1. Class 3 Network Industries, Spring, 2014 Traditional Rate Cases
2/23/2019
Class 3 Network Industries, Spring, Traditional Rate Cases
Randal C. Picker
James Parker Hall Distinguished Service Professor of Law
The Law School
The University of Chicago
Copyright © Randal C. Picker. All Rights Reserved.

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

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

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

5. ( ) 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”
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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

6. 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

7. 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

8. 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

9. 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

10. 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.
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11. 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 (b)(3)?
Does (c) limit this?
Can “cancellation costs” be considered operating expenses?
February 23, 2019

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

13. The Cluster Design Harris 1 Harris 4 Harris 2 Harris 3
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The Cluster Design
Harris 1
Harris 4
Harris 2
Harris 3
Common Facilities
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14. 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

15. Facts Design Decisions
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Facts
Design Decisions
“Prudence audit” suggests 1975 redesign would have saved $180 million of $570 million in excess common costs
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16. Facts Commission Ruling $570mm excess common facilities
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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

17. Two-Step Analysis under 62-133(b)(1)
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Two-Step Analysis under (b)(1)
1: Ascertain the reasonable original cost of the public utility’s property
2: used and useful
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18. Was the original cluster design “reasonable”?
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Was the original cluster design “reasonable”?
If Yes
Eligible for recovery
If No
No recovery possible
Court concludes was prudent
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19. But Should original prudence suffice?
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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

20. Step 2 Is the excess common property used and useful?
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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

21. Recalculate Rates? Says the Court
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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

22. Recalculate Rates? Says the Court
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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

23. Risk Allocation Policy
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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
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24. Risk Allocation Policy
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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?
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25. Issues on Risk Allocation
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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?
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26. Issues on Risk Allocation
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Issues on Risk Allocation
Risk Diversification
Who is better able to diversify the risk of failed projects? Shareholders or consumers?
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27. Analysis Mimicking Markets
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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
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28. 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
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29. Analysis Risk Diversification
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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