The Power of Positive Relationships — Managing regulatory forces

by Jeffrey M. Holloman

America is at a critical crossroads in terms of electricity supply and demand. The Energy Information Administration estimates that total electricity demand in the U.S. will increase by 1.8 percent in 2007 and an additional 1.4 percent in 2008. Longer term, the supply-demand equation is even more significant: the EIA estimates that from 2005 to 2030 energy demand will increase by nearly 40 percent in the residential sector, more than 60 percent in the commercial sector, and close to 20 percent in the industrial sector.

To meet this growing demand, utilities must focus on the future, particularly the energy infrastructure to serve customers within their service territories. The challenges they face in developing longer-term infrastructure projects include environmental regula-tions, renewable mandates, expiration of rate caps, and reliability issues, including physical and data security. And then there are rising investment requirements: capital costs have increased significantly over the last 12 to 18 months.

How do utility company leaders plan for and implement a program to manage related project risks and address cost recovery? By encouraging regulatory entities to take a long-term view of the need for infrastructure development and growth, utility companies and regulators can successfully address the supply-demand issue.

Rooted in relationships

A key element to effectively managing infrastructure risk, for both utility companies and regulatory agencies, is the relationship between the company leadership and commissioners. Utility companies should focus their time and resources on building understanding, awareness and a positive, productive dialogue with regulators. Here are three ways to accomplish that.

Create and maintain open, practical lines of communication with regulators. Utility executives and managers often talk to regulators only in connection with a rate case, or in a “reactive mode” when service issues need to be addressed. A more effective approach is to proactively establish a dialogue with the public utility commission. This will help create a more informed regulatory agency that, in turn, will be better able to educate the public and inform consumers about the electricity supply-demand environment.

A strong relationship with regulators can also lead to a productive dialogue about needed energy infrastructure projects. If company leaders utilize their relationships to convey current versus future demand data, regulators will have the insight they need to assess projects, as well as the cost recovery methods required to make them economically feasible. And through open lines of communication, company leaders can demonstrate the broader economic benefits of their proposed development.

Public utility commissions are responsible for serving the public interest; energy infrastructure projects that will help ensure reliable supply for the area well into the future aid them in fulfilling their mission.

Conduct an internal compliance risk assessment and document the efforts. Utilities should consider taking a proactive approach to identifying and resolving compliance issues within the company.

Traditionally, public utility com-missions have mandated that the utility hire third-party organizations to audit company activities. This reactive approach frequently requires the utility to fund the audit without gaining access to the auditors’ findings. The company receives no opportunity to address or remediate compliance issues prior to being penalized.

If a company utilizes an internal audit function or hires a third party to conduct a risk review of compliance activities as a component of its overall compliance risk management effort, leadership can demonstrate a commitment to proactively identify and resolve existing oversights, thus avoiding regulatory penalties and disallowances. Through a proactive risk assessment, auditors compile an organized record of activities that a utility can rely on when regulators request information on their processes, decisions and other activities.

Open internal lines of communication within the company. Another essential element of regulatory agency relationships is sharing information across groups within the company, not just between executives and regulatory affairs representatives. Internal staff should be equipped with insight and knowledge on the organization’s approach to managing risk and what systems and applications they are using to capture information. Internal information sharing should focus on due diligence to assess where the entire company stands in terms of effective compliance procedures.

Utility companies have a long record of serving as stewards within their communities. Colleagues who interface with utility commissions should be aware of these practices and, more importantly, included in proactive communications with regulators. An informed regulatory agency will be even more effective at educating consumers about its role in serving the public interest.

Regulatory issues provide a complex set of challenges, but utility companies have an opportunity to work within the existing regulatory environment to encourage and facilitate economically sound development. By building productive, ongoing relationships with regulators, they can ensure that there is an understanding of the need for energy infrastructure to meet long-term electricity demand.

Author

Jeffrey M. Holloman is Ernst & Young’s Americas utility industry sector leader. Holloman has more than 20 years of energy industry experience developing, implementing and leading successful corporate strategies, risk assessments, development projects, operating plans and commodity trading platforms. You may contact him at 415-894-8878 or by e-mail at jeffrey.holloman@ey.com.

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