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More regulators taking a look at COVID-19 impacts on utilities

With voluntary or mandatory moratoriums on service disconnections in place in all 53 of the jurisdictions followed by Regulatory Research Associates, a group within S&P Global Market Intelligence, more regulators and policymakers are beginning to look at how the financial impacts on the utilities they govern should be addressed.

When the COVID-19 pandemic first began its spread in the U.S. several weeks ago, the primary focus for regulators and policymakers was ensuring that home-bound, newly unemployed ratepayers continued to have access to essential utility services. Now that it has dragged on and brought with it a broad-based recession, the focus is expanding to include consideration of the financial well being of the utilities in the face of investor concerns about the longer-term profitability of the sector, including the implications for previously announced capital spending programs and merger activity.

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From a day-to-day operating standpoint, the coronavirus outbreak presents challenges for U.S. utilities on several fronts, including but not limited to, expected reductions in usage as businesses, schools and other government buildings remain shuttered, lower revenues due to a higher anticipated occurrence of bad-debt/uncollectibles and increased operating costs associated with enhanced biohazard safety measures and maintaining sufficient staffing to ensure safety and reliability of utility service.

The uncertainty regarding the sector's performance, at least in the near-term has been exacerbated by the delays in rate cases and other regulatory processes, disruptions in legislative sessions, understandable reluctance on the part of utilities to file new rate cases under the present circumstances and milder than normal weather in the first quarter of 2020 in most parts of the country.

Against this back-drop, RRA has observed an increasing number of jurisdictions at least beginning to think about ways to address the costs to the utilities. Connecticut, Texas and Wyoming were among the first to act, followed closely by Maryland . The paragraphs below provide a summary of actions taken by the states to date. This information has been compiled on a best-efforts basis and may not be comprehensive due to the rapid evolution of events. In the coming days and weeks, RRA expects additional developments to occur and will disseminate relevant details in a timely manner.

Alaska — On April 9, legislation was enacted that prohibits a public utility from disconnecting residential utility service for nonpayment if the customer is experiencing financial hardship related to the COVID-19 public health disaster emergency. The legislation calls for the utilities to work out deferred payment plans with customers, but also allows the companies to defer extraordinary uncollectibles and other COVID-19 related costs.

Arizona — The Arizona Corporation Commission has opened an investigation (Docket No. AU00000A-20-0050) to investigate utility responses to COVID-19 and explore options for addressing related costs.

Arkansas — On April 10, the Arkansas Public Service Commission issued an order (Docket No. 20-012-A) authorizing the utilities to establish regulatory assets to record costs resulting from the suspension of disconnections. In future proceedings, the commission will consider whether each utility's request for recovery of these regulatory assets is reasonable and necessary.

California — On April 16, the California Public Utilities Commission issued an order (Docket No. R.20-02-0008) that authorizes the electric, gas, communications, and water and sewer corporations to establish memorandum accounts to track incremental costs associated with complying with a previously ordered suspension of service disconnections.

Colorado — The governor's executive orders placing a moratorium on service disconnections and later extending that moratorium directs the Colorado Public Utilities Commission to "work with all public utilities to develop and provide payment assistance programs to aid customers. In RRA's view this implies that the intent is to, at least initially, offer customers extended payment options rather than treating the forgone revenues as bad-debt or "uncollectibles" expense. A proceeding has been opened (Docket No. EO-2020-012) under which the PUC is tracking actions taken by the utilities.

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Connecticut — On March 18, the Connecticut Public Utilities Regulatory Authority directed the regulated gas, electric and water utilities (Docket No. 20-03-15) to maintain a record of all costs incurred and revenues lost as a result of implementing the required emergency measures and permitting the establishment of a regulatory asset to track incurred costs."

District of Columbia — On April 15, the District of Columbia Public Service Commission issued an accounting order authorizing Exelon Corp. subsidiary Potomac Electric Power Co. and AltaGas Ltd. subsidiary Washington Gas Light Co. to defer incremental costs associated with the COVID-19 pandemic.

Georgia — On April 14, the Georgia Public Service Commission issued an order in the most recently completed rate case for Southern Co. subsidiary Georgia Power Co. (Docket No. 42516) authorizing the company to defer all lost revenue and increased costs associated with COVID-19, with the deferred balances to be addressed in a future. Affiliate Atlanta Gas Light Co. and the PSC staff (Docket No. 42315) have proposed that lost revenue associated with continuing to serve customers who are not paying their bills through the revenue true-up process within the Georgia Rate Adjustment Mechanism. The mechanism was initially approved in 2017 (Docket No. 40828).

