The public utility companies are at a crossroads in Florida. The cost of increasing deployment of variable renewable electricity generation continues to decline, and implementation of the Environmental Protection Agency’s Clean Power Plan is fast approaching, mandating Florida to cut its power-sector carbon emissions rate roughly 25 percent by 2030. A series of federal, state and local policy drivers for penetration of distributed energy resources into the US market have put the status quo of the electricity utility business model in question. The role of Florida utility companies is becoming smaller and will continue to do so if these companies do not adjust their market strategy to keep up with the ever-changing technology advances of energy generation and consumption. As it is the Commission’s role to exercise regulatory authority over utilities in economic regulation and the monitoring of safe and reliable service of electricity, the onus has fallen on us to determine the best business structure transformation of Florida’s electric utility companies that can not only preserve the industry, but allow it to be an indispensable player in the state’s electricity market.

PERFORMANCE BASED REGULATION (PBR)

Our current rate of return model for utility companies offers the same return on all approved capital investments without testing whether said investments are creating the most value possible for customers or for the state as a whole. The danger of the current system is that it may motivate utilities to over-invest in fixed assets without providing enough incentives for productivity improvements. Additionally, the lag time between approval of investments and cost recovery can prove difficult as electricity consumption in the US has become sluggish post-recession. While the rate of return business model worked well over the last century, unprecedented methods of energy generation over the past few decades have created gaps on how to regulate both recovery of investment, as well as services provided. There is also no measurement of a utility company’s ability to contribute to increasingly stringent environmental goals or to societal goals. Implementing a regulatory approach that focuses on desired, measurable outcomes, rather than prescriptive processes, techniques, or procedures is an ideal solution for waning Florida utility companies. Performance-based regulation (PBR) is such a method. It leads to defined results without specific direction regarding how those results are to be obtained.

     A brief illustration of how PBR would be carried out under our management: The Florida PSC sets rates or possible revenues along with clear performance standards such as a CO2/kWh standards, a power balancing standard, or a total cost per customer standard. These standards are to be reached in the medium-long term, 5-8 years. Over this time period, utility companies use this interval to innovate new methods of achieving said standards while accruing the lowest costs over the intervening years. At the end of the compliance period, the PSC will measure each utility’s performance based on their ability to meet said standards. Exceeding standards will be monetarily rewarded, while those that fail to meet them will incur penalties. PBR can also offer utility companies opportunities to earn increased revenues when they provide value-based products and services to customers. Under such a system, utility companies will no longer have a single stream of revenue focused on how much energy is sold, creating a contradiction of goals between the state and utility companies, but instead can profit from offering services that increase energy efficiency.

This new regulatory approach should be coupled with an energy efficiency bill similar to that of Maryland’s. As of 2014, Maryland utility companies are not granted licenses to build new power plants until they increase their energy efficiency by two percent. If, under the performance based regulation system described above, companies can generate revenues from their increase in energy efficiency, this may ultimately eliminate the need to build additional power plants, as well as benefit Florida’s CPP emission reduction goals.[1]

The biggest challenge for implementing performance-based ratemaking is that it cannot be instituted under many states’ regulatory frameworks. This is because it is difficult to offer legislators certainty about the way in which consumers’ utility bills will be affected. Performance-based ratemaking may increase bills faster or slower than cost of service regulation, depending on the utility’s performance (although it should be noted that volatility, although initially frequent, is minimal). A better approach may be to incrementally implement performance-based ratemaking earnings mechanisms over time. Metrics could then be broadened either through increasing performance incentives or increasing utilities’ returns on existing performance incentives. This brief recommends requesting a meeting between Florida governor Rick Scott and Florida legislatures, along with commissioners of the Florida PSC and all Florida state utility companies to discuss which customer and societal values are most important within the state. Then discussion should be carried out on how the role of utility companies can change in order to continue providing reliable, safe energy while innovating new methods of generating revenue through performance based regulations.

In order to promote the development of additional revenue streams for utility companies, the new regulatory approach will include a mandate that each public utility company in Florida participate in at least two of the three subsequent commission-approved energy efficiency projects.

