Utilities and Regulators: A Search for Harmony


Ratemaking Special Report: Survey respondents weigh in with needed actions.

Fortnightly Magazine - November 2005

The utility regulatory process is prone to controversy, given the inherently adversarial roles and varied viewpoints among the utilities, regulators, and other stakeholders. Oft-heard pleas of "why can't you just see this issue my way" or "can't we all just get along" underscore the deep-seated frustrations of utility leaders and regulators in trying to find a common ground for addressing crucial issues surrounding the formulation of business strategies, establishment of responsible financial goals, and setting of operational performance standards for the regulated gas and electric distribution utility segments of the energy industry.


In fall 2004, Navigant Consulting conducted a comprehensive survey1 to solicit the insights of utility leaders into the key challenges surrounding regulatory uncertainty, and the implications on the rate-case and ratemaking activities of gas and electric distribution utilities. The message, heard loud and clear, was that regulatory uncertainty is real and remains one of the most critical issues in the North American energy industry. It must be better managed.

For this year's survey, cognizant that state and provincial utility regulators keenly are aware of industry concerns surrounding regulatory uncertainty and have important perspectives to share on various issues, Navigant Consulting solicited perspectives from both utility executives and state or provincial regulators who oversee the operations of these utilities.2 Our objective was to compare and contrast the perspectives, priorities, and actions of utility executives and regulators in an effort to promote a better understanding of regulatory uncertainty between both groups, and to provide an issues-oriented platform to identify possible industry-wide solutions to minimize future regulatory uncertainty.

Survey respondents were asked to identify: (1) the major causes of regulatory uncertainty; (2) the key regulatory objectives that utilities and regulators desire to achieve; (3) the challenges to the regulatory process and the various actions that, if taken, could enhance the process; and (4) the challenges to the rate-case process and the various actions that can enhance the process.

Major Causes of Regulatory Uncertainty

Utility leaders and regulators exhibited their divergent views as to the major causes of regulatory uncertainty as shown in Figure 1. Interestingly, 80 percent of utility leaders indicated that the most important cause was "the potential for cost disallowances in after-the-fact prudence reviews," while regulators overwhelmingly (100 percent) stated that it was the "changing perspectives of regulators over time in addressing customer and shareholder issues." Despite their differences in ranking the causes of regulatory uncertainty, both groups agreed in other causal areas, most notably "not knowing the longer-term direction and progression of regulatory decisions" and "not being able to secure from regulators pre-approval of major infrastructure investments."

Approximately 90 percent of survey respondents either "strongly agreed" or "agreed" with the proposition that regulatory uncertainty is caused by "changing regulatory standards and expectations for the operational and financial performance of utilities." This may be indicative of the recent experiences of utilities, regulators, and other stakeholders related to the pronounced increase in rate-case activity during the last 12 months.

Survey respondents also provided their own comments regarding the causes of regulatory uncertainty, such as "failure of federal legislators and regulators to anticipate the unintended consequences of actions" and "erratic and/or dramatic changes in direction and policy at the federal and state levels."

Survey respondents were asked their opinions as to what specific actions the regulator or utility must undertake to address each cause that most contributed to regulatory uncertainty. Not surprisingly, the utility respondents focused on the after-the-fact prudence review topic. Typical of the comments received from utility respondents were the following actions:

  • Set standards in advance to follow, and if followed, the fact that the results were not what were expected should not be held against the utility."
  • "Commissions need to provide upfront assurances that they agree with the projects and will provide fair returns."
  • "Pre-approval should be accommodated whenever the utility feels the risk of disallowance justifies pre-approval."

The regulators also weighed in with their own actions to address regulatory uncertainty. Their comments included the following actions:

  • "While individual cases cannot be discussed, the general philosophy of the regulator could be obtained by the utility through more and improved communications."
  • "Regulators should work with utilities to establish a clear policy regarding infrastructure investments, and regulators should put a constant effort into being educated and knowledgeable about the current status of industry challenges."
  • "All regulators need to establish as a formal part of the decision-making process a 'chief consequences officer' who is tasked with attempting to anticipate unexpected results from actions contemplated, and with 'trial gaming' the system before decisions are rendered."

From these results, it is encouraging to see both utilities and regulators offering these types of constructive actions to address the challenge of managing regulatory uncertainty. Nevertheless, the real challenge will be how to undertake such actions within the context of the current regulatory environment. To accomplish some of these objectives, each group must take the initiative to begin the process of change, and each must believe that the other party will commit to do the same. Other parts of this survey will provide further insights into how challenging this goal might be to achieve in light of the various comments provided by survey respondents related to "best practice" principles associated with the regulatory process, the building of trust, and their perceptions of the rate-case process.

