Line Dividing Regulation and Management

Deck: 

Utility performance, investment versus dividends, rate of return incentives

Utility performance, investment versus dividends, rate of return incentives

Fortnightly Magazine - June 2016
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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.

Two of the five most noted in the press occurred in mid-March of 2015, two weeks before the city was to host the NCAA Final Four Basketball Tournament in Lucas Oil stadium. Coincidentally the utility also filed for a rate increase around the same time.

The commission consolidated the existing investigatory proceeding and the rate case. It eventually ordered the utility to participate in a collaborative process with its staff and other interested parties, to directly address the issue of the company's asset management activities going forward.

The commission ultimately found that the utility's network was basically sound. And that the utility had made necessary investments to address each explosion once it occurred. However, the commission also found that continued investments will be necessary to ensure safe and reliable downtown secondary networks.

Nevertheless, the decision to combine a base rate case and an audit of utility service issues is somewhat unique. It was an indication of the desire by the commission to highlight its attention to the seriousness of the issue of the utility's asset management.

Explaining its particularly strident reaction to the accidents and system failures, the commission pointed out that the

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