Requires electric corporations, gas corporations, steam corporations and water-works corporations to adopt the common equity ratio and rate of return on equity authorized by the public service commission unless such utility can successfully demonstrate that such authorized rates do not meet their capital and/or operating needs.
NEW YORK STATE ASSEMBLY MEMORANDUM IN SUPPORT OF LEGISLATION submitted in accordance with Assembly Rule III, Sec 1(f)
BILL NUMBER: A7502
SPONSOR: Barrett TITLE OF BILL:
An act to amend the public service law, in relation to requiring certain
utilities to adopt the common equity ratio and rate of return on equity
authorized by the public service commission
PURPOSE OF THE BILL:
To require regulated utilities to adopt the rate of return on equity and
common equity ratio as promulgated by the Public Service Commission by
using an updated generic financing methodology when setting final utili-
ty rates, which will provide the lowest possible delivery rates for
ratepayers.
SUMMARY OF SPECIFIC PROVISIONS:
§ 1-Legislative intent.
§ 2-Amends the Public Service Law by adding a new § 65-c, which includes
six new sections. First, it sets forth definitions to be applied in this
section, including: regulated utility, generic financing methodology,
authorized and actual common equity ratio, authorized and actual rate of
return on equity, rate period, and publicly available data.
Second, it requires the commission, on an annual basis, to promulgate
rules and regulations that: first, update the generic financing method-
ology such that, to the greatest extent possible, all of its calcu-
lations are based upon publicly available data; second, set a fair and
reasonable authorized common equity ratio for each regulated utility and
a single rate of return on equity for all regulated utilities based on
the generic financing methodology; and third, reconcile the prior rate
period's authorized rate of return on equity produced by the generic
financing methodology for that rate period (i.e. a "true-up mechanism").
In this true-up process, the commission shall require that any revenues
derived from the authorized rate of return on equity that exceeded the
average monthly rate of return on equity be returned to ratepayers in
the form of a surcredit to their bills for the following rate period,
and that any revenues that would have been derived from an average
monthly rate of return on equity exceeding the authorized rate of return
on equity shall be recovered from ratepayers in the form of a surcharge
to their bills for the following rate period.
The promulgated generic financing methodology, authorized common equity
ratio, authorized rate of return on equity, and prior rate period's
average monthly rate of return on equity shall include input from
outside experts, utility representatives, interested organizations, and
the public. The final regulations shall give preference to the best
interest of the ratepayer.
Third, it requires every regulated utility to: adopt the authorized
common equity ratio for the following rate period as set specifically
for each regulated utility by the commission; adopt the authorized rate
of return on equity for the following rate period; and adopt the
surcredit/surcharge based on the prior rate period's average monthly
rate of return on equity.
Fourth, it outlines the procedures in which a regulated utility may
rebut the commission's authorized common equity ratio, authorized rate
of return on equity, or prior rate period's average monthly rate of
return on equity. It must first initiate a request for public hearing.
If the commission finds substantial basis for the regulated utility's
claims, it shall publish dates from which a public hearing shall take
place. During the public hearing, a regulated utility must: present
documentary evidence, testimony, and exhibits indicating why the author-
ized common equity ratio, authorized rate of return on equity, or prior
rate period's average monthly rate of return on equity as set by the
commission is insufficient to meet its current or future operating and
capital needs, does not provide a fair and reasonable return, describe
why it is insufficient to attract capital at reasonable terms, and why
it is insufficient to to maintain financial integrity during the rate
year. If the commission determines, .by a preponderance of the evidence,
that the regulated utility has successfully met its burden, then it
shall order settlement negotiations via commission-led adjudication.
Fifth, it sets out the standards from which settlement negotiations
shall take place. Specifically, it requires the commission to consider:
testimony and exhibits from expert witnesses, including those from
public interest organizations; how the negotiated settlement reflects
the lowest possible delivery rates for consumers; how the negotiated
settlement improves equity for disadvantaged communities as defined in
the environmental law, how the proposed rates reflect the best interest
of the public and promote principles of equity for disadvantaged commu-
nities; whether the proposals result in the lowest possible delivery
cost to the benefit of the ratepayer; and whether the new settlement
agreement provides a just and reasonable return.
