Rate Case Strategy & Management  

By
Branko Terzic

Business strategy is among the main subjects taught in MBA programs and books on the topic are perennial best sellers. However, there are few books for the executive of a regulated utility looking for approaches to regulatory strategy and only one which includes the specific topic of “The Grand Strategy of the Rate Case.”  This is a shame because the rate case “deals with the financial life stream of the utility” and the strategy deals with “the planning, execution and control of operations” according to Francis X. Welch, long serving editor of Public Utilities Fortnightly magazine and author of Preparing for the Utility Rate Case (PUR 1954).  

Welch’s book is long out of print so allow me to provide a brief summary of his insights in the fifteen chapters of Preparing for the Utility Rate Case. As an author Welch was well qualified to provide these observations due to his years of experience as a regulatory lawyer, utility magazine editor and rate case researcher. Keeping in mind that many of the same considerations of rate case planning should also be included in planning for the other regulatory filings such as applications for major new construction and approval of mergers and acquisitions. 

The first topic Welch addressed is that of establishing the need for a rate case. Management is encouraged to designate the signaling of that need with one executive or manager based on pre-discussed indicators. While the authority to initiate a rate case rests with the executives and board of directors the early recognition of need may come from much lower in the management ranks. Welch’s years of experience show when he concludes the chapter with the italicized emphasis on “the importance of exhausting all other measures to yield an adequate return before resorting to the rate increase solution.” He follows this with the admonition that “The utility is well advised to be sure its house is in order before seeing an increase.” 

The next two chapters address issues of public relations and anticipation of rate case opposition.  Interestingly, but not surprisingly, the author quotes the then Chairman of the Wisconsin Public Service Commission, John C. Doerfer that the “full responsibility” for explaining the regulatory process to the press and public “...lies, with the utility.” The chapter offers objectives, organization and examples of successful programs. Often overlooked by some managements is Welch’s reminder that “specialized cultivation of public relations is probably the most challenging, if not the most difficult, aspect of rate case preparation.”  Welch’s discussion of “opposition” includes, appropriately the commission staff and external parties “challenging the objectives of the proponents in a rate case.” In reviewing the 1954 documents, nothing has changed much other than a proliferation of “opposition” from additional and sometimes multiple government funded sources.  

Welch next discusses the unique “nature” of utility rate proceedings, the significance of events leading up to the rate case and the importance of lawyer selection.  That utility rate proceedings are unique is an understatement. During long periods of time between rate cases; the press, the public, PASC and utility employees, and political figures may well forget the laws, rights, responsibilities, limits and authority involved with rate regulation. That a single utility rate case is a “precedent” for other utilities expands the importance within the state as well. Welch mentions also the possibility, now as apparent as in 1954, of a utility filing causing ill-informed “reform” legislation to be introduced. 

At this point Welch introduces Chapter VIII “The Grand Strategy of the Rate Case”. Having established the difficult environment in which a rate case is to be pursued the author now turns to management’s responsibilities for implementing a viable strategy and supporting tactics. The term “strategy”, taken from the original military context, refers to the planning, execution and control at a distance from the scene of operations, while tactics is the control and direction on the scene.  

Management’s grand strategic decisions include timing and type of rate case, establishing objectives and alternatives, the topics and changes to be requested, and some process to assure that all of the relevant essential points of coverage have been addressed sufficiently and convincingly. Here the directions of rate case counsel and executive decisions about witness selection, training and preparation are critical. 

The final chapters discuss the mechanics of rate case preparation with a survey of necessary components of each of the major revenue requirement determinants; rate base, rate of return, operating and maintenance expenses, depreciation taxes and return, cost of service allocations and adjustments to rates. All have their own unique histories and treatments in each state and at FERC. 

Returning to one of Welch’s earlier points, on the “the importance of exhausting all other measures” before initiating a rate case, I would remind the utility executive that while the company’s rate case may be driven because of a few explainable external factors, the initiation of a rate case invites in the regulators to review any or all of the utility’s operations, tariffs, or management decisions.  

As a former state PSC and FERC commissioner I did not appreciate this last point as much until later in my career when I was in the position of Chairman, President and CEO of a rate regulated utility. Initiating a rate case means taking on a new risk, a manageable one, if the strategy and tactics are sound, but a new risk, nonetheless. 

To address this issue and using the lessons from Welch’s book along with the instructor’s firsthand in February 2023, in coordination with EUCI I offered a one-day executive seminar on Rate Case Strategy & Management. Let me know if you or your organization have an interest in attending a general 2024 session or in a session tailored to your public utility rate case staff.