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Utilities and Regulators: A Search for Harmony

Ratemaking Special Report: Survey respondents weigh in with needed actions.

Fortnightly Magazine - November 2005

The utility regulatory process is prone to controversy, given the inherently adversarial roles and varied viewpoints among the utilities, regulators, and other stakeholders. Oft-heard pleas of "why can't you just see this issue my way" or "can't we all just get along" underscore the deep-seated frustrations of utility leaders and regulators in trying to find a common ground for addressing crucial issues surrounding the formulation of business strategies, establishment of responsible financial goals, and setting of operational performance standards for the regulated gas and electric distribution utility segments of the energy industry.

 

In fall 2004, Navigant Consulting conducted a comprehensive survey 1 to solicit the insights of utility leaders into the key challenges surrounding regulatory uncertainty, and the implications on the rate-case and ratemaking activities of gas and electric distribution utilities. The message, heard loud and clear, was that regulatory uncertainty is real and remains one of the most critical issues in the North American energy industry. It must be better managed.

For this year's survey, cognizant that state and provincial utility regulators keenly are aware of industry concerns surrounding regulatory uncertainty and have important perspectives to share on various issues, Navigant Consulting solicited perspectives from both utility executives and state or provincial regulators who oversee the operations of these utilities. 2 Our objective was to compare and contrast the perspectives, priorities, and actions of utility executives and regulators in an effort to promote a better understanding of regulatory uncertainty between both groups, and to provide an issues-oriented platform to identify possible industry-wide solutions to minimize future regulatory uncertainty.

Survey respondents were asked to identify: (1) the major causes of regulatory uncertainty; (2) the key regulatory objectives that utilities and regulators desire to achieve; (3) the challenges to the regulatory process and the various actions that, if taken, could enhance the process; and (4) the challenges to the rate-case process and the various actions that can enhance the process.

Major Causes of Regulatory Uncertainty

Utility leaders and regulators exhibited their divergent views as to the major causes of regulatory uncertainty as shown in Figure 1. Interestingly, 80 percent of utility leaders indicated that the most important cause was "the potential for cost disallowances in after-the-fact prudence reviews," while regulators overwhelmingly (100 percent) stated that it was the "changing perspectives of regulators over time in addressing customer and shareholder issues." Despite their differences in ranking the causes of regulatory uncertainty, both groups agreed in other causal areas, most notably "not knowing the longer-term direction and progression of regulatory decisions" and "not being able to secure from regulators pre-approval of major infrastructure investments."

Approximately 90 percent of survey respondents either "strongly agreed" or "agreed" with the proposition that regulatory uncertainty is caused by "changing regulatory standards and expectations for the operational and financial performance of utilities." This may be indicative of the recent experiences of utilities, regulators, and other stakeholders related to the pronounced increase in rate-case activity during the last 12 months.

Survey respondents also provided their own comments regarding

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