A few months back, the Federal Energy Regulatory Commission directed Deutsche Bank Energy Trading LLC to show cause why it shouldn’t be assessed a civil penalty of $1.5 million and be made to...
to update its current performance-based rate plan, in large part to account for declining sales associated with the recent energy crisis. But the state legislature recently had passed a law requiring the CPUC to ensure that errors in estimates of demand elasticity or sales do not result in a material over or undercollection of revenues by the state's regulated electric utilities-a signal that state energy policy had shifted a focus on regulation. The CPUC noted that the adoption of a balancing account tied to an approved revenue requirement essentially restores the Energy Revenue Adjustment Mechanism (ERAM) that was in place before the move to performance-based ratemaking.
Nevada Takes Strong Action to Protect Consumers
The Western power market crisis also brought out the strongest of weapons available to a utility regulator-the prudence disallowance. A prime example of this is actions taken by the Nevada Public Utilities Commission (NPUC) when faced with large rate hike requests by Sierra Pacific Resources operating utilities Nevada Power Co. and Sierra Pacific Power Co. The NPUC denied Nevada Power recovery of $437 million of the $922 million in purchased power costs it had incurred during the height of the regional power crisis in 2001. Similarly, it disallowed $55.8 million of the $205 million in power costs deferred by Sierra Pacific power during the period.
In both cases the NPUC found that the utilities' managers had made inexcusable mistakes in planning for and executing their purchase of power to meet peak needs. For example, it said that the decision by Nevada Power to purchase power in April of 2001 for delivery in the third and fourth quarter of the year at an average price of $513 per megawatt hour, when it knew as early as November of 2000 that it would have excess supplies, was beyond explanation.
In both cases the NPUC asked the question traditionally reviewed in prudence cases: What would a reasonable and prudent manager have done given the information available at the time? Similar findings were made in the Sierra Pacific case, where the NPUC found that nearly every party to the proceeding had agreed that there was some level of imprudence on the part of the utility in obtaining purchased power.
The unique aspect of these disallowances was their timing. The cases coincided with a period of great regulatory instability in the region, as policy-makers began reevaluation of ongoing efforts to deregulate the power industry. In fact, one of the major arguments posed by the utilities in support of its purchasing practices was that state regulators had not given clear signals as to the future service obligations of incumbent utilities under restructuring. That being the case, managers could not reasonably plan for the long term, and they were forced to buy blocks of short-term high-priced power instead.
Kansas Shocked by Failed Utility Diversification
Aside from problems directly related to electric restructuring efforts, regulators recently have been called to review the effect on ratepayers of the cyclical trend of diversification of utility companies into unregulated lines of business. Many companies with utility assets made major efforts