ML20059H541
| ML20059H541 | |
| Person / Time | |
|---|---|
| Site: | Monticello  |
| Issue date: | 09/06/1990 |
| From: | Parker T NORTHERN STATES POWER CO. |
| To: | NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM), Office of Nuclear Reactor Regulation |
| References | |
| NUDOCS 9009180048 | |
| Download: ML20059H541 (41) | |
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414 Nicollet Mall Minneapolis, Minnesota 554011927 Telephone (61P) 355500 September 6,1990 10 C.F.R. Part 50 -
Section 50.75(c)
Director of Nuclear Reactor Regulation
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U.S. Nuclear Regulatory Commission
. Attention: Document Contml Desk Washington, D.C.
20555 MONTICEllO NUCLEAR GENERATING PLANT Docket Nos. 50-263 License Nos. DPR d 1
Amendment to Finaaelal Assurance for DecommI=ionine By a letter dated July 24, 1990, Northern States Power Company (NSP) certified to the Nuclear Regulatory Commission (NRC) that financial assurance for-decommissioning Monticello Nuclear Generating Plant was provided in compliance with 10 C.F.R., Part 50, Section 50.75(c). The purpose of this letter is to amend the certification based upon events that have occurred since the filing of the certification.
The certification was based upon interim rates proposed by NSP and' accepted for fding by I
the Minnesota Public Utilities Commission (MPUC). The interim rate pmposal included provisions for the external funding of nuclear decommissioning costs. -
After the certification letter was submitted' to the NRC, the MPUC dismissed NSP's filing and den, led any rate increase at a hearing on August 6,1990. ' A written order was issued
-t on August 28, 1990, and this order requires NSP-to reduce rates to previously approved-levels and to refund the interim rate indeise.
A copy of the MPUC order has been enclosed.
As a result of the action of the MPUC, NSP is not presently authorized to establish an external nuclear decommissioning reserve fund, but rather 'is limited-by the MPUC. to
'I intemal funding for decommissioning pursuant to prior rate orders. Hence; NSP is unable-to commence monthly contributions to an external fund on August 26, 1990. NSP will record on its books a liability for external funding beginning with the accounting close of the month of August,1990.
j Regulatory Position 1.1.1 of the Regulatory Guide 1.159 entitled, " Assuring the Availability -
I of Funds for Decommissioning Nuclear Reactors," provides, in pertinent part, as follows:
"If the initial payment to an external sinking fund will not be made within 1 year of July 26, 1990, the licensee - should submit. as part of its decommissioning report a statement that it has filed or intends to file in a 9009180048 900906 PDR ADOCK 05000263 I
PNU 00 1 00103
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- timely manner a rate request with its public utility commission (PUC) or.
i Federal Energy Regulatory Commission (FERC) to allow 'deconunissioning costs to be recovered from its customers.
Notwithstanding action on such a rate request by a-PUC or FERC, a licensee should make its initial sinking.
j fund payment by July. 26,:1993 as a demonstration of good-faith compliance 1
with 50.75(c)(3)(ii)."
j Although it is unclear at this time whether NSP will be able to make its initial paynwnt to.
an external sinking fund within one year of July 26,~ 1990, NSP hereby represents that it intends to seek rate relief as expeditiously as possible, by pursuing a rehearing and, perhaps, an appeal of the rate order of the MP'vC or by initiating a new rate proceeding before the MPUC NSP expects to be able to comply with the July.26,1993, deadline set L forth in Regulatory Position 1.1.1.
i Thomas M Parker 1
Manager i
Nuclear Support Services c:
Regionhl Administrator - Region Ill, NRC NRR Project Manager, NRC Senior Resident Inspector, NRC MPCA Attention:
Dr J W Ferman f
Enclosure:
MPUC Order, Docket No. E002/GR-89-865 i
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NORTHERN STATES POWER COMPANY ISSUE DATE AUGUST _27, 1990 DOCKET.NO:
E-002/GR-89-865 l
FINDINGS OF FACT, CONCLUSIONS.
OF LAW, AND ORDER' j
TABLE OF CONTENTS; 3
PROCEDURAL HISTORY 1
I.
INITIAL' PROCEEDINGS 1
II.
PARTIES AND REPRESENTATIVES 1
Intervenors- -
~..-.._......... _...'-
1 The Company.
3 Withdrawal of Parties-3' III.
PUBLIC HEARINGS.
3' IV.
PRE-HEARING MOTIONS 4
Motion to Exclude or to Consider Filing Date 4
Joint Motion to Dismiss 41 Joint Motion to Exclude-5 Motions to Compel Discovery 5
.E..
Motions Renewed 6'
V.
EVIDENTIARY HEARINGS..
6 VI.
PROCEEDINGS BEFORE THE COMMISSION 6-FINDINGS AND CONCLUSIONS 7
VII.
JURISDICTION.
..t 7
VIII. FURTHER ADMINISTRATIVE REVIEW 7
IX.
NORTHERN STATES POWER COMPANY' 7-X.
SUMMARY
OF PUBLIC TESTIMONY 8
XI.
SUMMARY
OF COMMISSION ACTION. :.
9 XII.
BACKGROUND INFORMATION.
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Historical Context 10-l Overview of the Company's Budgeting i
& ' Forecasting System 11 XIII. THE COMPANY'S CAPITAL BUDGET.
. 11 1 L
The Department's Sample & Audit 13 The 1990 Forecast
.E.
14 Commissions Conclusions
- . 14 The Company's Position u15-o Past Practice
- 15 Significance of Actual Data-
& Specific Projects.
15 Appropriateness of the Sample 16-Significance of Cancelled Projects 17 Reference Points for Budget Comparison. 17 The ALJ's Recommendations.
18 Comparisons with Actual' Data. '
18 Representative Character of the Sample 19 Sample's Exclusion of Multi-year Project'20 Witness Integrity
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The Company's Need for Flexibility
.. 20-Substantiation Required'.-.
>. - 21 The Intervenor's Proposed: Adjustments 21 XIV.
OPERATING AND MAINTENANCE EXPENSES.
2 2-.
Positions-of the Intervenors and the ALJ.
.. 22 1
The-Department
.- 2 2 Minnesota Energy. consumers.
. 23 North Star Steel;. Company-23-i The ALJ.--..
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The Company's. Position.
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Historical 1 Dependability 24 J
Actual Financial'Results:
25-
, Basis for Comparison of Test Year Forecast 25 Competitivo~pressuresi.
27-Budget Bases 26 Deferred' Expenses..
28 The Reasonableness of Specific Budget Items:. 291 j
Unorthodox? Accounting. Methods 1 30 L
Forecasted PropertyeTax Increases.....:. 31
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The Company's~ Maintenance of D
Comparatively Low Rates
.;32-Conclusions
. 13 2' XV.
PROJECTED TEST YEARS"AND THE BURDEN OF PROOF'.
32 XVI.
INITIAL ACCEPTANCE OF THE FILING-...
. 35 XVII. REGULATORY FAIRNESS-36 XVIII. RATE DESIGN AND: CONSERVATION ISSUES-36 i
XIX.
CONCLUSION.
36.
ORDER
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BEFORE TME MINNESOTA PUBLIC UTILITIES COMMISSION Darrel L. Peterson Chair Cynthia A.
Kitlinski Commissioner Norma McKanna Commissioner Robert J. O'Keefe Commissioner Patrice Vick Commissioner.
In the Matter of the ISSUE DATE:
August 28,~1990 Application of Northern States Power Company.for Authority to DOCKET NO. E-002/GR-89-865 j
Increase its Rates for Electric Service in the State FINDINGS'OF. FACT, CONCLUSIONS, of Minnesota
'OF LAW,:AND ORDER PROCEDURAL HISTORY l
'I.
INITIAL PROCEEDINGS On November 2, 1989, Northern States PoweriCompany (NSP or the Company) filed a petition seeking a general rate increase of
$120,782,000, or 10.2%, effective January 1, 1990.. On November 13, 1989 the. Company made a supplementary filing containing information inadvertently omitted from.its initial.
filing.
On No'vember 29, 1989, t'. e Commission ; accepted-the filing, suspended the proposed rates, and ordered contested case proceedings under M3.an. Stat. 5 216B;16, subd. 1:(1988).
The Office of Administ';ative-Hearings assigned-Administrative Law Judge Richard C. Luis to the case.' +--
On December 29, 1989, the Commission set i$terim Lrates under Minn. Stat. 5 216B.16,'subd. 3 (1988).
Interim rates were authorized as of January.1, 1990 and were set at a level allowing an additional $81,542,000 in annual revenues.
The Administrative Law Judge (ALJ) heldya Prehearing Conference on December 21, 1989.
There the parties 5and the ALJ identified the major issues, established procedural. guidelines, and set timetables.
II.
PARTIES AND REPRESENTATIVES A.
Intervenors
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The following parties filed petitions to intervene in the case.
The ALJ granted all petitions.
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Minnesota Department of Public Service, represented by" Joan C. Peterson, Mary Jo Murray, and Eric F. Swan 9on, Special
' Assistant Attorneys 1 General, 1100 Bremer Tower, Seventh Place and i
Minnesota, St. Paul, Minnesota 55101.
Residential Utilities Division of the Office of the Attorney General, represented by Gary Cunningham, Dennis Ahlers, and-Julia Anderson, Special Assistant Attorneys General, 340 Bremer Tower, Seventh Place and Minnesota, St. Paul,, Minnesota-55101.
Minnesota Energy Consumers, represented by Byron'E. Starns and' James J. Bertrand, Leonard,~ Street and Deinard, Suite 2300,.
150 South Fifth Street,: Minneapolis, Minnesota 55402.-
Champion International / Corporation,' represented by Peggy Wells.
Dobbins, 915 Aduana Avenue,'. Coral Gables, Florida-33146.
Union Carbide Corporation, represe.ited by Maurice A. Frater, P.O..' Box 1166, Harrisburg, Pennsy?.vania -17108.
Metalcasters of-Minnesota, reprevented by John A. Knapp and Lloyd W. Grooms, Winthrop'and'Weinstine, 3200 Minnesota World Trade Center, 30 East Seventh Street, St. Paul,' Minnesota 55101.
North Star Steel Company, represented by~ Garrett A.9 Stone, Ritts, l
Brickfield and Kaufman, Watergate 600 Building,-Suite'915,.
l Washington, D.C.
20037-2474.-
Suburban Rate Authority, represented by.Glenn.E'. Purdue, Messerli and Kramer, 1500 Northland Plaza Building,'3800 West 80thLStreet, Minneapolis, Minnesota 55431-4409.
City of St. Paul,-Board of Water' Commissioners of the City'of' St. Paul, and the Municipal Pumpers Association,: represented'by:
i Thomas J. Weyandt, Assistant City Attorney, 647-City' Hall',
St. Paul, Minnesota 55102.
