LDC Infrastructure Replacement and Expansion: Rate Issues

Report
LDC Infrastructure
Replacement and
Expansion: Rate Issues
Jesse S. Reyes
Assistant Attorney General
Massachusetts Attorney General’s Office
June 17, 2014
INFRASTRUCTURE REPLACEMENT
2
Base Rate Cost of Service Approach
• Base Rate Recovery Approach
– Representative levels of cost
• Depreciation expense fixed in rates over time
• Declining actual depreciation creates funding for new
cap-x (along with growth and debt)
– The “old school” method
• Regulatory lag provides some deterrence to excessive
or imprudent investment
• Less direct regulation of capital expenditures
Capital Trackers:
The Regulatory Challenge
• Risk of costs recovered more than once
– Many manifestations of this risk
• Changes in accounting practices
• Operational changes after program approval
• Inadequate formula tariff
• Cumbersome annual review process
– Can be like a mini rate case
Tracker Creation
• By Commission
– Discretionary: commissions sometimes reject
requests to create special mechanisms
– Some courts say a commission cannot change the cost
recovery formula of a reconciling mechanism, outside
of a base distribution rate proceeding.
• E.g. Attorney General v. Department of Public Utilities, 453
Mass. 191 (2009); Consumers Organization For Fair Energy
Equality v. Department Of Public Utilities, 368 Mass. 599
(1975).
• By Legislature
– e.g. An Act Relative to Natural Gas Leaks (Mass.
H.4164 (2014))
Some Issues When Creating the
Mechanism
• Risk Reduction
– If the company is able to recover a cost on a dollar-fordollar basis, it will face lower business risk, and require a
lower rate of return to attract capital.
– This lower return must be reflected in rates when the
tracker goes into effect
• Cost Purging
– A full based rate case gives you the opportunity to ensure
that all costs to be recovered through the tracker are first
actually taken out of the distribution rates
Recommended TIRF Conditions
•
•
•
•
Pre-approved plan
Metrics
Rate Impact Cap
Incremental costs only
There Needs to Be a Plan
• The company should be directed to implement a comprehensive
risk management and asset management program based on sound
risk analysis and economically driven decisions to achieve the
lowest long-term total cost ways to manage risk levels going
forward.
– Set specific risk level targets, such as leak rates for unprotected steel
pipe and cast iron, and develop coordinated maintenance, life
extension, and replacement programs that achieve the targeted risk
levels at the lowest long term total cost to the ratepayer.
– Include appropriate assessment of root causes of the corrosion and
other chronic problems, as well as full consideration of alternatives to
replacement to mitigate risk and prioritize replacements of inside
meters, services and mains to reduce the most risk first.
• The absence of metrics, targets or to otherwise explain how it
would measure the success of additional investments in achieving
increased public safety leads to little or no accountability.
Tracker Metrics
• A leak reduction target or benchmark is needed.
– The tracker is premised on the need to replace defective equipment that is a
danger to the public.
– We need to measure performance.
• Examples:
– Strict leak-rate based performance target of 5% per year reduction in
corrosion-related leaks from mains and 7% per year reduction in corrosionrelated leaks from services.
– ROE reduction: A direct one-to-one penalty provision on allowed return on
investment associated with the mechanism, such that for every percentage
point deficiency in the company’s leak reduction target, the company’s return
on investment is also reduced by a percentage point.
– Penalty and incentive: allowed rates of return should be adjusted to increase
or decrease as leak performance improves or worsens.
• The AGO recommended that a 25-basis point cap be placed on increases or decreases to
allowed return on equity from these performance adjustments based on five-year
average leak reduction rates determined prior to the adoption of the tracker.
Recovery Should Be Capped
• There needs to be a cap on amount recovered.
– Massachusetts – 1.0% revenue increase cap based
on total revenues.
– Historically, the companies have invested far less
in main and service replacement than allowed
under the 1% rate impact cap.
– Expenditures over the cap to be considered in
next rate case under traditional ratemaking.
Limit Recovery to
Incremental Costs
• All expenditures in the tracker program should be incremental
investments to the amounts included in the test year rate base that
are being recovered through base rates.
• The Two-Step Test:
– First, compare actual labor overheads and clearing account burdens
charged to O&M each year of the tracker to the amount of O&M labor
overheads and clearing account burdens included in the most recent
base rate proceeding.
• If actual O&M labor overheads and clearing account burdens charged to the
tracker are less than the amounts included in base rates and amounts included
in other trackers, (i.e. Pension and PBOPs), then reduce the total capitalized
labor overheads and clearing account burdens in a given year of its tracker
filing by the difference.
• If the TIRF actual labor overheads and clearing account burdens charged to
O&M expense exceed the level set in base rates and in the other trackers, then
no such adjustment would be made.
