Consumer Participation in Regulation stipulated settlements the consumer advocate and

Consumer Participation in Regulation: stipulated settlements, the consumer advocate and utility regulation in Florida Professor Stephen Littlechild Judge Institute, Cambridge University Market Design 2003 Conference Stockholm 17 June 2003 Customers and regulation • There is now competition in generation, unregulated except under competition policy • Competition in retail supply enables customers to decide for themselves • But regulation seen as necessary for transmission and distribution networks • Could customers or their representatives negotiate price controls with companies? With regulator in background as last resort? Role for customers? • Many objections eg Who are consumer representatives? Would not be interested? They would lack information & resources? • But process said to happen in Alberta and in many US states eg Florida & California • This paper examines experience in Florida • Note role of formal consumer advocate in Florida overcomes above problems • Is outcome different from regulation? Better? Consumer advocates in US • 1970s rate increases, aim to defend customers • set up NY 1970, most 1970s & 1980s, 30+ states now • Holburn & Spiller suggest advocate means • utilities less likely to bring forward rate cases • lower rates of return and lower rate bases • relative advantage to industrial users • Evidence that consumer advocates result in • • • • rate cases 4.5% less likely in any year ROE lower by 0.19% to 0.37% residential/industrial rate ratios 0.02 to 0.03% higher residential consumers worse off by about 2% overall Florida PSC • Florida Public Service Commission 1897 • Investor owned utilities (since tel deregln): • • • • 5 elec, 7 gas, 207 water, 10 local tel, 1000s other tel very different sizes eg elec by customers: FPL 62% FPC 22% TECO 9% Gulf 6% Fla PU 1% 32 municipal elec, 18 elec coops, 27 municipal gas • 386 staff • budget $27m in 2001 Office of Public Counsel • OPC 1974 (Florida 5th= in time sequence) • single incumbent Public Counsel 25 years • duty “to represent the general public of Florida before the Florida PSC” • staff 15, now very experienced • also hires experienced consultants/lawyers • budget $2.5m 2002 (larger before tel. deregulation), not seriously constrained? Data • Database: all (300) major revenue decisions since 1960, with more detail 1976 onwards • since 1976 these decisions total as follows • • • • $2.4 bn allowed increases (out of $4.6 bn asked) $1.6 bn permanent rate reductions $1.3 bn one-time refunds almost all in telephones and electricity sectors • but marked patterns over time • what is impact of OPC? FPSC rate cases 5 year total incs & decs 1,200,000,000 1,000,000,000 800,000,000 $ 5 year total 600,000,000 Total increases Total decreases 400,000,000 200,000,000 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 -200,000,000 5 year period Methods of consumer advocates • How to best represent customers? • By challenging utility in regulatory hearings • Also by negotiating stipulated settlements with utility, then inviting FPSC to approve • Reflects previous less formal staff processes • Widely used in US, to save time & cost? • No reference to possibly different outcomes • No economic analysis, evidence or notice? Stipulated settlements in Florida • At first staff organised discussions, not later • after filings & counter-filings but before hearings • 41 stipulations in data base (a few other non-revenue stipulations not included there) • 36 stips with OPC, 5 stips with staff alone • several stips with OPC are also with other parties • small % of 300 cases, 000s dockets, but important • all stipulations accepted in total, no cherrypicking (unlike California) Hypotheses on OPC motivation • OPC resources into hearings & stipulations • to maximise benefits to customers • to ensure that general public is seen to be represented • OPC stipulations more likely for rate decreases • eg earnings reviews • OPC stips less likely for rate increases and minor/potential/automatic rate reductions • And within these groups, size matters: • more likely for large decreases & small increases Types of case where OPC signed stipulations, 1976-2002 Type of case Predicted high participation by OPC: -Earnings review Predicted low participation by OPC: -Requested rate increase -Minor cases (tax, ROE, MMFRs) Total OPC stipulations No. No. % 93 82 58 29 6 1 31% 7.3% 1.7% Florida PSC earnings review cases 1976-2002 Number of cases of earnings reviews 29 Aggregate value of reduction $m 1437.7 429.4 1867.1 % of total revenue reduction 77.0* 23.0 100 Average value of reduction $m 49.6 6.7 20.1 With OPC stipulation Without OPC 64 stipulation Total 93 *91.2% excluding Southern Bell 1988 FPSC rate cases and OPC stipulations Rate increases & decreases by 5 year periods 1,200,000,000 Rate incre ase s & de cre ase s ($) 1,000,000,000 800,000,000 600,000,000 400,000,000 200,000,000 0 1960 1965 -200,000,000 Total increases Total decreases OPC Stip incs OPC Stip decs 1970 1975 1980 1985 Year 1990 1995 2000 2005 Costs saved by stipulations • • • • • Many references to stipulations saving costs Projected review costs FPL $5m FPC $2m Assume 25% to 40% avoided by stipulation so savings FPL $1.3 - 2m, FPC $0.5 - 0.8m Value of recent rate decreases • FPL $404m & $250m permanent say $1.5bn & $1bn • FPC $54m, $118m, $134m say $200m to $500m • savings as proportion FPL 0.1-0.2%, FPC 0.1-0.4% • Savings under 0.5% - not full explanation? Does OPC benefit customers? • OPC costs 20yrs x $2.5m x 2/3 Elec = $33m • Various benefits: OPC provides 1) critical testimony even if no stipulation, 2) incentive regulation from stips may increase efficiency • 3) rate reductions: Elec stips 1976-2002 total is • ($846m perm x 4) + $409m refunds = $3792m. • Every 1% increased rate reduction beyond what hearing would get is worth $38m. • So 1% better rate reduction justifies OPC Elec Do stips affect rate reductions? • Alternative hard to assess, but note staff/FPSC views on 9 Elec stips + what happened before: – – – – – – – – FPC ‘86 $54m, “sooner & more certain … bird in hand” FPC ‘87 $140m, “largest reduction in state history” Gulf ‘93 stipulation avoided requested rate increase TECO ‘96 $25m x 3 after FPSC approved no reduction (2 stips) FPL ‘99 $350m after FPSC approved no reduction Gulf ‘99 $10m after FPSC approved no reduction FPL ‘02 $250m involved changing previous FPSC policy FPC ‘02 $125m involved changing previous FPSC policy • All reductions due to OPC stips, or made larger? Who gets rate decreases? • HS: consumer advocates favour industr. users • FIPUG signed several stips along with OPC • Florida Industrial Power Users Group • These stipulations mostly reduced rates on energy basis, not demand basis as used for rate setting • Staff calculation in main case (FPL $350m): • residents get 56% share of reduction on demand basis, but lose 10% on energy basis ie. 5.6% of total reduction • did stipulation get 5.6% better reduction than hearing? • Argument above: no reduction at all without stipulation • Res. customers still gain, but ind. gain more? Gains from trade • If utilities don’t get higher revenues from stips, and cost savings small relative to size of deal, why do utilities sign stipulations? • Reduce uncertainty, avoid embarrassment? • Also to get what FPSC could or would not give? • • • • Small example: Centel 1992 requested rate increase FPSC allowed interim increase $4.6m OPC protested, utility agreed stip for only $3.5m increase conditional on merger & withdrawal of legal challenge Revised accounting provisions • Gulf 1993 - deferring accrual increase • “Although adoption of the stipulation will defer implementation of the dismantlement accrual increase found appropriate by the Commission we believe that a bird in the hand is worth two in the bush.” • FPL 1999 - halt accelerated depreciation • $350m rate reduction better than lower stranded costs • FPL 2002 - reverse depreciation allowed • $125m reversal financed half $250m rate reduction Revenue sharing • Earnings sharing S. Bell 1988, TECO 1996 • OPC problems agreeing earnings with utilities • FPL 1999: $350m rate decrease, 3 yr revenuesharing, 2/3 to customers over set levels • greater incentive to utility, more benefit to customers • stipulation provided “ROE may be above the specified range but the sharing mechanism is the appropriate & exclusive mechanism to address that circumstance” • staff concern at constraint on regln. but FPSC approved • 2002 stips renewed revenue-sharing for 3 more years Conclusions • OPC stipulations significant in Florida • 77% FPSC earnings review rate reductions since 1976 • OPC testimony on rate increases but few stipulations • OPC secured greater & earlier rate reductions • especially for industrial electricity customers • but residential customers still benefit overall • Other changes accepted to get rate reductions • More flexibility on depreciation etc than staff/FPSC • More innovative forms of incentive regulation • Implications for regulation? - helpful to split regulator into separate judge & prosecutor?