Matthew Wurst Aspassia Staevska Patrick Donlon

Transcription

1 Tariff Development I: Overview of Rate Regulation and Basic Ratemaking Process Jeremy Hubert November 4, 2013 Matthew Wurst Aspassia Staevska Patrick Donlon

2 General Ratemaking and Regulatory Principles Jeremy Hubert November 4, 2013 Matthew Wurst Aspassia Staevska Patrick Donlon 2

3 TARIFFS: WHAT DO THEY REPRESENT Tariff are public documents that are on file with the regulatory commission and available to the public on request. Tariffs represent the schedules under which the total revenue of a company allowed by a regulatory commission is collected from its customers based on the class of service as well as type of service within each class. All customer bills have to reflect the rates published in the tariffs. Usually, no tariff can be changed without the approval of the regulatory commission. 3

4 RATEMAKING GUIDELINES Cost of service is the cornerstone of the ratemaking process. A fully distributed cost approach based on accounting costs should be starting point. Cost of service is the cornerstone, but it is unlikely that the exact values derived from the cost of service study will be used in the final rates published. Practicality requires judgment calls and consideration on noncost factors. Values can be adjusted to achieve a balance of revenue between classes or between seasons; across the board adjustments may be needed to achieve the desired total revenues and values will be rounded for simplicity and ease of administration. A balance between simplicity, complexity, and fairness in rate design is encouraged. 4

5 RATEMAKING GUIDELINES Rate innovation is encouraged to address a specific problem or objective. Marginal cost pricing methods have merit in many situations. The application of marginal cost principles p can provide useful insights into the costs of providing service and can provide helpful information relating to both cost allocation and rate design. Transitions to new rate structures and levels should be gradual to mitigate impact to specific customers. 5

6 RATEMAKING OBJECTIVES Set rates to provide adequate and reliable service at reasonable prices Set rates which provide the OPPORTUNITY for shareholders to earn a fair return on invested capital. 6

7 Factors Which Can Influence Ratemaking Objectives Overall cost of service Types of generation and fuel Self-generation vs. purchased fuel The size of the utility The age of its physical plant and rate of growth of the system Sources of capital or other funding Competition in the form of alternate fuels and/or the rates of neighboring utilities Customer mix Time-of-use service Weather Legislation and regulation 7

8 FOUR MAJOR REASONS FOR RATE ADJUSTMENTS Revenue Adjustment (up or down) Cost of Service Realignment Competitive Factors Legislative and Regulatory Mandate 8

9 TRADITIONAL RATEMAKING PROCESS Determination of Revenue Requirement Total revenues necessary to recover prudent investment, to recover reasonable and necessary costs, and to earn a fair profit. Driven by actual or projected costs. Allocation of Costs to Customers Generally based on usage Establishment of Actual Rates to Customers (e.g., Usage based versus Flat Rates) Price Elasticity Subsidization Affordability Price Signals 9

10 What is a test year? TEST YEAR A test year is a 12-month period over which a utility s costs and revenues are measured as the basis for setting prospective base rates. 1) Historic Test Year (HTY) A 12-month period that represents a recent full year of actual data. 2) Future Test Year (FTY) Begins the day after the HTY ends and is used in order to allow for the time it takes to adjudicate a rate proceeding by permitting a company to select a future time period upon which to base its financial information. By using a FTY, a utility makes a projected annualized estimate of future revenues and expenses and a corresponding measure of value at the end of the future test year. 10

11 Revenue Requirement Formula RR = E + D +T + (RB x ROR) RR - Revenue Requirement E - O & M Expense D - Depreciation Expense T - Taxes RB - Rate Base [consisting of Plant in Service minus (accumulated ROR - depreciation) plus (additions and subtractions)] Overall Rate of Return 11

12 Revenue Requirement Formula (Cont.) Rate Base = Used and Useful Plant in Service Less: Accumulated Depreciation Other Adjustments: Construction Work in Progress (CWIP) Contributions in Aid of Construction Advances in Aid of Construction Allowance for Funds Used During Construction (AFUDC) Plant Held for Future Use Construction Work in Progress Materials and Supplies Working Capital Allowance Special Amortizations Other 12

13 WHAT IS RATE BASE? A public utility is entitled to earn a fair return on the value of its property. p Rate base includes a utility s investment in facilities (distribution lines, vehicles, buildings, etc.) and the operating funds, or working capital, necessary to operate on a day to day basis. Utility property is included in rates only if prudently constructed and necessary. 13

14 WHAT IS PLANT IN SERVICE? Utilities are entitled to a fair return on their necessary investment in the provision of utility service. One element to look for in the plant accounts is property that is not necessary for the provision of a utility s service. For example a storage shed or garage that is used to store non-utility related equipment. Data requests and site visits are among the best tools to employ in getting this type of information. i 14

15 WHAT IS USED AND USEFUL? Utility property is included in rates only if it is prudently constructed and necessary to the provision of service to the public by a certain date. Plant must be constructed and completed and placed into service before being deemed Used and Useful. 15

16 PLANT HELD FOR FUTURE USE Utilities often include the cost of property which is not currently being used but may be used in the near future. This usually consists of land or land rights which his acquired before construction. For example, land for transmission lines, pumping stations, etc. The PUC generally will not permit the inclusion of such property in rate base unless the company can demonstrate a need and a definite plan to build within 10 years. 16

17 CONSTRUCTION WORK IN PROGRESS (CWIP) Traditionally CWIP had been denied as a rate base element because: It is not used and useful in the provision of service Present customers should pay only for construction cost directly incurred in providing current service 17

18 CWIP (Cont.) Inclusion in rate base is permitted under certain ti conditions: The plant will be placed into service within months of the end of the future test year The additions are neither revenue producing nor expense reducing assets The plant is constructed to improve the environment or will improve quality of service 18

19 ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC) Capital costs are incurred during construction and are a real and unavoidable cash expense. Interest is a cost like any other it is like capitalized labor, or the other building materials. Regulators have established an accounting category which is designed to reflect these financing costs on a deferred basis. 19

20 ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC) AFUDC allows for the total costs of financing to be paid like any other expense by adding the financing costs to the rate base when the plant is placed in service. The investors pay the financing costs during construction. The customer of the future will pay the full cost of the facility constructed for his use without burdening the current customer with supporting an investment designed for future needs. 20

21 RATE BASE ADDITIONS AND SUBTRACTIONS Additions Materials t il and dsupplies Cash Working Capital Gas Storage Inventory Reductions Customer Deposits Accumulated Depreciation 21

22 MATERIALS AND SUPPLIES Utilities maintain an inventory of frequently used materials and supplies in order to ensure the provision of safe and reliable service Examples include meters, valves, transformers, pipe of various sizes, conduit, etc. The money used to maintain these inventories is supplied by the utility s investors 22

23 MATERIALS AND SUPPLIES Ratemaking Treatment In order to eliminate the impact of unusually large investments in Materials and Supplies at any one point in time, such as the end of a test year, the Commission calculates the proper p level for ratemaking purposes by averaging the most recent 13 months of inventory balances 23

