Under-Depreciated: Can Public Utility Commissions Accelerate Depreciation for Fossil-Fuel Assets to Hasten the Renewable Energy Transition and Avoid Looming Stranded Costs?
Benjamin Civiletti
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The renewable energy revolution is taking shape across the United States, carrying the potential for environmental and economic benefits.[1] Developments in clean energy are encouraging, but the transition is not happening fast enough. One significant barrier is the traditional ratemaking model, where investor-owned utilities are incentivized to build large generation projects and keep them running for as long as possible.[2] This is partly because the cost of these projects is built into electric rates in the form of an operating expense called depreciation.[3] Depreciation is spread over the expected life of the project, which often stretches 30 years or more.[4]
While waiting decades to recover the cost of these (largely fossil-fuel) assets, utilities may be threatened by independent power producers (like community solar arrays) or changes in technology.[5] All the while, utilities may resist calls for new renewable infrastructure.[6] And, if enough renewable projects are built, the current depreciation model risks burdening ratepayers or investors with the stranded cost of obsolete utility investments.[7] The electric power industry has already experienced serious stranded cost problems from unexpected changes in the market––namely, from the cancellation of nuclear power plants.[8] Accelerating the depreciation rate for fossil fuel investments, and thereby allowing faster cost recovery, could help speed the transition to clean energy and avoid stranded costs.[9]
This note will analyze public utility commissions’ legal authority to implement alternative depreciation models which may help utilities adapt to the clean energy future. This note does not purport to identify the best solution to the problem, rather it endeavors to answer two threshold questions. First, do utility commissions have the power to mandate changes of this type? And second, what legal and economic parameters come into play when designing a new approach to depreciation? Part I will briefly describe the regulatory status quo and the problems associated with the current model. Part II will examine the regulators’ constitutional and statutory authority, and will argue that utility commissions have to power to mandate a new approach. Part III will investigate legal and economic limits or concerns, focusing on the positions of utilities and ratepayers. Finally, Part IV will lay out a regulatory roadmap for utility commissions addressing depreciation, and will note the most promising routes, the potholes, and the dead ends.
Questions and inquiries regarding this Note may be forwarded to the author at LawReview@vermontlaw.edu.
[1] See Ryan Cwach & Alex Baldwin, Catching the Wind: A Legal and Economic Comparison Between South Dakota’s Renewable, Recycled and Conserved Energy Objective and A Renewable Portfolio Standard, 58 S.D. L. Rev. 14, 18 (2013) (acknowledging the “economic and environmental benefits” of wind power).
[2] See Emily Hammond & Jim Rossi, Stranded Costs and Grid Decarbonization, 82 Brook. L. Rev. 645, 665 (2017) (explaining that the “high fixed costs” for these assets encourage utilities to keep them in use as funds are recouped).
[3] See Jonathan A. Lesser & Leonardo R. Giacchino, Fundamentals of Energy Regulation 121 (2d ed. 2013) (explaining that depreciation is used to recover capital costs over the “useful life” of the asset).
[4] William Boyd, Public Utility and the Low-Carbon Future, 61 UCLA L. Rev. 1614, 1624 (2014) (explaining that the lifespan of most generation assets is 30 to 40 years).
[5] See Elisabeth Graffy & Steven Kihm, Does Disruptive Competition Mean A Death Spiral for Electric Utilities?, 35 Energy L.J. 1, 9–10 (2014) (identifying the growth of renewable energy as a factor increasing the risk for conventional utility investments).
[6] See id. at 9 (stating that the current model of cost recovery “makes utilities reluctant to abandon infrastructure with decades of remaining useful life).
[7] See Charles F. Phillips, Jr., The Regulation of Public Utilities: Theory and Practice (1988) (noting obsolescence as a major concern for calculating depreciation).
[8] See Richard J. Pierce, The Regulatory Treatment of Mistakes in Retrospect: Canceled Plants and Excess Capacity, 132 U. Pa. L. Rev. 497, 498, 502–05 (1984) (tracking the costly decline of the nuclear power industry).
[9] See Hammond supra note 2, at 673–74 (asserting that “front-end” cost recovery could help move toward clean energy, and reduce the risk of stranded costs).