Minnesota Senior-Federation, represented by ElmerLScott and Kenneth Zapp, 1855 University. Avenue West, cst. Paul, Minnesota 55104.
North American Water Office,: represented by George M. Crocker and Bruce Drew, 3394 Lake Elmo Avenue North, Lake Elmo, Minnesota 55042.
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St. Paul Chamber of Commerce, represented.by William G. Flynn and i
David Sasseville, Lindquist and Vennum, 4200 IDS Center, 80 South' j
8th Street, Minneapolis, Minnesota 55402.
Minnesota Retail Merchants Association, represented by-Corey Ayling, O'Connor and Hannan, 3800 IDS Center, 80 South:
8th. Street, Minneapolis, Minnesota 55402.
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9 Minnegasco, Inc.,1 represented by Miggio E. Cramblitt, Corporate
- Secretary, Minnegasco, 201 South 7th Street, Minneapolis, Minnesota 55402.
District Energy of' St. Paul, Inc., represented by William M. Mahlum and Christine Stalker, 2222 North Central Life Tower,.445-Minnesota Street, St. Paul, Minnesota 55101.-
l The Minnesota Public Interest Research Group (MPIRG) also filed'a petition to intervene, which was granted.
However, MPIRG'did not appear at the evidentiary hearings, did not' sponsor.any 4
witnesses, did not file briefs, and did not otherwise participate
.in th.e. case.
-B..
The. Company The Company was represented by. David A.' Lawrence.and Michael Hanson, Northern States Power Company, 414'Nicollet Mall,.
Minneapolis, Minnesota 55401 and' Samuel L..Hanson,' Briggs and Morgan, 2400 IDS Center, Minneapolis, Minnesota '55402.
C.
Withdrawal of Parties Minnegasco and District Energy of St. Paul withdrew as parties when the Company withdrew its " Competitive Service Rider"t rate proposal, the source of their interest in the case.
All three parties agreed that competitive rates legislation enacted: after the Company's filing made it unnecessary to includeLthe proposal in the rate case.
III.
PUBLIC HEARINGS The ALJ held public hearings to receive comments and questions from non-intervening :ratepayers'.
The' dates and-locationst of these hearings are listed below,-followed-by -the number -of,
persons who attended each hearing.
In all, 46 members of1the-public spoke.
I March 6, 1990 Dilworth 17 March 7, 1990 St. Cloud 28 March 12, 1990 Coon Rapids 26 March 13, 1990 St.~ Paul, 43 March 14, 1990 Minneapolis 44 March 20, 1990 Winona 23 March 21, 1990 Mankato 60 At least one Commissioner attended every public hearing, except the one at St. Cloud, where inclement weather prevented it.
At least one member of the Commission's staff attended every hearing.
Company representatives attended every hearing.
Representatives of the Depart?. lent of Public Service, the Residential Utilities Division of the Office of the Attorney General, the Minnesota Senior Federation,-and North Star Steel Company attended various public hearings.
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s The public was also encouraged to-submit written comments on the proposed rate increase; some 67 members ofLthe public' wrote.to l
the.ALJ1or'to the Commission.
The Commission received-telephone-l comments.fren 33 members of the public.
Five members of the L
public, called.the ALJ.-
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'IV.
' PRE-REARING MOTIONS
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A.
Motion to Exclude or to Consider Filing. Data as y
February 5,-1990 a
On February 12, 1990, the Residential Utilities Division'of the i
Office of the Attorney General (RUD-OAG) filed a motion to:
exclude' supplemental testimony filed by the Company'on February-5, 1990.
That testimony related to proposed ratemaking treatment of Tax Benefit Transfers which, if: adopted, would-t increase the Company's claimed revenue _ deficiency by approximately 14 million dollars.
l The RUD-OAG asserted this testimony should_have been included in, 3
the Company's direct case and that its. late-filing denied other 1
parties adequate opportunity-to analyze and-respond to it..
The.
RUD-CAG also claimed that.the information-in the supplemental filing was so significant-that the initial filing wasLincomplete without it, and that the ALJ should therefore findithat'the-Company had'not made a complete rate. case filing until February 5, 1990, the date of the supplemental filing.
In,the alternative, the RUD-OAG requested that the. filing ldeadliner'for intervenor direct testimony and responses to the supplemental filing be' extended.
The ALJ found that the supplemental filing =was not an_ updating of previously filed. forecasted information, as supplemental filings were required to be under the pre-hearing Order.-
However, he also found the filing did not fundamentally change'the company's s
l original filing, did provide useful and relevant information, and-should be considered in this case.
He declined to-exclude'the testimony, declined to adjust the rate case filing date to February 5, 1990, but did extend the filing _ deadlines;for.
3 intervenor direct testimony and intervenor:responsas'toithe February 5 supplemental filing.
B.
Joint Motion to Dismiss On April 4, 1990, prior to commencement of evidentiary hearings,
- 1 the Department of Public Service (the Department) and_the Residential Utilities-Division of the Office of'the Attorney l
General (RUD-OAG) filed'a joint motion to dismiss'the Company's:
general rate case filing and requested that the motion be l
certified to the Commission.
North Star Steel Company (North Star) and the Minnesota Energy Consumers-(MEC)_ joined-in the motion.
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r The motion to dismiss was based on the assertion that the Company's rebuttal-testimony, filed March 27, 1990, contained so.
many additions and corrections to the initial filing that what a
remained of the initial filing was inadequate for purposes of setting just and reasonable rates.
The moving parties also asserted that the rebuttal filing contradicted the initial filing in so many. crucial respects that the rebuttal. filing itself j
demonstrated the inappropriateness of any attempt to set just and reasonable rates on the basisoof the initial filing' They further argued that the substance and scope of the rebuttal filing were so far-reaching that it actually constituted a new rate case filing, requiring dismissal of the initial filing and-the ongoing rate case..
The ALJ denied the joint $ motion-to_ dismiss-and declined to certify the motion to the Commission.
C.
Joint Motion to Exclude In conjunction with their joint motion to dismiss, the Department i
and the RUD-OAG moved that the ALJ exclude large portionslof.the Company's rebuttal testimony, on grounds that it constituted new 1
material or was offered by unqualified witnesses.
They also H
sought exclusion of certain portions of the compt.1y's original-testimony, on grounds - that -it had been discredit ed by the rebuttal filing or was' offered by-unqualified-witnesses.=
1 North Star and MEC joined in this motion also.
The ALJ granted this motion in part and denied it in part.
Small portions of the Company's rebuttal testimony were stricken an being in substance direct testimony.- The majority of the testimony at issue remained in-the record.
The Department then moved to strike all remaining testimony of 1
Ronald Clough, some of which was excluded by the partial granting of the joint motion to exclude.
This motion-was denied.-
i D.
Motions to Compel Discovery North Star Steel Company (North Star) and'NSP brought motions against one another to compel discovery of significant amounts of financial information not in the record.
The ALJ denied NSP's motion as inappropriate and burdensome.
The l
Company had admitted the reason for its motion was in part "to turn around on North Star the " discovery assault" North Star perpetrated upon it."
The ALJ noted that.it was NSP's financial operations which were at issue in this proceeding, not-those of the intervenors.
He concluded the information NSP sought in-regard to North Star's financial-and accounting practices was irrelevant.
The ALJ also denied North Star's motion, finding the Company had honored many of the discovery requests at. issue before the motion-5 a
V was-heard, and that the remaining requests wereiunreasonably burdensome.
E.
Motions Renewed In ruling on the joint motion to dismiss,;the-ALJ stated that he would continue taking the motion under advinement throughoutLthe course of.the proceeding.. The-Department and North Star renewed the motion in their post-hearing briefs.
On briefing tho' Department also renewed its motion to exclude and its motion,to strike all testimony of NSP witness Ronald Clough-not excluded by the partial granting of its' motion to exclude.
North Star similarly renewed its' motion to compel discovery.. All motions-were again denied in'the ALJ's reportiand recommendation to the Commission.
r V., EVIDENTIARY HEARINGS The ALJ held. evidentiary. hearings'.in St. Paulffrom April 9-13r April 16-20, and April 23-26, 1990.
He closed the record'on' July 2, 1990.
VI. - PROCEEDINGS BEFORE THE..CnMMTSSION?
The-ALJ filed his repobt and recommendations [inttwo parts.
The first part, dealing with revenue requirements, wasefiledton-July 13, 1990.
The second'part,= dealing with conservation'and-rate design, was filed on July 19,-1990.;
He also filed Additional Findings of Fact and
Conclusions:
o;. revenue requirements on July 17, 1990.
4 The Commission established ten-day time periods?for filing.
exceptions to Parts I'and IIoof the'ALJ's report'byl Orders dated July 13 and July 19, 1990.
The Commission heard. oral. argument on July 30 and 31,11990.
At the end of oral. argument the CommissionJChair announced that deliberations would begin with an opportunitylfer Commissioners to ask any final questions they might have.
ROn, August'2 deliberations opened with the Chair:asking1the Company to further explain'its reasons for considering its filed test year data' reliable and accurate. -All parties were allowed to comment on the Company's answer.
Upon review of the entire record of this proceeding,cthe Commission makes the following Findings, Conclusions, and Order.
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s FIMDIEGS_AND.CONCLDSIONS VII.
JURISDICTION' The Commission has. general jurisdiction over the Company under-Minn*. Stat. $ 216B.'01 and.02 (1988).
The Commission has specific. jurisdiction over rate changes under Minn. Stat..I 216B.16 (1988).
This case was properly referred to'the Office of Administrative Hearings under Minn. Stat. $$ 14.57-14.62 (1988) and Minn.' Rules, part.1400.0200 31 mag.
VIII.
FURTHER ADMINISTRATIVE REVIEW-Under Minn. Rules, part 7830.4100'any. petition for rehearing,-
reconsideration, or other post-decision relief must be filed within 20 days of the date of this Order.
Such petitions must be
-filed with the Executive Secretary of the Commission, must' specifically-set forth the grounds relied upon and errors claimed, and must be served on all parties.- The filing-should-
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. include an original, 13 copies, Land proof'of service on all' parties.
Adverse parties have. ten days from the date of service'of the 1
petition to file answers.
Answers must be filed with the Executive Secretary of the Commission and must include an original, 13 copies, and proof ~of' service on all1 parties.,
Replies are not permitted.
The Commission,.in its discretion, may-grant oral argument on the petition or decide the petition without ora' argument.
Under Minn. Stat. 5 216B.27, subd.-3 (1988),...no Order;of the Commission shall become effective while a petition forl rehearing is pending or until either of the following:
ten days after the petition-for rehearing is denied or ten days after the Commission:
has announced its final determination on rehearing, unless the Commission otherwise orders.
Any petition for rehearing not granted within 201 days.of filing, is deemed denied.
Minn. Stat. 5 216B.27, subd,4 (1988).
