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Clearing Up / Bearing Down

[July 7, 2017 / No. 1807]

Shall We Tell You How to Run Your Business, or to Just Go Away?

SUMMARY: Utilities are being told by legislators and regulators, in ever greater detail, how to run their businesses through mandates such as renewal portfolio standards. But there's a collision coming between that trend and the forces promising to rearrange the very structure of the industry and its regulation.

Utilities are accustomed to being told what to do and how to operate. That's the tradeoff for having a competition-free monopoly territory.

Historically the mandates have been confined to the financial realm, covering topics such as what's allowed in the rate base, the rate of return to be earned on those assets and how much customers will pay to achieve that authorized return.

Regulatory oversight extends to operational considerations (as Puget Sound Energy, with its whopping fine for a Seattle gas explosion, can attest), but it's generally been exercised by whatever entity -- a state utility regulatory commission, for example -- had direct authority over the utility.

Of late, others have been getting in on the action of involving themselves in managing utilities. Legislatures are considering, and sometimes passing, mandates such as "Thou shalt not use coal" or "You will get x percent of your electric supply from renewables, and here's how much x is going to be increasing."

But the trend is not universally in the direction of more mandates and control. Utility commissions, recognizing the reality that the landline telephone is increasingly an anachronism, have been relinquishing control over rates, although they still have a hand in service performance, such as an interruption in the availability of 911. The entire deregulation/open-retail-competition movement can be seen as a relinquishing of control over how electric utilities operate.

Such moves aren't without controversy, reflecting the ongoing tension between what markets and utilities are pushing for and the desire of regulators and in many cases customers to have someone telling utilities what they can do and charge.

Controversy and tension are likely to increase as the market, or at least parts of it, keeps pushing for more freedom to operate while others seek to impose more controls, whether from a philosophical motivation or from an interest in promoting a particular cause (reducing fossil-fuel use), as some recent news items suggest.

Nevada's governor and Legislature have been busy recently on energy issues, with a slew of bills being approved and signed into law. Interestingly, one that Gov. Brian Sandoval vetoed would have increased the renewables portfolio requirement to 40 percent (up from 25 percent). That's almost standard operating procedure for states these days, especially in the West.

But Nevada has also enacted the beginnings of a new mandate for electric utilities in the Silver State.

'Thou shalt not use coal.'

Senate Bill 204, according to a legislative report, "requires the Public Utilities Commission of Nevada (PUCN) to investigate and determine, on or before Oct.1, 2018, whether it is in the public interest to establish by regulation biennial targets for the procurement of energy storage systems by an electric utility. In making this determination, the PUCN must consider whether energy storage systems will achieve certain purposes. The measure further provides that, in measuring the benefits and costs of energy storage systems, the PUCN be required to consider all known and measurable benefits and costs. If the PUCN determines the benefits of the procurement of energy storage systems exceed the costs, the PUCN must establish by regulation biennial targets for the procurement of energy storage systems by an electric utility."

Grid-scale energy storage has emerged as the missing piece for making renewables truly ready for prime time, by having power available when the wind isn't blowing and the sun isn't shining. It's not an exotic technology (while big batteries are the current cutting edge, the concept is as old as pumped-storage hydro). Multiple companies, including Mukilteo's UniEnergy Technologies, are tackling the problem and utilities have deployed battery systems in test drives. At one legislative hearing, testimony was offered by executives of Tesla Motors, which just happens to be building a gargantuan battery factory (primarily for cars) near Reno.

But Nevada's electric utility market is headed for much bigger changes, if voters approve for a second time (in the 2018 general election) a ballot measure to open it to retail-level competition. Sandoval said uncertainty over the interaction between a higher renewable portfolio standard, a new energy storage mandate and retail competition (and the restructuring that would prompt) motivated him to veto the RPS increase and ask for more study.

Sandoval noted in his veto letter that the ratepayers often get overlooked in these debates, even though they're the ones ultimately assuming the risk of higher rates that result from what he called "aggressive new energy policies." That same issue of who bears the cost figures into a debate over more mandates, this time in Ohio.

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Legislators, environmental and energy-conservation groups and business are fighting over a series of mandates, including a renewable portfolio standard, and whether to suspend or roll those back. One such mandate is for commercial and industrial customers to participate in electric-distribution utilities' energy efficiency and peak-demand reduction plans. Large-usage customers already have opt-out provisions exempting them from participating. Legislative proposals have been offered to extend the exemption to smaller commercial customers.

The American Council for an Energy Efficient Economy is among those objecting. "The primary benefit of energy efficiency programs is to reduce utility system costs," it argues. "These costs include energy, generating capacity, and transmission/distribution infrastructure. An expanded opt-out would increase electric demand, leading to higher utility system costs. Increased costs would ultimately lead to higher electric rates and bills for all customers in Ohio."

Beyond the specifics of these debates are some larger questions about mandates, and even larger ones about regulation. Do mandates accomplish or cost more than natural evolution and market forces would? Should the government be telling utilities how to operate, beyond the basics of safety? Does a regulatory scheme whose design goes back decades make sense for an industry in which the technology, the nature of the service and the companies providing it are changing so dramatically?

Those are also the sorts of questions likely to get lost in individual and localized fights, although Sandoval's veto message hints that someone is thinking about them. Maybe someone force the participants to address them, and by a specific deadline. Call it a mandate. [Bill Virgin]

Bearing Down is excerpted from Energy NewsData's Clearing Up publication. If you aren't a current subscriber, see for yourself how NewsData reporters put events in an accurate and meaningful context -- request a sample of Clearing Up.

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