It is OPUC's position that MFF should be allocated on the basis of in-city kwh sales

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1 Because all customers benefit from ETI's rental of municipal right-of-way, municipal franchise fees should be charged to all customers in ETI's service area, regardless of geographic location.210 It is OPUC's position that MFF should be allocated on the basis of in-city kwh sales instead of total class revenues as proposed by SWEPCO. PURA expressly requires a kwh basis for MFF charges. However, OPUC agrees with the Company that costs related to MFF in base rates should be collected from all customers in a rate class, regardless of geographic location.211 TIEC correctly recommends allocation on the basis of in-city kwh sales, but incorrectly recommends that the collection of these fees be levied only on customers within the city limits where the fees are levied.212 TIEC's collection proposal should be rejected because it is not consistent with PURA or Commission precedent. 5. Miscellaneous Gross Receipts Taxes OPUC's Initial Brief does not address this issue, but OPUC reserves the right to address the issue in its Reply Brief as needed. 6. Primary Distribution Substation and Line Services OPUC's Initial Brief does not address this issue, but OPUC reserves the right to address the issue in its Reply Brief as needed. 7. Appropriate Load Factor for Use in Average Component of A&D/4CP OPUC's Initial Brief does not address this issue, but OPUC reserves the right to address the issue in its Reply Brief as needed. 210 Docket No , Order on Rehearing, Finding of Facts No. 179 and 180 (Nov. 2, 2012). 211 OPUC Ex. 4 (Seybold Cross-Rebuttal) at TIEC Ex. 1(Pollock Direct) at

2 B. Revenue Distribution [PO Issues 35, 36] The distribution of the revenue requirement in this case presents some difficult challenges. The amount of the requested rate increase is significant, percent overall with more than a 27 percent increase for the residential rate class.213 Under current rates, the residential class is providing a substantial subsidy to other classes.214 At SWEPCO's equalized rate of return, all classes are at unity; however, some rate classes see significantly higher increases than others. It appears that some degree of rate moderation is appropriate given the parameters of this rate increase. As discussed in more detail below, SWEPCO's revenue distribution methodology groups similar end-use customers together in eight major rate class groupings215 and brings each group to unity. SWEPCO's rate moderation plan targets the moderation where needed while limiting unnecessary crosssubsidies. In contrast, Staff's rate moderation plan affects each individual rate class and continues unnecessary cross-subsidies moving classes away from unity. TIEC also proposed its own revenue distribution plan that was similar in style to the SWEPCO methodology, but incorporated some TIEC proposed adjustments related to firm and non-firm revenue treatment.216 SWEPCO grouped its rate classes into major rate class groups for the purposes of distributing revenue requirements. These eight major rate class groups were formed from classes with similar end-use characteristics. SWEPCO's revenue distribution.217 Each major rate class group was brought to unity under Individual rate classes within each major rate class grouping, some of which had 5 or fewer customers,218 had varying percentage rate increases depending on each class's existing contribution to cost of service, the number of customers in its 213 SWEPCO Ex. 88 (Jackson Rebuttal) at Exh. JLJ-1R. 214 Residential rate class is at 1.17 under current rates. OPUC Ex. 4 (Seybold Cross-Rebuttal) Exh. LLS-1 at SWEPCO Ex. 88 (Jackson Rebuttal) at Exh. JLJ-1R. 216 TIEC Ex. 1(Pollock Direct) at Tr. at Tr. at Also SWEPCO Ex. 88 (Jackson Rebuttal) at 8 and TIEC Ex. 1 (Pollock Direct) at

3 class and its revenue deficit under proposed rates. As a result, SWEPCO's methodology allocates all necessary cross-subsidies wholly within each major rate class and does not involve other classes in the subsidies required within the major rate class. SWEPCO's proposal is based on the major rate class groupings used in the revenue distribution during SWEPCO's last rate case settlement.219 In contrast, Staff witness Mr. Murphy proposed a different revenue distribution that involves all rate classes in the sharing of subsidies. Staff picked a target maximum increase of 1.6 times the system average, or 32.5 percent, as the maximum allowable increase for any given class. Beginning with the class that was furthest away from its cost target, Staff increased that class's cost of service contribution until it reached the target maximum 32.5 percent increase. Then the next class furthest from its cost of service was treated to this process. This continued until all classes that were under cost prior to the moderation exercise were at the target 32.5 percent. At that point, there were still costs left to be distributed among the classes, so Staff applied those additional costs to classes that were already at unity under the equalized rate of return. As a result of this methodology, classes that were at cost under the equalized rate of return acquired costs in excess of their cost of service and now are subsidizing other classes. 220 While Staff represents that its plan moves each class closer to cost, Staff did not verify that its revenue distribution using SWEPCO's proposed revenue requirement as a starting point actually did move each of the classes closer to cost. Staff's claim is based on a revenue distribution performed after all Staff's adjustments to the revenue requirement had been made. Since not all adjustments affect each class in the same proportion as does the underlying revenue requirement, adjustments made will impact the proportions of cost assigned to each class. The actual result of Staff's revenue distribution methodology on each class can only be performed 219 SWEPCO Ex. 88 (Jackson Rebuttal) at Staff Ex. 5 (Murphy Direct) at