24 CASH WORKING CAPITAL (CWC CWC) What is CWC? The investment t of funds required to pay operating expenses prior to the receipt of customer revenues The amount of CWC must be sufficient to cover the lag between expense payments and receipts of cash through rates form the customers 24

25 CASH WORKING CAPITAL (CWC CWC) CWC is intended to provide only for the current or day-to-day d needs of fthe business and not tfor any of the capital requirements It represents the money needed to operate the company between the time the service is provided to the customer and the payment is received, and the time the company must pay its suppliers and employees for their work 25

26 CASH WORKING CAPITAL (CWC CWC) There are two common methods for calculating CWC which are acceptable to the Commission 1) The One-Eighth Method Federal Energy Regulatory Commission (FERC) Formula Method (Usually employed by smaller utilities). 2) The Lead/Lag Method- required for rate increase requests in excess of $1 million. 26

27 CASH WORKING CAPITAL (CWC) 1/8 METHOD The 1/8 method is equivalent to 45 days average lag in receiving revenue after paying necessary operating expenses. It is determined by multiplying1/8 by the total operating and maintenance n e expense less purchased power or purchased gas cost, depreciation and taxes. 27

28 CASH WORKING CAPITAL (CWC) LEAD-LAG LAG METHOD The Lead-Lag method measures the differences in the time frames between the time services are rendered until the revenues for that service are received d( (revenue lag); and the time that labor, materials, etc. used in providing services are incurred and recorded until they are paid (expense lag) 28

29 CUSTOMER DEPOSITS Customer Deposits are monies that may be required by utilities from new or current customers as a condition of service. They are limited to the average estimated bill of the applicant for a period equal to one billing period plus one additional month s service. The deposit plus interest is returned to the customer once bills for service have been paid for 12 consecutive months. Th 13 h i h The most recent 13 month average is the amount normally subtracted from rate base. 29

30 DEPRECIATION What is the basis for depreciation? Investors provide the funds to pay for the installation of the facilities or plant necessary to provide services. Part of the cost of service is not only a fair return on such investment, it is also a return of that investment over its service life. In other words, the investor is not only entitled to earn interest (return) on his/hers principal the investor is entitled il to recover hi/h his/hers principal. i 30

31 WHAT IS DEPRECIATION? Gradual conversion of the cost of a tangible capital asset or fixed asset (excluding land because it has unlimited life) into an operational expense (called depreciation expense) over the asset's estimated useful life. Depreciation is computed at the end of an accounting period (usually a year) and the method best-fitting the usage profile of the asset is chosen. 31

32 DEPRECIATION The objectives of computing depreciation are to (1) reflect reduction in the book value of the asset due to obsolescence and wear and tear, (2) spread a large expenditure proportionately over a fixed period to match revenue received from it, and (3) reduce the taxable income by charging the amount of depreciation against the firm's total income. In effect, charging of depreciation means the recovery of invested capital, by gradual sale of the asset over the years during which output or services are received from it. 32

33 DEPRECIATION EXPENSE The Pa PUC normally employs the straight line depreciation method to determine the level of that expense for ratemaking purposes. This method provides that the cost of the property is allocated in equal amounts over the estimated life of the asset. Assets with similar lives are grouped together and fitted onto an Iowa curve to determine the longevity of the property group (Service Life). Should the initial service life estimate prove too short or too long, then that service life may be adjusted. 33

34 ACCUMULATED DEPRECIATION The accumulated depreciation account is kept on the balance sheet. It shows all of the total t depreciation that has been charged to the income statement t t for an asset since the company acquired it. When the asset is sold, it is removed from the books. depreciation.htm 34

35 PPL Electric Utilities Corporation R MEASURE OF VALUE SCHEDULE Test Year Ending December 30, 2012 Total T&D Remove Operations Transmission & Company PA (JJS-2) Resale Primary Jurisdiction Plant In Service Intangible $80,871,566 $10,540,000 $70,331,566 Distribution $4,225,699,977 $2,697,000 $4,223,002,977 Transmission $1,543,367,519 $1,543,367,519 $0 General $642,451,815 $26,662,000 $615,789,815 Less: Smart Meter Plan Assets ($4,655,327) ($4,655,327) Total Plant in Service $6,487,735,550 $1,583,266,519 $4,904,469,031 DEDUCT: Allocated Book Reserve $2,379,356,764 $566,381,000 $1,812,975,764 Less: Smart Meter Plan Assets ($115,472) ($115,472) $2,379,241,292 $1,812,860,292 Depreciated Utility PIS $4,108,494,258 $1,016,885,519 $3,091,608,739 ADDITIONS: Plant Held For Future Use $0 $0 $0 Cash Working Capital $40,506,000 $7,437,000 $33,069,000 Materials and Supplies $47,287,000 $13,577,000 $33,710,000 Subtotal Additions $87,793,000 $21,014,000 $66,779,000 DEDUCTIONS: Customer Deposits $16,862,000 $0 $16,862,000 Customer Advances $180,000 $0 $180,000 Accumulated Deferred Tax $889,855,000 $170,615,000 $719,240,000 Subtotal Deductions $906,897,000 $170,615,000 $736,282, TOTAL RATE BASE $3,289,390,258 $867,284,519 $2,422,105,739

36 Expenses Matthew Wurst November,

37 Expenses a key component to the revenue requirement formula RR=E+D+T+(RB*ROR) E Where: RR = Revenue Requirement E = Expenses D = Depreciation T = Taxes RB = Rate Base ROR = Rate of Return 37

38 Volatile No Returns Expenses can be volatile. Utilities are not permitted to apply a return Require normalization, percentage on expenses annualization and/or adjustments Returns are only applied to capitalized assets Effective tracking of historical expenses by utilities is beneficial Key delineation 38

39 Two General Types of Expenses Estimated Expenses Expenses that a company is reasonably expected to incur during the rate year. Historical test years are used by many states as the primary basis for estimating future expenses. Future or projected test years are also used by some states (including Pennsylvania). For example: utility salaries, maintenance costs, office equipment costs 39

40 Two General Types of Expenses Deferred Expenses Expenses a company has already incurred but have been deferred for ratemaking to allow recovery in later periods. A company normally requires authorization from its regulatory agency to defer costs to a later period. For example: unexpected storm damage or billing system upgrades ordered by a regulatory agency 40

41 41

42 Types of Adjustments RESTATING OR ACCOUNTING ADJUSTMENTS Correct or adjust test year income statement for misclassifications, errors or restatements to regulatory accounting. PRO FORMA ADJUSTMENTS Adjusts for known and measurable changes in test t year results that the company will experience in the future. 42

43 Restating Adjustments OUT-OF-PERIOD Remove transactions that belong outside of the test year, A company expensed three months of 2011 rent in 2012 for a storage building. Include transactions that belong in the test year, A large invoice from a sub-contractor was not received until two months after the end of the year for work done in the test year and the bookkeeper failed to record the liability. 43

