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Regulatory Uncertainty: The Ratemaking Challenge Continues

Ratemaking Special Report
Fortnightly Magazine - November 2004

all the regulatory objectives ranked by survey respondents, promoting the efficient use of energy by a utility's customers was ranked as the least important. This view underscores some of the recent commentary and related positions put forward in the energy industry dealing with the problem that regulated gas and electric utilities are penalized for aggressively promoting energy efficiency. 2 For a gas utility, this occurs because traditional utility rate structures are designed to capture most of a gas utility's revenue requirements for fixed costs through volumetric retail sales of natural gas, so that a utility can recover these costs fully only if its customers consume a certain amount of natural gas.

Recent Utility Rate Case Activities

Approximately half of the utilities represented in the survey filed general rate cases within the last 24 months, and slightly more than half intend to file rate cases in the near future (over the next 12 months). Roughly two-thirds of the surveyed utilities that did not file rate cases in recent times intend to file rate cases over the next 12 months. For those utilities that did not file rate cases in recent times, they went without a rate case for 9 years on average, with a range of between 3 years and 14 years. At the same time, however, approximately one-third of the utilities surveyed indicated that they are precluded from filing rate cases because of either rate freezes or stay-out provisions (with most expiring between late 2005 and the end of 2006).

The overall profile of the rate cases filed by the surveyed utilities during the last 24 months is presented in Table 1. Of note is that the revenue increases approved by regulators represented approximately 40 percent of the revenue increases the surveyed utilities had originally requested in their rate-case filings. In addition, approximately 41 percent of the rate cases filed ended in a negotiated settlement rather than through a fully litigated proceeding.

Regulator and Stakeholder Controversy: What's Hot and What's Not

Not surprisingly, there was a great deal of controversy in these rate cases across a wide range of topics and issues related to the utility's total revenue requirement as well as to other parts of its rate-case filing. The survey respondents clearly indicated that certain aspects of their utilities' rate-case filings were very controversial, while others were not controversial at all. It is important to distinguish between the concept of a "controversial issue" and an "important issue." While certain rate case issues can be seen as controversial in nature, there can be other issues that are still important ones. However, they don't get the same attention in the utility's rate cases because: (1) the utility may have simply done a better job at making its case with the regulator and other stakeholders; (2) the parties to the rate case may have already been sensitized to the issue beforehand (by the utility previewing its upcoming rate case with parties or because the issue was already raised and contested in a prior rate case); or (3) there are other regulatory forums in which