Is Oregon Utility Regulation Part of the Problem?
Posted on January 25, 2024 by Bob Jenks
Tags, Energy, General Interest
As utility bills in Oregon continue to rise in 2024, CUB is asking tough questions from state regulators. Currently, utility regulators spend a lot of time looking at many requests from utilities to raise rates. This analysis can take up to 10 months in many cases. But overall affordability to customers is not part of the equation for regulators.
We need to look at utility bills holistically—before we see rates skyrocket. Our current system means that customer advocates, decision-makers, and customers do not have a clear picture of what to expect from utility bills. And an even harder time knowing when rates will go up dramatically.
Exposing Flaws in Oregon’s System of Utility Regulation
From December 2022 to January 2024, Portland General Electric(PGE) customers have seen bills go up by 30%. This large increase in 13 months shows real and significant flaws in Oregon’s system of regulation utilities.
Our current structure leads regulation to focus on each individual line item, but not on the overall affordability of rates. There are several parts to this problem:
- Utilities have an incentive to spend money
- Utilities can request dozens of rate increases a year
- Regulator looks at individual utility projects, not total rates
- Costs can be updated even after they are approved by regulators
- Utilities work to keep information confidential from the public
Electric utilities are typically the ones who see the most frequent requests for rate increases. PGE is not the only utility that has had large bill increases in the past few years. Pacific Power customers saw bills increase by 21% at the start of 2023 and by 11% on January 1, 2024.
Increasingly, gas utilities are also asking for more from customers more often. Alongside the big spikes in the cost of methane, NW Natural gas rates have increased by 32.7% since September 2022.
Utilities have an incentive to spend money
Utilities make a profit from making capital investments. This ability to profit from a new power plant, laying new lines, or other projects is protected by Oregon law. While many investments are necessary to maintain a reliable system, too many investments can cause rates to be unaffordable.
To justify a capital expense, a utility normally has to show that the investment was expected to bring benefits to the system and to customers. But affordability to customers is not part of the equation for regulators.
Example: Wildfire Mitigation
After the 2020 Labor Day fires, it became clear that utilities needed to invest money in wildfire mitigation. Oregon’s utilities are now spending hundreds of millions of dollars to mitigate potential wildfires. Since a wildfire caused by a utility line can cause significant harm, it would be hard to argue that this is not a prudent and necessary investment.
For utilities, wildfire mitigation was an opportunity to spend money and increase profits. Did they ask whether this was affordable for customers? Did they look at other investments to see if there were costs that could be avoided or delayed?
Read More: Protecting Oregon Customers from Wildfire Risk and Cost Increases
Regulation Looks at Individual Investments, Not Total Rates
Under Oregon law, regulators at the Public Utility Commission are supposed to establish fair and reasonable rates. What regulators do not consider is how these costs affect customers on the whole.
When a utility asks regulators if it can charge customers more money, it brings a list of investments and expenses. Regulators go down the list, examining each cost to see if it is reasonable and justifiable. They ask questions like: Will this cost provide a benefit to the energy system? Will this investment be able to be used for its expected lifetime?
What regulators do not ask: How much will approving this cost increase customer bills? What other costs is the utility asking for that will increase bills? Can customers afford this large of an overall increase?
Utilities are also not considering customer impact when making investments. When a utility makes an investment, it is motivated by profit first and meeting basic standards of providing service second. What is not considered is how an investment will impact the people they are charging.
While adding many new upgrades to the utility’s system may help the system, when combined their cost may be beyond the reach of most customers when they are added to the bill. With neither utilities nor regulators considering whether families can afford total energy bills, a lot of pressure falls on advocates like CUB.
Single-Issue Rate-Making Makes Controlling Costs More Difficult
Holistic Utility Regulation: Under traditional regulation, regulators consider utilities’ investments, the overall cost of providing service, profits, and more. For a long time, the holistic model was the standard for utility regulation. Over the past couple of decades, utilities have increasingly asked for surcharges outside of this process.
Single Issue Regulation (Surcharges): In the case of single-issue rate-making, regulators typically only look at the utility costs and surcharge requests related to a single issue. One recent example of a single-issue surcharge is the Wildfire Mitigation cases mentioned above. PGE and Pacific Power both asked to add a surcharge to cover costs related to wildfire prevention. Other examples of single-issue requests include surcharges to cover costs associated with the 2021 ice storm and pilot programs for electric vehicle investments.
