A cost tracker is a rate adjustment mechanism for expedited recovery of specific utility costs without any regulatory review. Balancing accounts are typically used to track unrecovered allowances, and cost recovery is often implemented using tariff sheet provisions called riders. Trackers are typically applied to a single issue such as environmental controls. Most trackers are a direct pass-through of costs to the utility’s ratepayers. A tracker may or may not include capital costs.
ELCON Position and Recommendations
- Single Issue Ratemaking
Trackers are a form of single issue ratemaking, which should generally be prohibited. Regulators should not condone a change to only one component of costs without considering whether changes to other costs might have offset the increase.
- Reasonable Demonstration of the Need for a Tracker
A tracker is only appropriate on a case-by-case basis if: (a) the cost at issue is large enough to pose a threat to the financial integrity of the utility; (b) the cost is highly volatile and cannot be reasonably managed by the utility; and (c) the absence of the tracker could result in substantial financial instability to the utility and significant over (or under) charges to ratepayers. In this context, a tracker is designed for a specific purpose and should never be a substitute for, or a means to avoid, a formal rate case.
- Benefits of Regulatory Lag
Trackers eliminate the inherent incentive a utility has to prudently manage its costs, by minimizing expenses and maximizing revenues, between base rate proceedings. Regulatory lag in this context is an important feature of traditional ratemaking in forcing the utility to bear the risk of higher costs between rate cases. This incentive over time works to keep electric rates lower than they otherwise would be. An important incentive for cost control by utilities is the threat of cost disallowance from retrospective review.
- Rate Impacts
Cost trackers allow a utility to increase rates even if the utility is already earning a higher than authorized ROR. This outcome should not be allowed.
- Other Problems with Trackers
Trackers tend to remove costs from regulatory scrutiny. They also create an incentive for the utility to shift other costs to the tracker that are not germane to the reason a tracker was created in the first place. Cost trackers, in the long run, can also bias a utility’s technology and investment decisions.
- Business Risk
Trackers reduce the utility’s business risk and therefore the utility’s regulator should consider revising downward the risk premium of the utility resulting in a lower return on equity.
- Earnings Sharing Mechanism (ESM)
A ROR tracker in the form of an Earnings Sharing Mechanism (ESM) is preferable to multiple cost trackers. An ESM, which consolidates different cost and revenue trackers, is a ratemaking procedure for stabilizing a utility’s rate of return between rate cases. Under this mechanism, the utility adjusts its rates periodically (e.g., annually) when its actual return on equity falls outside some specified band. ESMs allow utilities to keep a portion of earnings in excess of the allowed return while requiring a portion of the over-earnings to be passed back to customers. This mechanism avoids the perverse incentives for cost control of cost trackers, more appropriately matches a utility’s total costs and revenues, and provides more regulatory oversight of costs. The ESM provides a utility with an increased incentive to achieve the maximum amount of operating benefits since the shareholders’ benefits increase as more and more operating efficiencies are achieved.
Ken Costello, Alternative Rate Mechanisms and Their Compatibility with State Utility Commission Objectives, National Regulatory Research Institute (NRRI), Report No. 14-03, April 2014
AARP, Increasing Use of Surcharges on Consumer Utility Bills, Prepared by Larkin & Associates, PLLC, | May 2012