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Performance-based Ratemaking

Fortnightly Magazine - July 15 1995

It held unconstitutional a new law that permits state regulators to approve PBR rate reforms. The case overturned a rate plan

for local telephone exchange services for U S WEST Communications Inc.

The Utah court focused on a "veto" provision that would allow a public utility to reject an incentive form of regulation proposed by state regulators. It found the veto unconstitutional because it would allow private parties, such as U S WEST, to overturn legislative acts. (Under most state enabling acts, commission rate orders are "legislative" in nature.)

Moreover, the Utah court said that the state commission must take cost of service into account in setting just and reasonable rates under any form of ratemaking it might devise. With that point in mind, the court found the rate plan approved for U S WEST was illegal insofar as it allowed the company to retain earnings above the 12.2-percent rate of return on equity found just and reasonable under cost-of-service standards. The fact that the "excessive earnings" remained subject to a sharing with ratepayers did not justify the "exorbitant" charges. Stewart et al. v. Utah PSC,, 156 PUR4th 41 (Utah Supr. Ct. 1994).

Utah is not alone in its preference for cost of service. In 1993, the South Carolina Supreme Court reversed an incentive regulation plan approved for Southern Bell Telephone and Telegraph Co. South Carolina Cable TV Asso. v. S.C. PSC et al., 437 S.E.2d 38, 150 PUR4th 216 (S.C. Supr. Ct. 1993).

In contrast, regulators in Massachusetts recently turned back a jurisdictional challenge to a PBR plan put forth by New England Telephone and Telegraph Co. Opponents of the plan had claimed that the DPU had no jurisdiction to set up a price-cap plan that would relieve the utility from cost-of-service regulation. The DPU ruled otherwise, explaining that state law did not require rate-of-return regulation, or any other particular method, but left that choice to the DPU. Re New Eng. Tel. & Tel. Co. dba NYNEX, 160 PUR4th 95 (Mass.D.P.U.1995).

Lingering Doubts

Who benefits from PBR? Can utilities "rig" the process? Can PBR hurt utilities in some cases?

In New York, ratepayers complained a couple years ago when New York State Electric & Gas Corp. asked for approval of a rate increase under its multiyear incentive rate plan. The New York Public Service Commission (PSC) approved the request, rejecting claims that a series of recent rate increases for the utility showed that the incentive-based rate plan was not working. But it acknowledged that the benefits of PBR "cannot be captured overnight." The alternative (em fully litigated annual rate cases, "with all their gamesmanship and near-term focus" (em was thought more likely to harm ratepayers in the long run. Nevertheless, the PSC concluded that the incentive plan would not entirely offset the state's poor economic conditions. Thus, it asked the utility to consider how to modify the rate plan to mitigate further increases. Re New York State Elec. & Gas Corp., 155 PUR4th 337 (N.Y.P.S.C.1994).

A recent dispute before the Virginia Corporation Commission points up uncertainty as to how far the