Distribution system inquiry report: understanding Alberta’s evolving electric system

Canada Publication April 21, 2021

In a new report, the Alberta Utilities Commission highlights the challenges and opportunities associated with modernizing Alberta’s electricity grid. The Distribution System Inquiry final report brings to a close the Commission’s over two-year fact-finding process on “mega-trends” that are likely to transform Alberta’s electricity industry in the coming years. 

The inquiry’s main focus was technologies known as distributed energy resources (DERs), understood broadly as any technology connected to the distribution system that affects electricity supply or demand. DERs include sources of supply (e.g., solar, combined heat and power, or wind), energy storage, and devices to automatically manage electricity consumption. 

While DERs raise a number of challenges, the greatest concern was the potential for uneconomic bypass of Alberta’s grid. Uneconomic bypass occurs when a consumer employs a DER to reduce its own transmission or distribution bill without reducing the costs of the electric system that must be recovered through tariffs. As the avoided costs do not disappear, they must be recovered from other customers. While the individual customer engaging in the bypass benefits, the result is inefficient for society as a whole because greater overall costs are paid to deliver the same amount of service to all customers.

The Commission heard several views on solutions to uneconomic bypass and the other challenges DERs may create. In its final report, the Commission identified areas where there was a consensus or at least significant agreement on the response to these challenges. This update reviews the Commission’s findings on the impacts of DERs, the areas of agreement identified by the Commission and points of contention likely to arise in future proceedings. 

Where are we now? The impact of DERs

The Commission heard from about 90 parties, including the Alberta Electric System Operator (AESO), regulated utilities, advocacy groups and DER proponents. The Commission came to several conclusions on the impact of DERs on distribution systems and Alberta’s interconnected electric system more broadly:  

  • Uneconomic bypass poses a significant threat to the electrical system, and if unchecked may lead to a spiral of increasingly inefficient investments and the need for more difficult and disruptive corrections in the future. Where DERs are used to avoid paying system costs, utilities must ultimately recoup these costs from non-DER customers. This prompts a vicious cycle, as ever-increasing costs must be paid by an ever-decreasing number of non-DER users. The Commission noted California and Hawaii’s experience, which shows it becomes increasingly difficult to fix uneconomic bypass issues as DER adoption rises. 
  • In addition to shifting costs between customers, DERs may also raise the overall cost of distribution systems. The Commission also noted that larger loads and two-way flows associated with DERs may increase distribution costs from an operational and planning standpoint.
  • In spite of these concerns, with proper price signals and grid planning DERs could offer value to the grid. New York was held out as a model of successful DER integration.
  • Rates of DER adoption in Alberta remain relatively low and currently do not strain Alberta’s electric system. That said, while there was agreement that adoption rates will likely climb over the coming years, there was considerable uncertainty and disagreement around timing.
  • While the distribution system is most acutely affected, DERs could affect the entire electricity system. For instance, uneconomic bypass affects both transmission and distribution utilities, as DER users also avoid charges tied to transmission. 
  • DERs may also raise fairness concerns if distribution- and transmission-connected generators are treated differently. In this regard, the availability of tariff credits to distribution-connected generators was a contentious topic, one that the Commission is considering further in Proceeding 26090.

What’s next? Responding to the future impacts of DERs

In its final report, the Commission sought to establish common ground between the parties on the response to the challenges that DERs pose. 

As to the overall approach, the Commission noted three points of agreement: 

  • Even though some parties would advocate legislative changes on certain policy issues, Alberta’s current legal and regulatory framework is flexible and robust enough to address DER challenges.
  • Alberta’s response needs to be guided by a common set of principles, including the principles and objectives listed in s. 5 of the Electric Utilities Act, such as competition and customer choice to achieve economic efficiency, but also the “centuries-old principle” of utility regulation that rates must be just, reasonable and not unduly discriminatory. 
  • A comprehensive, coordinated response was needed between the distribution and transmission systems and between wholesale and retail markets.

On the issue of uneconomic bypass, the Commission found a consensus among the experts participating in the inquiry that traditional distribution tariff designs, based on volumetric or peak charges, contributed to uneconomic bypass. The remedy was a combination of non-avoidable charges and variable, avoidable charges to send a forward-looking price signal. 

The Commission also found that advanced metering deployment was essential for executing an improved rate design to address bypass and send accurate price signals.

The Commission suggested support for an integrated approach to system planning and DERs. This approach would seek better coordination between distribution utilities and the AESO, while granting opportunities for input from customers and DER proponents. The Commission also noted it saw consideration of DERs as non-wire alternatives to be part of this integrated approach.

Finally, the Commission noted widespread support for developing “distribution utility roadmaps.” The roadmaps would specify to industry stakeholders when and what mitigating actions need to be taken as DER use increases and market conditions evolve. 

Points of future contention

As noted, the Commission’s focus on finding common ground yielded several areas of high-level agreement. At a more granular level, the report reveals several topics that will remain contentious as Alberta’s electric system evolves.

For instance, the Commission noted disagreement on the particulars of rate design and rate classes. The need to address transmission rates means that the AESO tariff will also be part of integrating DERs through appropriate rate design. The solution to the uneven playing field created by DERs was also an area of contention.

More generally, the Commission’s call for distribution utility plans contemplates revisiting key regulatory responses in future proceedings as problems emerge. 

Some regulatory approaches that the Commission held up as models for Alberta are also likely to be contentious. For example, the Commission pointed to ConEd’s integration of DERs into its Brooklyn, New York, grid as an example of using DER integration that decreased utility costs. While an example of successful integration, ConEd’s solution, established in Brooklyn's densely networked grid, may not be transferable to Alberta’s comparatively low-density electric system.

Thus, while the final report identified broad agreement on policy and certain responses, many issues raised in the inquiry will inevitably be revisited in future proceedings. 

Building on the inquiry’s final report

The final report provides considerable information on the forces likely to transform Alberta’s electric system, together with insight into the principles that will guide the Commission in future proceedings. We expect this to contribute to regulatory efficiency, as parties in future proceedings will have a wealth of information on which to base their submissions. The Commission also pointed to some areas of high-level agreement, which we hope will help to scope issues that remained to be decided. 

As the Commission recognized, however, there are significant areas of contention among stakeholders on the appropriate responses to the issues still unresolved. Much remains to be decided despite the significant efforts on the part of stakeholders and the Commission over the past few years. The conflicting interests and ideas put in play by the various emerging DER technologies will make it challenging to maintain the collective, comprehensive approach called for in the final report. 

The Commission and the many stakeholders involved will also face the challenge of finding the right balance between a comprehensive and a timely response. On the one hand, the Commission has conveyed that Alberta has time to take a thoughtful, balanced approach to implementing solutions to issues raised by DERs. And we expect this is true of the approach to realizing the benefits of DERs. But on the other hand, the potential challenges of DERs, such as uneconomic bypass, call for a more immediate response. 

That said, the Commission’s endorsement of distribution utility roadmaps is a positive development. As the Commission stated, these roadmaps can identify outstanding issues to be resolved in both the short and long term. Their design and implementation can also involve consultation with multiple stakeholders. Further, they may serve as a platform for coordinated action. The specifics of a roadmap, of course, will be key, but the final report can help frame the outstanding issues that must be addressed.

All in all, the final report distills the debate and provides a sense of which facts and principles are—and perhaps more importantly, which are not—in dispute among the various stakeholders. There is no doubt it will provide direction to stakeholders and the Commission as they navigate the regulatory challenges posed by the coming transformation of Alberta’s energy grid. 

 The authors wish to thank articling student Ian Wylie for his help in preparing this legal update.

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