BEFORE THE ARKANSAS PUBLIC SERVICE COMMISSION IN THE MATTER OF THE ANNUAL DETERMINATION OF THE INTEREST RATE APPLICABLE TO UTILITY CUSTOMER DEPOSITS 1 ) DOCKET NO. 0-10-U ) ORDER NO. 1 1 HEARING BEFORE: 3URL C, ROTENBERRY, Administrative Law Judge THE ABOVE-STYLED MATTER was reported by Lee Ann Dickens, Certified Court Reporter, No.
A P P E A R A N C E S FOR THE PSC GENERAL STAFF: MR, PAUL WARD, Attorney at Law Arkansas Public Service Commission P-0. Box 00 1000 Center Street Little Rock, Arkansas 21-31 (01) 682- Lee Ann Dickens, CCR - Bushman Court Reporting - Certified Court Repoflers (01)32-11 - www.bushmanreporting.com
3 I N D E X WITNESSES D C AL J For the PSC Staff: Rob Daniel 8 (Pre-filed Testimony p- through p. 16) REPORTER CERTIFICATE, Page 18 Lee Ann Dickens, CCR - Bushman Court Reporting - Certified Court Reporters (01132-1 1 - www.bushrnanreporting.com
1 2 3 6 8 10 11 12 I3 1 1 16 1 ia 1 21 22 23 2 2 P R O C E E D I N G S ALJ ROTENBERRY: We will begin. The hearing will please come to order. The matter beeore us this morning is docket No. 0-10-U and is styled "In the matter of the annual determination of the interest rate applicable to utility customer deposits. I' This hearing has been scheduled in accordance with Order No. 1 of this docket, filed by the Commission on September 2, 0. This docket has been established by the Arkansas Public Service Commission for the purpose of considering and establishing the year 10 interest rate to be paid by regulated utilities on customer deposits for utility service- This is an annual proceeding. It is required by statute to be done on or before December 31st of each year or the following year. The General Staff of the Arkansas Public Service Commission has' Eiled prepared testimony in this docket by Mr. Rob Daniel, a financial analyst with the Financial Analysis Section. In that testimony, the General Lee Ann Dickens, CCR - Bushman Court Reporting - Certified Court Reporters (01132-1 1 - www.bushmanreporting.com
1 2 3 6 8 10 11 12 13 1 1 16 1 18 1 21 22 23 2 2 Staff is recommending that the interest rate paid on customer deposits during the year 10 be 1.6 percent. Is that right? MR- DANIEL: Yes, Your Honor. ALJ ROTENBERRY: 1.6 percent. At this point, I will call for the attorneys -- any attorneys present to state their appearances or the record- And it appears, Mr. Ward, by eyeballing the hearing room, you may be the only one that fits that description. MR. WARD: T think so, Your Honor- I'm Paul Ward representing the General Staff of the Arkansas Public Service Commission- And as Your Honor noted, our one witness today is Mr. Rob Daniel. ALJ ROTENBERRY: And, Mr. Daniel, would you hold up your right hand and be sworn, please- (WITNESS SWORN.) ALJ ROTENBERRY: According to my file, there has been no rebuttal testimony filed by any of the regulated utilities in this matter in response to Mr. Daniel's prepared testimony. The only written comment of which Lee Ann Dickens, CCR - Bushman Court Reporting - Certified Court Reporters (01)32-11 - www.bushmanreporting.com
6 1 2 3 6 8 10 11 12 13 1 1 16 1 18 1 21 22 23 2 2 T am aware is a brief letter from Steven Strickland, Vice-president for Regulatory Affairs for Entergy, Arkansas, Inc., who states that Entergy has no objection to the recommendation of 1.6 percent simple interest rate for customer deposits. And Mr. Strickland indicates he was not going to be here for this morning's hearing- Mr- Ward, are you aware of any other written comments that have been filed? MR- WARD: No, Your Honor. ALJ ROTENBERRY: Thank you. At this time, however, I will ask if there are any persons present at the hearing this morning who may wish to offer any public comments with respect to this proceeding. Let the record show there are none. Mr. Ward, do you have any opening remarks? MR. WARD: No, Your Honor. Staff waives the opening statement. ALJ ROTENBERRY: You may call your first witness -- your only witness. MR. WARD: Thank you, Your Honor. Staff calls Rob Daniel- Lee Ann Dickens, CCR - Bushman Court Reporting - Certified Court Repo~ers (01)32-11 - www.bushmanreporting.com
1 2 3 6 8 10 11 12 13 1 1 16 1 18 1 21 22 23 2 2 ALJ ROTENBERRY: You can just keep your seat, Mr. Daniel. MR. DANIEL: Okay. Thank you. ROB DANIEL called as a witness by instance of the PSC General Staff, being previously duly sworn, testified as follows: DIRECT EXAMINATION BY MR. WARD: Q A Would you state your name and employment, please. My name is Rob Daniel- I'm a financial analyst with the General Staff of the Arkansas Public Service Commission. Q Mr. Daniel, did you prepare the prepared testimony that was Eiled in this docket November 3? A Yes. I did. Q Do you have any changes to that prepared testimony? A No. Q If I asked you the same questions in that prepared testimony, would your answers be the same? A Yes- They would. Q Thank you. MR. WARD: Your Honor, I would offer into evidence the November 3 prepared testimony of Lee Ann Dickens, CCR - Bushman Court Reporting - Certified Court Reporters (01)32-11 - www.bushmanreporting.com
