SLIDE 1 The information provided in this Web Conference is not intended to provide legal advice with respect to any particular factual situation confronting an individual client. Almost all legal questions depend upon the facts of a particular situation. If you have any questions for which you need legal advice, you should speak directly with an attorney.
SLIDE 2 Today’s Presenters
John P. Ratnaswamy Partner Foley & Lardner LLP 312.832.4902
jratnaswamy@foley.com
Michael F. O’Connor Managing Director Huron Consulting Group 312.583.8724
moconnor@huronconsulting.com
Paul F. Hanzlik Partner Foley & Lardner LLP 312.832.4901
phanzlik@foley.com
SLIDE 3 Housekeeping
We will take questions throughout the program via the Q & A box at the bottom of your screen and live question at the end of the program. Foley will apply for CLE credit after the Web conference. If you did not supply your CLE information upon registration, please e-mail it to jquindt@foley.com. Today’s program is being recorded and will be available
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SLIDE 4
The Legal Perspective
Presented by: John P. Ratnaswamy Foley & Lardner LLP
SLIDE 5
Test Year Ratemaking, Page 1 of 2
Illinois follows the “test year” (also known as “traditional” or “rate of return”) ratemaking approach for electric, natural gas, water, and sewer public utilities and applicable telecommunications carriers
– Differentiation as to operating expenses and revenues versus cumulative rate base – Definition of public utilities (Section 3-105 of the Illinois Public Utilities Act, and of electric utility under Section 16-102 of the Act)
SLIDE 6 – The test year approach perhaps arguably is not mandated by statute (although Section 7-106(a)
- f the Act arguably assumes use of a test year in
electric ratemaking), but it is well embedded in the ICC’s rules, i.e., 83 Ill. Adm. Code Parts 285, 286, and 287 as amended in 2003, and in Illinois case law arising out of rate cases – Exception: Alternative rate regulation provided for in Section 9-244 of the Act – Riders are another significant form of cost recovery Test Year Ratemaking, Page 2 of 2
SLIDE 7
Parts 285 and 286, Page 1 of 2 Part 285 is the filing requirements for a rate case, and Part 286 contains additional rules re the required direct testimony
– Part 285 contains criteria for when Part 285 applies (essentially % rate increase) – Testimony and attachments requirements in Parts 285 and 286
SLIDE 8
Parts 285 and 286, Page 2 of 2
– Required Schedules and other filing requirements of Part 285
Extra requirements if using a future test year, to be discussed below
– Also are “make available” requirements in Part 285
SLIDE 9 Part 287, Page 1 of 2
Part 287 contains the test year rules
– Formerly, could use historical, current, or future test year – Staff opposed use of current test years, so 2003 amendments that broke Part 287
- ut of old Part 285 eliminated current test
years – Section 287.20
Examples
SLIDE 10
Part 287, Page 2 of 2
– Section 287.30 – Question of whether there is such a thing as a pro forma adjustment to a future test year given old ICC decisions and language of Sections 287.20, 287.30, and 287.40
SLIDE 11
Part 285 and Future Test Years, Page 1 of 2 Special Schedule requirements if using a future test year under Part 285
– Subpart J in detail, in particular:
The forecast’s underlying assumptions under Sections 285.7015 through 285.7045 (Schedules G-3 through G-8), and The four required financial statements under Section 285.7075 (Schedules G-15 through G- 18)
SLIDE 12 Part 285 and Future Test Years, Page 2 of 2
– Those financial statements require a unique
- utside CPA statement (attestation) -- Section
285.7010 (Schedule G-2)
Conceptual problem of expressly requiring reliance on the out of date 1999 AICPA Guide for Prospective Financial Information. Staff and the ICC have accepted use of later versions in some rate cases. Work papers requirements applicable to outside CPA Possibly are concerns regarding whether a utility or carrier’s independent auditor can, and is willing, to provide the statement in the current environment
SLIDE 13
The Financial Perspective
Presented by: Michael F. O’Connor Huron Consulting Group
SLIDE 14
Test Year
Twelve month period used as the basis for calculating all of the revenue requirement components Objective is to reflect conditions that will exist in the period rates become effective
– Level of Investment – Operating Costs – Customer Demand
Selecting a test year is a key first step in preparing your rate case
SLIDE 15 Test Year
Type Advantages Challenges
Historic Results can be supported by reference to actual transactions Represents a “projection” that the level of investment, demand, and costs will remain unchanged Historic with Pro Forma Adjustments Adjustments for known and measurable changes
year or shortly thereafter Restricted to known and measurable changes as
changes Future Better reflection of the level of investment, demand and operating conditions that will exist when rates go into effect Supporting expected changes that are based on estimates and judgments Rebuttal of other parties’ forecasts
SLIDE 16
Future Test Year - Illinois
Section 285, Subpart J of the ICC rules permits the use of forecasted test years Section 285.7010 Schedule G-2 requires a statement from the Independent Certified Public Accountant that the preparation and presentation of the applicable schedules comply with the AICPA guide for prospective financial information as of April 1, 1999. No later amendment or edition is included in this incorporation.
