Order 15519 - Narr. Elec.: Performance Based Rate Factor

 

STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS

PUBLIC UTILITIES COMMISSION

REPORT AND ORDER

On November 19, 1997, the Narragansett Electric Company ("Narragansett" or "Company") filed with the Public Utilities Commission ("Commission") a compliance filing under the Utility Restructuring Act ("URA") of 1996. Pursuant to R.I.G.L. Section 39-1-27.4, the Company proposed to increase its rates by $0.00156 per kilowatt-hour ("kWh"), as the Performance Based Rate ("PBR") factor to be applied to consumption on and after January 1, 1998. This would increase annual revenues by approximately $7,488,000. The URA authorizes electric distribution companies to increase base rates per kWh by a factor equal to the average revenue per kWh received during the twelve months ending September 30, 1997, excluding the cost of fuel and demand-side management programs, multiplied by the rate of inflation as measured by the change in the Consumer Price Index ("CPI") over the most recent twelve months for which data are available.

The URA also requires that, on or before November 15, 1997, each electric distribution company shall file a report with the Commission detailing the earned return on common equity ("ROE") from intrastate operations for the twelve months ending September 30, 1997. Narragansett filed its earnings report which reflects an earned return on equity of 9.25%. The Company's allowed ROE is 11.00%.  [1 Under the URA, electric distribution companies that earn less than six percent on common equity are authorized to implement a surcharge to collect over twelve months the revenue necessary to make up the difference between the return on common equity earned and six percent. Also, earnings exceeding the level currently allowed by the Commission shall be refunded to customers on a shared basis. The sharing formula returns 100% of earnings in excess of 1 1/2% above the allowed rate of return, and 50% of earnings between the allowed rate of return and 1 1/2% above that rate.]

Narragansett treated its annual PBR filing as a rate stability plan, encompassing not only the statutory PBR increase but also the end of the Fuel Adjustment Clause [2 The FAC is an on-going docket, No. 1287.]  ("FAC") and Purchased Power Cost Adjustment Clause  [3 The PPCA is an on-going docket, No. 2208.]  ("PPCA"), a refund of prior years' overcollection of Financial Accounting Standards Board ("FAS") 106 [4 FAS 106 is an on-going docket, No. 2045.] funds, a reduction in the recovery of FAS 106 expenses on a going-forward basis, and the refund of a streetlight revenue overcollection.

The Commission held an initial public hearing on December 11, 1997 at 100 Orange Street in Providence. The following appearances were entered:

FOR NARRAGANSETT:                    Ronald T. Gerwatowski, Esq.

Craig L. Eaton, Esq.

FOR THE DIVISION OF PUBLIC

UTILITIES AND CARRIERS:            Alan M. Shoer

("Division")                                           Special Assistant Attorney General

FOR THE COMMISSION:                 Adrienne G. Southgate

General Counsel

The hearing was limited to consideration of the FAC, which was presented through Jose A. Rotger, a Senior Rate Analyst for the New England Power Service Corporation ("NEPSCo"). Mr. Rotger testified that he had estimated a final balance for the fuel account, as of December 31, 1997, of $4,557,991. This over-recovery could change, since the final two months of 1997 were estimates rather than actuals. Narragansett proposed to flow back the over-recovery over a period of roughly twenty-six months as part of it rate stabilization plan.

The Company's normal practice in billing its FAC is that a new factor for the January through June period would be assessed on all bills rendered beginning in January. However, Narragansett proposed to treat its FAC differently in this filing, by pro-rating the factor over the billing cycles in January. Thus, a customer receiving a bill for a meter read on January 5 would see twenty-five days billed under December's FAC, and five days billed under the January rates. Mr. Rotger explained that this was the Company's method of dealing with the issue of cycle versus calendar billing, and the prospect of all customers obtaining retail access on January 1, 1998. The impact of the proration is to transform an under-recovery in the FAC into an over-collection. Several alternatives to this proposal were explored during the course of cross-examination.

Mr. Rotger conceded that Narragansett had not included interest on the FAC over-recovery, nor on the FAS 106 over-collection, during the proposed two-year refund period. However, the Company agreed to do so after consulting with the Division. This would add roughly $400,000 to the credit owed to customers.

As a result of New England Power's ("NEP") new Tariff No. 9,  [5 Under FERC Order No. 888, as supplemented by Order 888(A) and Order 888(B), NEP filed Tariff No. 9 on July 9, 1996. Those rates are in effect, subject to refund. Narragansett's base rates remain at the W-95 transmission cost level. The open access transmission tariff has increased Narragansett's transmission costs.]  Narragansett is not recovering enough revenues from its transmission rate. The under-recovery is presently small, because it is only applicable to those customers taking retail access. However, as of January 1, 1998, Narragansett's transmission service will be applicable to all customers. Mr. Rotger testified that the Company believes the URA precludes any rate increase to cover the increase in transmission costs, now or retroactively in the future. After the end of the PBR period, the Company may seek a rate increase on a going-forward basis.

On December 16, 1997, Narragansett presented its PBR proposal through Peter T. Zschokke,  [6 Mr. Zschokke sponsored Narragansett Ex. 1 (prefiled testimony and exhibits) and Narragansett Ex. 2 (tariffs).]  Manager of Retail Rates for NEPSCo; David M. Webster, who provides revenue requirements analyses for the companies in the New England Electric System, including Narragansett; and Theresa M. Burns, a NEPSCo senior rate analyst responsible for the design and implementation of retail access rates. Mr. Zschokke explained that the proposal in this docket merges a number of actions that are occurring on January 1, 1998: the second PBR increase under the URA; the termination of NEP's all-requirements contract with Narragansett; and the closing out of the FAC and PPCA accounts which reflected the all-requirements contract between NEP and Narragansett. In addition, the Company sought to use this docket to deal with setting a more realistic level of FAS 106 costs, and a refund from ongoing collections for FAS 106 in excess of costs.