4 with SWEPCO's revenue requirement as a starting point. Because Staff did not perform a direct comparison of results of the revenue distribution between SWEPCO's methodology and Staff's recommendation,221 we cannot know precisely the result of Staff's revenue distribution on the classes relative to the SWEPCO recommendation.222 However, assuming arguendo that Staff's plan does indeed move classes closer to cost, this claim can only be made with respect to moving classes from where they are under present revenues. With regard to SWEPCO's proposal to bring classes to unity, the staff s plan moves classes away from cost and continues cross-subsidies.223 SWEPCO's methodology for revenue distribution brings the residential class back to unity from a position under existing rates in which the residential class provides a significant subsidy to other classes; whereas, the Staff s recommendation continues the residential class subsidy of other classes by recommending that residential customers provide a contribution in excess of their cost to serve. While all classes will feel the burden of this significant rate increase, OPUC recommends that moderation come in the methodology proposed by SWEPCO. SWEPCO's plan is superior to Staff s plan because SWEPCO's methodology minimizes the cross-subsidies among classes and distributes any necessary cross-subsidies among classes with similar end-use characteristics. One might think of the Staffs method as one in which a broad brush sweeps across all classes. In this methodology, cross-subsidies occur throughout the rate structure. In contrast, SWEPCO's methodology is a targeted fine-tip pen, applying moderation only among similar classes resulting in cross-subsidies limited to those similar classes.224 Staff has previously represented that, for purposes of cost allocation and rate design, "its fundamental objective that the allocation of costs among classes not result in some classes 221 See OPUC Ex. 10, Staff response to OPUC RFI No Tr. at , , and Tr. at Tr. at

5 subsidizing other classes."225 The result of Staff's broad brush approach to revenue allocation does not accomplish this fundamental objective. Staffs ultimate result moderates the level of impact for some classes, but leaves some large classes, such as the residential class, still providing significant subsidies to other classes. In contrast, SWEPCO's results define unity by the major rate class groupings and successfully bring each major rate group to unity while minimizing cross-subsidies.226 Revenue allocation in this case should be based on SWEPCO's proposed major rate class grouping where each major rate class, consisting of similar end-use customers, is brought to unity for revenue distribution of the cost of service consistent with any adjustments to cost of service. C. Rate Design [PO Issue 32, 34] 1. Residential Because the residential class has been subsidizing other classes for a significant period of time prior to this docket, SWEPCO's proposed revenue distribution has returned the residential class to its cost of service.227 Despite the intent to recover only its own costs, the class is still facing a significant increase of more than 27 percent. Parties have proposed differing means of dealing with the intra-class increase through the structure of residential class rate design. SWEPCO proposes to apply the percentage increase uniformly to the existing rate structure. SWEPCO witness Ms. Jackson describes SWEPCO's intent not to introduce any unnecessary complexities and to ensure that all customers within a rate class experience a similar rate increase.228 Cities witness Mr. Johnson proposed a change to the residential customer charge 225 OPUC Ex. 4 (Seybold Cross-Rebuttal) at Tr. at SWEPCO Ex. 88 (Jackson Rebuttal) at Ex. JLJ-1R. 228 SWEPCO Ex. 88 (Jackson Rebuttal) at

6 but otherwise did not alter SWEPCO's proposed residential class rate design. Staff proposes a several changes to the residential rate design structure including a summer inclining block rate structure which Staff asserts will promote proper price signals, consumer rationing and energy efficiency. OPUC proposes an intra-class rate moderation plan for residential rates that leaves the structure of the rate design the same as that recommended by SWEPCO. The dollar value of each component differs from SWEPCO's proposal, as discussed in each of the sections below. OPUC's recommendation is intended to soften the blow of the historic rate increase for those using the least amount of electricity in this class, while still providing some relief for all customers in the class. None of OPUC's recommendations for residential rate design are intended to alter the revenue recovered from the residential class as defined by the revenue distribution discussed in an earlier section. The various proposals regarding residential rate design are discussed in the sections below. a. Customer Charge SWEPCO witness Jennifer Jackson applies the full percentage increase for the residential rate class to each component charge. In other words, SWEPCO proposes a 27% increase in the customer charge. If the Commission should order a lower revenue requirement, then the percentage will decrease accordingly. In SWEPCO's direct case, the proposed customer charge amount shows an increase from the present rate of $7.25 to $ Cities witness Mr. Johnson recommends that the customer charge be reduced from its present rate of $7.25 to $4.46, an amount that represents only those costs which vary by the number of customers. Alternatively, Mr. Johnson recommends that the residential customer 229 SWEPCO Ex. 51 (Jackson Direct) at

