Welcome to the website of the Pacific Economics Group ("PEG") companies. The PEG consortium consists of two companies (PEG LLC and PEG Research LLC) that are active in the fields of litigation and utility regulation. Principals of these companies are based in California and Wisconsin and include several nationally recognized economists. Performance-based regulation (“PBR”), revenue decoupling, and other kinds of alternative regulation are company specialties. Please explore the site and learn more about the PEG companies and the services we provide.
Blaine Gilles, a Senior Advisor to PEG Research, has been providing economic research and interim senior management services to Conversion Energy Systems, Inc. (“CES”), a Chicago-based startup firm. CES is a leader in the development of advanced thermal conversion technologies for use in disposal of medical, contraband, military and municipal wastes. CES plans to act as a distributed energy resource provider, utilizing a proprietary thermal gasification technology to process certain types of solid waste, extracting recyclable materials and energy. CES recently executed a strategic partnership agreement with Science Application International Corporation (“SAIC”), for the sale and integration of its technology in advanced solutions for the U.S. federal government.
Mark Newton Lowry has been asked to coauthor the third technical report in the Lawrence Berkeley National Laboratory’s (“LBNL”) Future Electric Utility Regulation series. The white paper will be on Performance-Based Regulation (“PBR”) in a high distributed energy resource (“DER”) future. The report is expected to discuss the use of multiyear rate plans and performance-based metrics focused on DER. Dr. Lowry is joining an expert advisory group of state regulators, utilities, stakeholders and national experts who are working on the Future Electric Utility Regulation project. In conjunction with this white paper, at least one public webinar will be held to present the results of the final published report to state regulators, policymakers, utilities and other interested parties. The report is expected to be released in late 2015.
LBNL is a member of the national laboratory system supported by the U.S. Department of Energy and managed by the University of California. Its staff includes 13 Nobel prize winners. LBNL’s research is focused in a wide array of scientific disciplines including policy analysis and technical assistance activities at the state, regional and national levels in electricity markets, electricity sector policies, and coordination of national, regional and state electricity policy.
Larry Kaufmann, a Senior Advisor to PEG Research, recently advised the staff of the Ontario Energy Board ("OEB") on a custom incentive regulation (“IR”) plan proposed by Toronto Hydro. The company proposed a price cap index of inflation-X form that is similar to those used today by most Ontario distributors, as well as a “C factor” intended to provide supplemental compensation for high expected capital expenditures. The Board requires statistical benchmarking evidence for custom IR applications. Dr. Kaufmann was asked to analyze the benchmarking work underpinning the Custom IR plan and the X and C factors that the company proposed. PEG’s analysis found that the benchmarking work supporting Toronto Hydro’s Custom IR plan was conceptually and empirically flawed. The combination of data errors and an unwarranted explanatory variable used in the benchmarking analysis over-stated Toronto Hydro’s estimated productive efficiency by more than 40%. PEG also found that Toronto Hydro registered a bad reliability performance and was projected to become an inferior cost performer over the term of its Custom IR plan. Given its substandard performance on both cost and reliability, PEG recommended that the X factor contain a “stretch” factor of between 0.6% and 1.0%. PEG also found Toronto Hydro’s C factor was not designed appropriately and would over-recover the Company’s projected capital expenditures under Custom IR. PEG accordingly recommended an adjustment in the C-factor calculation that would reduce price growth under the plan by an estimated 1.5% in each year. All evidence and arguments in the case have been filed, and the Board is expected to issue its decision on Toronto Hydro’s Custom IR proposal sometime this summer.
Larry Kaufmann, a Senior Advisor to PEG Research, recently moderated a session at the annual Oil Conference of the Canadian Energy Research Institute ("CERI") in Calgary, ALTA. The session addressed the growing transportation of oil by rail rather than pipeline, and the safety and regulatory concerns associated with this development. Dr. Kaufmann recently became a Research Fellow at CERI.
Mark Newton Lowry spoke at the Electric Utility Rate Cases conference in Las Vegas on “How Alternative Approaches to Regulation such as Revenue Decoupling and Performance-Based Regulation (Including Britain’s “RIIO” Approach to PBR) Can Help Regulate the 'Utility of the Future.'" The conference, organized by Law Seminars International, was held March 5-6 in Las Vegas. Dr. Lowry discussed the potential for multiyear rate plans with revenue decoupling and a mix of cost trackers and award/penalty mechanisms to spur innovation and balance incentives for cost containment and other goals such as clean energy.
Mark Newton Lowry has been retained as an economic advisor to the Powering Tomorrow initiative. This initiative, led by several former regulatory commissioners, is designing new regulations and laws for electric utilities which are more appropriate for an era of rapid technical change and increased penetration by distributed energy resources. The initiative has been funded by a group of prominent stakeholders. Dr. Lowry developed a new regulatory framework for the initiative and presented it at a recent meeting with stakeholders in Tempe, Arizona.
Mark Newton Lowry has been chosen by the Edison Electric Institute to lead a multiclient study on Performance-Based Regulation for Emerging Utility Challenges. The project will consider the potential roles of award penalty mechanisms, multiyear rate plans, and marketing flexibility in providing US investor-owned electric utilities with the timely rate relief, performance incentives, and operating flexibility they need to meet emerging challenges. Deliverables for the project include national webinars and white papers.
PEG Research wishes to congratulate Jean Tirole of the Toulouse School of Economics for winning the Nobel Prize in Economics. Dr. Tirole did pathbreaking theoretical research on incentive regulation of utilities through such classic works as A Theory of Incentives and Procurement in Regulation (Cambridge, MIT Press, 1998). Our hope is that the international recognition accorded to Dr. Tirole will prompt American regulators to take a closer look at the PBR option. A rare example of world-class PBR in North America can be found here.
