Utilities use different test year approaches to propose rate changes: historical test year (HTY), a future test year (FTY), or a combination of historical and future test year.
States may allow the use of FTY but have no experience with it or authorize it on a case-by-case basis.
FTY reduces regulatory lag or the time between a utility's cost and sales changes and its rate updates.
When utility companies want to change the rates they charge customers, they must collect data on expenses, revenue, and billing factors such as customer numbers and delivery volume (MD Dept. Legislative Services 2019, Lowry et al. 2015, Lowry et al. 2010). This data is collected over a 12-month period called a test year. They present this data to regulators, who review it over the next nine to ten months to establish reasonable revenue requirement and approve updated rates. The calendar year, starting January 1st, in which the new rates apply is known as the “rate year” (Lowry et al. 2010).
Three scenarios are typically used to construct test year data:
There is inconsistent data regarding which states use FTY and for which utility type (Carroway et al. 2022). One report listed 23 states that use FTY for electric utilities (Lowry et al. 2015). Another listed 15 states that use FTY and 16 states and D.C. that use a hybrid test year for electric utilities (Kirsch & Morey 2016). A third report concluded that 32 states and D.C. allow the use of FTYs for one or more utilities (Carroway et al. 2022, Figure 1).
Figure 1. States that allow FTY. States that allow or have allowed the use of FTY and utility type. Information taken from Carroway et al. (2022), Kirsch & Morey (2016), Lowry et al. (2015), and Costello (2013c). States’ statues, codes, and rate cases are provided in reference list in the online version of this note.
In many states, the use of partially or fully-forecasted test years is not standardized (Lowry et al. 2015). Even if authorized in legislation, some states may use FTY occasionally or not at all (Costello 2013c). IN, LA, and ME mostly use an HTY, while IL, KY, LA, MS, ND, and PA occasionally use FTYs (Carroway et al. 2022, MD Dept. Legislative Services 2019, Lowry et al. 2015, Costello 2013c). In some states like NM, UT, and WY, FTYs are approved on a case-by-case basis (Lowry et al. 2013). AR, OH, and NJ use partially forecasted test years.
MO has been reported as allowing FTY or using a hybrid approach for electric utilities (Carroway et al. 2022, Kirsch & Morey (2016), Lowry et al. 2015). However, utilities in MO use HTY with a few exceptions (MO Public Service Commission, personal communication). Since 2017, the Missouri American Water Company has proposed using an FTY in several of its proposed rate changes, but the Commission has not yet approved an FTY.
The gap between the HTY and the rate year is known as regulatory lag (Costello 2013b). It is usually two years between a utility's change in costs or sales and when it can update its rates to reflect those changes. This provides an incentive for utilities to control costs and manage operations and investments efficiently (Lowry et al. 2015, Costello 2013a). An HTY may produce deficient rates if a utility's costs are rising faster than sales, causing rates o fall below average costs. Historical data, even with adjustments, can provide a false sense of accuracy that may not reflect current or future conditions (Costello 2013a, Lowry et al. 2010).
Using an FTY could avoid revenue deficits from regulatory lag, support new investments, and give better price signals for customers (Costello 2013a). However, using an FTY in a stable market may lead to excessive rates due to forecasting errors or biased projections (Costello 2013b).
There is no research on the impact of FTY on customer rates, but a 2013 survey found that while commissions faced initial challenges with FTY, out of the 14 commission, 11 reported a positive experience, two (KY, MS) reported mixed experiences, and one (UT) reported concerns with FTY (Costello 2013c).
WI's Public Service Commission (PSC) has used FTY for more than 35 years (Costello 2014, Costello 2013c). WI’s PSC audits filings and requires extensive documentation of forecasted costs and revenues to ensure reasonable rates. The burden is on utilities to provide support for estimated data when filing applications. WI’s PSC requires historical data as a benchmark for evaluating forecasts.
