Episode 4 – Show Me the Money: Managing the Modern Utility Rate Case

ScottMadden intro, (00:11)
Welcome to the Scott Madden Energy Exchange, conversations with leaders shaping the future of the energy industry. I’m your host, Marc Miller, partner and energy practice leader at Scott Madden. In this podcast, we explore the most important issues facing utilities and energy companies, from infrastructure and regulation to operations and strategy. We focus not just on what’s changing, but on what it takes to execute in a complex and evolving environment.

Marc (00:41)
Today’s episode is titled Show Me the Money: Managing the Modern Utility Rate Case. For regulated utilities, the rate case is the moment when strategy, capital investment, and regulatory expectations all come together. It’s the process through which utilities justify their investments, establish their authorized revenue, and ultimately secure the resources needed to build and maintain critical infrastructure.

In many ways, the rate case is where a utility’s strategy meets regulatory scrutiny. It’s the moment when the company must clearly explain not just what it plans to spend, but why those investments matter for customers and the future of the grid. Or to borrow a phrase from a well known movie, it’s where utilities have to show me the money. Well, not me, but you get the idea. And that challenge is becoming more complex.

Utilities are entering a period of unprecedented infrastructure investment, while regulators and stakeholders are increasingly focused on affordability and clear customer value. To talk about how utilities can successfully navigate this environment, I’m joined today by Josh Kmiec a partner and rate application expert at Scott Madden, who works closely with utilities on regulatory strategy and rate case preparation.

Josh, let’s start with the big picture. When people think about a rate case, they often think of it as a regulatory compliance exercise. But in reality, it’s much more than that. At its core, what role does the rate case play in the business of a regulated utility?

Josh (02:22)
Yeah, it it’s absolutely. I think stepping back at its core, the a regulated utility is looking to do two things. It’s providing safe and reliable service, electricity, gas, water. And as a business, it needs to make money. And as a regulated monopoly, the rate case is how that utility makes money. The u- the utility’s not doing kind of marketing, sales, pricing, and any of those traditional.

business sense. And instead, it’s that rate case that determines its revenue and its profit. You know, or put another way, the rate case is the primary mechanism through which a regulated utility is turning its strategy into executable funding. You know, the rate case is how that company earns revenue. It’s justifying its infrastructure plan and other investments. And it’s also explaining to regulators and other stakeholders why those investments are necessary. So next to first, of course

delivering safe and reliable energy. I think the rate case is a really a core competency within the utility.

So when we when we think about the rate case, it’s the way that that utility determines its authorized revenue, the profit margin on that revenue, and really justifies its infrastructure plan and all other investments. It’s also an explanation to the regulator and stakeholders and why those investments are necessary. So next to again, delivering that safe and reliable in energy, the

It’s really a core competency of the utility to be able to deliver that rate case and, you know, make money.

You further in internally it it forces alignment across the organization. So we think about the finance organization, engineering, operations, and regulatory affairs, all have to come together for that rate case proposal. And externally, it’s the point where the utility is demonstrating that its capital plan, its O&M budget is disciplined, it’s credible, and really tied to customer outcomes. So when you know some people, some utilities will

Consider and talk about a rate case as a filing, but it’s really much more than that. It’s that point where the business plan really meets regulatory and public scrutiny. And you know, in this current environment where we’re seeing significant increases in capital plans, much greater affordability pressure, the role of the rate case is becoming increasingly important.

Marc (04:53)
Josh, I’ve heard you say that the rate case is really the defining business event for a regulated utility. Can you add a little more color on that bold statement?

Josh (05:05)
Sure. So, you know, as we talked about, it defines revenue and profit. you know, beyond that, it influences the cost of the utility’s debt. It shapes its credibility, both with regulators, with customers, with stakeholders for years to come following the case. And it and it’s also where the company signals its priorities again to those stakeholders and others. increasingly, that’s not just a public service commission and its staff, but customers.

Customer advocates, investors, politicians, more and more, or legislators, certainly, and as well as internally to the company itself. So in essence, it’s also a very complex communications tool on on top of everything else. a strong filing tells this coherent story of where the utility is going and why customers benefit. But in turn, a a weaker filing or one that’s

inconsistent can start to create doubt about the utility’s planning discipline, cost control, and ability to execute. And in that sense, the rate case becomes more than just about recovering investments. It’s about earning trust. And that trust matters because utilities we’re seeing increasingly coming back to regulators to increase rates for a n for a number of reasons. And that credibility is even more important again,

thinking about the environment we’re in now and the political crosshairs a lot of utilities are in.