7 charge remain at its present $7.25 level. Mr. Johnson notes that the customer charge serves the economic function of rationing access to the utility system, but beyond that it provides no price signal relevant to resource allocation. Lower customer charges ensure that usage drives a greater proportion of the cost recovery, consistent with energy conservation goals. 230 Staff witness Mr. Murphy supports mitigating the increase to the residential customer charge, but proposes that the customer charge be set at $8.00, an amount between the positions of SWEPCO and the intervenors. Mr. Murphy's recommendation is based on his concern that "higher load factor residential customers" will bear an inequitable share of the residential class rate increase.231 OPUC witness Ms. Seybold recommends that the customer charge remain at its current level of $7.25. Ms. Seybold notes that SWEPCO's existing customer charge is already the highest in Texas for investor owned utilities, where the range of current charges is from El Paso Electric Company's $5.00 to SWEPCO's existing $7.25. Consistent with arguments made by Mr. Johnson, Ms. Seybold notes that a higher customer charge results in a smaller energy charge which reduces the incentive to conserve energy and reduces the impact of energy conservation initiatives for low income customers.232 SWEPCO witness Ms. Jackson claims that OPUC's proposed customer charge would "result in a wide disparity of customer increases, which SWEPCO proposes to avoid with its residential rate design."233 However, Ms. Jackson's testimony compares SWEPCO's present rates with OPUC's proposed rates in Schedule JLJ-2R. Ms. Jackson goes on to note that Ms. Seybold's recommendations (which encompass all elements of the residential rate structure) would result in bill increases in the residential class ranging from 9.78 to 28 percent as compared 231 Cities Ex. 5 (Johnson Direct) at Staff Ex. 5 (Murphy Direct) at OPUC Ex. 3 (Seybold Direct) at SWEPCO Ex. 88 (Jackson Rebuttal) at

8 to present revenues; whereas the range of increases resulting from Ms. Jackson's recommendations are from to percent also compared to present revenues. 234 During discovery, OPUC asked Ms. Jackson to provide an updated calculation of Exhibit JLJ-2R in which customers' bills at various kwh usages under SWEPCO's proposed rates are compared to OPUC's proposed rates. 235 The results of this analysis are reflected in OPUC Exhibit 9. OPUC's recommendation would result in a $1.90 (13.03 percent) decrease to the monthly average bill for a residential customer using 100 kwh, and a $2.12 (1.38 percent) increase to the bill for a residential customer using 3000 kwh, when compared with the bills calculated under SWEPCO's proposed rates. In fact, under OPUC's recommended structure, a residential customer would see a smaller bill (when compared with SWEPCO's proposed structure) in all situations where usage was at or below 1500 kwh.236 Under OPUC's proposed residential rate design, most customers' bills are less than what they would be under the Company's proposal.237 OPUC's residential rate design results in rate decreases for low and moderate use customers (compared to SWEPCO's proposal) and a very small increase for the highest use customers (compared to SWEPCO's proposal). This so-called "wide disparity in increases" that Ms. Jackson referenced in her testimony is simply intentional intra-class rate moderation that acknowledges that the customer charge is regressive because the customer charge is unavoidable and constitutes a higher percentage of a lower use customer's bill than of a higher use customer's bill.238 SWEPCO's one-size-fits-all approach increases the customer charge and the energy charge by 27% and applies no intra-class rate moderation. OPUC's proposal applies intra-class rate moderation so that there is no increase in the existing customer charge. OPUC's customer 231 SWEPCO Ex. 88 (Jackson Rebuttal) at OPUC Ex. 9. See also, Tr. at OPUC Ex OPUC Ex. 9 and Tr. at Tr. at

