Indexing O&M Revenue

Dave Hovde and Mark Newton Lowry have developed a formula to escalate operation and maintenance revenue ("ROM") of U.S. power distributors. An article discussing their research was published in the July issue of the Electricity Journal. The authors explain that ROM escalators are used in "hybrid" revenue caps for multiyear rate plans. ROM is indexed, while capital revenue is based on a sensible assumption regarding future capital spending. Hybrid revenue caps have been used for decades in California and are now used in other states as well (e.g., Vermont). A key advantage is their ability to sidestep controversies over capital price and productivity trends, like those that have arisen recently in Massachusetts, where multiyear rate plans index capital as well as O&M revenue. ROM indexes can also be used to escalate O&M revenue requirements in forward test year rate cases. The research was based on publicly available data on the operations of investor-owned U.S. electric utilities. The logic supporting revenue cap index design is detailed.