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Utility regulators have 'no rules of the road' for addressing coronavirus

As COVID-19 Wears On, Regulators Examine Moratorium Extensions, Cost Recovery

Essential Energy Insights - June 11, 2020

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Utility regulators have 'no rules of the road' for addressing coronavirus

The coronavirus pandemic has presented utility regulators with a set of obstacles they have never before confronted, challenging them to adapt regulatory tools to balance the interests of ratepayers struggling through unemployment and gas distributors juggling unanticipated costs and lost revenues.

Analysts say the proliferation of new regulatory mechanisms since the Great Recession will help smooth out revenue and cost swings that would otherwise require new rate cases. But industry watchers nevertheless expect regulators to preside over extraordinary proceedings where utilities and consumer advocates vie for their interests on a largely unmapped battlefield.

"There really aren't any rules of the road of how to deal with this," said Lillian Federico, who has covered the power and gas industry for more than 30 years at Regulatory Research Associates, or RRA, a group within S&P Global Market Intelligence. "There's never really been anything like this before."

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis anytime here.

With that uncertainty in mind, some consumer advocates are calling for a total freeze on rate increases. They say millions of Americans cast out of work can hardly afford higher energy costs, particularly if their utility bills run up while state-mandated bans on service terminations are in place.

"Any utility company that raises rates on customers now is part of the problem, not part of the solution," said Mindy Spatt, communications director at The Utility Reform Network, a California ratepayer advocacy group.

But analysts said regulators are unlikely to halt rate increases across the board for fear of causing gas utilities' credit ratings to deteriorate, borrowing costs to rise and cash flow to thin outall of which could have negative long-term impacts on customer rates and investment in pipeline replacement and other safety and reliability programs that regulators typically support and utilities rely on for revenue growth.

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Regulators often shave a few basis points off authorized return on equity during economic downturns, according to Federico. But recent research by RRA found average ROE for gas utilities fell just 0.22 basis points between 2008 and 2009, the smallest drop among utility subgroups at the height of the Financial Crisis.

Rise of alternative regulation to change recession ratemaking

Still, analysts and consumer advocates stress that while the pandemic has aspects of past disastersthe post-9/11 market crash, major hurricanes of recent years, the Financial Crisisit is largely unprecedented in scale and uncertainty.

Over the past 10-12 years, state regulators have increasingly adopted alternative ratemaking policies that were less widely available during some of those catastrophes. These regulatory innovations could reduce the need for new rate cases to address potential recession impacts, helping to tamp down one of the drivers for a spike in filings after the Great Recession, said Russell Feingold, who leads the rate and regulatory advisory practice at consultancy Black & Veatch.

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The policies include formula-based ratemakingprevalent in Southern states such as Georgia, Alabama and Mississippiwhich establishes a target return on equity used to determine the company's revenue requirement, adjustable on a fixed schedule, usually annually, to account for changes in financial conditions.

Analysts also pointed to revenue decoupling, a policy that aims to make utility profits less reliant on the amount of gas they distribute. The policy typically allows a utility to charge ratepayers when it earns less than its fixed revenue level and forces the company to credit ratepayers when earnings overshoot. The purpose is usually to encourage energy efficiency, but decoupling also helps companies manage revenue fluctuations within the current rate period.

Still, Feingold stresses that while revenue decoupling provides revenue certainty, it does not ensure revenues will be sufficient to turn a profit.

"If a utility is continuing to invest in capital, is continuing to incur operating expenses at a greater rate than in previous years, revenue decoupling doesn't address that," he said. "You have to have another mechanism or file a rate case to be able to address the increased cost."

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Analysts and consumer groups also agree that many low-income ratepayers may never be able to repay their gas bills, raising the question of how to deal with the bad debt utilities will accrue from nonpayment. At the same time, they expect unforeseen expenses to stack up as utilities invest in remote working equipment, incur new costs to ensure field workers' safety and turn to overtime and contract workers when employees fall ill.

