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Collaborative Conversations: What Will Universal Service and Look Like in a High-DER World? Donna M. Attanasio1 December 2017 On October 27, 2017, the Sustainable Energy Initiative at The George Washington University School convened the second of its “Collaborative Conversations” series, addressing emerging issues in the energy . The October program focused on the question, “What Will Universal Service and Consumer Protection Look Like in a High-DER (Distributed Energy ) World?” Approximately 20 invited participants, representing a cross-section of the industry, including vertically integrated , newer service providers, and federal regulators, consumer advocates, academics, and students, looked at the trends in the industry that are changing how service is delivered and the implications for consumers. The discussion proceeded under Chatham House Rule.2 At the center of the question posed is the regulatory compact – that is, the concept that utilities would assume an obligation to serve under regulated rates in exchange for a state-sanctioned . That duty to serve has historically been the lever by which society (acting through government) provided universal service and certain forms of consumer protection, including affordability, in the electric sector. The breadth of service subject to regulated rates has already been reduced, including in many jurisdictions, and as opens new markets, state-sanctioned becomes further stressed. Under these conditions, what happens to the other end of the bargain, that is, the universal service and consumer protections that utilities provided as part of their duty to serve? While the participants did not reach a conclusion, for the author, at least, the discussion cast a new light on the problem, namely the role of regulators. Generally speaking, universal service has been implemented though regulators’ authority over utilities, not as part of a general grant of authority over consumer welfare. Thus, as utilities’ role in the place changes and they cede ground to new market entrants, the ability of regulators to demand the

1 Donna M. Attanasio is the Senior Advisor for Energy Law Programs at The George Washington University Law School and leads its Sustainable Energy Initiative. She is the lead organizer of the Collaborative Conversations series. 2 Chatham House rule prohibits attribution of the remarks made during the discussion to particular individuals (absent permission). Accordingly, this article describes the ideas exchanged, but without attribution (other than with respect to the prepared remarks). of the ideas and the conclusions drawn are those of the author.

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same degree of universal service and consumer protection from utilities as in the past will be affected. Is the appropriate solution a flight back to traditional regulation? Is the historic degree of protection no longer needed, as competitors fight for market share? Can the market provide an alternative answer through new products, such as an product that consumers can procure for themselves? A different type of regulatory structure? No conclusions were reached as to whether the path forward lies in a change to regulatory authority or whether a market solution will emerge, but the conversation highlighted many critical points. The of Universal Service Professor Jim Rossi of Vanderbilt University framed the discussion in his opening remarks. He observed that the regulatory compact has a number of elements at its core. Universal service or the duty to serve, including the terms and conditions for interconnection, disconnection and the continuation of service, is only one component of the consumer protections embodied in the regulatory compact. Affordability, non-discrimination, reliability, safety, and other protections related to equity and the public welfare are additional elements. The electric utility industry restructuring that occurred in the late-1990s placed stress on the regulatory compact and required consideration of the role of traditional utilities versus new market entrants. Indeed, Professor Rossi’s earlier addressed this issue.3 But even in the states that restructured in the late 1990s, utilities remained the core service providers with ownership of the wires that connected to the grid, and often as the provider of last resort. New stresses from DER, however, may require a broader renegotiation of the regulatory compact as technology fosters more non-wire alternatives, a variety of service options, and new ways to manage usage. The participants spent the morning discussing these changes, as summarized below. The Impact of DER and Technology The growth of DER poses both opportunities and threats to universal service and its various elements. Products that previously might have been cost-prohibitive or too unreliable are now commercially available. Products such as rooftop solar or on-site battery storage offer consumers service options with attributes different than the product offered by the local utility, permitting individuals to choose the attributes they most highly, such as sustainability, stability, or reliability, or enable different approaches, such as using on-site generation and microgrids in remote areas rather than connecting to the utility grid. As technology finds routes around the centralized-grid monopoly such that consumers can select from new market solutions, the need to impose a duty to serve on utilities is weakened. Consumers may have a range of non-utility choices and may prefer these choices to the one-size-fits-all product that

3 Jim Rossi, Universal Service In Competitive Retail Electric Power Markets: Whither the Duty to Serve?, 21 ENERGY L.J. 27 (2000).