Marc (06:29)
I know one reason the rate case is getting so much attention right now, in addition to their frequency, as you mentioned, is the scale of investment that the industry is planning to meet growing demand. utilities are entering this period of massive infrastructure investment. We have our reports on it, many others do as well. what’s driving that wave of capital spending?

Josh (06:54)
Well, maybe a little surprised we’ve gotten this far in and haven’t said data centers. but that’s that’s definitely part of it. and in some pla some places it is a staggering amount of growth that’s coming from from data centers. And in turn, utilities are needing to invest to meet that need. we think step back maybe nationally, data center growth may represent half of the forecasted demand growth in next five years.

I guess how much of that actually shows up either in the near term or long term is probably a whole nother podcast topic. But even if half of that shows up, it’s still a step change in growth that the industry hasn’t seen in decades. but there are certainly other drivers, you know, beyond data centers, there are I think several forces converging at once that are driving driving up these capital budgets for utilities. It’s just modernizing of aging infrastructure.

investing in resilience. I mean, think you have severe storms, wildfires, and things to counter that, building and integrating new generation to meet meet that need or the demand growth. And also expanding systems to accommodate what I call more maybe traditional growth. So just residential and commercial businesses growing, electrification of buildings in some places, to a lesser extent, electric vehicles coming.

Coming online and having electric demand. So that that story really varies by the region and in the service territory. But all told, when we look at the 30 largest US electric utilities, they’re projecting over a trillion with a T dollars in capital spending over the next five years. And that’s not even counting smaller investor owned utilities, municipal utilities, co ops, you know, start piling those in, and that number gets

continues to go up. So that just gives a sense of the scale. And this is not one isolated trend. It’s it’s that asset replacement, reliability investment, policy compliance, and in new demand that’s hitting all at the same time. And because these needs are overlapping, many utilities will need to a much tighter link between their planning, their prioritization and regulatory strategy that they maybe they didn’t have in prior cycles.

Marc (09:14)
At the same time, I know regulators are increasingly focusing on affordability and customer impacts, perhaps even more strongly than in the past. How is that changing the way utilities need to approach their filings or their rate applications?

Josh (09:32)
No, so that that’s most certainly the case. And maybe if we again start at the the macro level, I think what we’re seeing is certainly rising costs in the US, you know, across the board. And utility rate or electric gas utility rates are are are going up. That the story of why and to what extent is much more varied. You know, in some places that increases tracking with inflation, in some places it’s not.

Some places as data centers may be driving some of that rate increase. A lot of places it could be some of those other factors we mentioned. So it is it’s a very nuanced, you know, there’s a there’s a lot that goes into the drivers of you know some of this rate increase and focus on affordability. That’s the complicated, messy reality. I think there’s also the perception that’s can be a bit simpler that costs are going up, my electric rates are going up, data centers are coming.

And those things are all tied. And I I think that becomes the perception. we see that playing out, you know, it’s a it’s a midterm year, there’s a lot of elections. We see that playing out in the press and other places. And getting getting back to your question, I think both that reality and the perception are important as we think about rate cases because affordability is rapidly becoming, I think, one of the most important considerations when we when utilities are going into a rate case. So now they must they really have to prove that investment is.

Prudent, both in itself, but they also have to show where kind of it ranks, what customer value it creates, and how it impacts bills and how that’s being managed. So in practice, when we get into rate case filings, it means ones with maybe vague scope, inconsistent assumptions, or weak links to customer benefit, are going to face more scrutiny. And it in turn, successful filings are increasingly showing how investments are prioritized.

How those alternatives are considered and a clear explanation of why that investment is needed and why it’s needed now. I I think when we’ve thought about rate cases in the past, the conversation has really shifted from is this project useful to one, is this the right project at the right time, at the right cost? And in some places, is it cost effective? over the past maybe 10 years, again, depending on the jurisdiction, but you

Kind of three factors you think about influencing rate cases. reliability, affordability, and you know, depending on the service territory, the clean energy transition, reduct carbon reduction. And there’s always been a balance of those kind of across different service territories. But what I think we’re seeing now in a lot of places is affordability is really taking the lead as maybe the most significant CERN, reliability right there behind it.

And then that clean energy transition, again, very much depending on the service territory and the jurisdiction, kind of falling off. And I I think that’s really telling on the importance of affordability when it comes down to making a choice. It it’s it comes down to customer bill impact in a lot of places. So again, this is a regional story and the places where costs are going up, they can be driven by a lot of different things. And I think that’s what utilities need to consider.

