Canadian utility group Fortis, Inc., owns a number of gas and electric utilities across North America. The regulation of these public utilities plays a critical role in setting fair utility rates. Two of these utilities faced ratemaking challenges that were impacting the level of rates paid by certain customers and the utilities’ future financial health.

In British Columbia, FortisBC (electric) and FortisBC Energy (gas) sought regulatory approval to have their electric and gas distribution rates adjusted using a performance-based regulation (PBR) methodology, allowing them to better manage costs and improve customer outcomes.

Traditionally, utility rates are set by government regulators based on the cost of providing service.

A PBR plan considers broader economic indicators, such as the consumer price index (CPI), as a measure of inflation to adjust the utility’s rate levels over a multi-year period, with certain offsets for expected productivity gains.

Generally speaking, under this type of ratemaking methodology, as inflation rises each year, the utility’s rates will increase on a proportionate basis, ensuring the utility remains financially stable while meeting revenue requirements. The utility manages its resources so that customers continue to receive safe, reliable and cost-effective utility services and the utility can achieve the financial performance expected by its shareholders.

Supporting its case

“If a utility is well managed under a PBR plan, the interests of the utility’s customers and shareholders will be aligned,” noted Feingold.

Black & Veatch helped Fortis navigate the PBR concepts and regulatory mechanisms, finding the best fit approach for its utility operations and service offerings. The experts studied Fortis' plans, suggested best practice concepts, and testified before regulators on how the plan would work.

“Because of our work on regulated utilities across North America and internationally, we were able to provide knowledge of the broader industry landscape," Feingold said. "We have knowledge of how PBR works elsewhere, and were able to compare, contrast and help conceive of a PBR plan that the regulator felt was appropriate in British Columbia.” Fortis was successful in making its case before the regulator to approve the utility’s PBR proposal, which will extend through 2018.

Half a continent away, Black & Veatch also helped another Fortis-owned utility in Arizona successfully petition to change its rates to align them with its customers’ changing electric usage patterns.ㅤ

Solar challenge

Arizona ranks as one of the sunniest places in the world, so it's no surprise the Southwestern state has become a leader in solar power. The energy industry in Arizona leverages solar power as a key generation source, influencing public utility regulations. But if homes and businesses generate their own electricity via the sun, fewer homes will pay for the electricity infrastructure required to provide utility services to customers with and without solar power under the utility’s then current rates.

Tucson Electric Power (TEP), another Fortis utility operating company, needed to assess the impact of these solar loads on its electric distribution grid. It needed to create a plan for petitioning state regulators to adjust its rate structures to align rates with the costs the utility incurs to provide utility service.

Through its extensive work in this area, Black & Veatch has gained in-depth knowledge of the manner in which a utility incurs costs to serve different types of customers and how these customers impact the operation of the utility’s distribution grid. These cost characteristics affect how rates should be set so that all customers are charged fair and equitable prices for the utility services they require.

Working with TEP's sister company, UNS Electric, our team analyzed the incremental costs incurred by UNS to connect a new customer — such as a home or business generating its own electricity — to its electric distribution system.

We helped support the rate proposals made by TEP and UNS Electric and provided expert testimony on the conceptual and analytical bases for the proposals in three separate regulatory proceedings.

Black & Veatch and the ratemaking process

Utility ratemaking is fundamental for establishing fair and reasonable rates for public utilities. This involves determining the revenue requirement to cover necessary expenses, such as maintenance, service and infrastructure investment. This requirement ensures public utilities receive adequate revenue to meet both operating and development needs. Public utility commissions review and approve these rates, ensuring fairness for consumers and utilities alike. Achieving this balance allows utilities to cover their costs while providing reliable service, thus supporting a system where energy needs are efficiently met by public utilities.

Utility costs and the factors shaping rates

Utility rates emerge from a detailed analysis of the costs incurred by public utilities to deliver services. These include direct and indirect expenses like operations, maintenance and infrastructure investments. Public Utility Commissions evaluate these costs and the desired revenue requirement in rate cases. Energy supply, demand fluctuations and technological advances all influence these decisions. By grasping these dynamics, consumers can engage more effectively in the ratemaking process.

Empowering consumers in the ratemaking arena

Consumers can shape the ratemaking process by participating in public hearings and consultations held by Public Utility Commissions. By raising concerns and offering feedback, they can influence decisions regarding rate designs and demand-based charges. This participation can yield more consumer-friendly utility rates, fostering transparency and accountability in the utility sector. Active engagement empowers consumers and ensures utilities remain accountable for their pricing strategies.

Overcoming challenges in utility ratemaking

The ratemaking process encounters various challenges, including technological advancements, shifting energy demands and economic changes. Regulated utilities must strike a balance between meeting revenue requirements and maintaining consumer affordability, especially under varying energy demands. Furthermore, public utilities need robust rate case strategies to tackle these issues and plan for future infrastructure investments. Understanding these complexities allows stakeholders to create adaptive mechanisms that keep utility prices fair and reflective of actual service delivery costs.