Sixth, it requires the commission to submit to the Governor and legisla-
ture, a report outlining the findings and determinations of the final
authorized common equity ratio, authorized rate of return on equity, or
prior rate period's average monthly rate of return on equity. The report
must describe its findings in clear, accessible language and describe
whether, if at all, the final determinations changed, reflect changed
circumstances, or remained the same during the previous year. The report
must also include all monthly data used for generic financing methodol-
ogy calculations that is not publicly accessible data, together with an
explanation why it was necessary to use non-public data instead of a
publicly available data source. Lastly it shall be published online on
the commission's website and made publicly available.
§ 3-Effective date.
JUSTIFICATION:
Ratemaking represents one of the most fundamental undertakings between
regulated utilities and the New York Public Service Commission (i.e. the
commission). This intricate and protracted process leads to the determi-
nation of final rates that a utility can charge to their customers in
the form of utility bills. As a result, decisions made in ratemaking
can have enormous economic impacts on consumers.(1)
But the ratemaking process is in dire need of reform. Existing proce-
dures are inaccessible, outdated, and more often than not disproportion-
ately benefit utilities at the ratepayers' expense. Millions of New
Yorkers have difficulty understanding their utility bills, let alone
making clear determinations on how a utility ends up justifying its
rates. One core reason underlies this problem: the very manner in which
final rates are decided is driven by the utility rather than the commis-
sion.
Under the current ratemaking process, a utility begins by submitting a
"rate case," a formal proceeding before the commission requesting new
rates to cover the cost of operating and capital expenses. The utility's
request includes detailed information about its current delivery system
and financial accounts, in addition to the proposed rates it requests
for the upcoming "rate period," the time frame in which the utility can
collect rates from consumers based on the amount approved by the commis-
sion.
Once a rate case is filed, the commission reviews the utility's docu-
ments and rate requests, and develops a counter-proposal. Generally,
two percentages drive this evaluation: the "common equity ratio" and the
"rate of return on equity." The common equity ratio is the percentage of
a utility's total capitalization, which consists of common equity (i.e.
shares), retained earnings, and capital surplus. The rate of return on
equity is the return on the equity portion of the rate base that utili-
ties are authorized to collect in rates.(2) When combined, these deter-
minations make up the ceiling from which a utility can charge customers
through monthly utility bills. Herein lies the challenge.
To explain, both the utility and the commission provide their own common
equity ratios and rates of return on equity. The utility uses its own
accounting determinations, while the commission bases its on the "gener-
ic financing methodology," a standardized formula driven by its staff.
Notably, the commission's methodology is based on a 1994 recommended
decision(3) that exists as "policy guidance," a non-binding administra-
tive statement of general applicability used by the commission to direct
its policies or determinations. While the generic financing methodology
operates to serve the common good, its inputs are outdated and subject
to change due to its non-binding nature.
Because of the disparity between the percentages proposed by the utility
and the commission, settlement negotiations are typically held through
an administrative law judge tasked with hearing evidence and recommend-
ing a final decision. It is during this highly drawn out process that
the utility and commission typically propose a settlement to decide
final rates.(4)
The debates over percentages and fractions of percentages can have enor-
mous financial implications. As one expert noted from his 2022 testimo-
ny: setting a common equity ratio at 48% rather than the utility's
proposal of 50% would save ratepayers $64.2 million in the rate year,
while setting a rate of return on equity at 8.75% rather than the utili-
ty's proposal of 10% would save electric ratepayers $225.1 million and
gas ratepayers an additional $85.5 million.(5) The combined savings in a
one-year rate case resulting from a 48% common equity ratio and an 8.75%
return on equity would total $374.8 million.(6)
This legislation aims to modernize the manner in which regulated utili-
ties and the commission come to set final rates.(7)
First, it requires the commission to promulgate regulations that:
update the generic financing methodology to reflect new economic reali-
ties which are, to the greatest extent possible, based upon publicly
available data; set a fair and reasonable authorized common equity ratio
for each specific regulated utility and set a single rate of return on
equity for all regulated utilities; and reconcile the prior rate peri-
od's authorized rate of return on equity produced by the generic financ-
ing methodology for that rate period (i.e. a "true-up" mechanism).
