BEFORE THE ARKANSAS PUBLIC SERVICE COMMISSION

Transcription

1 BEFORE THE RKNSS PUBLIC SERVICE COMMISSION IN THE MTTER OF N INTERIM RTE SCHEDULE OF CENTERPOINT ENERGY RESOURCES CORP., D/B/ CENTERPOINT ENERGY RKNSS GS IMPOSING SURCHRGE TO RECOVER COSTS ND EXPENSES REUIRED BY LW RELTING TO THE PROTECTION OF THE PUBLIC HELTH, SFETY ND THE ENVIRONMENT ND PPLICTION FOR PPROVL OF RELTED TRIFF REVISION DOCKET NO. 0-0-U DIRECT TESTIMONY ND EXHIBITS OF WILLIM B. MRCUS ON BEHLF OF THE RKNSS TTORNEY GENERL ugust, 0

2 0 PREPRED TESTIMONY OF WILLIM B. MRCUS ON BEHLF OF THE TTORNEY GENERL RKNSS PSC DOCKET NO. 0-0-U. Please state your name, business affiliation and address.. I am William B. Marcus. I am Principal Economist for JBS Energy, Inc., D Street, West Sacramento, California 0.. Please provide your qualifications.. My qualifications are attached as Exhibit WBM-. I have years of experience with energy utility issues. I have previously testified or made formal comments before about forty federal, state, provincial, and local utility and environmental regulatory bodies in the U.S. and Canada on issues including utility restructuring and performance-based ratemaking, revenue requirements, resource planning, and cost-of-service and rate design. I have filed testimony with this Commission on a number of occasions since.. On whose behalf are you appearing?. I am appearing on behalf of the rkansas ttorney General. 0 What is the purpose of your testimony? I address the request by CenterPoint Energy rkansas (CenterPoint or the Company for recovery of $. million of revenue requirement for capital and expenses under ct 0, especially for costs under the Transmission Integrity Management Program (for CenterPoint s high pressure pipelines and Distribution Integrity Management Program (for its lower pressure pipelines.. What are the requirements under ct 0 ( --0 as you understand them?. While I am not a lawyer, the ttorney General s office previously presented this analysis in Docket -0-U, which I refer to for guidance. The General ssembly described a very specific set of circumstances for when certain expenditures could qualify as the basis for calculation of an ct 0 surcharge. The expenditures in question must be ( incurred Prepared Testimony of W. B. Marcus on behalf of the ttorney General Page rkansas PSC Docket 0-0-U (CenterPoint Energy rkansas 0 request for ct 0 Surcharge

3 0 0 0 because of legal requirements, ( relate to the protection of the public health, safety, or the environment, ( with respect to existing facilities used and useful to serve the public in providing service to the utility s customers, ( substantial, ( additional, ( not included in the utility s rates, ( unrecoverable in a prompt and timely fashion under existing regulatory procedures, and ( not employment compensation or benefits. Do these costs incurred in these circumstances constitute the type of expenditure that should be recovered under ct 0? I believe that there are significant questions regarding some or all of the expenditures. I note that the ttorney General has appealed the Commission s Order No. in Docket - 0-U and that questions raised in that appeal are likely to be germane to this case. Can you expand on your reasoning? Yes. s the ttorney General s office has contended in other dockets, as pointed out above, the legislation requires that a surcharge can only be required if, in order to comply with such legislative or administrative requirements, utilities are required to make substantial additional investments or incur additional expenses with respect to existing facilities. Section --0 (emphasis added. Finally, I think it is helpful to look at the law s purported purpose. s seen in rkansas Code nnotated, the Emergency clause which accompanied the bill that became ct 0 stated: Existing statutes of this State do not provide for a procedure to permit immediate recovery of additional expenditures incurred by public utilities as a result of legislative or regulatory requirements without the filing of a general rate case. These circumstances result in a gross inequity in that utilities must make expenditures to provide facilities which are clearly in the public interest which costs cannot be recovered in a prompt and timely manner by the utility. This indicates to me that ct 0 was designed to address a situation when a utility was faced with a large expense as a result of health and safety laws or regulations that it would have difficulty paying for under the usual general rate case procedures. Prepared Testimony of Emon O. Mahony on behalf of the ttorney General, Docket -0-U, pp. -. Prepared Testimony of W. B. Marcus on behalf of the ttorney General Page rkansas PSC Docket 0-0-U (CenterPoint Energy rkansas 0 request for ct 0 Surcharge

