The following is an except from Ice Miller's Pathways to Success for Utilities Guide which provides insights on a variety of topics potentially impacting utility service providers.
A utility’s base rates are determined based on a snapshot in time known as a “test year.” A utility’s investments, expenses, and revenues from sales are all examined within the context of this “test year” so that rates can be set with all of these inputs in sync. Indiana has traditionally relied on historical test years for base rate cases.
The use of a historical test year, however, can present problems. The utility’s rates are effectively out of date as soon as the new rate order goes into effect, because a utility files its rate case using historical data, and then the rate case process generally takes about a year. The “regulatory lag” caused by using outdated data for setting future rates increases financial risk for utilities, by making it more difficult for the utility to recover its current costs of providing service through rates. This increased risk can result in increased financing costs for utilities, which is eventually reflected in higher rates.
In 2013, the Indiana legislature recognized that the state’s rate case statutes needed to be modernized, in terms of providing utilities with certain rate case options to mitigate regulatory lag, which are widely available in other states. Senate Enrolled Act 560 (codified at Ind. Code § 8-1-2-42.7) provides two new rate case options for utilities:
- Allows rate cases to be based on a future or hybrid test period.
- Allows the utility to put 50% of its requested rate increase into effect, subject to refund, if the Indiana Utility Regulatory Commission (IURC) has not issued a rate order within 300 days after the utility’s case-in-chief is filed.
In our view, Ind. Code § 8-1-2-42.7 will result in more efficient rate cases and less regulatory lag.