This true-up mechanism is a flexible approach that operates to reconcile
the previous rate period's rates by requiring that revenues that
exceeded the average monthly rate of return on equity be returned to
ratepayers in the form of a surcredit to their bills for the following
rate period, and that revenues that would have been derived from an
average monthly rate of return on equity exceeding the authorized rate
of return on equity are recovered from ratepayers in the form of a
surcharge to their bills for the following rate period. Each of the
proposed regulations shall include input from accounting experts, utili-
ty representatives, outside organizations, and the public. The final
regulations must give preference to the best interest of the ratepayer.
Second, it requires every regulated utility to: adopt the authorized
common equity ratio as set specifically for each regulated utility for
the following rate period; adopt the single authorized rate of return on
equity for the following period; and adopt the surcredit/surcharge based
on the prior rate period's average monthly rate of return on equity.
Third, it sets out processes and standards from which a utility can
rebut the commission's authorized common equity ratio, authorized rate
of return on equity, and/or prior rate period's average monthly rate of
return on equity. This shall take place at a public hearing, in which
the regulated utility must present detailed evidence explaining why the
commission's regulations are insufficient. The regulated utility must
meet its burden by a preponderance of the evidence. If it does then the
commission shall order adjudication.
Fourth, it outlines the standards in which settlement negotiations
through commission-led adjudication shall take place. It requires the
adjudicator to consider: testimony from expert witnesses and public
interest organizations; and how the settlement reflects the lowest
possible delivery rates for consumers, improves equity for disadvantaged
communities as defined in the environmental law, promotes principles of
equity, is in the best interest of the public, and provides a just and
reasonable return.
Finally, it requires the commission to publish, on an annual basis, a
report that describes in clear, accessible language the findings and
determinations of the final authorized common equity ratio, authorized
rate of return on equity, and/or prior rate period's average monthly
rate of return on equity. The report must include all monthly data used
for generic financing methodology calculations that is not publicly
available data, with an explanation of why it was necessary to use non-
public data instead of a publicly available data source.
By requiring utilities to begin with the presumption of adopting the
commission's authorized common equity ratio, authorized rate of return
on equity, and surcrdit/surcharge determination based on the prior rate
period's average monthly rate of return on equity, and making explicit
its requirement to prioritize the lowest possible utility costs for
consumers and principles of fairness, New York will return power back to
the public institution whose primary mission is to ensure affordable,
safe, secure, and reliable access to utility services for New York
State's residential and business consumers, at just and reasonable
rates, while protecting the natural environment.(8) This legislation
recognizes that regulated utilities are entitled to make a fair and
reasonable return,(9) while emphasizing that the existing process of
ratemaking must be fundamentally restructured.
LEGISLATIVE HISTORY:
New bill.
FISCAL IMPLICATIONS FOR STATE AND LOCAL GOVERNMENTS:
To be determined.
EFFECTIVE DATE:
This act shall take effect one year after it shall be enacted into law.
(1) For example, the Bureau of Labor Statistics reports that New York
area electricity costs have exceeded the national average by at least
40% over the past five Decembers, and in December 2022, electricity
costs in New York were 40.8% higher than the nation.
(2) As one writer notes, "the process of setting an allowed ROE has
consistently proven to be the most contentious and subjective part of a
rate case proceeding." Phillip S. Cross, Public Utilities Fortnightly,
Equity Returns: 'Allowed' vs. Earned (Nov. 2015).
(3) 1994 "Recommended Decision" (Case 91-M-0509) (Proceeding on Motion
of the Commission to Consider Financial Regulatory Policies for New York
State Utilities).