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has historically been available from their utility providers. Thus, could replace the need for a regulatorily mandated duty to serve and the associated protections. But at the same time, a rapidly emerging market may include erroneous information, uninformed consumers, products that over-promise and under-deliver, and opportunities for fraud. Given how critical electric service is to individuals and the public, new consumer protections may be needed to limit the disruption that might be caused by poor choices and failed products. And, as is often noted, changes in consumers’ use of the wires raise questions of cost allocation and equity. Our current cost-recovery structure, often based on volumetric charges, depends on wide-spread use of the utility-owned infrastructure for energy delivery and includes cross-subsidies that support universal service. As grid usage changes, cost- recovery is impacted differently than cost. Absent change, affordability, which is a key part of universal service, can be diminished. Further, if consumers can choose their electric service from the market, some will be able to afford a product that has higher reliability or is “greener” than the electricity they receive today. For many others, “basic” service will be all they can afford (characterized as the equivalent of a flip-phone with pre-paid minutes that is available from the local Walmart for those who can’t afford a more advanced technology). This type of unequal allocation contrasts sharply with decades of experience in which electricity was a fungible product, with only a small tolerance for differences in reliability or quality across a service area.4 As technology opens new service options, there is increasing pressure to move from a highly- regulated to a more market-driven . Such a move could result in both more and greater , but also lead to differences in service quality and accessibility. Thus, society and consumers need to examine their priorities and chose a path forward. Whose Needs are We Meeting? A discussion of consumer protection requires defining the of consumers and the degree to which those interests require government protection. A threshold question is whether “consumers” and “customers” are synonymous terms. There seemed to be a consensus that the desires of the “” who pays the bills may differ from those of consumers who use the power (which is a larger class), although how that would affect the question was not resolved. Both customers and consumers have important interests in the market. There was a wide range of views on consumer needs expressed during the conference which may be reflective of the diversity of needs in the market, a lack of good market research, customers’ or inability to define their wants, or some combination of all three. At

4 Of course, there is an unequal of other basic needs as well, including and shelter. While to some degree the unequal distribution of is an inherent characteristic of capitalism, there are limits to the degree of inequality that are tolerable. For example, society has many programs to remedy not just the extreme cases of homelessness or starvation, but also substandard housing and “food deserts.”

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one end of the spectrum was the view that customers only want low rates, and the idea that “smart appliances” are appealing to consumers is just hype by the tech providers. This was characterized as the view of “Edna,” an elderly consumer who reportedly use to regularly contact her consumer advocate to advocate for low rates. At the other end of the spectrum was a concern that we start building and paying for a smart and sustainable system, ready to meet the needs of three-year “Eliza’s” generation. Data reflects these divergent visions. The Solar Energy Industries Association reports that “In the last decade, solar has experienced an average annual growth rate of 68%.”5 But other , including for the smart-home market, have been adopted at much slower rates.6 Consumers move away from traditional utility service for two distinctly different reasons, one participant suggested. One is a desire for independent control and a range of choices; and the other is dissatisfaction with the utilities’ energy offerings, primarily because the electricity is often not from renewable sources. For the latter group, green power may be seen as a potential hedge against volatile fossil-fuel as well as good environmental stewardship. There is extensive anecdotal evidence that consumers know little about how electricity is produced (e.g., an on-the-street interview asking passer-bys about “base-load generation” elicited the explanation that that’s the generation that comes after Generation X). But it was also posited that popular support for renewable portfolio standards, rooftop solar, concern over greenhouse gases, etc. undercut this belief. The average citizen may not be well-versed in the mechanics of how electricity is produced and delivered, or even know the rates or rate structures under which they are charged, but that lapse does not equate to a lack of concern about the production, use, and cost of the product. Consumer in electric service was characterized as a quest for comfort and the ability to charge cell phones and other electric products – that is, consumers look at the functions to be performed, not the product. The point was also made that the information and transportation sectors will continue to converge with the electric sector, creating opportunities for delivering consumers the end products they are seeking in more innovative ways.7 Notwithstanding the differing views of what customers want, and why they may opt to use resources other than those provided by traditional utilities, no one appeared to dispute a continuing need for some grid service. One participant observed, however, that in California, he recently heard the suggestion made (in light of the recent wildfires) that perhaps the utilities’

5 Solar Energy Industries Association website: https://www.seia.org/solar-industry-data (last viewed Dec. 15, 2017). 6 See e.g., https://digit.hbs.org/submission/nest-falling-into-the-chasm/ (documenting the struggle of Nest thermostats to reach beyond “early adopters” to the mass market). 7 Although not discussed at the roundtable, this idea is also captured by Gretchen Bakke in her book, The Grid, p. 246 (Bloombury USA, 2016) which suggests that electric vehicles can be seen as mobile, localized sources of power that accompany consumers to where they are using power, e.g., from home to work.

