Study of Utility Ratemaking Released

Study Recommends Protections for Ratepayers

In 2023 the Iowa legislature asked that the Iowa Utilities Board undertake a study of the utility ratemaking laws and procedures, with the results being recommendations for future changes.  That work was contracted to London Economics International.

The Sierra Club has reviewed the study and its recommendations, which would provide multiple protections for ratepayers.  The recommendations include

  1. Consider a maximum stay out provision for general rate cases.  This would require the utility companies to come before the board periodically to have their rates reviewed.  Utility companies have been able to avoid coming before the utilities board for extended periods of time, even though new information could inform the customer rate structures.

  2. Enact a statute that requires rate-regulated electric utilities to file an integrated resource plan (“IRP”) and gas and water utilities to file long-term supply plans.  An integrated resource plan for electric utilities is a plan that looks at future electricity needs, the means of generation, and the need for new generation.  Further, an IRP would ensure that the utility does not build more generation than its customers need and use, which would raise rates.

  3. Align necessity and advantages of advance ratemaking with the resource plan.  The IRP determines the need for the generation while the ratemaking lays out how customers will be charged to pay for the new generation.  Prior to new generation being built, the utility companies come before the utilities board for approval of how the new generation will become part of the customer bills.  This includes the utility’s return on equity, the depreciation rates, cost allocation among various classes of customers (homeowners, small businesses, large industries), cost recovery in case the project is cancelled, and other financial considerations.  This would ensure that electric consumers are provided cost-effective electricity while the utility is still able to operate profitably. 

  4. Review tracker and rider mechanisms for utility operations.  For example, charges for transmission lines automatically are added to customer electric bills.  This review would ensure that these add-on charges are not excessive and are necessary to provide reliable safe service to the customers.

  5. Initiate study on evaluating the current spending cap and alternative energy efficiency (“EE”) and demand response (“DR”) opt-out options.  Several years ago, the legislature put a hard cap on the amount of money that the electric and gas companies can spend on energy efficiency programs.  Energy efficiency and demand response programs reduce peak electric usage, which reduces the need for new power plants.  When new power plants are built, the utilities place additional costs onto customer bills to pay for the power plant.

  6. Examine the implementation of a performance-based regulation (“PBR”) framework and various components, which include multi-year rate plans, performance mechanisms (such as scorecards and performance incentive mechanisms), and earnings sharing mechanisms.  The utilities board could set goals for the utility companies to reach, with the intent of lowering consumer bills, while also giving the company financial incentives to meet the goals.  In the case of energy efficiency, this is often referred to as decoupling.

If you would like to read the study, see "Review of Current Iowa Code Provisions and Ratemaking Procedures", December 20, 2023, London Economics International.  The study was conducted by Julia Frayer, Ma. Cherrylin Trinidad, Donald Osborne-Moss, Hannah Braun, Max Lee, Luna Dou, and Jun-Soo Park.