Why Xcel Energy Wants to Change Utility Business Models in Minnesota
Earlier this year, Minneapolis-based utility Xcel Energy won a significant victory when it lobbied for, and then received, permission to file a multi-year rate plan that could include incentives for meeting specified performance metrics. The new format, which aims to create greater rate predictability and stability, was one of several reforms that Xcel Energy supported as part of an ongoing effort to reform the state regulatory framework called the e21 Initiative.
“e21’s recommendations envision a more anticipatory, forward looking and customer-focused regulatory framework,” according to Carolyn Brouillard, Manager of Regulatory Policy at Xcel Energy, e21 participant and a featured speaker at EUCI’s Utility 2.0 conference. A performance-based multi-year rate plan option was the first on a long list of recommendations designed to change the way utilities do business in Minnesota published in the group’s Phase 1 report, released in December of last year.
“We brought to the table the idea of a longer and more flexible multi-year rate plan and people got on board,” said Brouillard. “The general idea fleshed out by the e21 stakeholder group is that utilities would file business plans for up to five years that bring together rate, resource and policy decisions. The plan could also include performance metrics and incentives tied to outcomes that customers and stakeholders value. By setting up the basic terms upfront and allowing for a longer glide path to achieve the plan’s targets, a utility could avoid having to go into rate cases every year or every other year, as has been typical.”
The e21 initiative, a voluntary collection of Minnesota-based stakeholders including utilities, business interests, environmental advocates, clean energy companies, government and consumer advocates was the brainchild of former Xcel Energy policy manager Mike Bull, Great Plains Institute President Rolf Nordstrom, and current Minnesota PUC Commissioner Nancy Lange. Bull reached out to Nordstrom and Lange to Nordstrom and Lange to form the initiative after the Edison Electric Institute released its landmark Disruptive Challenges paper in 2012, which found that utilities would soon be impacted by disruptions caused by low load growth, more penetration of renewables, as well as increased investments. Though Minnesota was not at significant risk of these disruptions at the time, Xcel Energy was being challenged with flat or declining electricity sales at a time of increasing investments, which was leading to back to back rate cases.
“It was becoming clear that the status quo is unsustainable, ,” said Brouillard. said Brouillard. “One of the main benefits we saw with e21 was that it would create a safe space for many of our stakeholders to talk freely about these issues. It provided a place for us to engage outside of the more traditional and adversarial regulatory environment.”
Another thing looming on the minds of Xcel policy makers was the increasing adoption of renewables. During the 2013 legislative session, Minnesota lawmakers passed a new solar energy standard requiring investor-owned utilities like Xcel to generate roughly 30 times more solar power than they did at the time. That, coupled with solar power’s increased cost-effectiveness, suggested that Xcel needed to start preparing for a more distributed energy system.
“We saw these emerging trends, and there was a shared understanding that the more we can be proactive and chart a path now, as opposed to waiting until distributed generation is 5 or 10 percent of our load, the lower the transition costs and more optimized the system will be,” said Brouillard.
That realization was the basis of an agreed upon set of principles e21 stakeholders believed would formulate a more successful customer-centric regulatory framework that would steer utilities away from the “build more, sell more” revenue model to one that is tied to performance, value, and the creation of customer options.
One concept e21 is looking into in order to further these principles is the eventual transition of the 15-year Integrated Resource Plan (IRP) to an Integrated System Plan, which would be an input into a five-year business plan for purposes of setting rates and establishing performance goals. The concept would differentiate from an integrated resource plan in that it would take a broader, more comprehensive look at supply-side and demand-side resources, as opposed to an IRP’s traditional emphasis on centrally planned generation.
“The plan would shine a light on the distribution system, to see how distributed resources can meet system and customer needs and perhaps delay or scale back the need for large investments in centralized generation,” according to Brouillard. The idea would also neatly correspond with multi-year rate plans, creating a greater alignment between rate decisions and policy decisions.
Other recommendations to come out of the e21’s Phase 1 report include the establishing of clear methods for determining the value of grid services and distributed energy resource services, and enabling utilities to create innovative product and service options and technologies. Xcel says that the regulatory process should be streamlined in order to allow utilities the flexibility to offer tailored rate and service options that respond to customer needs and interests. Market-based rates for energy-intensive industries that take into account time, location, and other circumstanced-based pricing was one example, as was facilitating partnerships between customers and utilities in order to create initiatives beneficial to the grid, such as on-site cogeneration.
Brouillard says the e21 initiative recommendations could serve as a model for other vertically integrated utilities.
“I think distribution planning will be an area of stakeholder focus in a way it hasn’t been in the past, and will open up more opportunities for customer engagement and broader utility services,” she said.
As for what to see from Phase 2, Xcel says not to expect a long list of policy recommendations, but instead a focus on implementation and developing a better understanding of the issues.
“What we can expect to see are some principles and a menu of potential implementation options related to the key phase I recommendations. The e21 initiative is a great space for us to test ideas and gather input before we go through a formal regulatory proceeding,” said Brouillard.
For more information about the e21 Initiative, be sure to join us August 10-11, 2015 in Denver for the Utility 2.0: Adapting to the New Business Reality Conference.
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