Customers and Utilities Benefit
Ken Costello serves as principal researcher for energy and environment at the National Regulatory Research Institute. He previously worked for the Illinois Commerce Commission, the Argonne National Laboratory, Commonwealth Edison Company, and as an independent consultant. Contact him at kcostello@nrri.org.
Traditional rate-of-return ratemaking has undergone harsh criticism at least since the early 1960s. Various stakeholders, consultants and academic economists have offered ways to improve, replace, or supplement it with mechanisms designed to overcome its widely-acknowledged infirmities, such as weak incentives for innovation, rigid prices between rate cases and high regulatory costs.
One such mechanism is provided by multiyear rate plans (MRPs). An MRP is a mechanism that sets base rates or revenues beyond a one-year period to account for attrition and other factors. It does this by applying a formula or index. Alternatively, it can provide detailed forecasts for allowable rate or revenue changes over the duration of the plan.
Rather than a utility filing a new general rate case when conditions change, an MRP may forecast what these conditions are and accordingly adjust rates within a single rate case. One common practice is to allow rates to automatically change for a specified post-test year period. An MRP, for example, may specify that base rates would increase by five percent in 2017, three percent in 2018 and two percent in 2019.