Comparing NYS with CA: Blog 4 – A comparison of the fundamental regulatory principles
This is the fourth in a series of blogs comparing the New York State and Californian energy and regulatory policies.
Catherine Mitchell, IGov Team, 19th June 2017
This is the fourth in a blog series comparing NYS and Californian Regulatory Policy. The first blog provides an introduction to the series. The second blog provided an update on the NY Reforming the Energy Vision (NY REV). The third provided a brief overview of CA energy and regulatory policy. This blog provides a high level comparison of the 2 systems, drawing on Blogs 2 and 3 – and so it makes sense to read both of them before you read this. The fifth blog provides a more detailed comparison of the NYS versus CA regulatory policy with respect to distributed energy resources, and distributed resource plans. The sixth blog provides a review of distribution utility functions, and their differing names.
This comparison on NYS and CA is based on the assumption that the reader will have read the second and third blogs before this one.
Energy systems are changing all over the world. In the United States of America (USA), the different States follow very different energy policies. Some are at the forefront of global energy policy thinking (for example, California (CA) and New York State (NYS)). However, CA and NYS, whilst both very progressive in terms of greenhouse gas (GHG) reduction policies, have very different principles underlying their energy system governance. This blog endeavours to capture those differences.
CA is far ahead of NYS in some ways – for example, renewable energy deployment – in part because CA is one of the world’s earliest movers in terms of energy system transformation. NYS has a long way to go to catch up. However, the changes within the global energy system are clustering around decentralisation of technologies; the move to decarbonisation; the inclusion of digitalisation within energy system operation and market / platform transactions ; and the increasing preference for some degree of democratisation of the energy system via customer choice, new ownership or involvement of stakeholders. Together, these four ‘Ds’ are known as D4.
At this point in time, NYS’s intended energy pathway seems better suited to these changes, and therefore may – relatively – better benefit the citizens of NYS than CA in terms of energy system transformation over the longer term (meaning a move to sustainable system and operation, security and cost-effectiveness). A central question for CA’s more traditional regulated approach, is whether it is flexible enough to deal with the D4 issues coming its way, or whether it might find itself on the back foot with respect to transactive energy; customer choice and so on.
Both CA and NYS are major US States in economic and population terms. They both have very high total energy demand by State ranking (2nd and 4th respectively) and they both have low per capita consumption (49, 3rd lowest) and 51 (the lowest) (see here). They are both trying to ensure vibrant economies whilst at the same time meeting their progressive energy policies. CA has had a longer, supportive policy for sustainable energy than NY, but both have a reasonably environmentally literate public that has been slowly built up over time. For example, NYS is very proud of its energy history – being the home of the first Edison power plant. They both take an enabling environment approach to their policies where legislated policies, such as support for renewable energy, energy efficiency etc., intertwine with pro-environmental transport, security and affordability issues. They are both moving towards a greater importance of the distribution level within their energy systems, in part due to the decentralizing nature of energy technologies; they both support integration between electricity, heat and transport; and they both support a move to a flexible, smart future. Both have political buy-in for their governance changes and both CA and NYS energy systems, fundamentally, remain regulated industries.
In their different ways, both CA and NYS have had events which have shaped the development of their energy policies. In CA, the failure of the electricity privatisation in the early 2000’s has led to wariness of, and difficulty in moving towards, markets – and therefore a constraint of moving away from the traditional regulatory model. The CA State Legislature continues, effectively, to mandate change and the various CA agencies then implement it. In NYS, Hurricane Sandy has led to societal openness for change, and a questioning of the ‘old’ way of doing things. CA was an early mover with respect to energy system transformation and has therefore got various institutions and ways of doing things in place. Hurricane Sandy effectively allowed the past to be reinvented in NYS, albeit based on the PSC’s century old mandate that the PSC must ensure reliable universal service at reasonable rates.
