PUC-88-008-RL
7-2500-2027-2
E-002/GR-87-670
STATE OF MINNESOTA
OFFICE OF ADMINISTRATIVE HEARINGS
FOR THE PUBLIC UTILITIES COMMISSION
In the Matter of the Petition
of Northern States Power Company FINDINGS OF FACT
(NSP) for Authority to Increase CONCLUSIONS AND
Its Rates for Electric Service RECOMMENDED ORDER
in Minnesota
The above-captioned matter came on for evidentiary hearings before
Administrative Law Judge Richard C. Luis at the Large Hearing Room of the
Public Utilities Commission, 780 American Center Building, St. Paul, Minnesota
on April 5-8, April 11 and April 12, 1988. The record in this matter closed
on June 17, 1988.
Public Hearings for the purpose of receiving the comments and questions of
affected ratepayers were held as follows (persons attending) (public witnesses
testifying):
March 14--Bloomington (20) (3)
March 15 -Winona (19) (3)
March 16 -Mankato (19) (2)
March 17--Minneapolis (37) (7)
(afternoon)
March 17--Brooklyn Park (17) (1)
(evening)
March 21--St. Paul (25) (5)
(afternoon)
March 21--St. Paul (19) (3)
(evening)
March 22--Pipestone (13) (2)
March 23--St. Cloud (21) (3)
Commissioner Peterson attended the meetings in Bloomington and Mankato,
Commissioner McKanna attended in Winona and St. Paul (evening), and
Commissioner Kitlinski attended in Minneapolis, Brooklyn Park and St. Paul
(afternoon). Commission staff personnel attended in all locations but
Pipestone. The Office of Attorney General had counsel present at all
Metropolitan Area hearings and the Department of Public Service had personnel
at all the public hearings. Counsel and staff personnel attended all public
hearings on behalf of NSP.
Appearances at the evidentiary hearing were as follows: David A. Lawrence
and David M. Sparby, Northern States Power Company, 414 Nicollet Mall,
Minneapolis, Minnesota 55401, on behalf of NSP; Michael J. Bradley, Assistant
Attorney General, 340 Bremer Tower, 7th Place and Minnesota Street, St. Paul,
Minnesota 55101, on behalf of Hubert H. Humphrey, 111, Attorney General of
Minnesota (OAG); Ann M. Seha, Special Assistant Attorney General, 200
Lafayette Park Building, 520 Lafayette Road, St. Paul, Minnesota 55155, Joan
C. Peterson and Mary Jo Murray, Special Assistant Attorneys General, 1100
Bremer Tower, 7th Place and Minnesota Street, St. Paul, Minnesota 55101, on
behalf of the Minnesota Department of Public Service (DPS); Thomas J. Weyandt,
Assistant City Attorney, 647 City Hall, St. Paul, Minnesota 55102 on behalf of
the City of St. Paul and the St. Paul Board of Water Commissi oners (St. Pau I);
William E. Flynn and David Sasseville, Lindquist & Vennum, 4200 IDS Center, 80
South Eighth Street, Minneapolis, Minnesota 55402-2205 for the St. Paul area
Chamber of Commerce (Chamber); Glenn E. Purdue, LeFevere, Lefler, Kennedy,
O'Brien and Drawz, 2200 First Bank Place West, Minneapolis, Minnesota 55402
for the Suburban Rate Authority (Suburban); William Mahlum and Christina
Stalker, 2222 North Central Life Tower, St. Paul, Minnesota 55101 on behalf of
District Heating Development Company, d/b/a District Energy of St. Paul
(District Heating); Peggy Wells Dobbins, 915 Aduana Avenue, Coral Gables,
Florida 33146, on behalf of Champion International (Champion); Byron E.
Starns, Leonard Street and Deinard, 100 South Fifth Street, Suite 1500,
Minneapolis, Minnesota 55402 for the Metalcasters of Minnesota (Metalcasters);
Elmer W. Scott, 190 Iris Park Place, 1885 University Avenue West, St. Paul,
Minnesota 55104, on behalf of the Metropolitan Senior Federation (MSF); Scott
Wilensky, 2512 Delaware Street Southeast, Minneapolis, Minnesota 55414 for the
Minnesota Public Interest Research Group (MPIRG); George W. Crocker, 1519A
East Franklin Avenue, Minneapolis, Minnesota 55404, on behalf of the North
American Water Office (NAWO); Special Assistant Attorney General Gregory
Dittrich, and Richard Lancaster, Lee Larson, Janet F. Gonzalez, Diane
Sorrells, James Lindell and David Jacobson on behalf of the Commission Staff.
Notice is hereby given that, pursuant to Minn. Stat. 14 61, and the
Rules of Practice of the Public Utilities Commission and the Office of
Administrative Hearings, exceptions to this Report, if any, by any party
adversely affected must be filed within 20 days of the mailing date hereof
with the Executive Secretary, Minnesota Public Utilities Commission, 160 East
Kellogg Boulevard, St. Paul, Minnesota 55101. 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. If desired, a reply to exceptions may be filed and served within ten
days after the service of the exceptions to which reply is made. 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, and an original and 13 copies copies of each document should be filed
with the Commission.
The Minnesota Public Utilities 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.
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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.
STATEMENT OF ISSUES
Whether Northern States Power should be authorized to increase its rates
for electric utility service to customers in Minnesota by 75 million dollars
and to collect the revenues in accordance with the rate design proposed by the
Rate Design Settlement herein.
Based upon all of the proceedings herein, the Hearing Judge makes the
following:
FINDINGS OF FACT
Jurisdiction and Procedural History
1. On November 2, 1987, Northern States Power Company (NSP, Company or
Utility) filed a Petition with the Minnesota Public Utilities Commission
(Commission, PUC) for an increase in electric rates of 99.3 million dollars
(9.54% increase over current rates). The Company also filed a Petition for
Interim Rates in the amount of $97,008,000 (a 9.35% increase).
2. On December 4, 1987, the Commission accepted the Company's filing and
suspended the proposed rates until the Commission determines the
reasonableness of the proposed rates, or until September 2, 1988, whichever
occurs first.
3. On December 29, 1987, the PUC issued an Order setting Interim Rates
in this matter, which Order authorized the Company to collect $94,980,000
(9.15%) in additional annual revenues as Interim Rates beginning on or after
January 1, 1988. NSP is collecting Interim Rates subject to refund if they
are found to be in excess of the final rates determined by the Commission.
