STATE OF VERMONT PUBLIC UTILITY COMMISSION

Transcription

1 STATE OF VERMONT PUBLIC UTILITY COMMISSION Case No. --INV Investigation into the petition of Green Mountain Power Corporation's tariff filing requesting an overall rate increase in the amount of.%, to take effect January, 0. PREFILED DIRECT TESTIMONY OF BRIAN E. WINN ON BEHALF OF THE VERMONT DEPARTMENT OF PUBLIC SERVICE Summary: Mr. Winn provides an overview of the Department of Public Service s (the Department ) recommendation to reduce Green Mountain Power s requested revenue requirement by approximately $. million. Mr. Winn also discusses in detail the Department s recommendation regarding appropriate rate treatment for Green Mountain Power s proposed capital spending, introduces the testimony of the Department s witnesses, and briefly discusses innovative services.

2 Mr. Winn Sponsors the Following Exhibits: Exhibit PSD-BEW-: Professional Resume of Brian E. Winn Exhibit PSD-BEW-: GMP Standard and Poor s Presentation Exhibit PSD-BEW-: Attachment from the Docket 0/ MOU Exhibit PSD-BEW-: GMP s Response and Attachment to PSD Discovery Request DPS.Q0.

3 Case No. --INV PSD Prefiled Direct Testimony of Brian E. Winn Page of Q. Please state your name, occupation, and business address. A. My name is Brian E. Winn. I am the Director of Finance & Economics at the Vermont Department of Public Service (the Department or PSD ). My responsibilities include direction of Utility Finance and Economics group activities for the Department and the State of Vermont. My business address is State Street, Montpelier, Vermont Q. Please describe your educational background and experience. A. I have a B.A. in Political Science from Purdue University, and a Master s of Science in Management from The Georgia Institute of Technology. I have worked at the Department since July, 0. Prior to joining the Department, I was employed with Edison International or Southern California Edison, its regulated utility subsidiary, for over twenty years. During my tenure there I held various positions including: Director of Financial Planning and Analysis; Director of Business Analytics; Director of Performance Management and Measurement; Director of Nuclear Financial Management; and Director of SCE Budgets and Planning. Prior to Edison, I was a Utility Finance Consultant for Energy Management Associates. My professional resume is included as Exhibit PSD- BEW-. 0 Q. Have you ever testified before the Vermont Public Service Board? A. Yes, I have testified in Docket Nos. /0,,, and --INV.

4 Case No. --INV Page of Q. What is the purpose of your testimony? A. In my testimony I discuss the organization of the Department s case, summarize the Department s recommendations, discuss in detail the Department s recommended rate treatment for Green Mountain Power s ( GMP or the Company ) proposed capital spending, introduce the Department s witnesses, and briefly discuss innovative services. 0 0 Q. Can you provide some background on Green Mountain Power? A. GMP expanded significantly following the merger with Central Vermont Public Service ( CVPS ) in 0. GMP has not been a publicly traded company since 00, when it was acquired by Gaz Métro Limited Partnership, through its wholly owned subsidiary, Northern New England Energy Corporation ( NNEEC ). GMP accounts for % of electric revenues in the state of Vermont, serves approximately thousand customers, and in the fiscal year ending September 0, 0 earned $. million on total revenues of $. million. GMP s rates are better than average for New England. GMP has good reliability and safety statistics and has a reputation for pursuing innovative solutions as it seeks to adapt to the changing electricity market and rate pressures caused by netmetering. As it noted in its petition, GMP faces significant challenges, such as renewable requirements, net-metering, and other forms of distributed generation and the resulting decline in sales. To its credit, GMP has implemented various pilot innovations in a wide range of areas to confront these challenges. The Department appreciates the Company s desire to be nimble and make decisions as it embraces the changing energy landscape in Vermont.

