Crowley and McLeod Provide Innovative Reopener Recommendations in Alberta

Categories: Innovative Electricity Pricing, Performance-Based Ratemaking, Rate Design

November 29, 2024 - Nicholas Crowley and Dan McLeod

Rate reopeners under performance-based regulation (PBR) are rarely triggered in practice, but during 2021 and 2022, ATCO Utilities triggered its reopener under Alberta’s second-generation PBR framework. In its subsequent proceeding to determine an appropriate remedy, CA Energy Consulting’s Nick Crowley and Dr. Dan McLeod filed a report with the Alberta Utilities Commission suggesting an economically principled approach to resolving the reopener. The approach involved a voluntary, penalty-only performance incentive mechanism (PIM) tied to service reliability.

PBR plans are typically characterized by a longer period of time between traditional revenue requirement applications. This time between “rebasing” results in a prolonged separation of costs and revenues, providing the utility with enhanced efficiency incentives but also enhanced risk. A utility operating under PBR could potentially experience earnings that are dramatically higher or lower than the amount provided under the I-X formula. To protect against an untenable divergence of costs and collected revenues, PBR plans often include “off-ramps” or “reopeners”—mechanisms that allow for review of the regulated entity’s PBR plan during the PBR term and potential relief in the form of adjustments to the PBR plan or exiting the plan completely in the event certain predefined conditions occur.