Duff & Phelps Credit Rating Co. has released a report advising that a properly structured plan for securitization of stranded utility investment should address third-party credit risk.
Cost of Service Ignores Load Factor
none are left.
From 1983 to 1993, UI's average system price increased 8.3 percent-from 10.66 cents per Kwh (›/wh) to 11.55›/Kwh. SL rates increased 66.7 percent-from approximately 15 to 25›/Kwh. Yet the last cost-of-service study (COSS) submitted by UI and approved by the Connecticut DPUC showed that this class's ROR that was not only below system average, but actually negative (1.269 percent) when compared to the system average of 11.05 percent. Now, any reasonable person might ask how a class of service that is completely off peak, operates with 100-percent load factor, and pays rates 116.5 percent higher than average could have a negative ROR. The answer lies not only in the use of the misguided capital substitution average and excess cost-allocation methodology, but more in the way the DPUC has directed that costs be asigned to rating periods in UI's time-differential COSS.
There is virtually no possibility of UI peaking at any time other than noon to 5 pm, Monday through Friday, during the months of June through September. UI has designated the hours of 10 am to 6 pm, Monday through Friday, during the months of June through September as the onpeak period. This amounts to approximately 704 hours, or 8 percent of the total hours in the year. Shoulder is comprised of 2,080 hours, or 23.8 percent, and offpeak accounts for 5,976 hours, or 68.2 percent. UI proposed using the base, intermediate, and peak (BIP) method of assigning costs to these rating periods. For example, a base load plant that ran continuously would be assigned one-third to base hours, one-third to intermediate hours, and one-third to peak hours. The DPUC method assigns a percentage of annual hours in each rating period. Therefore, 8 percent of the costs of base load plants are assigned to the onpeak period, and 68.2 percent were assigned to the offpeak period. This has a devastating effect on offpeak loads.
Cost-of-service methods should realistically link the actual full costs of service to the unique load characteristics of the customer class and properly recognize the higher costs of serving short-duration peak loads. In today's changing environment, even a COSS that uses correct allocation methods is probably no longer relevant in designing rates. Value of service, which recognizes class inelasticities, is much more important.
The United Illuminating Co.
New Haven, CT
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