4. On December 4, 1987, the PUC 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 the Company.
5. On December 30, 1987, a Prehearing Conference was held before the
Administrative Law Judge in St. Paul. Petitions to Intervene were filed by
Hubert H. Humphrey, 111, Minnesota Attorney General; the City of St. Paul and
Board of Water Commissioners of the City of St. Paul; Suburban Rate Authority;
District Heating Development Company, d/b/a District Energy St. Paul, Inc.;
Union Carbide Corporation; Champion International Corporation; Metalcasters of
Minnesota; National Solid Waste Management Association; Metropolitan Senior
Federation; Minnesota Public Interest Research Group; North American Water
Office; the St. Paul Chamber of Commerce; and the Minnesota Department of
Public Service. All of the Petitions to Intervene were granted. Union
Carbide Corporation remains a party to this proceeding, although it made no
appearance at the evidentiary hearings. The National Solid Waste Management
Association subsequently withdrew its Petition to Intervene.
6. On January 26, 1988, the Administrative Law Judge issued a Prehearing
Order establishing the hearing schedule and procedural guidelines governing
the conduct of the case.
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7. On March 2 and 3, 1988, five parties, NSP, DPS, OAG, MPIRG and MSF,
reached a Stipulation as to all but one of the financial issues in the rate
case. The issue specifically reserved from this Stipulation concerns certain
amounts in NSP's Conservation Improvement Plan (CIP) Deferred Debit
("Tracker") Account related to the Good Cents Program and Administrative and
Regulatory expenses. An Explanation of Stipulation was filed by the five
parties with the Administrative Law Judge on April 27, 1988.
8. By April 5, 1988, all of the parties to the rate case reached a
Settlement on the majority of the rate design issues. The issues not settled
are: The special rate discount for customers who have medical needs which
require greater electrical usage, proposed by the DAG; conservation incentives
in the design of residential rates as proposed by the MSF; and the demand/side
management issues and associated rate structures raised by NAWO. The parties
filed Explanatory Comments to the Rate Design Settlement with the
Administrative Law Judge on April 27, 1988.
9. On May 27, 1988, the Administrative Law Judge issued an Order
Certifying Rate Design Settlement to the Commission. The Order found that the
Rate Design Settlement was supported by substantial evidence in the record,
with certain reservations. The parties filed Exceptions to the Administrative
Law Judge's Certification of Rate Design Settlement on June 17, 1988.
5ummary_of Public lestimony
10. At the hearings in Winona, Mankato, Minneapolis, St. Paul (afternoon)
and St. Cloud, representatives of local economic development organizations
appeared and presented testimony praising NSP for providing assistance,
including employee volunteers and financial support, to the economic
development of the specific localities. The prepared remarks of some of these
witnesses were entered into the record as exhibits.
11. In Winona, the Director of Economic Development for the City and the
City's Port Authority cited specific instances where the Utility worked with
her office to attract a new industry (a producer of fibrous composites) to the
Winona area. She believes the new industry was attracted to Winona, in part,
because of NSP's competitive rates.
12. In Mankato, the Executive Director of the Mankato Valley Industrial
Development Corporation cited the instrumental role played by NSP in the
consolidation of several industrial development organizations, which had
separately represented and promoted Blue Earth County, Nicollet County, the
City of Mankato and the City of North Mankato, into one economic development
entity. The Utility also aided in the preparation of a promotional video for
the Industrial Development Corporation and assisted in the Corporation's
economic development study for the region.
13. The Group Vice President--Economic Development of the Greater
Minneapolis Chamber of Commerce testified that NSP is promoting the
Minneapolis area well and had volunteered the time of some of its personnel to
help attract companies in the service and industrial sectors to the area. The
Chamber is concerned about both attracting new business and not losing some
local operations because of a presumption that the "business climate" in the
area is poor. The Chamber is grateful to NSP for addressing that concern.
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14. Robert De La Vega, an Assistant Commissioner at the Minnesota
Department of Trade and Economic Development, outlined NSP's participation in
a "partnership" with his agency for attracting business and recruitment of
industries to locate in Minnesota. The goals of the partnership are to add
jobs in industry, which will operate to increase the State's tax base and the
Company's revenues. NSP has placed advertisements promoting the State in
industrial trade journals, has prepared a packet of promotional--informational
literature used by the Department and has assisted companies considering
moving to Minnesota in site selection processes.
15. NSP is a member of the St. Cloud area Economic Development
Partnership, Inc., an organization founded to promote and facilitate business
development in the Greater St. Cloud vicinity. The Company has referred
businesses considering locating to the St. Cloud area to the Partnership and
has provided technical support in promotions made by the Partnership in an
effort to attract new industry. It has also assisted the Partnership in
market research and it is providing service and rate information to interested
companies.
16. The Company's proposal to eliminate the Conservation Rate Break for
its residential customers drew a large amount of comment at the public
hearings, all of it against elimination of the Break. The speakers stressed
that the existence of the Break makes them conscious of conserving energy and
gives them an incentive to practice that conservation. Several speakers cited
the importance of continued eligibility for the Break for persons on fixed
incomes and persons with lower incomes. Several persons challenged the
Company's assertion that the Break simply favors persons who choose an
apartment life-style by pointing out that many persons rent apartments because
they can not afford to buy or live in houses. They consider it inaccurate for
NSP to portray apartment living as the "life-style of the rich and famous".
17. Darlene Morse is a quadriplegic person whose consumption of
electricity is higher than it otherwise would be because of her medical
condition. She requires the use of an electric-powered iron lung to breathe
and her home environment is constantly controlled by electric appliances (air
purifier, humidifier and dehumidifier). Ms. Morse uses a wheelchair powered
by electrically-charged batteries to move from place to place, to raise and
lower her body and to adjust her posture. She is on a monthly budget for NSP
electric payments of $58 per month. Approximately $37 per month of her
electric bill goes for the maintenance and operation of medically necessary
equipment. She consumes approximately 562 kwh per month to operate that
equipment. She believes that amount is la little high" compared to the costs
of others who use electricity for medically necessary equipment.
