How the e21 Initiative is building smarter utility business models in Minnesota
Policy wonks, utility execs, and environmentalists prove collaboration can produce big new ideas
While Minnesota lawmakers are still battling over controversial net metering provisions in the state's proposed budget, word this week from stakeholders is that the controversial bill will likely be passed in a special session without changes to new regulations that push the state's utilities toward new ways of doing business.
HF 1437, the omnibus jobs, housing, economic development, and energy appropriations bill, will allow Xcel Energy, the state’s dominant electricity provider and a U.S. utility powerhouse, to file a multi-year rate plan with state regulators and request remuneration based on meeting specified performance metrics.
Those changes to Xcel's business don't come from the utility alone, but are the product of over a year of collaboration between the state's power companies, policymakers, and environmentalists in a program called the e21 Initiative.
“The provisions in the bill are e21-like but the specific language, though comparable, is not e21 endorsed,” said Great Plains Institute President/CEO Rolf Nordstrom, one of the co-founders of e21 Initiative.
“It was e21-inspired legislation,” agreed former Xcel Energy exec and current Center for Energy and Environment Policy and Communications Director Mike Bull.
It was not e21-endorsed, both said, because the law was written just after the panel of policy specialists, utility representatives, and environmentalists had taken a break in December of 2014 after approving the Phase I report on their year-long effort.
There was not time to go through the process of officially approving all the details, Nordstrom explained, but the coming reforms nonetheless mirror much of the initiative's work.
Bull, Nordstrom, and current Minnesota Public Utilities Commissioner Nancy Lange (before Lange was appointed) consulted to formulate the initiative after Bull returned from an Edison Electric Institute (EEI) briefing with a new mission.
How EEI’s Disruptive Challenges became e21
The 2012 EEI briefing covered the things that eventually became its landmark Disruptive Challenges paper, Bull explained. He realized Xcel Minnesota would not be immediately impacted by disruptions caused by low load growth, the increasing cost effectiveness of renewables, and the need for infrastructure investments. But Xcel Colorado would, he saw, and the company needed to get ahead of the curve.
“If the lifeblood of Xcel’s current business model continued to be volumetric sales of electricity and a rate of return on invested equity in building assets,” he realized, “it puts us in conflict with what customers want. As new technologies become more cost-effective and available, it is inevitable that customers will want them and it is a bad business practice for a utility or a regulator to get in the way of that.”
Back at Xcel, Bull found it was hard to get the attention of his peers.
“We are always focused on the next resource plan, the next rate case, the next filing, the next fire that needs to be put out and what I was talking about was something a few years away that we needed to start getting ready for,” he said.
That’s when he reached out to Nordstrom and Lange.
By February 2014, when the e21 Initiative’s first phase got started, the utility sector was “trying to prepare for a world that nobody knows the shape of yet,” Nordstrom said. They gradually gathered all the usual regulatory proceedings participants to “think out loud together about whether and how the utility business model and the regulatory framework need to evolve.”
Within a few months, Minnesota’s utilities began to understand the initiative was about helping them learn how to stay financially viable by providing access to the services customers want, he said. Xcel Energy was the first on board. Minnesota Power followed and then Great River Energy and Ottertail Power decided they wanted to be at the table as well.
The December 2014 Phase I report is the product of a year of monthly meetings to work through Transformative Scenario Planning to clearly describe three possible futures: Evolution, Revolution, and Metamorphosis, Nordstrom said.
“Instead of a long-term energy vision, the group was asked to agree on the principles the stakeholders believe should describe any future energy system,” Nordstrom said. “A successful utility business model and the regulatory framework would meet these principles. They are the true north of e21.”
Phase I of e21
The big picture is that, given all that is happening at the distribution edge of the grid, “we need to evolve the current integrated resource planning process toward a more integrated system planning process that would give a more end to end transparency on what’s happening on the system,” Nordstrom explained.
