Sorry, long reply, and even this is just a first whack. First, here's the basic theory on returns in traditional utility ratemaking. Utilities are allowed a return on long-lived assets to compensate them for the time value of money that is tied up in those assets. Roughly speaking, the total amount of capital tied up long-term is the uti…
Sorry, long reply, and even this is just a first whack. First, here's the basic theory on returns in traditional utility ratemaking. Utilities are allowed a return on long-lived assets to compensate them for the time value of money that is tied up in those assets. Roughly speaking, the total amount of capital tied up long-term is the utility's "rate base" and its rates are set to allow them a chosen annual rate of return on that amount (both often heavily litigated in front of the regulators who set the rates). Short-term expenses ("operating expenses") are regarded as basically being quickly passed through and collected from ratepayers, so there's traditionally no return allowed on those short term expenses. Going one detail further, there can be a "lead-lag study" that accounts for the average amount of credit or deficit the utility is carries due to the timing mismatch between paying its opex bills and collecting those costs from customers. That results in an adjustment to the rate base so that the utility can earn a return on any small amount of capital tied up as a result of this churn in short-term expenses, but this is pretty marginal compared to the actual capex.
The issue that often arises is that renewables built within a utility's territory are not actually owned by the utility. This can be because (a) the utility has to allow the developer to interconnect under FERC's open access transmission policies, and the developer is going to transmit and sell the power to someone other than the utility, (b) the utility has to take power from the developer under PURPA, or (c) the utility is buying the power from the developer under a PPA, but still doesn't own the project. In none of those cases does the utility own the capital facilities--even in (b) and (c) it just pays for the power each short-term billing period, resulting in opex with no allowed return. In (a) it gets some return on the transmission assets involved, through its transmission rates, but not on the generation capex. This dynamic often leads to criticism that utilities slant their new resource RFPs to favor projects they would build and own themselves over ones that developers would build and sign PPAs. You can see that the utility would have an incentive to build a self-build project that it can earn a profit on, even if an independent developer's project could be better for ratepayers.
I'm not sure what I'm describing exactly tracks the distributed / hub idea you mention, but the same principles apply for utilities still subject to traditional rate base/rate of return ratemaking any time they're looking at serving their ratepayers with resources whose capital costs would be borne by others. So if we're talking about a utility building out infrastructure to facilitate others connecting DG, batteries, PV, whatever to the utility system, those resources would tend to cannibalize the rate base of resources the utility itself would own, cutting into profits. Also, if it builds anything too expensive, it runs the risk of ratepayer advocates and regulators challenging the reasonableness of the cost and trying to get it excluded from rates, and this risk may be (or be perceived as) greater for new types of infrastructure that haven't routinely been included in utility rates in the past.
Regulators and legislatures are trying some things to better align utility incentives with public policy goals. For example, here in Washington, our 100% clean electricity bill passed in 2019 allows utilities to earn a return on the opex in their PPA payments to developers. RCW 80.28.410(2)(b) https://app.leg.wa.gov/RCW/default.aspx?cite=80.28.410
Others may be better informed on alternative approaches, or how any such efforts are working out.
Thanks for the additional info! My basic premise was one based on the utility building out the PV, battery, ext network so they would have the ownership and rates associated, but if those would be challenged for being too novel, then we're in a tricky situation.
Welp, looks like I mostly missed the point. My bad. But I do think those downward pressures on rates are probably part of the problem in your scenario. Possibly also utilities just being very cautious about adopting new tech. Would love to hear others' thoughts who are closer to the issue, because I agree with you that for utility-owned capital investments, all things being equal (which all things never are) they *should* want to build that sort of thing.
Sorry, long reply, and even this is just a first whack. First, here's the basic theory on returns in traditional utility ratemaking. Utilities are allowed a return on long-lived assets to compensate them for the time value of money that is tied up in those assets. Roughly speaking, the total amount of capital tied up long-term is the utility's "rate base" and its rates are set to allow them a chosen annual rate of return on that amount (both often heavily litigated in front of the regulators who set the rates). Short-term expenses ("operating expenses") are regarded as basically being quickly passed through and collected from ratepayers, so there's traditionally no return allowed on those short term expenses. Going one detail further, there can be a "lead-lag study" that accounts for the average amount of credit or deficit the utility is carries due to the timing mismatch between paying its opex bills and collecting those costs from customers. That results in an adjustment to the rate base so that the utility can earn a return on any small amount of capital tied up as a result of this churn in short-term expenses, but this is pretty marginal compared to the actual capex.
The issue that often arises is that renewables built within a utility's territory are not actually owned by the utility. This can be because (a) the utility has to allow the developer to interconnect under FERC's open access transmission policies, and the developer is going to transmit and sell the power to someone other than the utility, (b) the utility has to take power from the developer under PURPA, or (c) the utility is buying the power from the developer under a PPA, but still doesn't own the project. In none of those cases does the utility own the capital facilities--even in (b) and (c) it just pays for the power each short-term billing period, resulting in opex with no allowed return. In (a) it gets some return on the transmission assets involved, through its transmission rates, but not on the generation capex. This dynamic often leads to criticism that utilities slant their new resource RFPs to favor projects they would build and own themselves over ones that developers would build and sign PPAs. You can see that the utility would have an incentive to build a self-build project that it can earn a profit on, even if an independent developer's project could be better for ratepayers.
I'm not sure what I'm describing exactly tracks the distributed / hub idea you mention, but the same principles apply for utilities still subject to traditional rate base/rate of return ratemaking any time they're looking at serving their ratepayers with resources whose capital costs would be borne by others. So if we're talking about a utility building out infrastructure to facilitate others connecting DG, batteries, PV, whatever to the utility system, those resources would tend to cannibalize the rate base of resources the utility itself would own, cutting into profits. Also, if it builds anything too expensive, it runs the risk of ratepayer advocates and regulators challenging the reasonableness of the cost and trying to get it excluded from rates, and this risk may be (or be perceived as) greater for new types of infrastructure that haven't routinely been included in utility rates in the past.
Regulators and legislatures are trying some things to better align utility incentives with public policy goals. For example, here in Washington, our 100% clean electricity bill passed in 2019 allows utilities to earn a return on the opex in their PPA payments to developers. RCW 80.28.410(2)(b) https://app.leg.wa.gov/RCW/default.aspx?cite=80.28.410
Others may be better informed on alternative approaches, or how any such efforts are working out.
Thanks for the additional info! My basic premise was one based on the utility building out the PV, battery, ext network so they would have the ownership and rates associated, but if those would be challenged for being too novel, then we're in a tricky situation.
Welp, looks like I mostly missed the point. My bad. But I do think those downward pressures on rates are probably part of the problem in your scenario. Possibly also utilities just being very cautious about adopting new tech. Would love to hear others' thoughts who are closer to the issue, because I agree with you that for utility-owned capital investments, all things being equal (which all things never are) they *should* want to build that sort of thing.