Ms. Morse supports the Medical Needs Discount Rate proposal sponsored in
this proceeding by the OAG. If she was not required to operate and maintain
medically necessary equipment, Ms. Morse believes she would qualify for the
Conservation Rate Break.
18. The OAG, at each hearing where it was not represented in person by
Assistant Attorney General Bradley or Special Assistant Attorney General Gary
Cunningham, presented a written argument in support of the Medical Needs
Discount Rate, which was read into the record.
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1 9 . A variety of billing complaints we re registe red by sp eakers at
several of the public hearings. Representatives of NSP and Consumer Affairs
personnel from the PUC staff were present at the hearings for individual
conferences with these witnesses after their testimonies concluded.
20. Testimony generally complaining that the Company's costs were too
high was offered at several locations, and reasons for high costs were
identified by the witnesses: the Company's union contracts are said to be too
costly; executives' salaries are too high; and the Company has too much
invested in plants and not enough in conservation. It was suggested that NSP
should build smaller plants to keep down its required reserve capacity, and
several requests for more research into and reliance on wind-generated and
solar energy were heard. One suggestion was to design rates so that peak
energy charges would be paid only by persons who had air conditioning.
21. Two witnesses at the Minneapolis hearing suggested that the Public
Utilities Commissioners be elected rather than appointed officials. The
speakers stressed the need for accountability of the Commissioners to the
public in the wake of recent publicity involving former Commissioners who
subsequently accepted jobs and payments from the utilities they had regulated.
Test Year
22. The appropriate test year for determining the Company's revenue
deficiency, if any, is the twelve month period from January 1, 1988 to
December 31, 1988, as filed by NSP. No party challenged the appropriateness
of this test year as representative of the future period during which rates
will be in effect.
The Revenue_Reguirements Stipulation
23. The Revenue Requirements Stipulation (Appendix A) features an
agreement by NSP to a $75,000,000 annual rate increase (7.2%). The amount of
increase is just and reasonable.
24. The test year rate base agreed to in the Stipulation is
$2,350,498,000. This rate base figure is found to be reasonable.
25. The overall rate of return agreed to by the parties entering into the
Stipulation is 9.68%. The rate of return on common equity is stipulated to be
11.7%. Reducing the rate of return on equity to 11.7% from the Company's
originally-proposed 12.81% results in a reduction of $20.1 million in annual
revenues. The costs of debt (8.35%) and preferred stock (6.74%) originally
proposed by NSP remain unchanged by the Stipulation. An 11.7 rate of return
on common equity is found to be reasonable.
26. In its initial filing, the Company proposed a capital structure of
45.25% equity, 43.69% debt and 11.06% preferred stock. The Stipulation
provides the same proportions. A capital structure for NSP of 45.25% equity,
43.69% debt and 11.06% preferred stock is found to be reasonable.
27. Application of an overall rate of return of 9.68% to NSP's rate base
($2,350,498,000) yields a required operating income of $227,528,000. The
Company's stipulated after-tax income deficiency is $44,932,000, which is the
difference between its required operating income and the stipulated total of
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its operating income ($176,956,000) and Allowance for Funds Used During
Construction (AFDC) ($5,640,000). Multiplication of the Income Deficiency by
the Gross Revenue Conversion Factor (to account for the combined effect of
Federal and State income Taxes) yields a stipulated Revenue Deficiency of
$75,225,000. The Company stipulates that it will seek only $15,000,000 of
this total. The facts stipulated to in this Finding, which yield a Revenue
Deficiency of $75,000,000 for NSP during the test year, are supported by
substantial evidence in the record. The $75,000,000 Revenue Deficiency is
found to be just and reasonable.
28. The NAWO proposes a reduction in the rate base of $470,000,000,
representing a disallowance of the Sherco 3 Plant that began operations in
November of 1987. NAWO proposes to allow NSP still to collect an additional
$75,000,000 in revenue, all of which would be spent on demand-side management
programs to conserve energy. $45.5 million dollars of the stipulated revenue
increase is raised by applying the stipulated overall rate of return to the
$470,000,000 increase in rate base for the Sherco 3 Plant. If NAWO's proposal
is accepted, the Company's authorized rate of return on equity would have to
rise to 17%, with an overall rate of return of 12.1%, in order to raise
$75,000,000 in additional rates. NAWO's proposal is found to be unreasonable,
contrary to state law and not support by the record.
29. The Administrative Law Judge has treated the Revenue Requirements
Stipulation as an evidentidry item for purposes of the record. All
non-signatory parties were given the opportunity to present evidence and/or
file briefs in opposition to any of its terms. With the exception of the NAWO
recommendation mentioned in the previous Finding, none of the non-signatory
parties to the Revenue Requirements Stipulation in this case have opposed any
of the terms of the Stipulation.
30. The Administrative Law Judge has examined the Revenue Requirements
Stipulation (Appendix A) and the Explanation of Stipulation (Appendix B) filed
by the parties to the Stipulation on April 21, 1988. It is found that the
Stipulation is supported by substantial evidence in all respects. It is
further found that the terms of the Revenue Requirements Stipulation result in
rates that are just and reasonable. Its adoption is in the public interest.
The Stipulation and Explanation of Stipulation are hereby adopted as Findings
of Fact, Conclusions and the Recommendation of the Administrative Law Judge
with regard to the stipulated issues.
Conservation Improvement Plan(CIP) Tracker Account
31. The Company and the DPS disagree on treatment of certain portions of
the CIP Tracker Account. NSP agrees that the resolution of these uncontested
revenue issues will not affect the stipulated $75,000,000 revenue increase
proposed. Any Tracker Account monies disallowed by the PUC in its resolution
on the disputed items are proposed to be applied to the Interim Rate refund
that will result if the Commission's final Order accepts a $75,000,000 general
rate increase.
32. The Commission approved the Deferred Debit (Tracker) Account by Order
dated April 29, 1985. In NSP's last electric rate case (PUC Docket No.
E-002/GR-85-558) the Commission allowed NSP to establish a conservation cost
recovery method whereby NSP could track Conservation Improvement Plan (CIP)
expenditures. The Commission allowed the Company to establish a specific
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account, referred to as a "Deferred Debit" or "Tracker". As the Company
recovers CIP expenditures from rates, this Account is credited; and as the
Company incurs CIP expenditures, this Account is charged. The Tracker Account
is then reviewed within the context of a General Rate case.