5 Case No. --INV Page of Q. What has GMP requested in this proceeding? A. GMP has requested an all-in rate increase of. percent for rates starting January, 0. The filing with the Vermont Public Utility Commission (the Commission ) consists of a base rate increase of. percent which is partially offset by a year-overyear residual Power Supply Adjustor decrease of 0. percent. 0 Q. What is the Department s recommendation regarding the Company s requested rate increase? A. GMP filed a cost-of-service ( COS ) that reflects a $. million revenue deficiency. The Department s overall conclusion is that there is a deficiency of $.0 million. Therefore, the Company s request of. percent is reduced to. percent. The table below summarizes the Department s proposed adjustments: Summary of the Department s Adjustments to GMP Cost of Service $,000 Revenue Deficiency per GMP COS $,0 PSD Adjustments to COS Purchased Power, net ($,) Depreciation & Amortization ($,) Taxes - Federal, State & Gross Receipts ($,0) Net Gain from Assets Sold ($) Return on Utility Rate Base ($,) Merger Savings ($)

6 Case No. --INV Page of 0 Total PSD Proposed Deficiency $,0 Q. Does the Department make any other recommendations resulting from its review of GMP s petition and discovery? A. Yes. The Department issued extensive discovery requests related to capital spending and other areas. The Department needs the information it requested to verify that capital projects are only undertaken after undergoing appropriate analysis, that projects are managed well, and benefits to ratepayers are realized. However, the information available from the Company is not sufficient to allow the Department to assess the reasonableness of the proposed level of capital spending. In particular, the Company was unable to produce complete financial analyses and other documentation for approximately. percent of the projects reviewed by the Department. Having such information available for review is essential in order for the Department to fulfill its verification role in the rate case review process. The Department strongly recommends that the Commission require GMP to maintain adequate information on capital project planning and project management processes, the initial analysis of project costs and benefits, and postcompletion analysis of benefits realized. 0

7 Case No. --INV Page of 0 Background and Overview Q. Can you please describe the Department s investigation into the proposed change in rates? A. Yes. After the petition was filed, the Department organized a team composed of internal resources and experts from Larkin and Associates, SAGE Management Consultants LLC, and J. Kennedy and Associates. The team conducted a thorough review of the petition and supporting documentation, with a focus on capital spending, power supply, cost of capital, and regulatory accounting. The Department issued five rounds of discovery to the Company, engaged in a series of meetings and conference calls with key GMP staff to exchange information, and reviewed relevant Commission precedent. 0 Q0. How is the Department s testimony organized? A0. The Department is submitting testimony from 0 witnesses. In my testimony I provide a high level summary of the entire case including: the Department s recommendations; a discussion of GMPs documentation and analysis of capital spending; and summaries of the recommendations of the other witnesses. Ed McNamara, the Department s Planning Director and Joanna White, PSD Utilities Economic Analyst, provide a summary of the power supply portion of the case, including a review of the changing regulatory environment GMP faces. Carol Flint, the Director of the Department s Consumer Affairs and Public Information ( CAPI ) Division, provides an assessment of GMP s customer service. The remaining witnesses are outside consultants that provide more detailed testimony in the areas covered by Mr. McNamara, Ms. White, and myself.

8 Case No. --INV Page of Q. Please provide some background on the regulatory landscape. A. I will describe the regulatory landscape as it pertains to the capital spending and O&M portions of the rate case. In his testimony, Mr. McNamara provides a detailed history of the regulatory landscape relevant to the power supply portion of the case. 0 A substantial portion of GMP s O&M revenue requirement is determined under a formula outlined in a Memorandum of Understanding ( MOU ) adopted by the Commission in 0 in Docket 0, which concerned the merger of GMP and CVPS. The Docket 0 MOU defines this formula as Base O&M costs, but it is generally referred to as the O&M Platform. The revenue requirement for this portion of GMP s rates will be determined under this MOU through 0. 0 Although the Commission reviewed a cost-of-service filing from GMP in tandem with a proposed alternative regulation plan in 0 in Dockets 0/, GMP has not been through a fully litigated, traditional cost-of-service rate case since 00, when the Commission adopted GMP s initial alternative regulation plan in Dockets /. Since October, 0, GMP has been operating under the alternative regulation plan approved by the Commission in Docket, which offers annual accelerated base rate filings, a Purchased Power Adjustor ( PPA ), an Earnings Sharing Mechanism ( ESAM ), and an Exogenous Events Recovery Mechanism. The bulk of the alternative regulation plan, including an extension that excludes the ESAM, is due to expire at the end of 0. GMP has filed for a temporary alternative regulation plan that is proposed

