Forward Test Years for US Energy Utilities
Forward Test Years for US Energy Utilities
Dr. Mark Newton Lowry, PhD
President Pacific Economics Group Research LLC
Society of Utility and Regulatory Financial Analysts
SURFA 48th Annual Financial Forum April 28-29, 2016 Indianapolis, IN
1
Introduction
The choice of a test year for rate cases is an important issue in regulation Use of forward test years in rate cases is growing Economic research can help regulators improve test year practices This presentation provides useful results applicable to vertically integrated electric utilities (VIEUs) and energy distributors.
Forward Test Years for US Energy Utilities 2
Plan of Presentation
Test Year Basics Forward Test Year Pros & Cons When are Future Test Years Needed? Statistical Methods for Cost Projections Making FTYs Work
Forward Test Years for US Energy Utilities 3
Test Year Basics
Rate Year Historical Reference Year
Historical Test Year (HTY) Forward Test Year (FTY)
Year rates take effect (usually t+1)
Reference year for most test year calculations (usually t-1)
Ends before rate case (usually t-1)
Starts after rate case (usually t+1) Usually corresponds to rate year
Forward Test Years for US Energy Utilities 4
FTY Pros & Cons
Pro Rates reflect current business conditions better Rates more just and reasonable, less operating risk Con Information and financial asymmetries can benefit utilities at
customers' expense Higher regulatory cost Sanction for cost growth exceeding industry norms weakens
performance incentives Does not reduce rate case frequency when pressures are chronic
Forward Test Years for US Energy Utilities 5
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