State regulatory decisions present unintended consequences for power customers
As unprecedented severe weather events force investor-owned utilities (IOUs) and state regulators to work more collaboratively on cost recovery, utility experts say some final regulatory decisions still have electricity customers picking up the tab for damages as investors cringe over possible credit downgrades.
In fact, sources say that ongoing regulatory uncertainty around proposed rate cases for IOUs are already negatively impacting IOUs and their customers.
“The pressure to keep customer rates low is even stronger during a period of high inflation, but the paradox is that those inflationary pressures are also impacting utilities,” Bernard McNamee, a former commissioner with the Federal Energy Regulatory Commission (FERC) and now a partner at McGuireWoods LLP, told Daily Energy Insider. “Utilities need a reasonable return on equity [ROE] to ensure that they can raise the capital necessary to fund projects that benefit customers.”
The Public Utility Commission of Texas (PUCT), for instance, on March 9 discussed a rate case request by Dallas-based Oncor Electric Delivery Co., the state’s largest electric utility, which in May 2022 filed a rate increase request with the PUCT.
Oncor wants to recover its costs to offset the $10 billion it has invested in the Texas grid since its last rate review in 2017 and to help the company meet the growing residential and commercial demand in the state. The $10 billion was spent by Oncor to make the power grid serving its customers more resilient and reliable.
And as part of the rate review, Oncor requested that the PUCT revise and increase its authorized ROE to 10.3 percent from its current 9.8 percent.
During its open meeting on March 9, PUCT commissioners agreed to increase Oncor’s ROE to 9.7 percent, still below the utility’s request but above a Proposal for Decision (PFD) issued by state administrative law judges (ALJs) who recommended an ROE of 9.3 percent. The final order containing the higher ROE is expected sometime this month.
Lowering the ROE in such rate cases could impact reliability and resiliency during a time of increasingly severe weather, and could influence the progress of the clean energy transition, ultimately costing customers more money in the long run, according to sources.
“It is ironic that at the same time hundreds of billions of dollars of utility investments are needed to support ‘the energy transition,’ policymakers are pushing for lower ROEs for utilities which will make it harder and more expensive to fund those projects,” McNamee wrote in an email.
The Texas PFD also “appears to value the short-sighted illusory benefit of short-term lower rates over resilience and reliability,” said John Quackenbush, president of JQ Resources LLC, a consulting firm in the regulated utility industry that works to bridge the gap between the regulatory and investment communities.
“Customers are better served by rate increases today that support investment in resilience and reliability, and also result in lower long-run costs,” he said.
Quackenbush thinks a much lower ROE than what Oncor requested results in a significant threat to financial stability, increased leverage, and impaired financial metrics that are expected to lead to an Oncor credit downgrade.
“Should this credit downgrade occur, it would be a serious blow to the quality and cost of electricity services that Oncor provides going forward,” said Quackenbush. “This is because Oncor’s cost to borrow from banks and lenders will increase.”
In an October 2022 credit opinion, the credit rating agency Moody’s specifically warned that it would consider downgrading Oncor if the utility is not allowed to recover these costs and the proposed rate increase is not approved by the PUCT, explained Quackenbush, who served as Michigan Public Service Commission (PSC) chairman from 2011 to 2016.
Oncor also pointed out in its 2022 results report issued on Feb. 28 that it “cannot predict whether or to what extent its requests in the base rate review will be approved or what the ultimate impact of the proceeding will be on its results of operations, financial condition, liquidity, or cash flows.”
“Texas grew by nearly 1,300 people a day in 2022, leading the nation in both job growth and population growth. At Oncor, we also saw company records for annual new and active transmission points of interconnection requests, as well as the highest new subdivision requests in several years,” said Oncor CEO Allen Nye on Feb. 28 when releasing the report. “Now more than ever, we need to continue to attract the capital to build the infrastructure necessary to power that growth for years to come.”
During its March 9 open meeting, PUCT commissioners acknowledged that investors and customers both deserve to have regulatory certainty in the market.
“Customers, not just investors, benefit by having a financially stable utility with earnings and cash flow sufficient to attract capital on reasonable terms,” Quackenbush explained. “Allowing Oncor to recover grid investments necessary due to frequent extreme weather events and ensuring the utility has the resources it needs to serve a growing state is not only fair, but it will keep costs lower for Texans over the long-term.”
Marc Brown, vice president of state affairs at the Consumer Energy Alliance, agreed, saying “lowering Oncor’s ROE may increase its costs of capital to a point where it can no longer make the case that upgrades to its energy system are just and reasonable.”