4 . s a result of the statute, what issues do you believe are relevant?. I will examine both specific requests and CenterPoint s financial condition to evaluate whether the expenditures are substantial and additional as described in the statute or whether there is any gross inequity, as described in the emergency clause. I will also address whether these expenditures are not included in the utility s rates, and unrecoverable in a prompt and timely fashion under existing regulatory procedures. 0 0 Do you have concerns regarding the automatic recovery of Transmission and Distribution Integrity Management Program costs under ct 0? I agree that federal regulations exist in this area, but on a policy level, the broadness of CenterPoint s overall claim is breathtaking. CenterPoint effectively claims that it would be allowed to recover through a rider costs that the Company would have been required to incur whether the DIMP and TIMP programs existed or not. Essentially, some of the costs that CenterPoint wants to recover do not meet the test that they are additional costs caused by the regulation. The response to G DR - (Exhibit WBM- indicates that, under CenterPoint s theory of ct 0, virtually every pipe replacement that is not paid for by someone else is subject to recovery between rate cases under some type of rider. The only apparent exceptions are ( pipe replacements required because a private party needed a pipe to be moved or ( the extra costs associated with a betterment at the time of pipe replacement (improvement to the pipe for reasons such as increasing its capacity or repositioning it to allow it to serve additional customers or improve reliability at the time of replacement. CenterPoint alleges that any pipe replacement undertaken other than in these narrow categories above, is caused by DIMP or TIMP and therefore recoverable. Can you give a specific example of where this policy does not appear appropriate? Yes. It appears that some of the costs requested for ct 0 recovery (a are for work that is required in the ordinary course under common sense and existing rules governing Prepared Testimony of W. B. Marcus on behalf of the ttorney General Page rkansas PSC Docket 0-0-U (CenterPoint Energy rkansas 0 request for ct 0 Surcharge

5 0 0 franchised utilities, regardless of federal regulations and (b may involve imprudence by the past owners of the CenterPoint system. These are not additional costs. For example, looking at Mr. Bish s testimony at pages -, a particular work element should certainly not be charged to ratepayers under ct 0. This is the case where CenterPoint decided that it needed to dig up a pipe to determine whether it was a real gas pipe (instead of a water or sewer pipe. Looking at the facts as presented by Mr. Bish in the most favorable light to CenterPoint, it is not the ratepayers responsibility to pay for it under ct 0. If CenterPoint thought it had a pipe distributing gas that was not a standard gas pipe because it did not have adequate records or the records it had raised a concern, it would have had to investigate that issue, whether there was a federal regulation or not. Gas companies have been obligated to operate their pipeline systems safely since the beginning of their utility franchises, without ct 0 recovery for every such action. That is a critical part of their job. Excavating and inspecting this pipe was common sense federal regulation or no federal regulation. CenterPoint dug that pipe up as part of its ongoing responsibilities to operate a safe system because it was concerned that the installer might have installed water or sewer pipe (because of the name of the organization that manufactured the pipe and because there were no records to prove otherwise. This is not an additional cost covered by ct 0 by any stretch of the imagination even if tangentially, the federal program might have been the triggering reason why CenterPoint eventually figured out years after the fact that it had this allegedly egregious problem. There may also be a prudence issue. CenterPoint apparently purchased pipe from the previous owners of rkla that did not have adequate records to prove to CenterPoint that it was a real gas pipe. Now ratepayers are asked to pay for it. Where was the due diligence? nd should management and the shareholders who hired them, or ratepayers, be responsible for this kind of failure to keep adequate records? re there other potential issues of concern regarding specific ct 0 projects? Prepared Testimony of W. B. Marcus on behalf of the ttorney General Page rkansas PSC Docket 0-0-U (CenterPoint Energy rkansas 0 request for ct 0 Surcharge

