How Electric Utilities are Regulated
By Chris Schweitzer, General Manager, Auburn Electric, with Mark Cooper, Indiana Regulatory Attorney
This is part of a continuing series on the electric utility. We periodically receive questions on electric rates and regulation. The answers are complex because of the nature of how utilities are regulated and power is distributed. This series explains more on how utilities set rates as well as the local and state bodies that regulate utilities like Auburn Electric. In the first blog, we explained how rates are calculated—specifically, the cost of wholesale power and the cost of local service delivery. In this blog, we focus on how the electric utility is regulated in the setting of rates.
The City of Auburn has assembled a dedicated team of experienced professionals to aid our efforts to improve the cost of power and rate-making at Auburn Electric. One of our team members, Mark Cooper, is an Indiana regulatory attorney and former chief administrative law judge at the Indiana Utility Regulatory Commission (IURC). Mark has provided counsel for Auburn Electric in several regulatory matters over the last couple years, and recently provided some insight on this aspect of operating a utility in Indiana.
All electric utilities are regulated in some fashion. This is the result of what’s known as the regulatory compact that formed early in the 20th century. As part of the compact, electric utilities were given a monopoly to provide electricity service in a specific territory. In exchange, those utilities are regulated—including what they can charge for providing service to their service territory.
Mark explained that the regulatory compact makes sense for electric utilities because power infrastructure is an extensive investment. Duplication of infrastructure—with multiple sets of power lines strung through or buried under city streets, each owned and maintained by a different company—would be a massive waste of resources. Power infrastructure exhibits economies of scale, so the average cost goes down as more demand is served through a single wire. Therefore, duplicate services and competition in providing the infrastructure (wires, poles, substations, etc.), in this case, would not serve the public well.
Types of Utilities
There are different ownership models for utilities across the county. Each model has different objectives that guide them.
|Investor-owned||Generates profit for investors (who may or may not reside in the community)|
|Municipal||Municipal department that serves local community|
|Cooperative||Generates dividends for shareholders who also receive the service; utilities owned by members/customers|
Auburn Electric is a municipal utility. The vast majority of municipal utilities are self-regulated. Others, like Auburn Electric, have not opted out of the IURC, the state-appointed regulatory commission for natural gas, water, private sewer and electric.
How rates are determined is the major difference between self-regulated utilities and those that are regulated by the IURC. Self-regulated utilities decide and approve rate adjustments at the local government level. Regulated utilities, on the other hand, must seek IURC approval on any rate changes.
Being an IURC-Regulated Utility
To make any rate adjustments, utilities under the purview of the IURC, like Auburn Electric, must perform a rate study and may also perform a cost of service study. Additionally, they need to define revenue requirements, identify the rate adjustment and prepare a case to present to the IURC for consideration and approval. Through this independent review, the IURC:
- Determines what the utility is allowed to financially recover
- Approves the amount of revenue that can be collected
- Ensures rates are increased at reasonable levels to avoid “rate shock”
Being part of the IURC also provides considerable protection under the law. With established standards and procedures, customers must go through a proper legal process to bring forth complaints, as opposed to filing complaints in local courts of law.
Another impact of being an IURC-regulated utility is the additional layers to the process—layers that can require longer lead times and added expense, slowing down a utility’s ability to be more responsive to operational and market changes. In the past, these layers have been a disincentive for the utility to file more regular rate cases for more minor adjustments.
Role of Common Council
It’s important to note that while utilities in Auburn fall under the regulatory jurisdiction of the IURC, the Common Council still plays an active role in utility operations and rates. Common Council is charged with high-level oversight and management of Auburn Electric. Therefore, on a routine basis, they assess the health of the utility. They work with staff and contracted experts to review financials, assess the cost of providing both power and service, make recommendations for rates, and approve any steps we take with the IURC. They cannot, however, approve rates—that is the authority of the IURC.
A Combined Effort
Because Auburn Electric is part of the local government, it’s easy to forget we’re also a business. Just like any business, we have to regularly evaluate the health of our enterprise—from the physical infrastructure and our people and processes, to our ability to grow and continually invest in the utility. Any properly managed utility spends the time, effort and resources to ensure its service and rate-making abilities are on par with the local market. Our success requires that all parts (Auburn Electric, Common Council and IURC) work together on the community’s behalf. We’re committed to making that happen every single day.