DOCSLIB.ORG

Traditional Economic Regulation of Electric Utilities

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Traditional Economic Regulation of Electric Utilities JUNE 6, 2018 Traditional Economic Regulation of Electric Utilities Electric Utility Ratemaking Education and Engagement Workshop Regulatory Assistance Project www.raponline.org Introductions The Regulatory Assistance Project (RAP) is a global NGO providing technical and policy assistance to government officials, agency staff, and others on energy and environmental issues. • Foundation-funded; some contracts • Non-advocacy; no interventions Jim Lazar John Shenot Jessica Shipley Regulatory Assistance Project (RAP)® 2 Outline • 120 minute session • Genesis of Regulation • Roles of Utilities and Regulators Today • Ratemaking Basics: • Revenue Requirement • Cost Allocation • Rate Design Basics Regulatory Assistance Project (RAP)® 3 1 A Very Brief History of Regulation 4 Medieval England Accommodations • Business “affected with the public interest.” • Prices regulated due to monopoly stature New Inn, Gloucester, 1454 Regulatory Assistance Project (RAP)® 5 US Origins: Munn v. Illinois (1877) • Grain elevators charging monopoly prices to farmers. • Supreme Court ruled “affected with the public interest” and subject to price regulation. Regulatory Assistance Project (RAP)® 6 Bluefield Water Works (1935) • Prudent investment rule. • Utility entitled to a return comparable to companies with similar risks. Regulatory Assistance Project (RAP)® 7 Hope Natural Gas (1944) • “Just and reasonable” standard upheld. • End result, not the method employed. • Intervenors have limited rights. Regulatory Assistance Project (RAP)® 8 Market Street Railway (1945) • Company not entitled to recover cost of stranded assets due to technological evolution. Regulatory Assistance Project (RAP)® 9 Roaring ’60s and Scary ’70s • Load Growth • + Inflation Regulatory Assistance Project (RAP)® 10 PURPA: The Public Utility Regulatory Policies Act (1978) • Avoided Cost for Independent Power • Right of Intervention • PURPA Ratemaking Standards Rate Design Standards Utility Service Standards Cost of Service Master Metering Time of Day Fuel Adjustment Clauses Seasonal Information to Consumers Interruptible Termination of Service Declining Block Advertising Lifeline Regulatory Assistance Project (RAP)® 11 The PURPA Right of Intervention • Any subject utility: 750 million kWh/year • Any consumer may intervene • Right to present evidence • Right to reasonable rules of discovery • Right to intervenor compensation if no consumer advocate is funded. Regulatory Assistance Project (RAP)® 12 The ’80s: Rate Increases, Cost Overruns, and Abandoned Nukes • Expensive New Capacity • High rates resulted in low load growth • Three Mile Island incident led to 50 nuclear plant abandonments Regulatory Assistance Project (RAP)® 13 2 Electric Utilities and Regulatory Commissions Roles of Utilities • Provide service to anyone who requests it • Adhere to strict safety standards • Adhere to reliability standards • Provide adequate service • Be responsive to customer needs Regulatory Assistance Project (RAP)® 15 Investor-Owned Utilities (IOUs) • Privately owned • Publicly traded (usually) • Profit-making enterprises • Economically regulated by state public utility commissions (PUCs) • Examples: Duke Energy Carolinas, Mississippi Power, Entergy Arkansas Regulatory Assistance Project (RAP)® 16 Electric Membership Cooperatives • Owned by members • Not-for-profit • Governed by Board of Directors elected by the members • Less (or no) PUC oversight – varies by state • Examples: Jackson (GA) EMC, Northern Virginia Electric Coop, SW Louisiana EMC Regulatory Assistance Project (RAP)® 17 Public Power Utilities • Owned by taxpayers • Not-for-profit • Governed by locally elected officials or their designees • Less (or no) PUC oversight – varies by state • Examples: Orlando (FL) Utilities Commission, City of Huntsville (AL), Nashville (TN) Electric Service Regulatory Assistance Project (RAP)® 18 Asset Ownership • Vertically Integrated Utilities • Own generation, transmission, distribution • Serve retail customers • Generation & Transmission Utilities (G&Ts) • Own generation and transmission • Sell power at wholesale to other utilities • No (or few) retail customers • Distribution Utilities • Own distribution, sometimes transmission • Buy power from other utilities or from marKets • Serve retail customers Regulatory Assistance Project (RAP)® 19 Roles of Economic Regulators • Extensions of legislatures, executing powers granted in statutes • Pricing: the essential regulatory act • More on this later • Transparent and accessiBle process • Service quality standards • Prudence review • Regulate in “the puBlic interest” Regulatory Assistance Project (RAP)® 20 “Regulatory Compact*” • Utility accepts obligation to serve • Government will approve rates that will compensate the utility fully for