44 Restating Adjustments RATEMAKING ADJUSTMENTS Remove expenses classified as non-regulatory A regulated electric company providing heating and ventilation services. Remove expenses that, by their nature, are not allowed for ratemaking, e.g., Charitable donations, imprudent costs, fines or penalties. Restate GAAP or tax basis costs to regulatory basis. Small utilities may provide financials for rate-making purposes that are maintained by their tax accountant. 44

45 Pro Forma Adjustments = KNOWN AND MEASURABLE changes to the test t year that t are expected to incur during the rate year. ANNUALIZATION ADJUSTMENT -Spread revenues or costs that affected only a portion of the test year, but are of a continuing nature (or non-continuing), e.g., 5% Health insurance premium increase. 45

46 Pro Forma Adjustments NORMALIZATION ADJUSTMENT Adjusts revenue or expense for an unusual or abnormal event, e.g., in the test year, a steel factory with an electric furnace was taken offline and resulting in a significant revenue decrease. Adjusts revenue or expense in the test year in an attempt to smooth variable annual data. e.g., weather normalization or one-time cost benefiting more than one period 46

47 Depreciation Expense Allocation of capital asset costs over the life of the related assets. Return OF investment. Regulatory Basis Depreciation Expense Depreciation Expense Straight Line (Dr) Amort. of Contributions in Aid of Construction (Cr) 47

48 Determining Prudent Business Expenses Regulators must audit the utilities accounting records to be able to determine prudent business expenses. Typically the audit will start with the review of the utility s test year expenses at the account level compared to historical years (typically 3 or 5 years) to determine e e which accounts have large variances. a large variances are subjective to the relative size of the utility, often a overall dollar value and percent change are used. 48

49 Determining Prudent Business Expenses (continued) Regulators should ask for detailed account data for the test year and historical years of accounts that have been determined to have large variances or have a history of having a potential for imprudent expenses like Miscellaneous Expense accounts. Determine if it is possible to break the detailed data down further into smaller items for comparison and determine a variance. Take a random sample of the detailed data from the test year and ask for all backup for those entries. 49

50 Determining Prudent Business Expenses (continued) The random sample size will depend on the number of entries in an account. Regulators should then audit in detail all the entries picked in the random sample. If the detailed backup in the random samples is viewed as prudent business expenses then those charges can be approved. If a large majority of the expenses do not have adequate backup or seem imprudent then another sample should be taken and those entries should also be researched. 50

51 Determining Prudent Business Expenses (continued) Any entries that do not have adequate backup should not be passed through to the ratepayers. The prudent of proof is on the utility to show that the expenses booked are prudent business expenses. 51

52 Rate of Return Matthew Wurst November 4 th,

53 Where: RR=E+D+T+(RB*ROR) RR = Revenue Requirement E = Expenses D = Depreciation T = Taxes RB = Rate Base ROR = Rate of Return 53

54 General Definition Rate of Return is the amount of revenue an investment generates (in the form of net income), usually expressed as a percentage of the amount of capital invested, over a given period of time. Also referred to as Cost of Capital 54

55 Principles Established the following generally accepted principles for measuring a fair rate of return: Comparable Earnings: a utility is entitled to a return similar to that being earned by other enterprises with corresponding risks and uncertainties, ti but not as high h as those earned by highly hl profitable or speculative ventures; Financial Integrity: a utility is entitled to a return level reasonably sufficient to assure financial soundness 55

56 Debt Contractual interest rate (bonds, preferred stock) Equity Return rate is normally set in the market (Stock) For regulated utilities the return rate is set by the regulators as a substitute for the market using models (Discounted Cash Flow, Risk Premium, Capital Assets Pricing Model, Comparable Earnings) 56

57 ROR Effect on Revenue Requirement Company Capital Structure t Cost Rate Weighted Cost Request (A) (B) (A) X (B) Debt 45.19% 5.81% 2.63% Preferred Stock 1.63% 4.38% 0.07% Equity 53.18% 11.75% 6.25% Total 100.0% 8.95% Rate Base = $5,610,000,000 Total x RB = NI $502,095,000 Staff Recommendation Debt 45.19% 5.81% 2.63% Preferred Stock 1.63% 4.38% 0.07% Equity 53.18% 10.54% 5.61% Total 100.0% 8.31% Rate Base = $5,610,000,000 Total x RB = NI $466,191,000 57

58 What does a 0.64% change mean? Rate Base - $5,610,000, % (64 basis points) difference in overall rate of return between Company and Staff Means a $35,904,000 difference in Net Income 58

59 Methodologies Discounted Cash Flow (DCF) Risk Premium Capital Asset Pricing Model (CAPM) Comparable Earnings (Earnings/book Value) 59

60 Barometer Groups Purpose Industry Average Selection Criteria Comparable business (utility) Geographic Market Data Available Going Concern (no bankruptcy, dividend omission, etc.) 60

61 Discounted Cash Flow (DCF) Method k=d 1 /P o + g n Where: k = Expected rate of return D 1 = Annualized year-ahead dividend P o = Current stock price g n = Expected growth rate, period n -D 1 /P 0 is called a forward looking dividend yield 61

62 Dividend Yield Can be current dividend and stock price multiplied by 1 and half the growth rate Can be forward dividend divided by the current stock price Sources: Barron s, Wall Street Journal, Yahoo Finance, Value Line Investment Survey 62

63 Growth Rates Can be historic, forecasted or combination Can reflect the growth: EPS (Earnings per Share) DPS(Dividends per Share) BVPS (Book Value per Share) Sources: Value Line Investment Survey, Yahoo Finance, Zacks Investment Research, Morningstar, Thomson Reuters 63

64 Risk Premium Method k = Y + RP Where: k = Expected Rate of Return Y = Current Bond Yield RP = Equity Risk Premium 64

65 Current Bond Yield (Y) Investment Grade Public Utility bonds Average of yields over 12 month period Source Mergent Bond Record, Morningstar 65

66 Equity Risk Premium Difference between return on chosen equity item and return on chosen debt item Sources: Mergent Bond Record, Morningstar, Risk premium studies 66

67 CAPM k = R f + [(R m -R f )β] Where: k = Expected Rate of Return R f = Current Risk Free Rate R m = Expected Mean Market Return β = Beta 67

68 Risk free rate (R f ) Long term government treasury bond Source: Blue Chip Financial Forecasts, Barron s, Morningstar 68

69 Mean Market Return (R m ) Historical, Forecasted or Combination data Sources: Value Line Investment Survey, Barron s, Morningstar 69

70 Beta (β) Measures the systematic risk of a stock in relation to the risk of the market. The risk of the market is 1 Beta less than 1 indicates the stock is less risky than the market Beta more than 1 indicates the stock is more risky than the market Source: Value Line Investment Survey 70

71 Comparable Earnings k = EPS/BVPS Where: k = Expected Rate of Return EPS = Earnings per share BVPS= Book Value Per Share Source: ValueLine Investment Survey 71

72 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). 72

73 Uniform System of Accounts Assets and other debits Liabilities and other credits Plant accounts , Income accounts. 433, Retained earnings accounts Revenue accounts Production, transmission and distribution expenses Customer accounts, customer service and informational, sales, and general and administrative expenses. Source: PART 101 UNIFORM SYSTEM OF ACCOUNTS PRESCRIBED FOR PUBLIC UTILITIES AND LICENSEES SUBJECT TO THE PROVISIONS OF THE FEDERAL POWER ACT 73