II.
NORTHERN STATES POWER COMPANY NSP is an investor-owned gas and electric. utility incorporated'in the. state of Minnesota.
It provides electric service in Minnesota to approximately 1,0.09,442 retail customers, approximately 877,465 of them residential.
Its service area-covers approximately 40,000 square miles and includes parts of Minnesota, Michigan, Wisconsin, North Dako.ta, and South Dakota.
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I The Company's Minnesota' service area 11s comprised roughly of the southern one-third'of the state, and includes _the Minneapolis-St. Paul, metropolitan area.
Most of the Company's electric revenues come from service to the metropolitan area.
This rate case irivolves only the Company's electric operations ic h
the state of Minnesota.-
g X.
SNMaRY OF PUBLIC TESTI180NY' Two hundred forty-one people attended the public hearingsLin this case, and 67 submitted written comments.
Thirty-three memberstof a
the public contacted the Commission by_ telephone to comment on 1
the proposed rateLincreases Public testimony and. comment-were offered on a variety of issues.
Several community organizations in the' Company's service arear took a position-on theiproposed! rate increase.
Minnesota ACORN-(Association of Community Organizations for. Reform-Now) opposed the increase, submitting ~a petition signed by 229 ACORN-supporters.
They: emphasized the hardships ratacincreasesElmpose.
on low income and fixed income ratepayers.
They particularly'_
opposed the reduction'in the Conservation Rate Break-proposed by the Company.
The Senior Federations in Winona-and Mankato also" opposed:the rate increase.
In'Winona the Federation presented ~a: petition, signed by 58 DodgeLCounty residents.,, urging its. rejection ~
The NSP Retirees ClubiofLLocal 160, International Brotherhood-of Electrical Workers, similarly opposed the-increase..The-Retire'es Club advocated close examination of executive. compensation and-pension levels, lobbying expenses,_ consultant-hiring practices, l
and the environmental' implications;of the Company's wate--
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resource practices and PCB-burning; project.
h The' International Brotherhood of Electrical Workers, Local 160, representing active. union members, supported the increase.
They also asserted the Company and the union had formedca partnership to cut costs and:save energy.
Local chambers of commerce and community economic. development agencies appeared at hearings-in'St. Cloud, Minneapolis,_Winona, and Mankato.
They" praised the Company's corporate citizenship and economic development efforts, particularly in the area of business retention..The Deputy Commissionar of the: Minnesota-Department of Trade andLEconomic Development appeared at the St. Paul hearing and offered similar. testimony...
Officials from two major businesses in Mankato testified-that NSP has fair rates and helpful, courteous employees.
Most of the. members of the public who wrote to the Commission or to the ALJ opposed the requested rate increase.
Many argued that B
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the Company should'not need another general rate increase so soon after its last one. :Many urged careful. scrutiny _of the-proposed increase, emphasizing that electricity is an essential' service j
provided under monopoly conditions. Many people stated that their incomes were not rising as rapidly as their utility bills, i
XI.
SUMMARY
OF COMMISSION ACTION Because of grave doubts about the accuracy, reliability, and predictive value-of the test year budget data' submitted by ths~
Company, the Commission will cany the requested rate increase.
j The Commission finds that the rate case record'does.not 4
demonstrate that existing rates are unjust and unreasonable,-
which is necessary'for< approval of a-general rate increase.
Neither'does the record provide a reliable basis for setting new just and reasonable rates.
I Existing rates, which were-just and reasonaole whent set and are presumed just and reasonable until proven otherwise, shall remain
-i in effect.
Minn. Stat. 5 216B.16, subds. 4 and 5-(1988).
The
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inadequacies of the record are summarized below and= explained 11n I
greater detail in the remainder of:this Order.
NSP based its rate increase request on'a fully forecasted 1990 test year.
The Company did not base the test year forecast on a
actual 1989 financial results or on actual results from any.other historical period.
Instead, the Company based the test. year-forecast on management projections of what the financial needs of the Company would Lbe ' ' ur'ing"th'e' ~12-month test year period. - -This d
deprived the Commission of the opportunity to compare-individual
.t items in the forecast with corresponding items on the= actual books.
The Commission's only recourse, then, was to evaluate the accuracy and credibility of the overall budgeting process.
This evaluation disclosed serious deficiencies.
- First, historical analysis-of the two year budgeting process used by NSP revealed that second year capital bud (;sts were consistently overestimated,.and that the degree to'which they were overestimated was steadily rising.
The-differences between second year capital budgets and actual capital-expenditures for' the past four years are as follows:
1986 - 4.39%, 1987 - 8.60%,
1988 - 24.33%, and 1989 - 28.27%.
In all years projections exceeded actual expenditures.
Sines test year forecasts are for periods similar to second year budget periods, it would appear that test year capital expenditures are also overstated.
A Department audit of the Company's 1989 capital forecast produced results consistent with this pattern of overestimating capital expenditures.
The Department examined a sample of 100 items from the 1989 capital. forecast, which the Company used'to develop test year rate base.
The forecast for the'100 items in the sample exceeded actual expenditures on the items by 27.12%.
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'similarly,'the Department's audit of the 100-item sample found several items in the test year rate base'which clearly did not belong, and others which were highly questionable.
Those items included reimbursable projects, non-electric utility projects, projects not yet begun but included in rate base, projects not-yet in service but included in rate base, cancelled projects, and non-specific, unidentified project funds.
The Company conceded that many of these items should have been excluded from the capital budget and from rate base.
Finally, an examination of operating and: maintenance expenditures over the past five years reveals a pattern of significantly higher spending in rate case years than in non-rate case years.
For test year 1990 the company expects to exceed its second. year operating and maintenance budget by.7.8%, after underspending its 1989 budget by 2.67%.
This strongly suggests.that the Company has overestimated its operating and maintsnance expenses for.the test year, or that the test year operating and maintenance forecast-is not representative of expenses.in a non-rate case year.
The Commission concludes that the Company's filing does not provide a reliable foundation from which to determine just and-reasonable rates.
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XII.
mermtOUND INFORM & TION A.
Ristorical Context E
The $120,782,000 rate. increase requested by the Company is the:.
second largest rate request in Mir.nesota ' history, - and the second largest ever filed by this Company.. It was filed'only 14 months after the Commission granted the Company a $75 million rate
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increasw.
Presumably, the $75'million increase' met the Company's financial needs at the time, since the Company stipulated to,that amount.
In the Matter of the Anelication of Northern States Power Comnany for Authority to Increase its Rates for Electric Egryien in Minnesota, Docket No. E-002/GR-87-670.
Over half of the increase was attribu :able to the addition of a new major generating facility, Sherco 3.
By contrast, the current rate request was not prompted by any.
major construction project or other significant addition to rate base.- The fourteen month period between the last rate increase and this filing was a period of relat!vely stable pricesl, substantial growth in Company electric revenues, continued protection from fuel and purchased power cost increases through i
1 One estimate of the inflation rate was 4.6 percent as shown by NSP witness Currier on JAC-1 Schedule 6, Page 1 of 1.
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2 the fuel adjustment clause, and protection'from_ changes in mandatog.conservationcoststhroughtheconservationtracker j
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- In short, this was a rate case in which the factors y
which usually drive rate cases -- e.g., a new plant, a period of high inflation -- were missing.
In the absence of other major issues, the Company's budgeting processes were carefully examined in an attempt to discover what was causing the need for a rate increase.
B.
Overview of the Company's Budgeting and Forecasting System The Company's budgeting process is complex.
The record refers to first year budgets, second year budgets, first year forecasts, second year forecasts, test year forecasts,. normalized actual data, and actual data.
Actual data represents actual operating results for a historical period, while normalised actual represents actual operating results for'a historical period, after adjustments to reflect normal operating conditions.
An example of such an adjustment would be adjusting sales revenues d
to reflect average weather conditions, NSP's budgeting process includes; preparing and revising severaf budgets.
Some examples include capital budget, departmental operating expense budgets, and sales budget.
i In the fall of 1S88, NSP created its budget for the next two years.
The first year budget was for 1989 and the second year budget was for 1990.
Then, on a monthly basis, NSP reviewed -
current information as-it. developed.and. created the first year forecast (1989) and second year forecast (1990).
This activity continues on an ongoing basis whether or not a rate case is planned.
In approximately August of 1989, NSP-forecasted.the data for the 1990 test year and made regulatery adjustments resulting in the test year forecast.
The test year forecast filed in the rate case contains the data upon which NSP asked the. Commission to rely to set rates effective January 1, 1990.
XIII.
THE COMPANY'S CAPITAL BUDGET The issue confronting the Commission in regard to NSP's capital budget is whether it provides enough credible substantiating 2
Minn. Stat. I 2168.16, subd. 7 and Minn Rules 7825.2390.
q 3
Pages 21-23 of the Commission's Findings of Fact, Conclusions of Law, and Order in In the Matter of the Aeolication of Northern States Power comoany for Authority to Increase its Rates for Electric Service in Minnesota, Docket No. E-002/G3 670 (August 23, 1988).
11
i l
evidence to allow the Commission to determine rate base and establish just and reasonable rates.
In the original filing, NSP requested a rate base of 82,372,746,000.
This compares to a rate base of $2,342,665,000 i
found in NSP's last rate case, HEE, Docket E-002/GR-87-670.
i Except for a Company proposal to consider tax benefit transfers of approximately $73,142,000 as a source of zero cost capital, I
rather than as a reduction to rate base as in the last rate case, l
the originally filed rate base would be lower then the one approved in the last rate case.
This is indicative of a company i
that is not presently involved in major _ construction projects.
}
i The $2,372,746',000 rate base amount is an average of the 1
January 1, 1990 rate base and the December 31, 1990 rate base.
In order to have beginning of year and and of year rate base amounts at the time it made the filing, it was necessary for NSP i
to project the January 1, 1990 balance and'the December 31, 1990 i
balance.
The Januan 1, 1990 balance was projected based on t
part-year 1989 actual data, plus forecasted capital expenditures for the remainder of 1989.
The December 31, 1990 balance was projected based on forecasted expenditures expected to occur during 1990.
The Department recommended that the Commission deny the Company's l
request.for a rate increase on-grounds that the information in the record did not support the request.
In the alternative, the Department recommended that the test year rate base be reduced by at least $82,152,000 to reflect errors in the capital budget discovered during the Department's audit and investigation.
This amount represents a 27.12 percent reduction in the 1989 forecasted capital expenditures and a 23.08 percent reduction in the 1990 forecasted capital expenditures.
The Department also recommended an additional $3,736,000 reduction to remove l
reimbursabic projects erroneously included in rate base.
The Department recognized that in order to determine the i
reasonableness of forecasted data, the data must be subjected to l
intense scrutiny. ' As a starting point, the Department conducted l
an overall analytical review.
