Electric Ratemaking in Texasaect.net/documents/2017/AECT Ratemaking 2017.pdfcustomer growth,...

21
Legislative Advertising Paid For by: Julia RaTHGEBER, Association of Electric Companies of Texas 1005 Congress, Suite 600, Austin, TX 78701 • 512-474-6725 • www.aect.net 2017 Electric Ratemaking in Texas

Transcript of Electric Ratemaking in Texasaect.net/documents/2017/AECT Ratemaking 2017.pdfcustomer growth,...

Page 1: Electric Ratemaking in Texasaect.net/documents/2017/AECT Ratemaking 2017.pdfcustomer growth, regulatory requirements and specific public policy goals set by elected officials Newest

Legislative Advertising Paid For by: Julia RaTHGEBER, Association of Electric Companies of Texas

1005 Congress, Suite 600, Austin, TX 78701 • 512-474-6725 • www.aect.net

2017

Electric Ratemaking in Texas

Page 2: Electric Ratemaking in Texasaect.net/documents/2017/AECT Ratemaking 2017.pdfcustomer growth, regulatory requirements and specific public policy goals set by elected officials Newest

Transmission & Distribution Utilities

AECT Utilities within ERCOT

www.aect.net (512) 474-6725

2

Total ERCOT Capacity:

>77,000 MW

Page 3: Electric Ratemaking in Texasaect.net/documents/2017/AECT Ratemaking 2017.pdfcustomer growth, regulatory requirements and specific public policy goals set by elected officials Newest

Western Electricity Coordinating Council (WECC)

Midcontinent Independent System Operator (MISO)

Southwest Power Pool (SPP)

AECT Companies Outside of ERCOT

www.aect.net (512) 474-6725

3

Total ERCOT Capacity:

>77,000 MW

Page 4: Electric Ratemaking in Texasaect.net/documents/2017/AECT Ratemaking 2017.pdfcustomer growth, regulatory requirements and specific public policy goals set by elected officials Newest

Steps to Electric Competition in Texas

www.aect.net (512) 474-6725

4

Wholesale competition legislation passed (SB 373)

May1995

Jan.2002

Retailcompetition legislationPassed (SB 7)

June 1999

Sept. 1999

ERCOT Electric rates frozen

Jan. 2005

July 2001

Texas Choice pilot program begins

Affiliate REPs allowed to offer non-price-to-beat prices

Retail choice begins in ERCOT

Jan. 2007

End of price-to-beat

Page 5: Electric Ratemaking in Texasaect.net/documents/2017/AECT Ratemaking 2017.pdfcustomer growth, regulatory requirements and specific public policy goals set by elected officials Newest

ERCOT: Separate Companies Provide Retail, Transmission & Distribution and Generation Services

www.aect.net (512) 474-6725

5

• In competitive markets, consumers have multiple retail electric providers (REPs) and service plans to choose from.

• Wholesale and retail prices are set by competitive market forces, while the PUC sets transmission and distribution rates.

Power FlowFinancial Flow

Regulated

Page 6: Electric Ratemaking in Texasaect.net/documents/2017/AECT Ratemaking 2017.pdfcustomer growth, regulatory requirements and specific public policy goals set by elected officials Newest

Outside ERCOT: A Single Utility Provides Retail, Transmission & Distribution and Generation Services In Each Area

www.aect.net (512) 474-6725

6

• In fully regulated markets, the PUC sets retail rates charged to end-use customers.• Each of service area is part of a multi-state electric grid, with differing regulations. In

many cases, vertically integrated utilities purchase wholesale power from certain unregulated entities.

Power FlowFinancial Flow

Regulated

Page 7: Electric Ratemaking in Texasaect.net/documents/2017/AECT Ratemaking 2017.pdfcustomer growth, regulatory requirements and specific public policy goals set by elected officials Newest

The Regulatory Compact

www.aect.net (512) 474-6725

7

The basic purpose of utility rate regulation is to balance the needs of the consumer and the reliability of the utility

– Utilities are required to serve all customers in their territory

– In exchange, the utility is allowed to retain their territorial monopoly and earn a limited profit, which is regulated by the PUC

– The PUC has historically set prices at rates that reflect the cost of building and maintaining infrastructure, plus administrative costs and expenses that reflect policy decisions made by the state

Page 8: Electric Ratemaking in Texasaect.net/documents/2017/AECT Ratemaking 2017.pdfcustomer growth, regulatory requirements and specific public policy goals set by elected officials Newest

Continued Transmission & Distribution and Generation Investment Needed Long-Term

www.aect.net (512) 474-6725

8

• According to the Texas State Data Center, 5 million new residents are expected in Texas by 2020.

• New generation must be delivered effectively and efficiently to population centers of the state.

