Utility performance, investment versus dividends, rate of return incentives
Phillip Cross is legal editor, Public Utilities Fortnightly, and serves on the editorial staff of Utility Regulatory News, published by Public Utilities Reports, Inc. (our publisher), which reports weekly on ratemaking and regulatory decisions issued by state public utility commissions.
Generally speaking, regulatory commissions and courts are not anxious to substitute their judgement for that of utility management. Whether in deciding what to spend on operations and when, or how to allocate earnings between payments to shareholders and investments in facility upgrades and expansions for the benefit of consumers.
Under the traditional system of public utility regulation, good faith is presumed on the part of the managers of a business. Utility managers initiate actions necessary to provide an adequate level of service, raise capital, and file fair rates. Regulators review the actions to ensure that only prudent expenses are included in rates.
The line might not be so clear, however, when facilities' problems are recurrent. This is especially true when the public cannot help but notice deficiencies such as underground explosions, fires and dislodged manhole covers.
In such instances, is it public perception that drives the regulatory response? Or is the seriousness of the threat to the public? Or whether a utility acts responsibly to address the issue in the short term?
A recent example where state regulators found it prudent to gingerly cross the line can be seen in a recent case involving Indianapolis Power and Light Company. The Indiana Utility Regulatory Commission opened a proceeding to investigate a series of highly-publicized underground fires and explosions in downtown Indianapolis. Several occurred in the period 2011 - 2012. Five more took place between March 2014 and March 2105.
The more recent events produced a significant amount of fire and smoke. In one instance, the event caused a complete shutdown of one of four downtown secondary networks.