Alternative Ratemaking

Issue:

Under traditional ratemaking, if a utility wants to change rates, it needs to file a case with the Public Utility Commission. During the existing rate case process, the PUC schedules public input hearings to seek input from consumers about the rate increase and the utility’s service. This is often a valuable opportunity for customer service issues to be aired and addressed while the utility has the motivation to remove any opposition to its request for an increase.

IECPA Position:

Many alternative ratemaking mechanisms allow for and establish automatic rate adjustments without a complete hearing. This creates significant risk for customers in that these single alternative ratemaking mechanisms may allow for a rate increase while such increase would not be warranted under a broader rate case review.

IECPA will be monitoring and intervening as necessary in any rate case where a utility proposes an alternative rate.

Details:

HB 1782 (Rep. Delozier, R-Cumberland) amends Title 66 (Public Utilities) of the Pennsylvania Consolidated Statutes, providing for alternative rate making for natural gas distribution companies (NGDCs) and electric distribution companies (EDCs). This legislation also expands utility investment and cost recovery authority for Distributed Energy Resources (DER) – i.e. electricity generation. The legislation proposes to provide clear authority for the Commission to approve alternative rate making and rate design methodologies, including (1) decoupling mechanisms, (2) performance-based rates; (3) formula rates; (4) multiyear rate plans, (5) cost-recovery mechanisms and rates to support, and fully recover the allocated costs to deploy infrastructure and distributed energy resources or (6) any combination of these five mechanisms. To date, the Commission has engaged in rate design methodologies for narrowly defined infrastructure investments. For example, the distribution system improvement charges (DSIC) allows for the recovery of prudently incurred costs related to the repair, improvement and replacement of eligible utility infrastructure through a surcharge that is subject to reconciliation, audit and other consumer protections. A precondition to obtaining Commission approval of a DSIC is the filing and approval of a long-term infrastructure improvement plan (LTIIP). Specific to generation assets, the Electricity Generation Customer Choice and Competition Act resulted in EDCs divesting their generation assets – in order to create a competitive retail energy market. Thus, under this draft legislation, current statutory directives and policy as to utility ownership and cost recovery for generation resources would be implicitly reversed, or at a minimum conflicted. One of the principles of restructuring was that company shareholders, not customers, would be at risk for recovery of generation costs. This conflict makes it unclear whether the draft legislation intends customers again to be responsible for risks associated with investments by EDCs and NGDCs in generation, energy storage and CHP facilities. The draft legislation also appears to promote further utility spending for service not related to distribution. It does this by providing for cost recovery of non-basic service costs, including distributed generation resources such as distributed solar facilities, CHP facilities, as well as electric vehicles, CNG vehicles, liquefied natural gas (LNG) vehicles, and related charging facilities and energy storage facilities, without including any limitations on the size, location of interconnection, fuel source or purpose of the resource that would qualify as a “distributed energy resource.” The proposals to allow for cost recovery of DER projects necessarily raise important issues as to which consumers should pay for such localized facilities in the utility’s rate structure.  IECPA actively discussed these concerns with legislators and other key policy stakeholders.

IECPA Letter to House Consumers Affairs Committee re HB 1782

Update 5/2/18 - the Pennsylvania House of Representatives passed H.B. 1782 by a vote of   191-1

Updated 6/5/18 - IECPA sends a letter to Members of the Senate Consumer Affairs and Professional Licensure Committee requesting that the Committee consider the inclusion of consumer protection provisions to the bill.

Update 6/11/18 - IECPA along with the Pennsylvania Energy Consumer Alliance (PECA) and the Pennsylvania Manufacturers' Association (PMA) coordinated on developing a consumer protection amendment and associated advocacy materials for the Senate. HB 1782 Bad for Consumers and Business; Cover Letter Urging Amendment; Amendments Grouped by Reason

Update 7/6/18 - Our advocacy included direct outreach to nearly every Senate office. Ultimately, the bill passed without our amendment.  However when the Governor signed this legislation he included a letter from his office to the Chair of the PUC expressing concerns about the lack of consumer protections that we were advocating.  His office requested a robust stakeholder process prior to the PUC considering adjustments under an alternative ratemaking mechanism. IECPA met with the Governor’s Office as this process was evolving so it was encouraging to see our concerns raised from his office directly to the PUC. The Governor’s letter. The final bill version can be viewed here.

Update 8/23/18 - Following approval by the General Assembly and the Governor’s signature, the Pennsylvania Public Utility Commission (PUC) began the process of implementing Act 58 of 2018 (House Bill 1782), which provides for alternative rate making for natural gas distribution, electric distribution and water/wastewater companies.

Act 58 allows public utilities to petition the PUC to consider various alternative rate making mechanisms as part of utilities’ base rate proceedings, including: decoupling mechanisms, performance-based rates, formula rates or multiyear rate plans, or a combination of those alternatives. The Commission will now carefully evaluate how to best implement these changes to the Public Utility Code, while continuing the PUC’s underlying mission to ensure safe and reliable utility service at just and reasonable rates.