Idaho — On April 14, the Idaho Public Utilities Commission adopted a staff proposal to open an investigation (Docket No. GNR-U-20-02) to address whether and to what extent Idaho public utilities should be authorized to defer incremental COVID-19 related expenses into a regulatory asset for possible future recovery.

Illinois — The Illinois Commerce Commission has opened a proceeding (Docket No. 20-0309) to address issues related to COVID-19. Several parties to the proceeding have recommended that the commission address cost recovery issues at a later date.

Kentucky — The Kentucky Public Service Commission issued an order March 17 opening a proceeding (Case No. 2020-00085) to address issues related to the crisis, and presumably ratemaking issues will eventually be addressed therein.

Maryland — On April 9, the Maryland Public Service Commission authorized each utility to create a regulatory asset to track the incremental costs related to COVID-19. Costs eligible to be deferred as a regulatory asset include expenses incurred "in their efforts to serve customers during this period." Presumably, this would include atypical operations and maintenance expenses, as well as increased uncollectibles, or bad-debt costs, that arise from continuing to serve customers that normally would have been shut off for nonpayment.

New Hampshire — A gubernatorial order issued on March 31, states that at the end of the state of emergency, customers having utility payment arrearages that were accrued during the state of emergency must be provided the opportunity to make a reasonable payment arrangement over no less than a six-month period without any fees for late payment; however, "customers are not relieved of their obligation to pay bills for receipt of any service covered by" the governor's order suspending utility shut offs.

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

North Carolina — An order issued by the North Carolina Utilities Commission on March 19, with respect to the moratorium on service terminations during the COVID-19 State of Emergency states: "At the end of the State of Emergency, customers having arrearages accrued during the State of Emergency shall be provided the opportunity to make a reasonable payment arrangement over no less than a six month period and shall not be charged any late fees for late payment for arrearages accrued during the State of Emergency. No provision in this Order shall be construed as relieving a customer of their obligation to pay bills for receipt of any utility service covered by this Order" (Docket Nos. E-7 SUB 1236; E-2 SUB 583; G-5, SYB617M; E-35, SUB 52).

Ohio — An order issued by the Public Utilities Commission of Ohio on March 13, calling for the utilities to work with customers to avoid service disconnections, states that the directive "does not eliminate any payment obligations. Such obligations may be deferred based upon future filings made by the utility or stakeholder proposals" (Docket No. 20-0651-EL-UNC).

Pennsylvania — The Pennsylvania Public Utility Commission has opened a series of proceedings (Docket Nos. M-2020-3019244; M-2020-3019254; M-2020-3019262) to address issues related to COVID-19. Presumably cost recovery will be among the issues addressed.

Texas — On March 26, the Public Utility Commission of Texas issued orders (Docket No. 50664) that in addition to preventing service terminations by retail electric providers within the Electric Reliability Council Of Texas Inc., establishes an interim funding mechanism for the associated lost revenue through a charge on transmission and distribution utility, or TDU, bills. The orders also allow both the TDUs within ERCOT and vertically integrated utilities outside of ERCOT to establish regulatory assets for the related costs and lost revenues.

Wisconsin — On March 24, the Public Service Commission of Wisconsin opened an investigation (Docket No. D-UI-120) to understand what costs may be incurred by utilities from COVID-19-related disruptions, including efforts to prevent power shutoffs in the state.

Wyoming — On March 26, the Wyoming Public Service Commission acknowledged that the utilities had voluntarily instituted temporary moratoriums on service terminations and allowed the utilities to seek an accounting order to defer any related costs and lost revenues (Docket No. 90000-151-XO-20)

The Federal Energy Regulatory Commission's initial actions in response to the coronavirus pandemic on March 19 provided an extension of time for certain required "non-statutory" filings that are due on or before May 1. On April 2, FERC took a series of additional actions to address the impacts of the coronavirus pandemic. One order temporarily delegated authority until June 1, to FERC staff "to take action on uncontested requests for waiver of certain regulatory obligations to address needs resulting from steps entities have taken to meet the emergency conditions caused by the novel coronavirus disease." In a policy statement issued the same day, FERC noted that it will "expeditiously review and act on requests for relief including, but not limited to, coronavirus-related cost recovery requests…"

While traditional rate cases for electric and gas utilities are the primary means of achieving cost recovery, that is much less so at FERC. In the natural gas sector, where FERC has authority over the transportation and sale of natural gas in interstate commerce, traditional rate cases for gas pipelines are also relatively uncommon and often occur only as a result of a commitment in a settlement of a pipeline's prior rate case. In the electric power sector, where FERC regulates the rates and terms of transmission service in interstate commerce, more than 100 utilities now employ formula rates for transmission, greatly reducing the number of companies that are subject to traditional rate cases.

