7-2500-16714-2
E001/GR-05-748
STATE OF
OFFICE OF ADMINISTRATIVE
HEARINGS
FOR THE
|
In
the Matter of the Proposed Increase in Electric Rates of Interstate Power and
Light Company |
FINDINGS OF FACT, CONCLUSIONS, AND RECOMMENDED ORDER |
The above-entitled matter came on for evidentiary hearing
before Administrative Law Judge Richard C. Luis on December 12, 2005. The hearing was held in the Large Hearing
Room of the Public Utilities Commission, in
Jennifer
Moore, Attorney at Law,
Karen
Hammel, Assistant Attorney General,
Ron
Giteck, Assistant Attorney General, 900 Bremer Tower,
Robert Harding, Lillian Brion,
and Louis Sickmann, Rate Analysts,
Notice is
hereby given that, pursuant to Minn. Stat. § 14.61,
and the Rules of Practice of the Minnesota Public Utilities Commission
(“Commission”) and the Office of Administrative Hearings, exceptions to this
Report, if any, by any party adversely affected must be filed according to the
schedule which the Commission will announce.
Exceptions must be specific and stated and numbered separately. Proposed Findings of Fact, Conclusions and
Order should be included, and copies thereof shall be served upon all
parties. Oral argument before a majority
of the Commission will be permitted to all parties adversely affected by the
Administrative Law Judge’s recommendation who request such argument. Such request must accompany the filed
exceptions or reply (if any), and an original and 15 copies of each document
should be filed with the Commission.
The Commission will make the final
determination of the matter after the expiration of the period for filing
exceptions as set forth above, or after oral argument, if such is requested and
had in the matter.
Further notice is hereby given that
the Commission may, at its own discretion, accept or reject the Administrative
Law Judge’s recommendation and that said recommendation has no legal effect
unless expressly adopted by the Commission as its final order.
IPL and the Department, either through investigation and
responsive testimony, or through a Settlement, a copy of which is in the record
that accompanies this Report, have resolved all the issues between them. The OAG raised the following issues:
·
Does the residential customer charge in the settlement account for noncost factors?
·
Is the residential customer charge agreed to in the Settlement contrary
to public policy?
·
Is the analysis of the increase in the residential customer charge based
on a flawed analysis of low volume customers and would that increase result in
rate shock to residential customers?
·
Does the inclusion of TRANSLink start-up costs
violate rate making principles and must those costs be excluded from the
settlement?
IPL and the Department have requested that Findings of Fact be made with
respect to the issues addressed in the Settlement Agreement, in addition to the
issues raised by OAG. Those findings are
included in this Report, together with the findings on the disputed issues.
Based upon all the proceedings herein, the Administrative Law Judge makes
the following:
Jurisdictional-Procedural
Background
1.
On May 16, 2005, IPL filed a Petition with the Commission, under Minn.
Stat. § 216B.16, for an increase in electric rates of $4,768,696 (an
approximately 7.1 percent increase over current rates).[1] IPL also filed a Petition for Interim Rates pending
the resolution of the requested rate increase.
[2]
2.
On July 8, 2005, the Commission issued an Order accepting the filing and
suspending the proposed rate increase until the Commission has determined the reasonableness
of the proposed rates or the expiration of the ten-month statutory period
(whichever comes first) under Minn. Stat. § 216B.16(2) (2004).
3.
On July 8, 2005, the Commission issued a Notice and Order for Hearing,
directing that a contested case hearing be convened to determine the
reasonableness of the rate changes proposed by IPL. The Commission also approved the interim rate
request, permitting IPL to charge an additional annualized $3,385,186 in rates. IPL is collecting interim rates subject to
refund if the interim rates are in excess of the final rates determined by the
Commission.
4.
On July 25, 2005, a prehearing conference was
held before Administrative Law Judge Richard C. Luis in
Summary of Public Comments
5.
Members of the public were given the opportunity to testify regarding
the proposed increase. A public hearing
was held by videoconference on October 18, 2005. Judge Luis presided over that meeting from
the Office of Administrative Hearings in
6.
Tom Aller, President of Interstate, described
the costs that the Company has borne, particularly with respect to developing
“black start” capacity and the commissioning of the Emery Generating Station in
May, 2004 near
7.
Dale Lusti, Public Utility Financial Analyst
for the Department, explained the role of the Department in assessing IPL’s proposed rate increase. Particularly, Mr. Lusti
noted the Company’s proposed expenses, investments, cost of equity, sales, and
rates as areas of inquiry by the Department.
The Department’s initial review was described as reducing the Company’s
requested revenue increase by 4.6 million dollars, but also that additional
information was expected from the Company what would support a figure closer to
IPL’s requested increase.[4]
8.
Robert Harding, Rates Analyst for
the Commission, explained the Commission’s role in evaluating the Company’s rate
request and the process by which that evaluation and ultimate decision is
made. Mr. Harding strongly encouraged
the members of the public in attendance to provide information to assist the
Commission in making its decision.[5]
9.
Victoria Simonson, City Manager
of the City of
10.
Linda Baird, a resident of Albert Lea, expressed concern over the
proposed increases, both to residential rates and to the indirect impact of increases
in water and sewer costs likely to be passed on to the City’s residents. Ms. Baird suggested that the size of the
proposed increase would result in higher inflationary pressures on households
and urged the Commission to approve a lower rate increase than the increase
proposed by the Company.[7]
11.
John Bisek, manager of a grain facility in
Glenville, testified that IPL’s continued capital
investments in electricity production and its distribution network are very
important to maintain the dependability of electricity for local
businesses. Mr. Bisek
described the improvements to his business achieved through the Company’s
conservation programs with respect to grain handling and grain drying, which
are dependent on electricity. The need
to maintain a dependable electricity supply, in Mr. Bisek’s
opinion, justified the increase in rates proposed by the Company.[8]
12.