  1. DISTRIBUTED GENERATION: EXPANDING MICROGRIDS

The increasing spread of distributed energy generation in the US will almost certainly disrupt the status quo for utility companies whose current rate of return can remain steady only if companies maintain a broad range of customers, or request rate hikes (which we are often loath to grant). US utility companies that have seen the massive influx of solar panel energy generation in countries like Germany can be saved from making the same mistake as German utility companies who scoffed at the threat of losing customers to the trend of distributed generation (DG) that it did not believe would catch on until it was too late. This advancement of increased distributed energy generation, especially in a solar abundant state like Florida, will serve as either a threat or an opportunity for Florida utility companies, depending on if they respond defensively or advantageously to this inevitable technology advance. The Florida PSC should educate and encourage utility companies to see DG as an opportunity to offer a bigger ‘service and systems’ approach. We should encourage them to tie these energy sources into their service offerings and make themselves indispensable as a provider of this technology upgrade. This change can start with the expansion of microgrids in Florida.

Microgrids began to garner more interest in the US following Hurricane Sandy. Florida alone has been hit by 114 hurricanes in the last century and a half, followed by Texas with 63, and Louisiana with 54. This data proves that there is major market potential for microgrids in Florida, and utility companies should be spearheading their deployment. Some of the biggest obstacles that third parties say they are facing in developing microgrids include the obstacle of utility franchise rights, the threat of a project being regulated as a utility, and interconnection issues. These obstacles become an ideal situation if utility companies are the frontrunners of this market in Florida.

The integration of utility companies in the creation of microgrids should be carried out in tandem by both the PSC and the Florida Energy and Climate Commission. The project should mimic that of the California Energy Commission, which offered $26.5 million last year in a competitive solicitation to fund microgrid technology demonstration and deployment for several microgrid projects. It is recommended that the PSC mandate that each Florida state utility company partner with at least one project applicant (such as a university, a city government or private company) and submit a proposal for approval. Successful projects will count towards utility companies’ PBR targets for increasing renewable energy generation and energy efficiency.

  1. DISTRIBUTED INTELLIGENCE: SMART(ER) METERING

Since the Federal government’s $3.4 billion Smart Grid investment in 2009, utility companies have installed 50 million smart meters at homes across the U.S., reaching 43 percent of homes overall. And yet, smart metering as it stands still leaves much to be desired for the majority of consumers that are unfamiliar with electricity pricing mechanisms that do not directly translate how much money is coming out of their wallets. If consumers saw their meter running up and were able to understand what it was costing them in real time, similar to standing at the gas pump, consumer behavior would have a high chance of changing. Under a performance based regulatory approach, utility companies in Florida can begin acting as developers and deployers of such a technology by partnering with a private company like Nest, Rainforest Automation, IBM, Silver Spring Networks, etc. to bring these to the majority of Floridian retail consumers. This new business endeavor will allow utility companies to reach PBR standards of increasing energy efficiency while generating a new profit stream, and achieving their mandate of a 2 percent increase in energy efficiency. Enhanced smart metering will also lower the costs of generating peak energy supply, cutting some of utility companies’ highest cost factors.

  1. ELECTRIC VEHICLES

Despite the fact that customers are buying more electric devices than ever before, the energy efficiency in most devices is improving each year, lowering the demand for electricity. Today, American’s daily spending on energy is split between two categories: $1 billion on electricity and $1.4 billion on fuel for vehicles.[2] With the emergence of electric vehicles (EV), utility companies have the perfect entrance into this budding market. Sales of EVs have been nearly doubling in recent years, and homes that own an EV consume roughly 58 percent more electricity. The EV market offers massive potential for utility companies: it increases electricity demand, meets environmental goals, and can cut costs if utility companies electrify their own fleets of vehicles.

Under the new PBR regulatory approach, Florida utility companies will have the option to partner with a plug-in carmaker to offer inexpensive installation of home chargers, and can offer special tariff rates to Floridians that own EVs. This will allow utility companies to enjoy a recovery in dwindling demand and profit from a new revenue stream of EVs whose popularity is projected to continue increasing at a faster rate than years prior in the US.

CONLCUSION

Now is the time for the industry to transform itself by employing more innovative contributions to the energy market. In doing so, utilities can remain key players in the bright future of energy generation. Amongst all these changes in the electricity industry, customers will continue to demand safe, reliable service at an affordable price. Florida can be a front-runner in the electricity sector by providing utility companies with an opportunity to generate profits based on performance through services and systems that will benefit the state, the companies, and Floridian retail consumers.

[1] Further talks should be carried out between Governor Scott and the PSC to discuss the proposal of this bill.

[2] “Adapting to Plug-ins”. The Economist. October 4, 2014. Washington, DC.