Cost Recovery Mechanisms
There are three criteria that should be met for a cost to be considered for recovery through a tracking mechanism outside of a general rate case. The three criteria are: 1) volatility as to amount, 2) volatility with regard to timing, and 3) the cost is outside of the utility’s control.
Increases in the cost of natural gas, coal and fuel oil, along with increased price volatility for these commodities, make it essential for utilities to develop efficient mechanisms for recovering changes in these costs outside of a general rate case. The cost of purchased power reflects this fuel price volatility, especially in RTO energy markets, and is also a good candidate for recovery through a tracking mechanism. The cost of complying with changing environmental requirements and the administrative costs and cost of transmission in an RTO environment are other good examples of costs where a tracker could be effectively used.
As an example, prior to the evolution of RTO energy markets, wholesale power was sold on a bundled basis that included both the cost of generation and the cost of transmission. However, in an RTO energy market, the cost of energy is unbundled from the cost of transmission. This can be problematic if customers receive the benefit of lower energy prices immediately through purchased power adjustment clauses while the utility is stuck with the transmission costs for recovery in a general rate case at a later time. A transmission cost tracker would assure that both the benefit of a lower energy price and the transmission costs necessary to achieve this benefit are both flowed through to customers on a timely basis.
The Prime Group has assisted many utilities in developing purchased power adjustment clauses, fuel adjustment clauses, gas cost adjustments, environmental cost recovery mechanisms, performance-based rates, transmission cost trackers and rate incentive mechanisms.