PUBLIC SERVICE C O~~ISSION OF WEST VIRGINIA CHARLESTON. Case No G-390P

Transcription

1 PUBLIC SERVICE C O~~ISSION OF WEST VIRGINIA CHARLESTON Case No G-390P HOPE GAS, INC., doing business as DOMINION ENERGY WEST VIRGINIA, a public utility, Clarksburg, Harrison County. Surcharge on Infrastructure Improvements. October 29, 20 18

2 TABLE OF CONTENTS I. I1. I11. IV. INTRODUCTION... 1 THE HOPE PREP PLAN... 3 DISCUSSION... 6 HOPE PREP CAPITAL INVESTMENT PLAN A. Bare Steel Main and Utility Service Line Replacement B. Customer Service Piping Program Jk V. C. Farm Tap Upgrades CALCULATION OF PREP RATE INCREMENT A. Base Rate Depreciation Offset for Calculating PREP Rate Base B. Base Rate Deferred Income Tax Expense for Calculating PREP Rate Base C. Calculation of the Over Recovery of PREP Costs VI. D. PWP Rate OTHER ISSUES A. Air Conditioning Rate Class Allocation for PREP Rate Fixed Monthly Charges B. Consumer Protections VI1. C. Improving 390 Filings FINDINGS OF FACT VI11. CONCLUSIONS OF LAW IX. ORDER APPENDIX A: Proposed PREP Rates Effective November I

3 LIC SERVICE COMMISSI F WEST VIR~INrA CHARLESTON At a session of the PUBLIC SERVICE COMMISSION OF WEST VIRGINIA in the City of Charleston on the 29th day of October CASE NO G-390P HOPE GAS, INC., doing business as DOMINION ENRGY WEST VIRGINIA, a public utility, Clarksburg, Harrison County. Surcharge on Infrastructure Improvements. COMMISSION ORDER The Commission approves an increase in the annual Pipeline Replacement and Expansion Program (PREP) rate increment effective November 1, 20 18, for Hope Gas, Inc., doing business as Dominion Energy West Virginia (Hope or Dominion Energy) and accelerated cost recovery, pursuant to W.Va. Code <, commonly referred to as Senate Bill 390 (SB390). The Commission does not, however, approve all elements of the PREP that Hope submitted for Commission approval, I. INTRODUCTION In the 2015 regular session, the West Virginia Legislature enacted SB390, codified at W.Va. Code The underpinnings of SB390 are the legislative findings outlined in subsection (a) of W.Va. Code $24-2-lk.' Those findings focus on the W.Va. Code 24-2-lk(a) provides: (a) The Legislature hereby finds that: (1) West Virginia is rich in energy resources, which provide many advantages to the state, its econoniy and its citizens; (2) West Virginia is experiencing significant growth in the natural gas industry with the development of the Marcellus and Utica shale; (3) West Virginia's abundant natural gas reserves have created, and will continue to create, many benefits to the state and its citizens; (4) Growth in the natural gas industry and its accompanying benefits require West Virginia to be proactive and increase the focus on the natural gas infrastructure in this state in order for those benefits to flow to the state and its citizens, including those citizens in areas unserved or underserved by natural gas utilities; (5) A comprehensive program of replacing, upgrading and expanding infrastructure by natural gas utilities at reasonable cost to ratepayers will benefit the customers of the natural gas utilities, the public in West Virginia and the economy of the state, as a whole;

4 abundance of, and benefits to be derived from, the development of natural gas resources, particularly, the Marcellus and Utica shale gas. In that regard, SB390 is designed to (i) encourage growth in the natural gas industry, particularly in unserved or underserved areas, (ii) foster the extension and replacement of natural gas pipelines to enhance gas service, safety and customer growth, (iii) encourage the installation of natural gas infrastructure to help create jobs, (iv) provide for enhanced safety and reliability of aging natural gas infrastructure, and (v) specify certain accelerated ratemaking treatments related to the infrastructure investment in an expedited cost recovery mechanism approved by the Commission, but without waiting for a full base rate review and filing. Under SB390, if gas utilities file an application for a multi-year comprehensive plan (Plan or Program) for infrastructure replacements, upgrades and extensions, the Commission is to approve expedited recovery of certain related net costs if, in the opinion of the Commission [Tlhe expenditures and the associated rate requirements are just, reasonable, not contrary to public interest and will allow for the provision and maintenance of adequate, efficient, safe, reliable and reasonably priced natural gas service. W.Va. Code k(e). The West Virginia gas utilities have endorsed SB390 with unbridled enthusiasm. After the passage of SB390, four natural gas utilities in West Virginia requested approval of infrastructure programs with investments to replace deteriorating pipes, serve additional areas and achieve the expedited rate recovery mechanism for those SB 390 investments authorized by the statute. This proceeding is Hope s fourth PREP rate filing.2 The Commission approved initial infrastructure Programs and rate increments Case No. Commission Order G-390P February 4, G-390P October 18,2016, as revised November 14, G-390P October. 27,2017, reconsideration denied December 4,2017 Effective date PREP rates March 1,2016 November 1,20 16 November 1,2017 2

5 pursuant to SB390 for Hope, Bluefield Gas Company, Union Oil & Gas, Inc., and Mountaineer Gas Company. It is that enthusiasm, and quite frankly the growing and significant rate impact of these earlier SB390 filings and those sought by Hope from the West Virginia ratepayers (discussed more fully below), that have the attention of the Commission. Although SB390 provides an incentive to gas utilities to invest in infrastructure replacements and improvements, the legislation is not a blank check,3 but is subject to Commission oversight, review and approval. W.Va. Code k(e) requires the Commission to allow expedited recovery of infrastructure costs if the cornmission finds that the expenditures and the associated rate requirements are just, reasonable, not contrary to the public interest and will allow for the provision and maintenance of adequate, efficient, safe, reliable and reasonably priced natural gas service. 11. THE HOPE PWP PLAN Hope provides natural gas utility service to about 112,000 customers in thirty-five West Virginia counties. On May 31, 2018, Hope filed its 2018 PREP Application (2018 PFEP). Hope proposed specific projects for calendar year 2019 and provided an estimate of PREP 3 The Legislature clearly recognized that SB390 is out of the norm for traditional ratemaking. W.Va. Code lk is replete with references reminding the Commission of its primary role in rate regulation - monitoring and requiring fair and reasonable rates - and urging the Commission continue that activity, even with the expedited and generous ratemaking treatment of SB390: W.Va. Code $ k (a)(5) - at reasonable costs to ratepayer; W.Va. Code lk (a)(6) - provide for more economic gas service; W.Va. Code k (b) - [subject to Commission approval], the recovery of costs in support of plans shall be allowed in the manner set forth in this section if the proposed plans have been found to be prudent and useful; W.Va. Code $ k (c)(6) - The application [under SB3901 should contain testimony, exhibits or other evidence that demonstrates the need... in order to provide and maintain, adequate, efficient, reliable and reasonable natural gas service; W.Va. Code $24-2-lk(e) - Upon notice and hearing, if required by the commission,... if the commission finds that the expenditures and associated rate requirements are just, reasonable, not contrary to the public interest and will allow for the provision and maintenance of adequate efficient, safe, reliable and reasonably priced natural gas service; W.Va. Code $24-2-lk(h) - In a future rate case, the commission may allow recovery of deferred costs amortized over a reasonable period of time to be determined by the commission provided the commission finds that the costs were reasonable and prudently incurred and were not reflected in rates in prior rate cases. 3

