USA Law and Practice Contributed by: David P. Flynn, Lindsey E. Haubenreich, Thomas F. Puchner and Dennis W. Elsenbeck, Phillips Lytle LLP
Generally, the rate-making process is designed to balance the utility company’s opportunity to earn a fair return on its investments and the customer’s interest in receiving a safe, reliable service at just and reasonable rates. State Utility Commission For utilities with rates that are regulated by a state utility commission, rates are generally set through regulatory proceedings following sub- mission of a request to increase base rates, along with written supporting testimony and evidence. The state utility commission, along with interested parties that seek to intervene, may propound interrogatories and/or requests for information on the utility, and vice versa. Generally, parties will brief their positions, and the rate case may settle if a sufficient number of parties agree to a joint settlement, or the case may proceed to formal hearings. In most states, the utility rate case documents are posted on a public docketing database, unless they are confidential or protected pursu- ant to state regulations and state utility commis- sion rules. The process, frequency, duration and timeframe for rate cases depend on the state in which the distribution facility is located and the utility tariffs sought to be modified, but the pro- cess generally ranges from eight to 12 months and results in an order covering one or more years. Cost-of-Service Regulatory Model Most states operate under a cost-of-service reg- ulatory model whereby the regulator determines the utility’s revenue requirement that reflects
the total amount that must be collected from customers in rates for the utility to recover its reasonable and necessary expenses, as well as to earn a reasonable return on investment. The revenue requirement is generally derived from a formula that accounts for the utility’s rate base, a fair rate of return, operating costs, depreciation expenses, taxes and other costs. The treatment of electricity supply, among other items, will vary depending on the degree to which states have restructured their electricity market. While states may have different approaches to calculating a rate of return, the rate should be sufficient to maintain the financial integrity of the utility, enable the attraction of additional capital and be equal to that earned by other companies with comparable risk profiles. Depreciation rates are approved by state utility commissions upon review and consideration of depreciation stud- ies, which are generally performed by deprecia- tion consultants and supported with expert tes- timony in rate case proceedings. Some states have adopted alternative rate-making meth- odologies that are focused on incremental rate recovery, performance-based metrics and other adjustment mechanisms that vary by state. Reconsideration of Utility Rates Following issuance of a formal ruling or order on a utility’s rate request, a utility or interested party may request a rehearing or reconsideration depending on state law and regulation. Once a final agency determination has been reached and all administrative remedies have been exhausted, an entity may appeal the decision to the applicable state court for judicial review.
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