Balancing Utility Solvency and Customer Protection: A Comprehensive Framework for Extraordinary Cost Recovery in Regulated Energy Markets

Babu George
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Babu George: Alcorn State University

No 49r5w_v1, SocArXiv from Center for Open Science

Abstract: State Public Service Commissions face complex decisions when utilities incur extraordinary costs from disasters, fuel price spikes, or emergency infrastructure repairs. This paper examines five primary cost recovery methods, i.e., immediate pass-through, short-term amortization, rate base inclusion, securitization, and deferral, analyzing their distinct impacts on utility financial stability, customer affordability, and regulatory transparency. Drawing on a literature review of utility regulation theory, financial mechanisms, and empirical evidence, the study synthesizes theoretical foundations including natural monopoly theory and the regulatory compact with practical regulatory considerations. A detailed hypothetical case study included as appendix demonstrates how a $25 million extraordinary cost would be recovered under each method, providing complete mathematical calculations, customer bill impacts across residential, commercial, and industrial classes, and total cost comparisons over recovery periods ranging from three months to twenty years. The analysis reveals fundamental trade-offs: immediate recovery minimizes total costs but creates severe bill shock, while securitization offers the lowest monthly impact but highest total cost due to extended interest payments. The paper emphasizes that transparent modeling, reproducible calculations, and meaningful public engagement are essential for regulatory legitimacy. It concludes with best practice recommendations for regulators, utilities, and consumer advocates, arguing that method selection must be context-dependent, balancing cost magnitude, customer economic conditions, utility financial health, and regulatory precedent to achieve equitable and sustainable outcomes.

Date: 2025-10-28
New Economics Papers: this item is included in nep-ene, nep-inv and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:osf:socarx:49r5w_v1

DOI: 10.31219/osf.io/49r5w_v1

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