Power utilities spend more on their local distribution systems than almost anything else now — roughly a third of their capital budgets, and the biggest driver of rising electricity bills — yet unlike generation and transmission, that spending faces almost no scrutiny before it's approved. In this episode, I talk with Minnesota regulators Sydnie Lieb and Pete Wyckoff about why distribution spending escapes the modeling and optimization the rest of the grid goes through, and what it would take to make utilities justify it.
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Text Transcript
David Roberts
Power utilities are responsible for the three big parts of the electricity system: generation, ie, power plants; transmission, ie, the high-voltage lines that carry electricity over long distances; and distribution, ie, local networks of transformers, power poles, and power lines — the stuff you see around you in your neighborhood.
When it comes to spending money on generation and transmission, utilities’ choices face considerable regulatory scrutiny. They are obliged to carefully model those systems, produce detailed projections, and demonstrate how their plans optimize those systems at least cost to customers.
Their spending on distribution systems, however, has not traditionally faced the same scrutiny. Distribution systems have been viewed simply as delivery mechanisms. You build enough transformers, poles, and lines to get the power to customers, replace them when they get old, and that’s that. Utilities bucket this as “mandatory” spending and the only scrutiny it receives from regulators is to make sure they’re paying reasonable prices for the equipment.
However! If you’ve been following Volts for a while, you know that distribution systems are where all the action is these days. That’s where all the technologies that we cover here—rooftop solar, batteries, EVs and EV chargers, home energy management systems, and “virtual power plants” that tie all that stuff together—are located. Distribution systems have become much more complex. They can be used as a grid resource, not just a delivery vehicle, and there are many more choices now for exactly how to plan and construct them. What’s more, rising distribution system costs are the biggest portion of Americans’ rising electricity bills.
Many people, including many Volts guests, have been pressuring utilities to think more creatively about distribution systems, to embrace new technologies, and to use the distribution infrastructure they’ve already built more effectively. (If you haven’t yet, you should listen to our episode on grid utilization.)
But my guests today believe that some of this amounts to putting the cart before the horse. They believe that if utilities are going to get creative with distribution planning and spending, then that planning and spending should come in for the same kind of regulatory scrutiny as their other buckets of spending. Utilities should learn how to better model distribution systems so that regulators can ensure their choices optimize those systems as they grow and evolve. As we’ve said on Volts many times, left to their own devices, utilities tend to prefer concrete and steel—more spending—whereas many of these new technologies can produce the same results for cheaper.
Sydnie Lieb is the assistant commissioner of regulatory analysis at the Minnesota Department of Commerce. Pete Wyckoff was, until recently, that department’s deputy commissioner for energy. (As of a few weeks ago, he is the vice president for policy at Evergreen Action.) They are recommending that Minnesota regulators require much more analysis of distribution systems from their utilities before they sign off on that spending. Today, we’re going to talk about why, what that scrutiny would look like, and what they hope the outcome would be. This is a nerdy one, but it’s important and, honestly, I love this shit. Let’s do it.
All right, let’s do it. So with no further ado, Sydnie Lieb, Pete Wyckoff, welcome to Volts. Thank you so much for coming.
Pete Wyckoff: Thank you so much, Dave.
Sydnie Lieb: Thanks, Dave.
David Roberts: Sydney, let’s start with you. Just by way of background level setting here, I talked about this, I touched on this in the intro, but maybe expand a little. How utilities, we’ll just take Minnesota as an example, how utilities determine their distribution spending and how it is treated differently than generation and transmission spending by regulators. What is the what is the process now and how is distribution different than those other buckets?
Sydnie Lieb: Sure. So I think I want to start with just describing how we do transmission and resource planning. In Minnesota, we’re a vertically integrated state, so our utilities are planning and owning their own generation. And both the transmission and the generation processes are very robust regulatory processes. Transmission is largely planned at the level of the regional ISO, which here is MISO. And it’s a multi-year planning process to look at how much load is going to exist within the region, how much generation there is, where that generation is, where there are constraints on the system. And there’s several scenarios and sensitivities that are looked at to assess, you know, if you have 10% more load in one location, what does that necessitate in terms of transmission build-out that’s needed? And now with some of the federal requirements at FERC, we’re also seeing a lot of consideration of grid enhancing technologies alternatives that might reduce that transmission. And whenever you’re planning transmission, you’re looking at the trade-offs between having a generator closer to load versus having a transmission line there. And it’s a very robust process that involves many stakeholders. So you have consumer advocates coming in, you have environmental groups coming in, you have utilities coming in, you have states coming in. And through a two-year process, they plan out the optimized transmission system. At the same time, at the state level, when we have a resource plan come in, utility comes in, they have a load forecast, they have economic forecasts on how much energy prices are going to be, both in the market and also to procure generation. And they come in with their preferred plan of what they think the economic optimal solution is for that generation. And then Any other intervener can come in and say, we think we should have more of this type of resource. We think your load forecast is overblown and we think you’re actually building out more than you should. We think there should be a mix of distributed energy instead of just grid scale. And all of those decisions go through a clear economic optimization. On the distribution system, utility essentially buckets spending into two types of spending: discretionary spending. And non-discretionary spending. And the discretionary spending is a relatively small amount. These are projects that could or could not be done this year, and they look at some pros and cons there. But on the non-discretionary spending, which is most of what’s driving these significant budget increases, the utility doesn’t look at any sensitivity in their load forecast. They’re not informing what’s happening on their system. They could be informing the load forecast with AMI — advanced meter — data that we have now so that they could better predict whether or not they’re going to see electrification growth in a region or they’re going to see more distributed solar in a specific part of the grid. But none of that goes into the forecast. And even worse, I think, is that there’s no opportunity for any intervener to come in and say, if we think this load forecast is off by 10%. We could save tens to hundreds of millions of dollars depending on the system and the investment. But right now there’s no opportunity to do that because the utility says, we’ve made these decisions, they’re engineering decisions, they’re necessary to maintain reliability of the system. And we’re not having any discussion about whether or not we made the right investment decision on these discretionary spending topics.
