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Will Residential Customers Pay for Competition?

Fortnightly Magazine - March 15 1996

states across the country are adjusting rate structures for their electrics in much the same way. While approving a 2-percent rate increase for Indiana Gas and Electric Co., the Indiana Utility Regulatory Commission (URC) moved to correct the subsidization of residential customers by industrial and commercial users. (In a prior rate case, the URC had ordered the utility to reduce subsidies between rate classes by at least 25 percent.) To reduce rate shock for residential customers, no customers will receive significant rate decreases, and the increase to residential classes will be close to the overall increase approved for the utility. Re Indiana Gas and Electric Co., 1 PUR4th Cause Nos. 39871 and 40078, June 21, 1995 (Ind.U.R.C. 1995).

While granting Niagara Mohawk Power Corp. an electric base rate increase of $187.7 million, the New York Public Service Commission (PSC) has moved part of the revenue requirement away from the industrial and commercial classes and reassigned it to the residential class. The PSC capped the overall residential increase at 3.9 percent and estimated that the revenue shift would equal $16 to $20 million. Re Niagara Mohawk Power Corp., Case Nos. 94-E-0098, et al., April 21, 1995 (N.Y.P.S.C.).

The Question of Fairness

How far and how fast can a commission go in revamping long-standing cost relationships among customer classes?

In a case involving a major rate restructuring for local telephone service, an Illinois appeals court has ruled that state regulators failed to properly balance the interests of shareholders and ratepayers. More specifically, and unusually, the court found that the Illinois Commerce Commission (ICC) erred in failing to properly analyze the effect of a major shift in cost allocation on individual customer groups. Citizens Utility Board v. Illinois Commerce Commission, Nos.

1-94-2270, 1-94-2370, Nov. 9, 1995 (Ill.App.Ct.).

The dispute arose after the ICC decided to restructure rates for Central Telephone Co. of Illinois, a telecommunications local exchange carrier (LEC), by eliminating most of its flat-rate calling plans and replacing them with usage-sensitive offerings. The order also permitted a general shift of costs away from business users and onto the residential customer class. While the restructuring would decrease rates for some customers, others would experience a doubling or tripling of monthly bills if their calling patterns remained constant.

The court found insufficient the ICC's contention that the restructuring would eliminate the "complexity, cross-subsidies, inequities and inefficiencies" of the LEC's existing rate design. The court went directly to the cost studies presented in the case, and found that the prices of all calls exceeded their long-run incremental costs and that the prices approved for residential local calling far exceeded the level needed to reassign costs.

The Arkansas Court of Appeals, on the other hand, upheld a decision by state regulators permitting Arkansas Louisiana Gas Co., a natural gas local distribution company, to allocate to residential users the total amount of a recent rate increase. According to the Arkansas Public Service Commission (PSC), the cost-shifting was appropriate to prevent system bypass by larger customers, and consistent with prior efforts at removing interclass subsidies. (See, Bryant v. Arkansas Public