November 30, 2012 By Jim Malewitz, Stateline
Under intense pressure from Wall Street, public utilities in a growing number of states are charging customers upfront for costly upgrades to aging gas, water and electric systems. It’s a shift in financial obligation that’s rankling consumer advocates, who say companies are shirking their basic responsibility to keep infrastructure up to date.
The companies describe a combination of urgent needs — spurred by new federal regulations, rapidly changing economics and the simple passage of time — that’s too costly to absorb into normal rates.
Breaking with tradition, state regulators are increasingly signing off on proposals to tack onto utility bills extra fees, called cost trackers, to pay for planned multi-million dollar system upgrades. In the past, companies could recoup costs only after a project’s completion, as part of the normal ratemaking negotiations that take place with regulators every few years.
Trackers, on the other hand, can take effect almost immediately, increasing customers' monthly bills by amounts ranging from a few cents to several dollars, depending on a project’s size and whether states cap the increase.
Illinois, for example, allows natural gas, electrical and water companies to use the mechanism. Under a tracker rolled out in 2011, Peoples Gas can charge Illinois customers annual fees of up to 5 percent of base rates as it replaces some 2,000 miles of natural gas pipeline in the Chicago area, a process expected to take 20 years. Right now, the tracker is worth as much as $24 million each year.
“Consumer advocates across the country are recognizing this,” says Mark Schuling, Iowa’s state consumer advocate. His state has a mixed record on tracker requests. It rejected a proposal last year by the state’s lone regulated water company, but passed legislation allowing trackers for electric utilities.
“It’s a trend for sure,” says Ken Costello, a policy expert at the National Regulatory Research Institute, which provides information for state utility regulators. “It seems to have shifted regulations.”
The use of trackers isn’t brand-new; the mechanism has long been available to many utilities, but traditionally just for unforeseeable costs, such as volatile natural gas prices or fallout from natural disasters. The burden of maintaining and adding infrastructure long fell outside that category.
Natural gas companies were the first to request infrastructure trackers, beginning in the mid-2000s. But other utilities soon followed suit. “Once somebody gets a new mechanism, it’s like a herd mentality,” says David Dismukes, director of Louisiana State University’s Center for Energy Studies. “Everybody’s got to have it.”
With the flurry of recent activity, 18 states now permit natural gas companies to fully recover infrastructure costs through trackers, according to the American Gas Association. Eleven states do so for water systems, the National Association of Water Companies says. The practice is growing rapidly in the electric utility field as well.
All of this is stirring concern not only among state consumer advocates but among advocacy groups such as AARP, who say trackers unfairly shift financial risks to consumers who may never benefit from projects that can take decades to complete. What’s more, these advocates say, letting utilities claim the money upfront — outside the traditional ratemaking process — erodes incentives to invest efficiently. Once regulators approve the trackers, it’s difficult for them to scrutinize how that money is spent, and highly unlikely they would do so.
“It puts these rate increases on automatic pilot,” Irwin “Sonny” Popowski, the longtime Pennsylvania state consumer advocate, said this month at a utility commissioners meeting in Baltimore.
Good for Utilities
There’s no question that the trend is a boon for utilities and their major investors; a new supply of cash makes them less risky as an investment. Utility officials argue that this translates to better services and potential cost savings for ratepayers down the line. Additionally, they say, the practice prevents rate shock, letting utilities finance projects over time rather than all at once.
“Financially weak utilities don’t do good things for customers,” said Lawrence Borgard, president of Integrys Energy Group, at the commissioners’ meeting in Baltimore. “Unless we have reasonable cost recovery systems, Wall Street is going to chew us up.”
Undoubtedly, utilities are faced with huge challenges as they confront infrastructure needs: thousands of miles of natural gas pipelines not equipped to handle the country’s surging production; an aging electrical grid that nearly all experts agree must become more sophisticated; water pipelines that, in some places, predate the Civil War.
Along with needed telecommunications upgrades, utilities’ total modernization needs for the next 20 years could top $4 trillion, the National Association of Regulatory Utility Commissioners estimates.
“The systems that we have — they’re old, and they’re going to need replacement,” says Erin O’Connell-Diaz, an Illinois commissioner. “These are essential services,” she said. “It’s how you put water in your baby’s mouth. It’s how you heat your home.”
Such mammoth projects require unique funding mechanisms, she says, describing a tough balancing act for state regulators: acknowledging utilities’ long-term sustainability needs, while managing the burden on consumers.
Diaz admits that it is difficult to explain the reasons for the added fees to ratepayers. Raised rates always draw attention, she says, but the fact that “your pipes aren’t going to blow up” thanks to upgrades often get ignored.
On the natural gas side, the nightmare of exploding pipes has drawn federal regulators’ attention.
In September 2010, an interstate natural gas line ruptured in San Bruno, California, killing eight people and destroying 38 homes. The cause was a poorly welded and never-tested pipe installed in 1956. In 2011, an explosion in Allentown, Pennsylvania, killed five people. It was likely due to an 83-year-old cast iron gas main. Cast iron mains are especially prone to failure as they turn brittle over the years.
“An effective program for ensuring the timely rehabilitation, repair or replacement of high-risk gas pipelines might have helped prevent these accidents,” Cynthia Quarterman, administrator of the U.S. Pipeline and Hazardous Materials Safety Administration, wrote in a letter urging state commissioners to speed up work on infrastructure projects.
With pressures such as those, utilities are increasingly touting the safety benefits of approving trackers for equipment upgrades. They continue to insist that needed safety improvements are otherwise unaffordable.
But many consumer advocates — and some state commissioners — aren’t convinced that ratepayers should foot the bill for those projects and others. That burden, they say, should fall on utilities, who they are convinced can afford it. Maintaining reliability is one of utilities’ “core responsibilities — their contract with the public,” says Dismukes, the Louisiana State professor. “Why should ratepayers be holding the bag?”
Utility officials say trackers are needed because infrastructure upgrades don’t help bring in revenue. But critics argue the investments yield benefits for companies, through improved efficiency and reduced future maintenance. And they say utilities aren’t sharing gains brought by trackers.
Those are some of the reasons Maryland regulators are turned off to the shift in policy, says Douglas Nazarian, chairman of that state’s Public Service Commission, which has rejected several tracker requests in recent years. “The financial pressures on companies are not out of the ordinary,” Nazarian told Stateline. “They’re getting paid faster to do the exact same kind of work.”
Reprint courtesy of Stateline, a nonpartisan, nonprofit news service of the Pew Center on the States that provides daily reporting and analysis on trends in state policy.