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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.
March 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.
February 2010
The Hawaii Public Utilities Commission today approved the revenue decoupling plans proposed by the three Hawaiian Electric companies. The proposals feature decoupling for all service classes. The revenue requirement adjustment mechanism has a "hybrid" design like that which has been used in many California decoupling plans. It includes indexation of O&M expenses and budgets for plant additions. The HECO plans continue the trend in the electric power industry away from the revenue per customer approach to decoupling that is common in the natural gas industry. The proposal was detailed in a settlement between HECO and the state consumer advocate. HECO had 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 proceedings.
December 2009
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.
November 2009
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.
November 2009
PEG Research recently won a bid to advise the Ontario Energy Board on revenue decoupling. A white paper will be prepared that explains the basic approaches to decoupling, reviews decoupling experience, and appraises the suitability of decoupling for application to Ontario's gas and electric power distributors. Results of the study will be presented to stakeholders in Toronto next March. The inquiry is spurred by recent legislation in Toronto that is expected to spur demand side management and customer-sited generation. PEG Research President Mark Newton Lowry had previously helped the Board develop new regulatory systems for provincial gas distributors that helped them cope with the problem of declining average use.
November 2009
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.
September 2009
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".
Summer 2009
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.
July 1, 2009
The Hawaii Public Utilities Commission today completed three days of hearing on the innovative decoupling proposals of the three Hawaiian Electric Utilities. The proposals feature decoupling for all service classes and a revenue decoupling mechanism of traditional "hybrid" California design. The HECO proposals continue the electric power industry trend away from the revenue per customer approach to decoupling revenue adjustment that is common in the natural gas industry. PEG Research President Mark Lowry was a witness for the HECO companies in the proceedings.
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".
Spring 2009
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.
February 26, 2009
Mark Newton Lowry filed testimony today in support of the rate filing of Oklahoma Gas & Electric Co. He reported results of a statistical benchmarking study of the company's base rate operation and maintenance expenses. These expenses are a critical concern in any rate case because they are the principal costs that a utility can control in the shorter run. Using publically available data, Dr. Lowry developed an econometric model of O&M expenses and used it generate benchmarks for the company from 2006 to 2008. The econometric results were also used to guide the development of unit cost indexes and an associated peer group. The research found OG&E to be one of the nation's top O&M cost performers.
January 30, 2009
The Hawaiian Electric companies (Hawaiian Electric, Maui Electric, and Hawaiian Electric Light) today filed a revenue decoupling proposal in Docket No. 2008-0274. The companies have reached an agreement with the State of Hawaii Division of Consumer Advocacy to redouble their efforts to promote energy conservation and renewable energy resources. Revenue decoupling plans for all three utilities are a key part of the agreement. The plans would compensate the utilities for declining sales per customer such as may result from aggressive programs to promote demand-side management and distributed generation.
The companies favor a traditional "true-up" approach to decoupling rather than Straight Fixed Variable ("SFV") pricing. The proposed revenue adjustment mechanism would escalate the revenue requirement as needed for input price inflation, output growth, and new investments. It has a "hybrid" design like that which has often been used over the years by several California utilities. Mark Newton Lowry advised the HECO companies on plan development and prepared a white paper on revenue decoupling for the filing. The paper discusses decoupling experience and plan design issues and presents results of historical simulations for the HECO companies using alternative revenue adjustment mechanisms.
November 11, 2008
An Appeal Panel in Victoria, Australia today dismissed a complaint by a gas distributor that challenged PEG's methodology for adjusting allowed operating expenditures (opex) in a multiyear gas distribution price indexing plan. The Essential Services Commission (ESC) in Victoria employs a "building block" approach to setting the price cap that requires a multiyear forecast of operating expenses (opex). The opex escalation formula includes a productivity growth target. PEG developed an econometric methodology for calculating the target for each distributor. PEG also recommended specific values for changes in input prices and output for these adjustment formulas. These recommendations were adopted by the ESC in its final price determination. One of the three Victorian distributors challenged PEG's econometric methodology on a variety of technical grounds. The Appeal Panel rejected these challenges and found that PEG's approach was "an objective quantitative analysis undertaken by a qualified and experienced consultant." The Panel rejected two alternative approaches proposed by the company's consultants, finding that one did not "appear to the Panel to derive from an entirely objective analysis" and that the other "seems to be based on a series of general assumptions." PEG's analysis on this project was overseen and sponsored by Larry Kaufmann.