9 Case No. --INV Page of to take effect in January of 0. The temporary plan proposal calls for the major components of the current plan to continue for years. Recently, the Commission opened a proceeding to examine the future of alternative regulation plans in Vermont. 0 Q. What is the Department s role in a traditional cost-of-service rate case? A. The Department and, ultimately, the Commission serve as the regulatory check to ensure that a utility s proposed rates are just and reasonable. In plain terms, our role is to make sure that ratepayers are receiving a fair value for their money. To do so, we need to be able to verify that GMP is operating in an efficient manner and consistent with the objectives set out by the Commission and the General Assembly. Given that, per PUC Order in Docket 0, a sizable portion of GMP s O&M (approximately. percent of the revenue requirement) is determined through the O&M Platform, The Department recommendations in this case will focus primarily on capital spending, power supply costs, and the cost of capital. 0 It is important to note that it is not the Department s role to substitute its judgment for GMP s with respect to management of the company in a wide range of operational issues. Nor does the Department propose to modify or change the Commission s long-held regulatory standards for reviewing a traditional rate cases or to introduce a new element of risk into the regulatory process. As is discussed in more detail in Mr. McNamara s testimony, the Department largely supports GMP s approach to innovation and the introduction of new services for ratepayers. However, as a regulator, the Department has

10 Case No. --INV Page of an obligation to review the Company s cost-of-service filing and to advocate for a proper sharing of risks between investors and ratepayers in this area. The Department must also verify that GMP s capital investments are adequately documented, justified, and vetted through appropriate least-cost analyses. While the Department does not believe that formal least-cost analysis can, or should, always replace the engineering judgment or the common sense experience of utility employees, GMP nonetheless has an ongoing obligation to develop and retain sufficient documentation for regulators to refer to in reviewing the necessity and cost effectiveness of its investments. 0 0 Proposed Capital Spending & Investments Q. Why is the level of capital spending so important in the GMP rate case? A. Utilities are a capital-intensive business and the costs associated with GMP s rate base are approximately percent of GMP s revenues. GMP rates are set the way that most regulated utilities in the United States are, via a proceeding to determine the appropriate cost-of-service, which in broad terms include O&M expenses, purchased power costs and return on rate base. Capital spending and, in GMP s case, investment in subsidiaries are the primary components of rate base. In 0, over 0 percent of GMP s earnings came from the authorized return on rate base. Increased rate base results in higher rates for customers. Therein lies the need for the Department to pay particular attention to the level of capital spending, including the rationale for, and appropriate management of, capital projects.

11 Case No. --INV Page of Q. Can you please describe GMP s recent rate base growth? A. Yes. GMP projects that its rate base will grow from $. billion in 0 to $. billion in 0, which represent a % increase over years. The table below shows GMP s actual rate base from 0 to 0 and the projected rate base for 0. TOTAL RATEBASE INVESTMENT - MONTH AVERAGE ($,000) FY end Sept FY end Sept FY end Sept (pro forma rate yr) $,, $,0, $,, $,,0 0 Q. Is growth in rate base necessarily a cause for concern? A. No. As long as there is an operational need for the spending, and GMP has selected the acceptable least-cost alternatives, ratepayers are paying a fair price for the service provided.

12 Case No. --INV Page 0 of Q. How much capital spending has GMP proposed in this case? A. The Company has requested recovery for capital additions of $,, for 0 and $,, for 0. The proposed capital spending and investments in subsidiaries will increase the base rate revenue requirement (excluding one-time credits) by approximately $ million from the current level in rates. 0 0 Q. What is the Department s assessment regarding the level of capital investment and capital projects of the Company? A. GMP has experienced significant growth in capital investment, especially during the years following its merger with CVPS. As noted earlier, GMP expects the rate base to grow % from 0 to 0. In the Company s most recent presentation to Standard & Poor s, which is attached as Exhibit PSD-BEW-, the Company forecasted total capital spending of $ million from 0 through 0. In that same presentation, GMP forecasted retail revenues to grow between % and % annually during that same period. There may be sound reasons for this level of investment, but the fact that rate base is projected to grow % from 0 to 0 and seems to be on track to grow at a similar rate through 0 is a concern to the Department in light of the impacts on present and future ratepayers. There does not seem to be a clear operational reason for the level of rate base growth considering that customer growth is very low, load is stagnant, and sales are declining. The rapid changes in the electricity industry also imply significant rate consequences for ratepayers. For example, increasing the number of net metering customers, or customers leaving the grid entirely, could result in an upward rate pressure.

