Electric Industry Update · Resource Team (NMART) Regional Mutual Assistance Groups (RMAGs) • Provide general NRE oversight • Resolve issues identified by the NREC • Interface

Electric Industry Update

Aryeh B. FishmanAssociate General Counsel,

Regulatory Legal AffairsEdison Electric Institute

AGA-EEI Spring Accounting ConferenceMay 18-21. 2014San Antonio, TX

The Industry Record

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This year we are focused on optimizing opportunities to promote cutting-edge uses of electricity and to demonstrate the value of our innovation, as well as the value of our industry as a whole. We are a robust component of the nation’s economy—an $860-billion industry that accounts for more than 2 percent of GDP. Investor-owned utilities (IOUs) today employ more than 500,000 workers and serve more than 70 percent of America’s industries, businesses, and consumers.

Electricity: A Great Value

Sources: U.S. Department of Labor, Bureau of Labor Statistics (BLS), and U.S. Department of Energy, Energy Information Administration (EIA).

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And, while American homes use more electricity today than ever before, electricity prices remain an excellent value—and have, in fact, increased at a lower rate than the prices for other consumer goods.

We Now Spend 4x More on Electric Apps Than on Electric Bills

Electric Bills

Household appliances, therapeutic medical

equipment, telephone and facsimile equipment, electric appliances for personal care

Television, audio, and video equipment

Personal computers, software, and accessories

Cable and satellite television, radio services,

video media rental

Repair of household appliances, audio-visual, and computer equipment

Internet access

Landline and cellular phone services

20%

12%

13%

12%

11%

2%

10%

20%

Consumable

Durable

Electric Apps 80%

Source: Bureau of Economic Analysis Gross Domestic Product Survey.

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According to recent data released by the U.S. Department of Commerce, just 1.47 percent of consumer expenditures went to electric bills in 2013—that means for every dollar American consumers spent on goods and services, they spent less than a penny and a half of it on electric bills. At the same time, consumers spent a record $660.1 billion on technologies, appliances, and other devices powered by electricity—nearly 4 times what they spent on electric bills. So whether it is through greater energy savings or providing new uses for electricity, our industry continues to empower customers and to enrich their lives. By turning the growing demands of our customers into new business opportunities, we will better serve them and grow our bottom line. Rising to meet this occasion of opportunity will help the industry to power forward and define its success in 2014.

National Response Event Framework

EEI CEOs

National Response Executive Committee (NREC)

National Mutual Assistance Resource Team (NMART)

Regional Mutual Assistance Groups (RMAGs)

• Provide general NRE oversight• Resolve issues identified by the NREC• Interface with industry and government partners

• Initiates the NRE and resource allocation process• Manages the issue resolution process• Reports to the EEI CEOs• Chair co-locates with EEI during NRE

• Conducts the resource allocation process• Consists of representatives from each RMAG and EEI’s Mutual

Assistance Committee• Lead co-locates with EEI and NREC Chair during NRE

• Maintains baseline resource availability information• Gathers and consolidates participating utility information in

support of the allocation process• Matches allocated resources to specific requesting utilities

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Following Sandy, we applied the lessons we learned and worked for months last year to develop a new process for responding to significant events that cause widespread power outages and require a coordinated national response. The new “National Response Event” framework is now an essential part of our member companies’ operations and leverages our strengths, skills, and resources to bring the full impact of our combined efforts to bear in response to a national emergency event. Our goal is to ensure that resources are allocated equitably and that the response effort is streamlined, efficient, and coordinated with our federal, state, and local government partners. This year, we will continue to strengthen the strong industry-government partnership put in place after Sandy, and we will work to reduce legal and regulatory barriers that may delay future restoration efforts.

Cyber & Physical Security

Securing and protecting our nation’s critical electric grid assets are top industry priorities

The electric industry is the only critical infrastructure sector subject to mandatory, enforceable cybersecurity standards

Industry and government collaboration is essential. Exercises are taking place nationally and regionally to prepare for extraordinary scenarios

The industry is making significant investments to protect the most critical assets

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As you know, the reliability of electric service also is threatened by malicious events such as cyber and physical attacks. Mitigating these threats has been a growing priority for our industry over the past decade. Our approach focuses on risk management, not risk elimination. And, we are working closely with other critical infrastructure sectors, as well as with the White House, federal agencies, and law enforcement authorities, to share information, identify vulnerabilities, and assess, respond to, and recover from cyber attacks when they do occur. There is no single solution that can make the grid completely safe and secure, but it is important to remember that our industry is the only critical infrastructure sector that is subject to mandatory, enforceable cybersecurity standards. These standards help to ensure that the grid operates reliably across all segments of the sector, from the largest IOUs to the smallest electric cooperatives or municipally owned utilities.

ESCC Organizational Structure

Electricity Subsector Coordinating Council

(ESCC)30 member body to serve as the principal entity

coordinating with government counterparts on planning, preparedness, resilience, and recovery issues related to

national security issues affecting the electric grid.

