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Energy Central Power Perspectives™: Getting to Know Paul Alvarez, Expert in the Utility Management Community

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As the utility industry becomes more dynamic and new ways of thinking become more critical to the success of power companies, leadership at utilities is taking the center stage more than ever before. The ability to have foresight about the future of energy while ensuring the deliver the essential services in a reliable and affordable fashion today requires great management skills and insights into the wider industry.

In this important moment for the utility industry, looking to the experts in the field for how such leadership is being utilized across the sector is an important way to stay ahead. As such, the Energy Central network of experts continues to be one of the most valuable assets at your fingertips in this community. But our experts can only be as useful as possible when you know about them and why they are individually so knowledgeable, so this week we continue in our Power Perspectives™ “Getting to Know Your Experts” interview series with a seasoned veteran expert in our Utility Management Community, Paul Alvarez:

Matt Chester: I can’t thank you enough for taking the time to share some insights with our community, which is really just an extension of the already valuable work you do for us regularly as a registered expert on Energy Central. To give our readers who may not be familiar with you a good starting point, can you give the quick overview of where your career has taken you and how you got to be in the utility sector in the first place, as well as where you are and what you’re working on today?

Paul Alvarez: I came to the utility sector in 2001, when the wave of de-regulation sweeping the industry at that time prompted investor-owned utilities to increase representation of people from highly-competitive industries in their workforces.  I landed in demand-side management program development and measurement and verification, or “M&V”, where I worked for almost a decade.  My DSM M&V experience came in handy when I was asked to lead, as an independent consultant, two M&V projects regarding grid modernization.  These included Xcel Energy’s SmartGridCity project in Boulder, Colorado, in 2010 and Duke Energy’s Cincinnati-area deployment for the Ohio Public Utilities Commission in 2011.  To this day these are two of only three such independent, comprehensive evaluations of grid modernization investment benefits which have ever been conducted.

All three evaluations led to the same two conclusions: 1) that securing benefits from grid modernization sufficient to justify costs is extremely difficult, and requires extensive post-investment efforts from utilities, regulators, and customers; and 2) that utilities have economic motivations to discourage many potential benefit of grid modernization, including the reduction of system coincident peaks (due to capital bias) and the improvement of grid and customer efficiency (due to the throughput incentive).  These realizations prompted me to write a book, Smart Grid Hype & Reality: A Systems Approach to Maximizing Customer Return on Utility Investment, first published in 2014 and updated with a second edition in 2018.    

Around this time, my team’s work began to be discovered by consumer, business, and environmental advocates concerned about grid over-investment and lack of value creation.  We formed the Wired Group to address these advocates’ needs.  All our work since has revolved around helping advocates, in utility regulatory proceedings, rationalize grid modernization and investment plans and maximize the value delivered from distribution grid investments.    

 

MC: You’re an expert in our utility management group, which is going to be such a key area as the industry continues to undergo immense changes. If you could make leaders across the utility sector heed one piece of advice during this crossroads moment in the industry, what might it be?  

PA: Given my team’s focus on regulators and policymakers, my advice is going to be targeted to them.  It seems to me these folks, from the Department of Energy and FERC to state regulators and legislators, are deathly afraid of being blamed for deteriorating reliability, whether due to aging distribution equipment, increasing distributed generation, or severe weather events.  Investor-owned utilities are seizing on these fears to secure enhanced cost recovery, thereby encouraging ever-greater grid investment.  It seems no one but consumer or business advocates give much thought to the consequences of ever-greater grid investment, which are the distribution rate increases which act as a drag on our economy.  Now, falling natural gas prices have masked distribution rate increases in the past decade, and we think some level of distribution rate increase complacency is fueled by the fact that overall bills have remained flat, though distribution rate increases associated with dramatic increases in grid investment will remain for decades to come. 

So, if I could offer one piece of advice to state regulators and legislators, it would be for them to weigh the impact of certain distribution rate increases on their economies at least as heavily as they weigh the potential for uncertain improvement in reliability and/or distributed generation accommodation.  Excess grid investment is not cost free or risk free.  The US economy is exposed to global competitors, and the electric infrastructure for which our entire economy pays must be cost-effective.  To the extent investor-owned utilities make capital investments which are greater than the minimum required to maintain reliability or accommodate renewable generation, the US economy (and state and local economies) suffer.  

 

MC: One of the greatest challenges in managing the energy sector today is knowing how to best balance the critical goals of affordability, reliability, and environmental impact, none of which can be sacrificed. What do you think is the right way to approach these goals when there happens to be a push and pull between them?  

