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Which Pennsylvania utility will be the first to test the waters of alternative Ratemaking?

After a long, complex path, Pennsylvania has finally arrived as an alternative ratemaking state.  But who will be the first utility to avail itself of the options now available? Both the Wolf administration (“Administration”) and the Public Utility Commission (“Commission”) seem eager to have a test subject, I mean a willing participant, to propose an alternative ratemaking design.  . But there are specific steps a utility must take in order to comply with, and obtain approval from, the Commission.

Back in March 2016, the Pennsylvania Public Utility Commission (“Commission”) held an en banc hearing in Harrisburg, to gather information on alternative ratemaking methodologies.  The purpose of the hearing was to hear from experts and interested industry participants on esoteric issues such as rate decoupling and other non-traditional ratemaking approaches; whether such methodologies could produce “just and reasonable” rates; and, whether the benefits of such approaches outweighed the costs.  Many witnesses appeared and many interested parties offered comments. Almost a year passed before the Commission issued a Tentative Order  (On March 2, 2017) seeking further comment on industry specific proposals for alternative ratemaking.  Finally, on May 3, 2018, the Commission issued a Proposed Policy Statement, 52 Pa. Code §§ 69.3301-3303.  The proposed policy statement requested further comments, due within 90 days of publication in the Pa. Bulletin.

Only a few weeks after the Commission issued its proposal, on June 28, 2018, Governor Wolf signed Act 58 of 2018 into law, amending Chapter 13 of the Public Utility Code, by adding Section 1330, 66 Pa C.S. § 1330.  Act 58 affirmatively authorized alternative ratemaking in Pennsylvania, while at the same time recognizing that such methodologies had already been implemented, and not disturbing those schemes.  In response to the legislative mandate, on August 23, 2018, the Commission issued a Tentative Implementation Order at Docket M-2018-3003269 and issued a Final Implementation Order on April 25, 2019.  To close the loop, just a few day ago, on August 24, 2019, the Final Policy Statement was published in the Pennsylvania Bulletin.

The Final Policy Statement, in lieu of regulatory requirements, lists 14 factors that the Commission expects to address in the course of reviewing proposals for alternative rates.  These factors range from how the proposed ratemaking design will impact customer incentives, to whether such rates and rate design will improve reliability.  Any fixed utility filing for an alternative mechanism should strongly consider expressly addressing these 14 factors in the initial filing or be prepared for the inevitable negative reaction from the Commission’s own prosecutory arm (Bureau of Investigation and Enforcement or BI&E for short), the Office of Consumer Advocate (“OCA”), and the Office of Small Business Advocate (“OSBA”) commonly referred-to in the collective as the Statutory Parties, other industry specific groups of large customers as well as competitive suppliers in the gas and electric sectors.

In contrast to the cost/benefit analysis type questions of the Policy Statement, the Implementation Order is far more “nuts and bolts” and focuses on the form of alternative rate filings and the mandatory notices that accompany them.  The Order contains a substantial amount of discussion devoted to the form and content of customer notices for filings under 66 Pa. C.S. § 1330(c), with the customer advocates seeking more content and the utilities predictably seeking less. The Commission’s conclusions closely track the exact statutory language and do not require utilities proposing alternative ratemaking methodologies to provide proposed tariff pages as part of the notice to customers, as had been suggested by some commenters.  Likewise, with regard to the form of the filing that is addressed in 66 Pa. C.S. § 1330(d) the Commission adopted a narrow interpretation of that section and decided that filings for alternative ratemaking proposals, regardless of the form they take, must be filed pursuant to the requirements of § 1308 of the Public Utility Code, the section that provides requirements for base rate filings.  Invoking § 1308 imposes extensive filing requirements on the filer and provides a statutory shot clock on the proceeding, which a number of utilities sought to avoid.

Now that the Policy Statement and the Implementation Orders are completed, the question is which utility will be the first in the door and what sort of proposal will they make?  The electric industry would seem to be the natural choice for alternative ratemaking, due to the rapidly evolving technology and the need to deploy infrastructure that changes constantly, with decreasing throughput and the host of factors such as increasing buildout of renewables and shifting generation portfolios reshaping the industry on what seems like a daily basis.  Or will it be the water industry, seeking financial incentives for improving water quality or the sewer service providers seeking alternative funding mechanisms for the increasingly large capital investments that are required to keep treatment facilities up to date.  Only time will tell, but be assured that the first utility through the door will have the blessing and the curse of being first; of being the one that sets much of the precedent for all who follow.  Whichever utility(s) take on that role, they should be visionary and seek to address both the policy and procedure of this new alternative, while being prepared to be flexible when needed.

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