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In our opinion: Complex rate request

Published: Monday, Jan. 31 2011 12:00 a.m. MST

It's ironic. On the same day that Gov. Gary Herbert boasted in his State of the State address that "the cost of electricity in Utah is among the lowest of any state and the price of a kilowatt-hour has held steady for the past 20 years," Rocky Mountain Power, the state's largest electric utility, announced it is seeking a 13.7 percent rate hike.

But Herbert also noted in his speech why such a request might indeed be necessary. "Billions of dollars," said Herbert, "will be required to upgrade and expand Utah's electricity generation and transmission systems."

There is no denying the direct correlation between economic growth and electrical use. And there is no denying that Rocky Mountain Power's aging generation and transmission systems now require significant new capital investment. The open question is just how much new capital Rocky Mountain Power really needs.

Because of the natural monopoly enjoyed by utility companies, Rocky Mountain Power cannot unilaterally raise its rates. The Utah Public Service Commission must approve any rate increase, and then only after lengthy regulatory review.

The challenge before the Commission is to determine whether Rocky Mountain Power's proposed capital investments are necessary for meeting increasing customer demand while guaranteeing the opportunity for a fair return to investors on their invested equity.

What will make this rate increase review particularly challenging is that a fair amount of what is being asked for by Rocky Mountain Power is the ability to introduce capital investments that not only deal with increasing capacity, but also to cover capital investments that hedge against regulatory uncertainty.

A vertically-integrated utility like Rocky Mountain Power that mines and burns coal for a fair amount of its electrical generation is particularly vulnerable to changes in carbon emission regulations. At least some of the capital improvements that they will need to make in the next decade will have to address their declining reserves of high-BTU, low-sulfur coal while meeting yet-to-be-determined restrictions on carbon emissions.

And this is just one example of the regulatory pressures and uncertainties that could inform this rate making. They include everything from efforts to increase renewable sources of energy to regulatory requirements for the company's debt-to-equity ratio.

At a time when competition and recession have kept prices for many goods and services in check, it is jarring to contemplate this dramatic jump in utility costs. We trust that the Public Service Commission will scrutinize this complex application to ensure that Utah's customers are well served with both the affordable electricity that they need now and the regulatory-compliant infrastructure that they will need for affordable electricity in the future.

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