BILL NUMBER: S1896
SPONSOR: MAYER
 
TITLE OF BILL:
An act to amend the public service law, in relation to requiring certain
utilities to adopt the common equity ratio and rate of return on equity
authorized by the public service commission
 
PURPOSE:
To require regulated utilities to adopt the rate of return on equity and
common equity ratio as promulgated by the Public Service Commission by
using an updated generic financing methodology when setting final utili-
ty rates, which will provide the lowest possible delivery rates for
ratepayers.
 
SUMMARY OF SPECIFIC PROVISIONS:
Section 1 outlines the legislative intent, emphasizing the inaccessible
and outdated nature in which regulated utilities and the Public Service
Commission set final utility rates for consumers.
Section 2 amends the public service law by adding a new section 65-c,
which includes six new sections. First, it sets forth definitions to be
applied in this section, including: regulated utility, generic financing
methodology, authorized and actual common equity ratio, authorized and
actual rate of return on equity, rate period, and publicly available
data.
Second, it requires the commission, on an annual basis, to promulgate
rules and regulations that: first, update the generic financing method-
ology such that, to the greatest extent possible, all of its calcu-
lations are based upon publicly available data; second, set a fair and
reasonable authorized common equity ratio for each regulated utility and
a single rate of return on equity for all regulated utilities based on
the generic financing methodology; and third, reconcile the prior rate
period's authorized rate of return on equity produced by the generic
financing methodology for that rate period (i.e. a "true-up mechanism").
In this true-up process, the commission shall require that any revenues
derived from the authorized rate of return on equity that exceeded the
average monthly rate of return on equity be returned to ratepayers in
the form of a surcredit to their bills for the following rate period,
and that any revenues that would have been derived from an average
monthly rate of return on equity exceeding the authorized rate of return
on equity shall be recovered from ratepayers in the form of a surcharge
to their bills for the following rate period.
The promulgated generic financing methodology, authorized common equity
ratio, authorized rate of return on equity, and prior rate period's
average monthly rate of return on equity shall include input from
outside experts, utility representatives, interested organizations, and
the public. The final regulations shall give preference to the best
interest of the ratepayer. Third, it requires every regulated utility
to: adopt the authorized common equity ratio for the following rate
period as set specifically for each regulated utility by the commission;
adopt the authorized rate of return on equity for the following rate
period; and adopt the surcredit/surcharge based on the prior rate peri-
od's average monthly rate of return on equity.
Fourth, it outlines the procedures in which a regulated utility may
rebut the commission's authorized common equity ratio, authorized rate
of return on equity, or prior rate period's average monthly rate of
return on equity. It must first initiate a request for public hearing.
If the commission finds substantial basis for the regulated utility's
claims, it shall publish dates from which a public hearing shall take
place. During the public hearing, a regulated utility must: present
documentary evidence, testimony, and exhibits indicating why the author-
ized common equity ratio, authorized rate of return on equity, or prior
rate period's average monthly rate of return on equity as set by the
commission is insufficient to meet its current or future operating and
capital needs, does not provide a fair and reasonable return, describe
why it is insufficient to attract capital at reasonable terms, and why
it is insufficient to to maintain financial integrity during the rate
year. If the commission determines, by a preponderance of the evidence,
that the regulated utility has successfully met its burden, then it
shall order settlement negotiations via commission-led adjudication.
Fifth, it sets out the standards from which settlement negotiations
shall take place. Specifically, it requires the commission to consider:
testimony and exhibits from expert witnesses, including those from
public interest organizations; how the negotiated settlement reflects
the lowest possible delivery rates for consumers; how the negotiated
settlement improves equity for disadvantaged communities as defined in
the environmental law, how the proposed rates reflect the best interest
of the public and promote principles of equity for disadvantaged commu-
nities; whether the proposals result in the lowest possible delivery
cost to the benefit of the ratepayer; and whether the new settlement
agreement provides a just and reasonable return.
Sixth, it requires the commission to submit to the Governor and legisla-
ture, a report outlining the findings and determinations of the final
authorized common equity ratio, authorized rate of return on equity, or
prior rate period's average monthly rate of return on equity. The report
must describe its findings in clear, accessible language and describe
whether, if at all, the final determinations changed, reflect changed
circumstances, or remained the same during the previous year. The report
must also include all monthly data used for generic financing methodol-
ogy calculations that is not publicly accessible data, together with an
explanation why it was necessary to use non-public data instead of a
publicly available data source. Lastly it shall be published online on
the commission's website and made publicly available.
Section 3 sets forth the effective date.
 
