The speed of today’s power sector transition requires regulatory innovation that matches its pace, regulators, as well as utility and technology advocates, agreed in a new Department of Energy paper.
New power system technologies and operations can no longer await regulatory approval in litigated multi-year rate cases, said co-authors of the report, The Role of Innovation in the Electric Utility Sector, published in April by the Department of Energy's Lawrence Berkeley National Laboratory. Such delays increase the risk that states will fail to meet the rapidly growing need for new reliable, affordable, clean and equitable electric service solutions, they added.
“Regulatory innovation is needed to meet new decarbonization mandates and goals and the accelerating pressures of climate change,” Commissioner Tremaine Phillips of the Michigan Public Service Commission agreed. In response, Michigan and other states have initiated informal collaborative proceedings “to enable utilities to keep up with today’s energy transition.”
But inertia is designed into regulatory processes to protect power sector stakeholders’ many different interests, the paper's contributions from the National Association of State Utility Consumer Advocates, the BlueGreen Alliance, the Institute for Electric Innovation, Sunrun and Build Edison showed.
More informal and collaborative proceedings "that engage people in problem solving across different interests can be exhausting,” said Regulatory Assistance Project President and CEO, and former Vermont Department of Public Service Commissioner, Richard Sedano. But those proceedings have more time and latitude to address "the full dimension of innovative ideas and not just whether they are right or wrong" and "can drive solutions,” he added.
New approaches to regulation could, however, unjustly shift the risk of failure from utilities to ratepayers, the paper's consumer advocates wrote. Yet answers to key questions about the costs and benefits of efforts like pilot projects to test solutions are already emerging from new regulatory initiatives, regulators and utility and technology advocates told Utility Dive.
The need for innovation
Regulatory innovations can allow electric utilities to use new technologies and operations in “services, security, pricing, and market design,” according to LBNL Electricity Markets and Policy Department Manager and Strategic Advisor Lisa Schwartz, the paper’s technical editor.
New regulatory approaches are needed where state commissions have discouraged utility investments to improve reliability and affordability and accelerate decarbonization, Schwartz added. Nationally, utilities invest only an estimated 3% of profits in research and development while more competitive industries invest 40% or more, Schwartz reported from a 2020 McKinsey study.
Innovation must meet “the climate challenge” as well as “the challenges of racial and economic equity, fairness for workers, community agency, and environmental health,” BlueGreen Alliance State Policy Director Kevin Lee wrote. Traditional cost-based regulation’s “unrelenting pressure” on utilities has produced short-term cost savings at the sacrifice of "a longer-term view,” he added.
New regulatory approaches are needed, wrote Institute for Electric Innovation, or IEI, Senior Director of Research and Strategy Adam Cooper and other IEI members. Traditional practices are too slow to support investor-owned utility work to meet the "evolving needs and expectations” of their customers, they added.
But the needed “dramatic shift” in regulation should be “market-based” and provide “a strong role for third-party providers willing to risk capital and compete” for part of the expected trillion-dollar energy market, wrote report authors from Sunrun, including former Maryland utility commissioner Anne Hoskins, now the company's chief policy officer.
However, private sector parties, like Sunrun, do not have utilities' capabilities and reach for “identifying, deploying, and scaling” solutions, wrote Kristin Barbato, CEO and founder of clean technology consulting firm Build Edison, and other report authors. It is regulators’ responsibility to support cost-effective utility solutions and ensure utilities are not “trapped in pilot after pilot with no clear path to scaled deployment,” Build Edison wrote.
Rhode Island Public Utilities Commissioner Abigail Anthony and Indiana Utility Regulatory Commissioner Sarah Freeman supported the paper’s call for innovation in regulation. But reforms that align utilities’ risks and rewards should guide utilities to find their own solutions, Anthony noted.
Modernization “is likely inevitable” and will change the power system, acknowledged the National Association of State Utility Consumer Advocates members' essay. But that will offer both “opportunities and challenges,” they added.
The question for consumer advocates is how to “minimize consumer impacts and protect equity,” the association's executive director David Springe told Utility Dive. Regulation allows "due process through legal proceedings but making regulatory processes too easy and too fast may limit due process rights and prevent meeting policy goals in ways that protect vulnerable consumers.”
Regulatory reform that “shapes the policy and technology landscape” must come from “a collaborative, industry-wide approach involving all parties,” Southern California Edison spokesperson Jeffrey Monford agreed.
The DOE paper contributors' many different perspectives on innovation in regulatory processes are clear in their approaches to pilot projects.
Pilots in generic dockets
Collaborative “generic” non-rate case dockets that focus on broad topics and bring stakeholders together for non-litigated consideration of potential reforms have begun to include work on pilots.
Utilities and other frequent docket participants like consumer advocates are prepared for litigated proceedings, but “technology providers may come with data and not understand why it is questioned,” the Regulatory Assistance Project’s Sedano said. In generic dockets, like New York’s years-long Reforming the Energy Vision, or REV, regulators have helped participants "find shared interests" and "changed the way utilities work with stakeholders,” he recalled.
Generic dockets can establish “foundational policies with guardrails” for proposals like pilot projects “that allow implementation in each utility’s unique way,” Sedano added.
Collaboration with other stakeholders is “the right thing” for electric utilities, the IEI authors wrote. It allows regulators to structure pilots and programs that are “win-win-win” for technology providers, customers and utilities, IEI’s Cooper added.
Traditional regulatory processes like rate cases were not meant to be “innovation labs,” Michigan Commissioner Phillips said. “They regulate utilities’ use of ratepayer funds.”
Michigan Gov. Gretchen Whitmer’s, D, generic 2019 MI Power Grid initiative was a “proactive response to the demands climate change and decarbonization are imposing,” he said. It included extensive work on energy programs and technology pilots, he added.
