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The LRAM Explained

Oct 23, 2015 |

To explain what the LRAM is, we first have to define it. It’s an acronym that stands for Lost Revenue Adjustment Mechanism. It is, in short, an accounting mechanism that allows the company to recover the fixed cost of operating our utility systems when customers use less energy as a result of energy conservation.  Fixed costs are the costs of things like meters, power lines, distribution mains, and generating facilities that must be paid regardless of how much electricity or gas our customers use.

The Montana Public Service Commission and the Montana Consumer Counsel like volumetric billing structures, where nearly everything is billed on either a per kilowatt hour or per therm basis. However, the majority of the expenses that we control are fixed costs. In other words, the cost of maintaining the transmission and distribution doesn’t change depending on the amount energy used by customers.

When customer bills are based on usage, and when customers use less energy, we’re not recovering the full cost of providing electric and gas service to them.  We work very hard to manage the costs that we control and there isn’t any slack in the system. Running at a deficit isn’t an acceptable option.  The volumetric rate structures preferred by our regulators is not well suited to promoting energy conservation. The LRAM was intended to fix that.

We are required to purchase energy conservation from customers, which is normally done through various rebate and incentive programs. It’s an important part of our overall energy supply mix. We recover the cost of the programs through the annual tracker filing that reviews the prudency of all of our energy supply costs.  But when energy sales decline under a volumetric billing structure, we lose a  piece of revenue that is needed to maintain the delivery system.  That benefits no one, customer or company over the long-term. Losing the LRAM is a real loss to NorthWestern of about $12.5 million that in the short-term will be absorbed through cost-cuts throughout the Montana utility. 

We’ve seen variances of this same issue crop up in other settings recently, such as net-metering. Other states, including our neighbors in Idaho have worked through this issue to the benefit of all stakeholders and we can do the same here. We only ask for fair treatment that converts an outdated volumetric billing structure to a modern one without unfairly penalizing us or the delivery system in the process.

1 comment

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  1. Ginger | Sep 13, 2016
    Explanation is powerful..

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