RE: CenterPoint Energy s Evaluation of its Gas Affordability Program Docket G-008/GR

Transcription

1 800 LaSalle Avenue PO Box Minneapolis, MN August 13, 2010 Dr. Burl Haar, Executive Secretary Minnesota Public Utilities Commission Suite th Place East St. Paul, MN RE: CenterPoint Energy s Evaluation of its Gas Affordability Program Docket G-008/GR Dear Dr. Haar: CenterPoint Energy hereby provides its evaluation of its pilot Gas Affordability Program. The report includes background information, a description of the Program, information on Program participation, an evaluation of the Program from both statutory and cost effectiveness perspectives, and discussion of other relevant issues. If you have any questions regarding the information provided in this filing, please contact me at (612) Sincerely, /s/ Adam Pyles Director, Regulatory Activities CenterPoint Energy

2 AFFIDAVIT OF SERVICE STATE OF MINNESOTA ) ) ss. COUNTY OF HENNEPIN ) Marie M. Doyle, being first duly sworn on oath, deposes and says she served or caused to be served on behalf of CenterPoint Energy: A copy on the Minnesota Public Utilities Commission via electronic filing; a copy on the Office of Energy Security of the Department of Commerce via efilng; a copy on the on the Minnesota Office of the Attorney General via efiling; and a copy of the filing was provided to the remaining individuals on the attached Rate Case service list. Subscribed and sworn to before me this 13 th Day of August, 2010 /s/ Marie M. Doyle, Tariffs Administrator Regulatory Services CenterPoint Energy /s/ Mary Jo Schuh - Notary Public My Commission 1/31/2015

3 First Name Last Name Company Name Address Delivery Method View Trade Secret Service List Name Tamie A. Aberle Great Plains Natural Gas Co. Steven H. Alpert Office of the Attorney General-PUC Julia Anderson s Brenda A. Bjorklund ointenergy.com Jeffrey A. Daugherty rgy.com Sharon Ferguson Office of the Attorney General-DOC CenterPoint Energy CenterPoint Energy 400 North Fourth Street Bismarck, ND BRM Tower 445 Minnesota Street St. Paul, MN BRM Tower 445 Minnesota St St. Paul, MN LaSalle Avenue Floor 14 Minneapolis, MN LaSalle Ave Minneapolis, MN Department of Commerce 85 7th Place E Ste 500 Saint Paul, MN Elaine Fleskes 7295 Newcomb Avenue NW Paper Service No OFF_SL_5-1380_1 Electronic Service No OFF_SL_5-1380_1 Electronic Service Yes OFF_SL_5-1380_1 Paper Service No OFF_SL_5-1380_1 Paper Service No OFF_SL_5-1380_1 Electronic Service Yes OFF_SL_5-1380_1 Paper Service No OFF_SL_5-1380_1 Ronald M. Giteck ron.giteck@state.mn.us Office of the Attorney General-RUD Annandale, MN Residential Utilities Division 445 Minnesota Street, 900 BRM Tower St. Paul, MN Burl W. Haar burl.haar@state.mn.us Public Utilities Commission Suite th Place East St. Paul, MN Karen Finstad Hammel Karen.Hammel@state.mn. us Office of the Attorney General-DOC 1400 BRM Tower 445 Minnesota Street St. Paul, MN Paper Service No OFF_SL_5-1380_1 Electronic Service Yes OFF_SL_5-1380_1 Paper Service No OFF_SL_5-1380_1

4 First Name Last Name Company Name Address Delivery Method View Trade Secret Service List Name Paula N. Johnson Interstate Power and Light Company Joseph A. Klenken ntenergy.com John Lindell Office of the Attorney General-RUD 200 First Street SE PO Box 351 Cedar Rapids, IA CenterPoint Energy 800 LaSalle Avenue Fl. 14 P.O. Box Minneapolis, MN BRM Tower 445 Minnesota St St. Paul, MN Pam Marshall Energy CENTS Coalition 823 7th St E Paper Service No OFF_SL_5-1380_1 Paper Service No OFF_SL_5-1380_1 Electronic Service Yes OFF_SL_5-1380_1 Paper Service No OFF_SL_5-1380_1 Janet Shaddix Elling jshaddix@janetshaddix.co m Kathleen D. Sheehy kathleen.sheehy@state.mn.us James M. Strommen jstrommen@kennedygraven.com St. Paul, MN Shaddix And Associates Ste 122 Paper Service No OFF_SL_5-1380_ W Bloomington Frwy Bloomington, MN Office of Administrative Hearings Kennedy & Graven, Chartered PO Box St. Paul, MN Eric Swanson eswanson@winthrop.com Winthrop & Weinstine 225 S 6th St Ste 3500 Capella Tower Minneapolis, MN James E. Wallin City Of Brainerd City Hall 501 Laurel Street Brainerd, MN Paper Service No OFF_SL_5-1380_1 470 U.S. Bank Plaza 200 South Sixth Street Minneapolis, MN Paper Service No OFF_SL_5-1380_1 Paper Service No OFF_SL_5-1380_1 Paper Service No OFF_SL_5-1380_1 2

