Alternative regulation is an umbrella term for various regulatory frameworks and
pricing mechanisms. Most are designed to alleviate either regulatory lag or regulatory
uncertainty, two situations that ultimately delay needed infrastructure and increase
costs for consumers. Some forms of alternative regulation, however, address specific
societal goals such as increasing the use of renewable energy generation technologies.
While some alternative regulation models require a total restructure of the regulatory
framework, others are tools that alleviate specific constraints while working within
the existing framework, known as competition or cost-of-service regulation.
How we got to this point
In the mid-late 1990s, states began a stampede toward industry restructuring and
competitive retail markets. That stampede came to a grinding halt after the California
crisis in 2000 and 2001, and by 2005, states were reversing their decisions and
returning to the more stable environment provided by traditional regulation.
In the wake of the stampede, many state commissions instituted rate freezes and
price caps to control prices as consumers adjusted to the changes. In some cases,
those protections may have shielded consumers from the reality of electricity prices
which now seem larger because they are unexpected.
Many states now are considering alternative regulatory models within competition
framework – pricing tools and mechanisms to address specific issues without upending
the entire architecture.
AEP is supportive of competition, but believes flexibility to accommodate specific
scenarios is necessary to reduce regulatory lag and uncertainty, achieve certain
societal goals, and help consumers deal with the rising cost of electricity. Alternative
regulatory methodologies achieve that flexibility.
What the industry says
Avoiding unintended consequences is critical when considering ratemaking alternatives.
For instance, feed-in tariffs do boost fledgling markets for renewable generation
technologies. However, other incentives will achieve the same goals without artificially
inflating consumer prices to unacceptable levels.
On the whole, environmental advocates and Wall Street are supportive of the flexibility
yielded by alternative regulation.
What the stakes are
The tendency of competition to yield both uncertainty and lag can bring about lower
bond ratings on Wall Street and ultimately higher cost of capital, meaning more
expensive projects or delayed/canceled projects. And that ultimately results in
higher costs and lower reliability for consumers. Alternative regulation can alleviate
those challenges. That said, crafters of alternative models must be wary of unintended
consequences that result in cost shifting and higher prices.