ML20064A641

Amends 900724 Certification for Financial Assurance for Decommissioning Plant,Per Reg Guide 1.159.Util Intends to Seek Rate Relief by Pursuing Rehearing & Appeal of Rate Order by Initiating New Rate Proceeding

ML20064A641
Person / Time
Site:	Prairie Island
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
RTR-REGGD-01.159, RTR-REGGD-1.159 NUDOCS 9009170098
Download: ML20064A641 (41)

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Minneapolis, Minnesota $54011927.

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September 6,L1990{ 10 C.F.R.' Part 50 ; j p  ; Section 50.75(c) '

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7'A* Director of Nuclear' Reactor Regulation J h' . U.S. Nuclear, Regulatory Onmmission ' <

Thi .  ? Attention: Document Control Desk J' #

a LWashington, D.C.: :20555 0

i s PRAIRIE ISLAND NUCLEAR GENERATING PLANT h- ,

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' Docket Nos. 50-282 License Nos. DPR-42 L~

e 50-306 DPR-60 n

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4 iAnnd...w.t to Maancial'Assuranca for Decommissionine .

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[By a letter dated July l 24, .1990, Northern States Power Company (NSP) certified to .thel  !

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LNuclear Regulatory Commission'(NRC) that financial assurance for decommissioning Prairiei 7 Island Nuclear Gen; rating Plant Units 1 and 2 was provided in compliance with 10 C.F.R., i

h. T JPart 50, SectionOO.75(c).> : The purpose cf this letter is to amend, the certification based -  ;

@ . upon events lthat have occurred since the filing of the certification. ,

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6The!certific'ation 'was based upon interim rates proposed by NSP and accepted for filing by .h p> >

i theL Minnesota: Publicl Utilities Commission (MPUC). The interim- rate proposal included b j, progstons for the external funding of nuclear decommissioning costs. ]

% ; .. .. . . e .i jp (After the cer'ification letter was submittedito the NRC, the MPUC. dismissed NSP's filing T, "

and denied ~ anyl rate increase at a hearing on . August 6,- 1990.4 A written order was-issued -

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. .ori August:28,"1990,;and;this.' order requires NSP to reduce rates to previously approved l

,L. Llevela. and to refund: the? interim rate increase. A copy .of the. MPUC order has been i C . f enclosed.' 1

$r As 'a resultyf the action of the'MPUC, NSP is not presently authorized to establish an- y

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external nuclear ' decommissioning reserve fund, Lbut rather is ' limited by .the MPUC to

, Linternal funding for dec mmissioning pursuant to prior rate orders. Hence, NSP is unable u  : to commence monthly contributions to an external fund on August 26, 1990. NSP will N record on its books a liability for external funding beginning with the accounting close of- ,

M, c the month 'of August; 1990.- '  ;

i i# ' Regulatory Position 1.1.1 of the Regulatory Guide 1.159 entitled, " Assuring the Availability -

of Funds for-Decommissioning Nuclear Reactors," pmvides, in pertinent part, as follows:

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"If the initial payment to an rternal sinking fund willtot be made within 1

% jyear of July 26, 1990, tne licensee should submit as part of its  ;

3 ..g decommissioning report a statement that 'it has tiled or intends to file in a ,

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~U 9009170098 900906 .

DR ADOCK 05000282 lf ' _ f _

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g. j timely manner 'a~ rate request with!its' public utility commission' (PUC)1or

f f,,'T Federal Energy Regulatory Commission (FERC) to; allow decommissioningi

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costs to be recovered from its customers. .Notwithstanding action.on stich a q rate request by a:PUC or FERC, a . licensee should make its initial sinking-1 fund'paymnt by July 16,1993 as a demonstration of good faith compliance . >

with- 50.75(c)(3)(ii)." >

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Although it is unclear.at tha n whether NSP will be able_ to make its initial payment to j s

1an external sinking fund within one year of July 26,1990,: NSP hereby' represents that it.  ;

, , intends to . seek . rate ; relief as expeditiously as possible, bp ; pursuing . a renearing ' and, - -

-y, perhaps, an appeal of the rate order of; the MPUC or, by initiating a-new rate proceeding :  ; . .

.before the MPUC.' NSP expects to be able to comply with the July'26,1993,' deadline set i y forth in Regulatory Position 1.11. .

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Thomas M Pauer .

L e:  : Manager '

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jNuclear Support Services 4 sc , M :c:: .

