Rate cases are one of the most complex and contentious regulatory exercises an energy company can go through. This is especially true for companies regulated by the Federal Energy Regulatory Commission (FERC) who may need to file rate cases with the FERC and multiple state regulators. Collecting data for this can be complicated by itself for a single company, but what about collecting it from other companies such as your peers and competitors? It seems impossible, until now!
The XBRL mandate by the FERC opened new opportunities for data; not just in filing it, but revolutionizing its consumption like never before. Energy companies can now approximate entire formulas used in rate cases such as rate base, return on equity, and even the regulated retail rate customers pay. This means rate case simulations can be done not just on your own company, but every single FERC-regulated company in the United States.
What is a Rate Case?
Rate cases are proceedings where a regulator and utility negotiate the rates the utility can charge their customers. Rate cases are unique to the world of energy because of its heavily regulated nature. This regulation stems from government oversight of a “natural” monopoly, or a company whose industry naturally trends toward a monopoly. Utilities are considered a textbook example of a monopoly because they are given a predetermined service area where they are the only retail provider of electricity. As such, they must provide non-discriminatory, cost-based rates to any customers seeking power or gas service within their designated service area.
The problem that monopolies create is “monopoly pricing” where companies may charge exorbitant prices for goods and services because they have no competitors to check them. This necessitates a mediator to step in and protect consumers. State and federal energy commissions serve this role by negotiating rates via rate cases.
This same logic applies to midstream natural gas and oil pipelines who may be the only provider of services in the region that producers must go through to transport their products downstream. FERC is the main regulator for utilities and midstream companies that operate between state lines. Continuing the midstream example, a midstream provider cannot refuse service but also cannot charge unfair prices for services. The rate in which midstreams charge is negotiated with the FERC via a rate case.
Using FERC Data in a Rate Case
Financial and operational data from FERC Forms 1, 2 and 6 are perfectly placed to help companies prepare for a rate case. While metrics such as rate base and RoE are not line items in the form (except for oil companies in the Form 6), the inputs for these metrics are reported and, with HData’s Hub, can be automatically calculated for every FERC-regulated company.
One of the most important data points in a rate case is Rate Base. Rate Base is the value of property/assets of a company minus accumulated depreciation of those assets. Almost all of the variables that go into rate base can be derived from the annual FERC Forms 1, 2, or 6. Where the Form 6 has a line item for rate base for midstream oil companies to file, midstream gas and investor-owned utilities must draft their own rate bases.
Rate Base is important for rate cases because it is used to calculate the revenue requirement, which is the amount of revenue a utility needs to earn to cover all of its costs, including an authorized rate of return it is permitted to earn. The revenue requirement is a simple, yet contentious, metric:
Revenue Requirement = (Rate Base x Rate of Return on Rate Base) + Other Expenses
The most contentious piece of this is the rate of return on rate base, and the return on equity, or ROE, component in particular. The ROE is negotiated between the regulator and the regulated company and authorizes the company to have a chance to earn on its rate base. This rate varies between jurisdictions but will generally follow this same formula.
Return on Equity (ROE)
Return on Equity is set by the regulator, but can be approximated by taking a company’s net income divided by its proprietary capital (equity), both of which are reported on the annual FERC forms. This approximation allows you to get a general idea of what a revenue requirement is in combination with FERC-sourced rate base and other expenses reported in the FERC forms. ROE is one component of rate of return on rate base, so it is important to understand to get a fuller picture of a rate case.
A major first step in a rate case is comparing your company against a peer group. Understanding how well your company is performing relative to a peer group is key for a successful rate case petition because companies underperforming on returns may have a stronger argument for increasing rates than those charging higher than average.
Retail Rate Comparisons
Retail rates are not reported in FERC forms but can be approximated by taking operating revenues and dividing the amount of electricity sold (either in kilowatt or megawatt hours). This can be more granular through analyzing by the customer type (resale, residential, commercial, or industrial).
These rates are an example of using FERC data to analyze the impact of rate cases after the fact and how rates fluctuate over time or around notable events. While these rates are a good approximation of the real world, they are not the real rate a regulator sets on a company.
Variations in Rate Cases
General ”Full Blown” Rate Case
General rates cases are the standard rate cases we’ve discussed throughout this article. However, they aren’t the only type of rate case that regulators may impose on energy companies. Each has their own benefits and drawbacks, but ultimately seek to improve the process by reducing the time commitment in setting rates or decreasing customer/utility/regulator costs.
Formula Rate Plan (FRP)
FRPs are rate-making methods that may be added to general rate cases to standardize the process of rate setting. FRPs are an iterative process and make adjustments to rates with oversight from a regulator. While similar to a general rate case, a FRP will create a formula whose output is the rate to be charged, typically as a percentage adder to the previously-agreed upon base rates from the “full blown” rate case. The FERC Form 1 is a primary source for formula inputs where other inputs like the ROE and the FRP formula may only be established by a regulator during a general rate case.
Once the FRP is set, an energy company may need only to file an FRP adjustment and charge the new rate without the energy regulator needing to approve of the rate change. The regulator may still disapprove if the rate increases more than they expected, at which point the energy company will be forced to adjust rates retroactively and, in most cases, issue a refund to customers.
FRPs offer greater flexibility in determining rates and decrease the need for larger general rate cases that take up time and resources from both the regulator and the energy company. However, given this system is more automated, critics state that setting rates automatically degrades the power of utility regulators.
Multi-Year Rate Plans (MRP)
Similar to FRPs, multi-year rate plans (MRPs) conduct general rate cases periodically, such as every four or five years, with automated rate increases in the interim years. What is different is that these interim rate increases are often not tied to a formula, but rather external cost pressures that impact a company’s performance or service. These are called attrition relief mechanisms (ARMs). This requires diligent and accurate cost trackers from both a regulator and company perspective.
MRPs are a popular method for both regulators and the companies they regulate. Studies show that MRPs provide effective cost-saving incentives for companies, reduce regulatory burden and cost for both government and companies, and create predictable and steady revenues for companies to rely on. They also provide predictable rate increases for customers and mitigate sudden jumps in rates.
What we’ve discussed so far only scratches the surface on what a rate case looks like and how they run. There are types or rate cases that tend to define jurisdictions on the state and federal level, creating a complicated patch-work of regulatory environments. Even so, it is becoming easier to navigate these as clean, legible, and greater amounts of data become available for regulators and companies to use.
HData’s platform makes this process even easier. All the data and visualizations in this article are direct from HData’s Hub and updated each quarter and annually as companies file with the FERC. Interested in seeing it in action for yourself? Schedule a demo with me and I’d be happy to chat!