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obligation to serve should not require extending lines to serve those who “choose” to live in remote areas prone to wildfires or other natural disasters. The idea of deliberately denying service to selected customers rested very uneasily with the roundtable participants (although it was pointed out that there are populations in the U.S. that are not presently served or are underserved). For example, can a utility elect not to serve a poverty stricken area that has little industry, on the basis that the cost of serving the area is too high? The potential to serve customers through varying means, e.g., microgrids rather than traditional grid connected service, was more readily accepted. These reactions are consistent with a philosophy that sees “universal service” as a basic right that needs to be protected. The Role of the Utility In this uncertain landscape, what is the appropriate role for a utility? Although utilities’ roles changed in many states as a result of restructuring, in many other parts of the country utilities continue the traditional role of providing service through a vertically integrated structure as they have for decades. For consumers, these models provide two distinctly different experiences, one allowing or requiring individual customers to choose their commodity supplier, and the other delivering a relatively uniform product within each customer class. But, even under the traditional model, customers have options to self-generate or reduce or change their energy-usage patterns. The emerging trend for community choice aggregation, creates another service option for consumers, one that straddles the gap between individual choice (e.g., retail access or DER) and the utility-offered service with a consumer-driven group selection. Growth in the number of consumer options places pressure on utilities to respond or lose market share. Stagnant demand (which might be more optimistically characterized as increased energy efficiency and conservation) limits the expected growth of the market at present. Utilities that recover their distribution (wires) and commodity costs through bundled rates are still grappling with appropriate rate structures to assure they recapture fixed costs even as the usage of their system declines or changes. In response to these pressures, participants identified a number of actions that utilities are (and should be) taking, such as adding more renewables to their portfolios and seeking to build load and expand their markets, for example, by building out infrastructure for electric vehicles. There was a reference to possible interest in reviving utility participation in the electric appliance business (which could be related to demand response or other “smart” devices); and offering a range of projects and “branding.” There was also consideration of traditional utilities delivering services to customers outside of their own service territories. Notably, these points address utility viability more so than customer concerns, although they may have the effect of increasing consumer options and potentially lowering customer costs.

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Weighing against any dramatic shift in the scope of utility service are affordability and equity. There was significant concern that we not create “tiers” of customers or allow some customers to secure “choice” while shifting costs to others. Regulatory authority Perhaps the most critical point in the discussion was a debate about whether “consumer protection” is within the scope of state utility regulators’ authority. The proposition was put forth that it is not – at least not in a broad sense – and while the initial reaction to that point seemed to be negative, the subsequent discussion elicited some important points, linked to the changing nature of service. Some of the attributes of universal service and consumer protection have long been viewed as within the ambit of state regulatory commissions, such as affordability, reliability, and safety. Increasingly, regulatory authorities have also been asked to consider environmental issues, such as implementing renewable portfolio standards, and have become the vehicles for delivering – via utilities –other policy initiatives such as programs to subsidize lower-income customers’ utility bills and energy efficiency. At the same time, the increased use of regional markets that operate under the jurisdiction of the Federal Energy Regulatory Commission have narrowed state regulatory authority (e.g., for resource adequacy determinations and in some respects, demand response). As we move to more decentralized and technologically advanced industry models, there will be new challenges posed. For example, what is the utility regulator’s authority over the use of customer data or other information collected by utility-owned equipment? How does that differ if collected by a non-utility service provider, such as a company that leases solar or provides energy management services? Is it the role of the utility regulator to oversee contracts between third-party providers of services and customers, or is that an issue for the Federal Commission, state attorney generals, and other consumer-focused federal or state agencies? As the sector changes, there may be cross-overs with other agencies’ areas of oversight. Market participants who have not been traditionally regulated as utilities are concerned that jurisdictional overlap can result in inconsistent and burdensome regulation that can serve as a barrier to entry. Even within traditional areas such as affordability, regulators have limited powers. For example, arguably it would be more cost-effective to have a single platform for collecting meter information for electric, gas, and water usage, but what authority does a commission have to require various utilities, even if all are under its jurisdiction, to jointly implement and operate such a platform? An argument was raised that consumers who want renewable energy would be better served by utility-scale projects than by -metering policies that foster a multitude of less efficient, privately owned small projects, but again, the ability to require that outcome is outside the regulator’s direct control.

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Our regulatory structure has been built around the regulation of utilities.8 While regulatory commissions have the authority to ensure utilities under their jurisdiction act in a manner that is consistent with the public interest, and as a result they have provided for universal, affordable, and reliable service for consumers taking service from such utilities, in general, regulatory commissions’ mandate is not consumer protection, per se. The actors over whom they can assert authority is limited. Consumer protection in a broader sense is generally entrusted to other agencies or government offices. Statutes that create and grant authority to regulatory agencies often include sweeping language permitting the regulator to take actions incidental or necessary to its specifically assigned duties.9 Regulators may be prodded to test the boundaries of those clauses in coming years as changes in the industry raise non-traditional issues. Absent clearer enabling legislation or legislative direction, will be left with the question of how far regulatory agencies may go before their actions are deemed to be outside the scope of their authority or arbitrary and capricious. New Entrants, Innovation and the Future As referenced repeatedly above, new products, technologies and participants are entering or ready to enter the market, so change is inevitable. But the relationship between new service providers and consumers, and their impact on the industry, is still evolving.

