"It is one of the happy incidents of the federal system
that a single courageous State may, if its citizens choose, serve
as a laboratory; and try novel social and economic experiments
without risk to the rest of the country."
– U.S. Supreme Court Justice Louis Brandeis in New
State Ice Co. v. Liebmann
Such an experiment is underway in the State of New York where,
earlier this year, the New York Public Service Commission began
proceedings to fundamentally reconsider the regulation of
electricity utilities in the State. These proceedings have
the potential to shift the State away from the 'cost-of-service
paradigm' that has governed electricity ratemaking for decades
in favour of different incentives and could see the State moving
incrementally towards a more decentralized system that is dominated
by smaller "distributed" generation stations.
Because the issues raised in the proceedings are not unique to New
York, it is expected that the proceedings will reverberate beyond
the State's borders.
The Commission is considering these changes in an effort to
address the following issues, which will be familiar to many
Cost pressure caused by the need to replace aging supply and
Increased customer reliance on reliable and high-quality
The need to reduce carbon emissions and the associated costs
and threats to infrastructure posed by increasingly severe climate
Technology developments in distributed generation and
information systems, which challenge incumbent systems and present
opportunities for transformation of those systems; and
Electric price volatility caused by increasingly greater
dependence on natural gas as a primary generation fuel source.
A report prepared by the Commission forms the
basis of the proceedings. In it, the Commission is proposing
to transform the utility business model in the State by making
energy efficiency, demand management, and distributed generation
'primary tools' in the planning and operation of the
State's power grid. More particularly, under its
proposal, distribution utilities would function as
"Distributed System Platform Providers" who would be
responsible for managing and coordinating distributed generation,
such as wind complemented by storage, through smart-grid
technologies to balance localized load and production in real
time. It believes that this approach presents a viable, and a
potentially more effective and economic, method to achieve
reliability than the current 'forecast peak demand plus a
substantial reserve margin' approach that sees the system
underutilized for much of the year and more susceptible to extreme
weather events and price volatility.
In the proceedings, the Commission also proposes to examine the
State's ratemaking practices in order to establish regulatory
and incentive platforms that will support such market
transformations. In its report, the Commission finds that
traditional 'rate of return' regulation "provides very
little incentive for the utilities to improve performance" and
that such regulation "may also encourage the utility to
over-invest in capital spending". The approaches that
the Commission is considering include: (1) long term rate plans (as
long as eight years), (2) shifting the focus of regulation from the
reasonableness of historically incurred costs to long-term customer
value, and (3) using more "positive incentives" instead
of relying primarily upon "negative incentives" such as
Interested parties are currently in the process of commenting
upon questions raised in the report. The Commission expects
to have policy decisions on the proceedings by the first quarter of
We will be following the fate of the Commission's
deliberations with great interest.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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