Original-cost ratemaking doesn’t suit the challenges facing utilities today.
A. Lawrence Kolbe, Philip Q Hanser and Bin Zhou are members of The Brattle Group in its Cambridge, Mass., office. This article presents the authors’ views and not necessarily those of The Brattle Group or its clients.
Electric, gas, and water utilities will need to invest hundreds of billions of dollars in coming years, much of it on environmental, efficiency, or asset replacement measures that increase costs but leave demand unchanged or even reduced. Under traditional regulation, this is a recipe for rate shocks that will create problems for utilities, customers, and regulators alike. It’s time for a fresh look at alternatives to traditional original cost regulation that mitigate rate shocks while still making utility investors whole. Three alternatives have worked successfully in other contexts.