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NGVs -- Are Ratepayer Subsidies Appropriate?

Fortnightly Magazine - May 1 1995

captive customers should not have to finance the utility's NGVs. In addition, they warned, the funding increase could compromise the CPUC's role in bringing competition to the NGV market. (When the CPUC initially rejected the SoCalGas funding request, it directed the utility to pay particular attention to the fifth NGV program guideline, which cautions against interfering with the development of a competitive market.) The dissenting commissioners concluded that approving the funding was a mistake because the CPUC had not shown why a competitive approach was inappropriate to solve the air-quality problems plaguing the SoCalGas service territory. t

Faced with increasing competition, electric utilities are asking state commissions to authorize price cap plans that will enable them to compete more effectively. The Maine Public Utilities Commission (PUC) has responded by modifying its regulation of two large electric utilities in the state to include flexible pricing. Regulators in Pennsylvania have also agreed to examine a flexible-pricing proposal for an electric utility.

Maine's alternative electric rate plan for Central Maine Power Co. contains the nation's first price-cap plan in the electric industry. The comprehensive regulatory plan also includes flexible pricing, earnings sharing, and service reliability components. The PUC found that the alternative rate plan should produce just and reasonable rates as well as other benefits, including: 1) continued comprehensible and predictable regulation of electricity prices, 2) stable rates, 3) reduced administrative costs, 4) incentives for cost minimization, and 5) competition with reduced ratepayer risks. The price-cap plan uses current rates as a starting point.

The price-cap formula includes a price index, a productivity offset, a profit-sharing mechanism, sharing of qualifying facility (QF) restructuring benefits, and a mechanism to pass through certain costs outside of the price index. It also virtually eliminates dollar-for-dollar adjustment clause recovery of fuel and purchased-power costs. The service reliability component establishes an earnings-reduction mechanism that allows the imposition of penalties ranging from $250,000 to $3 million if net service quality or customer satisfaction declines as measured against five benchmark indicators. The pricing flexibility component lets the utility choose between a number of pricing options without having to seek PUC approval, typically between a marginal-cost-based floor and the price cap, subject to safeguards designed to protect core customers, avoid undue discrimination, and preserve the rate design policy expressed in earlier rate orders.

To protect ratepayers from any revenue deficits associated with flexible pricing, a "revenue delta cap" requires the utility to stop offering discounts without PUC approval when the difference between revenues collected under the new pricing policy and those the utility would have collected under standard rates approaches 15 percent.

The profit-sharing component of the price cap incorporates a 350-basis-point bandwidth above and below a benchmark return on equity of 10.55 percent. Profits or losses outside the bandwidth will be shared equally between ratepayers and shareholders.

The alternative regulation plan also allows the utility to pass through to ratepayers a share of savings/costs associated with QF contract buyouts and restructurings. Generally, net savings from buyouts and restructurings consummated after October 1, 1994, will be shared 50/50 between shareholders and ratepayers. Parties