As you think about affordability going into the rate case, what are those drivers? What’s happening in the specific jurisdiction? And providing the justification for the investment needed in why it’s needed now.

Marc (13:04)
Josh, one of the themes you’ve raised in the past is that successful rate cases actually start long before the filing itself. Traditionally people think about a rate case as a sequence of events. Prepare the filing, respond to discovery, negotiate or litigate, and wait for the order, but but you’ve described it more as an ongoing process. What do you mean by that?

Josh (13:29)
Yeah. So I think what I think about a rate case, the that outcome is shaped long before the filing date, you know, long before the beginning of the drafting of testimony. And maybe a different way to think about it is it’s it’s an output or could could be an output of a continuous capital planning process, a budgeting process. So when if a utility waits

Till that filing cycle you described to start organizing their story, validating assumptions, you know, tightening up estimates and documenting the basis for its capital plan, it’s already behind. You know, strong rate cases are built through that ongoing cycle of capital planning, documentation, you know, maybe white paper development, and also you know, stakeholder communications and bringing them along throughout the process. And

Essentially when that utility is executing on those core business practices, then the rate case is more of a continuous cycle within there rather than that linear linear sequence of steps. And I think that approach is really can be seen as leading practice. You know, the best performing organizations keep their support current between, say, multi-year rate cases. They update estimates annually, they preserve the rationale maybe for changes as the plans evolve.

And that way when the filing starts, they’re just refining a foundation rather than scrambling to create a story. And in practical terms, that rate case should function more like a core enterprise capability than a one-time project or effort that comes up every couple of years.

Marc (15:04)
What role does capital planning play in shaping the outcome of a rate case?

Josh (15:11)
Yeah, so I I think it’s foundational.

Because the rate case can only be as strong as its underlying capital plan. And increasingly, regulators and interveners want to see those detailed project scopes defined, the cost assumptions and that they’re supportable. And the numbers in say testimony, rate case work papers, financial schedules, they all need to reconcile. So strong outcomes in a rate case really depend on.

those things, well-defined scopes, traceability and budgets and systems into the filing. You know, estimates are updated. They’re not constantly changing. those things all create churn and as I kind of like to think about in the rate case process, like unforced errors, where you’re now on your back foot trying to explain why maybe two estimates from two different time periods don’t add up when you can prepare in advance, have a consistent story, well well documented, then you you avoid those things.

And you know, with that discipline in place, the utility is able to not just explain that total top line ask, but maybe the specific work, timing, the customer benefits behind the overall capital plan and the specifics within it. when that’s not in place, that case tends to generate discovery questions that could be avoidable, more skepticism, and greater risk of disallowance, even for capital investments that are maybe.

Well justified, but the documentation doesn’t reflect that justification. And essentially, you know, a poor, incomplete capital plan introduces those unforced errors into the process. So I don’t see capital planning to be separate. Going back to you can look at it one of two ways. The rate case is the output of a capital planning process, or you know, vice versa, the capital planning process is one and the same continuously in there with the rate case.

Marc (17:08)
Josh, when you get late in the rate case development process and your capital plans are still evolving, what kinds of issues tend to arise in those situations?

Josh (17:22)
So I think those late changes or you know to use often overused metaphor or analogy, building the plane in flight, you just tend to introduce the potential for inconsistency errors, and a lot of ways that you can lose confidence with regulators and stakeholders at the point of filing. You know, most some problems we see are maybe.

mismatches across testimony, white papers, financial summaries, and budgeting systems. And you know, that that just creates additional questions. For example, you know, project names not matching in different places or two different projects, a transformer costs two different amounts in the estimate. And you know what when somebody sees that, then there’s additional questions. There’s you’re again back on your back foot.

these unforced errors instead of presenting your story in the case and why it’s justified. So locking down estimates early, making sure they’re consistent, documenting changes, and doing all of it well before the filing puts you in a place to avoid some of those pitfalls.

And similarly underdeveloped plans that kind of lack that specificity or detail.

are going to create greater questions. And again, even if that overunderlying need is there, the ability to execute and the ability to execute a sound, that that’s not conveyed to the regulator, to stakeholders, and you’re risking disallowance.

Marc (18:57)
So once the filing is submitted, a lot of the work really begins to actually make your case. What does the post filing phase actually look like inside a utility?

