1. CEA Legal Committee and Regulatory Innovation Task Group
Utility Cost Recovery in an Era of Ageing Infrastructure, Technological Change and Increasing Customer Service Expectations
June 15, 2016
John Todd, President
Elenchus Research Associates

2. Agenda The Utility of the Future Cost and Recovery Issues
Electricity: An Industry in Decline??
Distributed Energy Resources (DER) vs. CO2 Reduction
Competitive Alternatives to the Monopoly
Cost and Recovery Issues
Ageing Infrastructure
Technological Change
Customer Expectations
Summary: An Array of Challenges

3. Electricity Demand is Declining (Ontario)
Extrapolations are dangerous

4. DER vs. CO2 : A Shift to Electricity
Electricity is the energy source with lowest CO2 content in most regions.
Hence, electricity use should increase;
but grid reliance may not.
Source: Environmental Commissioner of Ontario, Conservation: Let’s get Serious, Annual Energy Conservation Progress Report – 2015/2016

5. The Utility of the Future

6. The Competitive Alternatives
Tx Connected Solar/Wind/CHP
Generation
Transmission
Dx Connected Solar/Wind/CHP
Distribution
Added to the Customers’ Bills
Global
Adjustment
(Ontario)
So far the distribution sector has not experience disruptive change like other sectors
- telecommunications (cellular; Skype)
- information technology (mainframes to desktops to smart phones)
- journalism (electronic – daily to hourly to instantaneous news cycle)
- travel (AirBnB)
- taxi (Uber)
Stranded Costs

7. Impact of Cheap Distributed Storage
Enhances value of (increases) self-generation
Reduces demand for Grid Power
BUT value of grid connection also enhanced
Optimize storage (top up from & sell excess to grid)
Time shifting to increase value of kWh generated
A future with widespread DER
Pressure for transmission & distribution wheeling
Between locations (e.g., landfill gas to muni offices)
Between customers
DG to all customers (retailers?)

8. The Competitive Alternatives
Generation
Bypass:
Economic Or
Uneconomic?
Tx and Dx Solar/Wind/CHP
Grid Defection & Microgrid
Storage
Transmission
Distribution
Grid defection & microgrids will circumvent Gx + Tx + Dx + stranded costs (Ontario GA as well as impact of shrinking customer base)
Stranded Costs
Fully Allocated Embedded Cost
Competitive
(Marginal Cost +)

9. Impact of Resistance to the Trends
Incentive to bypass the utility
Economic bypass
Will government approve exit fees to avoid stranding?
Will government approve gross load billing (including behind the meter)?
Uneconomic bypass
Will regulator allow competitive pricing
Utility prices based on fully allocated embedded cost
Market pricing based on marginal cost +
Mitigate with relationship of utility and new entrants
Is entrant a customer (facilitate) or a competitor

10. Distribution Grid Defection Economics
For household with installed self-generation
Minimum connection cost (~$500/year, residential)
Storage enables grid disconnection
Average use (OEB now 750kWh/month = 25 kWh/day)
Low demand customer, say 12.5 kWh/day
2x6.4 kWh Powerwalls $3,000) = $6,000
Current payback ~12 years (for average daily use)
How long until payback is 5 years??
Declining cost for storage
Increasing efficiency (declining average use)
What about high load factor industrial customer?

11. Part 2: Cost and Recovery Issues
Whither goest thou, Shareholders’ Dollars?

12. The Featured Issues of Today’s Session
Summary Assessment: Generation, Transmission & Distribution
Challenge
Cost Features
Recovery Challenge
Mitigating the Risk
Ageing Infrastructure
Capital intensive
Long term commitment
Risk of future stranding
Used and useful in LR?
Do nothing also risky
Replace with lower risk alternatives
Technological Change
(Smart Grid)
Not predictable
Evolutionary vs. disruptive change
Asymmetrical risk
Regulatory model adapts slowly
Innovation expected
Financial view using economic, not physical, life
Increasing Customer Service Expectations
Cost is everything
Embedded vs marginal cost
Costs judged on basis of hindsight
Make your customer your partner

13. The Featured Issues of Today’s Session
Summary Assessment: New Opportunities
Challenge
Cost Features
Recovery Challenge
Mitigating the Risk
Innovation is inherently risky
Go big or go home?
Prudence judged with hindsight
Portfolio approach to new utility activities?
Level playing field for emerging competition
Different cost structures affect marginal costs
Utility or non-utility service
Risk/reward balance
New business models
Partnerships
Make competitors your customers
Maintaining the customer relationship
Cost is everything
Embedded vs marginal cost
Is the key software or hardware?
Make your customer your partner
Facilitate customer choice and innovation

14. Regulators can facilitate adaptation
Regulators can remove disincentives for utilities:
Asymmetrical pass-throughs and risk aversion
Regulators can implement incentives for utilities:
Recognize risk and innovation
Higher ROE for innovation projects/portfolio approach
Regulators can encourage market solutions:
Project partnerships (to mitigate cost and risk)
Open to new business/regulatory models
Forbearance where there are competitive alternatives

15. Interested in More Ideas?
Go to: Elenchus.ca
Click on “Insights”
For:
Today’s presentation slides and more
Overview of approaches to funding innovation
Details of selected funding mechanisms
Links to relevant reports
More info to be added in the coming months