Mark Newton Lowry, President of PEG Research, gave a presentation on Performance Based Regulation ("PBR") for the Utility of the Future to Minnesota's e21 Initiative. Convened by the Great Plains Institute and other parties, the e21 Initiative is working with Minnesota utilities, consumer advocates, and other stakeholders to map out a transition to a new regulatory model for Minnesota. Goals of the e21 initiative include:
- transition to a sustainable, carbon-neutral energy system;
- economically-viable utility business model(s) that support energy efficiency, renewable energy, distributed generation, and advanced energy technologies;
- reasonable rate of return for utilities;
- fair allocation of costs between customer classes; and
- reduced regulatory administration costs and resources.
PBR can play a key role in the attainment of these goals.
Dr. Lowry also spoke at the 2014 symposium of the Financial Research Institute at the University of Missouri in Columbia. His remarks there chiefly addressed the potential of distributed solar power generation to trigger disruptive change for vertically integrated electric utilities. He prepared a brief paper for conference participants that showed how changing business conditions are prompting VIEUs today to file for frequent small rate increases. These filings are triggering increased experimentation with multiyear rate plans.
Dr. Lowry has been active in the performance-based ratemaking field since the early 1990s and still produces results for clients in the regulatory arena. The most recent victory was in September. Pursuant to directives by the British Columbia Utilities Commission, Fortis had filed performance based ratemaking ("PBR") proposals for Fortis BC Energy, the largest BC gas utility, and Fortis BC, an electric utility. The PBR plans featured revenue decoupling and revenue cap indexes of general form inflation - X + customer growth. The BCUC chose revenue cap index formulas that were largely in line with Dr. Lowry's input price and productivity research and testimony. Both PBR plans have a term of six years.
The U.S. government and the Navajo Nation reached a settlement in a lawsuit alleging more than 50 years of U.S. government mismanagement of royalties from extracted resources on the Navajo reservation. The government will pay $554 million, the largest amount that it has paid to a single American Indian tribe in a lawsuit. The Navajo Nation was advised by PEG members and PEG Research Senior Advisors Charlie Cicchetti and Colin Long.
PEG Research was recently retained by the Ontario Energy Board to prepare econometric benchmarking models for power distributor cost and reliability. Econometric cost models are a form of "top down" benchmarking that is also featured in the "RIIO" approach to performance-based regulation (“PBR”) that is popular in Britain. The new benchmarking models for the OEB will be estimated with data on the operations of US power distributors and used to appraise the performance of Toronto Hydro-Electric System. Most Ontario power distributors operate under incentive ratemaking plans featuring price cap indexes with Inflation - X escalation formulas. The X factor for each company includes a "stretch factor" determined using an econometric cost benchmarking model previously developed by PEG Research. Toronto Hydro has argued that this model, which is estimated using only Ontario data, doesn't take proper account of its special operating conditions.
PEG Research is the leading expert witness on the productivity trends of energy utilities in the United States and Canada. These trends play a key role in many PBR plans. Here is a summary of our recent results presented in testimony and other recent publicly available reports.
|Industry||Productivity Growth Trend||Sample Period|
| ||U.S. Power Distributors O&M||1.51%||2002-2011|
|U.S. Power Distributors Multifactor||0.93%||2002-2011|
|Broad Northeast U.S. Power Distributors O&M||1.48%||2002-2011|
|Broad Northeast U.S. Power Distributors Multifactor||1.06%||2002-2011|
|Upper Northeast U.S. Power Distributors||0.56%||2002-2011|
|Ontario Power Distributors||-0.33%||2002-2012|
|New Zealand Power Distributors||1.21%||1999-2008|
|U.S. Gas Distributors||0.85%||1999-2010|
|Enbridge Gas Distribution||1.07%||2005-2010|
PEG Research personnel headlined a Chicago conference on "Alternative Regulation for Emerging Utility Challenges". Mark Newton Lowry, company President, chaired the conference and provided in-depth discussions of multi-year rate plans, revenue decoupling, capital cost trackers, and PBR in western Canada. Senior Advisor Larry Kaufmann discussed service quality PBR and recent developments in Ontario PBR. Senior Advisor Blaine Gilles discussed how PBR helped telecom utilities cope with emerging competitive challenges.
Dr. Lawrence Kaufmann, Senior Advisor to PEG Research, has been advising the Staff of the Ontario Energy Board on the review of Enbridge Gas Distribution's "Customized Incentive Regulation" application. In October 2013, Dr. Kaufmann prepared a report assessing the merits of the application, and recommended that it not be accepted in its current form. He also helped Board Staff prepare interrogatories in the proceeding and testified in February 2014 on his work. A Board Decision on the application is expected in the summer of 2014.
Mark Newton Lowry filed testimony on behalf of Commercial Energy Consumers of BC in the PBR proceeding of two British Columbia energy utilities. FortisBC (formerly West Kootenay Power) and FortisBC Energy (formerly Terasen Gas) had recently returned to cost of service regulation after years of operation under PBR. The BC Utilities Commission had stated a concern that they maintain a "productivity improvement culture". Both companies have proposed multi-year rate plans in which budgets for operation and maintenance expenses and routine capex would be escalated by inflation – X formulas. Large plant additions would be subject to certificates of public convenience and necessity and separate cost tracking. In his testimony, Dr. Lowry addressed appropriate designs for the O&M and capex escalator formulas and formulas for more conventional revenue cap indexes. He presented results of recent PEG Research studies of the multifactor productivity trends of US gas and electric power distributors.
