High industrial electricity rates are often blamed upon current regulation. Some state regulators respond with broad-based reforms; others simply reallocate system costs from industrial rate classes to rates for more inelastic customers (em namely, residential users. Regulators base such allocations on rate-of-return (ROR) regulation, which holds that rates for all consumers should match the cost of serving them.
The cost-of-service debate came first to the telephone industry, where costs were shifted from competitive toll calling to monopoly local service (em a job made easier by a shrinking revenue requirement. Now the same issue appears in electric and gas cases. The challenge there will lie in applying cost-of-service principles to two distinct markets (em industrial and residential (em when one sector (industrial) exerts market power and the other (residential) may remain captive.
The cost-shifting trend may be leading some regulators to consider the possibility that ordinary residential customers are inadequately represented in the ratemaking process.
A recent rate settlement in Kentucky is a case in point. Late last year, the Kentucky Public Service Commission (PSC) concluded a long-standing case governing rate treatment of Louisville Gas & Electric's investment in the Trimble county generating facility. Under the approved agreement, the utility will refund current customers $22 million, with $5.3 million reserved to special contract customers and the rest refunded to all other customers over a five-year period. The utility agreed to pay an additional $4.5 million to fund energy assistance programs for low-income customers over the same five-year period.