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Electricity System Transition

Electric System Transformation

Valuation and Ratemaking

As electricity demand has declined, use of distributed energy resources has expanded, and new technologies are increasingly providing ancillary services to the grid. Within this changing landscape, public utility commissions and stakeholders are exploring novel approaches to valuing and compensating customers, solution providers, and utilities for grid services. NARUC has supported a variety of initiatives aimed at plotting new courses for consistently and transparently determining the values of different resource investment options, in coordination with the NARUC Staff Subcommittee on Rate Design.

One category of evolving valuation and ratemaking approaches is often referred to as utility business model changes. NARUC operates a dynamic simulation exercise, called the MegaModel game, to support members’ experience with and understanding of cost-of-service and performance-based regulation (PBR). NARUC also facilitates a PBR state working group to enable commissioners and commission staff to explore the degree to which PBR can be a valuable tool for balancing the public interest with the financial requirements of utilities. These NARUC CPI activities are in addition to explaining fundamental financial concepts such as rate of return calculations.

  • Webinar: Regulators' Financial Toolbox: Cloud Computing, September 24, 2020 The Regulator’s Financial Toolbox series examines regulatory issues where technology meets bookkeeping. In this 90 minute webinar, speakers will address technology, economic, and accounting considerations for cloud computing. This webinar will explain what cloud computing is (and is not), and will address regulatory considerations for the utility leveraging cloud computing.

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  • Webinar: Earnings Sharing Mechanisms, August 13, 2020 Earnings sharing mechanisms are one way that a commission can manage a utility's actual rate of return and share efficiency gains with customers, although it may reduce the incentive to be efficient. In this state working group session, working group members heard from public utility commission staff from Hawaii, Nevada, and Vermont on how they have approached earnings sharing/adjustment mechanisms.

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  • Webinar: Multi-Year Rate Plan Considerations and Examples, June 3, 2020 Multi-year rate plans are one way that commissions can reduce the frequency of rate cases by leveraging sophisticated forecasting and design to apply a rate for longer that a 12-month period. In this state working group session, members heard from Commissioner Emeritus David Littell (Maine, currently a senior advisor with the Regulatory Assistance Project), and public utility commission staff from Georgia and Washington.

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  • Webinar: Performance-Based Regulation Foundations April 13, 2020 On this webinar, Michael O’Boyle of Energy Innovation discusses key similarities and differences of cost-of-service and performance-based-regulation. Matt McDonnell of Strategen outlines tools for performance-based regulation.

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  • Webinar: Determining Utility System Value of Demand Flexibility from Grid-Interactive Efficient Buildings, April 6, 2020 This webinar featured a synopsis of a new State and Local Energy Efficiency Action Network (SEE Action) paper. The report focuses on ways current methods and practices that establish the value of distributed energy resource (DER) investments to electric utility systems can be enhanced. These enhancements would improve analyses of the value of demand flexibility in grid-interactive efficient buildings (GEBs) that can provide grid services. The report introduces key valuation concepts that are applicable to demand flexibility and links to other documents that describe these concepts and their implementation in more detail.

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Full report

  • DOE: A Valuation Framework for Informing Grid Modernization Decisions, August 2019 The valuation framework provides a structure for valuation that is deliberate, inclusive, and transparent, documenting the intermediate and final results to ensure clarity, accountability, and repeatability. The document provides guidelines for the framework for valuing grid generation, transmission, and distribution assets—including distributed generation and storage—and the services they provide, as well as policy options commonly evaluated in the context of the electric power grid. The framework is the primary product of DOE’s Grid Modernization project titled “Grid Services and Technologies Valuation Framework Development,” also known by its project number, GMLC 1.2.4. Read the full report, a summary, and a companion standards review report below.