The Ontario Energy Board ("OEB") issued its report on "Rate Setting and Benchmarking under the Renewed Regulatory Framework for Ontario's Electricity Distributors." This report sets out the Board's policies and approaches to incentive rate setting for electricity distributors and the benchmarking of electricity distributor total cost performance. The Report also includes the Board's determination on rate adjustment parameter values for multiyear rate plans in 2014.
Most Ontario distributors will continue to operate under price caps with Inflation – X formulas. In setting the X (aka productivity) factor, the Board relied on the estimates of industry multifactor productivity ("MFP") trends developed by Board Staff’s expert consultants, Dr. Lawrence Kaufmann and his team at PEG Research entitled “Empirical Research in Support of Incentive Rate-Setting: Final Report to the Ontario Energy Board.” The MFP of a large sample of Ontario power distributors was found to average a 0.33% decline annually. The Board also used the econometric model developed and recommended by Dr. Kaufmann to assign Ontario distributors to one of five efficiency cohorts, each of which is given a different stretch factor. PEG Research's econometric model, and distributors' stretch factor assignments, will be updated in each of the five years of the price cap incentive regulation plan. The inflation measure is a weighted average of an Ontario labor price index and the Gross Domestic Product Implicit Price Index for Final Domestic Demand.
Mark Newton Lowry filed supplemental testimony in September in support of a revised PBR proposal by Central Maine Power. The revision was prepared in response to a July decision by Maine’s Public Service Commission rejecting the general concept of a "hybrid" revenue adjustment mechanism ("RAM"). The hybrid RAM previously proposed by the Company required a multi-year forecast of its capital cost. CMP is now proposing a comprehensive revenue cap index based on research by Dr. Lowry on the input price and productivity trends of Northeast power distributors.
Mark Newton Lowry filed testimony in Massachusetts on behalf of Fitchburg Gas and Electric ("FG&E"), a Unitil utility. FG&E has for several years operated under a revenue decoupling plan that provides little revenue escalation between rate cases. FG&E has accordingly been compelled to increase the frequency of its rate cases. Dr. Lowry's testimony details two Altreg approaches that can provide revenue escalation and reduce the frequency of rate cases. One is a broad-based capital cost tracker similar to those that have been approved for several Ohio power distributors and Massachusetts Electric. The other is a PBR plan featuring a revenue cap index ("RCI"). The RCI was designed with the aid of research by PEG Research on the input price and productivity trends of Northeast power distributors. No PBR plan has been approved in Massachusetts since the implementation of decoupling several years ago.
Blaine Gilles, Senior Advisor to PEG Research, presented a paper entitled "New Regulatory Frameworks for Energy Distribution: Lessons from the Disruptive World of Telecommunications," at the Eastern Conference Advanced Workshop in Regulation and Competition sponsored by the Rutgers University Center for Research in Regulated Industries. The paper discusses how alternative regulation dealt with disruptive technologies in telecommunications and its implications for the energy distribution industry as it faces disruption from distributed energy technologies.
The Edison Electric Institute ("EEI") has released a new survey of trends in alternative regulation ("Altreg") in the North American energy utility industry. The report, entitled Alternative Regulation for Evolving Utility Challenges, was prepared by PEG Research under the direction of Eric Ackerman, EEI's Director of Alternative Regulation. Dr. Mark Newton Lowry, President of PEG Research, was the principal investigator on the survey. New developments in cost trackers, revenue decoupling, forward test years, multiyear rate plans, and formula rates are documented in the report. The survey covers important gas as well as electric precedents.
Interest in Altreg has increased in recent years as utilities struggle to cope with the financial attrition caused by slower growth in the volume of energy delivered per customer. Drivers of slower growth in average use have included sluggish economic growth, changing building codes and appliance efficiency standards, and the demand side management programs of utilities and state agencies. Load losses due to distributed energy resources are an emerging problem for some electric utilities. The survey found that all of the major approaches to Altreg have expanded in recent years. Of special note is the growing popularity of lost revenue adjustment mechanisms by electric utilities and the increasingly widespread use of multiyear rate plans ("MRPs") in Canada. Capital cost trackers have been popular with energy distributors engaged in accelerated system modernization. Several utilities have recently agreed to MRPs that combine a capital cost tracker with a rate freeze. To obtain a copy of the report from the EEI website click here.
Mark Newton Lowry, President of PEG Research, filed testimony in early May in support of a new Alternative Rate Plan for Central Maine Power. The new plan features a revenue decoupling mechanism that will help CMP contend with declining average use of power by its customers. Revenue decoupling is typically accompanied by a revenue adjustment mechanism ("RAM") that automatically escalates allowed revenue for inflation and other changes in business conditions. CMP is proposing a "hybrid" RAM design that features index-based escalation of the budget for O&M expenses and a forecast-based "stairstep" trajectory for the capital cost budget. Dr. Lowry's testimony included evidence on the O&M input price and productivity trends of Northeast US electric utilities. Hybrid RAMs have been used for decades by California utilities and are known for their flexibility in financing capital spending surges. Hybrid RAMs are currently used by Southern California Edison and the Hawaiian Electric companies.
Larry Kaufmann, a Senior Advisor to PEG Research, recently prepared rebuttal and surrebuttal testimony on behalf of the Wisconsin Public Service ("WPS"). Dr. Kaufmann testified on the value of reliability improvements to WPS customers which are expected to result from WPS' $222 million System Modernization and Reliability Project ("SMRP"). Dr. Kaufmann estimated that the value generated by the SMRP would recoup the program's costs in a maximum of 15 years.
