An expert witness can be crucial to your electric rate or contract dispute

An expert witness can be one of the crucial building blocks for supporting a contract or electric rate dispute. The nature of the utility business can lead to contract and rate disputes. Many utilities and co-ops have joint ownership of power plants, where, even with the best of intentions, can lead to differing interpretations of the contracts that govern plant operation and pricing of electricity. Due to a public regulatory process at the federal, state, and local levels, many electric rate increase filings by utilities and cooperative have "intervenors" whose interests run counter to those of the filing utility or co-op and get their voices heard through intervenor filings and the regulatory process.

While large utilities and co-ops have internal electric rate departments that prepare and file cost of service studies and proposed electric rates, many small and mid-sized utilities and co-ops use consultants to prepare their electric cost of service and rate design studies. Whether done in-house or outsourced, there are times when an independent voice is needed to represent the views of the utility and co-op's desired rates. Many organizations turn to "expert" witnesses to provide their views. The independent view is also essential in contract disputes.

This article discusses the role of an expert witness and considerations in choosing an expert witness to represent the views of the applicant or parties involved in contract disputes.

 Key article takeaway

1. Disputes often arise in electric rate changes and joint-ownership of power plants. Many of these disputes can be solved short of legal or regulatory action. Use a public information process, committees, and contract audit clauses to identify and resolve potential dispute areas. If the situation moves beyond that, using an expert witness will aid in impartiality and credibility in solving a dispute in a technical area.

2. An expert witness can be an asset in making a case for the party they represent and bring experience, insights, past references, and a level of expertise that is not available internally to a disputing party.

3. Potential expert witnesses need to be thoroughly vetted, not for their potential opinion, but for the soundness of the legal arguments in the past decisions they have represented as their reference engagements.

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Electric disputes

Disputes arise in these general areas of the electric business:

1. Electric rates - Especially at the federal and state regulatory level, there are often intervenors who object to rate increase filings. These intervenors often propose their electric rates, which may favor their interests. At the federal level, filings on transmission rate disputes are often filed with the Federal Energy Regulatory Commission (FERC). FERC hearings sort through documents, and witnesses provide testimony in support or opposition of the rate filings.

2. Jointly-owned power plants - Due to the sizable dollars needed to build power generating facilities, jointly owned power plants are common in the electric industry. Small and mid-sized municipal utilities or electric cooperatives often band together with larger investor-owned utilities to build generating units or buy into existing facilities. Organizations call "Joint Action Electric Agencies" and "Generation and Transmission Co-ops (G&T)" combine utility or co-op "members" who buy ownership shares in power plants and share in operating costs while taking power delivery from the units.

1. In a jointly owned power plant, there is one owner that operates the plant (owner-operator), and all owners then pay the costs of operating the plant in exchange for taking the electrical output of the plant.

2. The owners enter into an Operations Agreement, which is a contract that governs the plant operation, costs, and other operating terms of the power plant, such as applying overhead costs.

3. These joint ownership situations are governed by operating committees that use operating agreements signed by all the members to meet the operational requirements of the units. Contract disputes arise due to differing contract interpretations between the unit operator and members.

4. Power purchase agreements (PPAs) are bi-lateral contracts between power producers and power takers. A PPA details the costs included in the electricity delivered to the power taker.

FERC regulates interstate rates for electric transmission and wholesale power rates, and interstate natural gas rates. While this may not impact your electric or gas co-op or utility, it is worth noting what items FERC questions in its review and approval of electric rate and other compliance proceedings. FERC’s approach defines the best practices allowable in developing electric cost of service studies and designing electric rates.

The FERC Division of Audits and Accounting noted items that needed addressing in their audits. Items of note are discussed next.

Avenues to resolution

Electric rates

Electric rate regulatory hearings

Investor-owned utilities are regulated at the state and local levels. Some municipal utilities are also regulated at the state level. The regulatory process invites public input into the rate process and allows interested parties to "intervene" in rate proceedings. In these interventions, the intervenor presents their supporting documentation as to why a rate application by the utility should be adjusted or does not properly reflect the cost to serve the intervenor's company.

The regulatory body then makes a final decision about the change in rates that will be allowed. Let's face it, no one likes rate increases, but everyone wants to use the product (electricity), and they want it available on-demand without interruption. There are always happy and unhappy parties when it comes to the final approvals for rate increases.

Contract disputes

Jointly-owned power plants

Jointly owned power plants generally have several committees made up of owner representation that oversees the management and operations of the jointly owned units. A contract between the owners establishes these committees. Joint committees are:

1. Management Committee has high-level oversight of plant operation and issues that arise.

2. Finance Committee, responsible for budgets, finances, rates, and the audit process

Depending on the arrangement, more granular committees may exist, such as Human Resources or technology.

The committees serve as a governance approach to setting policies, strategies, and a voice for each owner. The benefit is that many disagreements can be addressed at the committee level before becoming more significant issues.

