Problem is, it might be true.
Across Missouri — and, indeed, around the country — electrical utilities are grappling with ways to modernize the grid, much of which is showing its age.
“Some substations will be 90 years old when they’re replaced,” says Tom Byrne, Ameren Missouri’s senior director of regulatory affairs, if the current pace of replacement continues. Underground electrical infrastructure in downtown St. Louis, he said, may even reach 100 years in age by the time it’s updated with modern technology.
The challenge, as Byrne will tell you, is how to pay for those improvements in a timely manner. As state-regulated monopolies, utilities must seek approval for the rate increases needed for infrastructure and other costs. In Missouri, however, the regulatory approval process can make it years from the time a project is completed until its costs are recovered.
That delay is called regulatory lag, and it was one of the main topics of discussion in Jefferson City on Tuesday, when utility insiders, regulators and other experts came together at a meeting hosted by the state Public Service Commission to assess what policy levers can be adjusted to improve Missouri’s energy landscape.
Negative Load Growth
Utility representatives described the difficulties of funding improvements in their industry — a problem that they say has been compounded by declining revenue from their customer base, as technologies such as energy-efficient appliances and rooftop solar panels have helped reduce overall electrical demand, or load.“We can’t rely on load growth to pay for new facilities,” said Byrne. He said Ameren has experienced negative load growth in each of the last nine years, not including usage by Noranda Aluminum, formerly the state’s largest energy consumer, which closed its New Madrid smelter earlier this year.
So that utilities — and, by extension, the grid — don’t end up effectively being punished for growing trends in efficiency, many say new regulatory and revenue models should be explored. Policy tools exist that state officials may look to borrow from in the upcoming legislative session.
Some of the main options discussed Tuesday include alternate funding structures aimed to combat regulatory lag. Missouri, for instance, does not allow utilities to recover their costs until after projects are completed and in service. Some states do the opposite, granting rate increases to utilities in anticipation of funding planned improvements to the grid. Most states have at least some system in place to buffer against lag.
‘Don’t Invest’
Ashok Gupta, a Kansas City-based senior energy economist for the Natural Resources Defense Council, said Missouri is “one of the handful of states” that handles rate cases solely on a retroactive basis and that also has to process them so frequently. Gupta says those distinguishing features, and the lack of certainty they create for utilities, send a clear signal: “Don’t invest in Missouri.”While some are pushing for a full reversal of that system, developing “hybrid” pricing models based on a combination of utilities’ historic and projected costs is a compromise that has generated interest from multiple players. Use of interim rates during rate cases was another alternative receiving some vocal support.
Another technique mentioned, called “decoupling,” would change incentives for utilities, aiming to break the direct link between revenue and electricity sales. Decoupling could also be part of a system where annual rate adjustments are made if utilities meet certain metrics for factors like reliability and efficiency.
Rob Hack, a representative of Kansas City Power & Light, said decoupling “must be a part” of any change. He said Kansas City Power & Light fell short of its authorized earnings by $340 million from 2006 to 2015, blaming the gap on the broader trend of declining use per customer.
Reducing Demand
Others say financial incentives for efficiency shouldn’t target utilities alone, but should also seek to further reduce energy demand from the customer’s side of the meter.“We should be valuing investments on the customer side just like investments on the utility side,” Gupta said, adding that consumer-oriented incentives “may be much more cost effective.”
He said he has seen progress in the state’s approach to energy efficiency overall, with Public Service Commission Chairman Daniel Hall proposing minimum efficiency requirements be implemented — something Gupta said Missouri has not yet tried.
But not everyone sees regulatory lag as a purely negative thing. James Owen, the director of the state Office of Public Counsel, is open to reform, but says the current system provides watchdogs such as his office with the time necessary to police utility finances and ensure that fair prices are set for consumers.
“It gives us a chance to open their books,” said Owen. “There are inefficiencies. There is improper management. I’m not saying it’s intentional — it happens.”
Other regulators from the Office of Public Counsel and the Public Service Commission disputed some of the assertions made by utilities at the meeting, such as the systemic effect of regulatory lag on revenue and the extent of declining load growth in the state.
To some experts, Tuesday’s summit raised broader questions about what regulators should incentivize the utilities to aim for. Some said a change is needed to give utilities the certainty needed to plan investments for the long run without the constant stop-and-go of backward-looking rate cases.
“Do you want a regulatory structure that provides little incentive for investment?” asked Byrne.
No Certainty
A long-term plan of state energy goals, Gupta said, would be a good place to start.“It just freezes you when you don’t have clarity or certainty,” said Gupta. “Things don’t happen at random, they’re part of a plan. I know some people don’t like the word ‘plan,’ but with infrastructure, you need one.”
He is optimistic that conditions in Missouri are ripe for change, especially once a new governor takes office.
“I’m a believer that we need more change rather than less and I think we’re more likely to see it in the first year of a new administration rather than the last year of an old administration,” Gupta said.
©2016 the St. Louis Post-Dispatch Distributed by Tribune Content Agency, LLC.