“That could have a deleterious impact on the reliability of Oncor’s electricity delivery system,” Brown added.
“What this really comes down to is predictability and stability. When regulators, and in this case ALJs, stray from the regulatory compact and substantially reduce investor-owned utilities’ ROEs, it sends a signal to investors that IOUs aren’t the safe bet they have been in most cases for 100 years,” Brown added in an email.
In turn, Brown said, that lowers credit ratings and increases the cost of capital. “The result is that IOU investment is either chilled, or those investments cost more. That makes customer costs higher than they could or should be,” he said. “When there is predictability, investments are made at a lower cost of capital which benefits customers financially, and in terms of the reliability and innovation it incentivizes.”
Other solutions
In Louisiana and Oregon, recent regulatory decisions are translating into increased costs for IOU customers.
“In states like Oregon and Louisiana, we have seen battles over rate recovery for wildfire and storm repairs or maintenance,” said Brown.
In Louisiana, for example, roughly a million Entergy Louisiana customers will end up paying for a $1.5 billion repair bill following Hurricane Ida in August 2021.
The Louisiana Public Service Commission (LPSC) on Jan. 18 approved Entergy Louisiana’s request to finance $1.5 billion in storm costs using low-cost bonds through a process called securitization, which permits the costs to be financed with generally lower-cost capital.
The utility initially requested nearly $1.7 billion in financing for the repairs, but the LPSC negotiated to decrease the proposal by roughly $180 million. As a result, Entergy Louisiana says its residential customers will have about $5.50 added to their monthly bill for the next 15 years to cover post-Ida damages.
“The monthly bill effect for a 1,000-kWh residential customer is estimated at around $5.50 a month but could change based on interest rates at the time of issuance of the bonds,” according to an Entergy Louisiana statement. “To lessen the impact to customers’ bills, the costs will be collected over an expected 15-year term through a line item appearing on monthly bills, similar to recovery for previous hurricanes like Laura, Delta and Zeta.”
At the same time, the utility said that in conjunction with previously approved storm securitizations, the LPSC’s approval is projected to save customers billions over the long term as compared with other methods of financing.
And because Entergy Louisiana also worked with LPSC to secure approximately $1 billion for Ida recovery in February and continues to advocate for federal disaster relief, the company said that to any extent it is reimbursed for a portion of storm costs, it will reduce future bill impacts related to Ida.
Meanwhile, in Oregon, Portland General Electric Co. (PGE) has experienced cost recovery issues from recent storms and wildfires.
The Oregon PUC last year issued a decision on a PGE rate case regarding the cost recovery deferrals that PGE submitted related to the retirement of a coal plant, as well as those related to a 2020 wildfire and the 2021 ice storms.
The commission wasn’t asked about this in the context of the rate case, but denied the company deferrals on the cost recovery of those things, basically saying that the company needed to eat the costs on the wildfire and ice storm damages.
The spending related to the wildfires was $17 million, and some sources say the news sent ripples through the investment community.
In fact, PGE’s stock lost $7 in value and $500 million in market cap in a couple of days due to the decision by the Oregon PUC, causing the electric utility industry to view it as a chilling precedent in which a commission denied any kind of cost recovery on a prudent expense, even before the utility had the opportunity to go through a prudency review.
The Oregon PUC’s order states that the commission agreed with staff that PGE “should absorb some of that risk associated with its operation and challenging circumstances, rather than allowing the operation of an earnings test to preserve earnings at the precise level of PGE’s allowed ROE.”
The Oregon PUC cut PGE’s revenue request in its 2021 general rate case by $49 million, authorizing the company to increase its overall rates by $10 million annually, or 0.5 percent, to cover the costs of its general operations, according to its order released on April 25, 2022.
However, the commission’s decision, combined with separate automatic rate adjustments to recover costs for energy storage and transportation electrification programs, along with the early retirement of the Colstrip coal-fired generation facility, meant that PGE’s residential customers experienced an overall average bill increase of approximately 3.6 percent effective May 9, 2022.
From the company’s perspective, the whole regulatory compact is that it should be given an opportunity to recover its costs both in “blue sky-based” and in challenging circumstances.
“Nationally, we are seeing challenges to the ‘regulatory compact,’ which is essentially the agreement that utilities will make investments on behalf of their customers, who pay for those investments and ultimately own the assets,” said Brown with the Consumer Energy Alliance. “The compact is there to protect consumers and ensure that the electricity grid is reliably maintained with prudently incurred costs to consumers.”
Others have commented that the PUC was wrong to make a unilateral announcement that PGE had to absorb some of this risk when it didn’t find that any of the spending was imprudent and no one actually questioned the spending.