References
American Association of Retired Persons. v. Tenn. Public Service Com'n (1995). https://casetext.com/case/aarp-v-tenn-public-service-comn
Ark. Code § 23-4-1207. Link
CA Public Utilities Commission (n.a.) General Rate Cases. https://www.cpuc.ca.gov/generalratecase
Carroway K, Kasacavage S, Monsanto T (2022) Costs, Benefits, And Methods of Implementing Alternative Rate Mechanisms for Utility Ratemaking. Kentucky Legislative Research Commission. https://legislature.ky.gov/LRC/Publications/Research%20Memoranda/RM531.PDF
Colo. Rev. Stat. § 40-3-102.5. Colo. Rev. Stat. § 40-3-102.5
Costello K (2013a) Future Test Years: Are They in the Public Interest? The Electricity Journal, 26(9):69-81. https://doi.org/10.1016/j.tej.2013.09.016
Costello K (2013b) Future Test Years: Challenges Posed for State Utility Commissions. National Regulatory Research Institute. July Link
Costello K (2013c) Future test years: Evidence from state utility commissions. National Regulatory Research Institute. https://pubs.naruc.org/pub/FA86C105-05F5-9766-BC78-29829AC50361
Costello K (2014). Alternative rate mechanisms and their compatibility with state utility commission objectives. National Regulatory Research Institute. April. https://pubs.naruc.org/pub/FA86C519-AF31-D926-BE12-2AC7AE0CD8D6
Costello K (2016). Multiyear rate plans and the public interest. National Regulatory Research Institute. https://pubs.naruc.org/pub/FA86999D-D03F-2858-7228-A6353560E5B9
Ill. Admin. Code tit. 83 § 287.20. Link
Ind. Code § 8-1-2-42.7. Link
Kirsch L, Morey M (2016) Alternative electricity ratemaking mechanisms adopted by other states. Prepared for Public Utility Commission of Texas. Christensen Associates Energy Consulting LLC. Link
Ky. Admin. Regs. 5:001. Title 807 Chapter 5 Regulation 001 - Kentucky Administrative Regulations - Legislative Research Commission
Lowry MN, Kaufmann L (2006) Alternative regulation for North American electric utilities. The Electricity Journal, 19(5):15-26. https://doi.org/10.1016/j.tej.2006.05.006
Lowry MN, Hovde D, Getachew L, Makos M (2010) Forward test years for us electric utilities. Tech. rep. Edison Electric Institute. http://www.pub.nl.ca/applications/ARCHIVE/2013/NP2013GRA/files/information/Information-11.pdf
Lowry MN, Makos M, Waschbusch G (2013) Alternative Regulation for Evolving Utility Challenges: An Updated Survey. Prepared for the Edison Electric Institute. Pacific Economics Group Research LLC. https://www.senate.mo.gov/18web/wp-content/uploads/2016/08/Innovative_regulation_survey.pdf
Lowry M, Makos M, Waschbusch G (2015) Alternative regulation for emerging utility challenges: 2015 update survey. Edison Electric Institute. Pacific Economics Group Research LLC. Washington, DC. https://www.puc.pa.gov/pcdocs/1418301.pdf
MD Department of Legislative Services (2019) Alternative Utility Ratemaking Policies. https://dls.maryland.gov/pubs/prod/BusTech/Alternative_Utility_Ratemaking_Policies.pdf
Mich. Comp. Laws § 460.6a. Link
Minn. Stat. § 216B.16. Link
Miss. Code § 77-3-37. Link
MO Public Service Commission (2025). Response to Inquiry Re: Missouri Public Service Commission Rate Case Proceedings and Test Year. Personal communication.
NE. Admin. Code Title 291 NAC, Chapter 9. Chapter 9 - Natural Gas and Oil Pipelines Rules and Regulations_1.pdf
N.M. Admin. Code § 17.9.530.7. NM Public Service Commission. https://www.srca.nm.gov/parts/title17/17.009.0530.html
Pa. Code Ch. 121. Rules and Regulations Pennsylvania Public Utility Commission. Link
Pa. Code § 53.56. Supporting data for future test year. Link
PA Public Utilities Commission (2018) A guide to Utility Ratemaking. https://www.puc.pa.gov/General/publications_reports/pdf/Ratemaking_Guide2018.pdf
Public Utility Commission of Oregon (Dec 20, 2024) Order No. 24-454. https://apps.puc.state.or.us/orders/2024ords/24-454.pdf
Public Service Commission of Maryland (Aug 2019) Order No. 89226 Case No. 9618. Order on alternative forms of rate regulation and establishing work. Link
Public Service Commission of Wisconsin (n.a.) Revenue requirement. https://psc.wi.gov/Pages/ServiceType/Water/RevenueRequirement.aspx
Public Service Commission of Wisconsin (Dec 2024) Case No. 527740. https://apps.psc.wi.gov/ERF/ERFview/viewdoc.aspx?docid=527740
RI Public Utilities Commission and Division of Public Utilities and Carriers (1998) https://ripuc.ri.gov/generalinfo/commrules.html
Utah Code § 54-4-4.1. Chapter 4 Authority of Commission Over Public Utilities. Link
