STATE OF VERMONT
PUBLIC SERVICE BOARD
Docket No. 5983
Tariff filing of Green Mountain Power
Corporation requesting a 16.715% rate
increase, to take effect July 31, 1997
))
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Technical Hearings Held:
November 3-7, 17-21, 25-26, 1997
December 1, 5, 12, & 15, 1997
January 7-9; 12-17, 19-22, 1998
Public Hearings Held:
January 13 & February 9, 1998
Order entered:
PRESENT: Richard H. Cowart, Chairman
Suzanne D. Rude, Board Member
David C. Coen, Board Member
APPEARANCES: James Volz, Esq.
Laura Beliveau, Esq.
Sarah Hofmann, Esq.
for Vermont Department of Public Service
Michael H. Lipson, Esq.
Veronica M. Fallon, Esq.
Peter H. Zamore, Esq.
for Green Mountain Power Corporation
Michael P. Drescher, Esq.
Jeffrey R. Behm, Esq.
Donald J. Rendall, Jr., Esq.
Sheehy, Brue, Gray and Furlong
for Green Mountain Power Corporation
Gerald R. Tarrant, Esq.
Tarrant, Marks & Gillies
for Green Mountain Power Corporation
Harriet A. King, Esq.
King and King
Docket No. 5983
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for Vermont Yankee Nuclear Power Corporation
Barbara S. Brenner, Esq.
Couch, White, Brenner, Howard & Feigenbaum
for International Business Machines Corporation
Gregg H. Wilson, Esq.
Kolvoord, Overton & Wilson
for International Business Machines Corporation
Sheri Larsen, Director of Government Relations
for Lake Champlain Regional Chamber of Commerce
Deirdre O’Callaghan, Esq.
American Skiing Company
Raymond J. Obuchowski, Esq.
Obuchowski Law Office
for Associated Industries of Vermont
Gary N. Farrell, Chair
Vermont Electricity Consumer Coalition
James F. Harrison
Vermont Grocers’ Association, Inc.
John Clark, Chair
Vermont Consumer Coalition for Energy Responsibility
Jenny L. Carter, Esq.
Vermont Public Interest Research Group
James A. Dumont, Esq.
Keiner & Dumont, P.C.
for Vermont Consumer Coalition for Energy Responsibility
Mary Just Skinner, Esq.
for American Association of Retired Persons
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Table of Contents
I. INTRODUCTION ......................................................................................................................1
II. PROCEDURAL ISSUES ..........................................................................................................6
A. Procedural History ........................................................................................................6
B. Preclusion ......................................................................................................................6
1. Background .............................................................................................................6
2. Res Judicata and Collateral Estoppel .....................................................................7
a. Res Judicata and Collateral Estoppel defined and distinguished ....................7
b. Res Judicata .....................................................................................................8
(1) Application of Res Judicata to Administrative Decisions in General,
and to Public Service Board Matters in Particular ..................................8
(2) Res Judicata and Prudence ...................................................................10
(3) Res Judicata and Condition 8 ...............................................................12
c. Collateral Estoppel ........................................................................................12
(1) Application of Collateral Estoppel to Administrative Decisions in
General, and to Public Service Board Matters in Particular .................12
(2) Collateral Estoppel and Prudence .........................................................14
(3) Collateral Estoppel and Condition 8.....................................................19
3. Equitable Estoppel ................................................................................................21
a. General...........................................................................................................21
b. Equitable Estoppel and Prudence ................................................................22
c. Condition 8 and Equitable Estoppel ..............................................................23
4. Summary...............................................................................................................25
C. Other Evidentiary Rulings...........................................................................................26
1. Updating of Evidence ...........................................................................................26
2. GMP Motion to Strike Testimony on Non-Preclusion Grounds ..........................27
a. Lack of Statutory Authority for Appointment ...............................................27
b. Testimony Inconsistent with Appointment ...................................................28
c. Testimony not Authorized by the Rules ........................................................28
d. Procedural Defects ........................................................................................28
e. Lack of Qualifications ...................................................................................29
f. Sanctions ........................................................................................................29
3. Deprivation of Rights as to DPS and IBM Surrebuttal Testimony.......................30
4. Motion to Exclude IBM-19 ..................................................................................30
5. Confidentiality of GMER Contract ......................................................................30
6. GMP Rate Filing and Schedules ...........................................................................33
7. GMP’s Motion for Administrative Notice ...........................................................33
8. DPS Sponsorship of Witnesses ............................................................................34
9. IBM’s Proposal for a Rate Design Investigation ..................................................34
10. Proposed Findings of Fact ..................................................................................35
III. RATE BASE ISSUES ............................................................................................................35
A. Methodology ...............................................................................................................35
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1. Methodology.........................................................................................................36
2. Updating ...............................................................................................................38
B. Rate Base Summary ....................................................................................................39
C. Construction Work in Progress (CWIP) .....................................................................40
D. Plant Retirements ........................................................................................................43
E. Plant in Service - Distribution and Transmission Projects .......................................45
1. Distribution Plant ................................................................................................45
a. 1997 ...............................................................................................................45
b. 1998 ...............................................................................................................46
2. Transmission Plant ...............................................................................................47
a. 1997 ...............................................................................................................47
b. 1998 ...............................................................................................................47
F. Plant in Service - Production .....................................................................................49
1. 1997 ......................................................................................................................49
2. 1998 ......................................................................................................................51
G. General Facilities ........................................................................................................54
H. Computer Systems ......................................................................................................55
1. 1997 ......................................................................................................................55
a. Customer Service System ..............................................................................55
b. Purchase Order System..................................................................................56
c. Planning and Forecast Software ....................................................................56
d. Other 1997 Additions ....................................................................................57
2. 1998 ......................................................................................................................57
a. 1998 PC and Network Blankets.....................................................................57
b. Other 1998 Additions ....................................................................................57
I. Searsburg Project ..........................................................................................................58
1. Rate Base Adjustments .........................................................................................58
2. Used and Useful Analysis .....................................................................................64
J. Pine Street * .............................................................................................................66
K. CVPS Transmission Interconnection ..........................................................................69
L. Federal Energy Regulatory Commission (“FERC”) Headwater Benefits ...................72
M. Deferred Credits .........................................................................................................74
1. Health Insurance Reserve ....................................................................................74
2. Gain on Sale of One Main Street ..........................................................................74
3. Deferred Compensation and Other Benefits .........................................................75
N. Accumulated Deferred Income Taxes (“ADIT”) .....................................................77
O. Working Capital ..........................................................................................................77
IV. COST OF SERVICE ISSUES ...............................................................................................82
A. Power Costs ................................................................................................................82
1. Hydro Quebec Capacity Factor Adjustments .......................................................82
2. Power Costs Forecasts ..........................................................................................83
3. Miscellaneous Adjustments to Power Costs.........................................................85
4. Vermont Yankee ...................................................................................................86
a. Vermont Yankee Stipulations and Other Issues ............................................86
b. Forced Outage Rate .......................................................................................87
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5. New England Electric System Transmission ........................................................90
6. Merrimack II .........................................................................................................91
7. Compliance Filing ................................................................................................92
Salary Incentive Plans .................................................................................................92
Management Efficiency Adjustment ...........................................................................94
Taxes ...........................................................................................................................96
Accumulated Depreciation and Depreciation Expense ............................................97
Other Adjustments .......................................................................................................97
1. Service Awards Banquet ......................................................................................97
2. Relocation Costs ...................................................................................................98
3. Non-Recurring Wind Project Dedication Costs ...................................................99
4. Preliminary Survey Charges ...............................................................................100
5. Appliance Survey ..............................................................................................101
6. Shareholder Services Cost Savings ....................................................................101
7. Rent expense .......................................................................................................102
8. Reserve Account Correction ...............................................................................102
9. Miscellaneous Adjustments ................................................................................102
10. Cost Savings Adjustment .................................................................................103
11. Retirement Incentive Bonus .............................................................................103
CVPS Transmission Interconnection ........................................................................104
FERC Headwater Benefits ........................................................................................104
Payroll .........................................................................................................................104
PITW ..........................................................................................................................108
Conclusion ................................................................................................................112
V. COST OF CAPITAL ...........................................................................................................112
A. Capital Structure, Cost of Debt, Cost of Preferred Stock .......................................112
B. Cost of Equity ...........................................................................................................115
VI. DEMAND-SIDE MANAGEMENT ....................................................................................122
A. General ......................................................................................................................125
B. The Memoranda of Understanding ...........................................................................125
1. Docket 5780........................................................................................................125
2. Docket 5857........................................................................................................126
C. Commercial and Industrial Programs ........................................................................127
1. Large Snow-Making Project ...............................................................................127
2. Ski Area R&D (Heat Recovery Project) .............................................................127
3. Act 250 New Construction Projects ...................................................................128
4. Fuel-Switching....................................................................................................129
5. Discussion re: The Commercial and Industrial Programs ..................................130
a. Large Snow-Making Project ........................................................................130
b. Ski Area R&D .............................................................................................131
c. Act 250 New Construction Projects ............................................................131
d. Fuel-Switching ............................................................................................133
D. Residential Programs ................................................................................................133
1. The Residential Retrofit Program .......................................................................133
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The Residential New Construction Program ......................................................135
The Residential Low-Income Program ...............................................................135
Ripple Controls ...................................................................................................136
Discussion re: Residential Programs ..................................................................136
a. The Residential Retrofit Program ................................................................136
b. The Residential New Construction and Low-Income Programs .................138
c. Ripple Controls ............................................................................................139
The Mad River Valley Energy Project ......................................................................139
1. General................................................................................................................139
2. MRV Residential Retrofit Program ....................................................................140
3. The MRV Residential New Construction Program ............................................141
4. The MRV Large Commercial and Industrial Retrofit Program ..........................141
5. Termination of the MRV Energy Project ...........................................................142
6. Achievements of the MRV Energy Project ........................................................142
Summary: Program Costs ..........................................................................................145
Account Correcting for Efficiency ............................................................................146
1. Net Lost Revenues ..............................................................................................146
2. Marginal Energy and Capacity Adjustment ........................................................147
a. Large Snow-Making Project ........................................................................148
b. Act 250 Projects ..........................................................................................149
c. Residential Measures .....................................................................................149
DSM Payroll .............................................................................................................151
Avoided Costs ............................................................................................................152
1. Discussion re: Avoided Costs .............................................................................152
Distributed Utility Planning and the Mad River Valley Study...................................153
VII. GREEN MOUNTAIN ENERGY RESOURCES (“GMER”) * .....................................156
A. Background ...............................................................................................................156
B. Transfer of Property ..................................................................................................157
C. Transfer of Employees ..............................................................................................159
VIII. THE HYDRO-QUEBEC/VERMONT JOINT OWNERS CONTRACT .........................174
A. Findings of Fact ........................................................................................................174
1. General................................................................................................................174
2. The HQ-VJO Contract ........................................................................................175
a. Docket 5330 and Conditions of Approval ...................................................175
(1) GMP and Its Entitlements to Power Under the Contract....................177
b. Docket 5330-A: Allocations of Contract Power .........................................178
c. Docket 5330-C: Resales of Contract Power ................................................179
d. Docket 5330-E: Waiver and Release...........................................................180
e. Ability to Terminate the Contract ................................................................183
f. The Lock-In ..................................................................................................186
g. Docket 5330-F .............................................................................................189
3. Subsequent Regulatory Proceedings ...................................................................190
a. Docket 5428 .................................................................................................190
b. Docket 5532 ................................................................................................191
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c. Docket 5270-GMP-4 ...................................................................................191
d. Docket 5695 ................................................................................................192
e. Docket 5780 .................................................................................................192
f. Docket 5857 .................................................................................................193
4. Prudence of GMP’s Actions ...............................................................................193
a. The Contract and Docket 5330 ....................................................................193
b. The Lock-in .................................................................................................194
(1) Changing Forecasts of Energy and Fuel Prices ..................................194
(2) Changing Forecasts of Electricity Demand ........................................197
(3) New York — The HQ/NYPA Contract ..............................................199
(4) GMP’s Actions Prior to the Lock-in...................................................200
(5) Events after the Lock-In .....................................................................204
(6) Imprudence of the Lock-in .................................................................205
5. The Used and Usefulness of the Contract ..........................................................207
6. Compliance with Condition 8 of the Board’s Order in Docket 5330 .................209
7. Continuing Management of the Contract ...........................................................211
B. Discussion and Conclusions......................................................................................213
1. Background .........................................................................................................213
2. Positions of the Parties .......................................................................................215
3. Prudence .............................................................................................................217
a. The Standard ................................................................................................217
b. The Contract ................................................................................................221
c. The Lock-in .................................................................................................224
(1) Ability to Terminate the Contract .......................................................225
(2) GMP’s Decision to Lock in ................................................................231
4. The Used and Usefulness of the Contract ..........................................................241
a. The Standard ..................................................................................................242
b. The Contract ..................................................................................................245
5. Remedies ............................................................................................................248
a. Prudence ......................................................................................................248
b. Used and Usefulness ...................................................................................252
6. Compliance with Condition 8 of the Board’s Order in Docket 5330 .................255
a. Standard for Review ....................................................................................255
b. Parties’ Positions .........................................................................................256
c. DSM History................................................................................................258
d. Analysis and Conclusions ...........................................................................259
e. Future Actions and Obligations ...................................................................260
7. Continuing Management of the Contract ...........................................................263
8. Summary of HQ Power Cost Adjustments .........................................................265
IX. ORDER ................................................................................................................................267
* Some findings in these sections have been redacted pursuant to a protective Order.
Docket No. 5983
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I. INTRODUCTIONI. Introduction
This Docket considers a request by Green Mountain Power Corporation (“GMP” or
“Company “) for Public Service Board (“PSB”) approval of an increase in base rates of
$25,789,000 or 16.72 percent, beginning with service rendered March 2, 1998. This rate
request, obviously very substantial, has been the subject of intensive investigation, and the most
thorough set of hearings held on a rate case in many years. We have heard and considered the
testimony of 49 witnesses in direct, rebuttal, and surrebuttal hearings over 30 days. We also
received testimony at public hearings held on January 13, and February 9, 1998. The
Company’s rate request was the subject of critical examination by the Vermont Department of
Public Service (“Department” or “DPS”), International Business Machines (“IBM”), and three
consumer organizations: the American Association of Retired Persons (“AARP”), the Vermont
Consumer Coalition for Energy Responsibility (“VCCER”), and the Vermont Public Interest
Research Group (“VPIRG”). Finally, in this matter we have had the benefit of expert testimony
from an independent investigator, appointed by the Board pursuant to 30 VSA § 20. The
independent investigator — MSB Energy Associates (“MSB”) — examined GMP’s management
of costs related to its power supply contract with Hydro-Quebec (“HQ”), the provincial electric
utility of Quebec, Canada.
Upon careful review of this extensive record,1 the parties’ briefs, and Vermont
rate-making law and regulatory practice, we conclude that the Company is entitled to an increase
of $5.57 million, or 3.61 percent, in overall rates. The principal elements of this decision are as
follows.
First, in this rate case, the Board has for the first time been presented with a request to
review the Company’s decision to permanently commit to, or “lock-in,” the long-term Contract
with Hydro-Quebec in August 1991.2 We conclude that a significant portion of the Contract
costs are neither prudent nor used-and-useful under Vermont law, and must be excluded from
rates. We recognize, of course, that the HQ/VJO Contract was the subject of intensive
regulatory review in 1989 and 1990, and was approved by this Board in October 1990 under the
criteria of Section 248 of Title 30. We do not find the Company imprudent for entering into the
1. The record contains more that 13,500 pages of transcripts, financial and economic analyses, and other
documentary evidence.
2. The Contract was entered into by HQ and the Vermont Joint Owners (?VJO?) on behalf of Vermont?s
electric distribution utilities. We refer to it as the HQ/VJO Contract, or simply the ?Contract.?
Docket No. 5983
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Contract in 1987, or for preliminary commitments made in 1989 or 1990. However, the
evidence in this Docket is unmistakably clear that northeastern power markets and GMP’s own
power needs were changing dramatically in late 1990 and throughout 1991, and that prudent
utility managers should have undertaken serious analysis of the alternatives to the Contract, fully
evaluated the importance of contemporaneous developments in New York, and, at a minimum,
sought extensions from HQ in light of eroding market conditions in the region. Appropriate
studies would likely have led prudent management to the ultimate decision not to lock into the
Contract.
We believe that, initially, the Company’s managers were properly motivated by a desire
to secure what they viewed as a desirable long-term power supply for GMP’s customers.
Unfortunately, the Company’s historic commitment to the Contract appears to have blinded
management to the significant changes that were occurring in power markets, to energy prices,
and in the Company’s own load. There was additional evidence that, to the extent that the
Company was aware of these developments, its response was to lock in the Contract as early as
possible to avoid reopening a case in which fundamental issues related to the Contract could be
revisited, opponents of the Contract could “intensify their efforts to stop it,”3 and political
pressure could be brought to bear on the VJO. Thus, the Company prematurely locked into the
Contract in August 1991, just one day after the New York Power Authority and Hydro-Quebec
announced a one-year extension of the deadline for making commitments to a contract between
HQ and several New York utilities that was “similar in many respects to the Vermont contract.”4
The Company’s decision was based upon inadequate analysis, and it deprived the Company, its
Board of Directors, the Vermont public, and Vermont regulators of the opportunity to examine
the changing power markets and the effects of the New York extension on Vermont’s power
supply options. We find that the accelerated lock-in decision was imprudent: it did not
conform to the high standards of competent and vigilant utility management to which we hold
utility managers in Vermont.
In addition to imprudence, the Board has also found that a significant portion of the
HQ/VJO Contract costs are not used-and-useful under our regulatory law. A fundamental
principle of utility law is that customers should not be required to pay costs for services or
3. Exh. MSB-A (MSB-16).
4. Id.
Docket No. 5983
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investments that are not used-and useful in the provision of regulated services. In this case, we
find that Hydro-Quebec power costs are excessive, not only today, but for the entire remaining
life of the Contract over a wide range of likely scenarios. The Company has negotiated three
Contract modifications with HQ, each successive one with decreasing effectiveness in mitigating
the Contract’s above-market costs, and it has not demonstrated that the Contract is likely to
become economic at any point over its term — indeed, the Company’s own analyses support our
conclusion that the Contract will remain above-market until it expires. These economic losses
are not justified by non-price advantages of the Contract, such as stability, diversity and
reliability, and reliance on non-fossil generating facilities. The losses represent risks that the
Company accepted when it locked into the Contract: with the expectation that significant
portions of the power would need to be resold; following commitments that such resales could be
made at full cost; and having accepted the condition that the Company would be required to
implement all cost-effective demand-side measures that would lower costs for its customers,
regardless of the effects of the additional Contract power in its power supply. For these reasons,
we find that a significant portion of the Contract’s costs are not used and useful. Under our
precedents, these excessive costs are not passed on fully to ratepayers in rates, but rather are
shared between ratepayers and utility shareholders.
Following these decisions, we turn to the calculation of the magnitude of the power-cost
disallowance that should be applied in this docket. Some general observations are in order.
First, it is well settled that costs that are imprudently incurred should not be charged to
ratepayers, and costs that are not used and useful will be shared between ratepayers and
shareholders.5 Unless it is clear that ratepayers would be better served through payment of
some portion of those costs, they will not be charged in rates.
Second, in calculating the degree to which committed costs are imprudent costs, it is
necessary to consider the difference between (a) costs sought to be recovered today and (b) costs
that would properly be charged in rates today following upon reasonable commitments to the
elements of a prudent power portfolio in 1991 and the years following. Consequently, we
cannot calculate an imprudence disallowance simply by noting the difference between HQ/VJO
5. See, e.g., Docket 5132, Order of 5/15/87 (Seabrook I) (Imprudent costs will be disallowed, and costs that are
not used and useful will be shared equally between utility investors and ratepayers); Dockets 5630/5631/5632, Order
of 12/30/93; Dockets 5810/5811/5812, Order of 2/8/96 (disallowing costs that were imprudent and not
used-and-useful).
Docket No. 5983
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Contract costs and short-term market prices in 1998. Since it would have been reasonable for
the Company to make some long-term commitments in 1991, and to incur some measure of costs
for resources that would provide reliability, diversity, and environmental benefits, the proper
benchmark is not found in today’s short-term market power costs alone. Our task is to compare
the costs of the Contract commitment to a prudent portfolio of supply and efficiency resources
that reasonably would have followed from a decision to terminate, extend, or renegotiate the
Contract in 1991.
The evidence in this docket provides a wide range of estimates for a power cost
adjustment based upon these principles. To begin with, we incorporate the effects of rate
mitigation that the Company has secured through sell-back arrangements with Hydro-Quebec.
In the rate year, those savings will be $7.6 million. In addition, on the basis of the evidence and
consistent with the principles and methods employed in past cases,6 we conclude that an
additional $5.48 million per year should be removed from the costs of GMP’s share of the
HQ/VJO Contract for the purpose of setting retail rates in this docket. We conclude that this
disallowance is just and reasonable and, in the context of its overall rate recovery, will not
imperil the Company’s ability to provide reliable service to its Vermont customers pending
resolution of power cost questions in future proceedings.7
This decision is supported by the findings and conclusions herein regarding both
prudence and used-and-usefulness; these established regulatory principles provide two distinct
and independent bases for the power cost disallowance. At the same time, the record developed
to date contains numerous estimates and projections of future power costs and benefits. We
agree with the Department that additional evidence should be taken to determine the adjustment
that would be appropriate to apply in future rate periods. Consistent with that recommendation,
today’s power cost disallowance will be recognized as an element of the rates set in this
proceeding, but will be adjusted as appropriate in accordance with the evidence in future
proceedings. Today’s Order sets out the standards for conducting future reviews of these issues.
6. There is, of course, no prior case exactly like this one. However, the regulatory principles applied here have
well-established precedents. In particular, in calculating power cost disallowances under the prudence and
used-and-useful standards, we have been guided by the methodology used a decade ago in Docket 5132, our review
of Central Vermont Public Service Corporation?s Seabrook I costs.
7. Providing reliable service is an essential requirement of a public utility, and is an area which GMP has a
strong record. As Vermont?s recent experience with a major ice storm demonstrates, reliability is a matter
requiring continuing vigilance by utilities and by the Board.
Docket No. 5983
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In view of the widespread public interest in this case, it is perhaps useful to state a couple
of observations about what it does not involve. First, at the public hearings, we heard from
members of the public who oppose Vermont utilities purchasing power from Hydro-Quebec
because of concerns about the effects of HQ’s development programs on the environment and
peoples of northern Quebec. As we pointed out in Docket 5330 in 1990, this Board does not
have authority under the law of Vermont to consider those issues in our decisions.8 Absent a
statutory revision by the General Assembly, that limitation continues to govern our Board’s
scope of review and our decisions, including the decision in this proceeding.
At the public hearings we also heard references to the potential for future electric industry
reform or restructuring in Vermont. That is a matter for the Legislature to decide; here again,
our decisions must be based solely on existing law and established regulatory precedents. With
respect to rate recovery for power costs, Vermont’s established principles are set out in numerous
prior Orders.9 We have followed those precedents in this Docket.
As a comprehensive rate case, this Docket has considered many issues in addition to the
Company’s commitments under the HQ/VJO Contract. We have examined the full range of
costs incurred by the Company to provide regulated services to its ratepayers. Included among
them are expenditures associated with remediation of the Pine Street Barge Canal, the
establishment of Green Mountain Energy Resources (the Company’s unregulated power
marketing affiliate), the provision of demand-side management programs, and the entry into
service of the Company’s wind-powered generating facility in Searsburg, Vermont. With this
Order, the just and reasonable costs of these activities, as well as the many others that make up
the Company’s cost of service, will be included in rates for service rendered on or after March 2,
1998.
8. See Docket 5330, Order of 10/12/90 at 29, 43-51. This limitation was confirmed by the Vermont Supreme
Court.
9. A concise summary is included in the Board?s Report and Order in Docket 5854, ?Investigation into the
Restructuring of the Electric Utility Industry in Vermont,? Docket 5854, Order of 12/30/96 at 67 (?our precedent is
absolutely clear, and it is uncontroverted by any participant in this Docket, that imprudent expenditures by utilities
are not recoverable from ratepayers?). As that Order pointed out, power cost disallowances for imprudence and
non-used-and-usefulness would arise either under existing law or in a transition to retail competition; however,
write-downs of other above-market costs that satisfy traditional prudence and used-and-usefulness criteria would
require new legislative standards.
Docket No. 5983
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I. PROCEDURAL ISSUESI. Procedural Issues
A. Procedural HistoryA. Procedural History
On June 16, 1997, GMP filed a request to increase its rates by 16.715 percent, a revenue
increase of $25,788,486, on a service rendered basis commencing July 31, 1997. On July 2,
1997, the DPS recommended that the filing be suspended and that an investigation be opened.
On July 22, 1997, the Board issued a Report and Temporary Order that suspended
implementation of the rate increase, ordered an investigation, and appointed a hearing officer and
discovery officer (John P. Bentley, Staff Attorney) to preside over preliminary hearings.
A prehearing conference was held on August 6, 1997, before the hearing officer, and a
procedural order was issued August 21, 1997, establishing a schedule and a procedure for
motions to intervene. On September 10, 1997, the Board issued an order implementing a
Protective Agreement that had been entered into by GMP and the DPS with respect to allegedly
confidential information. Also on September 10, the Board issued an order disposing of the
several motions to intervene. On September 17, 1997, the Board issued an order granting the
motion, made by several intervenors, that it appoint an independent investigator to examine the
circumstances surrounding GMP’s entry into and administration of a purchased power contract
with Hydro-Quebec, the government-owned electric utility to our north.
The docket proceeded according to the schedule, as revised, with discovery during the fall
and technical hearings in November, December, 1997, and January, 1998. On January 20 ,1998,
technical hearings were held both before the full Board and before a hearing officer, Frederick
W. Weston. Public hearings were held on January 13 and February 9, 1998.
Docket No. 5983
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A. PreclusionA. Preclusion
1. Background1. Background
GMP has sought to strike portions of prefiled testimony of IBM and Department
witnesses who have recommended that the Board find that the HQ/VJO Contract and GMP’s
management of the Contract was imprudent due to GMP’s failure (1) to appreciate or act upon
market conditions in 1990 and 1991, (2) to sufficiently analyze the HQ contract in comparison to
other alternatives in the same time period, (3) to shop aggressively for alternatives, as directed by
the Board, and (4) for having locked-in to the HQ Contract in August 1991.10 GMP has argued
that the “testimony is irrelevant [to this proceeding] because the [Board] has previously
adjudicated claims and issues surrounding the prudence of the Hydro-Quebec contract.”11
GMP bases its arguments on three preclusion doctrines: res judicata; collateral estoppel; and
equitable estoppel. Other participants, including the DPS, AARP, and IBM, have strongly
disagreed. For the reasons stated below, we conclude that the testimony in question should not
be precluded on these grounds and, therefore, that testimony is admissible as relevant to the
inquiries in this Docket.
GMP also has moved to strike testimony which suggests that it failed to meet its Demand
Side Management (“DSM”) obligations under Condition 8 of the Order in Docket 5330
approving the Contract. In support of this motion, GMP asserts that five cases relating to its
rates were handled by the Board following issuance of the Docket 5330 Certificate of Public
Good (“CPG”); two were fully litigated and three were resolved by settlements that the Board
accepted.12 GMP further asserts that compliance with Condition 8 either was or should have
been considered by the Board prior to disposition of each of these rate cases, and that, therefore,
the Board now is precluded from considering whether GMP complied with Condition 8 between
issuance of the CPG and the Board’s Order in Docket 5857. GMP takes the position that res
judicata, collateral estoppel, and equitable estoppel all operate to preclude Board consideration of
compliance with Condition 8. For the reasons set forth below, we disagree.
10. Rosenberg pf. (10/97) Vol. II at 4.
11. GMP?s Motion to Strike Testimony Related to Hydro-Quebec on the Basis of Res Judicata and Collateral
Estoppel (and Other Grounds), October 31, 1997 at 1. These issues, according to GMP, include ?GMP?s
negotiation, execution, lock-in, or management of the HQ contract.? Id. The specific dockets cited by GMP are
5330, Order of 10/12/90; 5330-A, Order of 2/12/92; 5270-GMP-4 Order of 5/3/94, 5428, Order of 1/3/91; and 5532,
Order of 4/2/92.
12. Dockets 5428 and 5532 were litigated; Dockets 5857, 5780, and 5695 were settled.
Docket No. 5983
Page 8
2. Res Judicata and Collateral Estoppel2. Res Judicata and Collateral Estoppel
a. Res Judicata and Collateral Estoppel defined and distinguisheda. Res Judicata
and Collateral Estoppel defined and distinguished
Vermont law clearly distinguishes between the doctrines of res judicata and collateral estoppel, and treats
identical or substantially identical; and, it bars litigation of claims or causes of action which
should have been raised in the former litigation.14
For purposes of res judicata, two causes of
action are the same if they can be supported by the same evidence;15 whether the same cause of
action is present is a matter that must be determined on the facts of each case.16
By contrast, collateral estoppel (also called “issue preclusion”) prevents a party from
relitigating an issue that was actually litigated and decided in a prior case between the parties
resulting in a final judgment on the merits, where that issue was necessary to the resolution of the
action.17 Accordingly, preclusion on the basis of collateral estoppel cannot depend upon an
issue or claim that “should have been raised” in the prior litigation. And, even if an issue
actually was litigated and decided, if it was not an issue necessary to the resolution of the case,
collateral estoppel will not operate to preclude its future litigation.18
13. State v. Dann, Nos. 96-178 & 96-179 Slip Op. (Vt. Supreme Court, Aug. 8, 1997); Agway v. Gray, No.
95-651 Slip Op. (Vt. Supreme Court, Nov 21, 1997).
14. Lamb v. Geovjian, No. 95-510 Slip Op. (Vt. Supreme Court, Nov. 21, 1997), 693 A.2d 731, 734 (1996),
citing Berlin Convalescent Ctr., Inc. v. Stoneman, 159 Vt. 53, 615 A.2d 141, 143 (1992); State v. Dann, Slip Op.
citing Berisha v. Hardy, 144 Vt.136, 138, 474 A2d. 90, 91 (1984); Agway v. Gray, citing State v. Dann (quoting
Cold Springs Farm Dev., Inc. v. Ball, 163 Vt. 466, 472, 661 A.2d 89, 93 (1995).
15. State v. Dann citing Hill v. Grandey, 132 Vt. 460, 463, 321 A2d. 28, 31 (1974).
16. Hill v. Grandey, 132 Vt. at 464.
17. Longariello v. Windham Southwest Supervisory Union, No. 95-275 Slip. Op. (Vt. Supreme Court, May 31,
1996) 679 A.2d 337 (1996); Agway v. Gray citing Cold Springs Farm Dev., Inc., Berlin Convalescent Center v.
Stoneman, 159 Vt. 53, 56, 615 A.2d 141, 143 (1992).
18. See, In Re Application of Carrier, 155 Vt. 152, 157 (1990).
Docket No. 5983
Page 9
b. Res Judicatab. Res Judicata
(1) Application of Res Judicata to Administrative Decisions in General, and to
Public Service Board Matters in Particular(1) Application of Res Judicata to
Administrative Decisions in General, and to Public Service Board Matters in
Particular
Res judicata (claim preclusion) applies to administrative decisions only when an
administrative agency is acting in a judicial capacity.19 In Vermont, whether an agency is
acting in a judicial capacity is analyzed in two contexts: (A) whether the proceedings resulting in
the determination were adjudicative, as distinguished from legislative or policy-making in nature;
and (B) whether the determination made in an adjudicative type of proceeding entailed the
essential elements of adjudication.20
Therefore, in ascertaining whether res judicata (claim preclusion) may apply to a Vermont
agency determination, the threshold question is whether the proceeding was adjudicative, as
distinguished from legislative or policy-making in nature.21 On this point, the Vermont
Supreme Court has been quite clear; it has held repeatedly that proceedings before the Public
Service Board that affect the ratepayers of a company in general are legislative or policy-making
in nature. The Board “is an administrative body, clothed in some respects with quasi judicial
function, authorized in the exercise of the police power to make rules and regulations required by
the public safety and convenience, and to determine facts upon which existing laws shall operate,
and having, in a sense, auxiliary or subordinate legislative powers which have been delegated to
it by the General Assembly.”22 Therefore, in connection with proceedings that affect the
ratepayers of a company in general, the Board’s quasi-judicial powers are limited to those acts
19. Lamb v. Geovjian, 693 A.2d at 735.
20. Delozier v. State, 160 Vt. 426, 429, 631 A.2d 228 (1993); Ratepayers Coalition of Rochester, et al. v.
Rochester Electric Light and Power Co., 153 Vt. 327, 332 (1989); DAVIS, ADMINISTRATIVE LAW TEXT (1972) p.
372 (Res judicata applies only to adjudication and not to legislative actions of agencies, but legislative action may
still conclude in a final, enforceable order).
21. This is not inconsistent with the Restatement (Second) of Judgments ? 83 which states that administrative
adjudicative decisions have res judicata effect only where the proceeding resulting in the determination entailed the
essential elements of adjudication. Delozier v. State, 160 Vt. at 429.
22. Trybulski v. B. F. Hydro-Electric Corp., 112 Vt. 1, 7-8 (1941); Compare, Agway v. Gray, Slip Op. at p. 3
(Arbitration is recognized as being in the nature of a judicial inquiry for purposes of both res judicata and collateral
estoppel).
Docket No. 5983
Page 10
which are reasonably necessary or incidental to the exercise of its general supervisory power,23
and its determinations necessarily are made in the context of proceedings that are legislative or
policy-making in nature.
This general principle has been applied consistently by the Vermont Supreme Court. It
has explained: “In a § 248 proceeding, the Board is engaged in a legislative, policy-making
process.”24 And, “ratemaking proceedings that affect customers of a utility generally are
legislative in nature.” 25 Therefore, res judicata clearly does not apply either to § 248 CPG or
to utility rate-making proceedings that affect customers of a utility generally.26
Similarly, Integrated Resource Plan (“IRP”) cases (including those under 30 V.S.A.
section 218c) are appropriately classified as legislative or policy-making in nature. The IRP
planning process is a forward-looking process in which the utility seeks to minimize costs and
maximize benefits to its customers through a careful evaluation of demand and supply resource
options. Like rate cases, IRP cases are episodic in nature, and they apply to each utility and its
customers as a general matter. In addition, the Board retains continuing supervisory
responsibility over the company’s implementation of its IRP, which may be modified, updated,
or investigated over its term. For these reasons we conclude that dockets reviewing utilities’
proposed integrated resource plans under 30 V.S.A. section 218c are legislative or policy-making
in nature. And, accordingly, we find that res judicata (“claim preclusion”) does not apply to IRP
proceedings.27
23. Trybulski v. B. F. Hydro-Electric Corp., 112 Vt. at 7-8.
24. In re Petition of Twenty-Four Vermont Utilities, 159 Vt. 339, 357 (1992) citing Auclair v. Vermont Elec.
Power Co., 133 Vt. 22, 26, 329 A.2d 641, 644 (1974).
25. Ratepayers Coalition of Rochester, et al. v. Rochester Electric Light and Power Co., at 332 (citations
omitted). This is to be distinguished from proceedings involving a particular customer complaint about electric
service. In that circumstance, the proceedings are adjudicatory in nature. Id.; see also, Auclair v. Vermont Electric
Power Co., Inc., 133 Vt. 22, 26-27 (1974).
26. In addition, it is well recognized that a rate order is not res judicata because every rate order may be
superseded by another. This is true notwithstanding classification of a rate case as either legislative or adjudicative.
The main reason for this is that conditions change; desirable for one period of time may not be desirable for another
period. DAVIS, ADMINISTRATIVE LAW TEXT p. 368 citing Tagg Bros. & Moorhead v. United States, 280 U.S. 420
(1930).
27. GMP asserts that res judicata applies in this case because the prior rate case, CPG, and IRP proceedings all
were ?contested cases? and that, therefore, they necessarily entailed the ?essential elements of adjudication? which
necessarily render a proceeding adjudicative. This assertion is not correct, and is not consistent with the prior
rulings of the Vermont Supreme Court cited above. Vermont?s Administrative Procedure Act, 3 V.S.A. ? 801 et.
seq., provides specific procedural requirements for contested cases which are similar to the due process protections
applicable to adjudications. 3 V.S.A. ? 809. ?Contested case? is defined in 3 V.S.A. ? 801(2) to include
Docket No. 5983
Page 11
(2) Res Judicata and Prudence(2) Res Judicata and Prudence
GMP asserts that consideration of whether GMP has acted prudently in connection with
the negotiation, execution, lock-in, or management of the HQ/VJO Contract is precluded by res
judicata because the Board previously adjudicated claims and issues surrounding the prudence of
the HQ/VJO Contract in five prior Dockets: Docket 5330, Docket 5330-A, Docket
5270-GMP-4, Docket 5428, and Docket 5432. We disagree.
Dockets 5330 and 5330-A were § 248 CPG cases; and Dockets 5428 and 5432 were
rate-making cases. As explained above, the preclusion principle of res judicata (“claim
preclusion”) does not apply either to § 248 or to utility rate-making proceedings. In addition, for
the reasons discussed above, an IRP proceeding is legislative or policy-making in nature, and
therefore, res judicata (claim preclusion) does not apply to an IRP case.
Accordingly, GMP’s reliance upon res judicata (“claim preclusion”) as a basis to
preclude consideration of the prudence issue in this matter is misdirected.28 And, because res
judicata is the only preclusion principle which incorporates the prohibition against litigation of
matters which were not but “should have been” litigated as part of a former case, GMP’s
argument that the question of prudence should have been litigated as part of the earlier CPG and
rate cases is inconsequential.29
rate-making, clearly a legislative type of proceeding. Ratepayers Coalition of Rochester, et. al. v. Rochester
Electric Light and Power Co., at 332. Hence, an agency decision is not rendered adjudicative simply because the
agency complied with the due process requirements of 3 V.S.A. ? 809.
28. It also is significant that the cause of action (?claim?) in this rate case is not the same as the cause of action
(?claim?) in any of the five prior Dockets cited by GMP. First, neither a CPG case nor an IRP case is concerned
with setting specific rates. And second, each of the prior rate cases involved different revenue entitlement claims
for different rate periods that were based on different test years than this Docket. Therefore, even if res judicata
were an applicable preclusion principle in Section 248 cases, utility rate cases and IRP cases, it would not bar
consideration of the prudence issue in this case.
29. GMP emphasizes its assertion that the question of GMP?s prudence with regard to the HQ/VJO Contract
?should have been litigated? by arguing that the Department had a ?full and fair opportunity to litigate? that issue in
prior dockets but failed to do so. In making this argument, GMP attempts to merge the ?should have been
litigated? component of res judicata with the ?full and fair opportunity to litigate? component of collateral estoppel
set forth in Trepanier v. Getting Organized, Inc., 155 Vt. 259 (1990). This cannot be done.
First, res judicata and collateral estoppel do not always apply in the same types of situations: Res judicata
may apply in those situations where a claim was not previously litigated, while collateral estoppel applies only in
those situations where an issue was previously litigated and decided. And second, the ?should have been litigated?
component of res judicata protects the interests of the party asserting preclusion, while the ?full and fair opportunity
to litigate? component of collateral estoppel protects the interests of the party opposing preclusion: The res judicata
?should have been litigated? analysis centers upon whether the party asserting preclusion will suffer unfairness in
Docket No. 5983
Page 12
(3) Res Judicata and Condition 8(3) Res Judicata and Condition 8
GMP asserts that consideration of whether GMP has satisfied its obligations under
Condition 8 of the Order in Docket 5330 approving the HQ/VJO Contract is precluded by res
judicata because, following approval of the HQ/VJO Contract, the Board handled five rate cases
in which GMP’s DSM performance was discussed.30 As explained in detail above, the
preclusion principle of res judicata (“claim preclusion”) does not apply to utility rate-making
cases. Therefore, GMP’s reliance upon res judicata as a basis to preclude consideration of the
question about GMP’s compliance with Condition 8 is misdirected; and GMP’s argument that
the question of compliance with Condition 8 should have been litigated as part of the earlier rate
cases is inconsequential.31
the later litigation because it was incumbent upon the party opposing preclusion to have brought a claim forward in
the earlier litigation. By contrast, the collateral estoppel ?full and fair opportunity to litigate? analysis centers upon
whether the party opposing preclusion will suffer unfairness in the later litigation because of the manner in which an
issue was treated in the earlier litigation. See, Trepanier v. Getting Organized, Inc., 155 Vt. at 266, and Agway,
Inc. v. Gray, Docket No. 95-651 (Vt. Supreme Court, Nov. 21, 1997)(Court concluded that a party had a full and fair
opportunity to litigate the issue where it was addressed with specificity in four prior proceedings. According to the
Court, ?the record shows that [the appellant] not only had the opportunity to litigate . . . ,? but that ?he
acknowledged in his post-hearing arbitration memorandum that he had been ?afforded the opportunity to introduce
witnesses and evidence in support of [his] positions and to cross-examine the witnesses called by the other party.??
Id. at 4.
30. GMP cites Docket Numbers 5428, 5532, 5857, 5780, and 5695
31. See discussion and footnotes in the section 0, above.
Docket No. 5983
Page 13
c. Collateral Estoppelc. Collateral Estoppel
(1) Application of Collateral Estoppel to Administrative Decisions in General,
and to Public Service Board Matters in Particular(1) Application of Collateral
Estoppel to Administrative Decisions in General, and to Public Service Board
Matters in Particular
Collateral estoppel (“issue preclusion”) is a preclusion doctrine that is applicable to
administrative agency determinations regardless of whether the proceeding is adjudicative or
legislative/policy making in nature.32
an issue decided in a previous action.33
In this context, the doctrine bars a party from relitigating
Before precluding relitigation of an issue, a court must
“examine the first action and the treatment the issue received in it.”34
The Vermont Supreme
Court has held that application of “issue preclusion” in the administrative agency context
involves a determination of the following factors:
(1) Is preclusion asserted against one who was a party or in
privity with a party in the earlier action ?
(2) Was the prior case resolved by a final judgment on the merits?35
(3) Is the issue the same as the one raised in the earlier action?
(4) Was there a full and fair opportunity to litigate the issue in the
earlier action?
(5) Is applying preclusion in the later action fair?36
The Court has also stated:
No one simple test is decisive in determining whether either of the final two
criteria are present; courts must look to the circumstances of each case. Among
the appropriate factors for courts to consider are the type of issue preclusion, the
choice of forum, the incentive to litigate, the foreseeability of future litigation, the
legal standards and burdens employed in each action, the procedural opportunities
available in each forum, and the existence of inconsistent determinations of the
32. See In re Vermont Power Exchange, 159 Vt. 168, 180-181, (1992)(collateral estoppel invoked in challenge
to PSB order that regulated utilities bear part of VPX?s costs of operation) and Berlin Convalescent Center, Inc. v.
Stoneman (collateral estoppel invoked in challenge to recalculation of Medicaid rates).
33. In re J.R., 164 Vt. 267, 269 (1995).
34. State v. Pollander, No. 96-387 Slip Op. at 3 (Vt. Supreme Court, Dec. 5, 1997).
35. Related to this factor is the precept that preclusion applies only to an issue which was necessary and
essential to the resolution of the prior case. State v. Pollander; Berisha v. Hardy; Longariello v. Windham
Southwest Supervisory Union; See, In Re Application of Carrier.
36. Trepanier v. Getting Organized, Inc.,155 Vt. at 265; State v. Stearns, 159 Vt. 266, 268, 617 A.2d 140, 141
(1992); State v. Dann.
Docket No. 5983
Page 14
same issue in separate prior cases.37
Furthermore, a determination about whether a prior administrative agency case was
“resolved by a final judgment on the merits” must include an assessment of whether the agency
retained “continuing jurisdiction” over the matter.38 “Agencies’ jurisdiction frequently
continues after orders are entered in order to permit correction of errors and to take account of
ensuing events.”39
Finally, in Vermont, an agency may choose to sever and defer specific issues for future
consideration; when the language of an order leaves open the possibility of reviewing an issue
again, there is no final agency determination on that issue, and therefore, future consideration of
the issue is not precluded.40 And, the Vermont Supreme Court has acknowledged that
“[w]ithout control over its order of business, it would be difficult for any rate-setting body to
perform its statutory obligations to the parties and the public.”41 Therefore, the Vermont
Supreme Court has declined to prescribe any particular approach to rate regulation or to
designate a particular order of business which need be followed by the Public Service Board.42
37. Trepanier v. Getting Organized, Inc., 155 Vt. at 265 (footnote and citations omitted).
38. In re Stowe Club Highlands, No. 95-341 Slip Op. (Vt. Supreme Court, Nov. 8, 1996), 687 A.2d 102, 105
(1996)(collateral estoppel does not apply to issue of binding nature of permit when agency has authority to modify
permit conditions); Delozier v. State, 160 Vt. at 429-430, and cases cited therein (preclusion inapplicable when
administrative determination did not mark end of process within agency; preclusion inapplicable when commission
had power to reconsider finding).
?When the purpose is one of regulatory action, as distinguished from merely applying law or policy to past
facts, an agency must at all times be free to take such steps as may be proper in the circumstances, irrespective of its
past decisions . . . [A]dministrative authorities must be permitted . . . to adapt their rules and policies to the demands
of changing circumstances.? DAVIS, ADMINISTRATIVE LAW TEXT (1972), p. 369.
39. DAVIS, ADMINISTRATIVE LAW TEXT (1972), p. 372.
40. Zingher v. Department of Aging and Disabilities, 163 Vt. 566, 571, 664 A.2d 256 (1995);
Cf., Texas Coalition of Cities for Affordable Utility Rates v. Public Utility Commission of Texas, 798 S.W.2d 560
(1990) (administrative agency in Texas does not have authority to defer and reconsider issues absent express
statutory power to do so).
41. In re Petition of Green Mountain Power Corp., 147 Vt. 509, 516 (1986).
42. Id.
Docket No. 5983
Page 15
(2) Collateral Estoppel and Prudence(2) Collateral Estoppel and Prudence
We have carefully reviewed the Board’s Orders in each of the prior Dockets cited by
GMP, and can find no instance in which the prudence of the company’s management of its
Hydro-Quebec purchases was considered, evaluated, or ruled upon by the Public Service Board.
In none of these cases was the issue litigated or decided. Each of these Dockets is discussed
briefly below.
The Section 248 Cases: Docket 5330 and 5330-A
GMP argues that the issues in this Docket are the same as those raised in Docket 5330;
i.e., that once the Board reviewed the Contract for compliance with section 248 criteria in Docket
5330, “the issue of justness and reasonableness of the power costs contained in that contract
necessarily had been settled.”43 In this statement, GMP incorrectly equates a section 248
review with a prudence review.44 The logical implication of GMP’s position is that a section
248 approval necessarily constitutes rate approval for costs of the underlying project or contract,
a proposition that is unsupported in Vermont law.
In the Docket 5330 § 248 review, we considered whether the Contract should be
approved, not as a general matter, but under specific enumerated criteria.45 These criteria
including section 248(b)(2) and (b)(4)
do not mandate a prudence review.46 A § 248 review
is concerned with certification of a potential obligation that a utility will undertake. It neither
directs the utility to choose to undertake the obligation, nor does the Board assume any
managerial status by virtue of having issued a CPG.47
A prudence review, on the other hand, determines whether a utility’s management
decisions, based upon what it knew or should have known, were reasonable in light of all the
circumstances that existed at the time the actions in question were taken. If the Company was
43. GMP Motion to Strike at 13.
44. For purposes of analysis, we consider factor three of the Trepanier analysis before we analyze factor two.
Absent a demonstration that there is some identity of issues between the prudence questions being raised in this
Docket, and issues in prior proceedings, we cannot conclude that a demonstration of the second factor is possible.
45. 30 V.S.A. ? 248(b)(2)(3)(4)(6)(7) and (10).
46. The Board examined evidence with respect to these criteria presented by the parties, and did not examine
continued oversight of the Contract.
47. The Board?s subsequent supervisory role in a prudence determination is to review those management
Docket No. 5983
Page 16
aware of, or should have been aware of, material information that was not disclosed to the Board,
or if prudent managers should have considered relevant matters outside the scope of section 248,
it is obvious that a section 248 approval cannot substitute for a prudence determination.
Moreover, it does not supplant the responsibility that management has to respond to changing
circumstances even after a section 248 approval is granted: a utility’s obligations include
continued monitoring, review, and assessment of participation in power projects, and, this
continuing review and assessment process needs to be documented “so that its prudence can be
evaluated when challenged.”48
In this Docket parties have challenged the prudence of GMP’s negotiation and structuring
of the Contract. Those parties also have focused upon the prudence of GMP’s contract
management throughout 1991, including the decision to lock-in. Although much of the
evidence in Docket 5330 may be relevant to a prudence review of the Contract, we did not
review the prudence of the Contract when conducting the 5330 proceeding.
More significantly, the August 1991 lock-in occurred more than a year after the last
evidentiary hearing in Docket 5330; it was not and could not have been considered during the
initial review. Because Docket 5330 reviewed the Contract under the criteria of section 248,
and because at issue in this Docket are questions of prudence of the Contract and GMP’s activity
surrounding the early lock-in, we cannot conclude that these two Dockets considered the same
issue. Therefore, with regard to our disposition of Docket 5330, collateral estoppel cannot
provide the basis for precluding review of the prudence issues that parties in this Docket have
raised.
In Docket 5330-A, we indicated that the Docket’s subject matter and that of Docket 5330
was “in significant measure, the same.”49 Docket 5330-A considered whether the Vermont
Joint Owners (“VJO”) allocations met the criteria of Section 248. Participant shares of Contract
power were at issue, but the Contract itself was not. The hearings in Docket 5330-A were
concluded on March 13, 1991, well before the lock-in took place, and the Order was issued on
February 12, 1992, when the lock-in was an accomplished fact.50 The lock-in was not litigated,
and was not reviewed by the Board. The issues considered in Docket 5330-A and the issues of
decisions after they have been made.
48. Docket 5132, 83 PUR 4th 532, 566 (Vt. PSB 1987)(emphasis added).
49. Docket 5330-A, Order of 2/12/92 at 14.
50. Id. at 7.
Docket No. 5983
Page 17
prudence being raised in this Docket are not the same. Thus, Docket 5330-A cannot serve as a
basis for precluding the prudence issues raised in this Docket.
GMP’s Integrated Resource Plan: Docket 5270-GMP-4
GMP relies upon Docket 5270-GMP-4 as a prior adjudication of the prudence issues that
it seeks to have precluded in this Docket. In Docket 5270-GMP-4, the Board reviewed and
accepted a stipulation approving an integrated resource plan that GMP initially developed in
1991.51 In doing so, the Board determined that GMP’s IRP was, at that time, consistent with
the requirements of 30 V.S.A. § 218c and prior Board Orders on the topic.52 It did not
determine whether the lock-in or the management of the Contract was prudent.
A proper evaluation of whether an IRP is equivalent to a prudence review first requires an
understanding of the IRP process — what it is, and what it is not. The IRP planning process is a
forward-looking process in which the utility seeks to minimize costs and maximize benefits to its
customers through a careful evaluation of demand and supply resource options. For these
evaluations, existing or committed resources necessarily form a part of the starting mix. The
planning process is properly viewed as dynamic rather than static; conditions change and
planning projections ought to be updated as necessary to reflect important developments.53
Neither the IRP process nor the IRP review process includes an evaluation of the prudence of any
particular resource commitment, and they most certainly are not a prudence review of historic
commitments predating the IRP itself. Neither our order in Docket 5270, which required
utilities to submit IRPs, nor 30 V.S.A. § 218c contains such review standard; it would be
impracticable to burden the IRP review process with such a standard, and no prudence review has
51. Docket 5270-GMP-4, Order of 5/3/94 at 9.
52. Id.
53. For example, the parties acknowledged that the May 3, 1994 Order in 5270-GMP-4 relied upon data
prepared in 1991 which would require revisiting. The Board quoted GMP which had observed that:
the IRP that is subject of the docket, if and when it is finally approved by the Board, does not, in
its entirety, reflect today?s reality, or form the basis for GMP?s power planning and DSM
decisions. For example, any action for which GMP seeks 248 approval in the future, in all
likelihood, will be justified on assumptions different that those contained in the IRP. This is
consistent with GMP?s understanding of IRP as a dynamic process, rather than a static document
that controls all decisions between IRP filings.
Id. at 11. The Board also made clear that its ?orders and Vermont statutes recognize that utility resource
management is a dynamic process . . . ,? and that it expects utility managers ?. . . to adjust their resource portfolios
in response to changing circumstances.? Id.
Docket No. 5983
Page 18
been conducted in the review of any utility IRP in Vermont.
It seems obvious that if the Legislature wished to make such a significant departure from
regulatory tradition, and create a preclusive presumption of prudence regarding any resource
contained in a utility’s approved IRP, the legislation creating the IRP process would have so
stated. In that event, each IRP review proceeding in Vermont would have involved dozens of
prudence investigations, and it is doubtful that the planning process would have proceeded very
far. Indeed, while IRP processes are in force in the majority of states, we are aware of no
decision in any jurisdiction holding that the inclusion of an historically-committed resource in a
utility’s later-approved IRP confers an automatic prudence determination upon utility
management with respect to that commitment or subsequent management decisions concerning
it.54 Accordingly, because an IRP review does not review the prudence of utility resource
acquisitions, our disposition of Docket 5270-GMP-4 does not preclude, on the basis of collateral
estoppel, consideration of the prudence issue in this Docket.
Rate Cases: Dockets 5428 and 5532
In Docket 5428, the prudence of the Contract was not explicitly raised or joined as an
issue;55 and, because the Docket was decided prior to the early lock-in, the prudence of the
lock-in could not have been an issue at that time. Similarly, in Docket 5532, neither the
54. To the contrary, commission practices distinguish between the two. See e.g., Utah PSC Docket
90-2035-01, Order of 6/18/92 at 4 (?The Commission finds that acknowledgment of an IRP will not foreclose full
prudence examination of the resource acquisition at an appropriate later time.?); Docket 91-057-09, Order of
9/26/94 at 3 (?The Commission has stated in previous IRP orders that prudence will be judged in rate
proceedings.?); Order of 2/25/94 at 3 (?When an IRP has been submitted and acknowledged, it does not connote
pre-approval of the Company?s actions that are outlined in the IRP. The Commission will judge the prudence of
the Company?s actions based on the information that is available at the time the decision is made. This information
will obviously include the IRP itself.?); Michigan PSC Docket U-10574, Order of 4/22/94 at 11 (?To the extent
these companies use IRP, they then become available for review by the Commission Staff and the public in contested
rate cases . . . . As previously indicated, the rate case would cover investments in the near term implementation of
the plan and the prudence of those investments . . . .?); Ohio PUC Docket 91-2155-EL-COI, Order of 5/13/93 at 2
(?Prior to the utility?s recovery of costs . . . the Commission will conduct what is, in effect, a prudence review of the
utility?s operations . . . to determine that the utility is purchasing allowances pursuant to its already approved IRP . .
. .?); New York PSC Docket 92-E-0621, Order of 5/20/94 at 3 (?Cost recovery for DSM measures is properly a
subject of rate proceedings, and the prudence of accepting or rejecting DSM bids may be determined in such
cases?).
55. Costs of Schedule A power purchased under the Contract, however, were involved in the rate increases
granted in this Docket. GMP argues that their inclusion is a tacit approval of the prudence of the Contract. As we
discuss below, we find these assertions inconsistent with the rate-making process in Vermont.
Docket No. 5983
Page 19
prudence of the Contract nor of the lock-in were raised by parties as an explicit issue.
Nonetheless, GMP argues that the mere presence of costs in rates “necessarily reflects a finding
that negotiating, execution, and locking in to the HQ/VJO Contract was not imprudent, and that
GMP had complied with the Board Order relating to the HQ/VJO Contract.”56 We cannot
agree.
The “actually litigated and decided” requirement of collateral estoppel cannot be met by
an implication. Since a prudence determination “does not merely presume that management
operated properly,”57 a prudence determination requires an explicit inquiry, and cannot be based
upon an implication.
Of equal significance, the result sought by the company here would confound the
rate-making process long used in Vermont. The Board’s statutory duty to assure just and
reasonable rates does not require that the Board use any one particular method of valuation in
order to ascertain the rate base of a utility.58 The Supreme Court has held that the Board has
been given broad authority with respect to the means and methods available to achieve the stated
goal of adequate service at just and reasonable rates. It would be an overly burdensome task for
litigants and the Board to be required to make an affirmative determination about every possible
relevant variable which might have an impact upon the cost of service. Therefore, the
rate-making process relies upon the use of evidentiary presumptions to facilitate reaching a
conclusion about the overall justness and reasonableness of rates without requiring an exhaustive
review of hundreds or thousands of detailed cost of service items in every rate case; according to
Board practice, in each rate case, a utility’s filing receives the benefit of a rebuttable presumption
that “expenditures claimed to support the rates were reasonable and prudent.”59 Rate
proceedings then focus on those aspects of a filing that parties choose to examine and present to
the Board.
In Dockets 5428 and 5532, some portion of Contract power was included in GMP
costs.60 There is no question here that the Contract power costs were not contested in those
56. Motion to Strike at 16-17.
57. Docket 5132, Order of 1/2/87 at 13 (emphasis added).
58. 30 V.S.A. Sections 118, 225 et. seq. See, Hobbs Gas Co. v. Public Service Commission, 616 P.2d 1116,
94 N.M. 731 (1980).
59. 83 PUR 4th 532, 566 (Vt. P.S.B. 1987).
60. A further weakness in the GMP argument flows from the structure of the Contract itself. Power is
purchased under different schedules with different cost and timing characteristics. Schedule A, for example, was
Docket No. 5983
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prior cases, and that some historic Contract power costs were included in rates because of the
operation of the presumption.61 However, it does not follow that, in a subsequent docket, the
company can use the benefit of that procedural presumption as a shield against a review which
considers the continuation and expansion of additional contract costs in future rates.
The larger questions of prudence raised in this Docket were never raised, contested, nor
decided in any of the prior Dockets cited by GMP We cannot construe an evidentiary
presumption which gave management the benefit of rate recovery in past rate cases as equivalent
to a prudence determination on future costs when prudence was in fact neither litigated nor
decided. Such a ruling would unfairly hold that the Department and other parties are estopped
from raising issues here simply because they were not litigated previously, an outcome
inconsistent with the principles of collateral estoppel. Such a principle would also seem to
require the Department to litigate every potential cost item in every rate case, an outcome
inimical to the administrative process, and likely impossible to comply with within the statutory
period allowed for utility rate cases.
purchased from 1991 to 1995 and was relatively inexpensive compared to Schedules B and C3, the subjects of the
present Docket. This is the first rate case in which Schedule C3 power would be included in rates.
61. It, arguably, would be unfair for the DPS or another party in those Dockets to expect to be able to now
question whether those costs should have been included at that time.
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(3) Collateral Estoppel and Condition 8(3) Collateral Estoppel and Condition
8
Collateral estoppel (issue preclusion) applies to utility rate cases only when the issue in
question in the later case is the same as the one raised in the earlier action, and only when that
issue was definitively resolved in the context of a prior final judgment.62 Furthermore,
determination of whether an issue has been previously resolved is highly fact-specific.63
Consideration of whether GMP satisfied its obligations under Condition 8 is not precluded in this
case because the issue of compliance with Condition 8 was not definitively resolved in any of
the five prior Dockets cited by GMP64
GMP asserts that its DSM activities and costs were reviewed as part of the overall review
conducted in each of the five prior rate cases, and that approval of rates based on those reviews
should be construed as a tacit finding that compliance with Condition 8 was satisfied for the
respective time periods pertinent to each docket.65 GMP erroneously concludes that these
implied findings exist. The fact that the Board reviewed GMP’s DSM activities and costs in
conjunction with its rate reviews in prior Dockets does not mean that the Board implicitly found
GMP to be in compliance with Condition 8 during the time periods applicable to those Dockets.
Rather, with regard to both the settled and the litigated Dockets, the absence of specific
reference to Condition 8 as a discrete issue means that the question of whether Condition 8 was
satisfied simply was not litigated and was not resolved.66
62. Trepanier v. Getting Organized, Inc., 155 Vt. at 265. Moreover, an issue which is non-essential to the
conclusion of the prior adjudication is not barred by collateral estoppel from future consideration. State v.
Pollander; see discussion of Trepanier elements at section 0, supra, and accompanying text. Since a
determination about satisfaction of Condition 8 is not necessary for Board approval of rates in a rate case, its
consideration here would not be barred by collateral estoppel in any event.
63. Trepanier 155 Vt. at 265.
64. Order of Jan. 4, 1991, Docket 5428; Order of April 2, 1992, Docket 5532; Order of May 13, 1994, Docket
5695; Order of June 9, 1995, Docket 5780; Order of May 23, 1996, Docket 5857.
65. See GMP?s Motion to Strike at 2.
66. In Docket 5695, the Board explained the nature of settled cases: ?Overall, the parties have agreed to a
bottom-line result . . . without reaching agreement on the appropriateness of particular line item amounts or GMP
activities ... when the Board approves a bottom-line settlement of a rate case, the Board is not approving any of the
individual components of a company?s filings, unless the stipulation specifically relies upon explicit approval of
such components. Rather, the Board is concluding that the overall result is proper.? Order of 5/13/94 at 7-8.
Similarly, in the two litigated Dockets, DSM expectations are discussed without specific reference to
Condition 8. GMP?s obligation to undertake DSM activities arises not only as a result of Condition 8, but also
Docket No. 5983
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Moreover, of central importance is the fact that we are not dealing with the same issue in
both the past and current dockets. Each of the prior Dockets cited by GMP involved (1)
determination of how much of GMP’s adjusted costs should be allowed to be charged to
ratepayers for particular DSM activities undertaken by GMP during particular time period(s),
and/or (2) the process to be utilized for development of DSM programs and activities. Whether
GMP’s DSM activities were in full satisfaction of compliance with Condition 8 never was
identified as a specific issue in any of the five prior Dockets cited by GMP67
The facts in this case do not support a conclusion that the issue of satisfaction of
Condition 8 was raised and definitively resolved in the context of a prior final judgment. Nor
does the principle of collateral estoppel foreclose examination of the Condition 8 issue in this
Docket on the basis that the question should have been raised in the earlier Dockets.68
Accordingly, the principle of collateral estoppel does not preclude the Board from now
considering the issue of GMP’s compliance with Condition 8, since the time of the Board Order
in Docket 5330.
3. Equitable Estoppel3. Equitable Estoppel
a. Generala. General
Equitable estoppel does not rely upon a previous adjudication, but upon the dealings of
the parties inter se. It “is based upon the grounds of public policy, fair dealing, good faith, and
justice.”69 The party wishing to assert estoppel has the burden of establishing each of four
elements:
(1) the party to be estopped must know the facts; (2) the party to be estopped must
because of the directive of Docket 5270, Order of 4/16/90, and the provisions of 30 V.S.A. ? 218c. Therefore, it
cannot be automatically assumed that an approval of rates which incorporate DSM costs is based upon a
determination that Condition 8 has been satisfied.
67. Counsel for GMP and for the Department both made this point on Nov. 20, 1997: Mr. Rendall (for GMP):
?I don't mean to suggest that ? that condition eight was purposefully or intentionally addressed in the prior rate
proceedings. Obviously, it was not, and it?s ? it?s not listed in the MOU, it?s not listed in the DSM agreement.?
Mr. Volz (for DPS): ?[T]he issue that was the subject of that agreement was ... whether the costs of the particular
programs we were reviewing in that time frame were appropriate for inclusion in rates and for cost recovery, and we
were not looking at the broader question of whether or not over a long period of time the company was in
compliance with condition eight.? Tr. 11/20/97 at 24-25.
68. See fn. Error! Bookmark not defined. for an explanation of the distinction between the ?should have
been litigated? component of res judicata and the ?full and fair opportunity to litigate? component of collateral
estoppel.
69. Agency of Natural Resources v. Godnick, 162 Vt. 588, 592, 652 A.2d 988, 991 (1994).
Docket No. 5983
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intend that its conduct shall be acted upon, or the conduct must be such that the
party asserting estoppel has a right to believe it is intended to be acted upon; (3)
the party asserting estoppel must be ignorant of the true facts; and (4) the party
asserting estoppel must detrimentally rely on the conduct of the party to be
estopped.70
Further,
[estoppel] against the government is rare; it is appropriate only when the injustice that
would ensue from a failure to find an estoppel sufficiently outweighs any effect upon public
interest or policy that would result from estopping the government in a particular case.”71
b. Equitable Estoppel and Prudence b. Equitable Estoppel and Prudence
GMP argues that it would be “grossly unfair” if it were required to “defend the prudence
of its conduct in negotiating, executing, locking-in to, and managing the Hydro-Quebec
contract . . . .”72 Further, it states that “it would be grossly unfair to GMP to require it to defend
its decisions long after they were made.”73 It also states that equitable estoppel applies here
because GMP “reasonably relied” on DSM settlements that it made with the Department.74
While citing to the elements of equitable estoppel established in Fisher v. Poole, GMP has failed
to analyze them.75 Rather, GMP’s arguments resonate with finality and reliance, and argue in
conclusory terms the alleged inequity in being made to address prudence claims at this time.
The doctrine of equitable estoppel “is based upon the grounds of public policy, fair
dealing, good faith, and justice.”76 On this basis, we find GMP’s arguments unpersuasive.
None of the four elements of the Fisher test are met here. It is at best disingenuous for GMP to
assert that it was somehow without knowledge or notice that prudence issues could be raised in
its future cases. The Board has never issued a decision that litigated and closed these prudence
issues. On the contrary, the Board repeatedly has stated that these issues would be open to
future determination.77 GMP and its counsel, expert in the arena of regulated utility law, have
70. Id., citing Fisher v. Poole, 142 Vt. 162, 168, 453 A.2d 408, 411-12 (1982).
71. Id., citing In re McDonald?s Corp., 146 Vt. 380, 383, 505 A.2d 1202, 1203-04 (1985).
72. GMP Motion to Strike at 7.
73. Id. at 18.
74. Id. at 26.
75. See GMP Motion to Strike at 26.
76. Agency of Natural Resources v. Godnick, 162 Vt. 588, 592 quoting Dutch Hill Inn, Inc. v. Patten, 131 Vt.
187, 193 (1973).
77. Docket 5330-E, Docket 5330-F, and Docket 5780 at p. 30.
Docket No. 5983
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been participants in most of the cases discussed here. Furthermore, GMP’s current General
Counsel acknowledged in hearings in this Docket that the prudence of the early lock-in has
never, in the case of GMP, been evaluated.78
Lastly, it should be noted that estoppel against the government is rare.79 It is
appropriate only when the injustice that would ensue from a failure to find an estoppel
sufficiently outweighs any effect upon public interest or policy that would result from estopping
the government in a particular case.80 GMP has not demonstrated that our investigation into
prudence issues would create such manifest injustice as to outweigh the public’s interest in just
and reasonable rates.
c. Condition 8 and Equitable Estoppelc. Condition 8 and Equitable Estoppel
In its motion to strike, GMP states that the Board Orders and settlement agreements in
Dockets 5428, 5532, 5857, 5780, and 5695 address “GMP’s DSM performance and the propriety
of GMP’s recovery of expenditures relating to DSM.”81 GMP then takes the position that, for
this reason, the principle of equitable estoppel precludes consideration in this Docket of whether
Condition 8 was satisfied during the respective time periods applicable to each of the five prior
Dockets.82 We disagree.
Equitable estoppel only applies if the party against whom estoppel is asserted has done
something or made some representation upon which the party asserting the estoppel has fair and
justifiable reason to rely.83 In neither of the two prior litigated Dockets are there any findings
or rulings which either state or suggest that the Department either believed Condition 8 to be an
issue or considered GMP to have satisfied Condition 8. Rather, the Board Orders in both
Docket 5532 and Docket 5428 indicate that the Department was not satisfied with GMP’s DSM
performance: In both of these Dockets, the Department recommended a reduction in the rates
78. Docket 5983 Transcript of September 30, 1997 at 43.
79. Agency of Natural Resources v. Godnick, citing to In re McDonald?s Corp., 146 Vt. 380, 383 (1985).
80. Id.
81. GMP Motion to Strike at 24.
82. GMP?s argument seems to rest upon the assumption that acceptable resolution regarding DSM program
designs equaled Condition 8 compliance. However, there is no evidence that either the Department or the Board
had this understanding.
83. Fisher v. Poole, 142 Vt. 162, 168 (1982). The purpose of the doctrine of equitable estoppel is to forbid one
to speak against his own act, representations or commitments to the injury of one to whom they were directed and
who reasonably relied thereon.
Docket No. 5983
Page 25
requested by GMP as they related to DSM expenditures;84 and, the Board Order in Docket 5428
specifically acknowledged that the Department was critical of GMP’s Power$avers DSM
program design.85 Under these circumstances, we do not find that the Department acted in such
fashion as to give rise to an expectation on GMP’s part that the Department felt that GMP had
satisfied Condition 8.
Similarly, none of the three Dockets disposed of by settlement can be fairly read to
indicate that the Department considered GMP to have satisfied Condition 8.
First, Condition 8
is never mentioned in the Board orders of Dockets 5857, 5780, and 5695 or the respective
Memoranda of Understanding (or the additional DSM Agreement of Docket 5780) incorporated
therein.86 Second, there is no language in any of the MOUs to suggest that an agreement about
DSM cost allocations is equivalent to a conclusion that Condition 8 has been satisfied. And,
finally, the MOUs must be read in the larger context of the fact that Condition 8 is an ongoing
obligation of the utility which exists notwithstanding any particular agreements concerning
specific cost allocations for DSM in any individual rate case.87
GMP further argues that the Department is estopped from criticizing GMP’s past DSM
costs and activities because the MOUs in Dockets 5780 and 5857 provide: “the parties reserve
the right in any future proceeding to advocate positions that differ from the calculations set forth
in this Memorandum, and this Memorandum may not in any future proceeding be used against
any party except with respect to the recovery of deferred costs provided for in [the paragraphs of
the MOU which address DSM and ACE costs]”;88 the MOU in Docket 5695 contains similar
language.89 However, it is significant that each of the three MOUs also provides in the same
paragraph:
(1) “This Agreement shall not be construed by any party or tribunal as having
precedential impact on any future proceedings involving GMP;” and, (2) “(a)ny specific
calculation set forth in the attached exhibits may not be construed as admissions on any issue, or
as setting forth the position of a party on any particular fact.” Therefore, read as a whole, the
84. Order in Docket 5428 at 36-37; Order in Docket 5532 at 26-27.
85. Board Order in Docket 5428 at 36-37.
86. The absence of specific reference to Condition 8 has been acknowledged by GMP in this Docket: See
footnote Error! Bookmark not defined..
87. See Order of April 16, 1990 in Docket 5270, and Order of Nov. 12, 1990, in Docket 5330 at 40; also see
30 V.S.A. ? 218c.
88. Docket 5857, MOU at 6; Docket 5780 MOU at 4.
89. Docket 5695, MOU at paragraph 11.
Docket No. 5983
Page 26
MOU cannot be interpreted to foreclose future consideration of DSM cost allocations with
respect to determining whether Condition 8 has been satisfied. And, accordingly, GMP cannot
justifiably rely on the MOU to preclude the Department from questioning GMP’s prior DSM cost
allocations as part of a review concerning satisfaction of Condition 8.
GMP, in asserting equitable estoppel, has the burden of establishing each of four
elements. It has failed to do so. First, there has been no showing that the Department intended
that compliance by GMP with the MOUs would satisfy Condition 8. And second, GMP has not
shown that it was unaware of its obligation to satisfy Condition 8 in the Board Order in Docket
5330 notwithstanding any particular agreements concerning specific cost allocations for DSM in
any individual rate case. Accordingly, we find that equitable estoppel does not preclude the
Department from offering evidence concerning GMP’s past DSM performance in conjunction
with an evaluation of GMP’s satisfaction of Condition 8.