prudently incurred costs *Not a binding agreement Regulatory Assistance Project (RAP)® 21 3 Ratemaking and Rate Cases Basics • “Cost of Service” approach to determining a fair price for electric service: • Total costs for providing service are recovered, plus reasonable return on investment • Regulators concerned with ‘just and reasonable’ rates • Sufficient but no more than necessary to cover costs and return on investment • Rate design: structure of prices Regulatory Assistance Project (RAP)® 23 Alternative Cost of Service Frameworks • Embedded Cost of Service • As many methods as analysts • Marginal Cost of Service • Short-run marginal cost • Long-run marginal cost • Incremental cost • Total system long-run incremental cost Regulatory Assistance Project (RAP)® 24 Steps in Utility Ratemaking Revenue Requirement Functionalization • Assign cost to appropriate utility function Classification • Classify functionalized costs to demand, energy, customer Allocation • Assign cost responsibility among customer classes Rate Design • Develop pricing method for recovering assigned costs Regulatory Assistance Project (RAP)® 25 Steps in Utility Ratemaking Revenue Requirement Functionalization • Assign cost to appropriate utility function Classification • Classify functionalized costs to demand, energy, customer Allocation • Assign cost responsibility among customer classes Rate Design • Develop pricing method for recovering assigned costs Regulatory Assistance Project (RAP)® 26 Revenue Requirement • First step: revenue requirement • Total amount the utility needs to cover costs and earn a fair rate of return on investment • Requires determining: • Amount of investment allowed in rate Base • Fair rate of return on that investment • ReasonaBle expenses to serve customers Regulatory Assistance Project (RAP)® 27 Test Year Concept • Definition: A specific time period chosen to assess a utility’s costs of service and revenue requirement. • A test year can Be either historical, which is the most common approach, or projected (often called a “future” or “forecasted” test year). Regulatory Assistance Project (RAP)® 28 Revenue Requirement Formula Revenue Requirement = (Rate Base Investment x Rate of Return)+ Operating Expenses Major capital Percent return Regular expenses, expenditures, like utilities make like labor, power power plants and annually on their purchases, fuel, transmission lines, investment insurance and other but also buildings, costs that recur computers, fleet regularly vehicles, etc. Regulatory Assistance Project (RAP)® 29 Plant In Service At Original Cost • Generation • $40,000,000 • Transmission • $10,000,000 • Distribution • $60,000,000 • General Plant • $20,000,000 • Total Plant in Service • $130,000,000 Regulatory Assistance Project (RAP)® 30 Rate Base Calculation Plant in Service • $130,000,000 - Accumulated Depreciation • ($30,000,000) = Net Plant in Service • $100,000,000 + Working Capital • $ 5,000,000 + Regulatory Assets • $ 1,000,000 - Deferred Taxes • ($6,000,000) = Rate Base • $100,000,000 Regulatory Assistance Project (RAP)® 31 Traditional Rate of Return Regulation: Cost of Capital • Rate of Return • Cost of Common Equity • Equity Capitalization Ratio • Cost of Debt • Debt Ratio • Preferred Stock and Short Term Debt as appropriate Regulatory Assistance Project (RAP)® 32 Rate of Return Calculation Equity Ratio • 50% x Allowed Return on Equity • 10% = Weighted Equity Cost • 5% Debt Ratio • 50% x Cost of Debt • 6% = Weighted Debt Cost • 3% Sum = Rate of Return • 8% Regulatory Assistance Project (RAP)® 33 Operating Expenses • Production • $10,000,000 • Transmission • $ 1,000,000 • Distribution • $ 5,000,000 • Administrative and General • $ 2,000,000 • Taxes • $ 2,000,000 • Depreciation • $ 5,000,000 • Total Expenses: • $25,000,000 Regulatory Assistance Project (RAP)® 34 Traditional Rate of Return Revenue Requirement Rate Base • $100,000,000 x Rate of Return • x 8% = Return Requirement • $8,000,000 + Operating Expenses • $25,000,000 = Revenue Requirement • $33,000,000 Regulatory Assistance Project (RAP)® 35 Steps in Utility Ratemaking Revenue Requirement Functionalization • Assign cost to appropriate utility function Classification • Classify functionalized costs to demand, energy, customer Allocation • Assign cost responsibility among customer classes Rate Design • Develop pricing method for recovering assigned costs Regulatory Assistance Project (RAP)® 36 Functionalization Divide Revenue Requirement Among Utility Functions Regulatory Assistance Project (RAP)® 37 Functionalization: Area of Limited Controversy • Non-utility activities • Lobbying • Administrative and General Costs • Administrative & General Salaries • Outside Services • Employee Pensions and BeneFits • Insurance / Damages • General Plant and Maintenance
Load more

Recommended publications
  • Competitive Bidding and Independent Power Producers: Is Deregulation Coming to the Electric Utility Industry?