Pete Wyckoff: Just this is Pete, just, you know, back it up to a slightly higher view and topics that you’ve covered on this podcast before. We know how much a solar farm out in the country should cost. We know how much a transmission line should cost. The distribution systems, all the wires to everybody’s houses in a metro area and all the other pieces. It’s really hard to get all the data and information which we need to get. To accurately to say how much should that cost. Mm-hmm. And that’s why in in the past it’s been a black box, but as we’ll talk in this conversation, we can’t let it be a black box anymore because things are much more complicated. Things run two ways now.
David Roberts: Well, yeah, I was gonna my next question was why, I mean, pulling the camera back a little bit, talk a little bit about why distribution system spending is more important now than it used to be, why it’s getting more important in terms of both in terms of the complexity and technology, but also in terms of affordability. I think everybody’s aware that electricity bills are going up, everybody’s in a panic about it, there’s this affordability crisis. Lots of people, if you just talk to on the street, assume It’s like your choice of generators that is driving costs or that is transmission driving costs. But in fact it’s mostly distribution. So talk about sort of the rising importance of distribution generally.
Pete Wyckoff: Maybe I’ll start there and then I’ll turn to Sydney for more details, but just in as a general concept, we can give the cynical answer and the non-cynical answer. I think they’re both partly true. The non-cynical answer I can start with is it’s an aging system. It is a system we’re asking more and more of as we have home batteries, as we have home solar arrays, as we have more. Things and kinds of things and two-way flows on the system. So it’s a system that’s both aging and needs upgrading for that reason. It’s a system that is at being asked to do new things. And it’s a system that we are have become, and we’ll talk about this more, less and less tolerant of it being out for any any amounts of time. And we’ll talk about why that’s a really an important question. So that’s the non-cynical answer. The cynical answer, and I used to work at the federal level on electric policy, and then I came to work for Governor Walz four years ago. And one of the things I realized is that the state level with regulated utilities, these are monopoly utilities, they are for-profit utilities. They have a duty to get as much return for their shareholders as possible. And we as regulators have a duty. To make sure they don’t get an unfair return to their shareholders. But they have a lot of political power and there’s political pressure. And by building things, they only get return on equity or or return on equity, return on profit off of the things that are physical. You know, when they buy natural gas, they just pass it through at cost. When they do other things, they pass them through as cost. Their profits
David Roberts: Right.
Pete Wyckoff: Come from building things. When I first got out to the U.S. Senate as a staffer, I had a utility lobbyist come in and said, first thing you got to know, Pete, and I’ll just admit this, is we don’t sell electricity. That’s a loss leader. We we build stuff. And we’re always gonna want to build stuff. So we’re all for the clean energy transition. If it means we have to build things, we can undo the clean energy transition to build more things, whatever. We just want to build stuff.
David Roberts: This is I’m sure you both know a frequent a frequent theme here on Volts. And of course, you know, people who listen to Volts know that lots of these new technologies that are popping up on distribution systems. I mean, not just the new ones, like energy efficiency, for instance, but also a lot of the new ones like home solar, home batteries, software. Virtual power plants, all of these in one way or another have the effect of reducing the amount of stuff that the utility has to build. So there really is a very fundamental conflict between utility incentives and the best technology solutions for distribution grids. And I know, like, I know we’re going to talk about how regulators can sort of ameliorate that and restrain that. And that’s all to the good, but You know, as I frequently say, I just it’s hard for me to imagine the optimal solution to these things in the long term without that basic incentive problem being addressed somehow. And of course, like who knows exactly how, and who knows how to how to proceed doing that. But it’s just like that’s just like a tidal pull underneath all this in the wrong direction.
Pete Wyckoff: Minnesota’s actually an interesting case. Not the only one like this, but a lot of our electric system is regulated by our public utilities commission with the help from us folks at the Department of Commerce, which is where I was until two weeks ago. So these for-profit utilities in a regulated regulated system. But a lot of our electricity comes from not for-profit, municipal and cooperative utilities, and looking at differences in their behavior. Where one has this let’s build stuff because then we get more money versus let’s not build stuff because building stuff costs money. Right. It’s an interesting place to be where you can see both the ups and downs of both systems.
David Roberts: That’s pretty stark. So, Sydney, let’s make this a little concrete. So let’s just take like Xcel as an example. When we talk about Xcel’s distribution system spending, what are we talking about? What are they spending that money on? What falls into that bucket? What kinds of things count as distribution system spending?
Sydnie Lieb: It’s a lot of things. It’s a it’s a diffuse system. It’s things like wires, transformers, substation upgrades. I think all the hardware people think of when they think of the distribution system. It’s also all the things that we do to maintain reliability on that system. So it’s OM budgets for tree trimming.
David Roberts: That’s that’s operation and management for the
Sydnie Lieb: Yes, sorry. Operations and management budget. So as utilities are thinking about their budgets, there’s operations and management, which is basically a direct pass through. So
David Roberts: They don’t make money on that.
Sydnie Lieb: They do not make any profit on that. If they spend fifty million dollars on that, they get fifty million dollars of recovery from ratepayers. Right. And their general preference is to minimize those types of expenses in favor of something that is a physical capital asset because that’s something they will earn a rate of return on. So, you know, and one of the some of the other big budget spending categories we’re seeing in these distribution plans also are undergrounding of wires. And that’s one where I think it’s an interesting, as Pete is pointing out, that we have we have some regulated investor-owned monopolies in the state, but we also have one electric co-op that chooses to be rate regulated. So they have it required to file a distribution plan. And there, there’s a huge difference in what we’re seeing in terms of targeting targeted undergrounding of lines for reliability purposes. And the utility, there’s a trade-off between the amount of tree trimming and maintenance that you’re doing. Versus the cost of undergrounding a line. And the utilities that are investor owned utilities that have a real incentive to invest as much capital as possible, we’re seeing that they are taking existing lines that are still in surface, do not need replacement, and saying, we’re going to underground this line because now they can get the capital investment for the line that was there and an additional capital investment for undergrounding a totally new line before the old line was able to return was ready to retire.