6 expenditures for the next five calendar years. Hope s 2018 PNP rate increment will take effect on November 1, Hope Application at & attachments, The Hope infrastructure plan submitted to the Commission has two categories: General Program Construction and Gas Sales Service Customer Service Piping Program. General Program Construction. The primary category, the General Program Construction, addresses the replacement of bare steel distribution mains (Bare Steel Mains), unprotected and ineffectively-coated steel distribution mains (Coated Mains) and unprotected bare steel services, Le., the gas service line that Hope owns from the main to the curb box (Bare Steel Services); the replacement, upgrade or installation of gas measurement and regulation equipment (Distribution Regulating Stations); and the enhancement or upgrade of system facilities (Distribution Upgrades). Gas Sales Service Customer Service Piping Program (CSPP). CSPP is a pilot program approved earlier by the Commission as a three-year experimental program and slated to end on December 31, The CSPP is designed for Hope to install, repair and replace customer service piping for new and existing gas sales service customers. Hope Application at 4-5. These CSPP costs relate to replacing customer-owned service piping or initial installation of what would have been customer-owned service piping, as discussed later at page 14, 15. Hope witness Barnes testified that under Hope s proposed CSPP, the cost of the CSPP has been socialized by the rate treatment afforded the CSPP Pilot Program, and will be absorbed by all customers, rather than the identifiable cost causers. Tr. at 146. References to the transcript of the September 20, 2018 hearing will be by page number and witness where appropriate. Hope projected that it would spend $3 1,979,424 in General Program Construction projects and $3,792,976 in the CSPP category in calendar year Hope Application at 5. That General Program, discussed more fully below, has grown at what can only be described as a vigorous pace, particularly as compared to construction under traditional rate recovery by Hope (prior to the implementation of SB390 and the ability to implement accelerated rate recovery). The Commission prepared a demonstrative exhibit, introduced at the hearing as Cornmission Exhibit 1 (Commission Ex. I), containing a schedule that shows the significant cumulative investment proposed under Hope s SB390 plan. That discussion about the data contained on Commission Ex. 1 appears below at page 9; suffice it to say that Hope has seized the opportunity to put plant in the ground and recover rates and revenue immediately from ratepayers, at a far quicker pace than under traditional ratemaking and, in some instances, in the opinion of the Commission, for capital investments not squarely within the ambit of SB Hope s revised Purchased Gas Cost rate changes on November 1 annually and the revised PREP increment goes into effect at the same time. Hope Gas, Inc., dba Dominion Energy West Virginia, Case No G-390P, September 30,2015 JCF-D at 4. 4

7 The adjusted PREP rate increments that will be established in this proceeding are a function of 1. Projected PREP capital investment for and 20 19; 2. Actual cumulative PREP capital investment for 2016 and 2017; and 3. The true-up of projected PREP costs and actual PREP revenues for Hope Application at 4. Hope filed financial exhibits and Hope s calculation of proposed PREP rates with its Application, along with the direct testimony of its witnesses: Jo Carol Farmer Christopher E. Freeland James Gabbert Nicholas Long Kenneth L. Smith Eric Bowen, Ph.D. Manager of Regulation for Hope Regulatory Specialist for Hope Manager - Income Tax, Dominion Energy Services, Inc. Gas Projects Manager for Hope Manager Gas Operations for Hope Research Assistant Professor, Bureau of Business & Economic Research, WVU College of Business and Economics On June 19, 2018, the Commission required Hope to publish notice, established the procedural schedule and granted a Petition to Intervene filed by the Commission Consumer Advocate Division (CAD). June 19,20 18 Order at 4. On August 24, 201 8, Staff filed the direct testimonies of Utilities Analyst Nathan Mills and Engineering Technical Analyst Eric F. degruyter. On September 7, 2018, Hope filed the rebuttal testimonies of Mark E. Barnes, Hope s Director of Gas Operations, Ms. Farmer and Messrs. Gabbert, Long and Smith. The Commission conducted the evidentiary hearing on September 20, The transcript of the hearing consists of 233 pages and 355 pages of exhibits that were introduced at the hearing. On September 25, 2018, Hope filed information relating to operation and maintenance expenses, capital structure, and lost and unaccounted-for gas levels that the Commission requested during the hearing. Tr. at 135, and 163; September 24, 2018 Order at 2-3; Hope s Response to September 24,2018 Order & attachments. Staff, CAD and Hope filed Initial Briefs on October 2, 2018, and Staff and Hope filed Reply Briefs on October 9, In our review of this matter, the Commission considered the Hope Application and its exhibits, the direct and rebuttal testimonies and exhibits of Hope witnesses Barnes, Farmer, Freeland, Gabbert, Long, Smith and Bowen, the direct testimonies and exhibits 5

8 of Staff witnesses Mills and degruyter, the transcript and exhibits from the September 20, evidentiary hearing, and the post-hearing Commission Request Exs. 1 and 2 filed by Hope, and the Initial and Reply Briefs DISCUSSION SB390 did not change the statutory responsibility of a public utility to provide safe, efficient and reliable natural gas service at a reasonable cost to its ratepayers. Under traditional utility ratemaking, Hope would construct the improvements or extensions to its system, obtain financing, earn an Allowance for Funds Used During Construction, or AFUDC, and carry the project costs while retaining any benefits in the form of new customer revenue or cost savings until the Commission included those new investments in rate base and authorized Hope to modi@ its base rates, after consideration of Hope s total expenses and revenues in a base rate proceeding. Additions to rate base as part of a general base rate proceeding would normally be limited to capital investments that are placed in service within a test-year that ended before the new base rates became effective. The Legislature, however, has directed the Commission in W.Va. Code k, to provide the natural gas utility... recovery for the incremental rate of return, related income taxes, depreciation and property taxes associated with the infrastructure programs commencing with the implementation of an infrastructure program approved by the commission without waiting for a full base rate tariff filing as more fblly described in subsection (f) of this section. W.Va. Code lk(a)(7). SB390 directs the Commission to determine the cost-based rate increment applicable to the PREP investment, including return on rate base, income taxes, depreciation expense and property taxes, just as it would for the utilities full rate base elements in the context of a general base rate filing. The process for determining the rate increment applicable to the SB390 investment is addressed in W.Va. Code k(f): (f) Upon commission approval, natural gas utilities will be authorized to implement the infrastructure programs and to recover related incremental costs, net of contributions of recovery of return, depreciation and property tax expenses directly attributable to the infrastructure program provided by new customers served by the infrastructure program investments, if any, as provided in the following: (1) An allowance for return shall be calculated by applying the rate of return to the average planned net incremental increase in rate base attributable to the infrastructure program for the coming year, considering the projected amount and timing of expenditures under the infrastructure program plus any expenditures in previous years of the infrastructure program.... (2) Income taxes applicable to the return.... 6