Regional ' Administrator - Region III, NRC lNRR Project Manager, NRC , 1 Senior Resident Inspector, NRC W .. MPCA Attention: ' ' Dr J W Ferman s; *

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Enclosure:

J MPUC Order, Docket No. E002/GR-89-865i

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}]M , (NORTHERNJSTATES POWER-COMPANY: ISSUE DATE:: ; AUGUST 27, 1990. ~~

'9' Q ', ,LDOCKET NO: ,E-002/GR-89-8651 j Ad5 7 ,

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$ . FINDINGS OF. FACT, CONOLUSIONS  :

yE 'OF! LAW,.AND ORDERE i lr . ~ TABLE-OF CONTENTS 'l p[ ,

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4' , N PROCEDURAL'HI!TTORY ,. . .. ~ . - .: ... . . . . . . . . . . . . . . - . . 11- ,, ,

I. .INITIALEPROCEEDINGS . ' . . . . . . . "..- .. . . . . . - . . .1 <-

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II. . PARTIES ~AND REPRESENTATIVES . . . . . . . . . . . . -l' .l;

< Intervenors- . 1.- . . . . . .. . . . . - . . . .- ...:

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! ? 'The'Companyi . , , , .. . . . . . . . . . .. .;. . .. . ^ .v.- ;3 {

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-Withdrawal 5of' Parties . . .. . . . . . ~ . .. .

'. ..: . . 3 1 w III. . -PUBLIC: HEARINGS. . . .. . .. .. . . . . . . . . , . . 3  :

ye 'IV;- . PRE-HEARING MOTIONS . . . . . . . . . .. . . . . .

4' a LMotion to Exclude orsto Consider Filing Date:.'. .- 4 4 3 ;i '

Joint. Motion to Dismiss . . . . .. .. . .. . . . , 4 1

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' Joint'MotionL to Exclude . . .. .. . ~ . .. . . . S' ,

.' Motions to?CompalJDiscovery . - . .;.. . . . . . . . -5 <

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',  ; Motions' Renewed .. . -. .. . '. . . .. . . . . . . . . . 6 SV;. EVIDENTIARYcHEARINGS'. . . . . . . . . . . . .. . . .- 6. ,

VI.- PROCEIDINGS BEFORE.THE COMMISSION ..: . . . .- . . . 6 't g; '

FINDINGS?AND CONCLUSIONS . . .. . .. . . - . . . . . .. . .. . 7  :

VIIA JURISDICTION . .J. . . . - . .. . . . . . . . . . . 7- ]

..VIII.JFURTHERtADMINISTRATIVE REVIEW- . .. .. . . .. . 7.

'IX. :l NORTHERN: STATES? POWER COMPANY . .- . . . . .. . .. 1 NW '

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SUMMARY

-OF PUBLIC TESTIMONY . . . . . . . . . - - . . 8~ M 6 1 "XI. T

SUMMARY

JOF COMMISSION: ACTION . . . . . . . . . . .. .9 M

.  ?. XII..; BACKGROUND'INFORMATION ... . . . . . .. . . . '. 1110u t i w&K >

! Historical Context!. . .v.. . . . . . . .

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Q overview;ofjtheiCompany's Budgeting '.

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,, &.' Forecasting System '..=.:

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. XIII. .THE COMPANY'S CAPITAL BUDGET . . . . . . . . . . . . . .11 .

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" g" "J The Department's-Sample & Audit- . . . . . . . 1 ... 13-

' . ,.. 3 .,, The 1990 Forecast' .- . . . . . . . . . . . -. .. . 14 C '

.,- , Commissions Conclusions . . . . .- . . . .: . . . . 14 .i The-Company's' Position . . - . .. .. . . . . . 15 Past-Prectice . . . . . .. . . . . . . 15 q' Significance of Actual' Data . . . . . .- .

' & Specific Projects . . . . . . . . "15

• Appropriateness of the Sample . . . . .. 16 Significance of Cancelled Projects . . 17

~ Reference Points for Budget Comparison . 17 fi: >

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The ALJ's Recommendations . . . . . . . . . . 18

. Comparisons with Actual Data . . . . . . 18

'% Representative Character of the .3 ample . 19 Sample's Exclusion of Multi-year Project 20 t g <

' Witness Integrity . . . . . . . . . . . 20 1 - -

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The; Company's1Need?for. Flexibility . . m.;- . - .. . 2 0 ;

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The Intervenor'.s ProposedLAdjustments1.1 . c . - . "21

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.XIV.J' OPERATING AND MAINTENANCE EXPENSES!,.'.c.: '1 ,

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%m OLx Positions?of the IntervenorsLand the-ALJ M r"'

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. The Department;

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Minnesota Energy' Consumers l .. . . .

/ North: Star ~ Steel Companyc .- .

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Th e' AI.J r . . : . ' . c . . . ' . . ' ~....: .. .. . .- . . . - 24 g J The. Company's Position'..-'. . -

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Histrrical Dependability .-.L. . . . .. . . . . . 24: 7

• ;- Actua& FinancialLResults'.... ..25.