David Roberts: Right. And tree trimming is operations and management. So they don’t get a rate of return on that. They don’t get the profit on that. So they have a obvious preference.
Sydnie Lieb: Right. And if you look at the co-op, the co-op actually brought in an independent consultant to say, where can we do tree trimming and avoid undergrounding and achieve this a same or similar level of reliability on the system? And they’re actually balancing and optimizing really well on those two things. But it’s one of the recommendations we have, which is our utilities are spending hundreds of millions of dollars to underground lines, and they’re not doing any optimization or analysis quantitatively to look at. Could we just be trimming trees and avoid these investments? I think those are the types of things that need to happen.
Pete Wyckoff: It wasn’t obvious, tree trimming’s a lot cheaper than my
David Roberts: Yes, I would imagine Well, this was actually you’re cueing me up perfectly for my next question, which is sort of, you know, Xcel is bucketed all this, is non-discretionary, mandatory, just engineering. Don’t worry about it. Just give us the money. And let’s talk about a few things within that bucket that might be contestable, that might be that where where someone might reasonably argue that it’s not mandatory, that you have other choices. You mentioned Tree trimming versus underground. That’s mainly, I think, about wildfire mitigation, which is a huge, huge thing everywhere. But are there other what are some other examples of stuff they’re saying is mandatory where you might say, actually there are other choices?
Sydnie Lieb: So I think one of the ones that’s probably most relevant to a lot of the discussions you’ve been having is what can we do with some sort of grid load management derms type system?
David Roberts: I’ve pledged recently to my to my listeners to explain all acronyms. So I’m gonna unpack that one. Distributed energy resource management systems. Basically systems to manage all these, you know, sort of residential and commercial solar panels, batteries, EV chargers, managing all that stuff as a resource. That’s what
Pete Wyckoff: Software you need to make the grid look like David Roberts is telling us it should look like we
David Roberts: Yes. Yeah.
Sydnie Lieb: Right. So I think that’s one of the ones again, like this is something that’s been talked about regularly with you and your other guests is that you could be managing all of the stuff that’s interconnecting on the grid as like a well conducted orchestra. And that could avoid these very expensive substation upgrades that we’re having on the system. The challenge here is that when you try to push the utility in that direction, the response you always get. Is and we’ve actually been these are filed every two years and we’ve been marching on this. This is not the first time we’re taking this approach of saying what you really need is to manage the things on the grid, not to just keep overbuilding the capacity. The utility comes back and says, the software doesn’t exist. And even if it did exist, we don’t believe that it can fill the need that is needed by the physical capital investment.
David Roberts: Yes. And if and if people listen to my episode with Jigar Shah, I think people know at this point that that argument just gets less and less plausible with every passing year as more and more utilities in the US and around the world use that software just fine. Like there are, you know, it’s not theoretical anymore. There are utilities out there doing this stuff and it’s working. So this argument that, like, it’s this new thing, we can’t rely on it, we don’t know, like You know, that’s it’s starting to look like a kind of a rear guard action. But just to just to clarify, is it the case that software falls under the operations and management budget or that they don’t make that they don’t get a rate of return for deploying software type stuff?
Sydnie Lieb: So that’s a fun question. And the answer is it depends. It’s state by state. And it even once it gets down to state by state is oftentimes software decision by software decision. And I think our philosophy here at the Department of Commerce as a regulator would be that we would be very happy to allow the utility to capitalize. A modest software investment in exchange for a very significant capital investment. And, you know, philosophically, whether or not there are risks and the asset life of the software is very different than the asset life of something physical in the ground. And so there are some folks that may not feel it is appropriate to capitalize software, but I think getting back to like utility incentives, if we can get them to if we are gonna force them as regulators to make the software investment, I think there’s some space to capitalize that, but the utility would rather capitalize the very large capital investment.
David Roberts: Yeah, I mean, even even if they do get a rate of return on software, it’s not gonna be as big as if you’re building stuff, right?
Pete Wyckoff: I mean, as a regulator, you just have to be constantly aware that their incentive, and it’s not they’re not evil evil. This is how the system is set up, is to do the expensive thing, not the cheap thing, even if the cheap thing is the better way.
David Roberts: Yes, yes. One other case here where there’s some where you’ve said there’s some room for dispute where something might not be as mandatory as they’re trying to make it is these sort of reliability standards. Talk a little bit about kind of how they treat reliability, how they spend on reliability and how that might you know, what are the other options? What could it be? How could it be different?
Sydnie Lieb: Yeah. So I think this really gets to anytime somebody’s coming to me now and talking about, I wanna do a legislative grid utilization standard, or I want to do some sort of policy that is gonna increase utilization of the grid. I’ve been trying to be really clear with folks that if you are gonna increase the utilization of the equipment, you inherently are going to cause some, probably very small, but But existing impact to the reliability of the system. Because the reason that we have overbuilt this system such that it is so poorly utilized is because we are planning it for an extremely low probability event.
David Roberts: Yeah.
Pete Wyckoff: Can I jump in again? I’ll be the thousand-foot view guy. So I think it is really important, and politically it’s going to be really dicey to say and realize that the trend we’ve had is for fewer and fewer outages. We’ve built a more and more reliable system, and that is great, and that is good. But as you go from 95 to 98 to 99 to 99.99 to a hundred percent. Yeah. As you go to Six Sigma. Every little increment brings a huge cost as you get toward towards 100. It is nonlinear. There’s a huge growth there. So I do not want to be portrayed as the guy who says, we should have more power outages. But if you go to if you go to a to no chance of a power outage. You are going to have an electric system that is so expensive that it is great, it’s 100% reliable. No one can afford it. So there is that trade-off and political systems hate trade-offs like that.
David Roberts: Yes, they really do. Nobody wants nobody wants to be the person who says maybe we should tolerate a few outages a year so we don’t have to spend a cajillion dollars to up that percentage.
Pete Wyckoff: That’s a hundred percent. I mean, I can really get myself in trouble and say that a ninety nine point nine percent clean grid is a lot cheaper than a hundred percent clean grid as well.