4. Summary4. Summary
The purpose of a public utility commission is to ensure that ratepayers are charged just
and reasonable rates, while at the same time providing a utility an opportunity to earn a fair
return for its investors. The application of preclusion must be assessed in this context.90
“Utility rate cases do not proceed on a purely adversary model; they are basically a fact-gathering
proceeding, an investigation at which various parties often present alternative theoretical
approaches to the analysis and evalution of complex financial issues.”91 The Vermont Supreme
Court has observed that, in an administrative context, res judicata should not be applied as an
inflexible rule of law;92 and, that the Public Service Board must have wide latitude to manage
its cases and the manner in which it will defer particular issues for future consideration.93
To the extent that preclusion appropriately protects the interests of all parties, the Board
will use it.94 However, in this case, the facts do not support a finding that either res judicata,
90. See In re Green Mountain Power Corp., 136 Vt. 170, 173 (1978). (The interests involved in a rate
proceeding outreach the usual situation of contending private parties because of the Board?s responsibility to
maintain utility services while preventing the overburdening of the ratepayer).
91. Re New England Telephone & Telegraph Co., 135 Vt. 527, 537 (1977).
92. In re Stowe Club Highlands, 687 A.2d 102 p. 104 (1996) citing, In re Carrier, 155 Vt. 152, 157-58
(1990).
93. In re Petition of Green Mountain Power Corp., 147 Vt. 509, 516 (1986).
94. Order of May 15, 1995 in Docket 5270-HDPK-1. And, at the same time, the Board is mindful of the fact
Docket No. 5983
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collateral estoppel, or equitable estoppel preclude consideration either of GMP’s prudence in
connection with its lock-in or management of the HQ/VJO contract, or of GMP’s compliance
with Condition 8 of the Board’s Order in Docket 5330.
A. Other Evidentiary RulingsA. Other Evidentiary Rulings
1. Updating of Evidence1. Updating of Evidence
that, in order to insure that preclusion is a proper and useful tool for administrative justice, it should not be invoked
when the public interest requires that relitigation not be foreclosed. Louis Stores, Inc. v. Department of Alcoholic
Beverage Control, 57 Ca.2d 749, 371 P.2d 758 (1962) citing 2 DAVIS, ADMINISTRATIVE LAW TREATISE (1958)
561-566.
Docket No. 5983
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The DPS objected to certain testimony and exhibits of Messrs. Oakes and Soter filed by
GMP, introduced during the hearing on January 7, 1998, on the ground that the information in
those testimony and exhibits amends financial data previously filed by those witnesses and is
therefore a change in supporting information for the rate filing.95 30 V.S.A. § 225(a) provides
that:
In no event may a company amend, supplement or alter an existing filing or
substantially revise the proof in support of such filing in order to increase,
decrease or substantiate a pending rate request, unless, upon hearing, the company
demonstrates that such a change in filing or proof is necessary for the purpose of
providing adequate and efficient service.
This section of the law creates a tension in our rate cases. Companies prepare a rate filing based
upon a test year that usually ends several months before the filing. The test year data are
adjusted to take into account known and measurable changes for the “rate year” (adjusted test
year) when rates will actually be in effect. Companies are understandably anxious to bring
information to the Board’s attention that refines the information in the original filing. On the
other hand, updated information, particularly late in a rate case, makes it difficult for parties to
fully investigate the reasonableness of the revised figures.
In a prior GMP case96 we ruled that Section 225(a) and Board Rule 2.204(g) required
exclusion of updated and amended information unless the company could demonstrate either “(i)
that the relevant costs had been
incurred’ by GMP, or (ii) that they would be in effect during all
of the period in which resulting rates will be in effect,”97 and that the update be “necessary for
the purpose of providing adequate and efficient service” as provided in the relevant statute.98
Like rules of evidence, the DPS may waive objection to the introduction of later information if it
so chooses. However, the statutory rule is quite straightforward and, if the DPS or other parties
do object to evidence violating the anti-updating rule, the objection must be sustained. The DPS
objections to the amended rebuttal testimony of Mr. Oakes as to the Plant #18 rubber dam and
the 1998 blanket requests, as well as to the amendment to Mr. Soter’s rebuttal testimony, are
sustained, and that material will be disregarded. (See also the substantive discussion of updating
at page 41.)
95.
96.
97.
98.
Tr. 1/7/98 at 28 and 114.
Docket 5428, Orders of 11/5/90, 11/9/90, and 11/26/90.
Id., Order of 11/9/90 at 1-2.
30 V.S.A. ? 225(a).
Docket No. 5983
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2. GMP Motion to Strike Testimony on Non-Preclusion Grounds2. GMP Motion to
Strike Testimony on Non-Preclusion Grounds
On January 7, 1998, GMP moved to exclude the testimony filed by the Board's
independent witness, MSB, as well as rebuttal testimony by the DPS and IBM. The bases of the
objection include preclusion, impropriety, and inconsistency with Vermont statute. The
previous section of this Order addresses the preclusion issues. We will address the other points
in the sequence in which they are raised by GMP.
a. Lack of Statutory Authority for Appointmenta. Lack of Statutory Authority for
Appointment
In our Order dated September 17, 1997, we decided to appoint a Board witness to provide
a disinterested viewpoint on the evidence in this case, as authorized under 30 V.S.A. § 20. That
section allows the Board to appoint or retain expert witnesses. Our charge to the witness, given
in a letter dated November 6, 1997, and distributed to the parties, was to perform an investigation
and give its report as prefiled testimony.99 Since this docket clearly falls within the criteria of §
20(b), nothing in the statute limits the Board's authority to appoint an expert witness to present
testimony and request that the witness become familiar with the specific facts on which he or she
will testify. We might compare this situation to that of a court-appointed medical or technical
witness or special master, who must perform his or her own analysis and diagnosis and make a
report to the court.
Further, GMP could have made these objections to the Board's authority to make this
appointment at the time we appointed the experts (in which case we may well have exercised our
authority under 30 V.S.A. § 20(b) to appoint counsel to represent the public). Instead, the
Company chose to remain silent, only objecting to the independent investigator’s appointment
after the Company saw the results and the Board could not adopt a different mechanism for
obtaining an independent perspective. We thus find GMP’s late objection untimely as well as
unfounded.
99. The Board has previously used Section 20 to appoint an expert to present an independent evaluation of a
company?s filing. See Docket 5404, Orders of 4/15/91 and 6/7/91.
Docket No. 5983
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b. Testimony Inconsistent with Appointmentb. Testimony Inconsistent with
Appointment
The Board's appointment of this witness directed an impartial analysis of GMP's actions,
and a report that was not the advocacy position of any particular party. GMP objects to the
testimony as inconsistent with our directive, although GMP's real complaint appears to be that
MSB does not agree with GMP. The fact that the witness agreed with one party or another is
irrelevant to the question whether the witness acted consistently with the appointment. We
selected an expert witness that did not begin with an advocacy position, but who arrived at a
position through an impartial, independent review of the facts. Of course we expected our
witness to come to a conclusion, and to make a report based upon that conclusion. Here, the
independent witness presented evidence that we find consistent with our appointment and
instructions.
c. Testimony not Authorized by the Rulesc. Testimony not Authorized by the
Rules
GMP complains that prefiled testimony in Board cases is permitted to be filed only by
parties under Board Rule 2.213(A). Since 30 V.S.A. § 20 permits the Board to appoint a
witness, waiver of this particular limitation is necessarily implied when we appoint an expert
under the statute. The Board’s Rules permit such a waiver (see Rule 2.107). Moreover, the
purpose of our rule is to define who must prefile, rather than to limit who may prefile. Our letter
of instruction indicates they are to prefile, and GMP made no objection to that instruction.
Finally, as counsel for the DPS pointed out at argument, GMP would surely have objected
strenuously if MSB's testimony had not been prefiled, but were given orally, live. We find
GMP's argument here to be wholly specious.
Docket No. 5983
Page 31
d. Procedural Defectsd. Procedural Defects
GMP complains that its time for discovery and response relative to the testimony of MSB
was so short as to deprive the Company of its APA100 and constitutional due process rights.
But the Company has in fact deposed MSB's witnesses, and has filed substantial testimony in
response. While the Company may have preferred more time, we are certain that the other
parties and the independent investigator would have the same preference. We conclude that,
given the statutory constraints, GMP and other parties had a reasonable and fair opportunity to
respond to MSB. This case proceeded on a schedule necessary to a full hearing of the facts
within the statutory time limit of 30 V.S.A. § 225, a limit that GMP insisted upon
maintaining;101 the statutory deadline places hardships on all parties, restricting not only GMP’s
time but also that of others. Our schedule provided all parties a reasonable opportunity for
discovery and responses within the statutory constraints. The time limit could be waived by
GMP; indeed, the Board has on several occasions asked GMP to so waive. GMP has declined,
and made known its insistence on a decision within the allowed seven months. GMP cannot
now complain of the shortness of time.
e. Lack of Qualificationse. Lack of Qualifications
GMP moves to strike certain testimony on the ground that it could be taken as expressing
a legal opinion, and the witnesses for MSB are not lawyers. Many non-lawyer witnesses have
testified in this case as to their opinions and understanding of how the law should be applied to
the facts at issue. The Board is well able to distinguish such lay testimony and give it the weight
it deserves. It would be a useless exercise to attempt to strike out each sentence that a witness
includes in an extensive piece of testimony that he or she is not technically competent to utter.
100. Vermont Administrative Procedure Act, 3 V.S.A. ? 801 et seq.
101. We do not necessarily agree that the extreme time constraints imposed by GMP in this Docket were
unavoidable. See In Re Green Mountain Power Corp., 147 Vt. 509, 519 A.2d 595 (1986). However, once the
overall schedule was adopted in response to GMP?s request, there was no unfairness to GMP in adhering to it.
Docket No. 5983
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f. Sanctionsf. Sanctions
GMP asks for sanctions under VRCP 11, claiming that the testimony contains speculation
and material that has no evidentiary support. We disagree that anything in MSB's prefiled
testimony could call for sanctions against MSB. Even assuming that, as GMP charges, MSB's
testimony includes speculation and statements without sufficient support to be credible, this
would not be sufficient to require imposition of sanctions, but would only go to the weight to be
given the evidence.
3. Deprivation of Rights as to DPS and IBM Surrebuttal Testimony3. Deprivation of
Rights as to DPS and IBM Surrebuttal Testimony
GMP claims its due process rights have been abridged by the presentation of certain
testimony by the DPS and IBM, because there is no “opportunity for GMP to respond thereto.”
However, GMP has in fact performed discovery and filed responses to the rebuttal testimony of
the DPS and IBM, so it does not appear that its deprivation has had a substantial effect. Further,
as also noted, the deadline for completion of this case is imposed by statute and insisted upon by
GMP. The schedule we adopted was set up to provide parties a fair opportunity to be heard,
within the statutory time period. Relief from the time constraints is within the control of GMP,
and it cannot be heard to complain.
Docket No. 5983
Page 33
4. Motion to Exclude IBM-194. Motion to Exclude IBM-19
Exhibit IBM-19 is a filing made at the Massachusetts Department of Public Utilities by
Green Mountain Energy Resources. The Company objected on the grounds that the document
had not been authenticated and that it was not a prior inconsistent statement. We overruled the
objection, indicating that we would not regard the statements made in the filing as having been
made by the Company. The use of the document made by its proponent was for the purpose of
showing that a statement had been made, and asking a GMP witness whether he agreed with the
statement. This is not a hearsay use. As we made clear at the hearing, if the Company actually
disputed the genuineness of this document, we would accept a filing to that effect from the
apparent signer, Ms. O’Neill.102 Following the hearing, however, IBM filed a certified copy of
the complete document from the Massachusetts DPU. Notice of that filing was provided to all
parties. The document would appear now to be self-authenticating as provided by VRE 902 (1)
and (4), and may be used for any purpose.
5. Confidentiality of GMER Contract5. Confidentiality of GMER Contract
In September 1997, the parties entered into a protective agreement which sealed allegedly
confidential information in this docket. The Board issued an Order approving the
agreement.103
Shortly thereafter, the Board reconsidered whether its Order approving the protective
agreement should continue in force to cover materials sought by The Times-Argus Newspaper
(the ”T-A”).104 Specifically, the T-A requested access to commercial documents concerning an
agreement (“Agreement”) between GMP and Green Mountain Energy Resources (“GMER”), an
unregulated affiliate of GMP. The agreement contains language defining terms of the initial and
subsequent relationship between the two companies. In its November Order, the Board agreed
that certain of these terms were commercially sensitive and deserved continued confidential
protection, while other terms of the agreement did not deserve protection and could be made
accessible to the public.105 The Board granted protection to, among other things, all of
102.
103.
104.
105.
A former GMP attorney now employed by GMER.
Docket 5983, Order of 9/10/97.
Id., Order of 11/26/97.
Id.
Docket No. 5983
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paragraph 3 of the agreement because it “relate[d] to future business plans of GMER.”106
The Board once again revisited the issue of confidentiality in this Docket in its Order of
1/13/98 where it found that GMP had, itself, revealed some of the information for which it had
previously received protection. The Board held that, as a consequence, GMP had forfeited
confidential protection for that divulged material. In explaining its rationale, the Board repeated
its admonition to parties in its November Order: “if we were to discover that the details of this
protected material have not been closely-held or have been made public in any way, we will
release them.”107
Today we consider still another confidentiality claim. On February 2, 1998, IBM filed a
letter with the Board that addressed recent filings by GMP in this Docket.108 IBM states:
GMP did not treat information related to GMER, including the August 6, 1997
Agreement, as confidential. As such, GMP has waived the confidentiality
protection it sought and obtained for GMER related information and IBM does
not intend to treat any such information as confidential during the remainder of
the proceeding.109
Lacking a more specific statement from IBM with respect to exactly what language in the
GMP Brief and GMP Proposed Findings it believes waived confidentiality, we will construe
IBM’s statement as a request to review the appropriateness of continuing to treat any and all of
the sealed parts of the Agreement as confidential.110 Because IBM has not been sufficiently
specific regarding the exact language that it alleges has caused GMP to breach the confidentiality
agreement, we are unable to conclude that GMP has, in fact, done so.
In both the GMP Brief and GMP Proposed Findings, GMP discusses the use by GMER of
the name “Green Mountain,” and related issues concerning its value.111 This discussion, in our
estimation, does not cross the line into the issues protected by the Board that “relate to the future
business plans of GMER,” which the Board originally sought to protect in its Order of
106. Id. at 7 (emphasis added).
107. Id., Order of 1/13/98 at 1, referring to Order of 11/26/97 at 9.
108. GMP?s Brief in Support of its Proposal for Decision on Issues Other Than the Hydro-Quebec Contract
(?GMP Brief?) and Proposal for Decision on Issues Other than the Hydro-Quebec Contract (?GMP Proposed
Findings?).
109. IBM Letter of February 2, 1998. IBM writes, ?. . . in its brief on issues other than Hydro Quebec (at
pp.78-88), and its accompanying Proposal for Decision (at pp. 84-91), GMP did not treat information related to
GMER, including the August 6, 1997 Agreement, as confidential.? Id. at 1.
110. We must express our disappointment with the generality of IBM?s objection, and with IBM?s threat to
reveal matters under seal in advance of a Board order lifting the Protective Order.
Docket No. 5983
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11/26/97.112
However, GMP has discussed the substance of paragraph 3 of the Agreement in the
unsealed portion of its Reply Brief:
[t]hat there is value for the Company’s refraining from using the name Green
Mountain in future unregulated business activities, should be rejected . . . It can
engage or not engage in such activities, using or not using any name it chooses, as
it sees fit, irrespective of the assertions of the state or of IBM.113
The subject of GMP’s comments includes reference to those business plans which GMP argued
in November were commercially sensitive and deserving of confidential treatment.114 In
response to GMP and GMER’s requests, the Board agreed to seal paragraph 3 of the Agreement,
which discusses the use of the name “Green Mountain.”115
Inasmuch as this information has
now been made public, we conclude that the portions of the agreement which discuss the same
issues should be unsealed.
For these reasons, we find that in this instance GMP is responsible for “making public”
information which had been afforded confidential status by Board order.116 Therefore, we
believe that to the degree the Agreement considers the treatment by GMER and GMP of the
name “Green Mountain,” the material is no longer commercially sensitive and warrants
disclosure.117
Finally, we must note our dissatisfaction with the less than thorough treatment by GMP of
the confidentiality issues that have arisen in this docket. The Board has been willing to
accommodate the company and to extend protection to materials GMP maintained were
commercially sensitive; the Company has not given the matter the careful treatment it deserves.
We take very seriously all issues related to the protection of confidential material, and the proper
release of public information; we urge the parties to do so also in the future.
111. See GMP Proposed Findings at 85-86; GMP Brief at 79-81.
112. The Board originally agreed to protect this information, located in the Agreement at paragraph 3, ?Use of
the Name Green Mountain,? in its Order of 11/26/97 at 7.
113. GMP Reply Brief at 88, n.38.
114. Docket 5983, Order of 11/26/97 at 4.
115. See note 11 supra.
116. Docket 5983, Order of 1/13/98 at 1.
117. In accordance with this ruling we have unsealed the appropriate sections of the GMP/GMER agreement,
which is now available as part of the public record of this docket.
Docket No. 5983
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6. GMP Rate Filing and Schedules6. GMP Rate Filing and Schedules
The original rate filing and supporting schedules were never moved for admission. Since
it is often useful to refer to these documents, we will admit them as Board Exhibit 12.
7. GMP’s Motion for Administrative Notice7. GMP?s Motion for Administrative
Notice
On January 28, 1998, GMP filed a motion asking the Board to take official notice of
seven “portions and aspects of prior Board proceedings.” Four of the items presented are copies
of prefiled testimony from Dockets 5330, 5428, and 5532. GMP’s motion indicates that this
testimony is offered to show that particular statements were made to the Board in these dockets,
not to prove the truth of the statements.118 There has been no objection to GMP’s motion,119
which we take to mean at least that no party disagrees that this testimony was proffered in those
cases. They will be admitted as GMP exhibits 80 (Kelly in 5428), 81 (Kelly in 5532), 82 (Smith
in 5532), and 83 (Rohr in 5330) for the non-hearsay purpose requested by GMP. Another item
is a position paper of the DPS, dated February 24, 1992, filed in Docket 5270-GMP-4. We will
assume that this document is what it purports to be, an official document of the Department of
Public Service, and admit it as GMP Exhibit 84.
The other two items ask the Board to notice the absence of particular positions having
been taken by the DPS or IBM in Dockets 5428 or 5532. These requests place a triple burden
upon the Board: first we are to retrieve the testimony of two parties in two long-ago finalized
cases; then to review it carefully for the positions taken; and finally to declare it conclusively
proven that certain positions were not taken by these parties. The Board must decline to do so.
Other than to confirm that IBM was a party to Docket 5532, the requests to take notice of
positions not taken by the DPS and IBM, numbered 4 and 5 in GMP’s motion, are denied.
118. The filed material consists of copies of prefiled testimony of several individuals. It is not clear from
documents that they were actually admitted without modification. They are also offered without the transcript pages
of any cross examination that may have occurred. We are therefore reluctant to accept them as proving the truth of
the matters therein.
119. However, the DPS asked that four additional pages of Mr. Smith?s testimony in Docket 5532 be noticed
for the sake of completeness, and we accept that addition.
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8. DPS Sponsorship of Witnesses8. DPS Sponsorship of Witnesses
GMP moved to strike portions of the testimony of several DPS witnesses, on the ground
that the DPS is prevented from taking certain positions by virtue of agreements it made in
Memoranda of Understanding (“MOUs”) that were entered into in order to settle earlier GMP
rate cases. The DPS disagreed that the particular positions it was taking were forbidden to it by
the terms of the MOUs. The Board granted120 GMP’s motion to strike the DPS testimony, but
allowed other parties, intervenors in this case, to co-sponsor the testimony. The DPS has
asked121 that the Board issue a final ruling that the DPS is not prevented from sponsoring the
testimony because GMP has violated the MOUs, releasing the DPS from its commitments
thereunder. As discussed at page 129 below, the Board does not find explicit violations of the
MOUs. However, because this testimony is relevant to our conclusions as to the future
treatment of the Company’s obligations under 30 V.S.A. § 218c and Condition 8; because it is
relevant to many issues besides the imposition of penalties for non-performance of the
Company’s DSM obligations; because we do not in fact impose penalties for past
non-performance; and because the testimony was co-sponsored by other parties, we grant the
Department’s motion for its admission as DPS testimony.
120. Tr. 11/20/97 at 29.
121. DPS HQ Brief at 78.
Docket No. 5983
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9. IBM’s Proposal for a Rate Design Investigation9. IBM?s Proposal for a Rate Design
Investigation
Dr. Rosenberg, a witness for IBM, suggested in his prefiled testimony that the Board
should open a cost of service/rate design docket in order to address the issues of revenue
allocation and rate design. He presented no basis for this suggestion other than the fact that
GMP did not file a marginal cost of service study with its rate request. A marginal cost of
service study is a significant undertaking, and is not routinely expected as part of a company’s
rate increase filing. Further, GMP’s rate design was last modified in Docket 5857, Order issued
May 23, 1996. That docket was settled by stipulation, in which IBM took part. In the absence
of a credible showing that GMP’s current rate design needs adjustment, we decline IBM’s
invitation to order such a review at this time.
10. Proposed Findings of Fact10. Proposed Findings of Fact
Proposed findings not consistent with the following are hereby rejected.
I. RATE BASE ISSUESI. Rate Base Issues
A. MethodologyA. Methodology
1. The historic test year for this case is the 12 months ending March 31, 1997. Kvedar
pf. 6/16/97 at 4.
2. The adjusted test year, adjusted for known and measurable changes (also referred to
as the rate year) begins on March 1, 1998, and ends on February 28, 1999.122 Schultz pf.
10/7/97 at 27.
3. The Company has proposed a rate base consisting of the 13-month average level of
rate base investment for the 12-month period ending March 31, 1997, and made adjustments
thereto for the known and measurable changes. Kvedar pf. 6/16/97 at 12-13.
4. The Company has calculated rate base by using as a beginning point the 13-month
average balance of plant investments in the historic test year. Kvedar pf. 6/16/97 at 12-13.
5. To that 13-month average, the Company added the full cost of expenditures for 1997
and the full costs of projected expenditures for 1998. Tr. 11/5/97 at 214 (Schultz).
122. In this Order we will refer to rate year for the sake of convenience. When doing so, we mean the adjusted
test year.
Docket No. 5983
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6. The costs for these project additions are included in the Company’s filing as if they
had been completed (and thus were known and measurable) and costs recorded as of the
beginning of the rate year (February 28, 1998).
Schultz pf. 10/7/97 at 27.
7. Some of these project additions are not expected to begin until later in the rate year
and the blanket work orders included in the filing for 1998 will incur costs throughout the year.
Schultz pf. 10/7/97 at 27.
8. The Department maintains that in determining the level of 1998 plant additions to add
to plant in service, GMP did not utilize a proper 13-month average methodology. The
Department would propose that GMP continue to use the 13-month average test year plant and
the full cost of appropriate 1997 plant additions, but use a 13-month average of 1998 plant
additions rather than the full cost of projects expected to be constructed during the rate year.
The Department recommends numerous rate base adjustments based on its proposed
methodology. Schultz pf. 10/7/97 at 27; Schultz reb. pf. 12/24/97 at 8.
Discussion re: Rate Base Methodology
1. Methodology1. Methodology
Vermont rate-making methodology has traditionally employed the use of an historic test
year adjusted for known and measurable changes. The historic test year commences with the
beginning balance during the first month of the test year and includes the monthly balance for
each subsequent month for the following twelve months. The average over the period is known
as the 13-month average balance. The test year in this case is that period ending on March 31,
1997.
Vermont does not use the rate-making methodology that utilizes a future test year in
which rate base is projected out through the end of the rate year. The distinction is that the
future test year methodology develops rate year costs and revenues based on forecasts out
through the end of the rate year, whereas the historic test year methodology begins with the test
year average and then adjusts that average for known and measurable changes in the rate
year.123
GMP’s original filing in this case treated rate base items somewhat differently than the
Company had treated rate base in past filings. The Company's original filing requested that
123. Tr. 11/5/97 at 43-45 (Schultz).
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estimated costs for various projects to be added during both the rate year and the interim period
be included in rate base as if the project were to be completed, in service, and the costs were to
be recorded as of February 1998. If accepted, this would mean that for any particular project,
GMP could potentially recover in rates investment (and a return on such investment) that it had
not yet expended.
The Department recommends that, after it is determined that a project is known and
measurable, rather than granting the Company rates based on a scenario where rate year projects
are assumed to be completed at the beginning of the year, rates should be based on the thirteenmonth average methodology applied to each project included in 1998 plant additions.124 The
application of this average, in effect, allows the Company to include in rate base the costs of
1998 rate year projects as if they were in service as of the middle of the rate year.125 So for
each 1998 plant addition that is known and measurable, the Department recommends an
adjustment to rate base based on the thirteen month average. The DPS is suggesting that we
apply a methodology in this case that uses a thirteen month average balance for both test year and
rate year plant additions.
The Company argues that use of the Department’s methodology would not give GMP a
fair return on its rate year investment.126 The Company seems to recognize the plausibility of
the Department’s position that it would be unfair for the Company to receive a return in March
1998 on an investment that arguably may not be made until the end of the rate year. Yet GMP
argues that the DPS proposal contradicts the principles articulated in the Board’s Order in Docket
4865.127 However, in that Order, while recognizing that there simply is no “perfect match” in
rate-making, the Board rejected the concept of both a future test year methodology and a
methodology based on a purely historic test year, concluding that an average rate base adjusted
for known and measurable changes maintains overall balance for a company.128
We concur with the use of the Department’s rate base methodology. Given past Board
practice, it is consistent to continue to apply the thirteen-month average methodology in this case.
Using the 13-month average also reflects the fact that these plant additions will enter service
124.
125.
126.
127.
128.
DPS Brief at 11.
Tr. 1/8/98 (Kvedar).
GMP Brief at 7.
GMP Brief at 8.
Docket 4865, Order of 9/6/84 at 6-7.
Docket No. 5983
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(and thus be known and measurable) at different times during the rate year, not at the start. To
the extent that GMP is presenting a new methodological approach here, in particular including
1998 rate year additions based upon their inclusion in rate base as if they were in service at the
beginning of the rate year (the end of February, 1998), we must reject this approach. Such an
approach would grant the Company a full return on investment over a period of time before the
investments have been made. This result could adversely impact the Company’s ratepayers and
unfairly benefit stockholders. The Company is only entitled to a return on plant that is actually
serving ratepayers. This is a principle that is well founded in law and is the basis for the used
and useful criteria elaborated upon by the Supreme Court in Denver Union Stock Yard Co. v.
United States that we quote in relevant part here:
The utility is entitled to rates, not per se excessive and extortionate, sufficient to
yield a reasonable rate of return upon the value of property used, at the time it is
being used, to render the service. But it is not entitled to have included any
property not used and useful for that purpose.129
We conclude that the use of the thirteen-month average of known and measurable plant additions
for the year 1998, as proposed by the DPS, will fairly compensate the Company for investments
undertaken during the rate year.
2. Updating2. Updating
After making its original filing on June 16, 1997, the Company revised its estimates of
projects and project costs that it expected to incur during the rate year. According to the
Company, these revisions are attributable to “improved information which became known during
the pendency of this case.” The Company cites to such factors as a lower probability of a
project’s occurrence, and improved, more reasonable measurements of a project’s costs as factors
which have led to the decrease in the Company’s rate request.130
We must comment on the apparent discrepancy between the information that the
Company originally provided to the Board in support of its rate base request, and the information
that it finally supplied after months of discovery by the parties on the original filing and a
substantial amount of hearing time devoted to the original filing. It is incumbent upon a utility
filing support for an increase in rates to include in its original filed rate base only those items that
129. Denver Union Stock Yard Co. v. United States, 304 U.S. 470, 475, 58 S.Ct. 990 (1938).
130. GMP PFD, 1/30/98 at 2.
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it believes are known and measurable. As we noted in our Order in Dockets 5701/5724, the
Supreme Court has stated that “known and measurable” changes in plant investments are those
changes that can be measured with “a reasonable degree of accuracy and “that have a high
probability of being in effect” in the adjusted test year.131
In this case, several witnesses for
the Company testified they did not believe the proposed adjustments that they were supporting
were known and measurable.132 Requests for rate base treatment of a substantial number of
items that are not known and measurable presents the appearance of a “wish list,” particularly
when the Company substantially revises its estimate of what is known and measurable during
rebuttal. We find that the review of requests for rate base items that the Company knows are not
known and measurable to be unproductive. In the future, the Company should not include in its
filing additions to rate base if the Company is not prepared to demonstrate that the additions meet
the known and measurable test. As to the specific items in this case that were revised by the
Company, our decision on the Department’s objection to updating is at page 41, above.
In the future, GMP should carefully examine each item for which it is requesting rate base
treatment, and only include those items that it believes to be known and measurable. In
addition, for major items, a cost-benefit analysis should be conducted prior to the rate request,
and for smaller items, a financial analysis should be available in support.
B. Rate Base SummaryB. Rate Base Summary
9. In its original petition filed on 6/16/97, GMP included a total pro forma rate base
investment of $202,060,000. Exh. Board-12 at attach. B, sch. 6.
10. The Department recommends adjustments to rate base that would reduce the
Company’s pro forma rate base by $28,585,000 leaving an adjusted rate base of $173,475,000.
Exh. DPS-64 at sch. SR2.
11. Based on the specific findings and conclusions below, the adjustments we have
made here will reduce rate base by $25,472,000 for a total adjusted rate base of $176,588,000
that will result in just and reasonable rates.
Discussion re: Rate Base Summary
131. Docket 5701/5724, Order of 10/31/94 at 35.
132. Tr. 11/4/97 at 20 (Oakes); tr. 11/4/97 at 254-255 (Soter).
Docket No. 5983
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The Company has requested a pro forma rate base of $202,060,000. Based upon the
record evidence, we find that reductions to rate base totaling $25,472,000, resulting in an
adjusted rate base of $176,588,000, will lead to just and reasonable rates.
C. Construction Work in Progress (CWIP)C. Construction Work in Progress (CWIP)
12. Generally in Vermont, CWIP is allowed for normal utility construction and
maintenance projects for replacement or reconstruction of existing plant, as long as the projects
are not growth related.133 Projects included in CWIP need to be known and measurable.
Schultz pf. 10/7/97 at 23.
13. The Company is requesting $2,394,000 for CWIP in this case for distribution
blankets and miscellaneous distribution. Schultz reb. pf. 12/24/97 at 7.
14. In two prior GMP Dockets, 5532 and 5428, the Company’s request for CWIP was
based on projects actually in progress as of the end of the historic test year. In those Dockets,
the projects in CWIP at the end of the test year that were still booked as CWIP, remained in the
Company’s CWIP request for the next period, after adjustment to eliminate growth-related
CWIP. But all CWIP projects completed during the test year were included as specific projects
in the Company’s requested rate base. Schultz pf. 10/7/97 at 24.
15. In GMP’s last rate case, Docket 5857, which was settled, GMP used the five-year
average methodology for CWIP that it is using in this case. Schultz pf. 10/7/97 at 23.
16. Here, rather than including the CWIP projects undertaken during the test year as the
basis for the Company’s request for CWIP, GMP has taken a new approach on two levels: (1) it
has included the specific projects which have formed the basis for CWIP in prior cases, in its
request of plant additions in the present case; and (2) it has used the five-year average
methodology for determining its CWIP request in its filing for a rate increase. Schultz pf.
10/7/97 at 24.
17. In this case, the Company is requesting CWIP based on a five-year average of actual
spending for distribution construction blankets and miscellaneous distribution construction.
Kvedar pf. 6/16/97 at 24; Schultz pf. 10/7/97 at 23.
18. The Company agrees that the method of developing CWIP in this case is not typical
of the method the Company used in prior litigated cases. Tr. 11/4/97 at 314 (Kvedar).
133. For a discussion of growth-related additions to plant, see Docket 5428, Order of 1/4/91 at 21-22.
Docket No. 5983
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19. The Department takes the position that the use of a five-year average methodology
for determining CWIP is inappropriate because it is based on an average and therefore not
identifiable to specific projects. If projects are not known, they cannot be measured. Schultz
pf. 10/7/97 at 24.
20. Since GMP has shifted its test year CWIP balances entirely to rate base as plant
additions in this case, GMP’s proposed plant additions already allow for the recovery of a portion
of CWIP. Schultz pf. 10/7/97 at 24, 25.
21. GMP has requested plant additions that include the full costs of projects expected to
be undertaken during the year following the test year, or interim period (1997), and the rate year
(1998). These plant additions include requests for 1997 spending on distribution blankets of
$7,404,833, and miscellaneous distribution of $1,175,702, and requests for 1998 spending on
distribution blankets of $5,431,667, and miscellaneous distribution of $428,564. Schultz reb. pf.
12/24/97 at 7; exh. DPS-64, sch. SR9.
22. The Department recommends an adjustment that would increase the Company’s
requested amount for 1997 blankets and miscellaneous distribution by $272,274, and decrease
the Company’s requested amount for 1998 blanket and miscellaneous distribution by $2,495,625.
Exh. DPS-64, sch. SR9.
Discussion re: Construction Work in Progress (CWIP)
The Company’s original filing in this case used a rate base approach that was different
from past rate cases. Specifically, the Company has included a substantial number of specific
projects that it expects to complete during the rate year, as known and measurable changes to the
thirteen-month average balance for the test year. In the present case, rather than including the
CWIP projects undertaken during the test year as the basis for the Company’s request for CWIP,
GMP has taken a new approach on two levels: (1) it has used the five-year average
methodology for determining its CWIP request in its filing for a rate increase; and (2) it has
included the specific projects, which have formed the basis for CWIP in prior cases, in its request
of plant additions in the present case.
The CWIP balance requested in this case is for distribution blankets and miscellaneous
distribution. The Company has also requested plant additions for 1997 and 1998 for the same
category of items described by project or blanket work order. However, as noted above, not all
Docket No. 5983
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of the projects are expected to be completed at the beginning of the rate year.
The Department argues that the 1998 projects that the Company has included in rate base
are effectively the true rate year CWIP to which the Company would be entitled under traditional
Vermont rate-making principles. The DPS asserts that the Company’s requested CWIP is not
typical of CWIP requested in prior dockets, and does not comply with the Vermont policy for
allowance of CWIP in rate base. According to the Department, the Company’s request for
recovery of CWIP for distribution blankets and miscellaneous distribution, is duplicative of its
request for rate base recovery of the same categories of rate base items.134 If the Board were to
grant recovery for both CWIP and the 1997 and 1998 rate base items in these categories, GMP
would in effect be granted double recovery for the same category of items. Therefore, the
Department argues that the $2,394,000 average CWIP requested by GMP be disallowed in
full.135 Instead, the Department recommends the $4,228,928 13-month average of 1998 plant
additions be utilized as the equivalent of CWIP, as set forth in Dockets 5428 and 5532.
GMP argues that the Board has made it a practice of allowing CWIP in rates in prior rate
cases. In this case, GMP has used a five-year average of spending on distribution projects to
calculate CWIP. GMP agrees with the Department that this methodology has not been used in
prior GMP litigated cases. However, the Company argues it is a reasonable methodology to
reflect the historical average investment in ongoing distribution service to customers.136 GMP
does not dispute that it is requesting recovery through rate base inclusion, for investments in its
distribution system, reiterating that those investments should be counted as plant additions. The
Company justifies its request for CWIP, in addition to its request for distribution plant additions,
by stating that, since it is impossible to predict every project in advance that may be required to
maintain the reliability of the system, and since there undoubtedly will be CWIP incurred during
the rate year, GMP should be allowed its request for CWIP in this case.
The Company is asking us to apply an historic average of CWIP for the same category of
investments that the Company has already included in rate base as plant additions. GMP has
essentially presented an equivalent numerical value for the same items twice, using two different
methods of derivation: (1) it has estimated future rate year plant investments using CWIP
134. DPS Brief at 5.
135. DPS Brief at 9.
136. GMP Brief at 28
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methodology; and (2) it has listed specific and blanket plant investments that it will undertake
during the rate year.137 The Company has then included both of these numbers reflecting the
same construction projects in its filing. The Company’s argument, that the inclusion of CWIP
and plant additions are both justified because there still may be other projects that they cannot
predict over the rate year, does not persuade us, given the nature of the plant additions for which
the Company will be granted recovery. Distribution blankets and miscellaneous distribution
plant additions, are by their very nature, not project-specific and can very well include projects
that are as yet unforseen. We believe that granting recovery of both CWIP, and allowing such
extensive and non-specific plant additions in rate base, would indeed be duplicative. Therefore,
we shall disallow the Company’s entire request for CWIP in this Docket, $2,394,000.
In doing so, we must note however, that the recent severe ice storm has undoubtedly
placed a substantial strain on the distribution system of the state’s utilities. We understand the
necessity of a distribution utility to undertake the repairs and maintenance necessary to provide
high-quality service to its customers, even when faced with the ravages of nature. Nothing we
do here is intended to undermine the ability of the Company to maintain its obligation to provide
service to customers. GMP has not included any requests for recovery of storm-related costs for
the recent January, 1998 ice storm in this rate request, nor have we had any testimony as to the
need for special treatment of any category of rate base because of this storm. When the
Company does include a request for the recovery of costs associated with this storm in a future
rate filing, we will review those costs, and the Company’s supporting documentation, at that
time.
D. Plant RetirementsD. Plant Retirements
23. The Company did not adjust plant in service to reflect its projected plant retirements
for 1997 and 1998. Schultz pf. 10/7/97 at 51.
24. Rate base should be adjusted to reflect the plant retirements occurring from April
1997 through the end of the rate year based on the 13-month average rate year balance. Schultz
pf. 10/7/97 at 51; exh. DPS-64, sch. 14.
25. The five-year average of plant retirements was $2,571,782. The Company did not
137. Using the CWIP method of derivation produces an estimate of required future plant additions; because it is
an estimate, a strict numerical comparison between CWIP and plant additions cannot be made.
Docket No. 5983
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provide the five-year average of the associated reduction to accumulated depreciation resulting
from the retirements. An adjustment to reflect plant retirements based on this five-year average
would reduce rate base by $3,643,219. Schultz pf. 10/7/97 at 52.
26. GMP's filing also includes a reduction to rate year depreciation expense which will
result from projected 1997 and 1998 plant retirements. The Company then reflected an offset to
accumulated depreciation for those plant retirements. The Company’s filing for depreciation
expense should be recalculated to reflect the adjustment for plant retirements. Schultz pf.
10/7/97 at 51.
27. GMP agreed that it neglected to remove retirements from plant in service and
recommended an adjustment to rate base of $178,000 to correct this error. The Company
provided no support for this adjustment. Tr. 11/4/97 at 261 (Kvedar); Kvedar reb. pf. 11/24/97
at 281.
Discussion re: Plant Retirements
The DPS argues that we should reduce rate base by $3,643,219 because GMP did not
include the impacts of plant retirements in its plant in service during the rate year. GMP did,
however, include a reduction in depreciation expense for plant retirements. GMP agreed that it
neglected to remove retirements from plant in service and recommended an adjustment to rate
base of $178,000 to correct this error. However, the Company provided no support for this
adjustment.
The Department proposed an adjustment using the five-year average of plant retirements
and applied that to expected retirements from April 1997 through the end of the rate year based
on the 13-month average rate year balance. The Department did not have the information to
make the corresponding adjustment to accumulated depreciation. The DPS recommends that
this should be done in a compliance filing.
We agree with the Department that plant retirements represent known and measurable
changes that are typically included in the rate base calculation. Although the DPS did not
identify specific plant retirements, it recommended using an average level of retirements over the
past five years, which we find reasonable. The Company did not rebut the Department’s
methodology for its proposed adjustment. At the same time, we find no support for the
Company’s proposed adjustment. We conclude that plant in service should be reduced by
Docket No. 5983
Page 48
$3,643,219 to account for plant retirements. Once we reflect the plant retirements, it is also
necessary to adjust the accumulated depreciation based on the change to the plant accounts. The
Company shall provide the five-year average of the reduction to accumulated depreciation
resulting from plant retirements. Once that amount is provided, the offset to accumulated
depreciation for the retirements should be determined utilizing the methodology presented on
Exhibit DPS-64, Schedule 14, so that the reduction to plant in service and accumulated
depreciation are calculated in a like manner. The Company shall perform this calculation in the
compliance filing.
E. Plant in Service - Distribution and Transmission ProjectsE. Plant in Service Distribution and Transmission Projects
1. Distribution Plant 1. Distribution Plant
28. The adjustments to GMP's originally requested 1997 and 1998 additions to
distribution plant would increase GMP’s distribution rate base for 1997 by $272,274 and reduce
rate base for 1998 distribution plant by $2,495,625.
a. 1997a. 1997
29. GMP's original filing includes $9,754,918 of projected 1997 distribution plant
additions. Exh. DPS-64, sch. SR7.
30. The Company calculated its distribution blanket projects by applying a gross growth
rate to project costs net of contributions. The growth rate should be applied to total project
costs. GMP's projected distribution plant additions for 1997 should be increased by $344,282 to
correct for the error. The Department did not recommend disallowance for any of the 1997
requested distribution blankets. Schultz pf. 10/7/97 at 35; Schultz reb. pf. 12/24/97 at 19.
31. The Department agrees to the Company’s requested spending amount of $753,022
for work order 023. Schultz reb. pf. 12/24/97 at 18.
32. The Department recommends a $68,721 increase in 1997 miscellaneous distribution
projects. Schultz reb. pf. 12/24/97 at 19-20.
33. The Company and the Department agree that rate base should be adjusted upward to
reflect 1997 spending on mass distribution blankets. Schultz reb. pf. 12/24/97 at 21; Fonte reb.
pf. 11/24/97 at 2, Exh. DPS-64, sch. SR9.
Docket No. 5983
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34. The net impact of the Department's recommended changes to the distribution
blankets and the miscellaneous distribution projects is a $272,274 increase to 1997 distribution
plant additions. Schultz reb. pf. 12/24/97 at 18.
b. 1998 b. 1998
35. GMP's original filing includes $6,210,231 of 1998 distribution plant additions.
Exh. DPS-64, sch. SR7.
36. GMP based its request for the mass distribution blanket on the projected end of year
expenditures for 1997, adjusted for inflation in 1997 and 1998. GMP uses a 4 percent inflation
factor for this adjustment. Fonte reb. pf. 11/24/97 at 3.
37. The Department proposes an adjustment of $1,812,371 using the seven-year
average of such costs in 1996 dollars for the 1998 mass distribution blanket category, inflated by
a 3 percent inflation factor for 1997 and 1998. Schultz pf. 10/7/97 at 36-37.
38. Inflation rates are expected to hold at or below 3 percent through 2000. Hill pf.
10/7/97 at 9-10.
39. GMP did not rebut the Department's use of a seven year average or the use of 3
percent inflation for 1997 and 3 percent inflation for 1998. Schultz pf. 12/24/97 at 20.
40. The Department concurs with GMP’s spending levels for 1998 line transformer
blankets (work order 97023), but proposes an adjustment of $175,746 based on application of the
13-month average methodology. Schultz reb. pf. 12/24/97 at 20-21.
41. The Department is in agreement with GMP for five 1998 distribution plant project
additions (#97020, #97024, #97025, #97027, & #97111). However the Department proposes
adjustments for each project based on application of the 13-month average methodology. The
Department’s adjustments for these projects total $256,412.138 Schultz reb. pf. 12/24/97 at 36,
38.
42. The Department contested inclusion of $100,000 for a 1998 distribution project
identified as voltage conversion of the 19J4 circuit. In rebuttal GMP agreed that this project
should be removed because it will not be completed after 1998. Schultz pf. 10/7/97 at 38;
Schultz pf. 12/24/97 at 21; Fonte reb. pf. 11/24/97 at 5.
43. The Department agrees to the Company’s level of spending for 1998 miscellaneous
138. Individual recommended project adjustments are $19,391; $34,939; $9,614; $104,327; and $88,141.
Docket No. 5983
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distribution projects. However, the Department did propose an adjustment of $151,096 based
on application of the 13-month average methodology. Schultz reb. pf. 12/24/97 at 21.
2. Transmission Plant2. Transmission Plant
44. The adjustments to GMP's originally requested 1997 and 1998 additions to
transmission plant in service result in reductions of $132,669 and $298,090, respectively.
a. 1997a. 1997
45. GMP's filing included additions to plant in service for transmission plant of
$938,911 for 1997. Exh. DPS-64, sch. SR7.
46. GMP has included a request for $25,000 for transmission land rights blankets in
1997. The DPS recommends an adjustment of $21,000, since the five-year average of
expenditures under this blanket is only $4,000. Schultz reb. pf. 12/24/97 at 39.
47. GMP's projected 1997 plant additions include $55,000 for a survey of a portion of
the 3310 transmission line. After filing its original testimony, GMP received bids on the
projects, which resulted in GMP reducing its request for this project to $31,300. The
Department is in agreement with this revision, which results in a $23,700 reduction to GMP's
original request. Schultz pf. 12/24/97 at 21; Fonte pf. 7/11/97 at 3, 5; Fonte reb. pf. 11/24/97 at
6.
48. GMP’s transmission substation requests total $186,000 in 1997. The DPS
recommends an adjustment of $88,000 based upon a spending amount of $98,000 for both 1997
and 1998. The DPS spending amount is based on the average of the years 1991-1995, excluding
1994, since that average was significantly influenced by a large work order in that year. GMP
indicated that it was not aware of any large expenditures coming up in this category during the
rate year. Schultz pf. 10/7/97 at 40.
b. 1998b. 1998
49. GMP's filing included additions to plant in service for transmission plant of
$447,000 for 1998. Exh. DPS-64, sch. SR7.
50. GMP has included a request for $25,000 for transmission land rights blankets in
1998. The DPS recommends that we reduce the spending to $4,000, adjusted to $2,590 to
Docket No. 5983
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reflect the 13-month average. This leads to an adjustment of $22,410 to reflect the
recommended spending in 1998. Schultz reb. pf. 12/24/97 at 39.
51. GMP’s transmission substation requests total $194,000 in 1998. The DPS
recommends an adjustment of $130,551 for 1998 based on application of the 13-month average
methodology to a revised spending amount of $98,000 that reflects the average of spending from
1991 to 1995, excluding 1994. Schultz pf. 10/7/97 at 40.
52. The Department agrees with the Company’s 1998 transmission plant additions for
work order 97010, but proposes an adjustment of $45,128 based on application of the 13-month
average methodology. Schultz pf. 10/7/97 at 41.
53. GMP agrees to remove $100,000 for a proposed 1998 transmission plant addition
for an upgrade to project 3320 because the Company was not successful in obtaining the requisite
work permits. Fonte reb. pf. 11/24/97 at 6.
Discussion re: Plant in Service - Distribution and Transmission Projects
For 1997 distribution projects, the Department proposes an adjustment that would
increase GMP’s distribution rate base for 1997 by $272,274. This increase is a result of
corrections for growth adjustment calculations and other factors. We concur with the
Department’s final adjustment for this item.
The DPS and GMP disagree on both the base to use for the mass distribution blankets and
the inflation factor to be applied to the base. GMP uses the end of year 1997 expenditures as a
base and then applies a 4 percent inflation factor for both 1997 and 1998. The Department uses
a seven-year average spending on mass distribution blankets as a base and an inflation factor of
3 percent in 1997 and 1998 applied as an adjustment to the average cost of mass distribution
projects in 1996 dollars. GMP did not rebut the Department’s methodology for use of the
seven- year average as a base, and we conclude that a 3 percent inflation factor is reasonable.
Thus the adjustment for this category is $1,812,371.
We further conclude generally, based on our earlier decision, that the Department’s
proposed adjustments based on application of the 13-month average methodology will be
accepted. For 1998 distribution plant, those adjustments total $583,254. In addition, the
Company agreed to remove $100,000 for a voltage conversion project. The total adjustment for
1998 distribution plant is thus $2,495,625.
Docket No. 5983
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For transmission projects, GMP has included a request for $25,000 for transmission land
rights blankets in both 1997 and 1998. The DPS recommends that we allow $4,000, which is
the five-year average of expenditures under this blanket. This leads to an adjustment of $21,000
for 1997, and an adjustment of $22,410 for 1998 to reflect the application of the 13-month
average methodology discussed above associated with $4,000 of recommended spending. The
DPS recommends adjustments to the Company’s transmission substation equipment requests of
$88,000 for 1997 and $130,551 for 1998. The Company did not rebut any of the Department’s
recommendations in these areas and we adopt them here.
The Company also removed its request for $23,700 for a survey of the 3310 transmission
line, and GMP also agreed to remove $100,000 for a proposed upgrade to project 3320. The
DPS agrees that both of these revisions are appropriate.139 Other adjustments proposed by the
DPS are based on application of the 13-month average methodology discussed above. We adopt
the Department’s proposed adjustments resulting in reductions to GMP's originally requested
1997 and 1998 additions to transmission plant in service of $132,669 and $298,090, respectively.
F. Plant in Service - ProductionF. Plant in Service - Production
54. We conclude that production plant adjustments of $237,698 for 1997, and
$1,772,851 for 1998, totaling $2,010,549 will result in just and reasonable rates.
1. 19971. 1997
55. GMP's filing includes total projected production facilities additions for 1997 and
1998 totaling $3,039,000. This total includes projected 1997 plant additions for production
plant of $1,114,021. Kvedar pf. 6/16/97 at 13; exh. DPS-64, sch. SR7; exh. DPS-15.
56. For 1997, the Company provided the following requests for specific projects: (1)
relocation of the penstock at Plant # 6 in Marshfield - $82,041; (2) re-licensing improvements at
Plant #19 in Essex Junction - $20,103; (3) improvement at Plant #6 in Marshfield - $150,110; (4)
upgrade of the plant crane at Plant #22 in Waterbury - $12,788; (5) installation of a rubber dam at
Plant #15 in West Danville - $139,289; (6) installation of a 40-ton crane at Plant #18 in South
Burlington - $130,524; (7) replace station battery bank at Plant #18 in South Burlington - $6,000;
(8) refurbish the system at Plant #16 in Colchester - $8,000. Several blanket orders were also
139. DPS Brief 1/30/98 at 17.
Docket No. 5983
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included in the Company’s request. Oakes pf. 7/11/97 at 1-5.
57. Over the course of this case the Company made a number of revisions to its original
request for this category. The first revision included the following changes: (1) an increase to
the re-licensing improvements at Plant #19 in Essex Junction to $200,000, later revised to
$101,346; (2) a decrease to the improvement at Plant #6 in Marshfield to $125,000; (3) removal
of the rubber dam at Plant #15 in West Danville; (4) an increase to install a 40-ton crate at Plant
#18 in South Burlington to $157,028; (5) removal of the station battery bank at Plant #18 in
South Burlington ($6,000); (6) and removal of the request to refurbish the system at Plant #16
in Colchester ($8,000). Tr. 11/3/97 at 208-211 (Oakes); Oakes reb. pf. 1/6/98 passim.
58. In rebuttal, the Company made the following additional revisions: (1) a reduction
to the request for re-licensing improvements at Plant #19 in Essex Junction to $200,000; (2) a
further decrease to the improvement at Plant #6 in Marshfield to $100,000; (3) removal of the
relocation of the penstock at Plant # 6 in Marshfield ($82,041); and (4) adding back the request
for removal of the rubber dam at Plant #15 in West Danville for $139,289; and (5) removal of
the request to install a 40-ton crate at Plant #18 in South Burlington. In addition, the Company
revised its request for the safety blanket order for 1997, removing $38,000 and revised its request
for the steam blanket order, removing $34,900. Exh. GMP-26; Oakes reb. pf. 1/6/98,
amendment at B-E.
59. GMP and the DPS agree on an adjustment of $96,041 for removal of the request for
improvements at Plants 18, 16, and 6, an adjustment of $34,900 for revision of the steam blanket,
an adjustment of $38,000 for revision of the safety blanket, Schultz pf. 10/07/97 at 43, 45 & 46;
Oakes pf. 11/24/97 at 1-2, 4 & 6; Schultz reb. pf. 2/24/97 at 22-23; exh. DPS-64, sch. SR11.
60. The Company revised its request for the replacement of a butterfly valve at Plant #6
downward to $100,000; however, this project has been deferred until 1998. The Department
agreed to GMP’s revision resulting in an adjustment for 1997 of $150,000 for this deferral.
Oakes reb. pf. 1/6/98, amendment at B-E; Schultz reb. pf. 12/24/97 at 26.
61. The cost for the re-licensing of Plant #19 in Essex was revised to $200,000 in
rebuttal. The Company’s witness stated that the amount originally filed was an inadvertent
mistake in transposing numbers. The Department agrees with this increase. Rate base should
be increased by $81,243 for this change. Oakes reb. pf. 1/6/98 at 2; exh. DPS-64, sch. SR11.
Docket No. 5983
Page 54
2. 19982. 1998
62. GMP's filing includes projected 1998 plant additions for production plant of
$1,925,000 . Exh. DPS-64, sch. SR7.
63. For 1998, the Company provided the following requests for specific projects: (1)
refurbishing the engine at Plant #5 in Berlin - $300,000; (2) refurbishing the field poles at Plant
#22 in Waterbury - $500,000; (3) refurbishing the field poles at Plant #18 in South Burlington $400,000; (4) installation of a rubber dam at Plant #18 in South Burlington - $500,000. Oakes
pf. 7/11/97 at 1-5.
64. In its original filing, the Company also requested the following amounts for blanket
orders: (1) steam blanket - $45,000; (2) hydro blanket - $80,000; (3) safety blanket - $45,000;
and (4) other blanket - $55,000. Exh. DPS-64, sch. SR11.
65. The Company revised its original request for installation of a rubber dam at Plant
#18 in South Burlington to $250,000. Tr. 11/3/97 at 210 (Oakes).
66. In rebuttal, the Company made the following additional revisions: (1) an increase
to the revision of the request to install a rubber dam at Plant #18 in South Burlington to
$450,000; (2) removal of the request to refurbish the field poles at Plant #22 in Waterbury
($500,000); and (3) removal of the request to refurbish field poles at Plant #16 in Colchester
($400,000). 140 In addition, the Company revised its request for blanket orders for 1998,
removing $45,000 for steam blanket 98001, and $25,700 for safety blanket 98004. The
Company also increased its request for hydro blanket 98002 by $30,000, and increased its request
for other blanket 98003 by $10,000. Exh. GMP-26; Oakes reb. pf. 1/6/98, amendment at B-E.
67. The Company’s revised request for 1998 blanket orders includes the following
additional changes: (1) hydro blanket - $67,000 (a reduction of $13,000); (2) safety blanket $19,300 (a reduction of $25,700); and (3) other blanket - $52,000 (a reduction of $3,000).
These adjustments total $41,700. Oakes reb. pf. 1/6/98, amendment at B-E.
68. GMP and the DPS agreed to an adjustment of $25,000 for revision of the safety
blanket; however, the DPS makes an additional adjustment based on application of the 13-month
average methodology discussed above, for a total adjustment of $32,501 for this item. GMP and
140. This appears to be an error since the original filing referred to refurbishing field poles at only two
locations, Plant #22 and Plant #16.
Docket No. 5983
Page 55
the DPS agree on an adjustment of $900,000 for removal of the request for improvements at
Plants 22 and 16, and an adjustment of $45,000 for removal of the steam blanket. Schultz pf.
10/7/97 at 43, 45 & 46; Oakes pf. 11/24/97 at 1-2, 4 & 6; Schultz reb. pf. 12/24/97 at 22-23; exh.
DPS-64, sch. SR11.
69. The Company revised its request for the replacement of a butterfly valve at Plant #6
to $100,000 and deferred the project until 1998. The Department agrees to the Company’s
proposed spending level of $100,000 for 1998, but makes an adjustment based on application of
the 13-month average methodology discussed above of $64,744. Oakes reb. pf. 1/6/98,
amendment at B-E; exh. DPS-64, sch. SR11.
70. The Company revised its estimate for installation of the rubber dam at Plant #18 in
South Burlington from its original request of $500,000 to $450,000. The Department contests
the full amount of this project because it is not known and measurable. Oakes reb. pf. 1/6/98,
amendment at C; Schultz pf. 10/7/97 at 46.
71. The Company acknowledged that permits may be required for the rubber dam
project at Plant #18 and permit applications are not yet underway. This could delay the project.
Tr. 11/4/97 at 31 (Oakes).
72. The Company requests $300,000 to refurbish the compressor engine at Plant #5 in
Berlin. A 1995 report done for GMP concluded that there was damage to the engine. The
Department contests the full amount of this project because it is not known and measurable.
Oakes reb. pf. 1/6/98 at 5; tr. 1/7/97 at 29-31; Schultz pf. 10/7/97 at 45.
73. GMP was advised in August of 1995 that the engine at Plant #5 was in need of
repair. GMP did not make those repairs in 1995, 1996, or 1997. This plant operates close to
one hundred hours per year. Tr. 1/7/98 at 29-30 (Oakes).
74. The Company states that work on the engine repair at Berlin plant #5 will begin in
March of 1998; however, as of January 7, 1998, no contract had yet been signed for that repair.
Tr. 1/7/98 at 30-31 (Oakes).
Docket No. 5983
Page 56
Discussion re: Plant in Service - Production
GMP's filing includes projected production facilities additions for 1997 and 1998 totaling
$3,039,000. At the hearing, the Company’s witness sponsoring this testimony significantly
revised the original amounts filed with the Board. Some of the revisions were increases to
particular projects; others were decreases.
GMP and the DPS agree on adjustments for 1997 production items totaling $237,698.141
They agree on adjustments for 1998 totaling $945,000.142
The Department and GMP do not agree on all items, however. While they agree on a
reduction in spending levels for the 1998 safety blanket of $25,000, the DPS proposes an
adjustment of $32,051 based upon application of the 13-month methodology for this blanket.
The Company’s request for 1998 hydro and other blanket orders is $80,000 and $55,000
respectively. The DPS recommends that these blankets be based on GMP’s projected 1997
additions of $70,000 and $45,000 respectively. The DPS proposes adjustments to these amounts
of $34,679 and $25,865 based on application of the 13-month methodology. We accept the
Department’s adjustments.
GMP proposes, and the Department agrees, that the butterfly valve at Plant #6 will be
deferred until 1998. This results in a reduction of $150,000 for this item in 1997 (see finding
60), and inclusion of $100,000 in the 1998 account. However, the Department’s proposed
adjustment for inclusion of this item in 1998, based on application of the 13-month average
methodology, is an increase of $64,744. We accept the parties agreement in principle, but agree
that the Department’s recommended adjustment is consistent with use of the 13-month
methodology.
This leaves two substantial areas of disagreement between GMP and the DPS: (1) the
installation of a rubber dam at Plant #18; and (2) the repair to damage of the engine at Plant #5.
In its original filing, the Company requested $500,000 for the project at Plant #18, later providing
revised estimates of the cost of this project. Upon objection from the Department, we ruled that
141. Agreed upon adjustments for 1997 include: steam blanket ($34,900), safety blanket ($38,000), Plant #6
penstock relocation ($82,041), Plant #6 butterfly valve ($150,000), Plant #16 controls ($8,000), Plant #8 battery
bank ($6,000), and an increase for re-licensing of the Essex plant for $81,243.
142. Agreed upon adjustments for 1998 include: Plant # 18 field poles ($400,000), Plant #22 field poles
($500,000), and steam blanket ($45,000).
Docket No. 5983
Page 57
updating in this instance would not be allowed (See page 41). The Company states that work on
this project will begin in March of 1998, but acknowledges that permits may be required and
have not yet been sought.143 Based on the record before us, we conclude that this project is not
known and measurable at this time. We will make an adjustment to rate base of $500,000 for
removal of this project from the Company’s rate request.
For the second item, the Company requests $300,000 to refurbish the compressor engine
at Plant #5 in Berlin. GMP has known since 1995 that this engine was in need of repair, yet it
has not yet undertaken those repairs. As of January 1998, a contract for the repair of the engine
at Berlin plant # 5 had not yet been signed. We cannot accept this proposed addition as a known
and measurable change. We will make an adjustment to rate base of $300,000 for removal of
this project from the Company’s rate request. The Company can always request cost recovery
for these, or similar projects, in the future when their certainty is more apparent.
We conclude that production plant adjustments of $2,010,549 will result in just and
reasonable rates.
A. General FacilitiesA. General Facilities
75. GMP’s original filing included projected general plant additions of $1,317,252 for
1997 and $1,191,200 for 1998. The DPS recommended reductions to $697,917 and $63,643,
respectively. Exh. DPS-20 (Schedule R7).
76. Both the Company and the DPS have somewhat modified their recommendations;
after the rebuttal hearings the amounts were as follows:
GMP
DPS
DPS 13 month average
1997
827,714
673,817
1998
734,500
129,400
83,778
Exh. DPS-64 (Schedule SR8).
77. The only disputed item for 1997 is item #95167 for Program Development,
$156,797. The Company did not present testimony or evidence to support this item and it
should be disallowed. Schultz reb. pf. 12/24/97 at 13-14.
78. The disputed items for 1998 are:
143. In its brief, GMP states that the Company no longer believes that permits are required; however, we cannot
consider this as evidence in the record. See, GMP Brief at 13.
Docket No. 5983
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Office furniture & equipment
Structures and improvements
Leased structures
Land purchase
Call center
IVR system
Office reconfiguration
Copier
Total
6,500
27,100
29,500
70,000
250,000
100,000
50,000
$80,000
$613,100
Exh. DPS-64 (Schedule SR8).
Discussion
We agree with the DPS that the land purchase is too speculative to be allowed in the 1998
rate base. However, it is very likely that each of these remaining additions will be made in
1998.
The 13-month average to be allowed for the 1998 blanket and specific project additions is
$435,401.
A. Computer SystemsA. Computer Systems
1. 19971. 1997
79. The capital spending for computer information services (“CIS”) for 1997 was:
PC & Network Blanket
Load research
Production Planning Software
Internal Management Software
Network Upgrades
Decision Support System
Customer Service System
T&D System Enhancements
CAD Network Expansion
High Speed Laser Printer
Purchase Order System
Planning and Forecast Software
1997 Total
Exh. GMP-4.
$ 221,551
70,714
28,163
637,467
557,516
83,750
2,813,366
185,650
78,000
210,000
40,000
160,000
$5,086,177
Docket No. 5983
Page 59
a. Customer Service Systema. Customer Service System
80. The old customer service system is 13 years old and has become less reliable.
Whitmore reb. pf. at 2.
81. The new system has been installed and is being tested; it generated part of the
Company’s bills in January 1998. Tr. 1/7/98 at 105-106 (Whitmore).
Discussion
The DPS recommended that one half the 1997 cost of the Customer Service System be
allowed in rates, but that the rest be excluded because (1) its implementation is not absolutely
definite, (2) it may be useful to the company in a restructured, competitive environment, and (3)
because the Company did not produce a cost-benefit analysis for the project. It is not clear when
the new system will be fully functional, but it appears that it is necessary for continued efficient
operation, and that it will likely be operational in 1998. We conclude that the new Customer
Service System ought to be included in rate base in the following way: one half of the 1997
expenditures, or $1,406,683, will be deemed to have been spent in 1997, while the 13-month
average of the other half of the 1997 costs plus the 1998 costs, or $1,461,057, will be deemed to
be spent in 1998.
b. Purchase Order Systemb. Purchase Order System
82. The Company plans to spend $40,000 on a purchase order system. However, this
project has been deferred several times, and cannot be said to be either known and measurable or
used and useful. The purchase order system shall be removed from the rate base calculation.
Whitmore pf. at 9; tr. 11/4/97 at 61-62 (Whitmore); Schultz pf. 10/7/97 at 48.
Docket No. 5983
Page 60
c. Planning and Forecast Softwarec. Planning and Forecast Software
83. The Company seeks to add $160,000 to rate base for planning and forecast software.
There are no specific programs that have been identified for purchase, and it is unclear whether
any will be purchased. Company representatives do not agree on the purpose of the software, if
it is purchased. Mr. Saintcross believes it will be useful in the present environment, while Mr.
Whitmore and the Company’s brief refer to its use for mitigating stranded costs, an issue only
after electric industry restructuring. Tr. 11/6/97 at 337-338; Whitmore pf. at 9; GMP brief of
1/30/98 at 31.
Discussion
We conclude that the planning and forecast software is not known and measurable, and
should not be included in rate year rate base.
d. Other 1997 Additionsd. Other 1997 Additions
84. The DPS did not dispute the remaining additions proposed by the Company, totaling
$2,072,811. Exh. DPS-64, Schedule SR-11.
2. 19982. 1998
85. The budgeted amount for 1998 is:
PC & Network Blanket
Customer Service System
Frame Relay Network Expansion
VAX and server upgrade
Engineering data base
Financial System expansion
CSS Enhancements
Work Management System
Mobile field computing systems
1998 Total
Exh. GMP-4.
$ 315,000
850,000
225,000
345,000
127,000
87,000
95,000
175,000
425,000
$2,644,000
Docket No. 5983
Page 61
a. 1998 PC and Network Blanketsa. 1998 PC and Network Blankets
86. The Company requested inclusion of $315,000 for smaller purchases such as
personal computers, software upgrades, printers, and so on, each costing less than $25,000. This
number was later revised down to $265,000. Exh. GMP-4; exh. GMP-28.
Discussion
The Company’s spending level for this blanket was $200,000 in 1997, and this was likely
to be the actual spending level in 1998. Since these items would be purchased throughout the
year, a 13-month average of $129,487 was proposed. We find the Department’s argument
persuasive, and will allow the 13-month average figure.
b. Other 1998 Additionsb. Other 1998 Additions
87. The Company proposed $2,644,000 in CIS additions to rate base for 1998 costs. Of
that total, $850,000 is for modifications to the Customer Service System, treated in section 0
above, and $315,000 was for Small Equipment and Projects, treated in section 0, above. The
DPS proposed to exclude all of the remaining $1,479,000. Exh. DPS-64, Schedule 12.
Discussion
We find it likely that the Company will make the proposed additions. However, we will
allow the 13-month average of the additions, or $957,558.
B. Searsburg ProjectB. Searsburg Project
1. Rate Base Adjustments1. Rate Base Adjustments
88. The Searsburg Wind Power Project is a 6.05 MW wind research, development, and
demonstration ("R & D") project that GMP put into service in July, 1997, at an estimated cost
(less accumulated depreciation) of $11.714 million, including $3.5 million provided by the
Electric Power Research Institute (“EPRI”) and the Department of Energy (“DOE”). Rosenberg
pf. 10/7/97 at 25; Kvedar pf. 7/10/97 at 22-23; Saintcross pf. 7/10/97 at 2.
89. GMP’s filing included $8,376,854 in plant in service for the wind facility based on
the 13-month average balance for the rate year ended February 1999. The amount is based on
GMP’s beginning to depreciate the facility on January 1, 1998, for book purposes. GMP also
Docket No. 5983
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included $162,812 for accumulated depreciation as an offset to rate base based on the rate year
13-month average balance. Schultz pf. 10/7/97 at 53.
90. In Docket 5857, GMP included $5.512 million in plant in service, $23,000 in
accumulated depreciation and $99,000 in depreciation expense for the Searsburg wind project.
The rates from that Docket went into effect on June 1, 1996; thus, GMP has already begun to
recover the project costs from ratepayers. Id.
91. Docket 5857 was settled. In that case, GMP’s entire requested plant-in-service was
included in the resulting MOU upon which the settlement was based. This amount included the
amounts for the wind facility; thus, it was included in the settled upon rates in Docket 5857.
Schultz reb. pf. 12/24/97 at 9-10.
92. As of March 1, 1998, the anticipated date that rates resulting from this case will go
into effect, GMP will have effectively recovered $1,080,408 from ratepayers for the Searsburg
wind facility. Of this amount, $907,154 was for return on rate base and $173,250 was for
accumulated depreciation. Schultz pf. 10/7/97 at 53-54; exh. DPS-64, Schedule 15.
93. The Company’s current filing does not account for the fact that it has been
recovering a portion of the wind project costs, including depreciation, from ratepayers since June
1, 1996. Additionally, GMP continued to calculate an allowance for funds used during
construction (AFUDC) after the rates from Docket 5857 went into effect on the balance included
in plant in service for the wind project. Thus the Company included in this rate filing the
associated increase in plant resulting from the AFUDC calculated on the amounts that were
included in rates resulting from Docket 5857 in the addition to plant in service that GMP is
requesting in the current case for the wind facility. Schultz pf. 10/7/97 at 55.
94. GMP Witness Kvedar agreed that the first $5.5 million of investment in the
Searsburg wind facility, i.e., the amount included in rate base in the prior case, should have been
excluded when the Company calculated AFUDC on the project. The Company agreed to reduce
rate base by $345,700 for the AFUDC that should not have accrued, and to reflect the impact of
the reduction on depreciation expense and accumulated deferred income taxes. Kvedar reb. pf.
11/24/97 at 16.
95. Since no adjustment has been made by GMP to the $5,512,000 for depreciation,
accumulated deprecation should be increased by $173,250 to reflect the depreciation expense
which the Company has already effectively recovered from ratepayers. Depreciation expense
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should also be reduced by $48,470 for the wind project. Tr. 1/8/98 at 120 (Schultz); Schultz pf.
10/7/97 at 55; exh. DPS-64, Schedule 15.
96. The wind project was granted a Certificate of Public Good in Docket 5823. In that
Docket, GMP estimated that the project would produce power at a levelized, long-term cost of
5.8 cents/kilowatt-hour for its 25-year life. This projected cost included a 5 percent credit for
avoided air emissions. The Company calculated that this cost was similar to its projected
long-term levelized avoided cost for a similar period.
Docket 5823, Order of 5/16/96 at 12.
97. In its consideration of the merits of pursuing this project, GMP assigned little value
to its capacity value. Tr. 11/6/97 at 393-394 (Saintcross).
98. The long-term avoided costs used by the Department in that docket to measure the
benefits of the project were approximately 9 cents. This estimate was based on the use of the
societal test with the Massachusetts externality adders, which results in a higher avoided cost
than using the 5 percent avoided air emission credit as used by GMP. Docket 5823, Order of
5/16/96 at 13; tr. 11/6/97 at 411 (Saintcross).
99. In this Docket, GMP originally stated that the cost of the Searsburg wind project was
$2.047 million more than the Company had projected during the Section 248 review in Docket
5823. As a result, GMP estimated that the output from this wind plant would cost 7.8
cents/kWh. Saintcross reb. pf. 11/24/98 at 3-4.
100. GMP later revised its estimated total cost over-run downward to $1.149 million.
Based on this reduction, GMP estimates that the current levelized cost per kWh of production
declines to 7.18 cents/kWh. This reduction is the result of eliminating $480,000 of pre-project
selection wind development costs incurred prior to 8/1/93 from the project’s cost estimate, and
reducing its cost by $418,000 to account for EPRI/DOE funds that have yet to be received
because certain milestones have not been met. Saintcross corrected reb. pf. 1/22/98 at 1; Exh.
GMP-74 .
101. Of the remaining $1.149 million of cost over-runs, $238,400 constitute legitimate,
additional unforeseen expenses, outlined as follows: $11, 300 was spent to change the design
and reduce the height of the 69 kV capacitor bank in the substation for aesthetic reasons; $46,400
was spent to bury the collection circuit near the turbines to increase reliability and safety and
improve aesthetics; $50,300 was spent to hire an engineer to supervise the remediation of the
turbine problems that developed during the winter of 1996-1997; $11,800 was spent for sales tax;
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$108,000 was spent for additional project management to supervise construction and oversee
turbine problem remediation to protect GMP’s investment; and $10,100 was required for an
additional interconnection charge by NEPCO. Tr. 11/6/97 at 398-405; tr. 1/13/98 at 175-179
(Saintcross); exh. GMP-74.
102. GMP spent $52,250 for a change order for turbine blade coatings for the purpose of
shedding ice to improve project performance. This cost was not included in the estimate of the
project’s cost during the Section 248 review because it had not been exactly determined at that
time. Even though the Company realized during that proceeding that there would be some
additional cost associated with coating the turbine blades, GMP did not include a placeholder
estimate of this cost in Docket 5823, nor did it adequately explain why it failed to do so. Tr.
11/6/97 at 403 (Saintcross); tr. 1/13/98 at 178-179 (Saintcross).