CA and NYS do, however, have very different approaches to how they communicate and execute those policies. In NYS, the PSC was given general direction from the State and Governor to deal with the energy system issues following on from Hurricane Sandy. Having been given that general direction the PSC, and the Commissioners, were central to the shaping of that Vision. They argued that the current system is unsustainable and the PSC’s core mission of ensuring reliable universal service could not be fulfilled without fundamental change. NYS was upfront in the PSC 2014 / 2015 Vision Order arguing that traditional energy regulation is no longer fit for purpose, and that new roles for utilities, customers, and the Regulator are required. Moreover, NYS has been clear that it sees a rebalancing between Regulation and Markets as necessary – with both regulation and markets as having important roles: Regulation ensures direction and maintains a public service obligation whilst more markets enable innovation, cost-effectiveness and customer choice.
CA on the other hand has not been as strident in its public pronouncements. Moreover, CA in contrast is driven by the Gubernatorial (ie the State Governor) and legislative direction. Thus, CA still effectively delegates executive responsibility for its sustainable policies to its Investor Owned Utilities (IOU’s) via the State Agencies. Regulation remains the more important aspect of the alternative tools of regulation or markets. The role of the different actors in energy system transformation have not been so openly questioned in CA. Whilst Community Choice Aggregation (CCA) is making some inroads in CA, most domestic customers remain served by the incumbent IOUs or Munis, and even CCAs are reliant on the IOUs for billing and so forth.
Whilst NYS utilities remain at the centre of the energy system transformation, the basis of their future revenues are set to alter fundamentally, and part of that revenue is related to transforming to a new function (the distributed system provider, DSP), new players and new transactions. NY utilities may prosper in the new world, but only if they change. So far, whilst it is clear to all concerned that energy systems are having to grapple with all sorts of change, including the roles and business models of those involved, the Regulator has not added details of how the basis of the utilities revenue will change over the next decade or so. In this sense, the environment for the CA IOU’s is far less threatening than in NYS. On the other hand, NYS has also been clear that utilities can earn a higher return of return if they change – so there is a strong carrot and stick element within the NY REV, which in theory should be attractive to utilities.
At the same time, in theory, new entrants and new ways of doing things should find the NY REV world of DSPs and markets more attractive and, certainly, it seems that the NY REV ideas are squarely positioning NYS to complement D4 and transactive energy. However, CA continues to be the major market for DER in the USA. Whilst it may be a utility which procures, for example, DSR or solar from new entrants because of regulation rather than from via a market in NYS, CA is still providing greater amounts of value to DER than NYS. From a practical perspective therefore, whilst new entrants may like the NYS philosophy, it is still CA which is coming through with the value.
Nevertheless, the NY REV has engendered a much more an in-depth, transparent discussion than CA about what the role of the energy system should be in the 21st century energy system, and what would be appropriate regulation. NYS has tried to open up the debate about what energy policy is good for the NYS economy, as well as what customers want from the energy system and the ways in which it could connect customers, including domestic customers, to their energy use.
This has shifted the debate from the interests of companies to one of public interest and resilience. The NY REV is de facto arguing that an energy policy built around public interest is essential in meeting its public policy goals. It is also hoping, however, that the new forms of performance based regulation will make it in the interests of private companies to create and serve new market opportunities. This is both radical but also very different from CA.
The NY PSC, under its mandate, has continued with the public service obligation on the distribution utilities. At the same time, the NY PSC supports and wants to encourage new markets and new roles. In this way, the NY PSC is marrying a traditional regulatory role with the opening up of markets and new forms of performance based regulation via EAMS and PSRs. It is this triad approach, which together is unique and interesting.
NYS has been able to capture the position of regulatory innovator because it is the first State to put forward – and take steps to execute – such innovative ideas, centering on the Distributed System Providers for DER. DSPs, in theory, are incentivised to provide new markets and/or aggregated access to wholesale market and the transmission operator, thereby creating a new ‘value’ proposition for decentralised energy and the distribution utilities – all the while revealing a new economics of energy provision. This is opening up potential new market possibilities which the DSP, in theory, could, and according to the NY REV philosophy, should, facilitate.
Even though CA has not managed to be recognized as much as NYS for innovative thinking, it has implemented much of the same actions around distribution development – for example, distribution resource plans, Action plans, and ways to value distributed energy resources (This is discussed in much more detail in the next blog). CA is, in practice, still doing a better job than NY in terms of moving towards a sustainable future.