Arbitration

Disputes may arise between owners of jointly owned power plants or in the case of power purchase agreements between power providers and power takers. The contracts involved generally contain arbitration clauses that can be used to settle disputes. The owners select independent arbitrators. The arbitrators review facts submitted by the entities, hear testimony and depose the parties and their expert witnesses, and come to decisions on settlements.

Written contract modifications

Situations can arise later in the operation of jointly-owned power plants that can be modified through amendments to the joint-ownership agreement. This is a value provided by the committee governance structure.

Audits

Joint-ownership power plant contracts contain audit clauses that allows any owner to hire outside auditors to audit compliance by the owner-operator with the Operations Agreement. The audit firm uses the Operations Agreement as its workplan in auditing proper costs included in operations, allocations of costs, operations of the plant, and other issues identified by the owners.

Lawsuits

If agreement cannot be met on items in dispute in regards to electric rates or contract disputes with jointly-owned power plants, the last avenue is a lawsuit.

Why use an expert witness?

An "expert witness" is just as it sounds - someone who holds themselves as having expertise in the matter in dispute. In each of the situations described - electric rate disputes, jointly-owned power plants, and power purchase agreements, an expert witness can be an asset in making a case for the party they represent. The use of an expert witness is more common in electric rate and PPA disputes that cannot be resolved by the parties short of litigation or arbitration.

What does an expert witness bring to the table in helping to resolve a dispute?

1. Expertise - the expert will/should have more experiences in the disputed matter and references to pull from in their testimony.

2. Complicated matter - some disputes have nuances that may not fit the background knowledge of the disputing parties. Some newer power plant or PPA contracts might have unintended consequences not foreseen when the contracts were written.

3. Independence - the expert can bring an independent view of the situation. Their backup use is a scapegoat for the party that does not prevail in the dispute.

Expert witness qualifications

Depending on the niche being disputed, an expert witness can be easy to find. A utility should have a robust vetting process in place so that monies spent on an expert are well-spent. Areas to focus on in the vetting process include:

1. Years of industry experience - while years of experience do not automatically qualify someone as an expert, years of experience can allow the expert to know of similar situations that have been resolved in the past. This is valuable information to draw on.

2. Direct knowledge of the topic - hiring an industry generalist may not be a good direction to go in with an expert. The expert should have direct knowledge of the subject or have worked in the disputed area. For example, a common dispute in jointly-owned power plants is in the area of allocating common overhead costs between owners. An expert working in finance in this area would be of great value. In contrast, an expert that worked in fixed asset accounting may not carry as much in their credentials as needed in the dispute.

3. References - there may not always be a one-to-one match of your situation with an expert's project references, but the expert should be able to tie a connection to your disputed area.

4. Industry writer or instructor - an expert who stays current in the industry, writes articles or holds classes on utility topics can bring a level of expertise that bolsters the team's credentials.

5. Able to write and speak technical material for a non-technical audience - experts can be a bit full of themselves sometimes, i.e., doing an information dump to show that they are an expert and are considered an expert in the disputed area. A helpful expert must be able to present technical information on their knowledge of the disputed area to a non-technical audience. The non-technical audience will be arbitrators, sometimes Board Members, City Council members, and regulatory body officials. This does not mean that the expert's materials and delivery are "dumbed down to the lowest common denominator", but in order to be useful, the information must be concise, to the point, and avoid unnecessary fluff and sidebars.

Obtain the resume or CV of a potential expert to make an initial judgment as to their usefulness to your dispute. Interview a potential expert like you would anyone for a position in your organization. If you have retained legal counsel, have the legal counsel be part of the interview process. Counsel will be able to ask legal questions as to the depth of the expert's deliverables and testimony in the expert's reference engagements.

Do you need an expert witness?

Disputes arise and can be solved short of legal or regulatory action. Use committees and contract audit clauses to identify and resolve potential dispute areas. If the situation moves beyond that, using an expert witness will aid in impartiality and credibility in solving a dispute in a technical area.

In the area of electric rate adjustments, we have found that meeting with customers in the early stages of the rate application process can help to head off disputes and lead to a greater level of understanding by both parties. Don't wait until the public rate hearing or city council meeting process to try to resolve rate disputes. Avoid the messiness if possible. Contact us for ways we can assist as your expert witness.

About Russ Hissom - Article Author

Russ Hissom, CPA is a principal of Utility Accounting & Rates Specialists a firm that provides power and utilities rate, expert witness, and consulting services, and online/on-demand courses on accounting, rates, FERC/RUS construction accounting, financial analysis, and business process improvement services. Russ was a partner in a national accounting and consulting firm for 20 years. He works with electric investor-owned and public power utilities, electric cooperatives, broadband providers, and gas, water, and wastewater utilities. His goal is to share industry best practices to help your business perform effectively and efficiently and meet the challenges of the changing power and utilities industry.  

Find out more about Utility Accounting & Rates Specialists here, or you can reach Russ at russ.hissom@utilityeducation.com.

The material in this article is for informational purposes only and should not be taken as legal or accounting advice provided by Utility Accounting & Rates Specialists. You should seek formal advice on this topic from your accounting or legal advisor.