Innovations in Utility Business Models and Regulation CAMPUT 2015 Energy Regulation Course June 23, 2015 Kingston, Ontario © 2015 Concentric Energy Advisors,

Innovations in Utility Business Models and Regulation

CAMPUT 2015 Energy Regulation Course

June 23, 2015

Kingston, Ontario

© 2015 Concentric Energy Advisors, Inc. All rights reserved.

Discussion Topics

1. Why are regulators interested in changing the utility business model and regulatory framework?

2. How might the role of the distribution utility change?

3. What changes in regulation and ratemaking are being contemplated?

4. What are non-utility stakeholders looking to gain?

5. What is the potential impact for utilities in terms of fixed cost recovery, earnings, and growth opportunities?

6. Will customers and “society” be better off?

7. Examples

• New York’s Reforming the Energy Vison (“REV”)

• Ofgem’s Low Carbon Networks

• US Utility Investments in Gas Supply

2 Concentric Energy Advisors, Inc.

Electricity Industry Change Drivers • Declining costs and improved efficiency of emerging energy

technologies• IT/IS: ability to manage “big data”• Ability to monitor and control flows on distribution networks

Technology & Innovation

• Active engagement of stakeholders in energy development with NIMBY now redefined to imply “not on my planet”

• Willingness of policy makers (and some customers) to pay more for green

Concern for the Environment

• Frustration with FERC electricity capacity market outcomes Wholesale Markets

• Competition among certain states to be “first” in the United States, inspired by RIIOPolicy-Maker Leadership

• Diminishing tolerance for outages• Desire to lower energy costs• Increased responsiveness to new products and services

Customers

• 4-6% CapEx growth (much of it non-revenue producing) vs. 1% sales growthCapEx > Sales


New York’s REV Policy Objectives and Value Proposition

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Engage & Empower

Customers

Create Markets for Distribution

P&S

Improve System

Efficiency

Fuel and Resource Diversity

System Reliability

and Resiliency

Reduce Carbon

Emissions

Supply

Distribution Market

Customers

Clean

• Lower wholesale prices in the NYISO by flattening customer loads through DERs and Time-Varying Rates

• Reduce the amount of electricity purchased from the NYISO and replace peak capacity plants with DERs

• Invest in Smart Grid technologies: smart meters, distribution automation, and network communications

• Invite third-party proposals to address network constraints (“non-wires alternatives”)

• Create real-time markets for third parties and customers to sell services to the “Distributed System Platform” and generate fee-based revenues for new DSP services

• Promote widespread deployment of cost-effective DG and other DERs

• Encourage third-parties to sell innovative products and services to customers

• Reduce customer energy expenditures

• Replace carbon-emitting fuels with solar power, energy efficiency, large scale renewable resources and clean DERs

Policy Objectives

Energy Bill Components

Concentric Energy Advisors, Inc.

Breadth of REV Issues to be Resolved

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DSPPlatform

Services & Pricing

REV Outcomes

New Infrastructure

Regulation & Ratemaking

DER & Large Renewable Ownership

PromoteInnovation

Substantial T&D Investment Required

New Regulatory & Business Models


The array of REV obligations, processes and working groups is placing incredible demands on the Commission and all stakeholders

REV Track 1

REV Track 2

Non-Wires Alternatives

Demonstration Projects

Large Scale Renewables

Microgrids

Technology Platform

Market Design

Tariffs

Contracts

Affiliate Codes of Conduct

Energy Efficiency

Benefit Cost Analysis

Consumer Protection

Dispute Resolution

Interconnection

DG Emissions Rules

Digital Marketplace

Energy Billing

Low & Moderate Income

Net Metering

Community Choice Aggregation

Clean Energy Fund

NY Sun

Energy Affordability

REV Proceeding (Utility Obligations)

REV Proceeding (Stakeholder Groups)

REV Proceeding (Staff-Led Initiatives)

Other Related Proceedings


Dual-Track Regulatory Process (Track 1)

Track 1 is focused on development of the Distributed System Platform (“DSP”) model. The Order on Track 1 was issued on February 26 th but most details are being worked out through stakeholder collaborative processes.

