THE EMBATTLED REGULATORS
ON THE RAMPARTS OF CHANGE
Published In: EnergyBiz Magazine November / December 2011
UTILITIES ARE READY TO LAUNCH an unprecedented wave of capital investments as they deploy a smart grid and a new era of generation. Trillions of dollars will be spent making natural gas lines safer and wringing ever greater efficiency from the energy sector. State utility regulators will be in the hot seat as the companies they regulate attempt to secure the revenue to cover their investments.
EnergyBiz recently sat down with state regulators from across the nation at a gathering of the National Association of Regulatory Utility Commissioners to discuss these issues and other major issues confronting regulators. Their comments, edited for length and style, follow.
ENERGYBIZ An unprecedented wave of capital investments by utilities is coming. What are its dimensions?
CLARK We hear in the neighborhood of $1 trillion to $3 trillion in investment is coming on the electric side in the next two decades. And $1 trillion in water.
ENERGYBIZ What are some of the overarching changes shaping this investment?
CLARK There is technological convergence between different utility sectors. Telecommunications and energy are coming together in the smart grid. In the electric industry you have U.S. Environmental Protection Agency regulations, which will cost utilities several hundred billion dollars or more. And you have the upgrades that are going to take place with or without EPA regulations, which will probably cost several hundred billion dollars over the next few years. On the natural gas side, we have increased focus on gas pipeline safety. It seems as though each of the industries that we regulate are in an increasing cost cycle all at the same time, and that is eventually going to work its way into the political arena. That is an area that the industry, regulators and public policymakers need to keep a close eye on. We're going to need to be able to tell our own story and emphasize the importance of the independence of the regulator, because that's going to become a huge issue.
BOYD We're already there. You only have to look at state legislative action. Kentucky was hit hard by the potential of legislation to change the composition of the Kentucky Public Service Commission to make it elected. The argument was that they would then be more accountable to the ratepayers. The messages that came from the legislature are a bit troubling. We've had issues in other states where governors have become more active. In Florida, there was some question about whether regulators would be allowed to make independent decisions on rate increases.
GUNN Public service commissions cover up a lot of sins for legislators. We do things on occasion that the law requires us to do that may ultimately not be viewed by ratepayers and voters in a positive light.
CLARK I would hesitate to equate necessarily elected or appointed with politicization because it can happen either way. Look at where there have been huge flare-ups in regulatory policy and a lot of them have been in states with appointed commissions. Whether you're directly elected as a commissioner or whether you're appointed as commissioner, you're accountable somehow to the political process.
HONORABLE is is the most challenging time to be a regulator. Costs are going up. We are the ones uniquely situated by virtue of our responsibilities to receive the information, apply the law, and arrive at a decision that is in the best interest of the people that we serve.
WRIGHT We're a creature of the legislature by nature, so we're never going to be purely independent. We're there to do what they didn't want to do. A perfect storm for the ratepayer is here. We're going to see increased costs. It's going to happen a lot sooner than later. The rate increases are not going to be across the board. In a coal-aligned state it could be 25 or 30 percent. In many cases, those are areas where their average income is lower than the national average.
ENERGYBIZ Last year there were 124 decisions by state regulatory bodies in the United States, up 30 percent from 2009. Are we entering a period of a lot more regulatory activity?
JONES It's already started. Utilities are filing every 12 to 18 months and they're also going to the legislature when they aren't happy with our decision and asking for changes. They want to get accelerated cost recovery on certain items. In a state like mine that has a 15 percent renewable portfolio standard, there are increased costs associated with that.
ENERGYBIZ Commissioner Honorable, as a member of the White House Smart Grid Working Group, what is your view about the impact of the smart grid revolution?
HONORABLE The Smart Grid Working Group of NARUC was formed to interact with our federal counterparts on broad policy issues associated with smart grid implementation. We have focused on the technical standards that would guide commissioners all over the country as they considered smart grid applications. We give guidance on issues such as interoperability - how will we ensure that the systems are able to communicate together. We have worked on consumer education and engagement. That's how we will reap energy efficiency savings and also conservation savings. The other hot topics are who owns the data, cyber security, and privacy issues.
