STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS
PUBLIC UTILITIES COMMISSION
IN RE: NARRAGANSETT ELECTRIC COMPANY
STANDARD OFFER
DOCKET NO. 2715
On April 10, 1998, the Narragansett Electric Company (the "Company" or "Narragansett") filed several rate changes with the Public Utilities Commission ("Commission") pursuant to R.I.G.L. Section 39-3-10, to become effective June 1, 1998. This was the second filing made to satisfy Narragansett's obligations under the terms of a settlement agreement dated May 30, 1997 amongst Narragansett, New England Power Company ("NEP"), the Division of Public Utilities and Carriers ("Division") and the Commission ("Settlement Agreement") which was filed with, and approved by, the Federal Energy Regulatory Commission ("FERC"). The Settlement Agreement provides, in relevant part, for the implementation of Rhode Island's Utility Restructuring Act of 1996, as amended ("URA"). The general objective of the URA is to deregulate electric power supplies and allow the development of a competitive market for the purchase of electricity.
Narragansett is a wholly owned subsidiary of New England Electric System ("NEES"), an integrated public utility holding company. Narragansett is engaged primarily in the distribution of electricity to approximately 330,000 customers located in 27 Rhode Island cities and towns. Narragansett has purchased all of its energy requirements from NEP, NEES's wholesale generating and transmission subsidiary. The power has been purchased under the terms of a long-term all-requirement contract, the terms and prices of which have been regulated by the FERC.
A public hearing was held on May 11, 1998. The following appearances were entered in this proceeding:
FOR THE COMPANY Ronald T. Gerwatowski
FOR TEC-RI Andrew Newman
Rubin and Rudman LLP
FOR THE DIVISION Paul J. Roberti
Chief, Public Utilities Regulatory Unit
Office of the Attorney General
FOR THE COMMISSION Adrienne G. Southgate
General Counsel
Lindsay Johnson
Special Counsel
On October 10 and November 17, 1997, Narragansett filed proposed Standard Offer Service rates and Last Resort Service rates which were designed to implement open access and bring competition to Narragansett's ratepayers. [1 The Commission approved the filed rates with some changes on December 17, 1997. See Order No. 15520 dated July 9, 1998.] These rates mandate retail access to alternative suppliers of electricity. Simply put, Narragansett is now required to allow its customers to purchase electricity from other suppliers of electricity and is required to transport any such purchases on its lines from the supplier to the customer.
In its December decision, the Commission found that the proposed rates did not qualify as Standard Offer Service rates under the URA because the wholesale power supply had not been awarded by public competitive bidding as mandated by the URA. [2 R.I.G.L. Section 39-1-27.3(d), as amended.] Accordingly, the Commission ordered Narragansett to designate such rates "Interim Power Rates." [3 Order No. 15520 dated July 9, 1998.] These rates are based upon the wholesale charge of 3.2 cents per kilowatt hour ("kWh") to Narragansett for wholesale standard offer service. [4 Ex. NEC-1, pp. 18-20, PTZ-1.] The 3.2 cents wholesale charge produced a 22% reduction in purchased power costs. [5 Id.] In order to provide a reduction to all customers, the purchased power costs allocated to each rate class were reduced by 22%. [6 Id.] The rate structures for each rate class (whether reflecting energy, demand, or time-of-use charges) are maintained.
In March, 1998, Narragansett put its power supply out to bid in an effort to satisfy the requirements of both the Settlement Agreement and the URA. The currently proposed rates have been designated Standard Offer Service and incorporate the following additional changes:
1) Each tariff has been modified to add Last Resort Service.
2) A Standard Offer Adjustment Provisions has been added.
3) A Last Resort Adjustment Provision has been added.
4) Residential Time of Use rate A-32 has been closed to new customers.
Narragansett, the Division and TEC-RI presented witnesses who testified on the filed rates.
A. THE COMPANY
1. Mr. Peter G. Flynn
Narragansett's first witness was Peter G. Flynn, Vice President, Director of Rates, New England Power Service Company ("NEPSCO"). Mr. Flynn testified that, as part of the Settlement Agreement, Narragansett entered into a power supply agreement with NEP ("NEP Contract") that required NEP to provide the wholesale power supply required to serve Narragansett's Standard Offer customers. [7 Tr. 5/11/98, pp. 16-18.] Initially, Narragansett understood the terms of the contract to require NEP to supply power only to those who were Standard Offer customers of Narragansett as of January 1, 1998, the Retail Access Date pursuant to the URA.
