Litigating Cost
Tracker Mechanisms
By Joseph W. Rogers
Assistant Attorney General
Massachusetts Attorney General’s Office
June 3, 2014
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
investment and customer benefits
Specialized Cost Recovery
Mechanisms
• Targets an Activity Represented in Base Rates
– Mains and Services
– Poles and wires
– Bad Debt
– More
• Recovers Cost in a Separate Tracker
The Regulatory Challenge
• Risk of Recovering a Cost More Than Once
– Many Manifestations of This Risk
• Changes in Accounting Practices
• Operational Changes After Program Approval
• Inadequate Formula Tarriff
• Cumbersome Annual Review Process
– Can be like a mini rate case
Tracker Creation
• By Statute
– Commissions Sometimes Reject Requests to Create
Special Mechanisms
– Tariffs created by Legislatures
• Some States Say a Commission Cannot Change
the Cost Recovery Formula of a Reconciling
Mechanism, Outside of a Base Rate Proceeding.
– 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).
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
– Also a Rate Case Gives You the Opportunity to Ensure That
All Costs to be Recovered Through The Tracker are First
Actually Come Out of The Distribution Rates
Cap-X: 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.
Gas Cap-x: 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 A Five Percent Per Year
Reduction In Corrosion-related Leaks From Mains And Seven Percent Per Year
Reduction In Corrosion-related 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 - One Percent Rate Cap Set By Total
Revenues.
• Typically The Companies Have Historically
Invested Far Less In Main And Service
Replacement Than Allowed Under The One
Percent Rate Impact Cap.
Recovery: Limited 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 Test:
– (1) The Company Is Required To 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 The Company
Reduces 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.
Recovery: Limited To
Incremental Costs
(continued)
– (2) The Company Must 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 Would 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.
Gas Cap-x: Used and Useful Or
Plant Held For Future Use
• Are They Replacing Worst First?
– Look At Leak Rates
– Risk Ranking
• Optimain Scoring
– Software Driven Asset Management Systems
– Is the System Modeled?
– What Features are Enabled?
• Operational Needs vs Worse First
Gas Cap-x: Used and Useful Or 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. 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.
– Size & Pressure
• Are We Creating Intergenerational Inequities?
– The Shale Gas Affect and Carbon Reduction
Replacement of Services
• Are The Services Being Replaced When The
Main Is Replaced?
– It Is Not Economically Efficient Nor Prudent To
Require Customers To Pay Once To Connect A
Series Of New Services To A Leak Prone Main, And
Then To Pay Again To Reconnect Those Services To
The Main Once It Is Has Been Replaced.
– Such A Practice Would Unnecessarily Drive Up
Costs
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.
• NiSource’s Massachusetts affiliate has seen cost
increases of between 216 - 145 percent, over the
past ten years.
– May Indicate A Cost Control Problem
Storm Reserve Fund Trackers
• The Intent Of A Properly Designed And Administered
Storm Fund Is To Benefit Both The Company And Its
Customers By Levelizing The Effect Of Major Storms On
Distribution Rates.
• It Should Not Be Used As A Substitute For Normal O&M
Activities Or Good Utility Practices.
• The Company Must Be Prepared To Identify Historical
Spending Associated Solely With Extraordinary And
Major Storms, So As To Support Its Request For An
Appropriate Annual Funding Level. This Should Not Be
Used For Everyday Type Storms.
Storm Reserve Fund Trackers:
Creation
• Extraordinary And Major Storms Test
– Need A Standard That is Objectively Ascertainable and
Administratively Efficient.
• The Federal Emergency Management Administration
(“FEMA”) declares a disaster due to a storm of such
magnitude that public power communities can file for
reimbursement for storm damage, then the investor owned
distribution company with storm damage in the same areas
could seek reimbursement under a specialized cost recovery
mechanism.
• Governor Of The State Declares A Disaster Under The State’s
FEMA Rules.
• Storm Restoration Costs Exceed A Certain Level Based On
The Size Of The Utility, i.e. $XXX,XXX per storm.
Storm Reserve: Funding Level
• The Funding Level For A Storm Reserve Should Be Designed To
Prevent The Reserve From Having An Excessive Surplus Or A Deficit
Position.
• Any Amount Applied To The Storm Fund Reserve Should Be
Incremental Expenses. Amount Should Not Include
– (1) Normal Levels Of Costs Like Normal Wage And Benefits Expenses;
– (2) Any Capital Costs, That Should Be Included In Plant In Service; Or
– (3) The Level Of Costs Associated With Storm Restoration Activities
Already Included In Base Rates.
• Amount Determined By Review Of Prior Storms.
– Amortize Amount Of Incremental Costs For Each Major Storm Event
Over Five Years.
• If Any Return On The Storm Reserve Is Allowed, It Should Be At The
Customer Deposit Rate.
Storm Reserve: Defining
Weather Events
• When a Storm Starts and Stops
Cost Recovery: The Telephone
Company
• Many Poles Are Owned Jointly Between The Electric And Telephone
Company.
• Electric Customers Are Not Required To Pay For Storm Restoration To
Telephone Customers.
• Get The Joint Pole Agreements.
– Determine What Is The Telephone Company’s Share And Make Sure It Is Not
Recovered From Electric Customers.
• The Electric Company Can Sue The Telephone Company Under The Joint
Pole Agreements.
– If The Electric Company Is Successful In The Litigation And The Commission
Approves A Storm Fund Recovery For The Company With Collection Of Verizon
Costs, Any Recoveries Should Be Credited To The Storm Fund, Up To Actual
Costs Plus Any Allowed Carrying Charges.
– To Provide Incentives For The Company Diligently To Pursue The Litigation, It
Should Be Entitled To Keep Any Recovery Of Attorneys’ Fees, And Any Multiple
Damages Awarded Under Consumer Protection Statutes Should Be Shared
Equally Between The Company And Customers.
Final Observations
• Trackers add Regulatory Complexity
– Many Different Avenues
• Questions?