Comments of the R Street Institute Before the Iowa Utilities Board on Policy Charrette #2

STATE OF IOWA

BEFORE THE IOWA UTILITIES BOARD

Comments of the R Street Institute on Policy Charrette #2

The R Street Institute (R Street) submits these comments in response to the Iowa Utilities Board (IUB or Board) Policy Charrette #1 Subsequent Filings and Policy Charrette #2 Information notice issued Sept. 6, 2023.[1] R Street appreciates the opportunity to offer its perspectives on topics raised in Policy Charrette #2. The comments provided do not address all questions raised in the Board’s Notice; instead, R Street includes in its comments a recent policy study issued by R Street on the various types of electric paradigms that cover electricity regulation across the United States. R Street believes this report provides additional context and perspectives that will be helpful to the Board as it completes this initiative. R Street thanks the Board for the opportunity to provide comments on this initiative.

Introduction

The Board initiated this proceeding on July 5, 2023, in response to House File 617 passed earlier this year.[2] As directed by HF 617, the Board is to consider the following:

1. an evaluation of the adequacy of current ratemaking law and procedure to promote the Policy Objectives; 

2. identification of possible changes in law or procedure that might better advance the Policy Objectives; 

3. recommendations for changes in law and administrative rules; and 

4. identification of ratemaking laws and procedures of other states that, if adopted in Iowa, could enhance the competitiveness of utility rates in Iowa as compared with utility rates in other jurisdictions[3]

To facilitate the Board’s effort, the Board organized this proceeding into three policy charrettes to hear from stakeholders on a variety of issues. The result of this effort is a report to be submitted to the Iowa legislature by Jan. 1, 2024.

Comments in Response to the Board’s Questions

In its Notice, the Board identified a number of topics for stakeholders to respond to and which would be used to inform a two-day workshop under this policy charrette. R Street appreciates the opportunity to submit comments in response to these questions. 

1. Are there ratemaking policies or regulatory practices in other states from MISO and/or SPP that you believe would be worth examining? What characteristics of comparability or distinction in these regulatory practices from other states are worth examining relative to Iowa’s ratemaking practices? 

Attached to these comments is a recent R Street policy study that reviews the electric regulatory structure across the United States and organizes the states into three paradigms: traditional, hybrid and restructured.[4] Iowa—along with 18 other states—fits the hybrid paradigm, which is defined as follows:

…most generation and retail services remain served by regulated monopolies that participate in RTOs. Generation investment decisions are determined through state regulation and have the potential to coordinate with RTO planning processes, though RTO price signals generally do not determine resource entry and exit. RTOs conduct regional transmission planning, and FERC oversees RTO-coordinated operations.[5]

This report provides recommendations for each of the paradigms. For the hybrid paradigm, the primary recommendation is as follows:

States employing a hybrid model should transition toward full restructuring. If such steps are not currently viable, gradual improvements include enabling direct market access rates for large consumers, implementing robust all-resource competitive procurement to serve remaining captive customer customers and utilizing RTO data for prudence reviews of utility IRP and asset management.[6]

In short, the R Street report highlights the role of increasing competition and competitive options across each of the paradigms in order to increase the benefits to customers from the electrical system. Since Iowa is considered a hybrid paradigm, the recommendations and analysis of hybrid paradigms allows the Board to compare potential next steps against other similarly situated states. This conclusion is similar to other recommendations provided by R Street in other forums.[7]

2. Provide examples from other states addressing one or more of the following issues: 

a. Integrated resource planning or long-term planning processes

R Street supports the Board in considering the adoption of integrated resource planning (IRP) rules for Iowa. Implemented in varying fashions across the country, IRPs provide a regulator and stakeholders with a view into utility planning for future demand. Paired with opportunities for distributed energy resources, including energy efficiency and demand response to be part of that solution, an IRP can be useful in ensuring the utility is planning for a reasonable future that leverages all available options.  

R Street would like to add two additional and related policies to implementing an IRP.

i) Competitive Procurement

As noted in the R Street report, competitive procurement can be an important avenue for price discovery and managing costs. If the result of an IRP is a need for additional resources at a point in the future, requiring the utility to meet some or all of that future need through competitive procurement will create more opportunities for developers and other market participants to offer solutions directly to the utility. Examples of competitive procurement efforts can be found in Indiana and Colorado, where Northern Indiana Public Service Company and Public Service Company of Colorado have each successfully implemented competitive procurement solutions. A growing number of resources that participate in their efforts are carbon-free, thereby increasing the availability of renewable and carbon-free electricity for the grid without the utility having to rate base those costs through customer rates.

ii) Distribution System Planning

With the growth of distributed energy resources (DER) across the country, states are looking at implementing distribution system planning efforts. Similar to an IRP, a distribution system plan would require the distribution utility to submit detailed information about the capabilities, planning and operation of the distribution system and identify anticipated future investments. States including Minnesota, Colorado and Michigan have adopted robust distribution system plans for their utilities. Again, similar to an IRP, these plans include stakeholder meetings to ensure the distribution system is planned and operated in a manner that best utilizes new resources, including DER. This initiative would also be an opportunity for the Board to consider non-wires solutions and making information about hosting capacity assessments and maps public.

b. Trackers/riders usage, scope, and frequency; 

c. Advance ratemaking or other incentive statutes to construct electric generation or other major capital assets;