5 STATE OF MINNESOTA BEFORE THE MINNESOTA PUBLIC UTILITIES COMMISSION David Boyd Chair J. Dennis O Brien Commissioner Thomas Pugh Commissioner Phyllis Reha Commissioner Betsy Wergin Commissioner Evaluation of Gas Affordability Program Docket No. G-008/GR GAP PILOT EVALUATION REPORT I. Background In CenterPoint Energy s (the Company ) 2005 gas rate case (Docket No. G008/GR ), the Minnesota Public Utilities Commission ( Commission ) approved a $5 million per year gas affordability pilot program ( GAP or the Program ), effective May 1, Under the terms of its tariff, CenterPoint Energy's pilot program is scheduled to conclude on December 31, During the 2007 legislative session, the Minnesota Legislature amended Minn. Stat. 216B.16, subd. 15 to require gas utilities to propose low-income affordability programs designed to provide financial assistance to recipients of Low Income Heating Energy Assistance Program (LIHEAP) grants. The Legislature required natural gas utilities that serve low-income residential customers who use natural gas for heating to file individual affordability programs with this Commission by September 1, On November 2, 2007, the Commission found that the Company s GAP complied with the requirements of Minn. Stat. 216B.16, subd. 15. (See Docket G008/M ) On March 31, 2008, March 31, 2009, and March 31, 2010 the Company submitted its annual reports on the operation of the Program. On January 21, 2008 and June 23, 2009 the Company requested permission to roll over unspent Program funds from one program year to the next. These requests were granted on April 13, 2008 and November 18, (See Docket Nos. G008/M and G008/M ). 1

6 On November 18, 2009, the Minnesota Public Utilities Commission issued its ORDER ACCEPTING COMPLIANCE FILINGS REGARDING GAS AFFORDABILITY PROGRAMS AND REQUIRING FURTHER ACTION in Docket Nos. G-008/GR , G-002/GR , G-001/M G-007,011/M , G-004/M , G-022/C wherein the Commission invited a utility work group to submit an evaluation of and recommendations for affordability program changes. On May 28, 2010, a group of Minnesota Gas Utilities 1 filed the Utility Stakeholder Report and on June 17, 2010, the Energy CENTS Coalition ( ECC ) submitted comments on the Utility Stakeholder Report. On June 28, 2010, the Company submitted reply comments. The Company now submits this GAP evaluation report. The report includes background information, a description of the Program, information on Program participation, an evaluation of the Program from both statutory and cost effectiveness perspectives, and discussion of other relevant issues. II. Description of Gas Affordability Program CenterPoint Energy s Gas Affordability Program was designed to: Lower the percentage of income that low-income households must devote to pay current energy bills; and Increase the number of customer payments while also providing a mechanism for assisting customers in paying off arrearage balances. The Program includes the following general characteristics: Qualified customers must agree to be placed on a levelized payment plan and a payment schedule; Customers are automatically removed from the Program after a nonpayment period of 60 days; The Program includes an Affordability component that consists of bill credits determined by calculating the difference between the estimate of the customer s annual natural gas bill and the applicable income limit of the customer s household income (e.g., limits a customer s payment to six percent of their household income) The Program has an Arrearage Forgiveness component that applies a monthly matching credit to the customer s balance after payment is received. The application of this monthly credit retires pre-program arrears over a period of up to 24 months; The Program is funded through a per-therm charge of $ /therm effective July 1, and $ /therm from May 1, 2007 to June 30, This charge is billed to all firm customers, except those taking service under the Market Rate Service Rider. 1 Representatives from CenterPoint Energy Resources Corp., d/b/a CenterPoint Energy Minnesota Gas, Northern States Power Company, a Minnesota corporation ( Xcel Energy ), Minnesota Energy Resources Corporation ( MERC ), Interstate Power and Light (IPL or Interstate), and Great Plains Natural Gas Co. ( Great Plains ),and Greater Minnesota Gas provided input to the report. 2 Interim rates in the Company s 2008 general rate case (Docket G008/GR ) were in place in The $ /therm recovery rate reflects the recovery rate established in the 2008 rate case. An adjustment to the GAP 2

7 The Program was administered by a third-party provider, the Energy Cents Coalition. The administrator s primary duties included processing inbound paper application forms including clarification of incomplete information, entering participant data into an online Company system, notification of non-qualified customers, and responding to participant inquiries. Additional administrative functions performed internally included promotion of the Program, managing delinquent accounts, managing the renewal process, managing billing exceptions or corrections as needed, IT system development and maintenance, training, and reporting. III. Program Participation The Program became effective on May 1, Prospective participants were solicited through direct mail and call center promotions. The enrollment process was used to qualify prospective participants and place them on the Program. The number of participants is shown below YTD June Average Active at year end 6,751 10,519 14,837 18,133 12,678 Drop, customer request Drop, delinquency 371 5,370 5,979 1,413 5,675 Total participants 7,242 16,342 21,337 19,655 18,840 Number of participants that received a credit 6,021 13,934 15,613 10,930 14,773 Drop rate, delinquency 3 5.1% 32.9% 28.0% 7.2% 30.1% tracker will be made in 2010 to reflect recovery using the $ /therm recovery rate for the entire period that interim rates were in effect. See filing made on July 26, 2010 in the Docket. 3 The delinquency drop rate is calculated as the delinquency drops divided by the total participants 3