This review focused on the relative accuracy of second year budgets and first year budgets L
when compared to the actual data for the corresponding historical periods.
This review showed that the second year capital budget exceeded actual capital expenditures by 4.39 percent in 1986, 8.60gercentin1987, 24.33 percent in 1988, and 28.27 percent in-1989.
In addition, the review indicated that first year budgets l
are showing indications of greater deviation and volatility from actual expenditures.
Thus, the first year. budget for 1988 (prepared in 1987) exceeded actual capital expenditures for 1988 by 24.74 percent.
1988 was the test year in NSP's last rate l
case.
1 4
DF5 Exhibit 158, Page 11, Direct Testimony of Vincent C.
Chavez.
12 i
i Although the second year budget normally exceeded NSP's actual capital expenditures, NSP's forecast for the 1990 rate case test year exceeded the 1990 second year budget by approximately $46 million.
Based on the trends identified above, the Department yearwouldexceedactualexpendituresby$115million.getest estimated that forecasted expenditures for the rate ca
\\
A.
The Department *s Sample and Audit-In further investigation, the Department employed a discovery sample to review the forecasted capital expenditures for 1989, which the Company used to calculate beginning of test year rate base.
NSP identified specific projects according to improvement requisitions (irs).
The Department identified approximately 4.000 irs, then reduced that to 2,600 to eliminate those relating o other jurisdictions.
The Department further reduced the aumber by limiting projects to those beginning and ending in i
1989.
Approximately 600 irs remained, from which the Department ultimately took a sample of 100.
The sample represented approximately $15 million of budgeted projects from approximately S233 million for the Minnesota Company, excluding gas operations.
j TheDepartment'sexaminationofthesamplefogndadifferenceof approximately S4.1 million, or 27.12 percent, between amounts budgeted and amounts actually spent.
For the items in the sample, at least, the Company clearly had over-budgeted for capital expenditures.
The sample also included several items which clearly did not belong in rate base under.any. circumstances.
For example, it included a refuse derived fuel (RDF) trailer, a non-electric utility project.
NSP agreed that that item should not have been in rate base.
The irs in the sample included.one. project for which NSP will be reimbursed by another party.
In follow-up, NSP located 26 other reimb,trsable projects and 14 blanket projects which included amounts for reimbursable projects.
NSP agreed that reimbursable projecto should not be in rate base.
The sample identified 10 projects which were scheduled to begin and end in 1989, but had zero expenditures in 1989.
Since these are included in the forecasted beginning of the test year rate base, but no expenditures have been made, rate base is clearly overstated by the amounts budgeted for these projects.
l The sample identified 32 projects with December 31, 1989 Plant in Service dates, which were not yet in service.
Again, rate base may have been overstated by the amounts budgeted for these projects.
5 DPS Exhibit 188 at 6.
Direct Testimony of Dale V. Lusti.
6 DPS Exhibit 161, Vincent C. Chavez*VCC-7.
l 13
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)
g The sample identified'a cancelled project.
This project was included in the forecasted beginning of test year rate base, but will never be completed, again resulting in an overstated rate
]
3 4
base.
On follow-up, NSP identified 140 other cancelled projects, J
l all included in test year rate base.
The sample identified project funds and corporate funds.
These i
funds derive from cancolled projects and projects completed below l
budget.
At year-end, NSP zeroes out these fund balances.
The Dep6rtment was concerned that funds already included in the forecast and in test year rate base could be zerood out and l
diverted to non-utility or non-Minnesots operations.
The i
Department indicated that the total. draw-downs for the corporate fund in 1989 were over $58 million.
B.
The 1990 Forecast The Department was unable to sample NSP's 1990 capital expenditure forecast, used to develop end of test year rate base, because 1990 actual data was not in existence.
Instead, the Department examined the 1989 second. year budget, in which the Company over-forecasted by 28.27 percent above 1989 actual expenditures.
The Department recognized that the accuracy of NSP's forecasts tmproves as the period being forecasted gets closer.
Since the rate case 199.0 test year forecast was constructed using several monthsofactualig89 data,theDepartmentconstructeda 3
mathematical model to incorporate assumed. improved accuracy.
As t
a result, the Department recommended-that-the forecasted capital expenditures during the 1990 test year be reduced by 23.08 l
peret.nt.
C.
Constission Conclusions When determining just and reasonable-rates,_the. Commission.is directed by Minn. Stat. $ 716B.16, subd. 6 (1988) to give due consideration to property used and useful in utility service.
Such property must also be prudently acquired.
In order to meet that statutory directive, the Commission must be able to determine the proper amount to include in rate base for the test year.
l The Department's investigation raises _ grave doubts about the Company's forecasted 1990 test year rate base and the methods-used to derive that rate base.
As-noted above, the historical trends point to increasing inaccuracy and unreliability in NSP's first and second year budgets used to forecast future capital
)
i budgets.
The sample conducted by the DPS has revealed many l
individual and specific errors, which the Company has the burden of explaining.
7 DPS Exhibit 16.0, Vincent C. Chavez Surrebuttal, VCC-82 1
Corrected.
14 1
1
i 1.
The Company's Position a.
Past Practice NSP indicated that it has based its plant and CWIP amounts on capital expenditure forecasts since its first rate case in 1975.
The Commission does not dispute that it has accepted, and will continue to accept, forecasted test year data.
However, the l
Commission has noted its discomfort with inadequately documented forecasted test years in the past, including the last fully litigated rate case brought by this Company.
HEE, Docket No.
E-002/GR-85-558, FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER, at 8 (June 2, 1986).
Further, the Commission will not~ simply accept forecasted data without review because it has accepted such data in the past.
Each case will be reviewed according to its own merits.
In this case, serious questions concerning the capital expenditures have been raised whien cast. serious doubt over the reasonablenees of the rate base proposed by NSP.
b.
The Significance of Actual Data and Specific Projects The Company argued that the updated "actuals" for 1989 show that its projections for 1989 are accurate and reliable.
The Commission agrees with the Department and other parties th'at the use of unaudited actuals filed 13 days prior to the hearing does not bolster,the forecast in this case.
NSP's reliance on 1989 actual data to support its 1989 forecast ignores the purposes for which 1989 data are offered, namely to test the accuracy and reliability of its forecasting method.
NSP did not submit any evidence of its forecasting method to which the 1989 data could have been applied.
The Commission does not find that the data supplied by NSP in rebuttal are probative of the issue in the Case.
NSP argued that the Department's sample failed to accurately predict what the actual capital expenditures for 1989'would be.
The Commission notes that the sample was conducted to determine how well NSP budgets capital expenditures, not to determine what the actual 1989 expenditures would be.
The record shows that many projects that were forecasted were later cancelled or othorwise adjusted.
The Company argued that the Department did not identify specific forecasted capital expenditures as unnecessary or unreasonable.
i The Commission notes that the sample was designed to determine how well NSP predicts capital expenditures, not how reasonable each project is.
A determination on the reasonableness of individual projects would be based on a review of a list of projects.
A determination on whether or not projects which are charged to ratepayers are actually carried out would be based on l
a comparison between forecasted amounts and actual expenditures.
l 15 i
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1 c.
The Appropriateness of the Sample NSP argued that the discovery sample was not representative of the total population of irs.
The Commission recognizes that the Department mnde many adjustments in arriving at the subpopulation and has not demonstrated that the sample is totally representatAve ot' the entire population of irs.
However, the sample did focus on projects beginning and ending within 1989 and revealed many errors.
Furthermore, the sample included three projects, all with individual budgets in excess of $1 million, which were over-budgeted by as much as 51 percent.
The magnitude of such budgeting errors raises concerns which cannot be allayed by attacks on the Department's methodological rigor.
Whatever the margin of error inherent in the Department's sampling technique, the-Department's. investigation demonstrates that there l
j are serious inadequacies in the Company's capital budgeting i
process.
Those inadequacies infect the test year rate base and H
make it unreliable for purposes of setting just and reasonable rates.
The company. argued that the Department could have reviewed the 4,000 irs or at a minimum, the 2,600 irs associated with the Minnesota Company.
The Commission notes that the Company'could have chosen to rebut the sample by. supplying complete information 1
on all the irs.
The Company controls that information and is in the best position to offer such evidence.
Instead, the Company chose to argue that the sample was inappropriate, leaving the doubts raised by the sample unresolved.. The Company did not meet its burden of proof and show,. by a preponderance of the evidence, that its capital budget is reliable and trustworthy.
The Commission finds it more likely than not that the kinds of errors
.which affect the sample affect the Company's entire capital 1
budget.
The company argued that there was no need to sample, because the actual results for 1989 were known..The Company contends that,.
based on 1989 actual results, the Minnesota company forecast was i
only overstated by 0.55 percent, not.the 27.12 percent the sample suggests.
Again, however, rather than address the results related to the specific 4,000 irs upon which the test year capital forecast was based, the Company chose to' rebut by filing additional unaudited information relating to aggregate expenditures.
The Company filed 600 pages of testimony and exhibits, including unaudited updated data to replace the seven months of projected data the Company had used to calculate _its January 1, 1990 rate base.
Since the Company did not address the specific 4,000 irs upon which the test year capital' forecast was based, the filing did not disclose.the extent to which the expenditures made were the expenditures projected..
The Commission is asked to establish a test year rate base which was calculated using a forecast.
Yet when numerous errors and p
changes are found in the forecast, the Commission is. asked to accept unaudited 1989 data, which at most establishes only that i
the money was spent.
The filed data does not identify the 1
16
purpcses for which it was spent, or even confirm that it was spent for regulated Xinnesota electric utility operations.
d.
Significance of Cancelled Projects The Company argued that there is no adverse impact on ratepayers if an item included in the rate case forecast is cancelled and channeled through the contingency fund to a non-utility project as long as the expenditures were not included in test year actual expenditures.
The Commission finds this argument confusing at best.
If a rate case forecasted item is cancelled and the funds are reallocated to a non-utility project, ratepayers have funded a project that is not used and useful in providing utility service.
Apparently NSF argues that as long as the project is replaced with another utility project, ratepayers will not be adversely affected.
However, this lack of specificity is exactly the Commission's concern.
It does not allow the Commission to fulfill its statutory duty to ensure that rate base includes only
]
property used and useful in providi2q service to the public.
4 Minn. Stat. I 216B.16, subd. 6.(1988).
The Company's approach provides no certainty on what the rate base will include.
All that is known is that rate base in likely to not include many of the projects the ferocast said it would include.
L NSP argued that the Department's recommended adjustment of 23.08 i
percent to the 1990 capztal expenditures forecast should have j
been based on a projeca by project evaluation, including determinations on the reasonableness.of individual projects.
The l
Commission notes that the Department's adjustment is based on a historical deviation between second year budgets and actual capital expenditures for 1989.
