National Grid. Niagara Mohawk Power Corporation INVESTIGATION AS TO THE PROPRIETY OF PROPOSED ELECTRIC TARIFF CHANGES. Testimony and Exhibits of:

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1 National Grid Niagara Mohawk Power Corporation INVESTIGATION AS TO THE PROPRIETY OF PROPOSED ELECTRIC TARIFF CHANGES Testimony and Exhibits of: Revenue Requirements Panel Exhibits (RRP-), (RRP-), (RRP-) and (RRP-) Book January, 00 Submitted to: New York Public Service Commission Docket No. 0-E- Submitted by:

2 Testimony of Revenue Requirements Panel

3 Before the Public Service Commission NIAGARA MOHAWK POWER CORPORATION d/b/a NATIONAL GRID Direct Testimony of The Revenue Requirements Panel Dated: January, 00

4 Testimony of the Revenue Requirements Panel Q. Please introduce the members of the Revenue Requirements Panel. A. The Panel consists of Howard Gorman, James M. Molloy and Peter T. Zschokke. Q. Mr. Gorman, by whom are you employed and in what capacity? A. I am employed by Black & Veatch Corporation as a Principal Consultant in the Rate & Regulatory Advisory Group of its Enterprise Management Solutions ( EMS ) Division. 0 Q. Mr. Gorman, please summarize your educational background and professional experience. A. My educational background and professional experience are outlined in my curriculum vitae provided as Exhibit (RRP-). Q. Have you previously testified before this commission? A. Yes, a brief description of my testimony experience is included as Exhibit (RRP-). 0 Q. Mr. Molloy, by whom are you employed and in what capacity? A. I am the Director of Regulatory Accounting for National Grid USA Service Company Inc. ( National Grid Service Company ). Page of 0

5 Q. Please briefly describe your educational background. A. In, I graduated from Catholic University with a Bachelor of Arts degree in Accounting. In, I receive a Masters in Business Administration with a concentration in Finance from the William E. Simon Graduate School of Business Administration at the University of Rochester. 0 0 Q. What is your professional background? A. In I was hired by the New England Power Service Company as an Assistant Rate Analyst. In I was promoted to the position of Rate Analyst. In I was promoted to Senior Rate Analyst. In those positions, I was responsible for rate design analysis for various New England Electric System ( NEES ) companies. Specifically, I conducted allocated distribution cost of service studies and supported others in the development of cost allocation and rate design studies. In addition, I performed rate and cost allocation analytical work in the unbundling of rates for the NEES retail companies in preparation for industry restructuring. Further, I developed and implemented the rate plan for the merger of Narragansett Electric, Blackstone Electric and Newport Electric. In 00 I was promoted to Principal Regulatory Analyst. In this position, I was responsible for the development and implementation of the Niagara Page of 0

6 Mohawk Power Corporation d/b/a National Grid ( Niagara Mohawk or the Company ) and National Grid plc ( National Grid ) merger rate plan. In 00 I was promoted to Manager of New York accounting. In this position, I was responsible for the books and records of Niagara Mohawk as well as the regulatory filings associated with the acquisition of KeySpan Corporation. In 00 I was promoted to Director of Regulatory Compliance. 0 Q. Mr. Molloy, have you previously testified before a regulatory commission? A. Yes. I have testified numerous times before the New York State Public Service Commission ( Commission ), the Massachusetts Department of Public Utilities and the Rhode Island Public Utilities Commission. Q. Mr. Zschokke, by whom are you employed and in what capacity? A. I am employed by the National Grid Service Company in Waltham, Massachusetts as a Director of Special Projects in the Regulatory Affairs Department. 0 Q. Please briefly describe your educational background. Page of 0

7 A. I received a Bachelors of Arts Degree in Economics from Boston University in. I received a Masters of Arts degree in Economics from Boston University in. 0 0 Q. What is your professional background? A. Since I have served as an expert witness on various rate and regulatory matters. From April through March I performed rate analyses for Central Vermont Public Service and Boston Edison Company. From April onwards I conducted regulatory analysis, supported testimony and testified in numerous regulatory proceedings for National Grid predecessor companies in New England. I have testified regarding rate designs, allocated cost of service, interruptible credits, real time pricing rates, reconciling cost trackers and related subjects in front of the regulatory commissions in New Hampshire, Rhode Island and Massachusetts. In addition, from to 000 I lead the function that resolved large customer and municipality issues and conducted the energy efficiency programs in Rhode Island. Lastly, from August 00 to July 00, I was on assignment to National Grid s Group Strategy Department in the United Kingdom. Since my return in July 00 I have been assisting the Electric Distribution Operations and Transmission groups Page of 0

8 with the filings regarding the Company s Asset Condition Report and Capital Investment Plan along with other activities in regulation. 0 Q. What is the purpose of the Panel s testimony? A. First, the Panel supports the Company s request to increase its Delivery Revenue and presents Niagara Mohawk s historical and forecast data for various periods in a manner consistent with the Commission s regulations and policies. Second, the Panel s testimony supports the Company s forecast of the Operation and Maintenance ( O&M ) Expenses and amortizations of regulatory assets used to compute the revenue requirement for electric rates in the three proposed Rate Years, which are the twelve months ending December, 0, 0 and 0, respectively. Third, the testimony supports the continued use of trackers for regulatory assets that the Commission has previously approved and new cost trackers. 0 Q. Does the Panel sponsor any exhibits? A. Yes. The Panel sponsors the following Exhibits, which were prepared under our supervision and direction and which, in all cases, refer to Niagara Mohawk: Page of 0

