Regulatory Minute

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Perspectives on Rate Making – An Update

Rate freezes, arrangements where utilities are prohibited from filing rate cases, have been commonly used nationwide since the 1990s. As of January 2018, rate freezes or rate case moratoriums are in place across 27 jurisdictions, impacting 37 electric and 31 gas utilities. While these arrangements have overwhelmingly originated from past rate cases and are intended to benefit consumers, some adverse consequences can also result from such arrangements.

Key Details

  • During the 1980s, rate freezes were not widely employed. Instead, rate filings were quite prevalent and were driven by many factors, including:
  • Large-scale construction projects, particularly nuclear plants
  • Rapid customer-base growth requiring sizable investments in transmission and distribution infrastructure
  • Inflationary pressures driving up operating costs
  • Higher interest rates increasing utility company cost of capital
  • Regulatory activity was at its peak between 1980 and 1989, reflecting more than 1,200 electric and gas rate cases and roughly $40 billion in rate increases
  • Through the early 1990s, the number of rate cases decreased as authorized rates of return and efficiency gains were sufficient to fund new investments
  • As industry restructuring was introduced in the 1990s, rate freezes became an important tool for regulators to manage the transition to retail competition
  • Rate freezes, moratoriums, and price/revenue caps are being used in a different context to address actions such as:
  • Merger and acquisition approvals
  • Rate case settlements
  • Establishment of new alternative regulatory frameworks

SNL Financial recently completed a comprehensive study of all outstanding electric and gas utility rate freezes. Highlights from several of these cases are included in the table below.

Selected Rate Freezes and Related Actions

Jurisdiction Company Rate Freeze Expires Comments
Arizona Arizona Public Service 6/1/19 ·     The company may not file its next rate case until June 1, 2019

·     Based on past rate cases, the earliest new rates could be implemented would be August 2020

California Pacific Gas & Electric 1/1/20 ·     The PUC authorized electric and gas rate changes for a 2017 test year and attrition rate increases for 2018 and 2019

·     Except for these rate changes, rates are not expected to change prior to January 1, 2020

California San Diego Gas & Electric 1/1/19 ·     The commission authorized electric and gas rate changes for the 2016 test year and attrition rate increases for 2017 and 2018

·     The company is to refrain from filing a general rate case that would take effect prior to January 1, 2019

California Southern California Gas 1/1/19 ·     The commission authorized a rate change for the 2016 test year and attrition rate increases for 2017 and 2018

·     The company is to refrain from filing rates that would take effect prior to January 1, 2019

Florida Duke Energy Florida 1/1/22 ·     The company’s electric rates are frozen through 2021

·     Company is permitted to increase rates by pre-determined amounts in 2019, 2020, and 2021

Florida Florida Power & Light 1/2/21 ·     Four-year rate plan in place, allowing rate increases on January 1, 2017 and January 1, 2018

·     An additional increase is expected when the Okeechobee Clean Energy Center becomes operational; expected on June 1, 2019

·     Rates are not to increase in 2020

Georgia Georgia Power 1/1/20 ·     The company’s electric base rates will remain at current levels through 2019

·     Company is required to file its next rate case on July 1, 2019

Minnesota Northern States Power Co. 1/1/20 ·     In 2017, the PUC adopted a settlement which authorized a four-year plan with a three-step electric rate increase

·     The company is not permitted to increase base rates until January 1, 2020, outside of the settlement

New York Consolidated Edison Co. of New York 1/1/20 ·     Company operating under a three-year, PSC-approved plan which allows for annual rate changes to both electric and gas rates

·     Base rates are to be frozen otherwise

Implications

Utility rate freezes and similar incentive rate initiatives have both inherent benefits and corresponding costs to be considered:

  • Introduces greater discipline in managing the utility in a prudent and cost-effective manner
  • Encourages the utility to reduce its costs and innovate in different ways to manage costs and improve operations
  • However, may result in cost-saving initiatives that have the potential to undermine the quality of service (e.g., frequency and/or duration of outages)
  • Limits investment required to build new or upgrade existing infrastructure as interests compete for scarce capital resources
  • Constraints of fixed operation and maintenance budgets may make it difficult to meet operation, maintenance, and compliance obligations
  • Over time, weakens the link between the utility’s rate of return and unit cost of service compared to traditional rate of return regulation

More Information

SNL’s RRA Special Topical Report: Rate Freezes: Their Historical Context and Prevalence Today (Membership is required to access this article)

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