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I’m so happy to be back here in my home state of Wisconsin. I graduated from
Watertown High School and left for college in 1994, but my parents, extended family and a big part of my heart are still here in Wisconsin.
I recognize that Wisconsin politics have become a bit more polarized since I left and that’s made me a bit nervous about this talk. So … I thought I’d focus this talk on a couple safe topics that everyone agrees about. First – the Packers! I’m predicting an
Aaron Rodgers / Russell Wilson NFC Championship match-up and will try to weave in some football clichés to get us pumped up later in this talk.
In addition to the Packers, there’s another issue that almost everyone in Wisconsin actually agrees about – renewable energy! Recent polling data confirm that the overwhelming majority of Wisconsin voters want more solar, wind, biomass, and energy efficiency. The Wisconsin numbers are similar to polls from all around the country – there is overwhelming public support for renewable energy everywhere you look.
This gives me a lot of hope for the future and I think it reflects the values the majority of people feel about progress, new ideas, new technologies, and our collective responsibility to our children and this planet.
Unfortunately, Wisconsin’s energy policies, set by the State Legislature and the Public
Service Commission of Wisconsin, have become misaligned with the values that these polls suggest the vast majority of people in Wisconsin share. Many of you in this room have much deeper understanding of how and why this misalignment may have occurred, and I’m not going to speculate on that. But I do want to share some of my thoughts about how Wisconsin compares to some other states and what we might be able to do about it.
Over the past nine years as a regulatory attorney at ELPC I’ve had the opportunity to work on energy policy and regulatory reform in ten states across the Midwest and Great
Plains. I’ve also followed cases and trends in other states across the country. Some of you have been working in this area for a considerably longer time and others are just getting started, but I think it’s safe for me to say that there’s probably never been a more exciting time to be working on energy policy in the United States. It’s become increasingly clear that we’re on the brink of some major transformations in the way we generate and use electricity. The choices that policy makers and regulators make in response to these changes will fundamentally reshape public utilities, help define new markets, and facilitate (or hinder) the achievement of broader social goals.
I’d like to explore some of these changes from my perspective as a renewable energy advocate. I’ll start with some big picture context, but then focus in on some recent cases
I’ve been involved with in the Midwest, including the recent rate cases here in
Wisconsin. Finally, I’ll share some thoughts and recommendations for where we go from here.
First, the big picture:
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1/9/14 o For about 100 years, our bulk electric power system hasn’t changed much. For the most part, we’ve received our electricity from large central generation plants, delivered to our homes and businesses over long distances through a hub and spoke transmission and distribution system. Over the last several decades, energy usage (and therefore the need for new power plants and new wires) has steadily and predictably grown along with the economy. All of that is starting to change.
Rapid developments in energy efficiency and other new technologies are helping to flatten out electricity demand from incumbent utilities. For the first time in history, we’re using less electricity while still growing the economy. o At the same time, distributed resources like solar and battery storage are changing the nature of electricity customers. We’re no longer just passive ratepayers. Now we have opportunities to be much more active participants in how we power our lives and homes. o We’re seeing this most dramatically with the boom in distributed solar. In many parts of the country solar is now directly competitive on cost alone, especially if you factor in the peaking resource and other qualities of solar that make it a good strategic fit in the utility system. Although there are still a lot of regional differences, the U.S. solar industry installed more capacity over the last eighteen months than the entire amount installed over the past 30 years, and the weighted average cost for solar PV systems is less than half of what it was just a couple years ago. o Solar is just one part of the story. Electric vehicles, microgrids, storage, demand response and other innovations are creating opportunities for entrepreneurs to connect customers with new products and services. There’s a long list of nonutility players that are investing heavily to win the hearts and minds of customers in this new energy landscape. Google, Comcast, AT&T, Lowes, Tesla,
Honeywell, GM, Ford, Whirlpool, and BMW – just to name a few. They’re all attacking the intersection of mobility, energy, security, and home automation.
There’s a reason that Google spent $3.2 billion for Nest Labs – there’s a lot of value in untapped energy data that can be used to optimize the home’s central operating systems. o This is great news for the economy, the environment, and for consumers. But, like any major change, this one comes with challenges. o The challenge for utilities is that they’re still largely stuck with a 100-year-old business model which rewards them primarily for selling electricity and building new power plants and other infrastructure. Utilities have always been a safe bet for investors, as load growth has traditionally been very predictable and stable.
