Implications of a Changing Regulatory Construct on the Rate Setting Process.

Chuck Harder, Senior Director Regulatory Policy & External Relations CenterPoint Energy

Chuck Harder, Senior Director
Regulatory Policy & External Relations
CenterPoint Energy

Sponsored and written by Chuck Harder, Senior Director, Regulatory Policy & External Relations – CenterPoint Energy

For many years, the regulation of natural gas utilities mostly involved relatively infrequent rate cases, coupled with periodic gas cost reviews and audits of the utility’s compliance with service standards. The interaction between the utility and its regulators was very much “backward looking.” Today, that interaction is becoming more frequent and collaborative. Regulators are still interested in the setting of rates but most are more interested in looking for opportunities to improve customer service, pipeline safety and reliability. Also, they

work with natural gas utilities and interested parties to address issues that arise on a regional or statewide basis.

The setting of utility rates has become an increasingly smaller component of the utility-regulator relationship. In many instances, it is becoming more formulaic with key parameters established by commission rule or order.  Innovative rate mechanisms are being implemented to supplement, but not replace, the need for frequent and costly rate cases. These mechanisms are intended to align the Company’s private interest with the public interest – to achieve particular policy goals or address current issues. For my company, CenterPoint Energy, these changes have led to innovative infrastructure cost recovery mechanisms, customer affordability and energy efficiency programs, special rates for service to NGV refueling stations, greater focus on the natural gas procurement planning process, and rate stabilization plans that improve the timeliness of rates and improve the transparency and predictability of the rate-setting process.

In most of our jurisdictions, rate processes are moving away from costly, lawyer-driven procedures and toward the greater involvement of accountants, applying modern auditing procedures that efficiently analyze and verify utility costs and ensure that customers pay a just and reasonable, cost-based rate. Rate processes look more like an external audit of the company’s financial statements and less like complex commercial litigation. These accounting-based approaches promote transparency and predictability in the ratemaking process, they enhance regulatory oversight, and they significantly reduce the cost of regulation that is ultimately borne by utility customers.

In Oklahoma, for example, CenterPoint Energy has a rate stabilization plan that is all-inclusive of its cost of service, where many components of rate-setting have been fixed in a commission-approved tariff, and the determination of rates is driven primarily by auditable, historical financial results. The certainty of an annual rate filing allows the Company and its regulators to communicate regularly throughout the year, to discuss trends and changes in the business that will impact financial results. As a consequence, there are few surprises when the Company makes its annual filing and more opportunity to discuss issues as they arise. These communications also allow the regulatory staff to spend more time planning their review and determine areas of focus for a particular year’s rate filing.  In Oklahoma, as in other states where similar mechanisms have been employed, the cost of the rate setting process has been reduced from millions to tens of thousands of dollars.

Controversy and complexity drive up the cost of regulation. Moving to policy-driven, innovative rate mechanisms has the potential to greatly improve the efficiency of the rate setting process and facilitate the ability of regulators to be more “forward looking.”