• Though not shown here, areas of Texas located outside the ERCOT grid are also growing, both in terms of population and economic development.

Source: ERCOT, “Report on Existing and Potential Electric System Constraints and Needs,” January 2012 (most recent update)

Page 9: Electric Ratemaking in Texasaect.net/documents/2017/AECT Ratemaking 2017.pdfcustomer growth, regulatory requirements and specific public policy goals set by elected officials Newest

Two Basic Components of the Rate case

www.aect.net (512) 474-6725

9

Determination of Revenue RequirementsThe amount of gross revenues needed by a utility to cover its operating expenses, depreciation, taxes and other expenses

Determination of Rate StructureThe rates paid by each customer class to provide the necessary revenue as determined in the revenue requirements

1.

2.

Page 10: Electric Ratemaking in Texasaect.net/documents/2017/AECT Ratemaking 2017.pdfcustomer growth, regulatory requirements and specific public policy goals set by elected officials Newest

Statutory Timeline of a Rate Case

www.aect.net (512) 474-6725

10

Day 1 Day 185Day 35 Day 135

Utility files a statement of intent to file a rate case with Original Jurisdiction authorities (either its cities or the PUC). Original Jurisdiction authorities also have the authority to demand the utility file a rate case.

After the rate case is filed, the PUC may suspend the effective date of proposed rates by an additional 150 days beyond the notification period

After filing the rate case, PUC Staff, cities, affected ratepayer groups and OPUC may intervene and begin sending discovery requests to the utility.

• Rate cases are almost always referred to SOAH, where an ALJ establishes a procedural schedule to allow the PUC to decide the case before the deadline.

• Intervenors then file written testimony on the rate application. • The utility may then file testimony rebutting intervenor testimony.• About 70% of rate cases are settled without a hearing. If a hearing occurs, it’s

normally around 100 days after filing.• The ALJ will issue a proposed order (if no hearing) or a proposal for decision (if

contested) and refer the case back to the PUC.

The PUC must approve or deny the case by day 185, or the case is deemed approved. The utility may voluntarily extend the timeline.

Page 11: Electric Ratemaking in Texasaect.net/documents/2017/AECT Ratemaking 2017.pdfcustomer growth, regulatory requirements and specific public policy goals set by elected officials Newest

Determination of Revenue Requirements

11

Page 12: Electric Ratemaking in Texasaect.net/documents/2017/AECT Ratemaking 2017.pdfcustomer growth, regulatory requirements and specific public policy goals set by elected officials Newest

Determination of Revenue Requirements

www.aect.net (512) 474-6725

12

Operating Expenses include only those expenses the utility has incurred to provide the regulated services.

Depreciation – the loss of asset value over time due to wear and tear -- is separated from the net book value, and thus not multiplied by the rate of return described below.

Net Book Value of the utility’s capital assets includes those capital assets used by the firm specifically to provide the regulated service.

Rate of Return is the post-tax rate of return the utility is permitted to earn. It is based on a weighted average of the cost of debt and equity financing.

Revenue Requirement

Operating Expenses

Depreciation

Taxes

Net Book Value X

Rate of Return

+

+

+

=

Page 13: Electric Ratemaking in Texasaect.net/documents/2017/AECT Ratemaking 2017.pdfcustomer growth, regulatory requirements and specific public policy goals set by elected officials Newest

Determination of Revenue Requirements: Guiding Concepts

www.aect.net (512) 474-6725

13

o Public Interest: Regulators should take a long-term view to ensure appropriate prices and reliability of the system by considering service as well as price.

o Used and Useful: Assets must be deemed necessary or beneficial to the provision of utility service.

o Just and Reasonable: The PUC may take into consideration issues such as availability of required assets, technical obsolescence of equipment, expense of operation, physical or other values of assets, including business operations of the utility.

o Known and Measurable: Rate adjustments should have a strong measure of certainty and the ability to be measured relatively accurately.

o Watching for Gold-plating: Facilities used for all aspects of operations should be reliable and adequate but should not be extravagant or extreme.

Page 14: Electric Ratemaking in Texasaect.net/documents/2017/AECT Ratemaking 2017.pdfcustomer growth, regulatory requirements and specific public policy goals set by elected officials Newest

Determination of Revenue Requirements: Guiding Concepts

www.aect.net (512) 474-6725

14

o Matching: Plant, depreciation, taxes, revenues must be matched for the period being examined.

o Limiting Overcapitalization: Ensuring the utility is not making unnecessary investments.

o Studying Acquisitions: Adjustments based on the difference between original costs and purchase prices – often reviewed on a case-by-case basis.

o Limiting Regulatory Lag: The utility cannot change prices instantaneously to absorb cost increases; this must be taken into account by the PUC when determining rates. Given the costs and timelines of rate cases, and resulting strain on both the utility and the PUC,

effective regulation would result in fewer rate cases.