9 (3) Incremental depreciation and property tax expenses directly attributable to the infrastructure program.... (4) Following commission approval of its infrastructure program, a natural gas utility shall place into effect rates that include an increment that recovers allowance for return, related income taxes, depreciation and property tax expenses associated with the natural gas utilities estimated infrastructure program investments for the upcoming year net of contributions to recovery of those incremental costs provided by new customers served by the infrastructure program investments, if any, ( incremental cost recovery increment ). In each year subsequent to the order approving the infrastructure program and an incremental cost recovery increment, the natural gas utility shall file a petition with the commission setting forth a new proposed incremental cost recovery increment based on investments to be made in the subsequent year, plus any under-recovery or minus any overrecovery of actual incremental costs attributable to the infrastructure program investments, for the preceding year. W.Va. Code lk(q The stated purpose of SB390 legislation is clear. It provides expedited incremental cost recovery for the increase in rate base attributable to the eligible infrastructure program investments between general base rate filings, including related income taxes, depreciation expense, property tax expense and offsetting new customer revenue just as if those incremental SB390 eligible investments were being recognized for rate recovery in a full general base rate filing. SB390 also contemplated that after a general base rate case is filed, the incremental SB390 investment would be rolled into base rates with a corresponding decrease in the SB390 incremental cost recovery mechanism. The goals of SB390 are to expand the advantages and benefits of readily available and abundant natural gas service by (i) extending or improving gas service to both existing and new residential, business and industrial customers, (ii) promoting job growth and new industry, (iii) promoting increased safe, reliable and economical gas service, and (iv) providing accelerated rate recovery of the utility investments necessary to provide that enhanced gas service. Those goals do not, however, relieve the commission of meeting other statutory directives established by the Legislature to determine that those utility investments are prudently incurred, and the resulting rate increases are just and reasonable and in the public interest. 7

10 Reasonableness is the touchstone of rate reg~lation.~ In performing its statutory obligations, the Cornmission must assure that an accelerated rate recovery mechanism permitted under SB390 does not result in a utility (i) unreasonably expanding the level of investment in SB390 eligible infrastructure or (ii) expanding the types of investment eligible for recovery beyond what the Legislature intended in SB390. The Commission must implement safeguards to prevent regulated utilities from using the SB390 rate recovery mechanism to increase unreasonably its earnings potential. SB3 90 does not relieve the Commission of its statutory requirement to determine that the resulting rates are just and reasonable and fairly balance the interests of the customer, the state and the utility. SB390 is intended to spur economic investment in transmission and distribution plant to serve new customers or unserved or underserved areas. The millions of dollars of infrastructure investment that the Commission has approved, and the utilities have constructed, evidence that this has occurred. The statute equally requires, however, that investment be made in a manner resulting in reasonably priced natural gas service. The Hope SB390 filing process began in 2016, and the Commission is reviewing the third and fourth years of Hope s PREP Plan in this proceeding. In the current filing, Hope included forecasted PREP investment through Based on the level of PREP investment actually spent from and the level forecasted to be invested through 2022, the Commission is concerned by both the cumulative magnitude of the PREP investment since 2016 and the level of rate increases that will be attributable to that PREP investment. The Commission is particularly concerned that this significant PREP investment level and related rate increments have been authorized without the benefit of a review of the full cost of service for Hope. Hope has not filed a general base rate case since 2008, Hope Gas, Inc., dba Dominion Hope, Case No G-42T, November 20, 2008 Order at 1-60, Appendices A-C (2008 Rate Case). At the hearing in this proceeding, Hope witness Ms. Farmer indicated that Hope had no plans to file a general base rate case anytime in the foreseeable future. Tr. at 177. In order to assess the magnitude of projected PREP investment, the Commission developed a demonstrative exhibit of the cumulative PREP investment through 2022 and the resulting PREP Rate Increment. Commission Ex. 1. Based on that Exhibit, at year end 2022, Hope will have invested $ million in PREP utility plant since That level of PREP investment compares to $ million of the total utility plant investment at year-end 2016 before the PREP Plan was instituted. If the PREP Plan continues at the level forecasted by Hope, approximately 57 percent of the total utility plant of Hope in 2022 will be receiving full rate base cost recovery without having been reviewed as part of a general base rate case filing. The PREP investment alone will have increased rates by approximately 22 percent The Commission believes that the Legislature requires the Commission to apply a reasonableness standard to almost all these transactions. Reasonableness is the common yardstick by which utilities are measured under the various provisions of Chapter 24. VEPCO and UtiliCorp United, Inc., Case No E-PC, December 12, 1986 Order at 7-8. See footnote 1 at page 8 of the VEPCO Order. 8

