In a perfect world, one of the power industry’s great advantages should be the degree of certainty in its business activities. This is readily acknowledged on the regulated side of the business, where a rate case — win or lose — results in greater certainty, at least in the short-term, for both electric utilities and their customers. And even in unregulated parts of the business, fixed costs are relatively stable and customer demand doesn’t materialize or disappear overnight the way it can in other industries such as retail or travel.
But these are profoundly imperfect times, and uncertainty in the power industry is growing, not diminishing. This means the industry will be looking for certainty where it can find it while adapting to an increasingly competitive energy marketplace that seems to bring more unknowns by the day.
All of this comes at a moment of declining electricity demand. The U.S. Energy Information Administration’s (EIA) August Short-Term Energy Outlook projects a 3.6-percent drop in total electricity consumption in 2020. People working from home — along with a hot summer — are driving a 2-percent increase in residential consumption, but that was more than offset by drops in commercial and industrial usage. Commercial consumption was expected to fall 7.4 percent for the year, according to the EIA.
Much of the industry is adapting to these unprecedented times by looking for new sources of revenue. For example, utilities are continuing to enhance the process for securing incremental revenue through pole attachment fees from broadband and telecom providers (among others), and they are redesigning pricing structures to accommodate the long-term trend toward distributed energy resources (DER). While more homes and businesses are installing solar panels on rooftops, power providers are navigating a world where pricing often still is based on volume which creates financial uncertainty even though utilities have a continuing requirement to provide customers with reliable electric utility service whenever it is demanded.
Regulatory Uncertainty
Regulatory uncertainty loomed large for respondents to Black & Veatch’s 2020 Strategic Directions: Electric Report annual survey of the North American power industry. Recovering infrastructure investments and operating costs and predicting electricity prices all were areas cited as being impacted by regulatory uncertainty, respondents said.
Significantly higher regulatory murkiness over the past decade is largely driven by the transformational changes occurring in the market right now. The industry is transitioning very rapidly — with DER becoming more mainstream — and the regulatory framework in some cases has not caught up yet.
The COVID-19 pandemic is adding more unknowns. Many utilities moved proactively to halt customer disconnections for nonpayment even before regulators took action, but other moves by regulators have raised eyebrows. For instance, the Indiana Utility Regulatory Commission (IURC) in June “amended” — without utility consent — provisions in previously-approved tariffs, including the collection of late fees, convenience fees, deposits and reconnection fees. In August, the IURC extended that provision for two more months “to prevent injury to residential ratepayers as the prohibition on utility disconnection expires.” Other similar regulator actions have been taken across the U.S. as the pandemic extends its economic grip on both businesses and individuals alike.
Utilities also have more on their plates now as they meet requirements for renewable energy. Billions of dollars invested in the transition of generation portfolios and modernization of transmission and distribution (T&D) infrastructure over time have created considerable risks and uncertainties over whether the utility is going to fully recover those costs on a timely basis. These financial risks are perceived to be greater than they were in the past.
While those investments often have been encouraged by regulators, those costs eventually wind up in the utility’s rate base, and that’s where the rubber meets the road. Regulators and other interested parties increasingly are citing “rate fatigue” and rate affordability issues as concerns that drive closer regulatory scrutiny of the utility’s infrastructure proposals.
Even some states that allow large infrastructure investments to be included in rates have used revenue caps to moderate the immediate rate impacts on customers, with the utility left to seek reimbursement for the rest in future rate cases or regulatory proceedings.
While taking a closer look at what customers are getting for their money, regulators also are starting to ask fundamental questions. How do I make sure the utility is providing the customer with the most bang for the buck? And are the benefits of these investments, in fact, being realized by customers through cost efficiencies and enhanced services? To be sure, there is greater interest from regulators and intervenors in having utilities produce more rigorous cost-benefit analyses to make sure the value is demonstrable.
Recovering Costs from COVID-19
Two-thirds of the survey respondents said regulators had approved suspending utility service disconnection policies for non-payment.
Regulators will need to balance the utility’s need to recover added costs with the immediate electric bill relief sought by the utility’s customers due to the pandemic. This could mean seeking rate cases to cover some of those costs in 2021, with the rest coming later.
The pandemic doesn’t have to end for regulators to start allowing utilities to amortize the regulatory assets established this year, although utilities may wait until next year’s rate cases to press the issue. The requests could be contentious, and intervenors may argue against them or propose to extend the amortization period meaning some utilities that go in with rate cases next year won’t necessarily ask for as much as they could justify.
While utilities are likely to seek reimbursement for COVID-19 expenses, there does not appear to be an immediate urgency to initiate those discussions in light of the more pressing issues created by the pandemic. A scant 7 percent of survey respondents said the financial impacts of COVID-19 would “cause your utility to accelerate its next rate case filing.”
Looking to New Areas for Revenue
Given all this uncertainty, looking for new revenue sources is more important than ever for utilities. The survey showed that more than half — 56 percent — of utilities said they are “probably” or “definitely” prepared to capitalize on their existing asset base for new sources of revenue. This was true across all sizes of utilities — from those serving fewer than a half-million customers to those serving at least 2 million customers.
Examples of these new sources of revenue include behind-the-meter products and services (e.g., programmable thermostats, online marketplace, enhanced data services) and, of course, the rapidly growing area of transportation electrification. Any new technology that enhances the customer experience with the use of electricity could serve as an incremental source of revenue for the utility.
Utilities are realizing they may not see the same level of load growth as they have seen in the past, as energy efficiency continues to improve and DER measures such as rooftop solar or small generation grow. Such factors lead to less sales of kilowatt hours, leaving utilities to look for ways to replace not only the top-line revenue but the bottom-line earnings that would be impacted by those changes.
About the Authors
Russell Feingold is a vice president with Black & Veatch and leads its rates and regulatory services practice. For the past 42 years, he has advised and assisted utility management, industry trade and research associations, and large energy users in matters pertaining to pricing and costing analyses, innovative ratemaking strategies, competitive market analyses, business restructuring strategies, organizational reviews, strategic planning, market power assessments, energy supply planning issues, sales and revenue forecasting, merger and acquisition analyses and regulatory reform initiatives, including performance-based regulation, and energy litigation.
Deepa Poduval is senior managing director and associate vice president at Black & Veatch, leading its advisory and planning practice area. Her expertise includes developing business strategies to optimize asset portfolios, valuation of energy industry assets, negotiation of commercial agreements, performance and risk assessment, and market analysis. She has advised various clients on strategic responses to key issues impacting their business.
