The Commissioner’s Question: A Guaranteed Return?

“Ben” Cummings asked “Some intervenors claim this commission “guarantees” a rate of return in setting rates? Do we? If not, where does that notion come from?” 

“Well, commissioner, a return on investment is not guaranteed to the utility.” Explained the advisor “However, because this state has had stable regulation for years and the utilities have earned some return level for a long time, some observers have interpreted that to be a “guarantee.” 

“But it's not?” asked Cummings. 

“No, it’s not! Electric utilities in other states have gone onto bankruptcy even under our type of regulation.”  Payne continued. “Part of the confusion may come from the fact that the rate order issued by the PSC uses a specific number for the “authorized” rate of return. That number is published and readily available as part of the annual revenue requirement estimate used in the rate case by the PSC. Rates are then designed based on estimates pf future customer numbers and sales which would allow the utility an opportunity to earn that authorized return in the future. That is, if all the estimates match the reality of the actual year the rates are in effect.” 

Cummings interrupted “So, some people see a return ‘authorized’ by the PSC in its order and assume its guaranteed?” 

“Yes, some may.” Continued Payne, “Remember that, at the end of the first year the new rates are in effect and every year after that the utilities report their ‘earned return’ as an actual audited number.” 

“So, the actual ‘earned return’ reported at the end of the year could be the same or above or below the authorized return in the PSC order.”  Commings observed. 

“That is correct, Commissioner.” 

“What happens if the earned return is below the authorized return?” Cummings continued. 

“Well, the utility management then needs to decide whether it can continue with the authorized rates in the future. Management must decide whether the next year will result in more normal conditions and whether the current rates are likely to produce an adequate return next year.”  

“How do they reach that decision?” Cummings asked.  

“The approved rates are applied to sales in a “normal” year with respect to weather and other factors. Other costs are normalized as well. If this “normalization” shows an adequate return in a normal year, no further action is needed by either the utility or the PSC. The same process holds true if the utility reports a return higher than that authorized in the rates. Thus, there is no refund if the utility over earns and no surcharge to customer if the utility does not earn its authorized return.” Payne concluded. 

“Are there exceptions to this practice?” 

“Alas, as with much utility ratemaking there are exceptions based on the law, precedent and individual circumstances.” 

“Thanks Ben, I think that’s enough for me to think about now.” Concluded Cummings. 

“Yes, Commissioner.” Replied Payne.