Policy Window Open for Alternative Ratemaking in Missouri
Image courtesy of Electric Light & Power
In order to ensure that Missourians receive safe and reliable electricity in the coming decades it will be necessary to develop a mechanism that will promote significant capital investments into grid modernization and infrastructure improvements, without imposing significant financial risk on utility companies and their consumers. Missouri’s electric grid will require significant upgrades due to aging infrastructure, increasing energy demands, and more stringent environmental regulations1. Utility companies in Missouri pay for investments in infrastructure improvements and technology modernization through rate increases. Regulated utility companies must apply to the Public Service Commission (PSC) for rate increases, resulting in a hearing – a process which can last up to 11 months. The PSC determines the amount of the rate increase, should it be approved, as well as the allowed return on equity (ROE), and the rate structure2. The time between the application for the rate increase and the realization of the increased revenue is known as the ‘regulatory lag’, which can make it difficult for utilities to consistently recoups expenses in a timely manner.
Ameren Corporation, the parent company of Missouri’s largest electric provider (Ameren Missouri) has argued that lag time reduces the incentives for significant investment in infrastructure and grid modernization in Missouri, since investment in the state of Illinois and in federal transmission projects, offer more attractive investment climates through faster reimbursement of expenses and, in the case of federal projects, a higher potential ROE3. Ratemaking under both the Federal Energy Regulatory Commission (FERC), which regulates interstate transmission lines, and the Illinois Commerce Commission, adjust rates annually based on expected expenditures for the coming year, with a rate correction at the end of the year based on actual expenditures (this process is known as formula ratemaking or performance-based ratemaking, due to other company performance metrics used to determine the rate/ROE). This process allows for costs to be recouped as they are incurred, rather than years after the initial investment, as occurs under the cost of service ratemaking model used by Missouri’s PSC. Under the current regulatory framework in Missouri, utilities apply for a rate increase with the understanding that they will typically receive a fraction of the requested amount. Due to the unpredictability of the rate-setting process in Missouri, utilities may be reluctant to invest in innovative technologies, or large infrastructure projects, that may be viewed as risky or imprudent by the PSC.
Through lobbying efforts in recent years, Ameren (among other public utilities) has pushed for formula ratemaking legislation in Missouri that would allow for a faster and more predictable ROE, such as occurs in Illinois following the passage of similar legislation in 20114. During the 2015 legislative session, Missouri Senate Bill 1028 and House Bill 2816 (the 21st Century Grid Modernization and Security Act) were strongly supported by Ameren. These laws would have shifted from cost of service ratemaking, which requires utilities to apply for rate increases as needed, to formula/performance-based ratemaking, which provides a mechanism for annual rate increases and rate reviews with predetermined caps on rates and ROE. Ameren has argued that Illinois’ passage of similar legislation has allowed for increased infrastructure improvement spending in Illinois as compared to Missouri5. While the passage of a formula/performance-based rate system would allow for more predictable rate increases for both the utility companies and customers6, the involvement of the PSC in setting rates and ROE would be diminished. Consumer advocates have raised concerns that formula ratemaking would result in guaranteed rate increases with less government oversight7. While the formula/performance-based ratemaking legislation ultimately failed to pass in Missouri8, the need for large-scale infrastructure improvements remains. As coal-fired power plants are phased out due to environmental regulations, the population continues to expand geographically through suburbanization, the economy increasingly relies on advanced technology, aging infrastructure becomes less reliable, energy sources diversify, and demand for infrastructure resiliency continues to increase – grid modernization will become increasingly necessary.
