Finance and Ratemaking Flashcards

In a multi-year rate plan (MRP), rates are set for several years in advance primarily to:

Answer: Reduce regulatory lag and provide both utility and customer rate certainty

Multi-year rate plans reduce the frequency of expensive rate cases and give utilities a predictable revenue path to plan capital investments while giving customers stable rates.

Under the 'discounted cash flow' (DCF) method for estimating a utility's allowed ROE, the analyst primarily uses:

Answer: Expected dividend yields plus projected long-term growth rates of utility stocks

The DCF method estimates the cost of equity as the expected dividend yield (D/P) plus the expected long-term growth rate in dividends or earnings, representing what investors require to hold the stock.

A 'stranded cost' in the utility industry refers to:

Answer: Utility investments made under regulation that cannot be recovered in a competitive market

Stranded costs arise when deregulation exposes utility investments — made prudently under the regulated monopoly framework — to market prices that are too low to recover them.

A utility's 'rate base' is most directly reduced by an increase in:

Answer: Accumulated depreciation on utility plant

Rate base equals gross plant minus accumulated depreciation (and certain other deductions); as accumulated depreciation grows over the asset's life, net rate base declines.

The 'known and measurable changes' adjustment in a rate case allows regulators to:

Answer: Update test year data for changes that are certain and quantifiable at the time of the rate order

Known and measurable adjustments update test year figures for specific, certain changes (like a wage increase already agreed to or a bond already retired) to make rates more current.

Time-of-use (TOU) rates charge customers different prices based on when they consume energy. The primary economic rationale for TOU pricing is to:

Answer: Reflect the higher cost of producing or procuring electricity during peak demand periods

TOU rates signal the true cost of service — which peaks during high-demand hours — encouraging customers to shift usage to off-peak periods and reducing the need for expensive peaking capacity.

In a regulatory 'black box' settlement, the agreed revenue requirement is accepted by the commission without:

Answer: Requiring disclosure of which specific cost components changed from prior rates

A black box settlement resolves the rate case at an agreed revenue requirement without revealing how the parties allocated costs across components, providing settlement flexibility but less regulatory transparency.