“One interesting rate base item is storm damage. We are accustomed to seeing news coverage of tearful hurricane victims praising the heroic utility workers who restore their electrical service. Not so heroic is the way the utility accountants are booking that expense in a way that gives huge future streams of profits to the poor storm-victim utility.”
The procedures for state-level utility rate cases have evolved into a standard set of formulas and estimating methods over time. [1]
Most states use a future “test year” where the utility estimates its revenue and costs for an upcoming period. Naturally, the utility will ‘low ball’ the projected revenue to justify asking for a higher level of revenue through individual rates approved by the regulators. Similarly, costs in the model year will be overstated as much as the utility thinks it can get away with.…
“In Georgia and South Carolina, for example, the nuclear-related cost overruns are a good thing. Not only is rate base enlarged for assigned profits for decades, the CEOs can tell victimized consumers that they are avoiding emissions from much cheaper, cost-predictable conventional power plants. Bootleggers and Baptists all in one.”
Public utility regulation attempts to protect the public where one and only one franchised monopolist serves a certain geographical area. Such is the case with your local natural gas and electricity provider. But the alleged protection is actually the enemy of consumers on close inspection. To understand why, the fundamentals of rate base regulation must be explained.
The Formula
Regulated utilities are allowed to recover their cost to do business and earn a return on invested capital. Expressed as a formula this is the revenue requirement: R = Oc + (V-D)rr
where:
R = Revenue justified by cost and return
Oc = Operating cost including depreciation
V = Value, always first costs
D = Depreciation
rr = Rate of return allowed by regulators
(V-D) = Rate base, this is the current book value of assets and the un-recovered part of depreciable assets and other amortized capital.…
“As the magnitude of the Vogtle project disaster becomes clearer, the Public Service Commissioners are becoming less toleratant of criticism…. Steve Prenonvitz … heaps criticism on Georgia Power but also on the Commission itself…. Then there is Nuclear Watch South [whose] … assertions are painfully true and therefore irritating to the Commission, which is joined at the hip with Georgia power on the Vogtle project.”
Georgia Power has now provided details concerning the settlement with the Vogtle contractor. The total payout is $915 million of which Georgia Power’s 45.7% share is $350 million. Also agreed was a $69 million change order. This is a hit for customers, quite different from what the Company said for years: they expected to prevail in the litigation but were working on a possible settlement. (Ratepayers are protected unless the Commission orders a cost disallowance, which they should.)…