While not as pervasive as at the FERC, several state jurisdictions also have fomula-based ratemaking and other alternative regulatory constructs in place that could provide a smoother process for addressing COVID-19 costs and lost revenues.

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Formula-based ratemaking plans generally refer to frameworks where the commission established a revenue requirement, including a target ROE, capital structure and rate of return for an initial rate base as part of a traditional cost or service base rate proceeding. Once the initial parameters are set, rates may adjust periodically to reflect changes in expenses, revenue and capital investment. These changes generally occur on an annual basis, and there may be limitations on the percentage change that can be implemented in a given year or period of years. As it relates to COVID-19, these types of mechanisms are designed to take into account fluctuations in revenues and changes in costs. So, assuming a COVID-19 related rate change does not exceed the annual limit specified in the plan, cost recovery should occur as part of the plan. Presumably, cost increases that would cause a rate change in excess of that permitted under the plan would be deferred.

As the name suggests, under multiyear rate plans, the commission approves a succession of rate changes that are designed to take into account anticipated changes in revenues, expenses and rate base. The commission may approve a static authorized ROE or the plan may provide for adjustments to the ROE during the plan’s term. These types of plans may include annual true-up provisions that could allow the company an opportunity to recoup revenues that are below targets or costs that vary from planned levels, but even if they do not, the company would have incremental revenue coming under the plan without having to file a new case — assuming implementation of the latter steps is not delayed because of financial hardship to ratepayers.

As the name implies, earnings sharing mechanisms provide for the allocation between ratepayers and shareholders of earnings that differ from a target or target range established by the commission. To the extent that one of these mechanisms allows for a symmetrical sharing of earnings around the benchmark, i.e., allows the company to increase revenues if earnings are below the target, then increased costs and lost revenues associated with COVID-19 could be implicitly addressed in adjustments under the mechanism.

The above-discussed mechanisms can be implemented in conjunction with other provisions or on a stand-alone basis. As of this writing, 13 of the 53 jurisdictions followed by RRA had formula based ratemaking plans in place for at least one company in the jurisdiction, including jurisdictions where such plans were combined with other mechanisms. There are 17 jurisdictions in which a multiyear rate plan is in place for at least one utility, including instances where it is combined with other types of plans. Earnings sharing mechanisms are in place for at least one utility in 25 jurisdictions, on a stand-alone basis or as part of either a multiyear plan or a formula-based ratemaking mechanism.

A handful of utilities have mechanisms in place that allow the companies to adjust rates outside of a rate case in response variations in bad-debt or uncollectibles expense relative to a benchmark.

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Another class of adjustment clauses, revenue decoupling mechanisms, allow utilities to adjust rates between rate cases to reflect fluctuations in revenues versus the level approved in the most recent base rate case that are caused by a variety of factors.

Some of these factors, such as weather are beyond a utility's control and the mechanism can work both ways — in other words it can allow the company to raise rates to recoup revenue losses associated with weather trends that reduce customer usage and can also require the company to reduce rates when weather trends cause usage to be higher than normal.

As clean energy policies have gained momentum, driving ever-expanding energy efficiency initiatives, decoupling mechanisms have been implemented to reduce the disincentive for utilities in pursuing energy conservation programs by making the utilities whole for reductions in sales volumes and revenues associated with customer participation in these programs.

Some of these mechanisms also allow the utility to adjust rates to reflect fluctuations in customer usage that are brought about by broader economic issues, such as demographic shifts, the migration of large commercial/industrial customers to other service areas, the shutdown of such businesses due to changes in their respective industries and recessions.

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RRA considers a decoupling mechanism that adjusts for all three of these factors to be a "full" decoupling mechanism and designates those that address only one or two of these factors as "partial" decoupling mechanisms. By and large the partial decoupling mechanisms would not provide much in the way of mitigation for revenue losses resulting from declines in usage due to COVID-19 or the ensuing recession, as the partial mechanisms that are in place generally deal with weather and/or energy conservation program impacts. And only full decoupling mechanisms include the broader economic factors.

The data supporting the information included in this article can be found here. (Only for client)

Regulatory Research Associates is a group within S&P Global Market Intelligence.

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.

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