Only one written comment was received from an affected ratepayer. The customer described the impact of cost
increases on senior citizens and urged that salary cuts come before rate
increases.
Description of the Company
13.
IPL was formed as a result of a 1988 merger,
where Interstate Power Company (“IPC”), IES Utilities Inc. (“IES”) and
Wisconsin Power and Light Company (“WPL”) became wholly-owned utility operating
subsidiaries of the newly formed Interstate Energy Corporation. In 2002, IPC and IES were merged to form
Interstate Power and Light (“IPL” or the Company). IPL and WPL are wholly-owned subsidiaries of
Alliant Energy, previously known as Interstate Energy Corporation. Alliant Energy’s headquarters are located in
EXPENSE ADJUSTMENT
ISSUES
TRANSLink Expenses
14.
The Federal Energy Regulatory Commission (FERC) established in its Order
888 that the electric transmission system be administered by an
independent entity.[11] This requirement insures comparable access to
transmission facilities by all users.
IPL currently meets this Federal requirement through its membership in the
Midwest Independent Transmission System Operator, Inc. (MISO). TRANSLink was
proposed to be an independent transmission company (ITC) member of MISO.
15.
IPL expressed
concern over a number of unresolved issues in the existing transmission segment
of its business. IPL expressed concern over adequate transmission outlets for
new wind energy resources, the need for new transmission investment, and
elimination of operating seams. These
issues are currently addressed through IPOs
participation with MISO.[12]
16.
TRANSLink Transmission Company, LLC (TRANSLink)
was proposed as a separate entity to own and manage electric transmission
facilities. TRANSLink’s proposed status as an independent
transmission company (ITC) member of MISO was designed to meet IPL’s obligations under Order 888. Several
17.
In its initial filing, IPL proposed to recover $156,475,
amortized over a over a five- year period in
Minnesota-related startup expenses for TRANSLink.[15] In the settlement arrived at between the Department
and IPL, the TRANSLink expenditure recovery was
reduced from the proposed $31,000.00 annual recovery to $15,648.00.[16]
18.
The OAG objected
to the inclusion of any TRANSLink expenditures in
rates. Since the project never came to
fruition, the OAG asserts that the ratepayers are being charged for something
that does not exist. The OAG asserts
that TRANSLink was never used to provide any service
to IPL’s ratepayers and therefore the project could
not constitute furnishing electricity service to ratepayers. Additionally, the OAG maintains that:
· The TRANSLink costs were
incurred between 2001 and 2003, and are therefore outside the test year.
· IPL did not request recovery of these costs in its
prior rate proceeding.
· There has been no Commission determination that these
expenses were prudently incurred.
· TRANSLink, having never been started, was not used or useful in
service to the public, as required under U.S. Supreme Court precedent.[17]
19.
Citing the FERC rules for the Uniform System of Accounting, the OAG
maintains the TRANSLink project falls under
prohibition for including expenses for abandoned construction projects.[18] Approval of such expenses, the OAG maintains,
would result in a “very bad precedent” putting ratepayers at risk of paying for
imprudent, abandoned utility enterprises.[19]
20.
IPL disputed the OAG’s position, noting that
there is nothing in the record to support a conclusion that the TRANSLink start-up expenses are imprudent. IPL contrasts the capital investment
disallowed in the cited matters, to the cost expenses incurred for TRANSLink.[20] The treatment as allowable expenses is
consistent with a prior Commission Order.[21] IPL also noted that the Minnesota Supreme
Court overturned a Commission Order disallowing cost recovery on an abandoned
project.[22] In that decision, the Minnesota Supreme Court
stated:
In general, regulators have allowed recovery of
investment and cancellation costs of abandoned projects through rates. Utilities have usually been allowed recovery
of annual amortization expense from the ratepayers as a component of total cost
of service. [citation
omitted][23]
21.
The Department noted that the initial proposal was to recover 100% of
the TRANSLink start-up costs. The Department’s initial position was to
oppose all recovery of these costs, since the project had been terminated and
the request for Commission approval withdrawn.[24] The Department agreed, in the course of
negotiating the settlement of this matter, to recovery of one-half of the
proposed amount. The Department included
a condition in the settlement that this agreement does not constitute a
determination that the cost would be allowed on the merits.[25]
22.
As discussed in foregoing Findings, the costs of abandoned projects may
be expensed. The Department and IPL
arrived at a negotiated agreement that included financial concessions by both
parties. The treatment of the TRANSLink startup costs are an appropriate part of the
settlement and the partial allowance of those costs is in the public interest.
RATE DESIGN ISSUES
Residential Basic Charge
23.
IPL’s
residential customers have price differentiated choices between a demand/energy
or an energy-only rate. There is also a choice between a time of use
(TOU) rate or non-TOU rate. The existing customer charge for the energy rate is
$4.92. The customer charge for the energy TOU rate is $8.91. Another customer
rate is the demand rate. The customer
charge for the demand rate is $14.12.[26]
24.
Based on its class cost of service study (CCOSS,
discussed more fully below), IPL calculated that the average cost-based residential
customer charge would be $15.22. IPL
proposed an increase in the customer charge to $8.35 for energy-only non-TOU customers. For TOU customers, the proposed increase
results in a monthly charge of $11.70.
IPL proposed no change to the demand rate customer charge, since there
was little difference between existing charge and the cost-based expense
identified by the CCOSS.[27]
25.
The Department generally agreed with the Company’s
proposal to increase the residential monthly charge. As a general matter, the Department agreed
that customer charges should be priced near the cost of providing service to
prevent subsidies between customer classes.[28]
The Department strongly recommended that
the Commission promote the goals of fairness between customer classes and
accuracy in price information by approving cost-based rates.
26.
In the Settlement Agreement, the Department and IPL proposed that the
residential monthly charge be set at $8.35.
They agreed that, should the Commission reject the $8.35 charge, the appropriate residential monthly charge would be
$6.50.
27.
