PDF Electricity Regulation In the US: A Guide

Electricity Regulation In the US: A Guide

Second Edition

Author Jim Lazar, with RAP staff

How to Cite This Paper Lazar, J. (2016). Electricity Regulation in the US: A Guide. Second Edition.

Montpelier, VT: The Regulatory Assistance Project. Retrieved from

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Electricity Regulation in the US: A Guide

Second Edition

Author Jim Lazar, with RAP staff

June 2016

Electricity Regulation in the US: A Guide ? Second Edition ii

Electricity Regulation in the US: A Guide ? Second Edition

Foreword to the Second Edition

The original 2011 edition of Electricity Regulation in the US: A Guide has proven to be a handy reference for many people in the field. It was designed to be an introduction for the newly appointed regulatory commissioner, the first-time rate case participant, or the newly hired regulatory analyst. We think it has served that function well.

This revised edition includes updates to every chapter, and a number of new chapters. The new chapters include Integrated Distribution System Planning and Renewable Energy, plus a greatly expanded chapter on Regulatory Treatment of Environmental Compliance Costs.

The balance between completeness and brevity is a difficult challenge. We want this handbook to be short enough that it is not intimidating, current enough to be relevant, and complete enough to provide initial guidance on almost any regulatory topic. It is no substitute for Charles Phillips' The Regulation of Public Utilities, or Bonbright's seminal Principles of Public Utility Rates. Each chapter refers the reader to other resources that cover that topic in greater detail. Many of these are RAP publications, and we encourage all readers to visit and peruse our library of publications, presentations, and webinars.

Dozens of readers of the first edition contributed ideas that led to this update. The regulatory world is not static, and things will continue to change. Don't hesitate to contact us with things you think need to be added, things that are inadequately explained, or areas where you think we don't quite get it right.

This update has been a project involving most of RAP's team, but it builds strongly on the effort for the first edition. Our inside team included Jim Lazar, an economist with 38 years of experience in utility regulation, as lead author, plus Carl Linvill, Rich Sedano, John Shenot, David Littell, David Farnsworth, and Ken Colburn as authors of the new material. The internal review team included Rick Weston, Riley Allen, Donna Brutkoski, and Becky Wigg. Our outside review team includes former Commissioners Jeff Goltz (Washington State), Ron Binz (Colorado), Bob Lieberman (Illinois), Tim Woolf (Massachusetts), and Karl Rabago (Pace University). We cannot forget the work on the first edition of Edith Bayer, Christopher James, Thad Curtz, Wayne Shirley, and Diane Derby.

All of this was under the careful watch of Rich Sedano, US Team Leader, and Camille Kadoch, RAP Publications Manager.

Jim Lazar Olympia, Washington June, 2016

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Electricity Regulation in the US: A Guide ? Second Edition

Table of Contents

About This Guide To Utility Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

1. The Purpose of Utility Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.1. Utilities are "Natural Monopolies" 1.2. The Public Interest is Important 1.3. Regulation Replaces Competition as the Determinant of Prices 1.4. Regulatory Compact 1.5. All Regulation is Incentive Regulation

2. A Brief History of Regulation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.1 Grain Terminals and Warehouses, and Transportation 2.2 Utility Regulation 2.3 Restructuring and Deregulation

3. Industry Structure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

3.1. Overview

3.1.1. Investor-Owned Utilities

3.1.2. Public Power: Municipal Utilities, Utility Districts,

and Cooperatives

3.2. Vertically Integrated Utilities

3.3. Distribution-Only Utilities

3.4. Non-Utility Sellers of Electricity

3.5. Trends Toward Less-Regulated Systems

3.6. Federal vs. State Jurisdiction

3.7. Power Supply

3.7.1. Federal Power Marketing Agencies

3.7.2. Regulation of Wholesale Power Suppliers/Marketers/Brokers

3.7.3. Non-Utility Generators

3.7.4. Consumer-Owned Utilities

3.7.5. Joint Power Agencies and G&Ts

3.7.6. Retail Non-Utility Suppliers of Power

3.8. Transmission

3.9. Managing Power Flows Over the Transmission Network

3.9.1. RTOs, ISOs, and Control Areas

3.10. Natural Gas Utilities

4. The Regulatory Commissions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 4.1. Commission Structure and Organization 4.2. Appointed vs. Elected 4.3. Limited Powers 4.4. Consumer Advocates 4.5. COU Regulation

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Electricity Regulation in the US: A Guide ? Second Edition

5. What Does the Regulator Actually Regulate?. . . . . . . . . . . . . . . . . . . . . . . . . 29 5.1. The Revenue Requirement and Rates 5.2. Resource Acquisition 5.3. Securities Issuance and Utility Mergers and Acquisitions 5.4. Affiliated Interests 5.5. Competitive Activities 5.6. Service Standards and Quality 5.7. Utility Regulation and the Environment

6. Participation in the Regulatory Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 6.1. Rulemaking 6.2. Intervention in Regulatory Proceedings 6.3. "Paper" Proceedings 6.4. Generic Proceedings and Policy Statements 6.5. Stakeholder Collaboratives 6.6. Public Hearings 6.7. PURPA Ratemaking Standards 6.8. Proceedings of Other Agencies Affecting Utilities

7. Procedural Elements of State Tariff Proceedings. . . . . . . . . . . . . . . . . . . . . . 40 7.1. Scope of Proceedings 7.2. Notice and Retroactive Ratemaking 7.3. Filing Rules 7.4. Parties and Intervention 7.5. Discovery 7.6. Evidence 7.7. The Hearing Process

7.7.1. Expert Testimony 7.7.2. Public Testimony

7.8. Settlement Negotiations 7.9. Briefs and Closing Arguments 7.10. Limited Purpose Proceedings 7.11. Orders and Effective Dates 7.12. Appeal

8. Fundamentals of Rate Regulation: Revenue Requirement. . . . . . . . . . . . . . 47 8.1. Functional and Jurisdictional Cost Allocation

8.1.1. Interstate System Allocation 8.1.2. Regulated vs. Non-Regulated Services 8.1.3. Gas vs. Electric

8.2. Determining the Revenue Requirement 8.2.1. The "Test Year" Concept 8.2.2. Historical vs. Future Test Years 8.2.3. Average vs. End-of-Period Rate Base 8.2.4. Rate Base 8.2.5. Rate of Return

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Electricity Regulation in the US: A Guide ? Second Edition

8.3.

8.2.6. Operating Expenses 8.2.7. Tax Issues 8.2.8. Treatment of Carrying Costs During Construction Summary: The Revenue Requirement

9. Fundamentals of Rate Regulation: Allocation of Costs to Customer Classes. . 61 9.1. Embedded vs. Marginal Cost of Service Studies 9.2. Customer, Demand, and Energy Classification 9.3. Smart Grid Costs 9.4. Vintaging of Costs 9.5. Non-Cost Considerations

10. Fundamentals of Rate Regulation: Rate Design Within Customer Classes. . . 68 10.1. Residential Rate Design 10.2. General Service Consumers 10.3. Residential Demand Charges 10.4. Bundled vs. Unbundled Service 10.5. Rate Design and Carbon Emissions 10.6. Advanced Metering and Pricing 10.7. Rate Design and Renewable Resources

10.7.1. Green Power 10.7.2. Infrastructure Cost Recovery 10.7.3. Net Metering 10.7.4. Value of Solar Tariffs

10.8. Summary on Rate Design

11. Other Elements of Basic Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 11.1. Service Policies and Standards 11.2. Single-Issue Ratemaking

11.2.1. Issue-Specific Filings 11.2.2. Tariff Riders

11.3. Multi-Utility Investigations 11.4. Joint State or State/Federal Investigations 11.5. Generic Investigations

12. Drawbacks of Traditional Regulation and Some Possible Fixes . . . . . . . . . 86 12.1. Cost-Plus Regulation

12.1.1. Regulation and Innovation 12.1.2. The Throughput Incentive 12.1.3. Regulatory Lag

12.2. Responses 12.2.1. Decoupling or "Revenue Regulation" 12.2.2. Performance-Based or "Price-Cap" Regulation 12.2.3. Incentives for Energy Efficiency or Other Preferred Actions 12.2.4. Competitive Power Supply Procurement 12.2.5. Restructuring

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