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Cost Trackers 101

Cost Trackers 101

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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