The OAG objected to the proposed increase, noting that the increase
amounted to a 69.7% increase from the existing residential monthly charge.[29] The importance of noncost
factors was stressed by the OAG in carrying out the Commission’s rate setting
function.[30] IPL’s proposed
monthly charge was described by the OAG as IPL seeking to “receive more of its
fixed costs without fear of underrecovery.”[31] The OAG maintained that the residential
monthly charge should be set at no higher than $6.50.[32]
28.
The Department maintained that a higher monthly residential charge
worked to the benefit of low income customers who use more than 1,000 kWh per
month. The Department arrived at this
conclusion by noting the reduction of intra-class subsidy that results from a
higher monthly charge. Additionally, no
portion of the overall increase in rates is assigned to the residential
class.
29.
The OAG disputed the Department’s conclusion regarding intra-class
subsidies, noting that the Department had relied on Low Income Heat and Energy
Assistance Program (LIHEAP) data, and the Department did not control for any
policies in that program that would skew the data toward low income customers
with higher electric bills. The OAG also
pointed out that recent Commission decisions have applied a rate shock analysis
that disallowed a requested increase that was smaller on a percentage basis
than IPL’s requested monthly rate charge increase.[33]
30.
The Department did not
affirmatively demonstrate that intraclass subsidies
were appropriately addressed using the LIHEAP data. Such a demonstration would
compare actual costs incurred by differently situated customers under the
proposed rates.[34] No such analysis was offered in this matter.
31.
In the CenterPoint matter, the residential
monthly charge was agreed upon between the utility and the Department to be set
at $8.00, and that level was recommended by the ALJ for approval by the
Commission.[35] The Commission thoroughly analyzed the issue
and found that the increase was excessive, based on rate shock, the impact on
low income customers, and potential customer confusion.[36] The Commission found the increase from the
existing monthly charge of $5.00 to $6.50 to be appropriate, and ordered the
settlement to be modified accordingly.[37]
32.
Based on the record in this matter, the agreement to increase the
residential monthly charge from $4.92 to $6.50 results in just and reasonable
rates that do not result in rate shock for the affected customer class. Adoption of this settlement term would be in
the public interest.
Non-Peak Declining Block Rate Differentials.
33.
IPL’s rates currently contain a non-peak/winter
declining block rate for residential and single-phase farm service. That means that during non-peak periods, high
usage customers pay less, per kWh used, than do low-usage customers, so long as
the high-usage customers exceed a certain minimum usage (1,000 kWh per month)
that makes up the first block. In the
first block, all customers pay the same per kWh rate. But if a user goes into the second block,
then the rate in the second block declines. In IPL’s last rate
case, the Department proposed reducing the rate difference between blocks or eliminating
the block rate structure in the next rate proceeding (which is this matter). The Commission decided to “move toward
elimination of declining block rates, which it finds [in] conflict with encouraging
energy conservation, an important state policy goal.”[38]
34.
In this matter, IPL proposed to reduce the difference between the upper
block rate and the lower block rate. The
existing differential between the blocks was identified as 3.088 cents (7.719 per
kWh compared to 4.631 per kWh).[39]
35.
IPL provided evidence of a
positive correlation between customer energy usage and load factor.[40] The Department disputed the importance of
load factor due to the MISO “Day 2” energy market.[41]
36.
In settlement of this matter, IPL proposed to reduce the difference
between the upper block rate and the lower block rate. The Company proposes to reduce the
differential to 2.889 cents. To arrive at
this reduction, IPL compared the price ratio of the first block to the second
block, arriving at a ratio of 1.67. The
company compared the marginal load factor relationship of the two blocks to arrive
at a ratio of 1.605. The lower ratio
(1.605) is the basis for the agreement to reduce the block rate differential to
2.889 cents.[42] IPL also agreed to review the cost
relationship in its next rate case.
37.
The Commission has made clear that declining block rates are in conflict
with the policy of energy conservation.
IPL should consider creation of a phase-out plan to eliminate block rates
over a modest period of years. Based on
the record in this matter, the agreement to reduce the block rate differential
to 2.889 cents results in just and reasonable rates that do not result in rate
shock for those customers who are currently receiving electricity in the second
block.[43] Adoption of the settlement term would be in
the public interest.
Phase-in of Municipal Rate Increase.
38.
At the public hearing in this matter, the City of
39.
The impact of the proposed revenue allocation
to the Municipal
rate class does not appear to result in rate shock or impose an otherwise
excessive burden on the City of
I. FINANCIAL
ISSUES
A. Settled Issues.
40.
The Department and IPL reached agreement on
the Company’s rate design proposals and revenue estimates. These
were set out in the parties’ Offer of Settlement. The issues discussed above are those disputed
by another party, or identified as a matter of concern by Commission
staff. The following Findings address
those matters that were not contested.
B. Rate Case Expenses.
41.
IPL incurred $510,699.00 in out-of-pocket costs in bringing this rate
proceeding. IPL proposed to recover
$248,721 as expenses for this proceeding.
That amount is consistent with the Commission’s prior order in docket
number E-001/GR–03–767, which limits IPL to no more than $250,000 in this rate
matter. IPL proposed using a five year
recovery over which to amortize the out-of-pocket costs incurred. IPL also proposed to recover an additional
$285,199.00 for unrecovered expenses from the prior
rate case, docket number E-001/GR–03–767.
The total that IPL seeks to recover amounts to $159,180.00 per year over
the five year amortization period.[47]
42.
The Department agreed with the Company’s
proposed recovery of current rate expenses.
The Department examined the average time between rate cases for IPL from
1976 through this matter. The average was 4.1 years from 1976 and 4.8 years since
1981.[48]
Based on this history, the Department
agreed with the use of a five year amortization period.[49] The Department opposed allowing prior year
rate case expenses as allowable expenses in this rate matter.
43.
