Shared support services costs: are you transparent?
In Ernst & Young’s analysis of FERC filings from 2007–2010, about half of the companies showed an A&G expenses compounded annual growth rate of 5% or greater. Yet, in our recent survey, only half of the respondents said they believe that cost trajectories associated with support services will increase at a pace in line or faster than those associated with non-fuel O&M in generation and T&D.
Massive utility capital investment requirements alone are expected to translate into annual rate increases in the 4% to 5% range, along with additional rate increases as a result of higher operating expenses.
This could translate into the possibility that utility customers will see electricity rate increases that annually approach or exceed double digits.
If regulators view costs associated with support services provided by corporate-level functions as remote and removed from utility control and direct regulatory scrutiny, the pass-through could be disallowed.
Despite service-level agreements between support groups and jurisdictional business units, annual cost creep of 3% to 5% associated with support services is often the norm. Yet many utilities persist in downplaying the risk that regulators will no longer allow the routine pass-through of increases in allocated support services.
Three reasons for challenges to cost recovery associated with support services
- Support functions are often viewed as secondary in terms of importance when compared with operations areas. This makes it easier for regulators to question costs associated with “overhead” than those associated with energy delivery and power plant operations.
- For the utility with multiple jurisdictions, support services costs typically are assigned to a specific utility based on allocation percentages. These allocated costs often lack transparency and can provide an opportunity for regulatory scrutiny.
- The costs of support services sometimes increase more rapidly than costs associated with energy delivery and power plant operations areas — and become bigger targets for regulatory scrutiny.
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