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TRANSCRIPT
Rate And Regulatory Barriers To Innovation In The Energy Sector
Chuck Harder
Senior Director, Regulatory Policy & External Relations
CenterPoint Energy, Inc.
Overview
Restructuring the energy industry (both electricity and natural gas) and a national global focus on introducing competition and modernizing infrastructure has opened the market to new players, products and services.
The traditional process for setting rates in the United States – the rate case – poses a significant barrier to market transformation.
Traditional rate design misaligns the interests of the utility and its customers … and the public interest.
Regulatory regimes that can quickly adapt to the changing market and which better align stakeholder interests will succeed in promoting growth and innovation.
Texas’ regulatory regime is making progress, and there are some things that work well …
But much remains to be done.
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CenterPoint Energy
CenterPoint Energy, Inc., headquartered in Houston, Texas, is a domestic energy delivery company that includes electric transmission & distribution, natural gas distribution and competitive natural gas sales and services operations. The company serves more than five million metered customers primarily in Arkansas, Louisiana, Minnesota, Mississippi, Oklahoma, and Texas. The company also owns a 58.3% limited partner interest in a midstream partnership it jointly controls with OGE Energy Corp. with operations in major natural gas and liquids-rich producing areas of Oklahoma, Texas, Arkansas and Louisiana. With more than 8,700 employees, CenterPoint and its predecessor companies have been in business for more than 135 years. For more information, visit the website at www.CenterPointEnergy.com.
Electric Transmission & Distribution
Natural Gas Distribution
Competitive Natural Gas Sales & Services
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Historically …
Public utilities were vertically integrated monopolies that were first regulated by the cities where they were located.
Systems expanded to connect more cities and rural areas, and rate regulation in other states shifted from cities to state agencies.
Growth in customers and load created enough growth in revenues to offset increases in normal operating costs.
The need to raise rates typically arose when significant improvements were made to the infrastructure and the growth in revenues wasn’t sufficient to cover the normal operating costs and the additional capital investment.
Rates were designed to encourage growth in usage.
Regulatory oversight occurred mostly through rate cases where the determination of prudency of public utility investments and the setting of rates resembled complex commercial litigation.
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Innovation
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Drivers
Changing Market
Customer Expectations (Self Reliance, Reliability, Value)
Technology
Environmental Stewardship
Products
Distributed Generation
Micro-Grids
Energy Storage
Smart Products and Applications
Providers
Transmission and Distribution Utilities
Retail Electric Providers
Non-Traditional Players (like Microsoft and Google)
Funding
Tax Incentives
Traditional Financing
Other Incentives and Innovative Financing
Consumers
Innovation is driving decentralization in the electric industry, including the development of distributed generation, micro grids, electricity storage (including, for example, electric cars), and other alternatives to traditional delivery of electric services, and creating new opportunities at the intersection of gas and electric markets.
Transmission and distribution utilities sit at the center of all this change.
Introducing Competition Changes The Market
Since the late 1970s the Congress and the Federal Energy Regulatory Commission (FERC) have taken a number of steps to lessen federal regulation of natural gas markets and to make the industry more competitive. FERC Order 636 allowed pipelines in 1993 to offer unbundled firm and
interruptible sales services at market-based rates, and required that cost-based rates follow the straight fixed variable (SFV) method of cost classification, allocation, and rate design.
For the past two decades, natural gas utilities have incorporated much of the Federal model into their state-regulated rates, terms and conditions of service to local distribution customers.
Similarly, in the Texas electric industry, Senate Bill 7 passed in 1999 caused ERCOT to launch the competitive retail electric market in 2002 allowing individuals and corporations in most cities to choose power suppliers. SB 7 applied specifically to investor-owned utilities, enabling customer choice for
6.5 million.
SB 7 allowed municipal utilities and electric cooperatives to decide if they wanted to opt to participate in competition.
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ERCOT’s Market Structure
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Affiliated Utility
Generation
Distribution
Services
Unregulated
Wholesale Generation
REGULATED UTILITY
Customer
Transmission
Services
( ISO)
Qualified Scheduling
Entity
Retail Electric
Provider
Modernizing The Grid …
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Source: Edison Foundation, Utility-Scale Smart Meter Deployments: A Foundation for Expanded Grid Benefits (August 2013)
… Provides Significant Operational Benefits
Improved outage response through automatic notification of customer outage. Enhanced ability to reroute power around an outage, thus improving restoration time and minimizing the number of customers affected.
Reduced vehicle emissions by eliminating need to send crews to execute such routine orders as turning electric service on and off.
Environmental benefits as less power may have to be generated
Automated meter reading
Remote connect and disconnect
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… Facilitates Products/Services From REPs
In-home energy monitors – smart meters can interact with these devices, such as thermostats or other electric appliances, so users can better manage electricity
Special pricing plans like – Free nights and weekends
Peak and non-peak pricing
Pre-pay service
“Green Power” – 100% renewable products
Pricing options for charging electric vehicles
Bundled products including appliance maintenance and repair
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Source: Association of Electric Companies of Texas (AECT), Update on the Texas Electric Industry (January 23, 2014)
Technology Drives A New Kind Of Customer Engagement
Redefined customer service value proposition
Use of advanced customer service channels to deliver customer benefits based on their preferences
Shift from issue resolution to relationship building
Utilities will form new partnerships between electric and gas merchants and with companies like Google, Microsoft, etc.
