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July 19, 2013
Article Authored by Brattle Consultants on Utility Rate Case Benchmarking Published in Public Utilities Fortnightly

Brattle principal Ahmad Faruqui and senior associate Ryan Hledik have authored an article that demonstrates the process of benchmarking a rate case for utilities. The article has been featured as the cover story in the July 2013 issue of Public Utilities Fortnightly.

Amid a weak economic recovery, both investor-owned and publicly-owned municipal utility companies have faced resistance by state commissioners and board of directors in approving requested rate increases, even with electric rates trending upwards. Denying these rate requests will compound the problem by putting utility financials at risk, causing investor confidence to drop and making utility investments riskier. This will make it more expensive for utilities to raise capital, leading only to additional requests to raise rates.

According to Dr. Faruqui and Mr. Hledik, the best way for utilities to strengthen their rate case application before regulatory bodies is to benchmark their request against those from similarly situated utilities. In their article, the authors construct a hypothetical, medium sized investor-owned utility, “Smart Power & Light” (SP&L), to demonstrate the process of benchmarking its rate application. SP&L’s benchmark consists of two components: a historical assessment and a forward-looking assessment using a single metric, such as the average retail rate, which is defined as total retail revenue divided by total retail sales.

In the historical assessment, SP&L compiles trends in the average retail rate across several samples of utilities. In the forward-looking assessment, they review the assumptions and projections contained in various integrated resource plans across a defined control group of peer utilities. SP&L’s benchmark focuses on nine utilities, which are geographically dispersed and vary in factors such as size, market structure, customer mix, load growth, fuel mix, and regulatory mandates.

The authors explain that the process of benchmarking makes the rate case application more transparent than it otherwise would be by shedding light on what factors are driving rates upwards. More importantly, it assists in providing some additional context around the application by illustrating that nothing unusual is being requested.