Order 15756 - Blackstone Valley Elec., Newport Elec.: Standard Offer Service

 

STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS

PUBLIC UTILITIES COMMISSION

REPORT AND ORDER

On October 30, 1998, the Blackstone Valley Electric Company ("BVE") and Newport Electric Corporation ("NEC") (together, the "Companies") filed several rate changes with the Public Utilities Commission ("Commission") pursuant to R.I.G.L. section 39-3-10, to become effective January 1, 1999. The purpose of the rate changes is to recover an increase in the cost of power purchased by the Companies from their affiliate, Montaup Electric Company ("Montaup").

The Companies are wholly owned subsidiaries of Eastern Utilities Associates ("EUA"), an integrated public utility holding company. The Companies are engaged primarily in the distribution of electricity to customers located in Rhode Island. The Companies purchase all their energy requirements from Montaup, EUA's wholesale generating and transmission subsidiary. The power has been purchased under the terms of a long-term contract, the terms and prices of which have been regulated by the Federal Energy Regulatory Commission ("FERC").

The proposed rate changes arise out of the terms of a settlement agreement, dated October 17, 1997, amongst Montaup, the Companies, the Division of Public Utilities and Carriers ("Division") and the Commission ("Settlement Agreement"). The purpose of the Settlement Agreement is to implement the Utility Restructuring Act of 1996, as amended ("URA"). [1 The Settlement Agreement was filed with, and approved by, the FERC.]

The general objective of the URA is to deregulate electric power supplies and allow the development of a competitive market for the purchase and sale of electricity. Competition has been implemented by allowing the Companies and the Companies' customers to purchase electricity in the emerging competitive market for electricity. In other words, the Companies are no longer obligated to purchase electricity from Montaup and may take advantage of other opportunities in the wholesale market. In turn, the Companies' customers are no longer obligated to purchase electricity from the Companies. The Companies are required to allow their customers to purchase electricity from other suppliers of electricity and are required to transport any such purchases on their lines from the supplier to the customer.

A public hearing was held on December 7, 1998. The following appearances were entered:

FOR THE COMPANY                       David A. Fazzone, Esq.

David A. Fazzone P.C.

McDermott, Will & Emery

FOR TEC-RI                                       Andrew Newman

Rubin and Rudman LLP

FOR THE DIVISION                          Paul J. Roberti

Chief, Public Utilities Regulatory Unit

Special Assistant Attorney General

FOR THE NAVY                                Audrey Van Dyke, Esq.

Associate Counsel

FOR THE COMMISSION                 Adrienne G. Southgate, General Counsel

Lindsay Johnson, Special Counsel

I. INTRODUCTION

One way in which the URA implemented competition is by allowing the termination of all-requirements contracts between wholesale companies, including Montaup, and electric distribution companies, including the Companies. [2 R.I.G.L. Section 39-1-27.4]  The Settlement Agreement terminated the Companies' all-requirements contract with Montaup. As compensation to Montaup, the Settlement Agreement, consistent with the provisions of the URA, allowed Montaup to recover certain costs, incurred to provide service to the Companies, that would otherwise be unrecoverable in a competitive market. [3 Id.]  These costs are being recovered through a contract termination charge ("CTC") of 3.0 cents per kilowatthour ("kWh"). [4 R.I.G.L. Section 39-1-27.4]  The Companies, in turn, recover this charge from retail customers in the form of a Transition Charge of 2.8 cents.  [5 R.I.G.L. Section 39-1-27.4(e). The difference between the cost of 3.0 cents and the recovery of 2.8 cents is being recovered from other funds. See Order No. 15521, dated July 10, 1998 at pp. 15-16.]

The Settlement Agreement also requires Montaup to divest itself of its generating business and to attempt to divest itself of its purchased power contracts. An allocable share of the net proceeds is to be flowed through to the Companies in the form of a residual value credit ("RVC") that will be applied to reduce the CTC.