13 Case No. --INV Page of These kinds of changes and related impacts argue for a close review of how much capital the Company should be investing in the grid in its current form. 0 0 Q. Can you describe the quality of documentation provided by GMP in this proceeding? A. Yes. Good documentation and least-cost analyses are the bounds and guard rails that protect both customers and the company as it pursues energy transformation that we need. With respect to GMP s general obligations for creating and retaining documentation, the Commission has held, on more than one occasion that utilities have an obligation to document their decisions that affect ratepayers, so that those decisions can later be reviewed by regulatory authorities. In response to discovery, in-person meetings, and conference calls, GMP provided narrative explanations of its current process for analyzing capital project proposals and evaluating project performance, but did not provide the typical documentation generated by these processes. These processes would normally generate documentation of capital planning or project management processes, individual capital project implementation plans, project variance reports, financial analysis, quantitative analysis of benefits, and evidence of rejected project alternatives. In my opinion, the summary information GMP provided is not adequate for regulators to draw an informed conclusion as to whether capital projects are adequately planned for, capital projects are executed efficiently, and stated benefits are realized. See Tariff filing of Citizens Communications Company, Docket No, Order of //0, at - (citing Docket No., Order of // at )).

14 Case No. --INV Page of Additionally the Company and the Department disagree on whether adequate financial analysis was provided for a large portion of the capital projects. Overall, this impedes the Department s ability perform its role in the traditional rate case process. 0 0 Q. Can you provide more detail on the Department s position that the financial analysis is inadequate? A. Yes. The standard method of financial analysis in the utility industry is a Present Value of Revenue Requirements (PVRR). This as a numerical analysis conducted using a spreadsheet (or some other financial model) that lays out the costs and benefits of a project over the entire life cycle of the project. Costs include upfront and recurring capital and O&M and the annual carrying costs, which include depreciation taxes and return on rate base. Benefits can include a wide variety of items ranging from efficiency savings to avoided cost, but they must be quantifiable. The resulting stream of costs and benefits are then discounted to the present value using the cost of capital. The utility s authorized return normally serves as a proxy for the cost of capital. In the case where there are several alternatives, and all other factors being equal, a utility manager should chose the project that offers the lowest cost PVRR, in other words the lowest cost to the ratepayer. While it may not always be necessary to do a complete PVRR for every project, at a minimum, a simple financial analysis should consist of a table of numbers covering all the quantitative information available for a project and alternatives.

15 Case No. --INV Page of Q0. Does this type of PVRR financial analysis need to be done for every capital project? A0. No. Examples of where this type of analysis need not be required include projects that: are designed to address an immediate safety hazard; are in-kind replacements of damaged equipment; address regulatory requirements with no viable alternatives; a simple (but complete) financial analysis yields an obvious answer without discounting; or because the project is too small to make it practical. 0 Q. Are there projects for which this type of analysis should almost always be done? A. Yes. Projects for which the primary purpose is operational efficiency should always have a complete PVRR analysis in order to demonstrate that ratepayers will actually see a lower cost-of-service versus not doing the project. Projects that promise benefits in areas where performance is already acceptable should undergo a complete analysis in order to determine whether those additional benefits are worth the cost. Finally, most companies will also do such an analysis for large projects over a certain dollar threshold. For example GMP provided this type of analysis in the Enel Hydro Acquisition, which was reviewed by the Department and the Commission in Docket No. and included within GMP s capital folders as Project Nos. 0 and. 0