11 from 2016 levels and approximately 23 percent of the total revenues of Hope will come from the accelerated PREP Rate Increment. The Commission does not believe that SB390 was intended to provide the gas utilities continuing annual rate increases with a free-pass from assurances of reasonable, cost-based rates that can be determined only through a review of its entire cost of service. The Commission is concerned that we are not given the opportunity to determine whether Hope is escalating the level of PREP investment from historical levels with accelerated rate recovery, while at the same time retaining savings from other cost of service elements embedded in base rates, such as the overall weighted cost of capital, operation and maintenance (O&M) expenses and units of sales that are not subject to review as part of the SB390 filing. In response to questions from the Commission, Hope witness Freeland acknowledged that Hope had lost customer base since the last rate case and the rate of return was slightly above five percent. Tr. at In response to questions at the hearing, Hope witness Farmer testified that its stockholder (Dominion Energy, Inc.) was willing to absorb a lower return on its investment in Hope s West Virginia operation because other subsidiaries were performing better financially, and the Parent Company would continue to invest significant amounts of capital in Hope if it can be recovered timely by SB390 filings. Tr. at This answer is curious at best given the usual response from West Virginia utilities is that their rates should be set at a level that provides an opportunity to achieve the allowed rate of return on a standalone basis. Staff and CAD also expressed concern regarding the magnitude of Hope s projected cumulative investment in SB390 plant additions since and the cumulative rate increase resulting from that investment. Staff Ex. EFD-D at 4-5 and CAD In. Br. at 2-3. Both Staff and CAD advocated that the Commission incorporate some form of customer protection provisions into the SB390 filings to limit the level of revenue derived from SB390. Without these protections, the gas utilities, including Hope, could inappropriately shift historical costs recovered in base rates to the SB390 Incremental Cost Recovery mechanisms such as (i) utility plant investment from non-prep accounts to PREP-eligible accounts, and (ii) historical O&M expenses to the PREP Plan. These customer protections on the revenue generated from SB390 filings would trigger regular general base rate case filings where those cost shifts could be appropriately reviewed and captured in the customer rates. Staff Ex. NRM-D at and CAD Initial Brief at 3-4. In attempting to analyze any potential shift in historical O&M expenses to the PREP, Staff asked Hope to provide its annual O&M expense budgets and actual expenditures from the 2008 rate case to the present. Staff Data Requests 3-1 and 3-2 (Aug. 24, 201 8). Hope objected to those requests. Hope asserted that the O&M budgets have no bearing on the establishment of just and reasonable PREP rates. Hope wrote: If Commission Staff is interested in the Company s annual operation and maintenance expenditures, then it may review DEW s annual reports on 9

12 file with the Commission, as the information is included on pages 317 through 325 under the section Gas Operation and Maintenance Expense. Hope Response to Staff Data Request 3-1 at 1-2 (Aug. 30,20 18). The Commission is interested in, and has a right to monitor, the trend of historical O&M expenses and specifically requested at the hearing that Hope provide, as a part of Commission Request 1, the historical O&M expenses for the last five years. The historical O&M expenses were to be segregated by purchased gas expense which is recovered through an annual Purchased Gas Cost Adjustment (PGA) surcharge and other O&M expenses that are recovered through base rates. Hope filed the requested information after the hearing: Purchased Gas Expense $3 ~ 0 9 $27.37 ~ $46.62 $61.67 $65.12 O&M Expense $29.22 $29.05 $30.49 $32.58 $25.57 Total O&M $60.30 $56.42 $ $95.24 $90.69 The historical O&M expense breakdown indicates a trend of declining O&M expenses subject to base rate recovery since The analysis could be further extended back to the last Hope rate case and expanded to include other base rate revenue requirement factors. For purposes of this discussion, however, the O&M expense information provided in Commission Request 1 is sufficient to strengthen the Commission concern about the significant Hope investment in utility plant installed under the PREP Plan and associated revenue from the incremental PREP Rate recovery mechanism. The Commission should move cautiously in approving continuing unrestricted and growing Hope PREP investment and the resulting PREP Rate recovery until a general base rate case is filed in which the Commission can review all of Hope s cost of service elements. Without periodic base rate reviews, the Commission does not believe that it can determine that rates, including the PREP Rate, are just and reasonable and based primarily on costs. Hope fortunately clarified its position after the hearing about the timing of its next general base rate case filing. Although Hope witness Farmer testified at the hearing that Hope had no current plans to file a general base rate case (Tr. at 177), in its Initial Brief, Hope stated that it would file a general base rate case no later than June Hope Initial Brief at 1, 21. The Commission shares the concerns raised by Staff and CAD about the escalation and magnitude of the Hope PREP Plan and the cumulative rate impact of PREP, particularly in the absence of a full rate review. The Commission welcomes the Hope commitment to file a general rate case by June The Commission has no preconceived notion about the outcome of a base rate case. If Hope can demonstrate that its PREP and non-prep costs justify an additional Dollar amounts in the chart are in millions. Thus, $3 1,086,320 appears as $

13 rate increment over the PREP rates, then customers will pay nothing more than they are required to pay under just and reasonable cost-based rates. On the other hand, if total costs justify offsetting reductions to the cumulative PREP rate increases, then customers are entitled to rate relief. Chapter 24 as a whole, even considering the expedited rate increases required by PREP investment under SB390, still requires the Cornmission to set just and reasonable cost-based rates and continuing PREP investment and cost recovery is required only if the Commission determines that the resulting rates are just and reasonable and not contrary to the public interest. IV. HOPE PREP CAPITAL INVESTMENT PLAN This discussion will focus on the specific rate recovery issues raised by the parties regarding the cumulative level of the Hope PREP spend and PREP Rate recovery mechanism sought to be authorized effective on November 1, A. Bare Steel Main and Utility Service Line Replacement One stated goal of the Hope PREP is acceleration of the replacement of bare steel and coated pipes. Prior to the enactment of W.Va. Code k, Hope estimated that it would take 100 to 110 years to replace all of its Bare Steel Mains, Coated Mains and Steel Service Lines. Hope Gas, Inc., dba Dominion Hope, Case No G-390P, Hope Application at 6; MEB-D at 17. In Hope s first SB390 proceeding in 2016, Hope estimated that those pipelines could be replaced in half the time, Le., 50 years instead of 100 years, under the framework of accelerated investment and rate recovery established by SB390. a. at 21. It is important to remember, however, that nothing prevented Hope from replacing those lines under traditional ratemaking. If the expedited upgrading of any utility plant is necessary to provide safe and adequate utility service, the utility has a responsibility to do so even without an added incentive, such as the accelerated rate recovery mechanism authorized by SB390. In its SB390 proceedings to date, Hope has proposed to invest more than $212 million from 2016 to 2022 to replace mains, regulators, service lines and other related facilities. The proposed cumulative PREP Plan investment through 2022 would represent an increase of approximately 57 percent over the entire 2016 pre-prep utility plant balance. Commission Ex. 1. By any measure the Hope PREP plan as proposed would result in a significant increase in utility plant and associated rate base, and result in significant increases in rates. The Commission is required under SB30 to determine whether that level of investment is reasonable and whether the incremental PREP rate recovery surcharges are just and reasonable to the customers of Hope. Hope s witness Mr. Long testified that it has more than 1,600 miles of existing pipe to be replaced under the PREP Plan. Tr. at Hope plans to replace 2 1 miles of bare steel pipeline in 2018 and 23 miles in Tr. at 104. If Hope continues its 11

