Вы находитесь на странице: 1из 32

Group Exercise I:

Calculating the Revenue Requirement

Group Exercise I: Calculating the Revenue Requirement Ron Davis Principal Economist Colorado Department of Regulatory

Ron Davis Principal Economist Colorado Department of Regulatory Agencies Public Utilities Commission 1560 Broadway, Suite 250 Denver, CO 80202 P 303.894.2883 | F 303.869.0333 Email: ronald.davis@dora.state.co.us

1560 Broadway, Suite 250 Denver, CO 80202 P 303.894.2883 | F 303.869.0333 Email: ronald.davis@dora.state.co.us
1560 Broadway, Suite 250 Denver, CO 80202 P 303.894.2883 | F 303.869.0333 Email: ronald.davis@dora.state.co.us
1560 Broadway, Suite 250 Denver, CO 80202 P 303.894.2883 | F 303.869.0333 Email: ronald.davis@dora.state.co.us

Rates Recover Costs

Rates Recover Costs • The utility’s revenue requirement represents the total amount of money a utility

The utility’s revenue requirement represents the total amount of money a utility must collect from customers to pay all costs including a reasonable return on investment

The regulatory proceeding for determining the revenue requirement for an investor-owned electric utility in Colorado is the Phase I rate case

for determining the revenue requirement for an investor-owned electric utility in Colorado is the Phase I
for determining the revenue requirement for an investor-owned electric utility in Colorado is the Phase I

1

for determining the revenue requirement for an investor-owned electric utility in Colorado is the Phase I
for determining the revenue requirement for an investor-owned electric utility in Colorado is the Phase I

Revenue Requirement Formula

Revenue Requirement Formula RR t = (RB t )R t + OC t + D t

RR t = (RB t )R t + OC t + D t + T t + F t

Where:

RR

=

Revenue requirement

R

=

Rate of return

RB

=

Rate base (Gross Investment – Accumulated Depreciation)

OC

=

Operating costs

D

=

Depreciation expenses

T

=

Taxes

F

=

Other costs (Franchise Fees)

t

=

Test year

D = Depreciation expenses T = Taxes F = Other costs (Franchise Fees) t = Test
D = Depreciation expenses T = Taxes F = Other costs (Franchise Fees) t = Test

2

D = Depreciation expenses T = Taxes F = Other costs (Franchise Fees) t = Test
D = Depreciation expenses T = Taxes F = Other costs (Franchise Fees) t = Test

Phase I Methods

Phase I Methods • Surprisingly unsophisticated proceedings • Operating costs– pass-through at cost • Assets–

Surprisingly unsophisticated proceedings

Operating costs– pass-through at cost

Assets– book value; actual cost incurred at purchase

Depreciation– straight-line over useful life of asset

Allowed rate of return

– Weighted Average Cost of Capital

Price of debt– actual cost of bonds and other borrowing instruments

Price of equity– analysis (DCF) of returns of similarly situated companies (risk profile)

instruments – Price of equity– analysis (DCF ) of returns of similarly situated companies (risk profile)
instruments – Price of equity– analysis (DCF ) of returns of similarly situated companies (risk profile)

3

instruments – Price of equity– analysis (DCF ) of returns of similarly situated companies (risk profile)
instruments – Price of equity– analysis (DCF ) of returns of similarly situated companies (risk profile)

Test Year

Test Year • The foundation for developing Phase I rate case • The test year is

The foundation for developing Phase I rate case

The test year is a measure of the operations and investment in some specified 12-month period

A test year may be a recent historic 12-month period (historic test year)

A test year may be a projected 12-month period (future test year)

The financial statements in a test year are developed by the utility

Historic test years derive from the company’s books and records

Future test years come from the utility’s budget

test years derive from the company’s books and records – Future test years come from the
test years derive from the company’s books and records – Future test years come from the

4

test years derive from the company’s books and records – Future test years come from the
test years derive from the company’s books and records – Future test years come from the

Adjustments to the Test Year

Adjustments to the Test Year • A test year is restated to the extent necessary (or

A test year is restated to the extent necessary (or permitted) to produce the data considered reflective of conditions during the period rates are to be in effect

The adjustments that need to be made to the test year are generally classified as:

Commission prescribed adjustments

Accounting adjustments

Pro forma adjustments

generally classified as: – Commission prescribed adjustments – Accounting adjustments – Pro forma adjustments 5
generally classified as: – Commission prescribed adjustments – Accounting adjustments – Pro forma adjustments 5

5

generally classified as: – Commission prescribed adjustments – Accounting adjustments – Pro forma adjustments 5
generally classified as: – Commission prescribed adjustments – Accounting adjustments – Pro forma adjustments 5

Pro Forma Adjustments

Pro Forma Adjustments • Made to reflect an ongoing change • Typically made to historic test

Made to reflect an ongoing change

Typically made to historic test year data

Should be readily reconcilable to the test year without creating serious possibilities of distortion or mismatching

Typical pro forma adjustments include:

– Normalization - restate the period data for abnormal conditions

– Annualization - extend over the period, or eliminate from the period, events that had partial period effects and are either recurring or have terminated

– Out-of-period - required when an event is recorded in one period but applies to another period

– Reclassification - add or remove items for purposes of rate recovery

in one period but applies to another period – Reclassification - add or remove items for
in one period but applies to another period – Reclassification - add or remove items for

6

in one period but applies to another period – Reclassification - add or remove items for
in one period but applies to another period – Reclassification - add or remove items for

Rules of Thumb

Rules of Thumb • Rates are set based on what will be reflective of the utility’s

Rates are set based on what will be reflective of the utility’s financial operations in the future

Adjustments generally not more that one year out of the test year

Known, measurable, quantifiable or contracted

In the historic test year framework, pro forma adjustments usually generate the most debate of any adjustments made to the test year data

year framework, pro forma adjustments usually generate the most debate of any adjustments made to the
year framework, pro forma adjustments usually generate the most debate of any adjustments made to the

7

year framework, pro forma adjustments usually generate the most debate of any adjustments made to the
year framework, pro forma adjustments usually generate the most debate of any adjustments made to the

Rate Base

Rate Base • Rate base represents the investor-supplied plant facilities and other investments required to supply

Rate base represents the investor-supplied plant facilities and other investments required to supply utility service to customers.

Criterion for components to be included in rate base based on “used and useful” and “prudent investment” concepts

The principal method for valuing rate base is original cost at the time plant is placed into service

Categories of plant in rate base- production (generation), transmission, distribution, and general

Includes franchises, rights-of-way, land, structures, wires, furniture, tools, equipment, vehicles, software development, etc.

franchises, rights-of-way, land, structures, wires, furniture, tools, equipment, vehicles, software development, etc. 8
franchises, rights-of-way, land, structures, wires, furniture, tools, equipment, vehicles, software development, etc. 8

8

franchises, rights-of-way, land, structures, wires, furniture, tools, equipment, vehicles, software development, etc. 8
franchises, rights-of-way, land, structures, wires, furniture, tools, equipment, vehicles, software development, etc. 8

Rate Base Components

Rate Base Components • Plant in Service : land, land rights, infrastructure, etc. used to provide

• Plant in Service: land, land rights, infrastructure, etc. used to provide service to customers in the test period

• Utility Plant Held for Future Use: land, land rights, and complete units of property that have not yet been used or have been removed from providing service now to preserve them for later use

• Construction Work in Progress: work orders for electric plant under construction

• Cash Working Capital (CWC): average amount of capital provided by investors, over and above the investment in plant and other specifically measured rate base items, to bridge the gap between the time expenditures are required to provide services and the time collections are received for such services

• Prepayments: payments made in advance of the period to which they apply, such as prepaid rents, insurance, and taxes

• Utility Materials and Supplies: inventories of plant materials and operating supplies purchased primarily for use in the utility business for construction, operation and maintenance purposes such as poles, transformers, cables, etc.

in the utility business for construction, operation and maintenance purposes such as poles, transformers, cables, etc.
in the utility business for construction, operation and maintenance purposes such as poles, transformers, cables, etc.

9

in the utility business for construction, operation and maintenance purposes such as poles, transformers, cables, etc.
in the utility business for construction, operation and maintenance purposes such as poles, transformers, cables, etc.

