Finance and Ratemaking Flashcards
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Read the first 7 Finance and Ratemaking flashcards as text
In utility ratemaking, 'normalization' of revenues adjusts test year data to remove:
Answer: Extraordinary or non-recurring items that would distort typical year operations
Normalization adjusts test year data to reflect typical conditions by removing one-time events (storms, unusually mild weather, non-recurring expenses) that would otherwise distort the revenue requirement.
The 'embedded cost of debt' used in setting a utility's WACC refers to:
Answer: The weighted average interest rate on the utility's existing outstanding debt
Embedded cost of debt is the actual weighted average interest rate on the utility's existing long-term debt, which is typically lower than the current market rate for new issuances.
Under a 'straight-line' depreciation method for utility plant, annual depreciation expense is calculated as:
Answer: An equal annual charge spreading original cost over estimated service life
Straight-line depreciation divides the original (historical) cost of the plant by its estimated useful life, resulting in equal annual depreciation charges throughout the asset's life.
A utility's 'earned surplus' or 'retained earnings' represents:
Answer: Cumulative net income retained in the business after dividends are paid
Retained earnings (earned surplus) are the accumulated net profits kept in the company after paying dividends, forming part of the equity component of the utility's capital structure.
Which regulatory mechanism allows a utility to recover large capital investment costs gradually as they are placed in service, rather than waiting for the next full rate case?
Answer: Construction Work in Progress (CWIP) in rate base or a rider
Allowing CWIP in rate base or using a capital cost rider lets the utility begin recovering financing costs on major construction projects before a full rate case, reducing regulatory lag.
The 'price elasticity of demand' concept is relevant to utility rate design primarily because it predicts:
Answer: How customer consumption will change in response to rate changes
Price elasticity measures the sensitivity of customer demand to price changes; rate designers must consider elasticity to accurately forecast revenues after a rate increase.
A 'lifeline rate' in utility ratemaking is designed to:
Answer: Provide a low-cost tier of service for low-income or residential customers
Lifeline rates offer a subsidized low price for a baseline amount of essential utility service, ensuring that low-income households can afford basic electricity, water, or gas.