"This legislation represents a piecemeal approach to a problem which requires deliberate and thoughtful consideration .... [It] could lead to 'cream-skimming,' which would result in increased...
Will Residential Customers Pay for Competition?
High industrial electricity rates are often blamed upon current regulation. Some state regulators respond with broad-based reforms; others simply reallocate system costs from industrial rate classes to rates for more inelastic customers (em namely, residential users. Regulators base such allocations on rate-of-return (ROR) regulation, which holds that rates for all consumers should match the cost of serving them.
The cost-of-service debate came first to the telephone industry, where costs were shifted from competitive toll calling to monopoly local service (em a job made easier by a shrinking revenue requirement. Now the same issue appears in electric and gas cases. The challenge there will lie in applying cost-of-service principles to two distinct markets (em industrial and residential (em when one sector (industrial) exerts market power and the other (residential) may remain captive.
The cost-shifting trend may be leading some regulators to consider the possibility that ordinary residential customers are inadequately represented in the ratemaking process.
A recent rate settlement in Kentucky is a case in point. Late last year, the Kentucky Public Service Commission (PSC) concluded a long-standing case governing rate treatment of Louisville Gas & Electric's investment in the Trimble county generating facility. Under the approved agreement, the utility will refund current customers $22 million, with $5.3 million reserved to special contract customers and the rest refunded to all other customers over a five-year period. The utility agreed to pay an additional $4.5 million to fund energy assistance programs for low-income customers over the same five-year period.
In a separate concurring opinion, Commissioner Linda K. Breathitt expressed concern that residential customers would have to wait five years, while certain industrial customers would receive immediate payments. She noted that the agreement reflected a recent trend in settlement agreements presented to the PSC: The utility, its large industrial customers, and low-income customers benefit from ardent representation at the bargaining table, while the vast majority of customers appear to have a much smaller voice in the process. Re Louisville Gas and Electric Co., Case No. 10320, Dec. 8, 1995 (Ky.P.S.C.).
Class Rates of Return
Increasing rates for customers that produce only a small profit on investment, while decreasing rates for major contributors, is frequently supported by the principle that rates for all consumers should match the cost of serving them.
Perhaps the most straightforward example of this phenomenon occurred recently in a rate proceeding for Alabama Power Co. According to the Alabama Public Service Commission (PSC), the company's 1994 cost-of-service study placed the residential return on investment at 4.6 percent, as compared to a nonresidential group return of 10.68 percent. Noting that Alabama Power's residential rates were among the lowest in the country, the PSC adjusted rates to increase the residential customer-service charge while raising nonresidential rates by an equal amount if return from the residential class should fall below 90 percent of the overall ROR. The PSC also approved interim measures to lower nonresidential rates, including a waiver of automatic rate adjustments scheduled for 1995 and 1996 due to completion of new generating facilities. Re Alabama Power Co., 162 PUR4th 171 (Ala.P.S.C. 1995).