Collaborative Conversations: What Will Universal Service and Consumer Protection 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 Law School convened the second of its “Collaborative Conversations” series, addressing emerging issues in the energy industry. The October program focused on the question, “What Will Universal Service and Consumer Protection Look Like in a High-DER (Distributed Energy Resource) World?” Approximately 20 invited participants, representing a cross-section of the industry, including vertically integrated utilities, newer service providers, state 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 monopoly. 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 retail jurisdictions, and as technology opens new markets, state-sanctioned monopolies 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 utility 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 market 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). Organization of the ideas and the conclusions drawn are those of the author. 1 | Page COLLABORATIVE CONVERSATIONS THE GEORGE WASHINGTON UNIVERSITY LAW SCHOOL 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 insurance 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 Nature 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 work 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 customers 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 value most highly, such as sustainability, price 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). 2 | Page COLLABORATIVE CONVERSATIONS THE GEORGE WASHINGTON UNIVERSITY LAW SCHOOL has historically been available from their utility providers. Thus, competition 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 system. Such a move could result in both more innovation and greater consumer choice, 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 interests 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 “customer” 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’ uncertainty or inability to define their wants, or some combination of all three. At 4 Of course, there is an unequal distribution of other basic needs as well, including food and shelter. While to some degree the unequal distribution of resources 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.” 3 | Page COLLABORATIVE CONVERSATIONS THE GEORGE WASHINGTON UNIVERSITY LAW SCHOOL 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 marketing hype by the tech providers. This