Dive Brief:

• A June 29 order from the Indiana Utility Regulatory Commission denied a multi-utility request to defer costs and losses associated with COVID-19, and to recover the lost revenue with temporary rate increases.
• The Wisconsin Public Service Commission has stopped similar actions, while leaders in Michigan and Virginia have also expressed disapproval of revenue recovery efforts by utilities.
• 'Absurd' requests by utilities to pass COVID-19 losses to consumers are unlikely to get purchase with regulators in the near future, though long-term impacts may be discussed in future rate cases, consumer advocates predict.

Dive Insight:

The Indiana Utility Regulatory Commission has issued an "immediate" and "decisive" rejection of a request to raise residential electric rates to compensate for COVID-19, leading consumer advocates and industry analysts to conclude that similar requests in other states are likely to suffer the same fate.

"The utilities' request to recover lost revenue was beyond the pale, and, simply put, a bridge too far," said Kerwin Olson, executive director of Indiana's Citizens Action Coalition. "The reaction from the public and elected officials was immediate, decisive, and left no doubt that this request was unacceptable."

On May 8, nearly a dozen Indiana utilities joined forces to request authorization to document and defer costs and losses associated with the COVID-19 crisis, including increased costs associated with responding to the public health emergency, losses associated with government orders suspending disconnections, and decreased revenue due to declining sales. They then sought permission to adjust utility rates in order to recover the deferred revenue within 24 months.

The Indiana Utility Regulatory Commission rejected this proposal, citing the utilities' obligation to provide "safe, reliable service" in exchange for "just and reasonable rates."

"Asking customers to go beyond their obligation and pay for services they did not receive is beyond reasonable utility relief based on the facts before us," the order states.

Indiana Energy Association President Danielle McGrath said the company's her organization represents were still reviewing the IRUC order, but highlighted the fact that many Indiana utilities volunteered to suspend disconnections early in the pandemic.

Robert Mudge, a principal at The Brattle Group, said that while it remains to be seen how regulators across the nation will respond to the question of COVID-19 cost recovery, rushing to make a decision could result in negative outcomes for utilities and their ratepayers.

Research by The Brattle Group suggests that utilities nationwide have experienced a 5% reduction in load, resulting in potential net income losses of up to 30%. That kind of loss could be "survivable" for the utility, but the money has to come from somewhere, Mudge said, taking money away from essential services.

But if regulators and utilities aim to recapture these losses too soon, Mudge said, it could have a disproportionately negative impact on ratepayers if the 5% load reduction becomes permanent — or even increases as commercial and industrial bankruptcies continue.

"Let's say it's implemented in 2021," Mudge said. "That's going to be a pretty concentrated step up in rates to customers who remain on the system, and are therefore being called upon to make up those differences. What does that look like in terms of a rate hike? That's a question, but it might be sizable, and it might fall on customers who are economically challenged."

Securitization, rather than cost recovery, might be the best option in this case, Mudge said. Issuing bonds to cover losses tied to the pandemic would provide utilities with the money they need up front, while stretching the cost to rate payers over several decades, avoiding rate shock.

Matt Kasper, research director for the Energy and Policy Institute, said he believes utilities that seek similar provisions in other states will likely face rejection for requests he described as "absurd."

In addition to Indiana, he said, the Wisconsin Public Service Commission refused to extend recovery to losses due to declining sales in an mid-April decision. Officials in Michigan and Virginia have also indicated they would not support utilities that sought to recover lost revenue, arguing that shareholders, not customers, should bear the burden of declining sales, leading Kasper to his conclusion that there is very little appetite for these cost-recovery requests.

However, if COVID-19 results in long-term changes to demand for electricity or other services, Kasper said those trends could become the subject of future rate cases.

"If a utility isn't collecting as much revenue from the industrial users as expected," he said, "it will look to raise rates in a future rate case on residential customers in order to get its annual revenue requirement."