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⦁ The utility will be the DSP provider and serve three roles:

1. Market operations

2. Grid operations

3. Integrated system planning

⦁ Utility ownership of DG is restricted to markets unlikely to be served by competitive suppliers

⦁ Utilities were required to propose “non-wires alternatives” by May 1

⦁ Utilities must propose demonstration projects to test new business models by July 1

⦁ Several working groups have been established to focus on technical details related to the development of a benefit-cost framework for REV, the integration of DERs in Grid planning and operating decisions, the establishment of markets for DER and the development of supporting information systems

⦁ Utilities to file DSP implementation plans by January 15, 2016

Track 1: Distributed System Platform

Utilities will serve as the DSP

providers, coordinating

customer activities, and

supporting competitive

energy service providers that

offer value-enhancing services.


Outcomes-Based Ratemaking

• Performance metrics

• Targets

• Incentive/ penalty mechanisms

Long-Term Rate Plans

• “Optimal” CapEx plans and cost recovery

• Equity returns

• May have RIIO attributes

Rate Design

• Address net metering and fixed cost recovery issues

• Reflecting externalities in rates

• Pricing innovative services

Dual-Track Regulatory Process (Track 2)

Track 2 will evaluate regulatory changes and ratemaking issues that must be considered in order to establish a new cost recovery and revenue framework for the electric utilities. A Staff Straw Proposal this summer will invite comments with an order later this year.

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Track 2: Regulatory Framework & Ratemaking Issues

The utilities (and Wall Street) are

interested in how these three

elements will work together to

provide compensatory

returns on equity


Stakeholder Perspectives

Solar Industry

• It may not be necessary to invest a lot in the distribution network – greater clarity regarding locations where solar has the greatest value will help direct installations to where they are needed. Compensation should reflect this value and any other sources of value, including carbon

Third-Party P&S Providers• Protect new markets by keeping utilities

out of any potentially profitable businesses

• Utilities should be required to provide third-party providers with customer and system information at low (or no) cost

Environmental Advocates• Pay for carbon as a price signal that will

help replace dirty gas peakers with energy efficiency and solar power

Energy Efficiency Providers

• Concerned about the substitution of market solutions for utility-sponsored EE programs

Industrial Customers• Worried about rates

Low-Income Customers• Representatives of this customer group are

concerned that they will not benefit from REV, and are more likely to be harmed by REV particularly if a greater proportion of fixed costs are recovered through customer charges

Technology Vendors• Interested in selling equipment and

information services to utilities


Impact on Electric Distribution Utilities

Responsibilities and Accountability• Potential for separation of

the DSP function or future transfer to a third party

• Confined to serving markets that are not attractive to competitive suppliers

• Potential erosion of the relationship with customers

• Accountable for outcomes not entirely within utility control

• Utilities may be on the hook if distribution system reliability suffers as a result of reliance on third-party solutions

Fixed Cost Recovery• Increased attention to

fixed cost recovery is likely to lead to improved rate designs featuring demand charges and/or higher customer charges

• Cost-shifting and subsidies will be exposed in the new framework

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Earnings and Growth• There is no clear path to

earnings growth, particularly if political pressures result in a desire to limit distribution rates (and rate base investments) rather than focusing more holistically on total energy bills

• Potential for earnings if focus shifts from cost recovery to value of services provided by the utility

• Limited opportunity to own DERs


The Ultimate Question: Will Customers Benefit?

