Utility Rate Hike Train Wreck Ahead?

Utility rates are going up!

That was the assessment of someone who should know—North Dakota Public Service Commissioner Tom Clark and chairman of the National Association of Regulatory Utility Commissioners speaking this week to an energy business conference in Washington DC.

The reasons are not all that surprising.  They include the costs of:

  1. Replacing aging energy infrastructure or retiring ‘used and useful’ power plants early to reduce emissions
  2. Adding renewable energy sometimes at above market costs,
  3. New Federal regulations on everything from critical infrastructure protection, greenhouse gas emissions reduction, smart meters imposed by the Federal government which must be paid for in utility rates,
  4. Distribution system preventive maintenance, automation and replacement.

Add it all up and rates have only one way to go. Slow economic growth has delayed or postponed some of these costs as energy demand fell during the recession but recovery will inevitably lead to rebuild and a return to historic load growth of about 1-1.5% per year.

Another looming worry for commissioners is inflation.  Much of the capital required to keep up with the electric utility infrastructure will be debt and higher interest rates mean high utility rates to pay the added costs.

Those were the facts laid bare in Commissioner Clark’s remarks but the implications while not stated as frankly were nonetheless also laid bare.  Utilities will face growing push back over their prudence in seeking rate increases for these costs no matter how popular and politically correct things from renewable energy to smart meters might be.

Uncertainty is Certain but can be Managed

Commissioner Clark talked about uncertainty as a key factor in expected higher costs.  This is “code” for putting the blame for rising costs on new Federal policies and regulations that not only upset many regulatory traditions from the use of coal as a major baseload fuel and the uncertainty of whether new EPA regulations will force the closure of coal plants.  The uncertainty of whether new nuclear power plants will be permitted to replace older ones.  The uncertainty of whether there will be sufficient transmission to bring all the renewable energy being built to market.  Uncertainty about whether the promise of smart grid will bring benefits for consumers instead of just the cost of smart meters. Uncertainty about whether the Federal Government will continue to encroach into the traditional role of the states in energy regulation affecting their states.

But there are also uncertainties about how the state PUCs will respond to these changes bearing down on their jurisdictional utilities and themselves including:

  • Will the PUCs impose dynamic pricing in rates to create pressure on utility customers to improve energy efficiency, encourage demand response and create perceived “benefits” from smart meters unachievable under traditional average cost rate designs?
  • Will PUCs declare victory when current renewable portfolio standards are achieved or press onto higher levels like California’s 33% no matter what it costs ratepayers?
  • Will PUCs support ‘least cost, best fit’ integrated resource planning principles for new resource selection even if the least cost, best fit resource is a fossil fuel plant?
  • Will PUCs that have not done so ‘decouple’ allowed rates of return from the sale of commodity energy to reward the utility for promoting energy efficiency?
  • Will the PUCs and FERC ever work out their differences over interstate transmission? If not then all this investment in renewable energy, smart grid and demand response is imprudent since the benefits accruing to customers will not be worth their cost.

May you live in uncertain—make that interesting times.  Uncertainty is not new and using it as an excuse to perpetuate fragmented policies that work against the best interests of customers is no public service whether it is done at the Federal level or by the states.

Prudence People!

There is a reason our traditional average cost ratemaking, integrated resource planning policies, and reasonable, prudent and in the public interest regulatory supervision have endured so long in the public utility business—-they work!

They work to spread the costs equitably across classes of customers in accordance with their benefits.  They force an honest competition between supply side and demand side choices to serve the next increment of demand with the ‘least cost, best fit’ resource winning the preferred place in the supply stack.  Reasonable, prudent and in the public interest meant a reasonable balancing of the interests of shareholders, ratepayers and the public based upon the manifest weight of the regulatory record.

Those are principles Commissioner Clark still believes in—that’s the good news in the message.