Dec 2016

Comments on MIT Utility Report

MIT Issued a New Report Titled “Utility of the Future”
I share some reactions – not intended to be comprehensive or “fair and balanced.” These are the things that worry me.
MIT Report Greatest "Hits" (1)
From the regulators toolkit chapter – p. 307, et seq. 
“Any policy costs, taxes, and residual network costs that are not directly affected by changes in electricity consumption or injection should be removed from the volumetric ($/kWh) component of the tariff and charged in a manner that minimizes distortions of cost-reflective prices and charges for electricity services.”
Note the subtle reversal of decades of regulatory practice. The way things are now, and should be, is that only cost that directly vary with customer count and connection should be placed in fixed charges. Here, they advocate that the burden is to prove that the cost must be “directly affected by changes in electricity consumption or injection” in order to be in the volumetric charge.
MIT Report Greatest "Hits" (2)
Here is a blast from the past – the notion that customers who reduce their use of the utility product must pay for the right to do so through “exit charges.”
“Regulators and policymakers must also carefully monitor conditions that could lead to a serious threat of inefficient grid defection. If inefficient grid defection is a serious possibility, regulators should reconsider the costs that are included in the tariff, or the adoption of other measures (e.g., an exit charge), to prevent substantial cross- subsidization among consumers and a potential massive defection with unforeseen consequences.”
At p. 310
MIT Report Greatest "Hits" (3)
From p. 310 (call out box):
“We recommend a fixed charge (an annual lump sum conveniently distributed in monthly installments). The magnitude of each customer’s charge should be dependent upon some proxy metric of lack of price elasticity or some measure of wealth, such as the property tax or the size of a system user’s dwelling.”
Lack of price elasticity means – if the customer lacks any serious ability to change their consumption in response to increased prices, they are the ones that should bear the increase.
Think about that for a minute. And know that it is the “classical economic” argument about Ramsey pricing as the appropriate tool to recover excess monopoly embedded costs (e.g. from overbuilding) under monopoly pricing.
There is nothing “future” about this.
MIT Report Greatest "Hits" (4)
How does this classical economics and LMP (market prices are so wise!) mumbo jumbo translate for the large, very large, percentage of customers who are low- to moderate-income? Those who can’t jump into a full-on time of use world?
From p. 313, call-out box –
“Distributional concerns can be overcome and low-income consumers can be protected without giving up the implementation of a more efficient and comprehensive system of prices and charges for broad swaths of network users. Rebates to equalize average charges and mechanisms to hedge month- to-month bill volatility are some of the instruments that can be used to properly address these concerns.”
How durable would such rebates and supplemental payments really be? How likely is it that the regulators or legislatures would adequately fund them?
Pish posh – at least the poor are getting good price signals! (If they have no bread, then let them eat cake!)
MIT Report Greatest "Hits" (5)
How does this work for the incumbents? Well, what do we call costs charged that customers cannot realistically avoid, approved for imposition by regulators? Monopoly rents.
“Monopoly rents are (supernormal) profits earned that result from the monopolist restricting supply to raise price without fear of entry by rivals. They are distinct from Ricardian (scarcity) rents and from Schumpeterian (innovation) rents.”
As to “entry” – see previous Hit on exit charges.
MIT Report Greatest "Hits" (6)
Section Costs to be included in the tariffs
In which the authors point out that including “residual costs” – costs not directly related to volume of consumption – can raise rates and result in lower consumption!
Of course, that is a bad thing – because using more electricity is “economically efficient” and it may even indirectly reduce demand for renewables.
No discussion about economic incentive for energy efficiency, of course, because everyone is being just as efficient if they can be in the la-la-land of the neo-classical economist’s brain.
Oh, and if you are going to argue the carbon benefits of reduced consumption, the authors would like you to consider that the entire distribution system should be paid for in taxes. Cuz what is regressive about that?
MIT Report Greatest "Hits" (7)
Recommendation 13: Equalize incentives for efficiency in capital and operational expenditures.
That is, give the utilities rate of return (profit) on expenses as well as capital investments.
Cuz the traditional rate of return formula did such a great job of preventing over-building and over-spending.
MIT Report Greatest "Hits" (8)
Basically all of Chapter 5, which says that it is hard to be a distribution utility in a world where customers might invest in distributed energy resources.
So, after a commendable nod to designing efficiency metrics for the utility, the report concludes that best practice would be variations on one theme: Guaranteed Revenues. They call it a “Revenue Cap,” of course, to suggest that total revenues would be capped – they would not.
The proposals are a byzantine consultant’s dream of reference metrics, shared savings ratios, and other performance-based ideas.
I support performance based regulation, to be sure! But I would like us to measure performance against reducing customer bills and carbon emissions. Do we really have to ask much more?
Oh, yeah. And I would like utilities to do a much better job of forecasting under a high-DER scenario.
Proposals to immunize utilities from the consequences of over-building and reduced sales are nothing more than monopoly protectionism. And any (equivalent to) lost revenues payments send a powerful signal to the utilities to do nothing to improve the accuracy of their forecasts and to reduce revenue requirements.
Simply put – DER markets and utility transformation should eliminate the need for decoupling and lost revenue adjustments, if not in the near term, at least some day.
Isn’t that what a market would do?
MIT Report Greatest "Hits" (9)
This I actually like.
“We find that the best solution, from a market efficiency perspective, is structural reform that establishes financial independence between the distribution system operator (DSO) and any agents performing activities in competitive markets, including adjacent wholesale generation and ancillary services markets and competitive retail supply and DER markets within the DSO’s service territory.”
It needs to say more about a well-regulated DSO, but it is the right basic positioning.
MIT Report Greatest "Hits" (10)
I like this one, too:
Recommendation 19: Legal or functional independence requires significant regulatory oversight and transparent mechanisms for provision of services.
Last time we did dereg we mouthed a lot of silly language about how we would need less regulation – regulators would be put out of their jobs! Of course, Enron.
So, ignore the sentence right above this recommendation about “light-handed regulation,” and commit to the proposition that utility transformation is a full-contact regulatory activity.
We need the sharpest regulators, adequate funding for staffs, funding for intervenors, and strict rules of the road—this time.
MIT Report Greatest "Hits" (11)

This one is a doozy. The run-up is a bit of a straw man argument, about how there is no single “value of solar” or “value of” any DER. (Just like there is no single class-wide cost of service – but rate averaging works for the utilities, unlike average value of DER estimates.)
“To accurately value the services provided by DERs, prices, regulated charges, and other incentives must therefore reflect the marginal value of these services to the greatest extent practical.”
So, DER should only get its short-run marginal cost savings value. Never mind that a solar system will operate reliability for 25-plus years and that long-run value is how the utilities justify most of their investments.
This is neo-classical economics, of course, the argument is that we will get “efficient markets” if we value everything against short-run marginal costs. There is some truth to this, but not in markets with humans involved. And that wise course has us spending money to uplift out-of-market coal and nuclear resources (I can accept the latter, for a while, for carbon reasons). In the Midwest, the utilities are even arguing for major changes to wholesale markets – “organized market reform” – because coal plants can’t keep up with market prices.
The wholesale markets don’t do a good job assessing and reflecting long-run marginal costs. DER is too important to risk with some kind of classical economist’s theoretical dream.