Class 3 Network Industries, Spring, 2014 Traditional Rate Cases 2/23/2019 Class 3 Network Industries, Spring, 2014 Traditional Rate Cases Randal C. Picker James Parker Hall Distinguished Service Professor of Law The Law School The University of Chicago 773.702.0864/r-picker@uchicago.edu Copyright © 2000-14 Randal C. Picker. All Rights Reserved.

U.S. Nuclear Power Background World Nuclear Ass’n US Report February 23, 2019

Federal Energy Regulatory Commission, State of the Markets (Mar 2013) February 23, 2019

Pittsburgh Tribune-Review (2 Apr. 2014) February 23, 2019 Pittsburgh Tribune-Review (2 Apr. 2014)

( ) Operating Expenses Rate of Return Rate Base Revenue Requirements x 62-133(b)(3): “Ascertain such public utility’s reasonable operating expenses, including actual investment currently consumed through reasonable actual depreciation” 2/23/2019 62-133(a): “the Commission shall fix such rates as shall be fair both to the public utilities and to the consumer” Rate of Return Rate Base x ( ) Operating Expenses Revenue Requirements = + 62-133(b)(1): “Ascertain the reasonable original cost of the public utility’s property used and useful, or to be used and useful within a reasonable time after the test period, in providing the service rendered to the public within the State, less that portion of the cost which has been consumed by previous use recovered by depreciation expense” February 23, 2019

2/23/2019 62-133(b)(4) Fix such rate of return on the cost of the property ascertained pursuant to subdivision (1) as will enable the public utility by sound management to produce a fair return for its shareholders, considering changing economic conditions and other factors, as they then exist, February 23, 2019

2/23/2019 62-133(b)(4) to maintain its facilities and services in accordance with the reasonable requirements of its customers in the territory covered by its franchise, and to compete in the market for capital funds on terms which are reasonable and which are fair to its customers and to its existing investors. February 23, 2019

2/23/2019 62-133(c) The original cost of the public utility’s property, including its construction work in progress, shall be determined as of the end of the test period used in the hearing and the probable future revenues and expenses shall be based on the plant and equipment in operation at that time. February 23, 2019

2/23/2019 62-133(c) The test period shall consist of 12 months’ historical operating experience prior to the date the rates are proposed to become effective, but the Commission shall consider such relevant, material and competent evidence as may be offered by any party to the proceeding tending to show actual changes in costs, revenues or the cost of the public utility’s property used and useful, or to be used and useful within a reasonable time after the test period, February 23, 2019

2/23/2019 62-133(c) in providing the service rendered to the public within this State, including its construction work in progress, which is based upon circumstances and events occurring up to the time the hearing is closed. February 23, 2019

2/23/2019 Big Picture Questions Thornburg II (325 NC 463/385 SE2d 451): Operating Expenses What limits what can be considered a “reasonable operating expense” under 62-133(b)(3)? Does 62-133(c) limit this? Can “cancellation costs” be considered operating expenses? February 23, 2019

Big Picture Questions Thornburg I (325 NC 484): The Rate Base 2/23/2019 Big Picture Questions Thornburg I (325 NC 484): The Rate Base Can cancellation costs be added to the rate base under 62-133(b)(1)? How does the “used and useful” language limit this? February 23, 2019

The Cluster Design Harris 1 Harris 4 Harris 2 Harris 3 2/23/2019 The Cluster Design Harris 1 Harris 4 Harris 2 Harris 3 Common Facilities February 23, 2019

2/23/2019 Facts Big Picture 1971: Plans adopted for Harris Nuclear Power Plant; anticipated cost of $315 million for Unit 1 1973: Oil embargo hurts economy, electricity demand forecasts reduced, cancel Harris 2, 3, 4 1987: Harris Unit 1 comes online at cost of $3.9 billion February 23, 2019

Facts Design Decisions 2/23/2019 Facts Design Decisions “Prudence audit” suggests 1975 redesign would have saved $180 million of $570 million in excess common costs February 23, 2019

Facts Commission Ruling $570mm excess common facilities 2/23/2019 Facts Commission Ruling $570mm excess common facilities $390mm into rate base $180mm as operating expenses subject to amortization As noted, $180mm is amount that could have been saved through subsequent re-design of shared cluster facilities February 23, 2019

Two-Step Analysis under 62-133(b)(1) 2/23/2019 Two-Step Analysis under 62-133(b)(1) 1: Ascertain the reasonable original cost of the public utility’s property 2: used and useful February 23, 2019

Was the original cluster design “reasonable”? 2/23/2019 Was the original cluster design “reasonable”? If Yes Eligible for recovery If No No recovery possible Court concludes was prudent February 23, 2019

But Should original prudence suffice? 2/23/2019 But Should original prudence suffice? No, need to update design to reflect new developments Court misses this Would have saved $180 million had the utility done so February 23, 2019

Step 2 Is the excess common property used and useful? 2/23/2019 Step 2 Is the excess common property used and useful? If yes, eligible for rate base treatment If no, raises issues in Thornburg II (325 NC 463) Court concludes not used and useful, and under Thornburg II treated as cancellation costs eligible for amortization as operating expenses February 23, 2019

Recalculate Rates? Says the Court 2/23/2019 Recalculate Rates? Says the Court “Since our decision results in the removal of approximately $389,000,000 from the rate base, N.C.G.S. § 62-133(b)(1), it will be necessary for the Commission, on remand, to determine whether a new rate of return must be fixed in accordance with N.C.G.S. § 62-133(b)(4) February 23, 2019

Recalculate Rates? Says the Court 2/23/2019 Recalculate Rates? Says the Court “in order that the rates fixed by the Commission will be fair to CP & L and to the consumer as required by N.C.G.S. § 62-133(a).” February 23, 2019

Risk Allocation Policy 2/23/2019 Risk Allocation Policy Court See 3 Choices (1) Recovery of all of the costs from ratepayers, by allowing amortization of the investment plus a return on the unamortized balance (2) Recovery of all costs from shareholders through a total disallowance of recovery in rates, instead requiring the utility to write off the entire amount in a single year February 23, 2019

Risk Allocation Policy 2/23/2019 Risk Allocation Policy (3) Recovery from ratepayers and shareholders through amortization of costs in rates over a period of years, with no return on the unamortized balance. 3 is described as promoting “equitable sharing” of losses How should we evaluate this? February 23, 2019

Issues on Risk Allocation 2/23/2019 Issues on Risk Allocation Mimicking Markets Should we seek to mimic a market result? What would that mean? Risk Control Who is better situated to eliminate the risk of bad projects? Shareholders or consumers? February 23, 2019

Issues on Risk Allocation 2/23/2019 Issues on Risk Allocation Risk Diversification Who is better able to diversify the risk of failed projects? Shareholders or consumers? February 23, 2019

Analysis Mimicking Markets 2/23/2019 Analysis Mimicking Markets Smart decision-making irrelevant: question is whether value is created No ability to extract dollars from customers merely because project made sense upfront February 23, 2019

2/23/2019 Analysis Risk Control Both groups, shareholders and ratepayer/consumers, are quite diffuse Consumers have no direct say, only through public official perhaps February 23, 2019

Analysis Risk Diversification 2/23/2019 Analysis Risk Diversification Consumers as consumers can’t diversify by using multiple electricity companies Trend is entry, and shareholders will be stuck Shareholders can hold portfolio of stocks February 23, 2019