JUSTIFICATION:
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 financing methodology to reflect new economic reali-
ties which are, to the greatest extent possible, based upon publicly
available data; set a fair and reasonable authorized common equity ratio
for each specific regulated utility and set a single rate of return on
equity for all regulated utilities; and reconcile the prior rate peri-
od's authorized rate of return on equity produced by the generic financ-
ing methodology for that rate period (i.e. a "true-up" mechanism).
This true-up mechanism is a flexible approach that operates to reconcile
the previous rate period's rates by requiring that revenues that
exceeded the average monthly rate of return on equity be returned to
ratepayers in the form of a surcredit to their bills for the following
rate period, and that revenues that would have been derived from an
average monthly rate of return on equity exceeding the authorized rate
of return on equity are recovered from ratepayers in the form of a
surcharge to their bills for the following rate period. Each of the
proposed regulations shall include input from accounting experts, utili-
ty representatives, outside organizations, and the public. The final
regulations must give preference to the best interest of the ratepayer.
Second, it requires every regulated utility to: adopt the authorized
common equity ratio as set specifically for each regulated utility for
the following rate period; adopt the single authorized rate of return on
equity for the following period; and adopt the surcredit/surcharge based
on the prior rate period's average monthly rate of return on equity.
Third, it sets out processes and standards from which a utility can
rebut the commission's authorized common equity ratio, authorized rate
of return on equity, and/or prior rate period's average monthly rate of
return on equity. This shall take place at a public hearing, in which
the regulated utility must present detailed evidence explaining why the
commission's regulations are insufficient. The regulated utility must
meet its burden by a preponderance of the evidence. If it does then the
commission shall order adjudication.
Fourth, it outlines the standards in which settlement negotiations
through commission-led adjudication shall take place. It requires the
adjudicator to consider: testimony from expert witnesses and public
interest organizations; and how the settlement reflects the lowest
possible delivery rates for consumers, improves equity for disadvantaged
communities as defined in the environmental law, promotes principles of
equity, is in the best interest of the public, and provides a just and
reasonable return.
Finally, it requires the commission to publish, on an annual basis, a
report that describes in clear, accessible language the findings and
determinations of the final authorized common equity ratio, authorized
rate of return on equity, and/or prior rate period's average monthly
rate of return on equity. The report must include all monthly data used
for generic financing methodology calculations that is not publicly
available data, with an explanation of why it was necessary to use non-
public data instead of a publicly available data source.
By requiring utilities to begin with the presumption of adopting the
commission's authorized common equity ratio, authorized rate of return
on equity, and surcrdit/surcharge determination based on the prior rate
period's average monthly rate of return on equity, and making explicit
its requirement to prioritize the lowest possible utility costs for
consumers and principles of fairness, New York will return power back to
the public institution whose primary mission is to ensure affordable,
safe, secure, and reliable access to utility services for New York
State's residential and business consumers, at just and reasonable
rates, while protecting the natural environment.8 This legislation
recognizes that regulated utilities are entitled to make a fair and
reasonable return,9 while emphasizing that the existing process of rate-
making must be fundamentally restructured.
 
PRIOR LEGISLATIVE HISTORY:
S6557A/ A7502 (2023-24): Passed Senate; Referred to Energy in Assembly
 
FISCAL IMPLICATIONS:
To be determined.
 
EFFECTIVE DATE:
This act shall take effect one year after it shall be enacted into law.
1 For example, the Bureau of Labor Statistics reports that New York area
electricity costs have exceeded the national average by at least 40%
over the past five Decembers, and in December 2022, electricity costs in
New York were 40.8% higher than the nation.
2 As one writer notes, "the process of setting an allowed ROE has
consistently proven to be the most contentious and subjective part of a
rate case proceeding." Phillip S. Cross, Public Utilities Fortnightly,
Equity Returns: 'Allowed' vs. Earned (Nov. 2015).
3 1994 "Recommended Decision" (Case 91-M-0509) (Proceeding on Motion of
the Commission to Consider Financial Regulatory Policies for New York
State Utilities).
4 As of April 2023, for example, the commission and ConEdison have
submitted a request for public comments regarding its "joint proposal"
for their ongoing rate case.
5 Direct Testimony of William D. Yates for the Public Utility Law
Project of New York, Inc. before the New York Public Service Commission
(May 20, 2022).
6Id.
7 Regulated utilities means an "electric corporation," "gas corpo-
ration," "steam corporation," or "water-works corporation" as defined in
section two of the Public Service Law.
8 New York State, Department of Public Service, About Us,
https://dps.ny.gov/about-us
9 For decades, the Supreme Court has recognized that regulated utilities
are entitled to a reasonable opportunity to recover their "prudently-in-
curred costs," and earn a "fair and reasonable rate of return on their
capital investments." see Federal Power Commission et al v. Hope Natural
Gas Co. ("Hope"), 320 U.S. 591, 603 (1944); Bluefield Water Works and
improvement Co. v. Public Service Commission of West Virginia ("Blue-
field"), 262 U.S. 679 (1923).