8 1 2 3 6 8 Rob Daniel. ALJ ROTENBERRY: Without objection, let Mr - Daniels' pre-filed prepared testimony be made a part of this record. (WHEREUPON, the pre-filed testimony of ROB DANIEL was entered into the record as follows:) 10 11 12 13 1 1 16 1 18 1 21 22 23 2 2 Lee Ann Dickens, CCR - Bushman Court Reporting - Certified Court Reporters (01 132-1 1 - www.bushmanreporting.com
IN THE MATER OFTHEANNUAL 1 DETERMINATION OF THE INTEREST RATE 1 APPLICABLE TO UTILITY CUSTOMER 1 DEPOSITS 1 DOCK T NO. 0-10 PREPARED TESTIMONY OF ROB DANIEL FINANCIAL ANALYST FINANCIAL ANALYSIS SECTION ON BEHALF OF THE GENERAL STAFF OF THE ARKANSAS PUBLIC SERVICE COMMISSION NOVEMBER 3,0
CUSTOMER DEPOSIT INTEREST RATE DOCKET NO. 0-10-U PREPARED TESTIMONY OF ROB DANIEL -1-1 2 Q. 3 A 6 Q, 8 A. 10 11 12 QUALlFlCATlO NS PIease stafe your name and business address. My name is Rob Daniel. My business address is Arkansas Public Senric~; Commission (Commission or APSC), 1000 Center Street, Little Rock, Arkansas, 21. Please describe your present position with the Arkansas Pubfic Service Cornmission Generat Staff (StaiT). 1 am employed as a Financial Analyst in the Financial Analysis Section. In that capacity, 1 perfarm economic and financial analyses, including the determination of the appropriate relative relationship between debt and equiiy capital and caicuiating the cost of debt, preferred stock, and common equity as components for determining the overall required rate of return for jurisdictional utilities. 13 Additionally, 1 evaluate proposed debt and equity issuances, mergers, and 1 1 16 Q, 1 A. 18 1 acquisitions pertaining to the Arkansas jurisdiction, and monitor current economic and market trends and their impact on the cost of capital. PIease describe your education and qualifications. I graduated from the University of Central Arkansas with a Bachelor of Science degree in Business Administration with a major in Finance, and received a Master of Business Administration degree with a concentration in Finance from the Univerd'rty of Arkansas at Little Rock.
CUSTOMER DEPOSIT INTEREST RATE DOCKET NO. 0-10-U PREPARED TESTIMONY OF ROB DANIEL -2- Since joining Staff, I have attended the AnnuaI Regulatory Studies Program at Michigan State University sponsored by the National Association of Regulatory Utility Commissioners. 6 8 10 il 12 13 Q. A. Q. A. PURPOSE What is the purpose of your testimony? I will make a recommendation regarding the appropriate 10 customer deposit interest rate, as directed by Order No. 1. This rate will apply to all jufisdic ional utility companies operating in Arkansas and subiect to the Commission's authority. Are you recommending a change in the 2.8% rate that this Commission last authorized? Yes. I am recommending a customer deposit interest rate of.6%. METHODOLOGY I IS Q. What factors, including the appropriate statute, did you consider in arriving at your recornmen dation??s 1 IB 1 21 22 A. Ark. Code Ann. 236 (02 Replacement) requires the Commission to d&mnine annually the interest rate to be paid on customer deposits for utility service. The new interest rate is to became effective January *I and remain in effect for the calendar year. This statute further provides that interest paid on any deposit should be computed using sirnpk interest and the annual mte of interest set by the Commission for any year shall not be more ihan fen percent (IO%}*
CUSTOMER DEPOSIT INTEREST RATE DOCKET NO. 0-1 0-U PREPARED TESTIMONY OF ROB DANIEL-3- I 2 3 6 8 $0 f1 12 13 1 1 Q. A, In accordance with Rule.01 of the Cclmmission's General Sewice Rules, a ~Hity customer can be required to deposit funds with the utility fir the privilege of obtaining service. While the utility company has the discretion t~ request this deposit, the utility customer does not have the option ofwhether or not to compiy, which makes the customer a forced investor. Given these conditions, the utility customer is not free to (1) decide whether or not to make the investment (deposit) in the utility or (2) select an alternative investment opportunity that might produce a higher rate of return. Therefore, the ufility customer should be allowed a return on investment that would correspand tu the return from a corn parable investment. What characteristics of customer deposits did you consider relevant for identifying a comparable investment? first, I evaluated customer deposits from he perspective of an investment instrument, Rule.06 of the Commission's Genem! Service Rules requires a utiiry to promptly refund a residential customer deposit if the customer has paid 16 -I? 18 I 21 22 all bills by the due dak for the last I2 months. A customer can be assured of principal repayment if the customer meets the requirements of the Ruk. Thus, the principai amount of the depod has a minimal to non-existent default risk characteristic. Accordhgly, a comparable investment instrument would be one with little default risk. Another relevant characteristic of the depos% is its maturity, the Iength of time the utility has use of the funds before refunds are made to the customer.