    COMPETITIVE BIDDING AND INDEPENDENT POWER PRODUCERS: IS DEREGULATION COMING TO THE ELECTRIC UTILITY INDUSTRY? John Wyeth Griggs* I. INTRODUCTION The Federal Energy Regulatory Commission (FERC) has recently initi- ated regulatory actions that could largely deregulate the generation of electric power. The FERC issued three notices of proposed rulemaking (NOPRs) on March 16, 1988: administrative determination of full avoided costs (ADFAC), regulations governing competitive bidding programs, and regula- tions governing independent power producers (IPPs).' The FERC proposals were issued ostensibly in response to changes in the electric power industry brought about by the overwhelming response of cogenerators and small power producers to incentives under section 210 of the Public Utility Regulatory Policies Act of 1978 (PURPA).2 The competitive bidding and IPP proposals, which have been hotly debated in the electric utility industry for over a year,3 have been promoted by the FERC's Chairman Hesse and Commissioner Stalon in public speeches and in testimony to Congress.4 The competitive bid- ding and IPP proposals would attempt to create a market for electric power * Colgate University, B.A., 1969; Columbia University, J.D., 1973; Partner in the firm of Birch, Horton, Bittner, Cherot and Anderson, P.C., Washington, D.C. 1. Notice of Proposed Rulemaking, Administrative Determination of Full Avoided Costs, Sales to Power Qualifying Facilities, and Interconnection Facilities, IV F.E.R.C. Stats. & Regs. 32,457, 53 Fed. Reg. 9331 (1988); Notice of Proposed Rulemaking, Regulating Government Bidding Programs,IV F.E.R.C. Stats. & Regs. 32,455, 53 Fed. Reg. 9324 (1988); Notice of Proposed Rulemaking, Regulations Governing Independent Power Producers, IV F.E.R.C.
    [Show full text]
  • A Guide to Public Utility Ratemaking
    New Foreword The Pennsylvania Public Utility Commission, as an organization of professionals, stands on the shoulders of the commissioners and staff that went before. Our predecessors’ policy issues and economic challenges were different, but the solutions they shaped are the foundation that subsequent generations have built upon to solve their own. The original 1983 Rate Case Handbook was still in active use well past any probable expiration date, largely because the fundamental principles of base ratemaking remained unchanged. “It’s very helpful, except that none of what has occurred in the last 35 years is included” was the familiar grievance. Hopefully, this rewrite fills in those gaps and ages with equal grace. Since Jim Cawley and I authored this book, with a lot of help, 35 years ago, the world has transformed profoundly. The original handbook was typed on an IBM Selectric or similar typewriter that possessed very, very limited memory. When the seemingly endless rounds of revisions were complete, the typist was the most relieved of all. In comparison, this version is being written on a Dell OptiPlex 7050 with 238 GB hard drive, 4 GB of RAM, and a 3.4 GHz processor. It has sophisticated software that can “link” to a mysterious hole in the universe called the “internet.”1 The document has been atmospherically shared and edited among its multiple contributors in “the cloud.” In 1983, voice telephone service was all there was to know about telecommunications. Although the telecommunications industry was becoming selectively competitive, notably in long-distance calling plans, AT&T was broken up only later by the U.S.
