From the Blog

The Black Box

2

MAY, 2017

Sixty-four years ago this month, the black box was invented. The black box is the nickname for the flight data recorder that is on every commercial airliner to help investigators understand what occurred leading up to a plane crash. It records instrument readings and valuable aircraft information, as well as a recording of the pilots’ conversation. This information is vital to help authorities understand what caused the crash. The interesting thing is that the black box is no longer black, but instead bright orange. So I guess Netflix is correct. Orange is the new black. And just like the popular TV show, black boxes are becoming more popular in the utility rate-making process.

During the utility rate-making process, there are public hearings, witnesses, evidence submitted, and the process is very transparent to help the public understand how rates are established. However, sometimes that’s not the case. On some occasions, the public, and many times the regulators themselves, are not privy to the information on how rates charged to the consumers are established. These are called “black box” settlements, where all the interested parties meet in private and hammer out a deal on what the rates should be and how they should be structured.

The difference between a flight data recorder black box and a regulatory black box settlement is that aviation investigators rely on the indestructible material of the black box to protect the critical data so they can understand what happened in the event of a crash. In utility rate-making, interested parties of rate cases rely on the black box to keep regulators from the necessary data to assist them in making an informed decision on whether or not to approve the rates to be charged to the public. Instead, they are given ancillary evidence that all the parties in the case are ok with the deal or at least “do not oppose” the stipulation and agreement.

So for example, in a black box settlement, if I asked what the ROE (Return on Equity) is for the utility in these new rates, I would get several different answers from various parties in the rate case, all basing their number on what they think it will be. After the rates go into effect, I could work the formula for ROE backwards (if I knew some other information such as operational costs or rate base) but the horse has left the barn by then.

During the last rate case when there was a black box settlement, I asked the question of how is this different than when Nancy Pelosi was talking about the Affordable Care Act when she famously quipped “we have to pass it to find out what is in it.”

I heard crickets from the lawyers. Then one had the guts to venture an answer (of which I respected); however, that answer was that I should get comfort that everyone from the Office of Public Counsel, to the utility, to environmental groups, to large retail and industrial users were all ok with the black box agreement. I do agree it is hard to get all those diametrically opposed groups to agree on anything (except that simplifyingenergy.com is a phenomenal website), but my life experience has shown me that when someone says “trust me” I should be very cautious and safeguard my wallet.

So if a rate case stipulation goes down in flames at some point in the future, at least when the next utility commission is sifting through the wreckage, they will hear me asking tough questions, if they can hear anything over the sounds of the crickets chirping.

 

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