Finally, the Settlement Agreement established Montaup's Standard Offer rate in the form of a flat charge of 3.2 cents per kWh ("Standard Offer"). [6 Order No. 15489, dated December 17, 1997 at pp. 5-6.]  The Settlement Agreement stipulates that the Standard Offer will increase as follows: [7 Order No. 15490, dated December 31, 1997 at p. 6.]

In designing rates to recover the Standard Offer costs incurred under the Settlement Agreement, the Companies considered incorporating the flat Standard Offer charge in retail rates ("Uniform Rate") to recover the cost of power purchased under the Settlement Agreement. [8 The CTC billed to the Companies was, as required by R.I.G.L. Section 39-1-27.4(e), being billed to retail customers in the form of a flat 2.8 cents nonbypassable Transition Charge.]  The Companies rejected the Uniform Method, however, because it produced "unacceptable variations in the bill impacts on the rates and the customers within a rate, especially those on demand/energy rates". [9 Id.]  Alternatively, the Companies designed rates by reducing the power costs in all rate classes proportionately. [10 Id.]  These rates (the "Designed Rates") produced a range of energy charges for the rate classes ranging roughly from .57 cents to 3.9 cents for BVE and .67 cents to 3.4 cents for Newport. [11 EUA-1, pp 61-65. The lowest rates are for off-peak energy usage under time-of-use rates.]

II. POSITIONS OF THE PARTIES

A. THE COMPANY'S CASE

The cover letter accompanying the filed rates contained the following explanation of the proposed rate changes:

On January 1, 1999, in accordance with the Settlement Agreement, Montaup will increase its price of Standard Offer Service to Blackstone and Newport from $.03200/kWh to $03500/kWh, an increase of 9.375%. The Companies have incorporated this increase in its proposed Standard Offer Service tariffs as shown in Section 5 of its Tariff Advice filing.

The average effect of the increased Standard Offer service prices on the total price paid for electric service by the Companies' customers by rate class is shown in Section 6 of the filing. These effects range from 2.1% to 3.7% increases for Blackstone customers and from 2.5% to 3.5% for Newport customers. The monthly bill for a typical 500 kWh Residential Rate R-1 customer will increase from $56.15 to $57.64 (+$1.49 or 2.7%) for Blackstone customers and from $61.82 to $63.45 (+$1.63 or 2.6%) for Newport customers. [12 Ex. EUA-1. The filing also included workpapers showing the Companies' calculation (on a company-wide basis) of the price cap imposed by Section 39-1-27.3(d) (pp. 57-59), the calculation of the proposed rates (pp. 60-65), and a summary of the proposed rate changes (pp. 66-68).]

The Companies' witness Mr. Dennis St. Pierre answered questions on the proposed rates.

B. THE DIVISION'S CASE

The Division presented the testimony of Stephen Scialabba, Chief Accountant of the Division. Mr. Scialabba described how the Companies' rates were designed and the impact of the proposed changes on customers. [13 Ex. Division-1, pp. 2-5.]  Mr. Scialabba testified that he did not believe that it would be advisable for the Companies to adopt Uniform Rates because it would result in "excessive customer impacts". [14 Ibid., p. 7.]  In support of his opinion he presented the following examples:

1. About 46,648 of BVE's 88,812 customers would receive rate increases in the range of 4-6%. [15 Ibid., p. 8.]

2. Of the 2,686 BVE G-2 customers, nearly 1,800 would receive rate decreases, and over 1,000 other customers would receive decreases in excess of 10%.

Mr. Scialabba recommended that the proposed rates go into effect on January 1, 1999 and that the Companies subsequently re-examine the issues of uniform pricing "when the CTC is amended for the Residual Value Credit and other items that affect the wholesale transition charge formula." [16 Ibid., p. 10.]

