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Reducing Rate Shocks

Original-cost ratemaking doesn’t suit the challenges facing utilities today.

Fortnightly Magazine - June 2013
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abbreviations “OC” and “TOC,” which were used in the testimony by Prof. Stewart C. Myers that first recommended TOC to the FERC in the Williams proceeding. (Author Kolbe assisted Myers in developing this testimony.)

4. Several factors might have contributed to alternative methods’ lack of penetration for these entities. First, these companies tend to be natural or statutory monopolies. There is no competition to speak of, hence no pressure for the utilities to adopt TOC or levelized rates. Second, regulatory commissions tend not to change unless someone can demonstrate a real need. Both affected parties and regulatory agencies must invest time and effort to change prior practice, and such investments are unlikely to happen unless badly needed. Third, pipelines and transmission lines often consist of discrete investments, while electric and gas distribution systems and water companies have traditionally tended to have more continuous investments and a smoother profile of investments by vintage. The distortions due to OC-based pricing for any given asset are diminished for companies with smooth investment profiles. Lastly, since capital costs for electric and gas LDCs represent a relatively small proportion of the final electricity or gas prices, the OC-based distortions may not have registered.

5. “ Electricity: The Future Starts Here ,” Thomas Kuhn, Edison Electric Institute Wall Street Briefing, Feb. 8, 2012.

6. Another example is a Brattle study for the Edison Foundation “ Transforming America’s Power Industry ,” 2008, which foresees about $1 trillion in non-generation capital expenditures by the industry between 2010 and 2030.

7. Peter Fox-Penner, Smart Power: Climate Change, The Smart Grid, and The Future of Electric Utilities , Island Press, Washington, D.C., 2009.

8. Moody’s, “US DOE’s Electricity Grid Plan Is Credit Positive for Power Marketing Administrations,” March 26, 2012.

9. “ Demand Response & Energy Efficiency: The Long View ,” by Ahmad Faruqui, 2010.

10. Reuters, “ Update 1-AEP drops scrubber request for Big Sandy coal unit ,” May 30, 2012. See also “Industry in Transition,” interview with AEP CEO Nicholas Akins, by Michael T. Burr, Public Utilities Fortnightly, June 2013.

11. Yardley Associates, “Gas Distribution Infrastructure: Pipeline Replacement and Upgrades ,” prepared for the American Gas Foundation, July 2012, p. 7. 

12. Ibid., p. 13.

13. Black & Veatch, “ 2012 Strategic Directions for the U.S. Water Utility Industry ,” 2012. 

14. The number of rate case filings jumped from 42 in 2008 to 66 in 2009, 55 in 2010 and 50 in 2011. (EEI Rate Case Summary, Q4 2011, at p.1.)

15. For example, Duke and Progress Energy listed three drivers for utility consolidation: 1) competition for capital to fund major capital investments required to replace aging infrastructure and comply with increasing stringent environmental regulations; 2) increasing customer rates in an uncertain economic environment; and 3) need for scale benefits and continuing productivity gains. See Duke-Progress Energy presentation to EEI Financial Conference, Nov. 8, 2011.

16. Wisconsin Electric Power availed itself of Wisconsin’s Environmental Trust Funding mechanism to secure approximately $430 million in environmental financing for one of its past projects. Similar mechanisms have been used in West

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