8 For example: Arizona: “The commission may supervise and regulate every corporation in the state …” ARIZ. REV. STAT. § 40-202 (2016). California: “The commission may supervise and regulate every in the State ….” CAL. PUB. UTIL. CODE § 701 (2016). Idaho: “The public utilities commission is hereby vested with power and jurisdiction to supervise and regulate every public utility in the state ….“ IDAHO CODE ANN. § 61-501 (2016). Illinois: “The Commerce Commission shall have general supervision of all public utilities,…” 220 ILL. COMP. STAT. 5/4- 101 (2016). Maryland: “…the Commission has jurisdiction over each public service company that engage in or operates a utility business in the State...” MD. PUB. UTIL. CODE § 2-112 (a) (2016). Some, however, are worded more broadly: “The jurisdiction, supervision, powers and duties of the public service commission shall extend under this chapter …. [t]o the manufacture, conveying, transportation, sale or distribution of gas (natural or manufactured or mixture of both) and electricity for light, heat or power, to gas plants and to electric plants and to the persons or corporations owning, leasing or operating the same.” N.Y. PUB. SERV. L. § 5 (2016)``. 9 For example: Arizona: “The commission may …. do all things, whether specifically designated in this title or in addition thereto, necessary and convenient in the exercise of that power and jurisdiction.” ARIZ. REV. STAT. § 40-202 (2016). California: “The commission … may do all things, whether specifically designated in this part or in addition thereto, which are necessary and convenient in the exercise of such power and jurisdiction.” CAL. PUB. UTIL. CODE § 701 (2016). Idaho law provides: “The public utilities commission is hereby vested with power and jurisdiction to … do all things necessary to carry out the spirit and intent of the provisions of this act.“ IDAHO CODE ANN. § 61-501 (2016). Maryland: “The Commission has the powers specifically conferred by law …The Commission has the implied and incidental powers needed or proper to carry out its functions under this division. … The powers of the Commission shall be construed liberally.” MD. PUB. UTIL. CODE § 2-112(b) (2016). Virginia’s State Corporate Commission, which is established by and draws its authorization from the Commonwealth’s Constitution, has “such other powers and duties not inconsistent with this Constitution as may be prescribed by law.” Va. Const. art. IX, sec. 2.

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Assuming utility regulators’ scope of authority were to remain unchanged, a key factor going forward is the definition of “utility.” If non-traditional providers of electric services are not deemed to be utilities, then direct regulation of their services and their relationship to consumers will spring from either (1) contractual commitments among such providers and utilities that are made under utility regulatory commissions’ supervision (which could include, for example, bi-lateral agreements related to the of non-wires services and compliance with market rules established under regulatory supervision); or (2) the other government agencies entrusted with regulating consumers’ interactions with service providers in the marketplace (that is regulation that is not specific to utility service). Legislatures have the option of expanding the scope of utility regulators’ authority (e.g., by defining “public utility” or like terms more broadly) or supporting the shift from a regulatory to a market-driven structure in the electric sector. Markets offer the opportunity to expand consumer choices and bring competitive pressure to bear on prices. There was no overt advocacy, and some resistance, to imposing utility-like obligations on new market entrants. The issues include deterring or burdening emergent market participants and innovators who might otherwise deliver valuable products, distributing obligations inequitably, and the effectiveness of trying to regulate a diverse and rapidly changing market using a utility-regulatory model. But as competitors eat away a portion of the services that utilities historically provided, regulatory reach will also necessarily contract. This has implications with respect to the ability of regulators to reach consumers via the utilities that serve them with products such as energy efficiency, demand response, and subsidies for lower-income residents, as well as regulating affordability and equity. Conclusion The group did not identify a clear path forward, but the discussion did help illuminate an important issue and its root causes. The regulatory compact has at its heart universal service and all the constituent elements of universal service such as affordability, non-discriminatory access, and reliability. Changes in the electric industry wrought by technology are largely welcomed (subject to affordability) and provide great promise for delivering a greener and more resilient grid. But a multi-participant, market-driven system, which includes entities not defined as utilities and not within the direct reach of regulators, effectively means that regulators’ ability to assure the delivery of universal service and its constituent elements will be compromised. At present, there is neither an obvious means to assure all consumers will be able to (or want to) participate in markets for electric service, creating a market of sufficient competitive strength to mitigate the need for the protections embodied in the regulatory compact; nor to assure that regulators, working through utilities, will be able to deliver universal service

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(inclusively) on the scale as they have in the past, given the inevitable changes brought about by technological innovation. If society determines that the government should continue to provide these traditional protections, then a means to do so must be established, whether through a regulatory or market-driven structure. However, additional work is needed to find the paradigm that meets the needs of the consumers served by a 21st-century electric industry.

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