Assemblymember Mike Gato (D-LA) is proposing a constitutional amendment to dissolve the CPUC–blowing up the box! The CPUC currently regulates energy utilities, telcom, transportation and water. That’s a tall order to ask five people to competently understand all of those arenas. And on the flip side, many have recognized that the state has too many “cooks in the kitchen”regulating energy, and it’s only gotten worse with increased climate change regulation. The CPUC hasn’t done much to burnish its reputation with the scandal of Mike Peevey’s “rulings for sale” and the inadequate responses to the San Bruno and Porter Ranch disasters. Closing up shop and starting over may be the best solution.
Jeff McMahon at Forbes wrote a nice two-part series on the existential decisions that utilities face going forward. Part 1 is here, and Part 2 here. I posted earlier a longer article from the New Yorker looking at the changing landscape.
KQED posted a good summary of how solar power is driving the residential rate design rulemaking at the CPUC. (M.Cubed works for EDF there.) I offer three steps that should be taken to address the issues of how to change ratemaking for a changing energy marketplace:
3) Any calculation of grid costs and responsibility should reflect the changing demand by consumers. The grid charges proposed by the utilities assume that future consumers will install the same-sized equipment as they do today and that they will consume in the same pattern. Solar panels are ready today to “island” a home from the network, and EV charging could create greater load diversity even at the circuit level. That will radically change utility investment. The distribution planning rulemaking is an important step toward resolving that issue but the CPUC hasn’t yet linked the proceedings.
Severin Borenstein at the Energy Institute at Haas blogged about the debate over moving to residential fixed charges, and it has started a lively discussion. I added my comment on the issue, which I repost here.
The question of recovery of “fixed” costs through a fixed monthly charge raises a more fundamental question: Should we revisit the question of whether utilities should be at risk for recovery of their investments? As is stands now if a utility overinvests in local distribution it faces almost no risk in recovering those costs. As we’ve seen recently demand has trended well below forecasts since 2006 and there’s no indication that the trend will reverse soon. I’ve testified in both the PG&E and SCE rate cases about how this has led to substantial stranded capacity. Up to now the utilities have done little to correct their investment forecasting methods and continue to ask for authority to make substantial “traditional” investment. Shareholders suffer few consequences from having too much distribution investment–this creates a one-sided incentive and it’s no surprise that they add yet more poles and wire. Imposing a fixed charge instead of including it as a variable charge only reinforces that incentive. At least a variable charge gives them some incentive to avoid a mismatch of revenues and costs in the short run, and they need to think about price effects in the long run. But that’s not perfect.
When demand was always growing, the issue of risk-sharing seemed secondary, but now it should be moving front and center. This will only become more salient as we move towards ZNE buildings. What mechanism can we give the utilities so that they more properly balance their investment decisions? Is it time to reconsider the model of transferring risk from shareholders to ratepayers? What are the business models that might best align utility incentives with where we want to go?
The lesson of the last three decades has been that moving away from direct regulation and providing other outside incentives has been more effective. Probably the biggest single innovation that has been most effective has been imposing more risk on the providers in the market.
California has devoted as many resources as any state to trying to get the regulatory structure right–and to most of its participants, it’s not working at the moment. Thus the discussion of whether fixed charges are appropriate need to be in the context of what is the appropriate risk sharing that utility shareholders should bear.
This is not a one-side discussion about how groups of ratepayers should share the relative risk among themselves for the total utility revenue requirement. That’s exactly the argument that the utilities want us to have. We need to move the argument to the larger question of how should the revenue requirement risk be shared between ratepayers and shareholders. The answer to that question then informs us about what portion of the costs might be considered unavoidable revenue responsibility for the ratepayers (or billpayers as I recently heard at the CAISO Symposium) and what portion shareholders will need to work at recovering in the future. As such the discussion has two sides to it now and revenue requirements aren’t a simple given handed down from on high.