States and utilities around the country are considering new utility investments in modernizing the grid. To name a few, California utilities have proposed multi-billion dollar grid modernization upgrades through their distribution resource plan proposals, while Eversource has rolled out a $400 million grid modernization plan in Massachusetts, and Washington, D.C. is directing $25 million of its Pepco-Exelon settlement toward pilot and demonstration projects as a part of a larger proceeding. Today, half of customers already have advanced metering, and that number is climbing rapidly.

Getting the regulation of grid modernization right is certainly a trending topic – Ohio’s PUC Chairman just announced PUCO would be undertaking an investigation to develop “innovative regulations and forward-thinking policies” to guide grid modernization investment. As utilities come to the table for grid modernization funds in many states, regulators and stakeholders have an opportunity to plan now to get ahead of the process and generate the most benefits from those investments.

APP experts Sonia Aggarwal and Mike O’Boyle have laid out five steps utility regulators can take to ensure customers reap the benefits promised by a modern grid. A condensed version of this approach is laid out below, which complements a full whitepaper published in ElectricityPolicy.com, and copies are available via email.

Step 1: Conduct and integrated assessment of the distribution and transmission systems

Good practice for grid modernization programs starts with “integrated distribution planning” (IDP), a practice in which demand-side and distribution-level investments are considered in conjunction with bulk-system resources to achieve an optimized, integrated electricity system. This includes understanding the potential contribution from distributed energy resources, including a general assessment (and ideally a locational assessment) of a cost-effective portfolio of resources. Without a clear assessment of how distribution-level resources can provide value to the grid as a whole, utilities will struggle to unlock the full potential of grid modernization to provide environmental, reliability, and savings benefits.

At the same time, IDP can produce the data regulators and stakeholders will need to measure current system performance and set rational targets for grid modernization performance (steps 3-5 below). Smart customer-facing rate design, DER procurement, and technology deployment can then be deployed more precisely to improve overall environmental and economic performance.

Step 2: Define the goals of a grid modernization program

Different regions may identify different goals for grid modernization programs; the key point is spending time early on in the program to ensure stakeholders are on the same page with the full set of goals. Minnesota’s e21 initiative is a good example of this, and Ohio’s PowerForward initiative may also produce its own flavor of stakeholder agreement on system goals. Recognizing state goals will differ from stakeholder goals, we focus on the three we consider most important to grid modernization: (1) affordability, (2) reliability and resilience, and (3) environmental performance.

Step3: Choose metrics for each goal

Focusing on outcome-oriented metrics capable of tracking performance of the full grid modernization investment portfolio allows the utility more flexibility to find the least-cost approach to deliver outcomes, and should reduce the administrative burden on regulators reviewing utility investments over time. For example, the utility has choices about whether to focus on Volt-VAR optimization programs, improve integrated system planning, improve customer response through automation or enrollment in time-of-use rates, or undertake any number of other measures. Over the course of a grid modernization investment program, the utility is likely to learn which of these avenues or combinations thereof is most effective. And as long as outcomes are being achieved for each goal, regulators can have confidence customers are getting the full value of utility investment plans.

At the same time, policymakers should consider how much control the utility has over performance for each metric. The degree of control most often lies on a spectrum. For example, customer behavior that is outside the utility’s control can impact overall bills. However, utilities can take actions to shape customer behavior to some degree. The utility should be encouraged to weigh those kinds of actions against more traditional investments.

Finally, a measurable and verifiable outcome, free from manipulative influence, is crucial. Regulators should seek maximum transparency and replicability when stakeholders check utility performance against reporting. Regulators should also beware of measuring performance in ways that rely on subjective interpretation or contain loopholes to hide bad performance.

The measurable outcome most directly linked to affordability is the average customer bill, but it turns out to be a challenging metric for grid modernization because bills depend on so many factors (many outside the utility’s control), and don’t focus on the full picture of value, which grid modernization can create over time for customers. Instead, regulators can look to peak demand reduction or system load factor to determine the affordability and value of grid modernization investments, since a modern grid should be managed dynamically and thus should become less “peaky.” Such outcome-oriented metrics, perhaps system averages, or perhaps per feeder, can focus investments and activities on minimizing overall costs. Absolute peak reductions could be normalized to account for economic growth or weather anomalies.

