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Kentucky Resources Council, PO Box 1070, Frankfort, KY 40602 Phone [502] 875-2428

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PO Box 1070, Frankfort, KY 40602  Phone 502.875.2428, Fax 502.875.2845

KRC Voices Concerns With Natural Gas Utility Alternative Ratesetting Bill  Posted: February 16, 2007
Testimony of Tom FitzGerald, Director
Kentucky Resources Council, Inc.
before House Tourism, Development and Energy Committee
Concerning House Bill 261

Mr. Chairman, members of the Committee, as you know, KRC is a non-profit organization providing legal and technical assistance without cost to low-income individuals, community groups, and local governments concerning environmental matters. As such, many of KRC’s clients are those ratepayers in rural areas who are the most vulnerable to increases in the costs of essential utility services, including natural gas.

KRC has reviewed House Bill 261 as filed, and has also reviewed the proposed amendment that would require a rate case every five (5) years for gas utilities electing to be regulated under the proposed alternative model in the bill. KRC understands the intent of the utilities supporting the approach in seeking to avoid more frequent full-blown rate proceedings, but we are extremely concerned that the streamlined approach to adjustment of rates comes at the cost of scrutiny by and accountability to the ratepayer for expenses and earnings, and that the incrementally-adjusted rates under this model will result in higher costs to the ratepayers than would be incurred under the current regulatory model. While the proponents of the bill suggest that this approach will result in more gradual increases in rates, our concern is that the increases will, on balance, be much higher than would be the case under the traditional rate-setting model.

As you know, the retail sale and distribution of natural gas and electricity in our Commonwealth by most utilities is regulated by the Public Service Commission. Under current law, a utility is given a geographic monopoly over the sale and distribution of gas in return for an obligation to serve, and the Public Service Commission acts as a surrogate for the marketplace, approving a reasonable rate of return on prudent investment. The traditional rate case requires utilities to justify their claimed costs and expenses, and to account for their revenues.

In seeking to reduce the need for rate cases, this bill creates a mechanism for annual mini-rate cases, requiring under the proposed amendment a rate case every five years. Unfortunately, these annual mini- rate cases virtually eliminate the due process rights of interested ratepayers to intervene in order to challenge the proposed adjustments in rates, reducing the ratepayer and other interest entities to mere commenters.

A rate case is of necessity a complex legal proceeding, requiring complex financial accounting examination. While there is a cost involved in such proceedings, the scrutiny brought to bear on proposed tariffs has resulted in dampening the possibility of overearning, and has maintained those costs that are subject to PSC control (which exclude the cost of the fuel itself) at a reasonable level compared to other states. All of us share that interest in assuring reliable service at affordable and reasonable costs, particularly for those fixed and low-income consumers and small businesses that are most vulnerable to adverse impacts from rising utility costs.

To get a sense of the complexity, just look at all the general categories listed in Section 3(b) that make up a rate proceeding –

Net plant in service
Construction Work in Progress
Accumulated Deferred Income Taxes
Inventory
Working Capital
Other Rate Base Components
Depreciation
Operation and Maintenance Expenses
Income Taxes
Other Taxes
Other Components of Income, Revenue,
Capital Structure, Cost of Debt
Overall Cost of Capital
Earned Return on Common Equity

Each of these are general headings, and within each category there are tens or hundreds of sub-components, many requiring the exercise of judgment that can and should be scrutinized.

On top of this, the Company will typically propose dozens of “pro forma” adjustments that have the effect of reducing revenues and increasing expenses. Many of these “pro-forma” adjustments are controversial, especially the atypical ones mentioned in 4(d).

In a rate case, hundred or thousands of the Company assumptions and judgments are challenged by the PSC and Intervenors such at the Attorney General. The Company’s numbers are never accepted without many adjustments to these Company numbers. These challenges arise out of discovery, sworn testimony and cross-examination, all of which are eliminated in this bill except, with the amendment, on a five-year cycle.

What the bill will produce is that a natural gas utility will put forth a very complex set of numbers, as outlined in Section 3. Unlike existing law, interested parties would have no ability for discovery. Usually, there are usually at least two rounds of discovery in a rate case in which parties can require that the basis for claimed expenses and for the requested rate recovery be disclosed and justified. Here, the Public Service Commission and former intervenors (now interested parties) would not be given an opportunity through discovery or cross-examination to determine the basis, assumptions and calculations behind these numbers. Sworn testimony would be eliminated, and comments would have to be filed regarding the annual filings within thirty days (section 9(b)), compared to the five-month suspension period that is now provided in a rate case.

There would be no utility testimony filed, simply a financial schedule, with no one in particular responsible for defending the schedule or available for cross-examination under oath. Thirty (30) days later, without the ability to determine what is behind the Company numbers and where there any questionable assumptions and calculations, those “interested parties” must file any comments without the ability to probe the basis for the proposed “monitoring report.” Because of the lack of information, those comments would be based on very little and would provide minimal basis for the PSC to do anything but accept the Company’s numbers. By contrast, in a rate case, the PSC makes hundreds of changes to the Company’s filing before establishing new rates, resulting in lower incremental rate changes.

There is a right to appeal the PSC’s initial order, and to request an evidentiary hearing, but it is unclear what rules would apply to such a hearing and what would be the scope of review. Absent discovery rights prior to the initial order, the record before the PSC on which it will render that initial order will not be fully developed. Even if the hearing is intended to be a full de novo review, and the interested parties have full intervention rights, this approach shifts the burden to interested parties and the Attorney General’s office to challenge the initial order and requires the PSC to issue such an order with inadequate information on the basis of the assumptions in the report.

We would go from rate cases every five to seven years, to a new system of annual mini-rate cases, and with the amendment, a full rate case every 5 years. And since there is no requirement for a recent rate case prior to electing this approach, you could have a utility avoiding a rate case for almost a decade before having to submit to that level of scrutiny.

This bill would place a significant additional burden on the PSC and interested parties, who would be required to still have the resources for a rate case every five years, yet also the additional resources to monitor quarterly reports from each utility, and do annual mini rate cases for each utility on scant information. This would be especially burdensome each summer when these mini-rate cases would be going simultaneously for each gas utility, unlike current rate cases which are randomly scattered with natural gas rate cases not typically going on simultaneously.

The bill anticipates this additional burden for the PSC and offers additional resources for the extra work this bill would create. But it is unclear how that additional expenses would be projected or collected, and whether the PSC could realistically staff up in a meaningful manner. And what about interested parties? The Attorney General’s Office of Rate Intervention, which acts in the overall interest of the Commonwealth and the ratepayers, has a very limited staff and very limited budget to hire accounting experts. While I am sure it is not the intent of this bill to avoid scrutiny by creating so much work that interested parties cannot keep up, I am concerned that the effect might be that parties will not be able to properly track these cases and protect the ratepayers interests. And if the parties do get involved, as I mentioned, their ability to examine the Company’s filing is severely limited and their ability to meaningfully participate in assuring that the company is properly accounting for costs and revenues is hamstrung by the lack of disclosure opportunities.

In sum, the bill eliminates the due process rights of former intervenors that would exist in a traditional rate case, will be very costly to implement for the PSC and interested parties, and will accomplish very little other than to allow natural gas utilities the opportunity to overearn by default between five-year mandatory rate cases. This bill would erode the regulatory compact that is built into the statutes of the Commonwealth, and in its present form, should not become law.


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