In Part 1 of this series, we discussed the urgent financial challenges facing energy regulators in Texas, Colorado, Oklahoma, and Minnesota as customers are confronted by the prospect of high electricity and natural gas bills now that power has been restored. Wholesale costs of electricity in ERCOT were $50.6 billion over a 3-day period, compared to $4.2 billion for a seven-day period ending immediately before the crisis began. We also noted the financial challenges facing utilities and retail suppliers that purchase electricity and natural gas in wholesale markets to serve their customers.1
The outcry and calls for investigations from elected officials have been swift, leading to the resignations of the ERCOT CEO and several Board members, and two commissioners serving on the Public Utilities Commission of Texas (PUCT), including the Chair. Regulators in the most affected states are under tremendous pressure to either unwind transactions or adopt “cost-sharing” solutions. In an upcoming installment (Part 3), we will return to the urgent financial challenges and provide an update, focusing on the actions by utility regulators.
In this installment, we will focus on the role of regulation in addressing the resilience of energy infrastructure and mitigating the consequences of extreme weather events.2 Resilience has received more attention over the past decade as the frequency and consequences of major events have increased.
It is apparent that electricity and natural gas infrastructure did not perform as expected during the February storm. In response, the Federal Energy Regulatory Commission (FERC) and the North American Electric Reliability Corporation (NERC) have initiated a joint investigation that will examine the impacts of the 2021 winter storm on grid performance and reliability issues.3 The FERC also closed a controversial 2018 inquiry into resilience that focused on the contribution of coal and nuclear power, signaling its intent to take a fresh look at the resilience of the electric power grid.4
The contributors anticipate that resilience will become the focus of legislative and regulatory attention in most states. That said, addressing resilience presents unique challenges to distribution utilities and state regulators. Three main challenges need to be addressed to enhance the resilience of energy infrastructure, detailed below. We will use the electric industry as our example.
- The Value of Resilience: how should resilience be valued as a regulatory objective, and what metrics can be used to measure utility performance?
- Infrastructure Planning: how should utilities reflect resilience objectives in their planning processes, along with other planning goals, including decarbonization?
- Investment Decisions: how can utilities work with regulatory agency staff and other stakeholders to decide what investments to make, where to make them, and how to stage them over the next several years?
Regulatory Response: The Value of Resilience
The value of resilience as a distinct goal of regulation begins with understanding the difference between “reliability” and “resilience.” These distinctions are significant from a regulatory perspective.
- “Reliability” refers to the ability of an electric distribution utility to deliver the desired quantity of quality power to all customers when needed. Reliability is typically measured and reported using a set of widely accepted industry metrics. Reliability is reported for an entire service area or by circuit to help prioritize investments and is based on data that excludes major storms.
- “Resilience” refers to a utility’s ability to withstand storms and restore power quickly after a major outage. The industry has not adopted widely accepted metrics that can be applied to resilience, although the Department of Energy has been working on this important issue for the last several years.5
Establishing the value of resilience is also important for regulators that prefer to rely on Benefit-Cost-Analyses (BCAs) to inform investment decisions. BCAs are increasingly relied upon as tools that can evaluate investments that produce environmental benefits.
Regulatory Response: Infrastructure Planning
Regulators are increasing their attention on transmission and distribution planning processes, with encouragement from environmental organizations and other stakeholders. New York, as one example, requires electric utilities to file Distributed System Implementation Plans (DSIP) every two years that describe the actions that they are taking to enhance their forecasting and planning processes. This provides regulators and other stakeholders insight into how investment decisions are made before the utility seeks cost recovery for specific investments in a rate case.
Distribution system planning is a resource intensive process that relies on sophisticated planning models. Areas of the network and specific circuits that have been experiencing performance issues are the subject of detailed studies. Increasing the importance of resilience as a regulatory goal (along with reliability and integration of distributed resources) will impact infrastructure planning and recommended actions. Most potential investments address multiple objectives (e.g., the reconfiguration and automation of a circuit). Thus, investments to address resilience are assessed as part of an integrated exercise that delivers the most value to customers relative to cost.
It may also be appropriate for regulators to request, review, and compare materials standards that utilities apply when purchasing poles, wires, and other equipment. These standards serve an important role in enhancing resilience.
Regulatory Response: Investment Decisions
A third regulatory challenge relates to deciding which investments to make each year, given that enhancing resilience will require investments made over several years. Regulators are accustomed to balancing the need for investment with rate impacts. Investment decisions that enhance resilience and reliability are particularly challenging for the utility and regulators because they require prioritization among competing constituencies. For example, should urban areas serving large populations be prioritized over rural areas?
In summary, there is a growing consensus that resilience is an important regulatory goal and recognition that it will require infrastructure investments. However, deciding how much to spend and where to direct investments will present some unique challenges for both utilities and regulators.
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All views expressed by the authors are solely the authors’ current views and do not reflect the views of Concentric Energy Advisors, Inc., its affiliates, subsidiaries, or related companies. The authors’ views are based upon information the authors consider reliable at the time of publication. However, neither Concentric Energy Advisors, Inc., nor its affiliates, subsidiaries, and related companies warrant the information’s completeness or accuracy, and it should not be relied upon as such.
1 Customers that have elected fixed price electricity options may be protected, with their retail suppliers bearing the risk of spiking wholesale prices.
2 Legislators may also decide to take action, providing direction to regulatory agencies or expanding their authority if necessary.
3 https://www.tdworld.com/smart-utility/outage-management/article/21155438/ferc-nerc-to-open-joint-inquiry-into-2021-cold-weather-grid-operations. See also reporting in the March 4, 2021 issue of the Foster Report.
5 DOE has been working on developing a resilience metric that can be applied broadly. See https://gmlc.doe.gov/sites/default/files/resources/GMLC1.1_Vol3_Resilience.pdf