Key considerations when pursuing tariff reforms

  • There is no one size fits all approach: although the Toolkit lays the foundation for COS and PBR regimes, elements of either approach can be combined to address the particular concerns of the jurisdiction and/or utility in question. In this sense, there is no one size fits all approach that will meet the needs of all jurisdictions – ratemaking regimes will need to be adapted to the local context;

  • Appropriate mechanisms can change over time: the ratemaking regime will inevitably evolve with time, as the regulator, utility, and other stakeholders build the knowledge and capabilities needed to implement cost reflective rates;

  • Cost of service helps to quickly mobilize investment, while PBR is more suited to a system which has reached steady state: cost of service ratemaking incentivizes utilities to grow their capital base in order to increase their profits, this can be especially effective in regions that require a build out or expansion of electricity infrastructure;

  • Costs to consumers are more easily managed in systems where load is growing: where load is growing, fixed costs can be allocated across a growing customer base. It is when load is shrinking that rates are especially at risk of increasing, as the fixed costs of providing electric service are allocated among a shrinking customer base;

  • All regulatory systems represent a balancing act among key principles, particularly simplicity versus precision of cost allocation and incentives: key ratemaking principles include financial stability and a fair rate of return, non-discrimination, incentives compatibility, cost causation and avoidance of cross subsidies, and administrative simplicity. Policymakers need to determine which principles they prioritize most when developing the ratemaking approach; and

  • Sector costs do not disappear because they aren’t charged, and suppressing power prices can lead to larger problems in the future: the under recovery of costs incurred by a utility can threaten the financial viability of the sector. If subsidies are pursued to protect vulnerable customers from high electricity rates, those subsidies should be targeted, transparent, and time-limited.
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