rate making process
TRANSCRIPT
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The Ratemaking ProcessThe Ratemaking Process
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MutualMutual
NeedsNeedsCustomerCustomer
NeedsNeeds
UtilityUtilityNeedsNeeds
Af fordabi li tyAf fordabi li ty
Maintain Li festyleMaintain LifestyleImprove EfficiencyImprove Efficiency
Reliable PowerReliable Power
Economic GrowthEconomic Growth
System UtilizationSystem Utilization
Financial PerformanceFinancial Performance
Provide Price Signals,Provide Price Signals,Provide CustomerProvide Customer
SupportSupport
Grow the BusinessGrow the Business
Topics to be DiscussedTopics to be Discussed
Ratemaking Process ElementsRatemaking Process Elements
Revenue Requirement (Cost of Service)Revenue Requirement (Cost of Service)
Allocated Cost of ServiceAllocated Cost of Service Rate DesignRate Design
Process of Establishing RatesProcess of Establishing Rates
Regulatory Filing requirementsRegulatory Filing requirements
Preparation of a Rate FilingPreparation of a Rate Filing
Processing of a Rate FilingProcessing of a Rate Filing
Utility TariffsUtility Tariffs
Rate SchedulesRate Schedules Service Rules and RegulationsService Rules and Regulations
The Balancing Act
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Utility Cost of Providing ServiceUtility Cost of Providing ServiceElectric System: Supply, Transmission and Distribution
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Revenue Requirement (Cost of Service)Revenue Requirement (Cost of Service)
Revenue
Requirement = Expenses + Cost of Capital
RR - is the total Revenue Requirement or the total cost of providing
utility service
E - is all Expenses allowed by the Commission for ratemaking purposes:
Energy Costs (recovered separately in Electric and
Natural Gas Trackers for NWE)
Operations, Maintenance, Administrative and General
Depreciation
Taxes
RB - is the allowed Rate Base, or net valuation of utility propertyserving the utility customers. It is determined by taking original
cost of utility plant in service less accumulated depreciation.
Rate Base is what drives Utility earnings. Need to maintain
and/or grow Rate Base.
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Revenue RequirementRevenue Requirement ContinuedContinued
r is the allowed return on Rate Base (as a percentage)
r(RB) is the composite Cost of the Capital (in dollars) used to finance the
Rate Base:
Rate of Return is not a guarantee, the Util ity is provided an
opportunity to earn!
Cost of Debt (i.e., Interest Costs)
Cost of Equity (i.e., Target Return onCommon Stock for Comparable Utili ties)
Capital Structure Actual vs. Hypothetical
Industry Norms Importance of Bonds Ratings
Revenue
Requirement = Expenses + Cost of Capital
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The Revenue RequirementThe Revenue Requirement
FormulaFormula
Lets look atLets look at EEE equalsE equals
Energy Expense:Energy Expense: typically includestypically includes the cost of the coal, oil,gas, nuclear fuel, etc. used to fuel electric generating plants,plus the entire cost of purchased power
plusplus
NonNon--Fuel Operating Expenses:Fuel Operating Expenses: all O&M, A&G, and otherexpenses to run the company
plusplus
Depreciation Expense:Depreciation Expense: the amount allowed in a given year
for recovery of prior capital expenditures (not the return oncapital investment)
plusplus
Taxes:Taxes: all property, payroll, income, and other taxes
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The Revenue RequirementThe Revenue Requirement
FormulaFormula
Lets look atLets look at rrr equalsr equals
cost of debt:cost of debt: the interest charged on the companys debtplusplus
cost of equity:cost of equity: the return allowed on common stock
NOTE:NOTE: r, the allowed return on RateBase, often is called the overall Rate ofReturn and designated ROR; the
authorized return on equity is oftencalled the rate of return orROE.
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The Revenue RequirementThe Revenue Requirement
FormulaFormula
Lets look atLets look at RBRBRB equalsRB equals
original cost of facilities (assets):original cost of facil ities (assets): the total capitalinvestment in plant and equipment used to provide utilityservice
minusminus
accumulated depreciation:accumulated depreciation: the amount of capital investmentalready recovered through depreciation expense
NOTE:NOTE: Rate Base should be aboutequal to the total amount of capital (i.e.,debt plus common stock equity) raisedby the company.
