Negotiated Settlements: Long-Term Profits and Costs

Over the last 20 years, utility regulators have relaxed their oversight of cost-of-service regulation and this holds true for Alberta, where such regulation determines the fees associated with oil and gas pipeline usage. The traditional method has been for regulators to issue binding decisions on a firm’s cost of service after taking evidence at a formal hearing. Many regulators now prefer to encourage parties to settle a cost-of-service agreement through a negotiated settlement, which the regulator then approves. This process not only saves the cost of a hearing, it also permits firms and consumers to trade costs and benefits, settling on a final price more favourable to both. The author details how this arrangement can negatively impact future consumers by allowing the firm to defer the true burden of its depreciation expenses in return for inflated capital costs. Such a settlement lowers prices for the present but saddles future consumers with higher prices.