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• Basistfor':Compar! hon of TestlYear Forecast

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..;25 Q;r Competitive pressures.. .. . ...-..y. .- . ., .-.-27, T ' *~ ' ' '

Budget Basesi1 1 .- . . . ;. .. . ~ ., . . .- . . .: . 26 yJ ,; , , Deferred' Expenses '.

.q 28 1.o.- . .. . - . . .- .. .;

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The:Reasonablenessfof'Specifi, Budget Items _. .29 ~

y Unorthodox l Accounting Methods . .- . ... . . - . . 30-O' Forecasted? Property! Tax' Increases ... . . . . . 31; a q

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. The' Company's'Maintenanceiof . . . . . .- . . . . +j Comparatively Low' Rates Conclusions . . . . . L . - . v . .1 3 . . .

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.XV.: ~ PROJECTED TEST' YEARS AND THEiBURDEN OF PROOF 32 y

1. . 'XVI. JINITIAL: ACCEPTANCE OF THE' FILING . .- . .. :. ;

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. XVII;rREGULATORYJFAIRNESS. .c .~ ." ,]

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XVIII. RATE; DESIGN AND" CONSERVATION ISSUES .. . -. . ..' . . 361 ~!

zXIX. : CONCLUSION?..~. . . . ..- . .. . ...s . . .1 . c. . . .. .. 36'

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.< ,JORDER T...<.. -.. . . . ..: .. .. .. . , . . . ; . .. . . , .' . .. . . . '

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BEFORE THE MINNESOTA PUBLIC UTILITIES COMMISSION Darrel L. Peterson Ch&ir Cynthia A. Kitlinski Coraissioner Norma McKanna Commissioner Robert J. O'Keefe Commissioner Patrice ' fick Commissioner In the Matter of the ISSUE DATE: August 28, 1990 Application vs Northern States Power Company for Authorit y to DOCKET NO. E-002/GR-89-865 Increase it1 Rates for FINDINGS OF FACT, CONCLUSIONS Electric Sercice it. the State OF LAW, AND ORDER of Minnescta PRONDIIRAL HISTORY

'I. INITIAL PROCEEDINGS On Novnbar 2, 1989, Northern States Power Company (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, the Commission accepted the filing, suspended the proposed rates, and ordered contested case The proceedings under Minn. Stat. $ 216B.16, subd. 1 (1988).

Office of Administrative Hearings assigned Administrative Law Judge Richard C. Luis to the case.

On December 29, 1989, the Commission set interim rates under Minn. Stat. $ 216B.16,'subd. 3 (1988). Interim rates were authorized as of January 1, 1990 and were set at a level allowing an additional S81,542,000 in annual revenues. .

The Administrative Law Judge (ALJ) held a Prehearing Conference on December 21, 1989. There the parties and the ALJ identified the major issues, established procedural guidelines, and set timetables.

II. PARTIES AND REPRESENTATIVES A. Intervenors The following parties filed petitions to innarvene 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. Swanson, Special Assistant Attorneys General, 1100 Bremer Tower, Seventh Place and Minnesota, St. Paul, Minnesota 55101.

Resident.ial Utilities Division of the Office of the Attorney General, represented by Gary Cunningham, Dennis Ahlers, and Julia Ancerson, 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, represented by Maurice A. Frater, P.O. Box 1166, Harrisburg, Pennsylvania 17108.

Metalcasters of Minnesota, represented 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. Stene, 31tts, Brickfield and Kaufman, Watergate 600 Building, Suite 915, .

Washington, D.C. 20037-2474.

Suburban Rate Authority, represented by Glenn.E', Purdue, Messerli and Kramer, 1500 Northland Plaza Building, 3800 West 80th Street, Minnee~,olis, Minnesota 55431-4409.

City of St. Paul, Board of Water' Commissioners of the City of St. Paul, and the Municipal Pumpers Association, represented by Thomas J. Weyandt, Assistant City Attorney, 647 City Hall, St. Paul, Minnesota 55102.

Minnesota Senior Federation, represented by Elmer Scott and Kenneth Zapp, 1855 University Avenue West, St. Paul, Minnesota 55104.

North American Water Office, represented by George M. Crocker and Bruce Drew, 3394 Lake Elmo Avenue North, Lake Elmo, Minnesota 55042.

St. Paul Chamber of Commerce, represented by Willikm G. Flynn and David Sasseville, Lindquist and Vennum, 4200 IDS Center, 80 South 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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Ihi , ';hinseptsco,fInci,ErApresented by Miggie E.'Cramblitt,-Corporate -i

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' Sacret ~"i Minnegasco,z201 South'7th; Street, Minneapolis,7 l

[ u Mi.nne 05402. ,

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Diutrict Energy of'St. Paul, Inc.,~ represented by 1 J L Wi'liam

. M. Mahlum and Christine Stalker, 22221 North Central:_ }

. Life Tower, 445: Minnesota. Street, St.JPaul, Minnesota 55101. J

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cThe Minnesota'Public; Interest Research Group'(MPIRG) also1 filed'a j 1petitionsto intervene, which was granted. However, MPIRG didinot-4 , appear at the' evidentiary hearings, did..not sponsor any .

witnesses, did:not file briefs, and did~not otherwise~ participate: d j'[

.innthe case.