The overall initiative was “to facilitate the energy transition instead of waiting to address it in rate cases and rulemakings” and “missing the opportunity to see it more holistically,” Phillips added. Stakeholders identified important areas the commission and utilities had not considered, including Michigan automakers’ call for transportation electrification pilots, he said.
Hundreds of pilots have been proposed in multiple Michigan proceedings, but the generic docket gave the commission a “more effective, efficient, and timely” approach to them, he said.
For pilot proposals requesting funding through rate recovery, there should be a “streamlined pilot review process” that evaluates pilots with “objective criteria,” according to the September 2020 Michigan Public Service Commission Staff's Utility Pilot Best Practices and Future Pilot areas report resulting from the initiative.
Pilot proposals should detail the need, design, evaluation metrics, goals, costs, timeline and stakeholder engagement plan, the report said. And its recommended Michigan Pilot Directory database to catalog all proposals and their outcomes, now in development, "may be the first in the nation," Commissioner Phillips said.
Commission-required pilot criteria can be easily uploaded to the database, allowing regulators, utilities and the public “to determine if a pilot proposal will add new information or is ready to be scaled,” he added.
“Both MI Power Grid and the NY REV showed the value of generic processes in driving change,” Sedano said. “The problem with pilots is that people are fed up with dead-end pilots that don't have scaling plans built into them, but we shouldn't be fed up with pilots, we should get better at designing them,” he said.
A lot of power system stakeholders are thinking about better pilot designs.
Better pilot design
The priority of a utility pilot design is typically to obtain approval and cost recovery through rates, Sunrun’s Hoskins said. But regulators can also support pilot designs that plan for scaling new technologies or new rate structures that reduce customer costs, she said.
Traditional regulation requires investments to prudently balance the needs of utility shareholders and customers, but it is not keeping the power system reliable and affordable, agreed Build Edison’s Barbato. “Regulators need to recognize that early-stage pilots can scale more effectively in steps, with lessons learned from real-world challenges as each step’s core benefit.”
If new pilot designs include “a specific initial strategy, evaluation metrics, and cost recovery mechanisms for each step, failing early could be compensated and lead to failing smaller,” Barbato said. That would mean "faster learning and faster scaling,” she added.
Early small-scale energy storage projects in California showed that resilience, though difficult to quantify, “can change overall system risk in a tangible economic way,” she said. “Now utilities and their regulators are deploying energy storage at scale for that resilience value.”
Collaborative workshops in Oregon’s planning process led to the 2019 Portland General Electric multi-pilot Smart Grid Test Bed to test distributed resources for reliability, Commissioner Mark Thompson of the Oregon Public Utility Commission told Utility Dive. Requirements for the pilots’ designs incorporated best practices developed by LBNL that recognized “failures can allow quick learning and contain costs,” he said.
Oregon’s Smart Grid Test Bed is "a success story for regulators supporting innovation," agreed PGE Senior Director of Resource and Regulatory Strategy and External Engagement Nidhi Thakar, a former DOE and California Public Utilities Commission staffer. It shows “the important role regulators play.”
But even the best-designed pilots must be proven before being scaled and too many await that next step, the DOE paper’s authors said.
The pilot sandbox
The Connecticut Public Utilities Regulatory Authority's “regulatory sandbox” would allow pilots to rapidly scale solutions in ways “that might not be possible under traditional regulatory frameworks,” a PURA statement said.
The sandbox is built into the “innovation pilots“ framework, one of 11 initiatives in PURA's Framework for an Equitable Modern Grid generic proceeding, PURA Chair Marissa Gillett told Utility Dive. The sandbox “fail fast mentality” limits spending by requiring projects to “either scale up or get out,” she said.
It “addresses risk” by providing cost recovery for utilities and funding for developers if proposals include predefined design elements like costs, evaluation metrics, timeframes, guardrails and intended outcomes, PURA reported.
“Utilities should not be R&D labs and pilots can be a poor use of ratepayer dollars,” Gillett said, echoing Michigan’s Phillips. Connecticut’s sandbox, based on LBNL’s September 2020 pilot design best practices handbook, only tests proposals that identify up front how successful pilots will be scaled and detail when regulators can “pull the plug” on failures, she added.
But predesigned pilots and sandboxes trouble consumer advocates, National Association of State Utility Consumer Advocates' Springe insisted. Utilities typically “work in good faith for customers, but they are businesses that make money for shareholders,” he said. “Call it a sandbox or what you want, speeding up approvals and making pilots easier for utilities functionally removes risk from utilities and shifts risk to consumers.”
If a utility wants to test a technology or move faster, “it can move faster by using shareholder money for the pilot, prove the concept, and bring it to regulators for rate recovery,” he said. “The sandbox is an example of how utility talk about regulatory innovation really means ratepayers funding pilots.”
Regulatory innovation is often slowed by “pushback from consumer advocates,” but a new environment is changing the views of once conservative stakeholders and regulators, said former Illinois Commerce Commission Chairman and CEO Brien Sheahan, long a champion of the regulatory sandbox. “Connecticut deserves a lot of credit for its thoughtful approach to the sandbox concept,” Sheahan said.
Regulation “protects customers and the public interest,” PGE’s Thakar said. It “is not too different” from "the utility mission to provide safe, reliable, affordable service to customers," or "the private sector goal to provide cost-competitive technologies," but whether they will find common ground to support regulatory innovation “depends on the leadership and culture of the commission,” she said.
There is, though, "a new attitude toward innovation" in today's regulators, utility executives and other proceeding stakeholders, Thakar said. “We come to our roles with a shared interest to combat the scientific predictions about climate change and the recognition that we all have to be committed to working in concert and we can't do that without innovation.”