(4) As of April 2023, for example, the commission and ConEdison have
submitted a request for public comments regarding its "joint proposal"
for their ongoing rate case. https://dps.ny.gov/event/conedison-
comments-due-regarding-joint-proposal -submitted-con-edison-rate-case
(5) Direct Testimony of William D. Yates for the Public Utility Law
Project of New York, Inc. before the New York Public Service Commission
(May 20, 2022).
(6) Id.
(7) Regulated utilities means an "electric corporation," "gas corpo-
ration," "steam corporation," or "waterworks corporation" as defined in
section two of the Public Service Law.
(8) New York State, Department of Public Service, About Us,
https://dps.ny.gov/about-us
(9) For decades, the Supreme Court has recognized that regulated utili-
ties are entitled to a reasonable opportunity to recover their "prudent-
ly-incurred costs," and earn a "fair and reasonable rate of return on
their capital investments." see Federal Power Commission et al v. Hope
Natural Gas Co. ("Hope"), 320 U.S. 591, 603 (1944); Bluefield Water
Works and Improvement Co. v. Public Service Commission of West Virginia
("Bluefield"), 262 U.S. 679 (1923).
STATE OF NEW YORK
________________________________________________________________________
7502
2023-2024 Regular Sessions
IN ASSEMBLY
May 25, 2023
___________
Introduced by M. of A. BARRETT -- read once and referred to the Commit-
tee on Energy
AN ACT to amend the public service law, in relation to requiring certain
utilities to adopt the common equity ratio and rate of return on equi-
ty authorized by the public service commission
The People of the State of New York, represented in Senate and Assem-bly, do enact as follows:
1 Section 1. Legislative intent. The legislature finds and declares
2 that:
3 1. The increasing burden of high utility rates leaves New York resi-
4 dents with extreme financial difficulties. Soaring electricity rates
5 leave one in five New York residents at risk of having their electricity
6 cut off. Meanwhile, the long-term trend of utilities receiving record
7 profits threatens the livelihood of millions of New Yorkers who struggle
8 to afford utility bills.
9 2. The current process in which the public service commission (herein-
10 after the "commission") and regulated utilities set rates for utility
11 bills to ratepayers has historically been inaccessible and indeciphera-
12 ble to the public and often runs contrary to the stated goals of the
13 commission to ensure affordable, safe, secure, and reliable utility
14 service for New York residential and business consumers.
15 3. Regulated utilities are entitled to earn a fair and reasonable rate
16 of return on their capital investments, pursuant to Supreme Court
17 rulings in Federal Power Commission et al. v. Hope Natural Gas Co.
18 (1944) and Bluefield Water Works and Improvement Co. v. Public Service
19 Commission of West Virginia (1923). However, recent trends suggest that
20 the "fair and reasonable" legal standard is not always reflected in
21 actual utility rates for consumers. Aligning the incentives of regu-
22 lated utilities and ratepayers is essential to protect the interests of
23 all New York residents by establishing a more accurate standard for a
24 regulated utility's right to earn a fair and reasonable rate of return.
EXPLANATION--Matter in italics (underscored) is new; matter in brackets
[] is old law to be omitted.
LBD10360-05-3
A. 7502 2
1 § 2. The public service law is amended by adding a new section 65-c to
2 read as follows:
3 § 65-c. Setting a rate of return on equity and common equity ratio. 1.
4 Definitions. For the purposes of this section, the following terms shall
5 have the following meanings:
6 (a) "Regulated utility" means an "electric corporation", "gas corpo-
7 ration", "steam corporation", or "water-works corporation" as defined in
8 section two of this chapter.
9 (b) "Generic financing methodology" means a standardized procedure for
10 determining the authorized rates of return on equity and common equity
11 ratios of utilities regulated by the commission.
12 (c) "Authorized common equity ratio" means the authorized percentage
13 of a utility's total capitalization, such as common equity, preferred
14 stock, and long-term debt, that consists of common equity, retained
15 earnings, and capital surplus.
