Lawyers, consultants and business leaders working in the rates and regulatory area will find the recently released Pennsylvania Public Utility Commission’s (PaPUC or Commission) Guide to Utility Ratemaking helpful, even if you don’t practice in Pennsylvania.

The original Rate Case Handbook was first published in 1983. The handbook served as a valuable resource for energy and utility practitioners. Just as before, the updated guidebook is well laid out and manages to make complex information easy to digest.

In the new edition, readers are given both a general overview of how each utility (water, gas, telecom and electric) service is produced, priced and delivered, as well as a thorough synopsis of the legal and administrative structure of the PaPUC. The 181 page handbook is comprehensive and provides information on the following:

While many of the foundational principles outlined in the original handbook have retained their applicability, technological advancements and discoveries from Marcellus Shale to smart meters and distributed generation commanded special attention in the new update. A big thank you to authors James H. Cawley, former PaPUC Commissioner, and Commissioner Norman Kennard, as well as to those who aided in the completion of the project. It provides a relevant discussion on modern ratemaking issues.

Yesterday, former Pennsylvania Public Utility Commissioner (PaPUC), Robert F. Powelson, was officially sworn in as a Federal Energy Regulatory Commissioner, ending a six month drought in which the Federal Energy Regulatory Commission (FERC) did not have a quorum. The FERC is responsible for permitting decisions on energy projects such as natural gas pipelines. The lack of a quorum sidelined at least 15 energy infrastructure projects with an approximate value between $15 billion and $25 billion and an estimated 75,000 jobs. The projects include the $2 billion Nexus pipeline in Ohio and Michigan; the $1 billion PennEast pipeline in Pennsylvania and New Jersey; and the $5 billion Atlantic Coast Pipeline in West Virginia, Virginia and North Carolina. This is the first time the FERC has been without a quorum in its 40-year history.

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Last week the Senate unanimously confirmed Powelson and Neil Chatterjee, an energy policy advisor to U.S. Senate Majority Leader Mitch McConnell (R-KY). Chatterjee was officially sworn in on Tuesday. As a Pennsylvania based regulatory attorney, I join the Pennsylvania Public Utility Commission and others here in the Keystone State in congratulating the FERC’s newest Commissioner, Robert F. Powelson. Now the rest of the country will discover the reasoned judgement Pennsylvania has experienced. Those looking to discover more about Commissioner Powelson might enjoy this interview I did with then PaPUC Chairman Powelson regarding Pennsylvania’s energy future.  

Photo Credit: FERC

The Board on Energy and Environmental Systems (BEES) of the National Academies of Sciences, Engineering, and Medicine provides independent advice to the United States government and the private sector on science and technology policy issues related to energy and the environment. Given the importance of electricity to our nation’s health, safety, and economy, BEES has researched methods to minimize the impact of extreme weather events, earthquakes, cyber-attacks and other disasters that have the potential to cause large-scale outages. BEES’ most recent report, Enhancing the Resilience of the Nation’s Electricity System will be publicly released at 11 a.m. EST on July 20, 2017.

To provide insight regarding important issues in the report, BEES will host a free webinar on July 20, 2017, at 2 p.m. EST. The following authors will be panelists on the webinar:

  • Granger Morgan, Chair, NAS, Carnegie Mellon University, Pittsburgh, Pennsylvania
  • Jeff Dagle, Pacific Northwest National Laboratory, Richland, Washington
  • William Sanders, University of Illinois-Urbana Champaign, Urbana, Illinois 

They will identify technologies, policies and organizational strategies that should be implemented on the federal, state, and local levels. At the conclusion of the presentation, webinar participants will have an opportunity to ask questions.

On July 20, 2017, you can download the report on the National Academies Press website at nap.edu. Go here to register for the free webinar.

This week, the Illinois Commerce Commission (ICC or Commission) launched NextGrid, an initiative to explore the utility of the future. It will be an 18-month statewide collaborative aimed at transforming Illinois’ energy landscape and economy. The study will focus on finding new technologies, utility business models and regulatory strategies to transform the state’s grid into a more flexible and efficient resource. NextGrid will be managed by the Commission. An independent third-party facilitator will assist the Commission in engaging electric utilities, communities and stakeholders such as industry, academia, ratepayer advocates and environmental advocates as they examine the following areas:

  1. Consumers, Communities and Economic Development
  2. Grid Design, Digital Networks and Markets 
  3. Regulation and Encouraging Innovation
  4. Climate Change and the Environment

Anne Pramaggiore, ComEd President and CEO, addressed this development:

“We commend the Commission for taking a leadership role in establishing a forum for designing the future-oriented business model and joining ComEd’s effort to maximize the smart grid and deliver new value to customers. We see NextGrid as an opportunity to find common ground on critical issues facing our industry and as a driver of the clean, lean, ultra-resilient energy future our customers want.”

