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Fortnightly Magazine - April 1 1995

and subjectivity that built the foundation upon which regulatory bodies exist. In California entire proceedings are dedicated to just one particular aspect of this rate/cost calculation (em the cost of capital determination is a good example. This complexity has only increased as competition begins to knock at the door. Parties have come to realize that the CPUC, through its powers over the regulated utilities, can endow them with benefits they may be unable to garner in the competitive market. This is not something that cost-of-service regulation, nor the regulatory bodies themselves, were ever designed to deal with. Although we have not yet begun to see the full effects of competition in the electric industry, again my experience in telecommunications and natural gas convince me of what is likely around the corner for the electric industry. The natural tendency of regulators (em to view themselves incorrectly as a higher level of utility management (em can no longer persist. If it ever was justified (em and I have my doubts (em it is inconsistent with the competitive market and the need for quick and accurate decisionmaking now emerging in the electric industry.

PBR regulation is one step in the right direction. Rather than setting rates equal to costs, we replace much of our current general rate case and reasonableness review procedures with economic benchmarks that directly measure utility performance. Such a system will put utilities at risk for management and investment decisions, while at the same time allowing them to be rewarded for taking the right risks.

An example of a PBR mechanism, currently under consideration by the CPUC for several utilities, is to link changes in the utility's base rate revenues to increases in the consumer price index, less an annual productivity adjustment of 2 or 3 percent per year. Such an index should produce utility rates that decline in real terms, a prospect that traditional regulation has been unable to achieve. Properly structured, such a PBR approach allows utilities the freedom to minimize costs. Shareholders benefit as long as service is maintained at acceptable levels, as defined by the CPUC.

Second Thoughts?

Back in April 1994, when the CPUC outlined its proposed vision for the electric industry, we promised an August release date for a final policy statement. But then came the debates. Looking back, it may seem hopelessly naive of the CPUC to have established such an ambitious schedule. We unleashed a national debate. We were unprepared for the breadth of the discussion that would ensue. However, I don't think we were naive. The timing of this document just could not have been better. We were surprised because the industry (em regulators, utilities, producers, and consumers (em were all reaching the same conclusion that we were at about the same time: that regulation and the industry needed to change to prepare for the next century.

Please fault us, if you wish, for unimagined good timing. t

Patricia Eckert is a former member of the California Public Utilities Commission. She was appointed by Gov. George Deukmejian in 1989 and served through the