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Illinois Approach to Regulating Distribution Utility of the Future

Annual formula rate is working to stabilize distribution ratemaking.

Fortnightly Magazine - June 2016
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It is clear that the electric utility industry is in a state of transformation. It is also becoming increasingly clear that this does not signify the end of the electric grid.

Certainly it will cease to exist as we have historically known it over the past century. But this transformation is logically redefining the grid in a manner that increases its value to all participants in the industry.

This is an industry that is quickly moving from a monopoly system, based on one-way power flows from large central station generators, to a decentralized and increasingly competitive system featuring proactive consumers who can instantaneously, automatically, and without notice switch back and forth between being electricity loads and electricity sources. All this will require a highly reliable and resilient electricity grid to serve as the foundation (the backbone, if you will) of these emerging markets. Without it, these markets will not emerge and cannot exist.

"The annual formula rate is leading to a consistent trajectory of investments to upgrade and maintain a healthy grid." – Ross Hemphill

Therefore, one necessary condition for a market transformation that ultimately benefits all is the continual upgrade and maintenance of the electric grid. This brings into question whether the current and traditional method of regulating public utilities best accommodates the anticipated changes in the electric distribution services industry.

Traditional cost of service regulation with periodic rate cases, and regulatory lag as the only incentive, is ill-equipped to accommodate this transition. The changes to this industry require a new regulatory approach that results in manageable levels of risk by avoiding undue review processes and unduly prescriptive oversight, while also providing incentives to perform.

When rapid changes in circumstances occur, both utilities and their customers will benefit from management that has the flexibility to adapt and respond. New regulatory models should encourage the innovation that will enable utilities to remain forward-looking and responsive to the challenges and opportunities of the evolving energy landscape.

A necessity for this is to transform the issue of the recovery of basic infrastructure costs. A lot has been said of alternative ratemaking approaches but the clearest most direct path is what has been happening in Illinois, which is in the fifth year of an annual performance-based formula process for setting rates for electric distribution services. And it is clear that this process is a success in meeting the objectives that were established at the onset and by any other reasonable measure for a distribution utility.

Given this approach is long past an experimental stage, we thought it useful to explain just how this process was created, and how it is designed and administered. And just how well

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