Alerts and Updates
Energy, Environment and Resources Update
Issue 15 | July 2016
What Does Trend Towards Residential Demand Charges Mean for Overall Rate Design?
In several states, utilities have been moving toward incorporating demand charges into residential rates. In June, Arizona Public Service Company filed a rate case, which included a proposal for three alternative demand charge rates for residential customers, while proposing to reduce volumetric (kwh) rates. Last year, Salt River Project, also in Arizona, added inclining demand charges for residential solar customers. In Illinois this year, Commonwealth Edison Company supported a bill in the legislature that failed to pass, seeking to impose demand charges on residential customers. Other states, such as Georgia, Colorado, Alabama and North Carolina, have adopted opt-in residential demand charges.
Much of the pressure for residential demand charges has come from reductions in utility revenues and changed residential usage patterns due to new technology, such as battery storage, LED lighting, programmable thermostats, rooftop solar and electric vehicles. Utilities cite concerns about equity among customers, in particular where some residential customers that reduce their load with distributed resources ("DR") impose demand on the grid during hours when their DR is insufficient for meeting their energy needs. Moreover, as states, such as New York, move towards further disaggregating energy supply in an effort to hold down costs associated with adding utility-owned distribution facilities and development of expensive, large-scale generation and reduce deleterious impacts of fossil fuels on the environment, the impact may be exacerbated. Predictably, consumer advocates are fighting back, especially on behalf of low-income customers.
As DR proliferates, making deeper inroads into utility revenues, we can anticipate an increasing focus on rate design, including for commercial and industrial customers, at a level that has not been seen for several years as utilities work to retain their revenue base.
FERC Debates Future of PURPA
At a June 29, 2016, conference, the Federal Energy Regulatory Commission ("FERC") considered whether changes should be made to the Public Utility Regulatory Policies Act of 1978 ("PURPA"). PURPA aimed to increase generation capacity and change the generation mix by ending the dominance of highly regulated, vertically-integrated utilities and encouraging the development of fuel-efficient qualifying facilities ("QFs"). PURPA required utilities to purchase QF output irrespective of actual need at prices set by state regulators based on the utility's "avoided costs." The conference focused on both the mandatory purchase obligation and the method for calculating avoided costs.
Participants opposed to mandatory purchase obligations cite open-access tariffs, standardized interconnection procedures, robust energy markets, state renewable portfolio standards and environmental regulations as factors that create a strong market for renewable generation. Many utilities argue that with renewables accounting for over 60 percent of new capacity, a mandatory purchase obligation is no longer needed. Those supporting a mandatory purchase obligation, particularly for generators of 20 MW or less, contend that while market changes benefited large generators, smaller generators still face interconnection obstacles, pancaked rates, operational limitations and administrative cost burdens. Further, the intermittent nature of many renewable generators makes them unattractive to utilities without mandatory purchase obligations.
Utilities claim that an avoided cost regime often forces them to pay above market prices for QF-generated energy. This problem is exacerbated by the long-term nature of many power purchase agreements, the drop in natural gas prices lowering the cost of conventional generation, decreasing renewable generation costs and mandatory purchase obligations, which can lead to curtailment of less costly generation. In contrast, renewable generators warn that without long-term power purchase agreements and predictable cash flow, financing for new generation could become cost prohibitive. They also contend that avoided costs reflect what a utility would pay to develop new generation and as renewable generation becomes increasingly competitive, cost differences with conventional generation will lessen.
FERC will need to continue to strike a balance between encouraging renewable generation, both large and small, while providing conditions to ensure a functioning, efficient and competitive market for all generations.
FERC Opposes Private Right of Action in CFTC Proceeding; Congress Requests Briefing
In what is quickly resembling a jurisdictional conundrum, the Federal Energy Regulatory Commission ("FERC") has come out in opposition of a private right of action in the context of the country's wholesale energy markets. This issue has its roots in an order issued by the U.S. Commodity Futures Trading Commission ("CFTC") in April 2013. There, the CFTC granted certain exemptions from its regulatory authority to wholesale energy market entities, otherwise known as Regional Transmission Organizations or Independent System Operators ("RTOs"). Subsequently, the Court of Appeals for the Fifth Circuit interpreted the April 2013 order to include an exemption for RTOs from private rights of action, notwithstanding claims by the CFTC that no such exemption was ever granted. The CFTC now seeks to clarify its April 2013 order by amending that order to expressly allow private rights of action, which are derived from Section 22 of the Commodity Exchange Act, against RTOs. 81 Fed. Reg. 30,245 (May 16, 2016).
On June 15, 2016, a number of entities, including utilities, trade organizations, the RTOs and FERC staff, filed comments in the CFTC's amendment proceeding opposing the proposed amendment. FERC staff argues that the RTOs are within FERC's purview and that all aspects of the energy markets, including both physical and financial products, are rigorously monitored and regulated. FERC's comments explain that Congress included certain provisions in the CEA to prevent overlapping jurisdiction and conflicting regulatory regimes. FERC notes that Congress granted it exclusive authority through the Federal Power Act ("FPA") to enforce anti-market manipulation provisions with respect to the RTOs, and that the FPA expressly prohibits private rights of action. FERC's comments also note that it has sufficient powers under the FPA to initiate complaint proceedings if consumers' interests are threatened. In their comments, the RTOs argue that the FERC's regulatory authority is well defined, thus obviating the need for private rights of action. The RTOs recommend that to the extent a potential manipulation event involves both the CFTC and FERC, that both may work jointly to address such situations. The RTOs also argue that actions brought by private litigants will have a disruptive effect on the established regulatory and enforcement regimes, thus fueling regulatory uncertainty. It is with much anticipation that these and other energy market participants wait for the CFTC's final order and hope it can find a way to walk back its proposed amendment. This proceeding now has Congress' attention, with the House Committee on Energy and Commerce requesting a briefing from the CFTC by July 15, 2016.
California Public Utilities Commission to Be Restructured
Through a deal entered into between the California legislature and Governor Jerry Brown, the embattled California Public Utilities Commission ("PUC") will be restructured and reformed. Following a series of crises, including a 2010 major gas pipeline explosion that killed several people in San Bruno, California, a huge gas leak in Southern California that displaced many residents and allegations of secret dealings between the regulated utilities and members of the PUC, which included allegations of judge-fixing, an agreement has been reached to make the PUC more transparent and limit part of its jurisdiction. Notably, with implications on the national level, the PUC will no longer regulate companies like Uber and Lyft.
In recent years, the PUC had come under criticism for failing to adequately police utilities under its jurisdiction. This was particularly true regarding allegations of lax maintenance of gas pipelines by the investor-owned utilities subject to the PUC's jurisdiction. Among the reforms are that people who lobby the PUC will need to register as lobbyists. This will cover more than 50 utilities and others that regularly connect with the appointed commissioners of the PUC. Many documents currently held as confidential will now be made available for public inspection. Former utility executives will have to wait two years before being able to serve as a commissioner on the PUC. Certain contacts with commissioners will have to be posted on the Internet and the California Attorney General will have the authority to bring enforcement actions against people who violate specified ex parte rules. However, back-channel communications will still be allowed on a significant portion of PUC business outside of the rate-setting arena.
This legislatively-enacted set of changes represents a settlement between the legislature and the governor, who had previously vetoed a number of reforms the legislature had sought to impose. It also forestalls a constitutional amendment that would have gutted the PUC and permitted the legislature to reform it in its entirety. How these changes will impact the substance of the PUC's business is unknown.
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