In the March-April issue of The Electricity Journal, NERA Senior Managing Director Kurt Strunk, Consultant Ibrahim Ouf, and Associate Analyst Benjamin Schneider examine inflation attrition and its effects on investor-owned utilities.

Over the course of 2022 and continuing into this year, the Federal Reserve has rapidly raised interest rates in the face of inflation not seen since the 1970s. Inflation is affecting utility finances, putting upward pressure on labor costs and investment costs for new plants. It is also increasing the cost of capital, a key parameter regulators use in establishing utility rates.

In their article, the authors examine tools in the regulatory toolkit that are typically used to assure the approved utility rates are reflective of the utility’s cost. They highlight several mechanisms that have been used in past periods of high inflation to ensure rates continue to be cost-reflective, even as cost pressures mount. The authors conclude by noting that the mechanisms, while appropriate in today’s high-inflation environment, should also be flexible enough to allow for rates to reflect lower inflation levels when inflation does subside.