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Cost Trackers 101

Cost Trackers 101. Ken Costello, Principal National Regulatory Research Institute 43 rd SURFA Financial Forum Georgetown University Conference Center Washington, D.C. April 15, 2011. Topics. Definition of cost trackers History and rationales Terms and concepts.

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Cost Trackers 101

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  1. Cost Trackers 101 Ken Costello, Principal National Regulatory Research Institute 43rd SURFA Financial Forum Georgetown University Conference Center Washington, D.C. April 15, 2011

  2. Topics • Definition of cost trackers • History and rationales • Terms and concepts

  3. What Are Cost Trackers? • A cost tracker allows a utility to recover specific costs from customers outside of a rate case. • These costs deviate either from some baseline or are zero-based. • The utility recovers these costs based on some formula or predefined rule.

  4. What Are Cost Trackers? --continued • Examples include: FACs, PGAs, bad debt, energy-efficiency costs, pipeline replacement costs, environmental costs, post-retirement employee benefits. • A symmetrical cost tracker would allow rates to increase as well decrease. • Cost trackers are a cost-recovery mechanism that has features advancing some regulatory objectives while impeding others.

  5. History and Regulatory Rationales • Until five or so years ago, most energy utilities had only an FAC or PGA as cost trackers. • Over the last several years, regulators have approved a large number of cost trackers covering a wide range of utility functions. • The list of cost trackers is long; even though cost trackers haven’t supplanted traditional rate-of-return (ROR) ratemaking, they have assumed a larger role in rates that utility customers pay.

  6. History and Regulatory Rationales--continued • Regulators generally apply a three-part test for cost trackers, at least until the last several years; costs have to be: • Largely outside the control of a utility, • Unpredictable and volatile, and • Substantial and recurring.

  7. History and Regulatory Rationales--continued • Historically, regulators required all three conditions before a utility could hope to have costs recovered through a tracker. • Over the last several years, regulators have approved cost trackers when costs do not meet all three conditions, especially the third. • Consequently, we see regulators approving cost trackers under less strict conditions.

  8. Traditional rate-of-return ratemaking “Reasonable opportunity” Regulatory lag “Just and reasonable rates” Incentives for cost control Rate-of-return tracker Single-issue ratemaking “Extraordinary circumstances” “Severe financial consequences” Regulatory objectives and trade-offs Ten Pertinent Terms and Concepts

  9. What minimum threshold should regulators set for approval of a cost tracker? What conditions, if any, should a regulator attach to a cost tracker? What evidence should a utility present showing that it needs a tracker for a particular cost could place to avoid serious financial problems? What other cost-recovery mechanisms can regulators rely on to allow a utility to recover substantial unexpected costs between rate cases? What are the public-interest effects of these mechanisms relative to cost trackers? What advantages do cost trackers offer relative to traditional ratemaking? What are their disadvantages? Questions for Regulators

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