That deviation was shown above as 28.27 percent, adjusted to 23.08 percent to allow for improvement with the passage of time..That adjustment.does. net address the reasonableness of individual projects, but does attempt to adjust the test year rate base to represent only those projects that '
will actually be carried out.
e.
Reference Points for Budget Comparisons l
The Company argued that the first year budget for 1990 would have j
been a more appropriate comparison for the test year capital expenditures forecast.
There, NSP stated that the 1990 test rear j
forecast exceeded the 1990 first year budget by approximatel) 6 l
percent.
Further, the Company argued that it was inappropria 1 to compare to the 1990 second year budget since the test year forecast was not based on the second year budget, but on'an independent forecast.
The Commission is,also concerned about comparing the test year forecast to the second year budget in the aggregate.
- However, overall review demonstrates that second ysar budgets have recently exceeded actual results by a wide margin.
The sample conducted on the 1989 capital forecast also showed a wide margin 17 i
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' i of deviation.
First year budgets also show a recent trend to overbudget, with 1988's (another test year) fi exceedingactualresultsbynearly25 percent.gstyearbudgetThe first year budget to test year forecast deviation of 6 percent tends to j
support the concern regarding forecasting error.
Furthermore, j
i comparisons to the 1990 first year budgets may be skewed, since 4
l NSP knows what the target is from the test year forecast.
These facts raise serious doubts about the 1990 capital expenditures forecast as well.
The Company argued that the mathematical formula employed to reflect improved forecasting accuracy as the forecasted. period gets closer was based on improper assumptions.
The Company argued that the formula was skewed because the Department chose to base it en the year with the most: extreme deviation (1989).
The Commission assumes that the formula is not precise and that there is room to question the Department's choice of 1989 as the basis for measuring improved accuracy.
This is a minor concern, however, and should not obscure the central fact that there is a disturbing gap between forecasted expenses and actual expenditures.
2.
The ALJ's Recommendations a.
Comparisons with Actual Data The ALJ suggested that the Department could have performed a comparison of aggregate forecasted expenditures with the actual 1989 results, as did NSP.
However, as discussed above, this comparison determines only that the. money was spent, not how it was spent.
Only an itemization by the Company, with auditing.
would have shown how it was spent, and the 13 days between the i
i filing of the information and the opening of evidentiary hearings were insufficient time to conduct an audit.
The 2989 actuals do not address the more fundament
incarn raised by the Department and other parties about th J11 ability of the August 1989 capital budget / forecast for 1990.
Nor do they address the' underlying concern about the forecasting method.
The 1989 actuals are only probative of the reliability and accuracy of projections made for 1989.
The fact that NSP's August 1989 forecast was borne out by actual results does not show that the August 1989 forecast for 1990 test year was reliable and accurate.
It merely shows that NSP was able to stay within its budget target for the remainder of the year.
The 1989 data also raisad a set of its own questions, such as why spending in December 1989 exceeded budgeted spending for the first time in three years.
Since the Company was planning to file a rate case, the fact that actual data met the forecast does 8
NSP Exhibit 57, Stephen R. Foss, Rebuttal Testimony, Schedule 9, Page 1 of 1.
18 t
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l l
not dispel the concern that the forecast and the data were ranipulated and prepared in anticipation of NSP's decision to l
seek a rate increase.
The Commission cannot discount the possibility that spending was motivated by the need to fulfill a r
rate case forecast, which the Company knew could not be audited within the time frames imposed by the rate case statute.
b.
The Representative Character of the Sample The ALJ found that there was enough doubt about the representative character of the Department's sample to conclude that the results of the audit could not be reliably applied to the total capital forecast.
The Commission disagrees.
NSP submitted no information-on the total population to show that the sample was seriously unrepresentative.
NSP chose instead to rebut by showing that the Company actually spent the entire amount.it had forecasted for 1989.
Given the serious discrepancies disclosed in the sample audit, however, this is not reassuring.
Without detailed explanations of individual budget items, the Commission has no verification that these monies were spent on projects used and useful in the Company's regulated i
Minnesota electric utility operations.
The presence of unregulated, reimbursable, and cancelled projects in the sample, and-in test year rate base,.is not reassuring.
Neither is the fact that the funds flow through the Corporate Fund for regulated and unregulated projects in.all jurisdictions.
Furthermore, the Company clearly had an incentive to spend all amounts forecasted for 1989, knowing failure to do so would raise questions about its need for the requested rate' increase.
For these reasons, the i
fact th2t the 1989 forecast was spent in full does not discredit the results of the Department's audit.
The ALJ gave a great deal of weight to the testimony of NSP witness Campbell, who stated'the statistical probability that the sample is comparable to the total population-is so remote as to be meaningless.
The Commission finds this cause for concern.
At the same time, however, the errors the sample disclosed in the capital forecast are real.
Furthermore, when the-Company examined the 1989 capital forecast in light of the sample's findings, more of the same errors appeared.
For example, reimbursable projects, unregulated projects, and cancelled projects were.found in the 1989 capital forecast, in significant numbers.
The Commission does not find that the Department's audit, and the sample on which it was based, directly reflect the number of errors in the Company's 1989 capital forecast.
The Commission does find, however, that the audit demonstrates the presence of serious inadequacies in the capital budgeting process which make the test year capital forecast unreliable for purposes of setting just and reasonable rates, i
19
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c.
The Sample's Exclusion of Multi-year l
l Projects The.ALJ stated that the exclusion of multi-year projects from.the Department's sample tends to bias the results.
There are no comparisons of such budgets in the record, however, to show;that budgets for multi-year projects are more accurate than those for projects scheduled to be completed in a single year.
It isinot self-evident that such budgets would be more accurate.
In fact, it can be argued that budgets for discrete projects lasting less than a. year would be easier to project.
Furthermore, the sample did include three projects with budgets in excess of $1 million l
each.
Those profsets also recorded large. deviations.
The Commission is therefore unconvinced that the exclusion of multi-L year projects from the sample requires its rejection.
t d.
Witness Integrity The ALJ stated one reason he declined to apply the results of the f
Department's audit to the Company's filing was that he did not i
find the traits of dishonesty or incompetence in NSP's witnesses.
However, that is not the issue. 'The issue is whether the Company has proved by a preponderance.of the evidence that its budgeting process is reliable and accurate-enough to serve as the l
foundation for a Commission determination of just and reasonable l
rates.
The Commission finds that the Company has failed to meet l
this burden.
l The record shows that NSP's capital expenditure *budgats are l
becoming increasingly inaccurate, with deviations between j
budgeted and actual expenditures approaching 30 percent.
Not only do second year budgets suffer from such deviations, but j
l first year budgets are also beginning to be affected.
According to NSP witness Foss, Exhibit 57, Schedule 9, page 1 of 1, first year budgets overestimated capital expenditures only once from 1980 through 1987.
However, in 1988- {a test year)-the first year budget overestimated actual expenditures by nearly 25 percent.
In 1989, the first year budget overestimated by nearly 9 percent.
While such budgets may be sufficient for the purpose of day-to-day operations of the Company, the Commission cannot depend on-such information when setting rates.
3.
The Company's Need for Flexibility The Commission recognizes that flexibility is necessary when ope ~atina the Company.
It would not be wise or prudent to imp
+n /*roneous budgets..The Company needs the freedom to uno-jn budget when projected spending proves to be s.
.ach less flexibility can be tolerated when unnr f o rt.-
oudgets
'e used as the foundation for rates.
Once rats ratepay-r= will not have the opportunity to make day-to-ajustments raten to reflect flexibility in i
operatio t Rate must
.e. Sased on data which reasonably o
represents the n6eds of tht Lompany in providing service.
To
.20
ba'se rates on forecasts which may allow the Company flexibility l
of up to 30 percent does not result in just and reasonable rates.
NSP cannot pass its budgeting and forecasting risks on to the i
ratepayers.
i i
4.
Substantiation Required i
l Minn. Stat. I 2168.16, subd. 1-(1988) provides that a change of rate notice shall include substantiating documents and exhibits.
Those substantiating documents are to be included with the filing.
With errors and deviations of the magnitude discovered i
in the forecasted material supplied, NSP has not met its burden of supplying adequate substantiating evidence with its notice of change in ratec.
l The Commission is not convinced that the Company has shown that its capital budget / forecast and its forecasting method are accurate and reliable or that its 1990 forecast is evidence of a need for an increase in rates.
NSP has net provided sufficient detail in regard to how it arrived at its 1990 forecast or how it determined that it needed an increase in rates.
The most straightforward attempt to secure information on this subject was made by North Star Steel.
That intervenor served information requests intended to confirm or allay its suspicion that the 1990 forecast was designed to conform with rate case goals, instead of the rate case being designed to conform with an objectively prepared 1990 forecast.
North Star was unsuccessful, however.
The Company refused to' reply, citing attorney-client privilege and attorney work product privilege, and the ALJ upheld the Company's objection.
5.
The Intervenors Proposed-Adjustments-The Commission does not believe just and reasonable rates can be set by accepting or modifying the adjustments proposed'by the intervenors.
Historically, the Commission has adjusted proposed rate bases and operating budgets based on review of specific issues.
Here, the adjustments proposed represent "across the i
board" adjustments based on a sample and historical trends.
The j
Commission believes ratamaking requires more reliable facts and greater certainty than this record provides.
The information in this record does not allow calculation of a rate base which is sufficiently verifiable and substantiated to cause the Commission to declare the rate base found in the last rate case unreasonable.
Rates are not to be changed unless it is shown by a preponderance of the evidence that existing rates are unjust and unreasonable.
Minn. Stat. I 216B.16, subd. 5 (1988).
The Commission concludes that it cannot proceed with ratemaking on the basis of the existing record.
l l
21 l
XIV.
OPERATING AMD MAINTumun EXPENSES In its original filing NSP claimed ' test year total operating l
expenses of $1,195,737,000.
This represents an increase of l
approximately 17% over the $1,023,766,000 stipulated to and allowed in the laat rate case.
In supplement 41'and rebuttal filings, the Company increased its estimate of necessary operating expenses to $1,199,777,000.
Commission discussion will J
generally focus on the first number, as the intervenors did.
i The company also forecasted test year revenues of $1,358,824,000, i
an increase of approximately $85,000,000 over revenues authorized in the last rate case.
The record reflects little disagreement with the forecasted test year revenues.
As discussou earlier in the order, NSP's rate case test year expense forecast is developed using its budgeting and' forecasting systems.
1990 test year expenses were forecasted in approximately August of 1989, with the rate case filed'en November 2, 1989.
Parties have rtised serious concerns regarding the lorocasted expenses.
Those concerns will be addressed below.
i Parties also raised concerns about several other-individual expense items.
Those issues are not discussed in this order, A.
Positions of the Intervenors and the ALJ 1.
The Department The Department recommended that operating. expenses 9 be reduced by
$23,293,000.
