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Labor Costs and the Rate Case

Incentives, staffing, and benchmarking in a tight economy.

Fortnightly Magazine - March 2012

lag—the time between when a utility initiative begins generating expense savings and when that savings is passed on to consumers via rates—creates incentives for utilities to implement cost-savings initiatives with uncertain outcomes. If an initiative is successful, the utility will have the opportunity to capture some of the expense savings before they’re passed on to ratepayers, compensating the company for some of the assumed risk.

Utilities should remind regulators that regulatory lag benefits ratepayers and encourage commissions to take a forward view rather than attempting to capture expense savings retroactively. Additionally, employee compensation levels might reflect rising productivity—for example, staff reductions might have contributed to increased productivity, which benefits ratepayers. Individual compensation might have risen to reflect improved performance, even though aggregate compensation has fallen. Utilities can assist their commissions to place individual compensation levels in context by offering statistics that describe productivity through time.

 

Endnotes:

1. http://www.bls.gov/iag/tgs/iag22.htm

2. Butrica, Barbara, Howard Iams, Karen Smith and Eric Tober, “The Disappearing Defined Benefit Pension and Its Potential Impact on the Retirement Incomes of Baby Boomers,” Social Security Bulletin , Vol. 69, No. 3, 2009.

3. State of Indiana, Indiana Regulatory Commission, Final Order Cause No. 43839, p.48.

4. http://data.bls.gov/timeseries/CMU2034400000000D?data_tool=XGtable

5. http://data.bls.gov/timeseries/CES4422000001?data_tool=XGtable

6. The Center for Energy Workforce Development 2009 Survey , June 2009.

7. Wanda Reder, president, IEEE Power & Energy Society and vice president of power systems services at S&C Electric, Feb. 18, 2009.

8. DOE’s Workforce Labor Trends in the Electric Utility Industry Report to the United States Congress , pursuant to Section 1101 of the Energy Policy Act of 2005.

9. Ibid.

10. Order of The Commonwealth of Massachusetts, Division of Public Utilities in Petition of Massachusetts Electric Company and Nantucket Electric Company, pursuant to G. L. c. 164, § 94, and 220 C.M.R. § 5.00 et seq., for a General Increase in Electric Rates and Approval of a Revenue Decoupling Mechanism, DPU 09-39, Nov. 30, 2009.

11. State of Indiana, Public Utility Commission, Final Order, Cause No. 43839, Approved April 27, 2011, p. 50. (published at 289 PUR4th 9.)

12. Public Utilities Commission of Nevada, Order, Docket 10-06001, Dec. 23, 2010.

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