David Roberts: Yeah. I mean I think I think that’s I think that’s uncontroversial. That’s it’s it’s those last increments. It’s those la but again, like that’s gonna be a tricky argument. And are there other I mean are there other reliability standards that could be used instead? Like what are there concrete recommendations for how to treat this?
Pete Wyckoff: Talking about myself versus Xcel is good here.
Sydnie Lieb: We should talk about the power market, but I want to be really clear too. The question that you are asking is actually our position. Our position is not we should be spending $20 million less and have one more outage hour in a 10-year period. We’re not taking a position on actually making any less investment. What we are saying is Xcel said, or any of the utilities in these dockets have said. We have to spend this much, otherwise the system will be unreliable. And they have defined what unreliable is. And this is like think where the MISO example comes in. Right. And all the Department of Commerce and a lot of other interveners in the docket who are agreeing with us are saying is it’s not up to the utility to make that cost optimization in a black box, not out in the transparent public, which is where. Regulated monopolies are supposed to make these decisions transparently so that their regulator can tell them whether or not they think that’s a reasonable level of investment.
David Roberts: Right. I mean, it is a it is ultimately not an engineering decision. It’s a political decision, how much reliability you want versus how much cost you want to spend. Like that trade-off at the very least should be made in public with public regulators with their eyes on it. Right. I mean, that’s the idea here.
Sydnie Lieb: Right. And with the consumer advocates coming in as well, the there’s a lot of folks. The utility is not the person who speaks for low income ratepayers or small businesses. We have advocates, that’s not even me. I speak for Minnesota’s like as a whole, but there’s plenty of folks that are just concerned with what’s the impact to low income folks of a ten percent rate increase. Right. And those folks have deserve to have a voice in. What are we paying for what level of reliability?
Pete Wyckoff: So what I like to say, and this is what I said to legislators over the last four years, is the price of electricity is going to be the balance of the forces making it cheaper and the forces making it more expensive. And there’s a lot of things that push in both directions. If you force a coal plant, for instance, to stay online when economically it shouldn’t be there, that drives things up. If you start in exporting tremendous amounts of natural gas And make it a global price as opposed to a cheaper, former American price, that drives up the cost. Just as two random examples.
David Roberts: If you d you say, for instance, deny permits to wind and solar plants across the country, you might raise the price of electricity, just pulling things out of the hat here.
Pete Wyckoff: Right. But but there’s a whole huge stack of these things, and some of them matter more than others, and we should focus on the things that matter more. But as you and your guests before have shown, and LBNL and our friends in the in the national labs have shown, you know, one of the huge drivers, and we haven’t even gotten to the actual numbers here, and I think Sydney should give us some of the numbers because they’re shocking. One of the huge drivers is a rapid increase in cost of this black box distribution system. In the name of reliability and at some point, A, we gotta make sure that we’re getting that reliability for the right price. And then at some point we’re gonna have to decide what is the right amount of reliability to pay for before we can’t afford the electricity.
David Roberts: Right, right. We’ll talk about the difference between how MISO MISO of course is the is the sort of grid is the transmission grid governing body that governs Minnesota, a bunch of other states in the region. Talk about the difference between how they calculate reliability and how, say, Xcel does on the distribution level.
Sydnie Lieb: Yeah, and I’m I’m glad you’re asking this because it’s actually an opportunity for me to celebrate my staff. And I have, I tell people all the time, I think I have the best staff in all of state government, possibly the entire country in any space. My staff, one of the things they looked at was the utility was valuing an hour of outage at a certain price. And they said, you know, well, let’s actually look at what the transmission market is valuing an hour of outage at that system on. Because MISO is one of the biggest ISOs in the country. It’s a very diverse footprint politically. It’s a very diverse footprint in terms of sort of because politically, like you have very different resources and you have a lot of industrial load there. And when industrial load loses power, that is a very significant economic impact. And some of our utilities are valuing an hour of lost power on the distribution system. More than fifty percent higher than what the power market is valuing at. And I really loved my team because my team came to me and said, We did this calculation, it can’t possibly be right. There’s no way the utility is valuing the economic impact of a lost hour somewhere on the distribution system where people, you know, their houses are warm for an hour at the same price as the entire MISO footprint is valuing.
Pete Wyckoff: Folks who don’t have the MISO map in their head, this runs from one Canadian province down through the center of the country to the Gulf of Mexico and most of Minnesota is in this regional wholesale electric trading market.
David Roberts: Right. So just to make this kind of vivid for listeners, so MISO is valuing what is what is the value, what is how much would it cost a lost hour of electricity for that entire grid region? Multiple states, which include big industrial customers, et cetera, et cetera, et cetera. They are valuing that. And then you have an individual utility talking about a lost hour of electricity and an individual distribution system. It’s like a neighborhood or or or or a city or something, valuing that 50% higher than MISO values reliability for that entire region. And of course, like to return to our previous topic, why would an individual utility rate value reliability so much more highly than an entire regional transmission system? Perhaps because that justifies them. Spending money out the wazoo prevent that lost hour. Right? I mean, that’s it’s hard to it would be difficult to come up with any explanation for that other than that incentive. Am I am I wrong?
Pete Wyckoff: You are not wrong. I’m stalling while Sydney pulls up the actual numbers on her computer. So But that is exactly right.
Sydnie Lieb: I have to make sure that I actually have the numbers and that they’re not trade secret because I feel like they might be. I think the right answer is this is I like without getting into actual numbers, that the utility is valuing the l the hour of loss load more than 50% higher because that allows them to overbuild the system that much more. And again, this is getting back to again, it’s not their fault. This is the way we built the model. Investor-owned. Regulated utilities make money by building things. So the more they can design their engineering standards, design their planning processes so that they have to build more stuff, the more money profit they will make.
Pete Wyckoff: Numbers you certainly can give, Sydney, because I don’t think we’ve gotten them out there. What was the distribution system budget four years ago versus what is it going forward?
David Roberts: Is it the case that they are increasing the value of reliability over time, or is it just the case that they’ve set it very highly and the system is getting older?