8 GAP credits (affordability and arrearage) were provided to Program participants each year as shown in the table below YTD June Total Affordability Credits Arrearage Forgiveness Credits Total Credits Arrearage Credits/ Total Credits $ 702,686 $4,112,398 $3,962,958 $1,200,437 $9,978,479 $ 114,525 $ 384,047 $ 385,645 $ 88,514 $ 972,731 $ 817,211 $4,496,445 $4,348,603 $1,288,951 $10,951, % 8.5% 8.9% 6.9% 8.9% IV. Pilot program evaluation CenterPoint Energy s GAP tariff states The Program shall be evaluated before the end of the initial four year term and may be modified based on annual reports and on a financial evaluation. 4 The Company has undertaken this evaluation for the purpose of assessing the operation and impact of the Program in order to provide information to support a decision to continue, modify, or discontinue the Program. In order to present a comprehensive evaluation of the Program, the Company s evaluation criteria include the requirements of the enabling statute and the Commission-approved tariff, other operational factors, and societal impacts. These criteria are discussed below. The enabling statute states: (b) Any affordability program the commission orders a utility to implement must: (1) lower the percentage of income that participating low-income households devote to energy bills; 4 CenterPoint Energy tariff, Sixth Revised Page 25.a, Section

9 (2) increase participating customer payments over time by increasing the frequency of payments; (3) decrease or eliminate participating customer arrears; (4) lower the utility costs associated with customer account collection activities; and (5) coordinate the program with other available low-income bill payment assistance and conservation resources. 5 While the statute does not explicitly state that these requirements shall be used as evaluation criteria, the Company believes it is reasonable to do so in order to determine whether the Program satisfied the legislative intent. The statute also states: (c) In ordering affordability programs, the commission may require public utilities to file program evaluations that measure the effect of the affordability program on: (1) the percentage of income that participating households devote to energy bills; (2) service disconnections; and (3) frequency of customer payments, utility collection costs, arrearages, and bad debt. 6 CenterPoint Energy has reported on certain of these criteria as part of its annual compliance report and will discuss them as part of the overall evaluation as well. The Company s tariff states, in part: The financial evaluation will include a discounted cash flow of the Program s costeffectiveness analysis from a ratepayer perspective comparing the 1) total Program costs, which includes the Affordability component, Arrearage Forgiveness component and total company incurred administration costs, to 2) the total net savings including cost reductions on utility functions such as the impact of the Program on write-offs, service disconnections and reconnections and collections activities. The discounted cash flow difference between total Program costs and total net savings will result in either a net benefit or a net cost to ratepayers for the program. Any net benefit after the initial four year term of the Program will be added to the Tracker for refund to residential ratepayers. 7 5 Minn. Stat. 216B.16 Subd. (16) part (b). 6 Minn. Stat. 216B.16 Subd. (16) part (c). 7 CenterPoint Energy tariff, Sixth Revised Page 25.a, Section

10 Other operational factors may relate to efficient delivery of the Program and may also affect administration cost or participation rates. Societal impacts, while difficult to quantify, should also be considered as part of the Program evaluation. A discussion of these impacts may better inform policy decisions about future programs. Given that implementation of the Program began mid-year 2007 and that the 2010 Program year is incomplete at the time of this report, the Company has used partial-year data for 2007 and 2010 where appropriate. Some analyses may not be meaningful for partial-year data and the Company has taken this into consideration. Also, the reporting requirements changed over the course of the Program and not all data is available for all periods. Where necessary and reasonable, the Company has incorporated estimates and assumptions in its analysis. As stated above, annual compliance filings have been submitted each March that provided information on participation, payment amounts, arrearages, and other GAP related information. A summary of the information reported annually is provided in Schedule C. V. Evaluation Based on Statutory Criteria As previously stated, Minnesota Statute 216B.16 Subd. 15 part (b) lists five requirements that low-income affordability programs must meet. Each of these five requirements is discussed below. 1) Lower the percentage of income that participating low-income households devote to energy bills By design, the Program reduces the natural gas bill to participants from what the bill would have been without the Program. 8 The amount of this reduction is equal to the total affordability and arrearage forgiveness credits provided to participants. For this reason, the Company believes that the Program reduced the amounts billed for natural gas service to participating customers. While it s not possible to know definitively whether the Program lowered the percentage of income participants devote to energy bills due to a number of variables, including, for example, the impact of other energy bills (i.e., electricity) and any changes in participants income, assuming these other factors remained constant, CenterPoint Energy s GAP did satisfy this statutory requirement. 8 Changes in usage due to conservation or weather-related demand and changes in the price of natural gas also contribute to changes in the total amount of natural gas bills to participants. 6