16 Case No. --INV Page of 0 Q. What is the Department s conclusion regarding GMP s proposed level of capital spending and the adequacy of capital project management systems that are now in place? A. Primarily due to the minimal content of the documentation provided by GMP through discovery, the Department cannot be sure that GMP has proposed an appropriate level of capital spending. The Department has not been able to verify, through its review of documents provided by GMP, the following: ) Whether adequate operational and/or financial justifications exist for approximately $ million of the proposed capital spending; ) Whether projects are started with the appropriate degree of prior planning and whether project variances (scope, schedule, and budget) are tracked and corrective actions are taken when warranted; ) Whether GMP has analyzed completed projects to determine whether the anticipated reliability or efficiency benefits of capital projects are realized. Additionally, the Department does not consider the financial analysis provided on a large number of projects to be adequate for purposes of its regulatory review. 0

17 Case No. --INV Page of 0 Q. Can you summarize the capital investments and capital projects concerns and recommendations of your expert witnesses? A. Electric Distribution, Transmission, and Power Generation. David A. Whitman, CMC Sage Management Consultants, LLC reviewed GMP s capital spending plans in these areas. The lack of information included in the capital templates or regular project management reports does not allow him to appropriately resolve concerns raised by the information that has been provided. These concerns include: potential overuse of blanket work orders; that GMP does not appear to use a system to prioritize or rank projects; potential issues with project management and controls; unclear rationale for the current level of pole replacement; and capital projects in the Distribution Substations, Transmission Lines, and Transmission Substations categories citing reliability as a justification but GMP has stated that they do not actually measure the reliability benefits. The spending associated with the reliability projects is $. million. Out of approximately $ million of T&D capital expenditures.%, or $. million, are blanket work orders. 0 Communications, Facilities, Information Technology, and Transportation. Robert L. Rosenkoetter, Senior Consultant in SAGE Management Consultants, LLC, reviewed 00 proposed projects totaling $. million in this area. He found most of the level of detail in the project templates was minimal compared to what he has reviewed in analyzing other utilities. Operational efficiency was the rationale provided for almost 0% of the dollar amount of these projects. On page of his testimony, Mr. Rosenkoetter states that

18 Case No. --INV Page of operational efficiency justification requires that economic calculations or cost/benefit analysis be utilized to justify capital expenditures. Mr. Rosenkoetter found that for of the projects that he reviewed, totaling $ million, the justification for expenditures was limited, insufficient, or did not exist. According to Mr. Rosenkoetter, GMP has not provided the information needed to resolve these concerns. 0 Enterprise Wide Capital Planning Processes and Proposed Spending. David P. Vondle, Partner, SAGE Management Consultants, LLC, reviewed GMP s historical capital spending, its capital planning processes, and the strategic rationale for GMP s proposed level of capital spending. He finds that the Company s current level of capital spending is not justified in light of GMP s strategic plans, past good performance, recent completion of capital projects that would typically cause increases in capital budgets, and the Company s planning and operational improvement targets. 0 Regulatory Accounting Review. Helmuth W. Schultz, of Larkin & Associates reviewed the capital project templates and associated documentation for all of the projects. He concurs with the issues raised by Mr. Whitman regarding the overuse of blanket projects and he agrees with Mr. Rosenkoetter on the projects identified as lacking adequate financial analysis. Mr. Schultz also raises concerns about the Transmission and Distribution blanket projects including whether the projects have been reduced for growth and the Company s practice of

19 Case No. --INV Page of escalating the five year average in its request. Finally, he notes that cost summaries in the capital project templates are incomplete for some of the projects. 0 0 Q. Can you provide more detail on the capital project templates that GMP provided and whether they have ever been sufficient to justify capital spending? A. Yes. In order to address ongoing issues regarding the documentation provided during prior alternative regulation plan proceedings, the Company and the Department entered into an agreement adopting a detailed understanding of the type of documentation and templates to be prepared and retained by GMP to satisfy the Commission s known and measurable requirements. This agreement is referred to as Attachment of the MOU that was adopted by the Commission in Docket 0/ (the Docket 0 MOU ). Attachment is included with this testimony as Exhibit PSD-BEW-. In his testimony, Mr. Schultz discusses the adequacy of the financial analysis in the templates and demonstrates that it has been an ongoing issue. On page of his testimony, he states that: The Company has not properly prepared a financial analysis for a majority of the requested projects that require such an analysis. The Company has had issues with meeting this requirement in the prior alternative regulation proceedings, which had been documented in multiple Larkin Reports provided to the Commission. This trend continues as part of this filing. Mr. Schultz reviewed listed projects (i.e. excluding blankets and joint owners) and found approximately.% () of the project files to have insufficient financial analysis.