6 0 Yes. One possible concern would arise in the event that records are not available to support pressure tests on high pressure pipe from the time of installation and CenterPoint requests some kind of recovery under ct 0 for testing or replacing the pipe. If any high pressure pipe installed after 0 does not have such records from its installation, it would have been in violation of federal regulations ever since either the company failed to run the test or lost the records. If any of these projects exist, the problem was not caused by the current TIMP regulations but by a failure to comply with long-standing earlier regulations. nd ct 0 recovery is not retroactive back to 0 or before. It may be reasonable for the Commission to extend a requirement for pressure test records back to an even earlier date. The development of replacement records on these pipes through inspections and tests should not be charged to ratepayers, ct 0 or otherwise. Moreover, in the event that the lack of data is the reason for a replacement, the cost of such tests should be subtracted from a pipe replacement, as was done in California. re there more broad issues that relate to whether expenditures are additional to those in current rates? 0 Yes. CenterPoint has been doing pipe replacements (other than those covered by the Main Replacement Program - MRP and highway relocations for years in the ordinary course of business long before the existence of DIMP and TIMP and the ct 0 filing. It may allegedly be doing more of them now than in the past, but it is reasonable to assume that some of this work would have been done anyway because of general safety concerns and other reasons. These specific individual new projects may not be in the Mr. Bish referenced one project without records on pages -. CFR.. More limited records are required for pipes installed after (i.e., maximum pressures are related to the maximum operating pressure for pipelines installed from -0. Some states have had requirements for pressure-testing new pipes and retaining records for a longer period of time. For example, California s rules go back to. (California PUC General Order, cited at California Public Utilities Commission Decision No. --00, p. While there was no explicit governmental rule, the merican Standards ssociation Code for Pressure Pipeline (S B. established in the industry standard of preservice pressure testing for natural gas pipeline (Id., at The California PUC required PG&E shareholders to pay for the cost of inspecting pipes without records back to and, if PG&E chose to replace a pipe rather than inspecting it, to offset the cost of an inspection against the replacement capital cost. (Id., at - Id., at -. Prepared Testimony of W. B. Marcus on behalf of the ttorney General Page rkansas PSC Docket 0-0-U (CenterPoint Energy rkansas 0 request for ct 0 Surcharge

7 0 rates adopted as a result of Docket 0--U, but the expectation that some amount of such projects will occur is effectively comprehended in base rates, because these projects have occurred in the past, and rates are deemed just and reasonable as a whole until found otherwise. If most pipeline replacement and relocation projects are funded by ct 0, it is questionable whether all new projects are additional, given that existing rates have an amount of depreciation reserve as a percentage of rate base, and that percentage has been rising. Thus giving CenterPoint 00% of these projects could be an overreach. Existing projects in base rates are depreciated, and new projects are built. t the present time, except for MRP and ct 0, there is no growth in CenterPoint s rate base. This fact is shown by the table below, which compares the total change in CenterPoint s net plant in Calendar year 0 to the change in MRP and ct 0 plant. For MRP, we used the filings effective March, 0 and 0 as a proxy for the calendar year; for ct 0, we used the filings from last year and this year. Table : Gross and Net Plant, MRP, ct 0, and ll Other rkansas Plant ($ 000 Total rk. Plant 0 0 Change Gross Plant $,0 $ 0, $, cc Depr,,0, Net Plant,,0, MRP //0 //0 Change Gross Plant $, $, $,0 cc Depr,,, Net Plant 0,0 0, 0, ct Change Gross Plant $,0 $,0 $,0 cc Depr,, 0 Net Plant 0,,, Other rk. Plant 0 0 Change Gross Plant $,0 $, $, cc Depr, 0,0,0 Net Plant,,0 0 Prepared Testimony of W. B. Marcus on behalf of the ttorney General Page rkansas PSC Docket 0-0-U (CenterPoint Energy rkansas 0 request for ct 0 Surcharge

