Trackers (Inflation Adjustment or Otherwise) Some Practical Litigation Strategies

1. Trackers(Inflation Adjustment or Otherwise)Some Practical Litigation Strategies Roger Cox Harding & Shultz Nebraska Public Advocate

2. The Definition and Mechanics of a Cost Tracker • A cost tracker allows a utility to recover its actual costs from customers for a specified function on a periodic basis outside of a rate case • A tracker involves the dollar for dollar recovery of a utility’s actual costs in the periods between rate cases

3. Extraordinary Circumstances • Traditionally, only “extraordinary circumstances” justified cost trackers and they were applied only to costs that were: • Largely outside of the control of the utility • Unpredictable and volatile, and • Substantial and recurring

4. Argument for Trackers • Needed to Eliminate Regulatory Lag and Make Utility “Whole” • Regulatory lag refers to the time gap between when a utility undergoes a change in cost or sales levels and when the utility can reflect the change in new rates. • BUT -- Economic theory predicts that the longer the regulatory lag, the more incentive a utility has to control its costs.

5. Regulatory Lag Isn’t Necessarily a Bad Thing • Stress need for “efficient” management by the utility. • Addressing specific “problems” with trackers upsets the symmetry of a full review of all “winners” and “losers” in the context of a general rate case. • Single issue ratemaking

6. Tackling the Tracker • Think “Big Picture” • Ask Some Basic Questions • Don’t Check Logic at the Door • Help Commissioners Think in Terms of the “Right” Rhetorical Questions • Decide on the best way to help the Commissioners “learn” with you

7. Why is the Tracker Proposed? • What’s the problem? • Is the problem a “new” problem? • How has the problem been addressed in the past? • How do non-monopoly businesses address the problem?

8. Risk • Will adoption of the proposed tracker eliminate or lessen the risk faced by the utility? • Will adoption of the proposed tracker shift risk to ratepayers? • If yes, press for recognition in ROE of risk reduction/shifting • Either in rate case in which tracker is proposed, or • As precursor to implementation of the tracker

9. How to Make Your Points • Through your own witnesses in their pre-filed testimony • Through admissions elicited during formal discovery • Through admissions elicited from utility representative(s) during live hearing testimony

10. Inflation Adjustment Tracker • What Index is proposed to be used? • Check with your expert(s) to see if the proposed Index is the “right” one to use, if one must be used. • Establish that if utility holds “tracked” expenses beneath the Index level, the utility gets a windfall. • Utility response – if “tracked” expenses are greater than the Index level, utility absorbs the difference.

11. Contrast Tracker with Real World of Consumers and Non-Utility Businesses • Do consumers get an automatic increase in their household income to “track” inflation? • Clearly not. • Do non-utility businesses always get to automatically increase their prices to “track” inflation? • It’s not a given that private businesses can always increase their prices.

12. Possible Local Statutory Defense to Use of Tracker • Nebraska has a statutory definition of a general rate filing as a filing that would alter the overall revenue requirement of the utility. • Used successfully to defeat attempt to introduce a type of inflation tracker, denominated as a “Limited Cost Recovery” tracker, outside of a general rate case. • Even within general rate case, can argue that adoption of a tracker that will change future rates periodically may require a new general rate filing.

13. Tracker Proposals Outside of Rate Case • Even in the absence of a statutory “hook” to defend against an effort to adopt a tracker outside of a rate case, you can still argue that better public policy will flow from considering the proposed tracker in the context of a rate case.