Analysts anticipate statewide solutions

Some regulators may choose to address those issues in individual rate cases or by making adjustments through alternative mechanisms. But analysts expect many state utility commissions to initiate a statewide policy proceeding to develop overarching plans to protect ratepayers and ensure utilities remain on firm financial footing.

Those proceedings can provide a venue for commissioners to work through thorny issues, including whether to allow utilities to defer coronavirus-related costs and bad debt, funnel the expenses into a regulatory asset and later recover the costs from ratepayers over several years.

"At least within a given state, they're going to have to be consistent in how they treat it among the different companies and the different industries that they regulate, so it makes sense to have a generic proceeding" to determine how to socialize pandemic costs, Federico said.

The Illinois Commerce Commission, or ICC, initiated such a proceeding on March 18. In addition to prohibiting late fees and service shut-offs for nonpayment, the ICC ordered utilities to design flexible credit and collections procedures to ensure customers are not disconnected when the moratoriums end. It further allowed utilities to track their costs linked to the order and any COVID-19 expenses for later review by the commission.

Attorney General Kwame Raoul has called for the ICC to apply a "uniform, single approach" to credit and collection procedures rather than allowing utilities to implement the "dissimilar and often disparate" plans they have filed. That unified approach should include a 60-day extension to the shut-off moratorium after the governor lifts the state of emergency and deferred payment arrangements for at least 12 months, he said in an April 10 filing.

Raoul also urged the ICC to hold off making a decision about cost recovery so commissioners have the opportunity to gather evidence through discovery and fully examine appropriate costs and recovery methods.

Other states are expected to follow suit with generic proceedings. Arkansas, Connecticut, Maryland, Texas and Wyoming have determined that utilities can defer excess costs and lost revenue associated with the virus, according to RRA.

Stakeholders petition regulators in US coronavirus epicenter

In New York, the epicenter of the U.S. coronavirus outbreak, stakeholders are also petitioning the state's Public Service Commission, or PSC, to take broad steps to ease the burden on ratepayers.

A group of roughly 60 industrial, commercial and institutional customers known as the Multiple Intervenors asked the PSC on April 10 to suspend surcharges on customer bills that fund projects that currently cannot move forward due to COVID-19 restrictions, including energy efficiency, heat pump and renewable energy programs. The Multiple Intervenors also asked the PSC to issue bill credits to customers for any collected but uncommitted funds for the programs.

The Public Utility Law Project, or PULP, also intends to file a petition asking the PSC to renew austerity proceedings, which commissioners implemented after the Great Recession in order to commit utilities to cost cuts. PULP will be seeking relief for small business and residential ratepayers in particular, but it disagrees with the Multiple Intervenors on suspending clean energy programs. PULP wants the PSC to use those programs as a sort of economic stimulus, pulling forward spending in order to put New Yorkers to work on projects that support the state's climate goals.

"People who work for the utilities are highly trained. They bring in middle class incomes. They're the anchors of their communities," PULP Executive Director Richard Berkley said.

The proposal reflects how climate policy in states like New York could play a role in policy proceedings in a way it did not 10 years ago, though the idea is not entirely unprecedented. New Jersey's decision to allow utilities to accelerate infrastructure replacement and upgrade programs after the Financial Crisis was in part to generate economic activity within the state, according to Federico.

PULP has also proposed in recent rate cases that utilities should deploy accumulated deferred income tax, or ADIT, from 2018 federal tax reform to deal with the COVID-19 outbreak. It suggested that 50% of a pool of ADIT funds should go to low-income residential customers to prevent them from falling into insurmountable arrears, with another 25% allocated for rate moderation over the near-term and the remaining amount reserved to offset utilities' own arrears and uncollectibles.

"Being responsible and thoughtful with the way that that money is put on the table for this purpose ... makes perfect sense to me," Berkley said. "And we'll fight about that. Smart people will come in with plans during this statewide proceeding because these are the types of things we should be talking about."