Revisiting Regulatory Strategy

Regulated public utilities need to periodically review their regulatory strategies. One reason is the shifting landscape of their political and regulatory environments at the state and federal levels. Another reason is the need to expand infrastructure investment in the regulated electric utility industry to meet the expected electrification of the transportation and home heating (replacing natural gas) segments of the economy. I have mentioned earlier in these Weekly Commentaries estimated, with Dr. R. Bruce Williamson, that the transmission investment requirements going forward to meet electrification will be in the trillions of dollars.

Another factor causing some utilities to revisit their regulatory strategy is that some companies will be coming off of “rate freezes” during which cost increases due to market conditions or inflation were not included in current rates. Many of these same companies also face new requirements to raise capital to finance needed distribution infrastructure expansion or hardening against future storm or fire damage. During these “rate freeze” periods these companies may not have maintained the level of regulatory relationships needed to manage controversial rate increase or construction approval issues coming in the future.

It would also be fair to state that political or public disappointment in a number of states with state mandated “deregulation” or “restructuring” has negatively affected that state’s regulatory and political climate. Thus, in those cases a regulatory strategy review is warranted.

A number of years ago writing in Public Utilities Fortnightly magazine Gregory Aliff, then Vice Chairman of Deloitte, and I found that we could categorize most utility regulatory strategies in three parameters: active, balanced and compliant. We also recognized that the smart utility will modify and adapt its regulatory strategy as conditions warrant and may even maintain a different strategy for each jurisdiction based on local conditions. However, I still feel that these three strategies cover the most common and successful approaches to utility regulation.

A) Active regulatory strategy is for companies which are pro-active users of regulation and the regulatory process by which they seek to further corporate goals and strategies.

This strategy is for companies willing to be proactive in promotion of both legislation and regulatory initiatives. In some states these companies that have actively sought restructuring and retail access (liberalization) at their legislature. These are also companies which have asked for PBR, expanded adjustment clauses etc.

B) Balanced regulatory strategy is for those traditionalist utilities which continually look for opportunities to make regulation work for their shareholders and customers.

They quickly adopt the regulator’s initiatives, sometimes offering constructive suggestions for improvement. They comply with both the letter and the spirit of the Law. They are responsive to legislative initiatives by others but generally believe that existing regulatory laws and practices have enough authority and flexibility to accommodate most issues in regulation.

C) Compliant regulatory strategy describes that companies which will comply with the letter of the law, but view regulation as a necessary evil and try to avoid contact with regulators and regulation.

“Out of sight, out of mind” would be their motto. They seek to maximize their return operating under whatever regulatory scheme they are handed. They respond only when requested to do so or when the regulatory proposals are clearly so adverse as to be onerous.

There you have it. Take your choice.

Revisiting Regulatory Strategy

By Branko Terzic