9 Exhibit (RRP-) Exhibit (RRP-) Exhibit (RRP-) Exhibit (RRP-) Exhibit (RRP-) Exhibit (RRP-) Exhibit (RRP-) Exhibit (RRP-) Exhibit (RRP-) Statement of Electric Operating Income, by Component, for the Year Ended September 0, 00 and Rate Years Ending December, 0, December, 0 and December, 0; Operating and Maintenance Expenses by Expense Type for the Year Ended September 0, 00 and Rate Years Ending December, 0, December, 0 and December, 0; Electric Depreciation Expense for the Year Ended September 0, 00 and Rate Years Ending December, 0, December, 0 and December, 0; Taxes Other than Income Taxes for the Year Ended September 0, 00 and Rate Years Ending December, 0, December, 0 and December, 0; Federal and State Income Taxes for the Year Ended September 0, 00 and Rate Years Ending December, 0, December, 0 and December, 0; Electric Rate Base for the Year Ended September 0, 00 and Rate Years Ending December, 0, December, 0 and December, 0; Table of Inflation Factors; Deferral Account Exhibit; Various Historic Financial Exhibits for the Calendar Years 00 Through 00; Exhibit (RRP-0) Workpaper Data Supporting Certain Exhibits; and Exhibit (RRP-) Resume of Howard Gorman Page of 0

10 Q. Please describe the historical test year in this proceeding. A. The historical test year in this proceeding is the twelve months ended September 0, 00 ( Historical Test Year or Test Year ). The Historical Test Year data consists of the costs recorded on the books of Niagara Mohawk. These include: () costs from within the Company, () costs charged to Niagara Mohawk from National Grid Service Company () costs charged to Niagara Mohawk from the KeySpan Service Companies, and () costs charged to Niagara Mohawk from other affiliated companies. 0 0 Q. What Historical Test Year and Rate Year information is the Company presenting? A. The Company is presenting operating results for the Historical Test Year and forecast data for the Rate Years ending December, 0 ( Rate Year or Rate Year ), December, 0 ( Rate Year ) and December, 0 ( Rate Year ) (collectively, the three years are referred to as Rate Years ). The Panel also refers to the Rate Years as the Rate Plan Period or Rate Plan. The forecast data provides the basis for computing the revenue increases requested in this proceeding. The information presented in this filing is consistent with that required under Page of 0

11 the Commission s Statement of Policy On Test Periods In Major Rate Proceedings. 0 0 Q. What increase in base rate electric revenues is required in Rate Year to achieve an. percent rate of return on equity, as recommended by Company Witness Dr. Roger Morin, applied to the Company s actual capital structure? A. The Company requires increased base rate electric transmission and distribution delivery revenues of $ million. However, the Company proposes to offset this increase by reshaping recovery of certain stranded costs that would otherwise be recovered in Rate Year to achieve a zero net increase in base electric revenues as shown in the table below. Revenue Requirement Change Due to CTC Increase/ Deficiency Amortization Change (Decrease) T&D $ M - $ M CTC $ M ($ M) ($ M) Total $ M ($ M) - Q. Please generally describe the Company s proposal to increase electric transmission and distribution base delivery revenues. A. As explained by Company Witness Thomas B. King, as an alternative to a traditional one-year rate case, Niagara Mohawk is proposing a three-year Page of 0

12 0 Rate Plan. The Rate Plan is designed to continue rate stability for Niagara Mohawk electric customers and to update base transmission and distribution delivery rates to reflect the Company s cost of providing service. The Company s proposal is designed to produce, in the aggregate, no net increase in electric delivery rates over the course of the Rate Plan Period. The Company s proposal achieves this result by reshaping the current amortization schedule of certain fixed stranded costs. Pursuant to the Merger Rate Plan approved by the Commission in Case 0-M-00, the Company is authorized to recover certain deferred Fixed Competitive Transition Charges ( CTC ) associated with the divestiture of generation (referred to as stranded or fixed costs). As explained later in our testimony, the balance of these stranded costs is approximately $ million. But for this filing, Niagara Mohawk would recover these stranded costs by December, 0. In consideration of current economic conditions, Niagara Mohawk proposes to extend the amortization of these deferred costs to achieve no net increase in base rate electric transmission and distribution delivery revenues. At the expiration of the Rate Plan Period, approximately $ million of stranded costs will remain. The Company s proposal for addressing this balance is discussed Case No. 0-M-00, Niagara Mohawk Power Corporation Opinion and Order Authorizing Merger and Adopting Rate Plan, Opinion No. 0- (Issued and Effective December, 00) ( Merger Joint Proposal or Merger Rate Plan ). Merger Rate Plan at Section... Page of 0 0

