How did efforts to reduce support costs become such a problem?
The COO of a multistate electric utility faced a huge challenge: their current plan outlined capital expenditures translating into a 4% to 5% annual rate increase for customers over the next five years.
Increasing Operations & Maintenance costs would be on top of this asset-driven rate increase resulting in a double-digit rate increase across all jurisdictions. The regulators were going to be unhappy, but the COO felt he could demonstrate the need for the investment and the validity of the O&M costs.
To avoid even greater rate increases, the company had initiated cost-reduction efforts in support services areas (IT, finance, accounting, HR and legal) through a limited centralization or sharing strategy. The COO felt the regulatory team was doing a good job educating regulators and staff on shared support services allocations and methodologies.
But the COO had just gotten off a conference call with the General Counsel and the SVP of Regulatory Affairs. Settlement discussions with regulatory staff and interveners in connection with two ongoing general rate cases suggested that a significant portion of allocated support costs in both were being challenged and might be disallowed.
What was happening?
Our series, 5: insights for executives, explores the questions: