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Distribution Deregulation: Is it Time?

Why are some industry stakeholders now at least talking about distribution deregulation?

Is the distribution grid the next sector of the power industry to face deregulation?  Many folks in the utility business get the heebie jeebies when they think about further deregulation in the electric utility sector. I know I do. Having experienced deregulation of the generation and power marketing sectors firsthand, I remember the anxiety, turmoil and manipulation that enveloped the industry for a number of years, affecting personal lives and careers as well as the rights and interests of shareholders, customers and industry participants. After about 20 years of the deregulation experiment, one can find both strong advocates and strong opponents of the decision.

So why are some industry stakeholders now at least talking about distribution deregulation?  In a number of cases, the basis evolves around planning for the future.  A number of states have embarked on planning exercises recognizing that aging infrastructure needs to be replaced and such infrequent investments must be planned to anticipate the needs of stakeholders for the 20- or 30-year lifetime of the upgrades.  As an example, the Public Utilities Commission of Ohio (PUCO) spent the last year developing a roadmap for the future of the distribution grid in their state. They call it the PowerForward program. The goal of these regulators is to formulate a grid that provides maximum benefits to all customers at the lowest possible cost and enables services from all third-party providers.

That’s a lot to chew off, but the PUCO regulators have a pretty compelling comparison point. Look at what happened in the deregulated telecommunications sector with the advent of devices like the blackberry and IPhone. Some of the most valuable companies today arose as a result of deregulation in the communications sector. Will the distribution grid become the venue for the next FANG stocks? Think of the opportunities that may exist for distribution utilities, their unregulated subs, third-party technology companies and competitive power retailers. Maybe that potential is worth the pain that accompanies industry change.  

While recognizing the potential for amazing new opportunities associated with opening the distribution grid to competition as it is modernized, the PUCO is proposing a gradual, voluntary transition for the state’s electric utilities.  The PowerForward plan lays out the ratemaking/rate design concepts to be utilized to achieve its recommended goal of converting the distribution grid to a secure, open access platform while keeping costs in check and maintaining safe and reliable electric service. There are indications in the Powerforward summary that the PUCO intends to carefully oversee the Ohio grid modernization process.

Distribution grid modernization and restructuring conversations are well underway in other states. New York’s Reforming the Energy Vision (REV) docket is a familiar example. While not focused exclusively on the distribution grid, the REV initiative contemplates a transactive energy environment where users can partner with traditional utilities to produce, buy and sell electricity.  Much of what New York has accomplished since the REV program began has centered around encouragement to renewables and other distributed energy resources in a historically challenged development environment.  The New York Public Service Commission has acknowledged that achieving a competitive distribution grid will require a rethinking of financial incentives, including new market-based earnings opportunities, realignment of rate-making strategy and clear financial targets with bi-directional earnings impacts. See the NY REV Track 2 order for more information about the PSC’s plan. No one has suggested that getting to this new world of a market-based distribution grid would be simple.

Of all states, California may hold the record for fiddling with various forms of deregulation the longest. Currently, California utilities are struggling with the potential impacts of community aggregation, the loss of load to distributed energy resources and pending decisions regarding retail choice. By many accounts, the Golden State is well along on the path toward competitive retail electric service. However, some observers will note this situation is unfolding without an organized strategy, rules and safeguards for retail completion. Further, the future of the transmission and distribution grids now operated and maintained by the same utilities who risk losing all of their customers is in question.

Surely, all stakeholders in the electric industry will do their best to ensure our traditional electricity markets transition to a new regime without a free-fall into uncertainty.  It may not happen as quickly as some participants might like, but the opportunities for where we might go with a well planned path forward appear phenomenal.

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