13 0 later in our testimony. The Company submits this proposal conditioned upon the understanding that it will not be precluded from submitting a proposal in a separate proceeding to unbundle transmission and distribution delivery rates during the Rate Plan Period, and that any such unbundling proposal will not terminate this Rate Plan, nor will it affect the stay-out premium associated with the rate of return on equity. Otherwise, if the Company files to reset base rates prior to the expiration of the approved Rate Plan Period in this proceeding, the Company would refund to customers any approved stay-out premium. The Company would also retain the right to propose revenue-neutral adjustments to its base electric delivery rates during the Rate Plan. 0 Should the Commission approve a reduced revenue requirement for the Rate Plan Period, the Company proposes to carry forward for recovery during the Rate Years an offsetting balance of stranded costs remaining at the expiration of Rate Year. In such event, if the reduction exceeds the remaining stranded costs, the Company would propose to fully amortize those costs during the Rate Plan Period and proportionately reduce base rates in the Rate Years. Should the Commission approve a one year rate plan in this proceeding, the Company would still be willing to reshape the stranded costs to the extent necessary to mitigate delivery rate increases. Page 0 of 0

14 To accommodate the reshaping of stranded costs beyond December, 0, under either the Company s proposed three year rate plan or a one year alternative plan, the Company requests that the Commission waive the Merger Rate Plan requirement that the stranded costs be recovered by December, 0 and permit the Company to continue to defer such costs until such time as they are fully recovered. 0 0 Q. Pursuant to the Commission Order in Case 0-M-0, does the Historical Test Year reflect savings from austerity measures? A. Yes. In September 00 Niagara Mohawk reviewed its budgets and spending and implemented a number of austerity measures that could be undertaken in the short term. Specifically, salaries for top executives were frozen and the overall increase in the management payroll budget was limited to. percent with salary increases generally limited to promotions or employees whose existing pay levels were below market. This austerity measure is estimated to have reduced Niagara Mohawk s costs for Fiscal Year 00 by approximately $ million. The Company also deferred certain capital projects that did not compromise safety or reliability. This austerity measure is estimated to have reduced capital expenditures for Fiscal Year 00 by approximately $ million. As a Merger Rate Plan at Sections... and... Page of 0

15 0 0 result of this reduction, operation and maintenance expense associated with capital investments was reduced by approximately $ million. The Company further chose to defer certain electric line repair work categorized as priority level maintenance work in the short term. This is estimated to have reduced Niagara Mohawk s costs for Fiscal Year 00 by approximately $. million. In total these measures are estimated to have reduced Niagara Mohawk s revenue requirement by approximately $. million. These are savings that are embedded in the Historical Test Year. In addition to the austerity measures already implemented, the Company proposes an additional austerity measure in this rate proceeding. As discussed in Mr. King s and Mr. Zschokke s stand alone testimony, the Company is not proposing to recover the costs associated with implementing new initiatives associated with the Management Audit recommendations for the duration of the proposed Rate Plan Period. The Company has also (i) reduced its research and development budget to minimize discretionary spending, (ii) reduced operation and maintenance expense by eliminating accrued vacation from its forecast of labor expense and (iii) reduced its proposed level of transmission and distribution capital investment and associated operating expenses from its January 00 Capital Investment Plan budget and from the level that was discussed with the Department of Public Service Staff in December. The Company is Page of 0

16 further proposing to reshape the amortization of stranded costs over four years as opposed to recovering these costs from customers in one year to mitigate the impact of the proposed increase in base rate electric transmission and distribution delivery rates. 0 0 Operating Income By Component for the Historical Test Year and Rate Years Q. Please describe Exhibit (RRP -). A. Exhibit (RRP-) consists of a Summary sheet showing the calculation of the Company s electric operating income for the Historical Test Year and for the Rate Years at present rates. This Exhibit presents the computation of the base electric revenue in this proceeding, comprising: Revenues and Gross Margin for the Rate Years at present rates supported by Exhibit (RDCM-). Operation and Maintenance Expenses supported by Exhibit (RRP-). Amortization of Regulatory Deferrals supported by Exhibit (RRP-). Depreciation, Amortization & Loss on Disposition supported by Exhibit (RRP-). Taxes Other Than Income Taxes supported by Exhibit (RRP-). Page of 0

17 Total Income Taxes supported by Exhibit (RRP-). Rate Base supported by Exhibit (RRP-). 0 Based on the operating income calculated for the Rate Year, we determined the amount of base electric revenue increase, including federal income taxes, required to earn an. percent rate of return on equity for the Company s electric operations based on its actual capital structure which includes 0% common equity. In the absence of the rate relief proposed in this proceeding, the Company projects that it would earn a rate of return of. percent in Rate Year, which equates to an ROE of - 0. percent. 0 Q. What is the basis for the Rate Year allocations between expense and capital, and between electric operations and other operations? A. Except as otherwise indicated, Rate Year costs are allocated according to the Historical Test Year allocation for each Expense Type. Certain Expense Types include allocations to expense, construction and other charge categories. The general expense allocations of percent to electric operations and percent to gas operations used in the Historical Test Year were established in the Merger Rate Plan. Page of 0

18 0 Operation and Maintenance Expenses Q. Please explain the methodology for developing the Rate Year forecasts of O&M Expenses. A. In general, the Company used O&M Expense in the Historical Test Year and made normalizing adjustments to reflect operating conditions expected in Rate Year. The inflation factors set forth in Exhibit (RRP-) were applied to the majority of Expense Types. Certain Rate Year Expenses were developed using a more comprehensive methodology than simply adjusting for inflation. For example, Labor Expense was developed by annualizing the monthly and weekly employees on payroll as of September 0, 00 and applying contractual and other wage increases to forecast the Rate Years. 0 Q. What assumptions did you make regarding non-labor inflation? A. Except where specifically identified, the Company applied the non-labor inflation factor of. percent to all non-labor expense items in the Historical Test Year to forecast Rate Year for the period September 0, 00 to December, 0. The Company applied the non-labor inflation factor of. percent to forecast Rate Year and. percent to forecast Rate Year. These factors represent the forecast change in the Page of 0