Sydnie Lieb: It’s the case primarily that they’ve set it very highly and the system is getting older. I think that’s an important thing to call out as well, because we have been I think Pete said it at the onset. This some of this level of investment is because the system is getting older. And that is important. And again, like the department’s position is not we shouldn’t make the investment. It’s one. The utility has no idea how old the equipment is. The department has asked every single utility, are you tracking the age of your equipment? And they’ve all said, No, we just have everything on general replacement schedules. Which when the budget was 10 per so and I think that gets that’s one of the numbers I f think is most staggering is that I think people think a lot about the transmission build out that we’re doing, the retirement of fossil and the significant build out of renewables that we’ve been doing for several years now. And we don’t think about the distribution system budget. The distribution system budget used to be about 10% of the utility’s total capital budget. So their total budget of things they were building. It’s now almost 30%. It is on par now with what we’re seeing on transmission and generation investment. And so it’s no longer okay to say, well, we don’t really know how old this equipment is, but in general, this equipment on our system is at replacement age.
Pete Wyckoff: Another way of looking at it is I you know, when I would go up to the legislature in my role, I would show all these, you know, we’re getting generation of electricity because we’re moving towards wind and solar. Look at how much less it’s costing us to get this electricity. And there’d be this pushback. Well, I don’t see it in my bills. And it is true, generation costs and the cost of the actual electricity have been falling and falling, but it’s been countered By the rise particularly of distribution systems and then
David Roberts: More than countered. That’s why the bill that’s why bills are going up. So let me ask about this then. Like my instinct, and you know, I had out this whole podcast with Pier LaFarge, who’s making the sort of case that installing batteries in your distribution systems does increase reliability and it is an alternative to spending a bunch more on substations and transformers and wires, et cetera. These are called In the lingo, non-wires alternatives. This is how they’re discussed in these contexts. In other words, this is something you can do instead of building a bunch more wires. I, of course, am a huge fan of these solutions, but some of the materials you sent me sort of seem a little less enthusiastic about them. Like they’re not really getting built and they don’t really seem to be showing up. Like, what is the status? Of non wires alternatives in Minnesota.
Pete Wyckoff: So this, you know, Pier’s big first experiment is in Minnesota at Xcel. And I will say as one of the many things we accomplished in the time I was there, you know, we pushed into Xcel’s IRP that they needed to be moving in this direction. And integrated. So we reached a settlement with the parties and took it to the PUC and it included
David Roberts: Is their IRP is their resource plan.
Pete Wyckoff: With our pushing, let’s try distribution system batteries as something that that can help us deal with the needs of the distribution system in ways that will be cheaper. The devil’s in the details, so although we are the ones that reached the settlement to push this and are happy that we have this project moving forward, we are also charged with not giving a blank check to anybody. And saying this is this has to work as possible best as possible for Minnesota ratepayers and for the Minnesota system. And so that when you sense like, well, you’re not completely behind this and completely happy with how it’s it’s working, that’s our job is to never be completely happy and they’ll let Sydney
David Roberts: And it g and it gets back to the original point, which is how are you gonna know if it’s working? You need the utility to be modeling and projecting like what would it be without these batteries, so then they can find out what is it with these batteries? Like you need better and more transparent distribution system planning to even know whether these things are succeeding, right?
Sydnie Lieb: Yeah, and to be more specific there, both on this project specifically, because again, we were really excited we brought forward the Capacity Connect program, which is the SparkFund batteries, through on a settlement that we orchestrated on Xcel’s last integrated resource plan. I think on that specifically, the two things that are evolving and need to happen in order for that to be a success are Xcel or any utility that wants to do this needs to do. Robust power flow modeling on their system so that they know where those batteries are going to have the most value to the distribution system as a distribution system asset. So they need to know where they have constrains on their system. And the battery needs to go in that location, not just any specific feeder where they can cite it.
David Roberts: Right. And as I understand it, they’re not yet doing that. That’s sort of like the plan, but they’re not yet doing that.
Sydnie Lieb: It is the role of the regulator to make sure that it gets done in that way. I think the other thing that needs to happen there is that the again, the di the DERM system, we’ve defined that acronym, so we’re allowed to use it. That needs to be built and done well again so that that battery, that battery isn’t doing as much good on the system if it’s just sitting there. It needs to be working with the behind the meter stuff effectively. And the last thing I’ll say on non-wire’s alternatives, because We’re seeing this both on the electric side. We’re also seeing this on the gas side. We have a gas integrated resource planning process where there’s non-pipe alternatives that are happening. The utility is often defining the cost benefit analysis that is done to pick whether non-wire’s alternative will work. And again, utility would much rather put a physical asset in the ground than come up with some alternative.
David Roberts: It’s a n it’s like a non profit alternative t to them. So like you’re allowing the utility to determine whether they should get profits or not profits. So it’s pretty predictable how that’s gonna how that’s gonna turn out.
Pete Wyckoff: We were negotiating back and forth. I kept saying to the folks, so let’s say you’re putting 250 batteries out into the Twin Cities. You could also just put those 250 batteries in a field in the country. It’s cheaper to just dump 250 batteries into a field. So you better justify to me how you’re maximizing the distribution system benefit and the grid benefits of the more expensive, let’s put them all over town. Then let’s put them in one place. Right. And that’s where we’ve been back and forth and pushing, particularly Xcel, dis to take full advantage of these distribution system assets that we are pushing for them to have.
David Roberts: Well, this gets perfectly to my next question, which is you’re asking utilities, well, you’re asking regulators to force utilities to do more homework, basically. And and what concretely are you asking them to do? Like what does this homework look like? What do you want utilities to do regarding their distribution system spending? And then once they’ve done it, what do you want the PUC, the Public Utility Commission, the regulators to do with that homework? What how would how do you envision this a better system working?
Sydnie Lieb: Again, these happen every two years. And the first one was two years ago and it was one of the first things I had since inheriting my team and really like getting everybody running in the same direction on trying to really tighten the screws on this planning process. And it is inherently iterative because it’s complicated and it’s hard and you’re gonna take two steps forward and then come back a little bit and try again. But I think the things that we would like to see in this iteration are the sensitivities in the load forecasts need to be looked at transparently and they need to be f informed by AMI. We made this huge advan investment in advance
Pete Wyckoff: Smart meters that we as ratepayers have paid for, so they exist, now use them.