Important Regulatory Objectives

In an effort to better understand how regulatory uncertainty affects the distribution utility segment of the energy industry, survey respondents were asked to identify the most important regulatory objectives for a distribution utility to achieve, and the most important objectives for a utility regulator to achieve. Interestingly, as Tables 1 and 2 indicate, there was a fairly strong consensus among utility leaders and regulators as to the most important objectives for utilities and regulators. This is a desirable outcome, but the resulting actions that utilities and regulators actually take, and the related processes that they adopt in an effort to achieve these objectives, can be an entirely different story.

The perceptions of one group concerning the actions of the other group in addressing and achieving these objectives over a period of time can lead to disagreements concerning approach or style, and result in differences of opinion that cloud the original intent of each group's worthy efforts. Recognizing the age-old adage, "actions speak louder than words," it is thought that much of the strained relations that exist today between utility leaders and regulators is the byproduct of misperceptions created by past actions or styles inconsistent with the original business and regulatory objectives stated by these groups.

Key Roles and Responsibilities Supporting The Regulatory Process

One way to define the regulatory process is in terms of the various roles and responsibilities of utility regulators. We asked survey respondents to indicate their views as to the relative importance of these roles. The results, provided in Figure 2, underscore the different business and market outlooks taken by utilities and regulators on the utility distribution segment of the energy industry. These two groups find consensus in the fundamental roles and responsibilities of regulators-regulation of natural monopolies and advising the government-but there is little agreement when it comes to regulatory roles and responsibilities dealing with performance issues for both utilities and the markets in which they operate. Presumably, utilities believe that the establishment of quality and performance standards is less important as part of the regulatory process. Utilities claim they already embrace these standards by having to respond to customer needs, market pressures and competitive threats, and specific management initiatives. Many utilities also believe the market is self-policing and that if the "rules of the road" are properly set, regulatory monitoring of market behavior and performance is unnecessary. The survey results suggest that regulators believe the establishment of quality and performance standards, and the monitoring of market behavior, are both important aspects of their jobs, and that utilities cannot, or are not willing to, adopt these concepts without specific regulatory directives and oversight.

Survey participants also were asked to think about the "best practices" principles that can guide the specific activities of a particular regulatory body, and to indicate the relative degree of effectiveness of the regulatory body for which survey respondents worked, or under whose jurisdiction they operated ().

In summarizing these rankings, Table 3 contrasts the views between regulators and utility survey respondents in the five areas that the majority of regulator survey respondents saw themselves as "Most Effective/More Effective." We observed the greatest difference of opinion for the following three best practice principles: independence, predictability, and flexibility.

We also asked utility leaders and regulators to identify specific actions that could improve a regulatory body's overall effectiveness. Both groups provided many suggested actions, some of which are shown below.

  • On the principle of flexibility:
  • "Regulators need to recognize changed conditions and adapt to them more quickly." (Utility)
  • "Once a decision is made, that same decision is carried forward case after case, even if the conditions and facts have changed. Commissions and their staffs need to be open to new proposals. They also should be willing to look at new information and facts, and change their positions on issues." (Utility)
  • On the principle of predictability:
  • "The commissions and their staffs need to approach each utility proposal with an open mind and then weigh the pros and cons." (Utility)
  • On the principle of independence:
  • Commissions must be leaders in educating the public and not just critics of legitimate participants in the service process." (Utility)
  • "Regulators could decide to place less importance on political influence and stop using the job as a 'bully pulpit.'" (Regulator)
  • On the principle of communication:
  • "Better and on-time communication. Finding about all costs before we rule." (Regulator)
  • "The commission tends to 'speak through its orders' rather than more effectively communicating and informing non-regulated stakeholders (, the public)." (Regulator)
  • On the principle of effectiveness and efficiency:
  • "Commission takes a traditional view of data collection, somewhat reluctant to use non-traditional performance measures (, quantitative and qualitative research) for stakeholders and the commission." (Regulator)

Building Trust Among Stakeholders

The building of trust between the utility and the regulator greatly can enhance the effectiveness and efficiency of the regulatory process. With this premise, we asked survey respondents about the strength of their opinions as to the actions a utility and regulator each could take to build the greatest amount of trust between them. Table 4 shows how each group weighted these actions, with some carrying equal weight within each respondent group.

