Over the past decade, stakeholder expectations and regulatory requirements have evolved. While previous regulations focused on reducing risk and improving reliability, recent expectations have shifted to monetizing risk in investment plans and ensuring program benefits are greater than the costs to customers.
Regulated utilities must strike the right balance between managing business-as-usual activities and investing for the future—while complying with ever-changing regulatory requirements and ramping up renewable energy sources to meet Environmental, Social, and Government (ESG) and decarbonization goals. Meeting these objectives and earning stakeholder trust will require innovation and rigorous investment planning.
A consistent, transparent decision-making process can increase the speed and likelihood of regulatory approvals—by providing a line of sight from planned investments to regulatory and corporate objectives, and the ability to demonstrate how plans support the interests of internal and external stakeholders.
The importance of a defensible capital plan
New requirements mean utilities are facing increased scrutiny because any changes to investment plans can translate to changes in rates and costs to customers. From 2007 through 2021, Regulatory Research Associates saw over $30B in rate increases from 822 “settled” electric and gas utility base rate cases, but only ~40-50% of increases were approved.
In Virginia, regulators require utilities to account for reasonable load growth, and show compliance with recently passed state laws regarding offshore wind, battery storage, and increased spending on efficiency programs. In 2018, Arizona regulators rejected a utility’s resource plan for failing to account for uncertainty and the “best interest of its customers.” A Hawaiian utility had its plan rejected because they didn’t provide reasonable or meaningful analysis to justify proposed projects.
These examples highlight the importance of creating robust, transparent investment plans and exploring different scenarios upfront to ensure regulators can fully understand the proposed plan, and reduce clarification efforts and approval time. Utilities must demonstrate how the organization will operationalize the investment strategy to meet regulatory and stakeholder expectations around ESG requirements.
Meet regulatory expectations with value-based decision making
Passing regulatory scrutiny will require utilities to build accountability and trust by clearly outlining the rationale, costs, benefits, and impact of their proposed plans. Organizations must consider a much broader definition of value—to measure non-financial benefits and highlight how plans support goals related to environmental justice, energy equity, sustainability, decarbonization, and grid modernization. Considering the impacts of investments in these areas is no longer a nice-to-have, but required (or soon-to-be required, depending on the regulator).
These new considerations are difficult to quantify, but must still complement traditional investment drivers, such as safety and reliability. Regulators are requiring utilities to account for all these factors in their decision-making approach. Using a consistent, value-based decision-making framework to assess all potential investments allows projects focused on risk mitigation or environmental compliance to be compared fairly alongside capacity-building and revenue-generating investments.
Use decision analytics to communicate value and build trust
To build trust with regulators, utilities need to be more rigorous and data-driven with their investment scenario analyses during decision making, and provide more transparency in the resulting plans. Simply prioritizing some projects over others is not enough when all projects are not created equal, and utilities are called to justify and defend decisions. Therefore, utilities must perform detailed cost and benefit analyses to show regulators that they selected the most optimal plan while accounting for all stakeholder needs and requirements.
Pairing advanced decision analytics with a value framework that includes well-defined benefits and constraints can help utilities optimize investment planning and decision making. This combination allows organizations to compare disparate projects on a common, quantifiable scale, to create transparent, actionable plans. An equitable plan can also support less-tangible objectives related to ESG impact. Data visualization and GIS tools can facilitate communication of the plan and demonstrate how each investment meets requirements and provides benefit to customers.
The Copperleaf solution
Copperleaf’s approach and best-practice value models have been proven and accepted by regulatory bodies globally, allowing clients to create optimal investment plans, analyze sensitivities, predict expected outcomes, and defend plans to regulators and external stakeholders.
Copperleaf® clients across regulated industries report:
- significant time savings in preparing submissions
- reduced conflict with regulators and external stakeholders due to greater transparency
- a higher percentage of submissions approved with few to no revisions required
Download this playbook to learn six steps to streamline regulatory approval.