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Innovations in the way energy is generated and consumed have led Pennsylvania to become the latest state to adopt alternative ratemaking—a way for utilities to recoup costs in an environment where electricity consumption has been flatlining.
Governor Tom Wolf signed HB 1782 Thursday. The bill authorizes the state’s Public Utility Commission (PUC) to allow for a new range of options in crafting future rate designs.
“I support this legislation because I believe it offers the Commission new tools to encourage innovation, ensure grid reliability, and promote energy efficiency and renewable energy,” Wolf said in a letter to PUC Chair Gladys Brown. “I believe the Commission is well positioned to drive this innovation and continue the commonwealth’s position of leadership in restructured energy markets.”
Currently, electric utilities have an incentive to push for increased usage, because that drives investments into infrastructure and a guaranteed return from regulators on those investments. Because they’re now selling less power, it creates less of an incentive to invest.
Rep. Sheryl M. Delozier, a Republican from central Pennsylvania, was the prime sponsor of the bill.
“Quite honestly, the requirement for [utilities] to earn based on usage led to a precarious position for the industry as a whole.”
Alternative ratemaking mechanisms are among a slew of policies states are pursuing in the name of modernizing the grid. In fact, the PUC was already advancing its own proposal to explore alternative ratemaking before Pennsylvania lawmakers approved HB 1782.
The bill provides a range of new options for utilities to offer up to regulators: including decoupling mechanisms (which break the linking between the amount of energy a utility sells and the revenue it collects to recover the fixed costs of serving customers) as well as performance, formula-based rates and multi-year rate plans, or some combination of all four.
Generally if a utility found its costs are exceeding the amount of revenue it’s bringing in, it has to file a base rate case with the PUC—an involved, expensive process that can take months. Due to the regulatory lag, utilities can continue to lose money. Alterative ratemaking provides more flexibility.
Keystone Energy Efficiency Alliance Policy Director Julian Boggs called the new bill a win for energy efficiency. “It gives the Public Utility Commission much-needed authority to update utility ratemaking and give utilities an alternative to selling more energy as a way to recover the cost of investing in our grid,” he said.
Consumer groups raise concerns
Consumer groups, however, are worried the new legislation will shift more risks from utilities to ratepayers.
The AARP came out against the measure last year, arguing it would unnecessarily raise costs and particularly hurt older adults on fixed incomes.
“Under HB 1782, each utility could request approval of an alternative form of regulation from a menu of options that includes, but is not limited to, five broad methodologies,” AARP Pennsylvania state director Bill Johnston-Walsh said in a letter to legislators last fall. “In a nutshell, all five mechanisms could be used to fast track rate increases and would be harmful to consumers.”
Tanya McCloskey, Pennsylvania Acting Consumer Advocate, expressed similar concerns to a House committee, calling the bill “expansive in its authority, allowing the Commission to identify and implement any form of alternative ratemaking mechanism without standards, clear policy objectives, measurable outcomes, or consumer protections.”
She remains concerned the legislation contains little guidance to the PUC. “The bill that passed does not contain any specific public purpose that’s not already authorized,” she said.
Terrance Fitzpatrick, president of the Energy Association of Pennsylvania, a trade group representing electric and natural gas utilities, said he thinks regulators will handle the concerns in a balanced way.
“We did have an argument with some of the consumer groups over the bill, and that was really about how much detail there should be,” he said. “But any proposal to set up these alternative rates, like decoupling, has to be done in the context of a base rate case, where your books are open. There’s hearings, testimony, briefs.”
In general, Christina Simeone, of the University of Pennsylvania’s Kleinman Center for Energy Policy, views the bill as a move in the right direction, but thinks the devil will be in the details.
“It’s now clear this is another tool in the regulator’s toolkit, and we’re moving towards a more progressive environment for utilities,” said Simeone.
“It would have been ideal if there were more consumer protections in the bill, but hopefully the Commission will be looking at that aspect.”
In his letter to the PUC, Governor Wolf also noted the controversy, saying he expects the Commission will “closely scrutinize any alternative ratemaking proposal to ensure existing consumer protections apply.”