Travis Kavulla, a Montana Public Service Commission (PSC) commissioner, sees an electric utility sector in the midst of change with potential new energy markets emerging in the West and utilities seeking new ways to recoup their investments in the grid.
Elected to the five-member PSC at age 26, Kavulla deals with utility rate cases and major policy issues in Montana. But he also has a regional perspective as the head of the PUC EIM Group, a group made up of utility commission staff and commissioners from 12 Western states that is involved in discussions aimed at creating an energy imbalance market and other similar efforts in the West.
In a wide ranging interview with Utility Dive this week, Kavulla discussed his views on various issues facing the utility sector, noting that while the challenges may be similar across the U.S., each region will approach them differently.
Distributed generation
With little installed distributed generation, non-centralized generation only represents a “theoretical issue” in Montana, Kavulla said, but a combination of weather, regulatory rules and policy makes it a major challenge for utilities in Southern California, for example.
“An attractive resource, combined with high retail rates and supportive regulation can combine to create a perfect storm of customers seeking bypass of the utility's retail supply and [transmission and distribution] costs,” Kavulla said.
An “obvious solution” is to charge distributed generation owners an unavoidable fixed cost to pay for a utility's cost to maintain the grid, Kavulla said. However, the benefits of distributed generation must also be weighed in the equation in determining how much a DG owner should pay, he said, adding that he expects an increasing focus on the issue. Austin Energy has moved in this direction with its “value of solar” tariff, Kavulla said.
Regulators already have significant experience dealing with the issue when they set avoided cost rates for qualifying facilities under the Public Utility Regulatory Policies Act, Kavulla observed.
Demand growth
How do utilities respond to tepid demand growth across the U.S.? In a sense, it's a “simple division problem,” Kavulla said. Roll up utility costs and divide them by the amount of electricity that is used to get a rate, he said. “The math will solve itself ... and utilities will be made whole."
However, this may not satisfy investors who want to see utilities expand their ratebase, Kavulla said. “From that perspective, traditional regulation may need to adapt.”
But it's possible that the costs of providing electricity could shrink. “That just means you're like the buggy makers of the past,” Kavulla said. “It's not the point of government regulation to make sure manufacturers of horse-drawn carriages stay in business when something's replacing them.”
There's nothing preventing utilities from adapting. For example, if California supports solar, “maybe SoCal Ed should begin ratebasing rooftop solar,” Kavulla said. “What's really to prevent a traditional utility from annexing that part of the industry?”
Increasingly utilities are using trackers and pass-through mechanisms to reduce the time between spending money and recouping their expenses, according to Kavulla. The issue of regulatory lag can become more acute when demand growth is slack.
Generally, Kavulla said he is leery of single-issue cost-recovery trackers and prefers to review a utility's expenses in a single rate case where all the costs can be viewed in context.
New energy markets
Kavulla is a supporter of the efforts in the West to create an energy imbalance market and other means for making the existing grid system more efficient, partly by using existing transmission capacity that is currently sitting idle.
The California Independent System Operator, PacifiCorp and NV Energy are forming an energy imbalance market. Meanwhile, utilities in the Northwest and Southwest are also considering taking steps that would make their operations more efficient. Part of the Western Area Power Administration also plans to join the Southwest Power Pool.
“There had been a real allergy to participating in a regional market due to the Federal Energy Regulatory Commission (FERC),” Kavulla said, noting that some entities in the West are reluctant to cede authority to FERC .
“It's great,” Kavulla said. “You're letting regions guide their own horse.” Each area can set its own governance structure and policies to suit their needs, he said. “You can't expect the West as a whole to instantly form one of these things.”
Kavulla expects the markets in the West to evolve. “Five to ten years down the road, my sense is some kind of consolidation will take place,” he said.
Kavulla believes an energy imbalance market will make the grid more efficient. An NV Energy power plant, for example, may be used to meet needs in California increasing its capacity factor from 10% to 30%, he said, and that could help California avoid building a new power plant.