The Nevada Independent reports that Southwest Gas (Nevada's largest natural gas utility) is seeking to adopt an alternative ratemaking structure under the state's newly passed SB 417, which would allow it to move beyond the traditional cost-of-service model. United's Sarah Steinberg encouraged state energy regulators to draft a strong framework that details how alternative ratemaking will work while protecting consumers and meeting Nevada's energy goals.
The umbrella term of “alternative ratemaking” can include a suite of complicated mechanisms that do things such as tie customer rates to a utility’s performance (such as service reliability or average price for fuel in relation to peer utilities) or authorize future rate increases through a calculated formula.
It’s this last methodology, known as formula rate plans, that Southwest Gas is interested in, utility Senior Vice President Amy Timperley told Nevada lawmakers in May.
Formula rate plans are touted for their ability to reduce the frequency and costs of rate cases, reduce utilities’ financial risk and for making rate changes more gradual over time, rather than in a single, larger amount after a general rate case, according to a 2016 report compiled after the Texas Legislature required its energy regulators to analyze alternative ratemaking for electric providers.
Many electric utilities utilize components of alternative ratemaking, but it’s a newer concept for gas utilities, according to Sarah Steinberg, managing director of Advanced Energy United, a national industry association.
To be most effective, she said, alternative ratemaking needs to encompass a package of reforms that ask utilities to think outside the box while moving states toward priorities, such as consumer protection or environmental goals.
Formula rate plans by themselves fail to do that.
“Formula rates kind of let the utility go on autopilot. They will go on with their business-as-usual spending,” she said.
They can also shift financial risks on to customers, have less thorough review of utility costs by regulators and can reduce utility incentives to control costs between general rate cases, the Texas report found.
For decades, if the utility invested in infrastructure, the utility would have to build it, wait until its next general rate case to seek approval for reimbursement of incurred costs from state energy regulators, then have to wait for a decision from those energy regulators before collecting those funds through rates to customers, something known as “regulatory lag” — although in 2023, Nevada legislation was passed that, in part, requires gas utilities to seek approval from energy regulators before construction.
But that regulatory lag is a tool for consumer protection groups that rely on that time to examine the utility’s proposed costs. Under the proposed formula-based alternative ratemaking plan, opponents say the utility will actually have fewer reviews, ultimately leading to less consumer protection. They also point out that utilities can already address the issue of regulatory lag by filing general rate cases more often.
But those additional rate cases cost utilities hundreds of thousands of dollars, Leedom said, plus the costs borne by state energy regulators and interveners. It also introduces regulatory fatigue.
“There’s got to be a better way, and we feel like alternative ratemaking is the better way,” he said.
An opportunity for state regulators
Southwest Gas is still a long way from being able to implement alternative rate making in Nevada.
State energy regulators must first determine and adopt what that would look like — the rulemaking docket just opened in July. Once the rule is finalized, Southwest Gas would have to apply to be able to utilize it. For context, the rulemaking for SB300, the 2019 bill that applies to electric utilities, still hasn’t been finalized.
In Nevada, with Southwest Gas the dominant gas provider and NV Energy the dominant electricity provider, state energy regulators stand in for the competitive marketplace that would help control prices in non-monoply situations.
Now, it’s up to those state energy regulators to draft a strong framework that works for customers and toward state goals, Steinberg said.
“There’s an opportunity here for [state energy regulators] to say what they want these plans to look like and say, ‘Hey, Southwest Gas, if you want alternative ratemaking, you have to play within these rules.’”
If energy regulators draft a strong enough framework, “utilities won’t want to play ball,” she said.
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