Areas of Expertise
The critical nature of utility services requires that the public good be served by protecting the utility from debilitating competition through regulation. The trade off for such protection is that rates charged by public utilities are regulated by state and federal commissions. The regulation of energy transportation industries for crude and refined oil products, natural gas, and electricity have evolved along separate paths that reflect the underlying physical nature of the energy resource and how it is processed from raw material to consumers’ use. Crowley Energy Consulting can assist the client in applying the complex cost models and nuanced allocation and rate concepts to protect the client’s interests during the litigation process.
Regulatory Cost of Service
Developing fully allocated rate models requires that all components of the cost of service come together into one set of interrelated calculations. Assessing the components of rate base is the first step in the process, which, during expansion periods, can significantly affect the ultimate tariff rates. Operating expenses cover a wide array of otherwise ordinary business expenses within which may lurk a substantial level of unjustifiable costs. Furthermore, the allocation of those costs between jurisdictional and non-jurisdictional operating divisions of the utility, as well as the geographic segments of the jurisdictional divisions, entails a careful analysis of KN Formula weighting scheme for cost sharing. Similarly, the Massachusetts Formula for allocating corporate overheads to the operating units should be examined carefully to ensure all operating units carry their fair share of the burdens. Toward the end of the process the weighted average income tax rate derives the allowance for income tax liability for the cost of service. Crowley Energy Consulting can evaluate each of these components to ensure that the total revenue requirement is just and reasonable, and that ratepayers cover their respective cost burdens.
Depreciation
The code of federal regulations defines depreciation as the 'accounting for the loss in value' of the asset. Estimating that loss in value over time encompasses a wide variety of mathematical models to reflect the depletion of the underlying natural resources, the rate of deterioration of the utility asset, the laws governing the use of accelerated depreciation, and the actual calculation of the depreciation rate itself. Crowley Energy Consulting can ensure that the depreciation rate appropriately reflects the balancing act between ratepayers and utility owners, and between current and future generations of ratepayers.
Oil Pipeline Rate Challenges
The Energy Policy Act of 1992 deemed existing tariff rates just and reasonable, protecting such "grandfathered" rates from routine challenges by shippers, and ordered the Commission to devise simpler filing methods for rate changes, ushering in the annual "indexed rate" filings to adjust rates for claimed inflation. These measures have made oil pipeline filings more streamlined in part by making rate increases virtually automatic while establishing difficult hurdles to those challenging pipeline rates. Shippers must demonstrate that a "substantial divergence" has grown between the cost of service and the tariff rates, and that the difference is due to a "changed circumstance" in a factor used to derive the 1992 grandfathered rate. The evolved definition of these terms has created a complex dimly understood gauntlet for pipeline customers. Crowley Energy Consulting can help clients navigate these complex but critical terms-of-art that establish the threshold for acceptance of a filing at the Commission. Crowley Energy can help develop the nuanced analysis and written affidavit needed to overcome the Commission's complaint hurdles and help restore balance to the pipeline rate tariffs.
Market Based Rates
In competitive markets, price signals assure adequate supplies for any given demand for goods and services. However, the high cost of entry into energy markets and the unresponsiveness of demand to price signals lay the groundwork for imperfect markets that occasionally fail the public interest and require action by regulatory bodies. Where utilities seek to employ market based rates, regulatory commissions have sought to protect consumers by investigating whether the regulated entity has undue market power and would therefore be unlikely to gravitate toward cost-based rates. An investigation in conjunction with a market based rate proposal is not into whether the resulting rate is just and reasonable but whether the applicant has significant market power in the subject markets. If the applicant lacks significant market power in the subject markets, the rate is presumed just and reasonable. Crowley Energy Consulting can examine the market power status of the utility vis-à-vis the defined market in question and whether the market structure is likely to lead to equitable tariff rates for shippers.
Partnership Income Tax Allowance
Partnership, as an organizational structure, offers one outstanding feature that makes it a very attractive investment vehicle: no direct income tax liability. Consequently, the net income of the partnership passes through to the individual partners as personal income subject only to the partner's income tax liability – with no corporate income tax liability. However, entities engaged in natural resource extraction organized as Master Limited Partnerships may act like corporations and still avoid corporate income tax. Cash distributions and income allocations act as tax shelters for the investors. In addition, under IRS code §754(b), MLPs may deduct the premiums paid for partnership units as deprecation of an asset, in addition to the depreciation incorporated in the cost of service. The conversion of cash distributions from income into non-taxable return of capital occurs in the partner's capital account where distributions reduce the value of the account, giving the appearance of a loss in value of the partnership units and satisfying the IRS principle of "substantial economic effect" for determining income tax liability. A series of FERC and appeals court decisions have wrestled with this issue; it is likely to arise again. Crowley Energy Consulting can assist in ensuring that ratepayers carry the appropriate level of income tax liability in the tariff rates.
Oil Pipeline Rate Base
The interstate regulation of crude oil pipelines and refined products pipelines is governed by several unique cost-of-service and rate design concepts and methodologies. Its trended original cost (TOC) rate base, starting rate base adders, and deferred return on equity present a challenging cost of service model from the outset. The equity rate base incorporates the equity portion of the original cost plus a "starting rate base" adder and an inflation-based "accumulated deferred return" adder. Because the deferral of the inflation component of the return on equity is a postponed earning for the pipeline, it becomes a regulatory asset upon which a return is permitted. Thus the equity rate base includes original cost plus layer upon layer of inflation of that equity portion, hence the term 'trended original cost'. Crowley Energy Consulting is adept at the nuances of the oil pipeline cost of service model and can assess the rate base for fairness and correct compilation.