Both the Missouri Senate, by the creation of an Interim Committee on Utility Regulation and Infrastructure Investment9, and the PSC, by the opening of a case to examine how best to incentivize capital investments associated with infrastructure improvements, are focused on generating solutions to the infrastructure investment issue10. With the incentivization of infrastructure improvements and grid modernization issues on the state government’s agenda, it is vital that all stakeholders take part in the discussion surrounding alternative rate-setting frameworks and that all rate-setting alternatives and possible repercussions are thoroughly examined through a robust study of ratemaking alternatives11. Possible alternatives to the current system include the use of performance-based rates, time-differentiated rates, decoupling utility fixed cost recovery from the amount of electricity sold, and the use of forward test years to set rates based on the expected revenues and expenses for the period of time in which the rates will be in effect12. As is the case in the United Kingdom13, it will most likely take a mix of different regulatory strategies to achieve the sweet spot of adequate incentives for utilities to innovate and invest in modernization of the electric grid, and ensuring all consumer classes receive sufficient value for their financial input – including reliable service, fair and just rates, opportunities for increased energy efficiency, and access to renewable forms of energy. Now is the time for the members of the Missouri legislature, various players in the regulatory process, and consumers of all rate classes, to determine if a one hundred year old regulatory framework is the best way to ensure safe, reliable, and sustainable power generation for years to come.
- The American Society of Civil Engineers’ (ASCE) 2013 Report Card on Missouri’s infrastructure details the state of Missouri’s current infrastructure and the need for investment in the electric grid to ensure the state keeps pace with future demands. The ASCE gave the state a D+ rating for energy infrastructure in general. ↩
- The Missouri Public Service Commission Information Guide details the responsibilities of the commission as well as the process of ratemaking for investor-owned utilities in the state. In terms of Ameren Missouri, the PSC currently allows the utility a ROE of 9.53. The rate structure corresponds to the different electric rates approved for each customer class – including commercial, industrial, and residential. ↩
- The St. Louis Post-Dispatch article, “Ameren says Illinois, transmission better place to invest than Missouri” (9/8/15), outlines the greater certainly utilities experience during rate reviews in Illinois as compared to Missouri and the higher possible ROE available through federal transmission projects. ↩
- Under Illinois Public Act 097-0616, formula/performance-based ratemaking sets rates based not just on costs, but also based on performance metrics such as customer service and reliability. The ROE is set by a formula based on predicted costs and allows for deviation of 0.5%, otherwise the utility must either credit consumers or add consumer charges to correct the amount. The Connecticut General Assembly’s Office of Legislative Research produced a thorough summary report on the Illinois legislation. ↩
- The St. Louis Post-Dispatch article “Ameren says Illinois, transmission better places to invest than Missouri” (9/8/15) also details how Ameren’s predicted infrastructure investments will include Illinois electric and federal transmission, with no additional investment allocated for the state of Missouri. ↩
- Predictable rate increases may provide a benefit to the low-income population, whose utility bills consume a larger percentage of their income than those individuals with greater resources. Kansas City nonprofit Bridging the Gap supported the Missouri legislation due to the desire to avoid large unpredictable rate hikes. ↩
- These concerns were rebutted by supporters of the bill who outlined the benefits the state of Illinois has enjoyed, including increased infrastructure development, reliability, and stable electric rates. ↩
- Despite support in the legislature, the bill ran into a roadblock in the senate due to a republican-led filibuster. Some senators were concerned about higher consumer rates and a lack of utility oversight. ↩
- Both the Missouri Times and Missourinet published articles outlining the goals of the interim committee members, which will report out their findings by the end of the year. ↩
- In response to the proposed legislation, the commission voted to open a case to examine possible changes to utility regulation in order to spur investment into infrastructure and modernization (public comments can be found here). The chairman of the PSC also filed his own proposal for making regulatory changes. ↩
- With the Missouri legislature and the public service commission studying ratemaking alternatives separately, there is a risk of a lack of coordination leading to inconsistent recommendations. The commissioning of robust third-party studies regarding rate setting could aid in determining whether a change should be made and what alternative would be the best fit for the state of Missouri. Some state legislatures have enacted legislation requiring public utility commissions to study alternative ratemaking methods (Minnesota and Texas). ↩
- These ratemaking alternatives and others are examined in the Missouri Comprehensive State Energy Plan, published October 2015. ↩
- The United Kingdom utilizes the RIIO regulatory model, which combines decoupling and performance-based ratemaking. This regulatory framework has allowed for utility investment in innovative technologies. ↩