The Department believed this adjustment was necessary to eliminate costs deferred into the test year from earlier periods, and to reflect historical deviations in NSP's budget.
. i The Company's 1990 test year DOE (departmental' operating expense) forecast projected operating expenses 7.8 percent higher than the operating expenses projected in the second year budget for 1990, originally prepared in the fall of 1988.
To put the matter in perspective, the Department studied the historical deviation of second year budgets to actual expenses over the years 1986-1989.
l This review indicated that actual expenses exceeded-second year budget expenses by 2.4 percent in 1986, 3.54 percent in 1987, and i
6.9 percent in 1988 (the test year in the last rate case).
However, in 1989, second year budget expenses exceeded actual expenses by 2.7 percent.
Based on Department calculations,
[
i 9
Operating and maintenance expenses are frequently i
categorized as the production, transmission, distribution, customer accounts, sales, customer information, and administrative and general items in the income statement.
In the original filing, those items totalled $850,116,000 compared to
$713,091,000 in HER, Docket No. E-002/GR-87-670, (August 23, 1988 at 29), with slight modification on reconsideration.
22
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' actual expenses exceeded the second year budget by a1 average of 1
2.5 percent for the years 1986-1989.
4 The Department recommended that test year operating expenses be limited to 2.5 percent over the second year budget for 1990 prepared in the fall of 1988.
This was based on reducing the 7.8 percent amount that the test year forecast exceeded the original 1990 second year budget to the 2.5 percent amount that actual expenses have historically exceeded second year budgets on 1
average.
The Department then calculated a reduction to operating expenses (adjusted to exclude fuel, purchased power, 'and other items) by applying the 5.3 percent adjustment.
2.
Minnesota Energy Consumers Minnesota Energy Consumers (MEC) recommended that operating expenses be reduced by $2,997,000 to remove costs deferred into i
the. test year from prior periods.
MEC also recommended a r
$20~,108,000 normalization adjustment to insure that rates only i
reflect the cost of providing efficient electric service for the test period.
MEC calculated its adjustment by reviewing specific items and identifying specific items it believed had been deferred into the test year.
Those items included amounts for line clearance, delayedcommitmgnts,deferredmaintenance,deferredoutage,and deferred costs MEC contended NSP should be held to its goal i
of maintaining cost increases within the general rate of.
inflation.
MEC calculated its adjustment by beginning with the actualoperatingexpensesfor1987'andescalatingghosecostsby the Consumer Price Index (CPI)-Urban rate to 1990 3.
North Star Steel-Company ~ -
North Star Steel Company (NSS) recommended that no increase in rates be allowed on grounds that NSP's 1990 budget is not based on any actual financial results and is not sufficiently verifiable for ratemaking purposes, i
NSS stated it was unable to produce an alternative historical I
test year analysis.due to lack of time and data.
NSS did l
illustrate the volatility of departmental operating expenses, showing that expenses increased 11.5 percent from 1987 to 1988 (a r
test year), decreased 3.4 percent from 1988 (a test year) to 1989, and increased 16.9 percent from 1989 to 1990 (test year in this case).
10 MEC Exhibit 114, Direct Testimony of Stephen R. Yurek, Schedule 8.
11 MEC Exhibit 114, Direct Testimony,of Steven R. Yurek, Schedules 9 and 10.
23 l
l
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i g
4.
The ALJ i
f
~
The ALJ recommended no adjustment to operating expenses, finding that the Company's witnesses were not-dishonest or incompetent.
He also found that the Company's operating expenses in the last fiscal year were not a reliable indication of reasonable and necessary operating expenses, because the Company had deferred many expenses that year to avoid filing a' rate case.
[
B.
The Company's Position 1.
Historical Dependability 3
NSP argued that !t has consistently -filed'its rate cases using forecasted operating expenses and that history will show the dependability of the forecasts.- The Commission notes, however, that the intervenors have raised serious questions about-the forecasts in this case.
The evidence is clear that expenses are exhibiting roller coaster characteristics over the past,four years, with the highest levels being rea~ched in rate case test years.
Although distant history may show dependability in NSP's budgets, recent history shows increasing variability.
This increasing variability brings a need for more complete review.
Rates are set on a prospective basis and cannot be justified on the basis that distant history was dependable.
Furthermore, the Company did not request that rates be set somewhere along the roller coaster curve.
Instead, NSP asked the Commission to set rates above the highest point that can be located on the roller coaster.
The Commission cannot determine just and reasonable rates based on the mere fact that NSP has spent, or promises that it will spend, the forecastad expense money.
Under Minn. Stat. I 216B.16, subd. 6 (1988) the Commission is directed to consider the need for revenue sufficient for the provision of adequate, efficient, and reasonable service.
The Commission'must base its decision on substantial evidence showing-that the claimed costs are necessary in the provision of service.-
The Company has asked the Commission to find rates it agreed <to in the last rate case to be unjust and unreasonable.
The order in the last rate case was issued on August 23, 1988.
Fourteen months later the Company asked for new rates which would include 1
l an increase in-total operating expenses of approximately
$170,000,000.
Of this amount, nearly $140,000,000 is l
attributable to operating and maintenance expense, although the intervening time was a period of relatively stable prices, i
increased sales, no major plant additions, automatic fuel adjustments, and a conservation cost tracker account.
This necessitates careful review of the requested increase.
4 24
I
\\
i 2.
Actual Financial Results I
The Company contended at oral argument that it was difficult to support its budgets without being allowed to introduce actual
]
i data.
The Company's ability to introduce 1989 actual data was restricted by the ALJ, who refused to allow its introduction for updating purposes, but allowed limited portions into the record for rebuttal purposes.
Mr. Flaherty testified the.t a budget should be compared to actual results during the year it is in
)
effect12 At the hearing, however, Mr. Flaherty calculated that, based on the first two months of 1990 actual financial data, NSP would underspend its forecasted test year expenses by $85.8 million.
At the same time Mr. Flaherty cautioned against using partial budget periods for comparison.
j l
Mr. Flaherty's testimony underscores the difficulty, faced by the Commission.
The Company finds it' difficult to support its 1
forecasts without using historical data, and the Company's witness states that a full period of actual data should be used to verify a forecast.
A full period of actual data is unavailable, but actual data from a partial period indicates overbudgeting of approximately $85.8 million.
Under these circumstances the Commission has no alternative to strict scrutiny of the budgeting and forecasting process.
3.
Basis for Comparison of Test Year Forecast NSP argued that the second year budget was not an appropriate basis for comparison with the test year forecast because the test year was not based on the second -year budget.
The Company recommended that the test year forecast be compared to the first year budget for 1990, which was completed in the fall of 1989.
The Commission finds that the comparison to the second year budget is reasonable.
With the second year budget completed many months prior to the filing of the rate-case, it,is.less~1ikely to be influenced by the information filed in the rate case.
In response to MEC's argument that increases in its costs should not exceed increas9s in the Consumer Price Index (CPI), NSP argued that MEC er.ed in beginning its calculations with fiscal year 1987.
The Company pointed out that its newest major generating facility, Sherco 3, was in service for only part of majorgeneratingunitgoesintoservice."{gilyriseasanew that year, and that " Operating costs natu However, when explaining why operating costs have increased so much when no major f acilities have been added, NSP argued that increases in l
operating expenses in excess of the CPI can reduce the need for 12 Thomas J. Flaherty, Transcript Vol. 12, page 45.
13 NSP Exhibit No. 54, Jackie A. Currier, Rebuttal Testimony, Page 11.
25
i increases in capital costs 14 The Commission does not believe the Company can have it both ways.
When the parties focused on the major increase in expenses from 1989 to the test year, NSP filed a massive rebuttal comparing test year costs to 1988.
Compared with 1988, the company claimed, costs increased only slightly more than the CPI.
The-Commission sees no reasoned basis for making actual 1988 costs the primary reference point for test year costs.
1988 is not the moat recent year for which actual data is available.
-1988 actual
. expenditures have not been approved by this Commission as reasonable and necessary in the provision of service.
3 Furthermore, intentionally or not, by shifting the focus to 1988 5
on rebuttal, just days before hearings began, the Company deprived the* parties of meaningful opportunity to review, analyze, and audit the actual expenses on which the Company tried to rest its case.
While the record contains massive testimony arguing that costs have increased only slightly over the change in the CPI between l
actual 1988. data and the test year forecasts, that is not the issue.
NSP is requesting an increase over the rates set in its last rate case, not an increase over actual 1988 data.
When comparing costs in the last rate case order to the originally filed forecasted test year data in this case, NSP is requesting an increase in jurisdictional operating expenses of nearly 20 percent, including an approximately $30 million increase in i
administrative and general expenses.
On a total operating expense basis, NSP_has requested an increase far in excess of the change in the CPI.
NSP has not 6xplained or justified the need
+
for thest massive increases in this record.
1988 was the test year in the last rate case.
Throughout this reenrd, NSP has insisted that to evaluate the earned rate of return for any given year, the actual data must be normalized.
The August 23, 1988 rate case order contains'the 1988' normalized i
data, which the Company stipulated to as representing the necessary and reasonable costs of providing service in 1988.
The data was developed using the same budgeting and forecasting system relied upon in this case.
It is important to note that the rates set in reliance upon_this data allowed the Company to earn in exce.ss of its authorized rate of return on an actual basis for 1988 15, 4.
Competitive Pressures Mr. Flaherty testified that competitive pressures mandate low prices and remove the Company's incentive to inflate its 14 NSP Reply Brief, page 93.
15 General Rate Petition, Volume 3 of 4, Section A, Schedule A-1.
4 26
=
)
i e
forecasts 16 At hearing, however, Mr. Flaherty testified that he hadg9tperformedareviewofcompetitionwithinNSP'sservice area The Commission notes that, for the most part, electricity is still provided in a monopoly environment.
The Commission finds that the Company has not presented credible evidence establishing that competitive pressares play a major role in protecting the general body of ratepayers from excessive rates.
1 l
5.
Budget Bases NSP witness Flaherty indicated that the. budget shoulf8f
- Yet, historical performance and should be well documented the i
record clearly indicates that various responsibility centers begin their respective budget processes with different bases.
The Commission recognizes that the Company may be able to run its day-to-day operations with such budget procedures.
However, with different responsibility centers using different starting points, there is no continuity of basic assumptions in the overall budget.
Without this continuity, the Commission is prevented from tying the forecast to historical performance.
Determining the assumptions o'n which the overall budget is based is further complicated by Company statements that the 1990 test 1
yearforecastisbastgontheexpensesthattheCompanyforesees 4
as necessary in 1990'.
Despite the admitted need to compare to history, it is not clear what the test year data is based on.
This further amplifies the need for support of the projected numbers.' When the Company. files,a. rate case requesting the largest rate increase in its history based on a vision of what is needed in the future, the need for justification, verification, and testimony supporting the vision are great.
