Despite the lethargic economy and slow demand growth, public service commissioners in the United States aren't holding utilities back from making investments -- and in some cases they are encouraging them to invest more in their states. But the commissions are being extra diligent in asking the utilities to prove a project's economic worthiness and, in turn, are trying to better convey to ratepayers why the investments are necessary.

"I just can't imagine that the commission is going to be as warm and fuzzy as we have been in the past," said Georgia Public Service Commissioner Stan Wise, on the day that Georgia Power told the commission that it has cost overruns on a conversion of its Plant McDonough from coal to gas. "Ultimately, we will not support" similar cost overruns, he said.

But on the whole, Wise, like his fellow commissioners in Washington state, Texas, Pennsylvania, Michigan and New Jersey, are supportive of new investments to build, improve or expand generation, transmission, distribution, smart grid and energy efficiency. And some have made strong policy statements in support of those investments.

"Long story short, our system is still growing," Wise said. If Georgia does not keep up with infrastructure investments, state utilities won't be able to keep up with demand.

Or worse, they could face fatal accidents, as when a natural gas line exploded in Pennsylvania in early 2011.

"We have a very old infrastructure in the water side and electricity side," said Lee Solomon, president of New Jersey's Board of Public Utilities. Gov. Chris Christie appointed Solomon, then a state superior court judge, to the cabinet-level BPU position. In November, Christie appointed Solomon to return to the bench. "We have to make sure that we improve that infrastructure before disaster happens," Solomon said. "When you try to make those upgrades after bad things happen, the cost is far greater and the impact is far greater."

Cost Recovery

Solomon said in the coming months, the commission would discuss with the utilities various ways to accelerate their capital spending. Current capital improvement programs won't result in needed improvements for "decades and decades and decades," he said.

Robert F. Powelson, chairman of the Pennsylvania Public Utility Commission, echoed Solomon. "At the end of the day, we have an infrastructure problem," Powelson said. "And traditional ratemaking is not going to solve that problem."

House Bill 1294, which is pending in the Pennsylvania Senate, would allow utilities greater certainty in recovering their costs for investments in a more timely manner.

"That would be a real game changer for us," Powelson said of the bill. He said Pennsylvania is a progressive jurisdiction and doesn't believe in "taking a pound of flesh out of the public utility" before approving capital spending.

Solomon said that the downside of the "pound of flesh" approach taken by some states results in an overall higher cost for consumers because of the resulting higher cost of capital.

There is, however, a concern about rate case and ratepayer fatigue. Michigan is trying to balance the needs of utilities with ratepayers by supporting only the most economical of investments, said the chairman of the Michigan Public Service Commission, John Quackenbush.

"We do realize that there is a long lead time involved," Quackenbush said. "We're trying to stay abreast of that so we don't get caught short."

In Texas, where the Public Utility Commission does not directly determine the rates charged by companies selling electricity into the market, the PUC is encouraging investments in generation by minimizing mandates and taking other administrative actions to ensure certainty, said Donna Nelson, chairwoman of the Texas PUC. "We're doing everything we can to make sure we have reliable electricity and that it's at a competitive rate that is as low as possible."

In Washington, the focus is on investments in renewable generation and conservation -- which a regional group says can meet up to 80 percent of load growth. To help the state's utilities meet the renewable portfolio standard, the Washington Utilities and Transportation Commission has issued policies supporting purchases of renewable generation in advance of need and full decoupling.

"The utilities would say we aren't doing enough," said WUTC Chairman Jeff Goltz. "We would say yes, we are doing our share. But there is always concern about rate recovery."

Goltz said while it's always hard to raise electric rates, what's harder now is explaining the complex factors that are going into those rising rates -- depreciated assets, rising capital costs and lower natural gas prices. "If you have an hour, you can explain this," he said. "But if you're in a grocery store line, as I have been, and people ask what's the deal with the rate increase, you can't do that in a minute."

The moral: Rates should rise marginally and incrementally each year to avoid sudden jumps at once.

This story first appeared in EnergyBiz magazine in March/April