Mr. Webster testified that the Company had reduced its inflation factor from 2.2% to 2.15%, in response to a request by the Division. This change reduces the PBR factor to $0.00152, which reduces annual revenues by $191,000.

The PBR factor was calculated as follows:  [7 The revised PBR factor was recalculated in Narragansett Ex. 3.]

The increase in revenue to be realized by Narragansett in 1998 is approximately $7,295,632. In accordance with the URA, the PBR factor will not be applied to Narragansett's low income customer rate, Rate A-65. For the typical residential customer using 500 kWh per month, the PBR factor would add $0.76 to the monthly bill. However, the Company proposed to offset this increase by flowing back the various refunds described above.

In revised exhibits filed on December 16, the Company calculated a net refund to customers of $8,499,156. [8 This total is reached by adding the PBR increase of $7,295,632; the FAS-106 decrease of $3,107,247; the FAS-106 refund of $802,601; the FAC refund of $4,557,991; the PPCA refund (including streetlighting) of $6,497,093; and interest on the three refunds of $829,856. See Narragansett Ex. 4.]  Mr. Zschokke testified that the revision did not reflect a proposal made by Narragansett in Docket No. 2631, to offset the total refund amount with the Cooperative Interruptible Service credits of $880,000 per annum. Moreover, the interest calculation presupposed a ratable distribution over a period of approximately two years.

An alternative would be to refund the various over-collections during a single month. Applied to January bills, for example, customers would see a refund factor of roughly $0.029 per kWh.  [9 On December 31, 1997, the Company made a Compliance Filing, in which it calculated the Refund Credit factor at $0.0261 per kWh. The effect on the January bill for a typical 500 kWh residential customer is a refund of $13.05.]  The Commission has traditionally made an attempt to match refunds to the base of customers who contributed to the over-collection. This principle would be strained by spreading the refund over more than twenty-four months. Mr. Zschokke agreed that "money sooner is more valuable to customers." [10 See Transcript, 12/16/97, p. 68.]  He conceded that rates would then remain stable for a period of two or three years, which was one of the goals of the Company's rate stability plan.

The Division presented David J. Effron. Mr. Effron testified that he had reviewed the Company's filing, and that there were some relatively minor items that could arguably have been adjustments. However, none of the potential adjustments would have increased the ROE above the authorized level of 11%. Mr. Effron concluded that the reduction to the FAS-106 factor appeared to be warranted, based upon his review of the actuarial report which serves as a basis for the FAS-106 expense. He concurred with the Company's revised calculation of the PBR factor.

Mr. Effron did not oppose Narragansett's proposal to flow the refunds back to customers over a period of two years or more. He noted that any refund period selected would carry with it both positive and negative consequences. The Division felt that there was some advantage to rate stability. While Mr. Effron conceded that the large PPCA and FAC overcollections were the result of a single month of billing, and that therefore a refund over a single month might be justified, he noted that a one-month refund period introduces a large element of randomness.

The Commission considered the Narragansett rate stability plan at an open meeting on December 17, 1997. The analysis began with a summary of the changes to rates on January 1, 1998. As a result of the PBR change, the Company's rates will increase by roughly $7,300,000. This increase will be offset by a reduction in the FAS-106 collections of roughly $3,000,000, leaving a net annual rate increase of approximately $4,200,000. However, on January 1, 1998, the Company will also be holding about $12,000,000 in ratepayer funds, representing overcollections of the FAC and PPCA during the month of December (nearly $11,000,000) as well as an overcollection of the FAS-106 expense and interest.

There were three alternatives raised in the course of the hearing for addressing the circumstances outlined above. First, the Company might prorate and reduce December bills so as to prevent the FAS and PPCA overcollections. Narragansett testified that this would be extremely difficult and burdensome. Second, the Company could spread the refund out over some period of time. The filed proposal suggests a period of about two years. In the Commission's view, such a lengthy refund period violates the principle of matching. A third option is to make the refund all at once. The Company witnesses testified that they could not be certain that no customers would receive a rate increase if the refund were to be made in a single month rather than over a period of time. However, any rate increase will be mitigated by the refund itself. Moreover, the URA does not guarantee that customers will not see increased rates; in fact, that is precisely what the PBR provision requires.

The effect of making the return in a single month would be to lower the bill of a typical 500 kWh customer by approximately 20%, or $13.00, during the month of January. The Commission voted to require the single-month refund of all over-collections, with appropriate interest.

The Commission also adopted the proposed PBR factor of $.00152, as supported by the evidence and in compliance with the URA. The Commission also finds that the equity earnings of the Company for the twelve month period ended September 30, 1997, will not result in any surcharge or customer refund for 1998.

Accordingly, it is

(15519) ORDERED:

1. That the Narragansett Electric Company's proposed Performance Based Rate factor of $.00152 per kilowatt-hour is hereby approved to be applied to consumption on and after January 1, 1998. The PBR increase shall be applied "across the board" to all kWh usage, with the exception of the utility's low income rate.

2. The Company is directed to make the refunds emanating from the Fuel Adjustment and Purchased Power Cost Adjustment Clauses (including the streetlighting refund), and FAS 106 (a refund as well as an on-going reduction in rates), on a per kWh basis on bills rendered during the month of January, 1998.

EFFECTIVE AT PROVIDENCE ON DECEMBER 17, 1997, PURSUANT TO AN OPEN MEETING DECISION. WRITTEN ORDER ISSUED FEBRUARY 10, 1998.

PUBLIC UTILITIES COMMISSION