33. The current Tracker Account balance NSP seeks to recover is
$1,701,300. NSP proposes to recover this amount from the Interim Rate refund.
34. The DPS recommends that the amount recovered by NSP from Interim
Rates to balance the Tracker Account be reduced to $123,500 to reflect
disallowance from the Tracker Account of $734,400 of Good Cents program
expenditures and $843,400 in general administrative expenditures.
35. In its April 29, 1985 Order Approving the Deferred Debit Accounting
of Certain Conservation Related Costs, the PUC provided that NSP must show
that costs were in fact incurred as part of an approved plan before it can
recover any CIP costs in rates. As part of its ruling in The Matter of the
Petition of Northern States Power company for authority to change its schedule
of Rates for Electric_utility service for customers within the state of
Minnesota, Docket No. E002/GR-85-558, an NSP general rate case Order issued on
June 2, 1986, the PUC denied the Company's attempt to include costs of the
Good Cents Program in its Deferred Debit Account for purposes of that rate
case. The PUC held that the Company had not proven that the advanced costs
were incurred prudently. Therefore, it held that it was inappropriate to
include the Good Cents Program component of CIP costs from recovery through
the rate structure. Recovery for the Good Cents Program was denied because
NSP failed to request and obtain Commission approval for the program, and thus
did not meet the standards for allowed Deferred Debit Account treatment.
36. On October 7, 1986, the PUC issued an Order approving the Company's
CIP Program, which Order specifically denied coverage for Good Cents Program
expenses. The Commission found that NSP had begun to offer the Good Cents
Project to customers in May 1985, "although it was never approved by the
Commission . . . .". See DPS Exhibit 102, p. 3.
The Commissioner rejected the inclusion of the Good Cents Program as a CIP
program because it was not cost effective, not tailored to low-income
ratepayers and was a marketing program. The Commission added that NSP would
be allowed to submit its proposal on the Good Cents Program for "Commission
review" if it was able to resolve the afore-mentioned concerns and provide
adequate assurances in documentary form that the project will promote
conservation and not sales. See DPS Exhibit 102, p. 13.
37. The PUC issued an Order Approving Good Cents Home Project for NSP on
March 5, 1987. Approval was granted because of modifications made by NSP in
the program, specifically:
1. NSP will target the project at electrically heated
attached multi-family dwelling units which typically are
used as rental units.
2. NSP will charge builders of detached single-family
dwellings of size greater than two thousand square feet, a
fee of one hundred dollars for the service.
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3. NSP, DPS and DEED will jointly develop an adjusted
performance standard for attached multi-family housing
units.
See DPS Exhibit 103, p. 2.
The Commission's Order in that particular Good Cents docket provided that
the modified project, which provides a reasonable means to achieve the goals
of conservation improvement and reducing the amount of electricity used, as
opposed to having the goal of increasing the market for electricity, was
approved as part of NSP's Conservation Improvement Program.
38. The $743,400 associated with the Good Cents Home Program, which
amount represents expenses incurred prior to the PUC's approval of the Program
as a CIP, should be excluded from the Tracker Account.
Discussion
The Administrative Law Judge is persuaded that the intent of the
Commission with respect to timing the inclusion of Good Cents Home Program
expenditures for CIP Tracker Account treatment is to allow such expenditures
to be incurred only after approval of the Program (or any other individual
CIP) has been Ordered. As DPS witness Scala stated in her testimony, in the
past NSP has petitioned for Commission approval in advance to implement a
pilot program to cover start-up expenses incurred in initial implementation of
new conservation programs. In the instance of the Good Cents Program, NSP
failed to follow that procedure. The fact that the Company incurred
expenditures in good faith, prior to receiving commission approval for the
spending, is not enough to merit inclusion.
39. NSP seeks Tracker Account treatment for $843,400 in Administrative
and Regulatory (A & R) expenditures for CIP program years 1985 and 1986. The
DPS recommends a denial of such inclusion for those monies because the Company
failed to seek prior Commission approval for incurring those expenses and
because it is reasonable to infer from the record that the monies are already
incorporated in specific CIP accounts for those years.
40. The Utility has not presented substantial evidence accounting for
expenditures of $843,000 in A & R costs not attributable to specific CIP
program budgets for program years 1986 and 1987. The Utility has established
that some amount of A & R monies were spent on CIP programs that cannot be
isolated to a single program budget, but it has not offered evidence
establishing a precise amount.
41. For program years 1986 and 1987, whenever it was not possible to
charge A & R expenses to individual CIP programs, the Company charged such
expenses to a general administrative account which included administrative
expenses for all CIP and operating programs.
42. Administrative costs associated with CIP and operating programs
include monies for office equipment, office supplies, stationary, copying,
postage, data processing equipment, labor for regulatory reporting, training
of staff for performance of that reporting, overload labor, telephone,
printing and a variety of other tasks and equipment for which NSP does not
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budget separately. See NSP Exhibit 41 (KHW-2), Sch. 5, p. 1 of 3. Such
expenses are ongoing and part of routine business operation.
43. For CIP program year 1988, NSP established that it will spend an
allocated amount of $83,421 in A & R expenses attributable to Residential CIP
programs and $95,595 in A & R expenses attributable to Commercial and
Industrial CIP programs. $52,800 each was allocated for A & R expenses
attributable to Commercial and Industrial CIP and Residential CIP programs for
CIP program year 1985. For program years 1986 and 1987, no specific amount
was allocated to evidence an attempt by the Company to identify A & R costs
that support all CIP programs, as distinct from A & R costs that support
operating programs.
44. For program year 1986 and 1987, it is reasonable to allocate $284,616
to A & R expenses attributable to CIP programs for monies spent to support the
programs which can not be specifically attributed to any specific CIP
program. The $284,6l6 is computed by totalling approved or uncontested
comparable amounts allocated for 1985 and 1988. $558,784 in A & R expenses
sought by the Utilities for tracker account treatment should be denied.
45. The adjustment to NSP's refund of Interim Rates, if a refund is
Ordered, attributable to correction of the Company's Tracker Account is a
surcharge to the refund (which reduces the amount available for refund) of
$408,116. The total correction to the surcharge proposed by NSP should be
$1,293,184, instead of the $1,577,800 proposed by the DPS.
