What do changes in the rate-making process for the PUC mean?

A proposal was recently outlined for an alternative to traditional rate-making mechanisms for electric utilities by the Public Utilities Commission of Nevada.

Bradley S. Wimmer, professor of economics at Lee Business School, University of Nevada, Las Vegas, answered the Pahrump Valley Times’ questions about the PUCN’s proposal for an alternative to traditional rate making for electric utilities.

The changes in the rate-making process are being driven by technology, climate concerns and renewable standards, among other things, Wimmer said. The move toward incentive-based regulation may lead to new issues, he added.

“For example, one form of incentive regulation uses price caps to protect ratepayers, and allows regulated firms to retain, at least a portion, of any increase in profits. This gives regulated firms the incentive to cut costs,” Wimmer said via email. “As a result, regulators may have to spend more effort monitoring the quality of service, emissions, safety, etc, because reducing quality is one of many ways to reduce costs. The introduction of competition, renewable standards, along with changes in technology, makes this an interesting time for regulators.”

Low-income programs are another area that may be affected by changes in rate-making procedures, Wimmer said.

In general, the rate-making process must guarantee that the regulated firms receive a normal return on their capital investments.

Regulators are also concerned about the rates consumers pay and regulated firm incentives to minimize costs of production, Wimmer said. They also have to ensure that electricity is produced safely and that the state meets environmental standards.

“The manner in which the PUC regulates a firm affects its incentives and the choices it makes,” Wimmer said. “For example, a regulatory scheme that guarantees that firms receive a specific return on its investments, raising rates when earnings fall below the guaranteed return, and requiring lower rates when firm earnings exceed allotted amounts, blunts firm incentives to lower costs and can result in higher prices over time.”

As a result, Wimmer said, regulators have developed a host of alternative forms of regulation that improve firm incentives.

“When done correctly, incentive regulation can reduce the prices consumers pay and can increase firm profits,” Wimmer said.

The regulatory process must also address a number of other factors, he added.

For example, regulating prices becomes more difficult when firms face competition. In the case of electricity, renewable portfolio standards and other environmental concerns also affect both firm and regulator decisions, Wimmer said. Issues such as time-varying prices and storage are important and will likely play a part in the state’s plan to meet its 50-percent renewable portfolio standard, he added.

“It appears that the state PUC has put in place a process to evaluate different forms of regulation to deal with the substantial changes taking place in the market for electricity generation,” Wimmer said.

According to a press release from the PUCN, the move was in response to Nevada Senate Bill 300 that requires the commission to adopt regulations for an electric utility to apply for an alternative rate-making plan.