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Regulators Forum: Restructuring Rollback

State-policy turmoil reshapes utility markets.

Fortnightly Magazine - November 2007

their vegetation-management practices. Those standards mandate a four-year vegetation-management cycle for distribution lines in urban areas and require electric utilities to make a good-faith effort to obtain the consent necessary to trim trees outside utility rights-of-way that threaten distribution lines.

Last, it’s important to remember most of the baseload generation in this country is at least 25 years old. Maintaining and upgrading those plants to comply with new environmental regulations is going to cost billions of dollars in the next decade. If they haven’t done it already, now is the time for those utilities seeking future cost recovery, and commissions ordering rate hikes, to open a dialogue with customers about why these expenses are necessary and their effect on rates.

Fortnightly: Since fuel-adjustment clauses (FAC) were unavailable in Missouri from 1979 through 2005, and now the legislature approved their use, what can be learned from FAC approval for Aquila but not for AmerenUE?

Davis: The 2005 legislation affords the Missouri commission great discretion in determining whether a utility will receive a fuel-adjustment mechanism as well as the terms of how one operates. The law allows us to take a company-specific approach to fuel adjustment as part of a rate case and to review that decision every four years.

Aquila was granted an FAC because its fuel costs, primarily natural gas, were extremely volatile, and the financial integrity of the company was being jeopardized by changes in these costs. The Ameren case was different. The company’s fuel costs weren’t nearly as volatile and Ameren had robust off-system sales. Accordingly, we allowed Ameren to keep all of its off-system sales revenues above a base amount, feeling those margins would offset any future fuel cost increases and that customers would benefit from the price stability. In the Ameren case, we stated very clearly that utilities are free to propose any type of FAC mechanism and this commission will give them a fair hearing.

Missouri’s fuel-adjustment statute and the accompanying regulations could be a model for some of those changes. We require fuel adjustments to be based on actual, auditable fuel costs. There are prudence reviews mandated at least every 18 months and any discrepancies must be trued up on an annual basis with interest. Moreover, utilities permitted to use an FAC must file a rate case at least every four years to review the utility’s earnings and its operation.

Rapidly rising fuel costs are causing many state PUCs to consider toughening fuel-adjustment policies that haven’t been looked at for decades. I would hope those states would look at our rules, the result of a year-long collaborative effort, for guidance.

Pennsylvania: Avoiding Rate Shock

Fortnightly: Is the regulatory compact changing in Pennsylvania to accommodate increased market risk?

Holland: In Pennsylvania, the PUC doesn’t have jurisdiction over the generation of electricity or wholesale electricity markets. Prior to restructuring the electric industry under traditional rate making, Pennsylvania took into consideration market risks in calculating the rate of return for EDCs (electric distribution companies) during base-rate cases.

As the industry was restructured, the companies took a calculated risk on