20 Case No. --INV Page of Q. Do you agree with Mr. Schultz s assessment of GMP s compliance with the A. Yes. requirements of Attachment? 0 Q. Does the recent experience with GMP s capital proposals for the 0 and 0 alternative regulation plan proceedings provide any insight into GMP s capital planning process? A. Yes. Recent experience would suggest that GMP does not use the templates to guide its capital planning decisions or implementation. Under the alternative regulation plan process, GMP would submit a proposed capital plan in May or June for rates effective on October of the same year. The table below illustrates the large number of projects added and not completed. Planned Versus Completed Projects Category No. Of Projects 0 0 Cost $Dollars No. Of Projects Cost $Dollars Projects Originally Requested 0,,00,, Projects Actually Completed 0,,,0, New Projects Added,,,,0 Original Projects Not Completed,,0 0,0,

21 Case No. --INV Page of 0 Q. What is the significance of GMP s capacity to fund capital projects? A. For a utility to be able to consistently spend more on capital than the amount that is authorized in rates it must either find cost efficiencies to fund the additional capital carrying charges or accept a lower than authorized rate of return. This limitation of capital dollars provides an incentive to spend capital dollars efficiently. As noted earlier in the testimony, the amount of GMP s O&M costs included in rates is determined by the O&M Platform that was developed in response to the CVPS merger. GMP has been performing well under this arrangement and as a result, has generated earnings above its authorized return. Therefore GMP is in a position to exceed the level of proposed capital spending used to set rates without under-earning its authorized return. The chart below shows GMP s performance under the O&M Platform: Actual -Year Shared Savings A B C D E F Fiscal Year[] Projected Total Savings Actual Total Savings[] RP Projected Share RP Actual Share SH Projected Share SH Actual Share[] 0 $.0 $.0 $.0 $.0 $.00 $ $.0 $. $.00 $.00 $.0 $. 0 $.0 $. $.00 $.00 $.0 $. 0 $.0 $. $.0 $. $.0 $. Total $.0 $.0 $.0 $. $.0 $. [] The fiscal year runs from 0/ to /0. [] From Company ESAM filed November, 0. [] Actual Total Savings minus Ratepayer Actual Share of those savings (Column B D).

22 Case No. --INV Page 0 of 0 Q. Does the current situation present a risk to ratepayers? A. Yes. The combination of GMP s financial ability to exceed authorized spending in its capital plans, the state of the financial analyses, and the absence of adequate project documentation for regulators to review means that the Department and the Commission cannot assess: ) Whether there is an operational need for the proposed level of capital spending; ) The adequacy of the Company s management of capital projects; and ) Whether lower cost alternatives are being appropriately considered. This is of particular concern in an environment where the Company faces significant challenges presented by renewable requirements, net-metering and other forms of distributed generation and the resulting decline in sales. There is a risk of over-spending on the existing system should these trends accelerate, which in turn could result in upward rate pressure for GMP customers 0 Q. How did you address the Department s capital spending concerns in your cost-ofservice recommendation? A. The Department is proposing that the cost-of-service be set with proposed rate base reductions totaling $. million. With respect to these reductions, it is important to note that the Department has not recommended specific project disallowances. The Department s proposal sets rates by allowing the Company s proposed additions for Distribution, Transmission and Production/Generation. The approximate amount of capital spending associated with these additions is $0. million in 0 and $.

