about distributed generation.

I have not been able to get such a docket open to date in our state, so I dissent on a fair number of issues related to this topic.

State Reactions

MR. MARTIN: Does your state encourage distributed generation, discourage it, or take a neutral position, starting with Eric Callisto.

MR. CALLISTO: Certainly we are not in place of encouragement. The majority’s position is that any issues should be handled on a case-by-case basis in rate cases. We have seen a retraction of net metering.

MR. MARTIN: Mina Morita, as a public policy matter, should the Hawaii commission encourage, discourage or take no position on distributed generation?

MS. MORITA: We are actively looking at this subject. There are not only circuit issues, but also now system issues. We are seeing potential cross-subsidization issues raised by rooftop solar. We are trying to take a holistic approach by looking at both the technical and economic aspects and believing as a general matter that customers should have a choice.

MR. MARTIN: So far the story is that Wisconsin is not encouraging distributed generation and Hawaii is trying to deal with the technical fallout. Anne Hoskins from Maryland, should public utility commissions encourage or discourage distributed generation?

MS. HOSKINS: Public utility commissions are wrestling with a range of issues. They include what to do about carbon emissions, how to ensure grid resiliency and reliability, how to replace capacity as power plants shut down due to age or environmental regulations, and how to adjust to greater reliance on natural gas. Public utility commissions have an obligation to make sure that we have a reliable network. Rooftop solar and other types of distributed generation are an important part of the picture. The question is how all the pieces fit together.

I don’t think that means commissions should take a predetermined position for or against solar. That would be inappropriate under most commission administrative procedure rules. But regulators need to understand how distributed generation fits into the network and ensure that the utilities who operate the distribution networks are doing it in a way that will enable connection fairly and efficiently when it makes sense to do so.

I agree with Eric Callisto and Jeff Goltz that it would be productive to approach this challenge in a comprehensive way where we can look at all of these pieces together rather than react incrementally as rate cases come to us.

MR. GOLTZ: We take our cues in Washington state from the legislature. The state statutes are pretty pro-distributed generation. Distributed generation counts double in our RPS, for example. We were asked three years ago by the House energy committee to assist it with a study to assess the barriers to distributed generation and help remove them in order to encourage distributed generation. We reported in the fall 2011 and have taken some actions since then to remove some barriers. We have amended our interconnection rules to try to make them easier for owners of distributed generation to interconnect with the utility.

MR. MARTIN: Susan Bitter Smith, it sounds like Arizona is trying to accommodate distributed generation.

MS. BITTER SMITH: It is, despite the fact that Jeff Goltz’s friends are mad at us. We had one utility ask the commission for authority to charge customers with rooftop solar a $50 monthly backup charge. We ended up approving an average monthly charge of $5 after accepting a compromise suggested by a consortium of solar companies. We have an open docket to look at the value.

While I agree with my fellow commissioners that looking into these issues in a more deliberate manner free from outside pressure would ideal, it is not always an option. It was never our intention to make the front pages of the New York Times and Wall Street Journal. Every morning, there were stories or ads in the Arizona Republic, a steady drumbeat and campaign-oriented push. We had never seen anything like it in Arizona on an issue before the commission. Be forewarned. We are seeing ads starting to run in other states and issues starting to appear on election ballots. You, too, may see bodyguards for witnesses and extra security details added for the commission offices. We had thousands of emails, phone calls and robo calls coming into our offices.

MR. MARTIN: It is not an easy debate in which to be caught in the middle.

MS. BITTER SMITH: It is a complicated issue, and the danger for commissioners is that it gets distilled into a 30-second ad or a one-minute radio spot or a three second “push this button and e-mail your commissioner what you think.” I am still getting emails. There are a lot of people who don’t know we made a decision or who think it is coming on the November ballot. Jeff Goltz’s friends are grandfathered if they already have solar panels, so they don’t even understand they are not going to have to pay the $5 charge. It is confusion, which is not good for any of us in this room because there is no opportunity to have an articulate and informed discussion about what is a serious issue.

MR. MARTIN: The lead utility analyst at Bernstein Research said, in a cover email to utility investors attaching a summary of a debate among three power company CEOs in late March, that “distributed solar generators enjoy a parasitic relationship with their host, relying on the utilities for grid access and backup power supplies while eroding utilities’ power sales and revenues. As distributed generation grows, utilities will face ongoing pressure to raise rates to preserve revenues, only adding to the attractive of distributed solar and accelerating revenue losses.”

Ann Hoskins, how do the two models — distributed solar and regulated utilities — co-exist? A battle has erupted about not only about back-up charges, but also net metering.

Value-Based Solar?

MS. HOSKINS: More than 40 states have net metering. However, apart from Arizona, California and a few other states, most states do not have large amounts of solar penetration. Net metering is a simple way to enable people to put solar on their roofs and have an outlet for the excess electricity; it is a good place to start. In most states, the cross-subsidization argument is overstated, but down the road as solar penetration increases, it could become an issue. That’s when it may be useful to separate the value of solar from its impact on the grid and evaluate both aspects.

