PSC Begins Proceeding to Review and Possibly Reduce National Fuel’s Natural Gas Rates, based on Estimate of 13.15% ROE Under Current Rates (New York’s Utility Project)

The PSC has issued an order to show cause commencing a rate review proceeding to review reasonableness of the rates, terms and conditions of service of National Fuel, which serves  natural gas customers in the Buffalo area.  The Commission order indicates the possibility that the rates, last set by PSC order in 2007, are now too high and that they may be lowered:

In the 2007 Rate Order, the rates set for National Fuel were expected, among other things, to permit National Fuel to earn a return on equity (ROE) of 9.10% for the rate year ended December 31, 2008 based on a 44.35% common equity ratio. Under the 2007 Rate Order, there is no ROE earnings sharing mechanism, and, therefore, National Fuel retains all excess earnings when they occur. The rates and other terms prescribed in the 2007 Rate Order remain in effect today.  A review of the Company’s more recent financial statements by Department of Public Service Staff (Staff) indicates that National Fuel may now be earning in excess of the 9.10% ROE envisioned by the 2007 Rate Order, and in excess of a reasonable return. Staff’s projection forward suggests that this condition may continue in the future.
Specifically, National Fuel measures its annual earnings on a fiscal year basis that ends September 30th. The latest earnings calculation provided by the Company based on a 50% equity ratio, for the twelve months ended September 30, 2012, showed an earned unadjusted ROE of 12.77%. National Fuel made normalizing adjustments that appear to reduce the ROE to 11.87%. However, after adjusting the Company’s calculation for the 44.35% equity ratio allowed in its current rates and removing executive restricted stock and stock option compensation expense not allowed in current rates, Staff calculates that National Fuel earned a 13.15% equity return for the twelve months ended September 30, 2012.

A copy of the Order to Show Cause is here.   The proceeding will take about a year. If current rates are reset as temporary rates, potential refunds could be made retroactive to the date when temporary rates are set, if rates are eventually lowered at the conclusion of the case.

In March, National Fuel floated a proposal to keep in place its current rates and share any overearnings over a threshold (calculated generously high for the utililty) with customers, with the customer share of overearnings allocated to certain purposes other than reducing rates.   Also the proposal would reallocate certain unspent funds to the utility’s low income customer assistance program to offset sharp reductions in LIHEAP assistance.  Apparently the utility anticipated it would be called in for a rate review, and sought to forestall rate case litigation with some concessions that were insufficient.

The PSC webpage for the case, which will contain documents from the case, is here.

In a rate review proceeding, the utility has the burden to show that its rates, terms and conditions of service are just and reasonable. Customers and the general public can make their views known to the PSC regarding the rates, terms and conditions of service and practices of the utility by filing their comments here.

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