Regulation does not equal zero risk
As I pointed out in my previous blog, dealing with commissions without the thought of long-term implications can come back to bite you. Regulation is not risk free. In fact, it could be argued that regulation risk is higher and harder to quantify than market risk. In the regulation world, you are making deals which are perceived to be set in stone. Whereas in the free market, no one believes in any deals being set in stone. This makes the free market companies more agile and proactive. A regulated company without foresight will be punished. AEP recently saw this as the public utility commission reset the rates which was agreed upon. I don’t recall an event like this ever occurring. AEP clearly miscalculated the reaction and the potential pull of many of the small businesses. In general, the new rates impacted the commercial and residential class the most. The impact was greater than 60% for several customers. The outcry was too much for the commission and they quickly dismissed the rate agreement.
AEP rolled all their concerns into one rate case. This works well when the rate shock is not so great. In this case, given the expected rate shock, there was a significant risk of rejection. This has left AEP holding the bag on many legitimate rate increases. There were several gray areas of rate increases, which I will not get into. Utilities should learn from Barclays Capital economist Peter Newland and his latest discussion on gasoline prices. Peter notes, it is not the price, but the rise of gasoline prices. To an extent I agree with him, but in the gasoline case it is still important to look at the price. I will leave this discussion for another blog.
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