North American Performance-Based Regulation for the 21st Century

Electricity Journal

Volumn 25, Issue 4, 2012, Pages 33-47

  Makholm, Jeff D ^a   Ros, Agustin J ^a   Collins, Stephen C W ^a  

^a NERA   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

COST ITEMS; INDUSTRY STAKEHOLDERS; LONGEST RUN; NORTH AMERICAN; PERFORMANCE-BASED REGULATION; PRODUCTIVITY GROWTH; TOTAL FACTOR PRODUCTIVITY; UTILITY INDUSTRY;

ELECTRIC UTILITIES;

EID: 84862255279     PISSN: 10406190     EISSN: None     Source Type: Journal    
DOI: 10.1016/j.tej.2012.04.013     Document Type: Article

References (15)

1. The economic literature uses various synonymous terms for price cap regulation. Other terms include CPI-X regulation, RPI-X regulation, and performance-based ratemaking (PBR).
2. M. ARMSTRONG, S. COWAN AND J. VICKERS, REGULATORY REFORM: ECONOMIC ANALYSIS AND BRITISH EXPERIENCE (Cambridge, MA: MIT Press, 1994), at 165.
3. K. Gordon and J. Makholm, Allowed Return on Equity in Canada and the United States, at 32-34. See: http://www.cga.ca/pdfs/NERA.pdf.
4. ''An agency is justifiably skeptical of budget cost estimates as a basis for ratemaking. It will rely on test period results to adjustment for known or reasonably expected changes.'' Leonard Saul Goodman, The Process of Ratemaking, Vol. I, Public Utilities Reports, Inc., Vienna, VA, 1998, at 281.
5. Ofgem (2009) on the electricity distribution price control for April 2010 to Mar. 2015 (Distribution Price Control Review 5). Reference 149/09, Dec. 7, 2009. Starting on p. 57 of that report, which is available online, are the tables for each electricity distribution business, showing how the X-factor in its regulatory formula is calculated. It shows a forecast of costs in prices of 07/08, and the X-factor that achieves the same revenue as costs with a smoothly rising trend (''profiled'') from year to year. See: http://www.ofgem.gov.uk/Pages/MoreInformation.aspx?docid=371&refer=Networks/ElecDist/PriceCntrls/DPCR5.
6. ''The X-factor must be designed to equalise (in terms of net present value) the revenue to be earned by the Distribution Network Service Provider from the provision of standard control services over the regulatory control period with the provider's total revenue requirement for the regulatory control period.''
7. See Australian national rules for electricity distribution (Ch. 6, National Electricity Rules), clause 6.5.9, entitled ''The X-factor.'' The report can be found on the Australian regulator's Web site, www.aemc. gov.au.
8. In addition to using FERC data, we use data from the U.S. Bureau of Economic Analysis, the U.S. Labor Department, Statistics Canada, the Handy-Whitman Index of Public Utility Construction, and data compiled by the following financial service firms: Standard and Poor's, Bloomberg, Moody's, and Barclays.
9. See: e.g., D.W. Caves, L.R. Christensen and W.E. Diewert, The Economic Theory of Index Numbers and the Measurement of Input, Output and Productivity, ECONOMETRICA 50:6 (1982), at 1393-1414.
10. See: L.R. Christensen, D.W. Jorgenson and L.J. Lau, Transcendental Logarithmic Production Frontiers, REV. ECON. & STAT. (1971) 55:1, at 28-45.
11. The authors developed a particular flexible functional form called the ''translog.'' This is a second-order function. The superlative index number that is exact to the translog functional form is the Tornqvist/Theil index.
12. One use of this approach can be found in the doctoral dissertation of Jeff D. Makholm, Sources of Total Factor Productivity in the Electricity Industry, 1986 Univ. of Wisconsin-Madison (''Makholm Dissertation'').
13. With approximately 20 data series for 72 companies over 38 years, the database for our study contains over 50,000 ''data points.'' We reviewed the data to identify any anomalies and determined that some data pointswere sufficiently extreme to consider replacement.Although in each instance the data point could be traced back to the original FERC data, in 110 cases we decided that the data points were too extreme to be correct. For these data points, we extrapolated from nearby data points to estimate new numbers.
14. Much of this variability simply reflects how utilities book their costs. An individual examination of the year-to-year TFP growth rates shows many examples of countervailing positive and negative TFP growth numbers reflecting the particular decisions of when costs were booked to FERC accounts-a source of volatility that smooths out over time.
15. The program defines qualified investments as ''replacement mains and related appurtenances such as services, meters, regulators, measuring and regulating stations, city-gate check stations, and other ancillary infrastructure.''