PA: At the Wired Group, we sympathize with the challenges facing state regulators and legislators today.  Given that the challenge you cite has already been successfully addressed in the generation domain through integrated resource planning processes, we believe those processes provide much experience from which those of us in the distribution industry can all learn.  Three features of integrated resource planning are particularly relevant to distribution planning and investment:  Objectivity, Transparency, and Stakeholder Engagement.

Objective data has been used in integrated resource planning for decades, including load (kW and kWh) history, commodity fuel price history, and generating plant outage history, among others.  The analogies to distribution planning and investment are clear.  Regulators in California and New York are already mandating counterparts in distribution planning, including circuit-specific load forecasts, distributed generation forecasts, and (distributed generation) hosting capacity analyses, to name just a few.  All of these forecasts are based in largest part on actual historical data, which we encourage all regulators to require and review when making any decisions on distribution investment plans.  As we often repeat in our work, “In God we trust; all others bring data”.

Once objective data has been secured, integrated resource planning choices are made transparently, in formal regulatory proceedings.  In these proceedings all evidence is made available for review, priorities for the future (including renewable portfolio standards) are considered, and informed choices are made with full knowledge of trade-offs in cost and risk.  This feature is completely missing in distribution planning.  Today, utilities make all the choices.

Finally, integrated resource planning features stakeholder engagement, in which interested parties each have a say in negotiating the fuel mix targets the resource plan should pursue.  In essence, constituents have a say in the generation portfolio they want, thereby establishing the long-term goals important to them, after evaluating the pros and cons of various alternatives available for achieving those goals.  There is no such feature in distribution planning, in which investor-owned utilities generally recommend alternatives which require large amounts of their own capital.

MC: Regulators in several states have been considering new utility business models.  What advice do you have for them?

PA: I consider the phrase “utility business models” to be a euphemism for “utility compensation reform”.  Due to the chasm between investor-owned utility interests (greater capital spending and sales volume) and customer interests (lower rates and usage) exhibited in the current US ratemaking model, I believe utility compensation reform to be warranted.  On the other hand, the potential for reforms to cause utility income to skyrocket at customer expense is significant.  For example, I see “reward only” payments for strong performance, without corresponding penalties for poor performance, to be unfair to customers.  Similarly, rewarding utilities for using “non-capital” alternatives which result in lower costs to customers seems to absolve utilities of their existing requirement to act prudently in customer interests.     

For regulators considering utility compensation reform, I strongly encourage the use of performance benchmarking.  It is difficult to know how a utility is performing on reliability, customer satisfaction, capital investment, operations and maintenance spending, demand-side management, and other metrics without comparing it to peers with similar characteristics.  Without relative data, best practices can’t be identified; prioritization of opportunities for improvement is difficult; and the establishment of challenging but fair performance targets is all but impossible.  Financial and operating performance data is readily and publicly available from FERC and the Energy Information Administration is readily available for such applications; see, for example, the capabilities available at www.utilityevaluator.com.

For regulators who prefer to avoid compensation reform, I recommend the transparent, stakeholder-engaged distribution planning and capital budgeting process the Wired Group recommends.  Such a process is not likely to change the percent of profit a utility can earn, but it can certainly impact the amount of capital spent, the allocation of that capital among competing priorities, and the benefits delivered to customers by that capital, all in way which advances the public’s interest. 

 

MC: As one of our trusted experts at Energy Central, you’ve used the platform as a means to share your insights fairly actively. What do you think is the value in the Energy Central community and the ability to bring together utility professionals from different areas? What keeps you coming back to Energy Central?

PA: You asked earlier for my recommendation on how best to balance competing objectives.  We see the current discourse surrounding distribution planning and investment to be dramatically out of balance in favor of investor-owned utilities’ shareholders, and against the economic interests of businesses, consumers, and the environment.  If you examine any Department of Energy publication regarding grid modernization, for example, you’ll see that assistance from many investor-owned utilities, equipment manufacturers, engineering firms, software consultancies, and their associations is acknowledged.  Utilities use these same groups to serve as expert witnesses in state regulatory proceedings regarding grid modernization.  Yet all of these groups have a vested interest in greater grid investment.  Qualified voices with objective and valuable information to share regarding grid investment, customer returns, and measurement struggle to find venues to disseminate our perspectives widely. 

Despite their controversial nature, my views have never been censored or restricted on Energy Central.  In my experience a representative from any utility, or from any regulatory, legislative, or research agency, can get objective information on any issue with which he or she is struggling on Energy Central.  That is why I continue to participate.      


 

Thanks to Paul for participating in the “Getting to Know Your Expert” interview series and for time and again showing a commitment to sharing his insights within the Energy Central community.

The other expert interviews that we’ve completed in this series can be read here, and if you are interested in becoming an expert then you can reach out to me or you can apply here.

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