Rock the Rooftop: Wellinghoff's Plan to Set Solar Straight

When Jon Wellinghoff sat as chairman of the Federal Energy Regulatory Commission, he guaranteed open access to electric transmission lines. Marketers, traders, merchant power producers, owners, demand response aggregators - each could share in a slice of the grid, courtesy of FERC.

But now tables have turned. Battle lines have shifted. With solar photovoltaics nearing grid parity - and coming closer every day - maybe it's now time to consider rooftop parity. Instead of open access just for the interstate grid, why not also for the physical space on the roof atop the premises of the residential ratepayer?

Since he left Washington, Wellinghoff has returned private legal practice, as a partner in the San Francisco office of Stoel Rives, LLP. But he still looks at the problem much like a regulator. As Wellinghoff sees it, why not optimize the solar experience for ratepayer and utility alike? Why not permit utilities to get in on the action by owning solar behind the meter within their own franchised service territories, with the facility added to rate base and eligible to earn the authorized, regulated rate of return?

As it happens, that's exactly what the former FERC chairman now proposes, joined by co-author James Tong, vice president for strategy and government affairs at Clean Power Finance (CPF), a software and financial services provider for the residential solar PV industry. CPF works with multiple institutional investors, including utilities such as Integrys and Dominion. And CPF counts Duke and Edison International among its equity owners.

Working together, Tong and Wellinghoff have recently completed a policy white paper on these issues, set for publication in the upcoming July issue of Public Utilities Fortnightly:

"Thinking Outside the Box: A Case for Utilities Owning Solar within Regulated Service Areas"

As the white paper explains, regulated utilities today are generally barred from providing solar behind the meter to their own customers. Conflict is thus inevitable and will only intensify as rooftop solar grows. The focal point has been net energy metering (NEM) rules, which many see as the broken policy, but which Tong and Wellinghoff view as a distraction from more fundamental issues.

Current regulations leave the utilities with essentially two business strategies: "...do nothing and lose their best customers," as Tong and Wellinghoff write, "or 'compete' against solar by making it less attractive.

"Thus differences over NEM are consequences of - not causes for - the two business models being incompatible."

According to the two authors, a simple NEM price fix, standing alone, will ultimately not resolve the challenges from a disruptive innovation. : "No degree of pricing tweaks," they add, could have ever saved Kodak from digital photography, Blockbuster Video from streaming media, or typewriters from PCs."

Wellinghoff and Tong would rather pursue a structural solution - even if it means writing new legislation, state by state. Otherwise, they warn, each side will cling to "its own exclusive sandbox, fighting to prevent the other from playing in it..." to the detriment of both sides and all grid users.

And so the two authors sat down with Fortnightly in early June to talk about their ideas and explain how their proposal might work in practice.

FORTNIGHTLY: What is the state of the law now? Do most states bar utilities from rate-basing solar behind the meter and within the regulated service territory?

JON WELLINGHOFF: There are a number of states that would not permit a distribution utility to own these assets on the other side of the meter.

FORTNIGHTLY: Is that a majority rule?

JAMES TONG: It's almost all of the states. There are some notable exceptions ... I know that South Carolina is looking to allow rate-basing. They've recently passed legislation on that. But there's still a ways to go.

WELLINGHOFF: There are some states that have a sort of hybrid model with respect to customer-side investments. For example, Nevada allows utilities to invest in expensing items like energy efficiency on the customer side of the meter ... [T]he commission actually allows the utility to earn a return on that.

FORTNIGHTLY: That sounds like rate-base treatment. So it's a hybrid in what way?

WELLINGHOFF: I'm not sure about the period of time in which they are able to obtain this return. So it's not completely analogous to rate-basing long-term assets. I'm also not sure if they can get depreciation, and I'm not sure about the period of recovery. It may be only for one year.

To tell the truth, I should be more certain of it, because I actually helped write the rule. But that was a while ago.

FORTNIGHTLY: I understand your proposal would apply only to new customer-side solar installations. In the case of states like Arizona or California, where residential solar PV behind the meter has become quite popular, what you're saying then is you've lost some of the market, the solar that's already been installed?

WELLINGHOFF: It's such a tiny proportion of the market - less than 2-3% of the market in places where the market is the most vibrant - perhaps with the possible exception of Hawaii, which has a market penetration of perhaps 7-10%. But no other state has a penetration level that's near that.

FORTNIGHTLY: In your white paper you suggest that customers could benefit from utility involvement since, for one thing, utilities could provide financing at lower cost. But what happens to the vendors who have been providing financing to add value? If the utility takes over financing, will that take a share of the pie away from the commercial solar installers?

WELLINGHOFF: I think it will go the other way. This program could in fact expand the penetration of distributed solar throughout the utility service territory. It could increase the work for existing solar installers.

TONG: I would second that. It will expand the market tremendously ... [and] ... drive significant cost reductions. The supply chain is very choppy right now. Having more flow will introduce economies of scale. It will increase the size of the pie, and will reduce costs for installers tremendously.

They may see lower margins, but in return they will see significant growth potential. And most installers that I've talked to would be really happy with that. Margins become less important when you are assured of more project flows. Let's put this in perspective: regarding the cost of customer acquisition, there have been different estimates, but most of them fall within a range of about 50 cents to a dollar per watt. That's the acquisition cost alone. That represents anywhere from 10 to 25 percent of the cost of a residential system.

WELLINGHOFF: It could be anywhere from three to five thousand dollars per system, just for the acquisition costs. Those costs can be driven down substantially by having utilities stepping in, finding the customer, doing the financing, basically just handing them over to the installers to put in the system.

FORTNIGHTLY: You mentioned that your idea would require some new legislation in various states. Are you going to try to play a part in that?

WELLINGHOFF: We certainly would be interested in providing information to anybody ... assisting people in any way possible....

But once the model is out there, it provides opportunity for distribution utilities or others who might want to move forward with it.

FORTNIGHTLY: And you will be the guiding theoretician?

WELLINGHOFF: Well, also standing by to potentially assist entities who would like to move forward.

TONG: The idea is not to make this purely theoretical. We have kept the concept at a level high enough so that it could be applicable to a large number of states. Now, when you look at a specific state, there will be some details that will need to be hammered out, and we'll be prepared to help whoever is interested.

But right now, the conversation is stuck on net metering. Our goal is to expand the scope of the dialogue to something that's a lot more constructive.

FORTNIGHTLY: You say you wrote some rules in Nevada. You'd be prepared to write new legislation to make this happen?

WELLINGHOFF: Absolutely.

FORTNIGHTLY: So the death spiral is not here yet?

WELLINGHOFF: No, not yet. We're trying to find an alternative.

Editor's Postscript: Look for the full white paper in the August issue.

Bruce W. Radford is editor/publisher of Public Utilities Fortnightly. Contact him at radford@pur.com.