Leadership – 1 Chair, 2 Vice Chairs

Electricity Subsector Information Sharing and Analysis Center (ES-ISAC)

Day-to-day operations run by NREC

Steering Committee – NIAC representative, APPA, CEA, EPSA, ISO/RTO Council, NEI, NERC, and NRECA

Asset Owners – CEOs proportionally representing asset owners from across industry segments

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While we continue to support passage of cybersecurity legislation, we are not waiting for congressional action. We are proactively forging ahead with a series of cybersecurity and other security and resiliency initiatives that are focused on preparation, prevention, detection, and information sharing. To this end, we helped to strengthen the industry-government partnership on security and resilience last year by rebuilding the Electricity Subsector Coordinating Council (ESCC). The ESCC includes utility CEOs and trade association leaders representing all segments of the industry. It serves as the principal liaison between the federal government and the electric power sector, with the mission of coordinating efforts to prepare for, and respond to, national-level disasters or threats to critical infrastructure.

Electric Sector• Utilities• Trade Associations• ISOs and RTOs• North American Electric

Reliability Corp (NERC)• Information Sharing and

Analysis Center (ISAC)• Spare Transformer Equipment

Program (STEP)

Government• Federal Agencies• Regulators• Law Enforcement• State & Local

External Groups

• Other critical sectors• Vendors• Critical customers• Media

Electricity Subsector Coordinating Council

(ESCC)

Coordination• Security to support restoration• Media and public affairs

messaging• Logistical support, staging

Resource Allocation• Equipment, hardware, and materials• Human resources and expertise

Conflict Resolution• Investigation versus restoration• Prioritization of recovery• Distribution of limited resources

ESCC Coordination Responsibilities

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This year, the ESCC’s industry and government leaders have agreed to focus on providing tangible progress in three main areas: Tools & Technology: Deploying proprietary government technologies on utility systems that enable machine-to-machine information sharing and improved situational awareness of threats to the grid; Information Flow: Making sure actionable intelligence and threat indicators are communicated between the government and industry in a time-sensitive manner; and Incident Response: Planning and exercising coordinated responses to an attack. TOM WILL NEXT DISCUSS DG ISSUES. THERE ARE NO SLIDES FOR THIS PORTION. HOLD HERE UNTIL HE FINISHES/TURNS OVER TO BRIAN.

Electric Distribution System is in Transition

The Electric Distribution System Is In Transition

Customers are gaining new distributed energy resource (DER) options, including distributed generation (DG)

The structure and operation of distribution systems will change as “smart” infrastructures are built out and new DER technologies are deployed Ultimately, power will flow in 2 directions across

distribution systems Supporting a safe and reliable grid infrastructure is critical

to the deployment of new technologies

Distributive Generation

What is Distributive Generation (DG)?DG systems are small-scale, on-site power generation located at or near customers’ homes or business. Some common examples include solar panels, energy storage devices, fuel cells, microturbines, small wind and combine heat, and power systems.

Source: EIA

State Renewable Policies State Net Metering Policies

Public Policies Are Spurring DER Adoption43 States Have Net Metering + 17 States Have DG/Renewable DG Goals

Other Factors Contributing To The Transition

Declining cost of PV and new leasing models

Customer preference for “choice” or “self-supply”

Evolution of “smart” infrastructure technologies

Outage concerns – storms; cyber and physical security

Department of Defense policy to expand renewables, “islanding”

The Power of Energy

The Look Beyond the Horizon

Typical Energy Production and Consumption for a Small Customer with Solar PV

Source: Value of the Grid to DG Customers, Institute for Electric Innovation, October 2013

Current Rate Designs Work Poorly for DG

What’s the Problem? Most rates recover a large share of fixed costs through variable use charges

DG customers continue to rely on the grid and increase grid costs, most of which are fixed

Under most rate designs, rates to customers with DG fail to recover right amount of fixed grid costs

Net metering makes the cost-recovery problem worse, shifting a larger portion of fixed costs to non-DG customers

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Rates are volumetric Review fixed charges – cost of infrastructure – through them/non-fuel cost Variable cost include cost of fuel

New Regulatory Policy and Rate Design Are Needed

To ensure reliability:

Enhance electric infrastructure

To ensure safety:

Update interconnection standards & procedures

To ensure fairness:

Adopt new approaches to designing rates for DG so that all users of the grid contribute to grid infrastructure

Arizona Lessons Learned

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

Incentive Step-down

2009 2010 2011 2012 2013

15MW19MW

23MW

44MW47MW

Estimated Capacity

Background – Residential Distributed Energy (DE) Growth

• Rooftop solar is an option for a greater number of Arizona Public Service (APS) Company customers.

