Future Test Years & Pre-approval
The goal of rate-setting is to predict operating results during the period for which rates are being set – accurately estimating both expenses and revenues.
State utility commissions typically use the concept of a test year – a consecutive 12-month period deemed to be a representative year for a utility in terms of costs and revenues relative to the year that rates will be in effect. A future test year uses projections and utility resource planning to derive forward-looking revenue requirements in rate setting.
How they work
A test year may be based on an historic test year, with adjustments made to account for changes in utility spending and load that are known and measurable and reflective of the rate year. Most jurisdictions with historic test years allow adjustments up to 12 months beyond the test year. Alternatively, a future test year may be entirely forecasted based on utility planning and budgeting. Because historic test years may not accurately reflect future expenses, using future test years can capture planned expenditures, such as smart meter deployments or increased energy efficiency investments, reducing regulatory lag and the need for more frequent rate cases.
AEP supports the concept of future test years. Past expenditures and historic financial trends are vastly different from those facing us in the future.
To rely on historic expenditures in an era in need of large infrastructure investment simply slows the process of cost recovery.