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Performance-based Ratemaking

Fortnightly Magazine - July 15 1995

productivity or value given to resources associated with investments in research and innovation. Re Incentive Regula. for Elec. & Gas Cos., 159 PUR4th 585 (Mass.D.P.U.1995).

Ratepayer Protection

Regulators in Maine have already approved new PBR plans for the state's two largest electric utilities. In orders issued early this year, the Maine Public Utilities Commission (PUC) decided that PBR plans could accommodate competition while reducing the risk to ratepayers from unstable rates. It called PBR a "positive step away from ¬ traditional regulation." The PUC viewed pricing flexibility as an important component in that move.

But the PUC cautioned that it was not yet willing to relinquish its duty to ensure adequate service at fair rates. In fact, a look at the basic workings of the plan approved for Central Maine Power Co. shows just how far removed from deregulation PBR can be.

The Central Maine plan includes a price cap, pricing flexibility for certain services, and components for earnings sharing and service reliability. The price-cap formula uses current rates as a starting point, and then includes several elements: a price index, a productivity offset, profit sharing, a sharing of restructuring benefits (e.g., contract buyouts) from qualifying facilities, the virtual elimination of dollar-for-dollar adjustment clause recovery of fuel and purchased-power costs, and a passthrough for certain costs outside of the price index.

The plan ensures service reliability with penalties that range from $250,000 to $3 million (em imposed if service quality or customer satisfaction declines against five benchmark indicators. Pricing flexibility does not require PUC approval. Typically, the utility may choose between the price cap or a price floor based on marginal cost, subject to safeguards that protect core customers from rate discrimination.

To protect ratepayers from any revenue deficits that flow from flexible pricing, the PUC set a "revenue delta cap" that requires the utility to stop offering discounts without specific 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 price cap also incorporates profit sharing between ratepayers and shareholders (em to go into effect when return on equity falls below or above a certain range. Affected parties may request prudence reviews, rate design reviews, and rate level reviews while the alternative rate plan is in effect. Re Central Maine Pwr. Co., Dkt. No. 92-345 (II), 159 PUR4th 209 (Me.P.U.C.1995).

The plan approved for Bangor Hydro-Electric Co. adopts a somewhat different regulatory approach, but also allows for substantial pricing flexibility as well as elimination of the fuel adjustment clause. Re Bangor-Hydro Elec. Co., 159 PUR4th 460 (Me.P.U.C.1995).

Cost of Service (em Still a Requirement?

Some state laws refer directly to cost of service as a measure of rate reasonableness. Others may require an affirmative showing of how the rates balance the interests of ratepayers and shareholders. These rules may support challenges to PBR plans.

In a little noticed decision issued last year, the Utah Supreme Court questioned whether the state utility commission can approve a rate plan that does not refer to cost of service.