14 present pace of replacing 22 miles of pipe per year, it will replace its mains and bare steel pipe in approximately 72 years. According to Hope witness Long, a replacement cycle of years for bare steel pipe should be the goal. Hope Ex. NL-R at 2. It is not clear that Hope is concentrating its PREP investment in Bare Steel Mains and Services or whether its present PREP Plan and replacement cycle are reasonable. The Commission at this point has no detailed study of the condition of the Hope transmission and distribution pipeline system or the estimated remaining life of the various pipeline vintages in the Hope system eligible for rate recovery under the SB390 approach. The Commission has no factual basis on which to determine whether the replacement of 22 miles per year on average is reasonable or whether the condition of the system would warrant a longer replacement cycle or acceleration of the PREP pipeline replacement cycle to the years proposed by Mr. Long. Under the West Virginia-American Water Company (WVAWC) Distribution System Improvement Charge (DSIC) program, a detailed study was developed regarding the various vintages and type of pipe, estimated remaining lives, current replacement cycles (approximately 500 years) and a proposed replacement cycle ( years). West Virginia-American Water Co., Case No W-42T, August 9, 2010 Order at 1-7. Based on this detailed data, WVAWC was able to satisfy the Commission that the proposed replacement cycle and investment level for main and service replacement under the DSIC Program was reasonable for both the utility and its customers. The WVAWC DSIC Program was eventually authorized by the Commission in West Virginia-American Water Co., Case No W-DSIC, December 2,2016 Order. Staff witness degruyter testified that Hope s 2019 projected PREP spend included projects with a priority rating of less than 9.0 on Hope s Main Replacement Program (MRP). Mr. degruyter stated that 2019 projects with a priority rating of less than 9.0 and a cost of approximately $5.7 million should not be included in the 2019 PREP Rate recovery surcharge. Staff Ex. EFD-D at 4-5. Mr. degruyter indicated that, in his opinion, an MFtP score of below 9.0 indicated the pipeline was not in imminent danger of failure or a safety risk and, therefore, did not need to be replaced at this time. Tr. at Mr. degruyter also testified that eliminating $5.7 million from the proposed 2019 PREP would lower the rate impact. u. at 227. Hope witness Long testified that the Hope method of prioritizing projects in the PREP Plan was reasonable and argued that the Staff claim that Hope was over-investing in its PREP Plan was unfounded. Mr. Long claimed that limiting inclusion of PREP pipeline replacement projects to those with a MRP score of 9.0 or above was arbitrary. According to Mr. Long, the MRP is only one criterion relied on by Hope. Hope also considers proximity to higher risk pipelines, unanticipated breaks, system reliability and potential safety issues, along with MRP scores, in arriving at the final list of pipeline projects for which Hope will seek rate recovery in the SB390 filings. Hope Ex. NL-R at 7-9. In response to questions from the Commission, Mr. Long indicated that Hope is allocated a dollar amount each year for PREP Plan investment by its parent and Hope 12

15 identifies and prioritizes PREP Plan projects for that amount. Mr. Long emphasized that Hope does not blindly choose projects to meet a financial target, but attempts to schedule projects each year that will utilize the employees and contractors currently dedicated to the PREP Plan. Tr. at The Commission recognizes that Hope has an internal plan for PREP investment and the prioritization of eligible projects. It appears from Mr. Long s testimony that significant effort is involved in that process. One concern, however, is that Hope has not successfblly conveyed that process to the Commission or the parties to this case. Another problem with the SB390 process is that the Legislature has fixed a short review period for those filings. The allotted 150 days is not sufficient time to review hundreds of work order files and review the justification of proposed projects for the upcoming year based on what appears to be a complicated, somewhat subjective, and frequently changed prioritization policy. Although we are concerned by the basis for the MRP assessments, the Commission in this proceeding cannot eliminate $5.7 million of PREP investment based solely on the Staff testimony. Limiting the PREP main replacements to those with a MRP score of 9.0 was not sufficiently established by the evidence presented in this proceeding as a hard line test of reasonableness for PREP rate recovery. The Commission, however, places Hope on notice that its support and justification for the currently proposed PREP investment level of $3 1.2 million to $35.8 million per year for and beyond should be significantly improved. The Commission is reluctant to order Hope to perform a detailed study of its bare steel main and service line assets, but the Commission strongly recommends that Hope initiate some study using either in-house employees, if available, or contractors to develop a listing of the footage of pipe by vintage and material type of asset in those categories and the estimated remaining useful life. The study should address the total cost to replace those assets, including the annual cost at the pre- and post-prep replacement rates and a reasonable replacement cycle that considers the potential impact on rate payers. The Commission understands the potential benefits of enhanced and expanded gas service, but it must weigh those benefits against the costs that flow to the customers. The magnitude of the proposed Hope PREP spend has escalated to the point where the Commission must determine the reasonableness of the PREP Plan in order to balance the costs and benefits to the utilities, the customers and the State. Hope has committed to work with the Staff and other parties to this proceeding to arrive at reasonable customer protections and revenue limits generated through the incremental PREP Rate recovery mechanism. Hope Initial Brief at 1,21. We are encouraged by that, and the Commission strongly encourages Hope to follow through with that commitment and to expand the discussions about the bare steel pipe and service replacement cycle that could benefit both Hope and its customers. The Commission also recommends that the customer protection discussion be extended to include Bluefield 13

16 Gas who made a similar commitment in settlement of its recent SB390 filing and Mountaineer Gas whose current SB390 filing is before the Commission. A uniform methodology recommendation that could be applied in SB390 filings would be a laudable goal. B. Customer Service Piping Program Under Rule of the Commission Rules for the Government of Gas Utilities and Gas Pipeline Safety (Gas Rules), the utility customer is responsible for furnishing and installing the customer service piping from the property line to the place of consumption, subject to installation requirements and inspection by the utility. On February 4, 2016, in Hope s first SB390 proceeding, the Commission considered and approved a pilot program ending December 31, 2018, in which Hope replaced the customer service piping for existing gas sales service customers when necessary because of age or condition of the line, including when Hope discovers the poor condition during a General Construction Program project to replace distribution mains. Hope also installs customer service piping for new customers. Hope Ex. JCF-D at 7; Hope Ex. NL-D at 6. Hope included the CSPP capital investment in the accelerated cost recovery mechanism authorized by W.Va. Code $ k. In 2016, the Commission required Hope to provide notice of the pilot program in bills and advise customers that they no longer needed to consider purchasing a repair and replacement warranty for customer service piping after March 1, 2016, through December 31, The Commission also required Hope to recommend whether to continue the CSPP in the May 2018 PREP filing for calendar year The Commission waived Gas Rule a to the extent necessary to accommodate implementation of the pilot program. Hope Gas, Inc., dba Dominion Hope, Case No OO-G-39OP, February 4,2016 Order at 5-6. In this 390P filing, Hope asked to make the pilot program a permanent offering as part of the PREP Program. Hope projected that it would spend $3,792,976 in calendar year 2019 to replace and install customer service piping. Hope Application at 5, 7; Hope Ex. NL-D at 6, 15, Mr. Long testified that from a customer s perspective, replacement of one s customer service piping is not inexpensive, and is a process that most customers would prefer not to manage and cost they prefer to avoid. Hope Ex. NL-D at 22. During the hearing, Hope witness Farmer was asked about the necessity to assume the cost responsibility for customer service lines that by Commission rule had been the responsibility of each individual customer. Ms. Farmer responded that Hope proposed the CSPP because the utility had full operational responsibility for the customer service piping, Hope s replacement or installation of customer service piping facilitated efficient workflow for large projects, and the program provided a convenience to ratepayers, 14

