[BETA] Fortnightly

Ratemaking Special Report

Regulatory Uncertainty:

In a joint survey conducted by Navigant Consulting and , utility executives identify the biggest challenge to their business.

No matter what position you subscribe to when characterizing the degree of competition in today's energy industry, it is clear that regulation continues to serve as a major influence on the business strategies and operations of the gas and electric distribution utilities in North America. While it is readily understood why such regulatory oversight is necessary in this segment of the business, it is less clear how regulators internalize this important role, and how they choose to interact with utilities in implementing energy policies, reviewing operational issues, and approving the revenues and rates upon which the financial health of this industry segment is premised.

The results of a previous Navigant Consulting/ survey, " The Outlook for the North America Power Industry," identified regulatory uncertainty as the most critical issue for utility executives to resolve over the next five years. The words of one electric utility leader cut to the chase, "We need to solve regulatory uncertainty so we can plan and execute." Indeed, respondents to that survey (72 percent) said regulatory uncertainty was the top issue to solve to ensure a strong future for the industry. Understanding the key issues and challenges inherent in the utility regulatory process is the first step to gaining valuable insights into this uncertainty, and being able to manage it effectively.

Moreover, the challenges associated with regulatory uncertainty have no doubt been heightened by the recent increased activity in rate case filings by electric and gas distribution utilities. Regulators and other interested parties are now, more than ever, primed to closely examine all aspects of a utility's financial performance, business strategies, and day-to-day operations. It no longer is simply a matter of the utility making its financial case for rate relief. Instead, utility rate cases are fast becoming the focal point for management's public disclosure and defense of many of the key business practices and policies that affect each of the business segments of the organization.

With this situation as a backdrop, Navigant Consulting and recently conducted a comprehensive survey, , ¹ to solicit the insights of utility leaders into the key issues and challenges surrounding regulatory uncertainty, and their implications on the rate case and ratemaking activities of gas and electric distribution utilities. Specifically, survey respondents identified: (1) how utilities define regulatory uncertainty; (2) the most critical regulatory issues facing utility companies; (3) how and where these issues are raised in utility rate case proceedings; (4) the types of ratemaking and pricing proposals submitted by utilities to address these issues; and (5) the outcomes of these regulatory proceedings.

Besides identifying these broader issues, the survey results captured the particulars of recent rate case filings of the utility respondents to identify: (1) the specific business issues, related total cost of service claims, and ratemaking proposals most often raised; and (2) the outcomes of these cases compared to the proposed utility requests.

The Major Causes of Regulatory Uncertainty

Utility leaders clearly indicated that regulatory