103. After accounting for all of these cost overruns except for the additional turbine
blade charges, a cost overrun of $910,600 remains. GMP attempted to explain these costs as
follows: $365,000 was spent for supplies and engineering services that were associated with the
transmission line construction, although GMP admits that it can not provide any details about
these expenditures; $274,000 was added to account for employee time that was allocated to the
project, although again the Company cannot give any specifics about these expenditures; and,
finally, $75,000 was spent to meet an obligation to pay for the wind rights for the Searsburg site,
an amount that GMP admits was not included in the Section 248 estimates because of an
oversight. Tr. 11/6/97 at 402-404 (Saintcross); tr. 1/13/98 at 175-176, 179-180 (Saintcross).
Discussion re: Searsburg Rate Base Adjustments
The DPS argues that the rate base for the Searsburg wind project should be reduced by
$1,080,408, the amount that it calculates the Company has recovered from ratepayers since
$5,489,000 was included in plant in service for the project in Docket 5857 beginning on June 1,
1996. It is the DPS’s position that if this amount is not deducted, GMP’s ratepayers will
effectively be required to pay a return to GMP and its stockholders twice on a portion of the
project costs.144
This is not correct. GMP properly included $5,489,000 in rate base in Docket 5857;
therefore, it is legitimate for GMP to earn a return on that during the period in question. At the
144.
Schultz pf. 10/7/97 at 53-55.
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same time, since the facilities were earning a return and GMP was recovering a depreciation
expense, it is also appropriate to reduce rate base by the amount of accumulated depreciation that
ratepayers have paid the Company during the interim. That amount is $173,250. In addition,
GMP has determined that it should not have accrued AFUDC on the entire balance of the
Searsburg wind project while it was under construction.145 Consequently, the Company has
agreed to reduce rate base by $345,700 to account for this over-collection of AFUDC.
As outlined in the findings above, GMP has reduced its original estimate of the cost
overruns for the wind project in this docket from $2.047 million to $1.15 million. Part of this
reduction was for $480,000 of R&D costs that the Company had accumulated for wind
development prior to its being selected for EPRI/DOE’s TVP program in August 1, 1993. These
costs were not included in GMP’s calculation of the 5.8 cents/kWh costs for this project during
the Section 248 review in Docket 5823.
GMP continues to seek recovery of the R&D costs. Although the Company wants us to
disregard these prior wind development costs for the purpose of determining the present cost of
the output from this wind plant, it also seems to want to include them in rate base as legitimate
capital costs of the plant.146
While we believe that it is appropriate for the Company to
recover these costs because they were prudent expenditures made to determine the feasibility of
wind power in Vermont, we also believe that, if GMP intended to assign the R&D costs to the
rate base of this project, these costs should have been added to the estimates of the cost of this
wind project during the Section 248 review. Such an assignment of costs would have allowed
us to accurately assess the wind project’s real costs at that time. As discussed below, we are
very concerned that the Company omitted reporting costs for this project, resulting in artificially
low projected cost estimates during the Section 248 proceeding.
GMP has now also reduced the wind project’s cost by $418,000 to reflect additional grant
monies that it has yet to receive from EPRI and DOE. This change is a legitimate capital cost
reduction that will reduce the projected per kWh cost of the plant’s output; however, because of
this change, we must also reduce the rate base for this project as filed by the Company in this
Docket by $418,000. With both of the above adjustments, the Company now projects that the
cost of power produced by the Searsburg wind project would be 7.18 cents/kWh, rather than the
145.
146.
Id. at 56.
Saintcross corrected reb. pf. at 1; exhs. GMP-74 and 75.
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5.8 cents/kWh that it projected in Docket 5823.
The remaining $1.149 million net increase in project costs that the Company projects in
this Docket is partly the result of some prudent additional expenses that occurred during
construction because of some necessary changes to improve the project’s operation, safety and
efficiency; as well as some unforeseen expenses that resulted from problems that developed with
the turbine gearboxes during final construction and testing. Of GMP’s total estimate of
$290,700 for these expenses, we find that only $238,450 should be included in the project’s rate
base. We will disallow $52,250 for the wind turbine blade coatings because the Company knew
that there would be some additional expense for turbine blade coatings at the time of the Section
248 proceeding, yet it failed to include even a placeholder amount for this expense. Again, as
mentioned in more detail below, we are very concerned about the Company’s failure to include
all of the known and estimated likely costs for this wind project in its Section 248 petition,
particularly because of the marginal economics of the plant at that time.
GMP also suggests that the amount of cost overruns that it has projected should be further
reduced by $345,700 to account for the improper AFUDC charge as explained by Company
witness Kvedar.147 While it is appropriate to reduce the capital cost of the project by this
amount, and therefore its cost per kWh, subtracting this amount both from the AFUDC
calculation and the project’s overall overrun calculation would be to double-count the correction.
Therefore, instead of the approximately $510,000 of net overruns estimated by the Company,
the actual figure is $345,700 higher.
After the above adjustments, $858,300 of cost overruns remain. We find that we must
disallow this amount because of the Company’s inability to justify or provide detailed
descriptions of these expenditures. “Explanations” of these costs by GMP that can not specify
what was spent, why it was spent, and when the extra expenses were incurred are not sufficient to
allow us to include this amount in the Company’s rate base.148 For example, GMP states that it
incurred an overrun of $365,000 for supplies and engineering services for the project’s
transmission line to connect the plant to the NEPCO transmission facility. The Company also
included $274,000 of GMP employee costs that were allocated to this project as a capital
expense. There are no detailed explanations of these additional expenses and, in fact, GMP’s
147. Kvedar reb. pf. 11/24/96 at 16.
148. Tr.11/6/97 at 365 (Saintcross); tr. 1/13/98 at 175 (Saintcross).
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witness Saintcross states under cross-examination that:
there are some costs that are overages that I probably can’t really defend the
dollars as well as I would like to. That’s one of them (the additional employee
expense), and the engineering changes, because I can’t give you specifics of the
work or the timing of that.
[B]ut some of those are overages like — 365 and 20 something gets you to about
500 plus thousand of overages that its harder to explain where those charges come
from and when they were incurred.
Tr. 1/13/98 at 180-182 (Saintcross).149
Likewise, the Company failed to include the royalty payment of $75,000 in the costs of
the project for the site’s wind rights in Docket 5823, but it has included them in this case in rate
base as a capital cost of the project. An explanation that this cost was inadvertently omitted
from the Docket 5823 costs is not sufficient to recover them now, given the high reliance that we
placed on GMP’s estimates in that Docket when determining whether the project would promote
the general good.
Regarding all of these costs that have now been assigned to the project by GMP, our
original approval of the project in Docket 5823 was based on the representations made by GMP
that the costs of the power produced by the project would be very similar to the Company’s
long-term avoided costs of about 5.8 cents/kWh. At that time, we indicated that the project was
marginal economically, but we decided to approve it because of its other research and
environmental benefits. In that decision we said:
we conclude that the economic analysis of this project, by itself, makes this a
marginal project. However, when balanced with the many positive aspects of this
project, in particular its environmental benefits and research value, we conclude
that it serves the interests of the State of Vermont, its citizens, and GMP’s
ratepayers to allow this project to be constructed.
Docket 5823, Order of 5/16/96 at 44. Under these circumstances, we cannot accept in rate base
the large and unexplained cost overruns sought to be recovered here.
In summary, with the $1,328,500 of disallowances and capital reductions outlined above,
the cost of power from this project will be much closer to GMP’s long term levelized avoided
149. The $500,000 mentioned by witness Saintcross here includes a reduction of cost overruns by $345,700 for
Docket No. 5983
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cost as projected in Docket 5823.
2. Used and Useful Analysis2. Used and Useful Analysis
104. The Searsburg project is producing power and air quality benefits today. It has
been producing at 88 percent availability, has produced over 3,000 mWh from July 1, 1997
through October 31, 1997, and has avoided over 2,300 tons of carbon dioxide and over 10.5 tons
of nitrous oxide associated with NEPOOL marginal resources. Saintcross reb. pf. 11/24/97 at
6.
105. The wind plant will produce the greatest output of energy during the winter months
when GMP’s power costs are higher than average. The value of the output of energy would be
somewhat understated if given as an average annual power price. Id. at 3.
106. Even though some above-market costs may be paid for power from Searsburg,
customers will derive benefit from the application of the cold weather research to larger scale
wind plants in the northern plains. If constructed, these future plants will reduce emissions of
criteria pollutants that would otherwise come from fossil fuel power plants in the upper Midwest.
As a result, some health and related benefits could accrue to GMP’s customers in the long term.
Saintcross reb. pf. 11/24/97 at 5-6; tr. 11/6/97 at 367-68 (Saintcross).
Discussion re: Used and Useful Analysis
Intervenor IBM maintains that the project is not used and useful; GMP’s capital costs for
the Searsburg wind project should not be included in the Company’s rate base; and the above
market cost of power from the project should be excluded from expenses, resulting in a reduction
of $1,310,000 to GMP’s revenue requirement. IBM suggests that this would be an appropriate
result because the cost of production from the plant will be substantially higher than current
market prices for power, thereby making the plant uneconomic. Rather than assign the costs of
the project to ratepayers, IBM argues that the project should be transferred to a GMP unregulated
subsidiary, which would sell the output on the open market. In the alternative that the Board
does not accept this initial recommendation, IBM asserts that GMP should not be allowed to
recover costs for the project that exceed 5.8 cents/kWh, the basis for the Board’s approval in
inappropriate AFUDC charge, a reduction that we have determined above was improper.
Docket No. 5983
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Docket 5823.150
GMP responds that the project is used and useful because it is providing power to its
customers; the cost of the power produced by the facility is not as expensive as IBM asserts; the
project has many research and environmental benefits for its ratepayers; the value of the plant’s
production is greater than IBM maintains because much of it will be produced during the winter
months when GMP’s power costs are higher than average;151 and it is inappropriate to
compare the capacity rating of wind projects with the capacity of more conventional generation
plants. In fact, GMP never sought to justify the wind plant for its capacity value.
IBM responds to GMP’s rebuttal by stating that the Company has not presented sufficient
evidence to support its claims in these areas, and GMP’s customers are not receiving sufficient
benefits from the wind project to justify its excessive costs.152
We cannot accept IBM’s basic position that the plant is not used and useful. As we
found above, the wind project is providing power to GMP’s customers at a rate that, with the
disallowances that we have determined in this docket, will be much closer to the 5.8 cents/kWh
that was originally projected in Docket 5823. IBM’s analysis fails to consider the life-cycle
costs and benefits of the project, and does not value the project’s non-price benefits at all. In
evaluating the “usefulness” of this project, it is important to note that its CPG was justified not
merely on the basis of the facility’s power production economics, but for its critical non-price
benefits as well. As noted in our decision in Docket 5823, part of the reason for our approval
was to allow the Company to gain the real-world research experience developing and operating a
generation facility employing state-of-the-art renewable energy technology that has the long-term
potential to bring significant environmental benefits to GMP’s ratepayers and to the public.
We do not conclude that those non-price benefits would justify the degree of initial
under-reporting and later cost overruns that GMP acknowledges in this Docket. Neither do we
accept IBM’s argument that the project’s benefits are so narrow that the facility should be taken
out of the cost of service altogether. With the exclusions and adjustments ordered above, we
find that the project is presently used and useful, and appropriate for inclusion in the utility’s cost
of service.
150.
151.
IBM Brief at 37-43.
GMP PFD of 1/30/98, findings 178-183.
Docket No. 5983
152.
IBM Brief at 40.
Page 70
Docket No. 5983
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A. Pine StreetA. Pine Street
107. The Pine Street Barge Canal Superfund Site encompasses approximately 50 acres
of land in proximity to Lake Champlain. Between 1895 and 1967, a manufactured gas plant
(MGP) was owned and operated on the site by GMP and other entities. This plant's process
wastes, such as cinders, ash, iron oxide, and coal tars, were deposited on the site. These wastes
have resulted in polynuclear aromatic hydrocarbons, volatile organic compounds, semi-volatile
organic compounds, and inorganic compounds being released into the soil and groundwater at
the site. In 1983 the site was placed on the National Priorities List by the Environmental
Protection Agency (EPA). Lelash pf. 10/7/97 at 10.
108. The territory served with gas manufactured at the Pine Street plant lay mostly in
Burlington, which is outside the service territory of GMP. Tr. 1/8/98 at 138-139.
109. The Company (or its predecessors) owned the Pine Street MGP site from 1928
through 1964. This site was subsequently sold to Vermont Gas Systems. Based on Company
information, several other entities were involved in gas manufacturing operations on the site.
Accordingly, it appears that the site remediation costs will be allocated to the various other
owners or operators of the site as well as to the Company. Lelash pf. 10/7/97 at 10.
110. As of July 31, 1997, GMP has incurred approximately $14 million in costs relative
to Pine Street remediation. These expenditures were principally related to litigation,
remediation studies, and pursuit of insurance reimbursement. Tr. 11/5/97 at 33 (Kvedar); Lelash
pf. 10/7/97 at 11.
111. Expenditures on the Pine Street remediation have been added to rate base and
subjected to a five-year amortization. These expenditures therefore have impacts on rate base,
amortization expense, and deferred taxes. Kvedar pf. at 16-17, 42—44.
112. Through March 31, 1997, the end of the test year, GMP had amortized and
recovered from customers $3.9 million, and will have collected $5.4 million by March 1, 1998,
the start of the rate year. Carlson pf. at 12.
113. GMP requests $2,263,470 annual amortization in this rate case, and the inclusion in
rate base of $5.2 million of unamortized expenses. Carlson pf. at 12.
114. While specific amounts of insurance reimbursement are considered confidential by
the Company, it has acknowledged that insurance payments have been received and are being
reflected as reductions to the rate base. Lelash pf. (10/7/97) at 11.
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115. The final cost of the remediation is not known at this time, nor GMP’s share of the
total cost. Tr. 11/5/97 at 35 (Kvedar).
116. It appears that the Company and the DPS agree that Accumulated Deferred Income
Taxes with respect to Pine Street should be increased by $267,000. Kvedar pf. reb. I at 17;
Schultz pf. reb. 12/24/97 at 32-33.
117. This material has been redacted pursuant to a confidentiality Oder. This material
has been redacted pursuant to a confidentiality Order. This material has been redacted
pursuantTr. 11/5/97 at 32-33 (Kvedar).
118. The amount GMP has spent so This material has been redacted pursuant to a
confidentiality order.This materialCarlson pf. at 14; tr. 11/5/97 at 33 (Kvedar).
Discussion re: Pine Street
In Docket 5857, Order issued 5/23/96, the Board allowed GMP to book costs associated
with the Pine Street litigation and remediation and to recover them through rates by a five-year
amortization. This policy was reasonable considering the large potential costs faced by GMP.
In no proceeding has a party litigated the fundamental issue of who should ultimately pay for the
costs arising from the Pine Street site.
The final net cost of the Pine Street remediation still cannot be determined at this time,
because the total cost, the apportionment of that cost among the various former owners, and the
insurance reimbursements are all unknown. However, at the present time it appears that the
Company has collected sufficient funds from the ratepayers and the insurance carriers that there
is no longer a need to amortize the costs in rates, especially considering the reduced estimates of
the ultimate costs. The amortization of Pine Street costs shall be suspended until the next rate
case. In addition, the Board directs GMP to file a statement, under seal if necessary, showing
Pine Street expenditures, ratepayer collections, and insurance reimbursements. The statement
should show the amounts to date as well as the Company’s expectation of future costs and
collections. We are particularly interested in seeing exactly how the ratepayer collections and
insurance reimbursements are booked.
We cannot finally dispose of the question of the sharing of the costs of the remediation
between GMP shareholders and customers. Because of the relative sizes of the total expense
and the total recoveries, it is not necessary to now reach the question; in addition, we would
Docket No. 5983
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prefer to judge the relative equities when the final net costs, and their bases, are known.
However, we agree with the arguments put forward by the DPS and IBM to support the sharing
of the final net cost. Four arguments seem to us most persuasive:
The extraordinary nature of the costs.
The fact that, because of the remoteness of time and the incongruity of the service
territories, it is possible that no present customer of GMP was ever a recipient of gas from
the gas plant.
That the remediation costs are imposed upon the Company as a past owner, not as a
provider of electric (or gas) service.
The argument of the Indiana Utility Regulation Commission, denying recovery of
Indiana Gas Company’s MGP remediation, that “[w]e have found Petitioner's ratepayers
not to be insurers. Evidently, Petitioner would have its customers pay not only the
premium for its environmental insurance policy, and the business risk component of its
rate of return, but the uninsured balance as well. This amounts to no risk for Petitioner's
shareholders. Petitioner has not in the past waived environmental business risk as a
component of its rate of return and there seems to be a substantial lack, therefore, of the
regulatory quid-pro-quo or balancing of interests which we are obligated to maintain in
the Petitioner's proposal.”153
B. CVPS Transmission InterconnectionB. CVPS Transmission Interconnection
119. On August 28, 1996, GMP received an invoice from CVPS for approximately $1.9
million for transmission service under a 15-year Transmission and Interconnection Service
Agreement (“TISA”). The bill is based on transmission service taken by GMP at several
interconnection points. GMP disputes the amount of the charges it owes CVPS. Kvedar pf.
6/16/97 at 20.
120. GMP has capitalized $870,000 of charges by CVPS under the TISA. GMP has
amortized these charges over a period of 141 months beginning in January 1997, and booked
them to a deferral account. Kvedar pf. 6/16/97 at 19-20; Schultz pf. 10/7/97 at 60.
121. The Company requests $747,000 in rate base to reflect the amount owed by the
Company to CVPS. This represents the 13-month average rate year unamortized balance.
Schultz pf. 10/7/97 at 60; tr. 11/4/97 at 317 (Kvedar).
122. CVPS and GMP have entered into arbitration to solve this dispute. On October 6,
153. Re Indiana Gas Company, Inc., Cause No. 39353, Phase II, Indiana Utility Regulatory Commission, May
3, 1995, 162 PUR 4th 283.
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1997, the arbitrator issued an initial proposal for decision. The arbitrator’s decision was to
become final on January 30, 1998, provided the arbitrator did not receive any additional filings
prior to that date. The arbitrator’s proposal for decision, if adopted, would result in an increase
to the amount deferred, from $870,000 to $1,020,000. Exh. GMP-73; Kvedar pf. 6/16/97 at 20;
Kvedar reb. pf. 11/24/97 at 18-20; Schultz pf. 10/7/97 at 61.
123. Test year expense includes $92,552 for amortization of the CVPS transmission
interconnection deferral.
This is based on a monthly amortization expense of $6,170, carried
over 15 months. Schultz pf. 10/7/97 at 64.
124. GMP has agreed that the Company had inadvertently included an additional three
months of amortization expense (out of a total of fifteen months) in its filing and that GMP's
adjustment should be reduced by $18,510 to correct for the inclusion of the additional three
months of amortization expense. Tr. 11/4/97 at 260 (Kvedar).
Discussion re: CVPS Transmission Interconnection
GMP was billed $1.9 million from CVPS under a transmission interconnection
agreement. GMP disputed the amount of those costs and has engaged in arbitration to resolve
this dispute with CVPS. In the interim, GMP asked the Board to issue an accounting order for
the treatment of deferral of those costs, which the Board issued on December 31, 1996.154 That
Order stated, in pertinent part, that it was limited to the accounting treatment for the subject costs
and revenues and does not bar any party from contesting, or the Board from determining, or
disallowing, the reasonableness or prudence of such costs, or the rate-making treatment for such
revenues, in whole or in part, in any rate proceeding.
The Department states that the amount that GMP will owe CVPS is not known at this
time because the arbitration or settlement is not final, and that the deferral amount should be
recalculated based on the undisputed amount.155 The Department recommends an adjustment
to rate base of $586,676 based on recalculation of the deferral amount for the undisputed portion
of costs only.
The arbitrator issued a proposal for decision on October 6, 1997, that if adopted, would
154. GMP requests that the Board take official notice of this Accounting Order dated 12/31/96. The
Department has no objection, and we hereby take official notice of this document. GMP Brief at 97; DPS Reply
Brief at 10.
155. Schultz pf. 10/7/97 at 64; DPS-64, sch. 17.
Docket No. 5983
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result in an increase to the amount deferred, from $870,000 to $1,020,000. Even though the
proposed decision would result in a larger deferral, GMP agreed that it would be inappropriate
updating, to include the arbitrator’s proposed result in this filing.156 The arbitrator’s decision
was to become final on January 30, 1998, if no other filings were received prior to that date.
In its brief filed on January 30, 1998, GMP states that the arbitrator’s decision “became
final on January 30, 1998.”157 While the final decision was after the close of the record in this
Docket, we have no reason to doubt GMP’s statement that the decision is now final.
Given GMP’s attestation that the decision is now final, we find that $747,000 for the
CVPS interconnection costs should be included in rate base as a known and measurable change.
We conclude that the Department’s adjustment of $586,676 to rate base is not appropriate. We
will allow the Company to recover its full request of $747,000 in rate base for these costs.
However, the Company has agreed that their original filed amount of $92,552 in cost of service
should be reduced by three months’ amortization expense. Thus we will make an adjustment of
$18,510 to cost of service for this item.158 In order to complete the record, GMP shall file with
the Board a copy of the final decision reached by the arbitrator as part of the compliance filing in
this Docket.
The Department makes one additional argument: that the TISA costs are past expenses
of GMP, and requesting recovery for those past costs in the present Docket is retroactive
rate-making.159 GMP agrees that the bill from CVPS was for services rendered going back
until late 1993. However, the Company argues that the bill was presented to FERC in October
of 1993, but not acted upon until June, 1996.160 In the interim, CVPS did not bill GMP and
GMP did not charge ratepayers, since GMP was disputing the charges. When GMP finally
received a bill in August of 1996, “the amount and extent of the bill was wholly unexpected.”161
We find the Company’s behavior appropriate, and believe it would be counterproductive
to forbid recovery due to the FERC’s delay in resolving GMP’s protest.
156.
157.
158.
159.
160.
161.
Kvedar reb. pf. 11/24/97 at 20.
GMP Brief at 37.
Calculated as monthly amortization expense of $6,170 x 3.
DPS Brief at 68.
Kvedar pf. 6/16/97 at 20.
GMP Brief at 36-37.
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C. Federal Energy Regulatory Commission (“FERC”) Headwater BenefitsC. Federal Energy
Regulatory Commission (?FERC?) Headwater Benefits
125. On June 11, 1996, GMP received a letter from FERC claiming that the Company
owed $838,000 in headwater benefits. FERC completed a study of final headwater benefits and
informed GMP of these results on June 11, 1996. The FERC findings call for $838,000 to be
paid by GMP for benefits allegedly created by work done by the Army Corp of Engineers on the
Winooski River, net of interim payments already made by GMP. Kvedar pf. 6/16/97 at 17-18.
126. GMP takes the position that it does not owe FERC the $838,000. The Company
has not paid any of the $838,000 that FERC claims is owed by GMP. GMP has made previous
payments to FERC for headwater benefits. The total of previous payments plus interest is
$777,425. GMP is asking FERC to refund the $777,425. Tr. 11/4/97 at 313 (Kvedar).
127. Past headwater benefit interim payments made by GMP were included in the rates
paid by GMP's ratepayers. The Company has indicated that it anticipated achieving relief from
FERC in the range of $300,000 to $400,000. Schultz pf. 10/7/97 at 58-59.
128. GMP has included $516,000 in rate base and $16,401 in amortization expense for
FERC headwater benefits consisting of the rate year 13 month average of the unamortized
balance, based on $538,000 it began amortizing on January 1, 1997. Amortization is based on a
41 year schedule.162 Schultz pf. 10/7/97 at 58-59; Kvedar pf. 6/16/97 at 19; tr. 11/4/97 at 312
(Kvedar).
129. GMP inadvertently included an additional three months of amortization expense (a
total of fifteen months) in its filing for the FERC headwater benefit amortization. GMP agreed
to revise this adjustment to correct for the inclusion of the additional three months of
amortization expense. Tr. 11/4/97 at 260 (Kvedar).
130. Since GMP has not yet made any payments to FERC based on the $838,000 bill,
and since the Company is disputing that bill, plus previously paid amounts for headwater
benefits, the Department recommends removal of the $516,000 from rate base and $16,401 from
amortization expense. This matter between FERC and GMP has not yet been resolved. Schultz
pf. 10/7/97 at 58-59.
162. The amortization amount is acknowledged by the Company to be less than the total billed to GMP. See,
GMP PFD at finding 200.
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Discussion re: FERC Headwater Benefits
GMP requests that $516,000 be included in rate base and $16,401 in amortization
expense be included in cost of service based on a bill from FERC for $838,000 in headwater
benefit charges. In December 1996, GMP asked the Board to issue an accounting order for the
treatment of deferral of these costs which the Board issued on December 31, 1996. That order
stated, in pertinent part, that it was limited to the accounting treatment for the subject costs and
revenues and does not bar any party from contesting, or the Board from determining, or
disallowing, the reasonableness or prudence of such costs, or the rate making treatment for such
revenues, in whole or in part, in any rate proceeding.
GMP stated at the hearing that it is contesting the $838,000 bill from FERC as well as
asking FERC for a refund of previous payments plus interest in the amount of $777,425 and that
if those efforts are successful, it would not ask ratepayers to bear any of those costs.163 GMP
also stated that the Company has not paid any of the $838,000 in charges to date.
The Department argues that the full amount of costs in this case for FERC headwater
benefits should be removed because these costs are not known and measurable, because GMP
has not yet paid these amounts, and because there is significant doubt as to whether GMP will be
required to ultimately pay these charges.164
In addition, the Department recommends that GMP be required to refund ratepayers any
of the past interim payments that it has paid to FERC plus interest, if GMP receives such a
refund in the future. The Company represents that it will pass the benefits of any avoidance of
FERC headwater costs on to ratepayers if it receives relief from FERC.165
The Company did not present any evidence to rebut the Department’s position regarding
removal of the FERC headwater charges from this case. However, in its brief, the Company
requested that, if these costs are not allowed to be included in rates, the Board nonetheless should
allow GMP to continue to defer and amortize these costs pending the Company’s next rate filing,
and in addition, to affirm that the Company may seek rate relief for these costs in a future
case.166
163.
164.
165.
166.
Tr. 11/4/97 at 314 (Kvedar).
DPS Brief at 62-63.
GMP Brief at 42.
GMP Brief at 42, fn. 7; GMP Reply Brief at 68.
Docket No. 5983
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We see no reason to allow these costs in rates in this case. These amounts are not known
and measurable at this time. Thus we conclude that $516,000 should be removed from rate base
and that $16,401 in amortization expense should be removed from cost of service. GMP shall
also be required to refund any past interim payments plus interest to ratepayers should it receive a
refund from FERC for past headwater benefit interim payments in the future. While we
obviously cannot decide the issue of future rate recovery for the FERC headwater benefits, the
Company remains free to request rate relief in subsequent cases if it can demonstrate that the
charges are known and measurable.
D. Deferred CreditsD. Deferred Credits
1. Health Insurance Reserve 1. Health Insurance Reserve
131. The Department recommends a downward adjustment to rate base of $543,216 to
reflect deferred credits relating to injury/damages/health insurance reserves. Schultz pf. 10/7/97
at 68.
132. The Company has traditionally never included this item in rate base. Kvedar reb.
pf. 11/24/97 at 21.
133. The test year 13-month average balance in the injuries and damages reserve and the
health insurance reserve is $211,223 and $331,983, respectively. These items should be offset
against rate base. The combination results in a $543,216 reduction to rate base. Schultz pf.
10/7/97 at 68.
2. Gain on Sale of One Main Street2. Gain on Sale of One Main Street
134. GMP reflected a $10,075,000 offset to rate base for "Other" deferred credits. The
actual test year 13-month average balance of "Other" deferred credits on GMP's books was
$10,849,701. Schultz pf. 10/7/97 at 68.
135. This offset is a function of a gain on the Company's sale of its One Main Street
property. Kvedar reb. pf. 11/24/97 at 22.
136. The Department originally recommended that the difference, totaling $774,701, be
reflected as an additional offset to rate base as GMP did not provide an explanation for the
deficiency. However, in rebuttal, the Company adequately explained the reason for the
difference, so the Department removed this recommendation. Schultz pf. 10/7/97 at 68-69;
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Schultz reb. pf. 12/24/97 at 34.
3. Deferred Compensation and Other Benefits3. Deferred Compensation and Other
Benefits
137. The 13-month average test year balance of "Deferred Comp. & Other Benefits" is
$8,536,040. The Company included $2,759,822 of the total amount, which is associated with
supplemental pension insurance offset, as an offset to rate base. This leaves $5,776,218 of the
"Deferred Comp. & Other Benefits" that the Company has not utilized as an offset to rate base.
Schultz pf. 10/7/97 at 69.
138. The Company provided no explanation as to why it did not offset rate base by the
difference remaining. Schultz pf. 12/24/97 at 34-35.
139. The Department estimates that the following amounts included in the deferred
credit have not been allowed for recovery in rates and, thus, have not been collected from
ratepayers: $167,255 or one half of the management incentive plan amount; $1,352,360 or one
half of directors deferred compensation; and $1,150,280 or one half of officers deferred
compensation. This results in a total cost of $2,669,895. The sum of $3,227,959 is the deferred
credit estimated to have been provided by GMP's ratepayers and not yet expended by GMP.
140. The Department recommends that the remaining Deferred Comp. & Other Benefits
deferred credit balance which has been provided by GMP's ratepayers of $3,227,959 be offset
against rate base. Schultz reb. pf. 12/24/97 at 34-35.
Discussion re: Deferred Credits
The Department argues that ratepayers have provided the funds included in the injuries &
damages reserve and the health insurance reserve, as the associated expenses are reflected in
rates. It is therefore appropriate for these amounts to be included as an offset to rate base. The
Company states that, while this may be technically correct, these items have never been
previously included as deferred credits.167 The Company did not provide a reasonable
explanation as to why such treatment was not appropriate. We adopt the Department’s proposed
adjustment as appropriate rate-making treatment and will make a rate base adjustment of
$543,216 to reflect the offset.
167. Kvedar reb. pf. 11/24/97 at 22.
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The Department and the Company agree that no adjustment needs to be made for the
deferred credit account for the sale of the Company’s property at One Main Street; therefore, we
accept the Company’s originally filed amount for this item.
As to the deferred credit for the deferred compensation and other benefits account, the
Department found a difference of $5,776,218 that the Company has not utilized as an offset to
rate base. The Department noted that in its prefiled testimony and requested an explanation
from the Company. The Department’s rebuttal testimony stated that no such explanation had
been provided. However, the Department estimated that only a portion of the difference,
$3,227,959, has already been provided by GMP's ratepayers and not yet expended by GMP.
Therefore, the DPS recommends a downward adjustment for only this portion ($3,227,959) of
the deferred credit balance to be offset against rate base. The Department argues that since these
amounts have been provided by GMP’s ratepayers, they represent cost-free capital to the
Company, and therefore should be used as an offset to rate base.168
In its brief, the Company states that the Department’s approach to this issue raises serious
concerns of procedural fairness. On this basis, the Company asks us to reject the Department’s
recommendation. GMP states that the DPS served not one interrogatory on the Company
seeking this information.169 However, we note that in the Department’s original prefiled
testimony, the DPS states :
Additionally, a 13-month average deferred credit of $8,536,040 is identified as
“Deferred Comp. & Other Benefits.” The Company has reflected a supplemental
pension and insurance offset of $2,759,822 in its filing. However, the Company
did not provide an explanation for the remaining $5,776,218, despite being asked
to do so. Normally, I would recommend an adjustment to account for the
difference; however, I realize that some of the difference pertains to deferred
compensation that is not included in rates. Consequently, I will defer
recommending an adjustment, pending a more detailed explanation from the
Company regarding what deferrals are included in the difference, why the deferred
credit has been excluded from the Company’s offset to rate base and how the
excluded portion was determined.170
Clearly the Company was put on notice that the Department was considering an
adjustment if the Company did not rebut the DPS testimony. In the absence of an explanation
from the Company, the Department states that it calculated its adjustment based on the amounts
168. DPS Brief at 65.
169. GMP Brief at 43.
170. Schultz pf. 10/7/97 at 69.
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the Company provided in response to DPS 2-91.171
We can find no evidence in the record to support the Company’s concern over procedural
fairness. Nor can we find any evidence upon which GMP successfully rebuts the Department’s
claim for this adjustment. In this instance, the presumption that the Company holds has clearly
been challenged. The burden of proof rests with the Company to show that its request is just
and reasonable. In the absence of such proof for this item, we will reduce rate base by the
recommended amount of $3,227,959.
E. Accumulated Deferred Income Taxes (“ADIT”) E. Accumulated Deferred Income Taxes
(?ADIT?)
141. Any revisions made to GMP's projected 1997 and 1998 additions to plant in service
result in necessary revisions to accumulated deferred income taxes, as the amounts are contingent
on the amount of plant additions. Schultz pf. 10/7/97 at 50.
142. The adjustments that we have made to GMP’s plant in service, will result a
decrease to the Company’s accumulated deferred income taxes of $165,000.
F. Working CapitalF. Working Capital
143. The Company's calculation of a working capital revenue lag totals $9,007,000.
These calculations were based on a revenue requirement of $188,319,000. Leonard pf. 7/11/97
at 6; exh. GMP-7, sch. B.
144. The Company calculated the working capital adjustment to rate base by conducting
a lead-lag study to determine the amount of capital needed by the Company to finance daily
operations, in relations to the timing of receipts from customers and Company payments to
vendors. Leonard pf. 7/11/97 at 3-4.
145. By calculating these figures, the Company calculates a net revenue lag. The net
revenue lag equals the "revenue lag" (i.e., the capital needed to finance accounts receivable) less
the "expense lead" (i.e., the delay between the time services or goods are provided to the
Company and the Company's payment therefor). Leonard pf. 7/11/97 at 5.
146. The Company’s lead/lag study included in revenue the revenue dollars associated
with recovery of all of the operating expenses of the Company, including depreciation and
171. DPS Reply Brief at 9.
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amortization. As a result, the study includes an allowance for non-cash expenses in the working
capital calculation. Tr. 11/5/97 at 71 (Leonard); Carlson pf. 10/7/97 at 7; Schultz pf. 12/24/97
at 35.
147. The lead/lag study should calculate only the cash working capital allowance, which
represents the funds supplied by investors to bridge the gap between the time cash is spent and
the time revenue is collected. Non-cash items should be removed from the study because
investor-supplied cash is not required in the test year for non-cash items (i.e., depreciation and
deferred income tax expense) because they do not represent a current cash outflow. Carlson pf.
10/7/97 at 6-7.
148. The operating expense allowance should be calculated using a net lead or lag
multiplied by the expense and divided by 365. Schultz pf. 12/24/97 at 37.
149. The Company included a lead time of 48.2 days for preferred dividends in its
lead/lag calculation. The overall lead for preferred dividends should be 109.21 days instead of
the 18.21 days reflected in the lead/lag study. Exh. GMP-7 at 12; tr 11/5/97 at 50 (Leonard);172
Schultz pf. 10/7/97 at 66.
150. GMP’s requested working capital allowance includes prepayments of $1,448,000.
This $1,448,000 includes $106,082 of negative 13-month average balances, consisting of
$31,534 for prepaid employee benefits and $74,548 for MMWEC. Exh. DPS-64, sch. SR 21, at
3 of 4; Schultz pf. 12/24/97 at 38.
151. The prepayment balance in the working capital allowance should be increased
$106,082. Id.
152. In the operating expense allowance determination, the lead/lag study should
include $1,249,000 of employee benefit costs and $2,013,000 of power costs associated with
Stoney Brook. Id.
Discussion re: Working Capital
Part of the capital that investors provide a company is needed to meet the company's
normal operating expenses. The working capital allowance provides those investors a return on
that portion of their investment needed to meet the company's day-to-day operating expenses and
172. GMP?s initial filing used a lead of 18.2 days for preferred dividends. At the time GMP offered Mr.
Leonard?s testimony, the witness corrected this figure to 48.2 days.
Docket No. 5983
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is intended to "bridge the gap between the time when costs are incurred in providing service and
the time the utility is paid for that service."173 Working capital, in fact, has several
components: materials and supplies, prepayments, petty cash, minimum bank balances, and
cash working capital.174 In this proceeding, the parties have raised issues concerning GMP's
calculations of prepayments and of the cash working capital.
There are several means of calculating the cash working capital allowance. The two
most common are a lead/lag study, which measures the average time differential between the
receipt of revenues and expenditures, and the formula approach which allows the company a cash
working capital equal to 1/8 of the utility's annual operating and maintenance expenses
(excluding purchased power).175 In this proceeding, GMP based its working capital
calculations upon a lead/lag study.176
The primary dispute associated with the cash working capital revolves around whether it
is appropriate to include non-cash items, such as depreciation, amortization, and deferred taxes,
in the lead/lag study and thus the calculation of the working capital allowance.177 GMP argues
that these represent part of the Company's operating expenses and require investor capital.
Thus, in fairness to shareholders, the Company must be compensated for the shareholder capital
used to finance non-cash items. The Department and IBM both argue that inclusion of non-cash
expenses is inappropriate because there is no current cash-flow associated with them and thus no
lag time.
We agree with the Department and IBM. The purpose of the working capital allowance
is to recognize that in normal business operations, investors must supply capital to finance the
day-to-day expenses, i.e., normal cash flow. Non-cash expenses have no cash flow associated
with them and should not be incorporated into the calculation of a cash working capital
173. In re Franklin Electric Light Co., Docket 5137, Order of 9/25/90 at 10; Bonbright, Danielson and
Kamershcen, PRINCIPLES OF PUBLIC UTILITY RATES, 3d Ed. at 242.
174. Bonbright at 244; Carlson pf. 10/7/97 at 5.
175. Carlson pf. 10/7/97 at 5; Bonbright at 244-245.
176. Findings 145.
177. In fact, GMP did not calculate a lead or lag associated with the non-cash items. Leonard pf. 11/25/97 at
2; Carlson pf. 10/7/97 at 6-7. However, a lead/lag study calculates the relative timing of both revenues and
expenses. The Company's analysis calculated the revenue lag using the entire revenue requirement; there was no
adjustment to exclude that portion of the revenue requirement associated with recovery of non-cash expenses.
Schultz pf. 12/24/97 at 35. This had the effect of using a zero-day lag for non-cash expenses.
Docket No. 5983
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allowance.178 In reaching this conclusion, we recognize GMP's argument that non-cash items,
such as depreciation, amortization and deferred taxes represent operating expenses of the
Company.179 They do not, however, represent cash expenses. As we recently observed: "no
working capital is needed for non-cash expenses."180 This conclusion is consistent with our
past decisions and the practices in most state commissions.181 For example, Utah recently
stated this policy succinctly:
We find that the purpose of the Cash Working Capital adjustment to rate base is to
compensate investors for funds advanced by them to meet the expenses of daily
operations necessitated by external transactions with third party vendors. It is not
simply to recognize leads and lags associated with all revenues and all costs of
providing service.182
GMP also argues that failure to include the non-cash items in the working capital
allowance will deprive investors of an opportunity to earn a fair return on their investment.
This occurs because, it argues, the Company will continue to book depreciation expenses, thus
reducing rate base, while GMP has not yet received the funds from ratepayers to cover those
expenses.183
We do not agree. GMP’s assertion that the working capital allowance should
compensate it for non-cash expenses essentially transforms the allowance into a mechanism to
account for regulatory lag.184 However, our existing rate-making methodology is designed to
establish just and reasonable rates and allow the Company a reasonable opportunity to earn a fair
return. The methodology, including the return on equity, is designed to account for some degree
of regulatory lag.185 As we stated previously, the working capital allowance is intended to
provide investors with a return associated with cash flow leads and lags: “it is not meant to be a
178. Carlson pf. 10/7/97 at 7.
179. Tr. 11/4/97 at 193 (Carlson).
180. Investigation into Citizens Utilities Company re: alleged investment in facilities without proper regulatory
approval, and omission of least-cost analysis of such investments, Docket 5841/5859, Order of 6/16/97 at 13. See
also In Re Central Vermont Public Service Corporation, Docket 4634, Order of 9/16/82 at 17.
181. For example, Central Vermont Public Service Corporation uses this method of calculation. Schultz pf.
12/24/97 at 35. See also, Re Central Illinois Light Company, 94-0040, Ill.C.C. (December 12, 1994); Re U S West
Communications, Inc., Docket No. RPU-93-9, Iowa Util. Bd. (June 17, 1994);
182. Re US WEST Communications, Inc., Docket No. 92-049-05, Utah P.U.C. (April 15, 1993).
183. Leonard reb pf. at 8-10.
184. Tr. 11/4/97 at 210-211 (Carlson).
185. Id. at 211.
Docket No. 5983
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catchall for rate base treatment of every conceivable item.”186 We decline to include an
additional adjustment in the lead/lag study that would further increase this compensation.187
In addition to the broader question of the inclusion of non-cash expenses in the working
capital allowance calculation, the Department and GMP differ on several other components of
the calculation. GMP’s study shows a lead of 48.2 days between the time the Company books
its preferred dividends and pays them. The Department argues that the proper figure is 109.21
days.
We agree with the Department’s calculation. The evidence demonstrates that, in each
quarter, GMP’s books still showed a liability more than 48.2 days after the dividend was
declared.188 The Company actually paid these amounts to its preferred shareholders much
later.
A second area of disagreement pertains to the treatment of prepaid balances. In
performing a lead/lag study, certain expenses are adjusted out of the operating expense
calculation because they represent expenses that do not have a lead or lag associated with them.
These include items such as insurance, and property taxes. Instead, these expenses are handled
outside of the specific lead/lag study.189 The Department argues that GMP’s calculation of the
prepaid balances is erroneous because it includes costs with a negative prepaid 13-month
average, which are not, in fact, prepayments.190 Our review of the evidence leads us to the
same conclusion. GMP should increase the prepayment amount by $106,082 to reflect the
actual 13-month average for prepayments and remove the effect of the negative prepayments.
We also conclude that GMP’s lead/lag study excludes several expenses that are
appropriately included, namely $1,249,000 of employee benefits expense and $2,013,000 of
Stoney Brook Power costs.
We find the methodology used to develop the Department’s recommended working
capital allowance of $2,648,000 to be reasonable.191 The specific figure arrived at by the
186. In Re Central Vermont Public Service Corporation, Docket 4634, Order of 9/16/82 at 17.
187. See e.g. Re Paradise Valley Water Company, an Arizona Corporation, Docket No. U-1303-94-182,
Decision No. 59079 at 4-5, Ariz. C.C. (May 5, 1995) (rejecting the same argument that GMP makes here).
188. The Company?s calculations were also inconsistent with the workpapers that supported the 48.2 day
figure. Schultz pf. 12/24/97 at 38.
189. Tr. 11/5/97 at 75 (Leonard).
190. Tr. 11/5/97 at 78 (Leonard); Schultz pf. 12/24/97 at 38.
191. Exh. DPS-64, sch. SR 21, at 1 of 4.
Docket No. 5983
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Department is derivative, however, of the ultimate revenue and expense levels delineated
elsewhere in this Order. In its compliance filing, GMP should recalculate the working capital
allowance consistent with this Order.
I. COST OF SERVICE ISSUESI. Cost of Service Issues
A. Power CostsA. Power Costs
1. Hydro Quebec Capacity Factor Adjustments1. Hydro Quebec Capacity Factor
Adjustments
153. The Hydro Quebec/Vermont Joint Owners contract has a provision which allows
participants to lower their must-take energy to 70 percent capacity factor from 75 percent.
This
provision may be exercised 5 times during the contract term. Keyser reb. pf. 11/24/97 at 3.
The Vermont Joint Owners (“VJO”) have exercised this option in power year 1997 and recently
for power year 1998, which runs from November 1997 through October 1998. The last eight
months of the power year 1998 correspond with the first eight months of the rate year. Keyser
reb. pf. 11/24/97 at 3.
154. An adjustment should be made to reflect the VJO option to reduce the capacity
factor for the HQ B and C3 Schedules from 75 percent to 70 percent for the first eight months of
the rate year. Lamont 10/7/97 pf. at 3; Keyser 11/24/97 reb. pf. at 4; tr. 1/8/98 at 24 (Keyser).
155. The treatment of the opportunity market in this case assumes that conditions in the
regional power market will be the same in the adjusted test year as in the test year. The VJO
will have a similar financial incentive to exercise its option again in the 1999 power year.
Lamont 12/24/97 pf. at 3.
156. The exercise of the option in this power market would be consistent with recent
actions of VJO participants aimed at trading near-term savings for increased costs in the out
years. Lamont 12/24/97 pf. at 3.
Discussion: HQ VJO Capacity Factor Adjustment
The Department recommends and the Company agrees that an adjustment should be
made to reflect the VJO option to reduce the capacity factor for the HQ B and C3 Schedules from
75 percent to 70 percent for the first eight months of the rate year.
The Department maintains that this adjustment should also apply to the remaining four
Docket No. 5983
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months of the adjusted test year because the VJO are likely to exercise a third option for power
year 1999. They argue that since GMP has made the assumption in this case that the power
market will be essentially unchanged from the test year to the rate year, there is a high likelihood
that the VJO will elect to exercise another of its options. Since the VJO have exercised their
option for two consecutive years, it is likely they will do it again. Exercise of this option is
consistent with recent actions on the part of the VJO utilities in their efforts to reduce near-term
rate impacts associated with the HQ contract. Additionally, debates over the potential
restructuring of the electric industry cloud the future value of this option. The Department
maintains that this combination of factors will lead the VJO to exercise their option and lower
the capacity factor in the 1999 power year (“PY
99”) as well and that the adjusted test year
calculations of power costs should assume a 70 percent capacity factor for these schedules.
The Company maintains that, from an economic perspective, it would be speculative to
assume that the VJO, which would act to maximize the value of this option over the next sixteen
years, would use one of its three remaining options for PY
99.
Further they maintain that the
exercise of the option is not GMP's decision but the VJO’s, and because there has been no
reasonable probability shown that the option will be exercised for the year beginning the power
year November 1998, the change advocated for by the DPS is not “known and measurable.”
We agree with the Department and the Company that it is appropriate to reflect in the
power costs an adjustment for the exercise of the second option to reduce the capacity factor for
the HQ B and C3 schedules (that apply to the first eight months of the rate year). We further
agree with the Department that given the uncertain nature of the utility environment and the
uncertain future value of foregoing such an option at this time, it is reasonable to expect the VJO
to exercise one of its three remaining options and reduce the capacity factor for the rest of the
rate year. The facts presented to us indicate that there is a high probability that this option will
be exercised. Further, the effects of this option for power year 1997 are reflected in the latter
portion of the text year costs, and the Company has not demonstrated that a change is likely;
continuing purchase of Hydro Quebec power at a 70 percent capacity factor should therefore be
reflected in the power cost calculations for power year 1999.
Docket No. 5983
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2. Power Costs Forecasts2. Power Costs Forecasts
157. Schedule 1 (in Attachment D) of the filing documents in this rate case presents the
power costs which the Company seeks to recover in rates. That attachment is developed using a
UPLAN simulation of power costs premised largely on historical information, including test year
loads, changed only for known and measurable reasons. Keyser reb. pf. at 12. Strict rules
apply to the preparation of Schedule 1, which is in essence a
proxy’ for a future cost. There is
limited, if any, reliance on forecasts in preparing it. In preparing it, some contracts are modeled
net, i.e., showing only the value of the contract, not the offsetting revenues and expenses. Id.
158. Schedules 3-5 (Attachment D) present forecasts of future power costs but are not
used to set power costs in a rate case. Keyser reb. pf. 11/24/97 at 12-13; tr. 11/6/97 at 136-37.
Schedule 1 differs greatly from Schedules 3-5; the latter are true forecasts and are not prepared
with any prescribed methodology. Keyser reb. pf. 11/24/97 at 14.
159. The periods compared did not necessarily correspond to adjusted test years. One
comparison between Schedule 1 and actual power costs for the 12 months ended May 1997 did
involve a rate year (i.e., an adjusted test year). Tr. 11/6/97 at 134-36 (Rosenberg).
160. In certain cases Dr. Rosenberg relied on Schedules 3-5 in making his comparison
to the actual power costs. Tr. 11/6/97 at 130-31 (Rosenberg).
161. Comparing actuals to any forecasts is complex for a variety of factors, including
that actuals are presented “in gross” with full detail, but Schedule 1, for example, is calculated in
net form. Keyser reb. pf. at 15-16; tr. 1/8/98 at 22-23 (Keyser).
162. A number of different factors could explain the variances between the Attachment
D Schedules and actual power costs that were observed, including but not limited to potential
improper analyses introduced by the Company. Tr. 1/21/98 at 55-56 (Rosenberg).
163. The single variance between Schedule 1 in Docket No. 5857 and actuals is
explainable largely because the energy volume was up in the rate period due to the treatment of
the Northfield contract. Keyser reb. pf. 11/24/97 at 18-19.
Discussion: Power Costs Forecasts
IBM suggested that in each of its last three rate cases GMP overestimated its power
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supply costs.192 IBM concludes, therefore, that because GMP consistently has over-forecast its
purchase power costs, a reduction in GMP's forecast of 3 percent is appropriate.193
GMP responded to Dr. Rosenberg’s testimony by pointing out that Dr. Rosenberg appears
to have relied largely on Attachment D, Schedules 3-5 in making his comparison of actual power
costs to the forecasts. Schedule 1 represents the power costs that the Company is requesting in
rates based on test year costs adjusted for known and measurable changes in the power cost
situation; Schedules 3-5 present forecasts of power costs but do not directly relate to the power
costs rate request. GMP points out further that the appropriate comparison is not even just the
power costs rate request to actuals, but the approved amounts after corrections and adjustments
have been made to the requested amount.
We agree with GMP that IBM’s comparison does not demonstrate that GMP’s power
purchase costs have been consistently overstated. The correct comparison to make in the
context of a rate proceeding should reflect (1) a comparison of actual power costs to the adjusted
test or rate year, (2) a comparison of power costs actual and modeled costs that rely on a
consistent treatment of outside contracts, and (3) a comparison of the actual power costs with
those modeled for the rate request after other adjustments and corrections have been made to the
original rate request following Board review. We conclude that the proposed adjustment of and
the underlying comparisons of IBM suffer, to varying degrees, on each of these three points.
Indeed, in this proceeding, as in others, the Company is required as a compliance matter to
incorporate many detailed corrections and adjustments to its original Schedule 1 power cost rate
request, which need to be considered in making comparisons.
We do not accept the proposed adjustment in this case, but would welcome further
investigation into the Board’s methods for establishing estimates of power costs. Unfortunately,
the Company did not provide such a comparison in this investigation.194 If it can be
demonstrated that there is a consistent bias, then either (1) some adjustment like that proposed by
Dr. Rosenberg would be warranted or (2) we should review the methodological approach we
apply in establishing the power cost component of the rates.
192. Rosenberg pf. 10/7/97 at 22.
193. Rosenberg pf. 10/7/97 at 24.
194. Rosenberg reb. pf. 12/24/97 at 3.
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3. Miscellaneous Adjustments to Power Costs3. Miscellaneous Adjustments to Power
Costs
164. The 1998 power year energy price under the VJO Contract is known now, and
should be for the first eight months of the rate year. The Department recommends and the
Company agrees to increase the projected HQ/VJO energy price associated with Schedules B and
C3. Lamont pf. 10/7/97 at 2-3; Keyser reb. pf. 11/24/97 at 3.
165. The power costs should reflect adjustments to the opportunity purchase prices
recommended by the Department, and changes to reflect errors in GMP’s original calculations
related to the price of daily opportunity energy. Lamont 10/7/97 pf. at 3; Keyser reb. pf.
11/24/97 at 11.
166. The anticipated revenue from the canceled VEC wholesale power sale should be
removed. Lamont pf. 10/7/97 at 3.
167. The opportunity purchase price for VY outages should be adjusted to reflect
GMP’s actual costs during the last outage. The average of GMP’s opportunity purchases during
the previous refueling outage represents a reasonable estimate. The prices of the daily
opportunity unit should correspond closely to the highest average price paid by GMP to any
supplier. Lamont pf. 10/7/97 at 3, 6; Keyser reb. pf. 11/24/97 at 11.
Discussion: Miscellaneous Adjustments to Power Costs
The above listed adjustments are proposed corrections and modifications to the
Company’s request for recovery of power costs in rates. These adjustments are reasonable, are
not in dispute, and are required for a correct and fair forecast of power costs. Adjustments to the
power costs should reflect these recommended changes by the Department.
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4. Vermont Yankee4. Vermont Yankee
a. Vermont Yankee Stipulations and Other Issuesa. Vermont Yankee Stipulations
and Other Issues
168. The Department, GMP, and Vermont Yankee agreed by stipulation dated
December 1, 1997, that financial calculations would use a duration for the Spring 1998 Vermont
Yankee refueling outage of 42 days. Tr. 1/20/98 at 10 (Sherman); tr. 1/8/98 at 25, 35 (Keyser);
exh. DPS-VY-1. Vermont Yankee, in its Final Update of its 1998-1999 Operating Expense
Projection (“Vermont Yankee Update”), forecasts energy costs for 1998 and 1999 of
$18,100,000 and $18,290,000, respectively; and capacity costs (less outage costs) for the
adjusted test year of $159,878,000. Exh. GMP-VY-1.
169. GMPs original filing of costs for Vermont Yankee must be reconciled with the
Vermont Yankee Update. Tr. 1/20/98 at 29-30 (Sherman).
170. GMP and the Department have stipulated, in substance, that fees and interest
expenses that GMP projects it will incur, beginning on or about April 1, 1998, with respect to the
Texas Low-level Radioactive Waste Disposal Compact ("Texas Compact Expenses"), to the
extent actually incurred, will be deferred for accounting purposes, with reasonable carrying costs,
until the date when GMP receives the rate order in its next rate case filing. Exh. DPS-VY- 77.
171. The Texas Compact Expenses should be excluded from the current rate case, and
other expenses excluded in settlement; GMP's cost for VY operating expenses in this proceeding
will be reduced by $550,000. Exh. DPS-VY-77.
Discussion: Vermont Yankee Stipulations and Other Issues
The Company originally proposed a refueling outage duration of 56 days. The
Department recommended only 32 days based on their belief that VY would reduce the period in
response to the more competitive regional environment for generation.195 The Company and
the Department subsequently filed a stipulation dated December 1, 1997, agreeing that financial
calculations should use a duration for the Spring 1998 Vermont Yankee refueling outage of 42
days.
GMP and the Department later filed a separate stipulation indicating that fees and interest
195. Lamont pf. 10/7/97 at 6.
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expenses that GMP projects it will incur in the adjusted test year, with respect to the Texas
Compact Expenses, should be deferred for accounting purposes, with reasonable carrying costs,
until the date when GMP receives the rate order in its next rate case filing. Exh. DPS-VY-77.
The Company and the Department further stipulated to a reduction of $550,000 in VY operating
expenses to reflect the exclusion of the Texas Compact Expenses and other exclusions proposed
by the Department.
Both stipulations are approved. The updated information on VY’s operating expenses
should be reconciled with GMP’s original filing of costs for Vermont Yankee.
b. Forced Outage Rateb. Forced Outage Rate
172. The only remaining area of dispute with respect to Vermont Yankee surrounds the
forced outage rate to be applied to power cost adjustments attributable to expected Vermont
Yankee outages. Keyser reb. pf. 11/24/97 at 7.
173.
GMP developed the expected forced outage rate from an average of the previous
four years. The Company proposed the rate to be 4.7 percent. The Department says it should
be 4.4 percent. Lamont pf. 10/7/97 at 2. The Department’s proposed adjustment reduces
power costs by roughly $75,000. Id. at 6.
174. Fuel procurement and operation of Vermont Yankee is controlled so that at a
planned interval before shutdown the fuel is “burned” to the point where it can no longer sustain
full nameplate output of the reactor, and the reactor “coasts down” from then until the time when
shut down begins. Lamont reb. pf. 12/24/97 at 7.
175. In 1996, NEPOOL requested Vermont Yankee to delay its scheduled outage due to
an unexpected shortage in regional capacity caused by unscheduled outages of several nuclear
units within the region. This request was delivered so late in the fuel cycle that the timing of the
coast-down was unable to be altered, causing the coast-down to go longer and deeper than it
would have gone had the NEPOOL capacity emergency not occurred. Lamont reb. pf. 12/24/97
at 7.
176. This situation is an extraordinary event and is not likely to recur. VY owners were
fully compensated for this lack of production by NEPOOL because they were able to credit its
full output in their ownload billing and for other costs including retaining work crews and
rescheduling operations in response to this delay. It is inappropriate to include this inability to
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perform in the four-year average calculation. Lamont reb. pf. 12/24/97 at 6-7.
177. To correctly compute the lost production from the unit, one should assume that the
coast-down started at the actual time but was two weeks shorter, thereby removing the last two
weeks of the coast-down from the forced outage calculation. Lamont reb. pf. 12/24/97 at 7.
Discussion: Forced Outage Rate
The Department argues that the regional power situation, which caused NEPOOL to
request Vermont Yankee to delay its scheduled refueling outage during 1996, was extraordinary
and is not likely to recur. The Department argues further that since the owners were fully
compensated for this reduction in power output by NEPOOL, it is not justifiable to allow the
company to include this additional outage in its four-year rolling average. Not only is it not
indicative of the unit’s potential performance, but, they assert, it would result in GMP’s being
paid twice for the event.
The Company argues that the Department has offered no reason for the Board to decide
that the events surrounding Vermont Yankee's planned outage in 1996 were so extraordinary that
it should warrant a new Forced Outage Rate (“FOR”) calculation methodology
especially one
that is significantly more complicated than the generally accepted methodology that the Company
uses. Moreover, they maintain that the DPS argument ignores the reason for using a four-year
average at all. The four-year averages take into account such variability and unusual events.
We agree with the Department that an adjustment should be made to the FOR to reflect
the extraordinary nature of the NEPOOL request and resulting compensation arrangements.
Although we are sensitive to adding needless complexity, the question of whether this adds to the
complexity of the calculation is largely irrelevant to the question of whether the adjustment is
appropriate. While we agree with the Company that the four-year average methodology allows
one to smooth the year-to-year variability that would otherwise be associated with the forced
outages of the Company, we would distinguish normal variations from this particular event,
which we conclude is extraordinary. Moreover, in this case, the Company was compensated for
the loss of production by NEPOOL, which is not reflected in the calculation. Not only is this
event extraordinary in the sense that it, or a similar event, is unlikely to occur in either the
adjusted test year or over a four-year time frame in the future, it is also extraordinary in the sense
that to the extent that these circumstances repeat themselves the Company would, presumably, be
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compensated for their lack of production and other expenses. We conclude, therefore, that it
would be inappropriate to include in rates costs that cannot reasonably be expected to be borne
by the Company in the future.
The Department argues that an adjustment to the calculation for the FOR should be made
by excluding the last two weeks of VY’s 1996 operation prior to its refueling outage. The
Company argues that, to the extent that an adjustment is necessary, the recalculation should take
into account a considerably smaller amount of lost energy production that resulted from these
events. In particular GMP argues that, if any adjustment is made, it should be applied with
respect to the beginning of the coast-down, not the end; the last day the Plant had full output was
August 1.
Conceptually, the question of how to establish the adjustment to the FOR is quite simple;
it should be equal to the difference in production, comparing what actually occurred and what
would have occurred had VY not extended the coast-down period. The Department has offered
a straightforward methodology for making the adjustment. We conclude that the Department’s
recommended methodology is reasonable and that the Company has not adequately demonstrated
the error of the Department’s recommended approach nor the relative merits of their proposed
alternative. The anticipated forced outage rate should be reduced from 4.7 percent to 4.4
percent. This reduces power costs by roughly $75,000.
5. New England Electric System Transmission5. New England Electric System
Transmission
178. The Company seeks to include $1,997,000 in costs of service attributable to the
New England Electric System (“NEES”)196 transmission charges. Exh. Board-12, Attachment
D, Schedule 1, line 22.
179. The Company has provided the Department with the information on actual charges
for almost all of 1997. Tr. 1/9/98 at 123 (Lamont); exh GMP-37.
180. This is based upon actual NEES transmission billing in 1997, along with a few
estimated bills for the end of the year. Tr. 1/9/98 at 123-24 (Lamont); exh. GMP-37.
181. Rather than the amount GMP included in its cost of service, GMP’s 1997
196. In the testimony, transcripts, and exhibits these transmission charges are alternatively referred to as NEES
transmission charges, NEP transmission charges, or NEPCO transmission.
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transmission bill from NEES is projected to be $1,573,544.70. GMP is also projecting an
additional $120,000 - $130,000 in credits from NEES as a result of the Regional Transmission
Group (“RTG”). Exh. GMP-37.
Discussion: New England Electric System Transmission
GMP presented updated billing information from NEES regarding its 1997 transmission
bills in Exhibit GMP-37. As this bill represents the best available information concerning
GMP’s actual transmission costs, it is the appropriate figure upon which to estimate adjusted test
year costs. In addition, GMP is projecting an additional credit from NEES of $120,000 as a
result of RTG credits. These foregoing items have the specificity so as to be known and
measurable and used to calculate the cost of service. GMP should use a figure of $1,573,544.70
minus $120,000, or $1,453,544.70, as the expected transmission payments.
6. Merrimack II6. Merrimack II
182. Historically, the Merrimack II annual maintenance shutdown has occurred during
April and May. This year, with the Vermont contract ending, the owners have moved up the
outage schedule to coincide with the last two months of the Vermont ownership. Lamont pf.
10/7/97 at 7.
183. GMP is aware that VELCO is “looking into” this situation, but was unable to be
more specific. Lamont reb. pf. 12/24/97 at 9.
184. GMP is “sure that there is an expectation that NU would still have some manner of
settlement” that would compensate the Company for this change. Tr. 1/8/98 at 14-15 (Keyser).
185. GMP’s adjusted test year includes $582,000 of capacity costs for Merrimack II
even though Merrimack II will be available to produce energy for only two weeks in the adjusted
test year. Lamont pf. 10/7/97 at 7.
186. Vermont owners of Merrimack II have avenues to pursue remedies to this situation.
Lamont pf. 10/7/97 at 7.
187. The expenses related to the 1998 refueling (maintenance) outage are estimated by
the Department to be roughly $100,000; however, this is only a rough approximation without
clear foundation. Lamont pf. 10/7/97 at 7.
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Discussion: Merrimack II
The Vermont contract with Merrimack II is ending this year. Contrary to historical
practices, Merrimack’s owners have rescheduled the planned maintenance outage to coincide
with the last two months of Vermont ownership of the unit. This is obviously unfair to the
Vermont purchasers, who should not be required to pay for these lost power costs and increased
maintenance costs. GMP believes that NU will yet agree to some manner of settlement.
The Department argues that it is unreasonable for Vermont to pay for maintenance
expenses from which it will derive no benefits. The maintenance done during this outage will
not benefit Vermont ratepayers, and they should not be charged for it. The Department argues
that Vermont owners have several potential remedies to avoid paying these charges and these
should be pursued before asking the ratepayers to pay.
We conclude it is unreasonable to require Vermont ratepayers to pay for the costs
associated with the maintenance outage of Merrimack II unit that has been rescheduled to
coincide with the last two months of Vermont’s ownership of the unit. The maintenance costs
incurred provide no benefits for the future, when it will not serve Vermont, and this will not
benefit Vermont ratepayers. Neither the Company nor the Department were able to provide
reasonably sound estimates of these costs.
We conclude, therefore, that the Company should,
in its power cost compliance run, model Merrimack’s scheduled maintenance costs and its output
as though it were operating according to its historic maintenance schedule.
7. Compliance Filing7. Compliance Filing
Within 5 days of this Order being issued, the Company, in consultation with the
Department of Public Service, shall file a compliance filing consistent with the modification to
the power costs required in this Order. At that time we will consider whether further
modifications to the proposed rate adjustment established in this Order are warranted.
Salary Incentive Plans
188. The Company’s requested payroll expense includes incentive pay which GMP
witness Griffin contends is subject to an automatic reduction if the Company performs poorly.
GMP’s proposed cost of service includes costs for its management incentive plan (“MIP”),
totaling $186,465, and for its general incentive plan totaling $390,966 prior to the application of
an expense factor. This amount consists of the test year level of general incentive pay and an
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increased level of MIP. Schultz pf. 10/7/97 at 9-10; exh. DPS-64, Schedules SR1 and SR3; exh.
DPS-72 (correction to SR1).
189. The general incentive pay program is for all employees of GMP who work over 20
hours a week, are not in the bargaining unit and do not participate in the Management Incentive
Plan. General Incentive Pay is in addition to the normal salaries and wages for these employees.
Schultz pf. 10/7/97 at 10.
190. Determining whether or not incentive pay is appropriate for inclusion in rates
depends upon whether the measurements used in determining the incentive pay reflect the best
interest of ratepayers and whether the program provides an incentive to improve operations and
efficiency. The incentive pay should be true incentive pay as opposed to just a different form of
extra compensation for employees. Id. at 9.
191. In Dockets 5428 and 5532, the Board ruled that pay increases for non-union
employees should be at or near that provided to the bargaining unit employees. Id. at 10.
192. Prior to 1996, the pay increases for non-bargaining employees generally exceeded
the pay increases granted to the bargaining unit employees. Id.
193. The filing in this case seems to reflect equivalent pay increases for exempt and
bargaining unit employees, with the 1997 increase for bargaining unit employees being 0.5
percent higher. It would appear, however, that the incentive pay is actually a replacement for the
percentage increase differential between bargaining and non-bargaining employees that was
disallowed by the Board in Dockets 5428 and 5532. “On that basis alone it should be
disallowed.” Id.
194. GMP has stated that in the absence of incentive pay, base pay increases would have
to be higher. Tr. 11/5/97 at 185-86 (Schultz).
195. The Company’s reply to the Department’s position that incentive pay replaces the
percentage differential between exempt and bargaining employees was the statement that “[i]f all
or part of the broad-based incentive pay system is rejected by the Board, the Company would
have a strong incentive to return to a base-pay driven system, which an ever shrinking minority
of utilities use.” Griffin pf. at 25.
196. The incentive pay associated with the employees transferred to GMER remains in
GMP’s cost of service request. Incentive pay for 12 of the 27 positions identified as being
transferred to GMER totaled $100,172 during the test year. Schultz pf. 10/7/97 at 10.
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197. GMP’s incentive pay plan has five performance measures. The first two measures
are return on equity and total shareholder return, both of which are geared toward benefits
received by the stockholders. The other measures include rate performance, customer
satisfaction, and reliability.
While the rate performance measure appears to be a category
concerned with improving ratepayer welfare, the standards for this measure are too lax to be
useful; the peer group utilized to measure GMP’s rate performance all have rates higher than
GMP. The customer satisfaction measure is also defined too loosely to improve ratepayer
welfare; a minimum payment for customer satisfaction is made if a 70 percent customer
satisfaction rating is achieved. This is well below the 1991-1995 average customer satisfaction
rating of 89.4 percent. Similarly, the reliability measurement sets a low bar; it requires only a 1
percent increase over the prior year for incentive payment. Id. at 10-11.
198. There will not be a Management Incentive Plan (“MIP”) award for performance
year 1997. Tr. 1/7/98 at 186 (Griffin).
Discussion re: Salary Incentives
An incentive for employees does not exist when the Company already has the lowest rates
in its peer group. There also is not an incentive when the customer satisfaction target rating is
set at 80 percent; historically, the Company averages 89.4 percent customer satisfaction, and
when satisfaction declines to 81 percent, it is still “on target.” As stated by Department witness
Schultz:
Incentive is that which stimulates to action. If GMP’s management believes that
attaining goals that do not encourage improvement is sufficient for payment of
additional compensation, then its shareholders, not its ratepayers, should pay for
the related compensation. Nowhere does Mr. Griffin rebut the fact that the goals
are not sufficient as incentives.
The general incentive payroll expense should be reduced by $245,292197 and the MIP expense
should be reduced $186,465. This removes all incentive pay from GMP’s proposed cost of
service.
197. Using the Company?s payroll expense factor ? see Discussion in Section 0.
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A. Management Efficiency AdjustmentA. Management Efficiency Adjustment
199. In a study of the relative efficiency of electric utilities in the United States
published in the June 15, 1997, Public Utilities Fortnightly, GMP ranked 79th out of 94 electric
utilities in relative efficiency. GMP is approximately 6 percent less productive than the average
utility. The sample of electric utilities included approximately half of all the investor-owned
electric utilities in the U.S. Rosenberg pf. 10/7/97 at 30-33; tr. 1/6/98 at 161-164 (Rosenberg);
exh. IBM-5.
200. In that study, GMP ranks in the top third of the 17 utilities in the New
England-New York area. GMP's efficiency at 85 percent was better than average for that group
of 17 utilities (84 percent), which includes some very large ones. Tr. 1/6/98 at 165-168
(Rosenberg); exh. IBM-5.
201. Utilities that purchase power rather than generating it themselves were ranked as
less efficient. This result is due to higher costs per kWh for those utilities. Utilities that had
higher expenditures on DSM, all other things being equal, would also appear less efficient. Tr.
1/6/98 at 174-5 (Rosenberg).
202. According to the same study, GMP's relative efficiency decreased by 2.17 percent
during the period from 1990-1995. In contrast, the average relative efficiency of the 94 utilities
in the study increased by 2.47 percent during the time period. Rosenberg pf. 10/7/97 at 31; exh.
IBM-5.
203. GMP reduced employment levels and non-payroll operations and management
(“O&M”) costs over the period from 1990 to 1994, about the same period as the study covered.
Non-payroll O&M increased from 1994-1996. Tr. 11/6/97 at 157-58 (Rosenberg).
Docket No. 5983
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Discussion re: Management Efficiency Adjustment
IBM recommends that we impute a two percent efficiency adjustment to GMP’s
operating expenses, which would reduce the Company’s revenue requirement by $2.6 million
dollars. IBM cites a recent study in Public Utilities Fortnightly that compares the relative
efficiency of a group of approximately one-half of the investor-owned utilities in the U.S. and
asks the Board to consider two observations that show, IBM argues, that GMP is not efficiently
and economically managed and operated.198 First, according to this article, GMP ranks 79th out
of 94 in terms of relative efficiency, and is 6 percent less productive than the average of this
group. Second, GMP’s relative efficiency has declined by 2.7 percent from 1990 to 1995.
IBM also believes that an adjustment is needed to reverse the decline in efficiency over
the five-year period in the study. IBM argues that this adjustment would emulate competition
since in a competitive market GMP would have to compete with other utilities. Under those
circumstances, GMP would be required to increase its relative efficiency by lowering costs.199
GMP argues that relative rankings on a national basis are not appropriate and that if a
region-wide comparison is made, GMP places in the top third and has a relative efficiency that is
better than average for the region. GMP also points out that, given the basis for the efficiency
comparisons, utilities that have higher purchase power costs or greater spending on DSM than
average will rank lower, other things being equal, than utilities with lower spending on purchase
power or DSM.
We decline to adopt IBM’s recommendation for a two percent efficiency adjustment for a
number of reasons. The evidence presented is not persuasive that GMP is inefficiently managed
or operated. The nature of the efficiency measures clearly show some bias toward utilities with
a particular set of resources in their portfolios. There also is a reasonable basis to consider a
regional subset of companies a more appropriate measure of comparison than the national group.
Finally, since a principal measurement used in the study is the number of employees per MWh
of sales, the study appears biased against utilities that experience reduced sales through DSM
programs and other efficiency efforts in their service territories. We have long understood in
Vermont that this is not a proper way to measure a utility’s performance.
198. IBM Brief at 58.
199. IBM Brief at 58.
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B. TaxesB. Taxes
204. GMP's income tax expense calculation utilized a federal income tax rate of 34
percent. GMP is subject to the full 35 percent federal income tax rate. Schultz pf. 10/7/97 at
22.
205. Income tax expense should be adjusted to reflect the impacts of any adjustments to
the return on rate base. Schultz pf. 10/7/97 at 22.
Discussion re: Taxes
In calculating income tax expense, in its original filing GMP utilized a federal income tax
rate of 34 percent. However, GMP is subject to the full income tax rate of 35 percent. The
Company did not rebut the Department's recommendation that a 35 percent federal income tax
rate be used.