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The Revenue RequirementThe Revenue Requirement
FormulaFormula
Lets look atLets look at r(RB)r(RB)r(RB) equalsr(RB) equals
overall rate of return:overall rate of return: the cost of debt (i.e., interest) and theequity (i.e., ROE), in percentage terms
timestimes
net utility capital investment:net utility capital investment: financed by both debt and
equity
NOTE:NOTE: r(RB) is thecomposite cost of capital,composed of the cost of debt
plus the cost of equity.
Suppose a util itys RateBase of $250 mil lion is
financed by issuing $150mill ion of debt that pays10% interest and $100
million worth of commonstock for which the PSCallows a return of 15%.
What is r(RB)?
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The Revenue RequirementThe Revenue Requirement
FormulaFormula
Lets look at anLets look at an Income StatementIncome Statement
RRRR==
EE
++
r(RB)r(RB)
Income StatementIncome Statement
Revenue
equals
Expensesplus
Income
Income
Rate Base= Overall Earned Rate of Return
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Allocating the Utility Cost of ProvidingAllocating the Utility Cost of Providing
ServiceServiceElectric System: Supply, Transmission and Distribution
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Allocated Cost of ServiceAllocated Cost of Service
Customer Class Cost Classification
Detailed Accounting Costs
Functional Cost Allocation
Revenue Requirement (Cost of Service)
Customer Class Allocation
Energy
Demand
Customer
Energy
Demand
Customer
Energy
(Production
)
Transmission
Distributio
n
Customer
Residential
GeneralService
IndustrialEn
erg
(Pro
duction)
Transmission
Distribution
Customer
En
ergy
(Production)
Transmission
Distribution
Cus
tomer
Effect: ACOS analysis creates a hypothetical utili ty by customer class
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Rate DesignRate Design
Establishing RateEstablishing Rate
Structures to:Structures to: Recover Total RevenueRecover Total Revenue
RequirementRequirement Reflect Results of AllocatedReflect Results of Allocated
Cost of Service StudyCost of Service Study(Revenues = Costs)(Revenues = Costs)
Meet Rate Design Goals andMeet Rate Design Goals andObjectivesObjectives
Goals and ObjectivesGoals and Objectives
Rate/Revenue Stability (No RateRate/Revenue Stability (No RateShock)Shock)
Rate/Revenue Impact onRate/Revenue Impact onCustomersCustomers
UnderstandabilityUnderstandability
FairnessFairness
Feasibili ty of ApplicationFeasibility of Application
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Rate DesignRate Design
Class Revenue Requirement (from Allocated Cost of Service)Class Revenue Requirement (from Allocated Cost of Service)
Billing Statistics/Billing Determinants:Bill ing Statistics/Billing Determinants:
Number of CustomersNumber of Customers
Demand: KwDemand: Kw Electric/MDDQElectric/MDDQ GasGas
Energy (Commodity): KwhEnergy (Commodity): Kwh Electric/Mcf or MMbtuElectr ic/Mcf or MMbtu GasGas Components/Structures:Components/Structures:
Customer Charges (Fixed)Customer Charges (Fixed)
Demand (Fixed) ChargesDemand (Fixed) Charges
Energy (Commodity) ChargesEnergy (Commodity) Charges
Alternative Rate StructuresAlternative Rate Structures
Declining BlocksDeclining Blocks
Inclining BlocksInclining Blocks
Rate = Class Revenue Requirement dividedRate = Class Revenue Requirement divided
by Billing Statisticsby Bill ing Statistics
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Rate DesignRate Design Billing Impact andBilling Impact and
Rate ModerationRate ModerationCustomer Bill ing Impact:Customer Bill ing Impact:
Moderation of Billing Impact:Moderation of Billing Impact: Decrease in revenue requirement ofDecrease in revenue requirement of
one classone class necessitates increase tonecessitates increase toanother classanother class
Within classes: adjustment of one rateWithin classes: adjustment of one ratecomponent affects other ratecomponent affects other ratecomponent(s)component(s)
Revenue at Current Rates
Revenue at Current Rates minus Revenue at