74 Uniform System of Accounts - Excerpt Balance Sheet Chart of Accounts ASSETS AND OTHER DEBITS 1. Utility Plant 101 Electric plant in service (Major only) Property under capital leases. 102 Electric c plant purchased or sold. 103 Experimental electric plant unclassified (Major only) Electric plant in process of reclassification (Nonmajor only). 104 Electric plant leased to others. 105 Electric plant held for future use. 106 Completed construction not classified Electric (Major only). 107 Construction work in progress Electric. 108 Accumulated provision for depreciation of electric utility plant (Major only). 109 [Reserved] 74

75 Above the Line versus Below the Line By using the FERC Income Chart of Accounts, utilities and regulators can find the determination of Net Utility Operating Income. Accounts above this line are Above the Line and recovered dby ratepayers. Accounts below this line are Below the Line and recovered e ed by shareholders. s Allows for a more transparent rate case audit process and allows the utilities to separate out shareholder and ratepayer expenses and revenues. 75

76 Above the Line versus Below the Line Allocating specific accounts to ratepayers and shareholders simplifies the ratemaking process by: Allowing utility to track shareholder and ratepayer items separately. Reduces the need for adjustments and exclusions at the time of the application. Allows the utility to book prudent but none recoverable items accurately. Below the Line examples: Power sold outside the native load and the fuel cost associated with those sales. Lobbying fees. 76

77 Generally Accepted Accounting Principles (GAAP) for Utilities Generally, utilities financial statements follow the GAAP requirements. Some differences in the application of GAAP may occur between regulated and non-regulated businesses due to the rate-making process. Example: Regulatory requires Straight Line Depreciation while GAAP allows Accelerated or Straight Line. 77

78 Pennsylvania Public Utility Commission: Public Utilities Commission of Ohio: Jeremy B. Hubert Patrick Donlon Fixed Utility Valuation Engineer Administrator, Rates Division Phone: Utilities Department Phone: Aspassia Staevska Assistant Counsel Phone: Matthew A. Wurst Executive Policy Manager Phone:

79 Tariff Development II: Developing and Implementing a Cost of fs Service Study Criteria and Basic Components Jeremy Hubert November 4, 2013 Matthew Wurst Aspassia Staevska Patrick Donlon

80 Developing a Cost of Service Study Jeremy Hubert November 4, 2013 Matthew Wurst Aspassia Staevska Patrick Donlon 2

81 STEPS IN THE RATEMAKING PROCESS STEP 1 Determine the revenue requirement of the utility REVENUE REQUIREMENT DETERMINATION STEP 2 STEP 3 STEP 4 Unbundle costs by functions and services (production, transmission, distribution, etc.) Classify costs (demand, energy, customer costs, etc.) Allocate costs among customer classes (retail, industrial, etc.) COST ALLOCATION STEP 5 Design Rates RATE DESIGN 3

82 COST OF SERVICE STUDIES (COSS) WHY ARE THEY IMPORTANT? The cost to provide service to customers differs depending on the type of service, number of customer, usage, and usage patterns. A Cost of Service Study is performed by an electric utility to ensure that each customer class pays their fair and equitable share of the electric utility s revenue requirements Provides cost information that allows the rate analyst to allocate costs to the various classes of customers. Results of a COSS are used as a tool for reducing and eliminating crosssubsidies. 4

83 COST OF SERVICE STUDIES PRINCIPLES OF RATE REGULATION Fairness to both the regulated utility (its owners (or stockholders)) and the ratepayers Avoidance of unjust or undue discrimination between rate classes or customers Cost causation - the concept of the cost causer pays the costs it imposed on the utility system Cost allocation calculated through a cost of service study determines how many dollars to collect from various classes or rates allowing the proper total revenue requirement to be collected through rates Rate design determines how to collect dollars from various customer groups 5

84 TYPES OF COST OF SERVICE APPROACHES Embedded Cost Basis Determine apportionment of accounting-based revenue requirement using functionalization, classification and allocation process A fully allocated embedded unbundled cost of service study allocates all items of utility property and cost to determine the fully allocated embedded cost of service for each customer class of service and shows each customer class share of costs by major function (Production, Transmission and Distribution) 6

85 TYPES OF COST OF SERVICE APPROACHES Marginal Cost Basis Estimate t the additional cost in providing increments of service to each service function. Costs experienced or avoided when a customer or unit of output is added or forgone. Full marginal cost studies are not commonly done and do not assure full cost recovery of revenue requirements (only embedded cost analysis does). 7

86 COST OF SERVICE METHODOLOGIES TRADITIONAL EMBEDDED COST Definition Embedded Cost Average system costs assuming all utility resources sspread across all customers. s Generally based on historical or known costs. 8

87 TRADITIONAL EMBEDDED COSS STEPS Step 1 Determine Revenue Requirement Establish Test Year Adjust as Necessary Step 2 Functionalize Costs Separate Costs by Function Production, transmission, distribution, etc. 9

88 FUNCTIONALIZATION The costs are functionally separated into the following: 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 10

89 JURISDICTIONAL SEPARATION Jurisdictional separation is a product of the allocation process whereby the revenue and costs associated with the utility s wholesale for resale sales to wholesale requirements customers (regulated by the Federal Energy Regulatory Commission (FERC)) are separated from those associated with sales that fall under the jurisdiction of the PA PUC. The jurisdictional electric columns within a filing contain the portion of the utility s total electric costs that fall under the PA PUC jurisdiction. i 11

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91 COMMON AND GENERAL PLANT AND ADMINISTRATIVE COSTS Administrative and General costs are costs not included elsewhere such as general salaries, insurance, general office building and expenses or transportation equipment. Indirect costs are comprised of general and intangible (software) plant costs recorded in accounts 303 and , O&M expense in accounts , taxes, and working capital. 13

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94 FUNCTIONALIZATION OF COSTS 16

95 FUNCTIONALIZATION (PRODUCTION COSTS) Costs related to the production of electricity such as: The electric generating plant in service Variable costs such as: fuel operation i 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 17

96 Predominantly fixed costs FUNCTIONALIZATION (TRANSMISSION 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 18

97 FUNTIONALIZATION (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 19

98 STEPS IN THE RATEMAKING PROCESS STEP 1 Determine the revenue requirement of the utility REVENUE REQUIREMENT DETERMINATION STEP 2 STEP 3 STEP 4 Unbundle costs by functions and services (production, transmission, distribution, etc.) Classify costs (demand, energy, customer costs, etc.) Allocate costs among customer classes (retail, industrial, etc.) COST ALLOCATION STEP 5 Design Rates RATE DESIGN 20

99 TRADITIONAL EMBEDDED COSS STEPS Step 3 Classify Costs Once the costs are functionalized, they can then be l classified ifid into Demand (fixed), Energy (Variable), and Customer related costs Some service characteristics: Demand usage Energy consumption n Number of customers 21

