Riders and Trackers Outside a Rate Case

A general rate case reopens everything. Every expense, every plant account, the capital structure and the allowed return are all in issue, and the outcome reflects the net of every change since the last case. A rider does the opposite. It isolates one category of cost, adjusts the charge that recovers it, and leaves the rest of the revenue requirement untouched.

What a rider is and why utilities want them

The terminology varies by jurisdiction. Rider, tracker, surcharge, adjustment clause and cost recovery mechanism all describe the same structure: a tariff provision recovering a defined category of cost through a charge that is updated on a stated cycle, typically annually, in a proceeding narrower than a general case. The charge appears as a separate line on the bill or is folded into an existing one.

The case for them rests on volatility and lag. Some costs move too quickly or too unpredictably for a figure set in a rate case to remain accurate, and requiring a full case to correct the figure imposes a cost far larger than the adjustment. Other categories represent programs the commission has directed the utility to undertake, where the recovery mechanism is part of the policy decision rather than an ordinary business cost.

Categories commonly recovered this way include fuel and purchased energy, purchased gas, storm restoration and other catastrophic events, energy efficiency and demand-side program costs, infrastructure replacement programs on defined schedules, uncollectible accounts, and legally mandated environmental compliance expenditures. The list has grown over time in most jurisdictions.

The single-issue objection

The objection is straightforward and has never been fully answered. A utility's costs do not all move in the same direction. Between rate cases some rise and some fall, sales grow, productivity improves, and the net effect on earnings may be positive even while a particular category rises. A mechanism that captures only the rising category allows the utility to collect for that increase while retaining the benefit of every offsetting decrease.

The consequence is that a utility with many riders can earn above its authorized return while its rates rise, which is precisely the outcome the authorized return was set to prevent. The problem compounds as the number of mechanisms grows, because each additional rider removes another category from the general case and leaves a smaller residual on which the general case operates.

A second objection concerns incentives. Costs that flow through automatically are not disciplined by the prospect of absorbing them until the next case. The utility's interest in controlling a tracked cost is weaker than its interest in controlling an untracked one, and where the tracked category also produces rate base, the incentive can run the other way.

A third objection is structural rather than economic. Rate design and cost allocation decisions made inside a general case reflect the whole cost of service; the same decisions made inside a rider proceeding reflect only the tracked category. Over time a utility's charges can be assembled from a base tariff designed on one basis and a stack of riders designed on several others, with no proceeding at which the combined effect is examined.

The safeguards commissions attach

Commissions that permit these mechanisms rarely permit them unconditionally. The most common safeguard is reconciliation: amounts billed are compared against amounts actually incurred, and the difference is refunded or collected with interest, so the mechanism controls timing rather than total recovery. The second is prudence review, conducted in the annual proceeding, which preserves the substantive examination that automatic recovery would otherwise bypass.

An earnings test is the direct answer to the single-issue objection. Under such a condition, recovery through the rider is suspended, reduced, or refunded to the extent the utility's earned return exceeds the authorized return for the period. That mechanism reintroduces the whole-company perspective that a general case supplies, without the cost of a general case.

Caps limit the exposure. A rider may be capped in dollars, as a percentage of base rates, or by reference to the program the costs support. Sunset provisions terminate the mechanism after a stated period or on the occurrence of an event, most often the next general rate case, at which point the accumulated costs are rolled into base rates and the separate charge disappears.

Statutory authority matters as well. Some states authorize particular categories of rider by statute and permit no others, so a utility proposing a new mechanism must locate the enabling provision. Others rely on general ratemaking authority, and the availability of a rider then turns on whether the commission reads that authority as permitting recovery outside a general case. That threshold question is often litigated before any question about the amount.

How a rider proceeding actually runs

An annual rider proceeding is narrower than a general case but is not a formality. The utility files the costs incurred, the calculation of the proposed charge, the reconciliation of the prior period, and supporting documentation. Parties conduct discovery, file testimony where the cost or the prudence of the underlying activity is contested, and the commission issues an order approving, adjusting or disallowing.

The contested issues are of three kinds. Eligibility questions ask whether a particular cost falls within the category the rider was authorized to recover, and utilities are frequently found to have included items outside it. Prudence questions ask whether the expenditure was reasonable. Allocation questions ask which classes bear it and in what proportion, applying the same reasoning as allocating cost between customer classes.

Because the mechanism operates continuously, disputes about it recur, and a position rejected in one annual proceeding is often raised again in the next on a fuller record. Where the recovered category is fuel, the more developed regime described in fuel and purchased power adjustments applies. Where a party disagrees with the order, the route is the one set out in rehearing an order, and appealing it, and the costs that remain in base rates are those assembled in the revenue requirement and how it is built.