9 charge proposal moderates the impact of the rate increase on the low use customers without altering the revenue requirement for the class.239 Because of the greater impact that the customer charge has on lower use customers, OPUC's rate moderation recommendation regarding the customer charge should be adopted. b. Energy Charge All parties addressing residential rate design have either proposed seasonally differentiated energy charges or made no changes to SWEPCO's basic residential rate design. SWEPCO proposes no changes to the existing residential rate structure. This structure consists of a customer charge, discussed previously, an on peak energy charge imposed during the months of May through October (summer) for all kwh used and a two-tiered off peak energy charge during the months of November through April (winter) that includes a declining block rate for usage in excess of 600 kwh. Cities does not propose to alter the structure of the energy charges in the residential rate design. Staff proposes the addition of an on peak (summer) inclining block rate for usage above 900 kwh. Both OPUC and Staff propose reducing, though by differing amounts, the declining block differential between the two tiers in the off peak (winter) rate structure. A further discussion of the energy charge is also included as part of Section VII.C.I.a. above. c. Winter Declining Block Rate As discussed in Section VII.C.1. a above, SWEPCO applied its rate increase percentage equally to all components of its residential rate design. This resulted in a uniform 27% percentage increase for the various rate design components, but the off peak (winter) differential between the initial and tail block increased on a cents per kwh basis Tr. at OPUC Ex. 3 (Seybold Direct) at

10 Declining block rates are not consistent with the State's policy concerning energy efficiency and do not accurately reflect costs or provide appropriate pricing signals to customers.241 However, declining block rates have generally been made available in situations where significant numbers of customers use electric space or water heating.242 SWEPCO has not specifically stated that such use is the reason for the declining block rate structure; however, SWEPCO's Texas 2010 Residential Appliance Saturation Survey indicates that a large percentage of customers use electricity as their primary source for space and water heating.243 OPUC recommends that the declining block rate be eliminated over time.244 Given the large rate increase proposed in this docket, OPUC suggests that an appropriate initial step in that phase out process would be to hold the differential between the initial block and declining tail block in the off peak period at the current cents per kwh level. Staff concurs with OPUC's recommendation to phase out the declining block rate; however, Staff witness Mr. Murphy suggests a more aggressive approach to the phase out by reducing the differential by 20 percent to 0.98 cents per kwh.245 The Commission has recently ordered a decrease of 20 percent in the winter differential between the initial and declining tail blocks in the Entergy rate case.246 While a 20 percent reduction in the differential between the two off peak blocks would be a significant step toward the elimination of the declining block rate structure and would mirror the percentage movement in the Entergy case, OPUC suggests that the size of the rate increase in this case (a 27% increase for the residential class) warrants a moderation of the impact such a movement would have on the remaining rates within the residential structure. Furthermore, 241 OPUC Ex. 3 (Seybold Direct) at Id. at Id. at Id. at Staff Ex. 5 (Murphy Direct) at Staff Ex. 5 (Murphy Direct) at 54 and Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred Accounting Treatment, Docket No , Order on Rehearing, Finding of Fact 212 (November 2, 2012). 59

11 Staff's recommendations to: (1) increase the customer charge; (2) impose an inclining block rate; and (3) require the residential class subsidize other classes by providing a contribution in excess of their cost to serve as part of Staff's rate moderation plan all have significant bill impacts for residential customers. For these reasons, OPUC recommends that the differential be held at its current cents per kwh level for this docket. d. Summer Inclining Block Rate Staff proposes the addition of a new on peak (summer) inclining block rate for usage in excess of 900 kwh to the existing rate structure. Mr. Murphy states that an on peak inclining block rate promotes more efficient use of resources, provides a more efficient price signal to customers and is more representative of cost causation, since more expensive generation tends to be used as the system nears peak usage and those using more electricity during higher cost periods would pay more for the costs they incur.247 SWEPCO opposes an inclining block rate being added to the residential rate design structure. SWEPCO's intention in this docket is to eliminate any wide disparities in customer impacts due to the large rate increase.248 SWEPCO witness Jackson notes that Staffs recommendation to add an inclining block to the on peak period "introduces additional rate impacts at a time when SWEPCO is bringing two generating plants on line."249 Consequently, SWEPCO opposes Staffs recommended inclusion of an on peak (summer) inclining block residential rate.250 In support of its position, Staff opines that SWEPCO's customers are familiar with inclining block rates because SWEPCO had such rates in prior years251 and that customers would 247 Staff Ex. 5 (Murphy Direct) at SWEPCO Ex. 88 (Jackson Rebuttal) at Ibid., at Ibid., at Staff Ex. 5 (Murphy Direct) at