IPL and the Department agreed that no prior
year rate expenses would be included in the company’s expenses. The parties agreed that the Company’s
allowable current rate case expenses ($510,699.00) would be amortized over a four-year period. This results in an annual expense of
$127,675.00 to be recovered through rates.[50] The
agreement to allow all the current rate case expenses is outside of the
Commission’s order in the prior IPL rate matter, but does result in just and
reasonable rates that further the interest of settling this matter. Adoption of this settlement term would be in
the public interest.
C. Elimination of Rate Schedules.
44.
IPL proposed to eliminate frozen TOU rates for municipal pumping and
farm customers, since there are no customers using any of these rates.[51] A number of street lighting tariff rates
would be consolidated in a single tariff rate. The Company also proposed limiting the
availability of the controlled water heating rate to the existing 1,700
customers receiving the rate at their existing locations. This change was based on a desire to
establish rates by cost, rather than use of the electricity.[52]
45.
The Department did not object to the elimination of the frozen TOU rates.[53]
IPL agreed to examine the revenue impact of frozen and alternative TOU rates
and reflect that impact in the next rate proceeding.[54] The
agreement to eliminate unused rate schedules, consolidate street lighting, and
freeze the water heating rate results in clearer rate schedules. Adoption of this settlement term would be in
the public interest.
D. Excess Facilities Pricing Changes.
46.
Some customers require installation of meters, distribution facilities,
or transmission facilities in order to receive service beyond those facilities
that IPL installs without additional charge.
For such customers, IPL imposes an excess facilities charge. IPL proposed to standardize the charge to
1.6 percent of total investment in excess facilities and include this charge in
the Company’s rate schedule.
47.
The Department questioned the need for replacing the existing charges of
1.47% for meters, 1.79% for distribution facilities, and 1.42% for transmission
facilities.[55] The
parties agreed that, since these percentages were not far apart, having one excess
facilities charge will simplify rates and cause customers less confusion,
consistent with the overall goal that rates be understandable and easy to
administer. IPL and the Department
agreed that the excess facilities charge should be set at 1.6%.[56]
E. Test Year Accumulated Depreciation.
48.
IPL’s existing 2004 depreciation expense was established
by Commission Order.[57] IPL proposed a pro forma depreciation adjustment for the integrated digital
enhanced network (iDEN) project to be added to the
unadjusted 2004 depreciation expense.[58] The
Department pointed out that IPL filed a five-year depreciation study in another
Commission docket requesting an effective date for the new depreciation rates
of January 1, 2006.[59] Based on its calculation of decreases to the
net depreciation expense, the Department asserted that this constituted a known
and measurable change and proposed an adjustment to reflect the new
depreciation rates.
49.
The Department
and IPL agreed that an adjustment to test year depreciation rates would be made
to reflect the proposed new depreciation rates, including iDEN
depreciation. As part of this agreement,
IPL has agreed to request an effective date of January 1, 2005 in the separate
depreciation docket.[60] The agreed upon changes result in a decrease
in IPL’s depreciation expense for IPL’s
F. Time of Use Increment.
50.
IPL’s existing TOU charges are higher than non-TOU
customer charges for several customer classes.
IPL opposed to standardize the rate differential between the TOU and
non-TOU customer charges at $3.35. IPL noted
that this is the standard rate differential in its
51.
IPL and the Department concluded that the difference between their two
positions would not result in a significant impact on customers on an annual
basis. Adopting a single rate across
jurisdictions would standardize the Company’s rates and reduce customer
confusion. IPL and the Department agreed
that the standardized rate differential would be $3.35.[64] The
agreed-upon charge results in just and reasonable rates. Adoption of this settlement term would be in
the public interest.
G. Large General Service Customer Charge.
52.
IPL’s Large General Service (LGS) customers are billed
on a demand rate resulting in an average minimum bill of $492.00. The typical bill for an LGS customer is
$5,668.00. The current customer charge for LGS customers is $59.00. IPL calculated the cost of service for LGS
customers as $257.25. IPL proposed initially
to fold the customer charge into the demand charge.[65]
53.
The Department objected to the elimination of the LGS customer charge as
contrary to the principle of recovering the cost of service from the customers
creating that cost.[66] The Department maintained that interclass
subsidies would result from the elimination of the LGS customer charge. [67]
54.
IPL and the Department agreed
that the LGS customer charge would be increased from $59.07 to $125.13. The increase in the charge is not expected to
result in rate shock since the size of the customer charge is modest compared
to the average bill for customers in this class.[68] The agreement to increase the LGS customer
charge from $59.07 to $125.13 results in just and reasonable rates that do not
result in rate shock for the affected customer class. Adoption of this settlement term would be in
the public interest.
H. Test Year Uncollectible Expenses.
55.
IPL proposed that the expense for uncollectible bills be calculated
using an average over a five-year period
To obtain the five-year average, IPL used the actual net write-offs in
FERC Account 904 from 2000 to 2004.
These figures included write-offs for the premerger
companies IES and IPC.[69] The Department proposed using a three-year
period for averaging uncollectible expenses.
The Department supported its proposal by noting that the year 2001 write-off
figure was exceptionally high and appeared to skew the results of the
study. The Department’s proposal reduces
the test year uncollectible expense by $35,524.00.[70] IPL and the Department agreed that the
three-year period for averaging uncollectible expenses was appropriate. This adjustment decreases IPL’s
allowable uncollectible expenses by $35,524.00.[71] The agreement to use the three-year period for
averaging uncollectible expenses results in just and reasonable rates. Adoption of this settlement term would be in
the public interest.
I.
56.
IPL has a 70% ownership interest in the Duane Arnold Energy Center
(DAEC), a nuclear power plant located near
57.
The parties agreed that, should the DAEC sale be approved, the
Commission may remove the DAEC from the rate base, but that the PPA capacity
costs will be included in the revenue requirement.[75] If the transmission assets are sold within a
reasonable time after the Commission’s order in this proceeding, the Commission
may consider removing those assets from the rate base, with the resulting
change in rates offset by the expenses incurred by IPL in reasonable
transmission costs.[76] The
agreement appropriately addresses the contingencies regarding potential asset
sales. The adjustments, should they be
necessary, result in just and reasonable rates.