Limit Recovery to
Incremental Costs
(continued)
– Second, demonstrate that the overall level of the actual
capitalized labor overheads and clearing account burdens,
as adjusted, are allocated equally to all capital projects in
any given year, including tracker projects.
– The cost recovery should be limited to the lesser of: (1) the
total non-growth capital investments less the depreciation
expense allowance included in base rates; and (2) actual
TIRF capital investments.
Used & Useful versus
Plant Held for Future Use
• Are they replacing worst first?
– Look at leak rates.
– Risk ranking.
• Operational needs versus worst first.
Used and Useful Versus Plant
Held For Future Use (continued)
• Network Analysis
– Will replacement pipe generate higher deliverable volumes of gas?
• Request contemporaneous documentation that the company should have retained
and produced when replacement mains are not “like-for-like.”
– Get the Network Analysis. This is a tool that permits the distribution engineer
to examine the amount of deliverable volumes before and after a main
segment replacement project. It is critical to evaluating the classification of
tracker projects because it would provide the commission with objective
analysis as to whether a project is designed for load growth or not, and thus
appropriate for recovery in rate base at all or should be classified as plant held
for future use.
– “Replacement” does not necessarily mean the same size & pressure.
Prudence: Escalation Of Costs
• Prudence - Have the company’s replacement
costs per mile of replaced main and replaced
service increased?
– Compare them to what they said when the
commission approved the tracker.
– Compare them to their peers.
• Are the services being replaced when the
main is replaced?
LDC SYSTEM EXPANSION
16
Price Differentials
SOURCE: Massachusetts Department of Energy Resources
17
Residential House Heating Fuels
Connecticut
Number
Percent Number Percent
554,543
1,357,812
Total:
Maine
Massachusetts
Number
1,249,253 49.53%
104,858 20.20%
208,173 50.39%
41,601 16.09%
2.72%
72,091 13.89%
10,361
2.51%
38,497 14.89%
7.56%
38,606
9.35%
12,532
41,477
7.48%
Electricity
212,708 15.67%
23,260
4.19%
365,060 14.47%
Fuel oil, kerosene
615,734 45.35%
374,110 67.46%
772,641 30.63%
39,257
245,324 47.26%
144,208 34.91%
4.85%
114,708 44.37%
716
0.28%
3,563
0.14%
593
0.11%
413
0.10%
76,225 13.75%
43,393
1.72%
43,948
8.47%
7,592
1.84%
635
0.11%
487
0.02%
593
0.11%
204
0.05%
206
0.08%
0.73%
6,995
1.26%
14,495
0.57%
7,870
1.52%
2,165
0.52%
3,749
1.45%
0.29%
942
0.17%
4,985
0.20%
4,603
0.89%
1,361
0.33%
460
0.18%
0.11%
27,351
2.01%
378
0.03%
Other fuel
9,891
No fuel used
3,932
Solar energy
68,517
0.41%
1,526
Wood
258,520
413,083
3.23%
Coal or coke
Percent Number Percent
519,137
5.16%
43,849
Vermont
2,522,394
28,621
Bottled, tank, or LP
Rhode Island
Percent Number Percent Number
442,443 32.58%
Utility gas
New Hampshire
2,278
46,051 17.81%
SOURCE: U.S. Census Bureau, 2012 American Community Survey 1-Year Estimates, B25040 (House Heating Fuel)
18
Policy Goals of an Expansion
Program
•
•
•
•
Reliability
Affordability
Fairness
Economic efficiency
Traditional Hurdle Rate Model
• Method: NPV of cash flow stream discounted to
the present by the hurdle rate (or calculate
internal rate of return compared to hurdle rate).
• Contribution in Aid of Construction (CIAC).
• Ensures that new customers are not subsidized by
existing customers.
• Might be too conservative and miss investments
that would have benefited customers.
• CIAC plus cost of new heating system may be a
barrier to efficient investment.
Alternative Rate Mechanisms
• CIAC financing (on-bill, or other programs)
• Portfolio Approach
– Pool customers in a geographic area.
– “Open season” at a pre-announced CIAC level.
• Zone Rate
– Charge new customers a higher rate to fund
expansion.
– Need to comprehensively separate TIRF costs from
expansion costs.
Alternative Rate Mechanisms
continued
• Charge expansion cost to all new and existing customers
– Although all customers benefit from expansion, economies of
scope to existing customers are only residual compared to direct
benefit to new customers.
– This creates a subsidy.
• Free Service Lines
– Creates a subsidy, because only new customers benefit. Or, it
could be viewed as a free loan from existing customers.
– This could be mitigated by taking this out of base rates and
adding it to a new on-main expansion rate.
• Infrastructure Expansion Tracker
– Same problems as TIRF.
– Need to ensure that charges to existing customers are
minimized.

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