The Importance of Rate Case “Fundamentals”

Sponsored by: Pauline Ahern, Executive Director, ScottMadden, Inc. ~ Written by: Eric Hanson, Managing Associate & Preston Fowler, Director, ScottMadden, Inc.

Pauline Ahern

Pauline Ahern

After a few years of declining rate case filings, the number of electric and gas utilities filing rate cases in 2016 increased significantly. This trend continued into 2017 as 63 rate cases (41 electric and 22 gas) were filed in the first quarter alone. In addition to these cases, another 21 electric and gas utilities have indicated they plan to file a rate case before the end of the calendar year. 2017 cases filed-to-date represent an aggregate requested increase of approximately $3.9 billion. Recovering the costs associated with constructing and/or replacing assets remains the primary reason for these requested increases.

However, many of the cases filed include efforts by utilities to seek policy changes to address emerging issues that are impacting the industry. Though the specific changes being pursued vary based on numerous factors, including the type of utility, geographic location, regulatory environment, existing asset base, etc., they typically include:

Eric Hanson

Eric Hanson

Modifications to traditional rate design to address stagnant/declining load growth and associated revenues, increased penetration of distributed energy resources (particularly solar), and other technologies that are impacting demand, rapidly transforming the grid (primarily on the distribution side), and slowly changing the utility business model.

Adaptation of traditional rate-making constructs toward performance-based ratemaking, multi-year rate cases, future test years, etc., to encourage utility investments in grid modernization, reduce regulatory lag, and promote customer-centric outcomes.

Transitioning the generation fleet from traditional centralized baseload plants (particularly older coal, oil, and in some instances nuclear) toward natural gas, renewables, and other more distributed and flexible generation assets that produce lower direct carbon emissions.

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Preston Fowler

Pursuit of pilot or experimental programs like battery storage, system-wide AMI deployment, and other technology deployments to improve operations and oversight at the distribution level.

Special riders targeting infrastructure replacement, particularly true for gas utilities to replace existing cast iron pipes and steel mains.

It is important to note that this list does not include any of the modifications to energy regulations that the Trump Administration has implemented either through Executive Order or proposed through legislative solutions. These modifications include repealing many of the regulations enacted under previous administrations, eliminating the production and/or investment tax credit for wind and solar resources, pre-empting state laws relating to renewable portfolio standards, and other policies that promote renewable resources, could have a significant impact on utilities. Given these potential impacts, it is a safe assumption that state regulatory commissions will continue to desire some degree of oversight, either through rate cases or other regulatory mechanisms, over how utilities will respond to potential changes in federal laws/regulations.

As a result, based on our experience, many utilities have or will soon be hitting the perfect storm when it comes to preparing and filing rate cases. Utilities will likely be filing rate cases more frequently, and the rate cases will be more complex. In many instances, the people preparing the rate cases may not have the necessary resources or skills. To overcome these obstacles, utilities will need to focus on the “fundamentals” to help ensure a favorable outcome

Focusing on the Fundamentals

Many of you probably remember your high school coach, whatever sport in which you participated, telling you to “focus on the fundamentals.” Improving the basic kicking, throwing, or catching skills applicable to your chosen sport was a precursor to winning games. Often in business, the American Football analogy of “blocking and tackling” is used to describe basic, simple, or mundane tasks associated with a larger effort. This characterization is unfortunate because anybody with knowledge of football understands that a team will not be successful (i.e., score a touchdown/field goal or stop an opponent from scoring) if it cannot block and tackle effectively. The need to focus on fundamentals is also true when filing a rate case. These fundamentals include:

  • Developing a comprehensive work plan and providing the necessary support to ensure adherence to the plan. The work plan typically involves thinking through all of the activities required to complete the rate case, and the dates by which they should be completed, including an appropriate timeline that provides adequate flexibility to allow for unexpected issues, supporting analysis, and legal and management review and approval;
  • Ensuring that strategic themes are formalized and agreed upon early in the case and approved by senior management. These themes could be pursued in the case or simply introduced in the case to lay the groundwork for discussion in a separate forum;
  • Determining which functional areas will be engaged in developing the rate case and ensuring that everyone understands their role/responsibilities and what is expected from them for the rate case;
  • Identifying the witnesses who will be responsible for writing direct testimony and ensuring that their testimony is tailored to address the strategic themes of the case. For newer witnesses, this often requires educating the individual(s) on the rate case process and providing assistance outlining and drafting testimony;
  • Establishing a process with which to manage the substantial amount of data and documents that are included in the rate case filing to ensure version control is maintained throughout the drafting, review, and approval process. While often overlooked, this should also include establishing an issues/actions/decisions log that tracks all outstanding issues as well as decisions that have been made to date; and
  • Setting a meeting cadence that ensures the multitude of individuals involved in developing the case are on the same page in terms of strategic themes, timelines/due dates, etc., and having a forum to discuss and resolve outstanding issues. This also includes establishing a process to ensure members of senior management are aware of the specific case components so they are able to think strategically about how the case could impact other parts of the business.

Why Is This Important?

Given all that utility personnel have on their plate during the rate case process, often times these “fundamentals” are overlooked. Unfortunately, failure to develop and adhere to a proper work plan, establish strategic priorities, clearly outline roles and responsibilities, keep everyone informed of progress through regular meetings, etc., can lead to significant difficulties later in the process. Having a team and process in place that will support the filing of the rate case in a timely manner is of significant importance to a utility. Given that the purpose of most rate case filings is to increase the revenue requirement, the faster and more complete a rate case can be filed, the faster it may move through the process, and, if approved, the faster the rate increase will be implemented. Filing a rate case that lacks sufficient detail(s) or contains analytical or logical errors, cannot be well argued, etc., creates the risk of a less favorable rate case outcome