Adoption of this settlement term would be in the public interest.
J. Conservation Improvement Program.
58.
IPL conducts a conservation improvement program (CIP) to manage demand
side costs. The program is reviewed and
approved by the Department and funded through a conservation cost recovery
charge (CCRC) added to base rates.[77] The total collected in the test year was
$2,216,609.00.[78]
The Department recommended that the Commission
accept IPL’s CIP as meeting the requirements of
K. Variable Pay Program.
59.
IPL maintained that its base salaries are below the content of total
cash flow over comparable positions found in the market for utility industry
positions. Those base salaries, in the
company’s opinion, are not competitive against the total cash (salary plus
variable pay) market rate. The combined
base salary and variable pay rates are asserted to offer a competitive level of
pay for IPL employees. While
competitive, the sample identified in the company’s filing for base actual
variable pay is below the market average of base variable pay by 2%.[80]
60.
Alliant Energy offers three variable pay plans (VPPs). The employee ICP covers nonbargaining
unit, nonexempt, exempt, and some management level employees. The management
ICP covers mid and upper level management. The bargaining unit ICP covers all
bargaining unit employees. The Company
described its VPPs as tied to specific performance
goals. These goals include individual
and group objectives, workgroup objectives, and corporate objectives. IPL maintained that VPPs
were important to attract and retain talented employees.[81]
61.
In its filing IPL sought to recover 100% of the actual 2004 incentive
payments subject to a cap of 25% of individuals’ base salaries.[82] The Department maintained that the cap should
be set at 15% of individuals’ base salaries. This level is consistent with the Commission’s
Order after Reconsideration in the Northern States Power Company docket.[83] The Department’s recommendation decreases the
test-year VPP expenses by $561,975.00.
As an alternative, the Department proposed averaging the incentive
compensation paid in 2002, 2003, 2004 and the projected year 2005. This proposal would decrease the test year
VPP expenses by $315,581.00.[84]
62.
The parties agreed to the four-year alternate adjustment of $315,581.00
for VPP expenses.[85] The
agreement to reduce the test year VPP expenses results in just and reasonable
rates. Adoption of this settlement term
would be in the public interest.
L. Post Test Year Layoffs.
63.
Shortly after the Company filed its proposed rate increase with the Commission,
Alliant Energy (IPL’s parent company) issued a press
release announcing that 200 corporate operations and support positions would be
eliminated. Based on the nature of these positions the
Department estimated the anticipated cost savings that IPL could expect from the
reduction of salary expenses. IPL
indicated that adjustments would be necessary to the test year O&M labor
expense to reflect these cost savings. The Company also identified additional
adjustments to the test year O&M labor expense reflecting variable pay plan
or incentive compensation adjustments.
Based on this information, the Department proposed the reduction of IPL’s test-year O&M expense by $503,696.00.[86]
64.
The parties agreed to the reduction of IPL’s
test-year O&M expense by $503,696.00.[87] The
agreement to reduce the test year O&M expense results in just and
reasonable rates. Adoption of this
settlement term would be in the public interest.
II. CLASS COST OF SERVICE
STUDY (CCOSS)
65.
IPL proposed to apportion revenue across customer classes following the
results of the Company’s CCOSS. For this
rate proceeding, IPL used the individual customer classes approved by the Commission
in the Company’s last rate case, Docket No. E-001/GR-03-767.[88] As reflected in the discussion above, the
CCOSS indicated that the cost of providing service to the residential customer
class averaged $15.22 per month.
66.
The Department generally agreed with IPL’s approach
in using the CCOSS. The Department proposed
setting limits on particular classes (water heating and stored heating) and
retaining the existing revenue requirement for single-phase farm customers.[89] IPL agreed with the Department’s suggestions
and adjusted the revenue apportionment accordingly.[90]
67.
The Department supports adoption of IPL’s
CCOSS. For future rate matters, the
Department recommended that the Commission require the breakdown of
classification of the total revenue requirements by the relevant FERC account
rate base component. The Department also
recommended that the Commission require that the Company provide a
justification of its CCOSS classification methods in its next rate case.[91] The
agreement to adopt the Company’s CCOSS is supported by the record in this
matter. Directing the Company to address
any particular aspect of its CCOSS in the next rate proceeding is within the
Commission’s discretion.
III. REVENUE REQUIREMENT
ISSUES.
A. Test year interest synchronization.
68.
IPL calculates its interest expense deduction for test year income tax
purposes by multiplying its rate base by the weighted cost of debt, which is
2.735%. The Department agreed with this
method, but noted that whenever an adjustment is made to the company’s
test-year rate base or operating income statement, an adjustment must be made
to the increased interest synchronization adjustment.[92] Due to an expected $75 million equity
infusion not being made in 2005, the Department indicated that the test year
cost of debt increases to 2.822%.[93]
69.
In settlement of this issue, the Department and IPL agreed that federal
taxes should be decreased by $46,113 and state taxes decreased by $14,315. These adjustments are required due to the
impact of the interest synchronization to a number of test year adjustments. [94] The
agreement to adjust the tax amounts due to interest synchronization results in
just and reasonable rates. Adoption of
this settlement term would be in the public interest
B. Cash
Working Capital Requirement.
70.
The Company’s cash working capital (CWC) requirement needed to be
adjusted based on all the other expense adjustments in the settlement. The Department and IPL agreed that a rate
base adjustment to the CWC account of ($72,851) would be appropriate to reflect
the other changes in the settlement.[95] The
agreement to adjust the CWC requirement results in just and reasonable
rates. Adoption of this settlement term
would be in the public interest.
C. Forecasting.
71.