But energy efficiency and distributed resources are threatening this rosy picture of perpetual growth. Some utilities are trying to innovate and reinvent themselves
(just as the major telecom companies have) to survive and thrive in a more
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1/9/14 distributed future. Others are doubling-down on the status quo and attempting to exercise their political and regulatory muscle to slow down or block change. The majority of utilities, I think, are still trying to figure this out. o The challenge for regulators is to chart a course for a smooth transition to a more distributed future – balancing their obligations to maintain system reliability while modernizing the grid and enabling innovation to best serve customers and society.
So, how is this playing out in the Midwest? Let’s take a look at a couple of examples:
Last summer, the Iowa Supreme Court issued a very important and, hopefully, influential opinion that goes right to the heart of public utility regulation – what is the nature of a
“public utility”? o Bear with me here for a minute: Nearly all states have a “public utility act” that defines the nature of public utility service and regulation in the state. These state public utility statutes all contain a similar “regulatory compact.” The idea is that some goods and services—like electricity, water, and phone service—are so important to the public welfare – so “clothed with the public interest” – that the state must take extraordinary measures to abridge ordinary principles of freedom of contract to create a “regulated monopoly.” In essence, entities deemed to be
“public utilities” are granted a monopoly in exchange for obligations to provide
“just and reasonable” service to all members of the public. The state utility commission exercises stringent oversight to ensure that the utility is providing just and reasonable service and is not abusing its monopoly. o The Iowa case raised a question about just what kinds of business entities should be deemed “public utilities” under Iowa law. The case involved a dispute between the City of Dubuque and Alliant Energy, which serves Dubuque and its residents.
Dubuque wanted to install solar panels on city buildings using a third-party financing arrangement with a local developer – an arrangement commonly known as “Clean Energy Choice” here in Wisconsin. Under Dubuque’s third-party arrangement, Eagle Point would build and own the PV system on Dubuque city buildings and would sell the power from those solar panels directly to the City under a fixed long-term power purchase agreement, or PPA. Revenue from the
PPA would cover the installation and maintenance of the PV system, plus Eagle
Point’s profit. o The PPA was important to Dubuque for two reasons: First, it helped the City avoid the up-front cost of the solar project and instead spread the cost over a long term contract. Second, because Dubuque is a tax-exempt municipality, the PPA allowed Eagle Point to take advantage of federal tax benefits and pass those savings along to Dubuque through the PPA contract price.
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1/9/14 o All’s great, right? Wrong. Alliant Energy was not happy with Dubuque’s plan.
It felt that Eagle Point was encroaching on its monopoly by offering to sell power to Dubuque in Alliant’s “exclusive service territory.” Alliant argued that the PPA contract transformed Eagle Point from an ordinary solar developer into a “public utility,” which triggered the exclusive service territory restrictions under the state’s public utility act. o Eagle Point disagreed and asked the Iowa Utility Board to resolve the issue.
Unfortunately for Eagle Point and Dubuque, the IUB agreed with Alliant. Eagle
Point and a coalition of environmental and solar advocates appealed the IUB’s ruling to state court and a Polk County judge overturned the IUB’s decision. The utilities appealed and, in July 2014, the Iowa Supreme Court affirmed the trial court’s decision and conclusively determined that companies offering third-party
PPA financing in Iowa are not public utilities. o I realize I’m biased here, but I think the Iowa Supreme Court got it exactly right.
The opinion is extremely thorough, well-reasoned, and clearly written. It delves into the original historical reasons for public utility regulation, analyzes the changes that are occurring in the electricity market, and thoughtfully applies those old principles to facts in the case. Although the opinion is based on Iowa law, I anticipate that it will be influential in other states, including, hopefully, in
Wisconsin.
Here are some of the most notable things from the Iowa Supreme Court’s opinion: o First – the Iowa court took a very “practical” and pragmatic approach and rejected a rigid legal test for “public utilities.” The utilities had argued that any sale of kilowatt hours to a member of the public—regardless of the context of that sale—triggers public utility regulation. The Court rejected this “bright-line” test.
According to the Court, it’s much more important to take a broader look at the overall nature of the transaction to determine whether a public utility exists. In this case, the court found that Eagle Point’s actual business was installing and servicing solar panels and that the sale of electricity was just an incidental feature of Eagle Point’s financing package – it didn’t go to the heart of what Eagle Point actually does. This
“practical analysis” is a very important feature of the Court’s decision. o The Court appropriately prioritized protection of the public interest rather than protection of the utilities’ private business interest under Iowa’s Public Utility
Act. As Steve Kihm and Elizabeth Graffy explain in their recent Energy Law Journal article, the utility regulatory model “is designed to maintain institutional stability in order to uphold social welfare objectives … not to uphold the welfare of utilities themselves.” The Iowa Supreme Court got this exactly right as well. The Court’s analysis made clear that public utility regulation goes only so far as necessary to serve the public interest and is not meant to protect utility revenue against competition from innovative or disruptive technologies.