Mr. Flynn testified that Narragansett had recently reviewed the NEP Contract in light of questions raised in this proceeding. Based upon that review, Mr. Flynn stated that Narragansett now believes that NEP is required to provide service to all of Narragansett's Standard Offer customers over the Standard Offer period. [8 Id. Assuming that NEP was not required to provide the power requirements of customers added to the system after January 1, 1998, Mr. Molloy and Mr. Hager proposed in their prefiled testimony that the power requirements for these new customers be acquired by periodically seeking bids from qualified suppliers. Ex. NEC-A, pp. 8-10, 30-32. Because the Company now takes the position that NEP is required to provide this power, this proposal has become moot and is not discussed in this Report and Order.] Mr. Flynn, however, proposed that the Commission consider allowing Narragansett to release NEP from the obligation to provide service to customers added to the system after January 1, 1998, thus enabling Narragansett to put this supply requirement out to bid. If Narragansett were able to obtain power for less than the NEP Contract prices, ratepayers would realize the savings. [9 Tr. 5/11/98, p. 21.] For this reason, Mr. Flynn testified that Narragansett recommended the proposal. [10 Id.]
2. Mr. James J. Molloy
Mr. Molloy, Rate Analyst for NEPSCO, testified that Narragansett was "proposing to price Standard Offer Service exactly the same as the current Interim Power Service rates". [11 Ex. NEC-A, p. 5. All page references to this exhibit are to the page number of the volume shown at the bottom right of each page.] Mr. Molloy testified that Narragansett has deleted any reference to Interim Power Service in the proposed tariffs and substituted "Standard Offer Service". [12 Ibid., p. 6.] In addition to this alteration, Mr. Molloy described four other proposed changes to the tariffs.
The first tariff change described by Mr. Molloy was the addition of a Standard Offer Adjustment Provision ("SOAP") essentially identical to the Interim Power Adjustment Provision which it was designed to replace. Mr. Molloy proposed including the following paragraph in the SOAP to allow the Commission more flexibility in structuring charges or refunds to customers:
By March 1 of each year, the Company shall determine the Standard Offer Adjustment Balance for the prior calendar year and make a filing with the Commission. The Company will propose at that time a rate recovery/refund methodology for the Commission's review and approval to recover or refund the balance, as appropriate, over the twelve-month period commencing April 1. The Company may propose to collect or refund the balance from (i) all customers, (ii) only Standard Offer customers, or (iii) through another method, subject to the approval of the Commission. [13 Ibid., p. 7.]
The second tariff change described by Mr. Molloy was the addition of a Last Resort Service provision. The purpose of the Last Resort Service Provision is to implement a requirement of the URA that obligates each distribution company to act as supplier of last resort to customers:
[W]ho are no longer eligible to receive service under the standard offer and are not adequately supplied by the market because they are unable to obtain or retain electric service from nonregulated power producers. [14 R.I.G.L. Section 39-1-27.3(f).]
To satisfy this requirement of the URA, Narragansett added the following provision to all of its delivery tariffs:
Any Customer served under this rate who is no longer eligible for Standard Offer Service and is not being provided electric supply by a nonregulated power producer shall receive their electricity from the Company's Last Resort Service, under the Last Resort Service rate approved by the Commission from time to time. [15 Ex. NEC-A, p. 18.]
Narragansett also added a Last Resort Adjustment Provision to its tariffs that would allow Narragansett to adjust rates to collect or refund any over- or under-collection of the cost of Last Resort Service. [16 Ibid., p. 10.]
Finally, Narragansett proposed to close the Residential Time-Of-Use Rate A-32 to new customers. [17 Ibid., pp. 11-12.] Mr. Molloy testified that because of the unbundling of the Company's rates, this rate class no longer has retail delivery service rates with an on-peak and off-peak differential. [18 Id.] In this opinion, the result is that there are no longer any benefits to customers from Narragansett continuing to offer time-of-use based generation prices for new customers. [19 Id.] Narragansett proposed that the rate be made available only to existing customers. [20 Id.]