12 be able to track their usage at the meter.252 However, SWEPCO witness Jackson argues that only about 5,000 of SWEPCO's 135,000 to 145,000 residential customers ever saw this type of rate structure.253 Therefore, the implication that acceptance of this rate structure change will flow from past customer usage is ill-founded in this situation. Staff argues that the Commission has previously ordered the imposition of an inclining block rate where none previously existed. However, Mr. Murphy's testimony includes a Finding of Fact from Docket No (Application of Central Power and Light Company for Authority to Change Rates) that indicates the inclusion of the inclining block rate was the result of a rate design settlement of the parties to the referenced docket.254 As OPUC witness Seybold notes, no such agreement was discussed or accepted in the instant SWEPCO rate case.255 Staff also argues that an on peak (summer) inclining block rate will promote energy efficient price signals256 However, as noted by both SWEPCO and OPUC, the current rates already provide appropriate price signals that on peak usage is more costly and that conservation is encouraged.257 Further, Ms. Jackson argues that SWEPCO's customers are aware through the seasonal rate differentiation that summer usage is more expensive and that such knowledge is "probably more easily understood by customers than having an inclining block structure in their rate design" because residential customers do not have advanced meters.258 Both Ms. Jackson and Ms. Seybold note that the increased cost of generation during peak periods is reflected in the assignment of more production costs based on contribution to peak within the cost of service 252 Ibid., at Tr. at 838. Here Ms. Jackson identifies 145,000 residential customers. In SWEPCO Ex. 88 (Jackson Rebuttal) at 15, that number is 135,000. Actual residential customer count per SWEPCO Ex. 6 at Bates 6801, Schedule P-7, page 2 of 49, line 1= 147, Staff Ex. 5 (Murphy Direct) at OPUC Ex. 4 (Seybold Cross-Rebuttal) at Staff Ex. 5 (Murphy Direct) at SWEPCO Ex. 88 (Jackson Rebuttal) at 14; OPUC Ex. 4 (Seybold Cross-Rebuttal) at g Tr. at

13 study. In turn these extra costs, in conjunction with higher kwh usage ensure that residential customers understand that higher usage during peak periods costs more. 259 Both Ms. Jackson and Ms. Seybold argue that while inclining block rates can be valuable in some situations, this case does not present those parameters which would help define an effective and efficient use of such a rate design tool. Customers must be able to readily track their usage and be able to alter their usage to achieve the desired behavior.260 Neither of these parameters is clearly present in this situation. OPUC recommends that the Commission reject Staffs inclusion of an on peak (summer) inclining block rate for residential customers in this case. Should the Commission find the reasons for inclusion of an on peak (summer) inclining block rate persuasive, it could order SWEPCO to present a study on the suitability and effect on residential ratepayers of an inclining block rate in its next rate case Commercial OPUC's Initial Brief does not address this issue, but OPUC reserves the right to address the issue in its Reply Brief as needed. 3. Industrial OPUC's Initial Brief does not address this issue, but OPUC reserves the right to address the issue in its Reply Brief as needed. a. Primary Substation b. Large Lighting and Power Service c. Proposed Metal Melting Secondary Service d. Non-Firm Rates 219 SWEPCO Ex. 88 (Jackson Rebuttal) at 14 and OPUC Ex. 4 (Seybold Cross-Rebuttal) at Id. 261 OPUC Ex. 4 (Seybold Cross-Rebuttal) at

14 4. Other OPUC's Initial Brief does not address this issue, but OPUC reserves the right to address the issue in its Reply Brief as needed. VIII. FUEL RECONCILIATION [PO Issues 40-51] A. Dolet Hills Lignite Company Benchmark Price [PO Issue 411 OPUC recommends262 the ALJ reject SWEPCO's request to change the Dolet Hills Lignite Company benchmark pricing methodology (and specifically the price escalator) in violation of the Commission's Final Order in Docket No In 2001, SWEPCO, through its subsidiary, Dolet Hills Lignite Company (DHLC), acquired the assets of the Dolet Hills Mining Venture (DHMV) as part of a settlement to end litigation over operating problems at the lignite mine serving the Dolet Hills power plant. In 2003, in Docket No , the Company sought recovery of those litigation and lignite mining costs. In that docket, the Commission approved a settlement that set out the terms and recovery methodology of those costs for not only that reconciliation but for future reconciliations.264 Two of the most pertinent findings are restated here 265 : 9. Consistent with the terms of the Stipulation, for this and future reconciliations, SWEPCO will defer for ratemaking purposes the agreed upon Texas retail portion of Dolet Hills Mining Venture (DHMV) litigation costs and reasonable actual Dolet Hills Lignite Company (DHLC) costs incurred over and above the DHMV benchmark price, with a carrying charge consistent with the rate established by the Commission for under/overrecovery balances pursuant to P.U.C. SUBST R (e). (emphasis added) 10. Consistent with the terms of the Stipulation, the DHMV benchmark is 98% of the price that SWEPCO would have incurred under the DHMV-Lignite Mining Agreement (LMA) had DHMV delivered the lignite. Thus, the DHMV 262 OPUC Ex. 1(Nalepa Direct) at Application of Southwestern Electric Power Company for Reconciliation of Fuel Costs, Docket No (April 20, 2004). 264 Docket No , Findings of Fact Nos. 9-16, (April 29, 2004). 265 Id. 63