– Reduction of installed costs

– Customer finance models

– Federal and state investment credits

– Utility rate and cash incentives (in Arizona, Net Metering)

• APS has exceeded compliance for DE (175%)

375MW Total DE out of a 7000MW peak

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Presentation Notes

Solar cells have been reduced $2.08/watt – utility scale $4.T/watt – rooftop solar

Background

Regulatory finding required APS to address Net Energy Metering (NEM) cost-shift issue in 2013 Timing difficult given other significant policy issue under

consideration

Initiated stakeholder technical conferences

Aggressive DE advocacy groups (Tell Utilities Solar Won’t Be Killed (TUSK) emerged in early 2013

Misleading public relations by TUSK campaign distracted from factual discussion

Attack Ads - Examples

Themes: -“Utility monopolies”- “Tax the Sun”- “Anti-choice/competition”

Attack Ads – Examples (2)

Attack Ads – Examples (3)

Cost Impacts of Net MeteringDo They Accord with Ratemaking Principles?

Prices to ratepayers should be based upon the actual cost to provide them electricity

Any subsidies (additional costs borne by some classes of ratepayers to benefit others) should be transparent and justified

“Societal benefits” (e.g., job creation, CO2 emissions reductions, energy independence) should be paid for by “society”, not electricity ratepayers

Net metering at retail rates creates a hidden subsidy benefiting distributed generation owners at the expense of other electricity ratepayers that is being defended on the basis of the “societal benefits” that it provides

What is the Best Rate Approach for DG?Straight Fixed/Variable Pricing (SFV)

Fixed costs of service (transmission, distribution, metering, customer support, taxes, interest expense) should be recovered in fixed monthly charges (customer charges and/or demand charges)

Much of these fixed costs are currently recovered in volumetric (per kWh) charges

A straight fixed/variable (SFW) rate design recovers fixed costs through fixed charges, and variable costs (fuel, purchased power) through per kWh charges

Distributed generation customers on an SFV rate will continue to fully compensate the utility for fixed costs of service, even if they are no longer taking electricity from the utility

ACC Decision on Nov. 14, 2013

Interim charge supported by Residential Utility Consumer Office and some members of the solar industry

70 cents/installed kW = about $5/month for standard system

Effective Jan 1, 2014 through next APS rate case Grandfathering: Existing customers through 12/31/13

New customers Jan. 1, 2014 through next rate case

Affidavit for all new customers Solar adoption data filed quarterly with ACC

Operational Challenges and Benefits of the Grid

As we move towards wind, solar, newer units and gas turbines we are losing system inertia

By Charles E. Bayless, ASU Light Works, Arizona State University

Turbines

This generator inertia is an important factor in system stability

Solar has no inertia

As we lose inertia we will have to start adding significant inertia, energy (batteries) or rapid response reserves to meet NERC Criteria

Beacon Power Flywheel

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Beacon Power Flywheel

An important parameter for response of the reserves is ramp rate. How fast can the reserve generators increase or decrease their output

Ramp Rate is measured in mw per minute

The older displaced plants may not work as reserves they do not have the ramp rate

AEP Gavin


Ramp Rate

Variability

A GE report for NREL in May 2010 , “Western Wind and Solar Integration Study,” found that within the next decade supply variability could be 57 times demand variability

This variability can not be handled with today’s ramp rates

West Connect Utilities


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Presentation Notes

http://www.nrel.gov/wind/systemsintegration/wwsis.html

Storage

One suggested answer for the intermittency problem is storage

But, storage is not cheap and you need a lot of it


Reserves

However variable generation present us with another challenge

In the past generation only varied one way

So we had reserves to pick up the slack when needed

Pacific Corp Cholla


Reserves Cont.

However, today variable generation can increase or decrease

Thus when it increases we need decremental reserves that can decrease quickly to match the increase in renewable generation

BPA studies showed they needed 1050mw of decremental reserves and they ended up running and discharging extra water interfering with their fish management plans

BPA, Grand Coulee

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Luxury Power

Source: Der Spiegel, September 2, 2013

Lessons Learned from Germany (and other OECD countries)

Subsidies were too generous (Level of subsidies was too high for the market,

did not follow technology cost reductions, particularly in solar power)

Growth of renewables was too rapid(Grid and markets cannot not adjust quickly

enough to the rapid deployment of renewables, particularly wind and solar)

Impacts

Reduction in wholesale prices adversely impacts generators and the reliability of the grid

Increase in retail electricity prices adversely impacts consumers and competitiveness

Multiple redesigns of the incentive programs adversely impacts the renewable industry

Additional investment needs in the T&D networks will further raise costs

Shaping the Future Is Transformational

New Opportunities A changing customer model A changing utility business model A changing regulatory model

Conclusion

The U.S. electric grid delivers a valuable product essential to all Americans

The electric power industry is leading the transformation to make the grid more flexible and more resilient to meet the growing demands of our digital society

Everyone who uses the grid should help pay to maintain it and keep it operating reliably

It is vital for our Nation to have a diverse supply of safe and reliable electricity, and electric rates should be fair and affordable for all customers

Electric Industry Update · Resource Team (NMART) Regional Mutual Assistance Groups (RMAGs) • Provide general NRE oversight • Resolve issues identified by the NREC • Interface

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