Regulators use rate cases to craft incentives for capital spending.
Phillip Cross is legal editor of Public Utilities Fortnightly. Contact him at email@example.com.
A new trend has evolved in utility rate cases. In the past year, state utility regulators have begun tailoring return-on-equity (ROE) rate allowance to encourage utilities to build infrastructure.
Traditional ROE analysis focuses on the utility’s ability to attract sufficient capital to make the investments necessary for providing adequate service. Generally speaking, rate regulators leave the timing and choice of such investment to utility managers. But some current cases show an increasing willingness to give managers an earnings incentive to pursue preferred investments.
Federal regulators have made some high-profile moves in this direction in recent years. FERC recently ruled an investment by an electric utility in a transmission expansion project for Western Pennsylvania is eligible for significant levels of ROE incentives.1 In that case, the commission found Duquesne Light Co. was under no absolute mandate to make the upgrades and had voluntarily chosen to invest in an important reliability project that would benefit consumers.
The ruling allows Duquesne to earn returns as high as 13.8 percent on the investment. A look at the company’s returns reported this year indicates what a good deal this is for investors.