“If a regulator doesn’t understand the cost structure, the default position is disallowance.” Paul G. Afonso,
Former Chairman of the Massachusetts Department of Public Utilities
Co-Chairman of the Energy,
Utilities and Environmental practice at Brown Rudnick LLP
With the need to make significant capital expenditures each year for the foreseeable future, many utilities will also face the prospect of frequent filings for rate increases.
In response, utilities can expect regulators to take all possible steps to mitigate the impact of these rate increases on customers. Utilities must find new ways to reduce support services costs further — but do so in a manner that readily responds to more intense regulatory scrutiny and a greater burden of proof.
Increasingly, regulators will ask utilities to provide even more rigorous justification of all operating expenses and capital investment decisions before allowing recovery through increased rates. They will target costs associated with Administrative & General support provided by centralized corporate functions via a shared services delivery model:
Methodologies for allocating costs associated with centralized support services will increasingly be challenged.
Support services that do not “reside” with the local jurisdictional utility — also providing jobs and positive impacts to that state’s economy — are often contested and sometimes disallowed, especially when the regulator does not understand or agree with the allocation methodology.
Yet, 65% of respondents to a recent Ernst & Young survey believe their costs and allocations provided by a corporate service center and/or shared services group are “very transparent” to regulators.
“While respondents indicated their costs are transparent to regulators, it is our experience that many internal division leaders question the validity of shared service charges in their budgets,” says Roy Ellis, leader of Ernst & Young LLP’s regulatory services for the utilities sector. “The value of those services is not transparent to them, which raises questions about how transparent they truly are to regulators.”
To what extent will shared services costs be scrutinized by regulators in the future?
In our recent survey, almost 60% of respondents said they believe allocated costs associated with services provided by a corporate service center or shared services group will come under limited to no additional scrutiny by regulators.
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