Sydnie Lieb: They’ve been there for a while.
David Roberts: This is something that is shocking, I think, to listeners who are not familiar with this stuff. We spent a lot of money. This is not just true in Minnesota, but all all over the group. We spent a lot of money putting these advanced smart meters on homes and businesses all over the place. And we’re not using the data they’re producing in any meaningful way. And in a lot of times, the utilities won’t even tell you what that data is. It’s insane. Like we have the intelligence capacity out there. We’re not using it. It’s wild.
Pete Wyckoff: Or not.
Sydnie Lieb: It’s ridiculous. I mean, the way I describe it when I’m talking to people is I could be plugging in two electric vehicles in my garage and the utility would still assume that I was gonna get another one in the next five years based on whatever electrification load forecast they have. Because they’re not choosing to look at the data and go, this person’s already plugging in two EVs. They’re definitely not gonna increase the load at this location. Right. And they have that data and we’ve all paid for that data. And it is not that complicated to use it properly. So better forecasting and also allowing that forecasting to not happen behind a black box. The load forecasting needs to be able to have all kinds of interveners come into the process come into the regulatory space and say, We think your forecast is off by 10%. Or we think, you know, we think you’re going to get that much load, but we think it’s going to take 15 years, not 10. And if we do that, we can delay these investments. That’s the big one. I also think getting again back to the software side of things, the utility needs to do power flow modeling of their system. They need to understand where the constraints are. They need to, again, be bringing in better data from AMI to understand where they have a lot of DERs, where they have a lot of electrification happening, and how they can make all those things work together to better utilize the system. And then lastly, there’s a lot of folks talking about grid utilization and really excited about that. I feel really strongly that those folks are going to run into a brick wall when they try to implement what’s happening at the legislature. I think. Folks think that they’re gonna give the utility a seventy percent utilization target on their system. And then the utility is gonna come back and say, We looked at this, the system can’t be reliable at a 70% utilization factor. Trust us. Trust us. We’re not gonna talk to you about it. We’re not gonna let you talk to our engineers. Our engineers say it can’t be done. And that whole thing needs to happen a lot more transparently. And that needs to happen everywhere in the country where they’re trying to do grid utilization.
Pete Wyckoff: I think that’s our big theme here, or one of our big themes is show us the data. Show us how we as regulators can reproduce what you’re claiming. Right. The other thing that we haven’t really talked about is moving beyond this prudence test. So basically if they want to spend something in a distribution system, they come in to the and say, We put a new transformer here. Here’s the receipts. We got it from a reputable supplier. It works. And the system’s better than if we’d done nothing. So the analog there is most people think, you know, the FDA test to see whether a drug works well. No, they just test to see if a drug works better than nothing. So, so that’s the prudent test. Can you beat a placebo of doing nothing?
David Roberts: That’s a pretty low it’s a pretty low bar, especially in this kind of
Pete Wyckoff: What we really want, and back to the medical analog, and it’s only since Obamacare that that the government’s been looking at this at all is saying, Hey, there’s actually five things we could do for that medical condition. Which of them works better than the others? Right. And that’s what we’re asking. Not just did the thing you do actually happen? Show us the receipts and show us you got it, you know, not from some shady guy at the corner, but from a reputable supplier, right? But also was it The best thing you could have done if there were really five things you could have done.
David Roberts: Right, right, right. One of the questions I’ve had about all this is it just seems to me, not to, you know, I’m not in the habit of expressing sympathy for utilities, but in this case, like it just seems like forecasting distribution demand, distribution system demands has gotten wildly more difficult and complicated really rapidly. Like there’s all these new technologies coming on board in distribution systems as we’re talking about. And then there’s like, Data centers. We really have no, you I mean, you are now having to guess how fast our EV is gonna spread. How many people are gonna be charging at home versus here or there? How many people are gonna get solar panels? How many data centers are they gonna build in this area? How you know, there’s just like it just seems like the whole thing’s gotten a lot more difficult, which I guess goes to your point that like we need to make it more transparent how they’re doing this, but it is kind of like a much more complicated thing these days.
Pete Wyckoff: It’s much more complicated, but you know we have AI now and we have we have, you know, advanced in com computers and we have these smart meters and yes, it is much harder. It is a much more complicated thing, but we also have many more tools that if we decide to deploy and use them for getting on top of that complexity.
David Roberts: Well, let me ask ask this then, because this is one of the things, I mean, one of the big critiques these days of the electricity system overall is that it is not moving at a pace. You know, AI and data centers are coming all over the place, industrial electrification, blah, blah, blah. Things are happening very quickly and the electricity system moves very slowly. And when you describe these systems whereby utilities Determine their generation and transmission spending. I mean, one of the things a critic might respond, those are very slow. Those are very slow, two slow processes. And now you’re asking distribution spending to s to be equally slow. Like, is this not is asking for all this initial analysis not going to slow things down? What about the what about, you know, again, there’s a trade-off always, but like. What about speed?
Pete Wyckoff: So I actually think we can walk and chew gum. But I think what we are asking, pushing for is a distribution system that we can trust costs the right amount. And then we’re gonna lean on that distribution system to actually get us speed to power. You know, you like to talk about demand response, you like to talk about VPPs and virtual power plants and you know, taking advantage of home solar and home batteries and all these other resources out there that we haven’t taken advantage of. I think even with the complexity of how to how to get on top of that, how to do the technology for it and how to regulate it, it’s still going to be a lot faster than building a transmission line across five states. Like I think this still is speed to power. And I think Our utilities need to get very comfortable with this very fast if they are going to do the options that are best for ratepayers. Yeah. It’s uncomfortable for them. And as we’ve said several times in this conversation, they’re not really incentivized to do it because it will probably lead to lower profits. They’re gonna have to do a lot more work to make less money. Yeah. So this is why I mean, I’m not sure. There are, like I said at the beginning earlier on, there are advantages and disadvantages of a regulated for profit monopoly energy system. And we can actually see it in Minnesota at different parts of our electric system where we have munis, co-ops, and these for profit IOUs, investor owned utilities. But sorry, that’s the game. We should do it and it will still be the fastest way to meet the needs of data centers and EVs and do it cleanly too.
