Industry stakeholders continue to spend a considerable amount of time tackling utility cost recovery issues, and, broadly speaking, adjustment clauses have allowed utilities across the sector to score some attractive earnings gains.
In the face of the robust expansion of utility capital expenditures over the last 10 years or so — CapEx for the 53 companies in the RRA Index is estimated at $117.5 billion in 2017, versus $52 billion in 2006 — as well as increases in various expenses and sluggish demand growth in most parts of the U.S., industry stakeholders have developed ever more innovative strategies to achieving timely rate recognition of these factors.
A key component of these strategies has been the implementation of adjustment clauses to address recovery of these expenditures, as well as issues related to rising/volatile costs and sluggish demand growth. These mechanisms have contributed to steady earnings growth in the sector. Earnings results for the first half of 2017 showed solid growth for utilities, with an average gain of 6.2% year-over-year. Despite overall mild weather in the first half of 2017, regional weather variations boosted sales for some utilities, while others saw returns from capital investments through rate increases.
A defining characteristic of an adjustment clause is that it effectively shifts the risk associated with recovery of the expense in question from shareholders to customers, because if the clause operates as designed, the company is able to change its rates to recover its costs on a current basis, without any negative effect on the bottom line and without the expense and delay that accompanies a rate case filing.In a Topical Special Report issued Sept. 12, Regulatory Research Associates, an offering of S&P Global Market Intelligence, discusses the key adjustment clauses used by the largest electric and gas utilities in the 53 jurisdictions covered by RRA. As indicated in the accompanying table, all of these jurisdictions employ some type of adjustment clause, with fuel/purchased power clauses being the most prevalent. All electric and gas utilities are permitted to adjust rates, outside of a base rate case, for variations in fuel/purchased power expenses. In addition, roughly one-third of all jurisdictions have adjustment clauses in place to reflect changes in the costs associated with the utilities' participation in regional transmission organizations.
RRA notes that although roughly two-thirds of all utility commissions permit the use of, or are considering the use of, an adjustment clause for new capital investment, less than half of the utilities examined in the report currently have such a clause in place.
Another type of adjustment clause, a decoupling mechanism, enables utilities to offset the effect on revenues of unexpected sales reductions caused by energy-efficiency programs, deviations from "normal" temperature patterns or economic conditions in their territories. RRA considers a decoupling mechanism that adjusts for all three of these factors to be a "full" decoupling mechanism. Some form of decoupling is in place in the vast majority of the jurisdictions.
Further details concerning the adjustment clauses included in the report can be found in each of RRA's Commission Profiles.
For a full listing of past and pending rate cases, rate case statistics and upcoming events, visit the S&P Global Market Intelligence Energy Research Home Page.