    [Show full text]
  • Navigating Utility Business Model Reform a Practical Guide to Regulatory Design Authors & Acknowledgments
    M OUN KY T C A I O N R AMERICA’S I N E POWER PLAN STIT U T NAVIGATING UTILITY BUSINESS MODEL REFORM A PRACTICAL GUIDE TO REGULATORY DESIGN AUTHORS & ACKNOWLEDGMENTS AUTHORS ACKNOWLEDGMENTS Dan Cross-Call, Rachel Gold (American Council for an Energy-Efficient The authors thank the following individuals and organizations for offering Economy), Cara Goldenberg, Leia Guccione, and Michael O’Boyle their insights and perspectives on this work: (America’s Power Plan) • Lisa Frantzis, Coley Girouard, Ryan Katofsky, Hannah Polikov, and Danny *Authors listed alphabetically. All authors from Rocky Mountain Institute Waggoner (Advanced Energy Economy Institute) unless otherwise noted. • Sonia Aggarwal (America’s Power Plan) • Lena Hansen, Mike Henchen, Claire Wang, and Uday Varadarajan (Rocky Mountain Institute) CONTACTS • Erin Falquier (Chicane Labs) Dan Cross-Call, [email protected] • Dan Adler (Energy Foundation) Cara Goldenberg, [email protected] • Pete Cappers and Andy Satchwell (Lawrence Berkeley National Laboratory) SUGGESTED CITATION • Rich Sedano and Rick Westin (Regulatory Assistance Project) Cross-Call, Dan, Rachel Gold, Cara Goldenberg, Leia Guccione, and • Steve Corneli (Strategies for Clean Energy Innovation) Michael O’Boyle. Navigating Utility Business Model Reform: A Practical Guide to Regulatory Design. Rocky Mountain Institute, 2018. www.rmi.org/insight/navigating-utility-business-model-reform EDITORIAL/DESIGN Editorial Director: Cindie Baker Creative Director: Romy Purshouse Design: Michael Smyjewski Images courtesy of iStock unless otherwise noted. ABOUT US Rocky Mountain Institute, Advanced Energy Economy Institute, and America’s Power Plan have collaborated over the past year to identify approaches and curate resources to modernize utility business models in a manner that better aligns utility profit-making incentives with public policy objectives.
    [Show full text]
  • 2015 Energy and Environment Guide to Action: Chapter
    EPA Energy and Environment Guide to Action 7.2 Policies That Sustain Utility Financial Health Policy Description and Objective Summary Public utility commissions (PUCs) in leading states are refining Although aggressive energy efficiency and clean traditional utility policies to better align the utility financial distributed generation programs help utilities diversify their portfolio, lower costs, and meet interest with state and customer interest in affordable, customer needs, some utilities may face important reliable electricity service that minimizes environmental financial disincentives to adopting these programs impacts. under existing state regulatory policies. State regulators can establish or reinforce several policies to help curb these disincentives, including As part of their business model, utilities take on financial addressing the throughput incentive, ensuring commitments and incur risks in support of infrastructure program cost recovery, and defining shareholder investments and procurement plans (see Section 7.1, performance incentives. “Electricity Resource Planning and Procurement”). If the state PUC finds in a rate case or otherwise that such costs and risks are prudent, the costs are recovered in customer rates. Investor-owned utilities also need to remain profitable to their shareholders; their failure to do so can affect their stock price and bond ratings, as well as the cost of capital for future investments made on behalf of customers. Traditional regulatory approaches link the recovery of utility investment
    [Show full text]
  • Takings Clause Analysis of Utility Ratemaking Decisions: Measuring Hope’S Investor Interest Factor
    Fordham Law Review Volume 58 Issue 3 Article 4 1989 Takings Clause Analysis of Utility Ratemaking Decisions: Measuring Hope’s Investor Interest Factor Sean P. Madden Follow this and additional works at: https://ir.lawnet.fordham.edu/flr Part of the Law Commons Recommended Citation Sean P. Madden, Takings Clause Analysis of Utility Ratemaking Decisions: Measuring Hope’s Investor Interest Factor, 58 Fordham L. Rev. 427 (1989). Available at: https://ir.lawnet.fordham.edu/flr/vol58/iss3/4 This Article is brought to you for free and open access by FLASH: The Fordham Law Archive of Scholarship and History. It has been accepted for inclusion in Fordham Law Review by an authorized editor of FLASH: The Fordham Law Archive of Scholarship and History. For more information, please contact [email protected]. NOTES TAKINGS CLAUSE ANALYSIS OF UTILITY RATEMAKING DECISIONS: MEASURING HOPE'S INVESTOR INTEREST FACTOR INTRODUCTION In its landmark 1944 decision, FederalPower Commission v. Hope Nat- ural Gas Co.,I the Supreme Court established a deferential,2 end result standard3 for reviewing the constitutionality 4 of government regulation of public utility rates.5 The Hope test requires courts to examine the balance struck by the ratemaking authority between the competing inter- 1. 320 U.S. 591 (1944). 2. See Jersey Cent. Power & Light Co. v. F.E.R.C., 810 F.2d 1168, 1179 (D.C. Cir. 1987) (en bane) (Hope limited, but did not eliminate, judicial review of ratemaking deci- sions); Hoecker, "Used and Useful" Autopsy of a Ratemaking Policy, 8 Energy L. J. 303, 309 (1987). 3.
