Why Utility Rate Design is So Hot Right Now

​Small businesses are closing up shop, unemployment rates are at an all time high and I’m buying tickets to virtual concerts in hopes of keeping my favorite music venues afloat. It’s no secret that we’re amid an economic recession, but which businesses are really struggling and what does it mean to be guaranteed a profit from the pockets of those that may not be able to keep a roof over their heads? Luckily, we had the perfect intern for that research question.

​As you may know, we over here at the Alliance for Affordable Energy, are weirdly interested in utility rate design. Here’s the deal, our Investor Owned Utilities (IOUs) are guaranteed, not only to cover their costs through their revenue requirement, but also make a profit. If they don’t, they can collect more through rates in the subsequent years. So let’s say, hypothetically, a pandemic hits and shuts down businesses. Office buildings are no longer using as much electricity because no one is going to them. Sports arenas, City Hall, and all of the bars along Bourbon Street with the air conditioning blasting and the doors flung open, will see lower electricity bills. But, it doesn’t stop at the Commercial level. Large Industrial electric customers, like oil refineries, are also not operating at the same capacity and their electric usage drops. Yet, don’t forget, through various mechanisms, the IOUs are all but guaranteed that revenue. So concerns mount from utilities and their regulators over significant rate increases next year, and our utilities fan those flames with concerns over stranded costs associated with residential customers that will default on their bills. Some of them even get to create “regulatory assets” to formalize future recovery. 

Now, I didn’t just use the word “hypothetically” in the previous paragraph to be ironic. Sure, the above is all true- a pandemic hit, electric sales to commercial and industrial customers plummeted, our utilities complained to regulators that if they weren’t allowed to force payment from their residential customers through threatening disconnection for non-payment the utilities were going to have to lay-off staff, deepening the recession, and ultimately they may have to close up shop leaving everyone without wi-fi for the remainder of the pandemic.  That’s the hypothetical part. According to Energy Information Administration (EIA) data and utility financial reports, Louisiana’s investor owned utilities are doing fine financially. On Entergy’s Q2 Shareholder call they proudly exclaimed that residential customers are “really showing up for us” and exclaiming just how much their profits exceeded their expectations. Energy sales among the residential customers are up, and the majority of people are showing a good faith effort to pay their bills. 

This doesn’t just serve to reopen the conversation regarding reinstating the utility disconnect prohibitions, which may very well need to happen as COVID continues to wreak havoc on our service industry neighbors, this is also something that needs to be paid very close attention to as our utilities file their next  rate cases and rate plans. If there’s anything we learned during the pandemic, besides how to make our own bread, it’s how utilities can remain extremely profitable while asking  regulators for more rate increases. Whether that’s profit from late fees, double counting lost contributions to fixed costs associated with energy efficiency and demand response programs or touting only their losses while still exceeding their revenue requirement. And while we’re not exactly pointing fingers here, we are recognizing the importance of well informed rate design. With an under-resourced non-profit serving as the only consumer advocate in the state, and overcommitted regulators with very different technical expertise, the cards are very often stacked against us.  

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