The revenue requirement determines how much money a regulated utility is allowed to collect from its customers to recover its cost of providing service. In this context, the cost of service reflects:

• The investment in the facilities that are prudent and used and useful in providing utility service (or rate base);
• A reasonable return (which reflects the cost of debt, preferred stock and common equity) on the capital that funds the rate base; and
• Reasonable and necessary operating expenses.

The objective is to provide sufficient revenues to allow the utility to maintain reliable service at the lowest reasonable cost. The challenge is to balance the interests of the utility with the interests of the customers. Having participated in hundreds of rate cases, J. Pollock has the expertise in regulatory accounting and finance and is well versed in the various constructs and precedents governing the revenue requirement determination.

Knowing and understanding the rules and regulations imposed in both regulated and competitive markets is important to your business. Regulators are focusing much more attention on compliance with their rules and reporting requirements. Failure to comply can result in substantial penalties. For example, the FERC now has authority to impose fines up to $1 million per day, with each day being considered a new violation. This makes it absolutely essential to be aware and keep well apprised of all applicable regulatory reporting requirements. J. Pollock can provide timely advice and assist you in taking the necessary steps to remain compliant with the requirements of various regulatory commissions and market operators.

Cost-of-service studies are one of the most important tools in setting both the level and structure of the rates charged by utilities for energy and delivery services. A cost study measures the cost of serving (or revenue required from) each class of service provided by a utility (residential, commercial, industrial, and wholesale). The principles for allocating costs have been well developed and generally follow utility engineering and economics. However, regulators may be presented with a variety of different allocation theories, which can potentially shift millions of dollars of costs to your class, thereby increasing your rates. For this reason, it is important to hire an advocate who can credibly and effectively defend your interests, thereby mitigating the potential cost shift. J. Pollock understands all aspects of cost-of-service studies. We have the necessary tools and the track record to effectively analyze and critique studies filed by other participants, while advocating an approach that is consistent with cost-causation and accepted industry practice.

Unbundled Costs & Rates

The unbundling of utility services and rates is a prerequisite to allowing customers to choose a generation provider. We have participated in numerous rule makings and delivery rate cases both during and after customer choice. Coupled with our extensive experience with bundled cost-of-service studies and rate designs, J. Pollock is a strong proponent of cost-based delivery rates so that regulated transmission and delivery services do not subsidize competitive energy services.

Rate Design determines what customers taking service on a specific rate pay for utility services. The first step is to determine the revenues that must be recovered from each rate. A class cost-of-service study is the primary tool for making this determination. The second step is to design the actual charges. These charges might include:

• Customer or Basic Charge, which is a flat amount per month;
• Demand Charge, which is based on peak consumption levels for customers equipped with meters that measure real time energy usage;
• Energy Charge, which applies to the total amount of energy used during the billing period.

In addition to the above, the rates might also include various cost recovery factors, a penalty/credit for low/high power factor, and a facilities charge for any investment or other services provided by the utility that are specifically applicable to the location.

The sum of the base rate charges and the other charges will produce the individual customer's monthly bill. J. Pollock has evaluated and proposed numerous Rate Designs for a wide range of utility services.

Standby Rates

Customers who use on-site generation may need standby power when the capacity is idled due to either scheduled or forced outages. Current regulations require that each utility provide just and reasonable rates for providing standby service (except in organized competitive markets where such rates are negotiable). Properly designed rates should reflect the more diverse and, in the case of scheduled maintenance, off-peak nature of standby service. J. Pollock assists self-generating customers to qualify for and obtain standby service. Our knowledge of utility cost of service studies and tariff terms and conditions allows us to advocate fair and reasonable cost-based standby rates.

Open Access Transmission

The key to obtaining competitive electric generation service is having nondiscriminatory access to the utility transmission system. Pricing and terms and conditions are governed under the open access transmission tariffs or OATT. A typical OATT is hundreds of pages long and contains detailed procedures for obtaining and paying for various types of transmission service, ancillary services and congestion. This includes procedures for customer funding of system upgrades to accommodate transmission service requests. In organized competitive wholesale markets, the OATT also specifies detailed market rules (or protocols) and administrative fees. The OATT is a highly complex and controversial tariff, particularly with respect to pricing, scheduling, imbalance energy, determining available transmission capacity and participant funding. J. Pollock is familiar with the OATT and its many problems and can provide insight critical to procuring competitive generation.

