The Green Communities Act Wreaks Havoc on Utility Rate Structure

By Cynthia A. Arcate 11 November, 2011

Massachusetts’ Joint Committee on Telecommunications, Utilities and Energy held a hearing yesterday on the effectiveness of the Green Communities Act (GCA). I was among those who testified, including Attorney General Coakley, officials from DOER, the Patrick Administration, utilities, business groups and others.

From my perspective, there are many things that have worked well in the GCA, although I share the concerns of others about the cost, the impact on competition and the overall effectiveness in reducing greenhouse gases. I’ve shared some of my concerns in this space in earlier posts.

My testimony, which was reported on by the Boston Herald and State House News Service among others, focused on the impact of the GCA on the utility rate structure in the Commonwealth. I believe efforts to deal with the cost recovery and rate design aspects of the implementation of the GCA have resulted in a mishmash of base rates, automatic adjustment clauses and cost trackers which completely undermine the basic tenets of rate regulation by allowing utilities a guaranteed rate of return and no incentives to manage their costs. This has resulted in constant rate changes to PowerOptions’ members and all consumers. These changes not only increase their costs but they do it in an unpredictable and volatile way.

In the public and private sector, I’ve put rate cases together and I’ve torn them apart. The rate structure problems posed by the GCA can be simply summarized into three general categories:

• First, the utilities are the primary drivers and cashiers for the implementation of the Act and have been given enticements to play that role, such as revenue decoupling which ensures recovery of revenue lost for any reason not just the implementation of energy efficiency.

• Second, because there are several different programs to track and the need to segregate the cost recovery of each of these programs, there are several so-called cost trackers or adjustment clauses. There were many of such clauses in effect before decoupling, but rather than eliminate them, the utilities have devised excuses for more of them.

• Third is the design of the rates, which determines how the costs are recovered from customers, particularly between residential and commercial customers. Cost recovery under trackers and adjustment clauses result in a disproportionate amount of costs coming from the commercial and industrial customers.

We have a system which guarantees utilities recovery of all costs, including their established rates of return, and takes away all incentive to manage their costs – prudently or otherwise. For example, after National Grid received approval of its decoupling filing for its electric business, it reorganized its workforce, resulting in a significant reduction in labor costs. The reduction in cost for them will not change the revenue requirement set in its decoupling mechanism and, therefore, will not pass onto consumers—they pocket those savings.

A basic tenet of rate regulation is that a regulated entity should be guaranteed the opportunity to earn a reasonable rate of return but not a guarantee of a rate of return. Today, the gas and electric utilities each have over a dozen automatic adjustment clauses which are filed at least annually. Given that there are four electric companies and seven gas companies in the state, you can see the burden to regulators, the Attorney General and any intervenor seeking to meaningfully review such filings.

These clauses cover everything from medical benefit and pension costs for their employees to capital investments as well as the costs associated with the GCA. These clauses, taken alongside decoupling, which ensures recovery of an established revenue requirement, result in eliminating all exposure not only to ordinary business expenses but to risks of the business that utilities have always borne such as loss of revenue from the weather and economic conditions. Revenue decoupling was intended to protect utilities from loss of revenue from the aggressive implementation of the mandates of the GCA – not the risks to the business they should, and have always had, to manage.

In summary, there is a clear need to wipe the slate clean and start all over again in this area. Automatic adjustment clauses, except those directly related to GCA mandates should be eliminated and incorporated into base rates through a thorough rate review. While it may seem burdensome at first, it is not more burdensome, and in the end better for customers, than the current mishmash of endless adjustment clause filings which are difficult, if not impossible for interest groups and the state to fully review.

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