From Union of Concerned Scientists:

Another option that I’ve discussed with regulators seems to be the preferred choice for at least one former utility regulator and former president of NARUC, Travis Kavulla. Travis takes exception to the idea of disallowing past costs and argues in a blog that asking, “a regulator to judge whether a utility should have signed a particular fuel contract is a hopeless task in retrospection.”

I would argue that utility regulators need to scrutinize utility decision making more, not less. But I do agree with Travis that there are alternatives to the inevitable game of utility whack-a-mole that can ensue when trying to pin down the prudency of utility decision making.

What is Travis’ preferred solution?

“It involves reforming the “trackers” that cause utilities to be fully indifferent to their power-supply costs. Instead, trackers should incorporate cost-sharing. The basic design is fairly straightforward. First, the regulator sets a rate that reflects anticipated costs over a certain interval. When actual costs deviate (as inevitably they will), both shareholders and consumers share in the added costs or profits of that deviation. This approach motivates the utility toward efficiency in any given fuel supply issue—including its coal contracts. It also allows the regulator to put away the microscope and align the incentives of the utility with its customers’ interests to minimize their power costs. Indeed, this spin on a tracker has already been successfully adopted in several jurisdictions in the Pacific Northwest, though it is regrettably still not commonplace nor is it as amplified an incentive as it should be.”

Travis’ “light touch” regulation, isn’t without its own drawbacks. While serving as a regulator in Montana, it took years to put into place the tracker reform he describes above. Plus, regulators would have to set the target price right (no easy task) all the while avoiding the potential for unintended consequences.