Regulation
The prices we set in the US are based on a cost of service model, whereby the prices established by our regulators are designed to cover the costs we incur in providing services to customers, together with a return on capital invested.
Customer bills typically comprise a commodity rate, covering the cost of electricity delivered and a delivery rate, covering our electricity delivery service. Delivery rates comprise a combination of a per customer charge, a demand charge and a price per additional kilowatt hour of electricity delivered. The allocation and applicability among these components vary by size of customer.
Prices set by our rate plans are based on estimates of costs and our return and estimates of volumes expected to be delivered, which may differ from actual amounts. A substantial proportion of our costs, in particular electricity purchases for supply to customers, are pass-through costs, in that prices are adjusted on a regular basis to ensure that over- or under-recovery of these costs is returned to or recovered from customers. As a consequence, we have no economic exposure to such costs, however, there can be timing differences between the financial period when we incur such costs and the financial period when our prices are adjusted to return or charge for any over- or under-recovery.
Our Long Island generation plants sell capacity to LIPA under a contract, approved by the Federal Energy Regulatory Commission (FERC), which provides a similar economic effect to cost of service rate regulation.
Our rate plans include sharing arrangements, which allow us to retain some of the benefit of efficiency improvements in excess of those built into rate plan assumptions. Typically we retain all the benefits up to a certain level of return on equity, after which we retain only a proportion of the benefits, with the balance returned to customers. A summary of the key features of our rate plans is provided below.
| Rate plan | Equity return |
Equity to debt ratio |
Sharing arrangements |
|---|---|---|---|
| Upstate New York |
10.6% |
47/53 |
100% to 11.75%, 50% to 14%, 25% to 16%, 10% above 16% |
| Massachusetts | * | * | Not specified |
| Rhode Island |
10.5% |
50/50 |
50% from 10.5-11.5%, 25% above 11.5% |
| New Hampshire | 9.67% | 50/50 | 50% above 11% |
- *
- Massachusetts returns are based on the average of a peer group of utilities until 31 December 2009
We also have a number of service standards for our operations. These vary among our rate plans, but include reliability levels, customer satisfaction levels, customer complaints, customer meter reading performance, customer call answering, energy efficiency programmes and other measures. Many of these service standards have penalties if we do not achieve certain specified minimum standards.
The upstate New York rate plan also allows for subsequent recovery of specified electricity related costs and revenue items that have occurred since the rate plan was established, once these amounts exceed individual item thresholds and $100 million (£69 million) in total. These deferral account items include changes from the levels of pension and post-retirement benefit expenses from levels specified in the rate plan, as well as various other items, including storms, environmental remediation costs, and certain rate discounts provided to customers, together with costs and revenues from changes in tax, accounting and regulatory requirements.
The fourth and final filing for recovery of actual and projected deferral costs up to 31 December 2011 is anticipated to be made in August 2009 for recovery over a two year period commencing 1 January 2010.