3. Mr. Michael J. Hager
Narragansett also presented the testimony of Mr. Hager, Standard Offer Portfolio Manager for NEPSCO. Mr. Hager detailed the efforts of Narragansett to obtain Standard Offer power supply. [21 Ibid., pp. 28-32.] Under the Settlement Agreement, NEP agreed to supply Narragansett's Standard Offer Service requirements at a fixed price schedule, subject to a fuel index ("NEP Contract"). [22 Id.] The Settlement Agreement also required Narragansett to seek less expensive power by holding a one-time auction. [23 Id.]
Mr. Hager testified that subsequently Narragansett contracted with USGenNE for wholesale standard offer service at the price schedule fixed in the Settlement Agreement ("USGenNE Contract"). USGenNE's obligation to deliver power and Narragansett's obligation to purchase power under the USGenNE Contract, however, commences on the closing date of sale of both NEP and Narragansett's non-nuclear generating assets to USGenNE. [24 The original Asset Purchase Agreement between NEP, Narragansett and USGenNE was dated August 5, 1997. Commission Record Request 5. On October 29, 1997 the Agreement was amended and restated to facilitate the assignment of certain contract rights by USGenNE to TransCanada. Tr. 5/21/98, p. 54; Commission Record Requests 5 and 15, Ex. NEC-C, RIPUC 1-15.]
Narragansett then developed a list of 14 qualified bidders to participate in the competitive bidding required by the URA and the Settlement Agreement. [25 Tr. 5/11/98, pp. 157-159, Commission Record Request 5.] Only one qualified firm responded to the request for proposals ("RFP") and it did not submit a bid. [26 Ex. NEC-A, p. 29.] The result is that NEP continues to be the supplier under the terms of the NEP Contract. [27 Ibid., p. 30.]
Finally, Mr. Hager testified that during October, 1997, Narragansett issued an RFP to obtain suppliers for Last Resort Service. [28 Ibid., pp. 32-33.] No bids for the service were received. [29 Ibid., p. 21.] Mr. Hager testified that, in his opinion, when the NEPOOL wholesale power exchange opens up, as estimated, in the fourth quarter of 1998, more participation would develop. [30 Tr. 5/12/98, pp. 172-173.] As a result, NEP has agreed to provide Last Resort Service at the same price as Standard Offer Service, and Narragansett is proposing that it continue to purchase the power supply for Last Resort Service from NEP, until the power exchange is established. [31 Ex. NEC-A, pp. 32-33.]
B. THE DIVISION
The Division presented the testimony of Dr. John K. Stutz, Vice President of Tellus Institute. Dr. Stutz recommended that Narragansett develop an explicit procedure for the computation of the market price used to price Last Resort Service but he did not have any substantial objections to Narragansett's proposed rates. [32 Ex. Div-A.]
C. TEC-RI
Mr. Roger L. Buck, Executive Director of the Energy Council of Rhode Island ("TEC-RI") testified for this consortium of about 95 major energy users in Rhode Island. [33 Ex. TEC-RI-A.] Mr. Buck testified in support of two rate design principles. First, he testified that TEC-RI supported the "designed standard offer pricing mechanism" which was employed to design the presently effective rates. [34 Id.] TEC-RI opposes the uniform pricing method which would price each kWh of usage at the flat rate that Narragansett pays to its wholesale supplier. [35 Id.] He was of the opinion that the uniform method would cause customers with high load factors to experience "a much smaller decrease in their rates". [36 Id.]
Mr. Buck also recommended a provision in the tariffs that would fix the amount of future rate increases needed to pay for the increase in the wholesale standard offer rates stipulated in the Settlement Agreement. [37 Id.]
A. STANDARD OFFER
1. Competitive Bidding Requirements
As discussed above, the Commission rejected Narragansett's previous Standard Offer filing because Narragansett had failed to comply with the competitive bidding requirements of the URA. The URA provides:
The power supply contract required for the standard offer shall be awarded by public competitive bidding to the lowest priced power supplier. [38 R.I.G.L. Section 39-1-27.3(d), as amended. It should be noted that the FERC Settlement Agreement also requires the Company to put its power supply out for competitive bid.]
