Guidehouse
Peter Shaw is a director in the Communities, Energy & Infrastructure segment, where he leads a team of experts in regulatory and pricing strategies. His energy-transition advisory work for electricity and gas utilities focuses on regulatory compliance and innovation strategies for greenhouse gas mitigation, climate risk management, and corporate resilience.
Before joining Guidehouse, Peter’s energy industry work included senior strategy roles at EY-Parthenon, J.D. Power, and cleantech startups and focused on demand response, AI/machine learning, and industrial energy services.
What innovations in regulatory mechanisms do you see utilities considering to meet future customer needs while maintaining affordability for all customers?
Peter Shaw: A confluence of policy and market drivers is causing upward pressure on utility customers’ bills. These drivers are spurring generational capital spending on utility infrastructure, as well as increasing electricity consumption at the point of use.
Replacing aging generation fleets with renewables, hardening grids in the face of accelerating climate hazards, and electrifying the transportation and space heating sectors are well documented trends driving utility integrated resource plans and utility revenue requirements.
Adding to the issue of unprecedented growth in power demand from data centers and manufacturing, the current cost-of-service ratemaking paradigm is ill-equipped to handle the affordability challenges facing utilities and consumers.
Regulatory mechanisms exist to blunt the deleterious effects of rate increases. First and foremost, beneficial demand growth holds the greatest potential for spreading capital recovery costs across a greater volume of delivered energy, allowing utilities to earn their revenue requirements while mitigating rate increases. Creative regulation that promotes electrification load growth can contribute to electricity’s long-term affordability.
In another example, cross-sector compensation/incentive mechanisms can enable gas utilities to earn on system investments, while providing peak capacity relief to electric utilities in exchange for avoided capacity compensation, potentially lowering bills for all consumers.
Finance innovations including public-private partnerships can be leveraged to encourage investments in distributed energy resources – like onsite or collocated generation and storage – to provide energy at a cost that is less dependent on utility rates.
Moreover, regulatory incentives focusing on improving overall system utilization create a net downward pressure on rates, just as prioritizing rate impact benefits over other benefit-cost tests helps lower rates more readily than do traditional avoided capital cost tests.
Similarly, non-wires alternative investments can optimize the utilization of existing infrastructure to serve load growth and generate earnings more than infrastructure expansions do. By giving greater internal rate of return for non-wire alternative investments, regulators can help reduce rate base investments overall.
Policymakers and regulators should seize on the current period of exponential load growth to facilitate spending to upgrade the electric grid, which will help mitigate the financial impact on their customers.