16 (d) "Actual common equity ratio" means the actual percentage of a
17 utility's total capitalization, such as common equity, preferred stock,
18 and long-term debt, that consists of common equity, retained earnings,
19 and capital surplus.
20 (e) "Authorized rate of return on equity" also known as return on
21 equity ("ROE") or the cost of equity capital, means the return on the
22 equity portion of the rate base that regulated utilities are authorized
23 to collect in rates.
24 (f) "Actual rate of return on equity" means a measure of financial
25 performance calculated by dividing net income by shareholders' equity.
26 (g) "Rate period" means the time period in which a regulated utility
27 collects rates that are authorized and approved by the commission.
28 (h) "Publicly available data" means published data that is openly
29 accessible via the internet, or indirectly accessible through a public
30 library or similar institution.
31 2. Setting the generic financing methodology; common equity ratio;
32 rate of return on equity. (a) On an annual basis, the commission shall
33 promulgate rules and regulations that:
34 (i) update the generic financing methodology such that, to the great-
35 est extent possible, all of its calculations are based upon publicly
36 available data;
37 (ii) set a fair and reasonable authorized common equity ratio for each
38 regulated utility and a single authorized rate of return on equity for
39 all regulated utilities, based on the generic financing methodology; and
40 (iii) reconcile the prior rate period's authorized rate of return on
41 equity to a calculation of the average monthly rate of return on equity
42 produced by the generic financing methodology for that rate period, such
43 as a "true-up mechanism". In making this determination, the commission
44 shall require that: (A) any revenues derived from an authorized rate of
45 return on equity exceeding the average monthly rate of return on equity
46 be returned to ratepayers in the form of a surcredit to their bills for
47 the following rate period; and (B) any revenues that would have been
48 derived from an average monthly rate of return on equity exceeding the
49 authorized rate of return on equity shall be recovered from ratepayers
50 in the form of a surcharge to their bills for the following rate period.
51 (b) The promulgated generic financing methodology, authorized common
52 equity ratio, authorized rate of return on equity, and the prior year's
53 average monthly rate of return on equity shall clearly state the methods
54 used to justify and explain its proposed guidance.
55 (c) The promulgated generic financing methodology, authorized common
56 equity ratio, authorized rate of return on equity, and prior rate peri-
A. 7502 3
1 od's average monthly rate of return on equity shall be subject to tradi-
2 tional notice and comment procedures, as outlined in the state adminis-
3 trative procedure act, which shall include input from public interest
4 organizations, utility accounting experts, representatives from regu-
5 lated utilities, and other organizations and interested parties, includ-
6 ing residents of this state, as necessary.
7 (d) The final generic financing methodology, authorized common equity
8 ratio, authorized rate of return on equity, and prior rate period's
9 average monthly rate of return on equity adopted by the commission,
10 following the notice and comment period, shall give preference to the
11 best interest of the ratepayers.
12 3. Adopting the authorized common equity ratio, authorized rate of
13 return on equity and/or prior rate period's average monthly rate of
14 return on equity. Except as provided in subdivision four of this
15 section, every regulated utility shall:
16 (a) adopt the authorized common equity ratio based on the generic
17 financing methodology for the following rate period as set specifically
18 for each regulated utility by the commission;
19 (b) adopt the authorized rate of return on equity based on the generic
20 financing methodology for the following rate period; and
21 (c) adopt the surcredit/surcharge based on the prior rate period's
22 average monthly rate of return on equity, as outlined in subdivision two
23 of this section, for the following rate period.
24 4. Rebutting the authorized common equity ratio, rate of return on
25 equity, and prior rate period's average monthly rate of return on equi-
26 ty. (a) The burden of rebutting the authorized common equity ratio,
27 authorized rate of return on equity, and/or prior rate period's average
28 monthly rate of return on equity shall rest exclusively with the regu-
29 lated utility during a public hearing facilitated by the commission. In
30 order to rebut the authorized common equity ratio and/or authorized rate
31 of return on equity, the regulated utility shall first initiate a
32 request for public hearing through procedures outlined by the commis-
33 sion. Should the commission find a substantial basis for the claims
34 outlined by the regulated utility in its request, it shall publish a set
35 of dates from which a public hearing shall take place.