11 2) Increase participating customers payments over time by increasing the frequency of payments In the 2007 and 2008 annual GAP reports, when analyzing payment frequency, the Company looked at the situations where an account had a credit balance (usually due to receipt of LIHEAP) and the customer did not make a payment and considered those situations to be no payment made situations. However, since the account had a credit balance, no payment was actually requested. Subsequent to the 2008 annual GAP report, the payment frequency reporting was modified to not include those situations as a requested payment. The following table shows the payment frequency and history of GAP participants in 2009, compared to the payment frequency and history of LIHEAP/non- GAP customers in 2009 and the payment frequency and history of 2009 GAP participants prior to their enrollment in the Program GAP Participants 2009 LIHEAP 2009 Participants 12 Months Prior to GAP Amount Count Amount Count Amount Count Total Requested $10,523,812 97,408 $37,359, ,042 $24,573, ,463 Full Payment Made $2,567,158 39,778 (41%) $7,052,588 94,646 (30%) $4,971,472 58,632 (38%) Partial Payt Made $1,520,197 22,084 (23%) $4,466,436 48,147 (15%) $2,600,850 27,326 (18%) On Account Payts $362,872 13,748 (14%) $162,094 2,586 (1%) $21, (0%) Total Payments $4,450,228 (42%) 75,610 (77%) $11,681,118 (31%) 145,379 (45%) $7,593,579 (31%) 86,315 (55%) No Payment Made $0 21,798 (22%) $0 172,663 (55%) $0 69,148 (45%) This data shows that 2009 GAP participants had a higher payment frequency (77%) when compared both to the prior 12-month period (55%) and to LIHEAP/non-GAP customers in 2009 (45%). Based on the above information, the Program appears to have increased the frequency of customer payments. 3) Decrease or eliminate participating customer arrears The arrears of GAP participants decreased in 2009 compared to 2008 as shown below. GAP participants arrears levels decreased by six percentage points more than LIHEAP non-gap customers. Comparable data is not available for other periods. 7

12 Jan 2009 Dec 2009 $ Change % Change GAP 9 $258 $127 -$131-51% LIHEAP-non $274 $151 -$123-45% GAP Residential $141 $56 -$85-61% Based on this information, the Program appears to have contributed to a decrease in participant arrears. 4) Lower the utility costs associated with customer account collection activities The costs associated with collection activities include a variety of activities, but two of the more direct and measurable costs are those for issuing disconnection notices and performing disconnections and subsequent reconnections. The number of disconnection notices was reduced and this reduced collection costs as shown below YTD June Total Avoided disconnection notices Avoided disconnection notice cost 1,733 2,663 3,854 4,750 13,000 $693 $1,065 $1,451 $1,900 $5,200 Also, as shown in the table below, GAP customers were disconnected at a lower rate than non-gap LIHEAP recipients and this reduced collection costs associated with disconnection and subsequent reconnection. For the estimate below, the difference in 9 The average arrears amount shown for CenterPoint Energy GAP participants above is for the GAP participants that had arrears during January and December of It should be noted that due to changes in the exact customers that participate (due to de-activations and new enrollments during the year), all of the same customers enrolled in January are not the same customers enrolled in December. 8

13 disconnection rates observed in 2009 was applied to 2007, 2008, and 2010 YTD June data YTD June Total Disconnection rate, GAP Disconnection rate, LIHEAP non-gap Avoided disconnections Avoided disconnection and reconnection costs NA NA 3.5% NA NA NA NA 9.5% NA NA ,087 3,013 $19,366 $30,172 $42,557 $51,977 $144,071 Based on this information, the Program appears to have lowered collection costs. 5) Coordinate the program with other available low-income bill payment assistance and conservation resources In addition to mailing, calling, and ing customers about enrolling in GAP, the Company also conducted the following major outreach initiatives in These activities are also indicative of coordination efforts in 2007, 2008, and Multiple press releases throughout 2009 about heating costs, which included GAP messages and conservation resources, sent to 74 media outlets, May and October Community LINK newsletter included article on GAP and CIP rebate program. In addition, information about GAP and Energy Assistance was sent to 207 Community Leaders in October, Met with United Way, United Way 211, Salvation Army, MN FoodShare and Community Action agencies to discuss heating season, energy assistance and GAP in September, GAP Flyers distributed to 15 CAP agencies within CenterPoint Energy service territory at fall quarterly meeting to be distributed to customers who received services through our Conservation Improvement Program (CIP) Low Income Weatherization Project and to other LIHEAP-eligible 9

14 customers; additional GAP flyers distributed to 260 MN food shelves and churches, Energy Assistance Ad targeted 29 newspapers in 58 zip codes, circulation 430,931. Included GAP message and link to the portion of CenterPoint Energy website that includes information about CenterPoint Energy s low-income weatherization program, Various organizations published articles/information on GAP and/or energy saving tips in their newsletters. These organizations included: Greater Twin Cities United Way, NRP (Neighborhood Revitalization Program), and MN Council of Non-Profits, Bill Paying Assistance Posters which included information on GAP and energy-saving tips sent to 260 food shelves and 1,250 churches, 80 Minneapolis Neighborhood Associations, Discussed Payment Assistance information, including GAP, at Elderly Housing Association meeting and Minneapolis Third Ward Summit in October, and TouchPoint newsletter/bill insert included GAP information and energysaving tips was sent to all CenterPoint Energy customers in November. Based on this information, the Program was coordinated with other bill-payment assistance and conservation resources. In summary, the Company believes the Gas Affordability Program satisfied each of the statutory requirements. VI. Evaluation of other issues and criteria In addition to the evaluation based on statutory criteria above, CenterPoint Energy provides the following evaluation of other issues and criteria related to the Program. Inability to spend entire program amount Over the course of the pilot program, the Company had mixed success in spending the entire amount of funds available. It appears that customers with high levels of preprogram arrears had difficulty maintaining their payments under the Program and consequently were dropped due to delinquency. Under the pilot program, the participants bill was capped at 6% of their income, excluding payments toward their pre-program arrears. When the payments toward arrears were considered, the percentage of income for some customers exceeded 6%. These customers experienced a relatively higher default rate. The data below illustrates this point only for customers that received a credit. 10