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f, iB.- The Company.-- ~ .

m , Th's Company,was-represented by David A. Lawrence.and ,

V# Michael Hanson, Northern States Power Company, 414 Nicollet Mall, t

' Minneapolis, Minnesota 554011 and Samuel L. Hanson,'. Briggs and Morgan, 24001 IDS Center, Minneapolis,-Minnesotas 55402.'

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, Cn Withdrawal >of Parties

• Minnegasco'and Distrlet' Energy of St.-Paul withdrew asEparties-  ;

'N when theLCompany withdrew 11ts " Competitive Service. Rider" rate .

proposal,nthe source of the1r interest in the case.- All three K _ parties agreedLthat competitive rates 1 legislation enacted after-  ;

L , , Lthe; Company's; filing made it unnecessarycto include the. proposal ' -

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in the ratem case.

k-III.- PUBLIC HEARINGS . o ThelALJEheld,public hearings to: receive. comments and questions from'non-intervenint ratepayers; 'The7d ates7and-locations of

these3 hearings ' are .11: ted below; followed'by:the number _of L

personsswho attended eacn hearing. In all, 462 members of'the 1public spoke.

March: 6, 1990. Dilworth 17 ,

Marchi7, 1990 St. Cloud 28 ,'

March 12, 1990 Coon Rapids 26  !

MarchJ13, 1990 St. Paul 43 y

March.14, 1990 ' Minneapolis 44 j March: 20,- 1990 Winona 23 1 March 21, 1990 Mankato 60 t'

eat 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 1of'the Department of Public Service, the Residential Utilities Division of the Office of the Attorney General, the Minnesota Senior Federation, and North Star Steel

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' Company attended various public hearings.

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~ :The?pSblicTwasial'so_ encouraged to submit written. comments on the- 1 fproposed: rate-; increase'; some167: members'of the.phblic wrote to--

, "the ALJ-or to;the: Commission.; -The Commission received _ telephone: ,

? comments-'from 33 members of;the<public. Five members of':the j y i

- public; called the=ALJ.

3 D 17 .:'1 PRE-BEARING MOTIONS ~

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'A'.,' Motion to Exclude or to consider Filing'Date as-

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February 5,.1990 m i 9 J On' February > 12,:1990,- the Residential

• Utilities' Division of she l tofficeLof-the Attorney General (RUD-OAG)~ filed a motion tog .

pp .excludessupplemental: testimony-filr/'"; cae Company on j

February 5, 1990. That testimony reJ ated

to proposed ratemaking ,

f  : treatment of Tax Benefit Transform which, if adopted,:would- )

J Eincrease the= Company's claimed revenue ~ deficiency by 1 us 4 approximately.14 million sollars.  ;

J, The:RUD-OAG asserted this testimony should have been included in d the. company's direct case and that its late' filing denied other 1

,r : parties; adequate opportunity'to analyzerand respond to it. The- , R

.RUD-OAG;also claimed-that:the"information:in the supplemental' s filing:was sof significant that the initial: filing was incomplete 'l 3

, , * - Twithout it,. and that .the Alar should therefore find that the . 1 o g Company had not made.a complete rate case filing until i

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February 5, 1990, the date of the supplemental' filing. ~In the?

alternative, the RUD-OAG. requested that the. filing deadlines _for' l intervenor direct' testimony and responses to-the supplementali R Lfiling be extended.

.The-ALJ found=that the supplemental filing.was,not an. updating of 1 0 ) previously' filed l forecasted information, as supplemental. filings' l

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!wereiroquiredato be under the pre-hearing Order.- However, he q

, 4 also found-the' filing did notLfundamentally' change the' Company's l original; filing,-did' provide usetul4and. relevant information, and.  !

should~be considered'in this case. -He declined'to exclude-the- 1

' testimony, declined to adjust the. rate case filing date to' H February 5, 1990, but did extend the filing deadlines >for '

j

/ intervenor direct testimony and intervenor responses to the

February 5 supplemental filing. i s

B. Joint Motion to-Dismiss .

[On' April 4, 1990,. prior to commencement of evidentiary hearings, I

the Department of Public Service (the Department) and the )

. Residential Utilities' Division of~the Office of the Attorney General. (RUD-OAG) filed a joint motion to dismiss the Company's general rate case filing and requested that the motion be ,

certified: to the Commission. North Star Steel Company l

'(North Star) and the Minnesota Energy Consumers (MEC) joined i tin the motion. l l

