A Prescription for Regulatory Lag

Deck: 

Depreciation accounting methods can trim revenue shortfalls.

Fortnightly Magazine - April 2011
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What if utilities could earn an additional 100 ROE basis points using only their existing base rates? What if utilities are entitled to these additional 100 basis points but aren’t receiving them? This might sound too good to be true, but it isn’t.

Humans are creatures of habit. If something appears to be working, there’s little impetus to examine it further. However, recent developments are causing utilities to reconsider every aspect of their industry. The recent financial crisis, slowing customer growth, lower allowed ROE and increasing lag in base-rate filings are all affecting the bottom line.

Opportunities for improvement might be found in re-examining the way utilities initially recognize depreciation, and then use it in rate making. In particular, for assets acquired to serve customers while the utility is in-between rate cases, a pretax capital depreciation method would more accurately reflect the utility’s revenue requirement until those assets are incorporated into base rates.

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