determining and setting public utility rates bill wilks, senior project manager november 19, 2014...
TRANSCRIPT
Determining and Setting Public Utility RatesBill Wilks, Senior Project Manager
November 19, 2014
AGFOA Fall Conference
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Determining and Setting Public Utility Rates
Agenda1. Why rate studies are important2. Elements necessary to have a successful rate study3. Regulated vs. non-regulated public utility setting rates– Economic regulations by the Regulatory Commission of
Alaska vs. rates set by the local city government4. Three primary rate cost studies used to set utility rates 5. Why public involvement is important from beginning
to end
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Helps to maintain the long-term health and integrity of the utility system
Quantifies policies, priorities, and initiatives
Tells the “true” cost of providing service
Tracks cost information
Evaluates equity between customer groups
Communicates financial decisions and their impact
Management tool
Why Are Rate Studies Important?
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A Successful Rate Study is…
A blend of information and expertise from ALL departments: – Finance– Engineering– Customer Service– IT Service– Administration
NOT SIMPLY A FINANCIAL EXERCISE
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Key Question
Who sets your utility rates?– State Regulatory Commission? • Then your utility is economically regulated• Requires a completely different process of rate approval over
non-economically regulated utility
– Local Assembly/City Council?• Then your utility is not economically regulated
– Hybrid: Commission; then Administration; then Assembly; then state regulatory commission?
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Regulated vs. Non-Regulated Utilities
Regulated Utility– Historical Test Year– Adjusted using pro-forma adjustments
• Pro-forma adjustments must meet “known and measureable standard”
• Adjustments must be synchronized– Revenue requirement
• Operating expenses (includes depreciation on non-contributed plant)
• Return requirement – factor applied to rate base to recover cost to debt and equity
Non-Regulated Utility– Prospective Test Year– Adjustments using inflation factors
• Known and measureable standard does not exist.
• Adjustments must still be synchronized
– Revenue requirement• Operating expenses – system
reinvestment and debt • Return requirement non-existent
Compare and Contrast:
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Regulated Utilities Overview
In Alaska, must follow the Alaska Administrative Code to change rates:– 3 AAC 48.275(a) Supporting information required to file a request for rate relief– When filed, gets noticed to public– Sets schedule for determining utility request
• 45 days for RCA staff Review• If suspended then RCA opens a docket• RCA ask for interested parties to intervene• Sets a schedule that lasts 450 days before a final order is issued on utility request
for rate relief– Discovery; responsive testimony from interveners; discovery 2nd round; reply testimony;
discovery 3rd round; hearing
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Key Rate Study Steps
Your needs and objectives determine the steps to complete!
Sensitivities & PrioritiesSetting the Stage
Fiscal PoliciesEstablishing Study Foundation
Revenue Needs Assessment Forecasting Costs & Revenues
Public EducationFostering Understanding &
Acceptance
Cost of Service AnalysisEvaluating Customer Equity
Rate Structure DesignCollecting the Target Revenue
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Establishing Sensitivities and PrioritiesLess/No More/Yes
Growth pays for growth?
Renewal and replacement funding?
Expand existing discount programs?
Smooth rate impacts over time?
Phase-in COS impacts?
Level of debt funding?
Continue conservation?
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Basis for financial performance and budgeting Plan for weathering financial disruptions Foundation for consistent financial/rate decisions Documentation of management philosophy – To customers and outside financial community
Documentation of Policies Ideal
Role of Financial Policies
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Multi-year financial plan
Determines the amount of revenue necessary to meet all utility financial obligations
Evaluates sufficiency of current rates on a stand-alone basis
Develops annual rate implementation strategy
Role of a Revenue Requirement Analysis
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Revenue Requirement Elements
Fiscal Policy Achievement
Existing & New Debt Service
Forecast of Revenue at
Existing Rates
Forecast of O&M Costs
Planned Capital Costs
Annual Revenue
Requirement
=
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Two Key Cost Areas
Operations & Maintenance Capital Infrastructure Regular, ongoing activities Highly time & schedule
sensitive Predicable, steady spending
patterns Predictable, regular funding
source
Large, discrete projects Limited time, schedule
sensitivity Long-term in nature Inconsistent, varied
spending patterns Inconsistent, varied funding
sources
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Cost of service indicates how the rate adjustment will be equitably distributed among customer classes
Cost allocations are based on…
– Industry standard methodologies
– Unique usage characteristics (use and demands)
– Unique facility requirements (planning and design criteria)
Cost of Service = Equity Evaluation
Single Family 3,740,000$ 4,014,516$ 274,516$ 7.3%Multi-Family 1,700,000 1,893,800 193,800 11.4%Commercial 1,360,000 1,571,684 211,684 15.6%
Total 6,800,000$ 7,480,000$ 680,000$ 10.0%
ClassExisting Revenue
2014 COSA $ Difference % Difference
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Creation of rate structures that recover the target level of revenue
Primary communication with customers
Composed of fixed and/or variable charges
Considerations:– Equity of rates– Complexity of rates (understandable & implementable)– Rate impacts– Revenue stability and predictability– Social objectives (affordability, economic development, conservation, etc.)
Rate Design = Revenue Collection
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Public Education/Communication Greater public scrutiny requires public engagement, education and
transparency
Multiple options available
– Dedicated website
– Open house
– Traveling public meetings
– Rate committee
– Radio/television interviews
– Bill calculators
– Frequently asked questions
– Newsletters
– Bill stuffers/notices
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Determining and Setting Public Utility Rates
Questions?
