Distribution system operator rising

Two recent papers propose a new approach to managing the distribution grid by creating a “distribution system operator” (DSO). The DSO would control the local low-voltage grid between the substations and the customers’ meters, much as the independent system operators (e.g., CAISO, PJM, MISO, NEISO, NYISO) run the high-voltage transmission grid above the substations. The transmission and distribution system would be run as an open-access system, much as how many natural gas utilities are run now.

Lorenzo Kristov and Paul De Martini have written about this approach, focusing on the technical issues. They are agnostic on ownership, and talking with Kristov (frequently) he sees that the DSO can be either owned by the existing utility or spun off.

Former FERC Chair Jon Wellinghoff and James Tong of Clean Power Finance have addressed the ownership / management issue, proposing that the DSO be independent. They also have proposed that regulated utilities be allowed to own distributed generation on the customer side of the meter.

An important issue yet to be addressed in the creation of (I)DSOs though is transition and sustainability. The creation of ISOs has been politically traumatic, and creating IDSOs will face even more risk-averse political opposition, particularly in the West, after the energy debacle of 2000-01. We’ve also seen that ISOs are not particularly cost sensitive because they are largely insulated from direct cost regulation of the capital assets that they manage (a classic “agency” problem.) Since transmission is such a small portion of overall rates, the ISOs have been able to fly under the radar–but that may change soon.

Finally, it’s not clear how shareholders will view the change in asset ownership, management and returns. I wrote about this previously in the emergence of the “peer to peer” economy. Ensuring that shareholders don’t lose substantial value, even as the risk profile changes, will be key to easing the political process. There are alternative models for easing the asset management transition that is not threatening to current shareholders. There are better models than simply relying on regulated utilities to essentially do more of the same. Market forces are important in driving the innovation needed to transition the electricity system.  More on that another time.

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2 thoughts on “Distribution system operator rising

  1. Pingback: Three key steps in designing rates for solar power | Economics Outside the Cube

  2. Pingback: Looking beyond performance based ratemaking in New York’s Utility 2.0 | M.Cubed: Outside the Box

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