C. TEC-RI'S CASE

TEC-RI filed the following Statement of Position that supported the rates filed by the Companies:

TEC-RI generally support the filing of the Companies subject only to a confirmation that the proposed rates do not cause a violation of the price cap provisions of G.L. Section 39-1-27.3(d). TEC-RI suggests that the price cap is applicable on a customer-by-customer basis based on the clear provisions of the law and its reference to a "customer" and not customers.

The Commission should reject any proposal to change the design of the Standard Offer Service Tariffs to a flat rate charge of $.035 per kWh at this time. To accept such a proposal would violate rate continuity by causing certain rate classes and customers within certain rate classes to incur rate increases of over 14% as shown in IR DIV-1-1 and Com-1-2. Such increases would be unreasonable and would violate the spirit and letter of the price cap law. The Companies are not now proposing any residual value credits to offset the increases. Thus, it is not appropriate to go to a flat Standard Offer Rate at this time.

D. DEPARTMENT OF THE NAVY'S CASE

The Department of the Navy proposed that the Commission suspend the proposed rates until the results of the Companies' RFP  [17 The Companies have issued a Request For Proposals to provide electric service to meet the Companies' load requirements. Comm. Ex. 1-5.] are known and the parties have had a better opportunity to examine the Companies' filing.

III. FINDINGS

A. IMPLEMENTATION OF RATE CHANGES

The Declaration of Policy [18 R.I.G.L. Section 39-1-1.1] provides that it is the policy of the state "to provide just and reasonable rates and charges for ... such services and supplies, without unjust discrimination, undue preferences or advantages,"  [19 R.I.G.L. Section 39-1-(b).] and "to promote competition". [20 R.I.G.L. Section 39-1-1(d)(4).]  The Commission believes that rates that are substantially at variance with the cost of providing electric service are not consistent with the Declaration of Policy because they are not just and reasonable and do not promote competition.[21 The standard for determining whether rates are reasonable, just and nondiscriminatory is whether the rates are cost-based. United States v. Public Utilities Commission, 120 R.I. 959, 967, 393 A.2d 1092 (1978); J. Bonbright, Principles of Public Utility Rates, Columbia University Press (1960) pp. 61-81.]

The parties all appear to agree that while rates should be cost-based, the Companies' existing rates are not cost based. [22 Prior to the implementation of the Settlement Agreement rates, measuring the cost of providing service to customers was complex and highly subjective. The Settlement Agreement rates, however, initially consist of flat 2.8 cents Transition Charge and a flat 3.2 cents Standard Offer charge for each kWh of consumption. This simplified rate structure makes it easier to measure the cost of providing service to each customer. See Ex. Comm. 1-1.]  The question is how and when rates will be adjusted to properly reflect the cost of providing service. The parties again are in agreement that a Uniform Price should not be adopted because it would result in large changes in customer bills. The Companies, the Division and TEC-RI oppose any adjustments to the proposed rates at this time to bring them more in line with the cost of providing service. The Department of the Navy has taken no position on the issue.

While the Commission believes that rate stability is an important factor that must be considered in setting rates, it also believes that it is the duty of the Commission to protect the public from "unreasonable rates, tolls and charges". [23 R.I.G.L. Section 39-1-1(a)(2) and (c); R.I.G.L. Section 39-2-1.]  Therefore, the Company must adjust its rates to bring them into line with costs. If necessary, rate stability may be maintained by phasing in cost-based rates. In any event, the Commission believes that it is necessary that action be taken to bring rates into line with costs.

If there were sufficient time, the Commission would order the Companies to redesign the proposed rates to bring them more in line with cost. Unfortunately, this cannot be accomplished so that the Companies can begin recovering the increased cost for Standard Offer Service from Montaup on and after January 1, 1999. Accordingly, the Commission must reluctantly authorize the continuation of the Design Rates until the necessary rate redesign can take place, even though the Design Rates perpetuate and even magnify the deviation from cost-based rates. The Commission will expect the Companies, consistent with their offer, to file new rates to become effective with the change in the CTC, anticipated in April 1999. In designing these rates, it will be necessary to balance, to the extent possible, the twin objectives of cost-based rates and rate stability.