Subsequent to the enactment of the standard competitive bidding requirement, Narragansett entered into the USGenNE Contract that, contingent upon the closing of the sale of the non-nuclear generating assets to USGenNE, requires USGenNE to provide, at standard offer rates, the power required to supply Narragansett's Standard Offer customers who were customers as of January 1, 1998. [39 Ex. NEC-C, RIPUC-5 and 15.] After entering into this contract, Narragansett put its power supply requirement out to bid during the first quarter of 1998. [40 Ex. NEC-A, pp. 29-30.] Qualifying bids were required to be lower than the wholesale standard offer rates contained in the Settlement Agreement and the USGenNE Contract. [41 Tr. 5/21/98, pp. 54-55.] In other words, a successful bidder had to beat the wholesale standard offer prices contained in the Settlement Agreement and the USGenNE Contract.
The URA requires that a distribution company's power supply contract be "awarded by public competitive bidding to the lowest priced power supplier". Neither the USGenNE Contract nor the NEP Contract complies with a literal interpretation of this requirement of the URA. This should not be fatal, however, if Narragansett has produced a result consistent with the URA's intent. In other words, did the procedure employed by Narragansett produce a result consistent with the public competitive bidding process? If so, the requirement of the URA has been arguably satisfied.
Narragansett's bidding procedure was rather convoluted. It first awarded the contract and then conducted public bidding to determine if any supplier could beat the price of the existing contract. [42 Id.] Obviously, this approach is competitive only if the important terms of both contracts are materially alike. In fact, this was the case. The terms of the NEP Contract and the standard offer agreement required by the RFP are all substantially the same. [43 Ibid., p. 154.]
The Commission finds that Narragansett has satisfied the competitive bidding requirements of the URA. This finding is based on the fact that the terms of the NEP Contract and the standard offer contract in the RFP are substantially the same. [44 Id.] While there was some difference in the timing of the bids, all parties were bidding to provide all or some portion of the same load. Unless the NEP Contract produced the lowest cost to the Companies, the power would have been provided by other suppliers. This procedure is consistent with the competitive bidding requirement of the URA.
2. Supply Contract
The URA also requires each distribution company to acquire a power supply adequate to provide service to "customers that have not elected to enter into power supply arrangements with other nonregulated power suppliers". [45 R.I.G.L. Section; 39-1-27.3(d), as amended.] As originally enacted, the URA provided:
[E]ach electric distribution company shall arrange with its wholesale power supplier for a standard power supply offer ("Standard Offer") to customers that have not elected to enter into power supply arrangements with other nonregulated power suppliers. [46 Id]
On July 7, 1997, the URA was amended to require that the Standard Offer power supply be competitively bid. This provision of the URA, as amended, now reads:
[E]ach electric distribution company shall arrange for a standard power supply offer ("Standard Offer") to customers that have not elected to enter into power supply arrangements with other nonregulated power suppliers. The power supply contract required for the standard offer shall be awarded by public competitive bidding to the lowest priced power supplier. [47 R.I.G.L. Section; 39-1-27.3(d) as originally enacted by P.L. 1996, ch 316, Section 1.]
The statute requires that the distribution companies enter into a power supply arrangement that is adequate to provide power "to customers that have not elected to enter into power supply arrangements with other nonregulated power suppliers". [48 Id.] Narragansett entered into the NEP Contract which provides a power supply adequate to provide service to all Standard Offer customers over the period of the Standard Offer. [49 Ex. NEC-C.] The Commission finds that this contract satisfies the requirements of the URA.
3. Price Cap
The URA also places a price cap on the Standard Offer rates. The URA provides that:
The Standard Offer shall be priced such that the average revenue per kilowatt-hour received from the customer for such power together with approved distribution, transmission and transition charges shall equal the price that would have been paid under rates in effect during the twelve (12) month period ending September 30, 1996 adjusted annually for eighty percent (80%) of the change in the consumer price index for the immediately preceding twelve (12) month period, and also for other factors reasonably beyond the control of the electric distribution company and its former wholesale power supplier including but not limited to changes in federal, state or local taxes or extraordinary fuel costs; provided, however, that adjustments to the standard offer for factors other than inflation must be approved by the commission. The standard offer is to be a price cap and may, after notice to the commission, be less than the maximum allowed at anytime for the generation component of the standard offer. [50 R.I.G.L. Section 39-1-27.3(f).]