All members of the energy stakeholder community are encouraged and invited to provide input and suggestions regarding the selection of a facilitator and topics to be considered as a part of NextGrid by filing comments in response to the Resolution by April 30, 2017. Comments can be emailed to nextgrid@icc.illinois.gov

If you are new to the industry or simply want to brush up on the basics, the Federal Energy Regulatory Commission’s (FERC) consider the recently released Reliability Primer a gift. The comprehensive manual not only provides an overview of the FERC’s role in overseeing the reliable operation of the power grid, it provides a great overview of the electric power system. It should be required reading for electric utility employees, especially new hires and those with legal or regulatory responsibilities. This manual helps newcomers develop foundational knowledge in an industry riddled with acronyms and jargon. Its title, Reliability Primer, could very well have been Electricity 101 and 102.

Starting on page 10, the Primer begins with the basics, providing a detailed discussion about the three main functions of the electric system; generation, transmission and distribution. In the discussion regarding generation, the Primer explains the various types of power plants, ranging from thermal to renewables such as wind and solar. Data on energy sources is also provided. With the fracking boom, it is not surprising that natural gas is the leader with coal and nuclear rounding out the top three fuel sources.

If you want to understand the FERC’s authority under the Federal Power Act (FPA), section III of the Primer provides a detailed discussion. It explains the Energy Policy Act of 2005 and the FERC’s implementation of Section 215 of the FPA. The reader will gain an understanding of the FERC’s authority and oversight in the development and enforcement of mandatory reliability standards for the nation’s bulk power grid. The FERC states the Primer is written to be used as a traditional text or reference manual and I agree. 

Recently, the staff of the New York State Department of Public Service issued its recommendations in the Value of Distributed Energy Resources Proceeding. The 68-page report provides a comprehensive discussion regarding the compensation and valuation of distributed energy resources (DER). Among its many recommendations, the report provides that existing rooftop solar systems should continue to receive compensation under their current net energy metering (NEM) contracts for a period of 20 years from the date of initial operation. However, customers can also leave NEM and adopt the new proposed compensation method. Other recommendations include:

  • Utilities would develop fee-based, “Virtual Generation Portfolios” – a pool of new DER projects that will be developed in conjunction with private energy companies.
  • Interim measures for Community Distributed Generation (CDG) projects that are in the advanced stage of development. For a limited 90-day period, a specific amount of CDG projects can qualify for compensation under the current NEM framework in order to aid the transition to the new methodology and ensure that early CDG development can deliver on increasing DER access to all New Yorkers.
  • Distributed Generation projects, such as solar for large commercial customers, fuel cells, farm waste generators and micro combined heat-and-power would also transition to the new methodology following action by the New York Public Service Commission.
  • Behind-the-meter generation should be recognized for its environmental value and for contributing to the state’s overall Clean Energy Standard (CES) goal. 

Initial comments on the report are due December 5, 2016, with reply comments due December 19, 2016. Action by the New York Public Service Commission on these recommendations is expected in January 2017. 

The Public Utilities Commission of California (CPUC) recently introduced a draft regulatory incentive proposal addressing issues regarding the utilities’ business models, financial interests and role with respect to distributed energy resources (DER) deployment. Given the potential magnitude of this rulemaking to the utilities’ business models, I suggest that utilities and other stakeholders nationwide follow this docket closely.

The pilot program is offering regulatory incentives to the state’s three large investor owned utilities (IOUs) for the deployment of cost-effective DERs. The current proposal offers a shareholder incentive for the deployment of cost-effective DERs that displace or defer a utility expenditure, based on a fixed percentage of the payment made to the DER provider (customer or vendor). Below is a quote from the order that explains the concept:

“There are two roadblocks . . . to understanding financial value. Many in the regulatory community believe that:  (1) the utility’s return on equity is the sole value driver; and (2) regulators set returns on equity at a rate equal to the cost of equity. Neither of these perceptions is correct, and understanding why is key to developing effective utility incentive mechanisms. 

THE VALUE ENGINE:  (r-k) 

Many regulatory reform discussions focus on the utility’s return on equity as the sole driver of financial value, but that does not align with the concept of investor value creation. It is not the absolute level of a company’s return on equity (r), but rather the difference between r and its cost of equity (k), that creates the value opportunity that drives the stock price. (Appendix B, p. 6)

This discussion leads to the following correction to the investment incentive proposition espoused by many:

INCORRECT:  r > 0 utilities have an incentive to expand 

CORRECT:  r > k   utilities have an incentive to expand 

  r = k   utilities are indifferent as to whether they expand

  r < k   utilities have a disincentive to expand Capital, like any other input to a production process, is not free.

