The head of a utility regulatory group last Thursday said he sees state legislatures making changes to traditional ratemaking statutes to accommodate the large investments that will be required to build next-generation power plants to operate in carbon-constrained environments.

“I think you’ll see more activity actually happen at state legislatures in terms of changing traditional ratemaking statutes,” said Jim Kerr, president of the National Association of Regulatory Utility Commissioners (NARUC) and a member of the North Carolina Utility Commission, during a press briefing at NARUC’s headquarters in Washington, DC.

“There’s certainly a relatively significant school of thought that in order to make these significant investments in the current environment, the traditional approach to rate of return regulation of these type of investments is going to make it difficult and potentially more expensive, and so other alternatives ought to be explored,” he told reporters.

Kerr believes policy makers should take a comprehensive look at traditional ratemaking. “I think it is dangerous to start tinkering with parts of the traditional regulatory bargain and not look at it comprehensively,” he noted.

“What you’re really talking about doing is reallocating the risk” associated with investments in new power plants to accommodate the energy companies and the financial community. “I think most regulators are open-minded to a discussion of better ways to do it, but it ought [to be] a complete discussion,” Kerr said.

“There are concerns in the industry and, I suspect, on Wall Street about the magnitude of the various investments and whether traditional ratemaking approaches are best able to deal with that, or whether some nontraditional approach [is needed],” he noted. Specifically, the energy industry and the financial community want “more assurance earlier” from state regulators on the recovery of their investments in new power plants.

Power companies are particularly concerned about whether they will be able to recoup the costs to comply with restrictions on greenhouse gas emissions and environmental requirements.

With respect to the federal government’s increased role in the siting of power transmission, Kerr cautioned that “if the feds want to get involved in this, get your various apparatus or organs straight.” He noted that “a lot of the obstacles in getting infrastructure sited have been the federal agencies themselves.”

The Energy Policy Act of 2005 (EPAct) gave the Federal Energy Regulatory Commission the authority to site electric transmission in the event a state has failed to act on a company’s application within a year after being filed. EPAct also allowed the Department of Energy to designate national interest corridors for the construction of new transmission lines to relieve congestion.

“We opposed the concept of federal siting authority when it was in EPAct…This was something we viewed as an uniquely state matter. But Congress did what Congress did. So I think the answer then is to work through the process that they set up,” Kerr said.

The reaction of individual states to the federal siting role has been mixed, he noted. “There are states that are supportive of the need for transmission to get built and [they] think this is an important step in that process.” But other states object to federal intervention in transmission siting, saying it makes it more difficult for them to oppose unpopular projects.

On the natural gas front, NARUC officials said they were generally supportive of more drilling off of coastal states. “We got a strong level of support for improving the supply side,” Kerr said.

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