MR. MARTIN: What does it mean to “separate the value”?

MS. HOSKINS: Customers with rooftop solar are using part of the electricity they generate and basically storing the rest on the grid. In some places, they are paid the retail rate by the utility for the electricity and, in some places, they are paid the wholesale rate. As I understand it, what Austin, Texas and now Minnesota have done is to treat the customer like an independent generator and have her sell her entire output to the grid. The state would hold a proceeding to determine the fair value of what the customer is providing the grid. Is it the wholesale power rate or is there some other benefit? For example, is there a benefit through reduced transmission expense? Is there a benefit through greenhouse gas impact? On the other side of the ledger, the customer would continue to pay for the electricity he takes off the grid. That takes away the idea that customers are unfairly using the network or shifting a burden. The customer can be paid for what she generates, and she can pay for her use of the network.

MR. MARTIN: So no backup charge, but figure out the appropriate price for the electricity?

MS. HOSKINS: Yes. And just to be clear, this is not the policy of the state of Maryland. We have net metering, and net metering has worked fine for us so far, but we all need to be thinking ahead about potential approaches to deal with the challenges and opportunities that will accompany increasing amounts of distributed generation.

MS. BITTER SMITH: She makes a very good point. I have heard some people from the solar industry say at other conferences that net metering is an issue in four states — Arizona, Hawaii, California and New Jersey — and the rest of you guys don’t need to worry about it. You should not be talking about it. I would tell you that Anne Hoskins is correct. Now is the time for states to deal with this because you may get the opportunity without ads, emails and robo calls to have an articulate discussion.

MS. HOSKINS: One other point about the Austin, Texas or Minnesota approach is it could raise questions about federal jurisdiction. Some might argue that solar customers would be selling their power into the wholesale power market over which the Federal Energy Regulatory Commission, rather than the states, has jurisdiction.

MS. MORITA: In Hawaii, we are not looking solely at net metering, but at the value of all distributed generation and the kind of characteristics that are needed to stabilize the grid. Simply put, you pay for the services that you receive from the grid, and you are fairly compensated for services that you provide that help the grid. That is the direction in which we are moving.

MR. MARTIN: Does that mean that instead of utilities relying solely on electricity sales for revenue, they receive a fixed charge from everyone connected to the grid and they also pay the retail rate for net metered electricity?

MS. MORITA: We have decoupling in Hawaii. The sales are decoupled from the revenues of the utility. However, it has to be improved. When this approach was enacted in 2010, there were no performance standards. We are moving toward a service approach rather than rate base.

Crane Provocation

MR. MARTIN: Eric Callisto, at the Bernstein Research conference, David Crane, CEO of NRG Energy, said investing in centralized generation and distribution of electricity is futile. He said the day will come soon when people can buy the equipment they need to generate electricity at Home Depot. He believes a superior strategy for legacy power infrastructure owners — also known as utilities — is to shed cost to ensure that the sector remains viable as a backstop source of reliable power, allowing it to extend its decline over the course of decades. Do you see it this way?

MR. CALLISTO: Mr. Crane is a thoughtful guy. I have seen him speak at a couple conferences. He makes you think, and that is certainly a thought-provoking statement. [Laughter.]

Having said that, I do not think the utility central station model is a dinosaur yet. I am not sure it ever will be a dinosaur, but the point that should be taken away from Mr. Crane’s statement is utilities need to think differently.

And the same goes for the solar companies. It is time for the solar companies to start wearing long pants. As my colleague said, at some point, if you want to act and talk like a generator, then you get paid like a generator. We need to move away from the net metering model and find something that really talks about value.

The utilities need to move away from a model that admittedly has served them well for 100 years where the utility earns 10% or 12% returns on its rate base year after year by putting steel in the ground and earning a return over 20 years. Utilities that are willing to innovate, in a regulatory model where regulators are willing to provide an incentive to change, will succeed. Those utilities that continue to put their heads in the ground will get gobbled up or disappear. Mr. Crane’s point in that regard is well taken.

MR. MARTIN: Jeff Goltz, do you see the world the way David Crane does?

MR. GOLTZ: I think there will be a long-term role for the regulated utility and the grid. There will be some outposts in Hawaii where people go off the grid. I do not see that happening in the Pacific Northwest. I agree with my colleagues about how to compensate distributed generators. The fair compensation to the distributed generators may be higher than the retail rate or it may be lower than the retail rate. It depends on what your retail rate is. In California, the tail block rate is 30¢ per kilowatt hour. If you look at solar studies, the value tends to be in the 12¢ to 20¢ range. Rocky Mountain Institute did an assessment a couple years ago. In the state of Washington, if your tail block rate is 9¢ or 10¢ a kilowatt hour and the value of solar is 15¢, then the utilities are getting a pretty good deal if they are paying only the retail rate for distributed solar.

MR. MARTIN: How do you tell what the fair value is?