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%The motionStofdismiss was based'onithe assertion that_thet '

Company's rebuttal. testimony,7 filed: March 27;.1990, contained so e

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" manyL additions and corrections cto the . initial filing L thatL what 1

- remained of~the> initial filing-wasfinadequate for_ purposes-of ,

• . setting'just andLreasonableJrates.- The moving' parties;alsol

-asserted that1the' rebuttal' filing. contradicted the initial filing. ,

'inJsolmanyjerucial respects _that1the rebuttal ftling<itself. _

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'reasonabletrates demonstrated the3'en the. basic of the initial:filingt1nappropriateness They of:anyfattemp 1 further? argued-that the substance andfscope of the rebuttal' filing were.s far-reachingLthat it actually constituted a new'.

> rate case filiA;, requiring ~ dismissal of>the initial-filing:and , ,

1the-ongoing. rate. case.

The! ALJ denied the joint neotion to dismiss and- declined to A E certify the motion.to-the: Commission. >

C. Joint Motion to Exclude ,

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In ' conjunction with'their= joint motion to. dismiss, the Department-3 o fs and the RUD-OAG, moved that the ALJ exclude large portions of the y

Company's. rebuttal' testimony, on grounds'thatJit constituted'new '

7< material orEwasioffered.byl unqualified witnesses. .They also L  : sought _ exclusion. ofi certain" portions : of the LCompany 's ; original ,

testimony, onigrounds that'it.had been; discredited'by the 3

• lrebuttalL filingjor'wasLoffered by unqualified witnesses. 1

-North Star and MEC1 joined in this motion also. -p

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.The lKLJ. granted this; motion in part and denied it in part. Small i

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portions of1the Companys"r'ebuttal testimony _were, stricken'as ll 'being in substance: direct testimony. The_ majority of the 1

E p  ; testimony lat issue remainedlin the record.. gl

The Department then-moved to strike.all remaining testimony of.

Ronald Clough, some of which1was excluded.by_the partial granting. 3 l

L ofsth" joint motion to-exclude." This motion was-denied.-

a D. Motions to Compel Discovery b North Stars Steel Company (North Star) and NSP brought motions against.one'another to compel discovery of significant amounts of ,

-financiallinformation not in the record. i TheIALJ: denied NSP's. motion as inappropriate and burdensome. The

• Company hadnad Mt.ed the reason for its motion was in part "to 1 turn 4around:o wrth Star the " discovery assault" North Star perpetrated sp.n it." The'ALJ noted.that it was NSP's financial ,

i operations-thich were at issue in this proceeding, not these 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 nad honored many of the discovery requests.at. issue before the motior.

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m  : was' heard, _ arid 2 that : thei remaining _ requests were unreasonably; burdensome.- -

p$,ix;d t E.'. Motions" Renewed r

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1In ruling on the. joint: motion to dismiss,-the ALJ; stated that he=

-would2 continue taking the motion under advisement throughout the1

course;of_the proceeding.- The Department-and. North' Star-renewed

. :the motion in their post-hearing briefs.

7 On' briefing the; Department also renewed'its' motion:to excludeland cits motionato strike all testimony of NSP= witness Ronald Clough.

'not' excluded by-the-partial' granting of-its: motion to. exclude.;

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. North Star.similarly, renewed-its motion to compel. discovery. :All

c. , (motions wereiagain denied"in the'ALJ.'s" report and recommendation ,

[ to the: Commission.

1

1. .V. l3VIDENVIARY HEARINGS t; W The ALJ hwld evidentiary hearings in St. Paul from April'9-13, yy Aprilu16-20,5and: April 23-26, 1990. He closed =the record on

%, , ,-July 2, 1990.4 y VI . - PROCEEDINGS BEFORE THE NmuTSSION: . -

a m

-r M , The; ALJ flied his: report and recommendations in two= parts. The-first part,xdealing with revenue, requirements, wasifiled on July:13, 1990. The second~part, dealing 1:with conservation and rate 2 design, was filed on. July 19, 1990. He"also-filed-p Additional Findings of Fact and1 'Conclusions on revenue requirements.on" July' 17,'1990. ,

l1.3 The Commission established L.n-da'y time periods.for_ filing exceptions to Parts'I andFII'of the~ALJ's' report'by'Ordersidated'

' July'13.and July 19, 1990.

The Commission heard oral argument on July 30.and 31,.1990. -

At the:end of oral argument the. Commission Chair announcedithat.

deliberations'would begin with an opportunity for Commissioners to ask any final questions they might have.' On August /2

deliberations opened with the Chair asking the Company to further explain"its reasons'for considering its filed test year, data m reliable and accurate. All parties were allowed to comment on.

D, the Company's answer.

