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