15 benchmark price is 98% of the actual 2001 DHMV price escalated each year thereafter based on changes in the published GDP-IPD index. The deferral calculation for the Reconciliation Period is attached to the Stipulation as Appendix A. If the United States government should discontinue or substantially change the basis of the GDP-IPD, the parties may agree on another index as a substitute or on the application of the revised basis. (emphasis added). Although the Commission specifically ordered SWEPCO to use the GDP-IPD escalator for recovery of those costs, the Company desires to change the methodology and use the escalator included in the original mining contract.266 The Company states that the reason for the requested change is that certain contract components began escalating, in 2007, at rates above the national average inflation rate.267 However, the Commission's Final Order only allows the escalator to be modified if the United States government discontinues or substantially changes the basis of the GDP-IDP, and then, only upon agreement of the parties.268 SWEPCO has provided no evidence and no argument that the United States government has discontinued or substantially changed the basis of the GDP-IDP and certainly the parties have not agreed to the use of a different escalator. SWEPCO's argument is that the methodology approved in Docket No is not yielding the economic value that the Company thought it would when it stipulated to the use of the GDP-IDP escalator.269 There are many times parties to a settlement wish they could retroactively change the terms of a deal using hindsight. However, the Commission's Order is binding on SWEPCO and the parties to this case and the DHMV methodology, and specifically the GDP-IDP escalator, cannot be changed. In addition, the Dolet Hills lignite costs incurred during the reconciliation period should be recalculated using the approved price escalator, and the difference between the amount so 266 OPUC Ex. 1(Nalepa Direct) at SWEPCO Ex. 48 (Wright Direct) at ' Docket No , Finding of Fact No. 10, (April 29, 2004). 269 SWEPCO Ex. 48 (Wright Direct) at

16 calculated and the amount charged to fuel using the Company's proposed price escalator should be refunded to ratepayers. B. CenterPoint Energy Gas Transmission Contract In Docket No ,270 The Commission found that SWEPCO exercised reasonable judgment in entering into a contract with CenterPoint Energy Gas Transmission Company ("CEGT").271 The contract is used to deliver natural gas to SWEPCO's Mattison plant with secondary delivery points at other Company power plants.272 It was effective in January 2009 with a term of 10 years. 273 The contract has a transportation rate of $0.58 per decatherm (equal to MMBtu) and a $19,053,000 minimum annual revenue commitment.274 While the Commission found in Docket No that it was reasonable for SWEPCO to enter into the CEGT contract, the Commission will determine in this case whether the Company was prudent in the on-going administration of that contract so that only reasonable and necessary fuel expenses are included in rates.275 SWEPCO has a continuing obligation to prudently manage the contract so as to minimize the costs incurred under it. For the reasons outlined below, OPUC recommends the Commission find that SWEPCO did not adequately manage its contract with CEGT, and disallow $10,774,339 from fuel expense during the reconciliation period. During the reconciliation period, the average gas transportation rate to all of SWEPCO's power plants was $0.64 per MMBtu.276 However, at the Mattison plant, which is served only by 270 Application of Southwestern Electric Power Company for Authority to Reconcile Fuel Costs, Docket No , Finding of Fact No. 27 (January 27, 2010). 271 OPUC Ex SWEPCO Ex. 62 (Howsen Direct) at 19; Tr. at 854; and OPUC Ex OPUC Ex. 7; Tr. at OPUC Ex. 7. The annual revenue requirement requires the Company to take or pay the amount specified in the contract jr. at 869). 275 PUC SUBST. R (d). 276 OPUC Ex. 5 at Schedule , page 16 ($ $4.19 = $0.64). 65

17 the CEGT pipeline, the average transportation rate was $14.08 per MMBtu.277 SWEPCO witness Mr. Howsen, AEP's Director of Gas and Oil Procurement,278 confirmed the transportation rate at the Mattison plant.279 The rate at the Mattison plant is so much higher than the average transportation rate for all plants is because the Mattison plant has a low capacity factor and a high reservation charge under the CEGT contract.280 This is significant because to meet the $19,053,000 annual revenue commitment at the $0.58 per decatherm rate, SWEPCO must take 32,850,000 decatherm (or MMBtu) on the CEGT pipeline or pay CenterPoint for gas not transported. 211 During the reconciliation period, SWEPCO did not come close to taking enough natural gas at the Mattison plant to meet its minimum volume requirement in any year. Even including all the gas delivered to other plants with multiple connections including the CEGT pipeline, SWEPCO fell short in 2009 and Mr. Howsen admitted that SWEPCO did in fact make deficiency payments to CenterPoint for gas not delivered.283 Knowing that it was making these deficiency payments, a prudent manager would have taken steps to minimize these payments. SWEPCO could have explored whether these deficiency payments could have been minimized through more optimizing dispatch, increasing capacity factors by running the plants more, renegotiating the contract, delivering more of the gas to the other connected plants and the like. However, SWEPCO did little, if anything, to prudently manage the contract after it was approved by the Commission. SWEPCO took some gas under the CEGT pipeline to other power 277 OPUC Ex. 5 at Schedule , page 11 ($ $4.43 = $14.08). 278 SWEPCO Ex. 62 (Howsen Direct) at Tr Tr Tr. at ZgZ OPUC Ex Tr. at

