This blog is part of an ongoing series on energy policy and legislation. To read more from the series, click here.
Will Utility Regulators Allow Utilities to Increase Rates to Recover Lost Revenue from COVID-19 and How Will these Costs Be Distributed Across the Various Customer Classes?
There is no denying that COVID-19 has significantly impacted the U.S. energy sector. Many electric utilities are now preparing for decreased electricity sales revenue in the near-term, brought on by a combination of non-payment of customer bills and lower commercial and industrial sales. The U.S. Energy Information Administration’s latest Short-Term Energy Outlook predicts that retail electricity sales from the commercial and industrial sector will decline by 7% and 5.6% respectively in 2020 as businesses curtail their operations in response to stay-at-home orders.
To address these revenue shortfalls, many utilities have petitioned their state public utility commissions to prepare to recover costs associated with COVID-19 from their rate base. The first step towards cost recovery for some of these utilities is the formation of a regulatory asset. A regulatory asset allows the utility to track incurred costs due to COVID-19 in order to facilitate the recovery of those losses in the future.
Figure 1. States where utilities have been approved or requested approval of a regulatory asset to record costs incurred due to the COVID-19 pandemic.
This deferred asset allows utilities and regulators to keep rates low during the pandemic, but electric rates will eventually need to increase in the medium-to long-term to recover these costs (with interest). The treatment of these regulatory assets will generally be addressed in future rate proceedings before the state commissions. These regulators have the difficult task of balancing the need to protect ratepayers and the financial health of the utilities during this unprecedented time. Dependent on regulatory decisions, the impact to commercial and industrial rates will vary from utility to utility. It’s currently unclear whether there will be cross-subsidization between customer classes.
Some states, like Indiana and Wisconsin, have already ruled on what costs utilities can recover from their rate base. On June 29, 2020, the Indiana Utility Regulatory Commission issued an order rejecting a request by the utilities to later recover lost electricity sales revenues caused by the pandemic through temporary rate increases, citing that the creation of a regulatory asset for lost revenues is not in the public interest. These recent decisions bode well for commercial and industrial customers whose electricity costs materially impact their operations.
Edison Energy is tracking utility rate cases, commission orders and new dockets related to COVID-19 to keep our customers informed as to how these decisions may impact their energy procurement decisions. Please contact your Edison Energy representative to learn more.
If you’d like to learn more, please reach out to Shannon.Weigel@EdisonEnergy.com for our policy brief.