NSP stated that its budgeting ~and forecasting system includes continuous updates.
While this may be very useful for day-to-day operations, the Commission finds little comfort in continuous updates to forecasts once rates are set.
It is critical that the expense forecasts used in the rate case reflect the actual costs of providing service.
Once rates are set, they cannot be adjusted up or down to reflect continuous updating.
l 16 NSP Exhibit 82, Thomas J. Flaherty, Rebuttal Testimony, Page 58.
17 Thomas J. Flaherty, Transcript Vol. 12, Page 44.
18 NSP Exhibit 82, Thomas J. Flaherty, Rebuttal Testimony, Page 20.
19 Ronald H. Clough, Transcript Vol. 6, Page 26.
l 27 l
r
6.
. Deferred Expenses Parties raised concerns that test year expenses are considerably higher than expenses for 1989, and that certain costs have been deferred into the test year.
NSP responded with a massive rebuttal filing on March 27, 1990.
That filing included rebuttal testimonyO. rem at least seven witnesses addressing operating f
expenses' In general, NSP chose to rebut the concerns raised by the parties by arguing that 1989 is not a normal year for purposes of comparison with test year expenses.
The company stated it had cut costs significantly in 1989 in order to avoid filing a rate case any earlier than it did.
When it could no longer defer certain costs, the costs were reinstated and the present rate case was filed.
NSP stated that those cost-cutting efforts also explain the roller coaster. nature of expenses in the years before and after 1989.
NSP argued in its rebuttal that 1988 was a more appropriate comparison for test year expenses.
Witnesses then explained that in comparison to 1988 actual expenses, test year DOE expenses are I
only 12.7 percent higher, and represent an annual increase of only 6.2 percent.
The witnesses also discussed specific new or unusual expenses in their. responsibility areas which would show that the increase in expensen was even less if the effect of the new and unusual items were removed.
One of the areas in which the company allegedly cut back in 1989 was vegetation control.
NSP witness Clough testified that " Trees obviousg{"groweachyearandit'snecessarytotrimbackthat growth.
He then stated that trimming-costs were reduced in 1989 to avoid a rate case.
Clearly, however, there is a normal level of trimming cost in every year, and that is the amount to be built into rates.
The test year concept rests on the notion that the normal and ongoing costs of operating a utility can be l
determined with reasonable accuracy and built--into' rates.
Rates l
l are not set on the basis of extraordinary-expenses, or on the basis of a need to " catch up" from having delayed normal and ongoing expenses in the past.
NSPminimizedtrimmingcostsin1989toavoidarateegge;this-caused an increase in trimming costs for the test year The Commissiog3.acedthisidenticalissueinMinnesotaPower'slast f
rate case
- In that case, the Commission adjusted the test year 20 Currier, Doudiet, O' Leary, Larson, Clough, Tacheny, and i
Caskey.
21 Ronald H. Clough, Transcript Vol. 6, Page 31 and 32.
22 Ronald H. Clough, Transcript Vol. 6, Page 32.
23 In the Matter of the Petition of Minnesota Power & Licht Comeanv, d /b/a / Minnesota Power, for Authority to Chance its Schedule of Rates for Retail Electric Service in the State of 28 4
vegetation control budget because it was skewed by reduced control in the prior year.
This case is much more difficult, however, because individual line items are not identifiable and adjustable, as they were in Minnanota Power.
NSP filed aggregate i
L l
budgets containing much less detail.
At the same time, the l
Company's historical budgeting and spending patterns strongly l
suggest a practice of " loading" expenses into test years.
The L
Commission cannot ascertain with reasonable accuracy how much of the requested increase is attributable to normal and ongoing operating expenses, and how much to " carryover" expenses.
This contributes to the Commission's inability to rely on the Company's forecasted expenses to set new rates.
7.
The Reasonableness of Specific Budget Items The ALJ and NSP emphasized that the parties by and large did not j
identify specific expense items as being unreasonable, unnecessary, or inflated.
The reason for this, however, was the Conpany's decision to file aggregate budgets which prevented identification of individual line items without great difficulty, and sometimes prevented it altogether.
This decision made the credibility and reliability of the' Company's budgets the major issue in the case, not the propriety of individual line items.
For example, when asked for an itemization of forecasted expenses by the FERC Uniform System of Accounts (USOA), NSP responded that 29 it does not go into that much detail for ratemaking purposes This precluded systematic examination of commonly understood categories of expenses..
Similarly, the Commission itself queried the Company regarding 4
how much maintenance. expense was' forecasted in the test year for the transmission function.- The Commission did this to assure itself that the. normal. maintenance. costs _ included in the transmission function would not duplicate the costs proposed for the Manitoba line repair.
The Company responded that it did not have a breakdown in the forecast for maintenance.
The Company simply did not provide enough detail to allow meaningful review of individual budget items.
To require a substantive showing that individual expenses were inappropriate would essentially transfer the burden of proof to the intervenors.
It would also place them at great disadvantage to the Company, which did not provide specific items to review.
The Company's failure to classify forecasted expenses by USOA accounts prevents a comparison of the forecast to historical data, which is reported to FERC and other jurisdictions on a USOA account basis.
Forecasting without regard to USOA accounts also Minnesota, Docket No. E-015/GR-87-223, (March 1, 1988 at 47).
24 Dennis C. Fulton, Transcript Vol. 13, Page 11.
i 29
~
~
.w.n
,.,w.,.
prevents any reasonable review of the items making up the major utility functions such as production, transmission, distribution, and administrative and general expenses.
Forecasting data airsady removes many of the normal controls associated with.
i accounting, data.
Generally accepted secounting principles do not i
guide forecasting, and forecasts are not audited for presentation to the financial community.
The absence of these formal accounting controls allows significant subjectivity in the development of test year data.
To forecast without the detail required by the Uniform System of Accounts leaves the forecast virtually unverifiable.
In lieu of detailed financial testimony, tne Company tended to support its operating expense budget with testimony such as "th g caseinvolvestheessentialcoststo.runanexcellentutility;"gD or "the test year forecast is based on what we necessary expenses to run this company in 1390"jgresee are the Tha Commission does not believe the Company provided sufficient substantiation of its alleged need.for a rate increase to cover increases in operation and maintenance expenses.
NSP forecasted operating and maintenance costs in the aggregate, without the detail normally associated with utility accounts.
The Commission must determine the reasonableness, prudence, and necessity of the costs included in this rate casa.
It cannot do this without more detailed information than that presented by the Company.
8.
Unorthodox-Accounting Methods t
Determining the accuracy and reliability of the Company's forecasted budgets was further complicated in certain instances by the Company's use of unorthodox accounting nothods.
NSP chose to discuss expense items on a Minnesota Company basis, rather than on a jurisdictional basis.
However, many of the schedules were headed Northern States Power Comoany (Minnesotal Electric Utility-State of Minnesota.
This heading suggests that the schedule is presenting data at the Minnesota jurisdictional level, when it is not.
NSP witness Fulton agreed that the headings on schedules should indicate on what basis the schedule.s arereporggng,butdonot in the case of Ms. Currier's s hedules The same problem exists with the schedu'cs of many onher NSP witnesses.
Then, NSP chose to file rebuttal in a different format from that used by the intervenors, reporting elqctric operating expense by NSP FERC account rather than by 25 NSP Exhibit No. 1, Direct Testimony of James J. Howard, page 5.
26 Transcript Vol. 6, page 26, Ronald H. Clough.
27 Dennis C. Fulton, Transcript Vol. 13, pages 9 and 10.
30
y Business Unit and Corporate areas 8 Although these issues are 2
not substantive, they consumed over 50 pages of, Transcript l
volume 7 as intervenors struggled to understand which numbers belonged with which accounts.
This diversion of intervenors' time and resources compounded the usual difficulties of analyzing and trying a rate case within the statutory ten month time I
period.
Minn. Stat. $ 2168.16, subd. 2 (1988).
Furthermore, approximately $3.9 million of items which would normally be capitalized were shifted to operating expense, a
29 The witness on this issue did not major accounting change know whether or not the Commission has been notified of the This is highly improper.
Statutes and accouggingchange.give the Commission authority over utility accounts.
The rules Commission must be petitioned for accounting changes by the utilities.
Without direct Commission oversight, utilities could manipulate their accounts in a manner contrary to the public interest.
Again, the Company's failure to present information in recognizable and usable form compounded the complexity of this case, which would have been complex under the most favorable circumstances.
9.
Forecasted Property Tax Increase The Company pointed to an expected $17 million property tax increase as one factually supported increase in test year expenses.
Although the property tax increase is also a forecasted amcunt, it does have some factual support in the record.
General rate increases require more than one cost increase to support them, however.
While property tax expenses increase, other expenses may decrease.
The Company's total gas and electricdepreciationexpense,forexample,. dropped.S9.0milljgn l
in September of 1989, with no concomitant reduction in rates.
Revenues may increase or decrease as well.
The Company forecasted substantially higher sales revenues for the test year than were factored into the rates set in the last rate case.
In short, property taxes are only one part of the ratemaking equation.
Too many factors remain unknown for the Commission to solve the equation.
28 NSP Exhibit No. 54, Jackie A. Currier, Rebuttal, Page 5.
29 NSP Exhibit No. 31, Ronald H. Clough, Rebuttal, Page 6.
30 Minn. Stat. S 216B.10.
Minn. Rules 7825.02-7825.04.
31 In the Matter of Northern States Power Comoany's Recuest for Certification of 1989 Decreciation Rates, Docket No.
E, G-002/D-89-481, ORDER CERTIFYING DEPRECIATION RATES AND METHODS (September 6, 1989).
)
31
4 10.
The Company's Maintenance of Comparatively Low Rates l
NSP frequently pointed out that its rates are low in comparison with those of other utilities.
The Company does have a record of providing good service at relatively. low rates; the Commission prides itself on its role in that accomplishment.
Low rates do not constitute grounds for a rate increase, however.
To justify a rate increase, the Company must show by a preponderance of the i
evidence that existing rates are unjust and unreasonable.
C.
Conclusions Based on the information in this record, the Commission cannot determine with reasonable certainty the amount of operating expense necessary to provide service.
The Commission cannot determine which point on the roller coaster forecast and spending curve represents the best estimate of reasonable and necessary
[
expenses.
If Mr. Flaherty's calculations hold true, NSP's expenses may be $85 million less than claimed in the forecast, an amount sufficient to more than eliminate the entire increase.
recommended by the ALJ.
The Commission simply cannot set ratee based on this degree of uncertainty and still satisfy its statutory responsibility.
The roller conater spending and forecast pattern, the admitted deferral of 1989 costs into the test year, and Mr. Doudiet's comments that it.is very difficult fqr him to manage costs not knowing what the final rates will beJ2 suggest that there is a great deal of flexibility in the Company's operating and maintenance budget.
