ORIGINAL REPORTING: Why Traditional Utility Ratemaking Must Change

Fewer rate cases mean better utility performance and growth, LBNL finds; New numbers show multi-year rate plans can deliver big benefits

Herman K. Trabish, Aug. 15, 2017 (Utility Dive)

Editor’s note: What electricity customers should be concerned about is the way traditional ratemaking is preventing innovation and the emergence of New Energy.

As long as utilities’ load growth provides rising earnings, traditional cost-of-service ratemaking keeps the burden of rate cases down. But utility loads are falling, inflation is anticipated, and utility-scale renewables and distributed energy resources (DER) are proliferating. Together, they threaten to strand the value in older system assets, forcing utilities to go to their regulators more frequently for rate increases. Frequent rate cases are statistically associated with poorer utility productivity, according to State Performance-Based Regulation Using Multiyear Rate Plans fo U.S. Electric Utilities from Lawrence Berkeley National Laboratory (LBNL). More frequent rate cases are also statistically correlated with higher customer costs, the new metrics reveal.

It is not simply that customers pay the costs of regulatory proceedings, which can be substantial. More significantly, it is that frequent rate cases require a utility to focus on the near term and keep it from seeing the opportunities in innovation that lead to bigger rewards over the long term. An emerging form of ratemaking, which rewards utilities for performance the utility and its regulators agree is in the customers' interests, can require less frequent rate cases. The researchers argue that performance-based ratemaking (PBR) with multi-year rate plans (MRPs) can be designed to provide stronger incentives for utility innovation and to reduce utility regulatory costs. The result, metrics show, is reduced costs to customers… click here for more

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