Innovative Ratemaking Multiyear Rate Plans
This document: Discusses the current business and regulatory environment that is resulting in the increased use of innovative ratemaking techniques, including the consideration by some utilities and jurisdictions of a multiyear rate plan (MYRP) filing Provides an overview of the different MYRP approaches being utilized, including case studies in selected states and key takeaways from each approach Summarizes future trends regarding the use of MYRP filings Outline Current Environment Overview of Multiyear Rate Plans Case Studies Issues for Utilities Considering MYRPs Conclusions
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The current business environment is creating challenges for utilities Electric utility costs are increasing more rapidly than retail sales Utilities are actively modernizing and enhancing their delivery infrastructure Sales growth, which enabled utilities to finance new investments in the past, has not bounced back from pre-recession lows, and in some areas is declining
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- Current Environment
- Sources: SNL Financial; U.S. Energy Information Administration
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Traditional regulatory mechanisms are also impacting financial performance Regulatory lag makes timely cost recovery difficult Consistent under-earning impacts utility credit ratings, increases cost of capital, and may discourage needed investment Utilities have responded by filing rate cases more frequently, which leads to additional challenges Requires significant resources that could otherwise be used to run the business Contributes to increased uncertainty of revenues and ROE and puts upward pressure on financing costs Creates an additional burden and resource requirements for regulators and interveners
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- Current Environment (Contd)
- Electric utilities are struggling to earn their authorized return
- Median = 10.3%
- Median = 86.6%
- Sources: SNL Financial; Regulatory Research Associates
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In light of the challenges associated with traditional regulatory approaches, some utilities and public utility commissions are experimenting with alternative approaches Various methods have been introduced across many states including: Cost trackers Inclusion of construction work in progress (CWIP) in the rate base Revenue decoupling Forward test years Formula rates MYRPs
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- Current Environment (Contd)
- MYRPs represent one alternative regulatory approach to addressing the limitations of traditional regulatory mechanisms in the current business environment.
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Characteristics Originally utilized in the railroad, telecommunications, and oil pipeline industries Typically designed for a three- to five-year period Attrition relief mechanisms (ARMs) define annual rate escalations ARMs are usually capped either in terms of rates or total revenue Typical ARM designs include: Stairsteps predetermined increases in rates or revenues based on cost growth forecasts Indexing variable increases tied to an index like the CPI inflation rate Hybrids indexing for O&M and stairsteps for CapEx Additional provisions sometimes included in MYRP structure include: Cost trackers Earnings sharing mechanisms to distribute excess earnings between utility and customers (when allowed ROE is exceeded) Off-ramps to allow for plan suspension in the event of unusually high or low earnings Benefits Produces more predictable revenue stream and certainty for utility to make investments (reduces cost of capital) Reduces regulatory costs Incents utility to manage costs Enables utility to allocate resources to running the business rather than rate case administration
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17 states have implemented MYRPs in one form or another California and the states in the Northeast have the most experience with MYRPs Indexing is more common with distributors than with vertically integrated utilities MYRPs with rate freezes are most often accompanied by extensive supplemental funding through trackers
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- MYRP Adoption by State
- Source: Alternative Regulation for Evolving Utility Challenges: An Updated Survey, EEI, January 2013
- Recent U.S. Multiyear Rate Cap Precedents by State
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* Award levelized across three-year plan. Individual year increases calculated at $540.8M, $306.6M, $280.2M for 2010, 2011, 2012 Sources: New York State Public Service Commission; SNL
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Georgia Power Company
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- Sources: Georgia Public Service Commission; SNL
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Public Service Company of Colorado
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- Sources: Colorado Public Utilities Commission; SNL
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San Diego Gas & Electric
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- Case Study California:
- * ROE is settled in a separate proceeding in California Sources: California Public Utilities Commission; SNL
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Legislation Leads to Commission Order Minnesota legislature authorized the commission to approve MYRPs in 2011 with Minn. Stat. 216B.16, subd. 19 Commission solicited and received comments on appropriate terms and conditions for MYRPs Commission met to consider the motion on April 4, 2013 Final order issued June 17, 2013 (Docket No. E,G-999/M-12-587) Benefits and concerns associated with MYRPs (as noted in the order): The commissions goal is to permit plans that generate sufficient benefits to outweigh concerns and justify the burdens of plan administration
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- Minnesota PUC Authorizes MYRPs
- Case Study Minnesota:
- Source: Order Establishing Terms, Conditions, and Procedures for Multiyear Rate Plans: MNPUC, June 17, 2013
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The following table summarizes the outcome of MPUC deliberations on the various parameters of MYRPs under consideration:
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- Key Structural Decisions
- Case Study Minnesota:
- Source: Order Establishing Terms, Conditions, and Procedures for Multiyear Rate Plans: MNPUC, June 17, 2013
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Key Structural Decisions (Contd)
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- Case Study Minnesota:
- Source: Order Establishing Terms, Conditions, and Procedures for Multiyear Rate Plans: MNPUC, June 17, 2013
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Additional scrutiny MYRPs involve setting rates based on planned capital expenditures rather than reimbursing investments already made. Therefore, utilities must be prepared to provide more detailed information than what has been required in the past Budgeting and project management skills Utilities must be able to show that investments were made according to the plan submitted at the time of the filing. Failure to adhere to the plan may result in refunds or other costly regulatory issues. Ability to budget properly and execute projects to plan is critical with MYRPs Project selection Determining which projects to include in the plan can be challenging. Utilities should consider: Size of projects (impact on revenue requirement) Execution risk associated with projects (scope, schedule, and budget) Compliance Compliance mechanisms will play a significant role in whether a MYRP is the best solution for a utility Some specific issues that must be addressed include: Threshold for determining rate refunds Aggregate versus project-by-project approach Internal surveillance Reporting mechanisms
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- Issues for Utilities Considering MYRPs
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We believe the use of MYRPs will continue to grow as utilities and commissions work to overcome the limitations of traditional ratemaking in order to balance the needs of the ratepayers and shareholders with the realities of operating and maintaining a safe, reliable, and sustainable power delivery system Business as usual is not sustainable in the current business environment MYRPs provide a promising strategy for addressing some of the regulatory challenges facing the industry Additional scrutiny associated with MYRPs means utilities will have to improve their budgeting and project management practices in order to be compliant and successfully earn the maximum allowable rate of return The success of early adopters will influence the direction of ratemaking across the countryutilities and commissions will be watching closely
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- Conclusions
- Alternative regulatory mechanisms are in the early stages of development, and utilities have an opportunity to help shape the regulatory construct going forward.
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Contact Us
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- ScottMadden has helped several utilities develop the tools necessary to successfully develop and defend a multiyear rate plan filing. Please let us show you how we can help.
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