rate case processing - naruc
TRANSCRIPT
RATE CASE AND COST OF
SERVICE (COSS) OVERVIEW
Tamara S. Turkenton
Public Utilities Commission of Ohio
Chief of Accounting and Electricity Division, Utilities Department
June 17-21, 2013
§ 4909.18 (ORC) Application For
Establishment or Change in Rate • Any public utility desiring to establish or change rates
shall file a written application with the public utilities
commission. – Applications shall be verified by the president or a vice-
president and the secretary or treasurer of the applicant.
– Applications shall contain a schedule of the existing rate; a
schedule of the modification amendment; change, increase,
or reduction sought to be established; and a statement of the
facts and grounds upon which such application is based.
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§ 4909.18 (ORC) Application For
Establishment or Change in Rate – Applications shall provide such additional information as the
Commission may require in its discretion.
– If it appears to the Commission that the proposals in the
application may be unjust or unreasonable, the commission
shall set the matter for hearing.
– At such hearing, the burden of proof to show that the
proposals in the application are just and reasonable shall be
upon the public utility.
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§ 4909.18 (ORC) Application For
Establishment or Change in Rate • If the application is for an increase in rates it shall also contain:
– A report of property that is used and useful in providing utility
service;
– A complete operating statement of its last fiscal year, showing in detail all its receipts, revenues, and incomes from all sources; all of its operating costs and other expenditures; and any analysis such public utility deems applicable to the matter referred to in said application;
– A statement of the income and expense anticipated under the application filed;
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§ 4909.18 (ORC) Application For
Establishment or Change in Rate
– A statement of financial condition summarizing assets,
liabilities, and net worth;
– A proposed notice for newspaper publication fully disclosing
the substance of the application;
– Such other information as the commission may require in its
discretion.
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30 Day Notifications
• At least thirty days prior to filing an application for an increase in
rates, a public utility is required to notify, in writing, the mayors
and legislative authorities of each municipality included in the
application that it intends to file an application and the proposed
rates included in that application.
• Thirty days prior to filing an application for an increase in rates, a
public utility must also submit to the PUCO a Pre-filing notice
(PFN) containing the following exhibits:
– Statement of notice of intent to file for an increase in rates
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30 Day Notifications
– The service area to be included in the application
– Dates of proposed test year and proposed date certain
• The test period, unless otherwise ordered by the Commission, shall be
the twelve-month period beginning six months prior to the date the
application is filed and ending six months subsequent to the application
filing date.
• In no event shall the test period end more than nine months
subsequent to the date the application is filed
• The date certain shall not be later than the date of filing
– The proposed tariff schedules that are intended to replace or
add to current tariff schedules
– Typical Bill Comparisons.
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4901-7-01 (OAC)
Standard Filing Requirements Waivers
• All information required by these standard filing requirements, unless waived upon request or upon the Commission's own motion, must be included with the application at the time of the original filing.
• A request for waiver of any of the provisions of the standard filing requirements must set forth the specific reasons in support of the request.
• Except for good cause shown, all waiver requests must be filed thirty days or more before the docketing of the application with the commission.
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Uniform System of Accounts
• Electric and Gas Distribution companies are required to keep the books of accounts and records prescribed by the Federal Energy Regulatory Commission (FERC).
• Water and Wastewater companies are required to keep the books of accounts and records in accordance with the 1973 uniform system of accounts prescribed by the National Association of Regulatory Commissioners (NARUC).
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4901-7-01 (OAC)
Standard Filing Requirements Purpose
• All applications for an increase in rates shall conform
to the Standard Filing Requirements.
• The standard filing requirements are designed to
assist the Commission in performing a thorough and
expeditious review of applications for rate increases.
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4901-7-01 (OAC)
Standard Filing Requirements Minimum Requirements
• The standard filing requirements contain the minimum
information which utilities are required to submit with
their application for an increase in rates.
• The prescribed schedules present the applicant
utility’s relevant financial and operating information
needed to support its request.
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4901-7-01 (OAC)
Standard Filing Requirements Minimum Requirements
• If the applicant utility believes that additional
information is necessary to support its case, the utility
should supplement the standard filing requirements
as required to support its position.
• The Commission may require utilities to supply
information to supplement these requirements during
the course of the staff investigation of a specific case.
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4901-7-01 (OAC)
Standard Filing Requirements Written Testimony
• Utilities shall file the prepared direct testimony of utility personnel or other expert witnesses in support of the utility's proposal within fourteen days of the filing of the application for increase in rates.
• The testimony shall be the utility's case in chief. Any utility that files a rate increase shall be prepared to go forward at hearing time on the data and prepared direct testimony filed in support of the application and any revisions to sustain the burden of proof that the rate increase is just and reasonable.
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Staff Investigation
Pre-filing Notice
– Ensure that all information required by the Commission's
Code of Rules and Regulations has been provided.
– Accept or reject the Applicant's requests for waivers of the
Standard Filing Requirements.