David Roberts: Delaware has proposed, I’m told, a kind of spending cap on distribution spending, as in part, I think, as a response to all these affordability arguments. You know, all like r r regulators, legislators, everybody, governors, everybody’s under a ton of pressure to deal with affordability. And that I think can seem like An easy off the shelf response just to cap the amount they’re spending. But you guys think that that is the wrong way to go. Can you say a little bit about why?
Pete Wyckoff: Well, I think spending caps and rate freezes and I’m not saying the wrong plan in the short term, but in the long term, what you really want to say is what is the ideal amount of spending and what do we need to know and probably don’t know yet in terms of inputs and data to determine that ideal amount. And if you’re setting a spending cap now, I guarantee you don’t know what that ideal number is.
David Roberts: Gets back to how complex it is to forecast these things. Like do you want a governor or a legislature guessing at what the optimal spending is f two years from now, five years from now?
Pete Wyckoff: I mean, in the energy system in general, I think it’s just like if you put rent freezes in, you’re probably not gonna get as housing as much housing built. Maybe there’s ways around it. Right. But maybe there are times when you just need to say enough is enough. We people can’t afford this. We have to put a freeze on while we get while we get that knowledge. And I’m not gonna judge that a priori. But I don’t think it’s a long term solution to say Without information we’re gonna decide this is where the price should be.
David Roberts: Yeah, this is a worry I come back to again and again with the affordability stuff is we do want and need to build a bunch more stuff. Like that’s not, you know, s it’s utilities maybe want to build more than is strictly necessary, but we do, but like things are expanding. Electrification is happening even behind data centers. There’s a lot of other electrification happening. We are we do need a bigger and more robust energy. System. So I don’t want affordability solutions that inadvertently right, slow down the building that we do need. That’s the tricky
Pete Wyckoff: I’m gonna say something that I probably wouldn’t have said two weeks ago. And Sydnie’s gonna probably kick me because we’ve reversed roles here. So there are things about the electric system where we’re just gonna have to spend more. Yeah. And I am convinced that the distribution system, we’re gonna have to spend more. Do we need to go from a $250 million annual expense to a billion dollar annual expense?
David Roberts: Yeah.
Pete Wyckoff: I think we should very carefully ask questions and probably we’ll end up reducing that requested increase. But we’re not going to reduce it down to no increase. I was very disappointed in some recent actions by the Minnesota PUC. For one, they rejected our recommendation that they move beyond gas line extension subsidies, which cost ratepayers every year in the tens of millions.
David Roberts: Yeah. Yeah, we did a different pod about that.
Pete Wyckoff: And then we just did a an Xcel rate case where the three Democrats on the and I’m a Democrat on the commission voted to increase Xcel’s ROE. Jeez. Against our recommendation as the Department of Commerce and against how the non Democrats on the split commission voted.
David Roberts: That’s wild. And of course, like the more return on equity they get as a percentage, the higher their incentive to build more, like to build unnecessary stuff. Like all the in the exact incentive we’ve been discussing, their preference for wires over non wires, the more you increase ROE, the more they have that incentive, which is part of the problem.
Pete Wyckoff: I think my broader point is where we can save money and where we can put a downward pressure on prices, we’re gonna need to do it because we just need to increase affordability. And Americans are telling you in polling that we don’t wanna pay so much for our energy. I think a lot of that is not actually electricity, that’s what they’re seeing at the pump. So maybe we should have fewer wars in the Middle East. But but it is a real problem and it’s gonna be a real problem going forward because there are going to be investments we’re gonna have to make that will drive upward pressure on the cost of electricity. So every time we can counter that by let’s say moving more to wind and solar or looking hard at ROE or looking hard at other things, we should do that.
David Roberts: Right. Right. It’s a it’s it’s a both and. So here’s a slightly technical question. We’ve been talking about all this in the context of these vertically integrated utilities that you’ve got in Minnesota that that do generation and transmission and distribution. In restructured areas where you have generation utilities and transmission utilities and then distribution utilities, do you think that all this same basic logic applies to distribution utilities in restructured areas, or is it a kind of a different situation there?
Sydnie Lieb: So Pete should probably give the national context, but as the regulator of the vertically integrated utility, I suspect that this is something that needs to happen regardless of whether or not utilities are owning generation. Right. Because the ones that own distribution, this is their main cash cow on the on the capital side is to put in as much capacity on the distribution system as possible.
David Roberts: Right. Well, if you’re a distribution utility, it’s that’s your only your only cash cow. So it seems like all the same incentives sort of apply.
Sydnie Lieb: That is your Yeah. And and also sort of just pulling us back to where we started, on the question around like, are we going to need to build more stuff? We are absolutely going to need to build more stuff. I think on the transmission and the generation side, we have these very proactive planning processes to optimize the stuff we’re going to build and to allow people to really pressure test that in a transparent way. Now that we are seeing It’s time to replace aging poles, wires, transformers, undersized substations. We need also a proactive planning process there, or we’re just gonna throw away money all over the system and not be really sure that that was the right way to invest.
David Roberts: Right. So Pete, would you say that I mean, this is obviously the Minnesota Department of Commerce is recommending this for Minnesota utilities and Minnesota regulators, but would you say that this applies nationally, applies in other states? Like everybody, everywhere distribution system spending is going up, everywhere they’re getting more complicated, everywhere the planning process is not transparent and et cetera. I mean, do you think this is applicable everywhere basically?
Pete Wyckoff: I do, and I’m no longer at the Department of Commerce, so they’re not responsible for my comments, but I am now in an organization that focuses more nationally. And yes, I’ve only been there two weeks, but yes, I would say from a national perspective, this is all very important. But I think it’s also the flip side to what you talk about all the time on this podcast, that we want to actually ask more from the distribution system and ask more from the ability to go two ways. So if we’re gonna elevate the importance of the distribution system, make it less dumb. And you know, historically it was boring. Historically it was it wasn’t the big cost driver, it was the rounding error and no one paid much attention to. Yeah.
