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Regulatory Uncertainty: The Ratemaking Challenge Continues

Ratemaking Special Report
Fortnightly Magazine - November 2004

uncertainty most often is caused by lack of longer-term direction and progression of regulatory decisions, unanticipated actions by regulators and their impact upon a utility's current business strategies, and the potential for costs disallowances. In addition, nine other causes were cited most often (). Besides these stated causes, survey respondents noted other causes of regulatory uncertainty such as, inconsistent application of policies by state regulators among the utilities they regulate, lack of regulator understanding of key issues facing utilities, and current personal or political influences on current regulatory commissioners' voting patterns.

Interestingly, more than 90 percent of survey respondents either strongly agreed or agreed with the proposition that regulatory uncertainty is caused by the energy market changing at a faster pace than the related regulatory policies that establish the rules of the game in the marketplace. This perspective may be indicative of the inherent lag that often is observed between the time the market demands a new service or creates a new business opportunity, and when the utility receives final approval from the regulator to implement its proposal to address the market's needs.

To be fair in their assessment, some survey respondents also conceded that certain internal perspectives of the utilities themselves cause regulatory uncertainty. One survey respondent noted that "management has forgotten that utilities must invest in infrastructure and then file rate cases to earn on the investment." In another instance, a respondent concluded that regulatory uncertainty was caused by the "changing corporate structures and the provision of services by other affiliates." In both these situations, it appears that utility management may have been so distracted with its internal restructuring activities and related business initiatives that it simply lost sight of the regulatory process, and the value of having a well-conceived regulatory strategy that keeps the regulatory agenda in focus for management and links any required regulatory initiatives back to its overall corporate strategy.

Important Regulatory Objectives Sought by Utilities

With these types of regulatory uncertainties as givens, utilities seek to achieve a wide range of strategic and business objectives within the context of the regulatory process. Our survey identified those objectives most important to utilities. The results clearly indicate that the ability to earn a fair rate of return on assets and promoting profitable growth are the most important objectives for utilities to achieve (). At the same time, 100 percent of the survey respondents ranked the ability to effectively manage business risks as either the most important or an important objective for their utilities to achieve. And the majority of survey respondents (95 percent) believed that having the proper ratemaking tools to address their customers' energy needs was an important regulatory objective.

Although in recent years the concept of performance-based ratemaking (PBR) has taken a bit of a breather, upward of 87 percent of the survey respondents said it was important that regulators provide their utilities with an appropriate level of management discretion to achieve operational efficiencies. Yet, at the same time, more than one-third of survey respondents believed that achieving less regulation, not more, was not important.