A Formula Rate Plan, or FRP, is a ratemaking method in which the utility adjusts its base rates outside of a full rate case.
Utility rates are typically set through a multi-year process called a “general rate case,” in which regulators set rates based on the costs needed to serve their customers. These rates are structured according to each type of customer and their usage. Rate cases are how regulators define and approve:
Some states conduct general rate cases any time a utility asks for an increase (sometimes annually), and others set them when a regulator sees a utility is collecting more money than necessary from their customers. There are even states that set the rates and haven’t touched them in decades (hey there, Alabama!). Usually a general rate case sets parameters around rates in a static way; for example, allowing a utility to earn up to 10% in profit in a year.
A full rate case can cost $6-8M or even more, and those costs (utility’s costs and regulators costs) are paid for by us as utility customers.
Formula Rate Plans are multi-year plans that allow a utility to have rate adjustments on an annual basis outside of a general rate case, as needed. Some FRPs set a plan for incremental increases over time to manage rate spikes if there are significant increases needed. This can happen if the cost of energy jumps like it’s doing now, or because of other changing conditions related to the delivery of energy.
Whether rates go up or down usually depends on whether the utility earned the profit margin it was allowed by the Council. If the utility earns more than the allowed amount, the rates are required to decrease the next year based on a formula that helps ensure the utility doesn’t continue to over-earn by overcharging customers. If the utility earns less than they were allowed, they are allowed to use the formula to increase their rates to give them an “opportunity” to earn their allowed profit.
An important distinction here is that utility rates are “prospective”, meaning if a utility under-earns in a year, they cannot come back and demand that revenue in the new year. They can only request an increase that will allow them to earn their profit in the coming year. Same goes with over-earning; if they collect more money from their customers than they need to in a given year, they do not have to refund the money.
Formula Rate Plans in New Orleans have been used to allow for rate increases or decreases based on allowed profit between general rate cases, typically revisited on a three year basis. Entergy New Orleans rates have been set using some version of a Formula Rate Plan for decades, and the parameters of the FRP in place today were approved in November 2019. Since then, rates have increased incrementally nearly every year, and the FRP has been extended in two or three year terms.
ENO’s current FRP is set to expire after 2026, but earlier this year, ENO requested that their FRP be extended for four more years. The Council has set up a process to consider whether to grant the extension request or to conduct a full general rate case.. If ENO’s extension request is granted, it would set their allowed rate of return on equity (profit) between 8.8% to 9.85%.
An important element in this particular decision is how much change Entergy New Orleans is going to see in their revenues as Sewerage and Waterboard buys more power from the electric utility and generates less of its power on-site with gas bought from Delta Utilities. If rates are re-set using historic information that doesn’t account for lots of new revenue coming from SWBNO, Entergy would wind up over-charging all customers for at least a year.
Entergy Louisiana (ELL) rates are also set by a formula rate plan. Entergy last filed a Formula Rate Plan to increase customer rates in 2020. That FRP extended through 2023. In 2023, Entergy applied for a 3-year extension to the 2020 FRP, which was approved. Now, in 2026, Entergy is going through a full general rate case to reset and establish new rates beyond 2026.
