Regulators today must define earnings for energy retailers virtually bereft of fixed assets.
Charles Cicchetti is a co-founder of the Pacific Economics Group. Colin Long has co-authored numerous articles with Cichetti. Contact Cicchetti at cicchett@usc.edu.
In places that have restructured, the “duty to serve” principle of regulation has mostly morphed into a “duty to protect” smallish retail customers. Transition plans have become semi-permanent. With these changes, plus an increasing need to invest in generation and transmission, traditional rate base, also known as cost-of-service regulation, has re-emerged.
This may be reasonable to vertically integrated energy utilities, but applying the traditional rate-base concept to the new hybrid companies—built around retail-service providers and wholesale competitive markets—is where the gap between the old and the new regulatory paradigms resembles a deep schism.
For example, rate base does not apply to newly formed retail energy service providers that do not own any generation but may or may not own pipes and wires. Similarly, wholesale energy marketers or traders frequently do not own anything akin to a rate base. State and federal regulators recently have been called upon to set just and reasonable earnings for entities that are in the energy commodity business virtually without rate base.