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4.3 RATE CASE PROCESS
4.3.1 WHAT IS A RATE CASE?
A rate case is a formal process, conducted by utility regulators, to determine if the utility’s proposed base rates are just and reasonable. The process starts with the utility company filing an application and testimony with the utilities commission. This application includes the total costs to serve customers and the justification as to why current rates are no longer sufficient.
4.3.2 WHEN ARE RATE CASES INITIATED?
Electric utilities typically need to adjust rates when costs have risen and the revenues collected no longer cover the cost of building, operating, and maintaining the system. A rate case review process is initiated when an investor-owned utility applies to its regulator for a rate or policy change. Most utilities file for general rate increases every two to five years, though in some instances, utilities have gone more than ten years without a general rate case.
Some states require a general rate case on a fixed schedule, but most do not. The commission normally has the authority to initiate a rate review on its own motion, but this is also a rarity. In theory, an individual consumer submitting a formal complaint that the utility’s rates were not in compliance with the requirements of law (which generally state that rates should be “fair, just, and reasonable”) can also trigger a general rate review, but this almost never happens.
4.3.3 RATE SETTING TIMELINE:
A typical timeline for a rate case, according to the New York State Department of Public Service, is shown below:
Months 1-4: The Department of Public Service provides a staff team charged with the responsibility to analyze the utility rate filing and represent the public interest. The team includes lawyers, accountants, engineers, economists, financial analysts, and consumer service specialists who audit and investigate the company’s proposals. The team typically develops an opposing position and counter-proposal to the rate filing. Other interested groups can also file testimony and challenge the utility rate filing. An Administrative Law Judge is assigned to preside over the case, hear all the evidence, and provide recommendations to the PSC.
Months 5-7: The testimony filed by staff and other interested groups are received, rebuttal testimony by utility company is allowed, and hearings with cross-examination of all expert witnesses are conducted. Groups participating in the rate case may negotiate a settlement of the issues and submit it to the administrative law judge for review.
Months 7-9: Initial and reply briefs are filed with the administrative law judge; administrative law judges may issue a recommended decision. Public statement hearings are held in affected service territories.
Months 9-11: Additional briefs are filed with the PSC. Commission deliberations are held in open and public meetings and a written order is issued resolving all outstanding issues and matters necessary to determine the utility company’s revenue requirements and the amounts to charge customers.
4.3.4 WHAT ARE THE PROCEDURAL STEPS IN A RATE CASE?
The procedural steps for a rate case are shown in the chart to the right.
The detailed steps in a rate case are:
- The first step before a utility can change rates is to submit an official request to the respective public service commission.
- The respective commission staff audits the request and supporting documentation.
- Other parties, known as interveners, may perform additional audits and reviews, voicing concerns or requesting more information to better understand the utility filing.
- The commission invites customers and the public to ask questions or express comments about the requested change.
- The utility formally presents the case to the commission through testimony. Commission staff and interveners also file their case through testimony.
- The utility provides the most current numbers and final facts for consideration.
- The utility works with all parties to resolve as many issues as possible. The commission hears any unresolved issues in a formal hearing. Commissioners then review any agreements, testimonies and documentation presented.
- The commission issues a formal ruling and announces approved rates, which are then integrated into customer billing.
4.3.5 HOW APPROPRIATE RATES FOR CUSTOMERS ARE DETERMINED:
Below is the basic formula used by the regulatory commission.
Revenue Requirement = Expenses + (Rate Base x Cost of Capital)
Revenue requirement is the money needed to cover costs. Costs include a fair return to investors. The calculated revenue requirement is compared to the revenue under existing rates to decide if a base rate increase or decrease is needed.
Expenses include operating and maintenance costs, depreciation and amortization on assets, income, and general tax expenses.
Rate base, representing investor supplied capital, is made up of plants in service – net of depreciation to date – and working capital less deferred income tax and other miscellaneous adjustments.
Cost of capital includes the cost of debt or the average interest rate paid on outstanding debt. It also includes the cost of equity – the return an investor expects to receive when they buy stock. That return includes dividends and growth in stock value. The total revenue requirement can be distributed across customer groups, including residential, industrial and commercial, based on the cost of service for that group.
