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No Disconnect Orders - Another Coronavirus Problem

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Charles Bayless's picture
Retired CEO Tucson Electric Power

Mr. Bayless is a retired Utility Executive and a lecturer on Energy Policy, Climate Change and Ocean Acidification. Until June 30, 2008 Mr. Bayless was President and Provost of the West Virginia...

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  • Apr 27, 2020
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Coronavirus, No Disconnect Policies

and a Large Shadow.

Between the idea and the reality… falls the shadow. T.S. Elliott “The Hollow Men”

 

The Coronavirus is one of the greatest threats the world has faced in modern times. It has brought sickness and death, favoring  neither rich nor poor. It has brought economies to a standstill and it forced governments take unprecedented measures to protect their citizens.

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Millions of our customers are out of work with millions more to follow.  Their inability to pay their bills for food, rent, utility bills will work its way through the economy forcing others to in turn suspend payments potentially leading to an economic meltdown. While many commercial bills will be down “Stay-at-Home” Orders will tend to increase residential bills.

In response to this commissions in many jurisdictions have instituted “No Disconnect “ orders forbidding utilities from disconnecting customers during the pandemic. While a necessary response and needed response  the question arises, “What do we do with the very large deferred amounts once the crises is over? As T.S. Elliott said, “between the idea and the reality fall the shadow.” In this case the shadow between the very good idea of “No-Disconnect” Orders and reality is two-fold. First the huge buildup of unpaid bills facing customers when the crises is over, Second the very real potential of utility insolvency.

The present situation Is different from Winter or Summer “No Shut off” periods. These periods were for  about four  months. In the case of the Coronavirus Crises the shutoffs could last for a year or more resulting in much larger deferred balances.

Secondly, past orders were utilized by only a small number of utility customers, today’s orders will be used by many more customers  as they simply have no choice. Reasons for customers not paying  will vary those who simply cannot pay to those who can pay but simply choose not to, conserving cash due to the economic uncertainty.

Currently many utilities are experiencing revenue collections vs. the billed amount decreasing by  10-20% range. One utility, having over one million customers, has experienced over a 40% decrease. The result? Some weaker  utilities will reach the end of their ability to purchase  fuel within a few months leading to potentially even more government bailouts. And utilities should not hope for credit from fuel suppliers as they suppliers are in worse shape than utilities

We certainly cannot disconnect these customers when the orders are lifted as they will be unable to pay many months of bills  at once..

Utilities, Commissions, Consumer Advocates and others must immediately begin to think about the future problems that will arise from these orders and structure solutions now.

I have often pointed out that one of the strengths we have as an industry is that we have fifty laboratories, our States. On any given problem  five States will arrive at very good solutions, five, will totally mess it up and the others will be in between. But the glue that holds all of this together and allows us to coalesce around viable solutions are organizations such as NARUC, EEI, NRECA, APPA, LPPC etc. and their ability to disseminate what works and what doesn’t.

We need to activate this capacity now as the  crises is presenting us with unparalleled challenges. We simply can’t wait until the challenges are upon us to start thinking about solutions.  Organizations and Commissions should set up a working group to address the design, implementation and long-term consequences of these orders and solicit inputs from all interested parties to help steer the industry through an unknown future. Commissions need to order their companies to begin weekly reporting of Billed vs. Collected Revenues so that they can understand the magnitude of the problem.

Here is  one suggestion on how to design the “No Disconnect” Programs. As we bwgin to address the problem other ideas will be put forth,  hopefully some are better. I have already changed my mind numerous times on this as I think through the ramifications,  advantages and disadvantages of various solutions.

The Idea? Setting up a Regulatory Asset for the Deferrals. By creating a Regulatory Asset for the deferred payments Commissions could send a  signal to the financial markets that some portion of the missed payments will be recovered. This signal will  allow utilities to finance these costs and other recurring costs such as fuel costs at reasonable rates.