On May 3, the Ontario Energy Board ("OEB") released a report from PEG Research titled "Empirical Research in Support of Incentive Rate Setting in Ontario". The report provides recommendations on three elements of the "fourth generation" index-based ratesetting mechanism that likely will apply to more than seventy power distributors in the most populous Canadian province: 1) an industry-specific inflation factor; 2) the productivity factor component of the X factor; and 3) the stretch factor component of the X factor. PEG Research used econometric and unit cost/peer group benchmarking methods to identify five "efficiency cohorts" of distributors within the Ontario electricity distribution industry. The productivity factor recommendation was based on TFP research using newly available Ontario data. Recommended stretch factors will differ among cohorts. Dr. Larry Kaufmann of PEG Research will answer questions on the PEG report and recommendations at a May 16th stakeholder meeting at the OEB. He will also participate in a May 27-28 stakeholder conference in which Board members will consider evidence from PEG and other stakeholders who may present alternate proposals.
The Washington Utilities and Transportation Commission on December 26 approved a multi-party settlement of a rate case for the gas and electric services of Avista Utilities (UE-120436 and UG-120437). The Company had requested substantial attrition adjustments to their 2013 revenue requirements for both services to compensate for the inability of Washington's traditional rate case process to properly account for Avista's current high capital spending and slow sales volume growth. Attrition allowances were common in the early 1980s and there has been renewed interest in them in states with historical test years. Avista filed Washington rate cases for 6 consecutive years and nonetheless experienced chronic underearning.
Mark Newton Lowry and David Hovde of PEG Research developed the methodology for calculating the electric attrition adjustment and Dr. Lowry testified in the proceeding. Avista prepared a companion attrition study for its Washington gas operations based on the PEG Research method. Commission Staff filed a study that also indicated the need for substantial attrition allowances using a methodology similar to that developed by PEG Research.
The approved settlement details a two-year rate plan in which electric rates will rise by $13.7 million (or 3% on average) in 2013 and by $14.0 million (or 3% on average) in 2014. Gas rates will rise by $ 5.3 million (or 3.7% on average) in 2013 and by $ 1.4 million (or 0.9% on average) in 2014. The Commission states in its order that "We find sufficient evidence in both Staff and the Company's attrition analyses to demonstrate that, based on the 2011 test year data, Avista will experience some level of attrition in 2013 ... at least half of the Settlement's 2013 rate increase must be associated with some kind of attrition."
The Commission also commented favorably on the idea of a multi-year rate plan, stating that "The Settlement provides rate stability ... and represents an innovative approach that will provide incentives for Avista to cut costs in order to earn a fair rate of return. Moreover, the lack of annual rate filings will provide the Company, Commission Staff, and all parties with a respite from the burdens and costs of litigation."
Mark Newton Lowry, President of PEG Research, has filed testimony before the Surface Transportation Board on behalf of the Western Coal Traffic League and a group of other coal shippers and trade associations that includes the Edison Electric Institute. The testimony concerns changes recently proposed by the Board concerning the Stand Alone Cost ("SAC") test that shippers use to file claims of rail freight overcharges. Shippers construct hypothetical standalone replacement railroads ("SARRs") to deliver their coal and compare their hypothetical charges to those of incumbent railroads. A key to the calculation of accurate charges is the ability of the SARR to boost system utilization with "cross-over traffic" that is not delivered to the shipper. Dr. Lowry's testimony stressed the key role that efforts to boost capacity utilization and realize scope and density economies plays in any efficient business. He challenged the Board's proposed cross-over traffic rules as unduly restrictive and likely to reduce the effectiveness of the SAC tests in identifying rail freight overcharges.
The Alberta Utilities Commission issued a landmark decision in its lengthy proceeding on regulatory reform in Alberta. The Commission, intent on eliminating frequent rate cases, established five-year rate or revenue cap plans for Alberta gas and electric power distributors. These caps are escalated annually for changing business conditions using formulas based, in the North American style, on input price and productivity research. In contrast to many performance-based regulation ("PBR") proceedings, where regulators approve settlements between interested parties, the Commission discouraged settlement talks and instead rendered decisions on numerous plan design issues. The escalation formulas for all distributors will feature a custom inflation measure, based on Statistics Canada indexes, and a 1.16% X factor. A window has been established for possible supplemental funding of certain capital spending projects. A commission spokesman noted to the Calgary Herald that "Over time, the PBR plan should make the regulatory system more efficient. We expect that under PBR, customers will experience lower rates than they would have if we stick with the current system." These new regulations will also provide for "measures, targets, and consequences" to ensure that providers fairly calculate their performance while maintaining an acceptable level of service quality.
PEG Research President Mark Newton Lowry, a long time champion of index-based PBR, represented the Consumers' Coalition of Alberta in this important proceeding. He provided testimony on the inflation and productivity trends of gas and electric utilities and on numerous additional issues in PBR plan design. Charles Cicchetti, a co-founding member of PEG, was a witness for EPCOR Distribution and Transmission.
The California Public Utilities Commission has approved the transfer of ownernership of Pac-West Telecomm to Unipoint Holdings, LLP. PEG Research Senior Advisor Blaine Gilles advised Pac-West in the proceeding. Dr. Gilles is an expert on regulatory strategy, telecommunications economics, and mergers and acquisitions activities.
PEG Research has been chosen as a "Vendor of Record" by the Ontario Energy Board. This status prequalifies the Company to continue its extensive work for the Board for several years. The Board has established itself as one of the most innovative and influential regulators in North America. Most gas and electric power distributors in Ontario currently operate under index-based multiyear rate or revenue cap plans. This streamlined approach to regulation, which encourages good operating performance and shares benefits with customers, is now being adopted in Alberta and Quebec. The X factors in the price cap formulas of Ontario power distributors are linked to statistical benchmarking studies. PEG Research has been prequalified to assist the Board in a wide variety of areas, including performance-based regulation, benchmarking, rate design, and DSM policy. PEG Research looks forward to helping the Board fashion economical and effective regulatory systems for the utilities in Ontario's growing economy.
