Last week, the New York Public Service Commission (NY PSC), part of the New York Department of Public Service, issued an Order Adopting a Ratemaking and Utility Revenue Model Policy Framework (Framework Order) in Case No. 14-M-0101, Proceeding on Motion of the Commission in Regard to Reforming the Energy Vision (NY-REV). In this Framework Order, the NY PSC aims to establish a “modern regulatory model,” after concluding that it is no longer able to meet its core duties under the cost-of-service ratemaking model of the previous century.
The NY PSC focuses on three concerns with traditional, cost-of-service ratemaking: (1) the lack of incentives to innovate; (2) the biases toward capital expenditures and against third-party investment; and (3) the asymmetry of information between regulators and the regulated. While last week’s Framework Order does not eliminate cost-of-service earnings, it adds additional market-based and outcome-based earnings opportunities for utilities. The goal is to expand utilities’ revenue opportunities in order to better align utilities’ financial interests with grid modernization policies.
For example, the order establishes “Platform Service Revenues” (PSRs), which constitute a new form of utility revenues associated with the operation or facilitation of distribution-level markets. As an analogy, think of your smartphone and its operating system as a platform. Third-party developers can create apps for this platform, and the platform allows consumers and developers to reach each other. In terms of energy and grid modernization, Distributed Energy Resources (DERs) are the third-party app developers, and the NY PSC wants to use PSRs to encourage utilities to facilitate a distribution-level market, or platform, in which DERs can better interact with consumers. PSRs could be earned by providing services such as data analysis, optimization or scheduling services, energy services financing, engineering services for microgrids, and enhanced power quality services.
The Framework Order also provides utilities with an opportunity to receive “Earning Adjustment Mechanisms” (EAMs). EAMs offer outcome-based incentives for specific policy goals such as peak reduction, consumer engagement, affordability, and energy efficiency.
Several other state utility commissions are also exploring grid modernization through formal proceedings and/or investigations.