Alternative Regulation

The issue

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.

Regulatory frameworks in the US electric utility industry: 2001-2010
Source: EIA

Restructing Status
Source: EIA

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 position

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.

Ratemaking Continuum

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.

Issues In Electricity

Issues In Electricity

Alternative Regulation

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