MR. GOLTZ: The Minnesota process was interesting. They had a legislative mandate that set some parameters that limited their flexibility to a degree. There were a lot of variables in the Minnesota process. You have avoided fuel cost, avoided transmission and distribution costs, depending on where you are, perhaps avoided capacity cost and avoided environmental costs. You have to figure out how to determine each of these. Whatever you do will not be perfect. It involves some exercise of judgment. There will be a range of values.

MR. MARTIN: Susan Bitter Smith, are there other tools to address the growing tension between distributed generators and utilities besides what we have heard already put on the table: monthly backup charges, the rates paid for electricity through net metering and value-based solar?

MS. BITTER SMITH: Presumably so, and that is the next conversation that all of us have to have. As Jeff Goltz points out, there are two very distinct points of view about the value of solar and other forms of distributed generation. Just go to the Arizona docket and you can find two completely opposite positions taken in filings about how the value should be calculated.

I see some parallels to what happened in the telecom industry to what is happening to the electric utilities. The traditional land-line telephone company had a hard time holding on to its traditional business model. Electric utilities across the country know they need to adapt to a new environment. The opportunities are there to have these conversations and to do so sooner rather than later.

Rated-Based Solar?

MR. MARTIN: Eric Callisto, does the traditional utility revenue model still work, where utilities grow by making rate base investments whose costs they recover through electricity sales, in an age of rooftop solar, energy efficiency gains and potential widespread adoption of batteries? If not, what takes its place?

MR. CALLISTO: We have all had different experiments in our states with giving utilities other opportunities to earn, and I think we need to continue to think about that. Certainly a provocative suggestion would be to allow utilities to become full players in the rooftop solar business. That has come up in conversations. I know that has the hairs standing up on the backs of the necks of many people in the audience.

MR. MARTIN: What does that mean to be a full player in the business?

MR. CALLISTO: Utilities would be allowed to provide rooftop solar for their customers and put the costs in rate base. I think we should talk about it. I do not have a view on it, but I think we would all admit in our most honest moments that the utilities are major players in most of our states. When a utility comes before a commission with a model that it has spent time developing and has talked about with the state legislature and the governor, and it suggests that it can raise capital cheaply and it knows the customers and should be able to rate base solar, you had better worry if you are a developer because the utility proposal has political legs. Whether or not it is the right choice, it will have momentum.

MR. MARTIN: Anne Hoskins, does the traditional revenue model work? If not, what takes its place?

MR. HOSKINS: I used to work at a utility that owned solar and put it into rate base. This was an effective approach for building out solar. But now that I look at the issues from a regulator’s vantage point, I realize that we need to make sure that the other players on the competitive side of the business have fair access and an opportunity to develop. I also look back on when I worked at a competitive wireless company and remember just how valuable competition was in terms of encouraging innovation and new technology development.

The utilities are good at many things, but maybe innovation is not at the top of the list, and right now we need a lot of innovation. We need innovation in storage and in reducing the costs of solar technology and installation. That is my concern as I think about this. We need to give utilities an incentive to play a significant role because they are important players, but their most important role may be in maintaining and integrating distributed generation with the network.

MS. MORITA: I want to qualify that these are just my comments and not the comments of the commission as a whole. As I mentioned before, we are decoupled. As I see it, this has insulated the utility from making needed changes. We are trying to move more toward performance-based rate making because an important element in transformation is a cultural change within the utility. I do not think we can get the efficiency needed, and the productivity and outcomes we want by retaining the cost-of-service model for setting rates. If we want the outcomes we desire, then we have to move more toward performance-based regulation.

MR. GOLTZ: You hear a lot of talk at this and other conferences about the rate base model and whether to scrap it. The statutory model under which we operate is very flexible. The statutory terms could not give more discretion to the utilities commission in our state and in other states. We have plenty of room to adapt. We adapted by adopting decoupling. That is not statutorily mandated; we did it administratively. We can have performance enhancements, positive and negative, on the rate of return under our existing statutes. We have lots of flexibility.

My views on this are evolving continually, but I have felt for some time that an investor-owned utility should be able to get into the distributed generation business, even as a part of its regulated business, with the caveat that you have to be careful about the effect on competition. I would like to see more competition in the provision of distributed generation services. That would benefit consumers. If a regulated utility gets into it, then it is still subject to our consumer protection jurisdiction. If the utility abuses its power, we can hammer it.

From my experience, it is daunting for a homeowner to figure out how to put solar panels on his or her roof. You have to find a contractor. You have to figure out the tax benefits. It would be nice to have a general contractor to help with that. The utility is already selling you electricity, in our state at least, so the utility is already helping you with conservation expenditures. It is not that big of a step to add the solar rooftop business to what the utility is already doing.

MS. HOSKINS: No matter what we do, the drive toward distributed energy is consumer driven. As commissions, we need to recognize that technology changes, and the changes may require more flexibility in our processes and regulations.

One discouraging experience for me as a commissioner has been the number of requests I have seen for back-up diesel generators. With solar energy, with the potential for storage, with other types of natural gas generators, I wonder whether there is a more sustainable way for customers to achieve the reliability they are seeking and whether commissions have a role to play in that process. Rather than narrowly reviewing petitions from applicants, can and should