Rate freezes, arrangements where utilities are prohibited from filing rate cases, have been commonly used nationwide since the 1990s. As of January 2018, rate freezes or rate case moratoriums are in place across 27 jurisdictions, impacting 37 electric and 31 gas utilities. While these arrangements have overwhelmingly originated from past rate cases and are intended to benefit consumers, some adverse consequences can also result from such arrangements.

Key Details

• During the 1980s, rate freezes were not widely employed. Instead, rate filings were quite prevalent and were driven by many factors, including:
• Large-scale construction projects, particularly nuclear plants
• Rapid customer-base growth requiring sizable investments in transmission and distribution infrastructure
• Inflationary pressures driving up operating costs
• Higher interest rates increasing utility company cost of capital
• Regulatory activity was at its peak between 1980 and 1989, reflecting more than 1,200 electric and gas rate cases and roughly $40 billion in rate increases
• Through the early 1990s, the number of rate cases decreased as authorized rates of return and efficiency gains were sufficient to fund new investments
• As industry restructuring was introduced in the 1990s, rate freezes became an important tool for regulators to manage the transition to retail competition
• Rate freezes, moratoriums, and price/revenue caps are being used in a different context to address actions such as:
• Merger and acquisition approvals
• Rate case settlements
• Establishment of new alternative regulatory frameworks

SNL Financial recently completed a comprehensive study of all outstanding electric and gas utility rate freezes. Highlights from several of these cases are included in the table below.

Selected Rate Freezes and Related Actions

Implications

Utility rate freezes and similar incentive rate initiatives have both inherent benefits and corresponding costs to be considered:

• Introduces greater discipline in managing the utility in a prudent and cost-effective manner
• Encourages the utility to reduce its costs and innovate in different ways to manage costs and improve operations
• However, may result in cost-saving initiatives that have the potential to undermine the quality of service (e.g., frequency and/or duration of outages)
• Limits investment required to build new or upgrade existing infrastructure as interests compete for scarce capital resources
• Constraints of fixed operation and maintenance budgets may make it difficult to meet operation, maintenance, and compliance obligations
• Over time, weakens the link between the utility’s rate of return and unit cost of service compared to traditional rate of return regulation

More Information

SNL’s RRA Special Topical Report: Rate Freezes: Their Historical Context and Prevalence Today (Membership is required to access this article)

This report is part of ScottMadden’s Regulatory Minute series. To view all featured Regulatory Minutes, please click here.

Additional Contributing Author: Benjamin Lozier