Last month’s annual meeting of the National Association of Regulatory Utility Commissioners (NARUC) was notable for several reasons. In the days leading up to the meeting, NARUC released a final version of its Distributed Energy Resource Rate Design and Compensation Manual, and at the meeting members elected a new President, who happens to be from the NEEP region. Yet, from an energy efficiency perspective, the most important outcome of the meeting is a story no one is talking about: Resolution CI-1.
Regulatory Treatment of Software Investments
Resolution CI-1 suggests that utility regulators change the way they treat cloud computing arrangements on a utility’s balance sheet by moving them from the operating expense column into the capital expense column. The full version of the resolution can be found here (p. 4), but you can find the relevant language excerpted below for brevity:
“NARUC encourages State regulators to consider whether cloud computing and on-premise solutions should receive similar regulatory accounting treatment, in that both would be eligible to earn a rate of return and would be paid for out of a utility’s capital budget.”
In short, under current accounting guidelines, if a utility invests in on-premise software, that investment can be classified as a capital expense and a rate of return can be earned on the investment. However, if a utility invests in cloud-based technologies this is classified as an operating expense and the utility gains no rate of return. This distinction discourages the cloud-based solutions that are ubiquitous in other modern industries.
Echoes of New York’s Reforming the Energy Vision Proceeding
What NARUC has suggested here is essentially to place software offerings on a level playing field with power plants and on-site software, as far as utility shareholders are concerned. Notably, this action resembles one taken by the New York State Public Service Commission in May of 2016. In its Order Adopting a Ratemaking and Utility Revenue Model Policy Framework (p. 104), the Commission contemplated the move toward combining capital expenditures and operating expenditures into a single sum known as “totex.”
While the Commission ultimately decided to keep the distinction between the two, it noted “Utilities can earn a return on some types of REV-related operating expenses within the current accounting system,” and suggested that “To the extent that [software] leases are prepaid, the unamortized balance of the prepayment can be included in rate base and earn a return. This suggestion is strikingly similar to the language of the above-excerpted NARUC resolution.
Software-as-a-Service and Energy Efficiency
Moving software services into the capital expenditure column could have a big impact on energy efficiency and other distributed energy resources. For example, utilities may now be incented to contract with companies who use interval meter data to disaggregate load and provide a ‘virtual’ energy audit; this would unlock extensive savings and help inform program marketing. They would also have an incentive to contract with third parties who use cloud computing power to inform program administration through real-time measurement and verification. Looking toward the world of broader distributed energy resources, utilities might be encouraged to contract with a third party to deploy a distributed energy resource management systems.
These are just a few of the known examples how NARUC’s recent resolution might impact energy efficiency programs; let us know in the comments section if you can think of more.