Electrification of buildings and transportation, alongside rapid growth in distributed energy resources (DERs), is reshaping where and how power is consumed. To keep pace, utilities must make timely distribution investments so that grids are ready to support new loads when they come online. A major challenge for regulators is not only considering when and where these investments are needed, but also how their costs should be fairly allocated across the customer base in ways that maintain affordability.
This report highlights three different approaches from public utility commissions in Minnesota, Massachusetts, and New York. Using these case studies, (it or we) examines how cost allocation can be applied during proactive distribution planning to help state regulators achieve affordability and state policy goals.
- Minnesota’s framework applies standardized cost-sharing fees to large loads and DER developers while exploring cost caps.
- Massachusetts is piloting a Proactive Hosting Capacity Fee, combined with strong rate-impact caps and requirements to consider non-wires alternatives.
- New York, recognizing the diversity of project types, is requiring utilities to justify project-level allocation choices, rather than using a standardized method.
This report also explores the menu of options regulators can choose from when developing cost allocation strategies.
Options to Consider in Cost Allocation
| Question |
Concept |
Details |
| How are costs and benefits allocated to customers based on load-growth drivers? |
Uniform cost allocation |
- Definition: all costs treated equally and distributed based on demand by customer class
- Pros: simple to implement; distributes both costs and savings evenly across all customers, potentially delivering savings to large numbers of customers and spreading out high costs
- Cons: cost increases can be socialized among all ratepayers, creating issues when non-beneficiaries pay for upgrades
|
| Incremental cost allocation |
- Definition: specifically allocates costs of new, incremental investments to a customer class that benefits from them or that has caused them (also known as beneficiary or cost causer pays)
- Pros: costs and benefits are borne by those whose investments affect the system
- Cons: may require complex baseline and metering; may limit benefits (such as tax credits) to small customer segments
|
| When are upgrade costs recovered? |
Traditional investment cost allocation |
- Definition: infrastructure upgrades made because of customer request or need
- Pros: simple to implement; straightforward to identify and allocate costs to the requesting customer(s)
- Cons: may delay ability to electrify or connect DERs and increase costs in the long run because of the piecemeal, incremental approach to investment
|
| Proactive investment cost allocation |
- Definition: cost recovery given for grid upgrades to meet policy mandates and in anticipation of future load growth or expected DER adoption
- Pros: enables new load/technology to come on when available
- Cons: reliant on forecasting; some avoided or deferred costs may never be directly allocated, raising fairness concerns if load growth does not materialize as expected
|
This report was made possible with support from the Heising-Simons Foundation