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1/9/14 o The Court balanced a number of public interest factors to determine that Eagle
Point’s relationship with Dubuque was not “clothed in the public interest.”
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Was Eagle Point dealing with a commodity essential to commerce or everyday life? No. Behind-the-meter solar is (quote) “not an essential commodity required by all members of the public. It is, instead, an option for those who seek to lessen their utility bills or who desire to promote “green” energy.”
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Did Eagle Point have disproportionate bargaining power in its negotiations with Dubuque. No. Nothing suggested to the Court that Eagle Point was a
(quote) “600 pound economic gorilla that has cornered defenseless city leaders in Dubuque.”
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Was Eagle Point dealing with a product that is typically dedicated to a public use? No. Dubuque’s behind-the-meter solar installation is (quote) “no more dedicated to public use than the thermal windows or extra layers of insulation in the building itself.”
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The simple fact that Eagle Point’s services may cause a reduction in Alliant’s energy sales was explicitly not relevant to this public interest inquiry and the court properly rejected it. The Court concluded that Dubuque’s “behind-themeter solar generating facility represents a private transaction between Eagle
Point and the city.” o The Court’s analysis was characterized by a healthy respect for private property and private contract. When you think about it, public utility regulation is a pretty extraordinary extension of government authority over private contract, the free market, and competition. Viewed from that perspective, the Iowa Supreme Court’s approach was fundamentally a conservative one. The Court examined whether there was some compelling need, justified by social welfare, for the state to reach across
Dubuque’s electricity meter to regulate Dubuque’s financing of on-site solar projects.
The Court couldn’t find any compelling reason for such a dramatic expansion of state jurisdiction nor did it believe this is what the legislative had in mind when it adopted the state’s public utility act. o The Court was very skeptical of utility arguments that were not supported by data.
Iowa’s utilities argued that widespread use of PPAs would enable some customers to avoid paying for the grid, which would raise rates for everyone else.
(This should sound familiar to those of you that followed the Wisconsin rate cases.)
The Court rejected these arguments, finding “nothing in the record” to support them or their relevance.
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1/9/14 o Finally, the Court looked to other state policy goals – including statutes and policies supporting energy efficiency and conservation – to help them resolve the case.
They found that Eagle Point’s argument was more consistent with broader state policy goals and that there were no compelling countervailing state policies in favor of the utilities’ position.
Beyond Iowa, several states are undertaking a more comprehensive examination of utility business models with the explicit objectives of promoting greater customer choice, resource diversity, reliability, and efficiency in light of the fundamental changes taking place in electricity markets.
The most ambitious project underway is the
NY “Reforming the Energy Vision” proceeding. It represents a fundamental rethinking of the role of distribution utilities and the regulatory model of the future. o The Commission began this process to literally “transform New York’s electric industry … with the objective of creating market based, sustainable products and services that drive an increasingly efficient, clean, reliable, and consumer-oriented industry.” o The Chair of the Commission, Audrey Zibelman, has stated that the REV docket is intended to look at how the grid would be redesigned from scratch today to achieve the following policy objectives:
 Greater customer knowledge and tools to manage their consumption and bills;
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Greater system wide efficiency
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More fuel and resource diversity; and
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Enhanced system reliability and resiliency. o Although I haven’t personally been involved in this proceeding, I’m watching it closely and I’m hopeful that it will provide some good ideas for the rest of the country. o Interestingly, the New York Commission rejects the conventional “utility death spiral” narrative and instead contemplates an important role for utilities in the future. They’re examining the kinds of things that utilities are good at, and trying to identify the services that utilities can provide that the private market can’t. The initial proposal contemplates utilities continuing to play a pivotal role as a
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“Distributed System Platform Provider.” The idea is that the utility will need to manage a much more dynamic electricity distribution grid that will serve as a platform for all sorts of new customer applications and technologies. o It’s a powerful vision and one that makes sense to me. The telecommunications and personal computing industry support many more networked systems and features than they once did, and we’re all much better off for it. I think the same holds true for the electric power industry – customers are demanding a lot of new products and services from their utilities that will only be possible if we remain networked together. Utilities will likely need to play a central role in managing and supporting this network. o Another notable thing about New York is the strong leadership by the
Commission to identify the key questions and policy objectives and drive the process forward. Ms. Zibelman has made it very clear that this isn’t supposed to be just a “vision thing” that sits on a shelf – they intend to move this along and implement reforms as soon as they are practicable. The utilities are at the table and appear to be serious about finding solutions because they know they need to be.
