Challenges Related to Implementation of Investments for Tariff Purposes

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1 Challenges Related to Implementation of Investments for Tariff Purposes Case Study: Northern Utilities Cast Iron Replacement Program, Rate Recovery and Tracking Mechanism (CIRP, TIRA and EVM) CHRISTINE COOK CAROL MACLENNAN MAINE PUBLIC UTILITIES COMMISSION SEPTEMBER 9, 2014

2 Cast Iron Replacement Program (CIRP) Background Cast iron pipe in the Northern Utilities system Leak statistics and Commission safety concerns Monitoring program prior to CIRP Replacement program prior to CIRP Opportunistic Estimated time to completely remove all cast iron and unprotected steel from service: xx years Commission ordered 14-year replacement program beginning in

3 Cast Iron Replacement Program Commission Concerns Safety concerns associated with aging infrastructure Prior experience and events Leak statistics and incidents Cost of replacement program Methods of controlling costs Rate recovery, including the need to develop a cost recovery mechanism that could work outside of rate case Ensuring value received for costs incurred 3

4 Cast Iron Replacement Program Company Concerns Rate recovery and regulatory lag, ability to recover costs as they were incurred Avoidance of frequent rate cases Financial integrity of the company and continued access to capital markets, both equity and debt Continued compliance with existing and anticipated borrowed debt covenants Strain on other resources 4

5 Cast Iron Replacement Program Public Advocate Concerns Fundamental need to accelerate the pace of replacement of cast iron and bare steel pipe Cost-Benefit analysis of proposed program Ratepayer impact Near-term Long-term Rate impact of cast iron program in addition to rate impact expected from base rate case Northern Utilities had not had a rate case for 28 years 5

6 Cast Iron Replacement Program Scope 75 miles of cast iron, bare steel and wrought iron pipe replacement 38 miles of system conversion from low to intermediate pressure 3 miles of required system improvements 116 critical valve and 80 system valve installations low pressure drip removals 107 service renewals and tie-overs 10,345 meter relocations 6,000 meter replacements 13 regulator station retirement or conversion 6

7 Cast Iron Replacement Program Scope Replacement of aged mains combined with upgrade of existing low pressure system in Portland that comprised 57% of Northern s system Cost estimates provided in 2009 dollars, total estimated cost of $64 million 14-year program ensures Northern can maintain appropriate leverage ratio and fund expenditures for CIRP and other system capital investments Upgrade to intermediate pressure provides opportunity for 2% per year growth 7

8 Base Rate Case and CIRP Cost Recovery Consistent with statutory requirements, Commission determined that Northern would recover prudently incurred costs of the program through a mechanism developed in a base rate case Incorporated guiding principles for development of the recovery mechanism, including: Northern would be permitted to recover costs through an accelerated recovery mechanism The mechanism would include an incentive for Northern to control costs and meet construction benchmarks The mechanism would include a cap on the magnitude of the rate adjustment 8

9 Targeted Infrastructure Replacement Adjustment TIRA Approved in connection with 2013 Northern rate case Provides for annual adjustments to distribution base rates to recover costs associated with CIRP Approved for four-year term ( ) Contains a Rate Impact Cap such that distribution rate increase may not exceed 4% annually. Any excess is carried forward Requires that EVM performance indices remain above 100% or TIRA rate adjustment is suspended Contains Earnings Sharing Mechanism to return any excess earnings to customers 9

10 TIRA Revenue Requirement Annual TIRA adjustment calculated as a percentage change to current base rates based on the TIRA Revenue Requirement Subject to 4% Rate Impact Cap TIRA Revenue Requirement is the sum of: Annual depreciation expense Estimated property tax expense An operation and maintenance expense offset Allowed return for eligible CIRP facilities at a pre-tax rate of return of 11% 10

11 Earned Value Management (EVM) Program Tracking Earned value management is a project management technique for measuring project performance and progress. It combines measurements of scope, schedule and costs 11

12 EVM EVM requires the development of a scope of work for a project, a schedule for the work and a budget Scope of work is broken down into definable elements or a category of work Each category of work has a budget estimate which enables it to be defined in terms of planned value Once project work is underway, the earned value is determined by multiplying the number of units completed by the budgeted unit value of work The earned value (EV) can then be compared: To planned value (PV) to see if the project is ahead or behind on schedule To actual cost (AC) of the work completed to see if the project is above or below budget 12

13 EVM Cost and Schedule Variances 13

14 EVM Performance Metrics 14

15 CIRP Performance After three years of performance ( ), the CIRP remains ahead of schedule and under budget The EVM statistics for the CIRP through

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18 Questions? Carol MacLennan Christine Cook Maine Public Utilities Commission 18