Mark Newton Lowry filed testimony in the state of Washington in support of an attrition adjustment for the electric services of Avista. Avista offers vertically integrated electric service in eastern Washington and has been engaged in recent years in an aggressive capital spending program. Under Washington’s largely traditional approach to regulation the Company has filed frequent rate cases but nonetheless experienced chronic under earning. Dr. Lowry studied the trends in the Company’s costs and billing determinants and quantified the revenue deficiency that is likely in 2013, the first year that new rates take effect. Avista requests that the revenue deficiency be added to the revenue requirement. Attrition adjustments were a common form of alternative regulation in Washington and other states during the 1970s and 80s.
Dr. Lowry filed testimony in Alberta on behalf of the Consumers Coalition of Alberta. The Alberta Utilities Commission has launched a Rate Regulation Initiative that requires energy distributors in the province to step away from the current practice of biennial rate cases and instead adopt multi-year rate plans (aka performance-based ratemaking or PBR plans) that escalate rates using inflation – X formulas. To assist in setting the X factors, Dr. Lowry submitted evidence from a recent study of the multifactor productivity trend of US gas distributors. Over the 14 year 1996–2009 period he reports 1.32% average annual productivity growth for the full US sample. This was similar to the productivity growth of the U.S. economy.
Mark Newton Lowry filed testimonies for Pepco and Delmarva Power in Maryland and for Delmarva Power in Delaware supporting an alternative approach to the Companies' rate regulation. Pepco and Delmarva Power are both entering periods of high capital spending to improve the reliability of distribution service. Dr. Lowry explains in each filing why traditional ratemaking practices produce chronic under earning and frequent rate cases for energy distributors engaged in accelerated system modernization. He surveys salient alternative forms of regulation that can mitigate the problem and recommends that the Commission approve capex cost recovery mechanisms in the instant proceeding and the use of forward test years in subsequent rate cases.
Mark Newton Lowry filed testimony for Atlantic City Electric in support of a capex cost recovery mechanism for an extension of the Company’s Infrastructure Investment Program. The New Jersey-based power distributor is engaged in a program of high capital spending to help it improve system reliability. Dr. Lowry explains in his testimony why traditional ratemaking practices do not work well for contemporary energy distributors engaged in accelerated system modernization. Average use grows much more slowly than in the early post war period, while the rate base of electric utilities grows much more rapidly than in the 1990s and the early years of the present century, when there was a hiatus on new generation construction. Accelerated system modernization is thus likely to result in frequent rate cases and chronic under earning under traditional regulation. Dr. Lowry surveys salient alternative forms of regulation that can mitigate the problem.
PEG Research has filed a report for the Ontario Energy Board assessing the incentive regulation plans for Union Gas and Enbridge Gas Distribution. Both companies operate under incentive regulation plans that were approved in 2008 and include index-based attrition relief mechanisms and partial revenue decoupling. This project has been led by Senior Advisor Larry Kaufmann, and evaluated the impact of each Company's incentive regulation plan on its gas delivery rates, cost and productivity trends, financial indicators, and service quality performance. The analysis indicated that the incentive regulation plans encouraged both Enbridge and Union to control costs more effectively and generate productivity and efficiency improvements while sharing those benefits with ratepayers.
Mark Newton Lowry filed testimony in Oklahoma on the cost efficiency of Oklahoma Gas & Electric. The study addressed the company's generation maintenance expenses as well as its total non-fuel O&M expenses. In 2010 the company continued to be a top quartile O&M cost performer and was a second quartile generation maintenance cost performer.
PEG Research President Mark Newton Lowry filed testimony for Potomac Electric Power in the District of Columbia supporting an alternative approach to the Company's regulation. Pepco is entering a period of high capital spending as it scrambles to improve the reliability of its service in the District. Dr. Lowry explains in his testimony why traditional ratemaking practices do not work well for contemporary energy distributors engaged in accelerated system modernization. The cost of energy distribution grows much more rapidly than billing determinants even under normal circumstances today because of a gap between inflation and productivity growth that isn't offset by growth in customers' average use. Accelerated system modernization widens the inflation - productivity gap and results in frequent rate cases and chronic under earning. He surveys salient alternative forms of regulation that can mitigate the problem and recommends that the Commission approve a Reliability Investment Recovery Mechanism in the instant proceeding and use of fully forecasted (forward) test years in subsequent rate cases.
Blaine Gilles Joins PEG Research
PEG Research is pleased to announce that Blaine Gilles has joined the firm as a Senior Advisor. His career has spanned more than two decades in which he has been a business leader, government regulator, and economic researcher focused on the issues of network-based businesses. Issues that arise with the development of competition in regulated industries are a specialty. He is also an expert in formulating strategies to deal with challenges posed by developing and pricing capital-intensive services and effectively managing profitability amid challenging and rapidly changing regulatory and market conditions. Blaine has served as an expert witness in a variety of regulatory and legal proceedings.
Dr. Gilles played a significant role in the transformation of the U.S. telecommunications industry from regulated monopoly to competition. Between 1999 and 2006, he led the voice services business of WilTel Communications, previously a subsidiary of the Williams Companies, to achieve annual revenues of over $1.3 billion. He held a variety of positions in the regulatory department of Ameritech in metropolitan Chicago. He has also led product management, marketing and sales, and business and technical operations at Level 3 Communications, NewCross Technologies, and WorldCom. Blaine earlier served as an economist for the Policy Analysis and Research Division of the Illinois Commerce Commission and was an Assistant Professor of Economics at Kalamazoo College.
