The Missing Piece in California’s Electric Utility Reforms
Date : November 2, 2016
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By: Paul Augustine

As discussed in a recent blog post, California is actively forging a new path in energy on numerous fronts—renewable energy, energy storage, plug-in electric vehicles, energy efficiency, distributed energy resource (DER) integration, and more. The state’s aggressive policies will test the limits of what is possible on a modern electricity grid and may lead to advancements in technology and utility operations that will spread throughout the country. But one critical issue seems notably absent from the discussion at the California Public Utilities Commission (CPUC)—a robust dialogue on the utility’s role and business model of the future.

California’s regulatory environment has layered on policy after policy transforming how the state’s utilities plan for, procure, value, and optimize DERs on the grid. Between climate change policy, renewable energy procurement requirements, and other policies, California’s utilities are actively modifying their resource mix—away from coal, nuclear, and even natural gas generation–and are advancing their ability to integrate a greater share of DERs. While the result appears to be a tenuous balance of renewable technologies, energy storage, energy efficiency, and demand response, this may be the model for the future utility.

California’s parsing of many issues relating to DERs and the utility of the future into separate proceedings has resulted in focused thought, discussion, and debate about complex subtopics, which has not occurred in other states. On the other hand, this has created some conflicting drivers for DERs, a disjointed view of the utility’s role in the future, and a lack of requisite reform to both the regulatory model and the utility business model to align utility financial objectives with policy objectives engendered by the aforementioned proceedings. In the absence of a specific docket dedicated to the business model of the future utility, the state’s investor-owned utilities (IOUs) have begun grappling with this concept on their own. 

In early September, Southern California Edison released a white paper advocating that the state’s utilities become the Distribution System Operators “to manage a plug-and-play grid.”1 This is similar to the New York Department of Public Service’s New York Reforming the Energy Vision (REV) Order, which revised the utility business model such that they will serve as Distribution System Platform Providers that plan, operate, and manage markets for distribution-level services.2

The CPUC has started to form an overarching vision for DERs, however, West Monroe’s experience with New York REV and other states’ utility of the future efforts leads us to conclude that the CPUC should instead initiate a dedicated stakeholder dialogue focused on the utility business model of the future and how to ensure appropriate alignment of utility incentives with policy objectives to foster innovation and drive cost-effective decision-making.3

Paul Augustine is a manager in West Monroe’s Energy & Utilities Practice. He brings over a decade of diverse experience in the energy and environmental field—working as a project implementation lead for one of the nation’s largest electric utilities, a trader for a green investment firm, and a policy analyst for the executive and legislative branches of the federal government. Paul's work at West Monroe focuses on strategic priorities for utility clients. He may be contacted at paugustine@westmonroepartners.com.

1Southern California Edison. “The Emerging Clean Energy Economy: Customer-Driven. Modernized. Reliable.” September 2016. Available at: http://www.edison.com/content/dam/eix/documents/our-perspective/der-dso-white-paper-final-201609.pdf. Accessed on October 4, 2016.

2SCE’s white paper was released shortly after the utility’s General Rate Case request, which envisions capital expenditures of over $2 billion from 2016 to 2020 for grid modernization to facilitate the adoption of DERs.

3The CPUC’s DER Action Plan has three stated goals: (1) provide a long-term vision for DER and supporting policies; (2) identify continuing efforts in support of the long-term vision; and (3) assess and direct further near-term action needed to support long-term vision. For additional details, see “California’s Distributed Energy Resources Action Plan: Aligning Vision and Action” Discussion Draft, available at: http://www.cpuc.ca.gov/uploadedFiles/CPUC_Public_Website/Content/About_Us/Organization/Commissioners/Michael_J._Picker/2016-09-26%20DER%20Action%20Plan%20FINAL3.pdf.  

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