(November 2008)Economic uncertainties are raising doubts over utility returns. Will regulators feel the need to consider broader economic effects when engaging in ratemaking? While...
Ring Fencing In Utah
Regulatory structures protect ratepayers in geography-spanning utility mergers.
“optimal” resources that must be chosen under the laws and regulations of two different states in PacifiCorp’s region. This potential situation creates difficulties for the company to develop an integrated resource plan that satisfies the laws in all of the states it operates in.
With further merger and acquisition activity in the electric utility industry, geographic diversity issues may become more prevalent than they are today. David Sokol, MidAmerican Energy chairman and CEO, noted last year, “I don’t think there is a substantial benefit [to combining] neighboring utilities [compared to] ones that are separate. It really comes down to [whether] the operations are as efficient as can be in dealing with the requirements and the demands of their state and their customers. In this business all states don’t view the requirements the same. So, the fact you might have two different utilities neighboring, if the preponderance of their customers are in different states they still have to be run to the constituents [they serve].” 6
As geographic differences evolve, states may find themselves increasingly implementing ring-fencing strategies around PacifiCorp to protect themselves from other states.
But in the current environment, geographic diversity raises concerns that are implicitly understood by PacifiCorp’s parent company. Geographic diversity often is seen as a benefit in that it may smooth out cash flows over time. However, there may be downsides to geographic diversification wherein the costs are greater than the benefits.
1. Public Utilities Fortnightly’s parent company, Public Utilities Reports Inc. (PUR), has published several of the co-author’s books on corporate-restructuring topics, including: Faruqui, Ahmad and Malko, J. Robert, editors, Customer Choice: Finding Value in Retail Electricity Markets , 1999; Enholm, Gregory B. and Malko, editors, Reinventing Electric Utility Regulation, 1995; and Enholm and Malko, editors, Electric Utilities Moving Into The 21st Century, 1994.
2. York, Stanley and Malko, J. Robert, “Utility Diversification: A Regulatory Perspective,” Public Utilities Fortnightly , January 1983; Malko and Edgar, George R., “Energy Utility Diversification: Its Status in Wisconsin,” Public Utilities Fortnightly , August 1986; and Malko, “Assessing Corporate Restructurings In The Electric Utility Industry: A Framework,” NRRI Quarterly Bulletin, vol. 17, No. 4, Winter 1996-97.
3. “Stipulation between PacifiCorp, ScottishPower, the Division of Public Utilities, and the Committee of Consumer Services,” Docket No. 98-2035-04, approved by the Utah Public Service Commission on November 23, 1999.
4. Docket No. 05-035-54, “In the Matter of the Application of MidAmerican Energy Holdings Co. and PacifiCorp dba Utah Power & Light Co. for an Order Authorizing Proposed Transaction,” Second Amendment to Stipulation, April 20, 2006.
5. Oregon Public Service Commission, Docket No. UM 1276: “Staff’s request to open an investigation regarding performance based rate making mechanisms to address potential build vs. buy bias.”
6. “ The Ultimate CEOs ,” Public Utilities Fortnightly , June 2006, p. 45.