SCEG OATT Formula Transmission Rate Filing.pdf - SCANA ...

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20091231-0037 FERC PDF (Unofficia1) 12/29/2009 Exhibit No. SCE-2 How Returns On Equity Factor Into U.S. Utilities' Creditworthiness costs in base rates could impair a utility's ability to earn the authorized ROE. Commissions may set rates based on historical levels that are lower than actual amounts, reducing the ability to earn the authorized ROE because additional fuel and purchased-power income. costs could be incurred without rate recovery, ultimately lowering net • Depreciation expense. Higher depreciation expense provides timely rate recovery of inve~tments and stronger cash flow, but lower earnings and earned ROEs. If depredation match the useful lives of plant and equipment, and cash flow will be lower. levels are low, rate recovery of investments may not • Taxes other than income taxes. Property taxes and other taxes could rise above the level in rates, and result in earnings and cash flow erosion. • Return on rate base. The weighted average cost of capital (WACC), or overall return, multiplied by a utility's rate base results in an authorized return on rate base from which interest expense and dividends are paid. Multiple variables in this calculation can affect a utility's ability to earn its authorized ROE. The return can be lowered by relying on a WACC (overall return) that is calculated with interest rates lower than actual rates, a lower ROE, or a capital structure that may have a lower common equity component, all of which can affect a utility's ability to earn the authorized ROE. If a publicly traded utility issues additional equity after a rate case, the ability to earn its authorized ROE will be hindered. • <strong>Rate</strong> base. Another component of the return calculation is the rate-base level. If a commission relies on an outdated rate base or excludes plant from rate base if not "used and useful" when.setting rates, a utility could almost immediately experience earnings and cash flow erosion. In addition, if recovery of carrying costs on capital spending is disallowed unti] after the plant is considered useful, incremental earnings erosion will occur. Alternatively, cash flow and earnings would be strengthened if a commission allows the rate base to be updated. • Income taxes. If actual income taxes are higher than the level used to set rates, earnings and the ROE will be lower. • Test period. Partly or fully forecast test periods reduce regulatory lag by providing for recovery of estimated expenses that may be incurred in the near term. Using a historical test period without updates makes it more difficult to earn the authorized ROE because expenses may have already increased during the rate case (which can take many months to complete), resulting in cost recovery that is too low even after new rates are set. Credit quality benefits from forecast test periods and less so from updated historical test periods. • Other disallowances. A commission could disallow recovery of an acquisirion premium, resulting in lower earnings and cash flow. • <strong>Rate</strong> design. A utility's actual rate structure can affect a utility!s ability to earn its authorized ROE. Cash flows are more stable and earnings more predictable when a higher percentage of a utilitis costs are recoverable through the fixed charge paid by customers regardless of electricity used and the first-rate block of typical monthly energy usage. • Timeliness. The faster a commission approves new rates, the quicker the improvement in cash flow and the better a utility'S opportunity to earn its authorized ROE due to reduced regulatory lag. If a final ruling cannot be issued in a timely manner, a commission's ability to issue an interim rate ruling provides rate relief and lowers financial uncertainty about ultimate rate recovery. Regulatory Mechanisms Certain regulatory mechanisms may be available to commissions that, if used, can strengthen a company's cash flow. Earnings and cash flow should improve if such mechanisms are used. Among the items that could require www.standardandpoors.com/ratingsdirecl . 3 Standard & POOl's.All rights reserved. No reprint Of dissemination without sSP'spermissi()ll. See Terms of lhIejOisclaimer Oflltle lasl page.
20091231-0037 FERC PDF (Unofficia1) 12/29/2009 Exhibit No. SCE-2 How Returns On Equity Factor Into U.S. Utilities' Creditworthiness incremental recovery between rate cases are: • Fuel and purchased-power COsts. Recovery of fuel and purchased~power costs through a surcharge mechanism can improve a utility's ability to earn its authorized ROE. The more frequently adjusted, the less working capital required while the costS are deferred for future recovery. If partial or full rate recovery is disallowed or such a mechanism is not used, liquidity could be restricted and cash flow reduced. • Return on construction work in progress (CWIP). Provides for rate recovery of a return on new plant (carrying costs) while it is being built, assuring more stable cash flow through a construction CWIP reduces the size of the rate increase necessary after the construction carrying costs were recovered during construction, cycle. In addition, a return on of the new plant is complete because and not deferred for future recovery. Even more supportive is rate recovery of carrying costs through tracker mechanisms that may also provide for recovery, outside of a rate case, of depreciation, operations, and maintenance expenses after the plant is "used and useful." Certain states are allowing such tracker mechanisms to be used for recovery of pollution-control equipment. • Pension and other post-retirement benefit costs. Earnings are more likely to reach authorized levels between rate cases when utilities can recover pension costs not currently in base rateS through a pension-adjustment mechanism. • Storm damages. Utilities may receive recovery of storm damage costs through a special surcharge, which would increase cash flow and earnings. • Other costs. A surcharge mechanism may be used to recover unusual expenses such as those related to a utility'S participation in regional transmission organizations. • Weather normalization. A weather-normalization clause is primarily used to adjust rates (but not commodity prices) for natura) gas utilities that are exposed to swings in earnings and cash flow from weather volatility. The benefits of this clause are realized during the winter heating season when weather may be warmer than expected, but the customer is billed as though weather were normal, providing for more stable cash flow. Utilities without weather-normalization clauses may be unable to fully cover operating costs during warmer-than-normal winter weather. Standard & Poor's considers weather-normalization clauses as beneficial for creditworthiness and more likely to allow a utility to earn its authorized return. Standard & Poor's Rating_Direcl I June 14.2005 4 Standard & Poo(s. AU tights reserved. No repdm or disseminalion without SSP's permisskll'l. See Terms of Use/Disclaimer on the last page.
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64 FERC ER07-169 Ameren Energy Mark
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