23 Case No. --INV Page of million in 0. This information is documented in an attachment to GMP s response to the Department s discovery request GMP.PSD.Q0, which is attached as Exhibit DPS- BEW-. Categories excluded are: Information Technology; Other; New Initiatives; Fleet; and Facilities. The approximate amount of capital spending associated with these categories $. million in 0 and $. million in 0. 0 Q0. Why is the Department not pursuing specific project disallowances? A0. Given the absence of adequate documentation for regulators to review, the process of determining which projects to exclude could be arbitrary and inefficient. The Department does not intend to displace GMP Management s judgment regarding which capital projects to undertake within that overall capital spending limit. GMP has the financial flexibility it needs to exceed that limit if it so chooses. The Department s approach seeks to provide the Company with a strong incentive to compile and maintain the type of information and records the Department needs to perform its supervisory duties. In the end, if GMP is able provide adequate documentation and justification, the Department is open to recommending that additions in excess of the 0 and 0 proposed capital spending limits be included in rates in the future. GMP has a strong leadership team, and the Department is confident that the Company will make a serious effort to resolve the documentation and process issues. 0

24 Case No. --INV Page of 0 0 Q. Are you requesting that the Commission prescribe standards for the information GMP compiles for later review? A. Yes. The Commission should require GMP to create and maintain documentation related to its capital project planning and project management processes that will allow the Department and the Commission to verify: ) That there is a well-documented need for proposed capital spending; ) That alternatives to the proposed projects are appropriately developed and considered; ) That the appropriate financial analysis of the costs and benefits is conducted; ) That projects are started with the appropriate planning; ) That project variances (scope, schedule, and budget) are tracked and corrective actions are taken; ) That completed projects are evaluated (quantitatively and qualitatively) to determine whether they are delivering the projected benefits; and, ) That contemporaneous records are kept to document the preceding items. It is not the Department s intent that GMP be required to generate burdensome amounts of paper or to build inefficient processes to comply with these requirements. The Department is open to the many forms this information can be provided in using modern information systems. The bottom line is that the Department needs this information in order to fulfill its role in a traditional rate case.

25 Case No. --INV Page of Capital Structure and Cost of Capital Q. Please summarize the Company s requested cost of capital and capital structure. A. GMP requests an authorized return on equity of. percent and a capital structure consisting of. percent equity and. percent debt. The weighted average cost of capital ( WACC ) was estimated at.0 percent. 0 Q. What does the Department recommend for GMP s Cost of Capital? A. In his testimony, Richard A. Baudino of J. Kennedy and Associates, recommends a return on equity of.% and agrees with GMP s requested Capital Structure. Mr. Baudino also lowered the cost of GMP s future debt issues, although his revision did not significantly change the Company s requested cost of debt of.0%. Mr. Baudino s recommended cost of capital for GMP is.%. 0 Q. Is an.% cost of equity compensatory for the risks that GMP faces? A. Yes. Barring a serious mistake by management or some sort of event not covered by the exogenous event mechanism, there is low likelihood that GMP will fail to earn its authorized return. As stated previously, the Company will likely operate under an interim alternative regulation plan that will include a PPA and an exogenous events mechanism. Finally, the O&M Platform agreement largely assures that GMP will earn its authorized return.

26 Case No. --INV Page of 0 Regulatory Accounting Q. Can you summarize the general regulatory accounting issues with the Company s cost-of-service filing? A. Mr. Schultz provides the Department s cost-of-service model incorporating the adjustments to cost of capital, capital spending and power supply adjustments. He also makes adjustments related to: () a recorded net gain of $, on the sale of property during the test year; () to the Merger Savings Platform for $00,000 related to Exogenous Storm Costs; and (),0 related to the savings estimate and insurance costs. Mr. Schultz also raises a concern regarding how GMP is booking the up-front developer fee the Company anticipates receiving when its Joint-Venture ( JV ) Microgrid projects are put in service. GMP currently uses this fee to reduce amortization which benefits ratepayers in the first year but results in higher costs in subsequent years. The Department s position is that this fee should be used to reduce the Investment in Subsidiary, which produces benefits for ratepayers over the life of the project. 0 Mr. Schultz was also retained to perform an analysis of the filings on behalf of the Department to determine the reasonableness of the GMP Earnings Sharing Adjustor ( ESAM ) for the year ended September 0, 0 filings. He concludes that, after adjusting for costs that are deemed inappropriate, the Company is in an overearnings position, but that the over-earning falls within the dead band.