Minnesota is also exploring some fundamental business model reforms. In early 2014, a group of Minnesota stakeholders, including Xcel Energy, came together to try to get out ahead of some of fundamental shifts in the energy market that I’ve been discussing today.
Part of the shift is the result of environmental policy. The Minnesota legislature has adopted aggressive renewable energy standards that will require more than 30% renewable energy by 2020 with a goal to get 10% of Minnesota’s energy from solar power by 2030. But the other shifts cited by Minnesota stakeholders apply equally in
Wisconsin, including the impacts of greater conservation, customer demand for choice, and the effect of competition and new technologies.
The Minnesota group developed a set of recommendations that Xcel Energy recently presented to the Commission for consideration. Like New York, the Minnesota recommendations include the concept of the utility as a platform for connecting and managing new customer products and services. As Xcel put it in a recent filing with the
Commission: “Our customers are showing greater interest in receiving the same kinds of choices from their energy provider that they are offered in other areas of their lives, such as access to more detailed energy data, more advanced energy management capabilities, and a more customized energy mix.” We’ll see how this plays out, but at this point Xcel is saying and doing some really interesting things. The Company’s latest integrated resource plan—filed last week—proposes a 40% reduction in carbon emissions and a
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35% renewable portfolio by 2030. This includes the addition of 1,800 MW of wind and
1,700 MW of utility scale solar, with the expectation of 500 or more MW of consumer driven solar during the same timeframe. I don’t know if this is enough, but it is a heck of a lot more than the Wisconsin utilities are proposing.
One interesting contrast between New York and Minnesota is that Xcel believes it can achieve these goals and provide a distribution system platform for its customers while maintaining its traditional vertically integrated utility structure. Unlike Minnesota, New
York is a restructured state and the REV docket envisions a role for utilities only as operators and managers of the electricity distribution system. Interestingly, EON, one of the largest utilities in Germany, announced that it was spinning off all of its legacy generation assets with the remaining company focused solely on the distribution system, customer relations, and renewables. It will be interesting to see how all of this plays out!
As this market evolution moves forward, state regulators will need to carefully consider the utilities’ role in the rooftop solar market. To be more specific, in what circumstances is it appropriate for distribution utilities to directly own and operate distributed resources as part of their core regulated utility functions? Up to this point, utilities either haven’t been interested or haven’t been able to figure out how to break into the DR market themselves. This has left a wide open field for entrepreneurial companies like Solar City to enter the market. To date, utility responses have been largely aimed at penalizing solar
– like the proposals in Arizona and Wisconsin to add fees and surcharges to the bills of distributed generation customers. I think that may be starting to change, at least in some states. A number of utilities are now proposing programs to facilitate or even own distributed rooftop solar projects – as long as they ultimately benefit the utility and its shareholders. For example, Arizona Public Service, which last year was trying to kill the market for customer-owned rooftop solar, is now proposing a utility-owned distributed solar program in which APS would build and own solar on its customers’ rooftops in exchange for a monthly $30 bill credit for the life of the 20-year program.
As an environmental advocate, I’m intrigued by the possibility of utilities getting more involved in the distributed solar market instead of just trying to slow or stop it. At the same time, we need to make sure that utilities don’t use their market power to unfairly freeze out competition from the private sector. But it is exciting to think about a future where utilities and private developers partner and compete with each other to build more solar and provide more customer options.
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I know what you’re probably thinking at this point. “Cool, but how does any of this relate to Wisconsin?” Well – I’ll tell you why. Because what the Public Service
Commission just approved in three rate cases for WPS, MGE, and We Energies goes entirely in the opposite direction of the trends I’ve discussed up to this point.
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1/9/14 o Instead of providing a platform for more customer choice, Wisconsin’s new rates will reduce customer choice and the control that customers have over their own electricity bills. o Instead of looking for ways to promote distributed generation as a socially important goal, the utility rhetoric—accepted whole cloth by the Commission— characterizes customer-owned solar as an insidious and unfair menace that must be penalized and avoided. o Instead of promoting innovation, the rate design adopted by the Commission promotes “business-as-usual.” This is particularly puzzling for me because
Wisconsin has no coal resources, so the advantage of the status quo for Wisconsin is not clear. o Overall, instead of adopting a “customer-first” perspective that seeks to link new services with perceived customer values, the utility proposals in the three rate cases align the utilities in direct opposition to customer choice, self-reliance, technological innovation, and competition. It’s hard to imagine a private corporation disregarding their customers’ preferences in this manner, at least if they wanted to stay in business for long.