GMP states that, other than the calculation of payroll tax, the Company and the
Department have no dispute on the effect of taxes on the cost of service.200
A final adjustment for income tax expense cannot be made until we have taken into
consideration any other adjustments made to rate base and return on rate base investment, and
any revisions to the weighted cost of debt. Given the adjustments we are proposing here, based
on the federal tax rate of 35 percent, income tax expense will decrease by approximately
$1,942,000 for a total tax impact of $5,539,000. This amount shall be recalculated in the final
compliance filing.
C. Accumulated Depreciation and Depreciation Expense C. Accumulated Depreciation and
Depreciation Expense
206. In its initial filing, the Company requested an increase in depreciation expense of
$2,250,000 associated with capital items. Kvedar pf. 6/16/97 at 9.
207. Any revisions made to GMP's projected 1997 and 1998 additions to plant in service
result in necessary revisions to accumulated depreciation and depreciation expense, as the
amounts are contingent on the amount of plant additions. Schultz pf. 10/7/97 at 50.
200. GMP PFD at ? 340.
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Discussion Re: Accumulated Depreciation and Depreciation Expense
No party submits that the calculation or the methodology underlying depreciation expense
is incorrect. However, the depreciation expense and accumulated depreciation both depend
upon the amount of rate base after adjustments, thus any revisions made to GMP's projected 1997
and 1998 additions to plant in service will result in necessary revisions to accumulated
depreciation and depreciation expense.
Based on the adjustments we have made to plant in service, GMP's originally requested
accumulated depreciation will increase by $138,000 and amortization and depreciation expense
will be reduced by $471,123.
D. Other AdjustmentsD. Other Adjustments
1. Service Awards Banquet1. Service Awards Banquet
208. The Company seeks to include in the cost of service $16,020 in costs for an
employee service award banquet. Schultz pf. 10/7/97 at 14-15; Kvedar reb. pf. 11/24/97 at 1-2.
209. The banquet is used to recognize employee loyalty, to enhance employee morale,
and to discourage employee turnover. Kvedar reb. pf. 11/24/97 at 1.
Discussion re: Service Awards Banquet
GMP seeks to recover the costs of an employee service award banquet. This banquet is
used to recognize and motivate employees and thus is expected to reduce turnover and improve
performance. The Department recommends that these costs be removed because they are
excessive and because there is no evidence that the banquet accomplishes its goals.
The Board has previously approved the inclusion of such employee recognition costs in
cost of service, recognizing the importance of contributing to employee morale.201 We agree
with the Company that recognizing the efforts of its employees is a justified cost of doing
business and we will allow the Company to recover these costs in rates.
2. Relocation Costs2. Relocation Costs
210. GMP’s test year expenses include $10,478 for a 106-day stay (approximately 3.5
months) at a hotel associated with relocating a new employee. Schultz pf. 10/7/97 at at 15-16.
201. See Docket 5532, Order of 4/2/92 at 81.
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211. The last time the Company paid for temporary living costs associated with the
relocation of an employee with a duration of over 60 days was in 1984, twelve years prior to the
historic test year. Schultz reb. pf. 12/24/97 at 50.
212. No policy exists at GMP for length of reimbursement of relocation costs. Schultz
reb. pf. 12/24/97 at 50-51; tr. 1/8/98 at 105 (Schultz).
213. The Department recommends an adjustment of $10,478 for this non-recurring
relocation cost, but is not recommending a reduction for any of the Company’s other test year
relocation costs included in this filing. Tr. 1/8/98 at 106 (Schultz); Schultz pf. 10/7/97 at 50.
Discussion re: Relocation Costs
The Department recommends that the costs included for a lengthy hotel stay for
relocation of a new employee, totaling $10,478, be removed, as such costs are non-recurring in
nature.
The Department's adjustment removes only the relocation costs associated with lodging for this
one relocating employee; the cost of service still includes other relocation costs that occurred in
the test year.202 The Company argues that it needs to recruit and relocate quality employees
and that this expense recurs, as does the costs associated with relocating such employees to
Vermont.203
The last time the Company had this level of relocation expense for one employee was
over ten years ago. Clearly this particular level of expense is not recurring. Moreover, the
Company has no general policy for employee relocations and the last time.
We agree with the Department that the test year expense associated with the protracted
stay by a new GMP employee at a hotel should be excluded from rates. The test year will still
include all remaining relocation expenses, allowing for an ongoing level of relocation costs that
are recurring in nature. The evidence shows that this particular expense is non-recurring, and
therefore, we will adopt the Department's recommendation that test year expenses be reduced by
$10,478.
202. Schultz reb. pf. 12/24/97 at 50; tr. 1/8/98 at 49 (Kvedar); tr. 1/8/98 at 106 (Schultz).
203. Tr. 1/8/98 at 104-106 (Schultz).
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3. Non-Recurring Wind Project Dedication Costs3. Non-Recurring Wind Project
Dedication Costs
214. GMP’s estimated annual wind project O&M costs include $30,000 for the
Searsburg Wind Plant dedication ceremony. Schultz pf. 10/7/97 at 16.
215. The Searsburg plant dedication ceremony occurred on August 15, 1997, at a cost of
approximately $27,000. Id.
216. The dedication was a one-time event; it will not be repeated in the adjusted test
year or ever again. Tr. 11/6/97 at 345 (Saintcross).
217. The $30,000 projected plant dedication cost is a non-recurring event for which
GMP will not incur costs during the rate year. Schultz pf. 10/7/97 at 16.
218. GMP did not provide any evidence to rebut the Department’s recommendation on
this point.
Discussion re: Non-recurring Wind Project Dedication Costs
GMP’s projected annual O&M costs for the wind project include $30,000 for the plant
dedication ceremony. There are two reasons to disallow these costs. The dedication ceremony
was a one-time event which has already occurred and will not recur during the rate year. The
Company has not presented any rebuttal on this issue and has not presented evidence to indicate
that this cost will recur during the rate year.
In addition, the Company failed to include this expense during the Section 248 review of
this project in Docket 5283. Consequently, we agree with the Department that the projected
costs for the wind plant dedication ceremony should be removed from annual O&M costs.
4. Preliminary Survey Charges4. Preliminary Survey Charges
219. GMP’s test year expenses include $346,000 for the write-off of preliminary survey
charges.
The account to which the preliminary survey charges were written-off is the account
for office supplies expense. Schultz pf. 10/7/97 at 18-19.
220. The reason GMP gave for these write-offs was that the Company concluded that
these studies were not going to be developed into depreciable assets in the foreseeable future.
Schultz pf. 10/7/97 at 18.
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221. The Company stated that the costs being written off were primarily incurred from
1990 to 1994. Tr. 1/8/98 at 49 (Kvedar).
222. There was no preliminary survey write-off in 1992 or 1993. The write-off for
1994 was $5,059 and in 1995 it was $6,391. Tr. 1/8/98 at 49 (Kvedar); Schultz reb. pf. 12/24/97
at 53.
223. The test year level of write-off of $346,000 for preliminary surveys was not
normal. Tr. 1/8/98 at 49 (Kvedar).
224. GMP's external auditor’s report specifically identifies the $346,000 expense for
preliminary survey and investigation charges. The report serves to highlight items that the
auditors believe should be brought to the attention of the Audit Committee. Schultz reb. pf.
12/24/97 at 52.
Discussion re: Preliminary Surveys
The Company requests that the costs of conducting preliminary studies of potentially
large investment projects be included in the cost of service. Preliminary surveys are typical for
possible construction projects. GMP argues that it is important to the Company and its
customers that the Company make prudent decisions with respect to whether large scale projects
should be undertaken and accordingly, the costs of preliminary surveys rightfully belong in cost
of service.204
No party suggests that these costs were unreasonably incurred or unnecessary. However,
the level of preliminary surveys being written off in the test year far exceeds the past level of
write-offs in past years, indicating that they are not normal and recurring.
Furthermore, the
Company's own external auditors apparently were concerned with the level of preliminary survey
charges written off during the test year, as they specifically identified the item in their report to
GMP's Audit Committee.
The Department recommends that the preliminary survey costs written off during the test
year of $346,750 be removed from expenses.205 We agree that it is not likely that the Company
will continue to write-off preliminary survey charges at the test year level on an annual basis.
However, preliminary surveys may provide a utility with useful information upon which to
204. Kvedar reb. pf. 11/24/97 at 4-5.
205. Schultz pf. 10/7/97 at at 19.
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base construction decisions. These costs, by their very nature, are recurring. Therefore a
reasonable level of costs for these surveys should be included in the cost of service. We will
allow GMP to recover the five-year average of these costs in this case, or $71,640.206
5. Appliance Survey 5. Appliance Survey
225. Test year costs associated with the residential appliance saturation survey is a
recurring expense. Schultz reb. pf. 12/24/97 at 53.
226. The Department originally proposed an adjustment of $15,700 for the residential
appliance saturation survey.207 In rebuttal, the Department agreed that the costs associated with
residential appliance saturation survey is a recurring expense; no adjustment is required for this
item. Id. at 53.
6. Shareholder Services Cost Savings6. Shareholder Services Cost Savings
227. GMP implemented cost savings of $14,000 associated with the annual shareholders
meeting that took place in May, 1997. Those savings are the result of lower proxy costs,
elimination of the luncheon, and a reduction in security costs. Schultz pf. 10/7/97 at 19-20.
228. Test year expenses should be reduced to reflect these cost savings in the test year.
Schultz pf. 10/7/97 at 20.
Discussion re: Shareholder Services Cost Savings
The Department recommends an adjustment for savings that were realized by GMP but
not reflected in a reduction to expense. Cost savings should be reflected in reduced expenses
and passed on to ratepayers. GMP has not provided evidence to rebut the Department’s
recommendation on this issue. Therefore, we accept the Department’s recommended
adjustment of $14,000.
7. Rent expense7. Rent expense
229. Rental charges associated with 35 Green Mountain Drive were included in the
Company’s test year costs. Tr. 11/4/97 at 260 (Kvedar).
206. The average is computed from a total of $358,200 (0+0+5,059+6,391+346,750) divided by 5 years.
207. Schultz pf. 10/7/97 at 22.
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230. Those costs should be removed from pro forma expenses because 35 Green
Mountain Drive is included in rate base, and has been treated this way in the past. These costs
should not be included in both expenses and rate base. Tr. 11/4/97 at 260 (Kvedar); tr. 11/3/97
at 22 (Griffin).
231. An adjustment to expenses of $150,000 is appropriate to reflect this error. Tr.
11/3/97 at 22 (Kvedar); Schultz reb. pf. 12/24/97 at 49.
8. Reserve Account Correction8. Reserve Account Correction
232. GMP established a general reserve during the test year primarily for accrued
vacation costs. GMP had not accrued for vacation time prior to that point in time. Schultz pf.
10/7/97 at 20.
233. GMP established the general reserve at $187,000 by crediting a general reserve
account and debiting employee benefit expense by the $187,000. GMP also removed $150,000
from its injuries and damages reserve and credited injuries and damages expense during the same
period. Schultz pf. 10/7/97 at 20.
234. The accounting entries utilized by GMP to set up the general reserve resulted in a
net increase to test year expenses of $37,000. Schultz pf. 10/7/97 at 20.
235. GMP agreed to remove the $37,000 impact on test year expenses. Schultz pf.
10/7/97 at 20; tr. 11/3/97 (Griffin).
9. Miscellaneous Adjustments9. Miscellaneous Adjustments
236. Test year expenses include the charges for the annual maintenance agreement with
LCG Consulting twice, for both 1996 and 1997. Schultz pf. 10/7/97 at 21.
237. Test year expenses should be reduced by $32,000 to ensure that annual charges
from LCG Consulting are not double counted. Schultz pf. 10/7/97 at 21.
238. Test year expenses include $500 paid to the Vermont Lodging & Restaurant
Association to sponsor an afternoon break at the Association's Annual Meeting. Schultz pf.
10/7/97 at 21.
239. Sponsorships should not be charged to ratepayers. Schultz pf. 10/7/97 at 21.
240. Test year expenses include a payment of $2,000 for a presentation of
consumer-brand relationship framework and ideas. This cost is non-recurring. Schultz pf.
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10/7/97 at 21-22.
Discussion re: Miscellaneous Adjustments
The Department recommends a total adjustment of $34,500 for miscellaneous items that
the Department believes should not be included in the cost of service. GMP did not present any
evidence to rebut the Department's recommendations on these miscellaneous expense
adjustments. The Department’s adjustments are reasonable and we will adopt them here.
10. Cost Savings Adjustment10. Cost Savings Adjustment
241. GMP identified potential savings that would occur as a result of two specific
additions to 1997 general plant. Schultz pf. 10/7/97 at 33.
242. The bill inserter will reduce maintenance costs by $7,483 per year. The PBX
upgrade will eliminate certain toll calls and thus produce savings of $24,000 per year.
The total
cost reduction of $31,483 should be reflected in test year cost of service. Schultz pf. 10/7/97 at
33-34.
11. Retirement Incentive Bonus11. Retirement Incentive Bonus
243. During the test year, GMP offered a one-time cash payment of $1,000 as part of a
retirement incentive option to its employees. Twelve of GMP's employees accepted the
retirement option during the test year. Schultz pf. 10/7/97 at 13.
244. Test year expenses include $12,000 for the twelve employees accepting this
one-time cash payment incentive. This is a non-recurring expense. Schultz pf. 10/7/97 at 13.
Discussion re: Retirement Incentive Bonus
Test year expenses include $12,000 associated with the award of $1,000 to each of twelve
employees accepting a retirement incentive option. The awards were one-time only and thus by
their very nature are non-recurring. The Department recommends that $12,000 should be
excluded from the test year for these non-recurring costs. The Company has not rebutted this
Department recommendation, nor has it provided evidence that the costs will recur.
Non-recurring costs should not be included in the cost of service; therefore, we will accept the
Department’s recommendation and reduce expenses by $12,000.
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E. CVPS Transmission InterconnectionE. CVPS Transmission Interconnection
For a discussion of the cost of service and rate base treatment of this item, see Section 0.
Based upon that discussion, we will make an adjustment of $18,510 to cost of service for this
item.
F. FERC Headwater BenefitsF. FERC Headwater Benefits
For the reasons discussed in Section 0, we agree with the Department that this expense
should be reduced by $16,401.
G. PayrollG. Payroll
245. GMP is requesting an adjusted test year payroll expense of $11,854,081. This
request is an increase of $679,693 over actual test year payroll expense. Griffin pf. 7/11/97 at 2;
Schultz pf. 10/7/97 at 5.
246. GMP calculated its pro forma payroll costs by increasing actual test year payroll,
inclusive of overtime, by the effective pay increases occurring subsequent to the test year. Gross
payroll is then apportioned between capital and expense accounts based on an allocation factor.
The payroll expense included in GMP’s request includes DSM payroll. Schultz pf. 10/7/97 at 5;
Griffin pf. 7/11/97 at 3.
247. The effective pay increases used by GMP were based on estimated and contracted
percentages for the years 1997 through 1999. Union contracts call for 2.5 percent increases in
1997 and 1998. The increase also includes a base pay increase for non-union employees of 2
percent. To these base amounts the Company adds on-call premiums, shift differentials, and
incentive pay. Griffin pf. 7/11/97 at 3-4; Schultz pf. 10/7/97 at 5.
248. GMP counted 345 full-time equivalent employees during the test year. Tr. 11/3/97
at 40 (Griffin).
249. GMP is anticipating a head count of 335 in the rate year. Tr. 11/3/97 at 41
(Griffin).
250. GMP’s work force has been declining. From 1993 to 1994, it dropped by ten
people, from 1994 to 1995 it dropped by twenty people, and from 1995 to 1996 it dropped by
fifteen people. Tr. 11/5/97 at 178-179 (Schultz).
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251. In the test year, twenty-seven employees left GMP to work for the Company’s
unregulated subsidiary, GMER. Twenty-six of those employees were reflected in GMP’s test
year payroll expense. Griffin reb. pf. 11/24/97 at 7.
252. The Company intends to replace 13 of the 27 employees that left GMP for GMER.
Of those 13 positions, only five had been filled as of the date of rebuttal testimony on 1/7/98.
Griffin reb. pf. 11/24/97 at 2, 4; tr. 1/7/98 at 172, 200 (Griffin).
253. The Company’s request for payroll expense of $11,854,081 is computed on the
basis of 345.35 full-time equivalent employees. Exh. GMP-2, sch.1 at 1.
254. In GMP’s payroll calculation, the adjusted payroll was also reduced by DSM
payroll and increased by summer/temporary pay. The resulting amount was multiplied by the
actual payroll expense factor of 62.74 percent for the three months ended March 31, 1997. This
expense allocator is lower than the Company's five-year average expense ratio of 65.13 percent.
Tr. 1/8/98 at 94-95 (Schultz); Griffin pf. 7/11/97 at 3.
255. In the past, GMP has used a payroll expense allocation factor that represents the
five-year historical average. Griffin pf. 7/11/97 at 3.
256. During the test year, the percentage of payroll expensed declined from prior levels,
as GMP employees charged their time to GMP’s unregulated activities. Griffin reb. pf. 11/24/97
at 5.
257. In rebuttal, the Department used a payroll expense factor for calculating its
recommended adjustment to payroll. The Department’s 65.67 percent expense allocator is based
on the average expense allocator for nine months of 1992 and years 1993 through 1996. Schultz
reb. pf. 12/24/97 at 44.
258. The Department recommends that its adjustment to payroll expense reflect the
departure of the twenty-six GMP employees who left for GMER during the test year. If the
Department based its adjustment on replacement of thirteen of the twenty-six GMER positions,
GMP’s pro forma payroll expense would be reduced by $889,419, resulting in an overall
adjustment of $275,045. Exh. DPS-64, sch. SR3 at 1.
259. The Department also based its payroll expense adjustment on a different level of
DSM payroll than did the Company. The DSM expensed payroll has been declining and has
been under budget. Because of declining DSM payrolls, the March 1997 year to date amount of
$166,472 should be annualized to reflect a more known and measurable level of DSM payroll.
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The resulting annualized amount is $665,888 ($166,472 x 12/3). The Department recommends
using this level of DSM payroll expense, rather than the Company’s $717,146. Schultz pf.
10/7/97 at 8.
Discussion re: Payroll
GMP’s payroll expense is based on a gross payroll for 345.35 FTE employees, including
twenty-six employees who left GMP during the test year to work for GMER. The headcount
expected in the rate year is 335. Rather than removing these employees who left GMP for
GMER from gross payroll, GMP has purportedly accounted for their departure by using a lower
payroll expense allocator (for allocating payroll between expense and capital accounts), based on
the three-month period ending in March, 1997, rather than a higher allocator based on the
five-year historical average. The lower allocator, the Company argues, more accurately reflects
the level of labor at which service will be provided during the rate year.208 GMP argues that as
a result of using the lower expense allocator, GMP has effectively removed $424,000 from test
year cost of service to reflect this lower head count. 209
The Department argues that GMP’s payroll expense is overstated because it does not
recognize the full impact of the reorganization of employee costs from the regulated to the
unregulated side of the Company.210 The major difference between the Department’s
recommendation and the Company’s request is whether the Company will replace the thirteen
positions (out of the 26 employees) for workers who departed GMP for GMER. GMP has stated
that it is replacing those thirteen workers, and as of the date of rebuttal testimony, five had
already been hired. We find it reasonable for GMP to include the replacement of thirteen of the
twenty-six GMER positions that were included in the Company’s cost of service payroll expense.
The evidence also shows that DSM payroll is declining. The Department recommends
use of a lower level of DSM payroll than the Company, to reflect known and measurable changes
to DSM payroll. This adjustment will more accurately reflect DSM payroll expensed in the rate
year and is reasonable and appropriate.
The Department and GMP do not agree on the appropriate payroll expense allocator to
208. GMP Brief at 58.
209. Tr. 11/3/97 at 40 (Griffin).
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use. The Company claims that its expense factor for the three months ending March 1997 of
62.74 percent is appropriate because "the lower expense percentage is more indicative of the
labor levels at which service will be provided to" GMP's ratepayers in the rate year.211 The
Company states that during the test year, the percentage of payroll expensed declined from prior
levels, as GMP employees charged their time to GMP’s unregulated activities. GMP reasoned
that the effect of using the lower expense ratio was to transfer the cost of some employees to the
unregulated side of the business for the purpose of calculating the cost of service. The Company
used this lower expense ratio as a proxy for recognizing that some of the test year payroll costs
were for employees of GMP that had worked for GMER in the test year.212
The Company used the lower expense allocation factor because it represented a known
and measurable change
i.e., a lower expense percentage due to the movement of some
employees from the regulated to the unregulated side of the business. This is appropriate.
Using the higher factor recommended by the Department would not reflect this known and
measurable change. Thus we will apply the Company’s allocation factor of 62.74 percent when
calculating our adjustment. The Board adjustment will thus include a reduction of thirteen
positions, and will apply the Company’s lower expense allocator.
We are not persuaded that the effect of using both the Company’s lower expense
allocator, and removing the payroll expense from cost of service for the balance of thirteen
employees who transferred from GMP to GMER during the test year and are not going to be
replaced in the rate year, results in double counting. First, all twenty-six employees who left
during the rate year were included in the payroll calculation, when the Company knew at the time
of filing that it only intended to replace thirteen of those positions. While only five of the
twenty-six positions have actually been replaced as of the rebuttal hearings, the Company has
testified that it will fill all thirteen of those positions in the rate year. Second, the Company
itself states that, in light of changes affecting the utility industry, a lower expense allocator is
more indicative of the labor levels that will provide service to ratepayers in the rate year. Third,
the evidence shows that the trend at GMP is that the workforce is declining. Given these
reasons, we believe that the combined effect of our adjustment is just and reasonable.
The Department has calculated the effect of reducing GMP’s payroll request to include
210. Schultz pf. 10/7/97 at 5.
211. Griffin pf. 7/11/97 at 3.
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only thirteen of the twenty-six employees who left GMP for GMER. Applying the Company’s
expense factor of 62.74 percent to that calculation, results in a reduction to GMP’s payroll
expense request of $761,958.213
H. PITWH. PITW
260. PITW is an acronym for GMP’s allocated payroll insurance, taxes, and welfare
costs. Kvedar pf. 6/16/97 at 8.
261. GMP seeks to adjust the cost of service by $382,000 to reflect the allocation of
costs to pay for PITW. This adjustment is due to changes in costs relating to medical, pension,
workers compensation, 401(k) contributions, and costs associated with disability programs and
premiums. Exh. DPS-64, sch. SR4; Kvedar pf. 7/1/97 at 8.
262. GMP’s proposed adjustment includes a $166,766 reduction in rate year cost of
service to reflect the departure of thirteen test year payroll positions of employees who left for
GMER that will not be replaced. Griffin reb. pf. 11/24/97 at 21.
263. Gross PITW (including DSM PITW) is calculated by reference to test year costs
and then adjusted to take into account changes that will affect PITW levels in the rate year.
Griffin pf. 11/10/97 at 6-8.
264. PITW costs are both expensed and capitalized. Kvedar pf. 11/10/97 at 8.
265. With the exception of long-term disability costs, PITW costs are based on the test
year costs multiplied by the expense allocator. The long-term disability charges were based on
twelve monthly invoices rather than eleven included in the test year. Griffin pf. 7/11/97 at 6;
exh. DPS-Cross-1.
266. In determining pro forma benefits expense, GMP utilized a 64.19 percent payroll
expense factor, inclusive of DSM, for application to benefits costs. This expense factor is based
on the three months ending March 31, 1997 and is lower than the five-year historical average.
Schultz pf. 10/7/97 at 12; Schultz pf. 12/24/97 at 46.
267. The Department proposes an adjustment based on utilization of a 58.75 percent
expense factor based on GMP's four-month average, April-July, 1997. The Department is
proposing using this allocator to account for the impact on benefits resulting from employees
212. Tr. 11/3/97 at 39 (Griffin).
213. See, Exh. DPS-64, sch. SR3 at 2; substituting the Company?s expense allocator of 62.74 percent for the
Docket No. 5983
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who left GMP for GMER. Schultz pf. 10/7/97 at 13.
268. GMP will have no pension contribution requirements through 1999. Tr. 11/3/97 at
55 (Griffin).
269. GMP is not including any pension contributions in this rate request. Tr. 11/3/97 at
57 (Griffin); Griffin reb. pf. 11/24/97 at 20.
270. In this case, the Company has not accounted for pension costs under the FAS 87
methodology. The Company now uses the cash contribution methodology to record this annual
expense based on amounts funded (contributions). Griffin reb. pf. 11/24/97 at 20.
271. In Docket 5532, the Board endorsed GMP’s decision to base its pension expense
on its FAS-87 obligation. Schultz reb. pf. 12/24/97 at 45.
272. Using the FAS 87 methodology, GMP’s pension account shows a negative balance.
GMP's FAS 87 amount for 1996 is a negative $26,165. This is the most recent actuarial
calculated amount, which is consistent with what the Board has utilized in the past for
determining pension expense. Schultz reb. pf. 12/24/97 at 45.
273. GMP's pension plan is over-funded. No contribution to the pension plan was
necessary in 1996 and none will be required for 1997, 1998 and 1999. Schultz pf. 10/7/97 at 13.
274. GMP’s actuary used exceedingly aggressive assumptions to minimize the
Company's negative pension expense. The calculations were performed using an 8 percent
interest rate, a 6 percent salary increase and a zero percent return on plan assets in the actuarial
assumptions. In comparison, the 1996 calculations used assumptions of a 9 percent return and a
5 percent salary increase. Schultz pf. 10/7/97 at 13.
275. The Department recommends that the Company's PITW expense should be reduced
by $283,882 in order to reflect pension expense based on the FAS 87 accrual methodology, to
reflect the impact of the Department's recommended adjustment to payroll on payroll tax
expense, and to reflect the four-month average, April-July 1997, payroll expense factor of 58.75
percent in determining the expense amount. Schultz pf. 12/24/97 at 45-47; exh. DPS-64, sch.
SR4.
Discussion re: PITW
DPS allocator of 65.67 percent in column two, results in a general payroll adjustment of $761,958.
Docket No. 5983
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The Company submitted a request for recovery of PITW expenses. PITW refers to
certain employee-related expenses such as pensions, insurance, some state federal and local taxes
and healthcare, disability and retirement programs. As with payroll, PITW is charged to both
expense and capital accounts, with only the expense portion of PITW being included directly in
the cost of service. The capitalized portion is included in rate base along with the associated
capital assets.
As with payroll, the Company argued that rather than using the five-year historical
average for an expense allocator, a lower expense allocator should be used to account for cost
savings that may be realized by the loss of positions to GMER.214 The Department
recommends using a lower expense allocator based on the most recent information available and
to better reflect the impact of the employees transferred to GMER.215 The positions of both
GMP and the DPS deviate from the usual methodology which employs the five-year historical
average. The Department’s use of the most recent information seems reasonable in this case.
The Department also criticizes GMP for diverging from using the FAS 87 accounting
treatment for pension costs. GMP has used a cash contribution methodology for accounting for
pension costs in this case, and the Department urges the Board to require the Company to utilize
the FAS 87 accrual methodology. The Board accepted the FAS 87 amount in Docket 5532
because it was consistent with the ruling in Docket 5428, regarding post-retirement health care
costs.216 The DPS argues that post-retirement health care costs (FAS 106 costs) are not based
on a cash contribution methodology and neither should the pension costs be based on
contributions.217
The Company’s filing included zero dollars for pension expense. However, the
Company’s FAS 87 amount for 1996 shows a negative $26,165 balance. The Department
argues that the actuarial assumptions of a zero percent return on plan assets and use of 6 percent
salary increase are an aggressive effort by the Company to minimize the negative pension
expense.218 The Department suggests that only now, because the FAS 87 is negative, the
Company wants to deviate from its previous practice of using the FAS 87 accrual methodology
214.
215.
216.
217.
218.
Griffin pf. 7/11/97 at 6; Griffin reb. pf. 11/24/97 at 21.
DPS Brief at 95.
Docket 5532, Order of 4/2/92 at 73; Docket 5428, Order of 1/4/91 at 57.
Schultz pf. 12/24/97 at 45; DPS Reply Brief at 16-17.
Schultz pf. 10/7/97 at 13.
Docket No. 5983
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and use a method that results in a zero pension expense.219
We believe that our prior orders are clear on this point. In GMP’s last litigated rate case,
Docket 5532, the Company was required to account for pension costs using the FAS 87
methodology. GMP should base pension costs on the FAS 87 accrual methodology in this case.
Such treatment is consistent with FAS 106 treatment for post-retirement health care costs.
The Department recommends that the Company's PITW expense should be reduced by
$283,882 in order to reflect pension expense based on the FAS 87 accrual methodology, to
reflect the impact of the Department's recommended adjustment to payroll on payroll tax
expense, and to reflect the four-month average, April-July 1997, payroll expense factor of 58.75
percent in determining the expense amount. The Department’s recommendations are reasonable
and we will adopt the adjustment to PITW expense of $283,882.
Finally, we note that GMP’s pension fund has performed well in the financial markets,
and is presently over funded. These funds, provided by ratepayers, should be maintained for the
benefit of the Company and its employees in the provision of regulated utility services. GMP
shall not, without Board approval, make any disbursements from the pension fund, outside of the
normal course of business of the regulated enterprise in funding the pensions of employees
engaged in its regulated operations. We would welcome, in the next rate case, a report on the
status of the fund and the Company’s plans for its management.
I. ConclusionI. Conclusion
In its original filing, GMP requested a revenue increase of $25,789,000. Based on the
evidence described in rate base and cost of service sections, including power cost adjustments set
out in Section 0, we approve an overall revenue increase of $5,570,000 for a rate increase of 3.61
percent. On the basis of the Department’s filings, we conclude that this rate level will provide
sufficient revenue for the continued provision of adequate and reliable service to the Company’s
ratepayers. We find this rate level to be just and reasonable.
219. Tr. 1/8/98 at 100 (Schultz).
Docket No. 5983
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I. COST OF CAPITAL I. Cost of Capital
A. Capital Structure, Cost of Debt, Cost of Preferred StockA. Capital Structure, Cost of
Debt, Cost of Preferred Stock
276. GMP’s overall return request is based on a pro-forma capital structure as of March
31, 1997. Hill pf. 10/7/97 at 13.
277. The Company’s rate-making capital structure is different from its actual, booked
capital structure at March 31, 1997. GMP removes $1.7 Million of long-term debt and $1.65
Million of preferred stock due to be redeemed within one year from the balances at March 31,
1997. In addition, the Company has included a one-year average level of short-term debt in the
rate-making capitalization. The Company also removes its investment in unregulated operations
from the common equity balances. Those adjustments produce a capital structure which is
reasonable for rate-making purposes, similar to that with which the Company has been
capitalized in the recent past and is, therefore, representative of the manner in which it is likely to
be capitalized in the future. Hill pf. 10/7/97 at 14.
278. The Company also alters its per-book capital structure by adding $3.3 Million to
the equity balances which it indicates represents issuance (or “flotation”) expenses. Hill pf.
10/7/97 at 14.
279. The addition of $3.3 Million to GMP’s equity balances, alone, would cause rates to
increase $232,000 every year. Hill pf. 10/7/97 at 15.
280. An adjustment for flotation costs is unnecessary. Such costs are unnecessary
because the Company will not be incurring such a cost during the rate year. Hill pf. 10/7/97 at
15, 39, 38-40.
281. The majority of the $3.3 Million is comprised of underwriter’s discounts and does
not represent out-of-pocket costs by GMP. Even if the Company expected a public issuance of
common stock and needed an issuance expense adjustment to the cost of equity, the majority of
the issuance expenses incurred in any public offering are “underwriter’s fees” or “discounts”.
Underwriter’s discounts are not out-of-pocket expenses for the issuing company. On a per share
basis, they represent only the difference between the price the underwriter receives from the
public and the price the utility receives from the underwriter for its stock. As a result,
underwriter's fees are not an expense incurred by the issuing utility and recovery of such “costs”
Docket No. 5983
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should not be included in rates. Hill pf. 10/7/97 at 39.
282. GMP and the DPS agree to the amount and rates for Preferred Stock, Long-term
Debt and Short-term Debt to be used for rate-making purposes in this proceeding: Preferred
Stock - $17.660 Million (cost rate = 7.930percent); Long-term Debt - $94.900 Million (cost rate
= 7.740 percent); and Short-term Debt - $ 9.293 Million (cost rate = 5.730 percent). Exh.
DPS-23 (SGH-1), Schedule 11; exh. Board-12, Attachment B, Schedule 3 .220
283. With the $3.3 Million in equity capital excluded from the rate-making capital
structure, the Company’s pro-forma rate-making capital structure consists of 43.835 percent
common equity, 8.144 percent preferred stock, 43.761 percent long-term debt and 4.261 percent
short-term debt. Exh. DPS-23 (SGH-1), schedule 11.
Discussion re: Capital Structure, Cost of Debt, Cost of Preferred Stock
There are three steps to establishing the cost of capital in a rate proceeding. First, we
determine an appropriate capital structure. Second, we determine the rates of each component
of the capital structure. Finally, we compute the overall cost of capital from the component rates
after adjusting for the proportional contribution of each.
With respect to the first step, GMP and the DPS are in agreement with regard to all parts
of the proposed rate-making capital structure except the amount of common equity. With
respect to the second step, GMP and the DPS are in agreement on the cost rate for preferred stock
and debt. IBM has taken no position with regard to capital structure or the cost rates for
preferred stock and debt in this proceeding. As discussed in the following Section, IBM, GMP
and the DPS each offer different recommendations on an appropriate cost of equity.
There is no pending dispute over the amounts and cost rates for preferred stock and debt.
The appropriate dollar amounts and cost rates of preferred stock, long-term and short-term debt
to be included in the rate-making capital structure are: Preferred Stock - $17.660 Million (cost
rate = 7.930 percent); Long-term Debt - $94.900 Million (cost rate = 7.740 percent); and
Short-term Debt - $9.293 Million (cost rate = 5.730 percent).
The disagreement between the Company and the DPS over the amount of common equity
220. While there is no dispute over the short-term debt amount, the figure presented here is nevertheless
slightly different from that originally presented by the Company in Exh. Board-12, Attachment B, Schedule 3. We
conclude that the difference is attributable to a transposition error and that the Company?s figure of $9.293 (rather
than the Department?s figure of $9.239) is accurate for purposes of determining the capital structure.
Docket No. 5983
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to be included in the rate-making capital structure relates to flotation costs. The Company’s
witness maintains that the $3,285,267.27 of accrued costs of issuing common stock are
out-of-pocket expenses; as such, these expenses should be included in the equity portion of the
capital structure.221 The practical effect of this adjustment would be to increase rates by
$232,000 per year. The Department has responded by indicating that (1) these costs are not
appropriate to include in rates because such costs will not be incurred during the rate year and (2)
in any event, the majority of these costs are not “out-of-pocket” expenses, but rather underwriter
costs or discounts that are not appropriately allowed in rates. Further, underwriters fees are
accounted for in the price investors are willing to pay in the primary market for utility equities
and additional compensation (whether through an increase in the allowed equity return or the
inclusion of issuance expenses in the equity balances) is unnecessary.
In Docket 5372, the Board commented that recovery of issuance costs is irrelevant when
no evidence is presented to demonstrate that during the rate year a common stock issuance will
take place.222 Moreover, the Board noted that the proper treatment of issuance costs is that
they be treated as unusual expenses and recovered in the cost of service over time.223
We agree with the Department that it would be inappropriate to include in rates flotation
costs that the Company has not demonstrated will take place during the rate year. We further
conclude that future Company rate requests for out-of-pocket flotation costs be treated as unusual
expenses and recovered in the cost of service over time. Finally, we agree with the Department
that the Company should only be eligible to recover actual out-of-pocket expenses. Underwriter
fees are not out-of-pocket expenses and are not appropriate to include in rates.
Therefore, the $3.3 Million should not be included in GMP’s pro-forma rate-making
capital structure. The appropriate rate-making capital structure is shown below.
TYPE OF
CAPITAL
Common Equity
Preferred Stock
Long-term Debt
Short-term Debt
AMOUNT
$95,059,000
$17,660,000
$94,900,000
$9,293,000
PERCENT OF
TOTAL
43.824%
8.142%
43.750%
4.284%
221. Williamson pf. 7/11/97 at 52-53.
222. In re Central Vermont Public Service Corporation, Docket 5372, Order of 5/31/90 at n.9.
223. Id.
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TOTAL
$216,912,000
100.000%
B. Cost of EquityB. Cost of Equity
284. The level of capital costs existing in the U.S. economy is relatively low by
historical standards and is expected to continue to remain at those relatively low levels in the
future. Hill pf. 10/7/97 at 4-12.
285. The general standards to be considered in establishing the costs of common equity
for a public utility are financial integrity, capital attraction and setting a return on equity that is
commensurate with returns investors could achieve by investing in other enterprises of
corresponding risk. The utility's cost of common equity is the minimum return investors expect,
or require, in order to make an investment in the utility. Gorman pf. 10/7/97 at 2. The proper
level of return on the Company’s capital, including equity capital, must allow a return on capital
that is commensurate with returns on investment in other enterprises having corresponding risk.
Williamson pf. 7/11/97 at 3.
286. To arrive at the proper cost of capital for GMP, one should consider a set of
comparable electric utility companies. One should identify a set of companies facing similar
risks and market dynamics as GMP. It is important to view a group of companies in order to
minimize the effects of the vagaries of individual companies within the sample. Williamson pf.
7/11/97 at 3-4.
287. The electric utility industry is facing a period of transition with the advent of price
deregulation in the generation sector. Uncertainties about future industry structures and related
transition issues, potentially increase the investment risk of electric utilities at the present time.
That increase in investment risk is especially prominent in the Northeastern U.S. due to the
relatively high cost of some generation sources as well as competition initiatives undertaken by
many of the State legislatures and regulatory bodies. Williamson pf. 7/11/97 at 10-14; Hill pf.
10/7/97 at 18.
288. GMP has had difficulty raising capital in the debt and equity markets in the past
few years. Dutton pf. at 2-4.
289. Bond ratings reflect the market’s view of the financial risks of the company. The
bond rating, provided by rating agencies Moody’s, Standard & Poor’s (S&P), and Duff & Phelps,
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reflect a great variety of characteristics of an electric utility, including regional economy,
competitive forces, fuel and power supply, regulation, management, and other variables.
Williamson pf. 7/11/97 at 15-17.
290. The Company’s S&P rating is BBB+. In 1995, the Company’s Duff & Phelps
bond rating was downgraded due to “the company’s need for ongoing rate relief in an
increasingly uncertain regulatory environment.” In 1996, the same agency downgraded GMP’s
rating again. Williamson pf. 7/11/97 at 15, 18-19.
291. When estimating the cost of a utility's return on common equity, it is proper to use
a broad-based group of electric utilities with similar risk. Gorman pf. 10/7/97 at 3.
292. In order to capture the market’s perception of the investment risk of electric
utilities which are similarly-situated to GMP, the Company and the DPS analyzed the market
data of a sample of “BBB”-rated electric utilities in the Northeast region of the U.S. Williamson
pf. 7/11/97 at 15,16; Hill pf. 10/7/97 at 18, 19.
293. The decline in GMP stock price at the end of 1997 was due, primarily, to the
Company’s election to cut its dividend in half. Utility equity prices are driven by dividends and
the market price reduction was simply a reaction by investors to the Company’s decision to halve
the dividend. Hill reb. pf. 12/24/97.
294. The Department conducted its analysis before the problems in other jurisdictions
were resolved and before stock prices had increased, consequently the Department’s estimate of
cost of capital includes the risks for those companies as if they had not been resolved. Tr. 1/7/98
at 124-25 (Hill).
295. DPS witness Hill utilized several methodologies to estimate the cost of equity
capital: the Discounted Cash Flow model (DCF); the Modified Earnings-Price Ratio model
(MEPR); the Market-to-Book Ratio model (MTB); and the Capital Asset Pricing Model
(CAPM). Hill pf. 10/7/97 at 3.
296. GMP witness Williamson utilized the DCF and CAPM methodologies. IBM
witness Gorman utilized constant and non-constant growth DCF analyses and a Risk Premium
(RP) analysis to estimate the cost of equity capital. Williamson pf. 7/11/97 at 5; Gorman pf.
10/7/97 at 3.
297. The DCF method of measuring an appropriate return on equity focuses on dividend
yield and investor expectations of growth in dividends. Williamson pf. 7/11/97 at 5. Using
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growth forecasts by securities analysts is appropriate because their views are representative of
investor expectations and are a reasonable measure of those expectations. Williamson pf. 7/11/97
at 10.
298. In determining the market-required return on common equity under the DCF
model, the dividend or earnings growth rate that the consensus of investors believe will be and
has been built into the market stock price must be determined. Gorman pf. 10/7/97 at 5-6.
299. The Institutional Brokers' Estimate System (IBES) and Zacks Analyst Watch are
two reliable growth estimates. Gorman pf. 10/7/97 at 6; Williamson pf. 7/11/97 at 24.
300. IBES surveys security analysts and publishes a simple arithmetic average or mean
of surveyed analysts' earning growth forecasts. A simple average of the IBES growth gives
equal weight to all surveyed analysts’ projections. Gorman pf. 10/7/97 at 6.
301. A simple average, or arithmetic mean, analyst forecast is a good proxy for market
consensus expectations. The best proxy is the average of the high and low, or mean, IBES and
Zacks growth rate estimates. Gorman pf. 10/7/97 at 6, 14.
302. GMP's proposed return on common equity is unreasonable because the DCF return
calculated by GMP’s witness is overstated due to the use of growth rates which do not represent
a consensus of investors or security analysts. Gorman pf. 10/7/97 at13-14.
303. GMP relied only on the high growth rates of Zacks and IBES because low grow
rates cannot reflect investor expectations. Yet GMP’s expert acknowledges that the mean and
median of growth return estimates are also available through IBES. Williamson pf. 7/16/97 at
25-26; exh. DPS-24 at 14.
304. If average or “consensus” analysts’ growth rates were used by the Company,
rather than the highest available growth rates, the Company’s own DCF results would have been
virtually equivalent to the DCF estimates offered by the DPS (10.5 percent) and IBM (10.3
percent). Hill pf. 10/7/97 at 45.
305. The average DCF return produced by a constant growth DCF model is 10.3
percent. As updated, the DCF model results in a return of 9.7 percent. Gorman pf. 10/7/97 at
5-6.
306. The group of “comparable utilities” selected by Mr. Gorman for use in his DCF
analysis have Standard & Poor’s bond ratings that are equal to or lower than GMP’s S&P bond
rating. Exh. IBM-6 [MPG-5].
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307. Applying IBM’s DCF analysis to the “comparable group” of utilities relied on by
GMP and the Department’s witness results in a lower return than applying that analysis to Mr.
Gorman’s comparable group. Gorman reb. pf. 12/24/97 at 5.
308. The Company witness indicates that beta, the statistical measure used in the
CAPM, “may not be very helpful in establishing costs of equity.” Williamson pf. 7/11/97 at 41;
exh. DPS-23, Appendix D.
309. The Department’s witness notes that there are problems with the use of the CAPM
model that render it less useful than other models such as the DCF model. The CAPM can be
useful for testing the reasonableness of a cost of capital estimate. Hill pf. 10/7/97 at 32.
310. The Company maintains that a yield on a U.S. Government bond with a maturity of
about ten years or more is an appropriate rate to use for the risk-free rate. Williamson pf.
7/11/97 at 42.
311. The risk free rate of return based on ten-year Treasury notes has been relatively
consistent over the last three months at 6.4 percent. GMP relied on a rate of 7.0 percent in their
CAPM analysis. Gorham pf. 10/7/97 at 15.
312. Long-term T-Bonds do not represent the lowest-risk security available in the
market today. The reason why long-term Treasuries most often have yields higher than
shorter-term U.S. Government instruments is maturity risk, an element of risk investors do not
face with the purchase of T-bills. A rate of 5.1 percent represents a reasonable estimate of the
risk-free rate for use in a CAPM equity cost estimate. Hill pf. 10/7/97 at 33.
313. Non-diversifiable risk or systematic risk is the risk that is inherent in any stock or
portfolio investment. Inflation is a component of that systematic risk. According to theory this
risk should be captured in the beta that is used to capture systematic risk. If this inflation risk is
also embedded in the T-bond, then that risk is accounted for twice. Hill pf. 10/7/97 at 34.
314. Dr. Williamson's capital asset pricing model (CAPM) analysis is overstated
because it uses a beta too high to be representative of the comparable group. Gorman pf.
10/7/97 at 14-15.
315. After correcting the deficiencies in Dr. Williamson's analyses, GMP's own data
supports a return on common equity of 10.6 percent. Gorman pf. 10/7/97 at 12-13.
316. Based on a risk premium analysis, GMP would be entitled to a 10.9 percent return
on common equity. Gorman pf. 10/7/97 at 11.
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317. The average of the DCF model and risk-premium models results in a return of 10.6
percent return. Gorman pf. 10/7/97 at11-12.
318. The cost of equity results of the witnesses are shown in the table below:
METHOD
DCF
CAPM
RISK PREM.
MEPR
MTB
DPS
10.50%
10.56%/12.04%
n/a
10.34%/10.17%
10.37%/9.71%
GMP
13.00%
12.00%/13.00%
IBM
10.30%
n/a
10.90%
Hill pf. 10/7/97 at 38; Williamson pf. at 30, 49; Gorman pf. 10/7/97 at12.
319. The”best estimate” of the cost of equity capital for an electric utility company
similar in risk to GMP falls in the range of 10.25 percent to 11.25 percent. Given that range, an
appropriate estimate of the cost of equity for GMP would fall in the upper portion of that range
of returns. Hill pf. 10/7/97 at 38.
Discussion re: Cost of Equity
The focus of the testimony in this proceeding on the cost of capital has been on the cost
of equity component of the overall capital structure. The three cost of capital witnesses have
presented estimates for the cost of equity that are quite distinct from each other. The Company
determined from its analysis that its required return on equity is 13 percent. IBM’s witness
concluded that a required return on equity is 10.6 percent. The Department’s witness concluded
that the best estimate of the cost of equity capital fell in the range of 10.25 to 11.25 percent and
recommended that the cost of equity for GMP should fall in the upper portion of that range of
returns.
There is no objective measure of the return required for common equity. Therefore, the
Board must exercise its judgment in making the appropriate determination. The Board,
however, is not without guidance in exercising its judgment here. The principle factors that
should be used in establishing a rate were set out almost seventy-five years ago:
A public utility is entitled to such rates as will permit it to earn a return on the
value of the property which it employs for the convenience of the public equal to
that generally being made at the same time and in the same general part of the
country on investments in other business undertakings which are attended by
corresponding risks and uncertainties; but it has no constitutional right to profits
such as are realized or anticipated in highly profitable enterprises or speculative
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ventures. The return should be reasonably sufficient to assure confidence in the
financial soundness of the utility and should be adequate, under efficient and
economical management, to maintain and support its credit and enable it to raise
the money necessary for the proper discharge of its public duties.
Bluefield Water Works & Improvement Co. v. Public Serv. Comm’n, 262 U.S. 679, 692-93
(1923). See also Duquesne Light Company v. Barasch, 488 U.S. 299, 310 (1989).
These standards are reflected in the statutes governing the Board’s decisions, and have
been endorsed repeatedly by the Vermont Supreme Court. See, e.g., Petition of Village of
Hardwick Electric Department, 143 Vt. 437, 442 (1983); In re Green Mountain Power Corp.,
131 Vt. 284, 298 (1973); Letourneau v. Citizens Utilities Co., 128 Vt. 129, 132-33 (1969).
There is no one model or approach accepted as being definitive in determining rate of
return. The Company, DPS and IBM have presented the results of several models used in
determining an appropriate rate of return on equity.
The Department’s expert relied on four different models or variants in developing their
recommended rate for the cost of capital. These models included the discounted cash flow
(“DCF”) model that is widely relied on as an accepted method for estimating the cost of equity.
The Department also developed their recommendation by considering the results of a Market to
Book Ratio Analysis (“MTB”), the Capital Asset Pricing Model (“CAPM”), and the Modified
Earnings Price Ratio Analysis (“MEPR”).
The Company and IBM’s witness each relied on two models to estimate the cost of
equity. Each relied on a DCF analysis. The Company’s witness also relied on the CAPM while
IBM’s witness relied on a risk-premium analysis.
Several issues stand out in the analyses presented by these cost of capital experts. First,
while each of the experts relied on the DCF analysis in making their estimates and appear to
agree on the theory behind the model, the most notable difference relates to the development of
growth rates from investor expectations. The Department and IBM’s witnesses relied on an
average of investor growth projections while the Company’s witness selected only the high end
of the range of analysts’ projections.224 The witness removed the low forecast from the average
because he concluded they were not “plausible representations of investor expectations in light of
yields available on less risky government and utility bonds.”225
224. Williamson pf. 7/11/97 at 28.
225. Id.
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We conclude, however, that an average of high and low analyst projections, or a mean of
analysts’ projections, is nevertheless critical to the unbiased application of the model. By
removing the low growth estimates from both the IBES and Zacks growth projections and/or by
ignoring the mean and median information available through IBES, GMP’s witness has assured a
high growth factor in his DCF analysis. We conclude that this, in turn, has served to provide an
upward bias to GMP’s DCF results.
The Department and GMP relied on a group of similarly situated companies for their
analysis. IBM conducted its own analysis on a different, less similar group. While we agree
that the group selected by GMP and the Department are more representative of GMP, we
conclude that this factor alone did not materially impact the resulting estimates of IBM. In any
event, the results of the Department’s analysis and that of IBM are quite close (10.5 percent for
DPS and 10.3 percent for IBM) and we have found the Department’s analysis to be both highly
credible and well supported. After adjusting for the bias we conclude was introduced by
excluding the low growth estimates, the results of the Company’s analysis are in a similar range
(10.6 percent).
The results of the other model estimates were generally quite consistent with the analysis
of the DPS and IBM in developing their DCF estimate. Indeed, the evidence suggests that cost
of capital generally should be quite low by historical standards. The results of the Department’s
and GMP’s CAPM analysis suggest that the range of estimates could be above that suggested by
the DCF analysis. However, both the Department and the Company recommend caution when
relying on this model, except in testing the reasonableness of a cost of equity estimate. In any
event, the Department’s recommendation falls well within the range of estimates provided by the
Department’s models.
The Company, however, has been somewhat persuasive in showing that northeastern
utilities, and, in particular, GMP may be viewed with significant investor risk, largely due to the
pending nature of electric industry restructuring. Both the Company’s witness and the
Department’s witness agreed that investment risk is especially prominent in the northeastern U.S.
due to the relatively high cost of generation sources and contract commitments. The
Department’s witness has incorporated this risk, in large measure in the selection of utilities used
in its analysis.
Both the Department and GMP relied on market data of a sample of “BBB”
rated electric utilities in the Northeast region of the U.S. While the Company correctly observes
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that the risks to this pool of companies relied on in the Department and GMP’s analyses may
have declined since the time of the Department’s analysis, that analysis was conducted during a
period in which these utilities faced similar risks to that of the Company today. We conclude
that the Department’s witness has further accounted for such investment risk in recommending
that an appropriate value for the cost of equity should be at the upper end of the range provided
(10.25 percent to 11.25 percent).
We conclude, for the reasons outlined above, that a value of 11.25 percent provides a fair
estimate of the cost of equity based on evidence presented to us in this proceeding. This
maintains the cost of equity rate established for the Company in Docket 5857 on May 23, 1996.
The overall weighted average cost of capital for the Company should be as follows:
TYPE OF
CAPITAL
Common Equity
Preferred Stock
Long-term Debt
Short-term Debt
AMOUNT
$95,059,000
$17,660,000
$94,900,000
$9,293,000
PERCENT OF
TOTAL
43.824%
8.142%
43.750%
4.284%
TOTAL
$216,912,000
100.000%
COST RATE
11.250%
7.930%
7.740%
5.730%
WT. AVERAGE
COST RATE
4.930%
0.646%
3.386%
0.245%
9.207%
I. DEMAND-SIDE MANAGEMENTI. Demand-Side Management
Electric and gas utilities in the state of Vermont are required by law to design and
implement a comprehensive set of demand-side management (“DSM”) programs, to reduce
customers’ energy consumption with efficiency and conservation measures that cost less than the
energy they replace.226 DSM can provide significant benefits to consumers: decreased costs of
service, lower customer bills, reduced environmental impacts, and local economic benefits. It
has long been the policy of this Board to support the good faith efforts of the utilities and the
Department to capture cost-effective savings in Vermont.
GMP requests recovery in rates of costs associated with its demand-side management
efforts over the past two years. The Company has incurred costs for DSM programs offered
throughout its service territory, as well as for a more aggressive set of programs delivered as part
of targeted “distributed utility” utility initiative, aimed at relieving the “stressed transmission and
226. 30 V.S.A. ? 218c; Docket 5270, Order of 4/16/90.
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distribution system in the Mad River Valley. Specifically, GMP asks that we approve for
rate-making treatment the direct costs (excluding certain payroll expenses) of its DSM programs
for the period of July 1, 1995, through March 31, 1997. These costs—to be included in rate base
and amortized over five years—total $3,705,012. GMP also requests that we include in rate
base, and amortize over two years, net lost revenues totaling $1,482,938 associated with its
incremental DSM achievements during the 21-month period.227
The Department, VPIRG, and AARP allege that GMP has not designed and operated its
DSM programs so as to acquire the maximum amount of cost-effective savings.228 The
Intervenors argue, among other things, that GMP’s programs fail to satisfy the requirement of
Docket 5270 that all cost-effective energy efficiency and conservation resources in a utility’s
service territory be acquired. They allege a number of inappropriate expenditures, deficiencies
in program delivery, and lost opportunities for additional savings. For these reasons, they
recommend that we disallow from rate base $691,000 in program costs and $626,892 in ACE.
In addition, the Intervenors ask us to reduce the Company’s cost of service by $325,000 in DSM
payroll expenses.229
The Intervenors also request that we make additional findings about the Company’s DSM
efforts. In Docket 5780 and again in Docket 5857, GMP and the Department negotiated
comprehensive settlements to rate requests. One aspect of those memoranda of understanding
(“MOUs”) was a fairly detailed agreement on DSM program design, screening, and
implementation; originally set out in Docket 5780, its essential terms were reaffirmed in Docket
5857. The memoranda also described actions to be undertaken by GMP in the future, for
example, to work with the DPS on the development of state-wide “core” programs and
distributed utility planning. In this docket, the Intervenors assert that, in a variety of ways, the
Company failed to comply with the terms of the MOUs and that this constitutes evidence of the
Company’s failure to comply with Condition 8 of the Board’s approval.
227. Grimason pf. at 3; Kvedar pf. at 22; and exh. DPS-64 (Sch. 18). Net revenues are lost when new savings
are achieved in between rate cases; those savings result in a reduction in revenues (net of power costs avoided by the
DSM) that otherwise would have been collected from ratepayers to cover fixed costs. Net lost revenues are tracked
in the Account Correcting for Efficiency, ?ACE.?
228. Department witnesses who provided evidence and testimony on DSM issues were sponsored jointly by the
DPS, VPIRG, and AARP. For the purposes of this section and the discussion of Condition 8 in the follwing section,
we refer to these three parties as the ?Intervenors.?
229. Exh. DPS-54 (CEW-4R).
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GMP opposes the Intervenors’ recommendations, and also argues that, under the terms of
the MOUs, the Department is precluded from seeking penalties for alleged failures of the
Company’s DSM programs prior to 1995. As the findings that follow demonstrate, the MOUs
do not preclude the Department from evaluating GMP’s DSM programs, as they were designed
and operated during the period for which cost recovery is sought (July 1, 1995, through March
31, 1997). Nor do the MOUs preclude the Department from seeking disallowances (or, for that
matter, penalties) associated with those programs during that period. The expenditures at issue
have never been litigated before, and there is nothing in the MOUs to prevent the DPS, other
parties, and the Board from considering their reasonableness now.
We conclude that GMP has, in most respects, designed and delivered its DSM programs
in a manner consistent with its settlement agreements with the DPS. However, it has operated
some of those programs in ways that were not calculated to acquire all cost-effective DSM
resources in its service territory. Based on the findings and discussion that follow, we deny in
part and adopt in part the Intervenors’ recommendations. We remove $88,700 of direct program
costs from rate base.230 We also exclude the inclusion of $345,960 of the proposed ACE
accruals from rate base.231 We decline to make the payroll adjustment recommended. Finally,
we do not conclude that the Company failed to comply with the terms of the Memoranda of
Understanding that it entered into in Dockets 5780 and 5857.
A. GeneralA. General
320. On September 5, 1991, in Docket 5270-GMP-3, the Board approved a broad set of
energy efficiency programs to be delivered by GMP. The programs were designed through a
collaborative process involving the DPS and the Conservation Law Foundation (“CLF”).
Docket 5270-GMP-3, Order of 9/5/91.
321. On May 3, 1994, the Board approved GMP’s 1991 integrated resource plan
(“IRP”), as modified by a stipulation between the Company and the Department. The IRP had
originally been filed on October 23, 1991. Docket 5270-GMP-4, Order of 5/3/94.
322. The stipulation in Docket 5270-GMP-4 dealt with a number of supply, demand,
and Transmission and Distribution (“T&D”) issues. Of relevance here was the Company’s
230. This amounts to 2.4 percent of the Company?s original request for DSM direct cost recovery.
231. This is 23.3 percent of the Company?s original request for ACE recovery.
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agreement to “review its Residential New Construction and Residential Retrofit DSM Programs
to determine whether they are comprehensive and cost-effective and, if not, ways in which they
can be redesigned to correct any deficiencies.” Id. at 8.
B. The Memoranda of UnderstandingB. The Memoranda of Understanding
1. Docket 57801. Docket 5780
323. Docket 5780, a rate increase request by GMP, was settled by agreement of the
parties, which included the Company, the DPS, and IBM. The settlement agreement, a
Memorandum of Understanding (the “5780 MOU”), stated that:
The parties agree that the spending levels, program designs and other aspects of
GMP’s DSM efforts as described in Attachment B should be implemented.
Attachment B is incorporated herein and made a part of this Agreement.
Exh. GMP-18.
324. Attachment B contained two schedules, A and B, which set out program designs,
implementation plans, avoided costs for screening purposes, and a host of other features that the
parties agreed would determine GMP’s DSM activities until March 1, 1996. GMP agreed to
implement the terms of the Attachment B no later than March 31, 1995.
325. The 5780 MOU232 also stated that:
The DPS agrees not to seek, in any future proceeding, penalties for any
action or inaction by GMP on account of GMP’s revision of avoided costs or
DSM program revisions in 1994.
Exh. GMP-18.
326. The 5780 MOU was approved by the Board on June 9, 1995. Docket 5780, Order
of 6/9/95.
2. Docket 58572. Docket 5857
327. Docket 5857, a rate increase request by GMP, was settled by agreement of the
parties, which included the Company, the DPS, and IBM. The settlement agreement, a
Memorandum of Understanding (the “5857 MOU”), stated that:
The parties agree to the provisions relating to GMP’s continued provision of
DSM services to its customers as set forth on Attachment A hereto. Attachment
232. For purposes of clarity, we refer generally to the MOU and its attachments and schedules as the ?5780
MOU.? Attachment B to this MOU contains the DSM agreement.
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A is incorporated herein by reference and is part of this Agreement.
Exh. GMP-19.
328. The 5857 MOU233 also stated that:
The Department agrees not to seek in any future proceeding disallowances
of DSM-related costs (inclusive of ACE) included in GMP’s filing in this case.
Exh. GMP-19.
329. The 5857 MOU adopted and continued certain aspects of the DSM-related
agreements set out in the 5780 MOU, in particular with respect to the avoided costs used for
screening purposes. Id.
330. The Company “[agreed] in principle to the adoption of statewide core programs
based on DPS proposed concepts.” Id.
331. The Company agreed to abide by the terms of the 5857 MOU through the end of
1997. Id.
332. On May 23, 1996, the Board approved the 5857 MOU. Docket 5857, Order of
5/23/96.
C. Commercial and Industrial ProgramsC. Commercial and Industrial Programs
1. Large Snow-Making Project1. Large Snow-Making Project
333. GMP provided a series of three rebate payments to a customer for a large
snow-making project. The first payment was previously included in rates. The second payment
of $200,000 was made at the end of 1996, and its payment was conditioned on the achievement
of specified energy savings that the customer failed to meet during the 1996-97 snow-making
season. Grimason pf. 11/24/97 at 2-6.
334. The performance criteria specify that the system must meet target savings on the
bases of both per-acre-foot of snow made and total energy savings. The former target was met
during the 1996-97 season; the latter, however, was not. GMP and the customer took steps
intended to achieve both targets in the 1997-98 season (additional equipment was installed).
GMP can require a refund of a portion of the second payment for failure to meet the performance
criteria, but so far has not done so. Grimason pf. 11/24/97 at 2-6.
233. Again, for purposes of clarity, we refer generally to the MOU and its attachments and schedules as the
?5857 MOU.? Attachment A to this MOU contains the DSM agreement.
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2. Ski Area R&D (Heat Recovery Project)2. Ski Area R&D (Heat Recovery Project)
335. GMP paid $40,000 to one of its larger customers as a special research and
development (“R&D”) incentive to initiate the project (#1380). The payment was included in
rates in a previous rate case. Lloyd pf. 10/7/97 at 11; tr. 11/21/97 at 71 (Lloyd).
336. In this docket, GMP requests recovery of incentive costs totaling $176,000 for
Project #1380. Tr. 11/21/97 at 92. (Lloyd).
337. On March 23, 1993, GMP estimated that the total societal benefits (including
indirect benefits) of the project were $464,112, and that the total utility benefits (including the
five percent externalities adder required by the Board) were $379,723. Excluding externalities,
the utility benefits were estimated to be $363,169. Exh. GMP-DSM-1 (DWG-4).
338. On April 6, 1995, GMP estimated that the total societal benefits (including indirect
benefits) of the project were $197,407, and that the total utility benefits were $179,605. The
Company assumed that there were no externalities benefits. Exh. DPS-DSM-8.
339. The total incentive of $216,000 (176,000 + 40,000) exceeds the project’s estimated
total utility benefits. Lloyd pf. 10/7/97 at 11.
3. Act 250 New Construction Projects3. Act 250 New Construction Projects
340. Under the terms of the original design of GMP’s Commercial and Industrial New
Construction (“CINC”) DSM Program, developed in GMP’s collaborative, GMP provided
monetary incentives to customers for installation of energy-efficient measures in new
construction projects, including projects subject to Act 250 review. Grimason reb. pf. at 9; tr.
11/21/97 at 35.
341. In its Order in Docket 5270-GMP-3 approving the program design, the Board
directed GMP to monitor its program to ensure that incentives were used in the most effective
manner. In 1992, GMP contracted with XENERGY for a process and impact evaluation of the
CINC Program, which was completed in March 1994. As a result of the evaluation, GMP
modified its CINC Program in June 1994 to discontinue providing incentives for lighting
measures for projects subject to Act 250 review. The program evaluation report was filed with
the Board in September 1994 and GMP reported this program change in its 1994 DSM Annual
Report. Docket 5270-GMP-3, Order of 9/5/91 at 36, 40; Grimason reb. pf. at 9-10.
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342. In January 1995, GMP and the DPS agreed to further CINC Program design
changes as part of the settlement of Docket No. 5780. In May 1995, as part of the new program
designs outlined in the Docket 5780 MOU, GMP proposed modifications to the CINC Program,
including development of a set of Act 250 Energy Efficiency Design Criteria similar to those
used by CVPS, the provision of technical assistance and plan reviews for projects subject to Act
250 review, and exploration of the use of a pre-specified energy efficiency typical design
approach for Act 250 projects. On June 19, 1995, the DPS and GMP informed the Board that
they had reached agreement on the proposed modifications. Beginning in January 1996, GMP
discontinued providing incentives for efficiency measures other than lighting (which had been
discontinued in 1994) required by Act 250 in new commercial construction projects. Exh.
GMP-18; exh. DPS-53 (REL-1); Grimason reb. pf. at 11-12.
343. GMP determined that it should pay incentives to those customers to whom it had
committed to make such payments, prior to January 1996. Accordingly, GMP paid incentives in
connection with certain Act 250 projects after January 1996, when the commitment to do so had
been made prior to the program change. Grimason reb. pf. at 13; tr. 11/21/97 at 40, 64-65.
344. As a general matter, incentives should not be paid for DSM measures that can
reasonably be expected to be installed pursuant to the applicable Act 250 permits granted by the
District Environmental Commissions. There should be no ACE recoveries associated with such
measures. Lloyd 10/7/97 pf. at 8-9.
345. GMP claims ACE recoveries for Project 3129, even though the Company’s own
analysis shows that there will be no cost savings from the measure (increased diameter piping for
snow-making at a ski area). Proposed ACE amounts for this project, totaling $7,636, should be
disallowed from rates.234 Slote 12/24/97 pf. at 7.
4. Fuel-Switching4. Fuel-Switching
346. A 50 percent free-ridership rate is an appropriate default value for fuel-switching
measures in GMP’s Large Commercial and Industrial Retrofit Program (“LCIR”). Lloyd pf.
10/7/97 at 12; Mosenthal reb. pf. at 15-16.
347. Under the LCIR program, GMP provided substantial incentives for electric
234. This amount was not stated explicitly in the testimony or evidence. It was calculated as a residual. The
Intervenors?s proposed ACE reductions for the other C&I projects were subtracted from the total amount of
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efficiency measures but not for fuel-switching measures. Incentives are a significant driver of
participation levels in DSM programs. A program that provides information only will suffer
from significantly higher free-ridership rates than one that offers financial incentives, since the
program is unlikely to induce many customers to implement the desired measure, beyond those
customers who were going to do so anyway. Mosenthal pf. at 12/24/97 15; tr. 1/20/98 at
156-158.
348. The Board has directed CVPS to use a 50 percent free-ridership rate for the
purposes of its fuel-switching program, which also did not offer financial incentives. Mosenthal
pf. at 16; Dockets 5701/5724, Order of 10/31/94 at 165-166.
349. GMP had previously used a 75 percent free-ridership rate for similar residential
retrofit programs. Fifty percent is an appropriate (and probably low) estimate for the
commercial and industrial (“C&I”) sector. Mosenthal pf. 12/24/97 at 16-17.
350. Adjusting the free-ridership rate to 50 percent will reduce ACE by 641 MWh
(net,annualized) and 103 KW (net, annualized). Lloyd pf. at 12.
5. Discussion re: The Commercial and Industrial Programs5. Discussion re: The
Commercial and Industrial Programs
a. Large Snow-Making Projecta. Large Snow-Making Project
GMP worked with a ski resort to design and install energy savings devices for the resort’s
snow-making operations. The resort agreed to meet specified energy savings targets, in return
for which GMP agreed to pay specified incentives to offset the costs of the new, higher efficiency
equipment. The agreement calls for a refund of the payments, in whole or part, if the targets are
not met. The Intervenors argue that the second incentive payment is not known and measurable,
since it is possible that it will be refunded (either in whole or in part) if the savings targets are not
met. For this reason, argue the Intervenors, it would be “premature” at this time to allow the
incentive in rates.235
The Company counters that the payment is most certainly known and measurable: it has
in fact been made. Moreover, the Company argues that is has worked with the customer to
correct the failure and that it is expected that the customer will meet both its targets in the
proposed C&I ACE disallowances to derive this number.
235. DPS Brief at 122-123.
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1997-1998 season. Therefore, asserts GMP, any potential refund is not known and measurable,
and the Intervenors’ recommendation should be rejected.236
We concur with the Company. The record shows that the incentive has been paid in
accordance with the terms of an agreement between GMP and the customer. One of two savings
targets has been met, and it is likely that, given remedial action taken during 1997, the remaining
target will also be met. At this point, we see no reason to disallow the payment from rates.
We note that it is still possible that the required savings will not be achieved. We expect
that GMP will withhold payment of the third incentive installment until such time as the required
savings targets are met. Furthermore, we also expect that, if the targets are not met, GMP will
seek a refund of a reasonable portion of the payments already made, in accordance with its
agreement with the customer. At that time, appropriate adjustments to the Company’s DSM
deferral accounts can be made.
b. Ski Area R&Db. Ski Area R&D
The Intervenors recommend that DSM costs in this docket should be reduced by $40,000
to reflect an overpayment of incentives for a heat recovery system at a ski area (Project #1380).
The incentives paid totaled $216,000, of which $40,000 was collected in rates previously.
However, the project was expected to yield societal benefits of only $197,407, and direct utility
savings of $179,605. The Intervenors assert that GMP’s policy is to offer incentives less than or
equal to, but not more than, the direct utility benefit.237
Originally, the expected benefits (both utility and societal) of the project were expected to
be significantly greater. The record does not reveal why the anticipated savings fell, nor does it
indicate when the incentives were actually paid. The Company asserts that the incentive was
justified by the original screening analysis, implying that it was fully paid before the second
analysis was performed, but there is no conclusive evidence on this point.
As a theoretical matter, society should be willing to purchase efficiency savings for a
maximum “price” that is equal to the expected societal benefit of those savings. Of course, the
less paid, the greater the net benefits, and it has long been the policy of this Board that DSM
236. GMP Brief at 103-104.
237. DPS Brief at 130.
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programs be designed and implemented so as to maximize net benefits.238 GMP’s apparent
policy of limiting incentives to a maximum of the utility benefits, though not consistent with the
theoretical requirement, very likely poses few practical impediments to the acquistion of DSM
savings. The Intervenors do not object to GMP’s policy, but merely ask that the Company be
required to abide by it.
The Company’s own analysis shows that it paid an incentive that was too high.
Ratepayers should not be required to pay that portion of the incentive that exceeded the expected
benefits of the project. We therefore disallow from rate base $18,600 (216,000 - 197,407,
rounded), which represents the excess above the expected societal benefits of the project.
c. Act 250 New Construction Projectsc. Act 250 New Construction Projects
The Intervenors argue that GMP failed to operate its Commercial and Industrial New
Construction Program in a way that minimized costs while maximizing benefits. The
Intervenors assert that GMP paid incentives for energy efficiency investments on various
customers’ premises that their Act 250 permits would have required anyway and, therefore, the
costs of those incentives should be disallowed. Specifically, the Intervenors propose to reduce
rate base by $155,853 in erroneous incentive payments for six identified Act 250 projects. In
addition, the Intervenors recommend that an additional $44,147 be removed from rate base, for
GMP’s failure to manage the CINC program according to the terms of the May 12, 1995,
program design and the terms of the Board’s Order in Docket 5270-GMP-3. The Intervenors
propose to reduce rate base by $146,716, by decreasing savings for the ACE calculations by
1,706 MWh (net, annualized) and 285 kW (net, annualized).239
The Company asserts that, according to the terms of a letter-agreement in the spring of
1995, it redesigned its CINC Program to eliminate the payment of unnecessary incentives to Act
250 project developers. GMP asserts, however, that it is entitled to rate recovery of incentives
paid (or promised) prior to January 1996, when the program changes went into effect. The
Intervenors counter by noting that, between 1991 when the program was approved and January
1996, GMP had failed to operate it according to the terms of the Board’s approval (among others,
to perform the required comparison of its program with that of CVPS), despite being repeatedly
238. See, e.g., Dockets 5701/5724, In re CVPS, Order of 10/31/94 at 137.
239. DPS Brief at 123-128.
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alerted to the problems by the DPS. The Intervenors suggest that disallowances of all incentives
paid after October 25, 1993, when the Company informed the DPS that it was not going to
submit the report, should be disallowed.240
We do not accept the Intervenors’ recommendations in this regard, and decline to make
any adjustments to the Company’s direct costs or ACE accruals for these projects. The evidence
on these projects presented by the Intervenors was ambiguous at best and, in certain instances,
simply inaccurate.241 We certainly agree, however, that the Company should not pay incentives
for efficiency measures which, under Act 250, developers would be required to install anyway.
The Company recognized this problem and revised its program in early 1996. Because the
Company had committed prior to that time to pay the incentives at issue in this docket, and
because they resulted in the acquisition of cost-effective savings, we will allow them (and
associated ACE) in rates.
d. Fuel-Switchingd. Fuel-Switching
Under its Large Commercial and Industrial Retrofit Program, GMP provides information,
but no financial incentives, about electric space- and water-heating fuel-switching opportunities.
It does, however, offer financial incentives to induce customers to implement electric efficiency
measures. For the purposes of program screening and calculating ACE recoveries, GMP
assumes that the fuel-switching component of the program has a free-ridership rate of 12.5
percent.
