Thursday, March 16, 2017
Rate shock is a subjective measure of the assumed impact on utility customers of a proposed rate increase. It is a claim that can pop up in a ratemaking proceeding of any public utility, including water and wastewater utilities.
For example, in an Illinois case involving a drinking water utility, a witness for the regulatory commission testified that a rate increase of over 30% could be considered rate shock.* In that case, the commission approved a consolidated rate structure applicable to several water utilities having a common owner. The commission stated that the consolidated rate structure would enable capital costs to be "spread over a larger base of customers, thus mitigating rate shock to a smaller stand-alone division's base when infrastructure improvements are necessary."
In an Arkansas case, a witness for the Attorney General argued that a 22% gas utility rate increase to the residential class of customers would cause rate shock and, therefore, was unreasonable.** The commission did not address the argument.
Commonly, rate shock assertions arise when a large rate increase is proposed due to a sudden increase in a cost of service. Examples could be storm damage to facilities, unexpected failure of infrastructure and need to repair or replace it, new regulatory requirements, and the like. Sometimes, large rate increases arise because a utility has postponed seeking needed rate relief.
Generally, rate shock is not a basis for denying a rate increase that is justified by cost of service analysis. Rather, rate shock may be a basis for mitigating the impact on customers of a large rate increase. When potential rate shock is perceived, a rate increase may be phased in over two or three years. Or, as illustrated in a Connecticut case, an increased cost be recorded as a deferred expense or regulatory asset and amortized in rates over a period of years.*** The court quoted "A regulatory asset is a liability of a utility's ratepayers. Utility companies may incur large expenses in various ways--storm damages, installation of new facilities, increased taxes and so forth. These expenses, if passed immediately on to ratepayers, could create havoc. An immediate recovery of such expenses could cause sudden upward increases in rates, commonly termed 'rate shock.' In order to avoid rate shock, [public utility] commissions often will permit utility companies to recover their expenses from ratepayers on a deferred basis, listing the ratepayers' debt as a 'regulatory asset.' A regulatory asset is, therefore, a future debt of the ratepayers that can be passed on, together with interest, to the ratepayers."
Perhaps the best way for utilities to avoid claims of rate shock is to avoid, as much as possible, cost factors that can give rise to such claims. For example, regular and frequent review of costs of service and regular resulting incremental smaller increases in rates may avoid deferred large increases. Long range planning for repair and replacement of infrastructure along with establishment of reserves for such work in rates may also mitigate future sudden large proposed rate increases. Finally, phasing in of rate increases or using deferred expense and amortization procedures may enable more "gentle" rate adjustments.
Of course, there may be times when a large rate increase cannot be avoided because of a risk to continuity of good service. However, shock may be diminished when the utility adequately explains to its customers the reasons for the increase. There is no substitute for good communication.
*Lake Holiday Property Owners Association v.
Illinois Commerce Commission,2016 Ill.App3d
150816-U (3rd Dist 2016)
**Winston v. Arkansas Public Service Comm.,
984 S.W.2d 61 (Ct.App.1998)
***Office of Consumer Counsel v. Department
of Public Utility Control, 905 A.2d 1,
© 2017 Daniel J. Kucera