Understanding net lost revenue adjustment mechanisms and their effects on utility finances

Net lost revenue adjustment (NLRA) mechanisms are the most prevalent policy used in the USA to permit utilities to recover lost revenue from demand-side management (DSM) programs. The tendency for net lost revenue to accumulate over time and for NLRA mechanisms to increase utility rates is a concern for regulators and utilities. Their concern is heightened by the competitive pressures facing energy utilities. This paper discusses the concept of lost revenue, describes the three different NLRA mechanisms used by states, and examines the effects of these mechanisms on utility finances. Our results indicate that all three NLRA mechanisms restore the net revenue lost through DSM program operation. We found that the prospective surcharge mechanism exposes the utility to less variation in cash flow as a result of net lost revenue. Increasing the accuracy of the net lost revenue forecast reduces the volatility in monthly cash flow. All three mechanisms result in higher rates and, when the amortization periods are similar, have similar effects on rates. The primary difference between the mechanisms is in the timing of these rate effects. We anticipate that NLRA mechanisms will change in response to customer and industry needs. Changes to NLRA mechanisms may include net lost revenue recovery caps, partial revenue recovery, and time limits for recovery.