Proposed Rates = % Bil lImpact
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Preparation of a FilingPreparation of a Filing
Commission Filing RequirementsCommission Filing Requirements By StatuteBy Statute Public Service Commission has formal rules underPublic Service Commission has formal rules under
which NorthWestern Energy prepares and submits ratewhich NorthWestern Energy prepares and submits rate
filingsfilings
Preparing FilingPreparing Filing Entire Company involved in preparation of testimony,Entire Company involved in preparation of testimony,
exhibits and workpapers required to file rate casesexhibits and workpapers required to file rate cases
Basis for FilingBasis for FilingAccounting RecordsAccounting Records
Historical Test PeriodHistorical Test Period
Satisfy Minimum Filing RequirementsSatisfy Minimum Filing Requirements
Rate ReliefRate Relief
InterimInterim
FinalFinal
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Process of a FilingProcess of a Filing
Company submits Filing to Public Service CommissionCompany submits Filing to Public Service Commission
Revenue Requirement FilingRevenue Requirement Filing -- NineNine--month Clockmonth Clock
Commission issues Notice of Filing and Opportunity for HearingCommission issues Notice of Filing and Opportunity for Hearing
PrePre
--Hearing Conference: Parties set Procedural ScheduleHearing Conference: Parties set Procedural Schedule
Discovery Data Requests by IntervenorsDiscovery Data Requests by Intervenors
IntervenorIntervenorTestimony (Supportive and/or Adversarial)Testimony (Support ive and/or Adversarial)
Discovery by NorthWestern EnergyDiscovery by NorthWestern Energy
NorthWestern Energy Rebuttal TestimonyNorthWestern Energy Rebuttal Testimony
Commission Technical HearingsCommission Technical Hearings Record for AppealRecord for Appeal
Party BriefsParty Briefs
Commission OrderCommission Order
Motion for ReconsiderationMotion for Reconsideration NorthWestern Energy Compliance FilingNorthWestern Energy Compliance Filing
New Rates become EffectiveNew Rates become Effective
Appeal to Court System based on Violation of LawAppeal to Court System based on Violation of Law
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Public Service Commission HearingPublic Service Commission Hearing
Commission
WitnessStand
NorthWestern
Energy
Montana
Consumer
Counsel
Main Street
Business Assoc.
Commission
Staff
Low-Income
Sr. Citizens
Large Industrial
Customers
Court
Repo
rter
Audience
Noticed PublicNoticed PublicHearingHearing
Formal ProcessFormal Process
CourtCourt--Like SettingLike Setting
Court ReporterCourt Reporter
LawyerLawyerRepresentationRepresentation
Technical in NatureTechnical in Nature
Develops Record forDevelops Record forDecisionDecision
Public TestimonyPublic Testimony
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Tariff Manuals and BillingTariff Manuals and Billing
Rate Schedules and Tariff Updates PublishedRate Schedules and Tariff Updates Published
Tariffs are Public Information Source for RatesTariffs are Public Information Source for Rates
and Regulations Governing Util ity Service:and Regulations Governing Util ity Service: Table of ContentsTable of Contents
Rate SchedulesRate Schedules
Service Rules and RegulationsService Rules and Regulations
Available Electronically onAvailable Electronically on
NorthWestern Energy WebsiteNorthWestern Energy Website
Bill ing System modified to useBill ing System modified to use
new rates to bill customersnew rates to bill customers
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What will drive future utility costs?What will drive future utility costs?What will drive future utility costs?
Electric UtilityElectric Utility
NorthWesternNorthWesterns Capital Requirements Landscapes Capital Requirements Landscape
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QuestionsQuestions
SummarySummarySummary
The Ratemaking Process is:
A Well Established Historical Process
Very Detailed and Technical
A Public (Utility) Process
A Balancing Act