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Electric Ratemaking in Texas


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An overview of the regulatory ratemaking process in Texas

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Electric Ratemaking in Texas

  1. 1. Legislative Advertising Paid For by: Association of Electric Companiesof Texas 1005Congress, Suite 1000,Austin, TX 78701 •512-474-6725• 2019 Electric Ratemakingin Texas
  2. 2. Transmission & Distribution Utilities AECT UtilitieswithinERCOT (512) 474-6725 2 Total ERCOT Capacity: >77,000 MW
  3. 3. Western Electricity Coordinating Council (WECC) Midcontinent Independent System Operator (MISO) Southwest Power Pool (SPP) AECT CompaniesOutside of ERCOT (512) 474-6725 3 Total ERCOT Capacity: >77,000 MW
  4. 4. Steps to Electric Competitionin Texas (512) 474-6725 4 Wholesale competition legislation passed (SB 373) May 1995 Jan. 2002 Retail competition legislation Passed (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
  5. 5. ERCOT: Separate Companies ProvideRetail, Transmission & Distributionand Generation Services (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 Flow Financial Flow Regulated
  6. 6. Outside ERCOT: A Single Utility ProvidesRetail, Transmission & Distribution and Generation ServicesIn Each Area (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 Flow Financial Flow Regulated
  7. 7. The Regulatory Compact (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
  8. 8. Continued Transmission & Distributionand Generation InvestmentNeeded Long-Term (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. • Areas of Texas located outside the ERCOT grid are also growing, both in terms of population and economic development, requiring transmission investment. Source: ERCOT, “Report on Existing and Potential Electric System Constraints and Needs,” December 2018
  9. 9. Two BasicComponents of the Rate case (512) 474-6725 9 Determination of Revenue Requirements The amount of gross revenues needed by a utility to cover its operating expenses, depreciation, taxes and other expenses Determination of Rate Structure The rates paid by each customer class to provide the necessary revenue as determined in the revenue requirements 1. 2.
  10. 10. Statutory Timelineof a Rate Case (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.
  11. 11. Determination of Revenue Requirements 11
  12. 12. Determinationof Revenue Requirements (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 + + + =
  13. 13. Determinationof Revenue Requirements: Guiding Concepts (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.
  14. 14. Determinationof Revenue Requirements: Guiding Concepts (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.
  15. 15. Determination of Rate Structure 15
  16. 16. Determinationof Rate Structure: Customer Classes (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
  17. 17. Charges includedin Utility Rates (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
  18. 18. Newest Mechanismsin Utility ratemakingin Texas (512) 474-6725 18 Distribution Cost Recovery Factor for ERCOT TDUs o 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 Utilities o 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
  19. 19. Rates of Return: Allowedvs. Earned (512) 474-6725 19 Allowed Rate of Return The 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
  20. 20. Concerns Regarding Regulatory Lag (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)
  21. 21. How To Reach Us (512) 474-6725 33 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 @aectnet AECT Advocacy on Facebook An easy way to receive updates from AECT TheAECT App