18 plants when CEGT allowed it, but Mr. Howsen did not know how much.284 SWEPCO also "talked" with CenterPoint about ways to mitigate the high costs under the contract, but claims that there was little that CenterPoint could do285 Beyond this fleeting reference to "talks," there is no evidence in the record to establish that SWEPCO actively tried to re-negotiate the contract. Additionally, Mr. Howsen testified that he did not know if it was possible if the company could run the plant more to take more of the gas required under the contract.286 He did admit that Company does not take into account the annual $19 million minimum annual revenue commitment when dispatching Mattison or any of the other plants.287 SWEPCO entered into this contract under conditions that were challenged by other parties, but ultimately found to be reasonable by the Commission. Now, SWEPCO will incur at least $190,530,000 in transportation costs over the 10 year term of the contract, yet the Company asserts that opportunities to minimize these costs are primarily up to CenterPoint, not SWEPCO. The Company has not effectively managed its CEGT contract, and ratepayers should not bear the burden of excess costs as a result. During the reconciliation period, SWEPCO conservatively paid for 18,576,446 decatherms (MMBtu) not taken under the contract. At $0.58 per decatherm, this equals $10,774,339 that should be returned to ratepayers.288 IX. OTHER ISSUES A. Request to Recover Purchased Capacity Through Fuel SWEPCO proposes to shift the recovery method for incremental new capacity from base rates to one that is reconciled as part of its fuel costs. The Company asserts that a probable impact of complying with new EPA requirements is the potential need to procure capacity for 214 Tr. at Tr. at Tr. at Tr. at OPUC Ex. 12 (2009 deficiency of 17,751,022 Dth deficiency of 825,424 Dth = 18,576,446 Dth). 67

19 relatively short periods of time, either as a means to make up for plants that are down for construction of new pollution equipment, or as a mitigation measure when plants are curtailed. The Company also expects that it's purchased power capacity costs can be a significant and have the potential for annual variability.289 While SWEPCO has suggested several scenarios that might someday lead to a change in recovery methodology, some are merely hypothetical.290 Also, the Company asserts that environmental regulations could have an impact on its future capacity needs, but these have not been quantified and the Company instead forecasts no new incremental capacity purchases over the next five years.291 The Company has not demonstrated any need that would warrant a change in the Commission's rules prohibiting recovery of purchased power capacity in fuel costs.292 The Company's proposal simply represents piecemeal or single issue ratemaking. In a ratemaking proceeding, the Commission approves a cost of service that allows the utility a reasonable opportunity to earn a reasonable return on its invested capital used and useful in providing service to its customers, in excess of its reasonable and necessary operating expenses. The only way to determine whether the Company's total cost of service has increased is to examine all of its base rate costs in the context of a full rate proceeding. This way all cost increases and decreases are reviewed and evaluated and it can be determined whether a rate adjustment is necessary. By considering only one element of the cost of service, as SWEPCO proposes in its treatment of new purchased power capacity, it cannot be determined whether an increase is necessary. Recent Commission precedent opposes recovery of purchased capacity costs outside of base rates. In Docket No , Entergy Texas Inc.'s most recent base rate case, Entergy 219 SWEPCO Ex. 25A (McCellon-Allen Direct) at OPUC Ex. 1(Karl Nalepa Direct) at Cities Ex. 5 (Johnson Direct) at P.U.C. SUBST. R (a)(4). For Account 555, the electric utility may not recover demand or capacity costs. 68