R Street cautions the IUB against considering advanced rate recovery efforts for its utilities. In the electricity sector, programs like Construction Works in Progress (CWIP) have allowed utilities to earn revenue far in advance of equipment operation. Though some of these projects have ultimately been abandoned, the utility was permitted to keep the CWIP. R Street recognizes that cash flow and access to capital is important to fund projects and that the utility needs to account for those costs in some manner. Should the Board decide to allow such opportunities, R Street suggests that the Board require safeguards, including clawback mechanisms, so the utility does not over-earn in advance and burden current ratepayers with costs for a future project.

d. Multi-year rate plans; 

R Street supports implementing multi-year rate plans. It is important for the Board and stakeholders to ensure the utility does not over-earn over any particular time period that would inadvertently incentivize the utility to stay out of a rate case longer than necessary. A rate case every three to five years would give the Board and stakeholders greater visibility into utility costs and rates and ensure the utility continues to invest and plan its system accordingly. These benefits far outweigh any costs that might be incurred by having the utility come before the Board more often.  

e. Energy efficiency programs; 

f. Demand response; 

R Street encourages the Board to consider the role of aggregators[8] of retail customers in expanding demand response opportunities for Iowa customers. With the passage of Federal Energy Regulatory Commission (FERC) Orders 719, 745 and 2222, FERC has sent a clear signal that it sees demand response (including energy efficiency) as an important resource in Regional Transmission Organization (RTO) markets. By requiring RTOs to provide opportunities for the demand side to directly participate in RTO markets, FERC seeks to lower barriers to entry for new market participants rather than rely on the supply side to meet market needs.

g. Performance incentive mechanisms; and 

R Street considers regulation a form of incentive ratemaking and, consistent with the conversation on performance-based ratemaking (PBR), a topic the Board should be cautious in addressing. Utilities respond to the directions of their regulators, which already provide incentives for certain regulatory actions. For example, policies and laws requiring energy efficiency targets act as an incentive. However, since the utility is not incentivized to rely on efficiency, especially at the expense of new capital, it may be appropriate for the Board to consider other available options that would incentivize utility performance. R Street first recommends introducing competition, where appropriate, to send better incentives and to discover if market participants can provide the service at the same or lower cost. In the absence of expanding competition, implementing IRP and distribution system planning efforts may affect similar outcomes simply by bringing sunshine to historically closed utility functions.

h. Performance based regulation, whether similar or not to MidAmerican’s current revenue sharing mechanism.

R Street is not yet convinced that implementing a PBR structure will benefit customers. States that have considered PBR, such as Colorado and Minnesota, show this conversation can take many years. It is important that, if the Board does decide to consider a PBR structure, it explicitly identifies its process, vision and outcomes. To the extent that the Board considers PBR an add-on to existing cost-of-service ratemaking, R Street does not believe it will result in any meaningful change to utility incentives. Again, R Street believes that existing cost-of-service ratemaking is incentive ratemaking; thus, the Board must determine that the existing cost-of-service model is failing. To the extent, therefore, that the Board identifies a failure in the cost-of-service model, the Board may be better served by considering alternative options to this model instead of adding PBR to the current cost-of-service framework.

Conclusion

R Street thanks the Board for the opportunity to comment on these important topics.

Respectfully submitted,

___/s/ Christopher Villarreal____
Christopher Villarreal
Non-Resident Fellow
Energy Policy

The R Street Institute
1411 K Street NW, Suite 900
Washington, D.C. 20005
415-680-4224
[email protected] 

October 4, 2023

Read the original comments with attachments below:

[1] In Re: House File 617 Review of Specified Provision and Utility Ratemaking Procedures, Policy Charrette #1 Subsequent Filings and Policy Charrette #2 Information, Docket No. NOI-2023-0001 (Sept. 6, 2023) (Notice).

[2] In Re: House File 617 Review of Specified Provision and Utility Ratemaking Procedures, Order Initiating Inquiry, Docket No. NOI-2023-0001 (July 5, 2023) (Order).

[3] Order at 2.

[4] “Electric Paradigms: Competitive Structures Benefit Consumers,” R Street Policy Study No. 293, September 2023. https://www.rstreet.org/wp-content/uploads/2023/09/FINAL_r-street-policy-study-no-293.pdf.

[5] Id. at 5.

[6] Id. at 3.

[7] See, e.g., “Six actions the Midwest should consider to enable more competition,” Chris Villarreal (Aug. 17, 2023). https://www.rstreet.org/commentary/six-actions-the-midwest-should-consider-to-enable-more-competition. 

[8] See, In the Matter of a Commission Investigation into the Potential Role of Third-Party Aggregation of Retail Customers, Comments of R Street, before the Minnesota Public Utilities Commission, Docket No. 22-600 (March 13, 2023). https://www.rstreet.org/outreach/comments-before-the-minnesota-public-utilities-commission-in-the-matter-of-a-commission-investigation-into-the-potential-role-of-third-party-aggregation-of-retail-customers.
See, also, In the Matter of a Commission Investigation into the Potential Role of Third-Party Aggregation of Retail Customers, Reply Comments of R Street, before the Minnesota Public Utilities Commission, Docket No. 22-600 (April 10, 2023). https://www.rstreet.org/outreach/reply-comments-on-allowing-aggregators-to-participate-in-minnesota.