Upon r'eview of the entire record of this proceeding, the Commission makes the following Findings, Conclusions, and Order.

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( MlM m' FINDIMGS.AND COMCLDSIONS ,

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M  !" 'yII; IJURISDICTION" 3 -

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TheiCommission has general jurisdiction over the-Company unders

Minn*.71 Stat . .In216B.01 and1.02f(1988), ,The-Commission has '

Lspecific; jurisdiction over rate changes;underlMinn. Stat. .I .

+ 216B;16 (1988).

This case ;was properly- referred to the office'of ' Administrative n ,

HearingsJunder Minn.iStat.;Il-.14.57-14.62 (1988) and Minn.iRules,:

M y ;part 1400.0200?31 agg.e QT VIII.

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FURTHERLADMINISTRATIVE REVIEW

n ,

k, Un' der?Minn. Rules,;part 7830.4100 any petition'for rehearing, reconsideration, or,other-post-decision' relief must-be filadE' within17J days of the'date.'of this Order.. Such petitions-must'be-filed withlthe Executive Secrethry-of the Commission,Emust l specificallyLaat forth the:groundsLrelied upon and errors __

$ claimed',:and must beLserved on1allLpartis.s. .Thet f11ing':should.

includeLan: original,c13. copies, and proof of service:on'all--

partiest 4

' ; Adverse (parties!haveLten days;from.the date of service ofJthe petition to-file. answers; 'Answersimust be filed'with the Executive Secretary of the Commission and must--include anL*

.t Loriginal,.13; copies,:and' proof of^serviceron'allLparties.

--Replies 1are cnot permitted.'-

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T Thin'C'ommiss' ion, in its; discretion, ma'y grantioral argument on the -

petition or: decide the~ petition without oraleargument.

' Under=Minn. Stat. I 216B'.27, subd.- 31(1988), no;0rder of the c

'ommission shall become. effective while a~oetition for; rehearing-is pending.or until either of the followin p . 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 20 days of filing Minn. Stat. I 216B.27, subd-4;(1988).

o is deemed' denied.

iIX.. 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 Dakota, and South Dakota.

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The Company's Minnesota service area is 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 cone from service to the metropolitan area.

This rate case involves only the Company's electric oparations in the state of Minnesota.

X. SNMaRY OF PUBLIC TESTIMONY Two hundred forty-one people attended the public hearings in this case, and 67 submitted written comments. Thirty-three members of the public contacted the Commission by telephone to comment on the proposed rate increase, Public testimony and comment were offered on a variety of issues.

Several community organizations in the Company's service area took a position on the proposed 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 rate increases impose on low income and fixed income ratepayers. They particularly opposed che 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 Foderation presented a petition, signed by 58 Dodge County residents, urging its rejection. The NSP Retirees Club of Local 160, International Brotherhood of Electrical Workers, similarly opposed the increase. The Retirees Club advocated close examination of executive compensation and pension levels, lobbying expenses, consultant hiring practices, and the environmental implications of the Cumpany's water

' source practices and PCB-burning project.

The International Brotherhood of Electrical Workers, Local 160, representing active union members, supported the increase. They also asserted the Company and the union had formed a 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 praisod the Company's corporate citizenship and economic development efforts, particularly in the area of business retention. The Deputy Commissioner of the Minnesota Department of Trade and Economic 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 8

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the Company-shou 1C~not'need-another general--rate increase seisoon l

.after its lastione. Many urged careful scrutiny of1the proposed-

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'4 + 3 increase,1 emphasizing that- electricityyis an' essential service .;

-provided under monopoly conditions. Many people _ stated that-o itheir? incomes were-not rising as rapidly as their utility: bills.  ;

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II..

SUMMARY

OF COBOLISSION ACTION. .

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Because of grave doubts about the accuracy, reliability, and a predictive-value of the-test year budget data submitted by the.

Company,;the Commission will deny the requested rate increase.

The Commission finds that the rate case > record'does=not t

> demonstrate that existing rates are unjust'and unreasonable,.  ;

-whichlis"necessary for approval'of-a generalorate increase.

Neither~does the record provide a reliable basis:for setting new just and; reasonable rates. .

' Existing rates, which were just and reasonable when' set and are <

presumedLjust and reasonable until proven otherwise, shall remain in erfect. Minn. Stat. I 2165.16, subds. 4 and 5 (1988). The l

+ inadequacies of the record are. summarized below and explained in >

greater detail in the remainder of this Order.

NSP=basedrits rate increase request on a fully-forecasted 1990 l

_ test year. .The Company did not base the test year forecast on .

actual 1989 financial results or on actual results from:any other L

u, historical period.= Instead, the Company based the test year  ;

h forecast on management proj~ections of what the financial needs of.