19 Gross Domestic Product ( GDP ) price deflator index, as provided in Exhibit (RRP-). Q. Please explain Exhibit (RRP-). A. As described above, Exhibit (RRP-) includes Schedules and a Summary. It shows total Departmental Electric O&M Expense for the Historical Test Year of $. million and a forecast for Rate Year of $,. million. It also shows forecasts of total Departmental Electric O&M Expense for Rate Years and of $,. million. 0 0 Each Schedule pertains to an Expense Type and contains a minimum of sheets of detail. Sheet of each Schedule consists of three sections that show for each expense type: (i) the Historical Test Year actual electric and gas expense per books by Provider Company; (ii) the adjustments to normalize the Historical Test Year electric and gas expense by Provider Company; and (iii) the adjusted Historical Test Year electric and gas expense by Provider Company. A Provider Company (also referred to as an Originating Company) is any company that charged Niagara Mohawk for services. Sheet of each Schedule also consists of three sections that show for each expense type: (i) the adjusted Historical Test Year information from Sheet ; (ii) the adjustments made to the electric and gas Page of 0

20 expenses in the Historical Test Year to reflect conditions in the Rate Year (e.g. inflation) by Provider Company; and (iii) the adjusted Rate Year electric and gas expenses by Provider Company. Sheet consists of the adjusted Rate Year information from Sheet ; the adjustments made to the electric and gas expenses in the Rate Year to reflect conditions in Rate Years and (e.g. inflation) by Provider Company; and the adjusted Rate Years and electric and gas expenses by Provider Company. Sheet consists of an explanation of the adjustments presented on Sheets, and Sheet. Certain Schedules contain additional information as needed. 0 0 Q. Please explain the derivation of the Provider Company O&M Expense on Sheets, and of each Schedule of Exhibit (RRP-). A. As explained by Company Witness Andrew Sloey, National Grid plc holds multiple companies that provide various services directly and indirectly to Niagara Mohawk and its affiliates. The charges associated with those services are either directly charged to individual affiliate companies, or aggregated into bill pools and allocated among the companies that receive the services. For example, when the National Grid Service Company performs a service for the benefit of a single company, that company is directly charged for that service. Sheets and detail charges to Niagara Mohawk from the Provider Companies, including the Page of 0

21 National Grid Service Company, and from all other affiliated companies providing the Company with services. Charges originating within Niagara Mohawk, for services performed by Niagara Mohawk for affiliates, are charged directly to the affiliate. 0 Q. Please explain the expense specific Schedules in Exhibit (RRP-). A. Schedule Consultants This Schedule consists of sheets and shows the costs associated with external Consultants performing services for the Company. Sheet details several onetime adjustments to normalize the Historical Test Year and an adjustment to increase the remaining Historical Test Year costs by inflation. 0 Schedule Contractors This Schedule consists of sheets and shows the costs associated with external Contractors performing services for the Company. Sheet details several onetime adjustments to normalize the Historical Test Year including an adjustment to transfer $. million of deferred storm costs from Schedule (Other) to this Schedule to more accurately reflect the costs in the appropriate expense type. The Company also made an Page of 0

22 adjustment to increase the remaining Historical Test Year costs by inflation. Schedule Donations This Schedule consists of sheets and shows the costs of Donations by the Company. The Company is not seeking recovery of these costs. Therefore, Sheet shows the removal of these costs from the Historical Test Year. 0 Schedule Employee Expenses This Schedule consists of sheets and shows the costs of Employee Expenses. Sheet details several onetime adjustments to normalize the Historical Test Year and an adjustment to increase the remaining Historical Test Year costs by inflation. 0 Schedule Computer Hardware This Schedule consists of sheets and shows the costs of Computer Hardware used by the Company. Sheet details several onetime adjustments to normalize the Historical Test Year and an adjustment to increase the remaining Historical Test Year costs by inflation. Page of 0 0

23 Schedule Computer Software This Schedule consists of sheets and shows the costs of Computer Software used by the Company. Sheet details several onetime adjustments to normalize the Historical Test Year and an adjustment to increase the remaining Historical Test Year costs by inflation. 0 Schedule Other This Schedule consists of sheets and shows costs incurred by the Company for electric utility purposes that are not otherwise identified in specific Expense Types. Sheet details several onetime adjustments, for example Management Audit, Smart Grid, Solar, Enterprise Resource Planning Project and Entertainment Expense, to normalize the Historical Test Year for costs that are not recurring in the Rate Years. The Company made an adjustment to increase the remaining Historical Test Year costs by inflation. 0 Schedule - Rents This Schedule consists of sheets and shows the Rent Expense incurred by the Company. The Schedule consists of a Summary Sheet by FERC account, a Summary Sheet by sub-function, including Facilities, Information Technology, Transmission and Other, and detailed sheets for Page 0 of 0

