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Perspectives

Gas Utility Regulatory Responses During Recessionary Periods

Gas Utility Regulatory Responses During Recessionary Periods

By Russell A. Feingold, Vice President & John Taylor, Principal Consultant

The world is experiencing new and unprecedented challenges – both economically and socially – due to the global COVID-19 pandemic. The industry has experienced cycles of ebbs and flows before, but the unprecedented nature of COVID-19 is setting the stage for a recession that will impact the regulatory and ratemaking activities of gas distribution utilities in the U.S. To offer gas utilities a path forward, the industry needs new ratemaking solutions and regulatory policies that address the unique challenges ahead.

The impacts of COVID-19 are being felt much more rapidly and dramatically than during the last Great Recession, which lasted from 2008-2009. Unemployment has increased almost overnight to dramatic new levels, while far-ranging public health restrictions and mandates continue to impede business, interrupting how we work with one another and manage our daily lives. The resulting recessionary conditions are driving people to postpone spending and businesses to reprioritize investments. As a result, recovery will most likely take longer than from the 2008-2009 period.

Regulators Must Take Action

With these issues creating a new landscape for gas distribution utilities, regulators must address several important regulatory and ratemaking issues in the near-term, including:

  • Ratemaking that recognizes the decline in natural gas usage, the unanticipated costs incurred by utilities’ need to respond to COVID-19, and the resulting impact on the utility’s near-term financial performance.
  • Ratemaking solutions that provide ratepayer protections and temporary utility bill relief for customers in need.
  • Managing pending utility rate cases in such a way to minimize delays and preserve the rate case evidentiary process. 
  • Developing a mix of workable ratemaking solutions that balance the needs and interests of the utility’s customers and its shareholders.           

The decline in natural gas usage being exhibited in the commercial and industrial (C&I) market – less so in the residential market – underscores the need for revenue certainty. This comes as unexpected costs related to COVID-19 creates the need for incremental cost recovery methods. Meanwhile, the continued funding of incremental capital and O&M needs highlights the need for revenue sufficiency

The industry must also address growing concern over customers’ ability to pay their utility bills. This may mean considering short-term relief measures such as temporarily reducing customers’ gas bills, suspending disconnections for non-payment, and waiving deposits, late fees and service reconnect fees. But if these ratepayer protections are put in place, gas distribution utilities risk increasing their level of uncollectible expenses (bad debt) which, until now, they have been able to recover through rates.

Lastly, regulators’ ability to conduct periodic and timely review of utility rate cases is being affected by two actions: utilities delaying planned rate filings and regulators extending current rate case schedules. These challenges will make it more difficult for gas distribution utilities to meet the financial expectations of their shareholders and lenders.

Balancing Priorities and Developing Near-Term Solutions

Utility regulators often face the need to balance conflicting objectives when setting rates and establishing regulatory policies. To best address the impacts caused by COVID-19, regulators must develop a combination of workable ratemaking solutions to ensure a fair and reasonable approach while accommodating the interests of the utility’s customers and shareholders. 

For example, regulators must carefully weigh the decision to provide customers with temporary relief from fees with the need to preserve the utility’s near-term financial performance, as the latter can negatively impact cash flow and earnings, ultimately affecting the utility’s credit ratings and stock price, ultimately hitting customers’ natural gas rates.

Revenue certainty for can be addressed through revenue decoupling mechanisms, which are designed to protect both the utility and its customers from revenue variability driven by factors outside of the utility’s control, such as weather and economic conditions. Today, 42 states have approved revenue decoupling mechanisms, compared to only 18 states during the 2008-2009 recession. This illustrates a broader acceptance of revenue decoupling mechanisms. But despite this, without a revenue growth factor to replace growth in sales, revenue decoupling will not address a utility’s ongoing need for revenue to fund its infrastructure investments and increases in operating expenses beyond the level approved in its last rate case.    

Revenue sufficiency can be addressed with other types of rate mechanisms and ratemaking processes such as:

  • Rate stabilization mechanisms and formula rate plans that promote the full and timely recovery of utility costs. These have primarily been approved for utilities in southern states.
  • Use of a future test year to help minimize regulatory lag and match costs with revenues and rates.
  • Bad debt ratemaking mechanisms, which enable the gas distribution utility to reflect any changes in the level of bad debt in their ratemaking.  
  • A future rate case, with a 2020 test year, that treats unanticipated costs directly related to COVID-19 for recovery through a future rate case, along with a regulatory asset for future recovery or a temporary cost recovery mechanism.
  • Rate case filings, though with the number of ratemaking mechanisms in operation today, we do not anticipate a significant jump in filings over the next one to two years.

Finally, gas distribution utilities during this period will need to carefully manage their CAPEX and OPEX levels so that the resulting rate impacts to customers can be moderated as these investments and operating expenses are approved by regulators and included in rates. 

Finding a New Normal

When the world eventually emerges from the current COVID-19 pandemic, business-as-usual will undoubtedly find a new “normal,” with new ways of doing business that are dramatically different from the past. While businesses will no doubt prioritize the assessment of economic damage, and take action to recover, there is also opportunity to examine lessons learned and determine if the level of business has fundamentally changed. This will come even as the world continues to address the risk of a secondary virus outbreak within the next year.

Gas distribution utilities and regulators will be highly focused on determining how to minimize the impacts on customers and shareholders. It makes sense to adopt ratemaking mechanisms to offset some of the negative financial results, as long as regulators can maintain a fair and equitable balance between the interests of utility customers and shareholders. 

Regulators must also consider the longer-term implications of these actions, keeping in mind that offering temporary utility bill relief to customers today may result in higher utility rates tomorrow, once the utility is allowed to recover lost revenue and uncollectible expenses. Plus, suspending certain utility non-rate schedule charges may not immediately help those customers who need fast, short-term economic relief.     

Ultimately, gas distribution utilities and regulators will have to exercise judgment in maintaining the balance between addressing the most urgent needs of everyone involved – the utility, its customers and shareholders without disadvantaging one over the other.    

The Second Time Around: Gas Utility Regulatory Responses during Recessionary Periods ​​​​​​​

The Second Time Around: Gas Utility Regulatory Responses during Recessionary Periods

The personal and broader societal impacts of today’s world-wide coronavirus pandemic are unprecedented. And economically, we are experiencing new and unanticipated challenges from both a business and individual perspective. These challenges also are quickly beginning to impact the regulatory and ratemaking activities of gas distribution utilities in the United States. Interestingly, the impacts on gas distribution utilities today are in many respects different from those that were experienced during and after the 2008-2009 Great Recession. 

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