Example Rate Base

Example Rate Base (thousands) Plant in Service Utility Plant Held for Future Use Construction Work in

(thousands)

Plant in Service Utility Plant Held for Future Use Construction Work in Progress (CWIP) Common Utility Plant in Service Allocated Cash Working Capital (CWC) Prepayments Utility Materials and Supplies

$2,200,000

500,000

100,000

75,000

15,000

75,000

50,000

Gross Rate Base at Original Cost

$3,015,000

Less:

Reserve for Depreciation & Amortization Accumulated Deferred Taxes Customer Advances for Construction Customer Deposits Allocated to FERC

 

$2,000,000

150,000

25,000

900

24,100

Total Deductions

$2,200,000

Net Rate Base

$

815,000

150,000 25,000 900 24,100 Total Deductions $2,200,000 Net Rate Base $ 815,000 10
150,000 25,000 900 24,100 Total Deductions $2,200,000 Net Rate Base $ 815,000 10

10

150,000 25,000 900 24,100 Total Deductions $2,200,000 Net Rate Base $ 815,000 10
150,000 25,000 900 24,100 Total Deductions $2,200,000 Net Rate Base $ 815,000 10

Public Service’s Phase I Model

Public Service’s Phase I Model • Exhibit DAB-1 (May 1, 2009) • Development of Rate Base

Exhibit DAB-1 (May 1, 2009)

Development of Rate Base

Schedule 3

Concepts:

Categories of Plant (Functionalization)

Uniform System of Accounts (FERC Accounts)

Jurisdictional Allocation (Retail Revenue Requirement)

Customer Deposits

Customer Advances for Construction

Jurisdictional Allocation (Retail Revenue Requirement) – Customer Deposits – Customer Advances for Construction 11
Jurisdictional Allocation (Retail Revenue Requirement) – Customer Deposits – Customer Advances for Construction 11

11

Jurisdictional Allocation (Retail Revenue Requirement) – Customer Deposits – Customer Advances for Construction 11
Jurisdictional Allocation (Retail Revenue Requirement) – Customer Deposits – Customer Advances for Construction 11

FERC Form 1 Plant Accounts

FERC Form 1 Plant Accounts 12
FERC Form 1 Plant Accounts 12
FERC Form 1 Plant Accounts 12
FERC Form 1 Plant Accounts 12

12

FERC Form 1 Plant Accounts 12
FERC Form 1 Plant Accounts 12

Phase I Cost Allocations

Phase I Cost Allocations • Cost allocations between: – Separate corporate entities – Regulated and non-regulated

Cost allocations between:

Separate corporate entities

Regulated and non-regulated activities

Different regulatory jurisdictions

Allocators can evolve into a large and contested issue in a Phase I rate case

Different regulatory jurisdictions • Allocators can evolve into a large and contested issue in a Phase
Different regulatory jurisdictions • Allocators can evolve into a large and contested issue in a Phase

13

Different regulatory jurisdictions • Allocators can evolve into a large and contested issue in a Phase
Different regulatory jurisdictions • Allocators can evolve into a large and contested issue in a Phase

The “12CP-PROD” Allocator

The “12CP-PROD” Allocator 14
The “12CP-PROD” Allocator 14
The “12CP-PROD” Allocator 14
The “12CP-PROD” Allocator 14

14

The “12CP-PROD” Allocator 14
The “12CP-PROD” Allocator 14

CWIP in Rate Base

CWIP in Rate Base From 2008 Historic Test Year (Exhibit DAB-8) 15

From 2008 Historic Test Year

(Exhibit DAB-8)

CWIP in Rate Base From 2008 Historic Test Year (Exhibit DAB-8) 15
CWIP in Rate Base From 2008 Historic Test Year (Exhibit DAB-8) 15
CWIP in Rate Base From 2008 Historic Test Year (Exhibit DAB-8) 15

15

CWIP in Rate Base From 2008 Historic Test Year (Exhibit DAB-8) 15
CWIP in Rate Base From 2008 Historic Test Year (Exhibit DAB-8) 15

Capital Structure

Capital Structure • A utility’s capital structure identifies the source of funds and the cost of

A utility’s capital structure identifies the source of funds and the cost of those funds, i.e. , debt and equity

The utility uses these funds to purchase assets for the provisioning of service

Debt is where the utility has borrowed money and pays a interest rate on the amount owed