24 0 0 each sub-function. Sheets through detail Facilities lease expense by leased property, segregated by directly owned facilities and allocated facilities. The Rate Year amounts are based on the expected lease payments for the Niagara Mohawk lease obligations and Niagara Mohawk s allocated share of existing Service Company lease obligations plus Reservoir Woods capital costs. Reservoir Woods capital costs include depreciation of leasehold improvements plus a return on the average net leasehold improvements at National Grid s Waltham, Massachusetts facility. Sheets 0 and detail Information Technology leased from National Grid Service Company, segregated by projects placed into service prior to or during the Historical Test Year, and by projects to be placed into service subsequent to the Historical Test Year. The Rate Year amounts are based on the scheduled amortization of existing projects and the forecasted amortization and return on new projects. The return on the new projects is based on the projected long term debt rate at the National Grid Service Company. This return is applied to the unamortized asset balance less accumulated deferred taxes for the new projects. Sheets and detail Transmission related lease costs, consisting mainly of right of way rent payments. The Rate Year amounts are based on the existing contract for the Volney Marcy Right of Way plus the Test Year values for other transmission related rates inflated Page of 0

25 0 to the Rate Year using the inflation rate in Exhibit (RRP-). Sheets through detail all other Rent Expenses, such as data center, printing and copying equipment leases, both directly and indirectly incurred. The Rate Year amounts are based on the Historical Test Year values inflated to the Rate Year using the inflation rate in Exhibit (RRP-). The Company is also making three adjustments to the Historical Test Year. The first adjustment is to remove costs to achieve merger synergy savings. The second adjustment is to remove the Sacandaga Reservoir payment that relates to Non-Utility Property. The third adjustment is to annualize the Historical Test Year expense related to costs for the Reservoir Woods facility. Schedule AFUDC Debt This Schedule consists of Sheets and shows the reversal of AFUDC in the Rate Years. The forecast expense for AFUDC debt in the Rate Years is zero. 0 Schedule 0 Service Company Equity Credits This Schedule consists of sheets and shows the Service Company Equity Credits accrued by the Company relating to Service Company benefits (such as tax benefits) allocated to affiliated companies. Sheet details the Page of 0

26 reallocation of a portion of this item from electric to gas to normalize the Historical Test Year. The remaining Historical Test Year costs are adjusted by inflation. 0 Schedules Other Costs and Credits These Schedules each consist of sheets and show other costs incurred by the Company and reimbursements by customers to the Company. Sheet details several onetime adjustments to normalize the Historical Test Year and an adjustment to increase the remaining Historical Test Year costs by inflation. The Schedules consists of the following: Schedule Conservation Load Management Schedule Construction Reimbursement Schedule Company Contributions/Credits to Jobs Schedule Bill Interface Expense Type Schedule Capital Overheads Schedule Supervision and Administration Schedule Service Company Operating Costs 0 Page of 0

27 Schedule - Sales Tax This Schedule consists of sheets and shows miscellaneous Sales Taxes incurred by the Company related to purchases. Sheet details an adjustment to normalize the Historical Test Year and an adjustment to increase the remaining Historical Test Year costs by inflation. 0 Schedules and Other Post Employment Benefits and Pension Schedules and each consist of sheets that detail the estimated costs and assumptions associated with Other Post Employment Benefits ( OPEB ) Expense and Pension Expense. Q. How were these costs addressed in the Merger Joint Proposal? A. In the Merger Rate Plan, Niagara Mohawk stipulated to allowed levels of Pension and OPEB Expenses and agreed to reconcile and defer under or over recoveries of these Expenses pursuant to the Commission s Statement of Policy on Pensions and Other Post Employment Benefits based on the rate allowances. Q. How did you develop the forecasts of Pension and OPEB Expense? Section..., Section... and Attachment of the Merger Rate Plan. Page of 0

28 0 0 A. We developed the forecasts using the estimates of the Company s actuaries, Hewitt and Associates, of Pension and OPEB Expense. Attachment of the Merger Joint Proposal set the allowances for the Test Year at approximately $, million and $, million for Pension and OPEB Expense, respectively. The Company s Pension and OPEB Expenses have significantly exceeded these amounts, resulting in deferred debit balances as of September 0, 00 of $. million and $. million, respectively. Based on Hewitt and Associates projections of the anticipated expense in the Rate Years shown in Schedules and, and the objective of minimizing deferrals that will burden future rates, Niagara Mohawk proposes to increase the amounts included in rates in the Rate Years to $0. million, $. million and $. million for Pension Expense and $ 0. million, $. million and $. million for OPEB Expense, as illustrated on Sheet of Schedules and. The Company proposes to continue the reconciliation procedures set forth in Attachment of the Merger Rate Plan and the Commission s Statement of Policy on Pensions and Other Post Employment Benefits. These reconciliation procedures are more fully described in our discussion below of the Pension and OPEB deferrals and in Exhibit (RRP-). The Company s efforts to control these costs are described in the testimony of Maureen P. Heaphy. Page of 0

29 Schedules 0,,,, and Fringe Benefits These Schedules represent employee fringe benefits, exclusive of Pension and OPEB costs, as follows: Schedule 0 - FAS Long-Term Disability Retirement Schedule - Healthcare Schedule - Group Life Insurance Schedule - Other Benefits (primarily aid to education) Schedule - Thrift Plan (0k matching) Schedule Worker s Compensation 0 Each Schedule consists of Sheets. Sheets through present the Historical Test Year normalization adjustments and the forecast Rate Years. Sheet details onetime adjustments to normalize the Historical Test Year and the forecast of the Rate Years and adjustments to increase the remaining Historical Test Year costs by inflation, where necessary. Sheet presents the fully normalized Historical Test Year balances allocated to electric operations. 0 Q. How were the adjustments to normalize the Historical Test Year developed? Page of 0