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Rate And Regulatory Barriers To Innovation
19TH Century Rate Design Costs recovered based on energy consumption rather than on distribution
cost of service
Discourages energy efficiency (conservation)
1960’s Rate Setting Process Designed for determining prudency of major investments before rates could
be increased
Slow to respond to changes in the industry
Contentious
Expensive
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Rate Cases Are Time-Consuming And Expensive
Rate Case Timeline
Typical Issues in a Rate Case
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4-12 Mos
•Plan the rate case
•Close the books
•Prepare the rate filing package
6-12 Mos
•Filing
•Discovery
•Hearing
•Briefing
•Final Order
1-2 Mos
•Compliance tariffs
•Implement new rates
On average, a rate case takes 9⅓ months to process – from filing to final order.
(Source: Regulatory Research Associates)
Differences of Opinion Return on equity
Depreciation of capital investment
Lead/lag study – working capital needs
Pro forma adjustments and other estimated costs
Establishing or challenging regulatory policy
Cost allocation and rate design
Audit Findings Below-the-line disallowances
Out-of-period adjustments
Unusual and non-recurring items
Established regulatory policy misapplied
In Texas and other jurisdictions, the cost to process rate filings is a reasonable and necessary utility expense, and customers ultimately bear the cost of rate cases.
Controversy In Setting Distribution Rates
Cost Classification Fixed
Demand Commodity (Usage)
Rates
Cost Allocation to Rate Classes Residential Commercial
Industrial
Billing Determinants
Significant Differences of Opinion
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Gross Plant
Working
Capital
Accumulated
Depreciation
Rate Base
(Investment)
Depreciation
Rate
Rate of Return
(ROR)
Depreciation
Expense
O&M and G&A
Taxes
Return on
Investment
Cost of Service
+
–
=
x
x
=
=
+
+
+
=
The utility’s
cost of service
is based on a
past or future
“test year.”
Innovative Regulatory Mechanisms
Formula Rate Plans A formula rate plan (FRP) is a comprehensive cost tracker designed to help a
utility’s revenue track its cost of service.
Infrastructure Mechanisms Infrastructure mechanisms provide cost-based rate recovery between rate cases to
encourage broad-based investment in infrastructure or to address specific programs and concerns.
Energy Efficiency Energy efficiency rate adjustment mechanisms are designed to allow the utility to
recover its cost of funding energy efficiency programs and in most instances provide performance incentives.
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Innovative Formula Rate Plans
Sources: American Gas Association, Innovative Rates, Non-Volumetric Rates, and Tracking Mechanisms: Current List (February 2014) Edison Electric Institute, Alternative Regulation for Evolving Utility Challenges: An Updated Survey (January 2013)
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Trend Toward Accounting/Auditing-Driven Processes
Faced with having to deal with frequent, time-consuming and costly rate cases, regulators in many states have worked with public utilities, consumer advocates and other interested parties to develop alternatives to rate cases.
Innovative rate setting processes more closely resemble an external audit of a company’s financial statements than complex commercial litigation.
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Innovative Infrastructure Mechanisms
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Source: Edison Electric Institute, Alternative Regulation for Evolving Utility Challenges: An Updated Survey (January 2013)
Energy Efficiency
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Sources: American Gas Association, Innovative Rates, Non-Volumetric Rates, and Tracking Mechanisms: Current List (February 2014) Edison Foundation, State Electric Efficiency Regulatory Frameworks (July 2013)
New Rate Designs
Straight Fixed Variable Straight fixed variable (SFV) rate design imposes a fixed charge to customers that is
designed to recover all of a utility's fixed costs.
Revenue Decoupling Revenue decoupling (RD) is generally defined as a ratemaking mechanism designed
to eliminate or reduce the dependence of a utility’s revenues on sales.
Revenue decoupling works by adjusting the actual sales volumes to the weather-normalized sales volumes approved during the utility’s last rate case.
Lost Revenue Adjustment Mechanism Akin to RD, a lost revenue adjustment mechanism (LRAM) compensates a utility for
base rate revenues that are estimated to be lost due to its energy efficiency or demand-side management (DSM) programs, distributed generation (DG), or other specific causes.
Weather Normalization Adjustment Weather normalization adjustment (WNA) clauses adjust rates on a regular basis
with the goal of normalizing revenue or throughput by adjusting bills to correct for abnormal weather.
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Non-Volumetric Rate Designs (Natural Gas)
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Source: American Gas Association, Innovative Rates, Non-Volumetric Rates, and Tracking Mechanisms: Current List (February 2014)
Weather Normalization Adjustment Mechanisms
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Source: American Gas Association, Innovative Rates, Non-Volumetric Rates, and Tracking Mechanisms: Current List (February 2014)
Non-Volumetric Rate Designs (Electricity)
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Source: Edison Foundation, State Electric Efficiency Regulatory Frameworks (July 2013)
Regulatory Scorecard
Works Well Permanent infrastructure cost
recovery mechanisms for – Advanced meters
Transmission
Natural gas pipelines
Energy efficiency
Needs Improvement Rate case process City original jurisdiction is an
anachronism
Incentivizes controversy and causes high rate case expenses
Infrastructure cost recovery mechanisms for electric distribution set to expire
Rate design that aligns utility investor and consumer interests
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Questions? Chuck Harder Senior Director of Regulatory Policy and External Relations CenterPoint Energy, Inc. 1111 Louisiana Street, Suite 1960 Houston, Texas 77002 Tel 713.207.7273 [email protected]
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