Discussion
The DPS recommends an adjustment (surcharge) of $123,500 in the customer
refund of Interim Rates based upon its argument that the Tracker Account
should be reduced, to the detriment of NSP, by $1,577,800 ($734,400 for the
pre-1987 Good Cents adjustment and $843,400 in Administrative and Regulatory
expenses). The Administrative Law Judge recommends that $284,616 of the
$843,400 Administrative and Regulatory expenses proposed by NSP for the
tracker account treatment be allowed. See Finding 44. The Judge's Finding
that $408,116 should be surcharged to any interim rate refund results from his
recommended denial of all of the Good Cents program CIP monies proposed for
Tracker Account treatment and a recommended denial of Tracker Account
treatment of $558,784 in A & R expenses.
The Administrative Law Judge concludes that to adopt the DPS
recommendation that no A & R expenditures can be attributable to the CIP
program, apart from A & R monies that can be isolated into specific program
accounts, ignores business operations reality in a company as large and
complex as NSP. It is reasonable to assume that monies were spent by the
Company for items noted at Finding 42 during the period in dispute.
For program year 1988, the Company allocated its estimated A & R
expenditures of $876,429 into amounts of $697,413 for operating programs,
$95,595 for Commercial and Industrial CIP and $83,421 for Residential CIP.
See NSP Exhibit 41 (KHW-2), Sch. 5, p. I of 3. The DPS does not contest these
figures, nor does it contest an analogous allocation for program year 1985.
For program years 1986 and 1987, the Company has not made comparable
allocations. The treatment reflected in the above Findings represents an
attempt to make the allocations not prepared by NSP, allocations that average
the uncontested allocated amounts for program years 1985 and 1988.
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DPS proposal for depreciation studies
46. The DPS proposes that NSP be Ordered to perform studies every five
years to examine the expected economic costs of power plant life extensions or
reductions.
47. The parties, including NSP, agree that for purposes of this rate case
the 33-year depreciable life span of the Company's Sherco 3 plant should not
be altered.
48. The PUC currently requires NSP to seek a depreciation Order annually
to establish proper depreciation methods. Current depreciation methods allow
for the assessment of current generation and life extension technologies.
49. Although NSP assumes a 33-year life for new plants, some plants are
retired prior to the end of 33 years and many, after retrofitting and/or
conversion from base load to peak-use function, have useful lifes longer than
33 years.
50. The mandatory studies proposed by the DPS require estimation of
numerous variables such as alternative generation costs, fuel and maintenance
costs which will occur more than 30 years from the studies' dates.
51. The record does not establish that the mandatory periodic studies
regarding plant depreciation proposed by the DPS are necessary.
Disscussion
The concern raised by the DPS is valid. Plants which are retired prior to
33 years of useful life cause ratepayers to underfund the consumption of such
assets during the period of useful life, and plants that are used for over 33
years result in overpayments by ratepayers during the originally-presumed
lifespan. The Department's proposal is very general, and provides
insufficient details as to how these studies would operate and what they would
cost for the Administrative Law Judge to be able to recommend that they be
Ordered at this time. See DPS Ex. 93, p. 8
Rate Design
Principles_of Rate Desiqn
52. The Company bears the burden of proof that the proposed rate design
is just and reasonable and not unreasonable, preferential or discriminatory.
Minn. Stat. sec. 216.03 and 216B.16.
53. When the Commission allocates the revenue deficiency among classes of
customers to provide for the recovery of a revenue requirement, it acts in a
quasi-legislative capacity. Hibbinq Taconite Co. v. Minnesota Public Service
Commission, 302 N.W.2d 5, 9 (Minn. 1980); St.__Paul Area Chamber of Commerce v.
Minnesota Public Service Commission, 312 Minn. 250, 262, 251 N.W.2d 350, 358
(1977).
54. Having established a revenue deficiency, if Northern States Power
does not establish the reasonableness of its proposed rate design, then the
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Commission must determine just and reasonable rates to allow for the recovery
of the revenue deficiency. Minn. Stat. sec. 216B.1b, subd. 5.
55. The principles of rate design governing the exercise by the
Commission of its quasi-legislative authority may be summarized as follows:
a) Rates should be designed to provide the company with a
reasonable opportunity to earn its revenue requirement as
determined in the proceedings;
b) While cost of services is an important factor to be
considered by the Commission in determining the allocation
of rates among customers, the Commission must also consider
non-cost factors inherent in a proper balancing of public
policy and private need. Reserve Mining Co. v. Public
Utilities Commission, 344 N.W.2d 389, 393 (Minn. 1983); Ste
Paul Area Chamber of Commerce v. Minnesota Public Service
commission, supra, at 358 (1977);
c) Rates should provide a reasonable continuity with past and
future rates to prevent inordinate and immediate impact on
existing and future customers;
d) Rates should be as simple, understandable and easy to
administer as is practical; and
e) In Reserve Mining Co. v. Public Utilities Commission,
supra, 344 N.W.2d at 393, the Court listed the following
relevant noncost factors: whether the rates would be
disruptive; revenue stability; affordability; the ability
to pass costs on to others; and the ability to decrease the
impact of a rate increase through tax deductions.
The Rate Design Settlement
56. On May 27, 1988, the Administrative Law Judge issued an Order
Certifying Rate Design Settlement in this matter (Appendix C) in that Order,
the Judge certified the Offer of Settlement attached thereto (Appendix D) to
the Commission to determine whether acceptance of the Offer of Settlement was
in the public interest and whether the Settlement is supported by substantial
evidence in the hearing record. Subject to the limitations and conditions
more particularly described in the Memorandum of his Order, the Administrative
Law Judge recommended to the Commission that the Offer of Settlement be
accepted by it as appropriately resolving the rate design issues in this
proceeding, with the exception of the special rate discount for customers that
have medical needs which require greater electric usage, as proposed by the
Office of the Attorney General, and the conservation incentives in the design
of residential rates, as proposed by the Metropolitan Senior Federation. With
those qualifications, it was recommended that the Commission accept the Offer
of Settlement as an appropriate device for implementing the revenue increase,
if any, it grants in its final Order in this case.