Prior to joining PEG Research, Dr. Gilles operated a private consultancy where he supported a variety of network-based firms and private equity companies, as well as the U.S. Securities & Exchange Commission and the U.S. Department of Justice. He has been a key advisor to clients on mergers and acquisitions, competitive strategy, and pricing. At PEG Research, Blaine will participate in the Company's energy utility consulting as well as opening a practice in the field of telecommunications.
Dr. Gilles received his PhD and MA in Economics from Michigan State University where he studied regulatory economics with Harry Trebing of Michigan State's Public Utilities Institute. He also earned a BS in Economics and a BA in International Relations from the University of Minnesota. A native of Amherst, Wisconsin, he currently resides in Hoffman Estates, Illinois with his wife and daughter.
The U.S. Securities and Exchange Commission announced today that the United States District Court for the District of Colorado entered a Final Judgment, in a civil action against Joseph P. Nacchio, the former chief executive officer of Qwest Communications International Inc., a Denver-based telecommunications company. According to the SEC's complaint in this matter, from at least April 1, 1999 through March 31, 2002, Nacchio and others at Qwest engaged in a large-scale financial fraud that hid from the investing public the true source and nature of the company's revenue and earnings growth. The complaint alleged that, although Qwest publicly touted its purported growth in services contracts which would provide a continuing revenue stream, in fact the company fraudulently and repeatedly relied on revenue recognition from one-time sales of assets known as "IRUs" and certain equipment without making required disclosures. PEG Research Senior Advisor Blaine Gilles was the SEC's expert witness in the case and used his expertise and experience to opine on Qwest's contracting methods and provided analysis Qwest's contracts, financial disclosure information and network data.
The Edison Electric Institute released a white paper on "Innovative Regulation Remedies for Regulatory Lag". The paper was prepared by a PEG Research team lead by company President Mark Newton Lowry. It explains the salient alternatives to traditional cost of service regulation which can remedy the problem of regulatory lag that many utilities face today. The paper focusses on multiyear rate plans, revenue decoupling, formula rates, forward test years, and capital spending ("capex") trackers. There is an authoritative listing of recent precedents for each innovation. The problem of regulatory lag and promising remedies are currently a major focus of the EEI. To obtain a copy of the Report, click here.
The United States District Court for the Southern District of Florida granted the SEC's request for summary judgment in the case of the US Securities and Exchange Commission v. Joseph J. Monterosso, et.al. The Court supported the SEC's position and ruled that GlobeTel Communications Corp. had defrauded investors by falsifying claims of millions of dollars of revenue. PEG Research Senior Advisor Blaine Gilles was the SEC's expert witness in the case and performed econometric event studies and empirical analysis of telecommunications traffic data to demonstrate that the traffic data reported by GlobeTel to its auditors in support of its declared revenues had been falsified and that the falsified revenues had a demonstrable impact on investor behavior.
PEG Research issued a report on the design of a new Performance Incentive Mechanism for Gaz Metro in Montreal. The study calculated the recent input price and productivity trends of Gaz Metro and developed forward looking productivity growth targets that reflect the company's forecasts of its future business conditions. The research provides the basis for a revenue decoupling mechanism that indexes the revenue requirement to inflation. Index-based cost targets were developed for O&M expenses and capital spending which can be used in an incentivized formula rate regulatory system that Gaz Metro recently proposed.
PEG Research has won a competitive bid to advise the Ontario Energy Board on how to define and measure the performance of the province?s electric utilities. The review, led by Senior Advisor Larry Kaufmann, will begin with the issuance of a Concept Paper to provide a framework and structure for analyzing performance issues. The review will culminate with the issuance of a Board report setting out the Board's policy for defining and measuring performance of electricity distributors and transmitters that will be used to inform the setting of rates whether through a cost of service review or through a multiyear rate adjustment mechanism. Currently, companies in the province operate under index-based attrition relief mechanisms with the option to opt out and operate under cost of service regulation.
PEG Research issued a report on the generation maintenance expenses of Oklahoma Gas and Electric. The company is seeking special ratemaking treatment for a mechanical integrity program that would involve higher maintenance expenses. The study found that the company's maintenance expenses in recent years were unusually low.
PEG Research President Mark Newton Lowry testified on revenue decoupling for Commonwealth Edison (ComEd) in Chicago. The company proposed fixed variable pricing in the proceeding, while the Natural Resources Defense Council proposed a decoupling true up plan. Dr. Lowry's testimony included an authoritative white paper that considers the pros and cons of both approaches and their appropriateness for ComEd and details recent precedents. The Illinois Commerce Commission approved in a May decision a move to fixed variable pricing. To obtain a copy of the Report, click here.
Mark Newton Lowry filed statistical benchmarking testimony on the cost efficiency of Public Service of Colorado's gas system. Total cost and O&M expenses were both considered. PEG Research is one of the only consultancies in the world that is a long-time practitioner of rigorous total cost benchmarking. As in previous testimony on the electric operations of Public Service, the focus of this study was the company's proposed forward test year expenses. The proposed costs were found to reflect a superior level of cost management. The study also provided statistical evidence that forward test years and historical test years generate similar performance incentives on balance.
PEG Research was selected by the Edison Electric Institute to help the trade association develop a database on approaches to Altreg that help utilities reduce regulatory lag in the recovery of capital expenditures. Approaches to Altreg that are included in the database include capex trackers, CWIP in rate base, formula rates, and multiyear rate and revenue caps. Gas utility precedents are included because of their relevance to electric power distributors. The database is now available to EEI member utilities.