30 0 A. Sheet sets forth the standard process utilized to normalize costs incurred in the Historical Test Year. For charges made directly to Niagara Mohawk, we started with the Historical Test Year s total expenses (gross expenses prior to any adjustment for capitalization, but net of charges or credits that apply to another time period). Next, except for Expense Type B0 (Other Benefits), we applied a uniform Historical Test Year capitalization rate of.0 percent, which is based on the ratio in the Historical Test Year of capitalized labor to total labor for Niagara Mohawk, to arrive at the total (electric and gas) fringe benefit expense, percent of which was then allocated to electric operations. Q. How did the Company treat Group Life Expense detailed in Schedule? A. In January 00, the Company s Group Life benefits were changed. The current benefit includes an insurance benefit to employees equal to one times their annual salary as opposed to the former benefit of two times their annual salary. An adjustment to the Historical Test Year was made to reflect this reduction in cost. 0 Q. How did the Company treat Expense Type B0 detailed in Schedule? Page of 0

31 A. Expense Type B0 - Other Benefits (primarily aid to education) is not capitalized. This is largely due to the relatively small dollars associated with this expense. Q. Please explain the methodology for allocating fringe benefits to Capital. A. The portion of total fringe benefit expense allocated to Capital was the same as the portion of total labor allocated to Capital, which was based on historical percentages. 0 Q. Please explain the electric allocation percentage adjustments on Sheet of the Schedules. A. These adjustments adjust to an / allocation for those occasions when fringe benefit charges in the Historical Test Year were not allocated percent / percent between the electric and gas operations. 0 Q. Please describe the method for normalizing the fringe benefits of Service Company employees charged to Niagara Mohawk. A. Similar to the fringe benefits charged to Niagara Mohawk, we started with the total Service Company charges to Niagara Mohawk for the fringe benefit expense (gross expenses prior to any adjustment for capitalization) Page of 0

32 and removed any out-of-period charges or credits. We then allocated the total fringe benefit expense on the same basis that Service Company historical labor is allocated to Niagara Mohawk, or. percent. As discussed above, the fringe benefits were then allocated percent to electric operations. This is shown on Sheet of the Schedules. 0 Schedule Payroll Taxes This Schedule consists of sheets and pertains to Payroll Taxes incurred by the Company. Because the costs associated with Payroll Taxes are more properly presented in Taxes Other Than Income Taxes, Sheet shows the reclassification of payroll taxes from O&M to Taxes Other Than Income Taxes, as noted on Sheet. 0 Schedules through 0 - Materials These Schedules each consist of sheets and show costs related to materials purchased from outside vendors, materials released from inventory and material stores handling costs incurred by the Company. Sheet details several onetime adjustments to normalize the Historical Test Year, including an adjustment to reflect a known increase in postage occurring in Rate Year as shown on Schedule. The Company also Page of 0 0

33 made an adjustment to increase the remaining Historical Test Year costs by inflation. The Schedules consist of the following: Schedule Materials from Outside Vendors Schedule Materials from Inventory Schedule 0 Materials Stores Handling 0 Schedule - Labor Schedule contains all O&M labor expense. It consists of Sheets and presents the labor expense forecasts for the Rate Years. Schedule also presents the adjustments made to normalize the Historical Test Year and forecast the labor expense for the Rate Years. The Schedule provides this information by Provider Company. 0 Q. Please explain the components of Schedule. A. The first four Sheets are the total labor charges that were expensed for the Historical Test Year and Rate Years. Sheets and are the calculation of adjusted Historical Test Year and forecast Rate Years Operating Expense labor for electric operations only. Sheets through present the allocated total annualized adjusted base labor expense and adjusted Page 0 of 0

34 0 variable pay labor expense for all Provider Companies to Niagara Mohawk. Sheets through present labor expense charged by Provider Company by electric and gas, capital, expense and other for the Historical Test Year. Sheets through 0 present the same information for the adjusted Historical Test Year. Sheets through present the same information for Rate Year. Sheets through present this information for Rate Year and Sheets through present this information for Rate Year. Sheet presents the number of forecast full-time equivalent employees before any adjustments for additional consumer advocates. 0 Q. Please explain the general methodology used to forecast labor for the Company. A. The Company incurs labor charges from its own employees and from employees of the National Grid Service Company. The Company also incurs labor charges from the three KeySpan Service Companies (National Grid Corporate Services LLC, National Grid Engineering & Survey, Inc. and National Grid Utilities Services LLC, collectively the KeySpan Service Companies ) and other affiliated companies ( All Other Companies ) allocated to Niagara Mohawk. The forecast in Schedule starts with the Historical Test Year aggregate operating expense labor Page of 0