Due to the impact of temperature on heating and cooling needs,
forecasting is important to determine the amounts of electricity likely to be
sold in future years. IPL used a 65
degree day base for both heating and cooling degree days (HDD and CDD). Over the period of 1971 through 2000, an
ordinary least squares regression was used to develop the weather-sensitive
coefficients for weather normalization of estimated electric sales. IPL used judgment and statistical analysis to
determine annual adjustments to kWhs by rate
code. Only two years of monthly sales
were available for each rate/revenue code combination. IPL committed to improving its models in
future rate matters by having more data available for its estimates.
72.
IPL applied a weather
normalization adjustment which increased forecast revenues by $1,842,642.00 and
increased forecast expenses by $404,403.00. The downward adjustment to revenues
and expenses for the loss of a large resale customer amounted to $534,459.00 in
revenue production and $227,100.00 expense reduction.[96]
73.
The Department
disagreed with IPL’s regression normalized data and
suggested different weather-normalized sales volumes be
used in place of the Company’s proposed volumes. The Department also suggested adjustments to
the customer bill numbers for known and measurable changes in the Large Power
customer class. The Department
recommended that IPL’s estimated cost of fuel be
increased by $206,150 and operating revenue be
increased by approximately $645,202.[97] The Department also expressed concern that
the Company’s sample size was too small and its billed sales data was
inconsistent with the test year used (January 2004 through December 2004).[98]
74.
The Department
estimated a total weather-normalized sales volume of 30,761,239 kWh. This estimate is a net increase of 6,869,296
kWh over the company’s estimate of 23,891,943 kWh.[99]
75.
The Department also noted that IPL’s downward adjustment (reflecting the loss of a large
resale customer) did not take into account new customers in the large customer
class. The Department pointed out that
two customers were added in IPL’s rate class 540 in
2004. Since insufficient data exists on
these two customers for the entire test-year, the Department took the monthly
average for each customer and extrapolated the results over the entire year.
This calculation results in an increase in sales volumes by 5,109,250 kWh. This increase in sales volume results in an
increase in revenues of $196,000.00 and an increase in fuel costs of
$89,360.00. The net revenues for IPL increase by $106,640.00.[100]
76.
IPL agreed that the sales to two new customers
in the large customer class should be included in the revenue calculation. The Company disagreed with the annualized
estimate used by the Department. IPL
proposed using actual sales data for one customer through August, 2005. For the other customer, the Company noted that
it was an existing customer that merely changed its rate class. IPL noted that an annual adjustment had been
made to reflect the change.[101]
77.
The Department and IPL agreed to use IPL’s revised data for the two customers at issue. The result is a decrease to the Department’s
net adjustment of $79,611. Test year
revenue for IPL increases by $67,780.00 and test year fuel cost increases by
$40,752.00.[102] The agreement between the Department and IPL to use
revised forecasting data results in just and reasonable rates. Approval of this settlement term would be in
the public interest.
D. Capital
Structure.
78.
IPL proposed calculating its revenue requirements using a capital
structure derived from IPL’s 2004 historical year-end
figures, using pro forma adjustments
reflecting an expected infusion of $75 million in additional capital from IPL’s parent company.
The capital structure proposed by IPL was:
Component Percent of
Total
Long-Term Debt 40.354%
Short-Term Debt 1.476%
Preferred Stock Equity 7.507%
Common Stock Equity 50.664%
Total 100.00%[103]
79.
Due to lower-than-anticipated borrowing
levels, the anticipated $75 million equity infusion did not occur. IPL adjusted its pro forma figures accordingly.[104] Incorporating these adjustments, the
Department and IPL agreed on the following capital structure:
Component Percent of
Total
Long-Term Debt 41.634%
Short-Term Debt 1.523%
Preferred Stock Equity 7.745%
Common Stock Equity 49.099%
Total 100.00%[105]
80.
With the exclusion of the $75 million (for the
equity infusion that did not occur) and inclusion of the proposed 10.39% ROE,
the agreed-upon Cost of Capital can be summarized as follows:
Cost of Capital Summary
Component Percent of Total Cost Weighted Cost
Long-Term Debt 41.634% 6.696% 2.788%
Short-Term Debt 1.523% 2.240% 0.034%
Preferred Stock Equity 7.745% 8.411% 0.651%
Common Stock Equity 49.099% 10.390% 5.101%
Total 8.575%[106]
81.
No objections were received to the proposed capital structure and
derivation of the Cost of Capital. The Cost
of Capital accurately reflects IPL's cost of capital and
allows an appropriate rate of return.
The ALJ recommends that the Commission approve the proposed capital
structure and the Cost of Capital return set out in the Offer of Settlement.
IV. Summary of Proposed
Settlement.
82.
The critical financial areas resolved by the settlement are as follows:
|
Description |
Initial
Request |
Proposed
Settlement |
|
Rate
Base |
$134,734,047 |
$135,756,300 |
|
Rate
of Return |
9.192% |
8.575% |
|
Required
Operating Income |
$12,384,753 |
$11,641,103 |
|
Operating
Income |
$9,588,886 |
$10,909,605 |
|
Operating
Deficiency |
$2,795,887 |
$731,498 |
|
Gross Revenue Conversion
Factor |
1.705611 |
1.705611 |
|
Gross
Revenue Deficiency |
$4,768,696 |
$1,247,651[107] |
83.
The proposed settlement reflects a reduction of $3,521,045 in the
initially-proposed gross revenue deficiency.
84.
The revenue apportionment agreed to between the Department and IPL
contains no increases to the residential, Farm Single Phase, or Farm Three
Phase rate classes. The General Service
(GS) and Large GS rate classes experience increases of 4.59% and 2.65%
respectively, for overall revenue increases of $514,371 and $525,870 in each
class. The Municipal rate class
experiences an increase of 10.13% for a revenue increase of $114,545 and the
Lighting class increases by 3.38%. The
largest increases are in the Stored Heat and Water Heat rate classes with each
increasing by 25.00%. The revenue
increases for those two classes are modest, however ($2,646 and $54,685
respectively).[108] The
agreement between the Department and IPL results in just and reasonable
rates. Approval of the settlement by the
Commission would be in the public interest.