Well-executed grid modernization efforts also improve reliability and resilience. Utilities can improve situational awareness and allow for islanding or other approaches to stop cascading outages. Focusing on real-world measures of reduction in outage frequency (SAIFI) and duration (SAIDI) compared to a baseline start year is not a radical idea, thus it is a good place to start. Normalization can help account for abnormal weather impacts as well: Using a rolling average of three years is a common practice to reduce the impact of outlier years. Metrics for Energy Efficiency: Options and Adjustment Mechanisms provides greater detail on different approaches to weather and economic development normalization.

Grid modernization can further unlock the value of clean distributed energy resources like rooftop solar, community solar, demand response, and customer-sited storage. These technologies can help reduce pollution by generating carbon-free electricity or shifting energy demand patterns to better align with solar and wind availability. Valuable DERs add flexibility to the system, enabling higher shares of clean electricity.

Step 4: Create an open process to set targets

After selecting metrics, regulators must set reasonable targets. Through a transparent stakeholder process, stakeholders can carefully place the targets within a range that represents a reasonable stretch. This is ultimately more an art than a science, making it important to establish a transparent, predictable process for adjusting and calibrating the targets based on real-world performance data. Laying out the process for calibration at target revision ahead of time will be critical to maintaining low investment risk for utilities.

Some regions, such as New York, have decided to set targets in individual utility rate cases. Other regions, such as Ontario, have set them through a central process based on benchmarks. How they are implemented will depend on commission resources and existing processes for reviewing utility performance.

Step 5: Consider tying utility revenue to performance

The financial structure of a grid modernization program can impact its chances of success, as well as its overall affordability. Below we suggest some structural ideas to ensure that customers share in the program’s economic benefits.

Option 1: Conditional rate of return
Utility regulators may consider conditioning the total allowed rate of return for the full portfolio of grid modernization investments on achieving net benefits for customers, or on performance against targets. To weigh these options, policymakers should first consider the utility’s investment incentives under the current revenue model before altering the rate of return to align those incentives with the outcomes regulators seek from grid modernization.

For example, smart meters provide a wealth of potential benefits to customers, some of which fit with the existing utility business model, and others that don’t. Smart meters can automate meter reading (an operational expense traditionally passed through to customers without a profit opportunity for the utility), but may also send dynamic price signals to customers to manage distribution system peak and avoid physical infrastructure upgrades (a capital expense, and thus a traditional opportunity for utility profit).

In this example, a conditional return on smart meters may link the returns on equity normally allowed under traditional regulation to achievement of peak demand reduction, or a combination of targets. The “precondition” approach would require the utility to demonstrate achievement of these goals before earning the full authorized return for shareholders. A scaling approach would increase the return as performance on outcomes improves.

Option 2: Budget cap with shared savings
A “budget cap” describes a pre-approved total level of expenditures not to be exceeded for grid modernization efforts over a particular period, with a mechanism for sharing the budget’s savings between the utility shareholders and customers. This would provide revenue certainty for utilities to invest in grid modernization, but also incent program managers to look for operational savings opportunities as long as certain quantitative outcomes can be met.

The metrics identified in this paper provide a starting point for the kinds of outcomes that can be evaluated. Grid modernization investment plans in California, Massachusetts, and Illinois provide some examples of overall investment levels in distribution grid infrastructure to consider as potential sources for benchmarking other programs. And the U.K. RIIO model combines the revenue cap and conditional rate of return models – allowing utilities to capture operational savings and reap extra returns for good performance on outcome-oriented metrics.

Conclusion

Grid modernization represents a monumental opportunity to achieve cleaner, more affordable, resilient electricity service. It is worth taking time at the beginning of a grid modernization effort to carefully consider what specific outcomes these investments should target, and how utility and third-party investments can contribute to an optimized, integrated grid. Regulators in specific regions can benefit from determining which outcomes are most important to them, developing quantitative metrics associated with those outcomes, and beginning to compensate utilities based on their performance against those targets.

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This work was also covered and heavily quoted by Greentech Media and UtilityDive