. the Company _would:be"during the-12-month test year period. This.

deprived the Commission of the opportunity to compare individual items in the forecast with corresponding. items on the actual

" books. The Commission's only recourse, then, was to evaluate the 1

--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 budgets were consistently  ;

overestimated, and that the degree to which they were p

E overestimated was steadily ri'ing. The differences between second year capita 1' budgets and actual'. capital expenditures for' 7 the past_four years.are as follows: 1986 - 4.39%, 1987 - 8.60%,

• 1988 - 24.33%,:and 1989 - 28.27%. In all yearsLprojections exceeded actual. expenditures. Since test year' forecasts are for

periods <similar to second year budget periods, it would appear 3 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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2m  : Similarly,: the - Department 's i audit , of t thei100-item sample!foundj u a :severalsitems in the test year-rate' base'which clearly-:did? noti

" belong, and.others?which were highly questionable. Those items

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included reimbur_ sable projects,1non-electric 1utilityJprojects,;

w projects not yettbegun butf-includud in rate base, projocts'not:

yetminiservice but' included in rate base, cancelled projects, and , .

-non-specific, unidentified pro ectj funds.- The Company conceded; 4

' 7 that'many,of these' items should have1been excluded from-the;

' capital' budget and from rate-base.-

Finally, an examination lof' 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.;

ForLtest year-1990 the. Company expects to exceedEits-second; year 1

< operating andz maintenancesbudget by 7.8%,.after underspending its-

1989

' budget by12.67%." This strongly suggests thatithe Company

'has overestimated its operating.and maintenance, expenses =for,the test year, or that the test year operating and maintenance 1 forecast 11s not representative of expenses in a non-rate case-

1. year.

The Commissiontcencludes-that the Company's filing does not provide a reliable foundation from which to determine:just and reasonable' rates.

XII. RafTt:ROUND INFORMATION A.  : Historical Context The,$120,782,000 ratenincrease requested by the Company isLthe

. . second largest; rate request 11n; Minnesota history,cand the second

la gest ever' filed byfthis Company. It was. filed only 14 months:

after the Commission granted the Company a $75'million rate

' increase.- Presumably,,the^$75 million' increase" met-the: Company's:

financial needs at.the. time,-since thouCompany stipulated 1 to:that

. 1 amount. ,In the Matter of'the Acclication of Northern" States Power,Comesnv for Authority'to Increase its Rates for Electrici Service in' Minnesota, Docket No. E-002/GR-87-670. Over half of the; increase was attributable to the addition of a new major-

. generating facility, Sherco 3L., ,

'By contrast, the current rate request was not prompted by any

maj'or construction project or other significant addition to rate base'. The fourteen month period between the last rate increase W, andithis filing was a period of relatively stable prices substantial growth in Company electric revenues, continued protection:from fuel and purchased power cost-increases through 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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Udthesfuelfadjustment clause , and protection from changes in-2

'. Tmandateg;conservationcoststhroughtheiconservationtracker, Laccount .- In'short,-this,was.a rate; case.in.which the-factors

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-.which usually, drive. rate. cases -- e.g.,,a.new high: inflation---twere missing.

~~p l ant,;a period of:

.In' the, absence of' other: major issues,1the Company's budgeting processes were carefullyLexamined:  !

'in ansattempt to discover what was causing.the need for a rata =

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. increase. .

B. . Overview of the Compary's Budgeting 1 and Forecasting i System' q W

The Company's budgeting: process is complex.- The-record refers to-

first year budgets,.second year budgets, first year' forecasts, l

a second year forecasts, test year forecasts, normalized actual' ,

• 'datar and actual data. Actual data represents actual1 operating 1

.results for a historical period, while normalized l actual . l m represents actual operating results for.a historical ~ period l

after. adjustments'to' reflect normal operating conditions.- An. )

example of_such'an1 adjustment would be adjusting _ sales revenues to reflect average weatherfconditions. i l

?s .NSP's budgeting process incl'udes-preparing and revising several budgets. Some examples include capital budget, departmental N

operating expsnse budgets, and1saler budget,

. In the f all of 1988, NSP created its budget for the next two j or years. The first year budget was for 1989 and the second year-L '

1 budget was for 1990.'.'Then, on a monthly basis,.NSP reviewed

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E, = current information as-it developed and created theofirst year forecast (1989) and second_ year forecast.(1990). This-activity

. continues.on an ongoing basis whether or not a rate 1 case is planned.-

3

' In approximately-Augustiof-1989,tNSP forecasted theldata.forithe

'1990Etest: year and made regulatory adjustments:resulting in_the H test year forecast. The test' year forecast filed in the-rate ,

L S' 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 m 2 .Minn. Stat. $ 216B 5, subd. 7 and Minn. Rules 7825.2390.  ;

\

3 Pages 21-23 of the Commission's Findings of Fact, Conclusions of Law, and Order in In the Matter of the Aco11 cation of Northern States Power Comoany for Authority to Increase its Rates for Electric Service in Minnesota, Docket No. E-002/GR 670-(August 23, 1988). .