B. PURCHASED POWER CONTRACTS

As a condition of the divestiture, the Companies have required the parties acquiring their generating facilities to enter into power contracts to supply a portion of the Companies' load requirements. In addition, the Companies have issued a request for proposals to supply the balance of these load requirements (the "RFP"). While it would be expected that the Companies would purchase power neither at rates in excess of the Settlement Agreement rates now being paid to Montaup, nor from companies that are financially insecure, the record is not explicit on these points.  [24 Tr. 12/7/98, pp. 48-58.]  In part, the record is not clear because the Companies have generally objected to disclosing information on the details of their RFP and are unwilling to discuss the terms of the power contracts which they have conditionally executed. [25 Id.]

While the Commission is reluctant to require disclosure of information which may compromise the Companies' ability to obtain the best terms for their power supply, some balance must be struck between the Companies' concerns and the rights and obligations of other parties in interest. [26 While the Commission has been deferential to the Companies' concerns, it is not convinced that such information is not properly public information.]  In particular, the Division and the Commission have a statutory obligation to supervise utility operations both to ensure reasonable and adequate service and to protect the public against improper and unreasonable rates.[27 Id.] The Division and the Commission are not able to fulfill these obligations without free access to information. Clearly, the procedure by which the Companies purchase their power supply and the terms under which the supply is bought are basic facts that must be reviewed.

In an earlier proceeding, the Commission emphasized that the Companies' power supply acquisition policies must not compromise the quality and reliability of service. In commenting upon a pending RFP, the Commission stated:

It is imperative that the quality and reliability of service not be compromised. The bidding procedure must give consideration to the bidder's resources and the bidder's ability to provide a reliable supply of power. Lower prices that come at the cost of reliability and quality of service are unacceptable. [28 Order No. 15521, dated July 10, 1998, p. 14.]

The Commission's review of the terms of the pending RFP [29 Comm. Ex. 1-5, Appendix 5, Wholesale Standard Offer Service Agreement, Article 7, pp. 7-8.] and the proposed power supply agreement with Southern Energy New England, L.L.C. ("Southern") [30 Comm. Ex. 1-6, Asset Sale Agreement By and Between Montaup Electric Company and Southern Energy New England, L.L.C. as of May 15, 1998, Exhibit F to Asset Sale Agreement Form of Wholesale Standard Offer Service Agreement, p. 7.], however, indicates that the security provision of the power contracts is not consistent with the Commission's directive. While the Companies have represented several times to the Commission that the suppliers will be required to deliver a performance surety securing the suppliers' full responsibility, there appears to be no contractual requirement to do so in either the RFP or the proposed power supply agreement with Southern. [31 See Comm. Ex. 1-5, p. 6; Comm. 1-8.]  Rather, the contracts provide that the supplier meet a two-pronged test defined as the "Creditworthiness Criteria."  [32 Comm. Ex. 1-5, Appendix 5, Wholesale Standard Offer Service Agreement, Article 7, p. 7-8. Comm. Ex. 1-6, Asset Sale Agreement By and Between Montaup Electric Company and Southern Energy New England, L.L.C. as of May 15, 1998, Exhibit F to Asset Sale Agreement Form of Wholesale Standard Offer Service Agreement, Article 7, pp. 7-8.]  Under this provision the supplier is ostensibly required both to (i) "maintain an investment grade rating on its senior debt securities ... acceptable to the Companies," and (ii) "maintain total assets of at least $500,000,000 times the percentage of the Companies' Standard Offer Service which is initially satisfied by the Wholesale Standard Offer Service under this Agreement." [33 Id.]