Nevertheless, both CA agencies and the NY PSC are cautious when it comes to dealing with the distribution utilities in their respective States. There are concerns on the part of the distribution companies about the impacts of the transformation to DSP (including the regulatory base) on their businesses, either CA nor NYS are pushing the utilities too hard, as yet, for change. Moreover, whilst utilities are mandated to provide the public service, their future still seems reasonably assured.
The transformational nature of ideas
NYS appears to be trying to create a process where either regulation or markets (or a combination of them) can be chosen as the tool to reach a desired outcome, depending on what is best for each desired outcome. Their arguments in support of local markets, distribution system providers as coordinators, new performance incentives etc are fundamentally different aspects of regulation, brought together in new ways to encourage new ways of doing things / reaching the desired outputs. Moreover, it is an inherently flexible form of regulation – focusing on outputs so that regulation can keep up with technological and practice change.
NYS is placing customers at the centre of the energy system, and the PSC wants the services that they want to be provided, possibly in a new way. In other words, NYS has tried to shift the debate and move beyond a narrow cost effective service for monolithic customers towards enabling individual customer – of any type – choice.
This is a fundamentally different approach from that in place in NYS, and possible in CA. From a theoretical point of view, this blog prefers the NY REV model as a way to free up innovation to develop in ways ‘it’ (the innovation) wishes to and which ‘we’ cannot know about. The blog also, in theory, agrees that a DSP like value proposition is best able to work with, and coordinate, D4 and the developing transactive energy platforms ideas, and other energy system changes.
On the other hand, the NY REV may all come together in a few years able to meet the challenges of D4 and to take up its opportunities in a way that CA may find itself unable, or constrained, to do. This is not to in anyway undervalue CAs history to date – which is clearly the most successful in the USA.
It is true that the changes on the ground in NYS itself have not occurred as fast as some would hope. However, if the 2014 Vision is separated from the on-the-ground change in NYS, the NY REV is offering a new answer to the challenges of the 21st Century. In this sense, it is inspirational. If the goal is energy system change – then it is a case of ‘watch this space’ to see just how fast NYS is able to alter, and what the problems and difficulties have been so that lessons can be learned.
Sadly, it is still unknowable whether the more regulated approach of CA is preferable and cheaper than the NYS model in moving a State or country towards GHG reduction. Whilst NYS is arguing that innovation and a customer focus is necessary in order to achieve a cost effective energy system transformation – and that markets and the decentralized value proposition of DSPs is integral to that – we cannot as yet know if that is the case because it is still early days in NYS. Moreover, it may be that both will work – and there genuinely are different, possible routes to the same end.
This blog would argue, from the perspective of a State or country trying to work out what it should do now in this very uncertain time for energy, that they should pick the best practice of both NYS and CA governance for DER. We would argue this is a combination of steady public policy targets and support (as has occurred in CA for 40 or so years, and for a shorter period in NYS) combined with the new functions (i.e. DSP), centrality of customers, balance between regulation and markets, and new incentive mechanisms of NYS.
It also seems that some of the lessons learnt from Europe would also be beneficially incorporated into the NY REV – and that includes separating out distribution utilities from ‘supply’: in other words, turning the DSP function of utilities into an energy and wires companies but removing the supply base.
Moreover, NYS is dealing with similar big issues to other jurisdictions. Data, and its availability as a public good versus a source of revenue is similarly being debated in Europe. This blog takes the view that data should be freely available. Another common debate, is whether DSP utilities should own or not own DER. This blog takes the view that they should not.
Overall though, this blog argues, that the underlying principles of the NYS regulatory reform are potentially transformational because it has created a new ‘value’ proposition into energy system governance by arguing to move the ‘heart’ of the energy system to the distribution level and to create distribution system providers to facilitate and coordinate markets. Different countries may enact this new value proposition differently from NYS, but the ideas that the NY REV have unleashed can be expected to roll out around the world.
 Governance is thought of as the combination of policies, institutions, regulations, market and network rules and incentives, and the process by which the governance design details (ie the details of a RE policy, or a market rule) are agreed.
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