Rate freezes, arrangements where utilities are prohibited from filing rate cases, have been commonly used nationwide since the 1990s. Today, rate freezes or rate case moratoriums are in place across multiple jurisdictions impacting 70 utility companies. While these arrangements have overwhelmingly originated from past rate cases and are intended to benefit consumers; arguably adverse consequences can also be inherent with 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:
  • There were many large-scale construction projects, particularly nuclear plants.
  • The customer base grew rapidly, requiring sizable investments in transmission and distribution infrastructure.
  • Inflationary pressures were driving up operating costs.
  • Higher interest rates increased utility companies’ 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.
  • Today 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
    • Establishing new regulatory frameworks
    • Imposed penalties for mismanagement
    • As of May 2014, rate freezes or moratoriums were in place in 29 jurisdictions impacting customers of 43 electric and 26 gas utilities and one steam utility.

The table below provides a summary of some of the current rate freezes and their origins.

Summary of Rate Freezes and Related Actions

*For the complete list of rate freeze actions, please refer to the SNL report listed below.

Implications

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

• Weakens the link between the utility’s rate of return and unit cost of service compared to traditional rate of return regulation
• Encourages the utility to reduce its costs and innovate in different ways to manage costs and improve operations
• Introduces greater discipline in managing the utility in a prudent and cost effective manner
• Results 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 make it difficult to meet operation, maintenance, and compliance obligations
• Innovations through automation, organizational development, and advanced technologies can fall behind the pace of change required to maintain safe and reliable operations

More Information

SNL: RRA Special Topical Report; “Rate Freezes: Their Historical Context and Prevalence Today”

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