As hurricane seasons kicks off with Florence approaching the U.S. mainland, utilities and their investors are focused on the financial, operational and societal aftermath of the storm. How the storm impacts affected utilities' bottom lines will depend on the regulatory mechanisms in place in each state to address the recovery of the associated restoration costs.
Current projections show the storm hitting North Carolina, South Carolina and Virginia the hardest and weakening as it moves inland.
According to a preliminary review conducted by Regulatory Research Associates, an offering of S&P Global Market Intelligence, North Carolina and South Carolina are typical of most states across the country in that ongoing base rates generally include some assumed/historical average level of storm remediation costs. To the extent that actual costs above that level are so significant as to be deemed "extraordinary," the companies would be permitted to defer the incremental amounts, creating a regulatory asset, the recovery of which would be addressed in a base rate case. Generally, the costs would be amortized over a period of time, with a return authorized on the unamortized balance. The specific time period and return used would be at the discretion of the North Carolina Utilities Commission and Public Service Commission of South Carolina for the companies under their respective jurisdiction.
For the most part, in Virginia, a base amount of storm/restoration costs is included in the utilities' annual revenue requirements. Extraordinary costs above and beyond those already reflected in base rates may be expensed or deferred, with recovery of the deferrals to be addressed in future rate cases. It would be up to the company whether to expense or defer/capitalize the costs, and this decision would likely be based on whether the company is over-earning relative to its authorized return as demonstrated in its annual information filing submitted to the Virginia State Corporation Commission for the year in question.
However, for Dominion Energy Inc. subsidiary Virginia Electric and Power Co. and American Electric Power Co. Inc. subsidiary Appalachian Power Co., which are subject to an evolving periodic earnings review framework, storm costs above and beyond those reflected in base rates would be expensed and reflected through the assessment of under- or over-earnings in the periodic review covering the year in which the expenses occurred. To the extent that these costs cause the company to earn below the lower end of the allowed range under the review framework, recovery would occur as part of the earnings true-up process in the subsequent periodic review and could be deferred for recovery over a period determined by the commission, with a return permitted on the unamortized balance. The specific time period and return used would be at the discretion of the commission. Pursuant to legislation enacted in 2018, the next earnings review proceeding for Appalachian Power is to be conducted in 2020, looking at earnings for the calendar 2017, 2018 and 2019 test years. For Virginia Electric and Power, the next review will be conducted in 2021 and will look at earnings for calendar years 2017, 2018, 2019 and 2020. Thereafter, the reviews are to be conducted every three years.
Other states expected to be impacted by Florence are Alabama, Georgia, Kentucky and Tennessee. It is RRA's understanding that in Georgia, Kentucky and Tennessee, the commissions take a traditional approach, whereby extraordinary costs may be deferred, with recovery of the deferrals to occur in a subsequent base rate case. In Alabama, however, it appears that the utilities have reserves in place, funded by ratepayers, to cover extraordinary storm costs. The level of funding collected from ratepayers on an annual basis to fund the reserve has been established by the Alabama Public Service Commission. If the costs incurred exceed the amount accrued in the reserve, the commission may approve recovery of the incremental amounts over a period of time selected by the commission through a surcharge outside the formula ratemaking mechanisms that are in place.
With respect to recovery of deferrals, to our knowledge, there is no set standard in any of these states, and the length of time selected would likely depend on the magnitude of the costs; based on the research conducted by RRA, it appears that recovery periods have generally been between three and 10 years. Another important factor is that the amount of deferrals to be recovered will also be subject to a prudence review at the time recovery is sought, and a portion of any deferrals could be disallowed as a result.
While the mid-Atlantic is not expected to be materially affected by Hurricane Florence, the region has been prone to hurricane activity in recent years and so bears mentioning briefly at this juncture. It appears that Delaware, the District of Columbia, Maryland, New Jersey, New York and West Virginia generally rely on the more traditional framework where extraordinary storm costs may be deferred, with treatment of the related regulatory asset addressed in a future base rate case. However, in Pennsylvania, PPL Corp. subsidiary PPL Electric Utilities Corp. since 2012 has had an expedited recovery mechanism in place that allows rates to adjust outside of a rate case to reflect costs associated with "reportable" storms that deviate from a benchmark amount that is included in base rates. Costs above the threshold are generally amortized over three years. If costs are below the benchmark, the excess is returned to customers. Costs associated with "non-reportable" storms are recovered through base rates.
Similarly, while Florence is not expected to impact the Gulf Coast states, these states bear mentioning as the season begins since they have historically seen the most hurricane activity and, as such, have more robust mechanisms in place to deal with post-storm regulatory issues. In Florida, Louisiana, Mississippi and Texas, at least some, if not all, of the utilities, in addition to having a representative level of storm costs in base rates, have reserves in place that are funded through customer rates that are earmarked for recovery of extraordinary storm costs as they arise. Arkansas, Florida, Louisiana, Mississippi and Texas allow or have allowed the utilities to securitize extraordinary storm remediation costs.
For additional detail, please refer to the RRA state Commission Profiles.
For a complete, searchable listing of RRA's in-depth research and analysis, please go to the S&P Global Market Intelligence Energy Research Library.