All interested parties should be aware that the alternative rate making mechanisms authorized under Act 58 must be proposed within the confines of a utility base rate case under Chapter 13 of the Public Utility Code. The Commission has a well established process for reviewing base rate cases, which provides for hearings concerning the lawfulness and appropriateness of proposed rates, including proposed alternative rate mechanisms. Interested parties may respond to a utility’s application for alternative rate making by filing a complaint or intervening in a base rate case and addressing an alternative rate making proposal, including proposing and justifying any customer protections they consider appropriate.

Act 58 does not change this Commission process.

M-2018-3003269 - Act 58 of 2018 Tentative Implementation Order

Update 10/4/18 - IECPA filed comments with the PUC in case M-2018-3003269 regarding the Tentative Implementation Order addressing several customer protection issues and arguing that the regulatory prohibition on recovery of "lost revenues" should still apply to alternative ratemaking. 

Update 11/19/18 - IECPA filed Reply Comments providing highlighting additional support for these issues.

Update April 2019 - the Commission issued an order Order-3003269 - LAW - 4-25-19 PM Act 58 Implementation Order.docx. With regard to cost responsibility, the commission’s order does state that the utilities’ infrastructure costs are reasonably allocated to, and recovered from, customers is a foundational principal of ratemaking in Pennsylvania. The order did not go as far to mandate that in every alternative ratemaking case going forward that this would be the way the utilities should have to assign rates but at least some reassurance exists in the commission’s acknowledgement of the fundamental principal by giving the ratepayer specifically some leverage in these rate cases.  The fundamental takeaway from this order is that the commission was trying to take a conservative approach here and not issue board policy statements that would bind utilities and parties going forward. Ideally, we would have liked more concrete statements that were more applicable and precedential. However, there’s enough in the order that IECPA can rely on going forward in utility rate cases. Regarding the base rate case, the commission did specifically state that alternative ratemaking mechanisms must be proposed and examine within the context of the utilities base rate case. In addition to the cost responsibility, this was the main point the group wanted to see out of this order, which was fortunately achieved. Regarding lost revenues, in the proposed implementation order, it appears the Commission was willing to perceive Act 58 as superseding this. Our argument was that lost revenues are an element of cost that are prohibited and further, any allowance of alternative ratemaking does not supersede that the prohibition on the inclusion of that singular element of cost in whatever rates might be. The Commission’s order does acknowledge this argument but unfortunately, didn’t address it in full. Lastly, regarding customer protections, the Commission was not willing to go as far to impose the customer protections that IECPA and other groups had argued for but again, didn’t outright close the door on it.

PUC Case M-2015-2518883

The commission initiated a proceeding in late 2015, Docket No. M-2015-2518883, to look at "alternative ratemaking mechanisms" such as revenue decoupling. Hearings were held in 2016, but the proceeding floundered. During the course of the proceeding, the definition of alternative ratemaking expanded from decoupling and modifying demand charges to include multiyear test periods, formula rates, cost trackers and other mechanisms.

In March 2017, the PUC issued an order encouraging industry stakeholders to file additional comments related to specific industry sectors: electric, gas or water. Comments were issued in May 2017 and July 2017. Discussions have been ongoing since.

At the May 3, 2018 meeting, the commission adopted a motion by Vice Chairman Andrew Place to release a proposed policy statement regarding alternative regulation, with certain amendments. The statement itself will not be released publicly until the amendments have been incorporated and the commissioners have signed off on it. Once issued, another round of comments is expected.

In his motion, Vice Chairman Place highlighted that the changing energy landscape necessitates rate designs that avoid a “one-size-fits all” approach, and are based on the following first-order principles:

  1. Policies must support the continued efficient use of all energy resources.

  2. The evolution of a distributed energy environment requires substantial and well-targeted investment in distribution infrastructure.

  3. Policies must encourage least-cost solutions, with cost recovery based on long-term cost causation.

  4. Rate design should embrace, where feasible, the additional capabilities enabled by smart meter deployment.

  5. As noted by the Office of Consumer Advocate (OCA), “costs are variable in the long run.” Therefore, it may be appropriate for energy utilities to design rates in a manner that minimizes the long-term costs of serving existing and new loads. Given the substantial and ongoing Long-Term Infrastructure Improvement Plan (LTIIP) spending by the electric and natural gas utilities, a long-term approach to rate design may be appropriate.

He also suggests that weather normalization clauses and "revenue-per-customer" mechanisms could be appropriate for the gas industry if "implemented with care."

In a statement issued the same day, the newly reappointed PUC Chairman Gladys Brown, opined that the evolving utility landscape, with increased penetration of distributed energy resources and electric vehicles, presents "both a challenge and an opportunity." She expressed concern with regard how new technologies would impact utilities' capacity utilization and indicated an interest in innovative frameworks to increase distribution utilities' capacity utilization.

Interested parties have 60 days from the date of publication of the proposed policy statement in the Pennsylvania Bulletin to file written comments referencing Docket No. M-2015-2518883 with the Pennsylvania Public Utility Commission, Attn:  Secretary Rosemary Chiavetta, Commonwealth Keystone Building, Second Floor 400 North Street, Harrisburg, PA  17120.  Comments may also be filed electronically through the Commission’s e-File System.

Update 5/24/18

Proposed policy statement was issued.

Update 8/16/18

IECPA filed comments highlighting the need for a thorough design process to be utilized before any alternative rate mechanisms are implemented.