Requires certain utilities to adopt the common equity ratio and rate of return on equity authorized by the public service commission

• Democratic13

◆ The sponsor's argument

Why Shelley Mayer says this is needed

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 determination of final rates that a utility can charge to their custom- ers in the form of utility bills. As a result, decisions made in rate- making 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 Existing proce- dures are inaccessible, outdated, and more often than not disproportion- ately benefit utilities at the ratepayers' expense.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 nonbinding 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.' First, it requires the commission to promulgate regulations that: update the generic finan

This is the sponsor's own case for the bill, quoted from their memorandum. It is not Agora's description of what the bill does.