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Changes to distribution network planning and operations must not result in a policy-induced deterioration of reliability

Continued reliability & enhanced network resiliency

There may be a timing gap between investments (and costs) to implement REV and energy bill savings

Lower total energy bills

Affordable electricity service for residential customers

Creative solutions will likely be required to achieve broad public support for REV

It is likely that “clean” will be more expensive, either through compensation for carbon or some other means

Acknowledged value for an improved environment

New products and services will require that third-party providers show up and remain committed to the market – even though they lack the “obligation to serve”

Direct or indirect benefits from new products and services


Case Study: Low Carbon London


Sponsor UK Power Networks

Program Funding

Ofgem’s Low Carbon Networks (LCN) Fund (precursor to the NIA and NIC programs ) allows up to £500m to support projects sponsored by the Distribution Network Operators to try new technology, operating and commercial arrangements, and an annual competition for up to £64 million to help fund a small number of flagship projects.

TargetThe highest concentration of electricity demand and CO2 emissions in Great Britain, and the most demanding carbon reduction targets (60% of 1990 levels by 2025) for London.

Project Funding4 year innovation project co-funded by LCN £21.7 million and £6.6 million from UK Power Networks and 3rd party project partners

ApproachThe project brought together some of the best low carbon skills and capabilities available in forming the overall project team drawn from both UK Power Networks and project partners.

Results

• Dynamic time of use tariff trial• Wind-integration trials with both residential and I&C customers• Active smart management of EV charging to effect peak load shedding• Implementation of project learning directly into UK Power Networks ED1 business

plan • Creation of largest contiguous smart meter dataset in GB• Largest household energy use and appliance survey for over 30 years• Pioneering work on distribution system state estimation

Potential Impacts

The project sponsors estimate £9.5bn of gross benefits for GB, of which £1.0-2.0bn expected to accrue to DNOs from their making use of flexible demand and the remaining £7.5 - £8.5bn to the electricity system more broadly as a result of avoided carbon emissions and carbon penalties.

Case Study: Utility Investment in Long-Term Gas Supply

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Northwest Natural

NorthWestern

XcelBlack Hills

Questar

FPLSouthern

Duke


Utilities Investing in Long-term Gas Supply

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Case Study: Rationale for Utility Investment in Gas Supply

• Gas and electric utilities are incorporating upstream resources into rate base to serve as a physical and financial hedging tool

• Addresses greater reliance on natural gas as a fuel of choice

• Longer-term financial hedging vehicles are available, but come with credit and collateral obligations

• Producers are cash-constrained and more willing to engage with creditworthy utilities

• Regulators in several states have approved upstream investments on a cost-of-service basis where customer benefits are evident


Concentric Energy Advisors

16

James M. Coyne, Senior Vice President, is an industry

expert who provides financial, regulatory, strategic, and

litigation support services to clients in the power and gas

utilities industries. Drawing upon his industry and

regulatory expertise, he regularly advises utilities, public

agencies and investors on business strategies, investment

evaluations, cross-border trade, rate and regulatory policy,

capital cost determinations, valuations, fuels and power

markets. He is a frequent speaker and author of numerous

articles on the energy industry and regularly provides

expert testimony before federal, state and provincial

jurisdictions in the U.S. and Canada.

He testifies on matters pertaining to the cost of capital,

capital structure, business risk, alternative ratemaking

mechanisms and regulatory policy. Prior to Concentric, Mr.

Coyne worked in senior consulting positions focused on

North American utilities industries, in corporate planning

for an integrated energy company, and in regulatory and

policy positions in Maine and Massachusetts. Mr. Coyne

holds a B.S. in Business from Georgetown University with

honors and an M.S. in Resource Economics from the

University of New Hampshire.


Concentric Energy Advisors

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Transaction & Financial Advisory

Energy Market Analysis

Regulatory Policy, Support and Ratemaking

Management and Operations

Litigation Support

• Concentric is a management consulting and financial advisory firm focused on the North American energy industry.

• We offer a broad range of advisory and support services, and our expertise spans all aspects of the natural gas, power, and oil markets.

• Our workforce is comprised of energy industry experts who have held positions with utility companies, state and federal regulatory agencies, energy marketers, and global energy companies.

Our services span five major practice areas


Documents

Innovations in Utility Business Models and Regulation CAMPUT 2015 Energy Regulation Course June 23, 2015 Kingston, Ontario © 2015 Concentric Energy Advisors,