While ranking the effectiveness of these actions, survey respondents remained cognizant of the nature and the prospect for success in implementing such actions, commenting, "You can never 'fully disclose' to another party's complete satisfaction"; "[Parties should] not be bound by traditional thinking, or by an 'us/them' mentality"; "Better dialogue consistent with rigorous and ethical standards"; "Focus on goals, performance rather than micro-managing the process."

Enhancing the Rate-Case Process

Based on recent rate-case experience, survey respondents identified actions that would make the rate-case process less adversarial and controversial, but more predictable and effective. Comments from utilities and regulators reflect a mutual awareness, and in some cases, agreement as to the positive steps that each party can bring to the regulatory process. A sampling follows.

Less Adversarial

  • "Pre-warn key players of the filing, the objectives, and the impact (, treat effected parties with respect)." (Utility)
  • "Provide continuing education so the regulator is informed on the issues prior to seeing them in a rate case." (Utility)
  • "Each [should] 'walk in the other's moccasins' when approaching a case (, what would I want to know if I were the regulator?)." (Regulator)
  • "More open and ongoing dialogue between the utility, other shareholders, and commissioners." (Regulator)

Less Controversial

  • "Better understanding and comprehension by commission as to what its decisions can do to the utility's financial health and its credit ratings." (Utility)
  • "An acknowledgement by stakeholders that utility requests for rate relief are not automatically assumed to be unnecessary or unreasonable." (Utility)
  • "More consumer education and outreach by the utility and by the commission." (Regulator)

More Predictable

  • "More transparency (regulator should express concerns before deciding)." (Utility)
  • "Consistent positions by commissions regarding similar issues between different utilities and from one rate case to the next for the same utility." (Utility)
  • "Commission should stay consistent with generally accepted accounting standards and with mainstream methodologies for treatment of ROE, depreciation, ." (Regulator)

More Effective

  • "Tailor the filing to address the concerns of the audience." (Utility)
  • "Streamline the data requirements for rate-case filings. Too much data is required that is never used." (Utility)
  • "Better communication between all parties." (Regulator)
  • "Strict adherence to timelines by all parties and the commission. Resist over-burdensome data requests by parties and resist litany of irrelevant questions by commissioners." (Regulator)

Finally, we asked survey respondents to indicate the single most important change to the rate-case process that would improve stakeholder response to the utility's rate increase request and related proposals. The types of changes they identified focused on areas dealing with the need for better and more open communications, more transparency in the process, greater education, more efficient and understandable rate-case processing procedures, the need for an expedited regulatory decision schedule, reduced and more focused filing requirements, and fostering a better understanding of why the utility's rate increase is necessary.

After cutting through all the perspectives and suggested actions provided by survey respondents, we believe the single biggest obstacle that must be overcome to manage regulatory uncertainty is the lack of trust between utility leaders and regulators. The trust issue affects virtually all of the roles, responsibilities, and best-practice principles of regulators, and it greatly influences their interaction with the utilities they regulate.

In response to the ongoing transformation of the energy industry, it is well understood that the role of regulation-its focus, processes, and resources-must change. However, the correct solution and path to change often lies in the eyes of the beholder and varies considerably among utilities and regulators. Therefore, it is absolutely critical and incumbent upon utility leaders and regulators to ensure their intentions are well known to the other through open, honest communication and complete disclosure of the facts, and that this approach permeate throughout their respective organizations so that interactions at all levels are sensitized. Most important, it must occur at both the commissioner and staff levels. Although the process undoubtedly will be a continuous one, eventually the building of trust should instill a belief that each group will "do the right thing," which should over time enable utility leaders and regulators to focus on performance rather than simply on "one-off" rate case outcomes. The actions of utility leaders and regulators must be compatible so that utilities can continue to provide safe, reliable, and cost-effective services in a financially responsible manner and meet tomorrow's industry challenges.


  1. "Regulatory Uncertainty: The Ratemaking Challenge Continues," , November 2004, p. 52.
  2. The survey was sent to the regulatory officers of North American utilities and to the chairmen and commissioners of each state or provincial regulatory body. Survey respondents represented gas utility companies (43 percent), electric utility companies (13 percent), combination utility companies (22 percent), distribution-only (13 percent), integrated utility - generation/T&D (9 percent), and regulatory bodies (29 percent) from 20 states and one Canadian province.