15 2009 GAP Program No arrears With arrears and between 6% and 8% With arrears and greater than 8% Drop, delinquency Total participants that received a credit Drop rate, % 6% 49% 58% This relatively higher default rate led to two outcomes. First, the defaults contributed to the inability to spend all available funds since those customers were removed from the Program. Secondly, the defaults contributed to a need to enroll additional participants to replace those removed for delinquency. This created additional promotion and administrative activity and cost. As an additional consideration, the majority of GAP credits were applied toward the affordability component of the Program and not the arrearage forgiveness component (91% vs. 9% in 2009). This fact contributed to the inability to spend all available funds since relatively few dollars were applied to arrearage balances. In addition to explaining the spending shortfall, these two results also suggest that the Program was not as effective as hoped in assisting customers with high arrearage levels. Impact on incremental LIHEAP Customers that participated in GAP experienced a reduction in the average LIHEAP grant in each LIHEAP program year ( , , , ). This result differs from the relatively stable average LIHEAP grant of all LIHEAP recipients in each LIHEAP program year. This information is shown in the graph and table below. 10 For example, in the 2008 GAP year, GAP customers received an average LIHEAP grant of about $445 in the LIHEAP year and about $385 in the LIHEAP year. This compares to the average LIHEAP grant of about $487 for all LIHEAP customers in the LIHEAP year. 10 The ending LIHEAP year refers to the LIHEAP year that ends in the same year as a given GAP program year. For example, the LIHEAP year is the ending LIHEAP year for the 2008 GAP program year. Similarly, the LIHEAP year is the beginning LIHEAP year for the 2008 GAP program year. This nomenclature tries to accommodate the difference between the start date of the LIHEAP program year (October) and the GAP program year (January). 11

16 Note the data reported for the GAP customer LIHEAP grants in beginning LIHEAP year in the 2009 GAP Program Year column is partial-year data since it includes the LIHEAP year which is still underway Average LIHEAP grants for GAP customers in ending LIHEAP year Average LIHEAP grant for all LIHEAP customers in ending LIHEAP year Total Incremental LIHEAP $484 $445 $385 $493 $487 $529 -$411,296 -$712,451 -$2,835,408 12

17 This difference could be attributed to several factors including: The amount of the LIHEAP grant is based, in part, on the expected energy bill for the household. If the expected energy bill reflects the GAP credits, then the energy bill and subsequent LIHEAP grant calculation would be lower than for customers not on GAP. GAP customers may share some distinguishing demographic characteristic that contributes to a difference in LIHEAP grant, but that is unrelated to GAP such as smaller dwelling, newer (or older) construction, household size, or income level. There may be other reasons why GAP customers received lower average LIHEAP grants. The Company has not attempted to further explain this observed difference in results. Regardless of the cause of this difference, GAP customers received less LIHEAP than the average LIHEAP customer. Considered by itself, this difference increased the amount to be paid by GAP participants toward their natural gas bill. The incremental reduction in LIHEAP, however, was available to be awarded to other energy consumers (not necessarily CenterPoint Energy customers or even natural gas customers.) It s possible that the Program created an incentive for some customers to obtain LIHEAP, however it s not possible to separate out this factor from other factors that may have also influenced LIHEAP participation. The most obvious affecting factor is the level of LIHEAP funding. The table below shows LIHEAP funding in Minnesota, LIHEAP received by CenterPoint Energy customers, and the number of CenterPoint Energy LIHEAP recipients. Each of these measures showed material increases over this period LIHEAP Year LIHEAP Year LIHEAP Year LIHEAP Year Through June LIHEAP allocation to Minnesota LIHEAP received by CenterPoint Energy customers $77,480,727 $78,362,555 $144,527,532 $144,527,532 $ 13,568,462 $ 14,269,164 $ 19,931,460 $22,856,255 13

