JEFFERSON CITY, Mo. – A new rate case proposal from Missouri-American Water Company (MAWC) could drastically change the way rate cases are handled in the Show-Me State if the Missouri Public Service Commission signs off.
That’s because MAWC is proposing to use a future test year to base their water and sewer rate cases on.
In rate cases, test-year sales and operating costs are adjusted to reflect ‘normal’ weather based on either a model of future years or past years. Test years based on forecasted experience are known as future test years, while test years based on prior financial performance are referred as historical test years. The resulting prices are what customers pay until rates are reset with next rate case.
Missouri has, for decades, used historical test years, relying on the records of past performances to determine the next rates. That process involves taking actual numbers from a certain period of time and using that to build the rates.
But the Show-Me State is only one of a handful still using modified historical test years, with many now looking to future test years instead.
MAWC contends their rate base and expense are increasing while revenues decline as it moves forward, saying the relationship between revenue, expenses, and the rate base may exist in a historical test year but not in the first year the rates will be in effect. They argue a fully forecasted test year would produce rates that more accurately reflect the revenues, expenses, and investments during the period in which the rates are to be effective.
According to MAWC’s filing, over the period of 2007-2016, including a record drought in 2012, MAWC under-collected its authorized revenue by approximately $69.4 million. The company argues revenues are continuing to decline because of a nationwide trend of declining use per customer, brought on by national and state conservation mandates and programs, which they say shows no sign of changing.
“Therefore, even if rate base and expenses in the rate year were the same as they were in the historical test year, revenue will not be the same but will, instead, decline from historical test year levels.”
In short, that is their definition of regulatory lag – their numbers being used to build their rates are already one year old, and they’re always losing money.
MAWC proposes to utilize the following information and process to develop the future test year:
• a normalized and fully historical base year (that reflects actual revenues, expenses, and rate base for the 12 months ended December 31, 2016)
• consideration of changes to those cost elements through a verifiable link period (January 1, 2017 to May 31, 2018)
• an assessment of the period covering the first year that new rates are expected to be in place (12 months ending May 31, 2019)
As for the future test year, it’s not an uncommon practice. Nine of the fourteen American Water regulated companies authorize the use of a future test year (California, 6 Hawaii, New York, Illinois, Indiana, Kentucky, Tennessee, Pennsylvania, and Virginia), and many public regulators consider the future test year to be a “best practice.”
In an August 9, 2017 PSC agenda meeting, the commission agreed to allow both Ameren and KCP&L’s requests to intervene in the case, saying it is possible the decision made on this type of policy issue could affect them going forward. Chairman Daniel Hall also noted the companies may have some experience that could be useful as they consider it.
So where does the case stand right now?
The next step is to establish local public hearings, which will be discussed at an Oct. 3 procedural conference in Jefferson City at 10 a.m. at the Governor Office Building.
Benjamin Peters is a reporter for the Missouri Times and Missouri Times Magazine, and also produces the #MoLeg Podcast. He joined the Missouri Times in 2016 after working as a sports editor and TV news producer in mid-Missouri. Benjamin is a graduate of Missouri State University in Springfield. To contact Benjamin, email email@example.com or follow him on Twitter @BenjaminDPeters.