The evidence demonstrates that a reasonable free-ridership rate for an information-only
fuel-switching program is 50 percent, and may even be higher. Until GMP presents persuasive
evidence that the rate should be different, we direct the Company to use 50 percent for screening
and ACE purposes. The effect of this will be to reduce ACE accruals, both for setting rates in
this docket and in the future (see subsection VIII. G., below).
240. Id. at 126-128.
241. Tr. 11/21/97 at 31-64 (Lloyd).
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D. Residential ProgramsD. Residential Programs
1. The Residential Retrofit Program1. The Residential Retrofit Program
351. In 1994, GMP determined that its Residential Retrofit Program was not
cost-effective. GMP informed the Board and DPS of this determination in its DSM Program
Information Supplemental Filing, dated November 15, 1994. Although the program was
suspended, GMP continued to pursue cost-effective DSM opportunities in the residential market
by “piggy-backing” the delivery of direct-install lighting measures, low flow shower heads, and
low flow water aerators on the Company’s domestic hot water (“DHW”) rental program. In
addition, GMP provides incentives to residential customers for installation of additional lighting
measures through its participation in the Trade Ally Lighting Program and other statewide
promotions.
Grimason reb. pf. at 15.
352. During the cost recovery period, GMP implemented its new Residential Retrofit
Program. When installing rental domestic hot water (DHW”) tanks and/or ripple controls,242
the Company would also install DHW conservation devices and a limited number of compact
fluorescent lamps (“CFLs”). Parlin pf.10/7/97 at 6-7.
353. GMP installed a maximum of two indoor CFLs and two outdoor halogen flood
lights at each eligible residence. If the customer was not at home when the rental tank was
installed, the GMP representative left two CFLs, one low-flow showerhead, and one low-flow
faucet aerator for the customer to install. Id. at 7.
354. GMP installed, on average, approximately two high-efficiency light bulbs per
customer. Direct install programs operated by other utilities typically install between five and
six high-efficiency bulbs per customer. Exh. GMP-DSM-1 (DWG-5) at 29-30.
355. When the utility leaves conservation devices for the customer to install, the utility
cannot be sure that the customer will actually do so. Id. at 26.
356. GMP failed to make a good faith effort to acquire all cost-effective DSM resources
from lighting and DHW conservation retrofits and other common end-uses. GMP did not
attempt to provide comprehensive services, screen the program for cost-effectiveness, or make a
242. ?Ripple? controls allow the Company to turn electric DHW tanks on and off from a remote location,
thereby managing its load more cost-effectively (particularly at peak times). This produces cost-savings for the
Company; therefore, customers who consent to having their DHW controlled receive a discounted rate for the
electricity that the tank consumes.
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reasonable attempt to ensure that measures were correctly installed. Parlin pf. 10/7/97 at 7, 11.
357. In Docket 5428, the Board disallowed costs associated with GMP’s then-current
residential retrofit program. Under that program, the Company would install one CFL and a
variety of DHW conservation devices at each site. The disallowance was imposed primarily
because the program was not found to be comprehensive; it created lost opportunities. Id. at 8;
Docket 5428, Order of 1/4/91 at 36-37.
358. This program is intended to take advantage of the fact that a GMP representative is
on site, installing the DHW tank and/or ripple controls. Accordingly, the only costs associated
with this program should be the incremental cost of the materials, the labor associated with
installing the materials, and related administrative tasks. As such, this program should be
measurably less expensive than a direct-install program, which would include all of the costs
related to the site visit. Parlin pf. 10/7/97 at 8.
359. On a per site visit basis, GMP’s program costs approximately 33 percent more than
CVPS’s direct install program. Id. at 8.
360. Approximately $25,000 of the $114,000 in 1996 program costs could not be
accounted for. In addition, program cost assignments, as set out in the Company’s 1996 DSM
report, were not reliable. Id. at 9.
361. GMP overestimated the savings that DHW conservation measures would produce.
The Company assumed that tank wraps would have measure lives of 10 years, pipe insulation 20
years, and temperature reduction (turning down the thermostat) on the DHW tank is estimated to
last 10 years. These numbers should be adjusted downward to 7 years for a tank wrap, 15 years
for pipe insulation, and 2 years for the thermostat turn-down. Id. at 10.
2. The Residential New Construction Program2. The Residential New Construction
Program
362. During the cost recovery period at issue in this case, GMP implemented two
programs in its general territory which were targeted (either wholly or in part) to the residential
new construction (“RNC”) market: the joint VGS/GMP residential new construction market and
the Trade Ally Lighting Program. Parlin pf. 10/7/97 at 25.
363. The joint program was designed to capitalize on VGS’s DSM efforts and promote
electrical efficiency products to participants in the gas utility’s program. GMP required that
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builders or owners install five or more efficiency devices to be eligible for incentives. Id. at 25.
364. In two years, there were fifteen participants in the joint VGS program, representing
an average penetration rate of about 15 percent of the participants with completed installations in
VGS’s program. Id. at 25.
365. When GMP discontinued its collaborative residential new construction program in
January of 1994, it moved the lighting and appliance component of the original program to its
Trade Ally Lighting program. Id. at 25.
366. The Trade Ally Lighting program achieved an average penetration of
approximately 20 percent over two years, and the vast majority of this activity occurred in the
multi-family and condominium segments of the market. Id. at 25.
3. The Residential Low-Income Program3. The Residential Low-Income Program
367. GMP operated two programs targeted to the low-income market: the
Weatherization Assistance Program (“WAP”) “piggyback” direct install program and the
Low-Income Multi-Family Program. Parlin pf. 10/7/97 at 21.
368. The WAP piggyback program has been operating since 1992, and a fair amount of
information is available to review program performance. In contrast, the Multi-Family program
began in 1996, and consequently its “start-up” costs are under consideration in this docket. Id.
369. Of the 113 participants in this program in 1996, 27 percent used more than 7,000
kWh per year and continue to heat their water with electricity. It is likely that fuel-switching
would be cost-effective for a good number of these customers, they only received conservation
devices such as tank wraps and pipe insulation. Id. at 23.
370. GMP did not offer any services targeted to the low-income multi-family market
during the year between the termination of the Warm Choice Program in January 1995 and the
commencement of the Low-Income Multi-Family program in 1996. Id. at 24.
4. Ripple Controls4. Ripple Controls
371. GMP has been incorrectly charging the costs of installing ripple controls to its
DSM deferral account. Parlin pf. 10/7/97 at 3.
372. GMP started its “Ripple Program” before the collaborative filed initial program
designs in 1991. It is not included in the Company’s annual DSM reports. It is not listed
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among the programs mentioned in the 5780 MOU, nor was it allocated a share of the stipulated
DSM budget. It has not been reviewed by the Department as part of GMP’s DSM efforts.
Parlin pf. 10/7/97 at 12; exh. GMP-18.
373. GMP informed the Department that it was not charging the costs of the installation
of ripple controls to the DSM deferral account, but it was charging only the costs of DHW
conservation devices and lighting retrofits installed at the same time as the ripple controls and/or
rental tank. As it turned out, in fact GMP was charging the installation of ripple controls to the
DSM deferral account. Parlin pf. 10/7/97 at 12-13; exh. DPS-38 (KEP-6).
5. Discussion re: Residential Programs5. Discussion re: Residential Programs
a. The Residential Retrofit Programa. The Residential Retrofit Program
The Intervenors contend that GMP’s Residential Retrofit Program, now “piggy-backed”
to the DWH Rental Program, is neither designed nor operated in a comprehensive manner. The
Intervenors argue that, like the “Power$avers” program considered in Docket 5428, this program
creates lost opportunities as a consequence of its failure to install a comprehensive set of
efficiency measures, including high-efficiency light bulbs, in all areas of a home where they
would be cost-effective. The Intervenors recommend that we disallow all costs except those for
materials and the on-going costs of interest rate buy-downs for earlier fuel-switching loans. This
amounts to $61,000. The Intervenors also recommend that we disallow 50 percent of the value
of the staff time charged to the program, approximately $9,100.
The Company responds that the program is cost-effective, that the Intervenors do not
deny that it is cost-effective, and that by virtue of the 5780 MOU the DPS is precluded from
arguing that the general residential retrofit program should not have been discontinued in 1994.
In addition, the Company contends that the DPS’s “all or nothing” approach—that is, to
recommend disallowances for cost-effective measures if they are not provided as part of a
comprehensive program—is inconsistent with the Board’s Order in Docket 5270, which
encouraged flexibility in the delivery of DSM programs.243
The evidence demonstrates that the Company has not designed and implemented a retrofit
program that is comprehensive. It is a general property of DSM programs that cost-effectiveness
is vastly improved by increased efficiencies in delivery; significant economies of scope can be
243. DPS Brief at 109-111.
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captured when two programs are operated simultaneously, and the incremental costs of additional
installations are greatly reduced. It was for this very reason that GMP folded its residential
retrofit program into its DWH rental program. Consequently, its failure to take full advantage of
the new program’s promise is particularly disturbing.
GMP’s arguments in opposition to the Intervenors’ position are unpersuasive. First, the
Intervenors are not arguing here that the old Residential Retrofit Program should not have been
suspended. And second, cost-effectiveness is not the sole criterion by which effort and success
are measured. Comprehensiveness is essential too. This requirement protects against precisely
the sort of behavior that has been catalogued here: the failure to acquire all cost-effective savings
creates lost opportunities, and consequently the objective of minimizing the societal costs of
energy service is not served. The Company is right that utilities should be given flexibility to
pursue DSM savings; but flexibility does not mean that comprehensiveness can be sacrificed.
This program is quite similar to GMP’s Power$avers I program. Eight years ago the
Company failed to deliver a comprehensive set of efficiency measures, and it has done so again.
For these reasons, we adopt the Intervenors recommendations and disallow $70,100 from the
Company’s DSM costs, for the purposes of setting rates in this docket.244 In addition, we
direct the Company to redesign the program to assure the delivery and installation of all
cost-effective conservation and efficiency measures on the premises of eligible customers.245
244. Id. at 132.
245. This means that, in those instances when the customer is not present when the DWH work is performed,
low-flow aerators and showerheads and other efficiency measures cannot be left uninstalled in the hope that the
customers will take on the tasks themselves. Alternative means of assuring that the measures are installed must be
developed.
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b. The Residential New Construction and Low-Income Programsb. The
Residential New Construction and Low-Income Programs
The DPS argues that “GMP’s performance in the residential new construction market was
inadequate,” that it failed to provide effective, comprehensive services to a market that had been
identified for special attention by the utilities.246 The Intervenors note that, two years ago, the
Board had disallowed certain DSM costs from CVPS’s rates, in part because the penetration rates
in its residential new construction program had been extemely low (2.5 percent in 1992 and 13
percent in 1993). Dockets 5701/5724, Order of 10/31/94 at 156.
With respect to the low-income sector, the Intervenors argue that GMP’s efforts to deliver
comprehensive DSM services have been deficient, which it asserts is particularly egregious
because this sector was explicitly identified by the Board in Docket 5270 to require special
efforts. The Intervenors contend that, as with GMP’s other residential programs, this program,
which is “piggy-backed” on the state-wide weatherization assistance initiatives, fails to assure
that all cost-effective measures are installed while representatives are on-site. Moreover, the
Intervenors point out that, for all of 1995, the Company simply offered no DSM services to
low-income customers.247
The Intervenors recommend that, given GMP’s overall failure to implement these
programs effectively, the Board should disallow 50 percent of the costs charged to the “general
residential” account and 50 percent of the value of the staff time charged to that account.
Together, the two disallowances total $63,900 (8,200 + 55,700, respectively).248
We do not adopt the Intervenors’ recommendations. Although there is some evidence to
suggest that GMP did not operate its RNC programs to maximize net benefits, the savings that it
did achieve were cost-effective. Minor shortcomings do not justify disallowances here. As a
general matter, we remind the Company that it remains responsible for the performance of its
programs, even if it is not directly involved in delivering services. The evidence suggests that
there was room for improvement, particularly with respect to penetration rates. The Company
must be vigilant in monitoring and adjusting its programs in response to new information. As
for the low-income sector, we must emphasize that it has been the unwavering policy of this
246. DPS Brief at 142-143.
247. DPS Brief at 140.
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Board to assure that comprehensive DSM programs are delivered to low-income households,
designed to overcome the particularly steep market barriers that they face. We expect the
Company to take all necessary steps to cost-effectively expand the provision of comprehensive
DSM services to its low-income customers; we will closely monitor its performance in this area.
c. Ripple Controlsc. Ripple Controls
The Intervenors argue that, given GMP’s historic accounting treatment of ripple control
installations program and the Company’s assertions that the costs of ripple controls were not
included its DSM deferral accounts, these costs, totaling $17,000, should not now be included in
those accounts.
We do not take the Intervenors’ position to be that the costs of ripple controls are not
legitimate expenses. Simply, the Intervenors assert that neither the Company nor the DPS
considered ripple controls to be DSM measures for the purposes of the 1991 collaborative or the
later rate case settlements. We conclude that the costs of the ripple controls should be included
in rates, but agree that these costs should not be charged to GMP’s DSM deferral account. This
treatment will have no effect on overall rates, since it simply amounts to a transfer of the cost
item from one rate base account to another. For the purposes of setting rates in this case, we
will not remove them from the DSM deferral account, but in the future GMP shall not book them
to this account.
248. Id. at 133.
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E. The Mad River Valley Energy ProjectE. The Mad River Valley Energy Project
1. General1. General
374. Under the terms of the 5780 MOU, the DPS and GMP agreed that GMP should
design and implement a series of DSM programs in the Mad River Valley (“MRV”), an area
whose transmission and distribution (“T&D”) system experiences high loadings—it is “stressed.”
The project was intended to capture comprehensive DSM resources quickly, with as little cost to
GMP ratepayers as possible, thereby maximizing net benefits from the project to help avoid
substantial and imminent T&D investments.249 The project represented GMP’s first effort to
implement distributed utility planning (“DUP”). Grimason reb. pf. I at 18 ; tr. 1/9/98 at 152-53;
Lesser pf. at 13; tr. 11/21/97 at 260-61.
375. An internal company memorandum of May 10, 1996, revealed the Company’s
attitude to the project:
[The Company] was telling the public we wanted to defer the cost of a T&D
upgrade to save money for its customers. The least cost way to do that was to
fuel switch customers but internally we did not want to fuel switch any more
customers than needed to make the goal we filed with the DPS.
Parlin pf. 10/7/97 at 17; exh. DPS-42 at 1; exh. DPS-43 at 7.
376. There were four DSM components to the MRV Project: a residential retrofit
program, a residential new construction program, a large C&I program, and a small C&I
program. The Project began in mid-1995 and was shut down in early 1997. Grimason pf.
generally; Parlin pf. generally.
2. MRV Residential Retrofit Program2. MRV Residential Retrofit Program
377. This program focused on only three end-use measures: space-heat fuel-switching,
DWH fuel-switching, and space-heat load reduction. About 70 percent of the participants with an
installation received only one measure. Id.
378. The MRV residential retrofit program was targeted to achieve fuel-switching
249. Comprehensiveness can have two meanings when characterizing DSM programs. The first refers to the
range of program and measure offerings?are all potential end-uses targeted? The second refers to the breadth of
customers and customer classes targeted?are all ratepayers eligible to receive applicable DSM services? When the
term is used generally, it is intended to convey both meanings. The MRV Project, however, was designed to be
comprehensive in only one sense of the word. The MRV Programs targeted some, but not all, customer groups.
Within those groups, however, the comprehensive range of services were to be offered.
Docket No. 5983
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savings to the exclusion of other measures. GMP’s 1995 DSM report stated that, rather than
attempting to overcome barriers to lighting retrofits, it decided to “focus on larger impact
measures such as fuel switching and weatherization.” This suggests that the program was
implemented so as to “cream-skim,” that is, to install limited measures with potential for large
savings and, in so doing, to ignore other possibilities for cost-effective DSM installations at the
site. Parlin pf. 10/7/97 at 16-17; exh. GMP-DSM-1 (DWG-5 at 50-52); exh. DPS-30; exh.
DPS-37; exh. DPS-43 at 6.
379. The program design explicitly states that GMP will provide direct installation of
lighting and domestic hot water retrofits. These measures are included in the program
screening. Exh. DPS-39; Parlin pf. 10/7/97 at 13, 19.
380. GMP eliminated both lighting and DHW retrofits from the program prior to its
implementation, despite having explicitly agreed to these program elements in the 5780 MOU.
GMP did not perform any lighting or DHW retrofits. Parlin pf. at 13-14, 19-20; exh. DPS-39.
3. The MRV Residential New Construction Program3. The MRV Residential New
Construction Program
381. The MRV Residential New Construction (“RNC”) was modeled after the
assessment fee program run by Washington Electric Cooperative (“WEC”). Parlin pf. 10/7/97 at
25.
382. Program performance was reasonably good. Out of the 52 participants who paid
the assessment fee (through August 1997), 40 (77 percent) received a plan review from Energy
Rated Homes, 16 (31percent) completed the program and received a rebate, and 13 (25 percent)
are still “in progress”, i.e., the homes are not yet completed. Program participants achieved
average savings of 1,380 kWh per year, and 80 percent installed measures related to three or
more end-uses. Id. at 26.
383. GMP’s informal evaluation of this program indicated that GMP was unable to
affect efficiency decisions in a significant number of homes because of a failure to reach the
builder early in the construction process. GMP concluded that it should be marketing the
program to the builder at the time of the request for service. Tr. 11/7/97 at 141 to 153; exh.
DPS-29.
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4. The MRV Large Commercial and Industrial Retrofit Program4. The MRV Large
Commercial and Industrial Retrofit Program
384. The MRV Large C&I Program was designed to allow GMP to flexibly negotiate
and customize incentives in order to encourage customers to install high efficiency devices.
Lloyd pf. at 12-14.
385. The MRV Large C&I Program was operated similarly to the Company’s C&I
Equipment Replacement program. The C&I Equipment Replacement Program is a lost
opportunities program; that is, it is designed to encourage the installation of an efficient device at
the time of natural replacement. The incentive is based on the incremental cost of the efficient
device in excess of the cost of the standard. The MRV Large C&I Program was a retrofit
program in which inefficient devices are directly replaced prior to the ends of their useful lives.
Parlin pf. 12/24/97 at 12.
386. Incremental-cost-based incentives are not sufficient to induce customers to perform
retrofits that they were otherwise not planning (i.e., prior to natural replacement). Mosenthal pf.
12/24/97 at 12.
387. Six of ten possible customers participated in the program. Grimason pf. 11/24/97
at 21. Of those six, five installed only lighting measures and one installed only HVAC
thermostatic controls. Parlin pf. 12/24/97 at 14.
388. By comparison, approximately 65 percent of the participants in GMP’s (now
cancelled) Large C&I Retrofit Program operated throughout the Company’s service territory
installed measures relating to two or more end uses, and 24 percent installed measures associated
with four or more end-uses. Parlin pf. 12/24/97 at 14.
389. GMP did not re-screen its prescriptive (mostly lighting) measures using avoided
costs developed specifically for the MRV, which were greater than those for the Company’s
general service territory. Id. at 13-14; exh. DPS-68 (KEP-16).
5. Termination of the MRV Energy Project5. Termination of the MRV Energy Project
390. GMP terminated the MRV Energy Project without any regard to whether the
programs were successful, cost-effective, or needed. Chernick pf. 10/7/97 at 37.
391. In a short time, GMP built up its infrastructure to deliver the MRV programs.
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Staff were assigned to the project and trained to deliver the programs. Subcontractors were
hired and also trained. Parlin pf. 12/24/97 at 17; exh. DPS-41.
392. GMP terminated the program after a year-and-a-half, although cost-effective
resources were still available in the area. Parlin pf. 12/24/97 at 17.
6. Achievements of the MRV Energy Project6. Achievements of the MRV Energy
Project
393. GMP claimed that it exceeded its savings goal by 7 percent and spent only 79
percent of its budget for the Mad River Valley Energy Project. Grimason pf. 7/10/97 at 6; tr.
11/7/97 at 159-160, 174-175; Grimason reb. pf. 11/24/97 at 18; tr. 1/19/98 at 38-40 (Grimason);
exh. DPS-DSM-4.
394. GMP overestimated savings for a DHW fuel-switching project in the MRV
Residential Retrofit Program. Tr. 1/20/98 at 108-109 (Grimason); exh. DPS-69.
395. According to GMP’s 1996 DSM report, GMP saved a total of 2,057 annualized
MWh and spent $734,000 during 1995 and 1996 on the MRV programs. Correcting the
overestimated savings for the DHW fuel-switch in the MRV residential retrofit program reduces
the total project savings to 1,925 MWh per year. Exh. DPS-69.
396. GMP’s April 28, 1995, filing originally projected annualized savings of 2,126
MWh and a utility budget of $1,284,218 for the MRV Energy Project in 1995 and 1996. GMP
fell short of its MWh goals by about 10 percent. Exh. DPS-69; exh. DPS-DSM-4.
Discussion re: The Mad River Valley Energy Project
The Intervenors argue that GMP failed to implement the Mad River Valley Energy
Project in ways that would maximize net benefits, in accordance with Board directives and state
statutes. Their general criticisms are that GMP failed to offer comprehensive services in three of
the four programs, failed to properly evaluate many components of the project, failed to
implement the programs according to the agreed-upon program designs, and then inappropriately
terminated the project.250 The Intervenors recommend that the Board disallow $100,000 of
MRV program costs, as “a modest attempt to put GMP on notice that it is responsible for living
up to its agreements and make a good faith effort to achieve DSM resources as directed by the
250. DPS Brief at 145-146.
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Board.”251 The Intervenors also recommend specific remedial actions that the Company should
take to correct for the deficiencies of the project.
The Company responds that no disallowance should be made. It asserts that the project
exceeded its savings goals and came in below budget. The project was a part of the Company’s
first attempt at distributed utility planning (“DUP”), aimed at relieving pressure on a stressed
portion of the transmission and distribution system. GMP states that it was designed with the
advice of the DPS, was intended to capture DSM resources quickly at minimum cost; being
scheduled to operate for only one year was thought to give strong encouragement to customers to
avail themselves of the program offerings. GMP also argues that the Intervenors have given no
basis for the $100,000 disallowance.252
Some of the Intervenors’ criticisms have merit. The Company missed opportunities to
provide customers a full range of cost-effective measures, it did not take full advantage of its
negotiating flexibility to acquire additional savings, it improperly screened particular measures,
and it terminated the RNC program despite its good performance. By the same token, the
Project came quite close to achieving its savings objectives—objectives to which the DPS had
agreed. The Project reduced energy consumption by 1,925 MWh per year.253 Total spending
during the 18-month project was $734,000. GMP had originally projected savings of 2,126
MWh and a budget of $1,284,218. The Company fell short of its MWh goals by about 10
percent, but came in below budget by nearly 43 percent.
We find ourselves in the unhappy position of being asked to disallow costs for a program
that, in its general features and achievements, conforms to the terms of the 5780 MOU. We
decline to do so. While we are very concerned that the Company did not make sufficient efforts
to acquire all cost-effective DSM resources, there is no dispute that what it did acquire was in
fact cost-effective and largely consistent with the MOU. In this particular case, it does not make
sense to us to disallow costs for performing as expected, in the hope that such disallowances will
spur the Company to greatly improve its performance in the future.
Lastly, we are very troubled by the attitude of the Company revealed in the May 10, 1996,
memorandum. In that memo, GMP was startlingly frank in its comments about its objectives:
251. Id. at 146.
252. GMP Brief at 111-113.
253. The Company claimed that the project saves 2,057 MWh/year, but the evidence shows that this amount
was overstated. Finding 395.
Docket No. 5983
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[The Company] was telling the public we wanted to defer the cost of a T&D
upgrade to save money for its customers. The least cost way to do that was to
fuel switch customers but internally we did not want to fuel switch any more
customers than needed to make the goal we filed with the DPS.
Finding 375. The Company also noted that “The basic program designs were conceived to help
settle a rate case and to achieve the publicly announced goals.”254 These statements may be
symptomatic of a general reluctance of the Company to fulfill its obligations under the law; if so,
it cannot be tolerated. We expect the Company to take all necessary actions to acquire all
cost-effective energy efficiency and conservation savings in its service territory, as it is required
to do so under 30 V.S.A. § 218c, Docket 5270, and Condition 8. Evidence in the future of its
failure to do so could result in the imposition of substantial disallowances and penalties.
F. Summary: Program CostsF. Summary: Program Costs
The Company asks that we include in rate base and amortize over five years the direct
costs of its Commercial and Industrial, Residential, and Mad River Valley programs, totaling
$3,705,012. The Intervenors recommend that the Company’s DSM costs be reduced by
$691,000, broken down as follows:
C&I Measures
Large Snow-Making Project
Ski Area R&D
Act 250
$440,000
$200,000
$40,000
$200,000
Residential Measures
$151,000
Residential Retrofit
$70,100
RNC and Low-Income
$63,900
Ripple Controls
$17,000
Mad River Valley
$100,000
Total
$691,000
For the reasons set out in the previous sub-sections, we decline to make all the
adjustments proposed by the Department. Instead, we will reduce rate base for direct DSM costs
254. Exh. DPS-42.
Docket No. 5983
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totaling $88,700, differentiated in the following amounts:
C&I Measures
Large Snow-Making Project
Ski Area R&D
Act 250
$18,600
0
$18,600
0
Residential Measures
Residential Retrofit
$70,100
$70,100
RNC and Low-Income
0
Ripple Controls
0
Mad River Valley
Total
0
$88,700
G. Account Correcting for EfficiencyG. Account Correcting for Efficiency
1. Net Lost Revenues1. Net Lost Revenues
397. GMP requests that net revenues lost as a consequence of new DSM savings
achieved during the period between July 1, 1995, and March 31, 1997, be included in rate base.
GMP claims that those net lost revenues total $1,482,938.255 Exh. DPS-64, Sch. 18.
398. Net lost revenues associated with the large snow-making project’s energy savings
of 865.34 MWh (annualized) and demand savings of 210 kW should be recognized in rates.
These net revenues are estimated to be $78,463.256 This amount, reflected in the account
correcting for efficiency (“ACE”), is a preliminary figure. The Company will adjust it in light of
performance testing during the 1997-98 snow-making season. Mosenthal pf. 12/24/97 at 15;
exh. DPS-DSM-12 (PHM-11); Lloyd pf. 10/7/97 at 10; exh. GMP-DSM-1 (DWG-8); Grimason
reb. pf. I at 8.
399. ACE should be reduced by $71,792 to reflect an adjustment of 641 MWh and
103 kW to the Company’s claimed savings to incorporate the fuel-switching free-ridership
255. This is, like all ratebase adjustments, a 13-month average figure.
256. This amount equals 39 percent of the ACE amount originally requested ($201,187) and which the DPS
now seeks to have removed from rates. The $201,187 was based on estimated reductions of 2,198 MWh,
annualized, and 569 kW. The ratio of the verified savings (865.34 MWh) to estimated (2,198 MWh) is 39 percent.
Docket No. 5983
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change for the Large C&I Program. Lloyd pf. 10/7/97 at 12; Mosenthal pf. 12/24/97 at 15-16;
exh. GMP-DSM-1 (DWG-8).
400. In the MRV residential retrofit program, GMP incorrectly recorded the savings of a
DHW fuel-switch in a seven-unit building, resulting in the overstatement of gross savings by
176,400 kWh per year. When the gross savings were adjusted for the assumed 25 percent
free-ridership rate, the overstatement was 132,400 kWh per year. GMP has agreed to correct
this error. Exh. DPS-69; tr. 1/9/98 at 186 (Parlin).
2. Marginal Energy and Capacity Adjustment2. Marginal Energy and Capacity
Adjustment
401. ACE should be recalculated using savings estimates of $0.048/kWh and $0.35 per
kW-month for marginal energy and capacity costs, respectively. This will reduce ACE by
$188,069. Welch pf. 10/7/97 at 9; exh. DPS 54 (CEW-3).
402. GMP estimated marginal energy costs for the year period prior to the period that
rates will be in effect. The power market has not changed appreciably since the test year and,
since the test year values are known, GMP should use the actual monthly values for the test year
to project the production savings used to calculate ACE. Lamont reb. pf. 12/24/97 at 9; Welch
pf. 10/7/97 at 8.
403. The Company used a value of $0.00/kW-month for capacity when calculating the
production savings for the ACE calculation. The value of avoided capacity is currently quite
small, but it is not zero. A value of $0.35/kW-month for the entire ACE period, based on the
contract prices of a recent sale in Vermont, is reasonable. Welch pf. 10/7/97 at 9.
Discussion re: Account Correcting for Efficiency
The Company asks that ACE accruals totaling $1,482,938 be included in ratebase and
amortized over two years. The Intervenors recommend that the Company’s ACE accruals be
reduced by $626,892, broken down as follows:
Docket No. 5983
Page 153
C&I Measures
$427,331
Large Snow-Making Project
$201,187
Act 250 Projects
$146,716
Free-Ridership Adjustment
Project #3129
$71,792
$7,636
Residential Measures
$11,492
Marginal Cost Adjustment
$188,069
Total
$626,892
We address each of these in turn.
a. Large Snow-Making Projecta. Large Snow-Making Project
The Intervenors assert that the large snow-making project has so far failed to achieve its
savings goals; consequently, ACE accruals calculated on the basis of the projections are not yet
known and measurable. They urge us to disallow all of the ACE for this project at this time.
The Company responds that, on the basis of verifications that it has done to date, ACE accruals
totaling approximately 39 percent of the original estimates are appropriate. Furthermore, the
Company states that it will adjust the accruals on the basis of the completed verification analysis,
at the end of the 1997-1998 season.257
We accept the Company’s calculation for rate-setting purposes in this docket. As
discussed earlier, we did not disallow the second incentive payment for this project, recognizing
that savings were being produced (though not yet as great as projected) and that there was a high
expectation that the additional measures installed this season would improve results. For the
same reasons, we will recognize a portion of ACE—$78,463 (or 39 percent)—for this project at
this time.258 Additional accruals can be proposed and considered in a future rate case.
257. GMP Brief at 119-120.
258. GMP witness Grimason calculated annualized energy savings for this project to date to be 865,341 kWh.
This is 39 percent of the total annualized energy savings originally projected. 39 percent of the dollar value of the
net lost revenues associated with those savings is $79,463. Grimason reb. pf. I at 8.
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b. Act 250 Projectsb. Act 250 Projects
The Intervenors next recommend that ACE should be reduced by $146,716 to reflect an
adjustment of 1,706 MWh and 285 kW to the Company’s claimed savings related to Act 250
projects.259 For the same reasons that we allowed in rate base the Company’s full request for
the direct cost associated with these projects, we will allow the ACE accruals associated with
them to all be included in rate base.
c. Residential Measuresc. Residential Measures
The Intervenors argue that ACE should be reduced by $71,792 to reflect an adjustment of
641 MWh (annualized) and 103 kW to the Company’s claimed savings to incorporate the
recommended change in the fuel-switching free-ridership change for the Large C&I Program.260
Because we adopt the Intervenors’ recommendation on the appropriate free-ridership rate, we
also adopt their recommendation on the associated ACE accruals.
The Intervenors urge the Board to make a series of adjustments to GMP’s ACE
calculations for its residential programs. The Intervenors’ adjustments can be categorized as
follows: (1) correcting for the overestimation of savings from pipe insulation in the residential
retrofit and low-income WAP programs; (2) the removal of tank-wrap savings from the
residential retrofit program; (3) correcting for the overestimation of tank-wrap savings in the
low-income WAP program; (4) the removal of the unsubstantiated savings from air infiltration
measures in the MRV residential retrofit program; and (5) correcting for an error in recording the
savings related to a DHW fuel switch in the MRV residential retrofit program. The adjustments
total $11,492.261
We decline to make the requested adjustment. The Intervenors have shown that GMP
may have made a number of minor errors in the calculation of the ACE accruals for the
residential programs; however, it appears that the assumptions that underpin those calculations
were deemed to be reasonable during the collaborative development of the programs. It is not
necessary to change them for our purposes here. However, on a going-forward basis, we will
expect the Company to base its calculations on the latest and most reasonable information about
259. DPS Brief at 172.
260. Id. at 173.
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measure savings.262
Lastly, the Intervenors recommend two additional adjustments to the calculation of the
Company’s net lost revenues. The first is an adjustment to the marginal energy cost avoided by
DSM savings. The Intervenors recommend that the Board reject GMP’s use of projected
marginal energy costs for the period of April 1997 through February 1998, and use instead the
historic test year average marginal energy costs. This average ($0.048/kWh), argue the
Intervenors, represents a more accurate picture of marginal energy costs in the period for which
ACE is being calculated. Likewise, they recommend that marginal capacity costs be estimated
at $0.35 per kW-month, instead of the zero value that the Company used.
We concur with the Intervenors. Their estimates of the marginal energy and capacity
costs are more reasonable, in light of current market activity. ACE shall be reduced by
$188,069.
In summary, the Company’s ACE accruals shall be reduced by the following amounts:
C&I Measures
Large Snow-Making Project
Act 250 Projects
Free-Ridership Adjustment
Project #3129
Residential Measures
$157,891
$78,463
0
$71,792
$7,636
0
Marginal Cost Adjustment
$188,069
Total
$345,960
This reduces by $345,960 the Company’s original request for $1,482,938 in ACE recoveries, for
the period between July 1, 1995, and March 31, 1997.
261. DPS Brief at 173-177.
262. Specifically, we note that, with this conclusion, we are adopting the Intervenors? recommendation that
ACE associated with wraps of rental DHW tanks should not be recognized in rates. The reasoning here is that it
would be inappropriate to allow the Company to install inefficient rental DHW tanks, and then also allow it to collect
additional monies (i.e., ACE) associated with retrofitting the units to improve their efficiency. We fully expect that
the Company is providing only the highest efficiency equipment to its rental customers, which is to say that the tanks
should be wrapped upon installation.
Docket No. 5983
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H. DSM PayrollH. DSM Payroll
404. During the period of July 1, 1995, through March 31, 1997, GMP maintained
between 21 and 23 DSM employees who devoted 90 percent or more of their working time to
DSM activities. Time spent on non-DSM activities was charged to other accounts. Most of the
staff were employed in full-time equivalent (“FTE”) positions, although four to five have been
contract positions for which costs are booked and deferred. There are approximately 13.5 FTEs
reflected in the adjusted test year cost of service.263 Grimason pf. at 5-6; tr. 11/7/97 at 122-23
(Grimason); Welch pf. 10/7/97 at 3; exh. DPS-54 (CEW-4R).
405. That portion of GMP’s cost of service attributable to DSM payroll in the adjusted
test year is known, measurable, and necessary for the delivery of DSM programs and services.
Grimason reb. pf. at 27-28; Spellman pf. at 8-9; tr. 1/9/98 at 201-05.
Discussion re: DSM Payroll
The Intervenors recommend that the Board allow in rates only those payroll expenses
associated with five full-time equivalent DSM employees. This would be a reduction of
approximately $325,000 for seven FTEs.264 The primary reason that the Intervenors offer for
this adjustment is that five FTEs is all that GMP will need to administer the statewide core
programs that would be implemented by third parties under the Statewide Energy Efficiency
Utility Plan filed by the DPS in Docket 5980. Also with those five employees, GMP will be
able to perform distriubuted utility planning functions as well.265
The Intervenors also assert other reasons for the payroll deduction. They contend that
GMP has used its DSM resources to retain or increase load, rather than acquire cost-effective
DSM measures, to maintain relationships with the Company’s non-regulated subsidiaries, and to
provide DSM services to other utilities. They also state that the Company’s DSM budget and
savings projections for 1997 are lower than those for 1996.
The Company opposes this recommendation, arguing first that the Board has not issued a
263. GMP presented evidence that there are approximately 16 DSM employees in Company. The discrepancy
appears to reflect the difference between the number of employees and the number of FTEs actually included in the
cost of service.
264. Welch pf. 10/7/97 at 3; exh. DPS-54 (CEW-4R).
265. DPS Brief at 117.
Docket No. 5983
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final order in Docket 5980 and that the possible creation of a statewide energy efficiency utility
cannot be construed as a known and measurable change in this docket. Second, the Company
maintains that its current staffing is required to administer its DSM programs, which will
continue at roughly the same levels as they did in the historic test year.266
We decline to adjust the Company’s DSM payroll in the fashion recommended by the
Intervenors. Although there is a possibility that the manner of DSM delivery in Vermont will
change, it is by no means a surety; and even less predictable are the effects upon the Company of
such a change. We do not find it credible that the DPS would propose major reductions to DSM
payroll at the same time it criticizes the Company for perceived failures in its programs. The
Company must be provided with the resources necessary to deliver cost-effective energy
efficiency services to its ratepayers. Lastly, the evidence shows that only the payroll costs
associated with the efforts of the DSM personnel to deliver service to the customers of GMP’s
regulated operations are included in the cost of service.
I. Avoided CostsI. Avoided Costs
406. As of January 1, 1998, the Company is no longer committed to use the avoided
costs set out in the MOUs in Dockets 5780 and 5857. Welch pf. 12/24/97 at 3; exhs.GMP-18
and GMP-19.
407. For its June 1996 IRP, the Company developed a new set of avoided costs. Under
these costs, the IRP shows only one program, C&I Equipment Replacement, to be cost-effective.
It is unclear what avoided costs the Company intends to use for DSM in 1998. Welch pf.
12/24/97 at 3; exh. DPS-70 (CEW-5).
408. GMP is currently considering whether to continue using the 5780 MOU avoided
costs for the purposes of program screening. Welch pf. 12/24/97 at 3.
266. GMP Brief at 101-102.
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1. Discussion re: Avoided Costs1. Discussion re: Avoided Costs
As of January 1, 1998, the Company is free of its obligations under the 5780 and 5857
memoranda of understanding. The Intervenors raise the concern that GMP will use a new set of
avoided costs for DSM program screening—specifically, the avoided costs set out in its 1996
IRP (as yet, not approved), which are lower than the stipulated costs of the MOUs—and, as a
consequence, the Company’s DSM programs will suffer.267 The Intervenors do not, however,
ask us to take a specific course of action in response to this possibility.
Avoided costs are, of course, central to any determination of program and measure
cost-effectiveness. We direct the Company to notify the Board and Department if it intends to
use avoided costs differing from those agreed upon in the MOUs, for screening purposes.
J. Distributed Utility Planning and the Mad River Valley StudyJ. Distributed Utility Planning
and the Mad River Valley Study
409. Traditional integrated resource planning (“IRP”) emphasizes finding the
combination of demand and supply investments that will meet present and future demand for
energy services at the lowest expected total societal cost. Planning for needed transmission and
distribution (“T&D”) infrastructure to deliver energy to customers was often not subject to the
same scrutiny; greater emphasis has been placed on maintaining reliability and safety than on
reducing societal costs. Lesser pf. at 11-12.
410. Least-Cost Distributed Utility Planning (“DU-IRP”) represents the expanded
application of IRP principles to influence the types and amounts of a utility’s future investments
in equipment and services related to a company’s T&D functions. DU-IRP evaluates the
trade-offs between the higher costs of small, modular resources, such as DSM and local
generation, and the benefits that such resources can provide. DU-IRP also attempts to better
address the uncertainty in longer-term investments. Plunkett pf. 10/17/97 at 50; Lesser pf. at
2-3, 9-12.
411. To date, GMP has been involved in several DU-IRP efforts. In an attempt to deal
with capacity constraints in the Mad River Valley and the increased demand created by the
American Ski Company’s Sugarbush ski resort expansion, GMP developed a decision analysis
267. Welch reb. pf. 12/24/97 at 3.
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model to evaluate different capacity alternatives, including DSM, T&D upgrades, and local
generation. This was GMP’s first attempt at DU-IRP. Chernick pf. 10/7/97 at 4-7; Lesser pf. at
4-7; reb. at 13.
412. GMP’s initial decision model tentatively identified the least-cost solution to the
area’s capacity constraint problem as the construction of a distribution upgrade that would
increase area capacity by 10 MW. The upgrade was not built, however; instead, GMP
negotiated and received regulatory approval for an interruptible/dispatchable rates contract with
American Ski Company, an option that was not considered in GMP’s decision model. Lesser pf.
at 5-6; Chernick pf. 10/7/98 at 17; Special Contract No. 227, 9/6/96.
413. Although the results of the DU-IRP study were not ultimately implemented, this
effort represents an initial attempt at DU-IRP in Vermont and an opportunity to learn more about
local area T&D planning, targeting of DSM efforts to reduce local area capacity requirements,
and the potential for integration of DU-IRP into day-to-day utility practice. Lesser reb.
pf.11/24/97 at 13-14; Chernick pf. 10/7/98 at 5.
414. DU-IRP is conceptually consistent with the Intervenors’ DU Planning Guidelines,
proposed in its report, The Power to Save: A Plan to Transform Vermont’s Energy-Efficiency
Markets, May 23, 1997. However, GMP’s DU-IRP, as implemented so far, faces certain
difficulties, among them integration into other company functions and improved rules for
selecting DU-IRP target areas. Chernick pf. 10/7/97 at 7, 28, 35-41; Lesser reb. pf. at 14.
415. In spite of these apparent flaws in approach, assumptions, and modeling, the MRV
DU-IRP initiative has provided a foundation for substantial improvement and further
development by GMP. The Company has formed an interdisciplinary “DU Team” to address
communications between T&D engineers, DSM planners, generation supply planners, and
analysts. This team has taken the initial step of developing an area selection protocol, which has
been submitted to the DPS and which is intended to identify and weigh different criteria that will
assist GMP in its future DU-IRP efforts. Lesser reb. pf. at 14; Chernick pf. 10/7/97 at 4-5,
12-28.
416. GMP, in partnership with EPRI, has developed a newer iteration of DU planning
software (“AIS Model”) which is proprietary. The DPS has not had the opportunity to use this
software. Lesser reb. pf. at 6-9.
417. GMP is currently evaluating its T&D system in the Dover-Wilmington area. This
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area is marked by distribution constraints more complex than those in the Mad River Valley.
Lesser pf. at 7.
418. GMP will use the AIS Model to evaluate alternative resource strategies in the
Dover-Wilmington area, and will report its findings to the DPS. Lesser pf. at 7-8; Chernick pf.
10/7/97 at 7, 35-38; Chernick reb. pf. 12/12/97 at 22-23.
419. GMP plans to continue its preliminary DU-IRP work in the Bellows Falls area.
Thereafter, the Company may evaluate the Richmond, Williston, or White River Junction area.
Lesser pf. at 7-8; Chernick pf. 10/7/97 at 35-40.
420. GMP has submitted documentation of expenditures associated with the T&D
Efficiency Study. However, no documentation has been provided regarding expenditures on the
EPRI model. Chernick pf. 10/7/97 at 41-42.
Discussion re: DUP and the MRV Study
GMP has initiated a new approach to utility resource planning, referred to as distributed
utility planning. It is designed to better integrate T&D investments and related activities into the
utility’s overall planning effort. The Department has identified a number of shortcomings with
the Company’s first effort. It recommends in particular that the costs associated with GMP’s
development of decision analysis software (jointly with the Electric Power Research Institute,
“EPRI”) be disallowed from rates. They have not, however, been able to identify the precise
total of those costs.268
It appears to us that GMP has made a reasonable first attempt at DU-IRP. We recognize,
as does the DPS, that the topic of DU-IRP is, in many respects, a new discipline. The DPS also
agrees that, despite its problems, GMP’ efforts have provided an opportunity to learn more about
local-area T&D planning, the targeting of DSM efforts, and issues related to the integration of
DU-IRP into other utility disciplines. On the basis of the record before us, we cannot conclude
at this time that GMP’s efforts were so defective as to constitute an unreasonable or imprudent
use of ratepayer resources. We fully expect, however, that, in its on-going DU activities, the
Company will address the concerns raised by the Department in this case, and take all
appropriate steps to refine its methods. In fact, the Company has expressed its willingness to
work with the DPS in this respect, and we rely upon that commitment. Finding 418.
268. Chernick pf. 10/7/97 at 41-42.
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The DPS asks the Board to disallow recovery in rates for the development of the (AIS
Model) EPRI software. GMP has submitted documentation of expenditures associated with the
MRV T&D Efficiency Study; however, no documentation specifying expenditures on the AIS
model has been provided.269 Though the Department urges the Board not to accept the
GMP/EPRI modeling approach, it does acknowledge that GMP’s approach is conceptually
consistent with the distributed utility planning approach advocated by the DPS. In this case, the
Company has demonstrated that its first endeavor in this new area was undertaken in good faith,
with the aim of improving the methods—and, ultimately, the results—of its least-cost planning
processes. At this time, we see no reason to disallow costs associated with the new effort.
I. GREEN MOUNTAIN ENERGY RESOURCES (“GMER”)I. Green Mountain Energy Resources
(?GMER?)
A. BackgroundA. Background
421. GMP established Green Mountain Energy Resources LLC as a limited liability
company on February 26, 1997. Tr. 1/19/98 at 12-13 (Dutton).
269. The total costs of the Study appear to be $191,473. Exh. DPS-55 (DPS-PLC-DU-5, IR DPS 1-575).
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422. GMP made the decision to seek outside financing for GMER late in 1996; GMP
needed outside capital to operate GMER. GMP issued a preliminary investment memorandum
(“PIM”) to potential GMER investors.270 Exh. IBM-18; tr. 1/19/98 at 13-14 (Dutton).
423. In August 1997, the Wyly Family invested $30 million in GMER, in return for a
two-thirds ownership interest; the remaining one-third is held by GMP through its subsidiary
Green Mountain Resources, Inc. (“GMRI”). Exh. DPS 13; exh. DPS-57.
424. GMRI is a Delaware corporation that is a wholly-owned subsidiary of GMP. Exh.
Board-7 at 4.
425. The value of GMP’s one-third interest in GMER is worth between $10 and $15
million. Tr. 11/3/97 at 191 (Koliander); tr. 1/19/98 at 120 (Dutton); Rosenberg pf. 10/7/97 at
38.
426. GMRI made no capital cash contribution to GMER. Tr. 1/19/98 at 85 (Dutton).
427. GMRI received $4 million of the $30 million invested by the Wyly family for the
intellectual property that GMRI contributed, including four service marks, marketing studies and
analyses, and consulting and employment agreements. Exh. DPS-57 at Schedule II; tr. 1/19/98
at 86 (Dutton).
428. GMP entered into an agreement dated August 6, 1997, with GMER, and Green
Funding I, an affiliate of the Wyly family, which forbids GMP from selling electricity or natural
gas at retail to Vermont residential customers for a period of seven years beginning when
competition comes to Vermont. This agreement does not extend to: (1) the distribution of
electricity; (2) the provision of distribution products or services in Vermont; or (3) businesses
expressly permitted under Appendix A of the agreement. Exh. DPS-10 at
2, Appendix A.
429. This material mas been redacted pursuant to a confidentiality Order. This material
has been redacted pursuant to a confidentiality Order. This materia, the agreement also forbids
the Company from using the name Green Mountain in connection with any retail energy business
in Vermont once competition occurs; GMP retained the right to use the Green Mountain name in
connection with the sale of electricity in Vermont, prior to the potential arrival of competition.
GMP also agreed not to use the name Green Mountain in connection with both the sale and
distribution of electricity outside of Vermont at any time following the agreement. The
270. This document, entitled Green Mountain Resources, Inc., Retail Energy Business Plan, is marked
Confidential, and is dated July 28, 1997. The Board admitted this document under seal on 1/22/98.
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prohibition on the use of the Green Mountain name also extends to (1) the provision of
distribution-related services outside Vermont, and (2) This material has been redacted pursuant
to a confidentiality Order. This material has been redacted pursuant to a confidentiality Order.
This material has been
. Rosenberg pf. 10/7/97 at 35; exh. DPS-10 at
3.
430. GMER employees are continuing to perform work for GMP. There is some
residual work being done for GMER by GMP employees and at the present time there is no
limitation to the work that GMP employees can perform for GMER. There is no formal written
agreement setting out the arrangements for the performance of any of these services, nor is there
any one person at GMP who is responsible for determining whether these services should be
performed. Tr. 11/3/97 at 65-66 (Griffin).
B. Transfer of PropertyB. Transfer of Property
431. In return for its 33 percent share in GMER, GMP contributed: (1) the idea to sell
customers electricity on the basis of the perception that the company is environmentally friendly;
(2) the concrete and detailed information about how that would be done, what brand identity
would be established and how it would be communicated to customers; (3) a sophisticated set of
market research; and (4) the results of an information technology plan to create an information
system infrastructure to bill customers in an unregulated market. GMP invested a great deal of
time and $6 to $7 million during 1996 and 1997 on these efforts. Tr. 1/19/98 at 121-123
(Dutton).
432. GMP also contributed to GMER the right to use the name "Green Mountain" in
conjunction with the sale of electricity, and agreed to certain restrictions on the use of that name
by GMP. Rosenberg pf. 10/7/97 at 35-37; exh. DPS-10 at
3.
433. GMP has an agreement with GMER and the Wyly family not to use the name
Green Mountain elsewhere in the development of other unregulated business activities. Tr.
1/19/98 at 130 (Dutton).
434. The Green Mountain name was an important value to both GMP and the Wyly
family, and the agreement concerning it was part of the whole package. Tr. 1/19/98 at 129-130
(Dutton).
435. The fact that GMP held the name Green Mountain, and that the word “green” is
associated with renewable energy products, has potential value in a competitive energy market.
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That value is part of why the Wyly family was willing to invest $30 million in GMER. Tr.
1/19/98 at 139 (Dutton).
436. GMP is the only electric company in Vermont today using the name Green
Mountain. Tr. 1/19/98 at 149 (Dutton).
437. The name Green Mountain has been associated with the sale of energy products in
Vermont since the 1930's. Tr. 1/19/98 at 139 (Dutton).
438. The name Green Mountain has value in Vermont and beyond in large part because
GMP has for years provided electric service to GMP customers. GMP's ability to provide that
service has been paid for by GMP customers. Rosenberg pf. 10/7/97 at 37.
439. GMP's customers paid for the capital investments and service that created value in
the name Green Mountain in relation to the sale of electricity. Rosenberg pf. 10/7/97 at 37.
440. The Wyly family wanted GMP to forego the use of the name Green Mountain
Power Corporation and the Company refused. Tr. 1/19/98 at 141 (Dutton).
441. GMER has provided comments to the Massachusetts Department of Public
Utilities (“MDPU”) in response to proposed revisions to 220 CMR Sec.12.00 et. seq. that
addresses GMER’s position on the use of a utility name or logo by competitive affiliates.
GMER’s position in relevant part is as follows:
The use by a utility’s competitive affiliate in the competitive provision of retail
electric or gas services of the utility’s name and/or logo is a competitive
advantage which is . . . (ii) unavoidably intertwined with the utility’s former status
as an integrated regulated monopolist and must be seen as arising from this unique
status, and . . . (iv) derived or created in whole or in part with ratepayer funds,
presenting cross-subsidization concerns.
Exh. IBM-19, comments of Green Mountain Energy Resources, LLC at 2-3.
442. In those same comments, GMER also states that it supports the proposed rule on
affiliate transactions in California, with some modification. One modification is a change to
proposed Rule V F 1 in Appendix A which would add the following relevant language: “The
name, logo, service mark, trademark, or trade name of a utility shall not resemble that of the
affiliates.” Id., Attachment at 12.
443. If and when the energy market in Vermont is restructured, GMP’s current
customers could potentially be confused by another entity that was offering energy services using
the Green Mountain name. Tr. 1/19/98 at 140-141 (Dutton).
444. The Company’s market research showed that customers are more willing to buy
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from, or pay a premium for, electricity that is generated from renewable resources. Tr. 1/19/98
at 141 (Dutton).
445. GMP currently has in its portfolio, renewable resources that are booked at
above-market rates and those resources could probably be sold at a premium in the New England
region. GMP’s strategy to market those resources would be through sales to intermediaries
marketing in the region. GMER is one of those potential intermediaries. Tr. 1/19/98 at
142-145 (Dutton).
446. With one exception, the expenses of all market-related studies transferred to
GMER were charged below the line to shareholders. Dutton pf. 11/24/97 at 10; tr. 1/19/98 at
124 (Dutton).
447. GMP's ratepayers paid $195,537 for one of the studies provided to GMER. The
amount of costs for this study was contested in Docket 5857, a GMP rate case that was settled.
Dutton pf. 11/24/97 at 10.
448. GMER is entering a new line of business, with numerous unknowns and
uncertainties. There is a real chance that GMER may not exist as a viable enterprise a year from
now. Tr. 1/19/98 at 44-45 (Dutton).
449. GMP never gave confidential information about its customers to GMER and states
that it will not transfer such information without the customer's consent. Dutton reb. pf. at 2-3;
tr. 1/19/98 at 154 (Dutton).
C. Transfer of EmployeesC. Transfer of Employees
450. GMP transferred 27 officers and employees to GMER. Griffin pf. 11/24/97 at 7.
451. The officers transferred included GMP's President/CEO, its Vice President of
Energy Resource Planning, Vice President of Marketing, Vice President of Resource
Development and its General Counsel. Among the employees transferred were a number of
GMP's "Director Level" employees. Rosenberg pf. 10/7/97 at 36; exh. IBM-18 at 99-102.
452. Douglas Hyde, who had been President and Chief Executive Officer of Green
Mountain Power Corporation since 1993, resigned his position with GMP effective August 6,
1997, to become President of GMER. Exh. Board-7 at 28; exh. IBM-18 at 99.
453. This material has been redacted pursuant to a confidentialiy Order. This material
has been redacted pursuant to a confidentiality Order.This material has been redacted pursuant to
Docket No. 5983
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a confidentialiy Order. This material has been redacted pursuant to a confidentiality Order.
This material has been redacted pursuant to a confidentiality Order. This material has been
redacted pursuant to a confidentiality Order. This material was redacted pursuant to a
confidentiality Order. This material was redacted pursuant to a confidentiality Order. This
material was redacted pursuant to a confidentiality Order. This
Exh. IBM-18 at 16, appendix
D; tr. 1/19/97 at 24-35 (Dutton).
454. This material has been redacted pursuant to a confidentialiy Order. This material
has been redacted pursuant to a confidentialiy Order. This material has been redacted pursuant
to a confidentialiy Order. This material has been redacted pursuant to a confidentialiy O. Exh.
IBM-18; tr. 1/19/98 at 25 (Dutton).
455. This material has been redacted pursuant to a confidentialiy Order. This material
has been redacted pursuant to a confidentialiy Order. This material has been redacted pursuant
to a confidentialiy Order. This material has been redacted pursuant to a confidentialiy Order.
This material has been redacted pursuant to a confidentialiy Order. This material has been
redacted pursuant to a confidentialiy Order. This material has been redacted pursuant to a
confidentialiy Order. This material has been redacted. Exh. IBM-18 at 14; tr. 1/19/98 at 27-30
(Dutton).
456. The employees who left GMP for GMER had not been identified to be laid off,
fired or asked to be part of an early retirement offer. GMP did no studies or analyses, in
advance of the departure of the employees who went to GMER, to determine GMP’s downsizing
requirements. Tr. 1/19/98 at 42-43, 119 (Dutton).
457. Several GMP employees who worked on GMER matters signed non-compete
agreements with GMP. Exh. GMP-20; tr. 1/19/98 at 162 (Dutton).
458. GMP’s Board of Directors, in its meeting of August 4, 1997, waived the
obligations of the GMP employees who departed for GMER under their non-compete agreements
with GMP. Exh. Board-7 at 14.
459. If the employees who departed GMP for GMER had left to work for another
company such as ENRON, GMP probably would not have waived their non-compete
agreements. Tr. 1/19/98 at 163 (Dutton).
460. GMP employees departing for GMER were provided a number of incentives as a
benefit for making the decision to move to the unregulated side of the business including: (1) a
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pension bonus granting those employees 8 additional years of service credit for calculation of
retirement benefits; (2) maintenance of life insurance for some of the employees; and (3) a
supplemental pension for the then CEO of GMP of approximately $1 million to be paid over 15
years.271 Exh. IBM-13 at 5-6; tr. 11/3/97 at 60, 70 (Griffin).
461. GMP’s pension fund will make payments to those employees who left GMP for
GMER; GMP’s pension trust is responsible for current and future payments for these employees.
Tr. 11/3/97 at 68 (Griffin).
462. The pension payments for the employees who left GMP for GMER total
approximately $1,125,000. Of that total, $585,000 represents a pension enhancement of an
additional eight years of service granted to these departing employees. Exh. GMP-78.
463. GMP employees who leave for unaffiliated companies do not have their pensions
enhanced. Tr. 11/3/97 at 82 (Griffin).
464. The annual expense for GMP’s supplemental employee retirement plan (“SERP”)
is booked above the line with an associated adjustment made to rate base. Exh. GMP-78.
465. One of the five officers who left GMP for GMER retained SERP benefits. Exh.
GMP-78.
466. The CEO of GMP at the time of the GMER transaction (now president of GMER),
was granted a supplemental pension. That pension is not paid out of the general employee
pension plan. There is a non-qualified pension plan that those payments would come out of.
Tr. 1/7/98 at 202 (Griffin).
467. There are no costs specifically presented in this rate case associated with the
pension enhancements of the employees who left GMP for GMER. Tr. 11/3/97 at 66 (Griffin);
tr. 1/19/98 at 61 (Dutton).
468. Over the past several years, the investment performance of GMP’s pension plan
has led to excess funds; excess in the sense that GMP’s pension fund has resources in excess of
the amount required under conventional accounting rules and contracts. The excess in the
pension account is in the order of $7 million. Tr. 1/19/98 at 56, 61-62 (Dutton).
469. The base for the pension fund has been built over the years with contributions by
ratepayers. Tr. 1/19/98 at 56 (Dutton).
271. These benefits greatly exceed the one-time $1,000 retirement benefit offered to employees who left during
the test year, but who did not depart for GMER. See Section 0.
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Discussion re: Green Mountain Energy Resources
1. Background
After years of booking costs for the development of a retail marketing subsidiary below
the line,272 and after months of seeking outside funding for that retail marketing subsidiary, in
early 1996, GMP established Green Mountain Energy Resources (“GMER”), and by late 1997
had been successful at finding outside funding to capitalize the Company’s venture. In return
for the transfer of certain assets, and in consideration of certain agreements by GMP, the Wyly
Family of Texas invested $30 million in GMER, in return for a two-thirds ownership interest;
GMP received a one-third share in GMER through its wholly-owned, unregulated, subsidiary
Green Mountain Resources, Inc. (“GMRI”).
The Department and IBM have argued that GMP ratepayers should be compensated for
the transfer of assets to GMER. The Department states that the value of GMP’s one-third
interest in GMER is worth $15 million. The Company does not contest that the value of GMP’s
one-third interest in GMER is worth $10 or $15 million dollars.273 IBM originally asserted that
the value of GMP’s interest is $10 million, but accepts that the $15 million amount is the more
appropriate value to place on GMP’s interest in GMER.274
Of the $30 million invested by the Wyly family, $4 million went to GMRI for its
contribution of the intellectual property that GMRI set forth on Schedule II of the GMER
Operating Agreement.275 This material has been redacted pursuant to a confidentialiy Order.
This material has been redacted pursuant.
2. Transfer of employees
GMP began developing the idea of establishing an unregulated subsidiary to compete in
competitive energy markets several years ago. Prior to soliciting investors for this venture,
GMP identified a management team that was available to work in this new start-up company,
272. In a rate-making context, ?below the line? refers to an accounting treatment that removes both the costs
and revenues associated with a particular asset or obligation from the cost of service of the regulated entity. It is the
shareholders, rather than ratepayers, who bear the costs and benefits of any asset or obligation that is placed ?below
the line.?
273. Tr. 1/19/98 at 120 (Dutton).
274. IBM Brief at 7, fn. 4.
275. Exh. DPS-57.
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consisting of, almost exclusively, long-time GMP employees. This material has been redacted
pursuant to a confidentialiy Order. This material has been redacted pursuant to a
The DPS
and IBM argue that the expertise of this management team was part of the package of intangible
assets that was transferred by GMP to GMER and that this “brain trust” had value that had been
contributed over the years by GMP ratepayers.
GMP makes the argument that it did not transfer employees to GMER, stating that the
employees who left GMP for GMER did so voluntarily; just as they could have left for any
other job opportunity anywhere else.276
However, evidence demonstrates that the switch of
employees to GMER was far different from a normal, arms-length employment arrangement.
There appears to have been no outside recruiting for the positions filled by the GMP employees.
GMP allowed GMER to recruit those specific employees from the regulated side of the business,
who the unregulated affiliate (GMER) and the investor thought would provide the best services
to the start-up company. In fact, GMER’s current President (then President and CEO of GMP)
came to GMP’s current President, Mr. Dutton (then Vice President and CFO of GMP), and
informed him that he would be making offers of employment at GMER (including salary, a
position, and pension enhancements) to a number of employees of GMP.277 Some of those
employees had been devoting a majority of their time in 1997 to unregulated activities; others
had been working in the regulated arena.278 GMP’s Board of Directors sanctioned the
departure of this group of employees from GMP’s regulated business, to its unregulated
affiliate.279
GMP management went even further; they knew that at least some of the employees
would not leave GMP voluntarily because of the potential riskiness of the GMER venture, so the
Company provided incentives for them to move over to GMER.280 The incentives given
employees who left GMP for GMER included: (1) enhanced pensions; (2) supplemental
pensions; and (3) life insurance maintenance. The investor was made aware of the fact that
GMP employees were going to be given incentives, by GMP, for moving over to GMER.281
276.
277.
278.
279.
280.
281.
Tr. 1/19/98 at 36, 38-40 (Dutton).
Tr. 1/19/98 at 40-43, 67-68 (Dutton).
Tr. 1/19/98 at 40-43 (Dutton).
Exh. Board-7 at 14-15.
Tr. 1/19/98 at 44-46 (Dutton).
Tr. 1/19/97 at 48 (Dutton).
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GMP argues that the departure of employees to GMER lowered the cost of service for
GMP. While this may be true to a limited degree (although GMP is replacing at least half of the
departed employees), GMP had no downsizing plan in place for these employees, nor had GMP
targeted them for layoffs or told them they would be part of an early retirement offer. The
record makes clear that even though GMP may have had the goal of reducing its workforce, this
transfer was, in fact, designed to create a strong cadre of experienced, capable employees within
GMER, and to enable the start-up company to “hit the ground running” in quickly-evolving
competitive electricity markets in California and the Northeast.
With respect to pension enhancements for GMP employees who left for GMER, we find
that the Company’s recent practice of using pension funds provided by captive ratepayers to
subsidize the pensions of employees on the unregulated side of the business is unacceptable.
Drawing down GMP’s pension fund to enhance the pensions of executives and other high level
employees who leave for a side of the business that does not benefit ratepayers, and will only
serve to benefit shareholders, is not a practice we can condone.
We recognize, as GMP argues, that this rate filing contains no costs associated with
pensions, due to the fact that the pension fund is currently over funded. Whether or not the
immediate costs are paid for by ratepayers is irrelevant; the opportunity cost to GMP’s ratepayers
is real. At some point, GMP’s ratepayers will again be asked to make contributions to GMP’s
pension fund. That day will come sooner if we allow money from the pension fund to be drawn
down now to pay for the eight years of additional pensions granted to employees who departed
for GMER. The fact that GMP’s pension plan is over funded does not permit the Company to
do what it wants with those funds. Those funds were developed with ratepayer money and must
be managed to support the provision of regulated utility services.
Moreover, the pension funds were created with money provided by ratepayers, for the
purpose of providing part of the compensation package for the employees of the regulated entity.
The use of the pension fund represents a value of the regulated Company that has been
transferred without compensation to GMER. Therefore, we believe that the enhanced benefits
of GMER employees should be paid for by shareholders, and thus shareholders should make the
pension fund whole, in the near term, not at an undetermined future date. Ratepayers should not
bear the expense for the supplemental pension of any GMP employees as compensation for their
transfer to GMER.
Docket No. 5983
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In sum, as compensation to ratepayers for the benefits provided for past expenditures to
the pension fund that have been transferred for the benefit of an unregulated enterprise, we will
impute the full value of the eight years of enhanced pension benefits, or $585,000. One option
would be to require this in a lump sum payment. However, a more reasonable approach is to
allow the Company to amortize this amount over five years; resulting in a reduction to GMP’s
revenue requirement in this case of $117,000.
3. Transferred assets
The main point of contention among the parties on this issue is what exactly was
contributed by GMP through its subsidiary GMRI, in exchange for the remainder of the one-third
equity interest in GMER of $11 million. GMP argues that it was largely the idea that was
contributed, although the Company does not deny that the agreements embodied in Exh. DPS-10
also formed a basis for GMP’s equity interest.282 IBM and the Department argue that there was
clearly something of value transferred from GMP to GMER, and ratepayers should be
compensated for any value that was contributed by them.283 GMP has not credited ratepayers
for any portion of this transaction in this rate case.
This material has been redacted pursuant to a confidentialiy Order. This material has
been redacted pursuant to a confidentiality could not have value to GMP, or anyone who
developed such an idea, without the ability to obtain outside funding. While GMP has a valid
point, GMP’s argument does not consider the fact that GMP contributed value to GMER. The
issue before us is whether, as part of the overall transaction, the transfer of assets, rights, and
personnel to GMER constituted a transfer of value to which ratepayers have an interest or claim.
We conclude that it does.
First, the agreement places limits upon GMP’s position in a future competitive market.
GMP entered into an agreement that forbids GMP from selling electricity or natural gas at retail
to Vermont residential customers for a period of time under deregulation, and also forbids it from
using the name Green Mountain in connection with any retail energy business outside of
Vermont.284 Second, it is undisputed that GMP has agreed not to use the name "Green
282. Tr. 1/19/98 at 87 (Dutton).
283. DPS Brief at 108; IBM Brief at 8.
284. While the Company stated that the Wyly family wanted GMP to forego the use of the name Green
Mountain Power Corporation and the Company refused, that appears not to be true for retail energy sales outside of
Docket No. 5983
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Mountain" in connection with the sale and distribution of electricity outside of Vermont. The
prohibition on the use of the Green Mountain name also extends to (1) the provision of
distribution-related services outside Vermont, and (2) any product or service being conducted by
GMER in any location, specifically including This material has been redacted pursuant to a
confidentialiy Order. These agreements were part of the value for which GMP received some
compensation from GMER. Again, GMP has not credited ratepayers for any portion of the
value of that compensation in this rate case.
GMP denies that the name Green Mountain has any value or strength as a “brand.”285
GMP further argues that it did not have the right to sell the name Green Mountain, nor does it
carry a value on its books for its name.286 GMP shareholders do not receive any return on any
amount in rate base for the name. Additionally, the Company does not receive any return in rate
base for goodwill.287 Nor is there any evidence that the Company booked intangible assets and
then depreciated those assets at the expense of ratepayers.288 The Company also asserts that
GMER would be able to market itself using the name Green Mountain even if it had not entered
into any agreement with GMP and that GMER can use the term Green Mountain in its marketing
efforts, with or without GMP’s consent.289
We do not agree with these claims. GMP’s president acknowledged that the fact that
GMP held the name Green Mountain, and that the word “green” is associated with renewable
energy products and has potential value in a deregulated energy market and that is part of why the
Wyly family was willing to invest in GMER.290 This material has been redacted pursuant to a
confidentialiy Order. This material has been redacted pursuant to a confidentialiy Order. This
material has been redacted pursuant to a confidentialiy Order. This material has been redacted
pursuant to a confidentialiy Order. This material has been redacted pursuant to a confidentialiy
Order.
This material has .291
Vermont using the name ?Green Mountain.? GMP?s refusal evidently acknowledges some value in the name.
285. Kvedar pf. 11/24/97 at 33.
286. Dutton reb. pf. 11/24/97 at 11, 12-13.
287. Tr. 11/26/97 at 91 (Rosenberg).
288. Tr. 11/26/97 at 148-49 (Rosenberg).
289. Kvedar pf. 11/24/97 at 38; Dutton pf. 11/24/97 at 12.
290. In fact, the Wyly Family sought to obtain the right to use the name ?Green Mountain Power Corporation?
as well.
291. Tr. 1/19/98 at 142 (Dutton).
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This material has been redacted pursuant to a confidentialiy Order. This material has
been redacted pursuant to a confidentialiy Order.This material has been redacted pursuant and the
fact that compensation has been received for that value by GMP, it seems only fair and
reasonable to apportion some of that value to GMP ratepayers for the opportunity that they have
foregone by virtue of giving up any future claims to the Green Mountain name for the retail sale
of electricity, outside of the traditional regulated monopoly environment both within and outside
of Vermont. In the present case, intangible assets of GMP have been transferred and valued, but
none of that value will flow to ratepayers unless we order an adjustment in this or future dockets.
Moreover, as IBM has pointed out, it was not the name Green Mountain that was sold,
rather it was the right to use that name in conjunction with the sale of electricity. GMP has, for
over 50 years, provided energy services in Vermont using the Green Mountain name, and GMP’s
wholly-owned subsidiaries have been using that name in the regional market over the past few
years to market energy services at retail. While it may be pure happenstance that the word
“green” is now commonly and widely associated with renewable energy sources, there can be no
doubt that ratepayers supported the development of this Company, its name, reputation and
goodwill. And there can be no doubt that today, and continuing into the future as energy
markets evolve into a competitive arena, the name Green Mountain has value. In an arms length
transaction, an investor was willing to invest $30 million dollars, in part, for that name,
reputation, and goodwill. GMP’s shareholders stand to benefit from the one-third interest that
the Company holds in that investment; it is only fair that ratepayers benefit from their
contribution as well.
GMP argues that if the Green Mountain name has any value, then that value was created
below the line by GMP’s management.292 GMP cites to a case before the California Public
Utilities Commission (“PUC”) wherein the commission ruled that royalties were not to be
imputed to Pacific Telesis Group, holding company for PacTel Corporation (“PacTel”) for use of
the PacTel name, a name that was arguably an asset of the regulated monopoly provider, Pacific
Telephone and Telegraph Company, later known as PacBell. However, that case differs
significantly from the one before us in this Docket. The California PUC noted in that case that
the claim, that affiliates may benefit from the historical reputation of a utility, is strongest in
instances where the corporate structure includes the expectation of a continued association
292. GMP Reply Brief at 87.
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between the parent corporation, its affiliates, and the regulated monopoly. In the case before the
California PUC however, PacTel was to be fully divested from the corporate family. In fact,
PacTel had been in existence separately from PacBell for approximately a decade.293 In the
present case before us, there is a continuing relationship between GMER and GMP; GMP
through its wholly-owned affiliate GMRI, holds a one-third interest in GMER. GMP as a
corporation will continue to benefit from the operations of GMER, although its ratepayers will
not.
Finally, GMP also argues that even if the name had value, we have no authority to make
an adjustment to rates to reflect that value, citing a recent ruling of the Supreme Court of
Minnesota. The Minnesota Supreme Court held that the Minnesota Public Utilities Commission
(“PUC”) lacked statutory authority to impute revenue to the regulated company for value of that
company’s goodwill that was passed to an affiliate without compensation. We find GMP’s
reliance misplaced.
First, we note that the Minnesota Supreme Court based its decision upon an interpretation
of the statutes delineating the Minnesota PUC’s jurisdiction. Although both the Minnesota and
Vermont statutes base rate-making authority upon the principle of just and reasonable rates, prior
decisions in Minnesota had narrowly construed the scope of the PUC’s jurisdiction.294 By
contrast, the Vermont Supreme Court has explained that:
the statutory basis of the Board’s regulatory authority is extremely broad and
unconfining with respect to means and methods available to that body to achieve
the stated goal of adequate service at just and reasonable rates.295
Second, the facts in the two cases are different. The Minnesota PUC sought to value the
goodwill solely associated with the unregulated subsidiary’s use of the same name and services.
There was no specific transfer of the name or limitations on its use. By comparison, the
arrangement under which GMER was established entailed specific agreements limiting GMP’s
use of the name Green Mountain in the provision of retail energy services, precisely the same
sector in which GMP now operates as a regulated utility.
293. Pacific Telesis Group, 51 CPUC 2d 728 (1993).
294. See Minnegasco vs. Minnesota Public Utilities Corporation, 549 N.W.2d 904, 908-909, 169 PUR 4th 405
(1996).
