THE RATE CASE PROCESS

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THE RATE CASE PROCESS

• A Blend of Science and SuperstitionPresentation
  to the Mongolian Energy Regulatory Board
• By Burl Haar
• Executive Secretary
• Minnesota Public Utilities Commission
• September 30 - October 2, 2002
• Ulaanbaatar, Mongolia

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RATE PROCEEDINGS

• Regulatory tool to evaluate major rate changes
• General Rate Case - Most comprehensive tool for
  determining just
  and reasonable rates
• Review of all company revenues and costs.
• There must be a showing that the overall level of
  rates is too low or too high.
• Company bears the burden of proof that rate
  request is reasonable.
• Commission will suspend rate change until final
  decision reached. May allow interim rates.

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RATE MAKING PROCESS

• Three important perspectives
• 1. Consumers interest - Obtain quality service
  at the lowest rate
• 2. Utilitys interest - Obtain sufficient
  revenues and profits to attract investments and
  support efficient operations
• 3. Public interest - What is needed to provide
  the greatest benefit for the community as a
  whole.
• Provide safe, adequate and reliable service at
  just and reasonable rates
• Role of Regulatory Commission - act as an umpire.
  

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GENERAL CONTENT OF A RATE CASE

• 1. Historical information
• 2. Rate Tariff material
• 3. Rate Base material
• 4. Operating statistics
• 5. Economic factors

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OVERALL OBJECTIVES OF THE RATE-MAKING PROCESS

• 1. DETERMINING THE LEVEL OF REVENUES (REVENUE
  REQUIREMENT RATE BASE)
• 2. DETERMINING HOW REVENUES WILL BE
• COLLECTED (RATE DESIGN)

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LEVEL OF REVENUES - REVENUE REQUIREMENT

• COMPONENTS OF REVENUE REQUIREMENT
• Operating Expenses - expenses related to the
  utilitys operation
• Depreciation Expenses - charges to reflect the
  loss in value of assets due to physical causes,
  functional causes and contingent casualties.
• Taxes - taxes paid by the utility on earned
  income, gross receipts, franchise fees, capital
  stock, and unemployment and social security taxes
  on employees.
• Allowed Return (Rate base X Rate of Return)
• Rate Base - The value of utility plant used and
  useful in providing utility service minus
  accumulated depreciation
• Rate of return - Allowed return to investors
  stated as a percentage of profit per dollar
  invested.

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LEVEL OF REVENUES - RATE OF RETURN

• Rate of return determined by evaluating return
  of companies with comparable business risk, rate
  of inflation, overall growth in dividends,
  unusual business risks, etc. Subjective
  decision.
• Authorized rate of return not a guaranteed rate
  of return.

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HOW REVENUES WILL BE COLLECTED - RATE DESIGN

• Two major decisions
• How to allocate authorized costs among
  customer classes.
• How to design rates within customer classes to
  assure reasonably revenue recovery, efficient
  energy use and equitable treatment of
  ratepayers.

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RATE DESIGN CONTINUUM

• Differential pricing
• Distribution of rates on the basis of different
  characteristics of service cost and usage.

One set of rates for all customers
Individual price for each customer
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DIFFERENTIAL RATE-MAKING - THE UNITED STATES
ELECTRIC UTILITY INDUSTRY (Year 2000)
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RATE DESIGN DECISION-MAKING CRITERIA

• Criteria for rate design decision-making
• Cost of service
• Value of service
• Avoidance of unreasonable discrimination
• Rate structure continuity
• Appropriate rate relationship
• Ease of understanding and administration
• Customer impact
• Competitive impact
• Incentives for efficient use of service

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TYPES OF COSTS BY CLASSIFICATION

• There are several broad classifications of costs
• Customer costs - the fixed costs incurred in
  serving each customer (e.g., meter reading,
  billing, collecting, etc.). Allocated by number
  of customers.
• Energy costs - the variable costs connected with
  plant operation (e.g., plant expenses and fuel).
  Allocated according to usage.
• Demand costs - the costs related to the
  investment in plant and facilities needed to meet
  a customer and class of customers demand on the
  systems total capacity to serve. These are
  mostly fixed costs covering such items as
  interest on funds borrowed to build plant,
  depreciation, returns on equity capital.
  Allocated according to relative demand on system
  capacity.
• Common costs - Costs of capacity necessary for
  production but not directly associated with the
  number of customers, energy usage, service on
  system peak, or administrative functions.

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NON-COST FACTORS

• Simplicity, understandability, public
  acceptability, and feasibility of application
• Stability i.e., avoiding rate shock
• Fairness - value of service
• Avoidance of undue discrimination in rate
  relationships

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RATE STRUCTURES

• Rate Design has evolved over the years
• Meter Rates
• Step Rates
• Block Rates
• Declining Block Rates
• Inverted Block Rates
• Two-part Rates

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RATE - MAKING

• Final Comment The difference between
  reasonable rates and unreasonable rates is
  not absolutely clear. What is needed is a
  deliberate and open process for examining all the
  factors that affect rates. Through such a
  process the distinction between reasonable and
  unreasonable will become clearer.