Alternative ratemaking in the US: A prerequisite for grid modernization or an unwarranted shift of risk to customers?

Abstract

With increasing frequency, investor-owned electric utilities are requesting preferred cost recovery for “grid modernization” in multiple forms, from multi-year rate plans to riders. Utilities’ claims that massive grid investment is necessary, and that exceptional investment requires exceptional cost recovery, are typically accepted by policymakers with little challenge. It is difficult for policymakers to resist the siren call of grid modernization’s perceived outcomes, from improved reliability and resilience to reduced risks to safety and new customer technology adoption (electric vehicles, distributed energy resources, and more). This paper provides a contrarian viewpoint that is virtually absent as policymakers consider alternative ratemaking practices. It introduces the possibility that excess grid investment in the name of modernization is not only possible, and economically harmful, but has already occurred, encouraged by alternative ratemaking. It provides examples of common grid modernization expenditures the authors have identified as cost-ineffective in the course of their work. It also describes traditional grid planning practices with proven ability to address changing requirements over time, calling into question the need for exceptional grid modernization investment plans. Most important, the paper explains the moral hazard inherent in alternative ratemaking, and the fundamental shift in ratemaking risks and responsibilities from utilities to customers that results. The perspectives this paper presents are critical for policymakers to understand before adopting, extending, or expanding alternative ratemaking practices in their respective jurisdictions.