Full report

Summary

Standards review report

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  • The Value of Resilience for Distributed Energy Resources: An Overview of Current Analytical Practices, April 2019 Planning for long-duration power interruptions caused by high-impact, low-probability events requires new approaches to power system resilience above and beyond previous hardening efforts. This report examines both regulatory decision-making and non-regulatory cost-benefit analyses to determine if, and how, a value of energy resilience was calculated and applied to proposed investments. Four criteria were used to evaluate the methodologies, including the method’s ease of use, scope of outputs, geographic scalability, and power interruption duration analysis capability. Some of the valuation methodologies examined in the report may be useful in regulatory decision-making; however, none of the methods reviewed met all four criteria for regulator usefulness and usability, and no single method is capable of capturing all regulatory concerns regarding the resilience value of DERs.

Full report

  • The Interface between Utility Regulation and Financial Markets, November 2018 The purpose of this paper is to review the interfaces between regulators and capital markets to explain the significance of financial market knowledge in public utility regulation. This topic is critical because IOUs finance their investments in utility infrastructure through debt and equity capital obtained from capital/financial markets. This report reviews the significance of financial markets to regulation, describes how key variables (such as cost of capital) are calculated, and describes opportunities for regulators to become educated about relevant financial market activity.

Full report

  • NARUC Distributed Energy Resources Rate Design and Compensation Manual,November 2016 This Manual is organized to provide regulators with a comprehensive understanding of the question of how does DER affect regulation. It lays out a background on the principles of rate design and compensation, the availability and use of new technologies, an explanation of what is DER, and describes a set of certain types of DER. This is to provide a regulator ample background of not only how DER impacts existing regulatory and utility models, but also provides a foundation for considering how to evolve along with this transition. The Manual then describes a variety of rate design and compensation options that a jurisdiction may consider—the options described herein are not the only ones available to a jurisdiction, but are the most prevalent under discussion today. The Manual goes through them laying out the pros and cons of the option, and providing regulators with information to assist them in their consideration. Lastly, the Manual outlines a few practical ways for it to be used, including examples of determining costs and benefits of DER, questions for a regulator to support an investigation into appropriate rate design and compensation for DER, and how to use some of the details in this Manual to support a decision-making process.

Full report

  • MegaModel Utility Business Models Game

NARUC has developed an interactive, discussion-based game to teach regulators, legislators, advocates, and other decision-makers about utility business models and regulatory regimes. As a new utility manager, your team can explore performance-based and cost-of-service regulation in vertically integrated and restructured environments.

During the game, each utility manager team runs a utility for five, two-year planning periods (10 years total). In each period, players can choose to build or contract for generation; build transmission, distribution, and flexibility resources; and institute or respond to new policies. The MegaModel Excel-based platform shows how these decisions impact customer bills, reliability (minutes of outages), earnings per share, and air emissions (carbon dioxide).

Watch the 7-minute demonstration video and contact us for more information.

  • MegaModel at NARUC Winter Policy Summits, 2019-2020

In 2019, NARUC provided the MegaModel training to anyone who attended the Winter Policy Summit. In 2020, NARUC provided the MegaModel training to members of the PBR state working group.

  • MegaModel at Legislative Energy Horizon Institute, 2016 - 2020

NARUC has provided the MegaModel training to attendees of the Legislative Energy Horizon Institute since 2016.

Funder:

  • NARUC is grateful to the U.S. Department of Energy, Office of Electricity, which enables most of the resources and activities described on this webpage.
  • NARUC is grateful to the U.S. Department of Energy, Water Power Technologies Office, which enables the Pumped-Storage Hydro Techno-Economic Valuation Project.

PBR State Working Group Leadership:

  • Commissioner Abigail Anthony, Rhode Island Public Utilities Commission – Chair, Performance-Based Regulation (PBR) State Working Group
  • Commissioner Daniel Scripps, Michigan Public Service Commission -- Vice-Chair, PBR State Working Group.
  • Twenty-six states are members of the PBR state working group.

NARUC staff experts who support these activities: