OAH Docket No. 7-2500-8406-2
MPUC Docket No. G-008/GR-93-1090
STATE OF MINNESOTA
OFFICE OF ADMINISTRATIVE HEARINGS
FOR THE MINNESOTA PUBLIC UTILITIES COMMISSION
In the Matter of the Petition of Minnegasco, a Division of Arkla Inc., for Authority to Increase its Rates for Natural Gas Service in Minnesota
FINDINGS OF FACT,
CONCLUSIONS, AND RECOMMENDATION
The above-entitled matter came on for evidentiary hearing before Administrative Law Judge Richard C. Luis on May 17-18 and 24-26 and June 2-3 and 9-10, 1994 in St. Paul, Minnesota. The record in this matter closed on July 21, 1994.
The parties to this proceeding are: Minnegasco, a division of NorAm Corp., formerly known as Arkla, Inc. ("Minnegasco", "MGC" "the Company" or "the Utility"); Minnesota Department of Public Service ("the Department" or "DPS"); Office of the Attorney General, Hubert H. Humphrey III ("Attorney General" or "OAG"); Minnesota Energy Consumers ("MEC"); the Suburban Rate Authority ("SRA"), and the Regents of the University of Minnesota.
Appearances were made by the following:
For Minnegasco, a Division of Arkla, Inc., Paul Ruxin, of the firm of Jones, Day, Reavis & Pogue, North Point, 901 Lakeside Avenue, Cleveland, Ohio 44114, and Douglas Peterson, Minnegasco, 201 South Seventh Street, Minneapolis, Minnesota 55402.
For the Department of Public Service, Scott Wilensky, Joshua Wirtschafter, and Mark Chalfant, Assistant Attorneys General, 1200 NCL Tower, 445 Minnesota Street, St. Paul, Minnesota 55101-2130.
For the Office of Attorney General, Gary R. Cunningham, Assistant Attorney General, 1200 NCL Tower, 445 Minnesota Street, St. Paul, Minnesota 55101-2130.
For Minnesota Energy Consumers, James J. Bertrand, of the firm of Leonard, Street & Deinard, 150 South Fifth Street, Suite 2300, Minneapolis, Minnesota 55402.
For the Suburban Rate Authority, James M. Strommen, of the firm of Wurst, Pearson, Larson, Underwood & Mertz, 120 South Sixth Street, Minneapolis, Minnesota 55402.
For the Public Utilities Commission, Margie Hendrickson and Anu Seam, AssistantAttorneys General, 121 Seventh Place East,
Suite 350, St. Paul, Minnesota 55101. Staff members participating in the hearing included Gerald Desinger, John Lindell, Robert Harding and Clark Kaml.
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, Metro Square Building, Suite 350, 121 7th Place East, St. Paul, Minnesota 55101-2147. 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 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.
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 ISSUE
Should Minnegasco be allowed to increase its rates for gas utility
service to Minnesota
customers by $22,722,000 and collect revenues in accordance with the rate
design proposed by Minnegasco?
Jurisdictional Procedural Background
1. On November 5, 1993, Minnegasco filed a Petition with the Commission under Minn. Stat. § 216B.16, for an increase in gas rates of $22,722,000 (an approximately 3.6 percent increase over current rates). Minnegasco also filed a Petition for Interim Rates in the amount of $16,864,000 (a 2.7 percent increase).
2. On January 26, 1994, the Commission issued an Order accepting the filing and suspending the proposed rate increase until the Commission 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) (1992).
3. On January 26, 1994, the Commission issued a Notice and Order for Hearing, directing that a contested case hearing be convened to determine the reasonableness of the ratechanges proposed by Minnegasco.
4. On January 31, 1994, the Commission issued an Order Setting Interim Rates, authorizing Minnegasco to collect $14,600,000 in additional annual revenues in the form of a 2.3 percent surcharge to retail rate schedules as interim rates, beginning February 1, 1994. Minnegasco is collecting interim rates subject to full or partial refund if the interim rates are in excess of the final rates determined by the Commission.
5. On March 1, 1994, a prehearing conference was held before the ALJ in the Commission's Large Hearing Room, 121 Seventh Place East, Suite 350, St. Paul, Minnesota. Petitions to Intervene were filed by and granted to the Department, OAG, MAC, MEC, SRA and U of M.
6. The SRA appeared at the hearings but sponsored no witnesses. The U of M did not appear at the hearing nor did it sponsor any witnesses.
Procedural Background
7. On November 5, 1993, Minnegasco, a Division of Arkla, Inc. ("Minnegasco," "the Company," "MGC") filed a petition, pursuant to Minn. Stat. § 216B.16 (1992) with the Minnesota Public Utilities Commission ("Commission," "MPUC") requesting authority to increase its rates for natural gas utility service within the State of Minnesota. The petition sought an increase in rates of approximately $22.7 million or 3.6 percent of total revenues. On January 31, 1994, the Commission issued an order setting interim rates, allowing an increase of $14.6 million annually or approximately 2.3 percent of revenues in interim rates.
8. On January 26, the Commission accepted the filing as supplemented on December 9, 1993, and issued a Notice and Order for Hearing, which requested that the parties not include certain issues in any settlement. Administrative Law Judge ("ALJ") Richard C. Luis held a prehearing conference on February 1, 1994, and issued a Prehearing Order on March 1, 1994.
9. The following parties intervened in the proceeding: Minnesota Department of Public Service ("Department," "DPS"); Office of Attorney General, Residential Utilities Division ("OAG"); Minnesota Energy Consumers ("MEC"); Suburban Rate Authority ("SRA"); the Minnesota Alliance for Fair Competition ("MAC") and the Regents of the University of Minnesota.
10. Public hearings were conducted in Coon Rapids on April 21, 1994; in Minneapolis on April 25, 1994; in Bloomington
on April 26, 1994; in Mankato on April 28, 1994.
11. Evidentiary hearings were initially scheduled to begin May 5, 1994. Because the parties reached settlement on most of the contested issues, the ALJ twice granted extensions of the hearing date, ultimately until May 17, 1994. The hearings concluded on June 10, 1994. A total of 16 witnesses provided testimony.
12. The SRA appeared at the hearing but sponsored no witnesses. The Regents of the University of Minnesota did not appear at the hearing nor sponsor witnesses.
Description of the Company
13. Minnegasco is an operating division of NorAm Energy Corp., formerly known as Arkla. Minnegasco distributes gas to approximately 590,000 customers in Minnesota. In a transaction closed on August 31, 1993, and approved by the Commission on July 29, 1993, Minnegasco acquired the Minnesota properties of Midwest Gas in exchange for its South Dakota properties. Also in 1993, Minnegasco sold its Nebraska properties.
14. The largest metropolitan area served by Minnegasco is Minneapolis and its western suburbs. Minnegasco has a significant large volume load. Minnegasco maintains its principle office in Minneapolis, Minnesota, as well as other offices throughout its service territory.
15. Minnegasco purchases gas from producers, and also some gas from interstate pipelines. It services its customers with natural gas transported on Northern Natural Gas and Viking Gas pipeline systems.
Summary of Public Comments
16. Four public hearings were held. They were not well attended. Members of the ratepaying public testified at the public hearings. The dates, times, locations and attendance are set forth below:
Coon Rapids, April 21 at 7:00 p.m. (4)
Minneapolis, April 25 at 1:30 p.m. (1)
Bloomington, April 26 at 7:00 p.m. (2)
Mankato, April 28 at 7:00 p.m. (5)
17. The first Coon Rapids witness asked how the acquisition adjustment related to the increase in rates. He also had a comment about Minnegasco's Service Plus program. He believed that he always had his furnace repaired free because he paid for that service through the customer charge. He complained that customers are still paying the customer charge for service, but if they don't have a Service Plus contract, they don't receive appliance service.
18. The second Coon Rapids witness had several questions. First, she wanted to know why Minnegasco paid a premium when Minnegasco and Midwest exchanged service territories because it was her understanding that it was an even exchange. She also asked why part of the rate increase was due to a 16% increase in wages when the employees she had talked to only received a 3% increase. Another concern she had was that a large part of the increase was due to an increase in medical costs. She inquired whether rates would decrease if Minnegasco's health care costs decreased as a result of a national health care plan. Lastly, she complained about a ServicePlus technician referring her to another company to perform furnace maintenance that was not offered by Minnegasco.
19. The Minneapolis witness inquired whether the rates went up 3.5% last year for homeowners and decreased 5% for big businesses. Next, he wanted to know how the PGA on his bill related to the price Minnegasco paid for the gas stored underground in southern Minnesota. He thought that if Minnegasco purchased gas cheaper in the summer, then that price should be reflected in his bill when they start withdrawing it in the winter. Lastly, he wanted to know why the customer charge increased from $3 (including 3 ccfs) to $6 (including no ccfs) within the last two years.
20. The Bloomington witness
was concerned that he was being charged more when his bill changed from cubic
feet to therms. He also stated that it
appeared as though Minnegasco made a profit by removing the first 3 ccfs from
the customer charge. Lastly, he wanted
to know why Minnegasco listed increasing property taxes as a reason for the
rate increase when the city tax
assessor stated that industry property taxes have decreased.
21. In Mankato, one witness addressed the customer charge on her bill for her small business and attached apartment. She stated that she used to shut off her gas service from April to October when her gas usage was zero. She stopped doing this when the reconnection fee increased and now she receives a bill for only the customer charge during those months. She wanted to know what is included in the customer charge and also why the reconnection fee increased. She also complained about a portion of the increase going toward conservation programs. She felt that conserving energy was useless because customers would still be billed for the customer charge even if they used no gas. Lastly, she wanted to know if the number of customers, as shown on the fact sheet, represented only residential or the total for all classes.
22. Another Mankato witness wanted to know why the customer charge was continuing to increase each year.
23. The last Mankato witness also had a comment regarding the customer charge. He stated that the customer charge was confusing and suggested that the bill be set up so customers could see how much gas they are paying for and how much it costs Minnegasco to serve them. Also, he felt that the acquisition adjustment was a business expense and that customers should not have to pay for it. Next, he inquired how often meters are tested. Lastly, he commented on a personal experience he had regarding Minnegasco discontinuing his service.
Description of the Company
24. On November 29, 1990, Minnegasco became an operating division of Arkla, Inc. Prior to that time, Minnegasco had been a wholly-owned subsidiary of Diversified Energies, Inc. In April 1994, Arkla, Inc. changed its name to NorAm Energy Corp.
25. At the time of the filing, Minnegasco distributed natural gas at retail solely to customers in Minnesota. Earlier in 1993, Minnegasco sold its Nebraska operations and exchangedits South Dakota operations for the Minnesota operations of Midwest Gas. At year-end 1993, Minnegasco had approximately 599,000 customers in Minnesota. The largest metropolitan areas served are Minneapolis and west metro suburbs. Additionally, Minnegasco has a significant large volume load. Minnegasco maintains its principal office in Minneapolis, Minnesota, and has other offices throughout its Minnesota service territory.
26. Minnegasco purchases gas from pipelines, as well as directly from producers. It serves its Minnesota customers with natural gas from the Viking and the Northern Natural Gas pipeline systems.
Settlement And Stipulation
27. The Company, the Department, and the OAG jointly filed an Offer of Partial Settlement and Stipulation of Facts and Recommended Decision ("Settlement and Stipulation") (Joint Exh. 94) with the ALJ and Commission on June 2, 1994. In deference to the Commission's request, these parties kept certain issues out of the Settlement. Instead, these parties agreed to stipulate to the facts as to those issues. In doing so, the parties to the Settlement and Stipulation also agreed that the Commission's decision on the stipulated issues (and the remaining disputed issues) will not affect the reasonableness of the results of the Settlement, although the Commission's decision may have an impact on the additional revenues intended to be produced by the Settlement. Joint Exh. 94 at pp. 3-4.
28. The Settlement and Stipulation will result in just and reasonable rates consistent with the public interest.
Burden Of Proof
29. Minn. Stat. § 216B.16,
subd. 4 (1992) places on the utility proposing a rate
increase the burden of showing the reasonableness of its proposed rates. Under Minn. Stat. § 216B.03, every rate
made, demanded or received by any public utility " . . . shall be just and
reasonable . . . . Any doubt as to the
reasonableness should be resolved in favor of the consumer."
30. The Minnesota Court of Appeals and Minnesota Supreme Court have addressed the appropriate quantum of proof needed to establish the reasonableness of a proposed rate change. In In re Northern States Power Company, 402 N.W.2d 135 (Minn. App. 1987), the Court of Appeals stated:
We find . . . that the appropriate quantum of proof needed to establish the reasonableness of a proposed rate change is the same as in any other civil case--a fair preponderance of the evidence.
On review by the Supreme Court, the determination on burden of
proof by the Court of Appeals was affirmed. In re Northern States Power Company, 416 N.W.2d 719 (Minn. 1987). The Court went on to provide further explication of the fair preponderancestandard as applied to fact-finding processes in utility rate cases. It noted that the weighing of evidence to be employed by the Commission differs from the weighing of evidence traditionally employed by a court (416 N.W.2d at 722):
In evaluating the validity of a rate increase application, the Commission should apply the classic burden of proof analysis employed in civil cases in determining whether the utility has established the amount of a claimed cost as a judicial fact. . . . But in the exercise of the statutorily imposed duty to determine whether the inclusion of the item generating the claimed cost is appropriate, or whether the ratepayers or shareholders should sustain the burden generated by the claimed cost, the MPUC acts both in a quasi-judicial and a partially legislative capacity.
31. Intervenors in this case have recommended adjustments which, if adopted, would lower Minnegasco's revenue deficiency. At this stage of the proceeding, the Administrative Law Judge is acting in a quasi-judicial capacity. He interprets the above-noted rulings of the Court of Appeals and Supreme Court to imply that the Judge's fact-finding function in a utility rate case is to determine whether a proponent of a given position has established sufficient facts to support the reasonableness of that position by a fair preponderance of the evidence. The question of whether the evidence thus established on the record results in "just and reasonable" rates is left to the judgment of the Commission after the Judge makes his recommendations.
Gas Purchasing Incentive
32. When Minnegasco filed this rate case, it sought to recover an acquisition adjustment, the amount it paid in excess of book value for its purchase of Midwest Gas Company
("Midwest"). MGC Exh. 43 at pp. 16-23 (Hammond Direct);
MGC Exh. 56 at pp. 54-55 (Reimer Direct).
The Department and the OAG filed testimony recommending a denial of the
acquisition adjustment, on the grounds that there were no demonstrable savings
to the former Midwest and Minnegasco customers resulting from the
acquisition. DPS Exh. 107 at pp. 3-19
(Michelle St. Pierre Direct); OAG Exh. 103 at pp. 3-10 (Nelson Direct). In Rebuttal Testimony, Minnegasco witness
Phillip R. Hammond set forth a new proposal, seeking recovery of the
acquisition adjustment through a Gas Purchasing Incentive (GPI) Mechanism. MGC Exh. 45 at pp. 30-34. The Department and the OAG filed testimony
in opposition to this new alternative proposal. DPS Exh. 83 at pp. 18-21 (Bushee Surrebuttal); OAG Exh. 31 at pp.
1-12 (Morrisette Supplemental). In
reaching the Settlement and Stipulation, the parties agreed that Minnegasco
would withdraw its
request for rate base treatment of the acquisition adjustment and the parties
would litigate the question of a GPI as an alternate means for Minnegasco to
recover its investment over book value in Midwest Gas. Joint Exh. 94 at pp. 21-22.
33. Minnegasco proposed a GPI as "an alternate method of demonstrating the savings resulting from the Midwest Gas acquisition and a method of sharing those savings" with its customers. MGC Exh. 45, at p. 31. The proposal should be rejected since Minnegasco failed to demonstrate that it is entitled to an acquisition adjustment.
34. A utility should recover an acquisition adjustment from ratepayers only if theacquisition provides net benefits to ratepayers, such that the net cost of service to ratepayers declines. DPS Exh. 107 at pp. 5-6. The utility must demonstrate that any alleged savings to ratepayers are quantifiable, not speculative, due solely to the acquisition, and will continue over the time that the acquisition adjustment is amortized. Id.
35. Department analysts Michelle St. Pierre and Glenn
Bushee examined the cost/benefit study Minnegasco used to justify the acquisition adjustment and identified numerous items of claimed savings which actually resulted in net costs to ratepayers. DPS Exh. 112 (MAS-40) (St. Pierre Surrebuttal). Ms. St. Pierre examined most non-gas costs and benefits and recommended that all of the claimed savings from Midwest Gas allocations to its parent be eliminated, that costs previously allocated to the former South Dakota Minnegasco properties be increased to reflect test-year amounts, that inflation should reflect the Department's position for the test year, that savings claimed from Midwest's rate case expenses be eliminated and additional rate case expense added, and that all of the claimed savings from the North Central acquisition adjustment be eliminated. DPS Exh. 112 at pp. 2-3. Even the high range of the non-gas cost cost/benefit analysis shows significant net costs from the acquisition. DPS Exh. 112 (MAS-40).
36. Mr. Bushee testified that several significant areas of claimed gas cost savings, most notably involving gas storage, were speculative. DPS Exh. 75 at pp. 3-81 (Bushee Direct); DPS Exh. 83 at pp. 2-18 (Bushee Surrebuttal) He also identified areas in which gas costs, both commodity costs and demand costs, will actually increase as a result of the acquisition. Mr. Bushee also recommended that claimed savings involving the closing of Midwest's peaking plants and the long-range reinforcement projects be eliminated from the cost benefit analysis. DPS Exh. 75 at pp. 27-40; DPS Exh. 83 at pp. 21-24. The Department concludes that whereas Minnegasco claimed benefits from the acquisition in an amount exceeding six million dollars,Later adjusted downward by $2 million or 33 percent. MGC Exh. 57 at p. 12 (Reimer Rebuttal). the acquisition actually results in a higher cost of service in an amount ranging from approximately two million dollars to nearly five million dollars. DPS Exh. 112 (MAS-40).
37. While all of the issues
related to the withdrawn acquisition adjustment were not litigated, a GPI
designed as an alternate method of recovering an acquisition adjustment should
not be granted when the Company has not demonstrated net benefits from the
acquisition. The appropriate way to
gain an acquisition adjustment is to prove net benefits. By withdrawing its request to include the
acquisition in rate base, the Company abandoned any effort to prove that in
this case. However, the Company argued
that a GPI would eliminate speculation regarding costs and benefits and allow
the Company to recover a portion of the savings actually produced by the
acquisition. MGC Exh. 45 at p. 32. A GPI cannot eliminate uncertainty regarding
commodity gas cost savings, because there will never be a way to know what
would have resulted from the Commission's Order in the Midwest Gas
Investigation regarding its gas purchasing practices. Docket No. G-0l0/CI-92-1147.
Indeed, because of this uncertainty, the Department did not make a
downward revenue requirement adjustment based on its cost benefit analysis,
which shows negative savings or added costs due to the merger.
37. The ALJ does not believe that the Company will be able to show in the future that the other elements examined, non-gas costs and demand savings, will likely produce net benefits. Costs associated with parent allocations of the former Midwest-Minnesota were not eliminated by the acquisition. DPS Exh. 107 at p. 9-14. For example, the Company admitted that $2 million in depreciation was not a parent allocation that would disappear. MGC Exh. 57 at p. 12 (Reimer Rebuttal). Neither, for example, will bad debt costs, which were claimed as parent company savings, disappear. DPS Exh. 107 at p. 10. The GPI ignores these non-gas costs of the acquisition. Because of this, and because the GPI cannot reduce uncertainty as to gas