18 Number of CNP customers that received LIHEAP 27,497 29,289 37,697 40,496 Inclusion of customers that did not receive an affordability or arrearage credit Under the terms of the GAP tariff, customers were qualified for the Program if they received LIHEAP and agreed to a levelized payment plan and schedule as defined in the Program. A number of customers were qualified and enrolled in GAP, but did not receive either an affordability or arrearage credit. This could occur if the customer had no or a low level of arrears and also had an income level high enough such that their expected natural gas bill was less than six percent of household income. Because they were enrolled, these customers were protected from disconnection and held a place in the Program and could have received bill credits without going through the application process again if their household income had changed during the year. While this created some administrative efficiency, it also increased the reported number of participants and could affect reported per-participant Program statistics or comparisons to the affordability programs of other Minnesota utilities. The Company has considered this impact in its evaluation and, where appropriate, separately reports the total number of participants and the number of participants that received financial benefits. VII. Cost Effectiveness Analysis As previously mentioned, The Company s tariff states, in part: The financial evaluation will include a discounted cash flow of the Program s costeffectiveness analysis from a ratepayer perspective comparing the 1) total Program costs, which includes the Affordability component, Arrearage Forgiveness component and total company incurred administration costs, to 2) the total net savings including cost reductions on utility functions such as the impact of the Program on write-offs, service disconnections and reconnections and collections activities. The discounted cash flow difference between total Program costs and total net savings will result in either a net benefit or a net cost to ratepayers for the program. Any net benefit after the initial four year term of the Program will be added to the Tracker for refund to residential ratepayers. Pursuant to this provision, the Company performed a cost-effectiveness analysis from a ratepayer perspective for the period from the beginning of the Program in 2007 through June 2010 and found that there was a net cost to ratepayers of approximately $8.8 million 14

19 in nominal dollars 11. On an annualized basis, this is about $3.3 million 12. The results of the cost-effectiveness analysis are shown on Schedule A and are summarized below. Line Savings Total Average 1 2 Working capital allowance $ (796,627) $ (346,910) 3 Change in bad debt expense $ (3,407,022) $ (1,487,118) 4 Lower collections expense $ (149,271) $ (37,668) 5 6 Total ratepayer savings $ (4,352,920) $ (1,871,696) 7 8 Costs 9 Program costs, excl excess admin cost $ 12,121,837 $ 4,657, Working capital allowance $ (408,089) $ (119,011) 11 Income tax expense $ 1,471,238 $ 630, Total ratepayer costs $ 13,184,987 $ 5,169, Net (Savings) Cost $ 8,832,067 $ 3,297, Net Value in 2010 $ 9,947,022 The Company considered Program costs including affordability and arrearage credits, administration and startup costs included in the GAP tracker, 13 working capital costs, and income tax expense. While the Program was authorized at an annual level of $5 million, the total affordability and arrearage credits each year were less than the authorized amount. The total cost of affordability and arrearage credits provided to GAP participants was about $12.1 million over the entire period or about $4.7 million per year. The working capital cost was driven by the level of the GAP tracker balance. The Program was underrecovered in the first year and overrecovered in subsequent periods. This led to a negative cost of ($0.4 million) over the entire period or about ($0.1 million) per year. Income tax expense was driven by increases in taxable income due to reductions in 11 About $9.9 million in 2010 dollars. 12 Annualized or per-year figures are based on the average of 2008 and 2009 data. Both 2007 and 2010 data is for partial years and is not comparable to full-year data. 13 Excess administration costs of about $150,000 were incurred by the Company over the period, but were not included in the ratepayer cost-effectiveness analysis. 15

20 collections expense and bad debt expense. This cost was about $1.5 million over the entire period or about $0.6 million per year. Savings were considered including the impact of the Program on bad debt expense, collection and disconnection/reconnection costs, and working capital costs. Bad debt expense was affected by a reduction in the accounts receivable balance for GAP participants. This reduction is attributed to the GAP credits themselves and to an apparent improvement in the payment behavior of GAP participants. Since the accounts receivable balance was lower than it would have been without the Program, bad debt expense was reduced. This produced savings of about $3.4 million over the entire period or about $1.5 million per year. Collection and disconnection/reconnection costs were reduced by lowering the number of customers that received disconnection notices and that were ultimately disconnected from service. As a condition of the Program, GAP participants were protected from disconnection while they remained on the Program. This reduced collection and disconnection activity compared to the level incurred by LIHEAP non-gap customers and produced savings of about $150,000 over the entire period or less than $50,000 per year. The working capital cost was reduced by a lowering of the accounts receivable balance. This accounted for savings of about $0.8 million over the entire period or about $0.3 million per year. The Company believes that consideration of cost effectiveness is critically important when making decisions to institute, continue, or discontinue programs such as GAP. For programs that increase the total cost of providing utility service, then the Company requests that such programs be continued only if the Commission allows full cost recovery and if the Commission finds that policy considerations outweigh the cost to other ratepayers. VIII. Societal Benefits and Costs In addition to the tangible costs and benefits considered in the cost effectiveness analysis, there may be additional societal costs and benefits that could be considered in an analysis of a Gas Affordability Program. The Company has no special knowledge about how to assign costs or values to these various societal costs and benefits. We provide the following information as a foundation for discussion, but do not take a position on what weight should be provided to it. 16

