The digital revolution, which has transformed so many other industries, is now taking hold in the electric power sector. This is happening at the same time as increasing deployment of distributed energy resources (DER), including energy efficiency, demand management, distributed generation, energy storage, and electric vehicles. New technologies, the use of “big data,” apps, and the “grid of things” are leading to a greater variety of services and interactions between utilities, customers and third parties (non-utility companies that offer energy products and services).
One way to slice and dice this increasingly complex marketplace is whether services are considered “basic” or “value-added.” This is the subject of a new report from Lawrence Berkeley National Lab, Value-Added Electricity Services: New Roles for Utilities and Third-Party Providers, in which AEE was the author of one of three perspectives on emerging roles for utilities and third parties in providing value-added services.
AEE provided the third-party perspective, the Institute for Electric Innovation (part of the Edison Electric Institute) offered a utility point of view, and the National Association of State Utility Consumer Advocates presented the consumer standpoint. (You can view a recorded webinar featuring the principal authors here.) The report is the ninth in a Berkeley Lab series on the future of electric utility regulation.
At AEE, we define basic services as those provided by the regulated utility as it carries out its monopoly functions. Basic services are provided to all customers, with costs recovered from all customers. We include in this utility-sponsored energy efficiency and demand management programs. In this case, not all customers may participate in the programs, but the service is made available to all customers, with the costs of those programs recovered in rates. Because energy efficiency/demand management is often a least-cost resource, it is reasonable to treat cost recovery for such programs similarly to cost recovery for other (supply side) resources. As the role of the utility evolves and technology advances, some basic services also could be provided to third-party companies as part of the utility role in animating the market, such as the provision of smart meter data.
In contrast, value-added services are enhanced services, offered as options that customers can choose in addition to basic service. Some may be monopoly functions delivered by utilities, whereas others are provided by the competitive market. As with some basic services, some value-added services also can be provided by the utility to third-party companies – for example, enhanced analysis of smart meter data. Another example of a utility value-added service would be DER scheduling and dispatch, enabled by the utility’s unique role as the operator of the distribution system. An example of a value-added service that is typically provided by third parties is the sale, financing, installation, and operation of onsite distributed generation. Another is third parties managing customer participation in wholesale-market demand response programs.
Unlike basic services, which are paid for by all customers through rates, value-added services should be paid for by only those customers receiving those services. But as with all rules, there are exceptions, as described below.
Because both regulated utilities and third-party providers are in a position to offer value-added services, a host of issues arise with respect to the appropriate roles of these different entities. Our view is that regulated utilities should not be competing head to head with third-party providers to provide the same value-added services to the same customers. Competition drives innovation and customer value over the long term, and the monopoly position of utilities can inhibit creation of a level playing field for competitive services.
That said, we do believe that utilities have an essential role to play in the provision of value-added services, and should be rewarded for doing so. This includes creating a platform upon which a market for value-added services can flourish, but also offering value-added services when appropriate, whether to customers or third parties.
For example, products and services deployed on the customer side of the meter should generally be in the domain of the competitive market. This need not preclude the utility from engaging in revenue-producing activities related to services delivered on customer premises. Utility-sponsored energy efficiency and demand management programs are instructive here: Utilities generally design and administer the programs but services are usually delivered by third-party providers selected by competitive means. This model of cooperation and collaboration is possible when clear roles are defined by regulators for the different actors. Extending this to the evolving market for value-added services means that policymakers and regulators need to continue to clearly define the boundary between utility and non-utility functions. This will be an ongoing process as new technologies and service options continue to be developed.
We also view unregulated affiliates of utilities as similar to other third-party providers, subject to codes of conduct to ensure fair competition. This affords utilities, properly structured, the opportunity to participate directly in the provision of value-added services and be treated like other third parties.
We offer the following criteria to guide regulators in determining the circumstances under which a regulated utility could offer value-added services to consumers:
- Services to customers enabled by the utility’s monopoly position, such as renewable energy tariffs in vertically integrated markets
- Services to third parties to support development of an animated market for value-added services, such as provision of customized AMI meter data or customized analysis of the data
- Services that address underserved segments of the market that could benefit from initial utility involvement until a competitive market emerges, such as community solar for low- and moderate-income customers, or electric vehicle (EV) charging infrastructure and charging services. Utility involvement should target the barriers that inhibit development of a robust market within these segments.
- Demonstration of new technologies and business arrangements
This approach will be successful only in an environment that facilitates collaboration and new business relationships between utilities and third parties. This means a shift in financial incentives that give utilities greater flexibility for earnings as they transition from a traditional cost of service regulatory model based primarily on capital investment. The changes below are, in part, designed to establish a regulatory paradigm whereby regulated utilities are indifferent between themselves or non-utility companies in ownership of DERs, and where the utilities have good business reasons to integrate DERs regardless of who owns them. Regulatory options to make this possible include:
- Revenue decoupling
- Use of performance-based regulation (PBR) or performance incentives
- Equalizing incentives for capital expenditures and operating expenses
- Platform service revenues
- Shared savings mechanisms
These regulatory changes would encourage utilities to collaborate with third parties rather than compete against them to provide value-added services to customers.
And finally, the exceptions… As noted above, when a customer chooses to receive a value-added service, the customer should pay for it. The cost of those services should not be included in rates, where they are socialized across all customers. Exceptions would be where the utility is authorized to provide a value-added service that has important societal benefits and utility involvement helps overcome market barriers or market failures. A key benefit of utility involvement in such cases is the ability to socialize costs across all customers to help reduce the cost of the service and open up opportunities for competitive market entrants. One example of this is utility ownership of electric vehicle charging infrastructure, as is being undertaken in California. Utility ownership can make EV charging available when competitive options are limited and utility deployment can drive down cost and make EV charging available because the business model in which users pay for the infrastructure is not yet viable on a wide scale. In this case, user fees would still be collected, but would not be expected to cover the full cost of the investment.
With the growth of the use of information technology and the rapid expansion of DER in its various forms, we are facing a brave new world of electricity. It is no longer just electrons delivered over wires. It is products and services that put us all in charge of the energy that powers our homes and businesses. That means a new marketplace where we can pick and choose what we want in energy. Value-added services make that marketplace real and valuable, and who will provide those services, on what basis, will determine the benefit of this new arrangement. Utilities have a role to play, and so do third-party providers. Getting the balance between them right is central to giving all customers a brighter energy future.
AEE issue briefs on seven key topics in utility regulatory reform are available for download.