17 particularly when a customer service line had to be replaced during cold weather. Tr. at Hope argued that CSPP was not an avenue for Hope to invest more capital to earn an accelerated return, but was a natural and efficient complement to the replacement of Bare Steel Mains, Coated Mains and Steel Service Lines. Hope Initial Brief at Hope argued that the CSPP should be part of the PREP Plan because the service mitigated the sudden adverse impact on customers who learned during PREP Plan projects that their customer service piping needed to be replaced. Hope Reply Brief at Hope asserted that halting the CSPP program would lead to customer confusion and frustration. Hope Ex. MEB-R at 7. During questioning at the hearing, Ms. Farmer testified that the cost of replacing customer service lines under the CSPP pilot program had historically been the responsibility of each individual customer, but that cost was now paid for and added to the rate base of Hope. Ms. Farmer testified that CSPP added approximately $3.8 million annually to PREP Plan investment and shifted that cost from a direct individual customer cost paid by the cost causer to a cost born by all rate payers in the incremental PREP Rate surcharge. Tr. at Hope witness Barnes testified that this cost shift from the individual customer to all customers under the CSPP pilot program was a form of socialized recovery of CSPP costs. Tr. at 146. CAD argued that Hope s customer service piping program was not contemplated in the SB390 language. CAD Initial Brief at 2-3. Staff pointed out that Hope was spending almost $4 million on customer service lines annually through the CSPP, when the Gas Rules required customers to install the line. Staff Initial Brief at 3. Staff accepted the continuation of CSPP, except for new installations. Staff recommended that new customers be responsible for the installation of their service lines subject to Hope s inspection and approval. Staff Reply Brief at 5. The Commission does not doubt that affected customers look favorably at the CSPP. The CSPP, however, results in a shift of the cost recovery for the customer service line from the individual customer historically responsible for the customer service line to all customers resulting in a rate increase for utility investments that are not contemplated by the Gas Rules. The Commission is not persuaded at this time that the Commission should continue the Hope CSPP program on a permanent basis. CSPP costs that have been incurred through December 3 1, , will continue to be accorded accelerated recovery through the SB390 rate increment until new rates are established at the conclusion of Hope s next base rate case. The Commission has eliminated $3.793 million from the proposed 2019 PREP investment level to reflect discontinuance of the CSPP for rate recovery effective December 3 1,

18 The Hope waiver of Gas Rule related to its CSPP will cease at the end of the pilot program. Beginning January 1, 2019, the provisions of Gas Rule will govern the installation, repair or replacement of customer service piping. Hope should provide notice to its customers in a monthly bill issued in November or December 2018 of the termination of the pilot program. If a warranty service is still available, the notice should advise that customers may wish to consider purchasing a warranty for repairs or replacements to the customer service piping that occur on or after January 1,2019. C. Farm Tap Upgrades Federal pipeline safety regulations effective March 24, 2017, establish safety requirements for any service line directly connected to a production, gathering or transmission line that is not operated as part of a distribution system. 49 C.F.R Hope has 4,565 farm tap customers subject to this regulation. Hope plans to spend $12 million during the next five years to comply with these requirements, projecting to spend $2.5 million annually for each of the first four years and $2 million for the fifth year. Hope Ex. NL-D at 14, 19; Hope Ex. KLS-D at 6; Hope Application Ex. B, Schedule 12. Mr. Smith testified that the regulation requires Hope to inspect and inventory all of its farm tap equipment and inspect each farm tap every three years thereafter. Hope also has to replace or install any equipment necessary to meet the safety requirements. Hope Ex. KLS-D at 4. Hope asserted that the majority of existing farm-taps would not meet the safety requirements and most farm tap customers were not aware of the new regulation. Hope estimated an average compliance cost of $2,629 per farm at 4-6; Tr. at Mr. Smith testified that Hope proposed to take care of the safety requirements without requiring farm tap customers to pay for the compliance equipment, which is the same approach the Commission approved last year for Mountaineer Gas Company. Hope Ex. KLS-R at 1-3, citing Mountaineer Gas Co., Case No G-390P. Mountaineer estimated an average cost of $1,000 per farm tap. Gas Rule 5.6 and Hope s Tariff Sheet 9 address the equipment required to connect a farm-tap customer, and Hope proposed revised language for Tariff Sheet 9 to reflect that Hope would pay certain costs to bring farm taps into compliance with the federal pipeline safety regulations. Hope Application Ex. A, Hope Ex. KLS-D at 3, 8. The costs to comply with new safety regulations for farm taps should not be socialized across Hope s entire customer base. Hope s approach is proposed as a convenience to its farm tap customers, but the provisions of 49 C.F.R do not require Hope to construct or replace equipment in the extensive manner that Hope has described. Furthermore, the regulation does not require Hope to take ownership of the farm tap equipment and service lines. 16

19 The Cornmission is concerned about the size of the cumulative SB390 investment by Hope to date and forecasted through 2022 and the significant corresponding cumulative PREP rate that Hope customers must pay if the PREP Plan is carried out as proposed. The Cornmission does not believe that it is reasonable in the face of the large investment and associated rate impacts proposed by the Hope PREP Plan to add the significant cost of replacing customer service lines and farm tap equipment. The current Gas Rules require the costs of replacement of customer service lines and farm tap equipment to be paid by each individual customer directly benefiting from that investment. The Commission will not approve the significantly higher amount that Hope proposed to invest in farms taps or the proposed changes to Tariff Sheet No. 9. Hope farm tap customers will continue to pay the costs of the equipment that is necessary for them to receive natural gas service, as our Gas Rules require. In the interest of safety and compliance with 49 C.F.R , we note that farm taps that are part of the utility service line and subject to the cost responsibility of the utility should be replaced or upgraded as part of Hope s on-going responsibility to maintain adequate and safe service. In addition, if Hope determines that a tariff provision that authorizes it, as an option elected by the customer, to bring customer equipment into compliance and bill the customer as a Contribution in Aid of Construction is prudent in the interest of safety considerations, Hope should prepare and file such tariff provision for Commission consideration. V. CALCULATION OF PREP RATE INCREMENT A. Base Rate Depreciation Offset for Calculating PREP Rate Base Investment in utility plant additions eligible for recovery under SB390 is recorded primarily in FERC account numbers 376 (mains), 378 (measuring and regulating equipment) and 380 (services). These accounts contain investment eligible for rate recovery through the PREP Rate surcharge and non-prep investment that is recovered through base rates. In the Hope 2017 SR390 filing, the Commission rejected both the Staff and Hope calculations of a base rate depreciation offset that should be applied to the PREP rate base determination. Hope Gas, Inc., dba Dominion Energy W. Va., Case No P (2017 Hope Case), October 27, 2017 Order (2017 Hope Order) at 8-13; Hope Ex. JCF-R at 2. The 2017 Hope Order determined the Bluefield Method should be used to calculate the base rate depreciation expense offset, if any, that should be considered in arriving at the PREP rate base. Rased on the record in the 2017 Hope Case, the non-prep investment in the PREP-eligible accounts exceeded the amount of base rate depreciation in these accounts. The Commission, therefore, did not require Hope to reduce the PREP rate base for a base rate depreciation expense offset. 17