21 The societal benefits may include: 1) Lower Household Mobility/Increased stability (i.e., reduced move-outs). It has been reported that one impact of energy bills that are difficult for individuals to pay is a forced mobility for low-income households. 14 If a gas affordability program assists in reducing the forced mobility, there will be additional benefits when fewer individuals incur costs associated with moving such as movers, transportation expenses, rental deposits, and the other expenses associated with changing residences. In the evaluation of the Program, we examined 2009 data for GAP participants and LIHEAP non-gap customers to see whether we could identify any difference in household mobility. We examined customer records for move-out events that were likely related to a physical move 15 as a way to estimate mobility. GAP customers experienced a lower rate of move-out events likely related to a physical move when compared to LIHEAP non-gap customers (14.2% vs. 23.1%). We used this 7.9 percentage point difference to estimate the number of physical move-outs that the Program may have helped to avoid as follows: YTD June Total Move-outs possibly avoided by GAP participants 647 1,460 1,990 1,618 5,715 The Company does not know what the actual avoided costs of a physical move-out might be, but does believe that GAP participants experienced a lower rate of physical moves. 2) Increased Participants Purchasing Power - Recipients can direct their income to other needs. When low-income customers participate in GAP, the GAP credits may allow participants to direct that portion of their household income that they would 14 See Identifying Savings Arising from Low-Income Programs Prepared by Roger D. Colton, July 1994, page 12, available at 15 Move out events can be created in several ways including: a physical move out of a service address, a disconnection for non payment, a customer request that the account be taken out of their name, but they remain at the same service address, or a customer bankruptcy. The majority of move out events are physical moves or disconnections for non payment. 17

22 have otherwise paid to the Company to other household needs 16 instead of to their energy bills. It is also possible that GAP customers actually send more of their household income to the Company than if they were not on GAP. This can occur if a customer that made no or little payments before enrolling in GAP is actually able to make their lower, more affordable payment for their gas bill after the GAP credits have been applied. The Company does not know what percentage of the bill credits are actually available to increase purchasing power of the participant household, but does believe the increase is not dollar-for-dollar due to the possibility that some customers actually send more money than they otherwise would. 3) Incremental LIHEAP Available to Others As shown in the annual reports, the LIHEAP grants received on behalf of the GAP participants decreased after they enrolled in GAP. The decrease in LIHEAP for the GAP participants resulted in additional LIHEAP being available to others. There is no assurance that this additional LIHEAP would have actually been received by other CenterPoint Energy customers, by other natural gas customers of any utility, or by anyone at all 17. In addition to the societal benefits discussed above, there may be additional societal costs that should also be considered. 1) Non-participant dissatisfaction. Some non-participants expressed dissatisfaction with paying for GAP. Presumably other non-participants felt similarly, but did not express their sentiments. This has some level of intangible cost. 2) Participant transaction costs. Participants must apply for the Program and many read and respond to promotional materials or other communications. This activity has some level of intangible cost. There may be still other societal benefits and costs to consider when evaluating the Program. Other benefits could include a reduced use of alternative heating supplies, improved well-being (health and comfort) related to a higher average temperature for participants that increased their usage when service was more affordable, and a decreased property vacancy rate. Other costs could include distortion of the economic value of price-signals and the creation of opportunities for fraud and abuse. The Company has no information about whether or to what extent any of these possibilities were present during the pilot program, has made no attempt to estimate these effects, and presents this information only for discussion purposes. 16 These other household needs could include food, medicine, clothing, transportation or other expenses. 17 Not all available LIHEAP funds were actually provided to Minnesota consumers at least in the and LIHEAP program years. 18

23 IX Program As discussed in the 2009 Annual Report, due to lower bill amounts, the amount of GAP credits applied to customer accounts (and the amount expected to be credited in the rest of the year) for the customers enrolled in the 2010 program is lower than in previous years. It is anticipated that if the 18,000 customers remain on the Program for the rest of 2010, slightly more than three million dollars in GAP credits (both affordability and arrearage forgiveness) will be applied to participants accounts. We will continue our communication and outreach efforts throughout the year in attempts to increase participation, but it is unlikely that the funding cap will be spent this year. As discussed above, the current GAP is a pilot program in which the four-year term ends on December 31, and unless the Commission takes action before the end of the year, the Program will not be offered to customers after that time. X. Next Steps The Company believes that consideration of cost effectiveness is critically important when making decisions to institute, continue, or discontinue programs such as GAP. For programs that increase the total cost of providing utility service, then the Company requests that such programs be continued only if the Commission allows full cost recovery and if the Commission finds that policy considerations outweigh the cost to other ratepayers. If the Commission decides to continue a program that is not cost-effective, CenterPoint Energy offers to modify its GAP in order to increase the benefits to the participating customers by instituting two significant changes under the modified program. The first modification addresses the amount (percent of income) participating customers are required to pay toward their monthly natural gas bills. Under the modified program, all participating customer payments would be capped at 6% of income (4% Affordability, 2% Arrearage), instead of the current program where participating customer Affordability payments are capped at 6%, but there is no cap on the Arrearage payment component. The second modification addresses the length of time in which pre-program arrears are retired. Under the modified program, the participating customers who begin the program with existing arrears would have their arrears forgiven over 12 months as the participating customer maintains payments, compared to the current program where preprogram arrears may be forgiven over a period up-to 24 months. 19 Both of these 18 See Paragraph 7 of Gas Affordability Service Program Tariff Section V, Original page 25.b, included as Attachment B. 19 Due to the 2% cap on payment towards arrears, the arrearage forgiveness credits will also increase under the modified program. 19