35 0 costs for Niagara Mohawk, which are shown segregated by Provider Company on Sheet. Additionally, Sheets through show the Historical Test Year allocations of total labor incurred by Niagara Mohawk among itself, the National Grid Service Company and the KeySpan Service Companies. The Company forecast both components: the labor costs Niagara Mohawk incurred and charged to itself and other companies and the labor costs incurred by the National Grid Service Company, the KeySpan Service Companies and All Other Companies and charged to Niagara Mohawk. The forecast of total labor costs by Provider Company Niagara Mohawk and the forecast of total labor costs charged by National Grid Service Company and the KeySpan Service Companies were developed utilizing full time equivalents ( FTEs ) at September 0, 00, which was the basis for the forecast Rate Years. The results are then prorated back by the accounting allocations for each Provider Company based on the Historical Test Year. Electric labor expense incurred by and for Niagara Mohawk was the basis for the estimate of O&M Expense, as set forth in the Summary Schedule of Exhibit (RRP- ). 0 Q. How did you determine the appropriate headcount for the Rate Years? Page of 0

36 0 A. We began with the labor headcount in the Historical Test Year for Niagara Mohawk, the National Grid Service Company and the KeySpan Service Companies. The management FTE headcount at September 0, 00 as presented on Sheet, was,, and,0 respectively. The collective bargaining unit headcount at September 0, 00 was,,, and, respectively. The Niagara Mohawk collective bargaining unit headcount was adjusted to, FTEs to establish the base for the forecast as shown in Exhibit (RRP-0), the workpapers supporting Exhibit (RRP-) Schedule. This adjustment was made to reflect minimum staffing levels established in the collective bargaining contract. 0 Q. Please describe the process used to convert full time employees and part-time employees into FTEs. A. Full time equivalent status, shown on Sheet, was computed by the following method: (i) All full time employees were considered FTEs. (ii) Part time employees were converted to FTEs using the following formula: Average Part Time Salary per Employee divided by Average Full Time Salary per Employee times Part Time Employee Count. For Niagara Mohawk, National Grid Service Company and the KeySpan Service Companies, there were, and part time management employees, Page of 0

37 respectively, which equated to, and full time equivalents. The same procedure was used for represented employees. The companies had, and part time employees included in the represented labor base, which equated to, and full time equivalents, respectively. 0 Q. How was management labor calculated for the Rate Years? A. Management labor for the Rate Years was calculated using average salaries in effect at September 0, 00, including base and variable compensation. The average base salaries were adjusted for salary increases, applying a percent salary increase to management labor annually in July 00 through July 0, as shown on Sheets through of Schedule. This salary increase and an explanation of the base and variable compensation structure are addressed in the testimony of Maureen Heaphy and Richard Meischeid. 0 Q. How was management variable pay calculated for the Rate Years? A. Management Rate Year variable pay was calculated by first applying maximum plan payout ratios to average base salaries adjusted for salary increases. A target payout rate of percent was then applied to 0 percent of the maximum variable pay plan payout associated with attainment of financial goals. The Historical Test Year payout rate of Page of 0

38 percent was applied to 0 percent of the maximum plan payout associated with individual objectives. Q. How was represented employees variable pay calculated for the Rate Years? A. Represented employees Rate Year variable pay was calculated by applying the Historical Test Year payout rate of. percent to average base wages adjusted for wage increases, double time and shift premiums and overtime. 0 Q. Have you reflected senior leadership variable pay in the forecast? A. No. Senior leadership variable pay is reflected on the books of the Company under the other income and deduction section of the income statement. As such, these costs are not included in O&M Expense. 0 Q. How was represented employees labor expense calculated for the Rate Years? A. We first normalized the historic September 0, 00 represented labor expense for items such as double time and shift premiums. Employees labor expense for the Rate Years was determined by increasing average base wages in the adjusted Historical Test Year by percent in April of Page of 0

39 00 and by. percent in April of 0, 0 and 0, in accordance with the labor agreement between the Union and the Company. 0 Q. Please describe how overtime was calculated for the adjusted September 0, 00 total labor amounts. A. The ratio of overtime pay to base salary and wages was calculated for the Historical Test Year. These overtime rates were applied to the adjusted forecast management salaries and represented employees wages for the Rate Year. Overtime rates were calculated by expense, capital, and other charge categories and by electric and gas accounts. Q. Please describe the adjustments to miscellaneous pay for the Rate Years. A. The miscellaneous pay adjustments were prorated based on the Historical Test Year. 0 Q. Were any other adjustments made to the base Historical Test Year labor? A. Yes. The Company made two additional adjustments. One adjustment pertains to Voluntary Early Retirement ( VERO ) Employees and the other pertains to consumer advocates. Page of 0

40 0 Q. Please explain the adjustment relating to VERO employees. A. An adjustment was made to the Historical Test Year to include the actual incurred labor expense for VERO employees. As shown in Schedule, the Company reduced the synergy savings relating to these employees to reflect the embedded savings in the Historical Test Year. To illustrate, if a VERO employee making $00,000 worked three months in the Historical Test Year, the Company incurred $,000 in labor expense. That $,000 is included in the forecasted Rate Year inflated by the inflation factor shown in Exhibit (RRP-). The Company therefore would have $,0 of labor expense forecast in the Rate Year and $,0 of savings embedded in the Historical Test Year relative to that VERO employee. The synergy savings credit would be $,0. If an adjustment were not made to reflect the embedded savings associated with VERO employees leaving during the Historical Test Year, the credit to synergy savings would be higher and the savings would be double counted. 0 Q. Please explain the adjustment relating to consumer advocates. A. Pursuant to a settlement with Staff, the Company adjusted the base Historical Test Year labor expense to remove the labor expense associated Page of 0