The statutes require the Commission to' set just and reasonable rates at a level which will allow the company to meet the cost of furnishing service.
Minn. Stat. I 216B.16, subd. 6 (1988).
The Commission cannot determine from thls record what that cost is.
IV.
PROJECTED TEST TEARS AND THE BURDEN OF PROOF The Company has characterized intervenors' concerns about the i
reliability of the financial information filed in this case as an attack on the concept of the projected test year.
Although some intervenors' comments may have reflected antipathy toward projected test years, that is not what led the Commission to reject the proposed rate increase.
The Commission rejects the proposed rate increase because the Company failed to carry its burden of proof; it failed to show that it is more likely than not that a rate increase is 32 James T.
Doudiet, Transcript Vol. 3, Pages 31-32.
32
n i
necessary.
The Company's failure to carry this burden stems in i
part from the special proof problems presented by projected test l
years.
Traditionally, regulatory commissions have set rates based on l
detailed review of a company's finances over a twelve month I
period, or " test year.-
one treatise on utility regulation.
explains the test year concept as follows:
The company, with the concurrence of the commission or its staff, will generally select a " test year,"
i frequently the latest.12-month period for which complete data are available.
. More recently, due
)
largely to inflation, a few commissions have modified the. traditional historic test-year approach by using a forward-looking test year (either a partial or a fu.1 forecast) or by permitting pro forma expense and i
1 revenue adjuutments.
Phillips, Charles F., The Reculation of Public
. Utilities, Public Utilities Reports, Inc., Arlington, l
Virginia, 1984, at 182.
The projected test year is an attempt to improve ratemaking accuracy and fairness.
It is not a retreat from basing revenue requirements on actual financial information, but an attempt to 3
i improve the predictive value of that information by adjusting for changes which can reasonably be expected to occur.
For this reason, Commission rules on rate change procedures require companies to file extensive information on financial results from their most recent fiscal years, whether they file 1
,~
historic or projected test years.-
See, for example, Minn. Rules, part 7825.4000, A., requiring companies to file unadjusted average rate base for the most-recent fiscal year,-the. projected fiscal year, and the test year; Minn.. Rules, part 7825.4100,'A.,
i requiring operating income statements reflecting the most recent fiscal year, the projected' fiscal year, and the test year; and Minn. Rules, part 7825.4200, requiring rate of return cost of capital schedules for the most recent fiscal year, the projected fiscal year, and the test year.
Clearly, the rules anticipate an examination of both historical data and projected data, when projected test years are used.
Similarly, the Commission's rules require a utility to file projected data for the fiscal year in which the rate case is filed if the utility is unable to file at least 9 months of actual data for that fiscal year. Minn, Rules, part 3100, subp..
10, subp, 11, subp, 12; Minn. Rules, part 7825.4000, subps. A, B,
and D; Minn. Rules, part 7825.4100, subps. A, B, E (1989)..The purpose of these rules is to ensure that the Commission has at least one forecast for which actual, verifiable data will be available at'the time of hearing, showing the.same assumptions and approaches as the forecast used for the test year.
Actual data for the fiscal year in which the rate case is filed is 33
i probative to show the accuracy and reliability of projected data, as well as to provide a historical basis for the test year i
forecast upon which the Commission must rely in setting rates. '
)
Furthermore, Commission Orders in general rate cases have consistently expressed concern that projected test years be substantiated-by as much actual data as possible and be based on reliable forecasting techniques.
The Commission's 1980 Order in a Great Plains natural gas rate case, for example, traced a pattern of concern about.the reliability of prc jected test years, citing an earlier NSP case in which such concerns were raised.
4
)
i The Commission has had to face problems with projected test years in previous cases.
In Northwestern Bell
)
Telechone Comeanv, Docket No. P-421/GR-77-1509, the-Commission noted it might have dismissed the proceeding based upon lack of sufficient foundation for test' year projections had the question been certified to it.
= In Northern States Power comoany, Docket No. E-002/GR i 611, the Commission admonished the parties that it could not make a specific adjustment to budgeted data t
to include actual data when it was working with a projected test year without having comparable adjustments for all related accounts.
In Northwestern Bell Telenhene comoany, Docket No. P-421/GR-79-388, the i
Commission refused to allow updating of a future test year beyond one updating to seven months actual i
figures, noting the unreasonable time burden on intervenors trying to analyze and evaluate the not figures.
However, it would not be possible for this Commission to reach any conclusion on a company's revenue deficiency until and unless it had an accurate and reliable test year from which to' start.
The test year must be believable to have any use in rate-making.
The lack of a trustworthy test year was the cause of the l
Commission's initial rejection of this case, and only the substitution of a 1978 actual test year, which has been found to be reliable, has made possible a decision i
on a revenue deficiency now.
In the Matter of a Petition by Great Plains Natural Gas Comeany, 235 West Main Street, Marshall, MN 56258 for i
Authority to Chance its Gas Rates fog, Retail Customers
,in the State of Minnesota, Docxet No 4.004/GR-78-690, i
ORDER AFTER REHEARING (May 9, 1980) ss t3 and 14.
]
Similarly, in NSP's last fully litigated rate case (The Company's last general rate case was stipulated), the Commission expressed concern about.the Company's choice of test year.
In that case, like this one, the test year did not begin until after the rate case had been filed:
34
.1
i I
The Commission has difficulty with a test year that begins several months 'after the date of filing.
This j
. allows only two to three months of actual data.to be presented at the hearings and extends almost four-months beyond the Commission's final order.
Although i
J the Commission continues to accept the conecpt of a future or budgeted test year, it also believes that the period selected must bear a reasonable relationship to j
the available historic data'and the filing date.
The farther beyond either that that data is selected means that the budget is less likely to reflect actual results.
In the Matter of the Petition of Northern States Power Comeany for Authority to chance its Schedule of Rates for Electric Utility Service for Customers Within the-State of Minnesota, Docket No. E-002/GR-85-558, FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER (June 2, 1986) at 8 and 9.
In short, the Cemmission's concerns-in this case about verifying i
and substantiating the forecasted financial data.on which the test year rests do not come out of a void.
They are part of a longstanding Commission commitment to ensuring that projected test years have clear and substantial links with actual j
historical experience.
In this case those links were much too tenuous for the Commission to believe it could: set just and reasonable rates on the basis of the. forecasted test; year.
i XVI.
INITIAL ACCEPTANCE OF THE FILING
~
The Company and the ALJ relied in part on the Commission's initial acceptance of the rate case filing as evidence thst the s
Company's test year-documentation,was. adequate....Such reliance is misplaced.
The Commission typically solicits comments from potentially interested persons before formally accepting general rate case filings.
The Commission does this because_the filing requirements for general rate cases are complex) the evidentiary hearing process is expensivs and time'-consuming, and the Commission is under a ten month statutory deadline to reach a final decision.
It is therefore important-to detect and correct any gross filing errors immediately.
The merits of the rate request are extremely complex and are beyond the scope of this preliminary review.
The November 29, 19&9 ORDER ACCEPTING FILING AND SUSPENDING RATES l
found only that the filing was " complete and in proper form."
It noted that contested case proceedings were necessary to determine E
the merits.of the filing and that such proceedings-would be initiated by separate Order.
The November 29 Order intimated j
nothing as to the merits of the filing, which were properly addressed in the contested case proceeding'and in this Order.'
35
i XVII.
REGULATORY FAIRNESS The Company explained in its initial filing, in its briefs, and at oral argument that it believed the focus of this case should be regulatory fairness.
The Company alleged that the 11.7% rate of return allowed in its last general rate case was inadequate to the point of unfairness and represented a longstanding shortcoming of Minnesota regulation, failure to reward excellent utility performance with commensurate rates of return.
The Commission will not engage in detailed examination of the i
Company's regulatory f airness claim in this rate case.
It would be highly unusual for the Commission to examine authorized rate of return in isolation from other traditional rate case issues.
Rate of return is just one component of the ratemaking process.
Rate base, revenues, expenses, capital structure,.and rate design are other crucial components.
Determining one issue in isolation from the others would not allow the comprehensive review of the Company's financial requirements necessary to set just and reasonable rates.
i There are no circumstances.in this case justifying a departure from these basic principles.
The Company's existing rate of return was set only two years ago, in the Company's last general rate case.
In the Matter of the Aeolication of Northern States e
Pnwar Comeanv for Authority to Increase its Rates for Electric
~
sarvice in Minnesota, Docket No E-002/GR-87-670 FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER (August 23, 1988).
The current rate of return was requested by the Company itself, in a joint petition seeking approval of a revenue requirements stipulation it reached with other parties in the case; Since 1
that time, there have been no dramatic changes in the Company's l
secess to capital markets or in the markets themselves.
Under these circumstances, the Commission will not examine authorized rate of return in isolation from other ratemaking issues.
XVIII.
RATE DESIGN AND CONSERVATION ISSUES For the same reasons rate of return will not be addressed in this case, the Commission will not address rate design and
'k conservation issues.
These issues were raised in or deferred to the rate case because that is the appropriate vehicle for their resolution.
It continues to be the proper vehicle, and the Commission will not attempt piecemeal resolution.
7 KII.
CONCLUSION The Commission concludes that the Company's filed information and arguments do not provide a reliable foundation upon which to make a determination of just and reasonable rates.
The adjustments i
proposed by the intervenors offer an alternative foundation.
Since the Company's filing has so few links with historical 1
experience, however, these adjustments are either arbitrary or i
36
extremely crude.
Instead of rspresenting NSP management's unsubstantiated judgm9nts, they represent the intervenors' unsubstantiated judgments.
Both are unst'.isfactory.
What is lacking is a credible factual basis for setting just and reasonable rates.
The Commission will not proceed with a rate determination based upon financial information in which it has.so little. confidence.
The statute governing general rate increases provides that "The burden of proof to show that the rate change is just and reasonable shall be upon the public utility seeking the change."
Minn. Stat. $ 216B.16, subd. 4 (1988).
Elsewhere, the Public Utility Act provides, Every rate made, demanded, or received by any public utility, or by any two public utilities jointly, shall
. Any doubt as to be just and reasonable.
reasonableness should be resolved in favor of the consumer.
Minn. Stat. $ 216B.03 (1988).
The Commission has a statutory duty to reject the proposed rate increase as unsupported by the record.
The Commission will do so.
ORDER 1.
Northern States Power Company's request ~for a general rate increase is denied in all respects.
2.
Within 30 days of the date of this order, the Company shall file for Commission review and approval a plan to refund to ratepayers interim rates collected under the December 29, 1990 ORDER SETTING INTERIM RATES.
.This refund shall include interest at the average prime rate for the collection period.
3.
This Order shall become effective immediately.
BY ORDER OF THE COMMISSION n
4 Richard R. La a ter Executive Secretary (S E A L) i 37 4
G 4
4
~.1.