57. The Rate Design Settlement arrived at by the parties was explained in
detail in Explanatory Comments by the Parties to the Rate Design Settlement
(Appendix E) filed on April 27, 1988. The judge hereby adopts his order
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Certifying Rate Design Settlement, the Offer of Settlement and Explanatory
Comments by the parties to the Rate Design Settlement package as his Findings
of Fact, Conclusions and Recommendation to the PUC with respect to the rate
design issues settled therein.
58. The Rate Design Settlement contains the agreement of all parties
regarding revenue apportionment. The percentages of increase to each customer
class are based upon a $75,000,000 increase in annual revenues stipulated to
by NSP. The increase to the Residential class is 7.71%. A 6.9% increase in
rates to Commercial and Industrial customers, an increase of 7.52% for Other
Sales to Public Authorities, and a 2.59% increase for Street and Area Lighting
are the other rate increases in the Settlement.
59. If the Public Utilities Commission determines a different revenue
deficiency than $75,000,000, the parties agree that the inter class and intra
class revenue and rate relationships contained in the Offer of Settlement and
its accompanying Exhibits (See Appendices D and E) should be applied to the
Commission-determined revenue deficiency.
Discussion
The Administrative Law Judge adopts as his Discussion of the Rate Design
Settlement the Memorandum (pp 3-5) to his May 27, 1988 Order Certifying Rate
Design Settlement (Appendix C).
While adopting, without change, his Order of May 27, 1988, the
Administrative Law Judge notes that the Exceptions filed by the parties on
June 17 contain different explanations for the portions about which the Judge
expressed resrevations than those he had before him prior to certifying the
Settlement.
The Medical Needs Discount
60. The OAG proposes a 25% discount on the monthly energy charge for
Residential Class customers whose medical needs require high electric usage.
The discount would apply to all usage up to 1000 kwh per month.
61. Any household which has a full time member who is a paraplegic or
quadriplegic person or who requires the regular use of a power wheelchair,
hemodialysis machine or special respiratory equipment (such as iron lung
machines) can qualify for the proposed discount by submitting a form signed by
a physician declaring their eligibility. The OAG proposes setting the medical
needs discount at 25% as an extension of the Conservation Rate Break (CRB),
which currently provides approximately a 25% energy discount to customers
whose low usage allows access to that discount.1 The 1000 kwh limitation
includes an assumed medical related usage level of 600 kwh plus the 400 kwh of
personal usage contemplated by the CRB.
lthe CRB currently provides a $4.00 discount to customers who use less
than 300 kwh per month, and, if usage is between 300 and 400 kwh per month,
the discount is $2.00. Under the Rate Design Settlement recommended for
adoption in this case, the CRB is $3.50 for usage of up to 300 kwh and $1.75
per month if the customer's usage falls between 301 and 400 kwh. See Offer of
Settlement (Appendix C), p. 6.
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62. The OAG estimates approximately 1000 NSP Residential customers would
qualify for the proposed Discount. The estimated maximum discount is $200 per
year for an annual cost to other Residential customers of $200,000. Setting
1000 kwh as an appropriate amount of usage to which to apply the Discount
represents the OAG's estimate of the electric needs of persons who would
qualify for the Discount. Implementing a more exact method of matching need
to usage would involve expenses that could exceed the total amount
discounted.
63. NSP opposes the Medical Needs Discount for several reasons, including
the lack of showing of a need for a discount, the lack of any income test, the
lack of integration with assistance programs and a concern that the PUC should
be cautious in becoming involved in Rate Discounts based on perceived needs of
various customer groups.
64. The OAG proposes the establishment of a task force to determine
whether it is appropriate to include other special medical needs as
eligibility criteria for the Discount. The record fails to establish a need
for such a task force, in light of the next Finding.
65. The record does not establish a basis for estimating how many
households in NSP's service territory could qualify for the Medical Needs
Discount. In the absence of information regarding the potential cost to other
NSP customers of implementing the Medical Needs Discount as proposed, it
should not be adopted.
Discussion
The proposal for establishing a Medical Needs Discount in the Residential
Rate structure is a response to a valid concern-there are people whose
electrical bills are higher than they would otherwise be but for those
persons' handicapping conditions. As pointed out by the OAG, the PUC has
acted to set rate relief for handicapped persons whose handicap results
directly in increased utility bills (the discount in toll rates available to
hearing-impaired customers of Northwestern Bell who use specialized telephonic
equipment). The Judge is persuaded that the Commission has the authority to
grant such a rate discount, even if the discount only partially alleviates a
state wide problem, because there is a direct connection between the
handicapping conditions and increased, otherwise unnecessary electrical usage.
The Administrative Law Judge stops short of recommending implementation of
the Discount at this time, however, because the record contains only the
hearsay testimony of OAG witness Schmidt to establish that there are about
1000 customers who could qualify. Schmidt's information, allegedly from the
United Handicapped Federation, is not documented and does not represent
research done by the witness. Another problem with the evidentiary foundation
for establishing the reasonableness of the Discount in this record is that the
only testimony establishing the appropriate usage level for application of the
Discount is that of witness Morse, who expressed the view that her electrical
usage was "a little high" when compared to others who might qualify for the
discount. See Public Hearing Testimony-St. Paul (afternoon), T., p. 31. This
evidence is too vague to substantiate a conclusion that 1000 kwh is an
appropriate upper limit on the usage level qualifying for the discount.
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Inverted-Rate-Proposal- of the Metropplityn Senior Federation
66. The MSF proposes the adoption of an inverted rate schedule similar to
that used by Philadelphia Electric. That rate structure uses a flat winter
rate as a base rate, adds a surcharge to the base rate for the first 300 kwh
of summer usage and a higher surcharge to all other summer usage. MSF's
proposal also features a credit to persons who consume less energy than they
had in the past.
67. Adoption of the inverted rate proposed by the MSF would result in a
large, but unquantified impact on some residential customers. It would
eliminate the winter end-step discount, thus increasing significantly the
rates for space heating customers. The extent of the 'rate shock" under such
a scenario is unknown because the MSF has not calculated the dollar effect of
implementing its proposed inverted rate at various usage levels.
68. The records contains insufficient evidence to support adoption of the
inverted rate proposal of the MSF. The proposal should be rejected.
Discussion
The inverted rates proposed by the MSF are premised on the assumption that
costs vary as a function of an individual customer's consumption, without
other variables. That assumption ignores the fact that regardless of
consumption level, individual customers impose high capacity and energy costs
on the system if they consume during peak periods. Inverted rates are
inappropriate as a method to achieve conservation because an inverted rate
structure sends inappropriate price signals and may not encourage economic
conservation.
