Canadian utility group Fortis, Inc., owns a number of gas and electric utilities across North America. 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.
"Traditionally, utility rates are set by government regulators based on the cost of providing service," said Russell Feingold, Vice President of Black & Veatch Management Consulting, LLC, who leads its rates and regulatory services practice.
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 the CPI increases each year, the utility’s rates will increase on a proportionate basis,” Feingold said. “It is then up to the utility to manage 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.
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. 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, Black & Veatch 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.
"It's about balancing the interests of cost efficiency and providing choices to customers," Feingold said. "You don't want to get in the way of progress, but you don't want those who can't afford it or don't install (solar) to subsidize those who do want it.”
Black & Veatch helped support the rate proposals made by TEP and UNS Electric, and it provided expert testimony on the conceptual and analytical bases for the proposals in three separate regulatory proceedings. While TEP didn't receive approval for all the rate changes it had proposed, Feingold said meaningful progress was made.
"No regulator wants to be criticized as being anti-conservation or anti-renewables, but you also don't want the utility and certain of its customers to be placed in a financially stressed position. You have to find that appropriate balance of economic and societal considerations,” he said.