SLIDE 17
Future Test Year - Illinois
Requires making Independent Certified Public Accountant’s work papers available to the Commission Staff including:
– Engagement Letter – Representation Letter – Any additional correspondence regarding the engagement
SLIDE 18
ICC Subpart J: Future Test Year Requirements
G-1: Comparison of Prior Forecasts to Actual – Prior Three Years G-2: Statement from Independent Certified Public Accountant G-3: Statement on Assumptions Used in the Forecast G-4: Statement on Accounting Treatment G-5: Assumptions Used in the Forecast G-6: Inflation G-7: Proration of Accumulated Deferred Income Taxes G-8: Actual Gross Additions and Retirements Compared to Original Budget G-9: Comparison of Budgeted Non-Payroll Expense to Actual
SLIDE 19
ICC Subpart J: Future Test Year Requirements
G-10: Budgeted Payroll Expense G-11: Budgeted Number of Employees G-12: Forecasted Property Taxes G-13: Comparison of Actual Financial Results to the Originally Approved Forecast for Each of the Past Twelve Months and Eight Subsequent Months G-15: Income Statement, including non-jurisdictional service revenues G-16: Balance Sheet G-17: Statement of Cash Flows G-18: Statement of Retained Earnings
SLIDE 20
Development of Forecasts
Should be built from the bottom up Process needs to be well documented Incorporate approved operating and capital budgets Assumptions and use of trends consistently applied across all aspects of the forecast Results compared to information provided to third parties and for compliance with agreements Used to manage the business
SLIDE 21
AICPA Guide
Provides framework and guidelines for the preparation of financial forecasts Engagement and Management Representation Letters Details examination procedures and reporting language
SLIDE 22
Statement of Independent Public Accountant
Examination
– Independent Accountant’s Report – Identification of the projected statements – Projected statements are the Company’s responsibility – Examination conducted in accordance with AICPA attestation standards – Opinion that the projected statements are presented in conformity with the AICPA Guide – A caveat that projected results may not be achieved – No responsibility to update the report
SLIDE 23 Independent Certified Public Accountant
The Sarbanes-Oxley Act prohibits accountants from performing expert services for a public company audit
- client. Examples cited include:
– Retention as an expert to lend authority to client’s contentions in various proceedings – Appearance of advocacy by providing expert services is sufficient to deem the accountant’s independence impaired
SLIDE 24
Independent Certified Public Accountant
Company’s Auditor
– May not be an option – Limited to attestation procedures similar to the financial audit
Accounting Firm
– Extent of procedures performed to establish an “audit base” – Knowledge of the industry and ratemaking – Ability of the company to leverage knowledge gained by the firm
SLIDE 25
Possible Approach
Hire a firm to perform “pre-examination” activities and procedures
– Industry and ratemaking knowledge – Experienced former auditors – Ability to bring in specialized resources – Development and documentation of forecast models – Expert testimony and witness support
SLIDE 26
Questions & Answers