– Accept or reject the requested test year and date certain.
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Staff Investigation
Time Prior to Application Being Filed:
– Develop an overall understanding of the applicant's
operations and financial position and a general understanding of the applicant's industry.
– Develop a specific familiarity with the applicant and to develop an understanding of :
• The prior rate case issues
• The staff's treatment of the prior issues
• Commission rulings on these prior issue
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Staff Investigation
– Identify potential issues in the upcoming application
– Begin the process of planning the investigation of the case
Following Application Being Filed:
Standard Filing Requirements Check List
– The purpose of this review is to ensure that the information
submitted by the Applicant meets the standard filing
requirements
Staff Investigation
Field Investigation
– Ensure that the information contained in the application is reliable
– Ensure that the information contained in the application is verifiable
– Ensure that the information contained in the application can be supported by the applicant
– Determine that the applicant is keeping its accounting records in compliance with acceptable utility accounting standards and the uniform system of accounts.
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Staff Investigation
Budget Review
• Understand Applicant's budgeting process
• Assure the reliability and reasonableness of the budgeted data
Actual Expense Verification
– Verify the accuracy of the Applicant's accounting records and the
source of the financial information included in the application is the
Applicant's accounting records.
– Determine the overall reasonableness of the actual expenses
included in the test year and whether the actual expenses included
in the test year are includable for rate making purposes
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Staff Investigation
The Staff Report
– The Staff has 5 months, from the date the application is
accepted for filing, to complete its investigation and issue a
report.
– The Staff Report of Investigation serves to document the
Staff's position on the Applicant's request and to summarize
the Staff's analyses, conclusions and recommendations.
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Objections to the Staff
Report/Stakeholder Intervention
• Parties that will be affected by a proposed rate increase may move to intervene in the case.
• If the motion is granted, a party may file objections to the Staff's analyses, conclusions and recommendations within 30 days of the Staff Report issuance.
• The Staff prepares written testimony in response to the objections.
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Pre-Hearing and Hearing
• Pre-Hearing
– Stipulate or settle as many issues as possible
– Identify those issues that cannot be settled and clarify the
positions of each party
• Hearing
– Testify on behalf of the Staff of the Commission
– Explain and support the Staff's position
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Opinion and Order
• After consideration of all information on the record,
the Commission issues an Opinion and Order.
• The Opinion and Order addresses the issues
presented in the case.
• Rulings in the Opinion and Order are binding unless
appealed to, and overturned by, the Ohio Supreme
Court.
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§ 4909.42 (ORC) Procedure When
Commission Does Not Issue Timely Order
• The Commission has to issue a final order by the end
of 275 days from the date an application is accepted
for filing.
• If a final order is not issued by the end of 275 days,
the utility may implement the proposed rates subject
to refund of amounts over what is approved in the
Commission’s final order.
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RATE OF RETURN
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Rate Base-Rate of Return
• Traditionally, the rates for regulated public utilities have
been primarily established using the "rate base - rate of
return" concept. Under this method, utilities are allowed to
recover a level of operating expenses, taxes, and
depreciation deemed reasonable for rate-setting purposes,
and are granted an opportunity to earn a fair rate of return
on the assets utilized (i.e., rate base) in providing service
to their customers.
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Setting Base Rates
The Base Rate Formula
Revenue Requirements = Cost of Service
Revenue Requirements = Operating Expenses + Depreciation + Taxes +
(Rate of Return x Rate Base)
RR = OE + D + T + (RoR x RB)
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Components of Rate Base • The rate base generally represents the amount of
property deemed to be "used and useful" in providing
service. The components of rate base are listed below:
• Plant in Service
• Accumulated Depreciation
• Construction Work in Progress (CWIP)
• Plant Held for Future Use
• Working Capital
• Materials and Supplies
• Deferred Income Taxes
• Regulatory Assets/Liabilities
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Rate of Return
• The rate of return is developed from the cost of capital,
which is estimated by weighting the capital structure
components (i.e., debt, preferred stock, and common
equity) by their respective percentages in the appropriate
capital structure and multiplying these ratios by the
respective cost rates of capital. For Example
– Equity 45 % X 12% = 5.4 %
– Debt 50 % X 7% = 3.5 %
– Total 8.9%
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Significantly Excessive Earnings
Test (SEET)
• State law requires the PUCO to annually evaluate the
earnings of each investor-owned electric utility. The
evaluation is to determine if a utility’s standard service
offer produced significantly excessive earnings.
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Return on Equity (ROE)
• The Commission will evaluate the return on equity
(ROE) for each company. The ROE is then
compared with returns experienced by a ‘peer group’
of publicly-traded companies, including utilities, who
face comparable business and financial risk.
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Cost of Service (COSS)
Overview
The Cost of Service Study
(COSS) Provides cost information that allows the rate analyst to
allocate costs to the various classes of customers.
Provides cost information that is functionalized,
classified, and allocated to various customer classes for
a particular utility company.
• The cost of service study is provided by the utility
company with its rate application filings.