36 (b) During the public hearing the regulated utility shall:
37 (i) present documentary evidence, including but not limited to exhib-
38 its, written and oral testimony, and data, describing why the authorized
39 common equity ratio, authorized rate of return on equity, or prior rate
40 period's average monthly rate of return on equity is insufficient to
41 meet its current or future operating and capital needs;
42 (ii) present documentary evidence, including but not limited to exhib-
43 its, written and oral testimony, and data, describing why the authorized
44 common equity ratio, authorized rate of return on equity, or prior rate
45 period's average monthly rate of return on equity does not provide a
46 fair and reasonable return;
47 (iii) describe with sufficient detail why the authorized common equity
48 ratio, authorized rate of return on equity or prior rate period's aver-
49 age monthly rate of return on equity adopted by the commission is insuf-
50 ficient for the regulated utility to attract capital at reasonable
51 terms; and
52 (iv) describe with sufficient detail why the authorized common equity
53 ratio, authorized rate of return on equity, or prior rate period's aver-
54 age monthly rate of return on equity is insufficient for the regulated
55 utility to maintain its financial integrity during the rate year.
A. 7502 4
1 (c) If the commission determines, by a preponderance of the evidence,
2 after the conclusion of the public hearing, that the regulated utility
3 has sufficiently demonstrated that the authorized common equity ratio,
4 authorized rate of return on equity, or prior rate period's average
5 monthly rate of return on equity is insufficient to meet the regulated
6 utilities' operating needs, capital needs, or both, then the commission
7 and the regulated utility shall then enter into settlement negotiations
8 through adjudication pursuant to the procedures set out under this arti-
9 cle.
10 5. Settlement negotiations following successful rebuttal. All settle-
11 ment negotiations shall take into consideration the following factors
12 prior to reaching a final authorized common equity ratio, authorized
13 rate of return on equity, or prior rate period's average monthly rate of
14 return on equity:
15 (a) testimonies and exhibits from expert witnesses, including those
16 from outside public interest organizations;
17 (b) how the negotiated settlement reduces delivery rates for consum-
18 ers;
19 (c) how the negotiated settlement improves equity for, minimizes
20 impacts on, and prioritizes benefits to utility rates for disadvantaged
21 communities as defined in section 75-0101 of the environmental conserva-
22 tion law;
23 (d) whether the testimony and exhibits of the regulated utility
24 reflect positions that are in the best interest of the public and
25 promote principles of equity for disadvantaged communities;
26 (e) whether the proposals of the regulated utility would result in the
27 lowest possible delivery cost to the benefit of the rate payer; and
28 (f) whether the new settlement agreement provides a just and reason-
29 able return for the regulated utility.
30 6. Reports and legislative hearing on findings between the commission
31 and regulated utilities. (a) Annually, the commission shall submit to
32 the governor and the legislature, a report outlining the findings and
33 determinations of the final authorized common equity ratio, authorized
34 rate of return on equity and/or prior rate period's average monthly rate
35 of return on equity, whether set through the procedures outlined in
36 subdivisions three and four of this section or through negotiated
37 settlements outlined in subdivision five of this section, between a
38 regulated utility and the commission during the previous year.
39 (b) Such report shall analyze and describe in clear, accessible
40 language how the final authorized common equity ratio, authorized rate
41 of return on equity, and/or prior rate period's average monthly rate of
42 return on equity has changed, reflects new circumstances, or remained
43 the same during the previous year.
44 (c) Such report shall include all monthly data used for generic
45 financing methodology calculations that is not publicly available data,
46 together with an explanation of why it was necessary to use such non-
47 public data instead of a publicly available data source.
48 (d) The annual report shall be published online on the commission's
49 website and be made publicly available.
50 § 3. This act shall take effect one year after it shall have become a
51 law.
