The following is a contributed article by Travis Kavulla, vice president of regulatory affairs for NRG Energy and a former state utility commissioner and president of the National Association of Regulatory Utility Commissioners.
Most businesses are suffering a loss from the economic downturn caused by COVID-19. Less demand exists for products they sell. Those providing a continuous service, from apartment rentals to broadband subscriptions, have seen an uptick in nonpayment. Few of these businesses will be made whole — except, perhaps, for one industry: utilities.
Electric and gas utilities' fortunes should be tied to the wider economy. Shuttered office buildings and small businesses mean fewer kilowatt-hours sold, and mass unemployment leaves ratepayers unable to pay what they owe to the power company. Yet, increasingly, utilities' returns are divorced from the rest of the economy. That is because government regulation of these monopolies — often imagined as protecting consumers — often does more to keep intact utilities' bottom line. Indeed, in the midst of COVID-19, a low-key bailout of these companies already has begun and, unfortunately for utility ratepayers, it's happening on their dime.
In the last three months, utilities have rushed to ask their regulators at state public utility commissions to issue rulings colloquially referred to as “accounting orders.” Typically, accounting standards require businesses to report losses to shareholders as they occur. With an accounting order in hand, utilities are permitted to record on their books an offset known as a “regulatory asset.” That is, a shareholder asset entirely backed by regulation's promise to leverage a utility's monopoly to recoup losses through surcharges at a later date that would not be possible in a competitive market.
At least 35 states either have granted utilities these writs or are poised to do so. The accounting orders encompass a broad range of costs associated with COVID-19 — but, primarily, the rising “bad debt” associated with unemployed customers who cannot pay their bills. An accounting order stands as a regulator's pinky swear that a utility's other customers, not its shareholders, will pick up that tab.
What's more, these regulatory assets earn a return, at an amount calculated by the regulator rather than the open market. In Wisconsin, utilities have asked that their regulatory asset accounts grow at between a 7.22% and 7.77% annual return. In other words, a utility that couldn't collect $100 million from its customers during the pandemic ultimately would be able to collect $115 million in two years. At a time when the Federal Reserve has cut interest rates to zero, utilities are in a position not just to be made whole — but to make a substantial windfall even as their customers can't pay their bills.
Another policy, known as decoupling, goes further still. Simply put, decoupling allows utilities to charge consumers for electricity they never sold. This counterintuitive policy is permitted in 22 states, including some of those hardest hit by COVID-19 like California, New York, New Jersey, Maryland, and Illinois.
Decoupling's advocates observe that utilities will be more likely to embrace energy efficiency programs if their revenues are decoupled from their sales volumes. Perhaps. But today, decoupling's practical effect is to shift the risk of a major economic downtown from a utility's shareholders to a utility's captive set of customers. With electricity use down as much as 18% during New York City's used-to-be-rush hour, that risk will be realized in the form of higher rates.
Small businesses in particular will feel the hurt of this policy. Since their demand for electricity has fallen more significantly than other types of customers, decoupling's boomerang effect of higher rates will swing back at them with particular force in the years to come.
Consumer advocates have hit back on some of the most galling utility requests. Virginia's Attorney General has understatedly observed, “it is possible that utility management could simply share the financial burden with shareholders, as other businesses impacted by the pandemic have had to do.” Yet for the most part, utility regulation is so obscure that it flies under the radar of the normal political process. Besides, in this weird corner of politics, it is unfortunately commonplace simply to pay off the utility in the hopes that doing so will yield a social benefit — in the case of COVID-19, a moratorium on utility disconnects for nonpayment.
It doesn't have to be this way. In Texas, regulated utilities remain in charge of owning and operating the network that delivers electricity. But customers choose who will sell them electricity, and those companies bear the responsibility of billing customers. (Georgia has the same policy for natural gas.) Part and parcel of this structure is that retail energy providers — unlike monopoly utilities — do not have a captive set of customers they can use to recoup losses. By design, the competitive retail market absorbs the losses when customers cannot pay.
Texans have also not suffered a spate of disconnects. During the COVID-19 pandemic, the Public Utility Commission of Texas has adopted an Electricity Relief Program that prevents retailers from disconnecting customers facing hardship as a result of the pandemic. In exchange for continuing to provide electricity, electricity retailers obtain a partial reimbursement on bad debt, which still leaves their shareholders' skin in the game.
Policymakers elsewhere in the United States have a long way to go in achieving a balance that makes the private capital invested in the power sector bear some of the risk of doing business. Until that happens, it'll be energy consumers who pay — even for energy they didn't use.
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June 23, 2020 at 09:03PM
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