20 Staff raised an issue about whether non-prep investment should be adjusted for revenue producing additions to the PREP-eligible accounts. The Commission did not make an adjustment to the base rate depreciation expense offset in the 2017 Hope Case because the record in that case did not contain the level of revenue producing additions in the PREP-eligible accounts. The Commission determined, however, that it may be appropriate to consider some form of adjustment to PREP rate base in future years to account for new customer revenue that is generated by investments in PREP-eligible accounts and required Hope to provide that information in its 2018 SB390 filing Hope Order at Hope argued that, under the Bluefield Method, the amount of base rate depreciation expense embedded in Hope s PREP plant accounts is $2.169 million, an amount less than the Hope investment in non-prep investment in PREP-eligible accounts. Therefore, Hope asserted that no base rate depreciation expense offset is required for 2017, 2018 or 2019 under the Bluefield Method. Hope asked the Commission to reject the Staff attempt in this case to modify the Bluefield Method. Hope Ex. JCF-R at 2; Hope Initial Brief at 6-9. Staff witness Mills testified that the Commission should reduce Hope s PREP rate base by approximately $2.5 million to reflect a base rate depreciation offset once revenue producing additions embedded in the PREP-eligible accounts is considered. Mr. Mills used the information from the corrected Figure 2 shown on page six of Hope witness Freeland s direct testimony to determine the level of non-revenue producing investment for in the non-prep investment category. According to Mr. Mills, the annual base rate depreciation of $2.169 million in the PREP-eligible accounts exceeds the non-prep, non-revenue producing additions for the PREP-eligible accounts in 2017, 2018 and Mr. Mills argued that, after first applying the annual base rate depreciation to the total non-prep, non-revenue producing investment levels for 2017, 2018, and 2019, approximately $2.5 million of the base rate depreciation remains available to offset eligible PREP investment for those three years in determining the PREP rate base using the Bluefield Method. Staff Ex. NRM-D at 9-11; NRM Schedules 2 2 True-up, 11 and 10 True-up. Staff also argued that its position was based on the Commission ruling in Hope s 2017 PREP case. Allowing Hope to retain the revenues from the PREP projects that generate revenue and the base rate depreciation expense generated by non-prep, non-revenue producing projects results in an inflated PREP rate until the next base rate case. Staff Reply Brief at 4. Hope witness Farmer argued that if a depreciation offset is necessary in the future it could violate IRS Normalization Rules unless it is made as an adjustment to qualifying PREP investment. Hope Ex. JCF-R at

21 We do not agree that applying an offset for book depreciation built into base rates for the PREP-eligible accounts to determine the PREP rate base violates IRS Normalization Rules. Ms. Farmer seems to confuse the issues regarding the book depreciation offset and the accumulated deferred income taxes (ADITS) offset addressed by Hope witness Gabbert. The rate base offset related to book depreciation expense, however, as applied in determining rate base in the rate setting process of this SB390 proceeding is not subject to IRS Normalization Rules. The Commission discussed in both the Bluefield Order7 and the 2017 Hope Order that the Commission has determined that a base rate depreciation offset is permitted by SB390. We will not repeat that discussion here. Hope argued that no modification to the Bluefield Method for the impact of revenue producing additions should be permitted. Hope fails to mention that in the 2017 Hope Order, the Commission stated that it would consider further whether revenue producing additions in the PREP-eligible accounts should be addressed in determining a base rate depreciation offset in this case and if so, how. The Commission instructed Hope to provide a breakdown of its annual investment in the PREP-eligible accounts between PREP and non-prep investment in this case. The breakdown was to provide a further designation of the value of revenue producing investment included in the non-prep category and estimates of the revenue and operating income generated each year Hope Order at Based on the record in this case the Commission determines that the base rate depreciation offset to PREP investment should be adjusted for revenue producing additions. No base rate depreciation amount should be allocated to revenue producing additions included in the non-prep investment in accounts 376, 378 and 380 when calculating the PREP rate base. The revenue generated from investment in revenue producing additions will offset the cost of that investment, including depreciation expense related to that investment. The costs associated with revenue producing investment in PREP-eligible accounts should be properly matched for rate recovery in the context of a full base rate case proceeding. The Commission agrees with Staff that if the Bluefield Method does not properly adjust for revenue producing additions, Hope will recover the costs of the investment in those revenue producing additions first in either new customer revenue or depreciation expense and secondly through the PREP surcharge. This is not a modification in the Bluefield Method. Instead, it is the calculation that would have been made in the 2017 Hope Case if the record reflected the revenue producing, non-prep investment in accounts 376, 378, and 380. Hope was on notice of our intent by our discussion of the depreciation offset and the distinction 7 Bluefield Gas Co., Case No G-390-P, Order dated September 29,