CLARK Smart grid costs will be huge. The Electric Power Research Institute has said it will cost us $300 billion to $500 billion for smart grid investments. They estimated that there was a multiple return of that on the cost savings side. Approximately 70 percent of the costs are on the "state side" of the rate-making equation in the distribution network. It's not going to roll out the same in every state.
ENERGYBIZ Do you see a need to regulate the kind of information that's going to be collected and what's done with that information?
SIMON Entrants to the marketplace want that data as well as the utilities. There is going to be a growing conflict among consumers, businesses, investor-owned utilities, competitors and independents and we're doing our best to manage it in California.
ENERGYBIZ How might it be resolved?
CLARK The issue of privacy is one we can resolve. On cyber security, the leader is going to be the federal government. With regard to security and consumer privacy, it will require state and federal collaboration. We've dealt with this for years in telecommunications.
ENERGYBIZ What do state regulators need to do to speed utilization of the smart grid?
HONORABLE As the saying goes, you can't have a smart grid with dumb rates.
ENERGYBIZ If more than half the country has smart meters in 18 months, will there be a revolutionary change in how rates are created?
GUNN We don't know what we're building the smart grid for. There is not an overarching concept that says the reason why we're building the smart grid is because we want to move toward dynamic rate designs. We are not saying that we're building it strictly for reliability. Everybody recognizes that the technology that we're using is old and needs to be updated. But why are we doing that? A lot of people would say that all smart grid means is it enables a utility to shut offi your service when you don't pay the bill.
SIMON In Northern California we are probably ground zero for the smart meter and smart grid battle. I don't think consumers, and to a large extent regulators, understood what we were not getting from a smart meter. We all have a belief that we'll be seeing real-time pricing of electricity and consumers can begin to become more active in the demand and response markets. But investor-owned utilities in California have not done a very good job educating the ratepayers as to what the smart meter can and cannot do.
BOYD The utilities in my state are cautiously approaching smart grid. I think they want to be the second mouse to the cheese. Once the technology is proven, the cost savings are there and there's a great deal more communication with ratepayers, you'll see rapid deployment.
CLARK This issue of real-time pricing to me is an intriguing one. We talk about dumb rates and smart meters. People like dumb rates. We've got 25 to 30 percent of consumers on balanced billing plans. People like predictability and they're sometimes willing to pay a premium for it. How will that consumer culture match up with smart grid? The greatest growth will be in those things that happen without consumers even knowing. You may have a smart grid meter on your wall that can cycle your air conditioner but it's going to be invisible.
GUNN It will be most helpful if people understand their energy usage. You can take smart meter data and translate it very simply so people understand over a day, over a week, over a month when they are using a lot of electricity. You can translate that into slight behavioral changes. If you can give consumers simple signals with these very complex new technologies, you can begin to change their energy consumption. That can lead to shifts in rate designs.
SIMON I have voted for smart meters. But then I go to New York and the Wall Street analysts tell me that building standards are going to have more of an impact on consumption than the human behavioral impacts of smart meters.
BOYD Consumers care about bills, not rates, so they're going to open the envelope and they're going to look at the bottom line. If we offer tools that help them lower their bills, they're going to be effective. There are even lower-tech ways to do that. There are competing companies around the country that have used bill inserts to talk about the amount of energy used in neighborhoods. That has proven to be effective at inspiring the competitive spirit in consumers to lower their bills.
ENERGYBIZ When consumers can elect not to have smart meters installed, how does that affect the integrity of the smart grid deployments?
SIMON Consumers are going to have to pay to opt out on a monthly basis in order to maintain an electro-mechanical meter. Yes, a number of consumers, particularly in Northern California, are opting to opt out. We have a growing movement in California of people who feel that radio frequencies are having carcinogenic effects and other health impacts. Another issue is the distrust of the bills. My staff and PG&E are reviewing whether the smart meter deployment and scheduled rate increases have resulted in a disproportionate amount of bill increases. PG&E has taken the position that the analog meter was not working and bills are now more accurate. I don't like that answer, so we'll take a closer look. But yes, we will see a measurable amount of opt out in California. In PG&E's territory, right now we have 150,000 potential opt outs.
ENERGYBIZ Are other states worried about that?