The difficulty with this provision is that it is not clear how the cap should be applied. The cap is placed on "the average revenue per kWh received from the customer". [51 Id.] It is not clear whether this test applies to each customer, each customer class or to total customers revenues.
Assuming the price cap applies to total annual customer revenues, the Commission finds that the Standard Offer rates do not produce average revenues in excess of the URA cap. [52 Commission Request 1-1, Ex. NEC-3] If the cap applies to the average revenues from each customer class, the Commission finds that the average revenues from approximately 11 of the 13 customer classes do not exceed the URA cap. [53 Compare Ex. NEC-1, PTZ-5 to Commission Ex. 6, Commission -- RR-6 and also see Ex. NEC-20, especially Supplemental Filing Exhibit pages 2, 3, 4 and 6 of 6.] If the price cap is applied to individual customers, it follows that the average revenues from some customers would necessarily be in excess of the price cap, but there is nothing in the record to indicate how many customers would pay average revenues in excess of the price cap.
The Commission will allow the filed rates to go into effect so as not to delay implementation of the URA. However, the Commission will continue to pursue interpretation of the legislative intent embodied in the Standard Offer price cap provision of the URA. This effort will include seeking a declaratory judgment from the courts. It must be emphasized that the Commission is not making any determination of how the price cap should be applied in any future proceeding and shall require the Company to address this issue in any future rate proceedings. [54 The Company has expressed its intent to modify its rates to impose a flat uniform rate when the Residual Value Credit is realized upon the sale of Narragansett's and NEP's non-nuclear generating assets. Ex. NEC-1, pp. 20-22. Also see note 24. At that time, it is also possible that another party may propose the continuation of the existing rate design. In either event, the Commission will require the Company or any other party to demonstrate that any proposed change in rates is in actual compliance with the URA.]
4. Form of Tariff
During the hearings, a question arose as to whether the cover sheets summarizing the rates of each tariff are part of the tariff. The Commission believes that the cover sheets summarizing the rates of each tariff are very helpful and finds that the cover sheets are part of Narragansett's filed tariffs.
In addition, the Commission finds that the terms of Narragansett's tariffs would be clearer if the provisions of Standard Offer Service were contained in a single tariff.
B. STANDARD OFFER ADJUSTMENT PROVISION
The Commission finds that the SOAP filed by Narragansett provides the flexibility needed by the Commission to provide for an equitable distribution of any future under- or over-collections. The proposed tariff, however, needs some minor changes to delineate the Commission's authority to determine the details of the refund. Accordingly, the SOAP filed by Narragansett is approved with the fourth paragraph modified to read as follows:
By March 1 of each year, the Company shall determine the Standard Offer Adjustment Balance for the prior calendar year and make a filing with the Commission. The Company will propose at that time a rate recovery/refund methodology to recover or refund the balance, as appropriate, over the twelve-month period commencing April 1. The Commission may order the Company to collect or refund the balance over any reasonable time period from (i) all customers, (ii) only Standard Offer customers, or (iii) through any other reasonable method. [55 Ex. NEC-A, p. 7.]
C. LAST RESORT SERVICE
The Commission approves Narragansett's proposal to "provide Last Resort Service at the same price as Standard Offer Service". [56 Ex. NEC-A, p. 8.] Under the proposal, this arrangement will be in place until the Last Resort Service is successfully put out to bid as required by R.I.G.L. R.I.G.L. Section; 39-1-27.3(f). To simplify the tariffs, however, the Commission finds that the Last Resort Service tariff should not specify specific prices but should stipulate that Last Resort Service is being provided at the Standard Offer Service rates specified in the Standard Offer tariff. It should also stipulate that the Last Resort Service rate includes any other applicable Standard Offer Service charges, including the SOAP.
D. LAST RESORT SERVICE ADJUSTMENT PROVISION
Under the Last Resort Service tariff, with the modification directed by the Commission, usage will be subject to the SOAP. In light of this fact, the Commission finds no present need for a Last Resort Adjustment Provision.