Based upon the Findings of Fact, the
Administrative Law judge makes the following:
1.
The Minnesota Public Utilities Commission and the Administrative Law
Judge have jurisdiction over the subject matter of this proceeding pursuant to
Minn. Stat. Ch. 216B and section 14.50.
2.
Any of the foregoing Findings which contain material which should be
treated as a Conclusion is hereby adopted as a Conclusion.
3.
It is appropriate
to adopt a test year for this proceeding of January 1, 2004 through December
31, 2004.
4.
The Company has demonstrated that, in the context of a settlement, annual
recovery of $15,648.00 for its TRANSLink start-up
costs is in the public interest.
5.
The Company has demonstrated that the sale of assets, including the
6.
The Company has not demonstrated that the agreed to increase the
residential monthly charge from $4.92 to $8.35 results in just and reasonable
rates that do not result in rate shock for the affected customer class. The Company has demonstrated that an increase
to $6.50 in that charge results in just and reasonable rates that move the
charge for service closer to the costs for providing that service. An increase in the residential monthly charge
from $4.92 to $6.50 will not result in rate shock or an undue impact on low
income customers.
7.
The Company has demonstrated that the proposed revenue allocation to the Municipal rate class will
not result in rate shock or impose an otherwise excessive burden on that class
of customers.
8.
The Company has demonstrated that it should be entitled to maintain
declining block rates as agreed to in the settlement.
9.
The Company has demonstrated that the treatment of depreciation expenses
as agreed to in the settlement is appropriate.
10.
The Company has demonstrated that it should be allowed to eliminate frozen
TOU rates for municipal pumping and farm customers, consolidate street light
tariffs and limit the controlled water heating rate to the existing customers receiving
the rate at their current locations.
11.
The Company has demonstrated that it should be allowed to recover a
gross revenue deficiency of $1,247,651.
12.
The record supports the settlement recommendation to adopt an overall
rate of return of 8.575%, including a return on equity of 10.39%.
13.
The record supports all the uncontested matters, and it is appropriate
to adopt them.
Based upon the Findings of Fact and Conclusions, it is the
recommendation of the Administrative Law Judge to the Public Utilities Commission
that it issue the following:
1.
IPL is entitled to increase gross annual revenues in accordance with the
terms of this Order.
2.
Within 30 days of the service date of this Order, the Company shall file
with the Commission for its review and approval, and serve on all parties in
this proceeding, revised schedules of rates and charges reflecting the revenue
requirement for annual periods beginning with the effective date of the new
rates, and the rate design decisions contained herein. The Company shall include proposed customer
notices explaining the final rates.
Parties shall have 14 days to comment.
3.
(If the Commission orders an Interim Rate Refund) within 30 days of the
service date of this Order, the Company shall file with the Commission for its
review and approval, and serve upon all parties in this proceeding, a proposed
plan for refunding to all customers, with interest, the revenue collected
during the Interim Rate period in excess of the amount authorized herein. Parties shall have 14 days to comment.
Dated
this 20th day of January, 2006.
_/s/ Richard C. Luis___________________
RICHARD C. LUIS
Administrative Law Judge
Reported:
Shaddix & Associated (Transcript Prepared,
one volume).
[1] IPL Ex. 1, Vol. I.
[2] IPL Ex. 1, Vol. II.
[3] Public Comment Tr. at 6-9.
[4] Public Comment Tr. at 14.
[5] Public Comment Tr. at 14.
[6] Public Comment Tr. at 16-19.
[7] Public Comment Tr. at 20-21
[8] Public Comment Tr. at 22-24.
[9] IPL Exhibit 2, Mulford Direct, at 3.
[10] In the Matter of a Petition by Interstate Power and Light
Company for Authority to Increase Electric Rates in
[11] Promoting Wholesale Competition Through Open Access Non-discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, 75 FERC 61,080 (Order No. 888 issued April 24, 1996)(Order 888).
[12] IPL Ex. 14, Collins Direct, at 4.
[13] “Non-pancaked rates” means that additional transmission charges are not assessed as power moves through different control areas.
[14] IPL Ex. 14, Collins Direct, at 2; In the Matter of the Petition of Interstate Power and Light Company for Approval -of the Transfer of Functional Control of Transmission Facilities to TRANSLink Transmission Company LLC and for Related Relief – Request to Approve Notice of Withdrawal and Close Docket, PUC Docket No. E-001, PT-6205/PA-02-2219 (Notice of Withdrawal Approved, Docket Closed January 08, 2004).
[15] IPL Ex. 14, Collins Direct, at 14; IPL Ex. 3, Hampsher Direct, at 75.
[16] Joint Ex. 27, Offer of Settlement, at 12.
[17] Duquesne Light Company v. Barasch,
488
[18] OAG Brief, at 14-15 (citing In Re Northern States Power Company, Docket No. E-002/GR-80-316, 42 PUR 4th 339, 358 (April 30, 1981).
[19] OAG Brief, at 15.
[20] IPL Reply Brief, at 12-14.
[21]
[22] Northern States Power Company v. MPUC, 344 N.W.2d 374 (
[23] Northern States Power Company v. MPUC, 344 N.W.2d at FIND PAGE NO.
[24]
DOC Ex. 22,
[25] Joint Ex. 27, Settlement Agreement, at 12.
[26] IPL Ex. 7, Maher Direct, at 6.
[27] IPL Ex. 7, Maher Direct, at 7.
[28] DOC Ex. 24, Peirce Direct, at 10.
[29] OAG Brief, at 2.
[30]
OAG Brief, at 2 (citing Minn. Stat. §§ 216B.03 and 216B.16; Hibbing
Taconite Co. v,
[31] OAG Brief, at 5.
