Jury Influenced Electricity Regulation

This article was published in the June 2022 Newsletter of the Global Smart Energy Federation.

In a recent meeting with business and legal minds on electricity reforms, a comparison was made (in jest of course) equating electricity regulatory rulings with the criminal justice judgements of “life sentence without parole”. Humour aside, there is an element of truth to this. Regulated investments and their revenue requirements, do lend themselves to such “life sentences” for the rate-payer. This article examines this.

?Often, we question the usefulness of our public institutions. These include our banking system, public markets, justice system and government agencies.?These institutions were created to serve and protect public interests and hence their effectiveness must be periodically reviewed by public scrutiny. With rapid technology changes and the aspirations of our youth, such reviews become even more necessary. However, this periodic review rarely takes place.

?Infrastructure regulation (electricity, gas, telecom, transport) by its very nature is far-reaching and long-term on the public it serves. Due to its long-term capital commitments, regulatory decisions once awarded, can rarely be reversed as it has serious financial consequences on the business operator. Smaller operational adjustments are however included in subsequent rate hearings. Unlike the courts that rule based on legal merits alone, regulatory agencies take a broader view since the regulated business environment has little or no competition. The regulatory objective is to (a) protect rate-payer interest and affordability; (b) examine proposed alternatives; and (c) ensure system reliability. Its rulings are fully cognizant of such capital needs and long-term operational stability. However, the primary focus is on the application’s financial business-case merits and rate-payer affordability duly bounded by relevant existing legislation/policies. Clear legislation offers clear regulatory oversight, but this is rarely the case the world over.

?Regulatory bodies are tribunals created by statute. Unlike courts, their adherence to precedence (“Stare Decisis”) is not an absolute must. It hears various sides of an application (applicant and intervenors) and applies the Act and its Regulation as the guiding principle for its verdicts. The commissioners are the judges and depending on the case, a bench of more than one may hear the case. Akin to apex courts, commissioners may directly seek clarifications from any party. Depositions are made by the applicant (the filer) and intervenors (citizen groups and others may challenge it). While regulatory bodies do have internal staff to analyze submissions, the official clarifications and questions are directed by the commissioners. There is no empaneled jury that offers any verdict. The commissioner(s) are the sole judges in the matter.?

?Over the past 25 years, renewable energy (RE) and related technologies in power conversion, energy storage and energy management (“Smart Grid”), has moved the regulatory focus away from large centralized generation towards smaller, discretized and distributed assets embedded within the T&D network. Given bidirectional power flows, many technologies have moved further downstream closer to customers. Over the last decade, we have witnessed several new rate models such as “net-metering”, “feed-in-tariff”, “take-or-pay”, “time-of-use”, and others. However, until now such decisions have treated the “generator” and the “load” as separately metered streams (different applicable tariffs) connected to their utility.

?This rapid development in RE and Smart Grid technologies has introduced a lack of clarity globally between policy and regulation as to who should set (or limit) the “practicality and reasonableness” of the prosumer’s aspiration. Even today, each looks to the other side for clarity and so things muddle along with course corrections. Many NGO’s have staked claim in this area representing various groups. The daunting task is (a) validating a community’s serious aspiration for long-term change; (b) ensuring long-term affordability; (c) meeting national energy security needs; (d) avoiding technology/supply-chain concentration; and (e) how far to overreach behind the meter. All these need to survive the long-term test over several electoral cycles.

?Today, the prosumer (producer-consumer) can own both generation and load assets (behind the meter) and may aspire to consume their own power, store it for later use, and/or trade (buy/sell) energy directly with other prosumers, as opposed to buying or selling only through their balancing authority. This complexity widens the regulatory circle to reach well behind the meter, if direct retail prosumer transactions are to be allowed. If allowed, areas such as wheeling charges, standard offer, balancing authority, etc. will need major re-examination.

?This brings us back to our original question about usefulness and relevance. With such discretized, distributed technologies and off-the-shelf products available (home systems, energy storage batteries, rooftop PV, inverters), it would appear people may install them even without due consent. Therefore, the questions would be (a) how will our regulatory system govern this new prosumer retail market (side-stepping “life-sentence” type rulings); (b) what would be the role of utilities; (c) how can we make the delivery charges more variable to enable net-zero; and (d) what should be the prosumer’s obligations and service levels.

?Just imagine, if each of our daily general market activity involved a high component of a 30-year contract term, then how would we conduct our daily lives? The same can be said for the electricity market where regulation binds everyone for the long term with no rollback strategy to capitalize on future technology options when they do become available. I think we are at this turning point today. Notwithstanding scholastic definitions, I see a choice between two viable regulatory models as follows:

1.??Textual Regulation: Continue regulation as is today, but be guided by clearer policy/legislation. In other words, refer back ambiguity in policy, right back to policy makers for clarity or legislative enactment.

?2.??Contextual Regulation: Redefine regulation to be “ahead of the curve” to address wider oncoming issues such as climate-change, public aspirations and technology developments, duly acknowledging a higher risk model with course corrections. The stated objective would be for allowing a more open retail market with a higher spot/short-term component and a lower long-term component.

?Regardless, (notwithstanding its complexity), there should be a recognition of a more formal community “view-verdict” along the lines of a jury system. The intervenor process today provides a very limited “people’s voice” to current regulation and not a deep view of people’s aspirations. A jury at these hearings would offer the “people’s verdict” prior to the commissioners giving their final ruling. The jury element (membership, process, “verdict-weight”) can be formally shaped within each regulatory body. Such an inclusive process also alleviates the undue burden placed on the individual commissioners who may wish to better read societal aspirations and technical options.

?I know that legal experts would immediately pronounce this jury concept as way too radical (“why fix it, if it isn’t broken”). It is perhaps already broken now, with its inability to accommodate climate change and enable a robust prosumer choice. The electricity market globally (except for the Nordic countries) is a “very thin” open trading market with bulk of its energy procured through bilateral long-term power purchase agreements (as high as 90% in some jurisdictions). These same markets also have a very heavily regulated retail market at its downstream end which ricochets to the retail consumer as a non-recourse delivery and energy bill. The only option for the consumer is to reduce their energy component of their bill by consuming less.

?Radical as it may appear, a jury system is perhaps a better system in today’s prosumer world. It will also make the applicant work harder to come up with a much broader alternative retail solutions (perhaps some even outside their regulated area in collaborations with others). One could benefit from this convergence or joint services at a reduced delivery and energy cost.

?There is always a first time for any major overhaul and perhaps the time is now for the regulated electricity market.