Trackers – also known as riders or surcharges – are rate adjustment mechanisms (with true-up): add-on cost recovery mechanisms for single issues, such as environmental investment or fuel adjustment clauses. Many trackers are a direct pass-through of costs to customers. Some, such as riders for pollution control equipment, can include a cost of capital component.
Trackers may or may not include a rate of return on the investment in question. For instance, fuel adjustment clauses do not include a return – the utility simply recoups the amount it spent on fuel. Trackers for transmission investment or other major capital expenditures may well include an allowed return on that investment.
A tracker allows rapid recovery of an expenditure without waiting for a lengthy, full-blown rate case. However, it also creates a narrow, non-fungible bucket of funds that can only be used for one purpose.
Additionally, when costs of any expenditure are approved in a base rate case, the utility (and its ratepayers, when shared savings mechanisms are incorporated) can benefit from efficiencies. In the straight pass-through process of a tracker, this doesn’t happen.
Not all state regulatory commissions (or legislatures) embrace the concept. Some feel that single-issue ratemaking diminishes their authority and ability to regulate in a transparent environment.
|Examples of how trackers are used within AEP's jurisdictions
||Example of use
|All AEP States
||Fuel adjustment clause
Trackers would not be considered a form of traditional regulation. Under traditional (cost-of-service) regulation, an investor-owned utility (IOU) operates with an approved rate of return. All prudent costs are recovered, with a reasonable return added in to satisfy shareholders. When costs increase, the IOU can request a rate increase to recover the expenditures. This also holds true when a major capital investment, such as a new generation plant or transmission line, is constructed.
Reducing regulatory lag, the time between when a utility makes an investment and when it recovered through rates, and regulatory uncertainty, the risk that a utility commission will disallow recovery of an expenditure, are important considerations for utility companies.
Tools such as trackers help utilities to accomplish both of these goals, although they also have their disadvantages. Having this tool available allows companies to make large capital investments while maintaining financial strength and solid bond ratings.
The following regulatory mechanisms may be used in combination with or instead of traditional ratemaking to mitigate the financial stress on the utility and additional capital costs to the consumer created by regulatory lag.
Trackers are an expedient means to recover one-time or volatile costs without the administrative expense of a full-blown rate case.
AEP has been a supporter of trackers in situations where immediate cash flow is an issue. However, we also are cognizant of the issues associated with single-issue ratemaking tools.