22 between revenue producing and non-revenue producing investment in the Hope Order.8 The Commission will adopt the Staff approach to determining the appropriate base rate depreciation offset to be used in calculating the PREP rate base in this proceeding as shown at Staff Ex. NRM-D at ; NRM Schedule 11 and NRM Schedule True-Up. B. Base Rate Deferred Income Tax Expense for Calculating PREP Rate Base In the Hope SB390 case, Staff recommended that the Commission include a base rate deferred income tax expense (DITE) offset in arriving at the projected PREP rate base. The parties settled that proceeding and did not include an offset for ADITS in the stipulation. In the 2017 Hope Case, neither Staff nor Hope proposed a DITE offset, and Hope did not include a DITE offset in this case. Staff recommended that the Commission reduce the 2019 projected PREP rate base by $1,083,552. Mr. Mills explained that DITE from the last base rate case represented the amount of DITE being recovered annually in customer base rates authorized in the 2008 Rate Case. Mr. Mills asserted that because current base rates include a DITE component related to the PREP-eligible accounts, the calculation of the PREP rate base should include a DITE offset that reflects the DITE impact on 2019 PREP rate base. Staff Ex. NRM-D at 11-14; NRM Schedules 11, 11 a. Hope opposed any reduction to 2019 projected PREP rate base for the base rate DITE offset associated with the PREP-eligible accounts as determined from information filed in the 2008 Rate Case. Hope witness Gabbert argued that a base rate DITE reduction to projected 2019 PREP rate base violated IRS Normalization Rules. Mr. Gabbert testified that if Hope violates the Normalization Rules, Hope could be limited to the straight-line method of tax depreciation for all of its West Virginia jurisdictional assets in lieu of claiming accelerated tax depreciation. If this were to occur, Hope argued that it would result in a much higher rate base and rates in future rate filings. Hope asserted that if the Commission imposes a base rate DITE offset in calculating PREP rate base, Hope would be required to seek a Private Letter Ruling from the IRS. Hope Ex. JG-R at 1-11 ; Hope Initial Brief at 4-5; Hope Reply Brief at * The Commission is concerned, however, by Staff's contention that this method could allow the Company to pick and choose between revenue producing investment and non-revenue producing investment and exclude the revenue producing investments from the PREP and non-prep spend in the PREP accounts. As a result, the Commission will require the Company to identify each revenue producing investment project included in the PREP accounts for each year in its next filing and also indicate whether the revenue producing investment is a PREP investment or non-prep investment in the PREP accounts Hope Order at

23 Mr. Gabbert stated that the Normalization Rules limit the reduction in rate base (in this instance the PREP rate base) by a quantity of accumulated DITE that is not representative of the actual level of economic benefit the utility enjoys as a result of the availability of accelerated depreciation. Mr. Gabbert claimed mixing and matching a base rate DITE offset based on the tadbook depreciation differences for the vintage of property present in the 2008 Rate Case against the cumulative PREP investment that began in does not reflect the true tax economics of the PREP investment. Mr. Gabbert asserted such mixing and matching of various vintages of ADITS violates what is generally referred to as the Consistency Rule addressed in two Private Letter Rulings related to actions by the California Public Utilities Commission, and, therefore, violate IRS Normalization Rules. Mr. Gabbert testified that under IRS Normalization Rules the deferred tax balance by which rate base can be reduced is limited to the deferred tax that was reflected in tax expense for the same period - that is, the utility cannot reduce rate base by deferred tax that will not become available to the utility until sometime after the measurement date of that rate base. Hope Ex. JG-R at Hope argued that no base rate DITE offset should be used in calculating the PREP rate base, but Hope witness Gabbert testified that if the Commission chooses to do so, the Staff recommendation should not be used. a. at Hope also asserted that Staff erred by using a 38-year weighted average book life in NRM Exhibit 1 la for utility plant that has a 20-year recovery period for tax purposes under the Modified Accelerated Cost Recovery System (MACRS). Hope claimed that a portion of the plant would have been fully depreciated for taxes at March 31, Hope Initial Brief at 5-6; Hope Reply Brief at 17. Using tax depreciation information for December 3 1, 2007, and December 3 1, 2008, Mr. Gabbert updated the Staff calculation of DITE presently being recorded on those vintages of property to be $409,543. Utilizing Mr. Gabbert s updated DITE numbers would result in increasing the Staff-recommended PREP costs by $28,393, and the income tax impact is $5,9 15. Hope Ex. JG-R at 11-13; JG-R Exs. A & B. The Commission indicated in Mountaineer Gas Company s first SB390 proceeding that the inclusion of a base rate DITE offset to calculate PREP rate base could be reviewed in future SB390 filings. Staff argued that the pending Hope proceeding is the Commission s first opportunity to review the base rate DITE offset issue. Staff Reply Brief at 2-3, citing Mountaineer Gas Co., Case No G-390P, December 23,20 15 Order at 6. Staff argued that reducing projected 2019 PREP investment by a base rate DITE offset does not violate Normalization Rules because accelerated tax depreciation for Private Letter Rulings and

24 PREP investment was not being flowed through to ratepayers. Staff Reply Brief at 2-3, citing Hope Schedule 4 and NRM Schedule 4. W.Va. Code $24-2-lk(f)( 1) provides that Hope may only earn a return on the increase to incremental rate base attributable to PREP investment. Deferred tax built into current base rates should be used to reduce the amount of projected PREP investment to ensure Hope earns a return only on the incremental increase to rate base. Staff used the deferred tax amount that is embedded in current base rates for the offset and asserted that reducing projected PREP investment by base rate DITE would result in a lower PREP Rate increment that ratepayers must pay. - Id. The Commission is not persuaded by the Hope argument that an IRS Normalization Violation occurs if a base rate DITE offset is used in the calculation of PREP rate base. This argument focuses on the tax return and financial statement impacts related to the base rate DITE calculated from applicable utility plant accounts at the time of the 2008 Rate Case. The Commission, unfortunately, has no basis to challenge those numbers based on the record in this case and would note only that the utility plant retirements and turn-around that occurs after the tax life extinguishes at the end of the tax life are normal adjustments that are updated in the context of a general base rate case. There is one factor, however, that Hope fails to address. In the 2008 Rate Case approximately $1.OS3 million of DITE was included in the cost of service developed in that case related to the PREP-eligible accounts. Hope has not filed another base rate case since the 2008 Rate Case. Hope s customers, therefore, have continued to pay that $1.083 million annually through rates to Hope until the present. Because Hope has indicated that it is likely they will not file a rate case before 2020, the customers will continue to pay $1.083 million in rates for DITE related to PREP-eligible accounts in SB390 instructs the Commission to provide expedited rate recovery for PREP-eligible investments in the same manner the Commission would determine the rate base and return, and associated depreciation expense, property tax expense and income tax expenses, net of new customer revenue in a base rate case filed pursuant to W.Va. Code a. The term rate base has a clear meaning in utility accounting and ratemaking determinations, and it includes Accumulated Deferred Income Taxes. It is normal in a base rate case filing to offset utility plant balances by ADITS in arriving at rate base, including all changes in the ADIT balance that has occurred since the last rate filing. The Cornmission is not convinced by Hope arguments that inclusion of a base rate DITE offset as proposed by Staff is an IRS Normalization Violation. Neither has the Cornmission been convinced that the level of that base rate DITE offset should be adjusted to reflect what Hope claimed are the normal changes that have occurred in the DITE expense as it related to 2007 and 2008 PREP-eligible accounts. While those changes may very well have occurred, they have not been addressed in the context of a general base rate case filing. 22