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Top Four Regulatory Practices Sought by Electric Utility Industry

Top Four Regulatory Practices Sought by Electric Utility Industry

   Subject Matter Experts:
Russell Feingold: FeingoldRA@bv.com
   Ed Overcast: OvercastHE@bv.com

Utilities Look for More Nimble Regulatory
Practices as Electric Industry Evolves

The electric utility industry is experiencing significant changes affecting virtually every part of the traditional utility business model, including the regulatory and ratemaking aspects. As utilities grapple with these issues, four key regulatory practices that utilities are seeking have emerged.

According to Black & Veatch’s 2015 Strategic Directions: U.S. Electric Industry report, the top rate and regulatory practices that will be required by utilities over the next five years include:

  • Balanced regulatory treatment between the utility and consumer;
  • Regulatory recognition and recovery of stranded costs with an increased penetration of distributed generation;
  • Formula rates;
  • The unbundling of utility services and rates.

“Each of these top four changes reflects the basic issues that are currently impacting their business model,” said Russell Feingold, Vice President for Black & Veatch’s management consulting business. “Utilities continue to seek a balance of interests in order to find acceptable solutions.”

Feingold said the survey demonstrates the concern of regulated entities for both the matching of costs and revenues coming from the utility rate case, as well as the timeliness of regulatory decisions.

Top three rate and regulatory practices

While formula rates were important for many utilities, the concept of performance-based regulation (PBR) – and its associated formulaic approach to determining a utility’s revenue requirement – found its greatest support among independent/industrial power producers and merchant generation service providers, with both at 38 percent.

“For electric utilities, ideal circumstances will be a perpetual moving target,” Feingold said. “The best outcomes will require an informed, nimble regulatory process, as well as financial resilience and the ability to keep pace with innovation.”

Different Exposures to Change

As the electric utility industry wrestles with how to manage these concerns, it has become clear that a one-size-fits-all approach will fail, because the overriding issues do not have the same impact on each individual utility, according to Ed Overcast, Director for Black & Veatch’s management consulting business.

From disparate markets and economic conditions to regional competition, some utilities are more exposed to change than others, Overcast noted. Every significant utility issue has business implications from a regulatory and ratemaking perspective.

Changes recognized by a broad spectrum of industry stakeholders, including a growing number of state utility regulators, include low customer growth; low or negative growth in energy consumption; increasing requirements to replace aging infrastructure; new infrastructure demands associated with renewable resources; and disruptive costs for supporting technological innovation and cybersecurity.

“For electric utilities, the integration of distributed generation has highlighted significant questions related to regulators’ ability to adapt to the pace of change,” Overcast said. “As electric utilities revisit their traditional business model, net metering and its effect on utility costs require scrutiny.”

Net metering is recognized as a significant issue for the long-term financial viability of electric utilities. More than 70 percent of respondents viewed the issue as at least somewhat important.

Distributed generation continues to increase its share of the fuel mix as federal and state regulators continue to prioritize Renewable Portfolio Standards (RPSs), Overcast said. In addition, the cost of solar photovoltaic has declined significantly. As a result, utilities are making efforts to ready their systems for continued adoption. Sixty-four percent of utilities expect to make investments to accommodate the integration of distributed generation such as solar PV.

Consensus on Change in the Industry

More than 90 percent of respondents recognized the need for changes in the regulatory model to accommodate the energy market’s changing business model.

“Given that the survey included municipal and cooperative utilities that are not typically subject to the same regulatory models as investor-owned utilities (IOUs), it is reasonable to conclude that the fundamental changes in the electric industry are now recognized across the entire spectrum of utilities,” Feingold said.

Regardless of the type of utility, he said all entities are looking for ways to accommodate the changes and respond in a manner that continues to support a viable, cost-effective and reliable energy industry.”

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