Josh (19:10)
Yeah, that that’s right. In a lot of places, post filing is where the organization’s preparation really gets stress tested. And that can start with discovery requests from the regulator, stakeholders. And those requests can number in the hundreds and well into the thousands. And responding well to those requires tight coordination across the same organizations involved in developing the filing, you know, engineering.

Finance operations, legal, regulatory teams. And some keys to success there are really clear ownership of responses, a structured, well-understood process for responding to to discovery, qual reviews, quality control, and also accessibility of that supporting analysis, you know, going back to being well prepared and being having the documentation in place.

And not making it up once you’re on the clock when you have a week or two to respond to a a discovery request. in addition, so you again every jurisdiction is a bit different, but you have this discovery phase, and then you may move into settlement negotiations or litigation and and that phase changes as well, where you need access to that information sometimes even quicker.

Having the right trackers in place or dashboards in order to access information, you know, understand different priorities and and make, you know, say quick decisions within a negotiation that are gonna impact the utility for years to come. So when we think about think about internally in the utility, the postfiling phase is part technical response effort, part just document control exercise, and part really an organizational endurance test. You know, if you think about it, it’s

It’s all the same folks in the utility. Most of them have a day job that’s not the rate case. They just spent months preparing a filing, kind of breathe half a sigh of relief, and then roll right into this arduous discovery negotiation process. And it shouldn’t shouldn’t be lost on any of us that the amount of work that goes into it on the utility side and the challenges that can bring. But utilities that have already organized their their data, their information in advance, understand ownership.

of that issue ownership and decision making process can move quickly with less churn, where utilities that you know don’t have those things in place, there tends to be bottlenecks of one or two people that can make decisions, spend way too much time kind of recreating your organization information in order to respond. And it makes that whole process even harder.

Marc (21:50)
I know for many rate cases, settlement discussions and litigation are a key part of the activity. What separates the utilities that enter those negotiations well prepared from those that struggle?

Josh (22:07)
I mean, at the risk of sounding like a broken record, it’s it’s preparation and avoiding, you know, those same unforced errors. The difference is that a utility is usually internal alignment, like being well prepared. Utilities know what their priority issues are, they understand where they have room to negotiate, and have the financial and technical support ready to understand the different puts and takes in in making decisions, creating positions kind of within that negotiation.

So that means already having identified subject matter expert experts who need to be in the room, are empowered to make decisions or are on call to answer questions. And it’s also important to identify as early as possible what maybe the those hot topics are going to be, where are there going to be challenges and preparing those responses well in advance or building those positions in advance to avoid maybe unnecessary misalignment on the utility side or

just not creating un unnecessarily combative kind of positions in the room that complicate overall settlement

You in contrast, utilities that really struggle is what are when there’s disagreements that it’s surface late internally. issues of ownership of a of a topic or a position are unclear, and the company has not really translated its rate case strategy into a negotiation strategy. So good settlement performance, it’s rarely improvised. It’s typically the result of early planning.

strong internal communication and alignment and also disciplined tracking of both kind of the dollars, the numbers, the positions, and having an under understanding of that. So in in that sense, settlement success starts well before the settlement negotiations begin.

Marc (23:58)
Ultimately, the key question regulators are asking is whether the proposed investments are justified and beneficial for customers. From your experience, what characteristics tend to distinguish investments that regulators approve from those that they challenge?

Josh (24:18)
So I think simply put that the investments that fare best are the ones that have a specific scope, transparent cost support, and a clear line to customer value. In a lot of cases, seeing regulators respond better when the utility can explain what will be built, where, when, at what cost, and what you know, reliability, safety policy or other benefits to customers should be expected.

our experience is very clear that maybe broad programs with an ambiguous scope or inconsistent documentation are more likely to be challenged. Again, kind of going back to unforced errors. And we observe that those programs without the specific plans tend to receive that greater scrutiny. And in today’s environment, those are the first places regulators are going to look at to maybe reduce costs with an affordability lens in mind.

We also zer or so even necessary investments can face pushback if the utility is not shown how its sequencing work, how it’s how things are prioritized, and you know how the utility is also considering those impacts on rates to customers. Approval is usually more than just justifying the need alone. It’s about specificity, the credibility, and that affordability lens on it.

Put another way, in jurisdictions where settlements are common, the commission or its staff is looking to be able to justify that investment for their settlement position as well. So it’s generally not helpful to think about this as an adversarial environment where you’re trying to justify an investment while, say, a public service commission staff is trying to push back on it.