295. In re Green Mountain Power Corporation, 142 Vt. 373, 380 (1983). Other states have adopted similarly
broad interpretations, as the Minnesota Supreme Court noted. Minnegasco, supra, 549 N.W. 2d at 908; see e.g.
Re Southwestern Bell Telephone Company, 137 PUR 4th 63 (Okla. Corp. Comm. 1992); Rochester Telephone
Corporation, 145 PUR 4th 419 (N.Y. Pub. Serv. Comm. 1993).
Docket No. 5983
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GMP has received compensation for more than just This material has been redacted
pursuant to a confidentialiy Order. This material GMP’s President conceded the fact that, prior
to the agreement with the Wyly family, GMP held the name Green Mountain, This material has
been redacted pursuant to a confidentialiy Order. This material has been redacted pursuant to a
confidentialiy
“That value is part of why the Wyly family was willing to invest $30 million in
GMER.”296 Clearly, GMER recognized the value of the name Green Mountain, and provided
compensation to GMP for the use of that name. In licensing the name to GMER, GMP has
given up the opportunity to market or license the name to other power marketers. This material
has been redacted pursuant to a confidentialiy Order. This material has been redacted pursuant
to a confidentialiy
the regulated entity, GMP, has foregone an opportunity to capitalize itself
on the name and reputation it has built up through the years.297
Thus, we conclude that GMP transferred assets of value
a dedicated and experienced
team of employees, a great deal of intellectual capital,This material has been redacted pursuant to
a confidentialiy Order.
use of the Green Mountain name
, prohibitions on market activities by GMP, and the
to GMER. The evidence is clear that these assets were
valued by at least one outside investor as worth $10 to $15 million. Ratepayers should benefit
from these transfers. This result is consistent with recent decisions in New York where royalties
have been imputed to reflect the transfer of intangible assets from a regulated parent to an
unregulated affiliate. For example, in Rochester Telephone Corporation, the New York Public
Service Commission (“PSC”), concluded that it had the authority to compensate ratepayers for
the transfer of such assets, and that “name and reputation” is an asset used by a company to
benefit its subsidiary, to which the company’s ratepayers are entitled to compensation.298 In
assigning royalties, the commission makes the point that a regulated company must use its assets
to maximize ratepayer benefits. It also concluded that a utility’s name and reputation have
296. Tr. 1/19/98 at 139 (Dutton).
297. See, Minnegasco, supra, 549 N.W. 2d at 911-913 (As Justice Gardebring noted in an opinion concurring
in part and dissenting in part, the Company would be hard pressed to deny that the goodwill associated with the
company name and reputation has value in an unregulated environment, given the market studies that demonstrated
that services advertised under the Minnegasco name were three times as appealing to consumers as those offered
under a different name. Indeed, the Justice went on to say that by allowing the use of the name without
compensation, ?Minnegasco is foregoing a revenue opportunity by allowing the use of the utility?s name, image and
reputation without charge. That can only be considered a subsidy.?)
298. Rochester Telephone Corporation, 145 P.U.R. 4th 419 (1993).
Docket No. 5983
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value.299
In another case before the same commission involving Brooklyn Union Gas Company,
the PSC accepted a stipulation between the parties, patterned after analogous protections that
were found acceptable in the Rochester case cited above, that provided that ratepayers would be
credited with a $2.0 million annual royalty imputation. The credit is intended to compensate the
regulated company’s core customers for any benefits that non-regulated subsidiaries may derive
from the affiliation. The aim of the stipulation was to ensure, in part, that affiliates cannot
benefit from Brooklyn Union Gas Company’s name, reputation, goodwill, or financial strength
without compensation to ratepayers.300
Our conclusion is also consistent with our decision in Dockets 5701/5724, in which we
impute a charge for the use, by a CVPS unregulated affiliate SmartEnergy Services (“SES”), of
CVPS’s customer names. In that Order we stated that:
CVPS’s endorsement (i.e., goodwill) has imbued SES with CVPS’s imprimatur
and allowed SES to draw upon CVPS’s name recognition and reputation for
both expertise in energy matters and concern with the public interest.301
Because the evidence showed that SES had been charged little or nothing for that goodwill, we
concluded that an adjustment was appropriate, stating that:
Since CVPS’s ratepayers have paid for CVPS’s development of its mailing list,
billing system and goodwill through their utility bills, they have a right to expect
that CVPS will use its best efforts to maximize the value of these intangible
assets. (Emphasis added).302
In that case, we recognized that valuation of goodwill is difficult, but that the record in that
Docket provided a fair proxy. So it is in this case.
In making our adjustment in Dockets 5701/5724, we cited to a case before the Oklahoma
Public Utilities Commission. We include an excerpt from our decision in Docket 5701 here
because it is just on point:
This premium is not unlike a "royalty" payable by the subsidiary to the parent
company. In Re Southwestern Bell Telephone Company, 137 PUR 4th 63
(1992), the Oklahoma Public Utilities Commission imputed a 5 percent
“royalty,” based upon certain gross operating expenses of affiliates, to be
recognized as revenues to a parent utility company (South Western Bell
299. Id.
300. Brooklyn Union Gas Company, 173 P.U.R.4th 339 (1996).
301. Dockets 5701/5724, Order of 10/31/94 at 86.
302. Dockets 5701/5724, Order of 10/31/94 at 86.
Docket No. 5983
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Telephone of Oklahoma) for similar advantages conferred upon the subsidiaries
by the parent. The Oklahoma Commission imposed the royalty to compensate
the parent for intangibles which inure to benefit of the affiliates, including, but
not limited to: "use of the [parent company's] trademarks and logos; use of the
[parent company's] name, reputation and public image; access to and use of the
[parent company's] proven methods of operation and technical knowledge;
awareness of . . . industry issues and opportunities; and, reduced business risk,
access to capital and credit worthiness." Id. In South Western Bell, as in the
case of SES and CVPS, the extra charge was designed to act “as a surrogate for
reasonable compensation to [the parent company] when intangible benefits are
enjoyed by affiliates with no explicit accounting for such intangible transactions
on the books of [the parent] or the affiliates.” Id.
Given the facts before us now in this case, we will impose such an adjustment here.
4. Remedies
IBM argues that GMP's customers paid $195,537 for one of the studies provided to
GMER. This study was done in 1995 and GMP agrees that those costs were booked above the
line. IBM recommends that ratepayers should be credited that amount through a reduction of
GMP's revenue requirement in this case. Other than to suggest that the value of market research
has time limitations, GMP did not rebut IBM’s position that ratepayers should be compensated
for the transfer of this study.303
IBM is correct. GMP has contributed this property to GMER, receiving compensation in
return that, under the terms of the agreement, will only benefit GMP’s shareholders. Without a
rate-making adjustment, none of this compensation will flow back to ratepayers. GMP’s
ratepayers have paid for this study. Therefore, for this transfer of GMP’s property, we will
impute $195,537 as a reduction to GMP’s revenue requirement in this case.
We do not contest GMP’s assertions that it has booked the rest of the costs of marketing
studies, done to develop GMER and later transferred to GMER, below the line. There is no
evidence in the record to the contrary, nor has any party asserted that GMP did not properly
allocate costs between the parent Company and any of its subsidiaries on these issues.
As to the rate impacts of GMP’s relationship with GMER, it is appropriate to address
them in this case. The Department recommends that the PSB conclude here that GMP
transferred assets of value, but defer the decision on valuation until it is clear that competition
will be coming to Vermont. According to the Department, this valuation could occur as part of
Docket No. 5983
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a potential stranded cost determination should restructuring be authorized in Vermont.
IBM states that the evidence suggests that GMP’s ratepayers are entitled to $11 million of
the $15 million that GMP obtained in the transaction with GMER because customers paid for the
intangible assets that were transferred to GMER; however, IBM recommends that the Board
assign only 5 percent of the value of those assets or $550,000 (5 percent of $11 million) to
ratepayers for the purpose of setting rates. IBM recommends that GMP’s revenue requirement
be reduced by this amount. The Department does not object to IBM's proposed adjustment of 5
percent as an interim adjustment in this proceeding and subject to further hearings in appropriate
future proceedings. In addition, IBM recommends that the Board hold the remaining 95 percent
of those assets or $10,450,000 ($11 million minus the $550,000 proposed adjustment in this
case), as an offset against any stranded costs claimed by GMP if, and when, the retail energy
market in Vermont is deregulated.304
The evidence in the record for an adjustment is clear. GMP has foregone rights to use
the name Green Mountain, a name that brings with it the goodwill and reputation built up over
the years through payments made by ratepayers. This material has been redacted pursuant to a
confidentialiy Order. This material has been redacted pursuant to a confidentialiy Order. This
material has been redacted pursuant to a confidentialiy Order. This material has been redacted
pursuant to a confidentialiy Order. This material has been redacted pursuant to
Finally, GMP has provided GMER something else of great value, a team of expert
managers, experienced in purchasing, selling, and marketing energy services. This team was
recruited from within GMP by GMP managers who themselves became managers of GMER.
Members of the team were granted special incentives to depart GMP for GMER, and the team
left as a group soon after the agreement between GMP and the Wyly family was signed. GMP’s
Board of Directors approved the departure of this group of key Company employees, and granted
them an incentive package to make this move. This material has been redacted pursuant to a
confidentialiy Order. This material has been redacted GMP, through its partial ownership of
GMER, will continue to derive benefits from these employees, although regulated ratepayers will
not. It is clear that GMP ratepayers have contributed over the years to the development of the
expertise of this team. For ratepayers to receive no benefit from the consideration granted GMP,
303. Dutton pf. 11/24/97 re: GMER at 10.
304. IBM Brief at 18-19.
Docket No. 5983
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in the form of the equity interest in GMER, for the transfer of this management team to GMER
would be unjust.
It is incumbent upon us to ensure that ratepayers are adequately compensated for
contributions that they have made over the years for the intangible property that has been
transferred to an unregulated company, without appropriate compensation flowing back to them.
We will therefore impute, for rate-making purposes, compensation equal to 5 percent of the
equity interest that GMP has received in GMER to compensate ratepayers for this transaction.
We believe that this adjustment is both just and appropriate as a continuing obligation to GMP’s
customers until and unless a fair and final adjustment is made to GMP’s regulated rate base to
account for the value of assets transferred to GMER.
According to the testimony in this case, GMP holds an equity interest in GMER that is
valued between $ 10 and $15 million. We will take the lower range of the value of GMP’s
equity interest in GMER as a base for the imputation (minus the $4 million payment for the
contribution of tangible property listed in Schedule II of the Operating Agreement), a valuation
that does not seem to be in dispute. Thus, the imputation shall be 5 percent of $6 million ($10
million - $4 million), or $300,000 per year. Thus, the total impact on GMP’s revenue
requirement for adjustments for the GMER transaction is $612,537.305
Finally, IBM recommends that we direct GMP in this Docket to execute a service
agreement with GMER. We have heard testimony in this Docket that GMER employees are
continuing to do work for GMP, but there is no formal written agreement setting out the
arrangements for the performance of these services, nor is there any one person at GMP who is
responsible for determining whether these services should be performed. Given these
circumstances, we agree that IBM’s recommendation is an appropriate interim remedy to ensure
that any transactions between GMER and GMP, in either direction, are completed at fair market
value. GMP shall file a compliance filing with a such a proposed agreement for our review.
As noted above, the evidence in this case convinces us that it is just and reasonable to
require compensation to the regulated utility for the transfer of This material has been redacted
pursuan and an expert team of employees from GMP to GMER. We do not mean to suggest that
GMP’s decision to create GMER and to seek investment capital for the enterprise was improper.
305. The sum is computed as the total of $195,537 (marketing study) + $300,000 (transfer of assets) +
$117,000 (pension fund reimbursement).
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In today’s rapidly-evolving electricity markets, GMP’s strategic decision to create a retail energy
affiliate to promote sustainable energy services is commendable. Nevertheless, we are under an
obligation to ensure that (a) there is a careful delineation between GMP’s regulated and
unregulated enterprises, and (b) adjustments are made in this rate case to fairly reflect the
contributions that ratepayers have made over the years for property that GMP contributed to
GMER. We believe that the remedies applied here fulfill that obligation.
I. THE HYDRO-QUEBEC/VERMONT JOINT OWNERS CONTRACTI. The Hydro-Quebec/Vermont
Joint Owners Contract
A. Findings of FactA. Findings of Fact
1. General1. General
470. In this rate request, the Company seeks recovery of approximately $14 million in
increased annual costs associated with the Hydro-Quebec/Vermont Joint Owners Firm Power and
Energy Contract. Saintcross pf. at 3, 5; Keyser pf. at Sch. 2.
2. The HQ-VJO Contract2. The HQ-VJO Contract
a. Docket 5330 and Conditions of Approvala. Docket 5330 and Conditions of
Approval
471. The Vermont Joint Owners (“VJO”) of the Highgate interconnection facilities
consisted of eight utilities and the Vermont Public Power Supply Authority.306 In 1987, the
VJO, of whom GMP was one, negotiated a long-term contract for firm power and energy with
Hydro-Quebec (“HQ”), the provincial electric utility of Quebec, Canada. This contract (the
“HQ-VJO Contract” or simply “Contract”) provided for up to 450 MW of power and associated
energy to be delivered to Vermont, in varying amounts under several schedules, between 1990
and 2020. Under the terms of the Participation Agreement (a separate arrangement between the
VJO and all of Vermont’s electric distribution utilities, referred to as the “Participants”),
Contract power would be resold at cost to the Vermont utilities. Docket 5330, Order of
10/12/90 at 58-62 (hereinafter referred to as the “October Order”).
472. The Contract was signed on December 4, 1987, amended on August 31, 1988.
306. One of these utilities, Allied Power and Light Company, has since merged with Central Vermont Public
Service Corporation.
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Amendment 2, which was incorporated into the Contract as presented to and approved by the
Board gave the parties additional time — until April 30, 1991 — to commit to the Contract
(“lock-in”) or express dissatisfaction with regulatory approvals and thereby terminate without
damages. Specifically, HQ and the VJO agreed that either party could terminate the Contract
without liability on or before April 30, 1991, should rights or approvals be withheld or tendered
with conditions unacceptable to either party. Exh. GMP-65, Articles 1.3 and 1.4; Jobin pf. at
5-6; Jobin pf. reb. at 2-3; Reed/Oliver pf. at 4.
473. The Board granted conditional approval to the Contract and interim approval to the
Participation Agreement on October 12, 1990, in Docket No. 5330. October Order at 37-42.
474. The Board approved the purchase of 340 MW of non-cancelable Contract power,
under seven schedules. Options for an additional 110 MW were not approved, although the
VJO were free to seek later approval pursuant to 30 V.S.A. § 248 for (and in advance of) any
elections they wished to make.307 October Order at 37-38.
475. In approving the Contract, the Board relied upon analyses that assumed that peak
demand and energy savings of 27 percent and 20 percent, respectively, would be achieved by the
year 2000 by utilities under a scenario referred to as Intensified Demand-Side Management
(“IDSM”). October Order at 23, 95-120; Saintcross pf. at 16-17.
476. In considering the effects of the Contract upon the acquisition of cost-effective
DSM resources, the Board concluded that “no economic conflict with the Contract would emerge
at any level of efficiency achievements, if Contract power could be resold without a loss.”
October Order at 81.
477. The Board concluded that the Contract would provide net economic benefits for the
state. However, it also found that “[t]he optimal level of Contract power is unknown,” but that
the purchase of 340 MW was preferable to rejection of the Contract. The Board also noted that
in the early years of the Contract, the costs would outweigh the benefits. October Order at 120,
129, 130.
478. The Board imposed other conditions upon its approval of the Contract.
Conditions relevant to the issues in this Docket include the following:
Paragraph 4(c) of the October Order (“Condition 4”) required that HQ provide
an affidavit “that the damage and compensation provisions of the third paragraph
of Article 1.4 of the Contract would be controlling if the Canada National
307. None of the options has been exercised, and they have all since expired.
Docket No. 5983
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Energy Board were in the future to declare that approvals required by the
Contract were no longer valid under Condition 10 of the relevant licences
released by the Canada Energy Board on September 27, 1990.”308
Paragraph 7 (“Condition 7”) required all but two of the Participants309 to file
statements of their positions as to whether re-allocations among Vermont
utilities of purchases under the Firm Power and Energy Contract are
desirable.310 The Board also stated that, as a result of hearings on the proposed
allocations, it might “direct the Vermont utilities to offer specified amounts of
power and energy for return sale to Hydro-Quebec or for resale to other parties.”
Paragraph 8 (“Condition 8”) stated that “Each Vermont utility accepting power
under the authority of the Firm Power and Energy Contract and this Order shall
develop and implement measures to acquire all resources available from
cost-effective acquisition of energy efficiency, in accordance with the
principles ordered by this Board in the final Order of April 16, 1990 in Docket
No. 5270.”
Paragraph 11 directed the Participants to evaluate their needs under the Contract
and determine whether any amounts of Contract power are no longer required,
and file “a statement of their efforts to negotiate in good faith the return sale to
Hydro-Quebec of such amounts.”311
October Order at 37-41.
479. On January 7, 1991, following receipt of a filing from the VJO demonstrating
compliance with Condition 4(c), the Board amended its October Order to grant conditional,
rather than interim, approval to both the Contract and the Participation Agreement. Docket
308. The licences released by the Canadian National Energy Board (?NEB?) required that, in order to export
power to Vermont, HQ must adhere to Canadian federal environmental standards while it was developing its system
of power supply resources in the future. This proviso of the licences is referred to as ?Condition 10.? Even
though the electricity actually delivered to Vermont was not generated at one of the new plants that might be a part
of HQ?s development plan, HQ could be deemed to have violated one of the conditions of its export license if it
developed its system or built a facility inconsistent with existing or future federal environmental standards.
Reed/Oliver pf. at 4; Dutton pf. at 7.
309. Central Vermont Public Service Corporation (?CVPS?) and the City Burlington Electric Department
(?BED?).
310. The Board had concluded that, on a statewide basis, the minimum purchase of 340 MW was consistent
with the general good of the state, but that only CVPS and BED had ?demonstrated that their full allocations of
Contract power were needed as part of a utility plan that balances supply and efficiency resources at lowest total
cost.? October Order at 34.
311. Throughout this and earlier dockets, the paragraphs of the October Order have been referred to as
?conditions,? and we have retained that convention here. In the case of Paragraph 11, however, we must deviate
from this practice. Two conditions (numbers 10 and 11) of the Canadian National Energy Board?s export licences
have, since 1990, been the subject of much debate, and are themselves referred to as ?conditions? and identified by
their numbers. Therefore, in this Order, ?Conditions 4, 7, and 8? refer to obligations imposed by the Board upon
the VJO; ?Conditions 10 and 11? are those that were fashioned by the NEB and were applicable to Hydro-Quebec.
Docket No. 5983
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5330, Order of 1/7/91 at 1-16.
480. Several parties to Docket 5330 filed a timely appeal to the Vermont Supreme Court
of the Board’s January 7, 1991, Order. Following this appeal, the Board did not have
jurisdiction to modify or amend the October Order, absent a remand from the Vermont Supreme
Court. Docket 5330-E, Order of 4/22/91 at 2, 9.
(1) GMP and Its Entitlements to Power Under the Contract(1) GMP and Its
Entitlements to Power Under the Contract
481. In the mid-1980s, GMP was experiencing significant growth in demand for power
and energy, and was predicting continued growth at the rate of 2.0 to 2.5 percent per year
(compounded) in capacity and associated energy in its service areas. Also, the Company’s
existing entitlements under several contracts were due to expire in the 1990s. The load growth
and contractual expirations combined to suggest a need for substantial new resource
commitments in the next decade, even though GMP was projecting sizeable decreases in demand
as a consequence of demand-side management programs expected to be implemented in the
near-term. Saintcross pf. at 12; Saintcross reb. pf. 12/8/97 at 3.
482. The Company's analysis of the VJO Contract and associated power schedules
began in 1986 and was later presented in the Company's first Integrated Resource Plan (“IRP”)
filing in February 1989. The 1989 IRP was the basis for the Company's determination of the
amounts of power it intended to take under the VJO Contract, in accordance with the
Participation Agreement. Saintcross pf. at 13-14; Saintcross reb. pf. 12/8/97 at 2. Under the
Participation Agreement, GMP obtained entitlements to varying amounts of Contract power
under several non-cancelable schedules, as follows:
Schedule A (11/90 through 9/95)
Schedule B (10/95 through 10/15)
Schedule C-3 (11/95 through 10/15)
16.88 MW
67.55 MW
46.13 MW
October Order at 223-224.
483. Under the 1989 IRP, GMP also planned to acquire additional amounts of power
from Rochester Gas & Electric (0 to 50 MW), a hydroelectric plant (9 MW), and CoGen Lime
Rock (25 MW). Saintcross pf. at 15-16; Saintcross reb. pf. 12/8/97 at 2.
Docket No. 5983
Page 184
b. Docket 5330-A: Allocations of Contract Powerb. Docket 5330-A: Allocations
of Contract Power
484. In accordance with Condition 7 of the October Order, GMP submitted (on
December 12, 1990) additional testimony and evidence about the cost-effectiveness of its
purchases of Contract power. GMP, and other utilities, modified the analyses that they had
performed for Docket 5330 to reflect the assumptions, including fuel price forecasts, and
methods that the Department had employed in that Docket. GMP did not seek to update
information otherwise. Dutton pf. at 2; Saintcross pf. at 5, 18-19, 24; Docket 5330-A, Order of
2/12/92 at 20.
485. Consideration of GMP’s contract allocations (and those of the other utilities) was
taken up in Docket 5330-A, opened specifically for this purpose. Evidentiary hearings were
held in March and early April 1991. Docket 5330-A, Order of 2/12/92 at 7-8.
486. GMP presented evidence that its allocations of power were cost-effective, but also
that 41 MW, not the 46 MW, of Schedule C-3 power to which GMP had committed, were more
cost-effective than other amounts. Id. at 24.
487. The Board approved GMP’s allocations of Contract power (and those of all but one
of the remaining utilities312), finding them cost-effective based upon the analyses presented.
Again, the Board did not find that the allocations were optimal, but merely that they produced
benefits for the state. It reiterated that:
In analyzing the potential that DSM might reduce load by an amount even higher
than assumed in the IDSM scenario, we made clear that Contract power would
be excessive for Vermont only if power displaced by such DSM could not be
resold long-term at full cost recovery. [Citing to the October Order at 81-82.]
Id. at 45, 47.
488. The Board directed the Participants, in their IRPs and related filings, to “report on
the extent to which any supply resources may be surplus and upon their efforts to resell any
surplus power to third parties. We retain jurisdiction to order future re-allocations or resales.”
Id. at 46.
312. By this time (February 1992), the voters and lenders of certain municipal and cooperative utilities had
voted against their allocations of contract power. HQ did not require, under the ?step-up? provisions of the
Contract, that the remaining Participants take on the obligations of the utilities that had declined the power;
consequently the total amount of non-cancelable power was reduced to approximately 309 MW.
Docket No. 5983
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c. Docket 5330-C: Resales of Contract Powerc. Docket 5330-C: Resales of
Contract Power
489. In compliance with Condition 7 of the October Order, three Vermont utilities
entered into agreements to sell back specified amounts of power to HQ under Schedules A, B,
and C-1. In exchange, the utilities—CVPS, Village of Morrisville Water and Light Department,
and Lyndonville Electric Department—committed to re-purchase equivalent amounts of power
from HQ at later dates. The resales and purchases would be made at full Contract prices.
Docket 5330-C, Orders of 4/25/91, 4/30/91, and 9/18/91.
490. In approving the initial sell-backs, the Board observed “that additional return sales
of significant amounts of Hydro-Quebec power, reducing Vermont’s purchases during the early
years of the Contract, would be in the best interests of Hydro-Quebec and the Vermont utilities.
We will therefore direct the Vermont participants, particularly CVPS, to pursue negotiations for
additional return sales to Hydro-Quebec.” Docket 5330-C, Order of 9/18/91 at 9-10.
491. On October 3, 1991, CVPS notified the Board that it had entered into a second
sell-back arrangement with HQ.313 This one called for, among other things, the return sale of
all of CVPS’s entitlements (50 MW) under Schedules C-1 and C-2 for the period between
October 1, 1991, and October 31, 1996. CVPS was not obligated to re-purchase equivalent
amounts of power and energy during a later period. The return-sale was not, however, made at
full Contract prices.314 An evidentiary hearing on the second sell-back was held on October 21,
1991, and the Board issued an Order approving it on February 11, 1992. Docket 5330-C, Order
of 2/11/92 at 15-18.
492. GMP was a party to Docket 5330-C.
d. Docket 5330-E: Waiver and Released. Docket 5330-E: Waiver and Release
493. In January 1991, HQ informed the VJO that there was a strong likelihood it would
cancel the Contract because of its dissatisfaction with Condition 10 attached to the NEB
approval. Dutton pf. at 5; exh. Board-8 at 100; Saintcross pf. at 28.
313. CVPS had reached agreement in principle with HQ prior to the lock-in. Docket 5701/5724, Order of
10/31/94 at 101.
314. CVPS attempted to sell the power to other utilities, but found that a resale to HQ at 78% of the purchase
price represented the best deal. Docket 5701/5724, Order of 10/31/94 at 101, 103.
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Page 186
494. The VJO were concerned that HQ would terminate the Contract. Negotiations
between the contracting parties resulted in an agreement to extend the deadline by which either
party could terminate the Contract without liability, if dissatisfied with any regulatory approvals.
Exh. Board-5 at 12, 42, 81, 86, 127, 160; exh. Board-8 at 96, 105-6, 107, 136, 155; Dutton pf. at
5; Saintcross reb. pf. 12/8/97 at 11.
495. The agreement extended the termination deadline from April 30, 1991, to April 30,
1992. It took the form of an amendment to the Contract, and was referred to as Amendment 3.
This amendment was filed with the Board on April 5, 1991, and an evidentiary hearing was held
on April 17th. On April 19, 1991, the Board issued an order concluding that Amendment 3
constituted a material change to the Contract and that it was “seeking an expedited remand [from
the Vermont Supreme Court] of our Order of October 12, 1990, Docket No. 5330, for the limited
purpose of determining the effect of proposed Amendment No. 3 to the VJO Contract with
Hydro-Quebec filed April 5, 1991, upon the applicable criteria of 30 V.S.A. § 248.” Docket
5330-E, Order of 4/19/91 at 4, 13 (amended 4/22/91).
496. The VJO withdrew Amendment 3 and informed the Board that they had agreed to
an alternative contractual arrangement, a waiver and release which had the effect of deferring by
seven months (to November 30, 1991) the date by which the contracting parties could cancel the
Contract without liability. Id., Order of 4/30/91 at 2.
497. On April 26, 1991, the Vermont Supreme Court held oral argument on the motion
for remand and then granted it for a limited period: until May 1, 1991. Evidentiary hearings on
the Waiver and Release were held on April 26 and 29, 1991. The Board concluded that the
Waiver and Release, like Amendment 3, constituted a material change to the Contract, and
therefore considered its impacts under the substantive criteria of § 248. The Board conditionally
approved the Waiver and Release. Id. at 2, 6-19.
498. During the hearings on Amendment 3 and the Waiver and Release, the VJO
informed the Board that an extension of the date by which either party could terminate without
liability was necessary because, in the absence of an extension, both HQ and the VJO believed
that there were significant potential uncertainties associated with the regulatory approvals of the
Contract — uncertainties that could cause either party to conclude that the approvals were
unsatisfactory and therefore terminate the Contract. By extending the termination date, the
parties would be given additional time to perfect their approvals and consider alternatives.
Docket No. 5983
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Exhs. Board-5 and 8; Dutton HQ pf. at 5-6.
499. On April 17, 1991, the VJO informed the Board that:
Hydro-Quebec finds itself in a circumstance where it may be forced to
prematurely terminate if it is going to choose between unsatisfactory — the risk
of future unsatisfactory modifications of its permits and approvals and, similarly,
the petitioners may find themselves the subjects of unsatisfactorily modified
terms.
Exh. Board-8 at 23.
500. The VJO had informed HQ informally that they found regulatory approvals as of
April 17, 1991, generally satisfactory. They had also informed HQ that the risks arising from
the regulatory approvals, particularly those associated with Condition 10 of the NEB Order,
raised significant concerns that could form a basis for canceling the Contract, particularly if other
power sources provided competitive offers. Id. at 155; Exh. Board-5 at 323-327.
501. On April 17, 1991, GMP’s General Counsel testified that Amendment 3 would
give the VJO additional time to consider whether they were dissatisfied with conditions attached
to the Board’s approval of the Contract, and therefore terminate the Contract. Such
dissatisfaction would have to be in “good faith.”315 Exh. Board-8 at 141-144, 150-152.
502. GMP asserted that it would actively pursue alternatives to the HQ/VJO Contract to
address the contingency that the Contract might be terminated. Exh. Board-5 at 101.
503. GMP acknowledged that the electric market was changing and that the Company
was engaging in “serious discussions” with at least one New England utility for the purchase of
power in place of Contract power. Loads were “down in New England for the foreseeable
future,” and market opportunities to purchase power from other sources would still be available
throughout the period of the Waiver and Release.
Id. at 170-173, 305.
504. Even so, as of April 29, 1991, GMP still believed the Contract to be “the most
attractive long-term deal” available. As Mr. Boucher testified on behalf of the VJO, “we are on
the hook because we want to be on the hook.” Id. at 307.
505. GMP asserted that the inclusion of Contract power in its supply portfolio would not
defer any DSM that would otherwise be cost-effective. The Company expected to acquire the
DSM resources projected in the IDSM scenario considered in Dockets 5330 and 5330-A
notwithstanding the purchase of Contract power. Id. at 318-319.
315. The VJO replaced Amendment 3 with the Waiver and Release, which had the same effect of providing
Docket No. 5983
Page 188
506. On April 17 and 29, the VJO testified that they could, during the term of the
Waiver and Release, find a cost-effective alternative to the Contract and could, in light of
regulatory uncertainty, cancel the Contract without liability prior to the termination date.316 Id.
at 323-327, 329-331; Exh. Board-8 at 180.
507. In its Order of April 30, 1991, the Board noted the arguments of the VJO
supporting approval of the Waiver and Release, and in reliance upon which the Board formed its
decision:
The VJO also note that the Waiver and Release will permit Vermont utilities to
search for alternative suppliers, thus preparing for the possibility that
Hydro-Quebec ultimately will terminate the Contract. They argue that
maintaining the contract—even under the Waiver—will place them in a far
stronger negotiating position vis-a-vis potential alternative suppliers of
long-term power. The VJO witnesses also explicitly testified that neither the
Waiver nor the HQ Contract itself would lead to the deferral of otherwise
cost-effective investments in energy-efficiency and demand-side management.
The VJO also agree that utility management has a legal obligation to prudently
manage the contract so as to procure reliable power at the lowest long-term cost
to ratepayers. They acknowledged that, in future rate cases, the Board could
review the prudence of their decision to waive potential damage claims;
however, they note that such a prudence review must focus on the information
that now is (or should be) available to them, rather than upon knowledge gained
from the actual playing out of future events.
Docket 5330-E, Order of 4/30/91 at 3-4, 17.
e. Ability to Terminate the Contracte. Ability to Terminate the Contract
508. In the summer of 1991, GMP had the ability to lock into or not lock into the
Contract, upon a good faith declaration that regulatory approvals related to the Contract were not
satisfactory. GMP understood that it had this ability. Findings 498-507, above; exh. DPS-49
(PLC-P-3, Dutton 9/23/97 deposition at 26-29, 66, 68-69; and PLC-P-7, Saintcross 9/22/97
deposition at 27, 29, 47, 48, 57, 62-63, 121, 130, 137, 154-155); Saintcross pf. 7/11/97 at 4.
509. Under Section 1.3 of the Contract, the parties’ rights are contingent upon obtaining
additional time to HQ and the VJO to examine regulatory approvals.
316. The VJO presented their testimony on April 29th through a panel of witnesses, one from GMP and one
from CVPS. When a panel presents testimony, each member of the panel has an obligation to testify truthfully in
response to a question. A panel member who disagrees with the statement of another member, but withholds that
information would not have truthfully responded. Thus, we assume that the responses of each panel member are
shared by other panel members, absent a specific statement of disagreement. Moreover, testimony on behalf of the
VJO, given with GMP's knowledge, is attributable to GMP even if not presented by a GMP employee.
Docket No. 5983
Page 189
all necessary regulatory approvals. That section provides (in pertinent part) that:
the obligations under this Contract are contingent upon the receipt of all relevant
rights and approvals, including required permits and licenses, by
HYDRO-QUEBEC, VERMONT JOINT OWNERS, and purchasers of contract
power from VERMONT JOINT OWNERS under contracts executed on or
before April 30, 1991, for the purchase and sale and the transmission and
delivery of power and energy under this Contract and under any resale contract
between Vermont Joint Owners and third parties, upon terms satisfactory to
each party. . . . (emphasis added).
510. Section 1.4 of the Contract allows either HQ or the VJO to terminate the contract
in the following circumstances:
Until April 30, 1991, each party could terminate this Contract without liability to
the other party should any necessary regulatory approvals, including required permits
and licenses, be withheld or tendered upon terms unsatisfactory to it.317
After the April 30, 1991, deadline (as modified to November 30, 1991 by the Waiver
and Release), either party could invoke the right to terminate without liability “in the
event that a court sitting in appeal or review of either of the decisions [i.e., the
decisions of the Board in Dockets 5330 and 5331 and the Canadian Nation Energy
Board in Docket No. EH-3-89] cancels the license or permit or modifies it or
remands it for further modification” thus allowing cancellation without penalty.
After the April 30, 1991, deadline (as extended to November 30, 1991), either party
could terminate the contract due to unsatisfactory regulatory approvals but the
canceling party would then be required to compensate the non-canceling party for
“all costs, damages and expenses” as a result.
511. A contracting party would not have had to appeal an unsatisfactory condition of
approval in order to later terminate on that basis. Exh. Board-8 at 141-144, 150-152.
512. If, on the basis of an unsatisfactory regulatory approval, a contracting party wished
to terminate the Contract without liability, it was required to notify the other party of its intention
to do so as of the termination date. This right existed under the Contract, not merely
Amendment 3. Id. at 154.
513. Under the Contract, the VJO possessed termination rights based on their
dissatisfaction with approvals obtained by HQ. Exh. Board-8 at 71, 150-151, 186; see exh.
GMP-65 at Articles 1.3 and 1.4; Jobin 1/9/97 reb. pf. at 6; exh. Board-5 at 330-331.
514. The regulatory approvals obtained by HQ, specifically Conditions 10 and 11,
317. The April 30, 1991, deadline for the parties to the contract to exercise the rights under Section 1.4 was
extended to November 30, 1991, by the Waiver and Release that the Board approved in Docket 5330-E (Order of
4/30/91).
Docket No. 5983
Page 190
imposed a significant risk that the Contract would ultimately be terminated. This risk provided
a basis under which the VJO could have terminated the Contract. Exh. Board-5 at 307-308,
323-327, 330-331.
515. Condition 7 of the Board’s Order in Docket 5330, which was still operative at the
time of the premature lock-in, was a substantive condition of approval that posed a significant
risk to the Company. The Board retained authority to order unlimited sell backs and/or
reallocations of Contract power. Tr. 1/21/98 at 314-315 (Steinhurst); see tr. 1/21/98 at 203-228
(Dutton).
516. Condition 8 of the October Order, which operates for the life of the Contract, was a
substantive condition of approval that posed a significant risk to the Company. Tr. 1/21/98 at
313-314 (Steinhurst); see tr. 1/21/98 at 203-228 (Dutton).
517. A change in circumstances such that the Contract was no longer economic did not,
by itself, constitute reasonable grounds for giving notice of termination. However, in
determining their satisfaction with the regulatory approvals, the VJO could consider other
factors, including the economic benefits of the Contract. Jobin 12/8/97 reb. pf. at 6; exh.
Board-5 at 307-308, 323-327, 330-331; exh. Board-8 at 186-187.
518. During the period of the Waiver and Release, GMP had reasonable and non-trivial
grounds for exercising GMP’s or the VJO’s right under the Contract to terminate the Contract at
any time during the contractually specified termination notice period. The Company could have
expressed dissatisfaction with Condition 7 (potential reallocations); Condition 8 (DSM); and
Condition 11 (resales) of the October Order. Moreover, the Company could have expressed
dissatisfaction with the conditions attached by the NEB to HQ’s export licenses and the
possibility that the Contract could still be terminated without liability after the expiration of the
Waiver and Release as a consequence of future appellate action. Findings 513-516, above; tr.
1/21/98 at 314-315 (Steinhurst); tr. 1/19/98 at 177-178, 180 (Dutton); see tr. 1/21/98 at 203-268
(Dutton).
519. During the period of the Waiver and Release, CVPS took the view that CVPS (and
thus the VJO) had reasonable, non-trivial grounds for exercising its right to terminate the
Contract because Paragraph 11 requires resales that CVPS had not satisfactorily negotiated with
HQ. Docket 5701/5724, Order of 10/31/94 at 105-108.
520. Even if HQ had objected to a notice of termination and had prevailed, it is
Docket No. 5983
Page 191
reasonable to conclude that the damages awarded would not have differed materially from the
above-market costs of the Contract, which would otherwise be paid by ratepayers were the
Contract not terminated. Tr. 1/21/98 at 236-237 (Dutton).
521. Although the VJO obtained a waiver of HQ’s right to terminate because of possible
reinstatement of Condition 10, this commitment was not sufficiently valuable to GMP to warrant
premature lock-in. Chernick HQ reb. pf. 12/24/97 at 32.
522. The lock-in materially changed the rights of the parties to terminate the Contract.
Tr. 1/15/98 at 110-111 (Jobin).
f. The Lock-Inf. The Lock-In
523. On April 19, 1991, GMP’s General Counsel sent a letter to HQ advocating that the
VJO and HQ lock into the Contract rather than extend the deadline for termination (as set out in
Amendment 3). GMP stated:
Nonetheless, [GMP] believes the interests of both [HQ] and [GMP] will be
better served if there is no extension of the termination date and if there is,
instead, continued performance of the Contract throughout its term. We are
particularly concerned that an additional year of uncertainty will allow
opponents of the Contract to intensify their efforts to stop it. They have already
been very successful in slowing down our regulatory process and in re-litigating
questions that we had thought had already been decided by the VPSB. The
Mayor of Burlington and some other politicians have found their arguments
persuasive and have taken positions hostile to the Contract. We think it would
be inadvisable to give them another year. . . . Our commitment to the Contract
is so firm that we are willing to be flexible [on extending the April 30, 1991
deadline], rather than have Hydro-Quebec terminate the Contract on or before
April 30, 1991.
Exh. MSB-A (MSB-16).
524. In a letter dated June 4, 1991, the VJO and HQ referred to negotiating a “revised
Amendment No. 3,” the intent and provisions of which are not known. The contracting parties
were also discussing the possibility of another amendment, “Amendment No. 4,” to extend the
date of termination without liability beyond November 30, 1991. Exh. MSB-A (MSB-18).
525. In the June 4th letter, the VJO informed HQ that they (the VJO) believed that
“Amendment No. 4” would require a number of provisions assuring the Contract’s financial
reliability in order to receive Public Service Board approval. In addition, the VJO stated that “it
would be likely that the Board would insist that Vermont receive at least equal treatment to [the]
Docket No. 5983
New York Power Authority in the event their
Page 192
drop dead date’ is extended.” Id.; see Findings
591-592.
526. Also in the June 4th letter, the VJO noted that:
If we go forward with an Amendment No. 4, there is little doubt the Board
will revisit fundamental issues relating to the Contract. There is also no
question that there will be new media attention focused on Hydro-Quebec’s
problems.
As we have agreed, if we negotiate Amendment No. 4, we will treat it as a
contingency in the event that we are not able to find another way to lock the
Contract in by this summer. Nevertheless, I feel it important to emphasize our
serious reservations about any amendment that casts further doubt on the
certainty of this Contract.
Id.
527. On July 12, 1991, the Canadian Federal Court of Appeal rendered a decision that
affirmed the issuance of the export license to HQ, but it struck down Condition 10, the condition
to which HQ had objected. Dutton pf. at 5; exh. MSB-A (MSB-10).
528. At that time, HQ notified the VJO that it was willing to commit to the Contract,
notwithstanding the previous extension of the deadline to withdraw without liability (on the basis
of dissatisfaction with regulatory approvals) from April 30, 1991 to November 30, 1991 (i.e., the
Waiver and Release). Dutton pf. at 6; Dutton reb. pf. 12/19/97 at 5.
529. GMP and other VJO discussed HQ’s offer and agreed to pursue a commitment
with HQ. VJO representatives met with HQ to discuss how the parties could perfect their
commitments to the Contract. Dutton pf. at 6.
530. Although HQ was willing to commit to the Contract notwithstanding the
uncertainty associated with an appeal to the Canadian Supreme Court, GMP was troubled by the
prospect that Condition 10 could be reinstated by the Supreme Court of Canada. Dutton pf. at 6.
531. GMP was concerned that Condition No. 10 might be viewed as a condition
precedent to HQ’s export license. If that were the case, notwithstanding the lapse of the
December 1, 1991 cutoff date for withdrawing from the Contract without liability on the basis of
dissatisfaction with regulatory approvals, HQ could possibly be viewed as not having obtained a
requisite regulatory approval, and could be required by the pertinent Canadian regulatory
authority to terminate or withdraw from the Contract—and do so without liability. Dutton pf. at
7.
532. Termination under such circumstances would have meant that Vermont would have
Docket No. 5983
Page 193
paid above-market costs for power (by virtue of the financial “front-end loading" of the Contract)
without the ability to recover those above-market costs, either through damages or by continued
purchase of power in the out years of the Contract, when it was expected to produce economic
benefits. Dutton pf. at 7-8; see also exh. Board-5 at 265.
533. The VJO agreed to lock into the Contract but only if HQ agreed that it could not
interpose non-compliance with Condition 10, were it to be reinstated by a subsequent decision of
the Supreme Court of Canada, as a defense to a claim by the VJO that HQ had breached the
Contract by failure to perform as a consequence of losing its export license. Dutton pf. at 8.
534. At this time, CVPS was negotiating a second sell-back arrangement with HQ,
pursuant to Condition 11 of the October Order. CVPS had informed HQ that, in the absence of
such an agreement, the Contract would be canceled. By August 21, 1991, CVPS and HQ
reached a tentative agreement of the terms and conditions of a second sell-back. Dockets
5701/5724, Order of 10/31/94 at 105 (findings 224 and 225).
535. On August 27, 1991, the New York Power Authority (“NYPA”) publicly
announced that it and HQ had agreed to extend the termination date for the HQ/NYPA Contract
to November 30, 1992. Finding 592, below.
536. On the morning of August 28, 1991, during a telephone conference call, the VJO
voted in favor of the early lock-in of the Contract.318 Chernick HQ pf. 10/17/97 at 67.
537. On August 28, 1991, HQ informed the VJO that it was prepared to lock into the
Contract. The text of the letter is as follows:
Hydro-Quebec has examined all rights and approvals, including required
permits and licenses, that are effective at the date of this letter, both in the
United States and in Canada (the “Authorizations”), for the sale and delivery of
electric power under the Firm Power and Energy Contract between
Hydro-Quebec and the Vermont Joint Owners, dated December 4th, 1987, as
amended (“the Contract”), and finds that their terms are satisfactory.
Hydro-Quebec will not avail itself of its right to terminate the Contract based on
the terms and conditions of the above Authorizations. Therefore, it is the
position of Hydro-Quebec that the Waiver and Release agreed to on April 30,
1991, is no longer necessary or applicable to the Contract.
Hydro-Quebec acknowledges that the right to terminate the Contract
without compensation as provided in Article 1.4, within 90 days of a final
judgment in appeal, does not apply if conditions 10 or 11, or both, of the
decision of the National Energy Board of Canada in Docket No. EH-3-89 are
318. The evidence demonstrates that the VJO members made their final decision to lock in hurriedly, relying
upon faxed summaries of the lock-in letters.
Docket No. 5983
Page 194
reinstated by a decision of the Supreme Court of Canada.
Exh. MSB-A (MSB-14).
538. On August 29, 1991, the VJO informed HQ that they were prepared to lock into the
Contract. The text of their letter is as follows:
The Vermont Joint Owners have examined all rights and approvals, including
required permits and licenses, that are effective at the date of this letter, both in
the United States and in Canada (the “Authorization”), for the sale and delivery
of electric power under the Firm Power and Energy Contract between the
Vermont Joint Owners and Hydro-Quebec, dated December 4th, 1987, as
amended (“the Contract”), and finds that their terms are satisfactory. The
Vermont Joint Owners will not avail themselves of their right to terminate the
Contract based on the terms and conditions of the above Authorizations.
Therefore, it is the position of the Vermont Joint Owners that the Waiver and
Release agreed to on April 30, 1991, is no longer necessary or applicable to the
Contract.
The Vermont Joint Owners acknowledge that the right to terminate the
Contract without compensation as provided in Article 1.4, within 90 days of a
final judgment in appeal, does not apply if conditions 10 or 11, or both, of the
decision of the National Energy Board of Canada in Docket No. EH-3-89 are
reinstated by a decision of the Supreme Court of Canada.
Id.
539. Both “lock-in” letters were countersigned by authorized representatives of the
contracting parties. Id.
540. The lock-in letters were filed with the Board with a letter from the VJO dated
September 4, 1991. Id.
541. The lock-in occurred about 12 weeks prior to the November 30, 1991, deadline
under the Waiver and Release. Dutton pf. at 8.
542. The Supreme Court of Canada subsequently reversed the judgment of the Federal
Court of Appeal and reinstated Condition No. 10. Dutton pf. at 10.
g. Docket 5330-Fg. Docket 5330-F
543. In response to the notice of the lock-in, the Grand Council of the Cree and the New
England Coalition for Energy Efficiency and the Environment (collectively the “Cree”) filed a
complaint under 30 V.S.A. § 208 that the Board open an investigation into the actions of the
VJO. Docket 5330-F, Order of 11/26/91 at 1.
544. Shortly after notification of the lock-in, the Board invited all parties in Dockets
Docket No. 5983
Page 195
5330 and its progeny to file comments upon (i) whether Vermont utilities required prior
regulatory approval in order to lock in their commitment to the Contract before November 30,
1991, and (ii) whether prior review of the lock-in could take place while an appeal of the
underlying contract was pending at the Supreme Court. Id. at 3.
545. The VJO responded to the Board’s request. We observed that the VJO had taken
the position that:
prior regulatory review was not required because: (i) the new “lock-in” had the
same effect as the April 30, 1991 lock-in date that had originally been approved
by the Board; (ii) because the decision to treat the Contract as “locked-in” fell
within the range of managerial discretion allowed by the traditional law of utility
regulation; (iii) because the decision fell within the range of managerial
discretion expressly contemplated by the Board in its previous approval of the
Contract; and (iv) because the prudence of the utilities’ decision to advance the
lock-in date could be tested in any future rate cases.319
Id. at 4.
546. The Cree argued that the Waiver and Release could not be modified without
regulatory review and prior approval, and that that process could not occur unless the Vermont
Supreme Court remanded all prior proceedings back to the Board. The Cree requested such a
remand on October 15, 1991. Id. at 3, 5.
547. The DPS argued that the August lock-in date required no further review, because it
had the same effect as the April 30, 1991, date that had originally been approved by the Board.
Id. at 4.
548. The Crees’ request for remand from the Vermont Supreme Court was denied on
November 8, 1991. As a consequence, the Board concluded that it did “not have the authority to
grant the relief requested by the complaint” and dismissed the petition. Id. at 6-7.
549. Because of the Supreme Court’s action, the Board did not have jurisdiction to, and
did not address “in detail the utilities’ argument that they had full managerial discretion to give
up their right to withdraw from the Contract as late as November 30th by agreeing to a lock-in in
August.” The Board did note, however, that the decision to lock in “can be reviewed when the
319. The Board quoted the VJO?s September 25, 1991, memorandum on the matter, referring to the Board?s
Order of April 30, 1991, in Docket 5330-E, in which they acknowledged that utilities? discretionary actions are
?like all such discretion . . . subject to the general rule that ratepayers may ultimately be charged only for the
prudently incurred costs of providing them with service.? Docket 5330-F, Order of 11/26/91 at 4.
Docket No. 5983
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utility seeks to recover the resulting costs in future rates.”320 Id. at 5.
3. Subsequent Regulatory Proceedings3. Subsequent Regulatory Proceedings
a. Docket 5428a. Docket 5428
550. On January 4, 1991, the Board issued an Order in Docket 5428, granting GMP a
6.69 percent increase in its retail rates. The Company’s power costs in the adjusted year were
computed on the assumption that GMP’s entitlement under Schedule A of the Contract was one
of many resources in its supply portfolio; however, neither Schedule A nor the Contract was
litigated in that docket. The prudence of the Contract was not litigated; the lock-in had not
occurred yet; and Board made no explicit or affirmative findings with respect to the HQ/VJO
Contract at that time. Docket 5428, Order of 1/4/91 (see, in particular, pages 70-80).
551. Also in that docket, the Board disallowed approximately $606,000 of DSM
expenditures for the Company’s failure to have designed a comprehensive residential program
and an inability to establish that its commercial and industrial programs acquired savings. Id. at
36-37.
b. Docket 5532b. Docket 5532
552. On April 2, 1992, the Board issued an Order in Docket 5532, granting GMP a 6.00
percent increase in its retail rates. The Company’s power costs in the adjusted year were
computed on the assumption that its entitlement under Schedule A of the Contract was one of
many resources in its supply portfolio; however, neither Schedule A nor the Contract was
litigated in that docket.321 The Board made no explicit or affirmative findings with respect to
the HQ/VJO Contract at that time. Docket 5532, Order of 4/2/92 (see, in particular, pages
38-63).
320. The VJO did not object to this observation, nor to the Board?s previous statements concerning the ability
to review prudence in future proceedings. Only now has the Company developed the argument that these prior
regulatory actions constituted a prudence review, a fact at odds with the conduct of those proceedings, as well as the
explicit statements in several relevant Orders. See e.g., Docket 5780, Order of 6/9/95 at 30.
321. A DPS witness testified that he was ?not aware of any clearly imprudent resource acquisition or
management by GMP, and [he did] not propose such an exclusion of costs in this case.? Reed/Oliver pf. at 22-23.
No other evidence on the prudence of any aspect of GMP?s power supply decisions and activities was given or
considered in Docket 5532. Nor was there any evidence that the Department had affirmatively reviewed the
prudence of GMP?s actions. No party sought to raise prudence of the Contract as an issue.
Docket No. 5983
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c. Docket 5270-GMP-4c. Docket 5270-GMP-4
553. On October 23, 1991, GMP filed its IRP with the Board, pursuant to the Board’s
April 16, 1990, Order in Docket 5270. Evidentiary hearings were held in March 1992, after
which the parties (GMP and the DPS) agreed to enter into settlement negotiations. On August
4, 1993, they filed a stipulation resolving the outstanding issues. A hearing on the stipulation
was held on December 2, 1993, and on May 3, 1994, the Board issued an Order approving the
IRP, as amended by the settlement. Docket 5270-GMP-4, Order of 5/3/94.
554. The decision to lock into the Contract was not litigated in Docket 5270-GMP-4.
The Company’s entitlements under the Contract were considered “existing and committed
resources” in the IRP. Id.; see Section 4.1 of the IRP.
d. Docket 5695d. Docket 5695
555. On May 13, 1994, the Board issued an Order in Docket 5695, granting GMP a 2.9
percent increase in its retail rates. With the exception of three rate base and cost of service items
specifically identified, the agreement among the parties—GMP, the DPS, IBM, and Vermont
Yankee—was a “bottom line settlement” and did not constitute explicit or affirmative findings
with respect to any other component of the Company’s costs, including power costs and the
HQ/VJO Contract. The three identified cost items were $4.2 million of Pine Street Barge Canal
litigation expenses, $1.3 million of net lost revenues associated with DSM savings (ACE), and a
target rate of return on common equity of 10.5 percent.322 Docket 5695, Order of 5/13/94.
322. GMP?s cost of service in this proceeding did not reflect any power from Schedule C.
Docket No. 5983
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e. Docket 5780e. Docket 5780
556. On June 9, 1995, the Board issued an Order in Docket 5780, granting GMP a 9.25
percent increase in its retail rates. With the exception of cost elements specifically identified,
the agreement among the parties—GMP, the DPS, IBM, and Vermont Yankee—was a “bottom
line settlement” and did not constitute explicit or affirmative findings with respect to any
component of the Company’s costs.323 The identified cost components (rate base items) were
$2.743 million in Pine Street Barge Canal litigation costs, a $7.5 million payment to HQ to effect
a reduction in Contract costs, a $1.095 million investment in a joint research, development, and
demonstration project with HQ, $5.492 million in DSM costs, $1.471 million in ACE recoveries,
and an 11.25 percent return on common equity. Docket 5780, Order of 6/9/95.
557. In the Order in Docket 5780, we observed:
As to the issue of prudence, we agree with IBM that the parties did not discuss
the overall prudence of GMP s HQ commitments in this case and the Hearing
Officers have not presented us with findings on that issue. The Hearing
Officers’ observations should not be read as a statement on the overall prudence
of that contract. We recognize that, as IBM states on page 11 of its comments,
“there is an outstanding issue of whether GMP acted prudently when it
voluntarily locked into the contract on August 28, 1991. That issue has not
been litigated in this docket or addressed in the agreements among the parties.”
We do not read the Hearing Officers’ findings on IBM’s 1990 position statement
as going any further to resolve this question than did the parties themselves.
Docket 5780, Order of 6/9/95 at 6-7.
558. The settlement also included a detailed memorandum of understanding with respect
to GMP’s DSM programs and related issues. Id.
559. Lastly, the settlement also included an economic development agreement under
which IBM would purchase electric service in excess of its 1994 consumption at discounted
rates. The term of the agreement was three years, beginning in early 1995. Id.
323. The Board observed that expected increases in power costs, particularly those under the HQ/VJO
Contract, were contributing to the need for increased revenues, but it made no findings as to the justness and
reasonableness, or prudence, of any particular element of the Company?s power costs. Docket 5780, Order of
6/9/95 at 6-7.
Docket No. 5983
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f. Docket 5857f. Docket 5857
560. On May 23, 1996, the Board issued an Order in Docket 5857, approving a
settlement that granted GMP a 5.25 percent increase in its retail rates. With the exception of
cost elements specifically identified, the agreement among the parties—GMP, the DPS, IBM,
Vermont Yankee, the Vermont Low Income Advocacy Council, AARP, VCCER, VPIRG, and
Vermont Energy Industries Association—was a “bottom line settlement” and did not constitute
explicit or affirmative findings with respect to any component of the Company’s costs. The
identified cost components (rate base items) were $1.317 million in Pine Street Barge Canal
litigation costs, $3.741 million in DSM costs, $1.658 million in ACE recoveries, and an 11.25
percent return on common equity. Docket 5857, Order of 5/23/96.
561. The Board found that:
The parties to the MOU and Supplemental MOU have agreed that Supplemental
MOU in no way establishes a precedent for ratemaking treatment to be applied
to future costs incurred by GMP, if any, in connection with the Hydro-Quebec
VJO Contract, including but not limited to prudence and used-and-useful issues.
Id. at 8-9.
562. The settlement also included a supplemental memorandum of understanding with
respect to DSM programs and related issues. Id. at 7-8.
4. Prudence of GMP’s Actions4. Prudence of GMP?s Actions
a. The Contract and Docket 5330a. The Contract and Docket 5330
563. The evidence in this Docket does not demonstrate that the VJO (and, therefore,
GMP) imprudently negotiated the Contract. Similarly, the evidence does not support a finding
that the VJO were imprudent in failing to specify in § 1.3 of the original Contract or in § 1.4 of
Amendment 2 the effect of withdrawal by one utility on the other Vermont utilities’ obligations
under the Contract, and on the validity of the Contract. The evidence does not show that the
VJO were imprudent in failing to negotiate a provision of the Contract that would have allowed a
utility to reduce its take of HQ capacity, and the size of the Contract, if the approvals of the
remaining capacity were unsatisfactory, although for an extended contract providing one-third of
GMP’s load, such a provision would have been reasonable. Williamson reb. pf. at 6-7; exh.
Board-5 at 350-351.
Docket No. 5983
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564. Because the Contract contained the provisions noted above, because it was large,
long-term, “all or nothing”, and contained very large fixed cost components, the Contract
commitments had significant financial risks; Vermont utilities should have been especially
diligent in monitoring and mitigating those risks.
b. The Lock-inb. The Lock-in
565. In the spring and summer of 1991, projections of both long-term and short-term
fuel prices, New England regional loads, and GMP’s own loads were falling in relation to earlier
forecasts. GMP was aware of these changes. Saintcross pf. at 33; Chernick HQ pf. 10/17/97 at
50; Chernick reb. pf. 12/24/97 at 7-8; exh. IBM-15.
(1) Changing Forecasts of Energy and Fuel Prices(1) Changing Forecasts of
Energy and Fuel Prices
566. From 1989 to 1992, the expected levelized costs of non-utility generation (“NUG”)
contracts in New England fell significantly, dropping 21-42 percent.
Levelized price of
HQ/VJO Contract Power
Levelized cost of
NUG contracts
1989
$0.049/kWh
$0.057-$0.078/kWh
1990
$0.049/kWh
$0.052-$0.063/kWh
Early 1992
$0.049/kWh
$0.045/kWh
The levelized price of Contract power was expected to be approximately $0.049/kWh. (All in
1992 $). Thus, in a three-year period, long term-levelized NUG prices that had been 16-37
percent higher than the Contract dropped to 8 percent lower than the Contract. Exh. GMP-49
(JRWO-12).
567. In Docket 5330, the Company relied upon the Wharton Economic Forecasting
Associates (“WEFA”) fuel-price forecast of Winter 1987/1988, in evaluating the
cost-effectiveness of Contract power. Saintcross reb. pf. 12/8/97 at 13, 41-42.
568. In May 1991, GMP requested WEFA to provide an update of its fuel-price forecast.
Reed/Oliver pf. at 49-50; Saintcross reb. pf. 12/8/97 at 17.
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569. The Company compared the May 1991 WEFA forecast with its forecasts
developed for Docket No. 5330, as well as with the DPS fuel price forecast used in Docket 5330.
The fuel prices provided by WEFA in May 1991 were lower than those of the March 1990
WEFA forecast, which GMP had used in the analyses filed in Docket 5330-A. Saintcross reb.
pf. 12/8/97 at 17, 43.
570. After evaluating the price trends in the WEFA forecasts, GMP concluded that there
was some likelihood that fuel prices could be depressed for the short term. Saintcross reb. pf.
12/8/97 at 44.
571. Because the Company’s major deliveries under the Contract would not begin until
1995 and because WEFA assigned a low probability to the low long-term price escalation trend,
GMP considered the base case forecast to be the most probable case. Saintcross reb. pf. 12/8/97
at 44.
572. The May 1991 WEFA forecast for natural gas prices was generally consistent with
several other price forecasts generated in the 1991 time-frame. Reed/Oliver pf. at 50;
Reed/Oliver reb. pf. 1/9/98 at 21-22; exh. GMP-48 and 49.
573. In June 1991, the New England Power Pool (“NEPOOL”) concluded that, as a
consequence of “significant changes in the most recent savings analysis, primarily due to changes
in the fuel cost and NEPOOL capacity/energy forecast,” the pricing terms of HQ’s proposal to
replace the HQ-NEPOOL Firm Energy Contract (“FEC”) after the year 2000 to be “quite high
relative to other market options.”
MSB pf. at 16; exh. MSB-A (MSB-6 and 7). The Firm
Energy Contract was a purchase by NEPOOL of energy-only (i.e., no capacity) from HQ. GMP
knew or should have known about NEPOOL’s June assessment. GMP did not inform the Board
of these pricing concerns.
574. NEPOOL’s long-term CELT (Capacity, Energy, Loads, and Transmission)
forecasts produced in the years 1984-1987 were significantly lower than for those produced in
1988-1990. However, in 1991, this trend was reversed, and NEPOOL's April 1991 CELT Report
showed regional forecasts for both capacity and energy well below those in the immediately
preceding years. MSB pf. at 19-20; exh. MSB-A (MSB-7 and 9).
575. The CoGen Lime Rock plant was not fully subscribed at this time (it was
eventually canceled). The lack of interest in the project suggests that it may have been too
costly or risky compared to other options in the market. Chernick HQ pf. 10/17/97 at 55-56.
Docket No. 5983
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576. The New York Power Pool (“NYPP”) and NEPOOL (of which Vermont is a part)
are separate, but interconnected, power pools. Although economic and technical conditions in
the two pools may differ in varying degrees from time to time, their markets for power have
reflected long-term similarities. The fact that the timing and pricing provisions of the HQ/VJO
Contract and the HQ/NYPA contract were virtually identical suggests that, at the time the
contracts were negotiated, Vermont and New York shared similar expectations about the future
markets for electricity. GMP was aware of the similarities between the two contracts, and of the
fact that NYPA, in April 1991, still viewed the HQ/NYPA contract “favorably.”324 MSB pf. at
12-15; exh. MSB-A (MSB-16).
577. In the spring and summer of 1991, the New York utilities were facing large and
growing surpluses of capacity and energy, and falling avoided costs. At the same time, the New
York Power Authority was reconsidering its commitment to a major purchase from HQ. GMP
was aware of both of these developments. Chernick HQ pf. 10/17/97 at 55; exh. DPS-49
(PLC-P-12 and PLC-P-15); Rosenberg pf. 10/17/97 at 18-19; exh. Board-5 at 204.
578. Substantial amounts of excess generating capacity, with necessary transmission
capacity, existed in both the NYPP and NEPOOL, a condition that was bound to lower market
prices of alternatives to utilities throughout the NEPOOL region. Tr. 11/19/97 at 140-141
(Chernick).
579. In July 1991, New York issued the draft State Energy Plan, finding that alternatives
to the Contract were 0.3 percent cheaper on a levelized cost per kWh basis, although the
alternatives entailed increased air emissions. Exhibit MSB-A (MSB-10 at 11-12).
580. During the summer of 1991, it was evident that NYPA was reluctant to lock into its
contract with HQ and that NEPOOL had reservations about its HQ Firm Energy Contract and a
future replacement of it. MSB pf. at 35; exh. MSB-A (MSB-7 and 18).325
324. New York?s view of the HQ/NYPA Contract in April 1991 was essentially the same as that of the VJO, as
GMP?s General Counsel acknowledged.
325. The VELCO summary of the June 7, 1991, meeting of the NEPOOL Executive Committee suggests that
there are benefits to renegotiating the Firm Energy Contract, in light of the fact that NEPOOL ?doesn?t really need
all of the HQ energy at this time.? As for an extension of the FEC, NEPOOL was aware in August that ?the
preliminary indications from NEPLAN are that there is little probability of significant savings in the near-term. . . .?
Exh. MSB-A (MSB-7).
Docket No. 5983
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581. Between February and July 1991, GMP dramatically reduced its projections for the
market price of capacity over the following six years:
Docket No. 5983
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Year
February Market Price
July Market Price
Docket No. 5983
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1992
$58.98/kW-year
$0.00/kW-year
Docket No. 5983
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1993
$82.23/kW-year
$0.00/kW-year
Docket No. 5983
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1994
$77.43/kW-year
$0.00/kW-year
Docket No. 5983
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1995
$71.47/kW-year
$1.87/kW-year
Docket No. 5983
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1996
$65.96/kW-year
$2.56/kW-year
Docket No. 5983
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1997
$60.40/kW-year
$5.62/kW-year
Docket No. 5983
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Rosenberg pf. 10/17/97 at 16.
582. In May 1991, the Company understood that the regional power supply market had
changed; it was now characterized by “surpluses of capacity and energy for sale at attractive
prices.” Exh. IBM-15.
(2) Changing Forecasts of Electricity Demand(2) Changing Forecasts of
Electricity Demand
583. GMP updated its load forecasts for Docket 5330-A. Changes to the load forecast
fell into two categories. The first change related to changing economic conditions. The second
change was associated with methodology. Saintcross reb. pf. 12/8/97 at 13, 40.
584. In the spring of 1991, the GMP’s highest-volume customer (IBM) notified the
Company that it expected that its demand for electricity during the next five years would be
significantly less than previously anticipated (a reduction of 30 MW, and perhaps as much as 50
MW). As a consequence, the Company now considered its earlier long-range load forecast, “as
used in our collaborative [DSM] planning process and our most recent Hydro-Quebec filing . . .
[to be] dramatically outdated.” Exh. IBM-15.
585. The Company considered the changes in its projections of demand to be
“dramatic.” It was expected that the 30-50 MW drop in the expected peak in 1995 “will likely
change our expansion plans.” Id.
586. In May 1991, the Company identified several impacts (among others) that the
“dramatic” changes in the market and its load forecasts would have on its planning:
The break-even (or payback) period for its collaboratively designed DSM
programs would increase.
The Company’s need for new capacity was “significantly reduced.” On the
assumption that the Company purchased all of its non-cancelable entitlements
under the Contract, “the need for CoGen Lime Rock may all but disappear.”
The primary driver behind this conclusion was the reduced load forecast over the
long term.326
“The abundance of Hydro-Quebec baseload power beginning 1995 may create
326. At that time, GMP considered the drop in market prices to be short-term in nature and, therefore, the
cost-effectiveness of CoGen Lime Rock (a 30-year entitlement) was more sensitive to changes in the load forecast
than to changes in the fuel price forecasts. Exh. IBM-15. Because the Contract also was heavily front-end loaded,
the same analysis could have applied to it.
Docket No. 5983
Page 212
an excess of baseload capacity within our mix given the new load forecast.”
Id.
587. These changes resulted in a forecast of energy requirements, unadjusted by
anticipated reductions in demand due to aggressive implementation of DSM programs, that
would be 18 percent lower in 1995 than that used by the Company in previous analyses of the
Contract for Docket 5330-A.327 Saintcross reb. pf. 12/8/97 at 40-41; exh. IBM-15.
588. By March 1991, NEPOOL informed GMP and others that New England loads and
load forecasts were declining relative to earlier expectations, and that capacity surpluses would
increase. In the short-run, forecasted energy sales would not grow as previously expected, and
would actually fall by 0.7 percent; in the longer-run sales were expected to flatten as a
consequence of DSM and a general slow-down in the economy.
MSB pf. at 16; exh. MSB-A
(MSB-6 and 9).
589. Each year over the period from 1984-1991, NEPOOL’s long-term CELT forecasts,
issued annually, showed an increase in the expected demand and energy savings from DSM
efforts. In addition, the 1991 CELT report showed a dampening in load growth in the long-run.
MSB pf. at 19-20; exh. MSB-A (MSB-7 and 9).
(3) New York — The HQ/NYPA Contract(3) New York ? The HQ/NYPA
Contract
590. The HQ/NYPA Contract was expected to require construction of new generation
resources by HQ. In contrast, the HQ/VJO Contract was going to be served by existing HQ
generating resources. October Order at 9; tr. 1/19/98 at 15 (Bolbrock).
591. The VJO and the Company were aware that NYPA, during the summer of 1991,
was discussing an extension of the lock-in period for the HQ/NYPA Contract.328 Exh. DPS-49
(PLC-P-3, Dutton Deposition 9/23/97 at 47); exh. MSB-A (MSB-18).
592. An agreement between HQ and NYPA to extend the lock-in period for the
HQ/NYPA Contract until November 30, 1992, was announced on August 27, 1991. Exh.
327. By comparison, the Contract accounted for approximately one-third of GMP?s energy. Thus, an 18
percent drop in the Company's energy requirements would be equivalent to about one-half of GMP?s purchases
under the Contract.
328. And they were aware in April that avoided costs were falling in New York and that utilities were
reconsidering their commitments to the HQ/NYPA contract even though NYPA still found the HQ/NYPA Contract
Docket No. 5983
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Board-6; exh. IBM-21; exh. MSB-A (MSB-4); MSB pf. at 43.
593. The extension was intended to give HQ additional time to conduct environmental
reviews of its planned construction of new facilities and to allow NYPA to reassess the contract
in light of falling demand for electricity and changing economic conditions. The agreement to
extend the lock-in date also liberalized the conditions governing cancellation. Under the
agreement, NYPA could now cancel for any reason rather than being restricted to termination
based on unsatisfactory regulatory approvals (similar to the VJO’s rights under Section 1.4 of the
Contract). Exh. Board-6; exh. IBM-21; exh. MSB-A (MSB-4).
594. On August 29, 1991, New York Governor Cuomo directed three state agencies (the
NY State Energy Office, the NY Department of Public Service, and the NY Department of
Environmental Control) to prepare a study of the economics of the HQ/NYPA contract. Id.;
MSB pf. at 13.
595. On September 30, 1991, the Chairman of the NEPOOL/HQ Negotiating
Committee reported that "[a]s we understand the NY situation, provisions with respect to price
amount and delivery date of that previously negotiated contract are now open for re-negotiation."
Exh. MSB-A (MSB-7, Sch.1).
596. In March 1992, the three state agencies presented Governor Cuomo with their
preliminary findings and their recommendation that the contract be canceled because it was no
longer economic without a 30 percent reduction in price. Exh. MSB-A (MSB-4).
597. On March 24, 1992, NYPA informed Governor Cuomo of its recommendation to
cancel the HQ/NYPA contract. Attempts to negotiate significant price reductions had been
unsuccessful. On March 27th, Governor Cuomo announced that NYPA should cancel the
contract. Exh. MSB-A (MSB-5); MSB pf. at 13.
favorable at that time. Exh. Board-5 at 206-208; finding 576.
Docket No. 5983
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(4) GMP’s Actions Prior to the Lock-in(4) GMP?s Actions Prior to the
Lock-in
598. There is no documentary evidence that, during the spring and summer of 1991,
GMP undertook resource analyses and related work dedicated specially to determining whether
to “lock in” to the Contract (that is, to either waive rights under the Waiver and Release or let the
termination date pass without action). There is little written documentation describing the
analyses and decision-making processes undertaken by GMP during the months leading up to the
lock-in. Chernick HQ pf. 10/17/97 at 41-49, 68; MSB pf. at 67.
599. GMP planned a number of analyses to evaluate new power supply expansion
scenarios. These analyses would use the updated load forecast and more recent WEFA fuel
price projections. However, it is not clear whether these analyses would consider replacements
for all of GMP’s entitlements to Contract power.329 Id.
600. During the spring and summer of 1991, GMP gathered data and conducted analyses
for its second IRP. This effort was not specially directed to consideration of the lock-in
decision, although this is the only specific analysis of the Contract prior to the lock-in.
Saintcross pf. 7/11/97 at 4, 30; exh. DPS-49 (PLC-P-6); exh. DPS-49 (PLC-P-7 at 45, 47, 64-65);
Chernick HQ pf. 10/17/97 at 41-44; tr. 1/13/98 at 8.
601. The 1991 WEFA forecast for fossil fuel prices forms the basis of GMP’s base
fuel-price forecast in its 1991 IRP, and for its analyses of the Contract. Reed/Oliver pf. at 50;
Saintcross reb. pf. 12/8/97 at 18. GMP did not request updated fuel price forecasts in the
summer of 1991, or gather information on fuel-price forecasts and other market conditions from
other sources. Chernick HQ pf. 10/17/97 at 52-54; exh. DPS-49 (PLC-P-7 at 53-54); exh.
MSB-A (MSB-10).
602. In the IRP, GMP evaluated several alternatives against the Contract, primarily
varying mixes of resources from Northeast Utilities (“NU”), followed by natural gas-fired
combined cycle units after 2005. However, GMP did not evaluate a reasonable range of
portfolio strategies as alternatives to the Contract as a whole.330 Chernick HQ pf. 10/17/97 at
329. Other than the 1991 IRP (which contains fatally limited analysis, discussed below), the record does not
demonstrate that GMP performed these analyses.
330. Such alternatives would not necessarily have resembled long-term baseload units. In fact, given the
flexible capacity factor of the Contract, intermediate units might have been more appropriate options to model.
Docket No. 5983
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26-28; MSB pf. at 37-38; tr. 1/13/98 at 108.
603. Despite the information regarding changing supply conditions in New York, GMP
did not solicit sales of capacity and energy from any New York utility.331 Chernick HQ pf.
