2016 Annual Rate Case Survey

Deck: 

It is often said that ratemaking is as much art as science.

It is often said that ratemaking is as much art as science.

Fortnightly Magazine - November 2016
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It is often said that ratemaking is as much art as science. That is particularly true in setting the return on equity component of a utility’s revenue requirement.

In this, our annual survey of utility rate cases, we give readers a glimpse into the results of this process as conducted by state utility regulators across the country. The table reports several categories of basic data drawn from electric and natural gas base rate decisions issued during the past year. There is a special emphasis on the rate component that reflects the allowed rate of return on common equity capital.  See Figure 1 - Return on Equity in PDF format.

Figures and statistics tell part of the story. But it is the process of setting a return on equity that is fair to both shareholders and consumers that demonstrates the art and science practiced by regulators.

Figure 1 - 2016 Rate Case Study

One case reported here provides a good glimpse at the entire range of issues put before regulators. And how they assess the entire record to settle on a single return on equity figure to use in determining a utility’s revenue requirement.

The featured case is a decision by the Michigan Public Service Commission setting electric rates for Consumers Power Company. The suggested return on equity presented by the witnesses ranged from a low of 9.6 percent to a high of 10.7 percent.

The commission had before it the usual testimony regarding financial modelling, presented in support of each party’s estimate of the return on equity required, in order to attract an adequate level of capital.

Such modelling included proxy group recommendations, stock market performance data, bond rating data, and Treasury bond yield risk premium analyses. However, what was particularly notable was the broad range of more subjective types of evidence that could bear on an investor’s decision on whether to purchase utility stock.

The utility and other parties to the case spent considerable effort developing testimony detailing a wide range of seemingly subjective opinions, as to which factors investors think about, when deciding where to put their money.

Consumers Power presented technical evidence at the outset to support its request for a return on equity of 10.7 percent. But it also advanced a fail-safe position later in the case, after an administrative law judge had issued a proposed ruling to recommend a lower figure of 10.0 percent.

That fail-safe position asked the commission to recognize that investors would likely expect that the 10.3 percent figure approved by the commission in its most recent rate proceeding would continue in effect.

The utility argued that even though its models showed that investors should want a higher rate, 10.3 percent was still the minimum rate that investors would accept. This, considering the need for

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