NARUC’s Guide to Rate Design and the Way Forward

The growth in distributed energy resources (DER) is enabling consumers to take charge of their energy use, while providing new tools for a more affordable, reliable, and clean grid. But the increased adoption of DER has not come without controversy. Rate design issues, from net metering to fixed-charge fees and everything in between, are popping up with increasing frequency across the country. We at Advanced Energy Economy (AEE) have been at the forefront of these conversations in a variety of different arenas—most recently leading a collaborative discussion with utilities and other key stakeholders in New England around rate design for a DER future, and our ongoing involvement in New York as part of the Reforming the Energy Vision (REV) proceeding, most recently focusing on Value of DER/Successor to Net Energy Metering discussions—grappling with these issues and convening stakeholders to establish a dialogue on the best way forward. Our affiliate, AEE Institute, also convened public utility commissioners at forums in the Midwest and Mid-Atlantic regions to discuss distribution system planning to modernize the electricity grid.

Last November, the National Association of Regulatory Utility Commissioners (NARUC) jumped into the ring and created a Staff Subcommittee on Rate Design to address  the challenges inherent in a rapidly changing electricity system. The first order of business, as stated by NARUC President Travis Kavulla, was to develop a manual to assist jurisdictions in navigating the challenges, considerations, and policy developments related to the increase in DER on the grid. Following an initial round of comments, which AEE participated in, to inform the subcommittee on what to include in the manual, NARUC issued a draft manual on DER Compensation on July 21 and convened a town hall meeting two days later, during the Summer NARUC meeting in Nashville, to receive public input. On September 2, AEE submitted comments on the draft manual, applauding NARUC and President Kavulla for developing a solid first draft, while encouraging them to make additional improvements before the final version is released in November.

The draft manual was organized into five main sections: introducing the different components of rate design and describing the rate design process; defining DER and its effects on the electric system; outlining the different considerations, questions, and challenges when designing rates; laying out the different DER compensation methodologies available to regulators; and detailing the different advanced technologies that can support operations of the grid.

In its comments, AEE made five suggestions to make the manual more effective in helping regulators come up with rate designs that capitalize on DER for customers and the grid:

1. Include concrete examples of alternative rate designs already being implemented or considered in jurisdictions across the country. Information sharing across states and jurisdictions, including data-driven analysis of what has worked and what has not worked, can be an invaluable resource for regulators and commission staff. In our comments, we provided brief descriptions of case studies, pilots, and recent Public Utility Commission (PUC) actions that would give users of the manual real world examples.
2. Explore more deeply the full range of benefits and costs of DER and ensure they are fairly portrayed. Here, we suggested a benefit-cost analysis framework to help regulators identify and consider the full range of costs and benefits of DER projects and investments - the benefits including, but not limited to, capacity, transmission and distribution cost avoidance/deferral and ancillary services such as volt/VAR support.
3. Present a more robust discussion of technologies needed to enable DER compensation and rate design. We suggested adding additional information about foundational technologies to enable the deployment of DERs and the creation of programs, products, services and rates that will ultimately transform how customers, utilities, and third party service providers interact with the modern grid.
4. Outline a broader array of regulatory tools beyond rate design to give regulators a better sense of the options they have to overcome some of the possible economic pressures faced by utilities with the growth of DER.  Here we suggested that regulators could look at other tools within their toolboxes, such as integrated distribution system planning and ways of aligning utility incentives with the growth of DER, to help utilities take advantage of DER as an asset to the grid.
5. Make the manual a living document that is updated at regular intervals with stakeholder input. Given the rapid pace of technological change and the continued emergence of best practices around rate design and DER compensation, AEE recommended that NARUC outline a process by which this document is kept up-to-date and relevant, with regular opportunities for stakeholder input. We also suggested additional steps NARUC can take to further assist the regulatory community on these issues.

AEE is glad that NARUC is engaging stakeholders in the development of the NARUC DER Compensation Manual. The manual provides an opportunity to elevate the conversation beyond what is often portrayed as a zero-sum game between utilities and DER owners and make it a positive opportunity.

AEE is also starting work on a white paper on rate design for a DER future that should be finalized in early 2017. Rate design is an important and complex topic that is surfacing in our 21st Century Electricity System discussions throughout the U.S. Productive stakeholder discussions is critical to identifying possible pathways for a DER future that will increasingly see more integrated technologies such as solar, storage, energy efficiency, fuel cells, electric vehicles, demand response, and combined heat and power playing a more innovative role in our country’s energy mix and to addressing resiliency, reliability, and environmental sustainability concerns. We look forward to the publication of the NARUC manual this November and to continued engagement with NARUC and other stakeholders on this important topic.

To download AEE’s full comments, click here.