Policy: Environment & Energy

Utility, environmental group team up to change electricity business

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The trade organization that represents investor-owned electric utilities and a prominent environmental group laid out a series of principles that would lay waste to the way U.S. utility companies have operated for more than a century.

The recommendations put forth Wednesday by the Edison Electric Institute and the Natural Resources Defense Council call for ending a business model in which revenues depend on expanding electricity sales. Instead, the groups argued, utilities and state regulators need to place a value on "non-fuel costs" so those companies can generate revenues through offering more services.

"This is a recognition that in addition to energy efficiency there may be other approaches that affect the sales of utilities," David Owens, executive vice president at EEI, told the Washington Examiner. "The approach says let's try to encourage these technologies, but at the same time let's not penalize utilities."

A changing energy landscape drove EEI to that point — the group has increasingly warned of the impact flat demand growth and increasing volumes of distributed renewable energy has had on bottom lines. That's made it harder to drum up cash to reinvest in the electric grid, which relies largely on decades-old technology and is in need of upgrades.

Federal policy also could be driving the shift, as forthcoming greenhouse gas regulations for new and existing power plants will make the electricity system more "carbon constrained," noted Julian Boggs, federal global warming program director with Environment America.

To be sure, the utility regulatory structure makes the push ambitious.

In many respects, the issues start at various state regulatory bodies which, for the majority of utilities that operate in a regulated monopoly, must approve rate increases. Most have been unwilling to place a valuation on services and technology upgrades separate from electricity sales — a process known as "decoupling" — which makes it harder for electric utilities to justify rate bumps for those improvements.

"[R]evenue decoupling is an important part of the solution here, along with rate designs (like variable demand charges) that do a better job of capturing the extent to which customers are using grid services and/or using grids during peak periods," Ralph Cavanagh, co-director of NRDC's energy program, said in an email.

One utility is preparing to take the plunge in making it all work.

National Grid, which operates in Massachusetts, New Hampshire, New York and Rhode Island, told the Washington Examiner that it will reveal regulatory rate proposals and a plan to bring more technology partners into the fold later this month.

Tom King, the utility's president, has been meeting with state regulators and other utility chiefs about the effort, said spokesman Fred Kuebler.

National Grid has an array of different projects that would benefit from new rate designs. Those include a "smart grid" pilot in Worcester, Mass., a biogas facility in Brooklyn, a self-sustaining "microgrid" in upstate New York and an agreement to purchase power from the Cape Wind offshore wind project off the coast of Massachusetts and Rhode Island.

"This will be a call to action for utility partners and for government," Kuebler said of the forthcoming announcement.

Many utilities are listening, as they've struggled to manage an increasing amount of renewable power coming onto their systems.

For some, that's driven by "net metering," a process in which utilities pay customers with rooftop solar systems for excess power they supply to the grid.

The debate over net metering has heated up at public utility commissions in Arizona, California and Colorado. Utilities argue solar customers still need the grid for power when the sun isn't shining, so they should have to pay for maintenance. But net metering proponents say those customers help utilities shed fuel costs and reduce greenhouse gas emissions.

Xcel Energy in Colorado, which has said it believes the 10.5-cent per kilowatt-hour incentive it offers to solar customers is actually worth 4.6 cents per kilowatt-hour in benefits to the grid, said it welcomed the initiative from EEI and NRDC.

"Those are all very difficult things to measure, and that's obviously why we want to have this discussion," said Mark Stutz, a spokesman.

The NRDC acknowledged in the agreement that such policies amounted to strain on the grid that non-solar customers subsidized.

And while EEI is asking for its members to make significant changes, the concession from NRDC was just as key, said Joe Kruger, director of the Bipartisan Policy Center's Energy Program.

"I think what's significant with this is, to me, it marks kind of a new phase of the issue, of the debate," Kruger said. "It's saying both sides have interesting concerns. Let's figure out a way to work together and resolve this."

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