100 CLASSIFICATION (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 stem must supply to serve e the customers Rate base and expense items related to total kwh s consumed during a period of time Fuel and operation/maintenance most common 22

101 CLASSIFICATION (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. 23

102 CLASSIFICATION (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 24

103 CLASSIFICATION (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. 25

104 TYPICAL COST CLASSIFICATIONS Typical Cost Function Typical Cost Classification i Production Demand Related Energy Related Transmission Demand Related Energy Related Distribution Customer Service Demand Related Energy Related Customer Related Customer Related Demand Related 26

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106 STEPS IN THE RATEMAKING PROCESS STEP 1 Determine the revenue requirement of the utility REVENUE REQUIREMENT DETERMINATION STEP 2 STEP 3 STEP 4 Unbundle costs by functions and services (production, transmission, distribution, etc.) Classify costs (demand, energy, customer costs, etc.) Allocate costs among customer classes (retail, industrial, etc.) ) COST ALLOCATION STEP 5 Design Rates RATE DESIGN 28

107 TRADITIONAL EMBEDDED COSS STEPS Step 4 Allocate Costs Once the costs are classified they can then be allocated to the various customer classes such as Residential, Commercial, Industrial, and Other. Develop Allocation o Factors Spread Costs Across Classes 29

108 COST ALLOCATION (STEP 4) 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. 30

109 COST ALLOCATION (STEP 4) Allocation Schedules are developed, using customer class sales, load research samples and quantitative models, to determine the extent (expressed as a percentage) that each customer class uses the various portions of the electrical system. Percentages determined in the Allocation Schedules are used by the Cost of Service witness to determine rate class cost responsibility. Because all customer classes do not utilize the full distribution system to take delivery of electrical service, the Allocation Schedules are developed to assign only the portions of the system actually used by each customer class. 31

110 ALLOCATION FACTORS Allocation factors must align with the underlying cost classification. Demand Related Costs are allocated among the customer classes on the basis of demands (kw) imposed on the system by each of the customer classes. Energy Related Costs are allocated among the customer classes on the basis of the amount of energy (kwh) which the system must supply, including losses, to serve each of the customer classes. Customer Related Costs are allocated among the customer classes based on the number of customers within each class. Direct Assignments some costs are specifically assigned to a particular customer or class of customers if it can be determined that those costs relate only to that customer or customer class. 32

111 COMMON DEMAND ALLOCATION FACTORS Coincident Peak Method (CP) The CP method allocates costs to customer classes based on their contribution i to the system peak. Utilities build infrastructure to meet system demand. Therefore, a class s contribution to system demand directly influences investment and supporting operations. Class contribution is determined by a load research study, or in the absence of load research data general rules of thumb with respect to usage patterns and load factors for customer classes can be used. The CP method can be used for one month (1CP) or up to 12 months (12 CP) of a study period. 33

112 COMMON DEMAND ALLOCATION FACTORS (Coincident Peak Method cont.) A description of how the number of CP applied can be determined is as follows: 1 CP based on class CP demands for the month in which the annual system peak occurs. The 1 CP demand allocation factor is usually applied to assets and related costs that benefit customers during the system peak. 2 CP, 3 CP, 4 CP, etc. based on class CP demands for each of the months of highest system demands. A summer peaking system might allocate demand on the basis of class CP demands in each of the four months June through September. A winter peaking system might allocate demand on the basis of class CP demands in each of the three or four winter months. A system with significant summer and winter peaks might allocate demand costs on the basis of class CP demands in each one or four summer months and one to four winter months. 12 CP based on the class CP demands d for each of the 12 months of the year. The 12 CP demand factor is usually applied to assets and related costs that benefit customers year round. 34

113 COMMON DEMAND ALLOCATION FACTORS Non-Coincident Peak Method (NCP) The NCP method is based on the theory that demand d costs are strongly influenced by the highest demand of each rate class, whenever it occurs. The class NCP is determined on an annual or monthly basis and is derived from load research data, or in the absence of load research data general rules of thumb with respect to usage patterns and load factors for customer classes can be used. The NCP demand allocation factor is usually applied to distribution assets at or near the customer load. These assets are sized to meet the customer ss localized demand. 35

114 COMMON DEMAND ALLOCATION FACTORS Average and Excess Demand Method (AED) The AED method is based on the belief that demand costs are based on both the non-coincident peaks of each customer class and the energy used, or average demand. The method essentially reclassifies plant as being both demand d related and energy related. Recognizes that systems (particularly generation) are built for base load needs (energy) and peaking (demand). The AED methodology is a commonly used alternative to the CP method and is usually applied to generation assets. 36

115 ENERGY-RELATED RELATED ALLOCATION FACTORS Compared to other types of allocation factors, energy allocation factors are fairly straightforward. Class kwh sales are readily available and can be used in development of these factors. (the proper p use of these factors must include consideration of losses) Energy allocation factors should be developed at secondary, primary, transmission, and generation voltage levels. 37

116 CUSTOMER-RELATED RELATED ALLOCATION FACTORS Customer allocation factors are used to allocate a portion of distribution costs and customer care costs. Usually these allocators reflect customer weighted factors which represent varying levels of effort or investment for different rate classes. Two common examples of weighted customer allocation factors are related to meter investment and customer billing and collection expenses. 38

117 Meter Investment CUSTOMER-RELATED RELATED ALLOCATION FACTORS (cont.) Function of the meter type and data gathering capabilities. Metering requirements differ from class to class with most expensive meters used by large commercial and industrial customers. To properly allocate meter investment costs to the various classes, customer weighting factors must be developed dto account for cost differentials i in the metering equipment. Customer Billing and Collection Expenses Cost varies from class to class. Some customer types require more effort in meter reading, data processing and issuing a bill. Different customer weighting factors can be developed eloped through cost studies which evaluate the time and expense related to specific activities and determines the average costs of providing services for different rate classes. 39

118 ONE TIME COSTS: CONNECTION TARIFFS At times customers require significant amounts of plant investment be added to the utility system in order to provide adequate service to them. A large industrial manufacturing customer may need to have a line, substation or transformation equipment specifically design and operated exclusively for their use (dedicated service). A hospital may need to have a redundant nt service to provide adequate backup during emergencies. Costs such as these may be directly assigned in a cost of Costs such as these may be directly assigned in a cost of service study to a particular class or rate. 40

119 CLASS COST OF SERVICE RATE OF RETURN AND RELATIVE RATE OF RETURN Once a Class Cost of Service Study is complete, a summary page shows the revenue received and the cost to provide service for each class. The overall rate of return (return on net plant) for each class is determined by dividing the net income (revenue less taxes and expense) by the rate base allocated to that t class. The relative rate of return is determined by dividing the rate of return for each class by the overall rate of return. A relative rate of return above 1.0 indicates that the revenue received from that class is more than the cost incurred to provide service to that class. A relative rate of return below 1.0 indicates that the revenue received from that class is less than the cost incurred to provide service to that class 41