The Vermont Public Service Board today issued an order approving an alternative regulation plan for Central Vermont Public Service. The plan, which extends to December 2011, features a revenue adjustment mechanism that will escalate the company's revenue requirement for most of the company's non-power cost using an inflation - X formula. There is a separate mechanism for funding a surge in plant additions, which are detailed in an Asset Management Plan. The inflation measure is the CPIU for the northeast U.S. The X factor is set at 1% pending the completion of a business process review. The revenue requirement will be reset to reflect the results of the company's 2009 rate-base filing. The plan also features an earnings sharing mechanism, service quality provisions, and a new Power Cost Adjustment Mechanism.
Mark Newton Lowry provided testimony on behalf of CVPS on the design of the revenue adjustment mechanism. The testimony included research on the input price and productivity trends of northeast power distributors. This marks the tenth time that Dr. Lowry has filed testimony supporting an approved revenue adjustment mechanism.
The Ontario Energy Board today issued its supplemental report in case EB-2007-0673, which has established price cap plans for provincial power distributors. The supplemental report resolved certain issues in plan design.
- The base productivity target for the X factor of the price cap index has been set at 0.72%, the average trend in the total factor productivity of the U.S. electric power distributors from 1988 to 2006.
- A stretch factor term will be added to the X factor that ranges from 0.20 to 0.60, depending on a company's ranking in an operation and maintenance expense.
- Companies who qualify under a materiality threshold formula established in this decision may qualify for supplemental funding for capital spending surges.
- Changes in tax expenses due to currently legislated tax changes will be shared 50/50 between companies and ratepayers.
July 16, 2008
The Department of Public Utilities in Massachusetts issued its Order today in D.P.U. 07-50, which opened a statewide generic proceeding on implementing revenue decoupling for gas and electric utilities. At the outset of the proceeding, the DPU presented a "strawman" decoupling proposal which involved the elimination of multiyear performance based regulation (PBR) plans, which have recently been popular in the Commonwealth. Larry Kaufmann of PEG was hired by a coalition of gas and electric distributors to testify on the relationship between PBR and decoupling and explain why PBR should be maintained after decoupling takes effect. In its final Order, the Department did not mandate the elimination of PBR plans, and allowed distributors to retain their current PBR plans and to propose new PBR plans in conjunction with decoupling.
July 1, 2008
The Maine Public Utilities Commission today issued an order in Docket Nos. 2007-215 and 2008-111 concerning an Alternative Regulation Plan for Central Maine Power. The Commission approved a stipulation between CMP and other interested parties providing for a new five year Alternative Rate Plan for company's power distribution services. The plan features a price cap index with an inflation - 1 growth rate formula. The inflation measure is the gross domestic product price index. The plan also features an earnings sharing and service quality provisions. Mark Newton Lowry of the PEG companies provided the inflation and productivity testimony in the proceeding.
April 2008
A team of PEG economists lead by Mark Newton Lowry today published an article in Natural Gas and Electricity on the declining average use problem facing local gas distributors (LDCs). Frequent rate cases are the remedy for this problem under traditional cost of service regulation. Revenue decoupling is a salient alternative. One approach to decoupling is the periodic trueup of rates to the revenue requirement. Frequent rate cases are then avoided only with a revenue adjustment mechanism and several established approaches are identified. Decoupling can also be achieved by straight fixed variable (SFV) pricing, which sets the volumetric charge to marginal cost and gathers most base rate revenue from customer or demand charges. Econometric research by PEG to estimate marginal costs supports a monthly customer charge of around $20 dollars and a per therm charge of around $0.014 for residential customers of a typical LDC. The correct charges vary with local business conditions.
February 11, 2008
The Ontario Energy Board issued its decision today in Case EB 2007-0615, which concerned an alternative regulation plan for Enbridge Gas Distribution, Canada's largest gas distributor. The decision approves a settlement which figures a multi-year revenue cap plan for Enbridge. The escalation formula is
The inflation measure is Canada's Gross Domestic Product Implicit Price Index for final domestic demand. P, the inflation coefficient, ranges in value from .60 to .45. With current inflationary expectations, this is equivalent to an X factor ranging from .82 to 1.12. Revenue per customer indexes have applications in decoupling since they provide full attrition relief without multiple forward test years. Such an index was first used by Southern California Gas in the late 1990's. Mark Newton Lowry of the PEG companies was a witness for SoCalGas and advised Board Staff in this proceeding, conducting gas utility input price and productivity research using Ontario and US data. He provided similar support to Board staff in the design of the price cap plan recently approved for Union Gas.