[32] OAG Brief, at 2.
[33] Hearing Tr., at 36-41.
[34] See In the Matter of the Petition of CenterPoint Energy Minnegasco, a Division of CenterPoint Resources Corp., for Authority to Increase Its Natural Gas Rates in Minnesota, PUC Docket No. G008/GR-04-901, OAH Docket No. 7-2500-16151-2, Findings 101-109 (ALJ Recommendation issued March 25, 2005)(“CenterPoint ALJ Recommendation”).
[35] CenterPoint ALJ Recommendation, Finding 107.
[36] In the Matter of the Petition of CenterPoint Energy Minnegasco, a Division of CenterPoint Resources Corp., for Authority to Increase Its Natural Gas Rates in Minnesota, PUC Docket No. G008/GR-04-901, at 7-9 (Order Accepting and Modifying Settlement and Requiring Compliance Filing issued June 8, 2005) (“CenterPoint Order”).
[37] CenterPoint Order, at 9.
[38] IPL 2004 Order, at 30.
[39] IPL Ex. 9, Maher Rebuttal, at 4.
[40] DOC Ex. 24, Peirce Direct, at 17.
[41]
[42] IPL Ex. 9, Maher Rebuttal, at 4
[43] Set out in IPL Ex. 29, Supplemental Schedule A.
[44] Public Comment Tr. at 16-19.
[45] Joint Ex. 27, at 22.
[46] Hearing Tr., at 51-52.
[47] IPL Ex. 3, Hampsher Direct, at 66-67.
[48] DOC Ex. 20, Lusti Direct, at 8.
[49]
[50] Joint Ex. 27, at 8.
[51] IPL Ex. 7, Maher Direct, at 16-17.
[52] IPL Ex. 7, Maher Direct, at 18.
[53] DOC Ex. 24, Peirce Direct, at 19.
[54] Joint Ex. 27, at 26.
[55] DOC Ex. 24, Peirce Direct, at 21.
[56] Joint Ex. 27, Offer of Settlement, at 26-27.
[57] In the Matter of Alliant Energy - Interstate Power and Light Company’s Certification of Depreciation Rates for 2004, PUC Docket No. E,G001/D-04-501 (Order Certifying Depreciation Rates and Methods issued July 09, 2004).
[58] IPL Ex. 13, Kouba Direct, at 7; IPL Ex. 3, Hampsher Direct, at 31 and 67.
[59] DOC Ex. 20, Lusti Direct, at 23-24.
[60] In the Matter of Alliant Energy - Interstate Power and Light Company's Petition for an Extension of Time to File its 2005 Annual Depreciation Review, PUC Docket No. E,G-001/D-05-295.
[61] Joint Ex. 27, Offer of Settlement, at 15.
[62] IPL Ex. 7, Maher Direct, at 6-10.
[63] DOC Ex. 24, Peirce Direct, at 22-23.
[64] Joint Ex. 27, Offer of Settlement, at 28.
[65] IPL Ex. 7, Maher Direct, at 8.
[66] DOC Ex. 24, Peirce Direct, at 22-23.
[67] DOC Ex. 24, Peirce Direct, at 24.
[68] Joint Ex. 27, Offer of Settlement, at 30-31.
[69] IPL Ex. 3, Hampsher Direct, at 71.
[70] DOC Ex. 20, Lusti Direct, at 13.
[71] Joint Ex. 27, Offer of Settlement, at 9.
[72] IPL Ex. 17, Lacy Direct, at 13.
[73] DOC Ex. 22,
[74] IPL Ex. 17, Lacy Direct, at 13.
[75] Joint Ex. 27, Offer of Settlement, at 18.
[76] Joint Ex. 27, Offer of Settlement, at 18-19.
[77]
DOC Ex. 26,
[78] Joint Ex. 28, at 1.
[79] DOC Ex. 26, Davis Direct, at 1; IPL Ex. 8, Maher Rebuttal, at 2.
[80] IPL Ex. 18, Day Direct, at 9.
[81] IPL Ex. 18, Day Direct, at 10-17.
[82] IPL Ex. 18, Day Direct, at 22.
[83] Docket No. E-002/GR-92-1185 (issued January 14, 1994).
[84] DOC Ex. 20, Lusti Direct, at 19-20.
[85] Joint Ex. 27, Offer of Settlement, at 13-14.
[86] DOC Ex. 20, Lusti Direct, at 14.
[87] Joint Ex. 27, Offer of Settlement, at 9 and Schedule 5.
[88] IPL Ex. 7, Maher Direct, at 4.
[89] DOC Ex. 24, Peirce Direct, at 5-6.
[90] Joint Ex. 27, Offer of Settlement, Schedule 15, Revenue Apportionment.
[91] DOC Ex. 25, Ouanes Direct, at 8.
[92] DOC Ex. 20, Lusti Direct, at 24.
[93] Joint Ex. 27, Offer of Settlement, at 16, Settlement Schedule A, at 13.
[94] Joint Ex. 27, Offer of Settlement, at 16.
[95] Joint Ex. 27, Offer of Settlement, at 16-17.
[96] IPL Ex. 7, Maher Direct, at 16.
[97] DOC Ex. 23, Ham Direct, at 3.
[98] DOC Ex. 23, Ham Direct, at 5.
[99] DOC Ex. 23, Ham Direct, at 7.
[100] DOC Ex. 20, Lusti Direct, at 21, DVL-13.
[101] IPL Ex. 8, Maher Rebuttal, at 3.
[102] Joint Ex. 27, Offer of Settlement, at 16.
[103] IPL Ex. 5, Bacalao Direct, at 5.
[104] IPL Ex. 5, Bacalao Direct, at 5.
[105] Joint Ex. 27, Offer of Settlement, at 5.
[106] Settlement Schedule A, at 2.
[107] Joint Ex. 27, Settlement Schedule A, at 1.
[108] Joint Ex. 27, at 22.