Such an Integrated System Planning, as it is now called in e21 discussions, would recognize two shifts:
- Away from a system in which customers have almost no choice, to a system that has up to thousands of actors making choices about how their electricity is produced and how and when they use it
- Away from a revenue model where utilities make money building and rate basing power plants and transmission lines or selling more electricity, to a system where they earn by meeting pre-established metrics for providing distributed energy resources and other services customers want.
It will require different kinds of planning that don’t currently get done, Nordstrom said.
But perhaps the two most identifiable things that came out of Phase I were similar to HF 1437’s multi-year rate plan and performance-based rates provisions.
For the shift from cost of service ratemaking to a performance based system in which utility revenue is tied to achieving the yet-to-be defined performance outcomes, the utility needs a longer time horizon to be able to make the investments they think necessary to achieve those performance outcomes, Nordstrom said.
A performance-based system, the e21 group concluded, will help move utilities away from building and billing and toward helping customers meet their own needs, he added.
“The current regulatory framework looks in the rearview mirror and asks if we paid the right amount for what we got," Nordstrom said. "A more performance-based system asks what we want and how much we are willing to pay for it.”
This shift will necessitate a fundamental change in the regulatory system, Bull said. “Utilities and regulators are not known to be nimble and they may not know what their customers want. The way to find out is to be able to offer services on a pilot basis.”
It now takes 18 months to get a program through the regulatory process and almost as long to discontinue an unsuccessful one, he said. To get innovations through the regulatory system quicker, Bull wants the commission to establish official pilot program guidelines.
“Then the commission could know a pilot program will be offered to this geographic area and this customer class and it will cost this amount of money so the utility isn’t putting a lot of ratepayer dollars at risk for fly-by-night things,” Bull said.” And it is clear what the cost-benefit expectation is and why it is a useful thing to offer to customers.”
Once such guidelines are vetted by all stakeholders and approved by the commission, a utility pilot can be put in place without a lengthy and costly regulatory review, he said.
Some have expressed concern that such programs, like the multi-year rate plan, are risky because they reduce the public’s channels for input.
The process now is more public, Bull acknowledged, but it is time consuming and expensive to participate. Following the pilot program, if the utility wants to commit major resources, there would be a more rigorous public process.
For multi-year rate plans, he said, the new law includes provisions for commission review. “The commission always has the responsibility and right to protect the public interest,” Bull added. “If it looks like a multi-year rate plan is going off the rails, the commission is obligated to step in and other parties can raise that concern.”
Phase II of e21
“The e21 Phase I Report proposes a new blueprint for regulating utilities,” Nordstrom explained. “But the building still needs to be built. That is what e21’s second phase will be about.”
The group is beginning work on its Phase II objectives, which Nordstrom allowed Utility Dive to make public:
- Inform the grid modernization process that Lange is shepherding through a state commission proceeding and push for more transparency in distribution planning.
- Formulate principles and identify best practices for transitioning some utility revenue from a cost-of-service model to a value- and performance-based approach.
- Identify and prioritize the challenges and opportunities in rate reform.
- Evaluate the pros and cons of today’s Integrated Resource Planning and identify the improvements that will lead to “Integrated System Planning” that will accommodate distribution system dynamics.
- Establish deeper and broader understanding and ownership of e21 recommendations and outcomes with yet-to-be involved stakeholder groups.
The role of Minnesota’s utilities in the e21 process has been constructive because they know things happening in the market are outpacing both regulators and regulated utilities, Nordstrom believes. “They see this as a platform for establishing a new set of rules that will allow them to play a constructive role going forward.”
Three years after seeing that EEI presentation, Bull said, “I am satisfied the utilities are engaged, the consumer advocates are engaged, and the regulators are engaged, because we all realize that over time our current mechanisms will be less and less likely to insure the public interest.”
It is a challenge utilities, regulators, consumer advocates, and environmental advocates must all confront, he added. “We have created a collaborative and consensus-driven process. Some say that can’t lead to big recommendations but e21 proves them wrong.”