41 with four consumer advocates in Rate Year. The settlement precludes the Company from recovering this labor expense through the end of the Merger Rate Plan or December, 0. The Company included the labor expense for these advocates in the Rate Years and. 0 Q. Please describe rd week labor costs. A. Every calendar year does not contain pay weeks. Every years there is an additional pay week. Therefore, an amount equal to one-fifth of the weekly cost (i.e. one day) is added to the labor cost to reflect the normalized cost of the rd week. rd week labor costs impact any employee who is paid weekly. Typically, these are represented employees. The rd week labor costs are added to the total Rate Year represented labor costs found on Sheets through of Schedule. 0 Q. How were rd week labor costs calculated? A. rd week labor costs were calculated for the Rate Years by taking the estimated annual Rate Year labor costs for weekly paid employees divided by,00 hours and multiplied by hours. The,00 hours represents the total number of hours worked in a normal calendar year and the hours represents the normal work hours in a day (i.e. one-fifth of the week). The Page of 0

42 calculation was done by salary band for full-time represented employees and part-time represented employees. 0 Schedule Transportation This Schedule consists of Sheets and shows Transportation costs incurred by the Company. The first sheets are the same as all other schedules, with Sheet detailing adjustments to normalize the Historical Test Year and inflation adjustments to reflect the conditions in the Rate Years. Sheets through provide greater detail on the elements of costs relating to Transportation such as registration, fees and taxes, lease expenses and fuel costs. Q. What are the major cost drivers of Transportation expense? A. The majority of costs associated with Transportation pertain to lease expense, vehicle parts, vehicle maintenance and motor fuel. Sheets through of Schedule detail the cost components in the Historical Test Year and the Rate Years. Sheets through provide a further breakdown of the components in developing the forecast. 0 Q. Please explain why there is no credit balance for the Lease Refinance Amortization reflected in the Rate Years. Page of 0 0

43 A. The Lease Refinance Amortization is a static credit to the Fleet Management Department that will be fully amortized on March, 00 and therefore is not reflected in the Rate Years, as shown on Sheet of Schedule. 0 Q. What gave rise to the Lease Refinance Amortization Credit? A. In late 00, the National Grid Service Company refinanced approximately,000 leased vehicles to reduce the monthly cash outflow in lease expense by extending lease terms. Accordingly, the National Grid Service Company had the leasing company, Peterson, Howell & Heather ( PHH ), recalculate operating leases using longer terms and refund the difference between what the Service Company had paid and the recalculated amounts. The total cash refunded to the National Grid Service Company was $. million. 0 Q. What did the National Grid Service Company do with this refund? A. The National Grid Service Company amortized the refund over four years, which represents the approximate average remaining life of the units that were refinanced; $,0 is credited to Niagara Mohawk annually until March, 00. Page 0 of 0

44 Q. Please describe the components of transportation lease expenses. A. Transportation lease expenses consist of two components: () vehicles on lease in the Historical Test Year that will remain on lease through the Rate Years and () vehicles on lease in the Historical Test Year that will be replaced before or during the Rate Years. 0 Q. Please explain the lease expense forecast for the Rate Years. A. We started with the existing leases at the end of the Historical Test Year and adjusted for vehicles eligible for replacement. Vehicles become eligible for replacement when fully amortized or upon reaching the end of their expected life cycle. Based on a schedule from PHH, the base line level of lease expense is reduced by the vehicles reaching full amortization. Q. Please explain how lease expenses are calculated. A. Estimated delivery dates are established for the new units along with projected acquisition costs. Lease expenses are then calculated using the acquisition cost, term of the lease and projected interest rate from PHH. 0 Q. Please explain how motor fuel costs are calculated. Page of 0

45 A. The forecast for the Rate Years assumes the same level of consumption as the Historical Test Year. The dollars were calculated using the annualized Historical Test Year price per gallon and inflating that price per gallon out to the Rate Years and multiplying that price by the historical level of consumption. 0 Q. Please explain how vehicle parts and maintenance costs were calculated. A. Vehicle parts costs are the actual costs paid to vendors for procured parts. Vehicle maintenance costs consist of employee payroll and actual costs paid to vendors when work is performed on Company vehicles by outside vendors. Payroll costs are reflected in Schedule of Exhibit (RRP-). Q. Please explain the allocation of transportation costs between the electric and gas businesses. A. The allocation between electric and gas operations is based on actual usage hours of vehicles, as included in the Time Entry System or STORMS. Page of 0

46 Schedule - Energy Efficiency Program This Schedule consists of Sheets. The Company assumes that the revenues offset the expenses associated with the Company s Energy Efficiency Programs. The costs associated with these programs are not included in base rates but rather recovered through the reconciling System Benefits Charge. The Company is not seeking recovery of costs associated with these programs in base rates. 0 Schedule Injuries and Damages This Schedule consists of sheets and shows the costs associated with damage claims and insurance premiums. Sheet details adjustments to normalize the Historical Test Year by utilizing a -year average of claims and an adjustment to increase the adjusted Historical Test Year costs by inflation. 0 Schedule Other Initiatives This Schedule consists of Sheets and shows the costs of other initiatives to be implemented by the Company. These costs represent the following: Operation Expense Related to Capital Expense; Elevated Voltage Testing and Repairs; Transmission Infrared; Page of 0