That’s that staff settlement is probably part of a joint proposal in l a lot of these cases. So you’re looking to provide provide them with the evidence so they can say, yes, we support this investment as well. And I think when you think about it that way and provide the information we talked about, that’s where you can have much more positive outcomes.

Marc (26:28)
How important is the overall narrative that utilities present in their filings?

Josh (26:35)
So I think it’s fairly important. Of course, at the end of the day, the needs and the impacts to rates are going to be the most important factors. However, the the narrative is what connects a large number of these technical requests into a coherent business case and plan. A filing can have very solid specific analysis, but if the themes are fragmented, the justification is inconsistent across maybe different panels.

You know, regulators and stakeholders are going to pick up on that. It matters even more now because commissions are evaluating not just the engineering logic, but whether the proposed spending aligns with broader priorities. You know, first and foremost, affordability. Some jurisdictions also considering equity, the resilience benefits, and the customer need. So a narrative doesn’t replace substance, but it determines whether that substance feels coherent and credible.

A good narrative tells regulators that the utility is try what the utility is trying to accomplish, why it matters now, and how this customers benefit. But conversely, a bad narrative translates into a could translate into a negative story and can easily derail a proceeding, even if those issues are not really substantial.

Marc (27:56)
Looking ahead, Josh, do you think the rate case process itself is changing in a fundamental way as utilities invest more heavily in infrastructure?

Josh (28:08)
I do. I think the traditional model treated the rate case, as we kind of talked about, is this periodic regulatory event. And the emergent model treats it much more as a standing kind of enterprise capability tied directly to capital planning, data documentation, and also a stakeholder strategy. Maybe I’ll I’ll give one example of a client, and this was a a number of years ago when we talk about what that.

model looks like in that change. So this this client had, you know, fairly simple rate case filings for a number of years. And, you know, in in that jurisdiction, that it that had worked well, worked well for them. But over the period between rate cases, there’ve been a lot more stakeholder engagement, a lot more focus on both affordability, but also reliability, resiliency in in this case, support for the clean energy transition.

And going into their next case, you know, their justification for their capital investments was a single spreadsheet that had the you know names of the projects, where they are, how much they cost. And you know, no faults of their own. That had worked for years. And but going forward, that was not the amount of justification needed when you put all those lenses on top of it. And that goes back to.

The rate case going from a place where we assemble this spreadsheet of here’s our plan to here’s how we’re documenting our capital plan on a continuous basis with justification, understanding alternatives, understanding the benefits to customers, how we prioritize it, so we can tell that coherent story to the regulator and you know gain approval for our holistic plan again, rather than just a list of investments on a sheet. In this

That change is partially being driven by the size of the investment wave that’s coming in here in a lot of places. The comp that complexity of load growth met with other needs on the system, a much sharper focus on affordability that regulators are implying. And you know, externally we’re seeing data-driven load growth push utilities and regulators to focus on who pays, how that interconnection is handled, how the residential

Customers are protected. And when you put all that together, you know, the rate case is becoming a much more data intensive, cross-functional, and continuous process. And utilities that adapt to that model will be in a much better position than those still treating it like one in a few year exercise to put some numbers and testimony together and hope for the best.

Marc (30:53)
That’s great stuff, Josh. Thank you. If if there’s one piece of advice you would give utility leaders preparing for their next rate case, what would it be?

Josh (31:04)
So I think it’s start early and you know treat that preparation as a enterprise effort rather than just a regulatory work stream. the most practical version of that advice is lock down the capital planning process and know what you’re going into the rate case with sooner. Standardize estimates that are used in business cases to support, you know, update white papers or other kinds of work papers and documentation regularly, not just going into the case.

And keep a documentation and records of changes that take place to the plan over time. So you can explain, you know, your rationale as things change between rate cases. There are no signs that this new increased level of scrutiny in cases is going away. And the utilities that perform best will be the ones that can walk into a case with a stable plan, a consistent story, and support that is already organized before that filing takes place and those first redistrict.

Discovery requests come in.

Marc (32:04)
Josh, thanks for joining me today. I appreciate you sharing your insights on managing the modern utility rate case.

Josh (32:12)
Yeah, absolutely.

Marc (32:12)
Lily.

ScottMadden outro, (32:14)
Thanks for listening to this episode of the ScottMadden Energy Exchange. If you’d like to continue the conversation, you can find individual contact information in the show notes or reach us at info at scottmadden.com.