This overview of ratemaking and rate-design principles should ease the myriad tasks awaiting new rate analysts and attorneys, while provoking nostalgia among industry veterans still manning the ratemaking stations.
With increasing unit costs, the financial prospects and credit outlook for many utilities will depend on their success in passing along such costs to consumers.
The utility sector still has excellent access to the capital and credit markets. Yet, it is never safe to assume utilities will continue to enjoy the same low costs of capital. This is particularly true for companies facing compressed margins, regulatory deferrals or disallowances, and rising debt leverage.
FERC says it won’t ‘change’ the native-load preference, but don’t bet on it.
When FERC opened wholesale power markets to competition a decade ago in Order No. 888, it codified a system for awarding grid access known as the pro forma Open-Access Transmission Tariff (OATT), founded on physical rights, and on the fiction that electrons travel along a “contract path.” Should the commission “tinker” with the OATT, making only surgical changes to make it current? Or, do events instead warrant a complete overhaul?
Is the predicted crisis this winter a failure of policy, the market, or both?
Given the free market in natural gas, why haven't prices attracted the needed infrastructure or supply? (LNG imports are actually down from last year.) What policies could have been contemplated ahead of national legislation? Or put more simply, why has supply lagged demand?
The bias in RTO markets, and how FERC might fix it.
RTO practice creates less risk and uncertainty over the nominal short-term wholesale price of power, but more risk and uncertainty over the long-term cost of transmission. That spells trouble for the coal-fired plant, sited far off at the mine mouth, needing long-haul transmission over a long-enough term to pay back the capital costs.
California's pursuit of a centralized administrative solution in reliability hinders everyday operational issues.
California’s pursuit of a centralized administrative solution in reliability hinders everyday operational issues.
Why current estimation models set allowed ROE too low.
A material capital structure mismatch, which occurs frequently, can lead to material misestimates of the appropriate allowed return on equity, perhaps on the order of 2 percentage points. That is, a 9 percent estimate of the cost of equity can imply an allowed rate of return on equity of 11 percent.
Gas utilities and state commissions must work together to help preserve rates of return, encourage conservation, and lower customers’ bills.
A proposal to remove the bottlenecks on grid investment.
The lack of transmission investment transcends the usual culprits, pointing to a serious flaw in market structure.
Many of the obstacles and strategic issues that utilities face today are all too familiar. This time they must be solved with a different business model.