Equity is where utility has gone to the market and sold shares of stock (ownership) of the company

amount owed • Equity is where utility has gone to the market and sold shares of
amount owed • Equity is where utility has gone to the market and sold shares of

16

amount owed • Equity is where utility has gone to the market and sold shares of
amount owed • Equity is where utility has gone to the market and sold shares of

Customer Deposits

Customer Deposits • Customers, typically new customers, with a poor credit record or payment history pay

Customers, typically new customers, with a poor credit record or payment history pay a deposit with the electric utility

Customers paid interest on deposit held by the utility; Commission sets interest rate

Deposits considered a source of funds that the utility is free to use in support of rate base investment

Liabilities are treated as deductions to rate base

Generally refunded after 12 months after good payment record

Liabilities are treated as deductions to rate base • Generally refunded after 12 months after good
Liabilities are treated as deductions to rate base • Generally refunded after 12 months after good

17

Liabilities are treated as deductions to rate base • Generally refunded after 12 months after good
Liabilities are treated as deductions to rate base • Generally refunded after 12 months after good

Customer Advances

Customer Advances • Payments to the utility from customers for utility investments needed to provide service

Payments to the utility from customers for utility investments needed to provide service

Line extensions

Transmission line

Advances considered a source of funds that the utility is free to use in support of rate base investment

Liabilities are treated as deductions to rate base

Customer advances for construction may be refunded to the customer either wholly or in part, generally over time

• Customer advances for construction may be refunded to the customer either wholly or in part,
• Customer advances for construction may be refunded to the customer either wholly or in part,

18

• Customer advances for construction may be refunded to the customer either wholly or in part,
• Customer advances for construction may be refunded to the customer either wholly or in part,

Other Exclusions from Rate Base

Other Exclusions from Rate Base • Accumulated Depreciation: dollars invested in plant are depreciated (depreciation

Accumulated Depreciation: dollars invested in plant are depreciated (depreciation expenses) over the plant’s useful life on a straight-line basis and accumulated as a reserve

Accumulated Deferred Taxes: taxes that have been deferred as a result of revenues and expenses being recognized in different periods for book and tax purposes

been deferred as a result of revenues and expenses being recognized in different periods for book
been deferred as a result of revenues and expenses being recognized in different periods for book

19

been deferred as a result of revenues and expenses being recognized in different periods for book
been deferred as a result of revenues and expenses being recognized in different periods for book

Rate of Return

Rate of Return • Represents the amount allowed to be earned, expressed as a percentage of

Represents the amount allowed to be earned, expressed as a percentage of the utility’s rate base

The rate of return (ROR) is intended to allow the utility to:

Meet its obligations to present investors (interest and dividends)

Compete on reasonable terms in the financial markets for future capital requirements

Primarily consists of debt, preferred stock and common equity

Often the most controversial component of the revenue requirement

of debt, preferred stock and common equity • Often the most controversial component of the revenue
of debt, preferred stock and common equity • Often the most controversial component of the revenue

20

of debt, preferred stock and common equity • Often the most controversial component of the revenue
of debt, preferred stock and common equity • Often the most controversial component of the revenue

Example Capital Structure

Example Capital Structure   Amount Ratio Debt $80 40% Equity $120 60% Total $200 21 X
 

Amount

Ratio

Debt

$80

40%

Equity

$120

60%

Total

$200

$80 40% Equity $120 60% Total $200 21 X X X X Cost 8.0% 12.0% ROE
$80 40% Equity $120 60% Total $200 21 X X X X Cost 8.0% 12.0% ROE

21

XX

XX

Cost

8.0%

12.0%

ROEROE

==

==

Composite

Return

3.2%

++

7.2%

10.4%

$120 60% Total $200 21 X X X X Cost 8.0% 12.0% ROE ROE = =

RORROR

$120 60% Total $200 21 X X X X Cost 8.0% 12.0% ROE ROE = =
$120 60% Total $200 21 X X X X Cost 8.0% 12.0% ROE ROE = =

Public Service’s Phase I Model

Public Service’s Phase I Model • Exhibit DAB-1 (May 1, 2009) • Development of Rate Base

Exhibit DAB-1 (May 1, 2009)

