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'Alternative' rate-making bill would overhaul electric pricing structure for NV Energy

Riley Snyder
Riley Snyder
An array of solar panels at the Copper Mountain Solar 3 facility

Nevada’s long-standing system for setting and regulating the price of electricity is likely to be substantially overhauled in the form of a bill that’s gathered little public attention but could have major implications for NV Energy and its customers.

In its first hearing since lawmakers adopted a substantial amendment entirely replacing the original version of SB300, bill sponsor Democratic Sen. Chris Brooks told members of the Assembly Growth and Infrastructure Committee on Thursday that the measure was an attempt to align the business structure of NV Energy with new renewable mandates and technologies.

If approved, the measure would authorize the Public Utilities Commission to adopt regulations allowing for “alternative” ratemaking — a slew of mechanisms and triggers that automatically adjust rates based on performance and other metrics, and could possibly end the normal three-year cycle for the setting and adjustment of rates.

Although lawmakers asked few questions on the bill during the hearing, such a change would have a major effect on the business model of NV Energy, the state’s largest utility, as well as the structure of power bills paid by every resident and nearly every business in the state. Brooks said the measure was brought forward in light of bills passed by the Legislature raising the state’s Renewable Portfolio Standard and other requirements such as energy efficiency or storage that didn’t necessarily fit nicely into the traditional operating model and financial structure of electric utilities.

“We end up coming to odds with our policy initiatives and their business model as defined in current statute,” he said during the hearing. “So ultimately, we must look for ways to redesign the business model of utilities.”

Historically, electric rates are set based on a utility’s cost of service, a formula that spits out rates for utility customers after determining costs — everything from taxes, operations and depreciation of power plants — plus an authorized rate of return for shareholders (9.7 percent in 2017 for NV Energy). In Nevada, rates are set every three years in a general rate case held by the Public Utilities Commission.

But several states have opted to move away from normal ratemaking procedures to use such alternative ratemaking mechanisms, aimed at improving the “mixed incentives” that utilities face under the normally costly and lengthy ratemaking process. That process can lead utilities to face significant regulatory “lag” that drifts their actual earnings either above or below what is authorized by regulators. Such a “lag” results in either the utility operating at a loss or to customers paying more for electricity than they should.

Although there are various types of ratemaking “tools” identified in the bill, Brooks said the intent was to allow the commission to set up a structure where new technologies — such as energy storage, electric vehicle infrastructure, or distributed generation in the form of rooftop solar — could be baked into the utility’s rate structure.

“These are all the future of energy in Nevada,” he said. “The future is coming fast, and we are obligated to embrace it.”

As written, the bill requires the Public Utilities Commission to draft regulations setting a framework for alternative ratemaking tools, tying them to nine public policy goals identified by the Legislature, including rate stability, renewable energy development, electrical grid efficiency and security and ensuring customers benefit from lower administrative costs.

From there, the bill lays out a process wherein electric utilities (NV Energy) can file an application for the alternative ratemaking plan, which must be approved within 210 days by the commission and include one consumer session. The regulatory body has the ability to deny the application based on if the application is in the public interest, results in “just and reasonable” rates and protects consumers.

The bill also allows any such alternative ratemaking plan to waive or extend the requirement that a rate case is held every three years.

The change to the rate-making process was lauded by NV Energy lobbyist Tony Sanchez, who said the bill establishes a “framework for reform” that would allow the utility to better align itself with services desired by customers.

“With this type of flexibility, the commission can act nimbly; it can anticipate, rather than react to, changes and adopt plans that deliver value to electric customers, whether that value comes in the form of enhanced customer service, new pricing plans or more renewable energy,” he said.

Garrett Weir, the general counsel of the PUC, said the regulatory body was neutral on the bill but that the prospect of alternatives to traditional ratemaking could bring benefits for both the utility and its customers.

“Traditional cost of service regulation rewards utilities for investing in large capital-intensive projects, projects that may be less needed as renewable energy and distributed energy resources become more prevalent, available and affordable,” he said. “But traditional cost of service regulation also does not always promote consumer-centered choices by the utility.”

The bill presented by Brooks on Thursday contained several changes from the version approved unanimously by the Senate last month. It would require the commission to consider requiring a cost-of-service study and the difference in rates under a normal rate application and the alternative rate application as part of any approved alternative ratemaking application.

It also changes language requiring any benefits from the change in ratemaking go to all customers, not just fully-bundled — an inclusion that affects the large businesses and casinos that have left the utility’s electric service but still use it for transmission services.

Notably, the amendment would also repeal a section of state law approved in 2017 requiring the PUC to open an investigatory docket aimed at determining what impact, if any, net metering for rooftop solar has on the rates charged to other customers. That law set an initial 2020 deadline for the report, and the commission yet to create it.

Brooks said that section of law was included as a compromise in the bill passed last session and that there was broad agreement that the current net metering system was working, so no study was needed.

“We’re here to say that it worked out really well, and there doesn’t seem to be a lot of desire or need to do that study now,” he said.

Brooks also said an amendment submitted by Southwest Gas that would also apply the bill’s provisions to gas utilities wasn’t welcome.

“This is very narrowly tailored to an electric utility, and just not the appropriate vehicle for that concept,” he said. “And while I do support the concept that they’re trying to achieve, I just don’t want it in this bill.”

The bill does not require any specific ratemaking mechanisms to be adopted by the commission, but gives several definitions of potential programs or tools that can be used by the commission, including:

  • Performance-based rates, which are set or adjusted based on certain performance metrics such as service outages, employee safety or customer service set by a public utilities commission
  • Formula rates, which use a pre-specified formula to automatically adjust rates to keep a utility’s rate of return at or near its authorized profit margins, with periodic reviews
  • Multi-year rate plans, which would allow for rate cases beyond three year periods with built in rate adjustments based on factors such as inflation or capital investments which wouldn’t require a full rate case
  • Subscription pricing, which creates a special set subscription rate for electric customers  based on a fee — and can include other conditions
  • An earnings sharing mechanism, which would require the utility to share earnings with customers above a specific percentage of return on equity
  • A decoupling mechanism, which separates a utility’s financial performance and results from the sales of electricity — designed to encourage energy efficiency and remove incentives to increase sales

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