The creation of a Regulatory Asset for the deferred payments should provide that when the order is lifted the asset will be rolled into ratebase and collected over some period, say five years. Frist this gives the financial community assurance that the asset will be collected and lower utility borrowing costs. Second, it provides customer and the economy with assurances that just as the economy is starting to recover customers will not be hit with the shock of suddenly having to pay months of utility bills all at once.

When  the crises is over  the customer simply returns to their normal electric bill with a deferral surcharge instead of having to pay a large bill immediately helping the economy achieve quicker growth once the crises is over.

Everything we can do to keep any sector of our economy stable should be done, especially one that provides such a vital public Service as the utility industry. A Regulatory Asset for deferrals will go a long way towards keeping the utility industry stable, able to continue to employ millions of people nationwide and purchase goods and services from suppliers.  

If we set up a  Regulatory Asset Commissions will still have to decide what can the utility capitalize. What part do the utility shareholders have to bear. What is the recovery Period? Is all the cost recovered from individual Customers or is some of it “Socialized” I don’t know the answer to these questions. My point is that Commissions, Utilities, Consumer Advocates and other parties face a huge challenge in how to design, administer and exit such a program and we need to start discussing these challenges now.

Of course these parties will not agree on solutions. Consumer Advocates may point out that no industry should escape unscathed in such crises and that no regulatory asset should be set up or, if one is set up,  it should be only for out-of-pocket direct cash expenses such as fuel, the rest should be written off. Utilities will point out that under numerous court cases they have a right to earn a reasonable return and should ultimately be able to recover the entire deferred cost. Consumer Advocates will point out that in such unprecedented circumstances many customers will simply be unable to pay and the amounts for these customers should be written off. What happens if the deferred amounts rise into the 30-40% range and remaining customers will not accept socializing any of the cost?  What happens with  defaults from Retail Energy Providers who can no longer serve their customers as the they are not receiving enough revenues to cover their purchase power costs.  …… and the discussion, the give and take, the point and counter point  will continue. But that is exactly what is needed so that Commissions can receive the input they need to craft workable solutions.

The Coronavirus has created a crisis. Let us make sure we don’t create another one by not beginning to address what happens when it is time to lift the “no-Disconnect” Orders.

 

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Thank Charles for the Post!
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Matt Chester's picture
Matt Chester on Apr 27, 2020

Really great points, and what a challenging time for the utility industry (among many others, of course). Do you foresee any particular areas having this challenge hit them harder than others? For example, for utilities that serve a larger portion of low-income households that may have a great amount of deferred payments, will the lack of cashflow create more urgent and drastic problems? And will that only create a domino effect in that it'd be harder for utilities in said areas to climb out of such a hole?

Carlos Sousa's picture
Carlos Sousa on Apr 27, 2020

Matt's considerations make sense. Much of South America's utilities have a large number of low-income customers.

Bill  Shelly's picture
Bill Shelly on Apr 27, 2020

Charles, you have identified quite a challenging dilemma for customers, utilities and regulators. The amount of reduced revenues during these times will be significant and compounded by so many factors including, mild winter, reduced revenues from commercial businesses shut down, late payment fees and reconnection charges discontinued, increased residential bills, customers inability to pay, extended and deferred payment plans, potential bankruptcies and some leading to increased uncollectibles charge-offs for the Utility. How regulators and utilities reconcile this situation is still left to be seen but as you mentioned, the scenario is imminent and alternatives need to be considered sooner rather than later. It is unknown at this time what the utility cost impact of the No-Disconnect policies  and the other areas of revenue loss but as you mentioned utilities need to be diligent and be in a position and well advised to capture, monitor and report the financial impact of COVID-19. Interesting read and please refer to my post if you have not already related to many of the other challenges: https://energycentral.com/c/um/covid-19-–-unique-storm-utilities-neith...

Caleb Christopher's picture
Caleb Christopher on Apr 28, 2020

I like the regulatory asset idea. Excellent perspective.

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