As economies start to reopen and the nation adjusts to the Covid-19 pandemic, how should electricity regulators respond? According to a white paper from the D.C. law firm of Wilkinson Barker Knauer, utility regulators should look to medium-term recovery steps, rate design rationalization, capital cost adjustments, decoupling sales and rates, and infrastructure and decarbonization.
Written by Tony Clark, a former Federal Energy Regulatory Commissioner and North Dakota utility regulator (and not a lawyer); Ray Gifford, former chairman of the Colorado Public Utilities Commission (CPUC); and Matt Larson, a former CPUC lawyer, in these times, “utility regulators must consider how they may buttress utility stability and reliability. Then, once the most pressing and immediate concerns caused by this crisis have subsided, regulators should take the further steps needed to enhance stability for the long-term.”
The paper’s recommendations:
* Medium-term recovery. “Utility regulators should evaluate revenue shortfalls and increases in bad debt expense, then institute recovery mechanisms over the length of time appropriate for the magnitude of recovery.”
* Rate design. “Utility regulators should take this opportunity to rationalize rate design to safeguard utility stability and robustness. Rates should reflect actual costs to efficiently recover revenues and convey price signals to customers.”
* Capital costs. “Regulated returns must be adequate to compensate investors for the increased risk associated with doing business in a COVID-19 world. Capital will be needed to support the investments utilities must continue making to modernize the grid in recognition of evolving generation mixes.”
* Decoupling. In what may be the most controversial recommendation, the paper says, “We encourage regulators to consider how decoupling can promote utility stability and robustness while also fostering greater efficiency and conservation. We caution, however, that decoupling should not be executed in an overly simplistic way that limits total recovery and thereby creates disincentives to further electrification.”
* Infrastructure and decarbonization. “Regulators should consider policies for developing electric vehicle infrastructure and promoting beneficial electrification.” These actions, says the paper, will spread fixed costs “over a greater demand base” and “decrease costs per customer.”
In the challenging environment of the coronavirus pandemic, notes the paper, “utilities—as network industries—have high fixed costs relative to variable costs, and these costs are often—to a lesser or greater degree—recovered in part through volumetric rates. Accordingly, utilities may be left in challenging financial circumstances when demand decreases suddenly and steeply, and the utility’s revenue requirement cannot be met due to rates that were not designed to account for large swings in demand.”
The June paper is a follow-up to an earlier April paper from the three authors, looking primarily at short-term state regulatory responses to the pandemic. That analysis concluded, “State policymakers should consider both short- and long-term measures in responding to the COVID-19 crisis that support both customers and utilities. While quick and decisive action is necessary under the circumstances, that action should fit into a broad framework with the dual goal of protecting customers and keeping utilities financially and operationally stable.”
Clark, a Republican politician in North Dakota, elected to the state’s utility regulatory body, won appointment to FERC in 2012 by the Obama administration to fill a vacant Republican seat. He was liked and respected at FERC as he advanced state-oriented regulatory policies. Gifford, also a Republican, was CPUC chairman from 1999 to 2003. He is a member of the conservative legal group the Federalist Society.
— Kennedy Maize