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Do we need a new cost recovery model?
If smart grid investments really are different, do they demand a different cost recovery model? One based on performance rather than investment? One that provides
performance rewards as well as shareholder risk? Regulators in both Oklahoma and Ohio have approved performance-based smart grid cost recovery approaches. If my interpretation of these commissions’ orders is correct, IOUs forfeit some or all of their returns if anticipated O&M savings are not achieved. At the same time, they get the opportunity for returns above the authorized rate if actual O&M savings are higher than anticipated. There are many other potential performance metrics that could be considered, including distribution line losses, demand response per customer, and, of course, reliability.
Capital investment does not (by itself) make a grid smart. The value comes from the manner in which utilities make use of smart grid data and capabilities. Therefore, performance-based cost recovery would better motivate IOUs to pursue the difficult and critical organizational, operational and regulatory changes required to maximize smart grid value than the traditional capital investment incentive approach. Granted, performance-based cost recovery can be difficult to execute. Even so, an open, non-litigious dialogue between IOUs and regulators that tackles this issue would be a strong step in the right direction from customers’ perspectives.
Paul Alvarez is President of the Wired Group, a distribution business consultancy with a focus on smart grid benefit quantification and performance measurement. He has led teams that have completed comprehensive, independent evaluations of smart grid deployments for Xcel Energy (SmartGridCity) and the Ohio PUC (Duke Energy’s Ohio deployment). For smart grid reference work, case studies, links to benefit and performance measurement resources and more, visit www.wiredgroup.net.
More on smart grid regulation…
How the traditional regulatory process can inhibit grid modernization (and why change needs to be on the table)
Ratemaking landmark: Illinois approves new way to set electric rates
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| Yes the Time Has Come for PBR |
| Jesse I am very pleased to see you cover this topic and heartily agree with what Paul is saying. As Paul describes well historically utility investments were very black and white and necessitated by changing demand and/or aged infrastructure. Invesment made out of necessity. In most jurisdictions SG investment is viewed as discretionary, though the unabated rise in peak demand, climate change and intermittent resources (solar&wind) I would argue make SG investments a must. As I have written in SG News in the past, the innovation, scale of investment and uncertainty around SG platforms do not comport with traditional cost of service ratemaking. In many jursidictions commissions have left consideration of prudence open until after the fact and therefore create a healthy dose of risk to utilities and their shareholders. A level of risk that well outpaces the current regulated ROE afforded utilities. Performance Based Ratemaking (PBR) changes all of that and is a perfect vehicle to facilitate utility innovation and transformation of the business model. The SG technology whether it be customer or grid facing opens the door to a whole series of quantitative and qualitative improvements to the customer experience and utilities who are willing to go down that road, measure their performance and be accountable for outcomes should enjoy a financial upside. Apple has wowed us all with ipods, iphones and ipads and also have benefitted by 600% increases in stock value. That is an extreme illustration and I am not advocating 600% returns for utilities but instead making the point that a financial upside for the utility and their employees promotes excellence. It is a fair bargain if the customers have measurably benefitted and the utility prospers. The traditional ratemaking process, having been a part of it for eight years, is a race to the bottom of sorts where the climate is confrontational and emphasis is largely on the lowest possible number. Not the sort of dynamic that sparks innovation and superior outcomes. David O'Brien Bridge Energy Group |
| David O'Brien - 08/16/2012 - 09:33 |
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