The Ohio Public Utilities Commission (PUC) has proposed regulations to allow electric utilities to use fuel-cost clauses to recover gains or losses from trading Clean Air Act emission allowances....
WHEN THE CALIFORNIA PUBLIC UTILITIES COMMISSION approved a price-cap plan for Southern California Edison's distribution operations, it lamented the lack of a "distribution-only" study on productivity. So we prepared one.
Unlike electricity generation, electricity distribution will remain a regulated business. But the form of regulation likely will change to price caps, mirroring events in telecommunications regulation here and energy regulation abroad.
With price caps, rates are reviewed formally only at set intervals. In the meantime, rates move via a pre-set formula which looks at inflation and productivity (i.e., Retail Price Index minus "X"). Price caps break the link between costs and prices by providing more competition-style efficiency incentives for regulated companies.
Key to the price cap formula is "X," which reflects productivity growth. The best and most objective basis for such an index is "Total Factor Productivity." That is, the TFP for an industry, minus the corresponding TFP for the economy, reveals the best measure of X to calculate a price cap.
Electricity distribution presents a challenge for measuring productivity since, as a rule, the industry is vertically integrated. Only a few electric utilities operate separate distribution businesses.
Using Federal Energy Regulatory Commission Form 1 data, we created a cost-of-service study to compare the distribution component of each integrated electric utility (for 87 companies over 23 years). For the entire country, we found an average TFP-based X of 1.46 percent (after subtracting a 0.40 percent economy-wide TFP). More importantly, we found significant differences among companies based on region and use per customer. The regional differences are shown in the figure.
In recommending a value for productivity in the price-cap formula, Edison had put forward values of 0.9 percent for nongeneration functions and 1.4 percent for the total system, including generation. It then added a so-called "stretch" factor, to boost the two figures to 1.4 (nongeneration) and 1.8 (total system).
The PUC ended up approving a productivity factor for transmission and distribution of 1.2 percent for 1997, 1.4 percent for 1998 and 1.6 percent for the years 1999 through 2001. These values will apply to both the nongeneration performance-based rate and its ultimate successor, the distribution PBR. See, Decision 96-09-092, Sept. 20, 1996, 172 PUR4th 393 (Cal.P.U.C.)
Price caps are the new kid on the block in regulation. Targeting distribution activities may make price caps easier to apply in electricity.
Jeff Makholm and Michael Quinn are, respectively, senior vice president and senior consultant at National Economic Research Associates Inc.
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