24 modifications are designed to address the payment difficulties faced by customers with high arrears and are anticipated to increase the benefits paid under the program, while reducing the number of participants. In addition to the changes to the customer payments and arrears payment time, under the modified program, only customers that receive a credit (Affordability, Arrearage or both) will be enrolled in the program. As discussed above, it is not likely that the 2010 Program cap will be spent under the current Program. If the Commission decides to continue with the above modifications, it is anticipated that the higher credit amounts will result in additional program spending each year; therefore the Company requests that it be allowed to roll over the unspent 2010 funds and any unspent funds in subsequent years. The Company also suggests that if the Commission decides to continue with the above modifications, the pilot period be extended until December 31, It is anticipated that these modifications will require additional programming and testing of the billing system, at a cost of approximately $100,000 and to take approximately 90 days to implement. If the Commission decides to continue with the above modifications, CenterPoint Energy proposes to include these costs in the GAP tracker for full recovery, and have the modified program begin 90 days after Commission Order. The cost-effectiveness results of the modifications discussed above are included on Schedule B and are summarized below. These show that the modifications would create slightly higher savings for ratepayers which would be more than offset by increased ratepayer costs. The increased costs are primarily due to the improved ability to spend all available funds. 20 A two year extension will also provide time for interested parties to review other Minnesota gas utilities GAPs, in addition to analyzing any modifications made to CenterPoint Energy s program. 20

25 Line Savings Current Program: Average Modified Program: 4% CAP+ 2% ARR 1 2 Working capital allowance $ (346,910) $ (411,840) 3 Change in bad debt expense $ (1,487,118) $ (1,696,062) 4 Lower collections expense $ (37,668) $ (20,657) 5 6 Total ratepayer savings $ (1,871,696) $ (2,128,558) 7 8 Costs 9 Program costs, excl excess admin cost $ 4,657,620 $ 5,031, Working capital allowance $ (119,011) $ 11 Income tax expense $ 630,804 $ 710, Total ratepayer costs $ 5,169,412 $ 5,741, Net (Savings) Cost $ 3,297,716 $ 3,612,873 XI. Summary This evaluation of CenterPoint Energy s Gas Affordability Program shows that the Program satisfied the relevant statutory requirements by lowering the percentage of income participants devote to energy bills, increasing the payment frequency of participants, decreasing the arrears of participants, and lowering utility collection costs. The Program was delivered in a manner coordinated with other bill payment and conservation programs. The Program had some unplanned consequences such as high delinquency drop rates for customers with high arrearage balances. This contributed to an inability to spend all available Program funds and a high level of promotion activity. GAP participants also received lower LIHEAP grants than did non-participants. From a ratepayer perspective, the Program imposed a net cost on ratepayers of about $8.8 million from July 2007 through June 2010, in nominal dollars. The Program also appears to have created some societal benefits; however the Company was not able to quantify those impacts. If the Commission decides to continue a gas affordability program for CenterPoint Energy, the Company has recommended changes that would increase the benefits for all 21

26 participants and especially those with arrears. This would make it more likely that the full all available Program funds would be spent, however fewer customers would participate. XII. Conclusion CenterPoint Energy respectfully submits this evaluation of its Gas Affordability Program. Al though this is not a miscellaneous filing subject to the procedural schedule in Minn. Rule , the Company is aware that interested parties may wish to follow the same procedural schedule. If that timing is adopted, parties would have 30 days, until September 13 to file comments and 10 days until September 23 to file reply comments. This may allow Commission action before conclusion of the 2010 calendar year. 22

27 Attachments and Schedules Minn. Stat. 216B.096 Subd. 15 CenterPoint Energy GAP Tariff Attachment A Attachment B Cost Effectiveness Analysis Supporting Calculations and Workpapers Summary of GAP Annual Report statistics Schedule A Schedule B Schedule C 23

28 Attachment A Minn Stat. 216B.16 Subd. 15.Low-income affordability programs. (a) The commission must consider ability to pay as a factor in setting utility rates and may establish affordability programs for low-income residential ratepayers in order to ensure affordable, reliable, and continuous service to low-income utility customers. By September 1, 2007, a public utility serving low-income residential ratepayers who use natural gas for heating must file an affordability program with the commission. For purposes of this subdivision, "low-income residential ratepayers" means ratepayers who receive energy assistance from the low-income home energy assistance program (LIHEAP). (b) Any affordability program the commission orders a utility to implement must: (1) lower the percentage of income that participating low-income households devote to energy bills; (2) increase participating customer payments over time by increasing the frequency of payments; (3) decrease or eliminate participating customer arrears; (4) lower the utility costs associated with customer account collection activities; and (5) coordinate the program with other available low-income bill payment assistance and conservation resources. (c) In ordering affordability programs, the commission may require public utilities to file program evaluations that measure the effect of the affordability program on: (1) the percentage of income that participating households devote to energy bills; (2) service disconnections; and (3) frequency of customer payments, utility collection costs, arrearages, and bad debt. (d) The commission must issue orders necessary to implement, administer, and evaluate affordability programs, and to allow a utility to recover program costs, including administrative costs, on a timely basis. The commission may not allow a utility to recover administrative costs, excluding start-up costs, in excess of five percent of total program costs, or program evaluation costs in excess of two percent of total program costs. The commission must permit deferred accounting, with carrying costs, for recovery of program costs incurred during the period between general rate cases. (e) Public utilities may use information collected or created for the purpose of administering energy assistance to administer affordability programs.