New York Public Service Commission To Consider Fundamental Transformation of the Role and Regulation of Electric Distribution Utilities

by Latham & Watkins LLP

On April 25, 2014, the New York Public Service Commission (“NYPSC”) instituted a proceeding it terms “Reforming the Energy Vision” (the “REV Proceeding”) to consider “fundamental changes in the manner in which [electric distribution] utilities provide service” along with related regulatory and ratemaking issues in an effort to “align electric utility practices and [the] regulatory paradigm with technological advances in information management and power generation and distribution.”  Order Instituting Rulemaking, Case 14-M-0101, Proceeding on Motion of the Commission in Regard to Reforming the Energy Vision (April 25, 2014) (the “REV Proceeding Order”).  At its core, this order is the first step in a regulatory process to “improve system efficiency, empower customer choice, and encourage greater penetration of clean generation and energy efficiency technologies and practices.”

As provided in the REV Proceeding Order, the REV Proceeding will progress along two parallel tracks.  First, the NYPSC will examine the distribution utility business model in New York and consider changes necessary to establish Distributed System Platform Providers (“DSPP”), entities that would actively manage and coordinate distributed energy resources (“DERs”) such as energy efficiency, demand response, energy storage, and distributed generation, and provide a market that would enable customers to optimize their energy priorities and be provided the opportunity and compensation to provide system benefits.  Second, the NYPSC will consider whether and how ratemaking practices for electric distribution utilities should be modified to accommodate a DSPP business model and promote energy efficiency, renewable energy, least cost energy supply, fuel diversity, system adequacy and reliability, demand elasticity, and customer empowerment.[1]    


A Staff Report and Proposal from the New York State Department of Public Service (the “REV Report and Proposal” or “Report”) accompanies the REV Proceeding Order and will form the basis for initial discussions in the REV Proceeding.  The REV Report and Proposal identifies five major policy objectives to guide the possible overhaul of the business model and regulation of the state’s electric distribution utilities: 

  1. Enhanced Customer knowledge and tools that will support effective management of their total energy bill;
  2. Market animation and leverage of ratepayer contributions;
  3. System wide efficiency;
  4. Fuel and resource diversity;
  5. System reliability and resiliency; and
  6. Reduction of carbon emissions.[2]

The REV Report and Proposal identifies a convergence of circumstances driving both the need and opportunity for fundamental changes in the electric industry that give rise to the policy priorities.  These include:

  • Cost pressure caused by the need to replace aging supply and delivery infrastructure.
  • Increased customer reliance on reliable and high-quality electricity.
  • The need to reduce carbon emissions and the associated costs and threats to infrastructure posed by increasingly severe climate events.
  • Security threats to electric systems, both cyber and physical.
  • Technology developments in distributed generation and information systems, which challenge incumbent systems and present opportunities for transformation of those systems.
  • Electric price volatility caused by increasingly greater dependence on natural gas as a primary generation fuel source.

The REV Report and Proposal proposes that the REV Proceeding should address a number of key issues in response to these changing circumstances:

  • Technology and system requirements.
  • Definition of utility roles vis-à-vis other market participants.
  • Benefit/cost standards for utility investment.
  • Realigning ratemaking incentives.
  • Creating a new transaction model for customer decisions, including markets and tariffs.
  • Addressing barriers and opportunities related to customer engagement.
  • Alignment of wholesale markets with distribution-level markets.
  • Phased implementation – short, medium and long-term measures.

 The Distributed System Platform Provider (“DSPP”)

The REV Report and Proposal outlines the potential roles of electric distribution utilities as DSPPs.  The Report envisions that, similar to distribution utilities of today, DSPPs would own, plan, construct, operate, and maintain the distribution system, and would balance demand and supply at the distribution system level.  DSPPs would also continue to interface with the New York Independent System Operator, Inc., which manages the bulk power grid and associated wholesale markets in New York.  At the same time, the Report envisions that DSPPs would be responsible for ensuring that the distribution system integrates DERs as a primary means of managing distribution system flows, shaping system load, and enabling customers to choose cleaner, more resilient power options.  To facilitate the increased deployment and penetration of DERs, the Report envisions that DSPPs will develop and manage markets, tariffs, and operational systems to enable DER providers to supply and monetize products and services that provide value to the utility system.  Each type of DER provides differing benefits and imposes differing costs to both the system and consumers, and the REV Proceeding will assign appropriate values to inform prices and other incentives.[3]

The REV Report and Proposal also envisions that DSPPs will implement an advanced distribution management system to forecast load and dispatch resources in real time to meet customer needs and continuously balance supply with load.  To orchestrate the grid in real time and detect and satisfy grid needs, DSPPs will administer communication information technology and real-time information flow among market participants.  Advanced distribution management systems and real time communications will be critical on a grid involving bi-directional power flows and intermittent renewable resources.

