Defining a test period to overcome controversies and inaccuracies.
Joni S. Zenger is a technical consultant with the Utah Division of Public Utilities and Charles E. Peterson is a financial economist with the DPU. Robert Malko is a professor of corporate finance in the Jon M. Huntsman School of Business at Utah State University.The views expressed in this article are the authors’ and don’t necessarily represent the policies or opinions of the Utah DPU or the Utah Public Service Commission.
The selection of a test period and an associated test year continue to generate controversy within the framework of rate-base regulation. Some controversial issues associated with the test period and related test year for energy utilities in Utah stem from the inherent uncertainty about the future and the need to rely on imperfect predictions for forecast test periods. Issues of accountability and process have arisen in part due to the problems with forecasts; specifically those related to updating them and accuracy issues.
A framework is required for selecting a test period based on the evidence that best reflects the conditions a public utility will encounter during the period when rates will be in effect.
The Utah Public Service Commission (PSC) has defined the test period as follows: A test period as used in traditional rate base, rate-of-return regulation is a 12-month period of utility operations used in setting rates that, when properly adjusted, will afford the utility a reasonable opportunity to earn its allowed rate of return.1