8 Essentially, all new net plant is being funded through the MRP and ct 0; existing rate base including plant built to generate revenue such as new customer connections - is basically flat (although gross plant not recovered through riders, which governs depreciation expense, is rising at.% per year. Moreover, some of the new projects outside of ct 0 generate new revenue that should pay for them. Will you discuss CenterPoint s financial position, as it relates to whether its ct 0 projects are substantial, additional, not included in the utility s rates, and unrecoverable in a prompt and timely fashion? 0 0 Data provided in CenterPoint s nnual Reports and in responses to data requests by the ttorney General suggest that CenterPoint s financial position has been improving significantly in recent years. CenterPoint s rkansas revenue (excluding exact recovery riders for gas, municipal taxes, and energy efficiency have stabilized and increased, albeit slowly. CenterPoint s rkansas operations and maintenance costs (excluding gas have been steady over the last four years. fter also removing energy efficiency recovered by an exact recovery rider remaining O&M expenses have declined by about % before considering ct 0 expenses. The total of O&M, depreciation and taxes other than income taxes has declined by.% from Given that CenterPoint has placed a block of O&M and depreciation expenses into riders like the ct 0 request and the Main Replacement Program (MRP rider, the result is that the rkansas operating expenses contained in base rates are falling even faster than total expenses and taxes. s a result, CenterPoint s rkansas net income has doubled from 00 to 0, and there has been an even faster rate of increase of utility operating income, because nonoperating income has been flat to declining. CenterPoint Energy has paid off about 0% of its long-term debt since 00 (from $0 million to $ million without replacing it with short-term debt and has increased its equity capitalization from $ million to $ million in that time frame. rough estimate of return on equity suggests that the rkansas operations of CenterPoint are likely to have earned their authorized return or slightly more in 0, and may be Prepared Testimony of W. B. Marcus on behalf of the ttorney General Page rkansas PSC Docket 0-0-U (CenterPoint Energy rkansas 0 request for ct 0 Surcharge

9 0 0 earning less than authorized in 0 only because of the fact that its financial capitalization shown in its annual report is now close to % equity. What is your conclusion? We are not looking at an unhealthy company struggling to pay its bills at the moment. It appears that recovery of costs through riders coupled with cost reductions in areas covered by base rates are causing CenterPoint s profits to increase. s a result, given CenterPoint s financial condition today it is difficult for me to claim that these ct 0 costs are substantial, additional, not included in the utility s rates, and unrecoverable in a prompt and timely fashion. Has CenterPoint been able to show that ct 0 recovery is substantial? Not necessarily. Mr. Stevens goes out of his way to discuss how small the additional recovery is in this phase. He calculates an incremental impact of surcharge increases of only $00,000 or 0.% of base rates relative to the old surcharge (page. The existing surcharge is about.% of revenue, which might be considered a little larger if one is not also looking at the company s other cost reductions and the impact of its MRP surcharge. What has CenterPoint said regarding how this filing affects its financial position? In response to G DR -0, as well as in Mr. Stevens testimony (pp. -, CenterPoint stated that with ct 0 recovery it expects to be able to not file a rate case until the fourth quarter of 0. Do you agree? It appears to me that if this surcharge were to be granted that CenterPoint could actually stay out longer, given the information in its annual reports through 0. It also may be reasonable to have a rate case and look at the company s operations at some time relatively soon, given that CenterPoint expects to not have a rate case for about eight years given the MRP, ct 0, and the Billing Determinant djustment (BD. Equity divided by the sum of long-term debt plus equity. Prepared Testimony of W. B. Marcus on behalf of the ttorney General Page rkansas PSC Docket 0-0-U (CenterPoint Energy rkansas 0 request for ct 0 Surcharge

