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Restructuring Revisited

What we can learn from retail-rate increases in restructured and non-restructured states.

Fortnightly Magazine - June 2007

and non-restructured states increased sharply under the regulated industry structure of the mid-1980s to the mid-1990s but, despite more rapidly increasing fuel costs, has not increased further since the onset of restructuring efforts.

Because those “good old regulated days” perhaps weren’t as good as some of us may remember them, we ought to be careful about what we are asking for. Re-regulation would be a risky and potentially costly undertaking.

This concern is shared by others. For example, although Standard and Poor’s notes that it “does not consider the prospects for significant re-regulation to be broad based, and therefore we consider threats to utility credit quality—at this time—to be fairly muted,” and that thoughtful re-regulation efforts could be “beneficial for credit quality,” the agency also stresses that “especially in a political environment that is certain to be highly contentious” re-regulation “is a risky proposition that could threaten utility balance sheets, destroy value, and impair credit ratings.” 5 In fact, in its April 3 statement, S&P goes on to note further that:

“It is not definitively clear whether liberalization has succeeded or failed. … Would a return to traditional regulation lower electricity prices? Absent liberalization, would electricity prices have been lower, all else being equal? Forecasting what might have been is always difficult. And, of course, all else is rarely equal, such as the rapid rise in fuel prices and more recently a surge in capital costs. Nevertheless, the introduction of competition into generation resulted in greater efficiencies, lower heat rates, greater reliability, lower nonfuel operating costs, and in general, more widely adopted best practices. Consider how nuclear power plant operations have improved dramatically in competition's short tenure. Would a reversion to regulation preserve these gains? Absent the pressure of competition, it is hard to believe so, given cost-of-service regulation’s history.”

What Can Be Done?

Concerns about re-regulation do not mean that the recent rate hikes should not be addressed or that nothing can be done to mitigate rate hikes and reduce rate pressures going forward. 6 Available options include:

• Phase out the remaining rate freezes over a multi-year period, rather than ending them abruptly;

•Defer (and if possible securitize) portions of transition-related rate increases over a multi-year period;

•Improve and expand low-income assistance and energy- efficiency programs to mitigate impacts for the most vulnerable customers;

•Educate customers and facilitate municipal aggregation and entry of alternative retail suppliers to provide even small customers with a choice of service and pricing options;

•Establish overlapping supply contracts and more frequent procurements of generation supply to avoid rate shocks resulting from disproportional impacts of individual procurement efforts;

•Improve supply contracts and procurement processes to reduce the risk premium required by suppliers to serve the utilities’ residual regulated load;

•Adopt rate structures that better reflect market prices and more broadly implement demand-response, efficiency, and dynamic-pricing programs to reduce peak loads, enhance competition, and lower standard-offer procurement costs;

•Improve wholesale-power markets by reducing seams, rate pancaking, and other market-related barriers to efficient trade and plant dispatch; and

•Improve fuel and fuel-transportation markets to avoid or mitigate the