Without information on the impact that the MSF inverted rate plan would
have on NSP's customers it is inappropriate for the PUC to adopt such a rate
at this time. In addition, it is evident that the rate would have an
immoderate impact on space-heating customers, which contravenes one of the
goals of regulatory rate design. While the goals of such a possibly-drastic
rate design proposal are laudable-to wake our society up to the reality that
we must conserve our burning of coal in order to prevent acid rain and the
"greenhouse effect" on our earth and atmosphere, the MSF has failed to provide
evidence of the monetary impact of its proposal. Without such evidence, the
Administrative Law Judge is unable to recommend adoption of the inverted rate.
It is also noted that the proposal to provide credits for conservation of
energy in comparison to 'past' usage has the potential of awarding persons who
waited until after the proposed Rate Design went into effect, at the expense
of customers who showed conservation awareness in the past and already made
energy-saving improvements.
NAWO's Demand-Side Management Proposals
69. Finding 28 details the revenue impact of NAWO's proposals in this
case. That Finding is incorporated by reference herein.
70. A stated purpose of NAWO's involvement in this case is to propose
adoption of rate structures that bring the company and the PUC to aggressive,
proactive demand-side management with a major emphasis on insuring the
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efficiency of lighting, appliances, drivepower, low and high temperature
heating and other "end-use" electrical technologies. NAWO Exhibit 55, p. 6.
NAWO advocates implementation of cost-effective, efficient methods of
producing low cost electrical energy to meet the threats it sees posed by acid
rain, the greenhouse effect and reliance on nuclear power.
71. NAWO considers NSP to be better than most electric utilities in the
implementation of programs that increase electrical end-use efficiency.
However, in relation to capturing the full potential for increased end-use
efficiency, NAWO believes the Company has far to go.
72. To illustrate the importance of implementing end-use efficiency,
assuming that a unit of energy saved by implementation of conservation
programs is equivalent to a potential unit of energy produced by constructing
a plant for capacity purposes (Sherco 3), NAWO presented cost comparisons for
the production of a kwh of electricity and the cost of a kilowatt hour saved
by the Company's Appliance Rebate, Good Cents Homes, Chiller Efficiency
Improvement, Lighting Efficiency Improvement and Motor Efficiency Improvement
Programs. NAWO Exhibit 55, pp. 10-12. For each program, NAWO's figures
purport to show "production" of electrical energy and capacity at a fraction
of the cost it takes the Company to build capacity and produce energy in its
p 1 ants.
73. In order to capture greater end-use efficiency, NAWO advocates
spending the amount of the revenue increase stipulated in this proceeding on
existing company conservation programs and development of new endeavors such
as additional rebates, "buying back" of energy saved (using a competitive
bidding process), the marketing of negotiable instruments secured by the
Utility's promise to pay a building or factory owner a certain amount of money
for consuming no more than a certain level of energy, deployment of a sliding
scale for connection fees whereby the less electrically-efficient customers
would be charged more for getting on NSP's system and targeted retrofitting.
NAWO Exhibit 55, pp. 15-18. NAWO asserts that the rates NSP seeks in this
proceeding are almost three times higher than the cost-effective limit of
implementing such programs.
74. NAWO proposes the restructuring of the Company's rates to include an
"efficiency clause" that adjusts rates, month-by-month, in a fashion
comparable to the current monthly fuel adjustment clause, according to changes
in NSP's revenue requirements caused by electrical end-use efficiency
improvements within the Company's system.
75. The proposed investment of an additional $75,000,000 in end-use
efficiency, demand-side management programs, which monies would be made
available, in part, by excluding the Sherco 3 Plant from Rate Base, should be
rejected and the programs for conservation improvement advocated by NAWO in
this proceeding should not be implemented at this time.
76. NAWO's proposal for an "efficiency clause" that adjusts rates
according to savings attributable to the demand-side management programs
advocated in this proceeding should be rejected.
Discussion
Minn. Stat. sec. 216B.01 (1986) declares that it is in the public interest
that public utilities be regulated so as to provide retail customers of
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electric service in Minnesota with adequate and reliable services at
reasonable rates, 'consistent with the financial and economic requirements of
public utilities and their need to construct facilities to provide such
services" or to otherwise obtain energy supplies. Minn. Stat. sec. 216B.16,
subd. 6 (1986) lists the factors to be considered by the Public Utilities
Commission in the exercise of its powers to determine just and reasonable
rates for public utilities. The statute mandates due consideration be given
to the need of the public utility for revenue sufficient to enable it to meet
the costs of furnishing its service, including adequate provision for
depreciation of its utility property used and useful in rendering service to
the public, and to earn a fair and reasonable return upon the investment in
such property. Subdivision 6 further provides:
In determining the rate base upon which the utility is to
be allowed to earn a fair rate of return, the Commission
shall give due consideration to evidence of the cost of the
property when first devoted to public use, to prudent
acquisition cost to the public utility less appropriate
depreciation . . . and to other expenses of a capital
nature.
Minn. Stat. sec. 216B.243 (1986) requires a public utility to receive prior
approval for construction of a new large energy facility by justifying the
need for the facility via the Certificate of Need process. Where a facility
has received approval by way of a Certificate of Need and where that property
is prudently acquired and used and useful in rendering service to the public,
the PUC must allow the public utility to recover revenue sufficient to cover
the costs of providing that service.
In 1982, a Certificate of Need was granted for construction of the Sherco
3 Plant which the NAWO seeks to exclude from rate base in this case. The
Plant began commercial operation in November, 1987. Sherco 3 was prudently
constructed and is currently used and useful in rendering service to the
public. As a result, and in accordance with the statutory scheme outlined
above, there is no legal basis for exclusion of Sherco 3 in the rate base
component for purposes of computing an appropriate rate adjustment in this
proceeding.
In order to implement NAWO's proposal to grant NSP a $75,000,000 rate
increa s e wh i I e exclud ing Sherco 3 from rateba s e , the Commi s s i on wou I d have to
grant a rate of return on common equity slightly greater than 17%. Such a
return in today's market is excessive. The granting of that high a rate of
return is not supported by any rate of return analysis in this record. The
testimonies of rate of return witnesses in this proceeding clearly support the
stipulated amount of 11.7% return on common equity.
