Iowa Utilities Board releases ratemaking reform study
on Thursday, January 11, 2024
Last month, the Iowa Utilities Board submitted its report to the state legislature recommending updates to Iowa’s laws for utility rates. This was the broad first review of Iowa’s utility rate laws in nearly two decades and could lead to significant changes.
How did we get here?
During the 2023 legislative session in Iowa, lawmakers adopted House File (HF) 617, requiring the Iowa Utilities Board to conduct an independent, third-party study to explore potential reforms to ratemaking policy for the state’s utilities. To conduct the study, the IUB hired London Economics International (LEI), a consulting firm with expertise in energy policy issues. Throughout the fall, the IUB and LEI conducted a series of public meetings with a variety of stakeholders, including utilities, environmental organizations, customer advocates, business groups, and more. Stakeholders submitted written comments and met directly with the consultant to provide input into the process.
Guiding the content of the study, HF 617 instructed the IUB to explore reforms that would, “...ensure safe, adequate, reliable, and affordable utility services provided at rates that are nondiscriminatory, just, reasonable, and based on the utility's cost of providing service to its customers within the state.”
The final public meeting in this process was hosted in November 2023 and the IUB submitted LEI’s final report to the Iowa Legislature on Thursday, December 14 for their consideration. In all, the final report was over 200 pages long and used five peer states (Kansas, Michigan, Minnesota, Missouri, and South Dakota) to compare policies and identify opportunities for reform. The report made a strong case that Iowa’s utility laws are outdated and ripe for reform.
Recommendations from LEI Study
In all, the LEI study identified six key recommendations for policy changes in Iowa. IEC is focused on how these recommendations relate to Iowa’s electric utilities.
1. Consider a maximum stay-out provision for general rate cases.
Current law allows Iowa utilities to avoid rate case proceedings in front of the IUB for long periods of time, even though the basis for rates might shift during that time. For example, MidAmerican Energy last filed an electric rate case more than a decade ago and has seen changes in its customer base since then. Utilities also have an incentive to reduce their risk by relying on the use of riders and trackers that automatically adjust costs for fuel, transmission, and other items that show up on customers’ monthly energy bills. These automatic cost adjustments are making up a growing portion of electricity bills in Iowa without a complete review.
The study says setting a maximum amount of time that utilities can avoid bringing a formal rate case in front of the IUB would empower the agency to conduct thorough reviews of costs more regularly. Further, the report encourages lawmakers to allow IUB staff to submit their own evidence for contested rate cases, allowing regulators to include information that other stakeholders may not include. Kansas and South Dakota allow regulatory staff to submit evidence in their rate case proceedings.
2. Enact a statute that requires rate-regulated electric utilities to file an integrated resource plan (“IRP”) and gas and water utilities to file long-term supply plans.
Integrated resource planning is a process that requires utilities to regularly develop and disclose plans for meeting future electricity demand in a cost-effective manner that ensures system reliability. Out of the five peer states LEI identified, Iowa is the only state that does not currently require this transparent utility planning process. The consultant says this planning process would assist the IUB with making informed decisions in contested rate case proceedings by providing important information about the reasonableness of utility costs, electricity rates, and the current status and future needs of the utility’s electricity system.
The Legislature would need to decide how often utilities would need to file an integrated resource plan, what the contents of the plan would be, what analyses they would be required to perform, who they should consult with, and the role of the IUB in the process.
3. Align necessity and advantages of advance ratemaking with the resource plan.
Advanced ratemaking is a practice where utilities petition the IUB for a pre-established set of regulations and rate of return for future energy projects, allowing them to recover costs proactively to reduce risk. The study points out that Iowa’s current advanced ratemaking framework does not require the utilities to prove the need for their new projects or have any consideration of what type of resources they are choosing to build or how they would benefit overall reliability of the system.
The LEI study suggests that there should be a process to evaluate the need for these new projects and that if advanced ratemaking is kept as a practice in Iowa, that it should be aligned with the integrated resource planning process.
4. Review tracker and rider mechanisms for utility operations.
Iowa’s utilities use trackers and riders to automatically adjust costs charged to customers, allowing them to avoid coming in front of the IUB for a contested rate case proceeding, according to LEI’s study. The study highlights that, “Automatic adjustment mechanisms have been a growing and substantial portion of the rate-regulated electric utilities' total bills and operating revenues.”
Over the past decade, trackers and riders have accounted for 35.1% of Alliant’s residential customer costs and 6.5% for MidAmerican Energy. For MidAmerican, that number grew to 12% by 2022. The study points out that these growing costs could benefit from additional review from the IUB.
5. Initiate a study on evaluating the current spending cap and alternative energy efficiency (“EE”) and demand response (“DR”) opt-out options.
The LEI study recommends that the IUB conduct a cost-benefit study regarding the spending cap and opt-out policies for electric utilities’ energy efficiency and demand response programs. These caps, adopted in 2018, limit how much utilities can spend on energy conservation projects that lower overall demand on the system, which is often the most cost-effective option for meeting electricity demand. The same 2018 changes also allow some customers to opt- out of paying for these programs, shifting the burden to other customers.
The LEI study says these policies, including the cap and opt-out option, “...limits the impact that this ratemaking mechanism could have on potential energy savings from customer energy usage.” LEI goes on to say, “The EE/DR spending cap should be raised or eliminated, and the opt-out policy should be revisited.”
6. Examine the implementation of a performance-based regulation (“PBR”) framework and various components, which include multi-year rate plans, performance mechanisms (such as scorecards and performance incentive mechanisms), and earnings sharing mechanisms.
Performance-based regulation is a practice that ties electric utility revenues and profits to the achievement of specific performance goals instead of the traditional ratemaking process, which is based on the cost of the utility providing service to their customers. The study says PBR can improve utility efficiency and align utility rates with public policy goals, including keeping rates low and investing in more clean energy.
Overall, the study says this practice could eventually lower costs for consumers and reduce the administrative burden on the IUB by reducing the need to frequently conduct contested rate case proceedings.
These recommendations to the Iowa Legislature offer significant policy reform options for state lawmakers to consider. The Iowa Legislature has an obligation to analyze each of these recommendations seriously and act to protect ratepayers. Every Iowan has a role to play in making these changes a reality. Stay informed by signing up at iaenvironment.org/FlipTheSwitch.
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