If the Missouri General Assembly determines that it should be the policy of the state to encourage utility investment in grid modernization, then the General Assembly should consider four principles, including that Missouri’s current regulatory structure has functioned very effectively for more than a century, and there is no need for a massive radical overhaul, the state Public Service Commission (PSC) said in a Dec. 6 report.
The PSC said that the other principles that the General Assembly should consider in drafting any legislative proposal are:
- Any new mechanism must not impede the PSC’s authority or ability to meet its statutory obligations to set just and reasonable rates while balancing the interests of utilities and their customers
- Any modification of the currently regulatory structure should be narrowly tailored
- As with the use of other modified rate mechanisms, a utility’s use of any new mechanism must be contingent upon PSC review and authorization
Of the last principle listed, for instance, the PSC said that if the General Assembly determines that mechanisms such as performance metrics or preliminary determinations of decisional prudence are necessary to incentivize utilities’ investment in grid modernization infrastructure, those mechanisms should be implemented by the PSC as part of a case. In such cases, requests are thoroughly analyzed and refined by all interested parties, and disagreements that cannot be resolved between competing interests are brought to the PSC for a final resolution, the PSC said.
It would be necessary to take care that a utility is not rewarded for performance that is of the type and quality it has a duty to provide with or without incentives, the PSC said. Furthermore, that type of collaboration and review would act as a safeguard against performance metric designs that begin to operate as incentives for unnecessary or inefficient investment, the PSC said, adding that through this process, the PSC can fully evaluate each utility’s circumstances at the time a request is made while also considering the evolving and varied interests of the public at the same time.
As noted in the report, for more than a decade, Missouri investor-owned utilities have proposed legislation seeking to significantly alter the way that the PSC sets utility rates. The PSC said that while the breadth of the legislation and specific mechanisms proposed have varied significantly, each legislative effort has been primarily focused on the contention that Missouri’s regulatory framework creates regulatory lag effectively precluding utilities from earning their authorized return and disincentivizing needed capital investment.
The PSC said that residential and commercial consumer groups have successfully opposed each past legislative attempt, with their arguments following two general themes:
- They have contended that there was insufficient evidence supporting the need to dramatically change the current regulatory structure
- They have argued that each of those past legislative proposals was too far reaching, shifted too much risk to the ratepayers, would result in excessive rate increases, and precluded meaningful commission review
“Last session witnessed the latest chapter in this saga with the filing, debate and ultimate demise of Senate Bill 1028,” the PSC said.
According to the state General Assembly’s website, that measure proposed, for instance, that if an electrical corporation elects to participate in performance-based ratemaking, the electrical corporation’s return on equity (ROE) is to be set at 9.45%, adjusted to reflect U.S. Treasury Bond yields; the electrical corporation’s ROE may then be increased or decreased up to 0.20% in the electrical corporation’s annual reconciliation based upon performance metrics set forth in the measure.
The PSC noted in its report that it issued in June an order that opened a working docket to gather information and facilitate a productive dialogue between all interested stakeholders and their technical experts.
In October, PSC technical staff filed a report offering its analysis as to whether there is a need for, and if so, the scope of, any legislative reform. The PSC added that staff acknowledged that utilities are not currently allowed to earn a return on or recover amounts invested in infrastructure until the conclusion of the rate case following the date such plant is put in service, which can create lag between when a utility makes an investment and when it begins to recover that investment.
Staff concluded that while regulatory lag and utility earnings have not been a serious problem to date, minor modifications to the current regulatory structure may be necessary in the future to encourage significant additional investment in grid modernization, the PSC said, adding that such modifications may be particularly necessary if customer usage continues to remain flat or decline.
The PSC said that it recognizes that at least some utilities would like to automate their electric grids using modern technologies to adapt to changing customer needs. For instance, Ameren’s (NYSE:AEE) Ameren Missouri has identified its desire to invest in grid modernization by upgrading its distribution network to allow for automating the identification of repair needs and power restoration. Ameren Missouri also seeks to replace its out-of-date meters with smart meters that provide customers modern service options that would facilitate much greater penetration of energy efficiency programs as well as peak load management programs, the PSC added.
According to Ameren Missouri, use of energy efficiency and load management programs will be critical as it retires more baseload generating units and works to minimize the need to build additional large energy centers, but the company and others contend that regulatory lag disincentivizes such investment, the PSC said.
While the potential benefits of such modernization would always have to be weighed against its cost, staff identified these potential benefits: the ability to remotely disconnect/reconnect customers; the potential to resolve service issues more quickly; and the potential to reduce the duration of power outages, all without the need to send a service technician.
The PSC also said that it generally agrees with and supports the analysis, conclusions and recommendations presented in the report.