Development of Rate Base

Schedule 2

Public Service’s Phase I Model • Exhibit DAB-1 (May 1, 2009) • Development of Rate Base
Public Service’s Phase I Model • Exhibit DAB-1 (May 1, 2009) • Development of Rate Base

22

Public Service’s Phase I Model • Exhibit DAB-1 (May 1, 2009) • Development of Rate Base
Public Service’s Phase I Model • Exhibit DAB-1 (May 1, 2009) • Development of Rate Base

Operating Expenses

Operating Expenses • Operating expenses comprise the costs of using and maintaining the utility’s electric plant

Operating expenses comprise the costs of using and maintaining the utility’s electric plant in providing utility service

For transmission and distribution, operating expenses primarily consists of labor, materials, supplies and other necessary expenditures

Fuel costs handled by fuel clause

Expenses are presumed to be reasonable and necessary for efficient operation until proved otherwise

Pro forma changes often include:

Salary and wage costs

Uncollectible expenses

Postage expenses

Rate case expenses

Pension costs

Depreciation expenses

Property taxes

– Postage expenses – Rate case expenses – Pension costs – Depreciation expenses – Property taxes
– Postage expenses – Rate case expenses – Pension costs – Depreciation expenses – Property taxes

23

– Postage expenses – Rate case expenses – Pension costs – Depreciation expenses – Property taxes
– Postage expenses – Rate case expenses – Pension costs – Depreciation expenses – Property taxes

Public Service’s Phase I Model

Public Service’s Phase I Model • Exhibit DAB-1 (May 1, 2009) • Development of Expenses •

Exhibit DAB-1 (May 1, 2009)

Development of Expenses

Schedule 4

Concepts:

Removal of Fuel and Purchased Energy (Fuel Clause)

Labor and Non-Labor

Operations and Maintenance

Allocation of Service Company Expenses

Taxes

Clause) – Labor and Non-Labor – Operations and Maintenance – Allocation of Service Company Expenses –
Clause) – Labor and Non-Labor – Operations and Maintenance – Allocation of Service Company Expenses –

24

Clause) – Labor and Non-Labor – Operations and Maintenance – Allocation of Service Company Expenses –
Clause) – Labor and Non-Labor – Operations and Maintenance – Allocation of Service Company Expenses –

Depreciation

Depreciation • Depreciation is the way in which the electric utility recovers its capital investment costs.

Depreciation is the way in which the electric utility recovers its capital investment costs.

The recognition in financial statements that physical assets are consumed in the process of providing service.

Measures the loss in service value not restored by current maintenance

Depreciation expense increases the revenue requirement, while accumulated depreciation is a deduction to the utility’s rate base, reducing the revenue requirement

Depreciable property groups can be defined in any convenient manner, but they are often the individual primary plant accounts specified by the Uniform System of Accounts

Utilities prepare periodic depreciation studies measuring the mortality characteristics of plant and file for regulatory approval of book depreciation rates

Book depreciation rates are applied to original cost plant balances to calculate the depreciation expense

rates • Book depreciation rates are applied to original cost plant balances to calculate the depreciation
rates • Book depreciation rates are applied to original cost plant balances to calculate the depreciation
rates • Book depreciation rates are applied to original cost plant balances to calculate the depreciation

25

rates • Book depreciation rates are applied to original cost plant balances to calculate the depreciation

Taxes

Taxes • Taxes are a major component of a utility’s cost of service for ratemaking purposes

Taxes are a major component of a utility’s cost of service for ratemaking purposes

Include federal and state income taxes, as well as many other taxes, such as property, payroll, franchise, gross receipts, excise and sales taxes.

However taxes that are based on the utilities gross revenues are usually not included in the revenue requirement formula

“Gross-up Factor”

Used to calculate the pro forma adjustment to income taxes (and other costs that vary in direct proportion to changes in revenues) in determining the overall revenue requirement

Formula: 1 / (1 - Tax Rate) Example: 1 / (1 - 35%)= 1 / .65 = 1.53846

To increase net operating income (return) by $1,000, an increase of $1,538.46 in gross revenues is required, because the utility’s income tax expense will increase by $538.46

of $1,538.46 in gross revenues is required, beca use the utility’s income tax expense will increase
of $1,538.46 in gross revenues is required, beca use the utility’s income tax expense will increase

26

of $1,538.46 in gross revenues is required, beca use the utility’s income tax expense will increase
of $1,538.46 in gross revenues is required, beca use the utility’s income tax expense will increase

Income Statement

Income Statement • For ratemaking purposes, the income statement summarizes: (1) the funds collected by the

For ratemaking purposes, the income statement summarizes: (1) the funds collected by the utility from its customers; (2) the company’s spending and its use of resources in providing service to customers; and, (3) the company’s net operating earnings.