Dr. Charles J. Cicchetti, a founding member of California-based Pacific Economics Group LLC, released a report on December 8, 2010 entitled "Expensive Neighbors: The Hidden Cost of Harmful Pollution to Downwind Employers and Businesses." The report finds that pollution from coal-fired power plants that have failed to install pollution controls is costing businesses in affected downwind states nearly $6 billion annually because of higher labor and insurance costs, lost work days, and lost productivity. The report also quantifies the costs avoided by reducing sulfur dioxide (SO2) and nitrogen oxides (NOX) emissions in downwind states. It concludes that, under any reasonable set of assumptions, the benefits of the Environmental Protection Agency's (EPA) proposed "Transport Rule" under the Clean Air Act far outweigh any associated compliance costs. To obtain a copy of the Report, click here.
PEG Research issued a report on the O&M expenses of Oklahoma Gas and Electric. The study, which was filed in their Arkansas rate case, used unit cost indexes and an econometric benchmarking model. The company was found to be a significantly superior O&M cost performer.
The Hawaii Public Utilities Commission today gave final approval to the decoupling true up plans of the three Hawaiian Electric utilities. The Commission stated in its
- While Hawaii could rely only on setting specific [renewable portfolio standard (RPS)] mandates and other clean energy objectives, relying only on mandates may not yield the desired results...decoupling represents a possible means of enhancing Hawaii's commitment to wean itself from fossil fuels. Thus, decoupling supports the achievement of the RPS by the HECO Companies and supports the [energy efficiency portfolio standard]. Decoupling also helps reduce or eliminate regulatory lag, thereby allowing the HECO Companies more timely cost recovery, which facilitates their ability to fulfill Hawaii's statutorily mandated energy policy objectives.
Each plan features revenue decoupling for all service classes and an explicit revenue adjustment mechanism ("RAM") that adjusts the revenue requirement between rate cases for a wide range of business conditions. The RAM has a "hybrid" design like those used for many years in California decoupling plans. It includes indexation of O&M expenses and special treatment of major plant additions. The Commission has directed the companies to operate under three year staggered rate case cycles to ensure that the RAMs reduce the frequency of rate cases.
The HECO plans continue the trend in the electric power industry away from the revenue per customer ("RPC") approach to decoupling that is common in the natural gas industry. The Commission explicitly rejected this approach, stating that
- The RPC mechanism, which was not intended to address issues such as regulatory lag, will not perform as well as the RAM in meeting the objective to maintain the HECO Companies' financial integrity. In addition, the Commission finds that the RPC method may not provide adequate rate relief where the increases in costs may be far greater than increases in customers, or where the customer base is decreasing. Although various packages, including RPC plus rate cases, were discussed at the hearing, it does not appear from the record that any of these options would reduce regulatory lag, maintain the HECO Companies' financial integrity, or support the achievement of Hawaii's objectives as well as the RAM.
The plan is a component of the Hawaii Clean Energy Initiative, under which HECO has agreed to a wide range of measures to promote conservation and clean energy. PEG Research President Mark Lowry was a witness for the HECO companies in the proceeding.
PEG Research President Mark Newton Lowry has just filed testimony in California on the productivity trends of U.S. gas and electric power distributors. Over the 1999-2008 sample period, he reports that the total factor productivity ("TFP") of a large sample of U.S. electric power distributors grew at a 0.88% average annual pace. The TFP of a sample of natural gas distributors averaged 1.18% annual growth. The multifactor productivity index of the U.S. private business sector averaged 1.31% growth over the same period. The testimony was filed on behalf of two Sempra Energy utilities: San Diego Gas and Electric and Southern California Gas. SoCalGas is the largest gas distributor in North America. Dr. Lowry has provided productivity testimony for these companies in their general rate cases since the mid-1990s. SoCalGas has operated under revenue decoupling continuously since that time.
Springtime in Madison
PEG Research employees are enjoying the springtime weather at the company's office in Madison, Wisconsin. From our perch above Capital Square, we have watched the grass turn green, the tulips bloom, and the oak trees burst into leaf. We wish you all the best in this season of hope and renewal.
Larry Kaufmann, Senior Advisor to PEG Research, recently submitted Direct and Rebuttal testimony in support of an O&M net inflation adjustment mechanism proposed by National Grid for a gas utility decoupling plan in Massachusetts (D.P.U. 10-55). The proposed mechanism would allow National Grid to recover annual, formula-based adjustments in its O&M expenses over a multi-year period. The net inflation adjustment formula is inflation in the gross domestic product price index (GDP-PI) minus an O&M productivity offset of 0.52%. Dr. Kaufmann's proposed productivity offset was calibrated using a study of O&M input price and productivity trends for gas distributors in the northeast United States. A final Order in this proceeding will be issued by the end of October 2010.
The Ontario Energy Board has posted a report by PEG Research on revenue decoupling. The report, authored by company president Mark Newton Lowry and entitled Review of Revenue Decoupling Mechanisms, is the outcome of a months long study. It is intended to provide Ontario policymakers with a solid background for considering new directions for its decoupling policy. The report discusses all three established approaches to decoupling: lost margin trackers, decoupling true-up plans, and straight fixed variable pricing. There is an authoritative review of key precedents and an analysis of the circumstances in which each decoupling approach is advantageous. A discussion of the design of revenue adjustment mechanisms draws on the company's extensive experience with this complex subject. Linkages between decoupling and other regulatory issues are stressed, including rate design and the choice between forward and historic test years. The report also reviews Ontario's decoupling policies and considers promising new directions. The Board recently established a consultation process (EB-2010-0060) to address provincial decoupling strategy. A conference to discuss the report is scheduled for April 19 in Toronto. Ontario energy distributors have extensive DSM programs that slow growth in average use by small volume customers. Conservation and long displacement generation are also encouraged in the province by the recently passed Green Energy and Green Economy Act. A copy of the report is available here.