120 PPL Electric Utilities Corporation R Present Rate of Return Operation Revenue at PA Jurisdiction Present Rates Distribution RS RTS GS-1 GS-3 LP-4 LP-5 LPEP GH-2 SL/AL Revised Distribution Revenues 734, ,659 4,604 72, ,336 33,728 1, ,387 22,947 State Tax Adj Surcharge (2,503) (1,616) (16) (246) (421) (115) (4) (2) (5) (78) Revised Distribution Revenues 731, ,043 4,588 71, ,915 33,613 1, ,382 22,869 Late Pay Charges Present Rates 13,000 10, , Annualization Present Revenues (391) (1,209) (106) (4) 0 (28) 174 Adjusted Electric Sales 744, ,502 4,585 73, ,259 33,990 1, ,377 23,043 Other Operating Revenues 39,894 27, ,785 4,935 1, ,408 Total Operating Revenues 784, ,798 5,123 76, ,194 35,734 1, ,462 24,451 Operating Expenses Operation and Maintenance Expenses Distribution 170, ,844 2,292 15,552 20,187 7, ,868 Other Oper & Maint Expenses 248, ,460 2,702 20,404 19,207 6, ,516 Total Oper & Maint Expenses 419, ,304 4,994 35,956 39,394 14, ,384 Depreciation Expense Distribution 98,675 67,332 1,384 9,930 12,770 4, ,494 Other Deprec Exp 41,044 29, ,009 4,138 1, Total Depreciation and Amortization Expense 139,719 97,165 1,897 13,939 16,908 5, ,489 Income Before Taxes 225, ,329 (1,768) 27,051 72,892 15,890 (166) ,578 Taxes Capital Stock Present Level Other Other Taxes 9,046 6, Deferred Income Taxes 28,861 21, ,313 2, Net Investment Tax Credit (915) (630) (12) (87) (110) (38) (2) (1) (2) (33) Gross Receipts Tax 5.9% 43,930 28, ,316 7,331 2, ,360 Total PA Income Tax 9.99% 1,759 (4,341) (404) 833 4, (52) Total Fed Inc Tax 35% (6,769) (13,251) (749) 317 6, (125) 24 (20) (63) Total Taxes 76,725 38,932 (450) 8,640 22,125 4,880 (13) ,393 Total Operating Expenses 635, , ,441 58, ,427 24,724 1, , , Return (Ln 8-25) 148,764 65,396 (1,318) 18,412 50,767 11,010 (153) ,185 Total Rate Base 2,422,106 1,688,500 32, , , ,734 2, ,148 67,799 Rate of Return (ln 26 / ln 27) 6.14% 3.87% -4.01% 8.20% 17.51% 10.03% -5.57% 21.68% 5.32% 6.17% Relative Rate of Return

121 PPL Electric Utilities Corporation R Poposed Rate of Return Operation Revenue at PA Jurisdiction Proposed Rates Distribution RS RTS GS-1 GS-3 LP-4 LP-5 LPEP GH-2 SL/AL Sales of Electricity Distribution Revenues $734,462 $474,659 $4,604 $72,149 $123,336 $33,726 $1,209 $445 $1,387 $22,947 Proposed Revenue Increase $104,616 $101,086 $3,568 $815 ($4,674) $7 $712 $0 $323 $2,779 State Tax Adj Surcharge ($2,503) ($1,616) ($16) ($246) ($421) ($115) ($4) ($2) ($5) ($78) Adjusted Rate Revenues $836,575 $574,129 $8,156 $72,718 $118,241 $33,618 $1,917 $443 $1,705 $25,648 Late Payment Charges $13,000 $10,668 $103 $1,255 $828 $114 $9 $0 $23 $0 Annualization Present Revenues ($391) ($1,209) ($106) $3 $516 $263 ($4) $0 ($28) $174 Total Sale of Electricity $849,184 $583,588 $8,153 $73,976 $119,585 $33,995 $1,922 $443 $1,700 $25,822 Proposed Sales & Late Payments $849,184 $583,588 $8,153 $73,976 $119,585 $33,995 $1,922 $443 $1,700 $25,822 Other Operating Revenues $39,894 $27,296 $538 $3,785 $4,935 $1,744 $75 $28 $85 $1,408 Total Operating Revenues $889,078 $610,884 $8,691 $77,761 $124,520 $35,739 $1,997 $471 $1,785 $27,230 Operating Expenses Operation and Maintenance Expenses Distribution $170,666 $113,844 $2,292 $15,552 $20,187 $7,999 $537 $30 $357 $9,868 Other Oper & Maint Expenses $250,923 $196,641 $2,710 $20,450 $19,259 $6,499 $363 $93 $392 $4,516 Total Oper & Maint Expenses $421,589 $310,485 $5,002 $36,002 $39,446 $14,498 $900 $123 $749 $14,384 Depreciation Expense Distribution $98,675 $67,332 $1,384 $9,930 $12,770 $4,006 $484 $47 $228 $2,494 Other Depreciation Exp $41,044 $29,833 $513 $4,009 $4,138 $1,371 $82 $21 $82 $995 Total Depreciation and Amortization Expense $139,719 $97,165 $1,897 $13,939 $16,908 $5,377 $566 $68 $310 $3,489 Income Before Taxes $327,770 $203,234 $1,792 $27,820 $68,166 $15,864 $531 $280 $726 $9,357 Taxes Capital Stock Present Level $957 $664 $12 $91 $117 $42 $1 $1 $2 $27 Other Other Taxes $9,046 $6,570 $113 $870 $914 $317 $12 $5 $17 $228 Deferred Income Taxes $28,861 $21,552 $321 $2,313 $2,769 $985 $82 $16 $50 $773 Net Investment Tax Credit ($915) ($630) ($12) ($87) ($110) ($38) ($2) ($1) ($2) ($33) Gross Receipts Tax 5.9% $50,102 $34,432 $481 $4,365 $7,056 $2,006 $113 $26 $100 $1,523 Total PA Income Tax 9.99% $11,346 $4,934 ($70) $904 $4,394 $756 $13 $18 $31 $366 Total Fed Inc Tax 35% $23,463 $15,997 $306 $540 $4,874 $806 $81 $24 $76 $760 Total Taxes $122,860 $83,519 $1,151 $8,995 $20,013 $4,873 $301 $89 $274 $3,644 Total Operating Expenses $684,168 $491,169 $8,050 $58,936 $76,367 $24,748 $1,767 $280 $1,333 $21,517 Return (Ln 8-25) $204,910 $119,715 $641 $18,825 $48,153 $10,991 $230 $191 $452 $5,713 Total Rate Base $2,422,106 $1,688,500 $32,867 $224,518 $289,911 $109,734 $2,748 $881 $5,148 $67,799 Rate of Return (ln 27 / ln 28) 8.46% 7.09% 1.95% 8.38% 16.61% 10.02% 8.36% 21.66% 8.77% 8.43% Relative Rate of Return

122 Pennsylvania Public Utility Commission: Public Utilities Commission of Ohio: Jeremy B. Hubert Patrick Donlon Fixed Utility Valuation Engineer Administrator, Rates Division Phone: Utilities Department Phone: Aspassia Staevska Assistant Counsel Phone: Matthew A. Wurst Executive Policy Manager Phone:

123 Tariff Development III: Developing a Rate Design Jeremy Hubert November 4, 2013 Matthew Wurst Aspassia Staevska Patrick Donlon

124 STEPS IN THE RATEMAKING PROCESS STEP 1 Determine the revenue requirement of the utility REVENUE REQUIREMENT DETERMINATION STEP 2 STEP 3 STEP 4 Unbundle costs by functions and services (production, transmission, distribution, etc.) Classify costs (demand, energy, customer costs, etc.) Allocate costs among customer classes (retail, industrial, etc.) COST ALLOCATION STEP 5 Design Rates RATE DESIGN 2

125 WHAT IS RATE DESIGN? Rate design is the structure of a utility s rates; rate design determines the prices customers pay for utility services. Rate designs vary from utility to utility. All rate designs address: Customer classes Types of charges (customer, energy, demand) Some rate designs also address: Time (real-time, time-of-day, season of year, etc.) Rate design is highly technical and detailed, but it is more art than science 3

126 OBJECTIVES OF RATE DESIGN Rate design has a variety of objectives, some of which conflict with each other. Revenue-related objectives: Rates should yield the total revenue requirement. Rates should provide stable and predictable revenues. Rates should give a utility a reasonable opportunity to: Recover prudently incurred expenses, including investment. Earn a fair rate of return on its investment. 4

127 OBJECTIVES OF RATE DESIGN Cost-related objectives: Rt Rates should ldbe set tto promote economically efficient consumption. Rates should apportion costs fairly among customers and customer classes. Rates should avoid undue discrimination. Rates should promote innovation in supply and demand. 5

128 OBJECTIVES OF RATE DESIGN Practical considerations: A rate design should ldbe, to the extent tpossible, simple, understandable, acceptable to the public, and easily administered. A rate design should provide for rate stability. 6

129 DETERMINING CUSTOMER GROUPS Generally based on usage characteristics. Number of customer groups varies among utilities. Common groups: Residential Commercial Industrial Street lighting 7

130 MAJOR COMPONENTS OF RATE DESIGN Primary components of rate design: Customer charge Energy charge Demand charge Interaction of these components sends price signals. 8

131 MAJOR COMPONENTS OF RATE DESIGN Customer charge Recover costs that do not vary with consumption (for example, metering and billing). Can be fixed amount per day, month, or other billing period. Energy charge (kwh) Recover costs that vary with consumption (for example, fuel costs). Can vary depending on usage patterns. Demand charge (kw) Recover cost of building capacity to provide energy. Reflects fact that utility must have power available to serve customer. Encourages reduced usage at peak periods (especially load shifting). Typically only larger customers pay a demand charge. 9

132 RATE DESIGNS Price/ Unit Flat Rates Price/ Unit Declining Block Rates Quantity Consumed Quantity Consumed Price/ Unit Inclining Block Rates Price/ Unit Time-Based Rates Quantity Consumed Offpeak Peak Offpeak 10

133 Energy Only Exceedingly gysimple FLAT RATE Price/ Unit Flat Rates Not Normally Applicable to Usual Customer classes. Quantity Consumed Generally Used for Special Rates (billboards, traffic lights, street lights) 11

134 Customer/Energy TWO PART RATE Generally for Residential and Small Commercial. Customer charge intended dto collect fixed customer costs. (Example: $20.83/month and $0.065/kWh) Energy/Demand Generally for Larger General Service Customers Promotes Efficient Use of System (Example: $0.03/kWh and $16.67/kW-mo. 12

135 THREE PART RATE Customer/Energy/Demand Allows for Specific Rate Design to collect based on each component of cost. Example: $20.83/month $0.015/kWh $16.67/kW-mo. 13

136 BLOCKED RATES Declining block Price/ Based on assumptions that it is cheaper to serve large customers and that marginal cost is less than average cost. Encourages consumption, discourages conservation, so is particularly important to ensure prices are right. Inclining block Marginal cost is greater than average cost. Discourages consumption and encourages conservation. Peak and off-peak rates Encourage customers to use less power during peak periods. Unit Price/ Unit Price/ Unit Declining Block Rates Quantity Consumed Inclining Block Rates Quantity Consumed Time-Based Rates Offpeak Peak Offpeak 14

137 UNBUNDLED RATE DESIGN Typical unbundled costs include Generation, Transmission, Distribution, and Customer Service. Unbundled rates can only be derived from an unbundled cost of service analysis. 15

138 BUNDLED VS. UNBUNDLED Bundled Rate For all kwh Sold Per Month = Unbundled Rate For all kwh Sold Per Month: 8 cents per kwh Generation = $0.04 per kwh Transmission Service = $0.01 per kwh Distribution Service = $ per kwh Customer Service = $0.005 per kwh 16

139 BUNDLED VS. UNBUNDLED Traditional Bundled Rates: Monthly charge = Rate (1) x kwh + Rate (2) x kwh 17

140 ISSUES CONSIDERED IN DESIGNING PROPOSED RATES Increase in the present customer charges, Increase in the present usage rates, The percent increase of each rate, Increase in the average bill, Cost of service issues and factors, Rate division consolidation issues, Prior rate agreements in settlement, Final proposed revenue. 18

141 PROPOSED RATES COST JUSTIFICATION A Company s revenue allocation is cost justified when all the customer classes are moving towards the average system rate of return. Gradualism and rate shock are considerations when examining customer class returns. 19

142 GRADUALISM AND RATE SHOCK Gradualism is a ratemaking principle a slower movement to cost of service by increasing rates over time. Rate shock is an abrupt and significant change to current rates. Rate shock occurs when the concept of gradualism is violated. Rate shock can be mitigated by rate phase-in over multiple years. No specific actual or percentage increase in a rate can No specific actual or percentage increase in a rate can be defined as rate shock. 20

143 Time of Use Pricing Matthew Wurst November 4 th,

144 Goal = Reshaping/Shifting the Demand Curve 22

145 Types of Rates -Flat -Seasonal -Time-of-Use -Critical Peak -Real Time Simple Rates Dynamic Rates 23

146 Time-of-Use Pricing Customers pay different prices at different times of the day On-peak prices are higher and off-peak prices are lower than a standard or flat rate Price schedule is often fixed and predefined, based on season, day of week, and time of day 24

147 Conventional Time-of-Use Rate Structure 25

148 Critical Peak Pricing Very high critical peak prices are assessed for certain hours on event days (often limited to per year) Pricescanbe310 can 3-10 times as much during these few hours Typically combined with a TOU rate, but not always 26

149 Critical Peak 27

150 Real Time Pricing Typically require a wholesale generation construct ct that provides an hourly pricing signal Can also be predefined with a price for each hour Match customer usage for each hour with the wholesale generation or predefined price for that hour Very prevalent with large users such as industrials 28

151 Real Time Pricing 29

152 Implementation Challenges Require meters capable of incremental reading, typically y hourly reads. Require more complex utility billing systems to match up variable costs with variable meter reads Can be voluntary or non-bypassable, both options have ups and downs. 30

