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Efficient Regulation, Efficient Grid

Intelligent infrastructure requires an intelligent policy framework.

Fortnightly Magazine - August 2009

as they have for 50 years: The cost of the asset is returned over its useful life with an allowed rate of return for investor-owned utilities, and allowed margin and costs spread across the customer base for both municipal systems and cooperatives. This capital-recovery mechanism is added to the assumed operating benefits to determine the go-or-no-go decision on the investment in infrastructure. Nowhere in this model, even in a decoupled world, is value given to customers in terms of utilities increasing efficiency and lowering operating and planning costs. Nowhere are investors rewarded for innovation and risk associated with new technologies compared to alternative traditional options.

Grid Efficiency Framework

The solution to this dilemma is a grid-efficiency framework that, when coupled with regulatory support, creates an answer to resolve the financial disincentives that exists in the system and the lack of rewards delivered to the consumer, the utility and society for technological innovation related to the intelligent infrastructure.

The GEF mirrors the value chain, allowing proper compensation to all participants including investors, customers, utility and society. The basic tenet of the GEF is found in a three-factor formula:

First, the technology-deploying entity is allowed full and/or accelerated cost recovery on assets that are linked to the smart grid and have a proven improvement of performance efficiency over baseline equipment. Utilities can be granted expedited rate hearings outside of the stringent requirements associated with a full-blown rate case. Utilities can be granted rate relief on an interim basis subject to true-up and formal adoption in a rate case, thereby minimizing risk associated with regulatory lag.

Second, the utility is allowed to share a portion of increased profits related to performance improvements with the remainder being passed on to customers in a profit sharing/cost reduction agreement. This is similar to performance-based rate (PBR) theory, where utilities can increase return given satisfactory performance measured against baseline metrics reflecting system operation and performance before and after smart grid.

Third, the utility is allowed to count, bank and then trade the value of the carbon reduction associated with load reduction and improved system losses, etc., in the market. Again, this can be shared with customers. By creating the GEF, the decision to invest in the best and latest technology is incented and rewarded.

Looking at the suite of grid-efficiency improvements and granting them the same (or increased) benefit of other capital assets can make a significant difference in moving the nation towards a lower carbon future. Some experts certainly will maintain that utilities today aren’t prevented from including any capital item in their rate-recovery requests, yet, in practice, a balancing act occurs in which investments of all kinds are traded off against each other in an effort to trim budgets and win regulatory (as well as internal) approval. Today, in a typical rate case, utilities and investors are rewarded for capital deployment in support of load growth and reliability. In the future, under GEF, utilities and investors will be rewarded for minimal system growth, while maintaining the highest efficiency and reliability across the system.

The GEF allows