CUSTOMER DEPOSIT INTEREST RATE DOCKET NO. 0-10-U PREPARED TESTIMONY OF ROB DAN1EL 3 2 3 Q. 6 A, 8 10 11 Q, j2 13 A 1 1 Q..l6 1 A 18 I 21 Therefore, consistent with the Rule, a comparable investment instrument should have a term of at least one year. Given these considerations, which investment insburnen would best serve as a reasonable proxy or estimating the appropriate return on ufiiiity customer deposits? Considering principal risk, maturity, and the investment alternatives available to Arkansas ratepayers, utility customer deposits are most comparable to certificates of deposit. Accordingly, I selected a certificafe of deposit with a principal amount of $00 and a maturity of one-year to serve as a proxy for customer deposits. Has the Commission previously accepted this approach to determining he annual customer deposit interest rate? Yes. The Commission has accepted this methodology since 18 when % first began establishing customer deposit interest rates, Did you conduct a survey of financial instihrtions in Arkansas concerning the interest rate currenay offered on a $00, one-year certificate of deposit? Yes. On October 2, 0, I conducted a telephone survey of ten financial hstitufions located throughout Arkansas for $00, oneyear cerb'ficate of deposit interest rates. The average rate currently offered by fhese ken financial institutions is 1.6%. Atkchment RD-1 presents, by insaution, the oneyear certificate of deposit inkrest rates rounded to one decimal place.
CUSTOMER DEPOSIT INTEREST RATE DOCKET NO. 0-10-U PREPARED TESTiMONY OF R08 DANIEL -- 1 Q. 2 3 A. What is your recommendation to this Commission regarding the customer deposit interest rate to be paid by utility companies beginning January I-, 10 and ending December 33,10? I recommend the Commission require all jurisdictional utilities to pay simple interest at a rate of 3%. 6 Q. Does fiis conclude your testimony at this fime? A, Yes.
CUSTOMER DEPOSIT INTEREST RATE DOCKET NO. 0-j 0-U AlTACHMENT RD-1 $00 One-Year Certificate of Deposif Inkresf Rates Financial 1 nstifutio n Location Rate Bank of Little Rock fidelity National Bank First financial Bank Metropolitan National Bank First Security Bank Parkway Bank Simmons First National Bank Pine Bluff National Bank Liberty Bank Summit Bank Little Rock West Memphis El Dorado Little Rock Springdafe Rogers Little Rock Pine Bluff J onesboro Hot Springs 1.8% 2.0% 1.% 2.0% 1.% 1.% 1 -% 1.% 1.3% 1.% Average 1.6% Source: Rates were compiled from a telephone survey of financial institutions conducted on October 2, 0,
CERTIFICATEOF SER VICE this Novmlk 3,0. A&?&?& PaulJ. ad
1 1 2 3 6 8 10 11 12 13 1 1 16 1 MR. WARD: questions, Your Honor. And I have no further ALJ ROTENBERRY: I have no questions of Mr. Daniel. Does that conclude the General Staff's presentation of its case, Mr. Ward? MR. WARD: Yes, Your Honor. Staff rests and Staff will waive closing statements. ALJ ROTENBERRY: And it looks like we've gone just about as far as we can go. The General Staf E's recommendation of 1.6 percen simple interest rate for the year '10 will be the interest rate. And unless there's anything further, we'll adjourn the hearing- Thank you. (Hearing adjourned at :3 a.m., 12-1-0.) ********* 18 1 21 22 23 2 2 Lee Ann Dickens, CCR - Bushman Court Reporting - Certified Court Reporters (01)32-11 - www.bushrnanreporting.com
18 C E R T I F I C A T E STATE OF ARKANSAS 1 1 ss COUNTY OF PULASKI 1 IN RE: IN THE MATTER OF THE ANNUAL DETERMINATION OF THE INTEREST RATE APPLICABLE TO UTILITY CUSTOMER DEPOSITS; DOCKET NO. 0-1 0-U I, LEE ANN DICKENS, Certified Court Reporter #03, do hereby certify that the facts stated by me in the captfon on the foregoing proceedings are true; and that the foregoing proceedings were reported verbatim through the use of a Stenotype machine and thereafter transcribed by me or under my direct supervision to the best of my ability, taken at the time and place set out on the caption hereto. I FURTHER CERTIFY, that I am neither counsel for, related to, nor employed by any of the parties to this action to which this proceeding was taken; and Eurther, that I am not a relative or employee or any attorney or counsel employed by the parties hereto, nor financially interested, or otherwise, in the outcome of this action. WITNESS MY HAND AND SEAL this th day of December, 0. 1, # / 1' ' +'</ L A - LEE ANN DICKENS Arkansas State Supreme Court Certified Court Reporter #03 Lee 8usl?man Court Reporting - Certified Court Reporters (01)32-11 - www.bushmanreporting.com