I won’t go into all the details of the utility rate proposals just approved by the PSCW. You can read all about them on RENEW Wisconsin’s website. But I do want to focus for a few minutes on what didn’t happen in the Commission proceedings leading up to these decisions:
(1) We never got to have an honest conversation with the utilities about the real issues motivating their rate proposals. The utilities claimed that these cases were all about
“fairness” and that they were trying to protect their customers from “cross-subsidies” caused by customers with solar. Let’s be honest here. Of all the reasons that the utilities may have brought these cases, “fairness” for their customers wasn’t one of them. The real problem is an economic one for the utilities. The utility executive teams are trying to figure out how to minimize shareholder risk in a new era of flat or declining electricity use. But instead of actually addressing this issue head on—like they’re doing in
Minnesota and NewYork—we spent the last several months shadowboxing with a
“fairness” issue that doesn’t really exist.
(2) We never got to talk about alternatives. Rate cases are ill suited for comprehensive discussion and a thorough examination of alternative solutions to a problem. Instead, rate cases are built to result in an up-or-down decision on a set of proposals controlled entirely by the utilities. Several parties asked the Commission for a statewide docket that would have enabled a more thorough discussion of alternatives, but the Commission just wasn’t interested in having that conversation. This was a missed opportunity, particularly because there was no evidence in this case that immediate action was necessary or warranted.
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(3) There was a shocking lack of data supporting the utility proposals. The intervening parties never got to test (or even see) any real data documenting the (alleged) “problem” the rate cases were intended to solve. The utilities never documented the existence of the
“cross-subsidies” claimed to exist, nor did any of them present a study of the actual costs and benefits of distributed solar. The Wisconsin Commission’s decision to approve the utility proposals despite the lack of data stands in sharp contrast to the numerous studies in other states that have determined that distributed solar provides net benefits to the grid and to other customers. In Nevada, Mississippi, Utah, Louisiana, and many other states— both “red” and “blue”—the Commissions are insisting on actual evidence of crosssubsidies and cost-shifts before making major decisions about rate design and net metering.
Fundamentally, I believe the Public Service Commission lost track of the public when it decided these cases. As Commissioner Eric Callisto noted in dissent: “The primary purpose of the public utility laws in this state is the protection of the consuming public.” The outcome of these cases
“fails to uphold that purpose.” The end result is that Wisconsin is now widely considered among clean energy advocates and professionals to have the most hostile utility and regulatory environment for emerging and innovative energy technologies of any state in the nation. Instead of pointing towards the future, Wisconsin appears, at least for the time being, to be firmly rooted in the past.
So where do we go from here? I think there are some guiding principles we can draw from recent experiences in Wisconsin and comparisons with other states.
(1) First, we should demand leadership. From the industry. From utilities. And from our legislators and regulators. We need creative, collaborative solutions. We need to be pragmatic and not dogmatic. This goes for all stakeholders as well as for utilities.
(2) We should demand decisions based on facts. Not emotions. And certainly not scare tactics or wedge politics.
(3) We should demand solutions that are firmly rooted in the public interest, not protection of any one industry participant or business model.
(4) We should demand comprehensive solutions, not piecemeal attempts to address utility concerns through rate design alone.
(5) We should continue spending the time to build coalitions with non-traditional allies and broaden and strengthen public participation. That was one of the greatest successes of the recent Wisconsin rate cases and I hope we continue building on that success.
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(6) Most importantly, we all should stay focused and determined to win and not get discouraged by short-term setbacks. I know that this has been a tough couple of years for clean energy in Wisconsin. Many of you have poured your souls into this work and I know how frustrating it is when results don’t come as quickly as we all think they should. But nobody promised this would easy.
I guess this is as good a time as any for the football cliché I promised. Do you guys remember the movie Rudy – about the short, skinny kid who was always told he was too small to play college football? He refuses to quit and eventually is carried off the field by his teammates in victory? You guys – all of you in this room that have been working tirelessly against much bigger, stronger, and more powerful opponents – you’re Rudy. I really hope that, despite the occasional setbacks and frustrations, everyone in this room continues working even harder towards our shared goals and a cleaner, smarter, healthier, and more vibrant future.
I’m very excited about the future and I love this line of work. I want to extend my deepest thanks to the RENEW Wisconsin team for the opportunity to work with you over the past year and for the opportunity to share some of my thoughts with everyone today. I look forward to continuing to work with many of you in this room and getting to know many more of you in the coming years. Also – Go Packers!
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