HONORABLE In Arkansas, we recently approved our comprehensive three-year energy efficiency programs and we have opened a separate docket, which is pending, to explore the option of allowing industrial and large commercial customers to opt out. We have to ensure that those who choose to opt out are able to do so and achieve equal or greater savings than what they could achieve working with their local utilities. A Walmart, for instance, is very savvy and quite frankly leading the way. However, there may be others who have not yet achieved the level of efficiency that would allow them to opt out. The goal is energy savings.
ENERGYBIZ Turning to nuclear power, do state regulators have a role to play in reviving the nuclear option in this country?
BOYD Yes and no. As watchdogs for the ratepayer we have an obligation to vet any additions to the generation fleet to make sure that they pass muster. Plants that can be built with or without federal loan guarantees that are designed in a way to be competitively priced are projects we can and should support. There are very few companies that have a balance sheet to support building the large-scale plants that are going in now. If we do succeed in developing the small modular units, that's where we're going to see a lot more play. In my state there are lots of people who would oppose any changes to our nuclear fleet without having the federal government address the spent fuel issue.
ENERGYBIZ What will be the impact of our growing reliance on shale natural gas?
CLARK The amount of resources that are coming online are very real. But I do have a concern about the dash to gas. I once heard someone say that the quickest way to ensure $10 gas is for every utility in the country to build on the basis of $5 gas. We simply can't convert everything to natural gas.
BOYD I'm thrilled that we have a domestic fuel source that is abundant that can be part of our balanced portfolio.
SIMON There are a number of gas liquefaction applications now before the Department of Energy and the Federal Energy Regulatory Commission. I don't think we can just be on autopilot. There will be upward pressure on gas prices.
HONORABLE We have some tools in our toolkit, like long-term purchase power agreements, that allow for stability in pricing.
SIMON In California, we have a gas incentive mechanism that takes our hedging models and puts shareholder dollars as well as ratepayers' in the game based on a collar that's established. That is ensuring that risk in the commodity markets is reasonable. Shale gas, or unconventional gas, is going to be an amazing game changer for the United States in so many areas. But we only have a handful of states that actually regulate fracking. We're fully committed to a thorough environmental review to ensure that we're not in any way causing unnecessary damage to water tables, creating seismic issues or other problems.
ENERGYBIZ Do you think we need a national renewable portfolio standard?
WRIGHT I absolutely do not. We've got resources all across this country and some of them are specific to regions. Those renewables that are available need to be worked.
SIMON We're at a 33 percent renewables standard and our governor says that he believes we can reach 40 percent. He wants 12,000 megawatts of distributed generation. I know that California is going to lead in this space regardless of whether or not there's a national renewable portfolio standard. From an investor standpoint, the more certainty that we can create for investors to go into a multitude of alternative fuel choices for generation - distributed or central - the better. One thing that I'm very disappointed about in California is where are the green jobs?
ENERGYBIZ What are some of the leading disruptive forces facing the energy economy in the United States?
JONES I am most concerned about disruption of policy - inconsistent policy that's nonsustainable. We have a history in this country of starts and stops in energy policy, which is very damaging.
BOYD There's a certain apprehension about making 40- or 50-year decisions and being sure that we're making the right decisions.
SIMON I have concerns about policy's impact on technology.
WRIGHT We have all these regulations and potential rulemakings coming down that are going to increase the cost of electricity without creating 1 megawatt of new power.
CLARK If we as a regulatory community and utility industry decide that we're going to build nothing but gas and the federal government does a turn on the dime on fracking, then all of a sudden we're going to strand a lot of investment in this country.
HONORABLE There is a role for the federal government to play ensuring clean air, clean water and the environment. But we need balance. We know our utilities, the consumers and others better than anyone in our states.
GUNN I worry about the ability of one single decision, one election, one change in governor that will fundamentally change the way the people have been doing business for a long time. If states and businesses and consumers understand the conditions under which they operate, they will be able to adapt and adapt successfully. But right now we are in a period of time where we are frozen because no one knows what to do. We're afraid of making bad choices because of the uncertainty. That creates inaction, which is the worst thing that you could do for this industry. You cannot have investments. Consumers can't make the choices that they need to make that benefit them.
NARUC ROUNDTABLE 7/18/2011