10/17/97 at 54.
604. In the early 1990s, import capacity of approximately 1200-2200 MW was generally
available on the New York—New England interface. Constraints in 1990 and early 1991 appear
to have been resolved by late 1991. The transmission lines were not heavily loaded; for only
eight hours during the 1991-93 period were the lines carrying over 1000 MW. Saintcross reb.
pf. 12/8/97 at 36-37; Bolbrock reb. pf. 12/8/98 at 7; Bolbrock reb. pf. 1/9/98 at 5; exh. GMP-47
(RJB-1 to RJB-5 of 1/9/98); tr. 1/20/98 at 122 (Chernick).
605. Significant transmission capacity existed between New York and New England and
between Quebec and New England.332 Tr. 11/19/97 at 105 (Chernick).
606. GMP did not approach any New York utility, any New England utility with
transmission entitlements, or the Department, to determine the availability or price of
transmission capacity from New York.333 Chernick reb. pf. 12/24/97 at 12-15.
607. GMP had obtained transmission entitlements to import its purchase from Rochester
Gas and Electric, starting in 1988. Saintcross reb. pf. (corrections 12/24/97); Chernick reb. pf.
12/24/97 at 14.
608. GMP considered offers by NU to sell power at costs lower than those of the
Contract. NU initially proposed to sell a mix of nuclear, oil, gas, and pumped-storage capacity
to GMP for the period 1995-2005. The offer of pumped-storage was conditioned on a purchase
of power from the Connecticut Yankee nuclear facility. Chernick HQ pf. 10/17/97 at 54.
609. Given reservations about Connecticut Yankee’s costs and performance, and GMP’s
need for intermediate capacity, the Company reviewed other options from NU: the oil/gas-fired
Norwalk Harbor Units 1 and 2 and West Springfield Unit 3. This set of units became the
Chernick HQ pf. at 33.
331. In light of growing capacity surpluses and declining avoided costs in New York, there was reason to think
that utilities in that state would be interested in making sales to Vermont. Exh. Board-5 at 204-208.
332. GMP had some concerns that construction of certain NUG plants in certain locations might impede
transfers from New York to NEPOOL; however, the available information indicates that these problems either did
not occur or were quickly corrected. Exhs. GMP-47 (RJB-2 to RJB-5 of 1/9/98); tr. 1/20/98 at 117 (Chernick).
333. During the April 29, 1991, hearing in Docket 5330-E, a VJO witness testified that ?There are New York
utilities that are offering these various products. They are oil, coal, and nuclear offers.? Rosenberg reb. pf. at 44;
Docket 5330-E, tr.4/29/91 at 153.
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intermediate option that was ultimately considered by the Company in its evaluations of
Schedule C-3. Saintcross reb. pf. 12/24/97 at 2-3; Saintcross reb. pf. 1/9/98 at 2.
610. Other than NU, GMP did not approach any other utility regarding alternatives to
HQ. Chernick HQ pf. 10/17/97 at 54.
611. Since the intermediate NU option only extended for ten years, the Company’s
assessment of the NU deal included the addition in years 11 through 20 of a natural gas-fired
combined cycle unit (“NGCC”). The Company compared the NU offer to the CoGen Lime
Rock project. The results showed that the NU-NGCC option produced limited savings over the
CoGen Lime Rock Project. The Company concluded that, based on all factors, including
non-price factors, the CoGen Lime Rock option was slightly preferable to the NU intermediate
offer. Saintcross reb. pf. 12/8/97 at 51-52; exh. GMP-44.
612. The IRP analyses treated Schedule B as a fixed resource, and compared varying
amounts of C-3 power to several alternatives, among them the NU offers, CoGen Lime Rock,
and a baseload proxy.334 As such, GMP did not conduct any analyses of power portfolios that
did not include any Contract power. MSB pf. at 38-39; exh. GMP-44 at App. 4-D; tr. 1/13/98 at
108; Rosenberg pf. II at 14.
613. The analyses were flawed in several ways—among them, an over-estimation of the
capital costs of future plant additions and CoGen Lime Rock—which biased their results in favor
of the Contract purchases.335 An NU offer tailored more closely to GMP’s needs was not
designed or modeled. In addition, the Company assumed a heat rate of 8,412 Btus/kWh for its
proxy gas combined cycle plant (“GCC”), whereas GCCs with significantly lower heat rates
(around 7,500) were available in 1991. Chernick HQ pf. at 38; MSB pf. at 38-39; exh. GMP-44
at Appendix 4-D; exh. Board-11; tr. 1/1/98 at 27-28; Rosenberg pf. 10/17/97 at 14.
614. These analyses did not definitively establish that the Contract was no longer
economically justified, but they did indicate that its benefits were seriously in question. GMP
failed to perform a more detailed evaluation of the Contract in light of these changes.336 Id. at
334. The Company considered the integrated coal gasification combined cycle to be the generic baseload
technology. However, in 1991, it was already apparent that this technology was more costly than the natural gas
combined cycle alternative. Chernick HQ pf. at 33.
335. In certain analyses, varying amounts of Schedule C-3 were replaced by output from CoGen Lime Rock
and combustion turbines. Exh. GMP-44 (IRP at 4-14).
336. DPS witness Chernick testified that, in September 1991, GMP ?apparently came to take the low fuel-price
projection more seriously, which would make the [Contract] look worse against more promising options. . . .? This
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40.
615. GMP filed its 1991 IRP on October 23, 1991—after the decision to lock into the
Contract. Docket 5270-GMP-4, Order of 5/3/94 at 4; see Section A.2.c., following.
616. GMP presented testimony and evidence on a decision analysis that it performed to
determine whether, given the information available to it at the time, the decision to lock into the
Contract was prudent.337 Feinstein/Lesser pf., generally.
617. GMP’s decision analysis purported to show that, under a variety of assumptions in
1991 about demand, fuel-prices, available resources, etc., the generation portfolio that included
the Company’s Contract elections was most often least-cost over the planning horizon.
However, the decision rules by which the model dispatched resources appear quite
unrealistic.338 Chernick reb. pf. 12/24/97 at 38-49.
618. GMP’s decision analysis tool was not available at the time of the lock-in.
Feinstein/Lesser pf. at 2.
fact, changes in New York, and the output of analyses corrected for errors, would have given GMP and the VJO
?sufficient information to cancel the contract at the November 30 deadline.? Chernick HQ pf. at 9.
337. As a general matter, we believe that this analytical approach offers utilities a new and valuable tool to
assist them in developing and implementing least-cost resource strategies, particularly in the new world of distributed
utility planning. It attempts to deal with the many uncertainties facing decision-makers in a dynamic environment,
and in this sense has the potential to improve upon current and more traditional planning methods. This innovative
analytical technique deserves fuller exploration.
338. For example, the model?s reliance upon peaking capacity to meet significant energy requirements suggests
that the total cost of serving load is unnecessarily inflated, since, to the extent that there is energy available on the
market at prices below the running costs of combustion turbines (as there almost always is), economic rationality
would eschew the use of the turbines. Since there is good reason to conclude that the modeled portfolios were not
dispatched in the least-cost fashion, we cannot know if the portfolios themselves are least-cost.
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(5) Events after the Lock-In(5) Events after the Lock-In
619. On November 19, 1991, the DPS released a report describing its revised
assessment of the HQ/VJO Contract. Its analysis re-evaluated the low expected benefits
scenario that it had developed in Docket 5330 two years earlier; however, the scope of the
analysis was limited. The DPS modified certain assumptions with respect to the state’s existing
resource mix, future generation additions, the value of excess capacity, the amounts of power and
energy actually purchased under the Contract, and the impacts of cost penalties associated with
the HQ/NEPOOL transmission line. The DPS did not modify its assumptions regarding, among
other things, load and fuel price forecasts, concluding that those previously relied upon remained
within the range of reasonableness for a state-wide analysis. Exh. GMP-20.
620. Although the updated DPS analysis still showed the Contract to be cost-effective
on a state-wide basis under the low expected benefits scenario (though less so than before), it did
not establish that the entire range of expected benefits established in Docket 5330 ($16 to $200
million) had not been significantly reduced in light of changes in the market since then. The
Department’s analysis would have been insufficient for determining whether to lock into the
Contract and could not retroactively validate the lock-in decision three months earlier. Id.;
tr. 1/21/98 at 308-309 (Steinhurst).
621. It would not have been definitely clear during the fall of 1991 that the Contract was
no longer economically justified.339 It was clear, however, at that time that the Contract’s
economic benefits had changed significantly and that its cost-effectiveness was no longer a solid
basis for the Contract. MSB pf. at 40.
622. GMP and the VJO did not seek to renegotiate the Contract, despite having
concluded that the price no longer reflected the market conditions. Exh. MSB-A (MSB-18); tr.
11/18/97 at 65 (Dutton).
623. In March 1992, NYPA canceled its contract with HQ, in large part because of the
contract’s failing economics. Attempts to negotiate significant price reductions to that contract
were unsuccessful. Had the termination date of the HQ/VJO Contract been extended, it is not
clear that HQ would have been willing to grant lower prices to the VJO. However, by the spring
339. Had GMP conducted its IRP analyses in the fashion described by DPS witness Chernick, the Contract?s
failure to yield benefits over its lifetime would have been evident before November 1991. Chernick pf. at 8-9.
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of 1992, GMP’s own avoided costs had fallen significantly below the price of the Contract (in
levelized $/kWh).340 The Contract was no longer cost-effective. Exh. MSB-A (MSB-5);
MSB pf. at 42-44.
624. It is possible that, after New York terminated its contract, HQ would have been
more willing to renegotiate the HQ/VJO Contract. MSB pf. at 45-46.
(6) Imprudence of the Lock-in(6) Imprudence of the Lock-in
625. Before the lock-in date, there were a number of important changes in power supply
market conditions that should have counseled a cautionary approach to a final commitment to the
Contract:
The April 1991 NEPOOL CELT report forecast more excess capacity in New
England than had been previously expected.
The WEFA Spring fuel forecast reflected expectations of significantly reduced
fossil fuel prices.341
The extension of the lock-in date of the HQ/NYPA contract suggested changes
in the market for power that favored purchasers.
Long-term NUG contract prices had declined greatly.
New York’s reevaluation of their similar contract with HQ had shown
alternatives to be slightly less expensive.
Falling avoided costs for both GMP and other utilities had the effect of reducing,
or eliminating, the probable benefits of the Contract.
MSB pf. at 40-41; findings 566-582, above.
626. At the same time that fuel prices were dropping, GMP and regional demand also
declined:
NEPOOL released estimates showing a decline in anticipated load-growth,
including a short-term drop in load.
GMP’s own demand was expected to drop significantly due to reduced demand
by its largest purchaser, IBM.
Findings 583-589, above.
627. New York, faced with the similar trends, negotiated a further extension of the
340. A 24 percent drop in the levelized price of Contract would have yielded a price approximately 15 percent
below the then-current avoided costs. MSB pf. at 45.
341. Another forecast, produced in August, was available prior to the lock-in, but GMP did not obtain it. Exh.
MSB-A (MSB-10).
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lock-in deadline, and within seven months of the VJO lock-in, terminated the HQ/NYPA
Contract. Findings 590-597, above.
628. GMP was aware of these changes. In June, 1991, the VJO and HQ discussed the
possibility of a further amendment to the Contract to extend the deadline for committing. In that
context, the VJO asserted “[i]n negotiating Amendment No. 4, we must reconsider the capacity
value in light of current market conditions and settle on a price that can be justified in the
marketplace.” Exh. MSB-A (MSB-18); findings 566-597, above.
629. Faced with the market and demand changes, GMP failed to conduct an adequate
analysis of whether the Contract still provided favorable benefits to Vermont:
GMP’s assessment of the market alternatives to the HQ/VJO Contract was
overly limited and did not consider purchases from New York.
GMP did not evaluate a reasonable range of portfolio strategies as alternatives to
the Contract as a whole.
The only analysis of resource options GMP conducted used flawed assumptions
and, more significantly, did not consider the option of not taking power under
the Contract.
Findings 598-615, above.
630. The changing market conditions and events surrounding the HQ/NYPA Contract
during the spring and summer of 1991 should have suggested to the Company and VJO that the
economic benefits of the Contract were, at best, eroding, the need to secure the large, long-term
commitment was lessening, and their negotiating position with HQ was strengthened;342 these
factors should have cautioned against locking in. At a minimum, they should have been
sufficient to prompt a utility manager to conduct a more rigorous analysis of the merits of the
Contract prior to locking-in a 25-year contract whose benefits had been small in relation to the
total cost from the start. Nor was an effort made to renegotiate the Contract.343 Chernick HQ
pf. 10/17/97 at 57; Rosenberg pf. 10/17/97 at 18-19, 26; MSB pf. at 36.
631. If GMP, as one of the principal negotiators of the Contract and as the second
342. With the New York extension and cancellation, the VJO were HQ's only active prospect for new power
sales in the United States. Negotiations with NEPOOL were not fruitful, and a Contract with Maine utilities had
already been denied.
343. Insofar as a renegotiation of the Contract may have triggered new rounds of regulatory review in both
Vermont and Canada, the contracting parties were reluctant to follow that course. Nevertheless, a further extension
to the termination date or a substantial, longer-term sell-back arrangement should have, at the very least, been
considered. Exh. MSB-A (MSB-18).
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largest Participant, had opposed the early lock-in, it is unlikely that the VJO would have voted to
lock in anyway. Chernick HQ pf. at 68.
632. In light of these changes, GMP and the VJO should have, at least, requested an
additional extension of the Contract’s termination date. Earlier, the contracting parties had
negotiated Amendment 3, an extension until April 30, 1992, although they withdrew it. New
York had negotiated an extension until November 30, 1992. There was a reasonable probability
that HQ would have agreed to a similar extension to the HQ/VJO Contract. MSB pf. at 40,
42-43; tr. 1/19/98 at 211 (Dutton); see also exh. MSB-A (MSB-18).
633. By voting to lock in early, the Company gave up any benefits associated with delay
and with the opportunity to negotiate improved terms and conditions. GMP had recognized
and argued to the Board earlier in 1991 that deferral of the lock-in decision had positive value,
particularly in the light of the changing market. MSB pf. at 68-69.
634. GMP’s decision to prematurely lock into the HQ/VJO Contract on August 29,
1991, was imprudent. The Company failed to respond reasonably to information that was
available to it at the time, to conclude that the economic benefits of the Contract were
deteriorating significantly, and to take appropriate actions on the basis of the changed
circumstances—actions that would have significantly reduced the risks associated with the
Contract that the Company was facing. Findings 565-633, above; Chernick HQ pf. at 4-6,
75-76; MSB pf. at 72.
5. The Used and Usefulness of the Contract5. The Used and Usefulness of the Contract
635. GMP is receiving power and associated energy from HQ under the Contract, and
that power and associated energy is being used (if not wholly, then in major part) to serve GMP’s
regulated monopoly ratepayers in Vermont. However, the cost of GMP’s purchases of power
under the Contract is greatly in excess of its value, both today and over the entire remaining term
of the Contract. Laber reb. pf. 12/8/97 at 7; Biewald pf. 10/17/97 at 7.
636. Market conditions, beyond the control of the Company, have altered the cost
effectiveness of the Contract since 1991, compared to the market price of electricity in that
period. Dutton pf. at 13; Williamson reb. pf. 12/8/97 at 9.
637. The net economic losses of GMP’s Hydro Quebec purchase could range between
$87 million and $269 million (1997 present value dollars) over the duration of the Contract,
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depending upon the market price projection and the discount rate assumed.344 Biewald pf.
10/17/97 at 7; exh. DPS-BEB-6.
638. Setting different rate-making standards for utility-owned plants that are completed
and those that are abandoned, or for those that are held and those that are sold, would give utility
management incentives to take actions that would distort the resource acquisition process and fail
to provide least-cost service to ratepayers. Docket 5132, 83 PUR 4th 532, 596 (5/15/87).
639. Setting rate-making standards for utility-owned plants that are different from those
for purchased power could give utility management similar incentives to distort the resource
acquisition process. Steinhurst pf. 12/24/97 (corrected 1/20/98) at 7.
640. The Company cannot be assumed to have been unaware of the prospect that power
purchase contracts would or should be treated according to traditional rate-making principles as
they are applied to power plants. Id.
641. Investors are well aware of the risks inherent in purchased power contracts, have no
particular expectation of guaranteed recovery, and are alert to the contract issues typical of the
HQ/VJO Contract when assessing the riskiness of utilities. Id. at 11.
642. The Contract is structured to have certain non-price benefits, including high
reliability, relative price stability, and a reliance upon pre-existing non-fossil generation
resources. However, these non-price benefits do not justify or outweigh the magnitude of the
above-market costs associated with the Contract. A significant portion of the Company’s HQ
contract power is economically excess; that is, it displaces resources that could be acquired at
lower cost. October Order, generally.
643. During the proceedings in Docket 5330 and related dockets, the VJO, including
GMP, testified that excess contract power could be sold at cost. Although the VJO knew before
the lock-in that resales between 1991 and 1995 would not be at cost, this information was not
provided to the Board before the lock-in. Docket 5701/5724, Order of 10/31/94 at 105-108.
Although GMP knew before the lock-in that its load projections had dropped by 18% (without
considering the effect of DSM programs), this information was not provided to the Board before
the lock-in.
344. The high end of the projected losses?i.e., $269 million (1997 $)?was computed on the basis of the
Company?s own expectations of long-term market prices. Biewald pf. 10/17/97 at 7; exh. DPS-BEB-6. By
comparison, in 1990, the anticipated benefits to Vermont of the Contract as a whole (not simply GMP?s share) were
$16 million to $198 million. October Order at 123.
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644. In approving the Contract, the Board included a condition stating that the Board
may “direct the Vermont utilities to offer specified amounts of power and energy for return sale
to Hydro-Quebec or for resale to other parties.” October Order at 39-40.
645. Unlike other power supply resources in the Vermont mix, the Contract was
approved with a specific condition to ensure that Contract power would not displace more
cost-effective demand-side resources:
Each Vermont utility accepting power under the authority of the Firm Power and
Energy Contract and this Order shall develop and implement measures to
acquire all resources available from cost-effective acquisition of energy
efficiency, in accordance with the principles ordered by this Board in the final
Order of April 16, 1990, in Docket No. 5270.
October Order at 40. Consequently, in addition to the Board’s traditional criteria for
determining whether a power supply resource is used and useful, we find that Contract power
becomes not used and useful when it violates this precondition and displaces less costly energy
efficiency investments in Vermont. Power cost disallowances and/or resales may be required to
correct for these effects.
646. GMP’s entitlements to Contract power are uneconomic over the entire term of the
Contract and, therefore, are not used and useful. Biewald pf. at 4-5, 7-10, 13-14; Biewald reb.
pf. at 9.
6. Compliance with Condition 8 of the Board’s Order in Docket 53306. Compliance
with Condition 8 of the Board?s Order in Docket 5330
647. The Board granted conditional approval of the Contract on October 12, 1990, in
Docket 5330. Condition 8 of that approval required that:
Each Vermont utility accepting power under the authority of the Firm Power and
Energy Contract and this Order shall develop and implement measures to
acquire all resources available from cost-effective acquisition of energy
efficiency, in accordance with the principles ordered by this Board in the final
Order of April 16, 1990 in Docket No. 5270.
October Order at 40.
648. The Board has taken no action to rescind or alter Condition 8. It is a continuing
obligation of utilities receiving power and energy under the Contract. Plunkett pf. 10/17/97 at 6;
MSB pf. at 62.
649. A utility may seek pre-approval of its DSM programs, but pre-approval is not
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mandatory. Responsibility for proper DSM design, implementation, and on-going management
remains always with the utility. Plunkett pf. 10/17/97 at 9-10; Docket 5270-GMP-3, Order of
9/5/91 at 69-70; Docket 5270, Order of 4/16/90 at 52-53.
650. Board pre-approval of DSM programs is, by itself, not sufficient to establish
compliance with Condition 8. Pre-approval reduces certain regulatory risks, but it cannot be
construed as necessarily extending to actions taken (or not taken) by the utility after approval was
granted. Plunkett pf. 10/17/97 at 14.
651. Operating cost-effective programs is necessary, but is not sufficient, to satisfy a
utility’s obligation to provide least-cost energy services to its customers (and, therefore, to
establish compliance with Condition 8). Plunkett pf. 10/17/97 at 14; Dockets 5701/5724, Order
of 10/31/94 at 137.
652. The Board has previously articulated the standard by which to measure a utilities’
compliance with Condition 8:
We do not view Condition 8 as turning on the achieved acquisition of all
[cost-effective energy efficiency] resources. Rather, its explicit terms require
only the development and implementation of measures designed to do so.
Good-faith efforts to develop and implement such measures constitute
compliance with this condition.
Id. at 132; Plunkett pf. 10/17/97 at 15.
653. The scope and quality of GMP’s energy efficiency programs compare well with the
programs of utilities in other states, including those, like Vermont, that have strong regulatory
mandates for the acquisition of DSM resources. MSB pf. at 61; tr. 1/17/97 at 31-32, 37-38.
654. The DPS and GMP differ widely in their positions on what constitutes satisfactory
performance under Condition 8. Despite written agreements between them, the fact that their
strong differences persist “begs some remedy. Condition 8 will be most effective if all the
stakeholders hold common expectations and measures of progress.” MSB pf. at 63.
7. Continuing Management of the Contract7. Continuing Management of the Contract
655. As the time drew near for deliveries of its allocations of power under Schedules B
and C3, the Company entered into cost containment agreements with HQ. These arrangements
have resulted in power cost reductions in the amount of approximately $30.7 million (1995 $)
over the life of the Contract. Reed/Oliver pf. at 6-11, 21; Saintcross pf. at 3-6, 36.
656. On November 21, 1995, the first of three agreements with HQ was reached (the
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“1995 Agreement”). Its essential provisions were:
GMP would sell to HQ declining amounts of Contract power and associated
energy at full Contract prices for a four-year period beginning November 1,
1995. In the first year, GMP would sell back 84 MW. In each of the
subsequent years, the amount sold back would equal the previous year’s amount
minus 21 MW.345
GMP was obligated to purchase equal amounts of power and associated energy
over the four-year period at a capacity charge of $35 per kW-yr and at full
Contract energy prices.346
GMP made an up-front payment to HQ of $6.5 million (1994 $) and entered into
a joint research, development, and demonstration arrangement with HQ to which
the Company would contribute a minimum of $4.0 million (1994 $) over a
period ending October 31, 1999.
Saintcross pf. at 6-7.
657. GMP estimates that this agreement will reduce expected cost-of-service increases
associated with the Contract by approximately $26.7 million (1995 $). Reed/Oliver pf. at 21;
Saintcross pf. at 7-8.
658. The Company would have paid $10.5 million to secure the four-year reduction in
capacity costs, even in the absence of the RD&D program, since the sell-back arrangement was
expected to yield significant benefits anyway. Exh. DPS-48 at 187-189; Saintcross supp. reb. pf.
11/26/97 at 2-3; Kvedar supp. reb. pf. 11/26/97 at 5.
659. CVPS also arranged a sell-back to HQ. Under its arrangement, CVPS sells back
blocks of capacity at full Contract prices to HQ and repurchases the capacity at $25 per kW-year,
$10 less than the price paid by GMP. CVPS was not required to make any up-front cash
payments to HQ, and the amount by which it can curtail deliveries is greater than is GMP’s.
CVPS, however, gave HQ an option to take back 50 MW of power on four years’ notice
beginning 2004. Rosenberg pf. 10/7/97 at 8; exh. IBM-4 (AER-2).
660. In January 1996, GMP and HQ entered into a second arrangement (the “January
1996 Agreement”). HQ agreed to pay GMP $3.0 million on December 31, 1996, and $1.1
million on December 31, 1997. GMP dedicated up to 40 MW of Schedule C3 entitlements to
345. GMP also secured the right to curtail annual energy deliveries five times between the years 2000 and
2015. The curtailments are effected through a reduction of the Contract load factor from 75 percent to 65 percent.
Rosenberg pf. 10/17/97 at 8.
346. The net effect of the arrangement was to significantly reduce the capacity cost (approximately 3/5 of the
total cost) of Contract power for the resold megawatts.
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HQ/NEPOOL Phase I and II interconnection for delivery by HQ alone or HQ/GMP jointly to
third parties. GMP agreed to make annual energy purchases from HQ (the minimum amounts of
which were pre-determined) at the prevailing price of the Firm Energy Contract between HQ and
NEPOOL participants (“FEC” price). In the adjusted test year, the obligation amounts to
140,000 MWh (annualized). If GMP markets all or a portion of the minimum energy
obligations, it will receive a percentage of the difference between the FEC price and the sales
price. GMP has the option to cancel all or part of its purchase obligations at the FEC Price by
making a payment to HQ of a $4.00 per MWh canceled. GMP expects this arrangement will
lead to a net power cost reduction of approximately $1.7 million (1995 $) if it cancels all of its
purchase obligations by making the cancellation option payments. Reed/Oliver pf. at 21;
Saintcross pf. at 8-10.
661. Later in 1996, GMP entered into the third cost reduction arrangement with HQ (the
“November 1996 Agreement”). During the period from November 1, 1997, to October 31,
2015, HQ will be free to purchase from GMP power in limited quantities and at prices that track
energy prices established annually in accordance with the HQ/VJO Contract. For this option,
HQ paid GMP an up-front lump-sum amount of $8.0 million in October 1996. The Company
expects to realize net savings of $2.3 million (1995 $) over the term of this arrangement.
Reed/Oliver pf. at 22; Saintcross pf. at 10.
662. In 1997, under the January 1996 and November 1996 Agreements, GMP received
$9.1 million in payments from HQ ($8.0 + $1.1 million). Rosenberg pf. 10/7/97 at 12-13.
663. GMP did not amortize the $9.1 million that it received from HQ in 1997, thereby
returning it to customers. The amount was recorded as income to the Company and went
entirely to GMP’s shareholders. Rosenberg revised pf. 10/7/97 at 14.
664. It is proper rate-making to treat the $8.0 million received by GMP under the
November 1996 Agreement as a regulatory credit and amortize it in equal monthly installments
over the term of the agreement (through 2015). Id. at 15.
665. The $1.1 million payment to GMP pursuant to the January 1996 Agreement will
affect GMP’s rights under the Contract through June 2001. Therefore, the $1.1 million should
be booked as a regulatory credit and amortized in equal monthly installments over 4 years. Id.
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B. Discussion and ConclusionsB. Discussion and Conclusions
1. Background1. Background
On October 21, 1990, the Board conditionally approved the HQ/VJO Contract, and
granted interim approval to the Participation Agreement, under which the VJO sold all its
entitlements to Contract power to Vermont’s (then) 24 distribution utilities. There were several
conditions attached to the approval, the relevant ones of which required that the utilities:
Secure an affidavit from HQ stating “that the damage and compensation
provisions of third paragraph of Article 1.4 of the Contract would be controlling
if the Canada National Energy Board were in the future to declare that approvals
required by the Contract were no longer valid under Condition 10 of the relevant
licences released by the Canada Energy Board on September 27, 1990”
(Condition 4);
File statements of their positions as to whether re-allocations among Vermont
utilities of purchases under the Firm Power and Energy Contract are desirable
(Condition 7);
“Develop and implement measures to acquire all resources available from
cost-effective acquisition of energy efficiency, in accordance with the
principles ordered by this Board in the final Order of April 16, 1990 in Docket
No. 5270" (Condition 8);
Evaluate their needs under the Contract and determine whether any amounts of
Contract power are no longer required, and file “a statement of their efforts to
negotiate in good faith the return sale to Hydro-Quebec of such amounts”
(Paragraph 11).
October Order at 37-41; finding 478, above.
On December 12, 1990, GMP and the other Vermont utilities (except CVPS and the
Burlington Electric Department (“BED”) filed testimony and evidence in support of their
allocations of Contract power. Docket 5330-A was opened to consider the filings. Evidentiary
hearings were completed on April 5, 1991, and a final order approving most allocations
(including GMP’s) was issued on February 12, 1992, after the lock-in had made the Contract
non-cancelable without penalties.
On January 7, 1991, the Board issued an order amending the October Order to grant
conditional approval of the Participation Agreement. After this, several parties filed a timely
appeal of our Order to the Vermont Supreme Court.
In April 1991, hearings were held in two other related dockets. The first, Docket 5330-C
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(to which GMP was a party), investigated a sell-back agreement between HQ and three utilities
(CVPS, Lyndonville, and Morrisville); the agreement was approved in Orders dated April 25 and
30, 1991 (detailed findings issued September 18, 1991). The second was Docket 5330-E,
opened to consider whether to approve Amendment 3 to extend the date (to April 30, 1992) by
which parties could terminate the Contract without liability. Within days, the Amendment was
withdrawn and replaced by the Waiver and Release, which had the effect of extending the
termination date to November 30, 1991. After a limited remand of Docket 5330 by the Supreme
Court, the Board approved the Waiver and Release on April 30, 1991. In that Order, we noted,
and agreed with the claims of the VJO that the legal obligation to prudently manage the contract
so as to procure reliable power at the lowest long-term cost to ratepayers rested upon utility
management. Docket 5330-E, Order of 4/30/91 at 3-4, 17. We also instructed the utilities to
seek out alternatives to Contract power, in the event that the Contract was ultimately canceled.
Id. at 18.
In July 1991, the Canadian Federal Court of Appeal affirmed the grant of export licenses
to Hydro-Quebec, but struck down Conditions 10 and 11. Lock-in discussions between HQ and
the VJO began in earnest. The VJO and GMP were anxious to commit to the Contract, but there
was still a lingering concern about the consequences of a potential ruling by the Supreme Court
of Canada reinstating Conditions 10 and 11. HQ assured the VJO that, were the conditions to be
reimposed, it would not assert a right to terminate without paying damages, but the provincial
utility was unwilling at first to commit that assurance to paper. In the absence of a documented
pledge, GMP hesitated to lock in.
At this time, CVPS was negotiating a second return sale arrangement with HQ. When an
agreement in principle on the prices, terms, and conditions of such a sale were reached, CVPS
was prepared to lock in the Contract.347
On August 27, 1991, the New York Power Authority announced publicly that it had
agreed with Hydro-Quebec to extend the lock-in date of their firm power and energy contract to
November 30, 1992.
In a letter dated August 28, 1991, Hydro-Quebec agreed to lock into the HQ/VJO
Contract, stating that it found all rights and approvals as of that date to be satisfactory and that it
“will not avail itself of its right to terminate the Contract based on the terms and conditions of
347. See Dockets 5701/5724, Order of 10/31/94 at 98-121 for a detailed description of these events.
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[those rights and approvals].” The next day, the VJO articulated an identical commitment to
HQ. The effect of the two letters was to render the Waiver and Release “no longer necessary or
applicable to the Contract.”348
Formal notice of the lock-in was filed with the Board on September 4, 1991. In response
to it and the Cree’s complaint under 30 V.S.A. § 208, the Board opened Docket 5330-F to
consider, among other things, whether the VJO should have sought prior approval of the lock-in.
For the reasons set out in the Order of November 26, 1991, the Board concluded that the
Vermont Supreme Court had “not granted us the authority to act upon the notice or the
complaint.”349
2. Positions of the Parties2. Positions of the Parties
There are four essential questions that the parties ask us to resolve:
(1) Did GMP act prudently in negotiating the HQ/VJO Contract, seeking
regulatory approval of it, locking it in, and otherwise managing the
entitlements and costs of power under the Contract?
(2) Are the Company’s entitlements under the Contract used and useful
under long-standing principles of rate-making in Vermont?
(3) Has the Company complied with Condition 8 of the Board’s 1990
approval of the Contract, the requirement that utilities purchasing
Contract power must acquire all cost-effective energy efficiency
resources in their service territories?
(4) And, in light of our conclusions with respect to the first three, what
amount of Contract costs should be included in rates?
The Company asserts that all actions that it has taken in regard to the Contract have been
prudent, that is, reasonable given information that it had (or should have had) at the times it took
those actions. It also argues that the Contract is used and useful, despite its current expectations
that Contract costs will remain above-market for the remainder of its term. Lastly, GMP
maintains that it has complied with Condition 8. Therefore, argues the Company, all costs
associated with Contract power in the adjusted test year, and for the duration of the Contract,
should be included in rates.
The Department disputes the Company on all three points. The DPS asserts that GMP
was imprudent when it agreed to certain provisions of the Contract, that it was imprudent in its
348. Findings 537-538, above.
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response to changing market conditions in 1991, that it was imprudent in its analytical approach
to evaluating the economics of the Contract prior to locking in, and that it was imprudent when it
prematurely locked into the Contract. The Department also contends that the Company’s
entitlements to Contract power are not used and useful. Finally, the DPS charges that GMP has
consistently failed to comply with Condition 8, Vermont law, and the directives of the Board’s
April 16, 1990, Order in Docket 5270. For these reasons, the Department recommends, among
other things, that we disallow $1.719 million in adjusted test year power costs and impose a 200
basis point penalty on its authorized return on common equity.
Like the DPS, IBM argues that GMP was imprudent because (i) it failed to appreciate the
significance of, or react appropriately to, changing market conditions in 1991; (ii) it conducted
inadequate and deficient analyses of the Contract; (iii) that it failed to shop aggressively for
alternatives to the Contract; and (iv) it prematurely locked into the Contract, when only HQ
benefitted from that action. IBM urges the Board to disallow $8.6 million of capacity costs to be
paid by GMP under Schedule C-3, thus mitigating the impact of the Company’s imprudent
management decisions upon customers. In the event the Board finds that the imposition of such
a penalty would trigger FAS 71, IBM supports the imposition of a $4.0 million disallowance.
VCCER, the New England Coalition for Energy Efficiency and the Environment, and the
Grand Council of the Crees (collectively, VCCER) do not address the prudence and
used-and-useful questions. Instead, they argue simply that the evidence demonstrates that GMP
has not complied with Condition 8 and that the Board should revoke the Certificate of Public
Good (“CPG”) that it granted when it originally approved the Contract. In addition, they ask
that the Board require that the Company obtain prior Board approval for all future renegotiations
of the Contract and any other actions related to it.
MSB, the independent investigator appointed by the Board, also recommended that the
Board find that GMP acted imprudently when it locked in the Contract in August 1991. MSB
concluded that GMP had available to it information prior to the lock-in that “a prudent utility
would have seen as a call for caution.” MSB suggests that the Board consider a disallowance of
25% of the Contract costs. On Condition 8, MSB offered no recommendation, although they
observed that the scope and quality of GMP's energy efficiency programs compared well with
those of utilities in other states.
349. Findings 543-549, above.
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VPIRG concurs with the DPS, IBM, and the independent investigator that GMP’s
decision to lock in the Contract was premature and imprudent. It contends that a finding of
prudence requires that all imprudent costs be disallowed, but that the Board should suspend that
amount of the disallowance which would, if imposed, deprive customers of adequate and reliable
service and possibly render GMP insolvent.
AARP was also a party in this proceeding, although they did not file a brief.
3. Prudence3. Prudence
a. The Standarda. The Standard
The standard we apply to judging the prudence of utility expenditures is long-standing
and well-known to Vermont utilities. As we recently stated, “our precedent is absolutely clear,
and it is uncontroverted by any participant in this Docket, that imprudent expenditures by utilities
are not recoverable from ratepayers.”350 In Docket 5132, In re Seabrook, we concisely
explained the criteria we apply, quoting from a decision by the Massachusetts Department of
Public Utilities:
A prudency [sic] review must determine whether the utility’s actions, based on
all that it knew (or should have known) at the time, were reasonable and prudent
in light of the circumstances which then existed. Such a judgment should not
be based on hindsight or after-acquired knowledge, and it must respect the
managerial rights of the company. However, it does not merely presume that
management operated properly, and it holds the company responsible for making
all reasonable efforts to gather relevant information and to respond
appropriately.
A utility’s obligations include continued monitoring, review, and
assessment of its participation in specific power projects. These assessments
must, at least, consider the likelihood of the project’s coming on-line at expected
times and within estimated costs, options available in case of failure to meet
expected operating criteria, alternative power sources or conservation efforts that
might replace the power project and the effect of continued investment on
ratepayers and stockholders. This continuing review and assessment process
should be documented so that its prudence can be evaluated when
challenged.351
The obligation for utilities to operate in a prudent manner applies not solely to
investments in specific projects, but to the full range of utility actions, including the negotiation
350. Investigation into the Restructuring of the Electric Utility Industry in Vermont, Docket 5854, Order of
12/30/96 at 67.
351. Docket 5132, Order of 5/15/87, 83 PUR 4 th 532, 573 (1987).
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and management of purchased power contracts.352 In the case of purchased power contracts,
utilities have responsibilities paralleling those applicable to investments. Initially, the Company
must consider the value of the contract, recognizing the full range of risks (price, availability, and
environmental, among others), and the availability of alternative power sources, including
demand-side management options. After entry into a contract, the utility must continue to
reasonably manage its participation in the contract, exercising those rights that the contract may
provide and pursuing options to increase its cost-effectiveness.353
In our evaluation of whether GMP prudently entered into and managed the HQ/VJO
Contract, we are mindful of the regulatory history of the Contract. Specifically, the Board
reviewed the Contract under 30 V.S.A. § 248 in 1989 and 1990, resulting in the October Order
approving the VJO’s purchase of 340 MW, subject to certain conditions.
Although the October Order concluded that the Contract would promote the general good
of the state, contrary to the Company’s assertions in this proceeding, that review does not shield
GMP from all investigation into the prudence of its actions. First, the Board’s examination of
whether the Contract promoted the general good in Docket 5330 was based upon the evidence
presented by the parties. If, for example, prior to the Order approving the Contract with
conditions, GMP had available relevant data or knowledge suggesting that the Contract was not
favorable and did not make this material information available to the Board, we can and should
examine whether, based upon all of the information available to the Company, GMP’s entry into
the Contract was reasonable.354
Second, and more significantly in the context of this proceeding, the Docket 5330
352. See, e.g., Docket 5841/5859, Order of 6/16/97 (finding Citizens Utilities? managerial practices
imprudent); Docket 5270-GMP-3, Order of 9/5/91 at 110 (reiterating that GMP must operate its DSM programs in a
prudent manner); In the Matter of the Application of Interstate Power Company for Authority to Increase Its Rates
for Electric Service in the State of Minnesota, Docket No. E-001/GR-95-601, Minn. P.U.C. (April 8, 1996 and June
26, 1996) (affirming previous finding that the entry into certain long-term power contracts was imprudent); Re:
Puget Sound Power and Light Company, Docket No UE-920433, W.U.T.C. (Sept. 27, 1994) (holding both buy and
build options to the same prudence standards).
353. For example, the record here demonstrates that GMP has engaged in return sales arrangements with HQ
because of concerns over the relatively high Contract price. See Findings 655-661.
354. As we discuss in Section B.2.b., below, we do not reach such a conclusion here. However, it is clear that
the Company possessed material, relevant information on changing market conditions and demand projections in
1991, information that was not made available to the Board or to the Supreme Court prior to the Company?s lock-in
decision. See Findings 566-597, above.
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proceeding did not, and could not, examine GMP’s continued oversight of the Contract.355
After a utility enters into any purchased power contract, it bears the responsibility for managing
the contract, exercising all rights and responsibilities under the contract, and providing energy
services at least-cost. In the context of the HQ/VJO Contract, Section 1.4 allowed either party
to terminate the Contract if it found the regulatory approvals unsatisfactory. Thus, subsequent to
the October Order, GMP and the VJO had the responsibility to continue to examine the
regulatory approvals themselves, to consider other factors that may affect the reasonableness of
those approvals, and, in that light, to act prudently. The October Order approved the Contract,
but left the obligations of management upon the utilities. In fact, in proceedings subsequent to
that Order, both the Board and the VJO made this fact clear:
The VJO [Vermont Joint Owners] also agree that utility management has a legal
obligation to prudently manage the contract so as to procure reliable power at the
lowest long-term cost to ratepayers. They acknowledged that, in future rate
cases, the Board could review the prudence of their decision to waive potential
damage claims; however they note that such a prudence review must focus on
the information that now is (or should be) available to them, rather than upon
knowledge gained from the actual playing out of future events.356
Following the lock-in, the VJO made similar assertions concerning the Board’s ability to
examine the prudence of the management of the Contract, in general, and the lock-in in
particular, including the exercise of the rights thereunder.357 The VJO’s statements concerning
our ability to review the prudence at a later date were, and are, a correct statement of the law; and
they may well have influenced the Supreme Court’s decision not to remand the case to the Board
355. GMP argues in its Brief that the Board, Department, and IBM essentially approved the lock-in during
prior proceedings. We address the preclusion issues elsewhere and explain herein our conclusion that GMP was
fully aware that the Board had not ruled on the prudence issue. We note, however, that any argument that the Board
has somehow implicitly ruled upon the prudence of the lock-in assumes that GMP fully disclosed the facts prior to
each of these Board decisions. No evidence has been presented demonstrating that, in any proceeding in which
GMP alleges the Board "approved" the lock-in, GMP fully disclosed that the market and GMP's demand had
substantially changed and that the economic value of the Contract had significantly eroded in the summer of 1991.
To the contrary, the evidence demonstrates that GMP made no effort to inform the Board during Docket 5330-A that
the supply market and its demand forecasts had changed. Moreover, GMP did not seek approval of the lock-in, but
instead presented it to the Board as a fait accompli.
356. Docket 5330-E, Order of 4/30/91 at 3-4; findings 507, 545-549.
357. As we observed in Docket 5330-F, ?[t]he Vermont utilities contended that prior regulatory review [of
their decision to accelerate the "lock-in"] was not required because . . . the prudence of the utilities' decision to
advance the lock-in date could be tested in any future rate cases.? Docket 5330-F, Order of 11/26/91 at 1; see
findings 545-549. GMP did not contest this fact as recently as 1995. In Docket 5780, we specifically noted in
response to comments of IBM that no party had asked us to rule on the prudence of the Contract and that the issue
was still unresolved. GMP made no comment to the contrary. See finding 557.
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for an immediate consideration of changing market conditions and the lock-in decision in 1991,
as the Cree had requested.358
The record demonstrates that GMP and the Vermont utilities had been put on notice that
all actions that they took with respect to the Contract would be subject to future prudence
reviews. Moreover, they acknowledged that they bore the risk of potential findings of
imprudence. Docket 5330-E, Order of 4/30/91 at 4.
Finally, as we have explained previously, although GMP’s expenditures are presumed to
be prudent, once sufficient evidence is presented to rebut that presumption, the burden of
demonstrating that its actions are prudent rests with the utility:
[A] utility enjoys a presumption that its expenditures were, in fact, reasonable
and prudent, and that presumption alone is sufficient to satisfy its burden. The
presumption is rebuttable, however, and it is rebutted if an adverse party adduces
evidence sufficient to support a finding contrary to the effect of the presumption.
Once such evidence is introduced, the presumption entirely disappears and has
no further effect. The utility is then left with the task of persuading the Board,
as the trier of fact, of the reasonableness of its expenditures through the
presentation of evidence of the ordinary sort. This is in accord with the
so-called Thayer Rule, or bursting bubble theory, of presumption.359
The parties to this proceeding have presented substantial evidence suggesting that GMP’s actions
with respect to the HQ/VJO Contract were imprudent. We find this evidence, set out in the
Findings, sufficient to burst the presumption. Thus, the burden of persuasion on these issues
rests with the Company, and we find that the Company has failed to carry that burden.
b. The Contractb. The Contract
Before discussing the specific allegations of imprudence raised in this proceedings, it is
important to step back and consider the Contract that the Board approved in 1990 after what we
have described as “one of the most extensive investigations ever conducted by this Board.”360
The Contract submitted to the Board in Docket 5330 consisted of 340 MW of
non-cancelable power, with an additional 110 MW of options available to the VJO. The
non-cancelable component alone amounted to one-third of Vermont’s peak electrical energy
demand and would constitute the largest single source of supply for the State, surpassing even
358. GMP?s present arguments suggesting that we cannot examine the prudence of the Company?s Contract
decisions are inconsistent with the Company?s and the VJO?s representations to the Board as outlined above.
359. Docket 5132, Order of 5/15/87, 83 PUR 4 th 532, 566 (1987).
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Vermont Yankee. In addition to representing a large resource acquisition, the Contract extended
for 30 years (25 years in the case of GMP). Thus, entry into the Contract, and a later
determination that the regulatory approvals were satisfactory, would commit the Company to a
huge and extended purchase.
Another significant component of the Contract was its pricing structure, which provided
the VJO protection against increases in fossil fuel prices. The trade-off for this protection was a
Contract in which the payments for capacity were above market in the early years, with the
expectation that the later years of the Contract would be well below the market price (which was
then driven by projections of rising fossil fuel prices). This pricing structure meant that the bulk
of the charges — for capacity — were unavoidable and that fossil fuel prices below those
forecasted, particularly in the earlier years, could rapidly erode or eliminate the benefits of the
Contract.361
Moreover, the economic benefits of the Contract, while positive, were not particularly
large at the outset, especially for a 30-year contract. In Docket 5330, we concluded that the net
present value of the Contract ranged from $16 million to $198 million on a Contract whose costs
over its term would exceed $4 billion.362 Almost all of the Contract’s economic benefits
occurred in the later years. Thus, changes in the price of other sources and GMP’s load could
reduce the anticipated economic benefit of the Contract, especially if those changes occurred in
the early years.
These aspects of the Contract, and the risks associated with its structure, were tempered
by an important balancing mechanism: GMP’s ability to conduct off-system sales of excess HQ
power.363 GMP had successfully sold excess power to other utilities in the region and asserted
that such sales would continue. Again, with the expected increases in GMP’s load over time
(even after acquisition of DSM resources), the ability to sell power off-system was more valuable
in the earlier years of the Contract. GMP’s off-system sales could be affected, however, by
360. Docket 5330-F, Order of 11/26/91 at 1.
361. In addition to eroding the benefits of the Contract because the market alternatives had become less
expensive, a drop in fossil fuel prices would also likely lead to a reduction in anticipated benefits due to the effect
upon the rate of inflation. The calculations of the Contract?s economic value were based upon certain inflation
assumptions; lower inflation rates would reduce the anticipated economic benefit.
362. October Order at 11-12, 121-2. The net present value of the $4 billion payments was approximately
$1.17 billion.
363. In Docket 5330, we assumed that approximately 12% of the HQ power would be sold off-system.
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changes in fossil fuel prices, which would reduce the price at which GMP could sell its excess
capacity. These sales were also sensitive to changes in regional loads, which would reduce
demand for any capacity or energy that GMP sought to sell.
In the present docket, the Department and the independent investigator argue that
evidence supports several conclusions about the Company’s actions prior to our approval of the
Contract on October 12, 1990, in Docket 5330. First, the DPS contends that Vermont’s two
largest electric utilities, GMP and CVPS, had expended much effort during the 1980s to securing
significant purchases from HQ, with the threefold aim of serving native load, generating profits
through resales to other New England utilities, and eliminating retail competition from the
Department (by reserving all available transmission interconnections for the Contract and by
eliminating the demand within Vermont for additional DPS energy purchases under 30 V.S.A.
§ 211).364
Next, the DPS argues that the final Contract failed to contain provisions explicitly
specifying the effects of potential future events, among them Board approval of less than the
minimum required purchase, acceptance of only conditional approvals by only some of the
Participants, and failure of the cooperative and municipal utilities to obtain voter and other
approvals. The DPS asserts, moreover, that the Contract did not allow GMP to revise its
elections under the schedules after Board approval without triggering renegotiation (in fact, the
Contract required that Schedule C be finalized in 1988—before the utilities even sought Board
approval). The Department urges the Board to find that GMP was imprudent in negotiating
Articles 1.3 and 1.4 (as amended by Amendment 2) of the Contract, which severely limited its
flexibility to adapt to possibly unsatisfactory approvals.365 The independent investigator
criticizes the “all or nothing” nature of the Contract, which did not allow for regulatory
adjustments of the minimum purchase requirement of 340 MW.366
We do not conclude that the Company was imprudent in its negotiation of the Contract or
in its actions leading up to the Board’s October Order. In Docket 5330, the Department was
well aware of the limitations of various provisions of the Contract, as well as of other features
364. DPS HQ Brief at 13-14; MSB pf. at 21-23. Early on in the negotiations, the utilities were considering
imports of up to 1,000 MW (roughly equal to Vermont?s peak demand). Chernick pf. 10/17/97 at 11-14; exh.
DPS-49 (PLC-P-4).
365. DPS HQ Brief at 14-16.
366. MSB pf. at 55-56.
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that appeared to confer advantages;367 agreeing to such provisions does not necessarily
constitute imprudence.368 While we had reservations at that time about the “must-take” aspect
of the Contract and the fact that the 340 MW had been presented as an “all or nothing”
proposition,369 we nonetheless found the Contract, based upon evidence presented in hearings,
to promote the general good of the state. The possible motives behind GMP’s actions at that
time are of limited interest here and do not, by themselves, persuade us that the Company took
positions or made concessions in the Contract negotiations that were imprudent. By their very
nature, negotiations are a process of give and take; Articles 1.3 and 1.4 are elements of an overall
agreement from which the negotiating parties both believed they would derive benefit.
In the
absence of convincing evidence that the Company deliberately misled the Board, withheld
relevant information from us, or otherwise acted inappropriately during the original review of the
Contract under 30 V.S.A. § 248, we cannot conclude that the Company was imprudent in
negotiating the Contract and seeking its approval.370
However, our inquiry does not end at that point. These critical features of the Contract
— its large minimum purchase, long term, large fixed capacity payments, and front-end
financing — create a financial reality that imposes a high standard of vigilance upon utility
management. A contract with these characteristics will be highly sensitive to load and market
changes; commitments to such a contract must be evaluated and monitored by utility
management with the greatest care.
367. The Department accepted some of these limitations in its own analysis, rather than challenging them. For
example, the Department analyzed the Contract solely as an "all-or-nothing" proposition rather than attempting to
determine an optimal amount of power to purchase. October Order at 129.
368. In Docket 5030, the Board concluded that CVPS was not imprudent when it entered into the stringent
Joint Owners? Agreement for Seabrook Unit II; however, the Board also held that ?having entered into a contract
which gave it few rights vis-a-vis the lead participant, CVPS was, in our opinion, bound to exercise with diligence
those rights it did possess.? Docket 5030, 72 PUR 4th at 746 (12/18/86). The Board reached the same conclusion
with respect to CVPS involvement in Seabrook Unit I. Docket 5132, 83 PUR 4 th, 532, 584.
369. See October Order at 34 (?Because the 340 MW minimum has been presented legally as an ?all or
nothing? purchase, and because the evidence is clear that for Vermont as a whole, 340 MW is preferable to rejection
of the entire proposal, we approve purchase of the minimum contractual amount?), 120 (?The optimal level of
Contract power is unknown.?) and 129.
370. In Docket 5330, the VJO unambiguously represented that the non-cancelable schedules of the Contract
(340 MW) constituted an ?all-or-nothing? purchase, and we relied upon that assertion in our review of the Contract.
October Order at 34. GMP?s declaration in this docket that the Contract was not presented as ?an
?all-or-nothing? proposition? in Docket 5330 is very troubling. GMP HQ Brief at 47. If the Company?s current
position on this question is indeed true, then the Board and the DPS were materially misled in 1989, 1990, and 1991.
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c. The Lock-inc. The Lock-in
The size, duration, structure, and economic benefits of the Contract are all important
factors that a prudent utility manager must assess in managing the Contract. An essential aspect
of that Contract management was the utilities’ exercise of their options under that Contract,
specifically, the option to terminate due to unsatisfactory regulatory approvals. GMP has
asserted for the first time in this proceeding that, in 1991, it no longer possessed the legal right to
terminate the Contract, rendering its obligations under the Contract fixed and irrevocable (so that
changes in the market were irrelevant to its obligations). Thus, before we can address the
question of whether GMP acted imprudently in its failure to exercise its right to terminate the
Contract, we must first consider whether GMP retained such a right during that time period.371
(1) Ability to Terminate the Contract(1) Ability to Terminate the Contract
Following the execution of the contract by the VJO, two sections of the Contract set out
the contingencies and cancellation rights of the parties. First, section 1.3 made the obligations
of the parties contingent upon receiving all required regulatory approvals.
In addition, Section 1.4 of the contract allowed either HQ or the VJO to terminate the
contract if that party determined that the regulatory approvals were not satisfactory.
Specifically, the Contract states that “each Party reserves the right until April 30, 1991, to
terminate this Contract without liability to the other party should said rights or approvals,
including required permits and licenses, be withheld or tendered upon terms unsatisfactory to
it.”372 After the April 30, 1991, deadline (as modified to November 30, 1991, by the Waiver
and Release), either party could invoke these termination rights “in the event that a court sitting
in appeal or review of either of the decisions [i.e., the decisions of the Board in Dockets 5330
371. GMP is not a party to the HQ/VJO Contract and thus, does not have any direct rights under the Contract;
those rights rest with the VJO. The VJO?s exercise of rights under the Contract is governed by the Participation
Agreement. Under that Agreement, however, GMP and CVPS are the two principal parties. Those two companies
constituted the VJO Operating Committee. Tr. 1/19/91 at 239. Practically, if either of the two largest members of
the VJO had determined that it found the regulatory approvals unsatisfactory, the VJO would have terminated the
Contract. See Finding 631. Thus, when we refer to GMP?s opportunities to terminate the Contract, we are
referring to GMP, acting through the Participation Agreement, precipitating the VJO?s exercise of rights under the
Contract.
372. The April 30, 1991, deadline for the parties to the Contract to exercise the rights under Section 1.4 was
extended to November 30, 1991, by the Waiver and Release that the Board approved in Docket 5330-E (Order of
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and 5331 and the Canadian National Energy Board in Docket No. EH-3-89] cancels the license
or permit or modifies it or remands it for further modification” thus allowing cancellation
without penalty.373
In interpreting the VJO’s rights to terminate under these sections, we are aware that the
Contract specifies that Quebec law, not Vermont law, governs its interpretation. Nonetheless,
the testimony of GMP’s expert on Quebec law indicates that Quebec’s legal principles are not
dissimilar from the interpretation of the Contract we would adopt under Vermont law. The
basic principle guiding the rights of either party to cancel the Contract due to dissatisfaction with
regulatory approvals is that the party must exercise good faith in making that determination.374
In addition, if either the VJO or HQ sought to terminate under Section 1.4 of the Contract, that
party could not use purported dissatisfaction with regulatory approvals as a pretext for other
concerns. In other words, the terminating party must, in fact, find the regulatory approvals
themselves unsatisfactory, although that decision is a subjective one.375 Moreover, a party
could not terminate based upon trivial concerns.376
The limitations upon the scope of the termination rights lead to the conclusion that
neither party could terminate the Contract solely based upon changes in economics.377 Neither
the Conditions adopted by this Board nor those set forth in the NEB’s Order specifically limit
those authorizations based upon the electric power market.
This does not mean, however, that the economics, including changes to the anticipated
economic benefits, are irrelevant. Quite obviously, in determining whether one or more
conditions adopted by a regulatory body are unsatisfactory, both the VJO and HQ would also
need to consider all of the factors, including economics, that might render a particular condition
unsatisfactory.378 Moreover, the degree to which either party would find a condition acceptable
4/30/91).
373. In addition to the rights of either party to cancel the contract without penalties, as described herein, the
Contract also allowed either party to terminate the contract due to unsatisfactory regulatory approvals after April 30,
1991 (as modified to November 30, 1991), but the canceling party would then be required to compensate the
non-canceling party for ?all costs, damages and expenses? as a result.
374. Jobin 12/8/97 pf. reb. at 9-10; Docket 5330-E, Order of 4/22/91 at 5.
375. Jobin 12/8/97 pf. reb. at 10; exh. Board-8 at 143.
376. Tr. 1/15/98 at 70, 82 (Jobin).
377. Jobin 12/8/97 pf. reb. at 6.
378. For example, HQ?s concern over Conditions 10 and 11 of the NEB?s Order related not to the VJO
contract (which HQ had certified was a system power contract), but to concerns over how that condition might affect
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or unacceptable relates directly to the perceived benefits of the overall contractual arrangement.
If the Contract provided a large economic benefit to a party, that party would be more willing to
accept conditions that imposed additional costs or additional risks than if the contract provided
small benefits. By contrast, these same costs and risks arising from regulatory conditions would
be much less acceptable as the economic benefit of the contract diminished.
In fact, in 1991, the VJO, including GMP, drew precisely this linkage in testimony before
the Board. GMP’s General Counsel, the VJO’s Vermont counsel, and a panel of two witnesses,
one from GMP and one from CVPS, all stated that the Canadian regulatory approval had created
a risk that HQ would terminate the Contract. In light of this risk, these witnesses informed the
Board that the VJO had the right to, and would, terminate the Contract if more cost-effective
resources became available.379 We accepted and relied upon the VJO representatives’
assertions at that time, finding them consistent with the rights under the Contract.380
Finally, the record makes clear that, to the extent that GMP retained the right to terminate
the Contract without penalty based upon dissatisfaction with the regulatory approvals, that right
ended with the exchange of the lock-in letters at the end of August, 1991.381 After that date,
termination without penalty was only possible due to decisions of reviewing courts.
We now turn to the regulatory approvals themselves to determine whether, had GMP
desired to terminate the Contract in 1991, it could have found the regulatory approvals
unsatisfactory. Specifically, assuming GMP had concluded that the electric energy market had
changed and the value of a 25-year power purchase was not sufficient in light of the risks of
further market changes, did the regulatory approvals in Vermont and Canada impose conditions
the utility?s other plans.
379. Exh. Board-5 at 307-308, 323-327, 329-331; exh. Board-8 at 186-187.
380. Our present review of the Contract and testimony leads to the same conclusion: had the VJO found more
cost-effective or less risky resources in 1991,the risk to the VJO arising from Conditions 10 and 11 of the NEB
Order would have allowed them to terminate the Contract.
381. At the time of the lock-in, the VJO characterized the letters as not materially changing the parties? rights.
It is clear, however, that that representation was not correct and that the lock-in letters substantively eliminated
certain rights that the VJO possessed up until that time, namely the right to terminate the Contract based upon
dissatisfaction with regulatory approvals. Tr. 1/15/98 at 110-113 (Jobin). We also note that the lock-in letters are
internally inconsistent and thus unclear. The first sentence refers to each party?s conclusion that it was satisfied
with the regulatory approvals ?to date.? This appears to leave the VJO with the ability to terminate the Contract
based upon future, unsatisfactory regulatory approvals (until November 30, 1991), such as could have arisen in
Docket 5330-A. The last sentence of the first paragraph is broader, stating that the intent of the letters was to void
the April 1991 Waiver and Release. We conclude that the latter sentence clarifies the intent of the parties and thus
assume that termination based upon regulatory approvals was no longer possible after the lock-in letters.
Docket No. 5983
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that the Company could have concluded, in good faith, were unsatisfactory, thereby providing the
Company a basis for termination?382 We conclude that GMP did retain this right.
The record demonstrates a number of different bases upon which GMP could have found
those approvals unsatisfactory had the Company not been determined to lock in. First, the
regulatory approvals in Canada created significant risk that HQ would terminate the Contract.
As witnesses for the VJO testified in 1991, absent the Waiver and Release, it was highly likely
that HQ would terminate the Contract by April 30, 1991.383 Much of this risk revolved around
the NEB’s imposition of Conditions 10 and 11. In July 1991, the Appeals Court decision
reversed the NEB’s decision on this point. While this decision reduced the likelihood that HQ
would cancel the Contract due to Conditions 10 and 11, it did not eliminate it. The VJO
themselves perceived this uncertainty, as the lock-in letters demonstrate. In fact, the record
makes clear that the principal purpose of the lock-in was to eliminate the potential for
termination of the Contract.
The VJO eliminated this risk through HQ’s commitment to give
up its termination rights as they relate to Conditions 10 and 11.
Moreover, as the VJO made clear in Docket 5330-E, the acceptability of the performance
risks emanating from the regulatory approvals related directly to the benefit of the Contract.
Referring to the NEB’s Conditions, counsel for the VJO stated:
Now, what Mr. Stein was suggesting is that we have a dissatisfaction, a
potential dissatisfaction with these conditions. It’s different than
Hydro-Quebec’s.
Hydro-Quebec’s dissatisfaction is they believe they are illegal. Our
dissatisfaction is these conditions have created uncertainty with respect to this
contract. And to date, we have not exercised our option to terminate based on
those conditions, but that option exists.
And I think the testimony of the two witnesses has just made clear that we
are not going to sit around forever not exercising those rights, particularly if
there are attractive alternatives that turn up, and we are faced with pursuing an
382. GMP has argued that the Company could not have terminated the Contract because it ?wanted to be on the
hook? and was not dissatisfied with the regulatory approvals. Exh. Board-5 at 307 (Boucher). This rationale can
be reduced to the simple statement that because the Company still desired the Contract, GMP had no basis for
termination. This may be true given GMP?s state of mind, but the logic does not demonstrate that GMP lacked the
legal right to terminate. We fully understand that GMP was committed to the Contract. Our review here is
examining whether GMP could have terminated based upon the regulatory approvals had its inclinations been
different (such as if the Company had concluded that the Contract was no longer expected to provide a net economic
benefit over its lifetime).
383. The VJO witnesses stated their expectation that the likelihood of cancellation was 90 percent. Exh.
Board-5 at 304.
Docket No. 5983
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alternative course or hanging in for this course when they might terminate us.
So it’s clear that we do have that right, and I can represent that we have
made that known to Hydro-Quebec.384
Thus, we conclude that the risks arising from Conditions 10 and 11 of the NEB approval
provided a basis upon which the VJO could have terminated the Contract in 1991.385
A second basis on which GMP could have found the regulatory approvals unsatisfactory
was Condition 7 requiring 22 of the Participants, including GMP, to demonstrate that their
preferred allocations of Contract power promoted the general good of the state. In setting this
condition, the Board warned that a potential outcome of its review of the allocations (in Docket
5330-A) might be an order “to offer specified amounts of power and energy for return sale to
Hydro-Quebec or for resale to other parties.”386 In this Docket, the Company has argued that
this condition did not create risks for it, on the ground that, since the Contract as a whole was
found to have satisfied the criteria of § 248, there must be some set of internal allocations that
would also satisfy the statutory requirements.387
We do not agree. It was certainly possible that the Board could find that a set of
allocations whose sum was less than the 340 MW non-cancelable portion of the Contract was
more cost-effective than the allocations proposed. Indeed, in suggesting that resales might be
required, the October Order contemplated just such an outcome. However, even if the Board
concluded that the entire 340 MW were justified, it remained quite possible that the Board would
find that the Participants’ elections under the schedule should be significantly revised. Such a
revision might have required GMP to take more or less than the 114 MW of Schedules B and C-3
that it had chosen.
In the summer of 1991, the Board had not issued a decision in that proceeding. Evidence
on the allocations was presented in early 1991, and was based on assumptions that were, by the
following summer, quite out of date. Despite Department support of the proposed allocations, it
was by no means clear that the Board would approve them. The changed economic and market
circumstances since the original analyses were conducted raised additional concerns for GMP;
384. Exh. Board-5 at 330-331.
385. Under Section 1.4, the VJO could find the regulatory approvals in Canada unsatisfactory, just as HQ could
find this Board?s decisions unsatisfactory. Exh. Board-5 at 330-331; Jobin reb. pf. 1/9/97 at 6. GMP?s expert on
Canadian law concurred that the risk arising from Conditions 10 and 11 constituted serious concerns that could
provide a basis for termination. Tr. 1/15/98 at 80 (Jobin).
386. October Order at 39-40.
Docket No. 5983
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had they been made known to the Board in that proceeding, they may well have caused the Board
to reconsider the modeling assumptions underpinning the allocation proposals.388 As of the
date of the lock-in, the Board’s decision in Docket 5330-A was pending, thus providing a basis
upon which GMP could have expressed dissatisfaction with Condition 7 as the Board’s
continuing review presented the potential for a decision that the Company would find
unacceptable.
Finally, we note that, contrary to its arguments in this proceeding, in 1991, the Company
fully understood that a decision by the Board in Docket 5330-A could form the basis for
terminating the Contract. During Docket 5330-E, the Board posed precisely this issue to GMP’s
General Counsel, who acknowledged that Docket 5330-A could result in conditions that either
HQ or the VJO would find unacceptable.389
Condition 8 created even greater uncertainty for GMP. It imposed a continuing
obligation upon the Company for as long as it receives power under the Contract. It required
that GMP “develop and implement measures to acquire all resources available from
cost-effective acquisition of energy efficiency, in accordance with the principles ordered by this
Board in the final Order of April 16, 1990, in Docket No. 5270.” This standard is, as witnesses
for the Department and the independent investigator rightly note, very demanding. The
Company and the VJO understood that failure to comply with it could lead to revocation of the
CPG for the Contract purchases.
The Contract’s effect upon the acquisition of DSM resources in Vermont was heavily
litigated in Docket 5330 and the follow-on cases. The Board approved the Contract because the
evidence in Docket 5330 demonstrated that very large amounts of energy-efficiency
(significantly more than contemporaneous DSM plans envisioned acquiring) remained
cost-effective even if Contract power were included in the state’s resource portfolio. In April
1991, it was the testimony of the Company’s witness that this expectation remained strong; the
387. Dutton reb. pf. 1/9/98 at 2-3.
388. For example, as GMP acknowledged in an internal Memorandum in May, 1991: ?our long range forecast,
as used in our collaborative planning process and our most recent Hydro-Quebec filing [i.e., Docket 5330-A] is now
dramatically outdated.? This information, had it been presented in evidence in Docket 5330-A (then pending)
might well have led to a Board Order in that Docket requiring allocations or resales unsatisfactory to GMP, CVPS,
and other VJO participants.
389. Exh. Board-8 at 140-141.
Docket No. 5983
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Board relied upon that testimony when it approved the Waiver and Release.390 Under these
circumstances, if the Company had any doubt as to the meaning of Condition 8 and its ability to
comply with the condition’s rigorous requirements, it certainly could have expressed
dissatisfaction with it and terminated the Contract on the basis thereof.
Paragraph 11 of the October Order obliged the VJO to make efforts to negotiate return
sales of excess capacity and energy to HQ. Because GMP’s major elections of Contract power
began in 1995, it did not believe that this condition applied to it directly. Even if that were true,
it did not necessarily lessen any uncertainty associated with the condition. Failure by other
Participants to achieve adequate resales could have led to uneconomic reallocations to GMP.
Moreover, as the cost-effectiveness of the Contract diminished, the need for resales could have
extended to GMP (and, in fact, eventually did), and thus the condition did pose risks for the
Company.
The potential for the municipal and cooperative utilities to fail to obtain the additional
voter and other approvals that they needed also created uncertainty for the VJO. The risk lay in
HQ’s potential unwillingness to reduce the minimum purchase requirements, thereby triggering
the step-up provisions of the Participants’ Agreement. As it turned out, HQ did agree to reduce
deliveries from 340 MW to approximately 308 MW (after several municipalities rejected the
Contract); but, in August 1991, all municipal votes were not yet completed and the outcome was
still in doubt.
For these reasons, we conclude that, during 1991, there were legitimate, good faith, and
non-trivial reasons for the Company and VJO to consider any of several conditions of approval to
be unsatisfactory and, therefore, the basis for a decision to cancel the Contract.
390. Docket 5330-E, Order of 4/30/91 at 3, 17. Specifically, the witness testified that the Contract purchase
would not render uneconomic any DSM that, in the absence of the Contract, would have been cost-effective. This
meant that for purposes of determining the levels of DSM that were cost-effective, GMP would set avoided costs
equal to or greater than the price of the Contract. Exh. Board-5 at 318-319; finding 505.
Docket No. 5983
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(2) GMP’s Decision to Lock in(2) GMP?s Decision to Lock in
The evidence in this case demonstrates that, during the first half of 1991, the market for
electricity, in Vermont and regionally, had begun to change in ways that called into question the
overall economics of the Contract. Those changes manifested themselves in a variety of ways:
changes in the power supply market (in part precipitated by changes in short-term and forecasted
fossil fuel prices), changes in regional power demands and, significantly, changes in GMP’s
demand forecasts. The major trends affecting the supply market were the following:
The levelized price of NUG generation had been falling and continued to fall
over the period from 1989 through 1992.
In May, 1991, WEFA released a new forecast that showed reduced
expectations for fuel-prices. These forecasts were consistent with other
forecasts released in the same time period.
In April, NEPOOL projected growing surpluses of capacity in New England;
there were growing surpluses also in New York.
NEPOOL’s CELT Report, issued in the Spring of 1991, also forecast
lower short-term and long-term prices for capacity and energy than had
forecasts for the previous three years.
Avoided costs in New York began dropping significantly, while surplus
energy rose; by July 1991, New York concluded that alternatives to the
NYPA/HQ Contract (with pricing terms similar to the HQ/VJO Contract)
had become slightly lower in price.
NEPOOL also began to experience substantial amounts of surplus
generating capacity, which would have the effect of reducing the price of
alternative supply sources.
Northeast Utilities was making competitive offers to sell power and energy over
the medium to long term (ten years beginning in 1995).
The developers of the CoGen Lime Rock project failed to fully subscribe it.
See Findings 566-582, above.
While these changes to the energy supply market were occurring, the northeastern energy
market and GMP itself began to see forecasts of demand growth dampen.
By May, deteriorating economic conditions generally and a decrease in IBM’s
expected usage led to “dramatic” changes in GMP’s own load forecasts,
resulting in an 18 percent reduction in projected energy consumption.
NEPOOL’s 1991 CELT Report forecast a short-term drop in sales, as
well as a reduction in the rate of load-growth over the long-term.
Docket No. 5983
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This CELT Report, coupled with previous Reports, also suggested that
DSM programs would be reducing future regional load growth more than
previously anticipated.
See Findings 583-589, above.
The record also demonstrates that GMP was fully aware of these changes in both the
electrical energy market and in demand. As early as the Fall of 1990, GMP argued before the
Board that the market for resale of electrical capacity had changed so significantly that “there
will be no resale market for capacity in the adjusted test year [1991] or, put another way, that the
value of surplus capacity will be zero.”391
In May, the Company’s chief power planner alerted management to the changes the
Company was then facing, observing that the regional power supply market was now
characterized by “surpluses of capacity and energy for sale at attractive prices.”392 On the
demand side, he described the anticipated changes to GMP’s load as “dramatic,” so that the load
forecasts that GMP had used in its analysis of the Contract were “dramatically outdated”393 and
outlined a plan of analysis that would evaluate the impacts of the new circumstances on its power
portfolio. He stated that, among other things, analyses of “the optimum quantities of HQ C3 and
CoGen Lime Rock” would be undertaken.394
By June, GMP and VJO were considering a further amendment to the Contract. In the
context of those discussions, the VJO’s representative noted that “[i]n negotiating Amendment
No. 4, we must reconsider the capacity value in light of current market conditions and settle on a
price that can be justified in the marketplace.”395
In addition, GMP knew of the events occurring simultaneously in New York. The New
York Power Authority also had entered into a contract with HQ to purchase 1,000 MW of power
and associated energy from HQ, terms of which, including contract termination rights, and
pricing formulae were essentially identical to those of the VJO Contract. In April, 1991, New
York remained firmly committed to the Contract.396 By July, the changes in the market had
391. Docket 5428, Order of 1/4/91 at 83. Based upon the evidence before us, we did not agree that GMP had
demonstrated that the market price for capacity had, in fact, declined to zero.
392. Finding 582.
393. Findings 584-586.
394. Finding 586.
395. Finding 628.
396. Exh. MSB-A (MSB-16).
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eroded the economic benefit of the HQ/NYPA Contract so that New York concluded that its load
could be served at a slightly lesser cost without the purchase. By August 27, NYPA had
negotiated an extension of the period within which it must commit to the Contract and had
obtained the ability to terminate the contract for any reason until November, 1992.
The Company asserts that its assessments of the Contract during 1991 in response to the
profound power supply market and load changes were diligent and thorough. The record does
not support that claim. Although the record in this case is extensive, the Company has been
unable to produce any contemporary analysis that focuses on informing decision-makers about
the lock-in decision, the single largest resource decision that the Company has ever made.397 It
is not clear that such analyses were ever performed; the testimony suggests that they were
not.398
The Company initiated some analyses in the summer of 1991 that formed the basis of the
Company’s integrated resource plan; these analyses were not, however, conducted so as to
dispassionately and correctly assess whether the Contract was the least-cost option for meeting
present and future demand for service. The IRP analyses treated Contract power as an existing
resource, rather than evaluating whether other options could replace the Contract as a whole.