    [Show full text]
  • Public Ownership of Public Utilities: Have Stockholders Outlived Their Useful Economic Lives?
    Comments Public Ownership of Public Utilities: Have Stockholders Outlived Their Useful Economic Lives? This Comment proposes that regulation is an inadequate response to the problems inherent in the private ownership of monopolies that provide basic necessities: gas, electricity, water, and to some extent, telephone service. Structural and legal analysis of utilities points to public ownership as the preferable response to these problems. After a presentation of the legal basis for regulating these industries and of the limits placed on that regulation by the Supreme Court, this Comment will examine current rate regulation practices and their implications. First, some problems inherent in private ownership of utilities will be made explicit. Second, the validity of the traditional justifications for private ownership will be questioned in light of contemporary methods of utility construction financ- ing. This Comment will suggest that utility stockholders are not earning their profits, but rather, are earning returns on ratepayer moneys, not shareholder investments. In particular, construction work in progress, allowance for funds used during construction, and various financing methods will be analyzed. Legislative, judicial, and administrative responses to public concern about these financing mechanisms will be surveyed. This Comment will conclude that, given the United States Supreme Court's restriction on regulation and the integrality of profit motivation to private ownership, state regulation of privately owned utilities inadequately protects the public's interests. In addition, it will propose that stockholders, who at one time provided the capital necessary for growth, are currently dysfunctional within the utility industry. This Comment concludes that some form of public ownership is the only viable solution.
    [Show full text]
  • Used and Useful: Autopsy of a Ratemaking Policy
    "USED AND USEFUL": AUTOPSY OF A RATEMAKING POLICY James J. Hoecker* The "used and useful" principle emerged from the primordial ooze of the public regulation of private enterprise and, in the epoch of "fair value" ratemaking, entered common regulatory parlance. It has become "a bedrock principle of utility regulation."' Compared to the particularities of modem ratemaking, such as marginal cost pricing, discounted cash flow analyses, cost classification and allocation techniques, and econometric modeling, it has a certain immutable friendliness and clarity. It seems beyond cavil that "[t]he rate base on which a return may be earned is the amount of property used and useful, at the time of the rate inquiry, in rendering a designated utility service. If the original cost or prudent investment concept is applied, this figure nor- mally may be taken from the utility's books."' Why then should anyone intimate, as does this article, that "used and useful" is moribund? Or, for that matter, that it even requires scholarly expo- sition? The recent wrangling within the U.S. Court of Appeals for the D.C. Circuit over application of used and useful to a cancelled nuclear plant sug- gests that the concept is alive, if not well. That court struggled mightily with the principle in three successive Jersey Central Power & Light Co. v. FERC decisions3 which highlight how troublesome its various meanings and applica- tions have become during the era of end result ratemaking. In the process, the court examined used and useful for one of the few times in the ninety-year history of the concept.
    [Show full text]
  • Alternative Rate Mechanisms and Their Compatibility with State Utility Commission Objectives
    Alternative Rate Mechanisms and Their Compatibility with State Utility Commission Objectives Ken Costello, Principal Researcher National Regulatory Research Institute Report No. 14-03 April 2014 © 2014 National Regulatory Research Institute 8611 Second Avenue, Suite 2C Silver Spring, MD 20910 Tel: 301-588-5385 www.nrri.org National Regulatory Research Institute Board of Directors Chair: Hon. Betty Ann Kane, Chairman, District of Columbia Public Service Commission Vice Chair: Hon. Greg R. White, Commissioner, Michigan Public Service Commission Treasurer: Hon. Travis Kavulla, Commissioner, Montana Public Service Commission Secretary: Rajnish Barua, Ph.D., Executive Director, NRRI Hon. Susan K. Ackerman, Chair, Oregon Public Utility Commission Hon. David W. Danner, Chairman, Washington Utilities and Transportation Commission Hon. Elizabeth B. Fleming, Commissioner, South Carolina Public Service Commission Hon. James W. Gardner, Vice Chairman, Kentucky Public Service Commission Charles D. Gray, Esq., Executive Director, NARUC Hon. Robert S. Kenney, Chairman, Missouri Public Service Commission Hon. David P. Littell, Commissioner, Maine Public Utilities Commission Hon. T.W. Patch, Chairman, Regulatory Commission of Alaska Hon. Paul Roberti, Commissioner, Rhode Island Public Utilities Commission About the Author Mr. Ken Costello is Principal Researcher, Energy and Environment, at the National Regulatory Research Institute. Mr. Costello previously worked for the Illinois Commerce Commission, the Argonne National Laboratory, Commonwealth Edison Company, and as an independent consultant. Mr. Costello has conducted extensive research and written widely on topics related to the energy industries and public utility regulation. His research has appeared in numerous books, technical reports and monographs, and scholarly and trade publications. Mr. Costello has also provided training and consulting services to several foreign countries.
