10/29/2004

Utah Power

As of April 1, 2005, you can expect your power bill to go up by about $4.75 a month. The Public Service Commission (PSC) is experimenting on how electricity rates are set for Utah consumers. Utah Power is seeking permission to raise its rates 11 million. The full story about this is published in the Salt Lake Tribune.

The main difference in this new procedure on trial, is that the rates will be based entirely on projected costs that the utility expects to incur in the 12 months after the new rates go into effect. Utah Power believes using a so-called "future test year" to determine rates, instead of basing them on historical costs, the traditional method used by the PSC, will be more fair to the company as well as its customers. They say that these projected costs will eliminate the problem of "regulatory lag;" which is when a utility spends money on behalf of its customers but must wait for the PSC to approve those costs.

My question, along with everybody elses', is "Are these projected costs reasonable?" I thought that historical costs were used to determine projections. So what is making the difference here, and why are our electricity bills going up almost $5 a month? That's sixty bucks a year!

2 comments:

Ernie said...

I understand that UP&L's expenses may be going up, but maybe it isn't fair to pass those expenses on to the consumer. I sorta believe that an outside audit may find that most monopolies don't operate in the most cost-efficient ways.

Dr. Tufte said...

Utility regulation is understood by economists to be "captive". This means that the utilities can usually get what they want from the regulators. This leads to a phenomenon (in most books, but not this one) called lazy monopoly. Rather than make a profit, the regulated utility works at zero profits. But, since they have captured the regulatory process, any time they have cost increases, they pass those straight on to the consumer.

Rufio has missed a subtle point though. Getting their money earlier increases the present value of those payments. This is a good thing for the utility, and a bad thing for the public (because we are paying early, and losing some of our present value).