How does a regulated utility make money

Balancing accounts are designed to adjust revenues over-collected or under-collected from prior periods, so also provide no profit. Again, depreciation provides no profit on the original investment. Utility assets that make up electric and gas delivery systems are built using capital dollars.

This capital comes from two sources — debt and equity. Debt is money borrowed from financial institutions. Equity is money invested by shareholders in the hopes of making a return through dividends or stock appreciation. As noted above, the debt is repaid using money collected as part of the revenue requirement. This line consists of two factors:. These two factors multiplied together equal the amount of profit the utility will make if actual conditions match up with forecasts used to set the revenue requirement.

In this case, the balancing account will allow rates to adjust upward to make up the difference so that the utility is able to collect the revenue it expected. Hence consumers ultimately pay more for less.

So, while the wealthiest consumers may send a smaller payment to the utility, lower-income consumers who make no changes to their energy consumption often because they are tenants may bear the brunt of the increased rates. Yet the utility comes out ahead because it collects its required revenue, regardless of the economic inequities that its consumers face. The business model for utilities based on cost-of-service regulation was built for a time when safe and reliable power were the principle public interest.

Nowadays, there are other priorities too: reducing greenhouse gas emissions, improving system resiliency, promoting consumer equity, customer choices, and offering a degree of local control. Having infrastructure owned by utilities infrastructure may not be the best way to achieve these priorities. Instead, investment in grid operations and third-party-owned distributed resources e. As a result, many public utility commissions are starting to look at a new strategy called performance-based regulation PBR that may better align utility performance with the public interest.

PBR can support new business models by tying utility profits to achieving desired outcomes like reducing greenhouse gas emissions or making bigger investments in decarbonization. In , the Oregon legislature passed a bill that opened an investigation into utility regulation.

The law required the state utility commission to review industry trends, technologies, and policy drivers in consideration of changes to the regulated utility business model. Though the final report was published in , Oregon has not yet moved forward on the recommendation for PBR. Similarly, the Washington legislature has empowered the state utility commission to use PBR to help reduce carbon emissions as part of the Clean Energy Transformation Act.

Other Northwest states have made no efforts in this direction. In the coming years, the Northwest, like other regions, will begin to rebuild its economy from the disruption of early It is possible that states will even receive federal stimulus investments that can speed transformation of the energy sector. You can power us forward on sustainable solutions. Make a donation to Sightline now. Thank you for this superbly informative article!

There are only about 30 of 50 States that really matter when it comes to the amount of carbon emitted. There are usually 5, sometimes only 3, members of those Commissions. So say 10 are 3 Commissioner and 20 are 5 Commissioner set ups. Another not discussed driver of rate increases is the buying and selling of privately owned utilities. So, essentially, the public captive customers ends up paying the investor group to buy the utility and increase the rates it must pay.

Seems that the article only refers to Private for profit utilities. It does not specifically address Public utilities or Private non-profit utilities. I would like to understand the public utility business model better. Is there a similar article available that does focus on public utilities? The NW public utilities have mostly been able to rely on hydro, since they have preferred access. In most of the rest of the country, muni and coop utilities have been quite recalcitrant about giving up their coal plants.

Mostly, IOUs worry about whether they will be able to recover the remaining undepreciated investment in their worthless power plants. In some states, they get away with running the plants to maintain their ability to bill customers, even though the customers would be better off paying the remaining investment and paying for new renewables and storage, rather than continuing to pay for running the loser fossil plants.

In the Northeast, the generators have been spun off and subjected to market forces, resulting in most of the coal retiring. Please keep it civil and constructive. Our editors reserve the right to monitor inappropriate comments and personal attacks.

Give today to upgrade our democracy, advance housing affordability, and fight fossil fuels. Advanced Filter. Alaska British Columbia Oregon Washington. These programs date back to the s and have been evolving ever since. Over the past 30 years, per capita electricity use nearly doubled across the U. However, in California, the use has remained about the same for the past three decades.

Energy efficiency programs and policies helped to maintain usage levels. The agency establishes key policies and guidelines, sets program goals and approves spending levels.

The plan called for 7 billion kilowatt-hour savings over a three-year period. The amount represented 0. Using energy more efficiently saves you money on energy bills. It is also the fastest, most cost-effective way to reduce greenhouse gas emissions and fight global climate change. This is based on cumulative lifecycle savings. Decoupling process.