Page 15: Electric Ratemaking in Texasaect.net/documents/2017/AECT Ratemaking 2017.pdfcustomer growth, regulatory requirements and specific public policy goals set by elected officials Newest

Determination of Rate Structure

15

Page 16: Electric Ratemaking in Texasaect.net/documents/2017/AECT Ratemaking 2017.pdfcustomer growth, regulatory requirements and specific public policy goals set by elected officials Newest

Determination of Rate Structure: Customer Classes

www.aect.net (512) 474-6725

16

o The PUC works with stakeholders to determine rates for different classes of customers:

Residential and Small Commercial

Large Commercial

Industrial

Governmental

Other classes, such as low-income customers, private academic and community institutions

o The total estimated usage from each customer class, multiplied by the rate for regulated charges must meet the revenue requirement

Page 17: Electric Ratemaking in Texasaect.net/documents/2017/AECT Ratemaking 2017.pdfcustomer growth, regulatory requirements and specific public policy goals set by elected officials Newest

Charges included in Utility Rates

www.aect.net (512) 474-6725

17

o The following charges may be included in rates:

Rate case expenses

Federal income tax costs or credits

Nuclear decommissioning charges, if applicable

Transmission to competition charges

Energy efficiency cost recovery factor

Advanced metering cost recovery factor

ERCOT fee

o These surcharges allow utilities to recover the costs of meeting customer growth, regulatory requirements and specific public policy goals set by elected officials

Page 18: Electric Ratemaking in Texasaect.net/documents/2017/AECT Ratemaking 2017.pdfcustomer growth, regulatory requirements and specific public policy goals set by elected officials Newest

Newest Mechanisms in Utility ratemaking in Texas

www.aect.net (512) 474-6725

18

Distribution Cost Recovery Factor for ERCOT TDUso Allows utilities to periodically adjust their rates, specifically for non-

controversial investments in the distribution network, such as poles, wires, software and telecommunications equipment

o The DCRF is scheduled to expire in September 2019

Improvements in Ratemaking for Non-ERCOT Utilitieso Non-ERCOT utilities can update rate case filings to reflect more current

investments

o “Relate-back” provisions allow rates to be made effective on the 155th day after filing; a surcharge can be used to collect or refund changes in rates

Page 19: Electric Ratemaking in Texasaect.net/documents/2017/AECT Ratemaking 2017.pdfcustomer growth, regulatory requirements and specific public policy goals set by elected officials Newest

Rates of Return: Allowed vs. Earned

www.aect.net (512) 474-6725

19

Allowed Rate of ReturnThe level of return used to establish a fair rate level that is high enough to allow the utility to attract capital while allowing a reasonable profit, as determined by the regulator and the stakeholder process.

The determination of the allowed rate of return, including legal standards for the term, are complex, but the goal is meeting that reasonableness standard.

Earned Rate of Return

The amount of money a utility earns, over and above its expenses, expressed as a percentage of the rate base.

The Allowed Rate of Return is a target for the utility to attempt to achieve through efficient operations – it is not a guaranteed profit

Page 20: Electric Ratemaking in Texasaect.net/documents/2017/AECT Ratemaking 2017.pdfcustomer growth, regulatory requirements and specific public policy goals set by elected officials Newest

Concerns Regarding Regulatory Lag

www.aect.net (512) 474-6725

20

• By statute, a rate case is supposed to be processed in 185 days

• The average time to process an electric rate case in Texas is one year

• Since 1989:

– 30 out of 33 electric rate cases in Texas have exceeded the 185-day statutory deadline.

– One-third of those took longer than 16 months to process.

Examples of Recent Rate Costs and Duration

– Oncor Electric Delivery, Dockets 35717 & 36530 - $8.6 million (13 months)

– Entergy Gulf States, Docket 34800 -$9.5 million (17 months)

– AEP Texas, Dockets 33309, 33310 & 34301 - $6.4 million (13 months)

– Southwestern Public Service Co., Docket 32766 - $5.6 million (14 months)

– AEP Texas Central Co., Dockets 28840 & 31433 - $4.3 million (21 months)

Page 21: Electric Ratemaking in Texasaect.net/documents/2017/AECT Ratemaking 2017.pdfcustomer growth, regulatory requirements and specific public policy goals set by elected officials Newest

How To Reach Us

www.aect.net (512) 474-6725

21

For background on electric markets, environmental data and Electricity 101

Regular updates from AECT and its member companies

Keep up with pictures and links to latest documents released by AECT

AECT.net

@aectnet

AECT Advocacy on Facebook