In sum, the REV Report and Proposal states that, “in taking on the role of DSPP, distribution utility expands its function from being a physical conduit for delivery of electricity, to also being a transactional platform for a distribution-level market.”  The distribution utility maintains a natural monopoly with respect to the operation of its distribution system, but its monopolistic role shifts from sheer physical delivery to management of a complex system of inputs and outputs while maintaining reliability.

DSPP-Related Regulatory Issues – Utility Ownership or Control of DERs, Role of Microgrids

In considering the role of incumbent distribution utilities as DSPPs the REV Report and Proposal raises but does not resolve the issue of whether and to what extent the distribution utilities or their affiliates can own or control DERs.  Under the NYPSC’s existing Vertical Market Power Policy there is a rebuttable presumption that ownership of generation by an affiliate of a distribution utility would unacceptably exacerbate the potential for vertical market power.[4]   The Report acknowledges that the rationale for this presumption may not apply, or at least may not apply under some circumstances, under a DSPP model, and recommends that the REV Proceeding consider distribution utility engagement in DER activities with a realistic appraisal of the NYPSC’s Vertical Market Power Policy.  The Report poses a series of questions that should be considered on this issue, including the range of potential rules for utility engagement (e.g., allowing engagement up to certain limits, distinguishing between reliability and economic projects).

The REV Report and Proposal also raises the issue of microgrids and community grids and recommends that the NYPSC adopt a consistent policy towards them relative to their relationship to the distribution system (e.g., interconnection and backup service) and the regulatory status of their owners and operators.  The Report poses a series of questions that should be considered on these issues, including the role microgrids play in the DSPP planning function in relation to system needs as well as the resiliency of critical facilities on distribution systems.    

Customer and Energy Service Company (“ESCO”) Participation

With its focus on DERs, the role of distribution customers and independent energy service providers, both generators and retail suppliers, emerges as a primary consideration in the REV Proceeding.  Traditionally, retail customer demand has been relatively price inelastic.  With appropriate incentives, including time-of-use rates, and technological developments, distribution customers may become active partners in addressing the challenges and opportunities of an advanced electrical grid.  The REV Report and Proposal outlines a strategy for engaging distribution customers that centers on products, information, and enabling technologies.  The REV Report and Proposal also identifies a number of barriers to customer participation that must be overcome, including customer awareness, access to data, behavior patterns, economic and non-economic barriers, and particular barriers to the adoption of certain DERs.

The REV Report and Proposal also discusses barriers and opportunities for ESCOs.  ESCOs currently sell energy in New York’s restructured retail access electricity markets.  The REV Report and Proposal envisions that with the markets and products opened through the REV initiative ESCOs should become providers of bill management services for participants in DSPP-administered markets for energy products and services, including all types of DERs.  The REV Report and Proposal suggests that it will consider whether default retail energy services should be provided by the DSPP, or whether distribution customers should by default be required to purchase retail energy services from ESCOs.  That change would mark a fundamental shift from the existing restructured retail access market model, in which distribution customers must opt out of being provided retail service by their distribution utility.

Regulatory Reform

The REV Proceeding Order also contemplates a comprehensive redesign of the existing regulatory framework for electric distribution utilities.  Specifically, the REV Proceeding Order and the REV Report and Proposal address changes to existing regulatory, tariff, and market design and incentive structures to align the interests and incentives of the distribution utilities as DSPPs with the NYPSC’s stated policy objectives.  The REV Report and Proposal identifies issues to be examined by the NYPSC in greater detail and examines potential regulatory reforms in four different areas:

Incentive Ratemaking:  The REV Report and Proposal examines ratemaking reforms made in New York over the past three decades but ultimately conclude that these reforms have “mitigated but not eliminated the way in which [rate-of-return] ratemaking can present barriers to the achievement of policy objectives.”  To achieve the NYPSC’s stated policy objectives, the REV Report and Proposal recommends various ratemaking reforms, including longer-term rate plans (extending the length to as long as eight years), outcome-based ratemaking that focus on the pursuit of long-term customer value and utilizes output based performance metrics, and the creation of utility incentives focused on achieving policy outcomes such as the promotion of DER technologies.  (The REV Report and Proposal looks to the “Revenue set to deliver strong Incentives, Innovation and Outputs” or “RIIO” ratemaking model in the United Kingdom as a potential model for these reforms.)  The REV Report and Proposal also finds that rate design changes will be necessary to facilitate new pricing models and cost allocation models for the new services and products that the distribution utilities as DSPPs will buy, sell and aggregate.   At the same time, the REV Report and Proposal acknowledges that other factors, including accounting standards for rate regulated utilities, the response of the financial community to ratemaking reforms, and statutory ratemaking requirements must be considered.