A primary role of regulators is to provide a “surrogate” for competition. Just as competitive firms would not recover imprudent and unreasonable costs from their customers, utilities are similarly prevented from recovering costs that are not prudent, reasonable and necessary in rates.

Prudence means determining whether a utility has made appropriate decisions consistent with the then-available facts and information and that it has properly implemented those decisions. For example, an electric utility that invests $1 billion for new capacity based on a 6% per year growth in peak demand might be found to be imprudent because the projected load was based on unrealistic assumptions or did not consider legitimate alternatives (e.g., conservation, load management, purchased power). A related determination is whether an investment is “used and useful.” An investment is used if it is needed to provide safe and reliable service. Just because an investment is used does not mean that it is also useful. For example, spending $1 billion to construct a new power plant that could have been built for $500 million, even if the capacity is needed, the excess cost is not useful.

Reasonableness means that a particular cost is no higher than a similar cost incurred by others under similar circumstances. For example, a utility is charged $10 million of expenses from an affiliate for a customer billing system. However, if the same functionality could have been outsourced to a third party for $8 million, the extra $2 million would not be considered reasonable.

A necessary cost is one that is incurred because it is needed to allow the utility to fulfill its obligation to provide reliable service at the lowest reasonable cost.

Performance-Based Rates

Regulated utilities are constantly seeking opportunities to boost their authorized earnings. Their primary tactic has been to convince regulators to replace traditional rate cases with "performance-based rates" (PBR). Sometimes referred to as “incentive ratemaking,” PBR can take many forms, ranging from simple earnings tests to mechanisms that directly measure utility performance in certain areas (service quality, customer service, generation unit performance). More recently, PBR has been implemented to induce utilities to invest in needed transmission plants, to join regional transmission organizations and to support energy efficiency. The latter form of PBR is also referred to as “revenue decoupling.” The challenge with PBR is to ensure that utilities are still required to minimize costs and make prudent decisions as a prerequisite to having the opportunity to earn a reasonable return. With substantial experience in the design and setting of utility rates, J. Pollock is familiar with the many variations of and flaws with specific PBR mechanisms that disadvantage customers.

Resource Planning

Decisions about future supply will have potentially significant impacts on energy reliability and price. A utility that fails to consider demand-response or is too reliant on a specific fuel, resource technology or procurement strategy is not engaged in a robust enough planning process to ensure just and reasonable rates in the future. Utilities are also seeking regulatory “pre-approval” of major construction projects, which may force consumers to bear risks that should be borne by shareholders. Having participated in numerous integrated resource plans and certificate-of-need applications, J. Pollock is well qualified to advise clients on the need for and appropriateness of planned resource additions and to provide insight essential to conducting Market Assessments, Price Forecasts, and Price Surveys.

Rulemaking

Rate cases are but one of many regulatory proceedings that can affect your energy costs. Regulators also engage in rulemaking to establish policies and procedures on specific generic rate-setting issues that will affect future energy rates. With our depth of regulatory experience, J. Pollock can provide the guidance essential to establishing fair and reasonable rules and policies.

Streamlined Regulation

Recent developments in the industry are posing formidable challenges for consumers. Utilities are proposing to alter the regulatory compact through strategies that reduce regulatory lag. Their preferred strategy is to implement riders that allow recovery of changes in costs without the need for rate cases. This strategy is widely characterized as "single-issue" or "piecemeal" ratemaking. Facing ever-shrinking budgets and corresponding staffing constraints, regulators are increasingly receptive to fewer and less-frequent rate cases. The consequence of these growing constraints is less regulatory oversight in general (e.g., to appropriately monitor utility earnings) and diminished capacity to be fully engaged in the (fewer) rate cases that are filed. These activities are essential to ensuring just and reasonable rates. The challenges for consumers are to ensure that streamlined regulation:

• Employs proper ratemaking practices;
• Does not unfairly shift the balance of risks shared between the utilities and their customers; and
• Results in rates that are just and reasonable while incentivizing the utility to provide safe and reliable service at the lowest reasonable cost to consumers.

These challenges are more fully discussed in J. Pollock’s article “STREAMLINED RATEMAKING: RECOGNIZING CHALLENGES FOR CONSUMERS,” published in the November, 2010 edition of the Electricity Journal.

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