E-21 Report Released Recommending New Regulatory Model for Utilities

An initiative called “E-21” (standing for 21st Century Energy System) has been tapping into a need for visionary planning on a transition to a new utility regulatory model for Minnesota. It involves Xcel Energy teaming up with the Great Plains Institute, Minnesota Power, Center for Energy and Environment, Energy Systems Consulting Services, George Washington University Law School, and additional participants in to.  

 On December 15th, 2014 the E-21 initiative released its Phase I Report on its consensus recommendations. Click here to download report.

 The central recommendation is to revise Minnesota statutes to allow utilities to opt into a multi-year, performance-based regulatory framework for ratemaking and incentives. 

A performance-based regulatory framework allows utilities to earn revenue by delivering agreed-upon outcomes that customers and the public want (e.g., more energy efficiency, reliable supply, affordable rates, CO2 emissions reductions, etc.). The obsolete century-old regulatory system rewards utilities for the raw quantity of KWH they sell and for building additional capital-intensive power plant facilities which their “captive customer base” is on the hook to pay off.

The traditional utility business/ regulatory model not only threatens to lock us into future of compounding environmental dangers because they fear their sunken investments in obsolete, polluting or unnecessary energy technology infrastructure will go stranded and will never be paid off by utility customers. It also threatens a future of perpetual electricity rate increases because a system where profits are dependent upon sales poses a fundamental conflict of interest between utility shareholders and utility customers.

At a Citizens League meeting about E-21 which I attended, representatives from Xcel revealed their motive for being active in the E-21 process. Xcel wants an alternative to being in a constant state of filing these rate increase cases which have “adversarial” proceedings, are unpopular with the public, consume an enormous amount of paperwork and usually take 18 months to complete. The dilemma is that Xcel’s sales are not growing (because we are using less energy now than we did in 2008) yet they need revenue to upgrade infrastructure (such as their rebuilding of their Monticello nuclear plant) and to prepare for distributed generation (which is an encroachment to their market share). Therefore, without a growth in sales Xcel has to keep coming back to the PUC for rate increases. This explains Xcel’s motivation to have meeting performance outcomes as new stream from which to earn revenue and the reason why striving for new utility business models deserves to be a social movement.

At the state Legislature, Xcel plans to lobby for a bill to allow utilities to take advantage of an alternative multi-year rate structure but only making it voluntary so utilities who want a traditional rate case to still be able to get it. Xcel also wants the PUC to consider the changes laid out in the E-21 letter and feel empowered to act upon its recommendations.

The utility industry understandably wants reassurance that they can still remain profitable under a business model where revenue is based more on compensation for their services rather than upon quantity of electricity sold. However, there are a lot more questions to be answered and work to be done in fleshing out the primary E-21 recommendation. In order for utilities to be compensated for exceptional performance, we need to have benchmark performance indicators that are quantifiable, measurable and mutually agreed upon among all parties. 

Because there are unknowns about performance based regulation, being committed to implementing it involves putting some degree of capital at risk. That brings up a two-fold question which points toward a similar conflict between whether utility shareholders and utility customers foot the risk.

1: If capital is put at risk, how will investors maintain their confidence in the utilities?

2: Will the shift toward performance based regulation will be carried out in a way that shares the economic benefits with energy consumers in the communities served, or will the economic benefits be merely awarded to distant shareholders? 

Corporate shareholder owned utilities rely on a huge amount of capital from investors in order to finance building and maintaining the electrical infrastructure. These investors are motivated to keep investing in what is essentially a public good because of the utility industry norm of expecting guaranteed returns. The utility industry has gotten used to being a low-risk investment for shareholders. If the expectation of guaranteed returns were to be taken away, then this motivation to invest would supposedly cease.

Such stakeholders typically warn that substantial reforms will bring about "investor uncertainty" which in turn will supposedly result in across-the-board upward pressure on electricity rates for customers. The threat of rate increases is an effective attempt to intimidate advocates for substantial reform. 

The question remains: Will we have a utility regulatory system that actually rewards a utility for its ability for it to meet performance goals or a system that continues to reward utilities ability to squeeze the most revenue out of sunken investments (in an attempt to minimize this investor uncertainty)? 

An approach that prioritizes sunken investments will marginalize the deployment of decentralized clean energy technology to where it is too slow and gradual for what environmental and climate circumstances demand. Instead, regulatory reforms have to enable the systematic but expeditious phase-out of the old obsolete conventional generation facilities. In other words, a broader form of performance- based regulation is that winners and losers in the regulated market should be picked according to policy objectives of environmental protection, affordability, reliability, economic democracy, employment opportunity, etc., rather that who has the largest vested interest. That's where the need for social organizing and people power come in. Unless enough people are organized enough to require an alternative path, the largest vested interests ALWAYS dominate.  

Shareholders have chosen to enter the market, and they are fully aware market is fraught with risk. While that risk can dramatically mitigated by regulation, it can not be fully eliminated. There has been enough public foment for a long enough period of time that shareholders should be well aware of at least the perceptions held by large numbers of informed people about damages caused by their market investments, and that those damages and the perception of those damages increases the risk of diminished or negative returns on their investments.  It’s the choice of investors whether or not to take that risk. While total indifference to shareholder interests is counterproductive the question that remains is to what extent should the shareholders be shielded from the risk?

Or is there a way the interests of shareholders can be reconciled with that is best for customers, our ecology and our climate? 

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