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CPUC Seeks Comment on Proposed Incentive Framework for Distributed Energy Resources

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On April 4, 2016, Commissioner Florio of the California Public Utilities Commission (CPUC) issued a Commissioner Ruling seeking comment on a proposed pilot regulatory incentive structure. The program is designed to both encourage the expanded deployment of distributed energy resources (DERs) by California’s investor owned utilities (IOUs) and compensate IOU shareholders for the reduced return resulting from displacement of IOU capital investment by DERs.  The proposal is significant because it is an attempt by California regulators to harmonize aspects of the traditional utility business model with the societal benefits of increased DERs, benefits which can be otherwise difficult to quantify in a utility’s cost-benefit analysis.

The Ruling starts with the premise that IOU shareholder value is derived from the difference between an IOU’s return of equity (“r”), which is set by the CPUC, and the IOU’s cost of equity (“k”).  If r > k, Florio suggests, the IOU will have an incentive to expand its capital investment.  Further:

[because] in recent years r has consistently exceeded k by roughly 2.5 to 3.5 percentage points in California as well as nationally, the incentive to invest additional capital in the utility business has been strong. If [the CPUC] desires to incent the IOUs to displace some of that investment by procuring DERs, it should offer utility shareholders the opportunity to achieve equal or greater value by so doing. This suggests that IOUs could be incented to pursue DERs if they could achieve shareholder returns equal to, say, 3.5% when they choose DERs over more traditional rate base investments.

Commissioner Florio’s proposal is to provide IOU shareholders with an incentive for the deployment of cost-effective DERs that displace or defer more traditional rate base investments by IOUs. The value of the incentive would be based on a fixed percentage of the payment made to the DER provider, and the percentage would be set at the high end of the range of the estimated value of the return on equity minus cost of equity for California IOUs.  The Ruling reserves the determination of the exact methodology for calculating return on equity and cost of equity for the next step in the proceeding.  The Proposed Ruling also reserves calculation of the “exact amount of the incentive” for a subsequent rate-setting proceeding.

To test the above proposal, Commissioner Florio asked interested parties to assume a return of 3.5%. The proposed pilot program will be implemented in several steps starting with each IOU identifying opportunities for the cost-effective deployment of DERs on their systems.  The opportunities would be discussed by a “Procurement Review Group”, followed by submission of a tariff advice letter that would propose procurement of DERs. which in turn would be followed by additional opportunities for public comment.  If an IOU’s advice letter is approved, a procurement process will follow with the goal of achieving “the best, most cost-effective DER packages that can be obtained, at the right locations.”  Contracts resulting from a successful DER procurement process will then be submitted to the CPUC through an application process, in which the IOU would justify the procurement and propose the incentive to be applied.  The process outlined above would be followed “as often as necessary.”

The pilot program would last two years; although actual project development may take longer.

The Ruling requests comments and responses to several questions:

  1. Is the description of the source of utility shareholder value summarized above and discussed in the appendices to the Ruling accurate? If not, why not?
  2. Would an incentive program such as that described above achieve the objective of promoting the cost-effective deployment of DERs? If not, why not?
  3. What alternative approaches should the CPUC consider at this time?
  4. Is the proposed incentive, in the range of 3.5% grossed up for taxes, approximately correct?
  5. Are there other disincentives to the deployment of DERs that this proposal does not address that should be considered at the same time? If so, please explain.
  6. Is the suggested process for identifying and approving DER projects that would generate an incentive reasonable and appropriate? How could the process be improved?
  7. Is there need for a limit on the number of projects or the amount of dollars that a utility could propose during this pilot program? If so, what should it be?
  8. Would participation in a DER solicitation by a utility affiliate require any changes to the Affiliate Transaction Rules, or any changes to the process for review and approval of proposed DER solutions?
  9. What would be the appropriate role of the IOUs themselves in the deployment of cost-effective DERs? Should direct IOU participation in DER deployment be encouraged, foreclosed, or allowed with certain caveats?

Comments and responses to the Ruling must be filed no later than May 2, 2016, and reply comments must be filed no later than May 16, 2016. The Ruling was issued as part of Rulemaking 14-10-003, which was initiated in October 2014 and seeks to consider the development and adoption of a regulatory framework to provide policy consistency for the direction and review of demand-side resource programs.

 


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