August 20, 2021

Recent events highlight the need for performance-based rate making

Our blog posts tend to cover timely news items and have been cited and used as sources for others.  We  wanted to highlight some of our recent mentions for our blog reader who are not on LinkedIn and also speak to our “behind the scenes” engagement focused on challenges facing today’s energy systems.

Over the past three years, EIP has actively advocated changes in the existing regulatory regime for monopoly electric and gas pipeline utilities that has been in place for over 100 years—a legacy system that rewards investments based on costs rather than value creation.  Our preferred alternative is an incentive-driven scheme to drive pipeline and utility companies toward desired performance on safety, reliability, efficiency, and mitigation of environmental impact.

Incentivized regulatory structures that separate better performers from laggards aren’t likely to earn praise from trade associations and other industry advocates.  However, as investors, it’s our job to identify and own the better performers and avoid the bad apples.  As shareholders, we also believe it’s appropriate for us to advocate truly sustainable outcomes.

Our public advocacy started with our July 2018 Senate testimony, and two subsequent joint filings before the Federal Energy Regulatory Commission with the Environmental Defense Fund.  Our most recent effort on May 26, 2021, which addressed FERC’s Notice of Inquiry seeking stakeholder input on its pipeline certification process, was recently highlighted by energy legal consultancy Arbo (formerly LawIQ). Arbo’s blog post noted our affidavit’s call for FERC to revisit its current return on equity methodology to emphasize better use of existing pipeline infrastructure over simply incentivizing the building of more.

Bloomberg’s Liam Denning also referenced our posts on California’s aggressive push to make its electricity system fully renewable–and the reliability problems stemming from dependence on intermittent renewables and power imports from neighboring states.  Mr. Denning also points out that misaligned policy and economic incentives discourage gas-fired peaking generation.  In our view, gas-fired peaking generation is best-positioned to address renewable intermittency in a reliable and affordable fashion and emits significantly less carbon than the diesel backup generators that kick-in during blackouts.

We believe California’s ambitious redesign of its electricity system–with its renewable mandates and elimination of fossil fuel and nuclear generation—places its preference for renewable energy ahead of safety and reliability. A better alternative would incentivize developing a zero-carbon system that incorporates specific reliability, resilience, safety, and cost targets aligning compensation with performance.  If natural gas with carbon capture is cheapest, then let it compete, if geothermal and nuclear are slightly higher cost but are the most reliable, let them compete. Let the regulated utilities work with the merchant power providers to arrive at the best approach to achieve the desired balance of outcomes- In other words, set targets and get out of the way; we firmly believe policy should define outcomes, not the technology that achieves them.

Connecticut took a stab at this after tropical storm Isaias left hundreds of thousands of residents without electricity for a week or more in 2020.  Its utility regulator proposed a 90-basis point reduction in the allowed equity return (ROE) of that state’s largest utility, to “punish” poor reliability.  While we support greater use of incentives, we think a better outcome could have been reached with a predetermined ROE range based on reliability (and other factors) rather than a penalty levied in hindsight.  A proactive, symmetrical, outcome-based approach, rooted in hard analysis of economic and environmental impact, cost effectiveness of solutions, and identification of best practices would be a good start.

EIP, and increasingly others like Bloomberg’s Mr. Denning, believe changes in energy supply and usage as well as a shift away from the 20th century’s centralized, command-and-control electricity grid call for energy infrastructure business strategy and regulatory structures to adapt.  Residential and commercial consumers want reliable, clean, affordable energy and won’t accept compromised service accompanied by higher prices.  The technology and information needed to drive and measure performance exist; regulatory systems should incorporate them more.

The Information provided in this article is believed to be accurate as of the date above. EIP reserves the right to update, modify or change information without notice. Any statements of opinion are EIP’s opinion and should not be relied upon as a prediction of any future event. The information is based on data obtained from third party publicly available sources that EIP believes to be reliable but EIP has not independently verified and cannot warrant the accuracy of such information. Investors are encouraged to seek their own legal, tax, or other advice before investing.

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