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Texas PUC Issues Final Report On Alternative Ratemaking, Calls More Substantial Changes Outlined In Consultant's Report "Premature"

January 16, 2017

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Copyright 2010-17 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

The Public Utility Commission of Texas has provided to legislators a final report on alternative ratemaking mechanisms, that generally finds that major revision is not needed to the rate-setting and design process used for the utilities located within ERCOT

"At this time, the Commission does not believe that ratemaking mechanisms for transmission and distribution utilities that operate within ERCOT are in need of major revision. In fact, the Commission believes that existing streamlined methods of recovery are generally achieving their intended purposes," the PUCT's final report says

"The Commission believes that clarification of specific legislative intent with regard to the Commission’s use of certain limited-scope ratemaking mechanisms expressly addressing the timing of cost recovery could, when warranted by company-specific circumstances and after proper consideration by the Commission, serve to ameliorate the potentially negative effects of regulatory lag. Such express authority for the Commission to use specific mechanisms for particular purposes could address the comparatively weaker financial conditions of the vertically integrated non-ERCOT utilities and, when or if circumstances warrant, be useful for ERCOT companies as well," the PUCT's final report says

"Specifically, based on the experiences of the Commission, the Commission believes that legislative clarification of Commission authority and discretion could be useful with respect to the Commission’s use of at least three specific ratemaking mechanisms: 1) 'tracker' mechanisms for cost items of unusual or special-case nature; 2) interim rates and discretion in implementing their effective dates; and 3) 'relate-back' provisions that allow for earlier effective dates of final approved rates," the PUCT's final report says

Accordingly, the Commission recommended the following specific legislative actions:

1. Provide the Commission with express authority to use the following ratemaking mechanisms and practices when deemed reasonable by the Commission:

• 'tracker' mechanisms for cost items of unusual or special-case nature;

• authorization to adopt methods to streamline the ability of the Commission to set interim rates and implementation dates thereof; and

• increased flexibility in establishing 'relate-back' provisions that allow for earlier effective dates of final approved rates.

2. With respect to distribution investment, eliminate the expiration date for PURA § 36.210, relating to Periodic Rate Adjustments [distribution cost recovery factor], and the related provision in subsection (h) of that section requiring a study to inform the legislature of the need to continue the legislation.

3. Affirm or acknowledge Commission authority to require periodic rate cases if appropriate based on a utility’s individual circumstances or general industry policy.

As was first reported by EnergyChoiceMatters.com, a consultant's report on alternative ratemaking had recommended substantial changes in rate design and cost recovery -- most notably, expressing a preference for Straight Fixed-Variable (SFV) rates -- as opposed to the more discrete rate recovery timing issues ultimately reflected in the PUCT's final recommendations

Though the PUCT's final report did not specifically delineate any of these more substantial changes by name, the PUCT's final report said, "The Commission believes that modifying the current system by implementing more substantial changes such as those outlined in the [consultant] Report is premature at this time. Before any such changes are made, the Commission believes it would be wise to conduct further study and analysis."

However, the PUCT's final report removes earlier draft language concerning the negative impact on retail electric providers from SFV or other major rate design changes. The now-omitted draft language had stated, "The use of inappropriate alternative ratemaking mechanisms could result in uncertain and unintended consequences for the Texas competitive retail market and significantly impact the pricing strategies of retail electric providers."

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