An increase in the Company's authorized overall rate of return from the
stipulated 9.68% to 12.1%, the amount needed to finance the stipulated revenue
requirement if Sherco 3 is excluded from rate base, is also an excessive
return in today's economy. Therefore, NAWO's proposal that NSP be allowed to
earn a rate of return sufficient to finance $75,000,000 and demand-side energy
conservation improvements has been found to be unreasonable.
Finally, NAWO did not present sufficiently specific proposals for how NSP
should spend the $75,000,000 in conservation improvements. It would be more
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appropriate for NAWO to present specific conservation proposals in the annual
Conservation Improvement Plan proceedings conducted by the Commission or in a
presentation before a generic, industry-wide advisory board. Through such
processes, the Commission could adequately examine the proposals and determine
how NSP, or any other electric utility, should spend the funds dedicated to
such projects. There are insufficient guidelines and information for
appropriate and cost-effective use of the $75,000,000 proposed annual rate
increase for conservation in this record.
Concepts-to Govern
77. It is the intention of the Administrative Law Judge that the concepts
set forth in the Findings herein should govern the mathematical and
computational aspects of the Findings. Any mathematical or computational
errors are unintentional and should be corrected to conform to the concepts
expressed in the Findings.
Based upon the foregoing Findings of Fact, the Administrative Law Judge
makes the following:
CONCLUSIONS
1. The Minnesota Public Utilities Commission and the Administrative Law
Judge have jurisdiction over the subject matter of this hearing pursuant to
Minn. Stat. Ch. 216B and sec. 14.57-14.62, and Minn. Rules 1400.5100-.8300.
2. The Commission gave proper notice of the hearing in this matter, has
fulfilled all relevant substantive and procedural requirements of law or rule
and has the authority to take the action proposed.
3. Any of the foregoing Findings more appropriately considered
Conclusions of Law are hereby adopted aS such.
4. The proper test year for determining Northern States Power's revenue
deficiency for general rates is the 12-month period between January 1, 1988
and December 31, 1988.
5. It is appropriate to adopt the Revenue Requirements Stipulation filed
in this matter.
6. The Company's appropriate rate base for purposes of this case is
$2,350,498,000.
7. It is inappropriate to deduct $470,000,000 from the Company's rate
base for the purposes of this case to reflect disallowance of the Sherco 3
Plant as a component of the rate base.
8. NSP's appropriate test year required operating income is
$227,528,000.
9. It is appropriate to deduct $408,116 from the Interim Rate refund, if
any, Ordered in this case to permit recovery by NSP of past conservation
expenditures.
10. It is appropriate to disallow recovery by NSP from the Interim Rate
refund of $743,400 associated with the Good Cents Home Program, which amount
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represents expenses incurred prior to the Commission's approval of the Program
as a Conservation Improvement Program.
11. It is appropriate to disallow recovery by NSP from the Interim Rate
refund of $558,784 in Administrative and Regulatory expenses for Conservation
Improvement Program years 1986 and 1987.
12. The appropriate capital structure for Northern States Power is 45.25%
common equity, 43.69% debt and 11.05% preferred stock.
13. The appropriate cost of debt for NSP is 8.35%.
14. The appropriate cost of preferred stock for NSP is 6.74%.
15. The appropriate cost of common equity for NSP is 11.70%.
16. NSP's appropriate test year overall rate of return is 9.68%.
17. NSP's test year revenue deficiency is $75,000,000.
18. It is appropriate to reject the DPS proposal for an order mandating
periodic studies regarding plant depreciation.
19. It is appropriate to adopt the Rate Design Settlement of the parties
in this matter in accordance with the Administrative Law Judge's May 27, 1988
Order Certifying Rate Design Settlement, after due consideration of the
parties' Exceptions to the Order.
20. It is appropriate to retain the relative inter class and intra class
rate relationships stated in the Rate Design Settlement if the Commission
Orders a revenue deficiency different from $75,000,000.
21. It is appropriate to increase rates for the Residential Class by
7.71%.
22. It is appropriate to increase rates for the Commercial and Industrial
Class by 6.90%.
23. It is appropriate to increase rates for Other Sales to Public
Authorities by 7.52%.
24. It is appropriate to increase rates for Street and Area Lighting by
2.59%.
25. It is appropriate to reject the proposed adoption of a Medical Needs
Discount proposed by the OAG.
26. It is appropriate to reject the Inverted Rate proposal for the
Residential Class sponsored by the Minnesota Senior Federation.
27. It is appropriate to reject NAWO's proposal for restructuring of the
Company's rates to include an efficiency clause that adjusts rates according
to revenue requirements caused by electrical end-use efficiency improvements
within the Company's system.
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28. It is appropriate to reject NAWO's proposal to require NSP to invest
the monetary equivalent of the rate increase authorized, if any, in this
proceeding in demand-side management programs advocated by NAWO.
THIS REPORT IS NOT AN ORDER AND NO AUTHORITY IS GRANTED HEREIN. THE PUBLIC
UTILITIES COMMISSION WILL ISSUE THE ORDER OF AUTHORITY WHICH MAY ADOPT OR
DIFFER FROM THE FOLLOWING RECOMMENDATIONS.
It is the recommendation of the Administrative Law Judge to the Public
Utilities Commission that it issue the following:
ORDER
1. Within 30 days of the date of this Order, Northern States Power shall
file with the Commission for its approval, and provide to all parties in this
proceeding, a revised schedule of rates and charges, incorporating the
decisions made herein, so as to allow the production of revenues for the test
year equal to the revenue requirement herein, in accordance with the rate
design provided for herein.
2. Within 30 days of the date of this Order, the Company shall file with
the Commission for its review and approval, and serve upon all parties to this
proceeding a proposal to refund to its customers any monies collected in
access of the revenue requirement authorized herein.
3. This Order shall become effective immediately.
Dated this 23rd day of June, 1988.
RICHARD C. LUIS
Administrative Law Judge
Reported: Harold M. Reiner & Associates
Transcripts Prepared
NOTICE
Pursuant to Minn. Stat. 14.62, subd. 1, the agency is required to serve
its final decision upon each party and the Administrative Law Judge by first
class mail.
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