Thus, the results of the IRP cannot support a conclusion that committing to the Contract — i.e.,
locking in — was the least-cost, and therefore a reasonable, course of action; the IRP simply did
not address that question.399 Furthermore, it appears that the analyses that the Company did do
— limited comparisons of Schedule C-3 to the NU intermediate offer and CoGen Lime Rock —
were biased favorably toward the Contract because the alternatives were modeled in ways that
397. As we stated in our Seabrook decision, ?[t]his continuing review and assessment process should be
documented so that its prudence can be evaluated when challenged.? Docket 5132, Order of 5/15/87 , 83 PUR 4 th
532, 573 (1987). GMP?s failure to adequately document its continuing review and assessment process during 1991
is itself imprudent.
398. As we stated previously, GMP retains the burden of persuasion as to the prudence of its actions. The
Company did not present any analyses directed solely at analyzing the economic benefit of the Contract in light of
the market changes.
399. Our approval in 1994 of the 1991 IRP was not, nor can it be regarded as, an approval of the existing
resource portfolio that underlay the plan. An IRP charts a range of possible future actions designed to provide
service at least societal cost, given a utility?s pre-existing mix of resources. It makes no judgments about the firm?s
past actions. Moreover, we approved the 1991 IRP as modified by a stipulation between GMP and the DPS, in the
knowledge that GMP would file a new IRP within six months of our decision. Docket 5270-GMP-4, Order of
5/3/94.
Docket No. 5983
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overstated their costs.400
Finally, either as part of the IRP process or in a separate analysis, the record demonstrates
that the Company did not conduct a systematic evaluation of alternative supply resources (other
than the limited analyses of an NU offer and the CoGen Lime Rock), including those in New
York, where surpluses were growing.401
In fact, throughout the spring and summer of 1991, the evidence does show that the
Company continued to believe that the Contract was a good deal, and that it was making every
effort to lock into it.402 These efforts stemmed, at least in part, from a sensitivity to the
political ramifications of any delay and the possibility of further proceedings before the Board in
which the Contract could be reviewed. But whatever its motives, the evidence leads to the
conclusion that GMP did not seriously consider viable alternatives to the Contract,
notwithstanding the Board’s clear directives (and GMP’s stated commitments) to do so.403
The Company argues that, in 1991, it would have been inappropriate to conclude that the
recent changes in market conditions were anything but a minor, cyclical event that would have a
small impact on the overall cost-effectiveness of the Contract. The Company asserts that it
could not have known, nor should it have expected, that the new circumstances indeed signaled a
major, structural change in the regional market for electricity and, therefore, it would have been
improper to radically adjust its long-term plan in the face of temporary aberrations.
We agree with the Company’s observations that a utility should not radically alter its
resource planning solely on the basis of short-term changes that will not materially affect either
the energy supply market or demand forecasts. However, GMP’s evaluation of its own demand
suggested a major — 18 percent — drop in demand by 1995, thus greatly affecting its need for
power during the early years of the Contract: precisely the period during which the Contract was
400. Finding 612.
401. GMP?s decision analysis is not appropriate to the prudence review in this case. The model produces
unrealistic results. See Finding 617. In addition, this particular analysis tool was not used by the Company at the
time it made the lock-in decision. We are reluctant to employ a tool today to validate a decision that the Company
made seven years ago, when seven years ago that tool was not available to it. See Finding 618. The prudence
standard, which requires that we examine the Company?s behavior on the basis of information that it had or should
have had at the time that the actions in question were taken, counsels against our reliance upon the decision analysis
in this instance.
402. See Findings 504, 523. As we have stated, the Company did not present any evidence of analyses that
were performed to support this conclusion.
403. Findings 478, 505; Docket 5330-F, Order of 4/30/91 at 17 and fn. 11.
Docket No. 5983
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least cost-effective. The power supply market changes also were forecast to last more than a
few years, but reflected revised assessments of the long-term trends.404
Moreover, it goes without saying that a company should consider all available
information and assess the relevant probabilities when evaluating events that could have
profound effects on both its ratepayers and shareholders. It must also analyze short-term shifts
in the power supply market and load forecasts to determine if they represent aberrations or reflect
a change in the supply and load trends over a longer term. The record before us reveals no
attempt on GMP’s part to examine those shifts to determine whether they would have effects
over the long term.405
Furthermore, because the cost of the Contract was heavily front-loaded, its
cost-effectiveness was particularly sensitive to market prices in the short- to medium-term: even
if the Company were ultimately to conclude that drops in loads and market prices were
short-lived, the short-term losses might have still been large enough to render it non-economic
over its entire life.406 And, as the economic benefits fell, the risks associated with the Contract
increased because of the must-take aspect of the cost structure. Contract power and energy must
be paid for regardless of whether it is actually used. GMP’s management, operating prudently,
knew or should have been aware of these risks. Thus, rather than simply looking at the changed
forecasts and supposing they were short-term revisions that will leave the longer-term trends
unaffected, the Company had a duty to evaluate them more thoroughly, as it had informed the
Board it would, particularly since it still could terminate the Contract. The Company need not
have concluded, however, that the probability of uneconomic outcomes was particularly high,
only that it was high enough to counsel reconsideration of alternative resource strategies.
The evidence suggests that, had the Company retained its options, market trends from
August through November would have demonstrated that the earlier reductions in power prices
and load expectations did not reverse. These signs would have confirmed the previous evidence
of changes in the market and led to the conclusion that locking into the Contract was not
reasonable.
404. See Findings 566-582.
405. In addition to the supply and load changes already discussed, the supply market was undergoing
technological changes which GMP did not reflect in its analysis of alternatives. Finding 613.
406. This would have been in part the result of the necessity to discount any potential benefits in the out years
of the Contract, i.e., after the turn of the century.
Docket No. 5983
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GMP claims that, as of 1991, there were not alternative sources of supply that could
cost-effectively replace the 25-year contract for one-third of its load. Thus, according to the
Company, it was not reasonable to cancel the Contract. This claim is misleading. In its
determination of whether to terminate the Contract, the Company needed to assess whether the
market changes were such that the Contract still remained a reasonable, cost-effective investment
over its term. Although GMP also needed to analyze the market sufficiently to identify a
reasonable least-cost alternative portfolio, it did not necessarily have to commit to replacement
sources for supply equal to the full amount of the Contract.
GMP also argues that events in New York were irrelevant in its evaluation of supply
resources because there is no evidence that transmission capacity for such power was available.
This argument misses the mark for several reasons. First, the New York market had a direct
effect upon the regional market. Even to the extent that transmission over the New York/New
England interface faced constraints, the markets still affected one another such that a surplus in
New York had impacts upon New England. Second, GMP knew that New York had excess
power. Vermont has a long history of importing power from New York. The Department, on
behalf of the State, had obtained power from the Niagara Power Project, St. Lawrence, and
Ontario Hydro, all using transmission through New York. GMP’s contract with RG&E also
provided a very beneficial source of supply.
Third, the evidence suggests that transmission capacity from New York existed. In
addition, GMP could have employed transmission capacity then allocated to the Department, but
resting unused. In August of 1991, the Board concluded that the Department was no longer
using 26 MW of transmission entitlements previously allocated for the delivery of Niagara
power. Under the Board’s Order in Docket 5384, had GMP obtained supply sources in New
York, it could have requested reallocation of the Department’s transmission entitlement.407
Moreover, there is no evidence that GMP actually evaluated the New York market and the
availability of transmission. Finally, even if some transmission constraints existed, so that the
entire Contract amount could not be imported, New York sources could still be considered as
part of a prudent supply portfolio (as GMP’s contract with RG&E demonstrates). Thus, we
conclude that, as part of its failure to reexamine its commitment to the Contract, GMP ignored
407. See Docket 5384, Order of 8/13/91.
Docket No. 5983
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important potential supply alternatives.408
The parties and the independent investigator in this docket have presented extensive
evidence surrounding the events of 1991. We have reviewed detailed information regarding the
state of electricity markets in the Northeast, lowered expectations for fuel prices and electric
demand, technological changes, and difficulties with the HQ/NYPA contract. The record lacks,
however, persuasive evidence in support of the VJO’s — and GMP’s — decision to lock in the
Contract in August, precisely at a time when circumstances were strongly suggesting that there
was substantial value to putting off the decision. Caution, not haste, was warranted. The
evidence does not indicate that at any point in the nine months between the Board approval of the
Contract and the lock-in or in the four months between the Waiver and Release and the lock-in,
GMP stepped back from its pursuit of the lock-in to objectively evaluate whether the Contract
still provided sufficient economic benefit to its ratepayers to warrant an early decision waiving its
right to terminate.
New York’s experience with a similar contract provides a relevant, and telling, contrast.
The Company and the VJO were aware of events in New York, but they apparently did not fully
appreciate their import. Although New York and the VJO shared a similar view of their
respective contracts in April, by June of 1991, the VJO understood that NYPA was growing
increasingly reluctant to lock into its contract with HQ. NYPA was concerned that the
contract’s economics were eroding and was interested in extending its lock-in date. On August
27th, it announced that it had reached agreement with HQ on the terms of an 11-month extension,
until November 30, 1992.409 A salient feature of that extension was a liberalization of the
causes for termination: now, either party could cancel the contract for any reason.410
It is clear that the VJO failed to fully comprehend the ramifications of the New York
extension. In the absence of the extension, New York would have terminated its contract with
HQ; Hydro-Quebec had little choice but to agree to extend the lock-in date. And, in so doing, it
408. As we have stated, GMP made clear in Docket 5330-E that it would search the market for alternatives to
the Contract, a representation upon which the Board relied in its decision to approve the Waiver and Release.
409. The next morning, the VJO hurriedly exchanged faxes and decided that the time had come to lock into the
Contract. The timing suggests that, in light of the VJO?s previous concerns about the Vermont political and
regulatory environment (see Exh. MSB-A (MSB-16 and 18)), the decision to lock in was not unrelated to New
York?s decision and would ensure that opponents to the Contract in Vermont could not seek reevaluation by the
Board.
410. The VJO believed that ?the Board would insist that Vermont receive at least equal treatment to [the] New
Docket No. 5983
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agreed to unconditional rights of termination. Although Vermont’s Contract was one-third the
size of NYPA’s, it is nonetheless reasonable to conclude that it possessed like bargaining power.
It was imprudent of GMP not to reasonably exercise that power to improve the value of the
Contract. Yet GMP has testified that it did not even ask HQ for a similar extension.
The proximity of the Vermont lock-in to the New York extension suggests a relationship
between the two that is not merely coincidental. Facing a possibility that NYPA would not
commit to its contract, it appears that Hydro-Quebec was anxious to secure the one remaining
firm capacity and energy export customer in the United States that it had.411 Here suddenly
was a reversal of the roles that the two parties had occupied in April. It strains credulity that, in
its own eagerness to lock in, GMP failed to appreciate the significance of this circumstance.
Indeed, the evidence suggests that HQ and the VJO hastened to lock in so as to preclude others
from evaluating the significance of the New York extension. In June, 1991, the VJO informed
HQ that:
it would be likely that the Board would insist that Vermont receive at least equal
treatment to [the] New York Power Authority in the event their drop dead
date’ is extended. . . .
If we go forward with an Amendment No. 4, there is little doubt the Board
will revisit fundamental issues relating to the Contract. There is also no
question that there will be new media attention focused on Hydro-Quebec’s
problems.412
As GMP’s General Counsel wrote:
We are particularly concerned that an additional year of uncertainty will allow
opponents of the Contract to intensify their efforts to stop it. They have already
been very successful in slowing down our regulatory process and in re-litigating
questions that we had thought had already been decided by the VPSB.413
The decision to lock in the Contract, the day following announcement of the New York
extension, and without prior regulatory review, strongly suggests that the lock-in was accelerated
in order to avoid additional public and regulatory scrutiny in Vermont.
The option of following the New York example appears not to have been regarded
York Power Authority in the event their ?drop-dead date? is extended.? Finding 525.
411. This may have been a strong reason behind HQ?s willingness to bear the risk of future reimposition of
Conditions 10 and 11 (which, as it turns out, were reinstated). This, of course, is speculative, and we must point out
that an understanding of HQ?s motives is not necessary to our decision in this docket. What is important, however,
is what GMP thought of HQ?s likely actions, and whether those assessments were reasonable.
412. Exh. MSB-A (MSB-16).
413. Exh. MSB-A (MSB-18).
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seriously, or even considered, by GMP. The VJO had previously agreed to Amendment 3,
which would have extended the deadline for evaluating regulatory approvals to April 30, 1992,
although they subsequently withdrew it in favor of the shorter Waiver and Release.
Subsequently, HQ indicated a willingness to extend the deadline, to which the VJO did not agree.
The evidence shows that, throughout this period, the VJO and the Company believed that,
unless the Canadian Federal Court of Appeals struck down Conditions 10 and 11 of the NEB
licenses, HQ was likely to terminate the Contract. Consequently, the Waiver and Release
represented a sound decision to preserve the Company’s access to a potentially beneficial
long-term resource (it was, in effect, a low-cost option414); however, GMP failed to recognize
that, while the Waiver and Release had obvious benefits for HQ, it also offered new
opportunities to the Company and the VJO.
In the spring and summer of 1991, there was growing reason to believe that the value of
the Contract was falling, and that it could fall so far as to render the arrangement
non-cost-effective. In addition to affecting the direct anticipated economic benefits of the
Contract, a drop in the power supply market and in regional loads would also reduce GMP’s
ability to sell power off-system; the assumption that GMP would continue to profitably make
such sales had been an essential component of the Board’s original finding that the Contract was
cost-effective. The evidence demonstrates that, had the Company properly analyzed these
changed conditions, it would have concluded that the market changes were significant and that,
at the very least, there would be a positive value to deferring an irrevocable commitment to a
25-year contract, in order to obtain additional information on forecasts and alternatives.
The Waiver and Release would have expired on November 30th; it constituted a low-cost
option that had great value to Vermont. Associated with the voiding of the Waiver and Release
should have been benefits at least equivalent to the expected value of holding the option for three
more months.
What was that value, and how should GMP have been reasonably expected to act to
maximize it? Based on the information that was available at that time, it is clear that the overall
benefits of the Contract were declining, that additional observation of the market would better
inform a lock-in decision, and that the VJO’s bargaining position was improved. Rather than
414. Which we noted at the time. The potential loss to Vermont in the event HQ terminated in November of
1991would have been equal to the above-market costs of Contract power during that seven-month period, estimated
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lock in, the Company should have reevaluated its entitlements under the Contract (as it properly
should have in June and July). The Department argues that, had the Company pursued this
course, it would have concluded before the end of November that the Contract was no longer
economic. MSB asserts that the economics would not necessarily have been clear at that time,
but nevertheless the benefits of the Contract would have been sufficiently doubtful to have
caused reasonable utility managers to have sought a further extension, until April or November
of 1992.
The evidence establishes that the lock-in should not have occurred in August 1991. The
evidence also establishes that, absent the lock-in, several other events were very likely to have
occurred. The first is that continued monitoring of market conditions would have revealed that
the regional economic downturn, reduced fuel prices and electricity demand, and increased
generating surpluses were not merely short-term phenomena, but would likely have longer-range
effects.415 The second is that, in light of this information, the economics of the Contract would
have deteriorated further. Third, the evidence supports a conclusion that HQ would have been
willing to extend the lock-in date further, at least until April and probably until November 1992.
And fourth, with another year’s worth of market information and analysis, the Company would
surely have concluded that the Contract no longer promised net benefits for ratepayers, and
would have canceled it.416 At that point, to the extent that GMP needed capacity and energy to
meet its obligations to serve, it would have turned to the regional markets for replacement power,
and would have found resources whose costs were substantially less than the Contract.
We cannot know beyond all doubt that this sequence of events would have unfolded in
this exact manner, but absolute surety is not necessary to our conclusion that the Company’s
actions were imprudent. The evidence demonstrates that, in August 1991, a reasonable and
prudent course of action presented itself and that the Company did not avail itself of that
to be approximately $1.0 to $3.0 million. See Docket 5330-E, Order of 4/30/91 at 11, 18.
415. The evidence shows that, during the months between the end of August and the beginning of December,
market expectations were not rebounding. Nothing had occurred to suggest that the declining trends would not
continue.
416. Or renegotiated it. The evidence in this docket suggests, however, that HQ would have been unwilling to
renegotiate the entire Contract at that time. A renegotiated contract would have required NEB approval, which HQ
was reluctant to seek given the controversy over Conditions 10 and 11. Also, HQ had maintained a hard-line
position in negotiating the return-sales (in fact, the second one was made at less than full Contract prices), and had
repeatedly told the VJO that it was not interested in arrangements that had the effect of reducing the present value of
the net benefits that it expected from the Contract. Lastly, the experience in New York was consistent with this
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opportunity. By that time, had GMP examined the market, it would have seen sufficient erosion
of the economic benefit of the Contract to warrant seeking a further extension of the deadline for
committing to the Contract, as New York had done. The Company’s reasons for locking in early
are entirely unpersuasive. By August, 1991, the Contract was increasingly risky and
decreasingly economic. The costs of alternatives to HQ were dropping, and the range of
alternatives was expanding. GMP asserts that it was concerned that HQ might “walk away”
from the Contract, and we recognize that that was a legitimate possibility. However, during
1991, the risks associated with termination by HQ were growing smaller, while the risks
associated with an early commitment were growing larger. GMP failed to appreciate these
changed risks. As a consequence of its failure to proceed prudently, today the Company is
obligated to pay millions of dollars in power costs that are significantly more expensive than
would have ensued from prudent decision-making, and it seeks to recover those excess costs in
tariffed rates. We decline to order ratepayers to make those payments.
4. The Used and Usefulness of the Contract4. The Used and Usefulness of the Contract
The Department and IBM argue that the HQ/VJO Contract is not used and useful because
the power is “uneconomic, with costs greatly exceeding market value, currently and on a
projected basis over the life of the contract.”417 The Department presented evidence
demonstrating that costs of GMP’s entitlements to Schedules B and C-3 power are now, and will
remain for the duration of the Contract, above the market prices for equivalent power and energy.
The DPS asserts that those above-market costs, which it calculates to be between $87 and $269
million dollars (1997 $), represent the extent to which GMP’s entitlements are not used and
useful and that, under long-standing rate-making principles, ratepayers should not be required to
bear the full burden of those costs.418
The Company makes a number of arguments in opposition to the Department’s
recommendation, which we take up in detail below. The essence of its position is that the
Contract is being used to provide service, that it would be inappropriate to disallow expenses that
are not associated with a shareholder investment (and, hence, opportunity for a return), that such
a disallowance would be contrary to Vermont law, and, finally, that it would be inequitable.
view: ultimately HQ preferred to terminate the NYPA contract rather than significantly reduce its price.
417. DPS Brief at 37.
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The Company goes on to argue that, in Docket 5330, the Board decided in advance that the
Contract would be used and useful and, therefore, it would be inappropriate to disallow any costs
on the ground that some portion of it is now not used and useful, particularly in light of the fact
that Contract prices are now lower than had been anticipated at the time of the original
approval.419
a. The Standarda. The Standard
This Board has held in numerous decisions, consistent with long-standing rulings of the
United States Supreme Court, the policies applied by the Federal Energy Regulatory
Commission, and with orders of many other state commissions, that ratepayers should not have
to pay for utility investments and purchases that are not used and useful. The origins of this
principle are the United States Supreme Court decisions in Smith v. Aymes420 and Denver
Union Stock Yard v. United States.421 The used and useful standard has been regularly applied
in both federal and state jurisdictions since that time.
In Docket 5132, we examined the application of the used-and-useful standard in
Vermont, concluding that:
this Board has a well-founded policy of disallowing recovery of at least a portion
of a company’s investment in facilities that are not used and useful; that similar
policies are followed in other jurisdictions; that these policies are judicially
approved; and that they are expected by investors.422
We based this conclusion on our review of five cases of major uneconomic investments, in four
of which the Board had fashioned a remedy that shared the resulting burden of uneconomic costs
between shareholders and ratepayers.423
Recent decisions, including two cases examining proposals to restructure Vermont
Electric Cooperative’s enormous debt, have applied the principles enunciated in the Docket 5132
(In re Seabrook) decision, characterizing them as “a consistent set of rules for calculating the rate
418. Id. at 34-39.
419. GMP HQ Brief at 64-65. The Contract prices for energy, and to a lesser extent, for capacity are lower
because the actual rate of inflation has been less than that anticipated in 1990. Williamson pf. at 3; Laber pf. at 15.
420. 169 U.S. 466, 546, 42 L.Ed. 819, 18 S.Ct. 418 (1897).
421. 304 U.S. 470, 475, 24 PUR NS 155, 159, 160, 82 L.Ed. 1469, 58 S.Ct. 990 (1938)(holding that a utility is
not entitled to a return on ?any property not used and useful?).
422. Docket 5132, Order of 5/15/87, 83 PUR 4 th at 601.
423. Docket 5132, Order of 5/15/87, 83 PUR 4 th 590-594. In the fifth case, no argument for sharing was
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effects of failed investments in major power plants.”424
The principles that underlie our application of the used and useful standard to utility
investments also apply to purchased power contracts.425 Just as ratepayers should not have to
pay the entire costs of failed investments, they should not bear the entire risk that utility
purchased power contracts will not be used and useful.426 And, as the Department persuasively
argues, failure to apply the used-and-useful principle to both investments and power purchases
would create perverse incentives to fill resource needs with purchased power contracts simply
because rate-making practices made doing so less risky, notwithstanding the merits of the
particular power sources and the obligation to meet demand at the least societal cost.427
GMP argues that our decision in Dockets 5701/5724 stands for the proposition that it is
inappropriate to apply the used-and-useful principle as a criterion for evaluating whether to
disallow prudently incurred expenses of relatively high-cost purchases.428 We do not agree.
In Dockets 5701/5724, we examined to some degree the manner in which the used and useful
standard would apply to purchased power contracts. In that proceeding, we considered a
proposal from the Department recommending that we adopt “an economic, or market, test to
determine whether a resource or group of resources is used and useful for the purposes of setting
rates”429 Under the Department’s proposal, the Board would conduct a life-cycle cost analysis
of a resource (or portfolio of resources) in any rate case, and “compare its total costs (in present
value terms) to the present value of the least-cost alternative method for meeting the demand that
the resource in question would otherwise supply, and, to the extent that the resource's costs
exceed those of the alternative, deem the excess to be a measure of the non-used and useful
portion of the resource.”430
raised.
424. Dockets 5630/5631/5632 (Vermont Electric Cooperative), Order of 12/30/93 at 52; Dockets
5810/5811/5812 (Vermont Electric Cooperative), Order of 2/8/96 at 34.
425. Other jurisdictions have reached the same conclusion. See, e.g., In the Matter of the Application of
Interstate Power Company for Authority to Increase its Rates for Electric Service in the State of Minnesota, Docket
No. E-001/GR-95-601, Minn. P.U.C. (June 26, 1996); Re Section 712 of the Energy Policy Act of 1992, Case No.
2512, N.M.P.U.C. (October 7, 1993).
426. We have previously accepted the principle that purchased power contracts could be excluded from rates if
they were found not to be used and useful. Dockets 5701/5724, Order of 10/31/94 at 121-127.
427. See, Re: Puget Sound Power and Light Company, supra.
428. GMP Brief at 63-64.
429. Id. at 122.
430. Id.
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We rejected the Department’s proposal for several reasons. First, we found that “if an
asset is
explicitly approved for placement in rate base’ and its costs are deemed used and
useful, it would be inappropriate to subject their continued recovery over many years to a
year-by-year market test.” We noted that, as we had in the Seabrook decision, we were rejecting
a “year-to-year market test.”431 Second, we concluded that:
As structured, Dr. Rosen’s test would penalize investors for prudent investments
that are, or had been, reasonably expected to yield net present value benefits over
their lifetime, that are not excessive in scope, and that are still in service, but
whose costs may exceed market prices at a particular moment in time.432
Finally, although we rejected the particular market-based test before us, we also noted that we
were not concluding the market-based analyses were “fundamentally unacceptable.”433
We continue to believe that the Department’s rate-making proposal in Dockets 5701/5724
is not presently appropriate. Although the market for electric energy is changing, those changes
do not now justify evaluating whether a resource is used and useful solely on the basis of the
market at a particular moment in time — that is, merely during the period rates will be in effect.
The used-and-useful principle differs from the Department’s recommendation in the CVPS
docket in that it requires consideration of the resource’s value over its remaining lifetime.
At the same time, our CVPS decision did not conclude that an investment or purchased
power contract was per se used and useful if, at inception, it had been reasonably expected to
yield net present value benefits during its lifetime, notwithstanding significant changes in the
market. Energy markets and the marginal price of electricity change and these changes will
inevitably affect the value of any long-term investment or contract. We recognize these shifts,
which is why we rejected the “snap-shot” approach proposed in Dockets 5701/5724 that could
lead to re-evaluations of the used-and-usefulness of a resource based on the market at the time of
each rate case.
Moreover, the “snap-shot” approach fails to account for the fact that there is not a single,
commodity price market at the present time. For purposes of determining whether an
investment or purchased power contract is used and useful, we must also consider and weigh the
non-price benefits that it may provide. These benefits, which we discussed previously, include
431. Id. at 126.
432. Id. at 125 (emphasis added). We recently repeated these concerns in Docket 5854, Order of 12/30/96 at
68.
433. Docket 5701/5724, Order of 10/31/95 at 126; Docket 5854, Order of 12/30/96 at 68.
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contractual and physical reliability, flexibility, environmental benefits, and counter-cyclical
characteristics.
The true value of a particular resource reflects all of these factors.434 Thus, a
resource that may have prices expected to remain above the commodity market price for its term
may remain used and useful because of these other factors.
In sum, the case law on used-and-usefulness is straightforward and the standard has been
applied consistently by this Board over many years. An investment or purchase decision has
failed when it is not expected to yield net present value benefits, after consideration of non-price
benefits, over its lifetime.435 Excess costs associated with the investment or purchase decision
should be shared between shareholders and ratepayers, as appropriate.436
b. The Contractb. The Contract
The evidence establishes that GMP’s entitlements to Contract power under Schedules B
and C-3 are not used and useful. Findings 635-646. The Company does not dispute that its
Contract purchases are above the market price for equivalent power, and, moreover, does not
assert that there is anything but a remote probability that the Contract will ever become economic
over its remaining life, even after accounting for all non-price benefits.437
GMP contends that its purchases under the Contract are used, in that they provide power
and, also, that they are useful, in that they are dispatched into the load curve to avoid running
units with higher operating costs.438 We reject this argument for several reasons. The
used-and-useful principle is a two-part standard. A utility’s expenditures for a particular
resource (or other item) will be included in rates if the resource is both used — that is, necessary
434. For example, the New England Electric System recently completed a sale of certain generating assets at
prices higher than the lowest commodity-based price due to the output characteristics of those particular assets.
435. Usefulness is measured by the economic value of a resource, based on the market value of its power, over
its lifetime. Docket 5132, 83 PUR 4th 532, 587, fn. 40; Dockets 5701/5724, Order of 10/31/94 at 124.
436. This policy has generally meant an equal split of the uneconomic costs between ratepayers and
shareholders, but the Board?s discretion here is broad. See also our discussion on used and usefulness in Docket
5854, Report and Order of 12/30/96 at 56-70 (especially 67-70).
437. We question the ability of GMP to mitigate the effect of the non-used-and-useful portion of the Contract.
The Company has negotiated three sell-back arrangements with HQ resulting in $30.7 million savings that reduce
these costs. It is important to note that 87 percent of the savings came from the first arrangement, while the last two
represented just 13 percent. Unless there is a significant change in circumstances or negotiating position, we are
concerned that future attempts at mitigation through negotiations with HQ could result in more harm to the Company
and its ratepayers than benefits.
438. GMP HQ Brief at 63.
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to provide service to ratepayers — and useful — which is to say, economic for the purposes it is
serving. Both parts of the standard must be satisfied in order for the overall principle to be met.
In this case, the evidence shows that the Contract is used. It is being dispatched to meet demand
for service. It is not, however, useful. Indeed, over its entire remaining life under a wide range
of possible scenarios, the Contract is non-economic. The demand that the Contract serves could
be more cost-effectively met by other resources currently available in the market. Therefore, the
Contract is not used and useful.439
Next, the Company contends that disallowing recovery of certain Contract expenses
because they are not used and useful “would be inefficient, in that it would impose
uncompensated, asymmetric risks on the company that would increase the cost of capital.” The
Company asserts that this would “violate the requirement that the risks of gains and losses be
symmetrical. GMP would be penalized for a Contract that never gave it the opportunity to earn
a profit.”440
We reject this argument. Appropriate application of the used-and-useful standard to
non-investment expenditures does not create a new set of asymmetric risks for which the
company’s shareholders have not been compensated. As the DPS pointed out, there is an
“essential symmetry” embodied in the methods by which rates are set in Vermont.441 The
return on equity that investors demand reflects the business and market risks that the Company
faces — among them, the possibility that its contracts for services (for instance, labor, billing and
collection, and purchased power) may impose costs upon it that may not be fully recoverable in
the market price of the goods it sells. This is true of any competitive business, and it is this
pressure upon firms that improves economic efficiency. There is no compelling reason that
439. We cannot accept the technical argument that the Contract is used and useful because it is being
dispatched not only to serve load but also to displace units with higher running costs. The variable running costs of
a resource do not by themselves control the used-and-useful analysis; it is total costs that matter. Indeed, it is an
economic characteristic of most generating facilities that running costs decrease as capital costs increase.
Consequently, simply because a particular resource displaces, through the dispatch process, units with higher running
cost does not reveal whether the resource as a whole is economic. Dispatch reveals nothing about capital costs and,
therefore, nothing about total costs. As the evidence demonstrates, the majority of the Contract costs are in the
unavoidable capacity charges, and since the marginal (running) costs of the Contract are low, the power is
dispatched. GMP?s proposed test would have us ignore the Contract?s high capacity costs and high total costs by
focusing only on the effects of its low running costs.
440. GMP HQ Brief at 63-64.
441. DPS HQ Brief at 35-36; Steinhurst pf. 12/24/97, corrected 1/20/98, at 6.
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utilities should be free of that discipline.442 Moreover, exempting purchased power from
application of the used-and-useful standard would, as the DPS warned, effectively insulate utility
purchase decisions from regulatory scrutiny, shift all business and market risks onto ratepayers,
and discourage utility management from making least-cost choices, particularly where the
appropriate course of action would involve direct investment that would be subject to the
used-and-useful rule.443
Next, the Company asserts that disallowing recovery of some portion of the Contract’s
costs “would be inconsistent with the terms of regulatory approvals, which never warned of a
disallowance of prudent expenditures.”444 We must emphatically reject this assertion. The
principles of setting utility rates in Vermont are well-established, and the Company has operated
under them for decades. The Company cannot claim that our approvals in earlier dockets must
have explicitly enumerated the long-standing criteria of rate-making in order for us now to be
able to apply them. It would place upon the Board and other judicial bodies an unnecessary
burden:
among other things, it would have the practical effect of again shifting risks to
ratepayers that are properly borne by shareholders.445
442. In Dockets 5701/5724, we rejected the Department?s ?market-test? proposal in part because the
asymmetry of risks and rewards that it created but, as we noted above, that proposal is distinguishable from
traditional application of the used-and-useful standard.
443. See Puget Sound Power and Light Company, supra (holding that both ?buy and build options need to be
held to the same standard?) and cases cited in Footnote Error! Bookmark not defined.. In this vein, the
Company argues that its ?critics are asking this Board to order that legitimate expenses of providing service be paid
by shareholders, even though Vermont has never before ordered such a disallowance.? GMP HQ Brief at 65.
GMP?s misapprehends the positions of the DPS, IBM, and other intervenors. They are not asking GMP?s
shareholders to pay legitimate costs of service; rather, they are asking that ratepayers not be required to pay costs
that they (the other parties) believe are not legitimate. GMP refers to the US Supreme Court?s recent decision in
Duquesne Light Co. v. Barasch, 488 U.S. 299, (1989) in support of its position when it quotes (at 315) the Court?s
warning that ?a State?s decision to arbitrarily switch back and forth between methodologies in a way which required
investors to bear the risk of bad investments at times while denying them the benefit of good investments at others
would raise serious constitutional questions.? We are mindful of the Court?s opinion (and, indeed, referred to it in
our decision in Dockets 5701/5724), but conclude that it is not apposite in this instance. No party is proposing, nor
are we adopting, a new rate-making methodology: we are merely applying a well-established rule of utility law.
And, as a final note, we are troubled by the testimony of Professor Williamson who suggested, in response
to a general question about how a utility should determine whether to acquire a new resource, that the appropriate
course of action depended on whether the company would be able to recover its sunk costs. Tr. 1/12/98 at 89-90.
This is inappropriate, both as a matter of rational economic behavior and in keeping with the utility?s obligation to
provide service at least societal cost. The used-and-useful standard is an express protection against such inefficient
outcomes. See, generally, Docket 5132, 83 PUR 4th, 532, for a discussion of this issue.
444. GMP HQ Brief at 64-65.
445. In this proceeding, the evidence demonstrates that the Board, relying upon representations of the
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5. Remedies5. Remedies
a. Prudencea. Prudence
Having concluded that GMP acted imprudently by locking into the Contract on
August 29, 1991, we must now determine the remedies for that imprudence. A wide range of
options have been presented by the parties. Several parties urge us to exclude the costs of large
amounts of the Contract; although the issue was not litigated, some intervenors have urged in
their briefs that we revoke the CPG issued in Docket 5330. The Department recommends a
more moderate approach, with some disallowance of costs followed by a more thorough
investigation into how to incorporate today’s decision into rates for future periods.
The first question to be decided is the harm that GMP’s early lock-in has caused
consumers, since this represents a reasonable measure of the effect upon ratepayers of the
imprudent actions. One approach would be to simply conclude that the difference between the
long-term market price today and the value of the Contract (approximately $87-$269 million) is
the appropriate measure. This result, however, rests upon the assumption that having terminated
the Contract, GMP could have obtained replacement resources for up to one-third of its total
capacity needs beginning in 1991 at today’s prevailing market price and that such a resource
acquisition strategy would have been reasonable. This result would not reflect the historic facts,
nor would it reflect the kind of prudent portfolio management that we have always expected of
utility managers, and that is explicitly required by Vermont’s utility statutes.446 Our task, in
measuring the harm that has been created by the Company’s imprudence, is to compare the cost
of the Contract to the cost of the reasonable and prudent portfolio that would have been acquired
instead in 1991 and the following years. What would resources have cost from potential
alternative sources, including Northeast Utilities, Rochester Gas & Electric, New York State
Electric and Gas, demand-side management programs, new combined-cycle units, and other
options?
Had GMP exercised its right to terminate the Contract, the Company would have needed
to begin to acquire replacement resources. In the short term, the Company may have needed to
Company, had clearly stated prior to the lock-in that GMP?s actions could be examined to determine whether they
were prudent. See Docket 5330-E, Order of 4/30/91. So even if we had accepted Professor Williamson?s tests,
which we do not, the facts of this case demonstrate that it has been met.
446. 30 V.S.A. ? 218c. These least-cost planning principles were also embodied in our Order in Docket 5270.
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replace some or all of its Schedule A power. Beginning in 1995, a much greater gap between
available supply resources and load would have existed due to the gap created by the cancellation
of Schedules B and C-3.
To fill these needs, a prudent utility would need to commit to purchases of various kinds.
A reasonable portfolio would include both long-term and short-term purchases, even in a market
that was undergoing change. In fact, a well-constructed power portfolio may well lead to the
acquisition of resources that are above market in either the short or long term for several reasons.
First, contract structures vary. As we have seen with the Contract and with other Vermont
power sources, power purchases may be structured so that the costs outweigh the benefits in the
early years, in the expectation that the reverse will be true in later years.447 A utility should not
unduly limit its investments just so it can purchase at the short-term market price. Second, it
may be worth entering into contracts of longer duration to mitigate risks by providing secure
sources of supply. Third, utilities acquiring supply resources may need to pay above the lowest
short-term price in order to capture non-price values, such as flexibility, contractual and physical
reliability, environmental benefits, and counter-cyclical price stability. These are all legitimate
objectives, consistent with Vermont law and policy, and they should be reflected in our analysis
of the power cost adjustment.
Our approval of the Contract recognized all of these factors; we expect that, in replacing
the Contract that it should have terminated, GMP would have acquired a mix of supply resources
that included some resources priced above the lowest market prices so as to achieve these
benefits. At the same time, due to the changes in the power supply market and regional loads, as
well as on-going technological shifts, we conclude that the prudent replacement portfolio (even
with some above-market power sources) would today be priced below the costs of the Contract
and would have led to significant savings to consumers over the life of the Contract.
GMP’s calculations demonstrate that over the remaining seventeen and one-half year
term of the Contract, ratepayers will pay between $87 and $269 million more than they would if
GMP supplied the power over that period at today’s market price. In the adjusted test year, the
447. As the previous discussion makes clear, we do not conclude today that a front-end loaded contract is
imprudent per se. However, the early costs of the Contract were a feature that GMP, as a prudent utility, should
have considered when deciding to commit to a large, 25-year contract in the face of expected declines in load,
regional power surpluses, and falling prices.
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estimates of the above-market costs range from $7.3 to $22 million.448 As we have observed,
however, based upon the alternative power sources discussed in this proceeding, we expect that
the actual portfolio would likely have been priced above today’s market price; therefore, we do
not conclude that the entire difference between market prices and Contract prices constitutes the
amount of the imprudence. Nevertheless, absent the decision to lock in, GMP would have been
able to develop a power portfolio that provided significant savings to ratepayers over the HQ
purchase.
Faced with this information, the Department urges us to disallow $1.7 million in the
current rate case (as well as imposing an ROE penalty, so that the total disallowance is $2.791
million), while conducting further proceedings to establish the adjustments that should apply to
rates over the remaining term of the Contract. IBM recommends that we reduce rates by $8.6
million during the adjusted test year.449 MSB, the independent investigator, states that we
should disallow 25 percent of the Contract power costs, which is approximately $10 million (or
$11.6 million if we calculate the HQ power costs that GMP would incur in the absence of the
1995 sell-back agreement).450
For the reasons discussed above, we find the range of estimates presented by the
Department, IBM, and MSB — $2.8 million to $11.6 million — to be reasonable measures of the
additional power costs incurred by Vermont ratepayers on an annual basis due to the Company’s
actions; the evidence clearly supports a disallowance within this range.451 For the purpose of
setting rates in this proceeding, our judgment is that approximately 20 percent reflects a
reasonable estimate of the amount by which GMP, by terminating the Contract, could have
448. Exh. DPS-60 (BEB-8). These estimates exceed the pro-rata share of the total above-market calculation
because of the front-end loaded nature of the Contract. We expect that if we calculate the difference between the
price of the Contract and the price of market alternatives on an annual basis, those differences will decline over time.
449. IBM also states that, should the Board adopt GMP?s interpretation of Financial Accounting Standard
(?FAS?) 5 and FAS 71 (which GMP argues would require the Company to recognize the entire amount of the
imprudence disallowance on its financial books immediately), IBM recommends that the disallowance be reduced to
$4 million. We find that GMP has not demonstrated that either FAS 5 or FAS 71 will require the suggested
accounting treatment, therefore, we do not need to consider IBM?s lower estimate. In addition, in this Order, we
have not estimated the amount of the disallowances in future rate periods, so that even if GMP were correct, there is
no basis for determining the amount of the future disallowances.
450. The three sell-back agreements are described in Part 0, below.
451. We recognize, however, that the lower end of this range, the Department?s recommended $2.8 million
adjustment, was not based upon the additional costs that GMP must pay because of the imprudent lock-in decision.
Docket No. 5983
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reduced its power costs.452 This amount is equal to $9.4 million in the adjusted test year. We
arrive at this conclusion after carefully examining the parties’ recommendations and the
methodologies by which they arrived at them.453
Our calculation of the effect of the imprudence for this rate case must, however, consider
that GMP has negotiated several sell-back agreements that reduce the HQ power costs that GMP
will incur in the adjusted test year. Specifically, GMP’s costs include approximately $39
million for HQ power costs, which reflect a saving of $7.6 million in the adjusted test year,
attributable to the 1995 sell-back, from what the power costs would have been under the Contract
— $46.6 million. GMP’s efforts to mitigate the high cost have benefitted ratepayers.
Therefore, these savings should be incorporated into our calculation of the effect of the
imprudence in the adjusted test year.
We thus conclude that the additional imprudent amount of the HQ/VJO Contract, in the
adjusted test year, after accounting for the effects of the 1995 sell-back, is $1.8 million,
calculated as follows:
Imprudence Calculation
(in millions)
Power Costs (before sell-back)
$46.6
Imprudent portion (20 percent)
$9.4
1995 Sell-back savings
Disallowance (imprudent portion minus
sell-back)
($7.6)
$1.8
We believe the $1.8 million reduction in GMP’s power costs associated with the Contract
is a reasonable calculation of the costs to consumers arising from GMP’s imprudent decision to
452. As we discuss below, we will schedule subsequent proceedings to establish the calculation of imprudence
that will apply to future rate periods. Those proceedings will broadly examine the appropriate methodology for
measuring the effect of the Company?s imprudence and will include an examination of the 20 percent figure we
adopt in today?s Order.
453. This estimate lies within the range of estimates provided by the parties and the independent investigator.
By comparison, New York concluded that to make the NYPA/HQ Contract cost-effective would have required a 30
percent reduction in the prices. See Finding 596. MSB?s 25 percent disallowance is comparable to New York?s
analysis of the effect of the changing market upon the two, similar, contracts with HQ.
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lock in.454 However, the disallowance for imprudence is provisional; it will apply to rates
established in this proceeding only. While we find it reasonable based upon the evidence before
us, we conclude, as recommended by the Department, that a more thorough investigation of the
appropriate measure of imprudence, and the cost to consumers arising from GMP’s decisions, is
appropriate. We will thus schedule further proceedings to determine the appropriate long-term
measure of imprudence for application in future rate proceedings.455
b. Used and Usefulnessb. Used and Usefulness
As we have found that the Contract is not used and useful (see section 0), we must now
determine the appropriate remedy. Traditionally, this Board has employed a policy that excess
costs associated with an investment or purchase that is not used and useful should be shared
between shareholders and ratepayers, as appropriate.456 We applied that policy in the Seabrook
decision. First, we disallowed 20 percent of CVPS’ investment in Seabrook due to imprudence
in the management of the facility’s design and construction. Finding that a portion of the
remaining investment (after accounting for the unit’s market value) was not used and useful, we
concluded that ratepayers should only have to pay for one-half of the non-used-and-useful
investment. We employ the same approach here.
GMP’s filing includes HQ power costs totaling $39 million, which incorporate the
effect of the 1995 sell-back. We have previously concluded that $1.8 million of this amount
results from the imprudence of the Company’s decision to lock in the Contract. To calculate the
portion of the remaining power costs that are not used and useful, we start from the amount by
which the Contract is above-market.
The Company, the Department, and other parties have provided a range of estimates of
the above-market costs of the Contract over its life. In the absence of a sale of Contract
454. This Board has a responsibility to establish just and reasonable rates for GMP and its ratepayers. In
achieving reasonable rates, we have substantial flexibility to exercise judgment and arrive at a fair result. As the
Supreme Court pointed out in Duquense Light Company v. Barasch et al., 488 U.S. 299, 316:
The designation of a single theory of ratemaking as a constitutional requirement would
unnecessarily foreclose alternatives which could benefit both consumers and investors.
455. In these subsequent proceedings, we will also consider whether to adopt IBM?s recommendation that the
Board require preapproval of all future renegotiations of the Contract and related actions.
456. This has generally meant an equal split of the uneconomic costs between ratepayers and shareholders, but
the Board?s discretion here is broad. See also our discussion on used and usefulness in Docket 5854, Report and
Order of 12/30/96 at 56-70 (especially 67-70).
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entitlements, we cannot definitively place a value on these amounts.457 However, the
Company’s own estimates establish a range for the uneconomic cost of the Contract over its
remaining term from $87 to $269 million (1997 $).458 The Department believes that the net
economic losses of GMP’s Contract purchases will likely fall within a range described by the
Department’s low and high market price projections, that is, somewhere between $119.8 million
and $218.9 million (1997 $).459 If we focus only on the adjusted test year, the estimates of the
above-market costs range from $7.3 to $22 million.460
For the purposes of establishing rates in this proceeding, in our judgment, it is reasonable
to use the broader range of the net economic costs, using the mid-point of this range as a measure
— $178 million.461 However, to account for the non-price benefits of the Contract that a sale on
the open market may well produce, we believe an adjustment of 10 percent is appropriate; we,
therefore, base the used-and-useful calculation on an estimate of above-market costs, for GMP,
of $160 million.462 As the recent NEES sale indicates, buyers are willing to pay above the
lowest commodity price for such output characteristics as non-fossil generation, reliability, and
stability.463 Averaged over the remaining seventeen and one-half years of the Contract,
approximately $9.15 million represents the amount by which the Contract exceeds market prices
457. Compare this with our May 15, 1987 Order in Docket 5132, where the Board was able to establish a
used-and-useful adjustment for CVPS?s investment in the Seabrook I facility in relation to the price that CVPS had
received on the sale of its entitlement.
458. While we believe that non-price benefits are important to our determination of whether an investment or
purchase is used or useful, because we have developed a policy of sharing the above-market costs between
ratepayers and shareholders, it is appropriate to use the market price itself as the baseline for establishing the
non-used-and-useful component of the asset. If parties believe that there are significant non-price values to an asset
or investment that do not have a market value, we will hear evidence and consider whether to make an adjustment in
particular cases.
459. Exh. DPS-60 (BEB-6).
460. Exh. DPS-60 (BEB-8). Specifically, depending upon the market price forecasts, the expected HQ above
market costs in the adjusted test year are:
Low
$22.2 million
Mid
$16.7 million
High
$7.3 million
The evidence suggested that low and mid-range estimates were more likely; id., Biewald pf. at 8.
461. In the follow-on proceedings described previously, we intend to examine the methodology for calculating
the portion of the Contract that is not used and useful. We find the present methodology reasonable based upon the
evidence presented in this proceeding.
462. This figure is well within both the broader and narrower ranges estimated by the Department using
GMP?s own projections.
463. See footnote Error! Bookmark not defined..
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during the adjusted test year.
Under the analysis we employed in Seabrook, to calculate the non-used-and-useful
portion of the above market costs, we first exclude the imprudent amount — $1.8 million — that
has already been disallowed, leaving a remainder of $7.35 million as the annual above-market
cost.464 Consistent with our prior decisions, only one-half of this amount will be included in
rates; the remaining $3.68 million represents the share that should be removed from GMP’s cost
of service in this proceeding.465
Combined with the disallowance for imprudence, we exclude a total of $5.48 million of
Contract power costs from GMP’s adjusted test year cost of service. We note, however, that in
addition to the sell-back discussed in the prudence section, GMP also received two up-front
payments under a subsequent resale agreement with HQ.466 We find below that we should
adjust GMP’s retail rates so that ratepayers can benefit from the receipt of these payments that
reduce the costs of the Contract. But, as the payments represent further mitigation of the
above-market costs, once we impute them into GMP’s retail rates, it is appropriate to credit the
adjusted test year amount ($719,000) against the disallowances set out in this section. Thus, for
the adjusted test year, the net disallowance for the imprudence of the lock-in and for Contract
costs that are not used and useful is $4.76 million.
Not Used-and-Useful Calculation
($ millions)
Difference between Contract and Market Price
(Adjusted mid-range)
$160.2
Annual average (over remaining 17.5 years)
$9.15
Imprudent costs — disallowed
($1.8)
Non-used-and-useful costs
$7.35
Used and Useful Disallowance (at 50 percent)
$3.68
464. We note that in the absence of the imprudence disallowance, we would base the used-and-useful
calculation on the full $9.15 million rather than adjusting it. This would result in a used-and-useful disallowance of
$4.58 million for the adjusted test year.
465. This figure would be higher in the absence of our decision on prudence.
466. See Section 0, below.
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6. Compliance with Condition 8 of the Board’s Order in Docket 53306. Compliance
with Condition 8 of the Board?s Order in Docket 5330
a. Standard for Reviewa. Standard for Review
We must emphasize that the standard for DSM performance in Vermont is indeed high.
It was first set out in our April 16, 1990, Order in Docket 5270, and later reaffirmed in law by the
General Assembly. Section 218c of Title 30 requires that each regulated gas and electric utility
shall prepare and implement:
a coordinated set of investments or program expenditures . . . to meet the
public’s need for energy services through efficiency, conservation or load
management in all customer classes and areas of opportunity which is designed
to acquire the full amount of cost effective savings from such investments or
programs.
Condition 8 is no less stringent a standard:
Each Vermont utility accepting power under the authority of the Firm Power and
Energy Contract and this Order shall develop and implement measures to
acquire all resources available from cost-effective acquisition of energy
efficiency, in accordance with the principles ordered by this Board in the final
Order of April 16, 1990 in Docket No. 5270.467
Furthermore, as the Board stated in Dockets 5701/5724, a CVPS rate case, also involving the
application of Condition 8:
[M]erely operating cost-effective programs is necessary, but it is not sufficient to
satisfy a utility’s obligation to provide least-cost energy services to its
customers. Without reaching any conclusions on specific disputes, we must
remind CVPS that the achievement of self-set program goals is one important
indicator of program success, but the fundamental goal is to maximize net
benefits through high levels of program participation and the installation of
comprehensive packages of measures. Thus, programs must be cost-effective
and must also strive to acquire the maximum amount of energy savings that can
be purchased for less than the cost of comparable power.468
Vermont law and Condition 8 require that utilities must acquire all cost-effective energy
efficiency and conservation savings in their service territories. The HQ/VJO Contract was
approved only after its potential effects on the acquisition of DSM savings were carefully
analyzed. GMP accepted Condition 8. In April 1991, the Company assured us that Contract
power would not defer acquisition of otherwise cost-effective DSM, and we reminded the
467. October Order at 40.
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Company of that obligation.469
Whether GMP has complied with these conditions must be evaluated in light of the DSM
programs it has implemented over the last seven years.
Both the Company and the Department
ask us to employ the “good-faith” standard in this case. We accept their recommendations, and
adopt the 5701/5724 standard as a reasonable benchmark for performance in this Docket.
b. Parties’ Positionsb. Parties? Positions
The Department and other Intervenors assert that GMP has failed to satisfy Condition 8
of the Board’s approval of the HQ/VJO Contract. The DPS recommends that, as a consequence
of this failure, a 100 basis-point penalty on the Company’s return of equity should be imposed
(concurrently with a like penalty for other violations) and that certain remedial actions be
required. Specifically, the Department asks that:
the Board order that this penalty continue until the [Condition 8] violation is
corrected as evidenced by at least 12 months of demonstrated successful
acquisition of all cost-effective DSM resources, followed by a period of at least
an additional 48 months during which the penalty shall be reinstated if it is
shown that the Company has failed to continue the successful acquisition of all
cost-effective DSM resources.470
The Company opposes the Department’s recommendations. It argues that it has
designed and implemented DSM programs according to the terms of the collaborative DSM
program design process which culminated in a portfolio of DSM programs, which the Board
approved in Docket 5270-GMP-3, Order of 9/5/91, and the memoranda of understanding in
Dockets 5780 and 5857. GMP contends that, in complying with the MOUs, it has thus complied
with Condition 8.471 Furthermore, GMP maintains that its DSM performance since 1991 has
achieved the savings goals originally established during the collaborative process, in spite of
declining avoided costs.472
In this docket, the DPS suggests that good-faith “can be judged by the Company’s
468. Dockets 5701/5724, Order of 10/31/94 at 137.
469. Docket 5330-E, Order of 4/30/91 at 3.
470. DPS HQ Brief at 3.
471. Moreover, GMP argues that, because the DPS entered into the memoranda, it is precluded now from
asserting that GMP has not met its obligations under Condition 8. As we conclude in Section 0 of this decision, the
Department is not precluded by the terms of the MOUs from arguing that the Company has not complied with
Condition 8. We need not repeat that discussion here.
472. Grimason addendum to pf. reb. at 1-5; GMP-DSM exh. 4.
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behavior. If a company could demonstrate good intentions, good planning, and good
management with respect to the pursuit of all cost-effective DSM, it would be in compliance
with Condition 8.”473 The Department argues that GMP cannot make such a demonstration
and therefore has failed to satisfy Condition 8. In response, the Company contends that, in
Dockets 5780 and 5857, it entered into DSM agreements with the Department, that it has abided
by those agreements, and that it is unfair now for the Department to assert that compliance with
the agreements does not also satisfy Condition 8.
MSB, the Board’s independent investigator, observes that the divergent opinions of the
DPS and GMP over GMP’s performance is puzzling in light of the numerous written agreements
between them. MSB suggests, on a forward going basis, that changes to the development and
delivery of DSM programs may be warranted. At a minimum, the standards against which
performance is measured need to be clearly stated. In regard to GMP’s compliance with
Condition 8, MSB was unable to state whether or not GMP had satisfied Condition 8.474
c. DSM Historyc. DSM History
Since the imposition of Condition 8 in 1990, GMP has worked closely with the DPS in
the development of its DSM programs. A collaborative process (which involved other parties
besides GMP and the DPS) led to the development of a series of programs, which were approved
in Docket 5270-GMP-3, Order of 9/5/91.
We recognize that the DPS has presented evidence about GMP’s DSM performance prior
to the execution of the MOUs, and that the DPS asserts this evidence establishes a pattern of
non-compliance with Condition 8. While the MOUs do not explicitly refer to Condition 8, in
fairness we believe they create an expectation that compliance with them would satisfy the
condition. Moreover, no one has testified here that GMP failed to exercise good faith in the
earlier collaborative process that resulted in programs approved in Docket 5270-GMP-3. In fact,
the DPS offered supportive testimony of GMP’s efforts in Docket 5695 (a GMP rate case). The
Department testified that GMP’s overall implementation and performance through 1993 had
been effective:
[there had been] a general support on the part of corporate management
and commitment of — a kind of enduring commitment to developing this
473. DPS HQ Brief at 42; Plunkett pf. 10/17/97 at 16; tr. 12/1/97 at 13-14 (Plunkett).
474. MSB pf. at 63; tr. 1/17/98 at 37-38 (Swanson).
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DSM resource.475
In the fall of 1994, when GMP suspended some programs and modified others in
response to revisions in its avoided costs, the DPS expressed concerns over these changes. The
Department entered into negotiations with GMP, which resulted in the MOU and DSM
Agreement in Docket 5780 that were approved by the Board. At that time the DPS testified that
the DSM agreement represented:
GMP’s commitment to using information that has been gained, using it
thoughtfully and constructively to increase the cost effectiveness of DSM
programs, to revise program design[s] based on market experience and
delivery experience. And we believe that those goals are being met by the
outline of program designs that we have reviewed with you today.476
Again, in Docket 5857, the Department and GMP filed an MOU and DSM Agreement
that were approved by the Board. At that time the DPS testified that the MOU provided a sound
basis on which GMP could build a set of cost-effective DSM programs and represented:
a good faith effort on the part of both parties to adopt a common approach to
Integrated Resource Planning, DSM program design and implementation, and
it holds the potential to increase significantly the societal benefits derived
from DSM program activities in the years ahead.477
In summary, the Department’s testimony in Dockets 5695, 5780, and 5857 assured the
Board that the settlements constituted reasonable programs for GMP, and they reflected the
Department’s confidence that the Company would make good faith efforts to acquire
cost-effective DSM resources.
d. Analysis and Conclusionsd. Analysis and Conclusions
Overall, we have found the evidence in this case does not support a finding that GMP
failed to meet Condition 8 for two reasons. First, the history of interaction and settlements
between the DPS and GMP make it difficult to ascertain that GMP has failed to meet its DSM
obligations. Second, the quality of evidence presented by the DPS witnesses on this issue was
unfocused and unpersuasive.
The Company and the Department settled a number of rate cases over the past five years,
and with those settlements came detailed agreements on GMP’s DSM activities. While it is true
475. Exh. GMP-22 at 75 (Parker).
476. Exh. GMP-24 at 75-76 (Parker).
477. Exh. GMP-DSM 2 (Parker).
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that the settlements did not explicitly address compliance with Condition 8, we believe that it is
inconsistent for the DPS to now assert that GMP’s compliance with agreements that it (the DPS)
had negotiated and for which it had sought and obtained Board approval should not be construed
to satisfy a standard of performance that preexisted and coexisted with those agreements. The
record in this docket demonstrates that, for the most part, GMP complied with the terms of the
settlements. The Department has shown that, in a variety of ways, GMP’s program management
was by no means perfect and that opportunities to acquire cost-effective savings were lost.
Indeed, we are troubled that the Company was less interested in capturing all cost-effective
savings than it was in simply meeting its minimum obligations under its agreements with the
DPS.
Nonetheless, the record in this case and the history of settlements between the DPS and
Company suggest that, at the very least, the Department’s expectations for performance were
ambiguous. For this reason, we do not conclude that there were unambiguous violations of
Condition 8.
As to the quality of evidence presented, we are most concerned that the Department’s
DSM witnesses were unable to articulate clear and consistent standards by which GMP’s
programs could be evaluated. In some instances, the DPS has criticized GMP for strictly
following certain program designs; in other instances, the DPS has faulted GMP for making
unilateral program changes. The DPS has recommended disallowances for programs that were
narrowly targeted and for programs that were not narrowly targeted. We find support for
GMP’s concern that some of the DPS’s claims appear to be based on subjective and inconsistent
opinions about GMP’s behavior. Although we appreciate the effort and hard work involved in
preparing and presenting the DPS’s case, the Department’s witnesses were unable to articulate or
focus upon the specific elements of GMP’s actions that would support a finding of a pattern of
GMP DSM failures.
The settlements reached with the DPS provided the Company with some assurance that
compliance with their terms would be deemed to be satisfactory. The evidence presented by the
DPS witnesses has not demonstrated that the Company’s behavior was significantly at odds with
the MOUs, and with their regulatory approvals. For this reason, we will not impose the penalty
sought by the Department and the other Intervenors at this time, based on the evidence presented
in this case.
Docket No. 5983
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e. Future Actions and Obligationse. Future Actions and Obligations
Notwithstanding our conclusion above, the evidence in this docket does demonstrate that
in certain instances the Company operated its programs to meet a minimum standard of
compliance with the MOUs, but no more. Representative of its general attitude toward DSM,
expressed in the May 10, 1996, memo, is its management of the MRV program. Once GMP met
its savings objectives, it terminated the program—yet there were significant savings still
available.478 As stated above, merely operating cost-effective programs is necessary, but it is
not sufficient to satisfy a utility’s obligation to provide least-cost energy services to its customers.
Under Docket 5270, Condition 8, and 30 V.S.A. § 218c, the Company should have been
diligently pursuing all cost-effective DSM resources in its service territory.
Condition 8 still applies to GMP. The Company must understand that continuing its
DSM programs as currently designed and implemented could support a finding that it is not in
compliance with Condition 8. In the future, the absence of strong evidence that the Company is
making good faith efforts to acquire all cost-effective DSM resources throughout its territory
may still result in the imposition of substantial penalties.
A comment about cost-effectiveness is warranted. In our October Order in Docket 5330,
we found that the Contract would not displace substantial amounts of DSM, in part because of
the expectation that surpluses of Contract power could be resold at full cost. The VJO assured
us that such resales would take place, and we relied upon those representations.479 The resale
of Contract power at full cost implies that the minimum value of DSM is the Contract price.480
Consequently, the Company should be prepared to acquire all cost-effective DSM resources,
including those that would have been more cost-effective than the Contract but have since been
displaced by it.481
MSB, the Board’s independent investigator, recommends that new standards have to be
478. More importantly, GMP?s failure to install lighting and water heating efficiency measures during site
visits created lost opportunities that now make cost-effective acquisition of these measures highly unlikely.
479. October Order at 23-24, 118-120; exh. Board-5 at 320; see also Dockets 5701/5724, Order of 10/31/94 at
104-105, fn. 53.
480. And may, in fact, be significantly higher. This because, at certain times of the day and year, DSM can
displace higher-cost resources than Contract power.
481. Exh. Board-5 at 318-320. See also Docket 5330-E, Order of 4/30/91 at 3: ?The VJO witnesses also
explicitly testified that neither the Waiver nor the HQ Contract itself would lead to the deferral of otherwise
Docket No. 5983
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developed against which a company’s DSM achievements can be evaluated. MSB states that the
general standards developed in Docket 5270 need to be revised in light of changes in marginal
fuel costs, the costs of available technology, and the current equipment in homes and businesses.
Most importantly, MSB recommends that objective standards that are known, measurable, and
predictable be developed in consultation with a wide variety of stakeholders. In regard to
whether or not GMP’s efforts satisfy Condition 8, MSB refers to the lack of clearly articulated,
objective standards and states that it is unable to reach a conclusion regarding GMP’s efforts and
achievements.482
Lastly, it appears to us that, after a decade of effort, the level of DSM achievement is less
than Vermont’s rigorous standards require. The Company has performed adequately and, in
comparison to utilities across the nation, it ranks highly. However, the evidence we have heard
in this and many other dockets persuades us that the potential for cost-effective investments in
energy efficiency in Vermont greatly exceeds GMP’s achievements to date.483 GMP’s
commitment to the Contract has created a powerful disincentive to the more aggressive pursuit of
DSM measures. It also appears that the well-intentioned exertions of the DPS have, at times,
created mixed signals and unnecessary controversy. And, as MSB testified, the pattern of
litigation and confrontation has become increasingly counter-productive. In 1994, the
Department acknowledged the problem of evaluating DSM programs in a rate case setting.
Specifically, the DPS suggested that:
some sort of framework be established in which goals and a definition of
superior performance would be created . . . Maybe a forum for doing that is
appropriate because inventing that in the course of a rate case on an ad hoc basis
is a difficult and probably not a very fair way to do it.484
Our review of the evidence presented in this proceeding suggests that we are involved in such an
ad hoc process.
cost-effective investments in energy-efficiency and demand-side management.? (Emphasis added.)
482. Tr. 1/17/98 at 37-38, 51-54.
483. The performance of BED and WEC suggests that comprehensive programs can capture significantly more
savings. In 1996, BED had reduced its peak load by 14.2 percent and its energy requirements by 10.2 percent. In
that year, WEC had achieved peak reductions of 9.4 percent and energy savings of 5.5 percent. The equivalent
figures for GMP were 4.5 percent and 3.4 percent, respectively. (We recognize that there may be differences in
reporting practices which, if adjusted for, could affect these percentages. For example, GMP calculates BED?s
peak and energy savings to be 11.3 percent and 7.8 percent, respectively, and likewise WEC?s to be 9.4 percent and
6.7 percent. Exh. DPS-70 (CEW-6); tr. 1/9/98 at 200-201; Grimason reb. pf. III (addendum) at 2-5; exh.
GMP-DSM-4 (GMP-DWG-19).
Docket No. 5983
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For these reasons, it is time to consider new approaches to developing and implementing
comprehensive and cost-effective DSM programs. Indeed, that question is at the heart of our
current investigation into the DPS’s proposal to establish an energy efficiency utility to deliver
state-wide programs. That proposal and its alternatives may well provide a more productive
means of securing compliance with 30 V.S.A. § 218c and Condition 8; they deserve immediate
and thorough examination by this Board, the utilities, and the many other entities that have
interests in Vermont’s energy sector. We remain committed to the acquisition of all
cost-effective energy efficiency resources throughout the state; the time has come for
re-examining our methods for doing so.
7. Continuing Management of the Contract7. Continuing Management of the Contract
Between 1995 and the present, the Company entered into three arrangements with
Hydro-Quebec that are expected to reduce power costs by $30.7 million (1995 $) over the term of
the Contract. The first of the three (the 1995 Agreement)—in essence, a capacity swap that
reduces capacity costs by nearly 90 percent over a four-year period—produces the lion’s share of
the savings. In return for $10.5 million (consisting of a $6.5 million up-front payment and a
$4.0 million contribution to a joint R&D effort), HQ agreed to significant reductions in Schedule
C-3 capacity costs for four years, ending in 1999. The second arrangement, the January 1996
Agreement, involves the purchase from GMP by HQ of Contract power and transmission
capacity for delivery of that power to third parties. GMP also agreed to purchase and market
additional energy from HQ, with options to cancel. This arrangement is expected to reduce
power costs by approximately $1.7 million (1995 $). Under the third (November 1996)
agreement, HQ paid $8.0 million for an option to purchase limited quantities of power from
GMP at Contract prices. The Company expects to realize net savings of $2.3 million (1995 $)
over the term of this arrangement.
IBM argues that ratepayers will not benefit from GMP’s $10.5 million payment to HQ
under the terms of the 1995 Agreement. Specifically, IBM contends that there is little likelihood
that ratepayers will benefit from the RD&D component of the deal, and urges the Board to
disallow its costs ($4.0 of the $10.5 million). IBM notes that, under the terms of the settlement
in Docket 5780, GMP has already collected $1,095,000 of the RD&D payment; IBM
484. Exh. GMP-22 at 78-79.
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recommends that all monies in excess of $1,095,000 that have already been collected should be
attributed to the $6.5 million payment.485
IBM also recommends that the two up-front payments that GMP received from HQ in
1997 ($1.1 million and $8.0 million) should be deferred and amortized over specified time
periods. In this way, the benefits of the payments will correspond with (and ideally offset) the
increased costs that those arrangements impose on GMP. The $1.1 million payment is the
second of two payments received under the January 1996 Agreement (the first was made in
1996), and it requires GMP to dedicate both power and transmission facilities for deliveries to
third parties. The $8.0 million payment, pursuant to the January 1996 Agreement, gives HQ
options to purchase power and energy from GMP over the next 17 years. IBM recommends that
we direct GMP to amortize the $1.1 million payment over four years, at which point its
obligations under the January 1996 Agreement end, and amortize the $8.0 million payment over
17 years, the duration of the November 1996 Agreement (which corresponds to the remaining
term of the Company’s purchases under the Contract).
GMP opposes IBM’s recommendations. With respect to the 1995 Agreement, GMP
asserts that, given the expected benefits of the swap, it would have been cost-effective to enter
into the agreement even in the absence of the RD&D project. It also argues that IBM’s
recommended accounting treatment of the unamortized balances of the $6.5 million and $4.0
million up-front payments to HQ would constitute retroactive rate-making. And, as for the
R&D project, the Company contends that it produced benefits for Vermont ratepayers.486
As to the total of $9.1 million paid to GMP by HQ in 1997 under the terms of the two
1996 Agreements, the Company argues that those monies should not be amortized as revenues
over the coming years. GMP states that “the anticipation of this payment (and ability to book it
in 1997) was the explicit basis for GMP’s decision not to file a rate increase request in 1996.”487
The evidence in this docket shows that, in total, the three “sell-back” agreements are
expected to yield net present value savings to ratepayers of $30.7 million. We commend the
Company for its efforts to reduce the costs of the Contract, and we encourage it to continue to do
so. However, in light of the fact that each successive agreement produced lesser projected
benefits than its predecessor, it appears that the opportunities for additional cost reductions are
485. IBM HQ Brief at 78-79.
486. GMP HQ Brief at 75.
Docket No. 5983
Page 278
limited. Moreover, since the second and third agreements, in essence, merely shift current
obligations to future periods (though we recognize that they have some potential for additional
benefits), we are concerned that the Company, in negotiating these deals, has been driven largely
by short-term financial considerations. Similar arrangements in the future are unlikely to be
viewed with favor.
In this case, we reject in part and adopt in part IBM’s recommendations. The evidence
demonstrates that the 1995 Agreement produces significant benefits. Conversely, it is
inconclusive as to whether CVPS’s arrangement is so far superior to GMP’s that the Company’s
failure to obtain an equivalent agreement justifies a $2.9 million disallowance. The two
agreements differ in significant ways; and there is presumably value associated with those
differences. Since GMP’s arrangement with HQ yields substantial savings, we see no
compelling reason to disallow costs associated with it.
We reach a different conclusion with respect to the $9.1 million in payments that the
Company received from HQ in 1997. HQ made those payments in return for future actions by
GMP, actions which will have cost consequences for ratepayers. It is only appropriate that those
who bear the costs should also share in the benefits. We are unpersuaded that ratepayers have
already benefitted from the payments, because they may have deferred an earlier rate increase.
This is speculative at best. It is by no means certain that, in the absence of those payments,
GMP would have filed for a rate increase or, more importantly, have been awarded the increase
sought. Consequently, we direct the Company to amortize the $1.1 million payment over four
years and amortize the $8.0 million payment over 18 years. This results in reductions in the cost
of service amounting to $275,000 (for the $1.1 million payment) and $444,000 (for the $8.0
million payment).
487. Id.
Docket No. 5983
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8. Summary of HQ Power Cost Adjustments8. Summary of HQ Power Cost
Adjustments
For the reasons set out above, we have concluded that we should reduce GMP’s adjusted
test year power costs associated with the HQ/VJO Contract by $1.8 million due to the
Company’s imprudence. We also find that under long-standing Vermont rate-making principles,
the Contract will exceed the market price over its remaining life and, thus, it is not used and
useful; therefore, for this proceeding, GMP should reduce its adjusted test year power costs by
$3.68 million. However, because we amortize the payments recently made to GMP by HQ,
which serves to mitigate the effect of the above-market HQ power, we will reduce the
disallowance for the Company’s imprudence and the non-used-and-useful by the same amount to
reflect the benefit of those payments to ratepayers, thereby creating a net disallowance of $4.76
million for imprudence and non-used-and-useful costs.
In addition, GMP should reduce its adjusted test year power costs by $719,000, reflecting
the amortization of payments made by HQ to GMP during 1997. Therefore, the total reductions
that we order to GMP’s Contract power costs are $5.48 million ($4.76 million + $0.719 million).
Including GMP’s 1995 sell-back, which mitigates by $7.6 million the degree to which
ratepayers will pay above-market prices, the total reduction in HQ costs (below the prices
specified in the Contract) for the adjusted test year is $13.08 million.
Docket No. 5983
Page 280
I. ORDERI. Order
IT IS HEREBY ORDERED, ADJUDGED AND DECREED by the Public Service Board of the
State of Vermont that:
1. Green Mountain Power Corporation (“GMP”) is entitled to rates which will produce
additional retail revenues in the amount of $5,570,000 or 3.61 percent above existing base rates
for service rendered on or after March 2, 1998 (see Attachment A hereto).
2. GMP shall file revised tariffs with the Board and the DPS in conformance with the
above findings and conclusions within five (5) days of the issuance of this Order.
3. GMP shall file revised supporting schedules, complying with sections 0. (Working
Capital), 0. (Plant Retirements), and 0. (Power Costs), within five (5) days of the issuance of this
Order.
4. As required at page 179, GMP shall file a proposed agreement with GMER
describing conditions and payments for work done by GMP employees on behalf of GMER.
5. As required by section 0. of this Order, GMP shall file a statement (which may be
under seal) accounting for monies spent, amortization, and insurance reimbursements for Pine
Street Barge Canal remediation costs.
Docket No. 5983
Page 281
6. The Board will retain jurisdiction in order to conduct proceedings to establish the
appropriate power cost adjustments due to imprudence and the non-used-and-useful portion of
the HQ/VJO Contract for application in future rate proceedings.
DATED at Montpelier, Vermont, this
day of
, 1998.
)
)
PUBLIC
SERVICE
)
)
)
)
BOARD
OF
VERMONT
)
OFFICE OF THE CLERK
FILED:
ATTEST:
Clerk of the Board
NOTICE TO READERS: This decision is subject to revision of technical errors. Readers
are requested to notify the Clerk of the Board of any technical errors, in order that any
necessary corrections may be made.
Appeal of this decision to the Supreme Court of Vermont must be filed with the Clerk of
the Board within thirty days. Appeal will not stay the effect of this Order, absent further Order
by this Board or appropriate action by the Supreme Court of Vermont. Motions for
reconsideration or stay, if any, must be filed with the Clerk of the Board within ten days of the
date of this decision and order.