Retail Cost Recovery and Rate Design in a Restructured Environment
30 December 2004
By Dr. Kenneth Gordon, et al.
This paper, authored by NERA for the Edison Electric Institute, examines regulatory policies toward electric utility retail electricity cost recovery and rate design. Electricity rates need to accomplish two basic goals: impart information that helps customer and investors make economic decisions about their consumption and investment decisions, and ensure that regulated utilities' costs are recovered. Today's electricity rates often fall short on both counts. Current cost recovery mechanisms (e.g., base rates cases and fuels adjustment clauses) should be updated to reflect the new economic realities.
New costs of service and new forms of financial risk are emerging for utilities as energy markets evolve. In particular, expansion of the wholesale markets and formation of Regional Transmission Organizations (RTOs) have introduced new categories of costs that are largely beyond the control of an individual utility. These new costs, as well as the costs of mitigating the new risks, must be reflected in the utilities' cost-recovery mechanisms and rate structures.
Over the next several years, revising retail rate structures and cost-recovery approaches must be a high priority for electric utilities and regulators. The authors offer key recommendations for how to go about accomplishing this goal. They also provide an overview of the U.S. electric industry (its past, present and future) and highlight the economic underpinnings of an efficient and competition-compatible rate structure. Other areas addressed include:
- Recovery of regional costs;
- Provider-of-last-resort (POLR) obligations;
- Use of adjustment clauses;
- Asset investment trackers to support infrastructure investment; and
- Economic rate design.
Read the paper on Edison Electric Institute's website.
