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Rate Discounts Pave the Way for Restructuring

Fortnightly Magazine - January 15 1995

a utility might attempt to maximize sales by discounting rates for elastic customers at the expense of their captive customers. Other commissions have required utilities to allocate revenue losses only to customers in the same rate class as those receiving the discount. Finally, some states have found that ratepayers are adequately protected as long as the discount rate does not fall below marginal cost of service.

In approving its guidelines for flexible rates, the New York PSC addressed both legal and economic aspects of the lost revenue issue. It rejected claims that requiring shareholders to absorb part of the cost of reduced revenues was illegal. Electric utilities had argued that the PSC was required to set rates based on actual or reasonably forecast expenses, revenues, and capital costs. One utility argued that ignoring part of the revenue drop under the flexible rate program while setting base rates was unconstitutional.

According to the PSC, the sharing was required as part of its mandate to set fair rates. It said that flexible rates induce a customer to remain on the system, which benefits both ratepayers and shareholders by reducing the potential for stranded investment. Because both groups benefit from maintaining a revenue stream sufficient to contribute to common costs, as opposed to the alternative of lost load and revenue margin, the PSC concluded that it was proper for both to bear a portion of the reduced margins. It called the approach a reasonable response to the "significantly changing landscape of the electric industry." t

Rate Discounting Popular in 1994

Re New York State Electric & Gas Corp., 155 PUR4th 337 (N.Y.P.S.C.1994). Orders electric and gas utility to absorb a percentage (generally 30%) of revenue shortfalls resulting from anti-bypass, load retention, and economic development rate discounts.

Re Competitive Opportunities Available to Customers of Electric & Gas Service, 154 PUR4th 19 (N.Y.P.S.C.1994); and 154 PUR4th 35 (N.Y.P.S.C.1994). Rules that utility shareholders should absorb part of any lost margins resulting from discount rates.

Re Self Generation Deferral Rates, 154 PUR4th 283 (N.C.U.C.1994). Defers ratemaking treatment for losses under self-generation deferral rates to general rate case proceedings.

Re Arizona Pub. Service Co., 153 PUR4th 396 (Ariz.C.C.1994). Permits innovative rates for "at risk" customers.

Re Valley Gas Co., 153 PUR4th 142 (R.I.P.U.C.1994). Authorizes a natural gas LDC to cut rates for large industrial service. Warns not to shift projected lost revenues to residential customers.

Re Montana Power Co., 152 PUR4th 403 (Mont.P.S.C.1994). Shares between ratepayers and shareholders the revenue shortfall resulting from a discount industrial retention rate.

Re Illinois Power, 151 PUR4th 28 at 360 (Ill.C.C.1994). Finds no shareholder responsibility required because special contract gas-service rates are designed to recover marginal cost of service and thus make a positive contribution to fixed costs.

Re Consumers Power Co., 151 PUR4th 374 at 46 (Mich.P.S.C.1994). Assigns to shareholders any initial revenue loss associated with an interruptible electric-service rate discount. Also assigns to shareholders the benefit of any associated revenue increase.

Re Central Maine Power Co., 150 PUR4th 229 (Me.P.U.C.1094). Rules that promotional pricing should be "risk-adverse"--discount rates must be set high