10 0 What are your conclusions and recommendations? The Commission should carefully examine whether the costs requested are in fact additional to those currently incurred and whether they are substantial, not included in the utility s rates, and unrecoverable in a prompt and timely fashion given the remainder of CenterPoint s finances and operations. The Commission should also place common-sense limits on recoverability of costs rather than adopting CenterPoint s expansive definition that all but a very few main replacements that it pays for should be recoverable in riders. Not every main replacement is an additional cost. Finally, the Commission should specifically not allow recovery of inspection costs in cases where pressure records are unavailable on projects built after some date no later than 0 (and possibly as early as and should subtract estimated inspection costs from main replacement costs on any projects where a replacement is done in lieu of an inspection if these records are missing. Does this complete your testimony, Mr. Marcus? Yes. Thank you. Prepared Testimony of W. B. Marcus on behalf of the ttorney General Page 0 rkansas PSC Docket 0-0-U (CenterPoint Energy rkansas 0 request for ct 0 Surcharge

11 WBM- ualifications of William B. Marcus

12 Exhibit WBM- Page of William B. Marcus Principal Economist JBS Energy, Inc. William B. Marcus has years of experience in analyzing electric and gas utilities. Mr. Marcus graduated from Harvard College with an.b. magna cum laude in economics in and was elected to Phi Beta Kappa. In, he received an M.. in economics from the University of Toronto. In July,, Mr. Marcus became Principal Economist for JBS Energy, Inc. In this position, he is the company s lead economist for utility issues. Mr. Marcus is the co-author of a book on electric restructuring prepared for the National ssociation of Regulatory Utility Commissioners. He wrote a major report on Performance Based Ratemaking for the Energy Foundation. Mr. Marcus has prepared testimony and formal comments submitted to the Federal Energy Regulatory Commission, the National Energy Board of Canada, the Bonneville Power dministration, the U.S. Bureau of Indian ffairs, U.S. District Court in San Diego, Nevada County Municipal Court; committees of the Nevada, Ontario and California legislatures and the Los ngeles City Council; the California Energy Commission (CEC, the Sacramento Municipal Utility District (SMUD, the Transmission gency of Northern California, the State of Nevada s Colorado River Commission, a hearing panel of the lberta Beverage Container Management Board; two arbitration cases, environmental boards in Ontario, Manitoba, and Nova Scotia; and regulatory commissions in lberta, rizona, rkansas, British Columbia, California, Colorado, Connecticut, District of Columbia, Hawaii, Iowa, Manitoba, Maryland, Massachusetts, Nebraska, Nevada, New Jersey, New Mexico, North Carolina, Northwest Territories, Nova Scotia, Ohio, Oklahoma, Ontario, Oregon, South Carolina, Texas, Utah, Vermont, Virginia, Washington, Wisconsin, and Yukon. He testified on issues including utility restructuring, stranded costs, Performance-Based Ratemaking, resource planning, load forecasts, need for powerplants and transmission lines, environmental effects of electricity production, evaluation of conservation potential and programs, utility affiliate transactions, mergers, utility revenue requirements, avoided cost, and electric and gas cost of service and rate design. From July, through pril,, Mr. Marcus was an economist at the CEC, first in the energy development division and later as a senior economist in the CEC s Executive Office. He prepared testimony on purchased power pricing and economic studies of transmission projects, renewable resources, and conservation programs, and managed interventions in utility rate cases. From pril,, through June,, he was principal economist at California Hydro Systems, Inc., an alternative energy consulting and development company. He prepared

13 Exhibit WBM- Page of financial analyses of projects, negotiated utility contracts, and provided consulting services on utility economics. rkansas Testimony rkansas Electric Cooperative Corporation ( ECC Docket 0--U rkansas Oklahoma Gas Corporation ( OG Dockets -0-U, 0-0-U, 0-00-U and 0-0-U CenterPoint Energy rkansas and predecessors ( CenterPoint Dockets 0--U, 0--U and 0--U The Empire District Electric Company ( EDE, Dockets 0-0-U and 0-00-U Entergy rkansas, Inc. ( EI General Rate Case Dockets -0-U, 0-0-U, and 0-0-U and other Dockets -0-U, -0-U, -0-U, 0-0-U. 0--U, 0--U, 0- -U, 0-0-U and 0--U Oklahoma Gas and Electric ( OG&E Dockets 0-0-U, 0-0-U and 0-00-U Source Gas rkansas (SG and rkansas Western Gas Company ( WG Dockets -0-U, 0--U, 0--U and 0--U Southwestern Electric Power Company ( SWEPCO : General Rate Case Dockets No U and --U and Docket -00-U. Conservation-related dockets (0--U, 0-0-TF, 0-0-TF, 0-0-TF and 0-0-TF, 0- -P, Restructuring Investigation Docket No U (both September, 000 and September, 00 phases pproximately 0 rate unbundling cases for co-ops and investor-owned utilities, most of which were settled.

