Introduction to Rate
Cases and Rate
Design
David G. Loomis, Ph.D.
Executive Director, Institute
for Regulatory Policy Studies
Review of Process
and Q & A
Company and Customers
The regulated utility is entitled to an
opportunity to recover all costs prudently
incurred in providing services
 The customer has an obligation to
reimburse the utility at rates that will
provide such an opportunity

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Revenue Requirement
The amount of money a utility must collect
from its customers to pay expenses and
provide a fair return to investors
 Incremental revenue requirement is
positive if current revenues are insufficient;
negative if current revenues are excessive

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Fundamental Rate-of-Return
Equation

Revenue Requirement = OC + T + d + r(V-D)
 OC = Operating Costs
 T = Taxes
 d = Annual depreciation
expense
 r = Rate of return
 V = Value of physical and financial
 D = Accumulated depreciation
capital
is called the “return portion” and V-D is called
“rate base”
 r(V-D)
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Regulatory authority must

Determine the allowed expenses, allowed
rate base and allowed rate of return
(revenue requirements)

Determine mix of prices that will achieve
that revenue requirement (rate design)
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Process
Select a test year
 Determine the revenue requirement
 Determine whether existing prices would
yield more or less that the revenue
requirement
 Adjust prices accordingly
 Rates set for the future no “retroactive” rate making

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Traditional Regulation
Recap




Commission sets the “just and reasonable” price
level
Once determined, price level remains fixed until
commission sets a new price level
Utility is provided an opportunity to earn a
reasonable return - but is not guaranteed one
No retroactive rate making
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Traditional Regulation
Concerns

Rate cases can be long and costly
 adjusting
rates to reflect rapidly changing costs
 adjusting rates to meet the competition

The “incentives” effect
 inducement
to over invest in capital
 perpetuation of a “cost +” mentality
 little financial encouragement to find operation
efficiencies
 financial disincentive for demand-side energy
efficiency and conservation programs
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Rate Design
The bulk of utility costs are fixed costs
 Once fixed costs are incurred, everyone
wants to walk away from them
 Trick is to shift fixed costs to other
customer classes and to other customers
 There is no “right” way to allocate fixed
costs

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Questions?