David Roberts: And it got interesting real quick, like in the context of how fast utilities move and how fast they think, it got interesting really quick, like b overnight basically from their perspective.
Pete Wyckoff: But the sort of stuff that Volts listeners tend to get really excited about goes through the distribution system.
David Roberts: So by way of wrapping up here then, I guess I would ask maybe both of you, like, what is the vision here? What is the desired outcome? What would what would it look like if things were working well? If maybe just for Minnesota, Sydney, if like if Minnesota regulators and legislators took your advice, what would a well functioning process look like and what would be the outcomes?
Sydnie Lieb: So the distribution system planning is not something that was legislatively mandated. It is something that was created in the regulatory space. And a lot of where that grew out from was we would get to rate cases. And as Pete was describing for prudency, prudency just asks, did you get a good price for this widget? Right. It does not ask, did you actually buy the widget and did you get it at a competitive market price? It does not ask if you needed the widget to begin with.
David Roberts: Or if there are other widgets you could have gotten instead.
Sydnie Lieb: There’s some other widget. Yeah. So I think that if the distribution plan, and again, it’s an iterative process, we may not get all the way this year, but it should progress into a detailed planning process so that when something is coming for cost recovery in a rate case, we can say this was a cost optimized investment and it was prudent. Because the rate case can only ask, was this prudent? It cannot ask, was it optimized? So there must be a place somewhere, and it should be this place that you plan an optimized system and we really look at was there an alternative that could have been purchased? Did we not need this much overbuild of capacity in this location to begin with? And how are we balancing affordability and reliability? And are we doing that in a transparent way? What
David Roberts: Let me ask, this is all upstream of the rate case. This is all supposed to happen before the rate case, but I’m sort of what is the enforcement mechanism? I mean, sort of like the rate case is where the the rubber hits the road. It’s where the PUC, the public utility regulators, actually can give them the money or not give them the money, as it were. So how would the PUC enforce this? How would it make sure that the utility is doing it well and doing it correctly if rate cases only involve this prudency judgment. Where’s the enforcement mechanism to make sure the utilities are doing distribution system planning well and correctly?
Sydnie Lieb: I think it would actually need to happen in the planning process is the utility would need to have an approved plan and then they would build to that plan. And then if they got to a rate case and they did something else, they would need to very clearly explain why they did something else and prove that that was in the public interest. And, you know, it’s utility regulatory, so it might get a little bit squishy of how much enforcement authority there actually is at the commission. I think that that’s really what it. Would happen is that you’d have an approved plan. And if you’re going to deviate from that plan, you better have a very good, robust analytical explanation when you come for cost recovery.
David Roberts: And am I correct in saying like a prudency review doesn’t ask very much of the regulators? They’re just like, did you, you know, is this a credible vendor or whatever? This type of thing that this type of process that you’re envisioning and encouraging here is also going to ask a lot more of regulators, right? They’re going to have to know a lot more and engage a lot more and have. Again, to return to a Volts theme, the capacity, the staff, the funding, the expertise to make these what are really some pretty complicated judgments about whether utilities are doing this correctly, right? I mean, you need good regulators to make this work.
Pete Wyckoff: I think this is absolutely true and we need to staff up our regulatory agencies. And in Minnesota we’ve done a good job on this. And there will be more needs going forward because it gets more and more complex. But I’ll just go back to the there’s three parts of the electric system. There’s the generation. In Minnesota, we have a very robust integrated resource planning process, which I think is very good. And my understanding is there are states where it isn’t very good. So we are leading there. We have, I think in Northern MISO, in particular, a sort of model transmission planning system in Minnesota’s part of that, I think, is model. So that’s two legs of the stool. The third leg is distribution. We have moved from not doing much there to doing something. But what we are pushing, thanks to Sydney’s brilliance and my brilliance in bringing her on board, was Yeah.
David Roberts: Your reflected brilliance.
Pete Wyckoff: Was we’re pushing, let’s get the distribution planning process up to snuff compared to the things we’re already doing well. And then we have one more step beyond that, that probably a future podcast episode. We would like those three planning processes to talk to each other because we think we think we think that considering the three in isolation may not lead to the optimal solution. So we should have another layer that says, okay, let’s optimize across the three Legs of the stool.
David Roberts: This is another Volts theme. Another this is something that in w in almost every different context, almost every different podcast, sooner or later you pull the string and you get back here. We need better and more holistic planning, which we just don’t do very well in any area, it seems like in the US. It’s like whether you’re talking about municipal stuff, gas stuff. Electricity stuff, it always comes back there. We need to step back and do more holistic planning. And that’s sort of like that’s what you guys are all about here.
Pete Wyckoff: And as a Minnesotan who no longer works in the state enterprise, no longer works for the regulator, but now works for a national group that tries to help take the best solutions out there and bring them to more states and tries to influence federal policy. I think as a Minnesotan, what I would like to see is Minnesota to get better and better and better at this.
David Roberts: And gosh Pete, what if like the states talked to the other states and there was even like national there was national planning?
Pete Wyckoff: Yeah, my new organization. What if give us the tools that we can say, Hey State X, look at State Y, which you think you’re like or better than? Well, maybe they’re better than you on this, so why don’t you get up to speed, right?
David Roberts: Maybe you could build less of this if they built more of that. Maybe we could like plan, you know, nationally ‘cause we can all we can all dream. Well, is there anything else we missed? Anything else you want to say before we wrap up?
Sydnie Lieb: I think we caught it all.
David Roberts: This is beautiful. I love talking about utility regulations. I guess that’s my that’s my kink. Thank you guys for coming on. This is super fascinating. I think this is like this has to kind of been hovering in the background of a million different Volts discussions. And I’m really glad to surface it. Just the general need for better distribution system planning. So thank you both.
Pete Wyckoff: Thank you so much for having us on.