E. RESIDENTIAL TIME-OF-SERVICE RATE A-32
Narragansett has not presented a convincing case for closing the A-32 Rate. The closing of this rate may impose higher costs on customers who would otherwise qualify for this rate. [57 Ibid. P. 12.] This is inconsistent with the Commission's policy of implementing open access competition without imposing rate increases on any customers. Also, in this filing, the Company continues to apply time-of-use rates for large use commercial and industrial customers. Accordingly, Narragansett's request to close Rate A-32 to new customers is denied.
F. NEP'S POWER SUPPLY OBLIGATIONS
Mr. Flynn proposed that the Commission should consider allowing Narragansett to release NEP from its obligation to provide service to customers added to the system after January 1, 1998. This would enable Narragansett to put this supply requirement out to bid without NEP's consent which, in Mr. Flynn's opinion, is required under the Settlement Agreement. Mr. Flynn testified that there was at least a possibility that Narragansett could then purchase power for less than the wholesale standard offer prices payable under the NEP Contract. [58 Tr. 5/11/98, p. 21.]
There are several problems with this proposal. First, the record does not clearly indicate that another power supply could be obtained, or that it could be obtained at a lower cost. [59 Tr. 5/11/98, pp. 117-118.] In addition, this proposal requires the approval of all of the parties to the Settlement Agreement and the Commission does not have the authority to impose it upon the parties. [60 Narragansett has taken the position in its Memorandum dated May 15, 1998, that the Commission does not have the authority to interfere with contracts falling under the jurisdiction of the FERC.] Further, it is not clear to the Commission that Narragansett lacks the ability to put this portion of the power supply out to bid without the consent of NEP.
The Commission notes that the terms of the Settlement Agreement appear to be identical to the terms of a FERC settlement agreement filed by the Eastern Utilities Associates retail companies, Blackstone Valley Electric Company and Newport Electric Corporation. Those companies have taken the position that they are not prohibited from putting their power supply out to bid. The Commission takes no position at this time on which interpretation is correct but believes that the Division should takes steps to address the issue.
On June 9, 1998, Narragansett filed tariffs modified to reflect the decisions made by the Commission at the Open Meeting held on May 29, 1998. On July 1, 1998 the Company filed revised Standard Offer Service and Last Resort Service tariffs modified to correct an error in the rate available to A-60 Low Income customers taking Standard Offer Service or Last Resort Service. The Commission finds that the tariffs filed on June 9, 1998, as modified by the July 1, 1998 filing, are consistent with the findings in this Order with one exception. The refiled rates include a Last Resort Adjustment Provision despite the fact that this tariff was rejected by the Commission because it was not needed. Accordingly, the refiled Last Resort Adjustment Provision is again rejected because it is not consistent with the Commission's decision made at the Open Meeting and this Report and Order.
The Commission recognizes, however, that the Last Resort Service tariff as now filed is not subject to any adjustment provision. This was not the intention of the Commission. Accordingly, the Commission directs Narragansett to revise the Last Resort Service tariff to make it subject to the SOAP.
1. That the Standard Offer Service tariff filed on July 1, 1998 is approved for consumption on and after June 1, 1998.
2. That the Standard Offer Adjustment Provision filed on June 9, 1998 is approved.
3. That the Last Resort Service tariff filed on July 1, 1998 is approved for consumption on and after June 1, 1998, provided, however, that Narragansett shall file within 30 days of the date of this order a modified Last Resort Service tariff that is subject to the Standard Offer Adjustment Provision.
4. That the proposed Last Resort Adjustment Provision is rejected.
5. That the Company shall act in accordance with all other findings and instructions contained with this Report and Order.
EFFECTIVE AT PROVIDENCE, RHODE ISLAND PURSUANT TO OPEN MEETING DECISIONS ON MAY 29, 1998 AND JULY 9, 1998. WRITTEN ORDER ISSUED JULY 10, 1998.
PUBLIC UTILITIES COMMISSION
James J. Malachowski, Chairman
Kate F. Racine, Commissioner
Brenda K. Gaynor, Commissioner
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