Risk & Operations

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Introduction

A rate case is the formal process which industries that have the legal designation of public utility are mandated to go through in order to set the rate at which they are allowed to charge consumers for their service. Rate cases serve as one of the primary instruments of government regulation of such industries. Rate case management is an integral part of any Utility's CIS system. Every year one or more rate changes will require to be implemented to keep up with the industry's ever changing trends.

The graph below gives an idea about the number of rate cases filed quarterly by Investor Owned Utilities in the US from 1990 to 2008.

Source: SNL Financial/Regulatory Research Assoc. and EEI Rate Department

Rate cases typically go through a cycle (sometimes multiple cycles) starting from determining a need and all the way through getting the rates approved by a regulatory board. This article attempts at explaining the key drivers, challenges and potential solutions for overcoming those challenges.

Rate Case Drivers

Typical events that drive a rate change are:

• Utilities need to maintain an effective rate of return
• Utilities having to maintain better financial rating
• Need for newer products to address environmental issues

Need for effective rate of return

Every Utility, be it a Municipality Owned Utility (MOU) or an Investor Owned Utility (IOU), has constant pressure to deliver an effective rate of return year after year. The rate of return is typically affected by the following factors:

• Increasing cost of supply
• Increased investment in infrastructure

Utilities need fuel to generate the energy that needs to be supplied. Rising costs of fuel such as natural gas, coal etc., results in higher operating costs for Utilities to supply energy. As markets grow, a Utility will have to make heavy investments in its infrastructure (also known as Rate Base) to be able to sustain the growing demand.

Maintain Financial Rating

Utilities have a need to finance their infrastructural and operational costs through various financial instruments. This includes obtaining loans from various financial institutions. Financial institutions fix the interest rate for the debts based on financial stability (read - better cash flow) of the Utility. Utilities tend to increase their rates to maintain an effective cash flow so that the interest rates on their debts could be kept at a minimum.

Need for Environment Friendly Products

In these days of global warming, environment conservation plays a very vital role. Utility companies and their customers have their fair share of contribution towards such environment friendly initiatives. Environment friendly energy sources such as Solar and Wind energy need to be tapped to maintain a balanced ecosystem. Investing in such infrastructure means more expenses to the Utility. A part of such expenses will be recovered from customers who wish to participate in them. This requires unique energy products and rates to be defined or redefined.

Challenges with Rate Case Management

Rate Case implementations come with a set of unique challenges unlike other system changes. Some of the key challenges with respect to implementation of rate changes have been discussed further in this section.

Business Case

When it comes to rate changes a comprehensive business case needs to be in place. A business case should be in place that details the need for a rate change with all the necessary data to convince internal and external stakeholders. A business case should have the following components:

• Variance Analysis - explaining the difference (or variance) between actual costs and the standard costs allowed for the good output. It can also show the change in expenses from one period to another.
• Benchmarking - the process of comparing the cost, time or quality of what one organization does against what another organization does.
• Economics Analysis - studies the production, distribution, and consumption of goods and services.
• Expense Normalization - process of reviewing current expenses as compared to normal conditions and expected levels.
• Trend Analysis - concept of collecting information and attempting to spot a pattern, or trend, in the information.

This becomes a challenge when there are not enough support systems available to collect the various data points.

Timeliness

Rate cases typically come with uncertain timelines for implementation. The complete lifecycle could take anywhere between three months to a year and much longer to realize the benefits from it. There are times when the regulatory approvals happen so quick that there is a tremendous rush to implement the rate change. There are times when systematic changes will be in place and the Utility will have to wait for months for approval and subsequent implementation. A Utility should be geared up to face such timelines.

Quality Assurance

Whenever there is a rate change, the biggest and direct impact is to a Utility's billing system. The Utility needs to ensure that their customers will be billed appropriately with the new rates. Complexities such as pro-ration, contractual agreements, summary bills etc., add additional risks to such rate changes. It becomes imperative to have robust quality assurance programs to minimize the risk of unduly charges to customers by validating the rate changes in a sufficient fashion. Typically this takes enormous efforts due to the above mentioned complexities.

Solutions to address Rate Case Management

As we can see from the above challenges the Utility's management needs extensive information management processes and tools to have a successful Rate Case implementation. Solutions are needed at all levels of management right from the CXO level executives to line managers. Certain potential solutions have been described below to address the needs of a rate case implementation.

Business Case Management

As we saw earlier, the business case for a rate case is very critical and requires a lot of time sensitive information. The business case should contain the right amount of information to speed up the rate case approval process. This solution should have mechanisms to consolidate and report based on various sources of inputs needed for a business case for a rate case.

Rate Case Simulation Tools

Rate cases come in several sizes from a minor adjustment to an existing rate component to coming up with several new charges and riders. It is imperative to understand exactly how the Utility and its customers will get affected by the change. Typically rate changes have a direct impact on the Utility's billing engine. Updating the billing engine before a rate change is approved could be a very tricky situation since they go through several iterations. A rate simulation tool which could use the existing billing engine as a backend will come in handy to experiment different rates even prior to requesting for a rate change.

Quality Assurance Frameworks

As we have seen above, timeliness of a rate case implementation becomes a very critical factor to the success of the implementation. At the same time, it takes a lot of time and effort to thoroughly test all the possible business scenarios. A potential solution to address this situation would be to have a Quality Assurance framework which will ensure thorough testing and also minimize the efforts. The framework will contain a repository of reusable test cases, tools to manage test data and automated testing.

Existing Market Solutions

SAP's rate case management applications provides an integrated framework that helps you establish and prioritize corporate strategies and execute them effectively at an operational level to manage costs, budgets, and rates. The software integrates enterprise data from SAPr and non-SAP software and automates key processes to support the delivery of critical information to all key stakeholders. Robust functionality facilitates the rate case filing processes and enables consistent, timely, and accurate responses to interveners.

Oracle Utilities Rate Management helps utilities and energy companies quickly respond to rate and price changes that affect the fair allocation of resources and competitive pricing to retain customers and earnings stability. Utilities now have a completely automated system that integrates business functions and improves accuracy, timeliness, and competitive response of rate pricing, design and analysis. Accessing rates, load, and customer demographic data is quick and easy with Oracle Utilities Rate Management. Data can be analyzed, graphed, and reported using industry-standard rate analysis techniques.

IMC Rate Case Submission Management with IBM ECM utilizes industry-leading technologies to enables the utilities industry to improve validation for rate case modifications. Companies improve the tracking and usage of information, enabling them to more quickly respond to inquiries from constituents and the Public Utilities Commission (PUC), and present information to validate the submission. Implementing this solution will result in better management of information required for tariff approval, standardization of accounting formats, review of annual reports, analysis of mergers and acquisitions, assessment of other related business activities and faster resolution of customer complaints.

CaseWorksTM provides a solution for rate case management and work flows for managing regulatory and rate case processes. This solution automates procedures in a docket / case including drafting, reviewing and filing business critical documents.