# Presentation: 057625

## Key Issues for Developing Energy Efficiency and Renewables:The Regulators’ Perspective

- Rick Weston
- 9 November 2004

## Regulatory Cosmos (Chaos?)

## Existentialism

- What is a regulator?
- A creature of the legislature, whose job is defined by enabling statutes
- Typically cautious, occasionally bold
- Integrated resource planning and energy efficiency, implementation of PURPA
- Clean Air Act enforcement, cap-and-trade regimes
- Described by one regulator as a person with “awesome power and confusing roles”

## Regulatory Objectives

- Of public utility commissions:
- To promote economic efficiency and equity in the delivery and use of public utility services
- Reliable electric service, on demand
- Reasonable cost, low risk, environmentally sustainable
- James Bonbright, Alfred Kahn, NARUC
- Of environmental regulators
- “. . . to conserve, improve and protect the natural resources and environment . . . in such a manner as to encourage the social and economic development of [the state] while preserving the natural environment and the life forms it supports in a delicate, interrelated and complex balance, to the end that the state may fulfill its responsibility as trustee of the environment for present and future generations.”
- Connecticut Department of Environmental Protection

## The World Regulators Inhabit

- Public utility commissions
- “Just and reasonable” retail electric rates
- Integrated utility service
- Default service and delivery charges
- Siting
- Planning and investment
- Market structure
- FERC jurisdictional, except in Texas, but still of critical importance to state regulators
- Bidding rules and regional demand response programs
- System expansion
- Environmental regulators
- Emissions standards
- NOX, SO2, PM, CO, VOCs, CO2
- Allowance trading regimes and allocations (credits or set-asides) for non-emitting resources
- Land and water use
- Point-Counterpoint
- Decisions of utility regulator have environmental consequences
- Anything that affects behavior affects the environmental profile of the electric sector
- Decisions of environmental regulators have economic consequences

## The Wider Array of Resource Options

- Demand response (DR)
- Customer-sited
- Short-term load management (LM)
- Regional (ISO) programs, utility programs, curtailment service providers
- Distributed generation, combined heat and power
- Long-term end-use energy efficiency (EE)
- Consumer response to prices
- Renewables (RE)
- On either side of the meter

## Barriers to DR and RE

- At wholesale
- Supply-only bidding
- Demand should be required to bid; demand reductions should be allowed to bid
- Load profiling by pools and RTOs
- Customers (or their load-serving entities) don’t receive full credit for their load reductions
- Reliability rules and practices excluding demand-side resources
- Historic subsidies for wires and turbines
- Transmission pricing and expansion policies don’t allow for lower-cost demand-side resources
- Transmission pricing rules that penalize low-capacity factor resources
- Markets have failed to fully value the risk hedges that renewables provide
- Fossil-fuel price risk
- Environmental risk

## Barriers to DR and RE

- At retail
- Averaged rates and default service plans block price signals, slow innovation
- Traditional ratemaking promotes throughput
- Avoided cost calculations rarely recognize the full value of distribution savings
- Metering traditions, costs, and standards

## DR and RE:Areas for Policy Action

- At wholesale:
- Build the demand side into the market
- Regional (ISO-sponsored) price-response programs
- Funded by charges on all participants in the market
- Demand bidding and demand-reduction bidding
- DR for reliability: ancillary services, emergency curtailments
- Resource adequacy policies
- Sufficiency of capacity over the longer term
- Transmission: congestion relief, prices, and expansion plans
- Least-cost, resource-blind solutions
- Emissions requirements, trading regimes
- Output-based standards

## Build Demand-Side into Market

- Demand Curve

- Supply Curve

**Price**

**Quantity**

- P

- 1

- P

- 2

- Q

- 2

- Q

- 1

- Assumed

- Demand

- 数量

## DR and RE:Areas for Policy Action

- At retail
- Performance-based ratemaking
- Get the incentives right
- Pricing and advanced metering
- Economically efficient pricing
- Long-term demand response: embedded energy efficiency
- Funding comprehensive EE programs
- Renewable portfolio requirements and public benefits programs
- Integrated resource planning (vertically integrated utilities) and portfolio management (default service)
- A company’s least-cost plan of action should also be its most profitable

## Customer-Sited Resources: The Ratemaking Problem

- Investments on the customer side of the meter generally reduce utility sales and profits
- Rate design ($/kWh and $/kW) links profits to sales
- Incremental revenues almost always exceed incremental costs;
- Utility makes money even when the additional usage is wasteful, and loses it even when the reduced sales are efficient
- In three decades, the problem hasn’t changed: how do we align utility incentives with the public good?
- Restructuring has made its solution a little more complicated, that’s all

## Customer-Sited Resources:Ratemaking Solutions

- Decouple sales from profits
- Performance-based regulation
- Revenue (not price) caps that reward utilities for improving the efficiency of their customers’ usage
- Maintain unit-based pricing, though with rate structures that better reflect the economics (including environmental costs) of generation and delivery
- TOU, critical peak, inverted tailblock, real-time
- Fund comprehensive EE programs

## Other Policies

- Appliance efficiency standards
- Information
- Labels, audits, and prices