Wellinghoff Urges Creation of Distribution ISOs

Published March 17, 2015 in Smart Grid Today. By Karen Haywood Queen
IOUs would own grid, maintain it but not run it

EXCLUSIVE INTERVIEW

In retail markets, grid ownership and operation should be separated to allow competitive energy sales, Jon Wellinghoff, former chairman of FERC, told us recently in an exclusive interview. “Retail energy sales are a competitive product and as a competitive product, should be provided by multiple entities,” he added.

In the current model in most states, there is no incentive for utilities to encourage DG and DR because successful deployment may cut the need to boost the utility’s asset base, Wellinghoff, who stepped down as FERC chairman in 2013, said. He argued for unbundling utility services and increasing competition while at FERC.

Such a separation between operation and ownership of the power transmission system already works well in the power wholesale markets at ISO/RTOs, he added, noting competition has lowered prices.

QUOTABLE: Most of the RTOs are doing a very good job of creating robust markets at the wholesale level and incorporating as many products as possible – both supply and demand-side products. In those markets, you create systems that improve efficiency and provide benefits to individual entities that are providing products to the market and providing benefits to all members of the market. The result is, overall prices go down. – Jon Wellinghoff, former FERC chairman, in an exclusive interview

He imagines a system on the retail side where state-regulated distribution utilities would continue to own the distribution grid but would transfer operations to independent distribution-system operators akin to the ISO/RTOs on the transmission side. If these distribution system owners wanted to be involved in another energy business, they could create a separate division, Wellinghoff said.

“The only monopoly service would be the owner and maintainer of the distribution system,” he added. “The Duke Energies and other owners of the distribution system would be like the transmission owners on the bulk grid. They would own the assets, maintain the assets and earn a regulated cost-of-service return on those assets.”

The resulting independent distribution operators would operate a market platform for the sale of energy and other energy service products to retail end users, Wellinghoff said. Competitive firms would facilitate and aggregate these energy services, including DR and energy efficiency.

Such a separation could yield results in the utility sector similar to what happened when the Bell system was broken up in 1984, we noted and Wellinghoff agreed.

QUOTABLE: To the extent that consumers will have new and additional sources for the generation of energy through solar PV and other local generation opportunities, as well as storage opportunities, [the utility sector] will start to look like this diverse world we now have in the communications sector. – Wellinghoff

Seventeen states and the District of Columbia currently have retail energy choice, but none yet provides an ideal array of distinct options, he added.

In an ideal competitive retail market, consumers might choose among different billing and pricing structures with and without demand or time-of-use pricing, from their retail provider, Wellinghoff said. Such pricing would provide customers incentives to cut energy use during peak times.

In turn, that would lessen the need to build peak generation plants and reverse the trend of higher peak-to-average demand ratios, he added.

“We really need a market-based system that provides consumers with multiple market choices that allow them to control their energy costs overall. We would have more opportunities for that if we had a retail choice structure.

“I would advocate for allowing retail third-party providers to provide services for consumers because it is competitive.”

To create such a system, nothing would have to change at the federal level but the states would have to change how their PUCs oversee the distribution utilities, Wellinghoff said. States already looking at such a change include California, Hawaii, Minnesota and New York, he added.

There has been much discussion surrounding the fairness of net energy metering (NEM) policies for rooftop solar, we reported this month (SGT, March-6) but a market-based, retail energy pricing system would transcend that discussion, Wellinghoff noted.

“Efficiency is a better word than fairness,” he said. “Any pricing system that does not provide for a market-based system that looks at costs and benefits that are being provided by consumers participating in these systems is not efficient. You improve efficiency and everybody wins.”

Wellinghoff stepped down as FERC chairman in 2013 and joined the law firm Stoel Rives based in Portland, Ore. The firm listed San Francisco and Washington, DC, as the offices he works in.

Since leaving FERC, he has written frequently about NEM and fixed charges. Wellinghoff represents clients in an array of emerging energy technology fields including energy storage, DR, data analytics, distributed solar PV, advanced transmission control technology and waste heat recovery systems, the Stoel Rives website said.

BOTTOM LINE: We included the topic tag “transactive energy” on this story because we think the idea of distribution ISOs is a good match to the idea of a future in which computers buy and sell electrons from a variety of systems and devices based on finding the lowest cost, creating market efficiencies and price signals throughout the energy internet of things. That is one way of describing the transactive energy future we would love to see evolve from some of the old models used now. Taking the ISO/RTO concept and using it on the distribution side begs one to imagine transactive energy systems having access to those market efficiencies. That seems like a very smart grid, maybe Smart Grid 3.0.