153 Applications in Pennsylvania Large C&I Customers (>500 kw demand) offered real time pricing from utility. Residential customers offered free nights in some utilities from competitive electric generation suppliers. Some utilities offer TOU to residential customers with smart meters. 31

154 Benefits of Effectively Implemented Rates Reduces peak electric demand which in turn Reduces energy expenditures for customers Mitigates need for additional generation capacity Mitigates need for additional transmission capacity Provides customers s with a more precise understanding of the true cost of service 32

155 Pennsylvania Public Utility Commission: Public Utilities Commission of Ohio: Jeremy B. Hubert Patrick Donlon Fixed Utility Valuation Engineer Administrator, Rates Division Phone: Utilities Department Phone: Aspassia Staevska Assistant Counsel Phone: Matthew A. Wurst Executive Policy Manager Phone:

156 Tariff Development IV: How a Commission Develops an Order on Rates Jeremy Hubert November 4, 2013 Matthew Wurst Aspassia Staevska Patrick Donlon

157 Rate Case Proceedings Pennsylvania and Ohio Experience Jeremy Hubert Matthew Wurst November 4, 2013 Aspassia Staevska Patrick Donlon 2

158 Rate Case Process Pennsylvania Public Utility Commission 3

159 Basis for Regulation Constitution and Case Law forms the framework for the regulation of public utilities Cases have long shelf life some cases from the 1800 s are still relevant Statutes Every rate made, demanded, or received by any public utility shall be just and reasonable, and in conformity with regulations or orders of the commission. 66 Pa. C.S.A

160 Basis for Regulation U.S. Constitution Article I, Sec. 8 Commerce Clause the authority to regulate commerce among states t Article I, Sec. 10 Contracts Clause - no state shall pass any law impairing the Obligation of Contracts 5

161 5th Amendment Basis for Regulation no person shall be deprived of property, without due process of law no taking of private property p for public use without just compensation 14th Amendment...no state shall deprive any person of property without due process 6

162 Rate Case Process Quasi-Judicial Commission cases impacting utility rates are quasi-judicial proceedings held before an Administrative Law Judge ( ALJ ). The case results in the establishment of an evidentiary record that represents the only facts and arguments that can be considered in the Commission s deliberations and rulings. 7

163 Rate Case Process Rate Case Filing Timeframe: 9 months from date of filing no public utility shall make any change except except after 60 days notice to the commission 66 Pa. C.S.A. 1308(a) such tariff shall be suspended d for a period not to exceed seven months 66 Pa. C.S.A. 1308(d) 8

164 Pre-Filing Notification (30 day letter) Rate Filing with Required Data and Testimony/Exhibits Initial Discovery TUS and I&E Data Requests Public Meeting Commission Order Suspending/Investigating Assignment to OALJ Continued Discovery Prehearing Conference Public Input Hearings(s) in Company Service Territory Rate Case Process Direct Testimony Formal Settlement Discussions Rebuttal Testimony Surrebuttal Testimony Evidentiary Hearings Main Briefs Reply Briefs Recommended Decision Exceptions Reply Exceptions Public Meeting (Polling) Commission Order Reconsideration/Clarification Appeal 9

165 Rate Case Process Pre-Filing Notification: Thirty days prior to the filing of a general rate increase that t is anticipated to exceed $1 million, a public utility shall file with the Secretary a written notice. 52 Pa. Code

166 Rate Case Process Rate Case Filing: Filed with Commission. Must include data to support request. Testimony and Exhibits (tax return statements, audit reports, statement t t of reasons for rate increase, balance sheet and operating statement for the test year) Served on Bureau of Investigation & Enforcement and Statutory Parties (Office of Consumer Advocate and Office of Small Business Advocate). 60 day notice. 11

167 Rate Case Filing: Rate Case Process Burden of Proof: The utility has the burden of proof to show that the rate involved is just and reasonable. 66 Pa. C.S.A. 315(a) 12

168 Rate Case Process Entities involved in a Rate Case: Secretary s Bureau Bureau of Technical Utility Services Office of Administrative Law Judge Public Utility ( Company ) Bureau of Investigation and Enforcement represents the public interest Office of Consumer Advocate Attorney General s Office Office of Small Business Advocate Department of Commerce Other Parties with vested interest in outcome 13

169 Rate Case Process Discovery (Initial and Ongoing): Propounded on Company Propounded on Intervenors Data Requests/Interrogatories Problems include: Scope of Information sought Proprietary Timeliness of Response 14

170 Rate Case Process Discovery (Initial and Ongoing): Obtain Additional Information Verify Company Claims/Support Avoid Surprises Narrow Issues Eliminate Issues Support Prepared Testimony Obtain information for Exhibits 15

171 Public Meeting: Suspension Order Rate Case Process Assignment to Office of Administrative Law Judge (OALJ) Development of a Record Issuance of Recommended Decision Seven Month Suspension Begins 16

172 Rate Case Process Prehearing Conference: Identify Parties Establish Litigation Schedule Testimony, Hearings, Briefs Determine Need for Public Input Hearing Establish Service Requirements Review Discovery Rules and Modifications 17

173 Rate Case Process Public Input Hearing: Held in Service Territory Opportunity for Consumer Participation On the Record proceeding Additional means of gathering evidence 18

174 Testimony: Rate Case Process Direct Testimony Case in Chief Rebuttal Testimony responsive, -- may agree, but often disagree Surrebuttal Testimony -- provide further response and clarify Rejoinder Testimony often outline or oral As the party with the burden of proof, the Company is granted the last say in the evidentiary part of the case. 19

175 Testimony: Rate Case Process Question and Answer format Served according to Litigation Schedule Testimony with supporting Schedules Accounting, Engineering, Financial 20

176 Rate Case Process Settlement Nothing conclusive occurs until after last Public Input Hearing Complete Settlement Partial Settlement Stipulations 21

177 Rate Case Process Evidentiary Hearings: Party with Burden of Proof Opens Witness sworn in Presentation and Admission of Evidence Cross-Examination of Witness Motions to Strike/Admit Entry into the Record 22

178 Rate Case Process Briefs: Main Brief: Present Theory of the Case Legal Arguments with facts to support Reply Brief: Responsive Not an Opportunity for New Argument 23

179 Rate Case Process Recommended Decision: Prepared by Presiding Officer Identifies Record Evidence Offers Recommendation on Resolution of Contested Issues Presents Findings of Fact Presents Conclusions of Law 24

180 Exceptions: Rate Case Process Initial Exceptions: Parties may address findings in the Recommended Decision. Not used for argument not included in the Evidentiary Record. Reply Exceptions: Responsive 25

181 Rate Case Process Commission Order: Resolution of Filing Prior to end of seven month suspension 26

182 Rate Case Process Petition for Reconsideration: Must be Filed within 15 days of Commission Order Must raise new or novel argument or identify evidence not considered by Commission Answer to Petition must be filed in 10 days 27

183 Appeals: High Standard Rate Case Process Is the order supported by substantial record evidence? Error of law? Did the Commission act beyond its statutory authority? Is the Order arbitrary and capricious? 28