20 requested that a Purchased Power Recovery Rider be established to allow it to recover its actual purchased power expenses. The Company made many of the same arguments as SWEPCO does, such as increasing reliance on purchased power and the potential variability of market-driven purchased power capacity costs.293 Ultimately, the Commission rejected Entergy's request and ordered that purchased power capacity costs be recovered in base rates. 294 While SWEPCO's request does not include a new rider to recover purchased power capacity, use of the existing fuel factor to recover capacity costs would serve the same purpose. OPUC recommends that the Commission reject SWEPCO's request to recover purchased power capacity costs in fuel expense and that the costs that the Commission determines are reasonable be recovered in base rates. CARD,295 Cities,296 TIEC297 and Staff all recommend the Company's request be rejected as well. B. Request to Recover Consumables and Allowances as Fuel [PO Issue 411 OPUC Supports CARD298 and Cities299 recommendation to reject SWEPCO's proposal to recover the cost of emissions allowances and cost of consumables used to control emissions through its fuel factor. As CARD witness Norwood points out, the costs at issue are properly classified as production O&M expenses and therefore do not meet the definition of eligible fuel expenses, as specified under the Fuel Rule, (a)(1).30o In order for SWEPCO to recover these costs as eligible fuel expenses under the special circumstances provision of the fuel rule, 301 it would have to demonstrate that the expenses were "fuel related" and reasonably expected to result in increased reliability of supply or lower fuel expenses than would otherwise be the case, 293 OPUC Ex. 1(Nalepa Direct) at 43 citing Docket No , Direct Testimony of Phillip May at OPUC Ex. 1(Nalepa Direct) at 43 citing Docket No , Supplemental Preliminary Order (January 19, 2012); Docket No Order on Rehearing at Findings of Fact (November 2, 2012). 295 CARD Ex. 4 (Norwood Direct) at Cities Ex. 5 (Johnson Direct) at TIEC Ex. 1(Pollock Direct) at CARD Ex. 4 (Norwood Direct) at Cities Ex. 5 (Johnson Direct) at P U.C. SUBST. R P U.C. SUBST. R (a)(6). 69

21 and that such benefits received or expected to be received by ratepayers exceed the costs that ratepayers otherwise would have paid or otherwise would reasonably expect to pay. SWEPCO's proposal does not meet this standard for special circumstances recovery. Staff witness Ms. Spence supports the Company's proposal, asserting that there is a relationship between the amount of fuel burned and the number of allowances required and consumable expense incurred, and therefore it is reasonable to consider any expenses and revenues associated with these items as eligible fue1.302 But Ms. Spence acknowledged on cross examination that other costs also vary with the amount of fuel consumed yet are recovered in base rates. 303 Furthermore, Ms. Spence asserted that SWEPCO's request does not fall under the special circumstances section of the Fuel Rule, 304 and therefore did not do any of the analysis necessary under (a)(6) to substantiate a special circumstance. 305 And she agreed that emissions control expenses are explicitly excluded from reconcilable fuel expenses absent an exception. 306 Ms. Spence also acknowledged that there is nothing in the Fuel Rule that supports her contention that expenses should be treated as eligible fuel expense if there is a relationship between the amount of fuel burned and that expense.307 She also suggested that another basis for including allowances and consumables in eligible fuel expense is that they are variable and volatile, yet admitted that she did not know the price of the consumables or whether they were in fact volatile.308 The Commission has not previously granted an exception to allow consumables in eligible fuel expense, and SWEPCO has not supported its request to do so in this case. 302 Staff Ex. 6 (Spence Direct) at Tr. at Tr. at Tr. at Tr. at ' Tr. at Tr. at

22 C. TCRF Baseline [PO Issue 391 OPUC's Initial Brief does not address this issue, but OPUC reserves the right to address the issue in its Reply Brief as needed. D. DCRF Baseline [PO Issue 39] OPUC's Initial Brief does not address this issue, but OPUC reserves the right to address the issue in its Reply Brief as needed. E. IBEW Staffing Issues OPUC's Initial Brief does not address this issue, but OPUC reserves the right to address the issue in its Reply Brief as needed. X. CONCLUSION AND PRAYER For the reasons stated herein and in the testimony of OPUC's witnesses Mr. Karl Nalepa, Dr. Carol Szerszen, and Ms. Lacy Seybold, the Office of Public Utility Counsel respectfully prays that the Honorable Administrative Law Judges adopt OPUC's recommendations and incorporate said recommendations into the Proposal for Decision. OPUC further asks to be granted such other and further relief to which it may be entitled. 71

23 Dated: March 6, 2013 Respectfully submitted, Sheri Sanders Givens Public Counsel State Bar No ^u/ie Barker Ekikctor of Litigation & General Counsel State Bar No N. Congress Avenue, Suite P.O. Box Austin, Texas / (Telephone) 512/ (Facsimile) laurie.barkergopuc.texas. gov ATTORNEYS FOR THE OFFICE OF PUBLIC UTILITY COUNSEL CERTIFICATE OF SERVICE PUC DOCKET NO I hereby certify that today, March 6, 2013, a true copy of the Office of Public Utility Counsel's Post-Hearing Initial Brief was served on all parties of record via hand delivery, facsimile, or United States First-Class Mail. a e Barker 72