In this lesson, we're going to tackle the regulatory compact and the rates process in more detail. Where did it all start? In the early 20th century, there was lots of frustration of over natural monopoly. That was railroads. And so a compact or a regulatory agreement, in other words, was formed for US Electric Utilities, so that consumers wouldn't fall prey to the same fate. The utility got to provide exclusive service for a territory and in return they had to take on some responsibility. And that was they had to serve everyone in the territory. And you can see how this would be a lot easier if people have concentrated more closely together versus if they were more spread out and located in rural areas. So over the regulatory compact, if the utility is the only electricity provider in the area, it's able to recover it's costs and have a reasonable rate of return on the investment that it makes. The return order profit is equal to the market determine cost of the debt and equity capital. In return, the utility has to provide low cost and reliable power. And as I mentioned, serve everyone. Another really important piece of that compact is they have to submit to price or rate regulation through a very specific process, and this is in the absence of market competition. I talked to some experts from both the utilities themselves as well as the regulator to see what this looks like in reality. I was able to spend some time with Ted Niemi, who has a four decade long career at one of the largest investor only in the United states Xcel energy. He provided a great overview of the process from end to end.Including how the various utilities make money. >> The Utilities commission, every state has one And they regulate the retail rates of electric and gas and sometimes water and other utilities. And the wholesale is regulated by the Federal Energy Regulatory Commission, FERC. So Xcel Energy and Public Service Company are both regulated by the FERC for the wholesale transactions they do as well as the Public Utilities Commission in the state of Colorado for the retail rates, the rates that the average person pays. So an investor owned utility makes investment on behalf of its customers and that's how it makes money. It has shareholders and no shareholders, our pay of a reasonable return as approved by the commission. And they also have other cost of debts. They issue corporate bonds and other financial vehicles to invest in the system. One thing that's common with any utility is they are capital intensive which is why there are monopolies or oligopolies because there's a barrier to enter into the market because of the capital intensive nature of the business. >> As I mentioned state PUC is existing the absence of competition in order to play a key role in providing checks and balances on what the investor on utilities can charge. Let's hear more about this from Drew Bolin from the Colorado PUC. He'll help shed some light on this process from the perspective of the regulator and determining in IOUs rates. >> So when they do rate cases, they are basically filing to say we would like to increase rates on the rate payers for these different reasons. And so what happens is there's a lot of stakeholders involved. You have rate payers, you have small business, you have agriculture, you have low income, you have environmental considerations. So, the process is referred to as litigated proceeding. And a proceeding is simply a fancy word for a docket. And a docket is simply some kind of a topic and a file that you're working to work through in a litigated way so, this does look like a courtroom, the commissioner sits there. We do have tables and mics where interveners will go ahead and make their case. And they can also be cross-examined by staff or the company, or ask questions by the commissioners. So the thing the main thing about it is to get all the facts on the table so that the three commissioners can go ahead and balance the costs and the benefits to make educated decisions but it is a very legalistic process where a filing a rape case will come in and will be assigned a number and a name and then interveners or groups of people or even sometimes individuals will go ahead and have the opportunity to make their case. And whether this is a good idea or a bad idea, how it will affect them in a pro way or a con way and so the whole range of interveners are represented. >> It would look a lot like a trial. It's not a civil or a legal trial, but it's a it's administrative trial is what it is. And so each party has the right to ask questions of the witnesses for the other parties during this process. Each witness usually provides written testimony and then probably oral testimony during the hearing. And so it looks a lot like a trial and then of course the parties whose witnesses read these questions has a chance to cross the witness as well. So it does look just like a trial. >> As I mentioned, state PUCs exist in the absence of competition in order to play a key role in providing check and balances on what the investor-owned utilities can charge. >> Rates are one of the most complicated things on the planet. I'm not kidding. Generally, rates are done in kind of a incremental way. There's called what's base rates, and those are the rates that are in place. There are tariffs, and tariffs sounds like a pretty complicated word. Tariffs simply means the rate structure. So, there's a tariff for like us as individual home owners or what have you, as a residential tariff. Then there will be a tariff for small commercial, large commercial, industrial. And it gets much more complicated than that. >> For electric utility, there's really three different rate classes. There's the residential rate class. There's a commercial and industrial class and there's a street and area lighting class. That's three basic classes. And one of the main reason why you have these classes is each class uses different parts of the system, differently. So which state generation, for instance? From generators perspective, the utilities' plan for the peak demand usually in the summer about now. You've got these 100 degree days. Everybody's got there air conditioners on and so the utilizes got base load generations, they have some gas generation, they have some solar generation, they have all this generation on this my system. And at that peak, who is using most of that energy at peak? So different entities are using different portions of the system at any given time. For instance, street lighting. Street lighting uses no energy during peak, except for perhaps a few hours in the winter time. So their cost assignment for, we'll just say peak energy, is much different than a residential customer that's using their air conditioner at peak. So in addition, they use different parts of the system. For instance, we have large transmission customers that only use the transmission system. So they don't use the distribution system, so they're not charged for that system. CMI customers, there's a couple of different voltage levels and different types of facilities that are in place to serve them. Residential customers and small commercial customers really use the whole system all the way down to distribution secondary. So, it depends on how you use energy and it depends on what part of the system that you use that determines your rate class and the types of rates that you pay for service. >> So what happens is we actually have two phases when there's a rate case. Phase one, you can think of as the pie, so if a utility basically needs to go ahead and recoup some costs for certain things, they'll go ahead and propose something in a phase one. So, phase one is to say, okay, how big is the pie? Then, generally about a year and a half later, this is all very, very slow process. A year, year and a half later, then a phase two can happen. And then that's where they decide how big each of the slices of the pie is. So imagine, if you would, that each slice would be a tariff. So how big should the slice be for residential, how big would it be for small commercial, large commercial, and industrial as an example. >> My rate cases that I filed for Xcel Energy have ranged from 11,000 pages to 40,000 pages of information. So you can imagine that doesn't come together overnight. So typically, you're looking at a four to six month process before you make the filing. And then most of the filings take close to 3/4 of a year. So here in Colorado, the statutory deadline is 210 days. In Texas, it's 185, and it's different in each of the states that you operate in. So you really are looking at over a year or at least close to a year from the time you start a recuse process to the time that you finish a recuse process. >> In this lesson, you can see that the experts both PUC and the Utoliate governs have very different views. But they seek the same outcome and that is affordable, reliable, and sustainable electricity. In this case, the consumer wins. Throughout the module, you've seen that the creation and capture of value has been important regardless of the type of utility. In our next modules, we'll explore how the changes in technology and stricter regulations will fit into this regulatory compact, and we'll even look at some opinions on how things may change.
