The Utility Agenda: Trackers
A company in a competitive market has to compete for your business and therefore must carefully manage its costs in order to stay competitive. However, a regulated monopoly utility has no competition, and therefore regulation of rates and services is necessary.
Under regulation, a regulated monopoly utility is entitled to recover its prudently incurred costs plus a return on the capital invested by its shareholders. The utility’s costs are determined by looking at a test year – 12 consecutive months of the utility’s operations – and adjusted for known and measurable changes to costs.
Regulators also determine a fair return for shareholders by looking at the utility’s risk profile compared to similar ventures. Regulators then determine a revenue requirement, or yearly income amount that would allow the utility to recover its costs plus the authorized return. The revenue requirement is then divided among the customers and the energy (amount of gas or electricity) that the utility’s customers use.
Between rate cases, the utility is supposed to manage its costs. Because it takes time for regulators to approve new rates (called regulatory lag), the utility has an incentive to manage its operations and reduce costs. Because there can be regulatory lag in cost recovery, and there is some risk a utility may not be able to recover its costs and generate the full return authorized by regulators, the utility’s return includes a "risk premium."
Trackers allow the utility to recover expenditures on an on-going basis by adjusting rates on a quarterly or biannual basis for certain categories of costs, which means utilities do not have to wait for the next rate case to recover those costs.
Fuel costs used to be examples of costs that could reasonably be tracked, but that is no longer the case. Since the 1980s, Indiana's utility companies have charged customers for fuel costs (coal, fossil gas, etc.) through a tracker called the Fuel Cost Adjustment/Fuel Adjustment Clause (FAC). Indiana’s monopoly electric utilities make FAC filings at the IURC every three months, except for Indiana Michigan Power (I&M/AEP), which files every six months.
With the FAC tracker, the utilities are insulated from the risks presented by rising and volatile fossil fuel prices. As captive customers of Indiana's monopoly electric utilities, Hoosiers - who are struggling to put food on the table and keep a roof over their heads - are forced to absorb the risk and the cost of fossil fuels.
Meanwhile, the monopoly utilities are making money hand over fist while they drag their feet in making the transition to renewables and energy efficiency. Renewables and efficiency are not subject to the regular and ongoing volatility of fuel prices and fuel-supply constraints facing coal and fossil gas, and they do not face the substantial ongoing capital and O&M costs that plague fossil-fuel power plants.
Shifting to renewables and efficiency will go a long way toward bringing down the fuel costs for Indiana's electric utilities. Hoosier utility customers are paying a heavy price for the poor choices of Indiana monopoly electric utilities to delay meaningful investments in renewables and energy efficiency.
Legislatively, electric utilities have lobbied hard and given a lot of money in campaign contributions, which has led to their success in getting laws passed at the Indiana Statehouse to give them trackers for:
- Transmission and distribution lines, which should not be tracked because utilities can properly plan for these investments and assess the costs;
- Construction Work in Progress - CWIP - allows utilities to charge ratepayers for power plants while they are under construction, before they are producing any electricity, and even if they NEVER produce any electricity.
- Any costs that are the result of a government mandate, which, for a regulated utility, covers just about all core costs since they involve providing service.
In addition, electric utilities have embedded sweeteners for themselves in their proposed tracking legislation. These include:
- Deregulating revenue that is generated from trackers, which means as the number of and revenue from trackers increase, the less regulatory oversight there is of the utility's profits.
- Automatic, monetary incentives for trackers that have been approved. Under the proposed incentives, the IURC would have to automatically increase the utility’s rate of return if the proposed tracker is approved. The IURC would have no discretion in these cases.
- Reduced regulatory oversight of utility investments and costs.
The issue here is that once approved, trackers virtually guarantee, with perhaps minor adjustments, recovery of costs going forward. This reduces the company’s risk in terms of the potential of not being able to recover those costs in a future rate case. Wall Street investors and lenders then view the utility as a less risky investment, which means:
- That the utility will receive more favorable interest rates on any borrowed money; and
- That their rate of return should be lowered, not increased with incentives, because there is less financial risk to the company. That is, ratepayers should not have to pay a risk premium on that investment when risk related to cost recovery for that investment is essentially nonexistent. Adding an incentive on top of the rate of return is adding insult to injury.