The first test is wholly illusory, however. The contracts provide that in the event the supplier does not meet the "credit rating" requirement of part (i), it will be required to provide a guarantee equal to the difference between the value of the supplier's total assets and its requirement pursuant to part (ii). [34 Id.]  In other words, if the supplier fails to meet the part (i) test, the consequence is that the supplier is required to meet the preexisting requirements of part (ii). [35 Id.]  This is made clear by the proviso that "if the supplier meets or exceeds its obligations pursuant to part (ii) of the Creditworthiness Criteria no Guaranty will be required of it." [36 Id.]  In effect, there is no requirement that the supplier maintain the stipulated "credit rating".

Part (ii) of the Creditworthiness Criteria may also be illusory. It requires that the supplier have a minimum amount of assets to satisfy the security provision. [37 Id.]  No consideration is given, however, as to whether these assets are encumbered. In addition, no consideration is given to the amount of the supplier's liabilities. It appears, therefore, that a supplier could be bankrupt or insolvent and still meet the creditworthiness requirements of these contracts. Accordingly, the Commission finds that the security provisions of the contracts do not meet reasonable commercial standards because the quality and reliability of service may be compromised, and/or additional costs could be incurred in the event of a supplier default.

It should also be noted that under Article 18 of the RFP and the Southern agreement, if either the supplier or the Companies incur costs attributable to changes to the NEPOOL Agreement, the affected party is entitled to an unstipulated amount of compensation. [38 See fn. 26.]  Given the existence of this provision, it is possible that the contract prices could exceed the Standard Offer prices established by the Settlement Agreement.

The financial consequences to ratepayers arising from these issues (Article 7 and Article 18) will be mitigated by the fact that the Companies have represented to the Commission that costs arising from the default of a supplier are not recoverable from ratepayers  [39 The Companies have represented that "the Companies are at risk for the costs to secure a new supplier that are above the Wholesale Standard Offer Service rates and not recovered under Wholesale Standard Offer security provisions." Comm Ex. Item 4.]  and that the negotiated cost increases allowed by Article 18 are recoverable only with the Commission's express approval. [40 The Companies represented that "Customers are shielded from the risk associated with these changes because such change would not apply to the retail Standard Offer Service rates, absent an order by the Commission." Comm. Ex. Item 5.], [41 Even without the Companies' representations, the general principle that only reasonably incurred costs are recoverable from customers applies to all tariffs.]  The Commission believes that these facts should be made clear in the Companies' tariffs. In addition, the Commission finds that the tariff language should specify the rights of all parties to examine the facts surrounding the acquisition of power supply and to contest the Companies' rights to recover any resulting costs.

Accordingly, the Companies shall amend their Standard Offer Cost Adjustment provisions to add the following sentence at the end of the first paragraph:

Notwithstanding the foregoing, the Company may not recover, without full disclosure and the express approval of the Commission, any costs of Standard Offer Service in excess of the costs billable under the Settlement Agreement dated October 17, 1997.

The Commission will again emphasize that it is imperative that the quality and reliability of service at reasonable cost be maintained. Under the URA, the Companies have a continuing duty to provide service through the year 2009 and will, moreover, be suppliers of last resort indefinitely. Consequently, in contracting for power, the Companies must give consideration to the supplier's resources and ability to provide a reliable supply of power. Reliability and quality of service at a reasonable cost must be the first priority.

Accordingly, it is:

(15756) ORDERED

1. That the proposed rates are approved to become effective for consumption on and after January 1, 1999.

2. That the Companies shall amend their Standard Offer Cost Adjustment provisions to contain the following sentence at the end of the first paragraph:

Notwithstanding the foregoing, the Company may not recover, without full disclosure and the express approval of the Commission, any costs of Standard Offer Service in excess of the costs billable under the Settlement Agreement dated October 17, 1997.

3. That the Company shall act in accordance with all other findings and instructions contained in this Report and Order.

EFFECTIVE AT PROVIDENCE, RHODE ISLAND PURSUANT TO OPEN MEETING DECISIONS ON DECEMBER 15 AND DECEMBER 18, 1998. WRITTEN ORDER ISSUED DECEMBER 31, 1998.

PUBLIC UTILITIES COMMISSION