Rate Making Formula vs. Bonds - Research Paper Example

The rules will cost $800 million annually until 2014 in addition to $1.6 billion already spent annually under its predecessor, CAIR, in capital investments. The industry players say that the rule is the most costly and burdensome to the business and consumers and analysts say that it is likely to increase consumer bills by an estimated 40 to 60 percent by 2014 . Consumer advocacy groups have also come out to fight the utility rate hikes as well as the CSAPR that are adding the cost burden to their bills.

This explains why three dozen lawsuits had already been filed by November 2011 and their adversarial nature . This is just one example of compliance costs struggle that environmental regulations bring . As energy utilities attempt to reach the set compliance standards, whether by capital investment, or adopting different operational strategies, or adopting new and cleaner technologies costs will be incured. Since these costs are associated with environmental compliance, utilities will argue that they should be included into rates, and ratepayers will be disinclined to bear costs .

Municipal bonds are better alternatives to recoup environmental compliance costs while eliminating cost shifting to consumers and ensuring implementation of environmental regulations in a less adversarial atmosphere. This will eliminate much creditworthiness and the revenue deficiency risk utilities bear from environmental compliance, allowing utilities to operate more efficiently and thus keeping energy prices low.. As energy utilities attempt to reach the set compliance standards, whether by capital investment, or adopting different operational strategies, or adopting new and cleaner technologies costs will be incured.

Since these costs are associated with environmental compliance, utilities will argue that they should be included into rates, and ratepayers will be disinclined to bear the costs5. Municipal bonds are better alternatives to recoup environmental compliance costs while eliminating cost shifting to consumers and ensuring implementation of environmental regulations in a less adversarial atmosphere. Currently as a general rule, environmental compliance costs are recoverable in rates because these costs are not costs that an energy utility can chose to incur; they must incur them6.

In ratemaking, a PUC may deem that a measure taken by a utility was not the most economical or efficient way to reach compliance, therefore, reject to include the cost into the rate. Using municipal bonds to recoup environmental compliance costs eliminates this cost shifting struggle7. The proposed bond will be a private activity bond which will be issued to recoup short term loans that the county will take from Qualified Energy Conservation Bond (QECB) on behalf of the electric utility company.

This is because counties within a state are allocated their amount according to population as stipulated in the QECB Formula Allocations. This will be given in a lump sum upon approval by the Department of the Treasury at low interest rate and which 10% of it will have to be used in the first six months and the rest in two years time8. The county will then issue general obligation municipal bonds to repay for the QECB loan plus interest. This will eliminate much