Alongside the above formula, several other points are factored in while coming up an appropriate rate value:
- Interstate System Allocation – When a utility serves more than one state, the commission conducting the proceeding must decide which facilities serve its state. Identifying distribution facilities and expenses is fairly straightforward, because they are located in specific states and serve only customers in that state. The more complicated part of the problem is allocating a utility’s costs for administrative headquarters, production, and transmission investments and expenses. In the case of some multi-state utility holding companies, FERC determines the allocation of generation and transmission costs between jurisdictions. Commissions split production and transmission costs – including the investment in generating facilities and transmission lines, the operating costs of those facilities, and payments made to others for either power or transmission – based on various measures of usage.
- Regulated vs. Non-Regulated Services – Many utilities are also part of larger corporations that engage in both regulated utility operations and non-regulated businesses, which may or may not be energy-related. In these cases, the commission needs to determine the allocation requirement for the specific company and location. It also needs to determine what part of the costs will go to expenses for officers and the board of directors, for corporate liability insurance, and for headquarters facilities. Non-regulated operations are typically riskier business ventures, and the commission must carefully allocate the costs so that utility consumers do not bear these risks. Allocation of these costs requires an assessment of relative risks and relative benefits and can become highly contested.
- Gas vs. Electric – The commission also needs to segregate revenue and operational expenses for utilities that provide both gas and electric service, so that electric rates cover only the costs of providing electric service and gas rates only those of gas service. Formulas that are typically used for dividing the shared costs will consider the numbers of customers, the amount of plant investment directly associated with each service, the labor expenses associated with each service, and the total revenue provided by each service.
4.3.6 WHO PARTICIPATES IN RATE CASES?
The key players in a rate case are the:
- Utility company
- Commission staff
- Consumer advocate
Other participants or interveners, such as representatives of industrial consumers, low-income consumers, and environmental groups are granted the right to participate by the commission, sometimes after demonstrating a particularized interest that is not better represented by the statutory parties. A federal law, the Public Utility Regulatory Policies Act (PURPA), gives consumers of large electric utilities a statutory right to intervene in any rate-related proceeding pertaining to standards addressed in PURPA.
4.3.7 HOW CAN THE GENERAL POPULATION PARTICIPATE IN THE RULE-MAKING PROCESS?
The general population can participate in the regulatory rule making process via many avenues. While some opportunities are complex and legalistic, others are simple. Various forums give consumers, environmental advocates, business groups, and others the opportunity to participate in the regulation of utility prices, policies, and resource planning.
- Rulemaking – Commissions make two types of rules. Procedural rules guide how the regulatory process works. Operational rules govern how utilities must offer service to consumers. Normally the public is given an opportunity to comment when rules are proposed or amended.
- Intervention in Regulatory Proceedings – Intervention in a formal regulatory proceeding is probably the most demanding form of citizen participation. Utility hearings are normally held under state administrative law rules and function very much like a courtroom. While an individual may usually participate without an attorney, requirements of the rules of procedure and evidence must still be met.
- Stakeholder Collaboratives – In the past decade or so, many commissions have formed stakeholder collaboratives to engage utilities, state agencies, customer group representatives, environmental groups, and others in a less formal process aimed at achieving some degree of consensus on dealing with a major issue. These collaboratives may meet for a few months or more, then collectively recommend a change to regulations, tariffs, or policies.
- Public Hearings – Utility regulators hold two types of public hearings. When a rate case is underway, the entire process of cross-examination of witnesses is generally called a public hearing, but is usually a very technical process not really designed for public involvement. In addition, regulators often hold public hearings on matters pending before the commission in a policy investigation or rulemaking context. Public hearings of this type offer the commission an opportunity to hear opinions of the public on the particular issue.
4.3.8 RATE CASE BY NUMBERS
From 1997 to 2002, on average, approximately five rate cases were filed per quarter with state regulators. Since 2006 that figure has been roughly thirteen per quarter. In the first quarter of 2016, investor-owned electric utilities filed fourteen new rate cases. The primary reason for rate case filings is capital expenditures followed by utilities’ desire to implement rate mechanisms that allow for cost recovery between rate cases. A third was companies’ desire to enhance return on equity.
The graph to the right shows the number of rate cases filed quarterly by IOUs.
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