The income statement includes:

Operating Revenues

Operating Expenses

Depreciation

Amortization

Taxes

Net Operating Earnings

Operating Revenues – Operating Expenses – Depreciation – Amortization – Taxes – Net Operating Earnings 27
Operating Revenues – Operating Expenses – Depreciation – Amortization – Taxes – Net Operating Earnings 27

27

Operating Revenues – Operating Expenses – Depreciation – Amortization – Taxes – Net Operating Earnings 27
Operating Revenues – Operating Expenses – Depreciation – Amortization – Taxes – Net Operating Earnings 27

Example Income Statement

Example Income Statement Operating Revenue Sales of Electricity Other Operating Revenue (thousands) $ 100,000

Operating Revenue Sales of Electricity Other Operating Revenue

(thousands)

$

100,000

5,000

Total Operating Revenue

$ 105,000

Operating Expenses Fuel Purchased Power Production Expenses Transmission Expenses Distribution Expenses Customer Operations Expenses Administrative & General Expenses Subtotal O&M Expenses Depreciation & Amortization Taxes other Than Income Income Taxes

 

1,000

1,000

2,000

1,000

1,000

3,000

4,000

 

$

13,000

$

15,000

 

500

2,100

Total Expenses

$

30,600

Net Operating Earnings AFDUC Addition FERC Allocation Deduction

$

74,400

100

(500)

 

$

74,000

Total CPUC Jurisdictional Net Operating Earnings

Deduction $ 74,400 100 (500)   $ 74,000 Total CPUC Jurisdictional Net Operating Earnings 28
Deduction $ 74,400 100 (500)   $ 74,000 Total CPUC Jurisdictional Net Operating Earnings 28

28

Deduction $ 74,400 100 (500)   $ 74,000 Total CPUC Jurisdictional Net Operating Earnings 28
Deduction $ 74,400 100 (500)   $ 74,000 Total CPUC Jurisdictional Net Operating Earnings 28

Public Service’s Phase I Model

Public Service’s Phase I Model • Exhibit DAB-1 (May 1, 2009) • Development of GRSA •

Exhibit DAB-1 (May 1, 2009)

Development of GRSA

Schedule 28

Concepts:

Test Year Revenue

Billing Determinants

General Rate Schedule Adjustment (GRSA)

28 • Concepts: – Test Year Revenue – Billing Determinants – General Rate Schedule Adjustment (GRSA)
28 • Concepts: – Test Year Revenue – Billing Determinants – General Rate Schedule Adjustment (GRSA)

29

28 • Concepts: – Test Year Revenue – Billing Determinants – General Rate Schedule Adjustment (GRSA)
28 • Concepts: – Test Year Revenue – Billing Determinants – General Rate Schedule Adjustment (GRSA)

General Rate Schedule Adjustment

General Rate Schedule Adjustment • In the absence of a Phase II rate proceeding, existing rates

In the absence of a Phase II rate proceeding, existing rates need to be adjusted up or down in order for them to recover the Phase I revenue requirement

A percentage increase or decrease

Sometimes there are multiple Phase I cases before there is a Phase II case

• A percentage increase or decrease • Sometimes there are multiple Phase I cases before there
• A percentage increase or decrease • Sometimes there are multiple Phase I cases before there

30

• A percentage increase or decrease • Sometimes there are multiple Phase I cases before there
• A percentage increase or decrease • Sometimes there are multiple Phase I cases before there

“Other Revenue” Reduction

“Other Revenue” Reduction 31
“Other Revenue” Reduction 31
“Other Revenue” Reduction 31
“Other Revenue” Reduction 31

31

“Other Revenue” Reduction 31
“Other Revenue” Reduction 31

Оценить