• The study should be an account by account detail of all
expenses and revenues over the twelve-month test year
period.
Functionalization
The costs are functionally separated into
Production related;
Transmission related; and,
Distribution related costs.
Functionalization is rather straightforward. It’s important
to distinguish between regulated and unregulated
costs
Some costs which are harder to functionalize are:
general plant and common plant investment
administrative and general expenses
Production Costs
Costs related to the production of electricity such as:
The electric generating “plant in service”
Variable costs such as: fuel
operation and maintenance
Can also include purchase of power (wholesale)
and delivery INTO the bulk system: at the bus-bars of the power stations
interconnection points
Transmission Costs
Predominantly fixed costs
Does not vary with the quantity of energy transmitted
Associated with the transmitting of the energy from the generating plant to the distribution facilities
Transmission of power to and from interconnected utilities
Transfer of power from one geographical location to another, various regions or load centers
Distribution Costs
Costs associated with plant, equipment, maintenance
and operation required to move the energy from the
transmission system to the customer’s premises
Affected primarily by demand and number of customers
Classification
Once the costs are functionalized, they can then be “classified” into Demand (fixed), Energy (Variable), and Customer related costs
Some service characteristics: Demand usage
Energy consumption
Number of customers
Energy Costs Energy costs are generally variable costs and easier to
allocate than fixed
Allocated among customer classes on the basis of energy (KWH) which the system must supply to serve the customers
Rate base and expense items related to total kWh’s consumed during a period of time
Fuel and operation/maintenance most common
Energy Costs
Energy costs are allocated to the various classes based
on each class’ energy usage compared to the total
energy usage from all classes.
For example, if Residential customers use 33% of the
total energy consumed then the residential class will be
assigned 33% of all energy related expenses.
Demand Costs
Demand costs are generally the fixed costs related to plant in service and much more difficult to allocate
Typically, demand costs are demand (KW) imposed on the system during specific peak hours.
Demand costs are generally allocated to various customer classes
based on the coincident demand of the class during the utility
system peak period.
This could be anything from a 1 C.P. (coincident peak) to a 12 C.P.,
depending on the operating characteristics of the utility company
Customer Costs Customer costs are generally fixed
Customer costs are allocated to the various classes
based on the number of customers in those classes.
Directly related to an individual customer taking service
from the utility, such as meter expense or service line.
Typical Cost Classifications Typical Cost Function
Production
Transmission
Distribution
Customer Service
Typical Cost Classification
• Demand Related
• Energy Related
• Demand Related
• Energy Related
• Demand Related
• Energy Related
• Customer Related
• Customer Related
• Demand Related
Allocation
• Once the costs are classified they can then be allocated
to the various customer classes such as Residential,
Commercial, Industrial, and Other.
Allocation (con’t)
Certain costs are directly assignable to specific customers
or classes. For example, a residential customer uses a
much different meter (and less expensive) than an industrial
customer, therefore, the costs associated with meters are
directly assigned to the appropriate classes, otherwise the
residential customers (which number thousands more than
industrials) would be paying a disproportionate share of
meter expenses.
Rate Design Once all costs have been allocated to the classes you
can design rates for the classes
Each customer class generally has several different rate
schedules in an attempt to provide appropriate rate
designs to meet individual customer characteristics
Each rate schedule can have a separate rate for
Customer, Demand and Energy
Not all rate schedules have all three rate components. If
there is not a separate demand charge, the demand
costs are likely included in the energy charge. Often,
Residential and Small Commercial schedules are
designed this way, since such customers generally have
inexpensive kWh-only metering
The customer charge is determined by taking the
amount of customer-related costs that were allocated to
this class and dividing the amount by the number of
customers in the class.
$100,000 of customer-related costs
class of 100 customers
divide the $100,000 by the 100 customers and then
divide by 12 to get a monthly customer charge.
(($100,000/100)/12) = $83.33
Customer Charge
• The demand charge is calculated by dividing the total
demand related costs allocated to a class by the total
class demand (kW).
• Rates may be “blocked” (different rates for different
blocks of demand) to reflect variations in costs due to a
customer’s demand pattern.
Demand Charge
The energy charge is calculated by dividing the total
energy related costs allocated to a class by the total
kWh’s used by that class.
Rates may also be “blocked” (different rates for different
blocks of usage) to reflect variations in costs due to a
customer’s usage patterns.
Energy Charge
Typical Rate Schedule
Schedule A
• Customer Charge $83.33/mo.
• Demand Charge
• First 50 kW/kW $10.00
• Over 50 kW/kW $8.00
• Energy Charge
• First 1,000 kWh/kWh $ 0.085
• Next 1,000 kWh/kWh $ 0.045
• Over 2,000 kWh/kWh $ 0.025
While it is practical to design rates based on cost causation, some other non-cost causation generally accepted principles of rate design are
– gradualism
– continuity in rate structure
– resulting customer bills
– ease of understanding
Other Principles of Rate Design