At a time when utilities are requesting record-breaking increases in electric rates, New York is doing things a little bit differently.
While most utility rate increases invariably result in an absolute increase for utility shareholders, this summer the New York Public Service Commission approved a measure that will actually decrease shareholder return if the utility does not meet baseline performance metrics regarding the accuracy and timeliness of customers’ energy bills.
The Commission vote in July approves of a so-called negative revenue adjustment, or NRA, for the state’s electric utilities. Essentially a fine, the NRA is assessed on the basis of the utilities’ performance on community solar billing and crediting practices.
The measure is a win for utility accountability — and also for aligning the utility’s incentives with broader clean energy goals. And it just may have implications for how electric utilities are regulated nation-wide.
New York’s novel ‘stick’ approach
Because electric utilities are natural monopolies, one could see how the electric utilities may have perverse incentives to overbuild the distribution grid in order to boost their financial return. That’s where public utility commissions come in — to determine what is a prudent investment based on the public interest, and approve or deny the utility’s requests to spend. Their job is to keep customer costs low while still ensuring the reliability of the electric grid.
But in recent years, reliability is no longer the only consideration utilities must take into account. Grid resilience in response to increasing extreme weather events, broader adoption of renewable energy and distributed energy resources, and energy equity and access are all essential policy goals in the growing face of the climate crisis. But the old regulatory regime doesn’t provide any financial incentive for utilities to take these into account.
That’s where Performance Based Ratemaking (or PBR) comes into play.
Slowly over the past few decades, advocates of PBR have been pushing for measures to redefine utility objectives by aligning their financial incentive — generally the utility’s regulated rate of return, set by the state — to state policy goals. In recent years, utility commissions in Hawaii and Connecticut have led the charge, incentivizing utilities to take actions such as speeding up interconnection timelines for rooftop solar and increasing EV charger adoption.
But historically, these have been presented as “carrots”: additional revenue for hitting certain goals. The “stick” approach of instead penalizing utilities for missed milestones is exceedingly rare. This is where New York broke new ground in July. The NY PSC’s decision marks the first time that a negative revenue adjustment is being utilized to incentivize better utility performance on a clean energy goal.
Specifically, utilities in New York will be penalized for not maintaining baseline levels of performance on a state policy goal around community solar — marking a total reorientation of how utilities are being regulated by the state.
Problems with community solar in New York
The specific problem this NRA is seeking to deal with revolves around community solar billing and crediting practices, which is esoteric and a bit complicated in its own right.
By some metrics, New York’s community solar program has been wildly successful. With over 1,300 projects built, the program is delivering real monthly bill savings of 10-20% to nearly a quarter million customers in the state who wouldn’t otherwise be able to realize the financial benefits of rooftop solar. Due to the state’s aggressive climate justice and equity goals, 35% of the benefits are being delivered to disadvantaged communities in the form of higher bill savings.
But for community solar to work, it’s essential that utilities apply the credits generated by the community solar farm to the customer’s bill on a monthly basis, so the customer can see reliable savings. If utilities are derelict in this responsibility — as New York’s utilities have been — these bill credits begin to add up without being applied to the customer’s utility bill.
When the utility then applies all of the solar credits amassed over several months (often several hundreds of dollars), customers have to spend far more than they normally would just to exercise these credits. While this allows them to essentially pre-pay their bills for the coming months, it’s often impossible for lower- and medium-income customers to come up with enough money — and even for those that can, it’s a terrible customer experience, all in the name of saving money.
To disincentivize this behavior by the utility, the PSC is now experimenting with the “stick” of the NRA.
The PSC’s July commission order states in no uncertain terms that the utilities have been deficient in their responsibility to customers. More forcefully, the Commission states that this inability to apply bill credits have actually undermined the community solar program: “Concerningly, billing and crediting issues have forced some subscribers to cancel their subscriptions, eroding customer trust in the CDG Program…[and] can also dissuade potential customers from adopting CDG and developers from entering or remaining in the CDG market.” (CDG here stands for community distributed generation.)
It was a long road to arrive here. Beginning in the fall of 2023, I led a coalition of community solar subscriber organizations and solar access advocates in designing and drafting a proposal that outlined six billing and crediting metrics that the utility should track to measure the timeliness and accuracy of bill credit application. (This proposal was ultimately submitted and supported by our industry association partners at NYSEIA). In addition, we also assigned certain threshold levels by which a financial penalty, such as the NRA, should be triggered if the utility’s performance drops below an acceptable threshold.
The New York Department of Public Services ultimately published a straw proposal in January 2024 that drew from many of the recommendations that we designed and proposed. Moreover, staff recommended a combined NRA across all metrics and all utilities that could be as high as $120 million per year. Even to a multi-billion dollar utility, that’s no chump change.
The game of compromise and incentives
As is often the case in the world of regulatory policymaking, many compromises were made in the final commission order. Instead of the six metrics that industry advocates pushed, the PSC ultimately only approved two. And the NRA that was adopted has a combined financial exposure of about $15 million per year across all New York utilities — a far cry from the initial $120 million that DPS staff proposed.
But regulatory policy is a game of not only compromise, but also incrementalism. And there are many great wins in the commission order as approved. For one, it requires utilities to begin tracking some of the other metrics, opening the door for additional NRAs to be levied if the utilities are found to be deficient in meeting baseline performance expectations. This could ultimately ratchet up the financial exposure for utilities.
It also adopts a $10 monthly credit to be provided to customers if and when the utility doesn’t apply credits — creating both relief for customers and additional financial incentive on the utilities to get their act together.
But while the NRA is a huge win for New York and community solar at large, it’s an even bigger win for the advancement of a more aggressive approach toward electricity regulation that creates real, enforceable mechanisms to incentivize corporate accountability. For too long we’ve been held captive by a regulatory framework with limited incentives for utilities to be responsive to the public interest, particularly around climate goals.
But that’s slowly changing. The utility is an essential player in the energy transition. But there is a growing recognition that utility business models must be reformed and incentives realigned if we are to continue progress on our climate goals.
New York regulators are aggressively moving toward a more responsive utility system — and they’re only the first step. are It’s only a matter of time before others begin looking to the Empire State as a model of how to align utility incentives with desired public policy outcomes. Austin Perea is an independent policy consultant for Arcadia and Perch. He was the chair of the NYSEIA committee on CDG billing and crediting and the primary author of the solar industry proposal on the CDG NRA. Prior to his community solar advocacy role, he worked at SunPower and Greentech Media covering the distributed solar market. His music project, deathblow, just released a climate rock anthem streaming on all platforms. The opinions represented in this contributed article are solely those of the author, and do not reflect the views of Latitude Media or any of its staff.
