Regulatory and Public Policy
The electric utility industry is one of the most highly regulated sectors of the U.S. economy. The industry is undergoing a major transformation to modernize the grid, making it more reliable, resilient and customer friendly. Through this evolution, we continue to work with our customers, regulators and policymakers at the federal, state and local levels.
AEP is at the forefront of evaluating and deploying technologies to improve the customer experience. Regulations must be progressive enough to allow the utility to provide these solutions for customers.
In 11 states, AEP operates within a variety of jurisdictional regulatory frameworks. Those frameworks primarily are governed by state legislatures that direct state regulatory commissions to achieve overarching policy goals. These regulatory and legislative environments, in conjunction with federal regulation and legislation, define the parameters of AEP’s business and planning models.
Our focus always is on a safe and reliable grid that is resilient and adaptive. Our generation, transmission and distribution system investments directly affect our customers and shareholders. These investments must coexist with regulation and policy considerations such as environmental rules and affordability. As we transition to a clean energy future, we are reshaping our asset base in a reliable and affordable manner for our customers while managing the financial risk for our shareholders. The changes we are making must be compatible with the regulatory frameworks in which we exist on the wires (transmission and distribution) side of the business.
However, regulatory frameworks must be responsive to today’s technology and customer preference environment. AEP is at the forefront of evaluating and deploying technologies to improve the customer experience. Regulations must be progressive enough to allow the utility to provide these solutions for customers. The customer must be the center of our focus and analysis and regulatory policy decision-making.
The regulatory compact is a term used to describe traditional regulation of vertically integrated utilities. It is the regulatory paradigm in which a regulated utility makes prudent investments to ensure a safe and reliable electric service universally to all customers. The utility applies to its state regulatory commission for cost recovery on its investments. The commission then approves the prudent expense, including an opportunity to earn a fair rate of return on the investment. This was the way virtually all electric utilities did business from the time the industry was regulated in the 1930s until the deregulation trends of the 1990s. Now we have a patchwork quilt of states that have varying levels of competition. In those states where competition exists, the generation or access to the retail customer is competitive. However, even in those states the regulatory compact still exists in the regulation of the wires.
AEP embraces the regulatory compact but also sees a need to increase flexibility through alternative ratemaking models and to alleviate regulatory lag (the time it takes to recover investments) and uncertainty. This is referred to in the industry as the regulatory paradigm shift. AEP is among the industry leaders calling for regulatory reform that will allow us to more nimbly respond to technological changes necessary to meet today’s more complex consumer and societal demands while still preserving the need to provide service to all customers.
Today’s technologies are evolving into creative new solutions that were not envisioned just a few years ago. We need regulatory models that give utilities the ability to explore those new solutions as they determine what technological configurations will best serve the customers of today and tomorrow.
As we look at the regulatory future of our industry, we see a need for dramatic changes. Utilities need the ability to offer customized goods and services to some customers while still preserving their universal service provider obligations. We need to revisit the demarcation of behind-the-meter and front-of-meter technologies. The classifications of generation, transmission and distribution need to be revisited, as those boundaries are becoming blurred with new technologies. And we most definitely need to consider transition issues as utilities move from central station generation to cleaner, more distributed, energy resources.