27 Case No. --INV Page of Innovative Services Q. Does GMP offer any products or services to the public that are not provided for in its tariffs? A. Yes. GMP has for many years offered a water heater rental program. Additionally, under its alternative regulation plan, GMP has piloted the following products and services: 0 Cold Climate Heat Pumps Heat Pump Water Heater ehome Electric Vehicle Charging Stations Off-Grid Package GMP Tesla Powerwall ConnectDER Smart Water Heater Q. What is the Department s view about GMP offering these services? A. The Department generally supports the Company s efforts to find innovative solutions to serve its customers needs. That said, there are issues in two areas, which are discussed below. 0

28 Case No. --INV Page of 0 0 Q. Does the Department have a view about whether these services are currently being subsidized by non-participating customers? A. Yes. Anytime a public utility offers competitive services, such as the un-tariffed products and services I am discussing here, an issue arises about the utility s impact on the competitive market. For instance, in this case, GMP has included the costs associated with the heat pump, heat pump, electric vehicle charging stations, and the Tesla Powerwall in rate base. The Department s position is that, for these generally available consumer products to be included in rate base, the Company must have the ability to control the usage of those products for the benefit of all ratepayers. The Department and GMP have discussed this Department position throughout the pilot review process, and it was addressed in the resolution of Docket, in which GMP sought to tariff its heat pump and heat pump water heater pilots. The ability to exercise such control is not implemented for the products offered in 0 and part of 0. The Company has stated that beginning in 0, such control will be a standard component of innovative products and services included in rate base. The Department will monitor this issue going forward. Until the Department can be assured that GMP has implemented the ability to control these devices, the Department recommends excluding them from the level of plant additions. The Department recommends that GMP file a tariff for these products and services after the eighteen-month pilot period that allows for innovative product and service development under the alternative regulation plan.

29 Case No. --INV Page of Q. What is the Department s recommendation with respect to water heater leasing? A. The Department recommends that, in light of its position on the products being offered under the Innovative Pilot Program, GMP should file tariffs. The tariff process will provide a venue to determine whether it is appropriate for GMP to continue to offer this service given the current state of the industry, and allow regulators to examine whether the service provides a benefit to ratepayers. In her testimony, Ms. Flint, points out that a tariff filing will allow the Department to ensure that these programs offer the appropriate consumer protections and will also provide customers with transparent pricing and terms of service. 0 Power Supply Q0. Please summarize the Department s testimony regarding GMP s Power Supply expenses. A0. Edward McNamara, Director of Energy Policy and Planning, Vermont Department of Public Service. Mr. McNamara explains the Department s position with respect to Green Mountain Power Corporation s (GMP) power supply portfolio. He also discusses the applicable statutory and regulatory framework through which GMP is guided in making its power supply decisions and the efforts that GMP has undertaken to further the transformation of the electric sector. 0 Joan White, Utilities Economic Analyst, Vermont Department of Public Service. Ms. White provides an overview of GMP s power supply costs. She also proposes downward

30 Case No. --INV Page of adjustments to net power supply costs totaling $,,. Based on her analysis, the Company overestimated power supply costs associated with the standard offer and netmetering programs. She also recommends eliminating the ANI Adjustment line item, which grosses up revenue to cover costs GMP does not capture in its power supply model. This item does not meet the known and measurable standard because it is not tied to a specific, known cost GMP is likely to incur in the rate year. She also makes a small correction to calculations of REC revenue. 0 George W. Evans, Power Supply Consultant, SAGE Management Consultants, LLC. Mr. Evans reviewed the Company s rate year power supply costs and made recommendations to: reduce the payments by the ISO for predicted energy from the Company s peakers (Wyman, and Stonybrook units); reflect the removal of the ANI Adjustment; and remove the costs associated the JV Microgrids. He also recommends that the Company consider the acquisition of a commercially available simulation model to replace the Company s spreadsheet model. 0 Customer Service Q. Please summarize the Department s testimony regarding GMP s Customer Service? A. Ms. Flint, the Department s CAPI Director, presents an overview of GMP s recent customer service history including service reliability as well as an opinion of the Company s provision of certain un-tariffed products and services. Ms. Flint does not recommend any adjustments to GMP s cost-of-service.

31 Case No. --INV Page of Q. Does this conclude your testimony? A. Yes.