On Friday December 4, the Colorado Public Utilities Commission approved a settlement in the rate case of Public Service of Colorado. The company's featured evidence was based on a forward test year (FTY). PEG Research provided statistical support for the FTY filing. It showed that the company's proposed O&M expenses reflected a good level of operating performance. The sample used in the benchmarking study was also used to show that the trend in the O&M performance of companies operating under forward test years was similar to, and a little better than, that of companies operating under historic test years. The approved revenue requirement is based on an historic test year with extraordinary adjustments for future business conditions, including the costs of a smart grid project. The settlement also provides that Public Service will file forward test year evidence in its next rate case but also provide historic data and a thorough deviations analysis. The company will work with interested parties to improve reporting requirements with respect to budget and actual data to facilitate the review of future cases.
PEG Research won a bid to investigate the use of "top down" techniques for estimating the reductions in gas consumption from utility DSM programs. The estimates would be developed by applying econometric methods to gas distributors' billing data, in an effort to identify the changes in gas consumption that result from energy efficiency programs. These "top down" estimates could potentially substitute for the "bottom up" methods that are currently used to calculate gas savings, and which are based on assumptions regarding projected savings from particular measures and programs. PEG Research will develop statistical models that can be used for the "top down" measurement and verification of utility DSM programs and prepare a white paper that evaluates the merits of a top-down approach compared with the current methodology.
PEG Research was recently selected by the Edison Electric Institute in Washington DC to prepare a white paper on forward test years in the U.S. electric utility industry. Roughly half of all investor-owned electric utilities are still required to use historic test years in their rate case filings. The results are increasingly uncompensatory in today's rising unit cost environment. States that have in recent years moved away from historic test years include Idaho, New Mexico, Wyoming, and Utah. The paper will present data on the financial harm caused by historic test years and explain the forward test year alternative.
Mark Newton Lowry, President of PEG Research LLC, filed testimony in Rhode Island on behalf of the Energy Efficiency and Resource Management Council. The testimony supported the general outline of a revenue decoupling proposal recently filed by National Grid in the state. Dr. Lowry discussed basic approaches to decoupling, decoupling precedents, and criteria for choosing between alternative decoupling methods such as decoupling trueup plans and straight fixed variable ("SFV") pricing. He commented that "the trueup approach to decoupling is the best practice approach because it encourages, at a reasonable administrative cost, the full range of measures that can promote clean energy. These advantages help to explain why decoupling trueup plans are spreading rapidly in the gas and electric power industry and are used or scheduled for use in most states that have a strong commitment to clean energy".
As a result of recently passed legislation, the New Zealand Commerce Commission is required to set up new electricity distribution rate plans for the period 2010-2015. The plans will utilize the format of CPI-X to escalate rates. Total factor productivity (TFP) is the preferred basis for setting the X factor. PEG Research Senior Advisor Larry Kaufmann has been retained to evaluate the Commission's proposals on behalf of the Electricity Networks Association. PEG Research personnel have extensive experience in New Zealand, having testified in the previous price controls for electricity and gas distributors. A final decision on the price controls is expected in December 2009.
June 22, 2009
The Oklahoma Corporation Commission staff filed responsive testimony today in Oklahoma Gas & Electric's (OG&E) rate case. As part of its testimony, it reviewed the February 2009 PEG Research report, filed as evidence by OG&E in the rate case. The report stated that OG&E was a top performer at minimizing non-fuel O&M expenses, which are the company's chief controllable cost. Staff's testimony concluded that "Staff is in agreement [with the PEG Research study] that OG&E is a very cost-conscious company in its O&M expenses as compared to other utilities".
Public Utilities Reports has published Charlie Cicchetti's latest book, Going Green and Getting Regulation Right: A Primer for Energy Efficiency, which responds to the rising interest in energy efficiency and demand-side management programs by exploring the important lessons that can be learned from earlier mandated conservation efforts. Going Green and Getting Regulation Right is a valuable resource for regulators, legislators, utilities, public advocates, and other policy makers. The book draws on a vast database of results from utility programs throughout the nation over the past 15 years. Energy efficiency programs are addressed both quantitiatively and comprehensively. These analyses are complemented by a thorough qualitiative and institutional review of the different approaches to conservation and efficiency that have been taken across the nation and over time. For more information or to order, visit http://www.pur.com/books/55.cfm
April 16, 2009
Bay State Gas today filed a revenue decoupling plan with the Massachusetts Department of Public Utilities (DPU). Bay State proposes to add revenue decoupling to its existing PBR plan, where rates escalate in accordance with a GDPPI-X formula with an X factor of 0.51%. This is the first decoupling plan to be filed in Massachusetts which conforms to DPU guidelines that decoupling plans can be PBR plans with revenue adjustment mechanisms that feature revenue adjustment mechanisms which provide automatic relief for price inflation.
In today's filing, PEG Research Senior Advisor Larry Kaufmann testifies that the existing PBR plan and the revenue decoupling proposal are compatible. His testimony also supports the continued use of Bay State's existing X factor. PEG Research personnel have supported PBR in Massachusetts numerous times over the past 15 years, including the research underpinning the current power distribution rate plan of NStar Gas & Electric and testimony in support of the original and current rate plans of Boston Gas and the current Bay State plan.
March 4, 2009
The Essential Services Commission of Victoria (ESC) today filed comments in an examination of the merits of adding a total-factor productivity (TFP)-based regulatory option in Australia's energy regulatory framework. This examination is being undertaken by the Australian Energy Market Commission (AEMC). The ESC advised the AEMC that a TFP-based option was feasible and appropriate and provided details on a specific, TFP-based regulatory approach. The ESC was advised by Larry Kaufmann when preparing its submsission.