The capital pressures squeezing utilities today need to be offset by stronger alignment among the four critical dimensions of capital planning: strategic, regulatory, financial, and managerial....
Mitigating "Mandated" Rate Hikes
How to develop balanced revenue-backed financing to manage the impacts of governmental mandates.
stable price that is desired at a much lower price than offered through short-term price hedges on the market. Unnecessary upward pressure on rates caused by the enormous insurance premiums associated with short-term future contracts is eliminated while still protecting selected customers from market-price volatility.
Meanwhile, transmission and distribution reliability have become an increasing concern in the wake of large-scale outages caused by relatively small mishaps and the threat to our nation’s infrastructure from terrorism. But how do we spend more on T&D reliability mandates without causing upward pressure on rates? One answer is T&D ring fencing, another RBF application. T&D ring fencing functionally separates the T&D assets and operations from the rest of the holding company and funds these assets entirely or nearly entirely with an RBF. The potential savings may be about one third of the revenue requirement needed to support the wires portion of a customer’s bill. This potential 15-plus percent decrease in overall electric rates can be used to temper the mandate-driven rate cases, whose impacts are being mitigated but not eliminated by these other strategies or used to fund or offset the cost of mandated T&D projects.
RBF of T&D assets can make the financing of new T&D reliability mandates cheaper and provide a large cushion for customers from the impact of associated rate increases. But as with other applications of RBF, this can strip the utility of the proper incentives to perform. To avoid this long-term pitfall, it may be necessary to insert some performance incentives into the risk-reward-responsibility balancing act. A loss of load or outage benchmarks would be possible approaches where the utility gets extra revenues when it surpasses a performance benchmark. As the structure here is not based upon the sharing of explicit savings, a cap on incentives earned should be considered.
Other Applications of Balanced RBF
Applications other than the ones mentioned above also should be considered, keeping in the mind the following principals.
• Single Critical Purpose: The program should meet a critical need that is easy to understand.
• Dedicated Revenues: A key element to RBF is that there be an irrevocable, non-by-passable revenue stream supporting it.
• Lower Retail Rates: Financial strategies that don’t deliver rate relief are tough to sell.
• Balance: Create balance among risks, rewards, and responsibility. Any regulatory structure that is significantly out of balance eventually will collapse.
• Reconcilable: This has been the norm in many dedicated-funding applications and provides the consumer and regulator with additional comfort.
• Benchmarks: The benchmarks used in any IBR should be reasonably achievable and changed slowly over time, unless found to be greatly out of kilter.
Balanced RBF can save a utility and its customers tens if not hundreds of millions of dollars as it moves to comply with governmental mandates. Achieving balanced RBF takes discipline and careful assessments of the mandates, the structure of RBF and the incentives that are supposed to keep it in balance. When successfully achieved, balanced RBF respects investors and customers and is good for all concerned—not just a grab-bag that helps someone