What can be done?

Iowa’s general ratemaking laws have been revised, at the behest of the IOUs, to reduce their risk while failing to provide corresponding benefits to or protection of customers. Future test years in rate cases serve no purpose other than to reduce the lag between a utility’s expenditures and its recovery of (and profit on) those expenditures. Because of the forward-looking nature of these rate cases, the rate base and resulting rates are estimates that require a subsequent proceeding to determine whether the utility performed in a manner that is reasonably close to what is estimated. While the subsequent proceeding attempts to ensure that customers were not and will not be harmed, such proceedings not only have increased the regulatory costs to customers, but they have been hotly contested as to the actual results, how the utility chooses to calculate them, and whether they comport with the Board’s directives. 

IEA supports IUB’s review of existing general ratemaking policies to determine whether the policies truly reflect the regulatory compact at the heart of the utility industry. Should the monopoly utilities bear any risk of recovery of investments and their businesses or should customers bear all of those risks? Should an electric IOU be able to dictate what it builds and under what terms without agency or customer input? Should utilities be able to gain rate approval for investments without showing a need in the context of a resource plan?

Many of Iowa’s energy laws have outlived their initial purpose resulting in an enormous imbalance between utility and customer risk.   When the General Assembly initially enacted the advance ratemaking statute in 2001, their intent at that time was to attract generation facilities in the state “in sufficient quantity to provide reliable electric service to Iowa consumers, and to provide economic benefits to the state . . . and shall be implemented in a manner that is cost-effective.” At the time of the law’s enactment, it was believed that Iowa’s IOUs deemed generation investments to be too risky to make without certainty that came from receiving approval in advance. However, that is no longer the case given the proliferation of generation projects in the state since the law’s enactment. In fact, there are dozens of active projects in Iowa in the MISO queue.[1]  
   

As currently implemented, Iowa’s advance ratemaking principles nearly eliminate a utility’s risk and shift that risk to customers. Currently, a utility awarded ratemaking principles is guaranteed not only the certainty of recovery of its investment, but recovery at a premium return on equity (ROE) for the life of the asset, even if the asset does not meet its projected benefits to customers. Compounding this imbalance is that ratemaking principles are often awarded even though the utility did not provide an integrated resource plan or a quantitative evaluation of alternatives through requests for proposals, competitive procurement, or similar practices.  

IEA supports a critical review, or potential elimination, of the advance ratemaking statute to address how Iowa’s energy landscape has changed in the more than 20 years since its implementation and to ensure that the IOUs build cost-effective, reliable generation that will benefit Iowa customers.  

[1] See MISO Generator Interconnection Queue Map (last visited Sept. 8, 2023)

The vast majority of states have an integrated or long-term resource planning process including most of Iowa’s neighboring states. For example, Minnesota, Missouri, South Dakota, and Wisconsin all have such a process. The planning horizons typically range from 10-20 years and typically are filed every two-to-three years. Integrated resource planning used to be required in Iowa but the law was repealed at the utilities’ urging in favor of a piecemeal approach where instead of one holistic review, multiple reviews occur requiring additional regulatory and customer time and cost while limiting the information available to perform a holistic review. 

Integrated resource planning would provide important regulatory oversight and transparency between the IOUs and ratepayers, especially in Iowa’s non-competitive marketplace. It would also allow for customers, particularly large energy users, to measure affordability of not just base rates but the all-in energy costs. Increasing total energy costs create pressure for existing Iowa customers and hamper efforts for existing customers to expand their presence in Iowa as well as to attract new customers. A well-planned generation portfolio can help mitigate fluctuations in energy costs. Large and unpredictable changes in energy costs are more likely to continue absent resource planning.   

IEA recommends that energy efficiency and demand response be incorporated into an integrated resource plan, thus promoting regulatory efficiency as well as an acknowledgement that both are key components of an integrated resource plan. In addition, transmission planning and distribution planning should also be required so that the impacts of the IOUs’ plans are not presented piecemeal but rather in a holistic view of the utility’s forecasted operations over the planning horizon. 

While no energy user wants a rate increase, there is also danger in allowing outdated rates and cost allocations to continue indefinitely. Notably, MidAmerican has not undergone a review of its rates since 2013. In that time, its customer mix and load size and profile has changed. Cost causation and allocation has increasingly become mismatched across MidAmerican’s customer classes, its energy portfolio has changed, and technologies have also changed. The proliferation of riders has exacerbated the situation. MidAmerican has increased its rates (despite claims to the contrary) steadily through automatic pass-through riders. When adjusted for inflation since its last rate case, MidAmerican’s residential rates have increased by 20.5%, commercial rates by 20.4%, and industrial rates by 32%.  

Regular rate reviews are the only way to ensure against large unexpected increases and the resulting rate shock, enable customers to better plan to accommodate one of their largest expenses, and better ensure that a utility’s rates are based on a current evaluation of its cost of service and the allocations of those costs among customer groups. They also allow for a reduction in the need for automatic adjustment clauses and give opportunities for the utilities and customers to propose different rate options to respond to changing customer usage and needs.

IEA supports policy requiring regular rate cases which would also address troubling automatic adjustment clauses hikes.

 Whether the rates in place accurately reflect the actual costs to serve a customer or class of customers is a critical affordability consideration. To IEA’s knowledge, MidAmerican is the only utility in the Country that utilizes the hourly cost model, which is not recognized by the NARUC electric cost allocation model, the industry standard for cost allocation methodology for utilities.[1]  
   

[1] See Electric Utility Allocation Manual, National Association of Regulatory Utility Commissioners, January 1992, https://pubs.naruc/org/pub/53A3986F-2354-D714-51BD-23412BCFEDFD(last visited Sept. 6, 2023).

Iowa’s exclusive service territory laws currently precludes a retail electric customer from purchasing electric supply from the market or from another provider via a purchase power agreement. Currently, the IOUs have refused to provide a proxy for that choice via market-based rates, which can act as a proxy for directly paying market rates.  

Such market and rate options would not only decrease large users’ rates, but all users’ rates would likely decrease because when faced with a potential loss of their monopoly power, the electric IOUs would be forced to make efficient, prudent decisions in an effort to keep their energy costs more in line with the market. Notably, MidAmerican’s sister company (MidAmerican Energy Services) currently provides wholesale competitive electric service in the following markets: Delaware, Illinois, Maryland, Massachusetts, New York, New Jersey, Ohio, Pennsylvania, and Texas.

IEA supports policy that would permit large energy users to purchase electric generation from the provider of choice in a manner that does not impact other energy customer classes or to require the IOUs provide tariffs approximating a market rate for energy.