A Utility’s Obligation to Serve: Bidirectional Subsidies

Within a utility’s assigned exclusive service territory, the incumbent cannot “pick and choose” which areas to serve. The utility may not slice its service territory into slivers and then serve only the most profitable. Some courts have found that this unconditional obligation can cause a utility to make large investments that produce little revenue, such as adding infrastructure to a low-population area in advance of load growth.

On the surface, this outcome seems rotten for the utility. But there are two points to absorb. First, the obligation to serve includes an obligation to stand ready to serve: to plan for, and create, the infrastructure necessary to serve. Second, the Commission has a statutory and constitutional obligation to ensure the utility has an opportunity to earn sufficient revenues to cover its prudent expenses and investment— unless the regulator has alerted the utility that it will bear the risk of prudent but unlucky investment. The utility cannot avoid its service responsibility merely because it presently lacks the funds to meet it. It must serve; and it must seek the funds through a rate increase request. If the Commission denies the request for higher rates, the utility still has to serve. Its only recourses are to appeal the Commission’s rate decision, or seek to withdraw from its franchise privilege.

In the short term, until the utility files for a rate increase, the obligation to build in advance of load makes the shareholders the subsidizers of service territory: absorbing the cost of expansion but not getting rate recovery. In the longer term, when the utility obtains a rate increase to cover the costs, the subsidizers of expensive-to-serve areas are the other customers.  (It works the other way when commissions require today’s customers to pay for a plant during its construction period, when the benefits will accrue to later customers.) Subsidies among citizens are nothing new.  Think about the postage stamp:  same price regardless of the distance your letter travels.