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The Two Overarching Issues in Utility Rate Cases

June 6, 2012

Every utility rate case is concerned with answering two fundamental questions: First, what is the amount of revenue that the utility should be allowed to recover in aggregate from its customers? This is known as the utility’s revenue requirement. Second, how should the revenue requirement be recovered from customers?

The common thread that runs through the two issues is cost. Cost incurrence is basic to the determination of both the allowed overall revenue requirement, and its recovery from ratepayers. A utility’s annual revenue requirement is equal to the summation of its yearly operating expenses and the allowed return on its rate base. Although rate base has several components, it can be thought of as being essentially equal to a utility’s undepreciated investment in plant.[1] More specifically, a utility’s revenue requirement equals:

 Rate Base x Rate of Return + Operating & Maintenance Expenses + Depreciation + Taxes.

 In a rate case proceeding, the determination of the allowed rate of return on rate base along with permissible levels of operating and maintenance expenses are issues that usually engender substantial controversy.

After a utility regulatory commission has determined the allowed revenue requirement for a utility, it is compared to the current level of revenues. The difference is the overall revenue adjustment that is granted in a rate case (usually an increase).

The second rate case issue, the determination of how the revenue requirement should be recovered from customers, also generates great controversy. Often much of the debate centers around how to determine the cost incurred by the utility in serving different types of customers. In other words, how should plant investment and expenses be apportioned to different ratepayers? Wouldn’t it be easier, equitable and less contentious to simply divide the overall allowed revenue requirement by the amount of energy provided by the utility, thereby producing the same rate for each customer? This question will be addressed in a subsequent post.

UAI is expert at discerning specific rate case issues, evaluating their potential impact on clients, and providing guidance with regard to how clients should approach specific proceedings before regulators. We would be happy to discuss these services in detail with you.

Ken Eisdorfer

Since 1986, UAI has provided energy supply management services that reduce utility costs for multi-site industrial, commercial, and governmental customers.  UAI’s core team of unbiased utility rate analysts and deregulated energy procurement experts manage over $2 billion in annualized energy spend and are focused on lowering the cost of utilities for end-use customers. UAI’s comprehensive energy cost management services include deregulated energy procurement, utility rate analysis, utility bill auditing and overall utility bill processing services that result in reduced energy costs and measurable utility savings. For more information on Utilities Analyses, Inc., visit www.utilitiesanalyses.com


[1] Growth in utility plant has been the prime motivator for filings of rate cases by electric utilities during the past several years. Many utilities have substantial construction programs including Ameren, Arizona Public Service, Dominion, Entergy, and Southern Company (which includes Alabama Power, Georgia Power, Gulf Power, and Mississippi Power),

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