How Much Should a Utility Earn for Managing Its Assets?
Posted on May 4, 2018 by Bob Jenks
Tags, Energy
Utilities earn a rate of return on their capital investments. This is the main source of profit for utility companies - when they build a generating plant or put pipes in the ground, they recover that capital investment from customers over several decades while earning a return on their original investment.
Utilities can also earn an additional return when they can convince the Public Utility Commission that they are doing something unusual that deserves an additional reward – called an “incentive payment”. NW Natural set up one of these incentive plans back in the 1990s. The existing incentive is for the company to optimize its assets by doing things like selling excess pipeline capacity or allowing some of NW Natural’s gas in storage to be “loaned” to another party when prices are high and returned when prices are lower. When this was set up, NW Natural convinced the Commission to allow it to keep 33 percent of the revenue associated with asset optimization.
In NW Natural’s 2012 rate case, CUB challenged the continuation of this sharing percentage. CUB pointed out that by 2012, asset optimization was something that utilities were expected to do and many did it without any additional incentive. The idea that NW Natural would keep 33 percent of these revenues, in addition to earning a return on the underlying asset, was excessive. NW Natural argued that its program was different, and deserved such a high reward. That docket ended with the Commission ordering a new separate investigation into the issue.
That new investigation continued with CUB arguing that NW Natural was being overly compensated and NW Natural arguing that what it was doing was unique. That docket closed with the Commission ordering an independent study of NW Natural’s optimization.
That independent study wrapped up last November, and the results were clear. NW Natural’s optimization program is not unique; it is a typical utility function. NW Natural is not taking on any unusual risk. The only thing unusual about NW Natural’s program is that the company is being allowed to keep 33 percent of the revenue. The study looked at other similar programs. In 25 percent of cases, the utility does not earn any additional return. The average utility keeps 10 percent or less of the revenue from optimization.
NW Natural has filed a new rate case this year, and with this independent study that supports CUB’s proposed changes, we will again be trying to trim this oversized incentive and return the benefit to customers. Stay tuned for further updates.
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05/04/18 | 0 Comments | How Much Should a Utility Earn for Managing Its Assets?