    [Show full text]
  • The Case for the Use of an Appropriate Capital Structure in Utili
    William Mitchell Law Review Volume 8 | Issue 2 Article 8 1982 The aC se for the Use of an Appropriate Capital Structure in Utility Ratemaking: The General Rule Versus Minnesota Bruce M. Louiselle Jean E. Heilman Follow this and additional works at: http://open.mitchellhamline.edu/wmlr Recommended Citation Louiselle, Bruce M. and Heilman, Jean E. (1982) "The asC e for the Use of an Appropriate Capital Structure in Utility Ratemaking: The General Rule Versus Minnesota," William Mitchell Law Review: Vol. 8: Iss. 2, Article 8. Available at: http://open.mitchellhamline.edu/wmlr/vol8/iss2/8 This Article is brought to you for free and open access by the Law Reviews and Journals at Mitchell Hamline Open Access. It has been accepted for inclusion in William Mitchell Law Review by an authorized administrator of Mitchell Hamline Open Access. For more information, please contact [email protected]. © Mitchell Hamline School of Law Louiselle and Heilman: The Case for the Use of an Appropriate Capital Structure in Utili THE CASE FOR THE USE OF AN APPROPRIATE CAPITAL STRUCTURE IN UTILITY RATEMAKING: THE GENERAL RULE VERSUS MINNESOTA BRUCE M. LouISELLEt & JEAN E. HEILMANf I. INTRODUCTION ...................................... 423 II. STATUTORY OBLIGATIONS OF THE COMMISSION ..... 425 III. PRECEDENTS FOR THE USE OF HYPOTHETICAL CAPITAL STRUCTURES ............................... 426 IV. BURDEN OF PROOF OF AN APPROPRIATE CAPITAL STRUCTURE ....................... .................. 434 V. THE MINNESOTA EXPERIENCE WITH CAPITAL STRUCTURES ......................................... 436 VI. THE TEST OF REASONABLENESS OF A CAPITAL STRUCTURE .......................................... 440 VII. CONCLUSION ......................................... 447 I. INTRODUCTION The Review of Minesota Public Utilities Commission Decisions Regard- ing CapitalStructureMatters,I by James W. Brehl and James A.
    [Show full text]
  • White Paper on Ratemaking and Utility Business Models
    STATE OF NEW YORK DEPARTMENT OF PUBLIC SERVICE CASE 14-M-0101 - Proceeding on Motion of the Commission in Regard to Reforming the Energy Vision. STAFF WHITE PAPER ON RATEMAKING AND UTILITY BUSINESS MODELS JULY 28, 2015 CASE 14-M-0101 TABLE OF CONTENTS Page No. I. INTRODUCTION AND SUMMARY................................. 1 A. Introduction......................................... 1 B. Purposes, Scope, and Process of this White Paper..... 4 C. Summary of Proposals................................. 7 1. Principles and Framework........................ 7 2. Utility Business Model Reforms.................. 9 3. Rate Design and DER Compensation............... 11 D. Legal Authority..................................... 13 II. LIMITATIONS OF CONVENTIONAL COST-OF-SERVICE RATEMAKING.. 15 A. The Foundation of Traditional Regulation, Efficient Investment, and Innovation in New York.............. 15 1. Overview of Cost-of-Service Ratemaking......... 16 2. Historical Concerns and Improvements to the Cost-of-Service Approach....................... 18 B. The Limits of Conventional Cost of Service Ratemaking in the Context of REV.................... 21 1. Deterrents to DER and Market Participation..... 21 2. Discontinuity Between Cost-of-Service Ratemaking and Multi-Sided Markets............. 23 III. ALIGNING CUSTOMER VALUE WITH EARNINGS OPPORTUNITIES..... 27 A. Summary............................................. 27 B. Market-Based Earnings in a Fully Developed Market... 29 1. Platform Service Revenues, Customer Enhancements, and Synergy Opportunities........
    [Show full text]