Affordable Universal Service:  The REV Report and Proposal discusses the need for the design of future rate changes and the transition to the distributed grid to be done in a way that ensures that the burden of providing the utilities revenue requirement is not disproportionately born by low-income individuals with limited ability to install DER or participate in DSPP markets.  A reexamination of the definition of default service is recommended in the course of the REV Proceeding. 

DSPP Rate Design:  The REV Report and Proposal examines how the transition to a DSPP model, in which the distribution utility would act as a purchaser, aggregator and seller of products and services, would require a reassessment of rate design and the best basis for determining price (e.g. market, tariff or contract).   In addition to examining traditional rate design structures, the REV Report and Proposal looks at innovative rate designs that could be “better suited for a two-way transactive grid,” including time-sensitive pricing and locational factors considered as part of rates to optimize efficiency.  The REV Report and Proposal also notes that a transition to a DSPP model would impact gas and steam rates.  Finally, the REV Report and Proposal suggests that a DSPP model will encourage the sale of enhanced service products such as aggregation fees to third party providers and that the proper allocation of those fees will require further study.  

Standby Tariffs:  The REV Report and Proposal also examines the need for the pricing of grid services to accurately reflect the disparate benefits based on customer type.  Certain modifications to existing standby rates are suggested to ensure that DER customers are properly incentivized without unduly burdening non-participant ratepayers.  The REV Report and Proposal also recommends a reexamination of the standby tariffs for microgrids and existing exceptions to standby rates.


According to the REV Proceeding Order the two tracks of the REV Proceeding will proceed in parallel, with Track 1 scheduled to begin immediately.  For Track 1 (relating to DSPPs), the Order expects to “reach generic policy determinations by the end of [2014].”  The first status report on the DSPP issues outlined in the Report is due at the PSC’s July 10, 2014, session.  For Track 2 (relating to regulatory and ratemaking reforms), an “initial staff straw proposal on regulatory changes and ratemaking issues” is anticipated in mid-July 2014.  The straw proposal would then be subject to collaborative discussions with stakeholders, and interested parties could submit comments on the initial draft.  A status report on the regulatory reforms is expected at the NYPSC’s September 4, 2014, session and a “generic Commission policy determination” is expected in the first quarter of 2015.   However, all procedural deadlines are subject to revision at the discretion of the appointed administrative law judge or the NYPSC Secretary. 

[1] The nature and scope of the two tracks is further specified in two rulings issued in the REV Proceeding on May 1, 2014, by the appointed administrative law judge.  The Ruling Establishing Collaborative Agenda and Working Schedule (“Track 1 Ruling”) establishes the agenda for the first track 1 proceeding meeting on May 12, 2014, which will include a full staff briefing, a session to establish a working schedule, and breakout sessions to discuss approaches to specific issues.  The Ruling Issuing Track 2 Questions and Establishing a Response Schedule (“Track 2 Ruling”) poses a list of questions on outcomes-based ratemaking, long-term rate plans, and rate design to be answered by interested parties.  Responses are due June 13, 2014. 

 [2] The sixth policy objective regarding reduction of carbon emissions is not included in the REV Report and Proposal, but was included in the REV Proceeding Order by recommendation of Staff.

[3] The identification and quantification of benefits and costs for DERs has been a topic of recent interest in a number of states, especially as relates to distributed generation solar electric systems participating in net metering arrangements with their local electricity supplier.  For example, the Minnesota Department of Commerce and Public Utilities Commission recently issued a report on a methodology for a Value of Solar Tariff as an alternative to net metering.  See Minnesota Value of Solar: Methodology, Minnesota Department of Commerce, Division of Energy Resources (April 1, 2014).

[4] See Cases 96-E-0900 et. al., Orange & Rockland Utilities, Inc. – Rate Restructuring, App. I, Statement of Policy Regarding Vertical Market Power (July 17, 1998).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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