The concept
Trackers – also known as riders or adders – are rate adjustment mechanisms (with true-up):
add-on cost recovery mechanisms for single issues, such as storm recovery 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.
Background
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 expenditure may well include an allowed
return on that investment.
Kentucky currently has a tracker that includes a
return on investment for any retrofit equipment used
to bring a coal plant into compliance with the Clean
Air Act of 1990.
A tracker allows rapid recovery of an
expenditure without waiting for a lengthy, fullblown
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.
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.
AEP position
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.
Trackers are an expedient means to recover one-time costs
without the administrative expense of a full-blown rate case.
Examples of how trackers are used within AEP’s jurisdictions
| STATE | | EXAMPLE OF USE |
|---|
| KY | | CAA/1990 retrofits (includes ROE) |
| VA | | Generation investment (Dresden) |
| TX | | Transmission cost-of-service |
| All AEP States | | Fuel adjustment clause |
Traditional regulation
Trackers would be considered a form of traditional regulation. Under traditional, or 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 increase. This also holds true when a major capital investment, such as a new generation plant or transmission line, is constructed.
Regulatory lag
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. Mechanisms such as trackers help utilities to accomplish both of these goals. Having this tool available allows companies to make large capital investments while maintaining financial strength and solid bond ratings.
