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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 causes of regulatory uncertainty, such as "failure of federal legislators and regulators to anticipate the unintended consequences of actions" and "erratic and/or dramatic changes in direction and policy at the federal and state levels."

Survey respondents were asked their opinions as to what specific actions the regulator or utility must undertake to address each cause that most contributed to regulatory uncertainty. Not surprisingly, the utility respondents focused on the after-the-fact prudence review topic. Typical of the comments received from utility respondents were the following actions:

  • Set standards in advance to follow, and if followed, the fact that the results were not what were expected should not be held against the utility."
  • "Commissions need to provide upfront assurances that they agree with the projects and will provide fair returns."
  • "Pre-approval should be accommodated whenever the utility feels the risk of disallowance justifies pre-approval."

The regulators also weighed in with their own actions to address regulatory uncertainty. Their comments included the following actions:

  • "While individual cases cannot be discussed, the general philosophy of the regulator could be obtained by the utility through more and improved communications."
  • "Regulators should work with utilities to establish a clear policy regarding infrastructure investments, and regulators should put a constant effort into being educated and knowledgeable about the current status of industry challenges."
  • "All regulators need to establish as a formal part of the decision-making process a 'chief consequences officer' who is tasked with attempting to anticipate unexpected results from actions contemplated, and with 'trial gaming' the system before decisions are rendered."

From these results, it is encouraging to see both utilities and regulators offering these types of constructive actions to address the challenge of managing regulatory uncertainty. Nevertheless, the real challenge will be how to undertake such actions within the context of the current regulatory environment. To accomplish some of these objectives, each group must take the initiative to begin the process of change, and each must believe that the other party will commit to do the same. Other parts of this survey will provide further insights into how challenging this goal might be to achieve in light of the various comments provided by survey respondents related to "best practice" principles associated with the regulatory process, the building of trust, and their perceptions of the rate-case process.

Important Regulatory Objectives

In an effort to better understand how regulatory uncertainty affects the distribution utility segment of the energy industry, survey respondents were asked to identify the most important regulatory objectives for a distribution utility to achieve, and the most important objectives for a utility regulator to achieve. Interestingly, as Tables 1 and 2 indicate, there was a fairly strong consensus among utility leaders and regulators as to the most important objectives for utilities and regulators. This is a desirable outcome, but the resulting actions that utilities and regulators actually take, and the related processes that they adopt in an effort to achieve these objectives, can be an entirely different story.

The perceptions of one group concerning the actions of the other group in addressing and achieving these objectives