NARUC releases final rate design manual to assist state regulators

The National Association of Regulatory Utility Commissioners (NARUC) has issued its final manual on distributed energy resources (DER) to help give guidance to U.S. states that are navigating the thorny issues of rate design.

The manual was designed to help regulators consider appropriate rate design and compensation policies for DER amid an environment where electric utilities, solar companies, state utility commissions and other stakeholders are debating the relative costs and benefits of DER to the electricity system.

“Although the manual is not the final word on the subject, it will be a useful practical resource for regulators,” said NARUC President Travis Kavulla of the Montana Public Service Commission

The NARUC Board of Directors will take up a motion to formally adopt the manual on Nov. 15 during NARUC’s annual meeting in La Quinta, California. A discussion of the manual will take place at the annual event on Nov. 16, which will be led by Staff Subcommittee Chair Chris Villarreal of the Minnesota Public Utilities Commission.

According to the final guidelines, “The reason for this manual is that the nature of electricity delivery, consumption, generation, and grid itself are changing, and changing rapidly.”

The manual discusses how DER affects existing regulatory and utility models and offers options on rate design and compensation.

“Understanding how DER impacts the grid itself, including reliability, is an important factor, but also understanding where, when, and how DER can benefit the grid is of equal value,” the manual said.

No longer is electricity delivered in one direction from large power plants through transmission lines and to homes. Consumers are now utilizing technologies to generate their own electricity, respond to prices, change their level of demand or store electricity for future use.

“We believe that rate structures need to be reformed now to benefit customers and, ultimately, to give them greater control over their energy bills,” said Phil Moeller, senior vice president for energy delivery and chief customer solutions officer at Edison Electric Institute.

“With record amounts of DER being integrated onto the energy grid, it is also crucial to have rate structures in place that recognize the importance of the energy grid and minimize the cost shift from one group of customers to another. NARUC’s manual will be an important tool for state commissions as they look to redesign rates to more appropriately reflect the realities of the growth of DER and the importance of the energy grid in achieving those goals,” Moeller said.

The manual does not provide all the answers to state commissions on difficult topics being debated by the industry, such as the issue of net metering creating cost-shifting from DER to non-DER customers, but attempts to give guidance in a neutral manner, NARUC has said.

When discussing cost-shifting, the manual states: “In sum, under the traditional ratemaking model and commonly used rate design, if the utility passes its relevant threshold of DER adoption, the utility may face significant intra-class cost shifting and erosion of revenue in the short run. If left unaddressed, the utility could face pressures in the long term that might prevent it from recovering its sunk costs, which are necessary to provide adequate service.”

The manual also acknowledges the debate that exists over the benefits of DER. “Part of the disagreement is in quantifying benefits from DER and the effects of integrating DER into the grid and utility systems,” the document said.

Regulators are also interested in calculating benefits that have not been typically incorporated in rate design or are difficult to quantify, including the environmental benefits of distributed carbon-free generation.

The manual defines a DER as a resource sited close to customers that can provide their electric and power needs and can also be used by the system to either reduce demand or provide supply to satisfy the energy needs of the grid. Examples of different types of DER include solar photovoltaic, wind, combined heat and power, energy storage, demand response, electric vehicles, microgrids, and energy efficiency.

NARUC began work on the manual in 2015 when the Staff Subcommittee on Rate Design was directed to draft a distributed energy resources manual to help states manage the challenges associated with current rate design.

A town hall meeting to discuss the draft version of the manual was held in Nashville at NARUC’s summer meeting in July. More than 70 comments from various stakeholder groups were submitted to NARUC to consider for the final manual.

NARUC said it will publicly release the written comments it received on the manual on its website around the time of the annual meeting on Nov. 13-16.

“This publication was a major undertaking by the staff subcommittee and we appreciate their hard work and the many valuable comments we received from commissions and stakeholder groups,” Kavulla said.

The manual is available on the NARUC website at http://www.naruc.org/ratedesign.