14 WBM- CenterPoint Energy s Response to ttorney General s Data Request - in PSC Docket No. 0-0-U

15 Exhibit WBM- COMPNY NME: COMPNY NME: DTE RECEIVED: //0 DTE DUE: //0 EXTENSION DTE: RKNSS PUBLIC SERVICE COMMISSION PSC DOCKET NO. 0-0-U CT 0 REUEST NO.: G- CENTERPOINT ENERGY RESOURCES CORP., D/B/ CENTERPOINT ENERGY RKNSS GS INFORMTION REUESTED: Under CenterPoint s interpretation of ct 0, please describe any circumstances known to CenterPoint where pipeline replacement or system maintenance would not be potentially eligible for ct 0 recovery? REUESTED BY: ttorney General RESPONSE: Pipeline replacement or system maintenance would be potentially eligible for recovery under ct 0 if it can be demonstrated that the pipeline replacement or system maintenance is required by legislative or regulatory requirements, is related to the protection of the public health, safety or the environment, and is not included in the Company s existing rates. Examples of pipeline replacement or system maintenance that potentially would not be eligible for ct 0 recovery are: Projects which are fully reimbursable by a third party such as the rkansas Highway and Transportation Department. Reimbursable portions of projects which are otherwise eligible for ct 0 recovery Replacement projects requested by a third party such as a subdivision or commercial property developer. Projects which are fully recoverable under the Company s Main Replacement Program (MRP. Recoverable portions of MRP projects which are only partially recoverable under MRP but which are otherwise eligible for ct 0 recovery. For those projects that are required as a result of Public Improvement Relocation or Integrity Management regulations, the portion of the project that is considered a "betterment". See also Direct Testimony and Exhibits of Jeffrey. Bish Page Line for further explanation. SUBMITTED BY: Jeffrey Bish RESPONSIVE DOCUMENTS: None The foregoing response to the above information request is accurate and complete, and contains no material misrepresentations or omissions based upon present facts known to the undersigned. The undersigned agrees to immediately inform the Requestor if any matters are discovered which would materially affect the accuracy or completeness of the information provided in response to the above information request. Signature of Company Representative DTE PROVIDED: //0

16 CERTIFICTE OF SERVICE I, Emon O. Mahony, do hereby certify that on the th day of ugust, 0, I provided a copy of the above and foregoing Direct Testimony and Exhibits to the following at the indicated address or by first class mail, postage prepaid, if no address is indicated: Fran Hickman PSC General Staff - Legal 000 Center Street P O Box 00 Little Rock, R 0 Fhickman@psc.state.ar.us Robert Rhoads Hall Estill North East ve., Suite 0 Fayetteville, R 00 rrhoads@hallestill.com Stephanie Hammons Centerpoint Energy Resources Corp. 0 W. Capitol Ste. 0 Little Rock, R 0 stephanie.elmore@centerpointenergy.com Susan D'uteuil PSC Commissioners' Staff 000 Center Street P O Box 00 Little Rock, R 0 susand@psc.state.ar.us Thomas Schroedter Hall Estill 0 S. Boston, Suite 00 Tulsa, OK 0 tschroedter@hallestill.com Dennis Hansen PSC Commissioners' Staff 000 Center Street PO Box 00 Little Rock, R 0 dhansen@psc.state.ar.us Kenny Henderson 0 West Capitol Suite 0 Little Rock, R 0 kenny.henderson@centerpointenergy.com /s/ Emon O. Mahony Emon O. Mahony