Right now, electric utilities are the ones most likely to use the surcharge method to raise rates. But gas utilities are also able to use this tactic. Across the country, energy utilities are using single-issue regulation more and more often to get more and more money from customers
Costs are Updated After Regulators Review Them
In some of these mechanisms, PGE will file a proposal but is allowed to update the proposal. In the case of power costs, the final update is after the Commission actually issues its final order in the case. This means the Commission is expected to make a decision without knowing the rate that is established.
Lack of Transparency on Rate Impacts
In order to protect trade secrets, utilities are allowed to designate some information as confidential. But utilities abuse this process. When PGE updates its power cost forecasts in power cost cases, it designates the expected price increase as confidential. CUB can not think of any reason why a forecasted rate increase could ever be considered confidential. But it does make it difficult to inform the public about what their rates will be and it makes public discussion of future rate hikes more difficult.
Enough is Enough.
PGE’s rates have increased by 30% in the last 13 months. But no one has reviewed the overall rate level and asked the question: Are rates fair and reasonable?
Using the Tools in Regulators’ Toolbelts
Regulators at the Public Utility Commission have tools that they can use to lower the impact to customers.
Directing Utilities to Adjust Expenses
First, the Commission can order a utility to propose and implement other measures to reduce rate shock. The regulators could tell the utility to delay certain expenses. They could also direct utilities to take other cost-cutting measures, reducing the need for a rate increase altogether.
Delaying Increases
Second, when regulators approve a rate increase, they can order the utility to delay some of that increase until sometime in the future. By delaying increases, electric customers in particular can avoid a large increase during winter when energy usage is the highest.
In the case of PGE’s 2024 increase, regulators asked the utility to delay an additional 2% increase until the spring. In 2023, Pacific Power delayed the rollout of its 21% increase until the spring, lessening the impact of the winter heating season.
By delaying increases, regulators can help protect customers from surprisingly high bills during the winter months. This could be the difference between a household being able to keep the heat on or facing disconnection.
Tying Customer Costs to Allowable Profits
Third, regulators can add incentives to keep costs low by lowering allowable profit margins if the cost to customers is not controlled.
State utility regulators are required to set some costs, such as utility profits, at a reasonable level. However, the Public Utility Commission can set the rate at the lowest level that is considered reasonable. For example, the Commission might determine that a reasonable profit margin is anything between 9.0% and 10.0%. Under normal circumstances, the Commission might set that margin at the midpoint or 9.5%.
But to mitigate a large rate increase, the Commission can set the profit margin at the lowest point which is reasonable or 9.0%. Lowering profits will lower the rate increase for customers. This is an important tool because it tells utilities that if they cannot control their costs, it will reduce their profit margins.
CUB is Pushing for Policy Changes
CUB advocates are hard at work this year to create lasting change to protect customers from more bill increases. In 2024, we are facing multiple requests from utilities to increase rates again. Oregonians from Newport to Ontario could be impacted.
Reduce the Number of Increases
A big policy issue for CUB this year is to reduce the number of rate requests that utilities are asking for each year. We have been pushing back against the rising tide of surcharges facing Oregon energy customers.
In the PGE case, CUB continued to fight for a more holistic approach to utility regulation and won on several issues we raised. Now, PGE is consolidating some of their requests and has dropped others. This is good for customers’ ability to know what to expect from bills down the line.
Read more: Are Utility Customers Being Nickled and Dimed? - CUB Blog
Pushing for New Policy: Avoid Large Bill Spikes in the Winter
Regulators did the right thing in delaying even more increases for PGE customers this winter. Now, CUB is calling on the Public Utility Commission to make spreading high rate increases a standard practice to prevent disastrous winter bills for Oregonians.
While CUB has negotiated delays in winter increases with utilities, this is the first time in recent memory that the Commission has made such a request. Without this delay, customers could have seen a higher bill increase in January, a month that typically brings the highest energy bills of the year.
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08/22/24 | 3 Comments | Is Oregon Utility Regulation Part of the Problem?