Critical Issues in the Regulation of Electric Utilities in Wisconsin

1
Critical Issues in the Regulation of Electric
Utilities in Wisconsin

• Karl McDermott Carl Peterson
• Vice President Consultant
• Ross Hemphill
• Vice President

MMAC Energy Symposium April 7, 2006 Milwaukee,
Wisconsin
National Economic Research Associates, Inc. 875
North Michigan Avenue, Suite 3650 Chicago,
Illinois 60611 USA 1 312.573.2800 1
312.573.2810 (f) www.nera.com
2
Thinking about Regulatory Reform

• Objectives What do we want from the regulation
  of electric utilities?
• Context What are the factors we need to take
  into account in making these decisions?
• Methods What methods do we have to address these
  issues?

3
Objectives for Regulation

• Reliability
• Price
• Other factors
• Environmental concerns
• Rate mitigation and social programs

4
Context

• The current Wisconsin regulatory model has
  provided certain benefits to consumers
• Investment in Wisconsin, in generation,
  distribution and transmission has been
  forthcoming from the utilities
• Wisconsin consumers will have safe and reliable
  service for the near and intermediate term
• Historically Wisconsin has been a leader in
  promoting efficient price signals for customers.
  

5
Context

• Input prices for electric generation will
  continue rise, at least in the near term

6
Context

• Retail Electric Prices are rising in the US

7
Important Factors

• Wholesale electric markets will continue to
  evolve
• Federal policy continues to promote competition
• Competitive wholesale markets are now being
  tested, but modifications to the industry are too
  far along to move backward
• Developing workable markets is essential
• Price and profit incentive enable market to
  adjust to changes
• Markets, when they work, are superior to
  administrative pricing
• Demand-side of market will be of growing
  importance
• Customers, whether wholesale or retail, must be
  part of the equation for markets to operate
  effectively
• Unbundling of products and services will continue
• Customer choice, either through retail access or
  through utility provision of options, will
  continue to evolve
• Customers will seek value-added products and
  services, especially in times of increasing
  electricity costs

8
Important Factors

• Incentive regulation can be a valuable policy in
  both providing better price signals as well as
  efficiency incentives
• Incentive regulation is becoming more prevalent
  in the regulation of public utilities
• Telecom industry has nearly completed a full
  transition to incentive regulation
• Electric industry, while far behind telecom, is
  also experiencing some experimentation with
  incentive regulation

9
Policy Choices

• Traditional cost-plus regulation
• Poor incentives for efficiency
• Strong incentives for investment
• Incentive regulation
• Good incentives for efficiency
• Incentives for right amount of investment
• Markets
• Strong incentives for efficiency
• Investment incentives theoretically correct, in
  practice still uncertain

10
Why Incentive Regulation?

• Leads to higher efficiency
• Moves utilities toward market-like behavior
• When combined with proper pricing, provides
  customers with the correct signals

11
Results of Incentive Regulation
12
Results of Incentive Regulation
13
Summary of Recommendations

• Explore Implementation of Incentive Regulation
• Provide Utilities Option of Unbundling Prices
• Modify Legislation to Allow Incentive Regulation
  To Operate More Effectively
• Promote the Expansion of Utility Service Options
• Promote the Expansion of Demand Response Programs

14
About the Authors

• Karl A. McDermott is a Vice-President in NERAs
  Chicago office where he specializes in public
  utility regulation. Prior to joining NERA, he
  served as Commissioner on the Illinois Commerce
  Commission where he initiated the Commission's
  investigation into the alternative restructuring
  options for the Illinois electric industry. Dr.
  McDermott earned his Ph.D. in economics from the
  University of Illinois at Urbana-Champaign, an
  M.S. in public utility economics from the
  University of Wyoming and a B.A. in economics
  from Indiana University of Pennsylvania. He can
  be reached at Karl.McDermott_at_nera.com.
• Carl R. Peterson is a Consultant in NERAs
  Chicago office where he specializes in energy and
  public utility regulation. Mr. Peterson is
  currently completing his dissertation entitled
  Efficiency in the US Electric Industry
  Transaction Costs, Deregulation and Governance
  Structures, as a final requirement for a Ph.D.
  in economics from the University of Illinois at
  Chicago and holds a B.S. and M.S. in economics
  from Illinois State University. He can be reached
  at Carl.Peterson_at_nera.com.
• Ross C. Hemphill is a Vice-President in NERAs
  Chicago office where he specializes in pricing
  design, cost of service analyses, and regulatory
  strategies for electricity and natural gas
  utilities. Dr. Hemphill obtained his Ph.D. in
  resource economics from The Ohio State
  University, and his M.S. and B.A. in economics
  from Indiana State University and Lewis
  University, respectively. He can be reached at
  Ross.Hemphill_at_nera.com.