Regulation of Rates for Water Utilities

Oregon Public Utility Commission

Oregon Public Utility Commission

Power Natural Gas

Water

Telephone

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The Commission is charged with the duty to ensure safe and adequate water service at fair and reasonable rates. The Commission is chartered as a consumer protection and advocacy body. It is responsible to protect the customers of any public utility, and the public generally, from unjust and unreasonable exactions and practices, and to obtain for them adequate service at fair and reasonable rates.

The Commission balances the interests of the utility investor and the consumer in establishing fair and reasonable rates. Rates set by the Commission are sufficient to ensure confidence in the financial integrity of the utility, allowing the utility to maintain its credit and attract capital. The utility should be allowed to earn sufficient revenues for reasons of debt service and capital for reinvestment.

PUC STATUTORY AUTHORITY° ORS 756.070 – 125 INVESTIGATORY POWERS° ORS 756.160 – 200 ENFORCEMENT & REMEDIES° ORS 757.005 DEFINES A PUBLIC UTILITY° ORS 757.020 DUTY TO SERVE° ORS 757.061 REGULATION OF WATER UTILITIES

Public Utility Commission

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Public Utility Commission

PUC Authority Regulate Rates Regulate Service

Regulatory Obligation Protect Customers Protect Utility

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Rate Case Filing

Utility Files Application Brief - summary of application

Direct Testimony - details of application

Tariffs include: Rate schedules Rules & regulations

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Flowchart - Water Rate Case

Public comments taken Written comments may be

submitted to the Administrative Law Judge

Utility files applicationdirect testimony, and

tariffs to PUC Adopt scheduleReceive petitions to intervene

Establish issuesIdentify Parties

Create service list

Data RequestsData Responses

3. TARIFF SUSPENSION

6. DISCOVERY

4. OPEN HOUSE

5. PREHEARING CONFERENCE

1. UTILITY FILING

9. REBUTTAL TESTIMONY

Within 15 days of filing, utility notifies customers by an

article in the newspaper or direct customer mailing

IfNecessary

Commission orders tariffs suspended to allow time to review the utility’s proposal

2. NOTIFICATION

Staff presents its Preliminary Results of Analysis to utility &

intervenors who attempt to reach agreement on as many

issues as possible

7. SETTLEMENT CONFERENCE

Staff & intervenorsresponding to utility’s

direct testimony

8. WRITTEN TESTIMONY

Enter pre-filed testimony into record

Cross-examination of witnesses

Identify issues to be briefedALJ briefing instructions

10. EVIDENTIARY HEARING

Briefs are submitted if requested by

the ALJ

11. WRITTEN BRIEFS

Commission issues order establishing new rates

12. COMMISSION DECISION

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Customer Notification

Within 15 days of utility filing

Utility must provide customer notification

Newspaper article

Direct mailing

To receive copy of filing, call the utility

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Suspension of Tariffs

PUC 30-Day Response to Filing

Approve

Disapprove

Suspend tariffs

Generally request a 6-month suspension –

allows investigation of rate proposal

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Open House

Opportunity to Communicate Customer Concerns Voice Opinion

Comments to Staff or Consumer Services Phone Written by mail or fax E-filed to PUC Filing Center

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Consumer Services

Public Utility CommissionConsumer Services DivisionP.O. Box 2148Salem OR 97308-2148

puc.filingcenter

@state.or.us

1-800-522-2404

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Prehearing Conference

Purpose1) Petition to intervene

2) Identify parties

3) Create a service list

4) Establish issues

5) Adopt schedule

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Who are the Players?How to Participate

Public & Interested Persons

Utility - Party

Interveners - Party

PUC Staff - Party Assistant Attorney General

Administrative Law Judge

Commission

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Discovery PeriodInformation Exchange

Burden of Proof Gather Information

Data Requests Data Responses

Develop Position

Verify Facts Revenues Expenses Utility Plant Service Issues Other Issues

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Settlement Conference

Staff presents its settlement case

Only parties may participate

Customers may attend

Parties attempt to reach agreement

Stipulation

Partial stipulation

Contested case

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Testimony

Written Testimony FiledStating the Party’s Position

Staff testimony

Intervener testimony Rebuttal Testimony

(if necessary)

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Evidentiary Hearing

Contested Case ALJ Presides

Testimony entered into

the record

Cross-examination of witnesses

Briefs, identify issues if requested

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ALJ Drafts Order & Recommendation

ALJ reviews evidence in the record

ALJ writes draft order & makes

recommendation to Commission

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Commission Decision

Issues Order Disposing the Rate Case

Establishes New Rates

Sets Effective Date of New Rates

Resolution of Outstanding Issues

Petition for Reconsideration If warranted, Commission will review

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Rate Regulation

Allows company to recover its prudent and

reasonable cost of service Gives company an opportunity for a

reasonable return on its investment Establishes rates through rate cases

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Ratemaking Formula

R = E+(v-d)rRevenues (Revenue

Requirement)

Expenses

value of rate base

plant depreciation

rate of return20

The revenue requirement is the amount of annual revenue necessary to recover the annual cost of providing service and provide an opportunity for the utility to earn a reasonable return on its investment. The revenue requirement is based upon the formula:

r represents the rate of return that is achieved by adding the weighted cost of debt and the weighted cost of equity. The rate of return is then applied to the utility's rate base to produce a return on the utility's investment. The resulting amount is then included in the revenue requirement.

R = E + (V-d) r

E represents expense. This is the reasonable annual expense the utility incurs to provide utility service (also called the cost of service).

R represents revenue requirement. It is the amount of revenue required to generate a desired return on investment given a specified level of operating expenses and rate base.

(V-d) represents the value of the utility's capital investment less its accumulated depreciation (and other required adjustments) necessary to calculate the utility's net plant in service. Working cash and materials and supplies inventory adjustments are then added to the net plant resulting in the utility's capital investment, called rate base.

Summary: Determining Rates Under the Rate of Return Regulation

Methodology1. DETERMINE REVENUE REQUIREMENT

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Rate spread is the allocation of the revenue requirement to the various classes of customers (residential, commercial, etc.). Customers with common characteristics are grouped into customer classes. If it is possible to determine the costs associated with the different customer classes, the costs should be allocated to the customer class that incurs the cost.

2. RATE SPREAD

3. RATE DESIGN

Rate design is the determination of the rate or price structure for each customer class. The revenue requirement has already been determined and divided among the different customer classes. Now the customer service rate must be designed to provide for the recovery of the allocated revenue requirement within each class. There are several different types of rate structures that can be used. Rate design is to determine the most appropriate rate structure for each customer class.

Determining Rates (continued)

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Water Program Staff

Kathy WillisSr. Utility Analyst(503) 373-1003kathy.willis@state.or.us

Brian BahrFinancial Analyst(503) 378-4362brian.bahr@state.or.us

Celeste HariUtility Analyst(503-378-6628celeste.hari@state.or.us

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