This should have intuitive appeal. Does it seem likely that utilities would rush to expand their facilities if regulators allow them to earn, for example, a 2 percent return on such investment? Clearly there is some minimum acceptable level of return. The cost of capital, by definition, is that minimum return hurdle.

This corrected incentive structure should give some readers pause. Many, if not most, regulators say that they set utility rates of return equal to the cost of capital. If that condition held, utility management focused on creating value should not care whether it ever makes any plant investment. Just as buying apples for 50 cents and selling them for 50 cents creates no value for the grocery store owner, raising capital at a cost of 10 percent to invest in assets that earn 10 percent is similarly a financial wash—no matter how large the investment, it creates no investor value. (Appendix A, p. 3)” 

Comments and responses to the questions are to be filed no later than May 2, 2016. Reply comments may be filed not later than May 16, 2016. Some of the questions to be addressed are:

  • Is the proposed incentive, in the range of 3.5% grossed up for taxes, approximately correct?
  • Are there other disincentives to the deployment of DERs that this proposal does not address that should be considered at the same time? If so, please explain.  
  • Is the suggested process for identifying and approving DER projects that would generate an incentive reasonable and appropriate? How could the process be improved? 

It’s a great day for the Federal Energy Regulatory Commission (FERC) and supporters of demand response. Today, the United States Supreme Court issued its decision in FEDERAL ENERGY REGULATORY COMMISSION v. ELECTRIC POWER SUPPLY ASSOCIATION ET AL., upholding the FERC’s authority to regulate wholesale demand response as well as FERCs method of compensating demand response participants. In the 6-2 decision, the Supreme Court ruled:

  • The practices at issue directly affect wholesale rates.
  • The Federal Power Act (FPA) provides FERC with the authority to regulate the wholesale electric market.
  • FERC has not regulated retail sales.
  • FERC’s method of compensating demand response participants at locational marginal pricing (LMP) is not arbitrary and capricious.
  • A contrary view would conflict with the FPA’s core purposes by preventing the use of a tool (demand response) that will curb prices and enhance reliability in the wholesale electricity market.

Vice President Joe Biden recently spoke in Philadelphia to announce the release of the Quadrennial Energy Review (QER). According to a White House fact sheet, “the QER is envisioned as a focused, actionable document designed  to  provide  policymakers, industry, investors, and other stakeholders with unbiased data and analysis on energy challenges, needs, requirements, and barriers that will inform a range of policy options, including legislation.” The first installment of the QER examines how to modernize our nation’s energy infrastructure and is primarily focused on energy transmission, storage, and distribution (TS&D), the networks of pipelines, wires, storage, waterways and railroads. Each chapter provides recommendations to improve or remedy the issues discussed. At 347 pages, the QER provides an in-depth overview of the energy issues impacting our nation. If you are not interested in all of the topics or simply want to save some memory space, the Review’s homepage provides an individual PDF of each chapter. Here is a listing of the chapters:

Ensuring the Resilience, Reliability, Safety, and Security of TS&D Infrastructure

Modernizing the Electric Grid

Modernizing U.S. Energy Security Infrastructures in a Changing Global Marketplace

Improving Shared Transport Infrastructures

Integrating North American Energy Markets

Addressing Environmental Aspects of TS&D Infrastructure

Enhancing Employment and Workforce Training

Siting and Permitting of TS&D Infrastructure 

Before the chill of last winter’s polar vortex, many in the industry may not have even heard the term uplift payments. If you are still wondering exactly how it works, the Federal Energy Regulatory Commission (“FERC”) has a docket and workshop for you (Docket No. AD14-14-000). At this docket you will find an educational staff report on uplift payments in RTOs/ISOs. On Monday, September 8, 2014, FERC will hold a workshop to explore the technical, operational and market issues that give rise to uplift payments and the levels of transparency associated with uplift payments. The daylong informative workshop will begin at 8:45 a.m. and conclude at 5:15 p.m.

Panel 1 will address the basic issue of “What is uplift?” and explore issues that give rise to uplift payments as well as:

  • Drivers of uplift payments in RTOs/ISOs
  • Uplift payments that have been highly concentrated and persistent on a geographic or resource basis
  • Technical, operational and market issues driving uplift payments
  • The relationship between uplift payments and unit flexibility

Panel 2 will explore the impact of uplift on market participants.

Panel 3 will explore the adequacy of and the potential to enhance uplift transparency and recent market design changes that may address some of the causes of uplift.

Panel 4 will explore broader price formation issues and discuss next steps.

This agenda provides further details. As expected, the event will be held at the Federal Energy Regulatory Commission, 888 First Street, NE, Washington, DC 20426. This workshop is free of charge and open to the public.