Illinois Power & Light just spent $5 million repairing one of its electrical gen
ID: 2480945 • Letter: I
Question
Illinois Power & Light just spent $5 million repairing one of its electrical generating stations that was damaged by a tornado. The loss was uninsured. Management has asked the public service commission for approval to treat the $5 million as an asset for ratemaking purposes rather than as an allowed expense. Assume the public utility commission sets ROA at 10%. What difference will this make to customers?
a. This request makes no difference to customers
b. Customers will pay an additional $5 million in higher electricity costs under both plans.
c. Customers will pay $5.5 million in higher electricity costs if the repair costs are an allowed operating cost for rate-making purposes.
d. Customers will pay $5.5 million in higher electricity costs if the repair costs are treated as an asset for ratemaking purposes.
Explanation / Answer
The correct option is A
Treatment of repair costs as an asset for ratemaking purposes has nothing to do with what the power company charges to the customers. The treatment of repair costs as an asset for ratemaking purposes is for accounting purpose only and it has no relationship with what the power company charges to the customer. Thefore this request makes no difference to customers.