Critics deride Texas performance-based rate proposal

Under a controversial performance-based rate proposal to be considered by Texas regulators next week, Texas transmission and distribution utilities will receive extra financial credit for good customer service, reliability, and having few accidents. The plan, filed Aug. 15 with the Public Utility Commission of Texas, will allow so-called wires utilities to collect a return on equity of 11.2%, or 2.9% higher than the average utility bond yield of 8.3%.


Ann de Rouffignac
OGJ Online

Under a controversial performance-based rate proposal to be considered by Texas regulators next week, Texas transmission and distribution utilities will receive extra financial credit for good customer service, having few accidents, and providing reliable service.

The plan, filed Aug. 15 with the Public Utility Commission of Texas, will allow so-called "wires" utilities to collect a return on equity of 11.2%, or 2.9% higher than the average utility bond yield of 8.3%. Conversely, they will be docked financially for underperforming.

If approved by the commission, the new rate system will be implemented after electricity deregulation is implemented in 2002 and will apply to the wires owning utilities that remain regulated. The rate of return and the incentive bonus program will be incorporated into consumer electric bills through charges for delivery of electricity.

The commission requested the bonus program be developed and put on a fast track to give �wires� utilities monetary incentives for good performance. But critics charge the program will reward utilities for doing what is normally expected of them.

They dislike the plan because it gives utilities the bonuses upfront and the bonuses will be reduced only if performance does not meet the standards set. This doesn�t jive with what most experts believe should be the basis for performance-based rates which usually employ some version of the �carrot and stick.�

�The proposal ignores the presumption of reasonableness and neutralizes any penalty measure introducing no additional risk to the utility," says Janee Briesemeister, senior policy analyst with Consumers Union, Austin. "The [program] has transformed the carrot and stick approach envisioned by the commission to the carrot and steak approach.�

Underperforming utilities can be penalized up to 80 basis points, under the proposal. But the rate of return can�t fall below 10.3%. Moreover, the penalty can be imposed only if performance is grossly inadequate in every category, says the Office of Public Utility Counsel (OPUC) in its comments filed with the PUC.

OPUC argues the PUC staff "has proposed to resolve this dispute with a non-traditional �carrot and stick� approach. The donkey will be given a carrot before the journey, then threatened with a stick if it doesn�t walk fast enough.�

The city of Houston questions whether this program provides performance-based incentives at all.

�The bonus should be to reward demonstrated excellent performance, rather than expected performance,� the city of Houston states in its filing. �This result is extremely unreasonable."

But utilities praise the concept. Reliant HL&P, a large Houston-based utility, is solidly behind performance-based rates for transmission and distribution companies.

�We are very positive about performance-based rates,� says Reliant HL&P spokesman Graham Painter, �But how we go about it is up to discussion.�

The commission will consider the proposal on Sept. 7.

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