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evidenceLto' allow.the. Commission to: determine'rateLbase1and

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' establish just andireasonable rates.

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,In the original filing,JNSPJrequested'a' rate' base of- .

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3 sS2,372,746 , 000r ;This.comparesato=a rate baseaof-S2,342',665,000 s J foundt in NSP's"last rateLcase, HEE, Docket E-002/GR-87-670.;_

j if ExceptJforJa1 Company proposal to consider tax benefit 1 transfers: 1

• cfeapproximately S73,142,000 as a source'of-zero cost capital,- ]

j rather than as a reduction.to rate base:as:intthe last rate case,.

s

'the'. originally-filed rate base would be' lower than the one j

.#;  ; approved in'the last rate case. This is indicative of a company' j

., I cJ sthat is not. presently involved in major construction projects..

• -The $2,372,746',000 rate base amount is an average of the I 4 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 <l 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 1 j

balance. The January 1,.1990 balance was projected based on

part-year 1989 actual data, plus forecaeted capital expenditures for the remainder of 1989. The December 31, 1990 balance was 'q projected based on forecasted expenditures expected to occur during 1990.  !

a m The' Department recommended that the Commission deny'the Company's  ;

request for a' rate increase on grounds that the information in y 1 the record;did=not support the. request.' 'In the alternative, the  :

o Department recommended that the test year rate base be-reduced by J 4

L at least $82,152,000 to1 reflect errors in the capital budget l ' discovered during the Department's audit and investigation. This L amount represents a 27.12 percent reduction in the'1989

? a forecasted capital expenditures and a 23.08. percent reduction in p'~ the-1990 forecasted capital erpenditures. The Department also ,

L recommended an-additional S3,736,000 reduction to remove-L' reimbursableprojectserrone{1 sly-included ~in' rate-base. .4 The Department recognized that in order to' determine the -

reasonableness of forecasted data, the data must-be subjected-to j intense-scrutiny. . As a starting point, the Department > conducted ',

an overall analytical review. Thi's review focused on the relative accuracy of=second year budgets and first year budgets  ;

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,

, 8.60rgercent 1989.

in 1987, 24.33 percent in 1988, and-28.27 percent in  ;

In addition, the review indicated that first year budgets are showing indications of greater deviation and volatility from ,

L actual expenditures. Thus, the first year. budget for 1988 '

.(prepared in 1987) exceeded actual capital expenditures for 1988 o

by 24'.74 percent. 1988 was the test year in NSP's last rate case.

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DPS Exhibit 158, Page 11, Direct Testimony of Vincent C.

Chavez.

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Although:the;secondTyear budget-normally-exceeded: NSP's' actual' capital expenditures,'NSP's forecastLfor.the 1990' rate caseitest

~ oyear exceeded the 1990 :second- year budget: by approximately $46

.million. Based cn theftrendsLidentifiediabove,.the Department r?s estimated that' forecasted expenditures for- the rateEca yearwouldexceedactual:expendituresby'Sil5aillion.getest A.. The Department's-Sample and' Audit .

In?further investigation, the Department employed'a discovery

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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

> to:other: jurisdictions. 'The Department further reduced the -

number by limiting projects to those beginning and ending in' 1989'. Approximately 600. irs remained, from:which the Department'

-ult.imauely took a-sample of 100. The. sample' represented approximately S15-million of budgeted projects from approximately

$233 million for the Minnesota. company, excluding gas _ operations.

TheDepartment'sexaminationofthesamplefogndadifferenceof between amounts a pproximatelyLS4.1 million, or 27.12 percent,

. budgeted:and amounts actually spent. For the items in the sample,-at least, the. company clearly had'over-budgeted for capitaliexpenditures.

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 3een in rate-base.

The.IRsLin_the sample. included.one.projectLfor which NSP will-be reimbursed by another party. In fcllow-up, NSP located 26 other reimbursable projects and'14 blanket' projects which included amounts for reimbursable projects. -NSP agreed that reimbursable

, projects should not be in rate base.

The, sample identified.10-proj; cts which were scheduled to begin-

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and end in 1989, but ht4 zero expenditures in 1989. Since these Lare 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.

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.  !

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Thelsample91dentified aicancelled pr,oject.- This project was;.

'N 4 ' included:in the-forecasted.beginning of; test year rate' base,1but' Os Jwillinever-be> completed 1again resulting in an overstated' rate",

base'. On' follow-upF NSP identified-140 othericancelled projects, all included in test yearLrate bass' -

iTha2 sample ~ identified project funds and' corporate:. funds.

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These funds-derive from cancelled projects and' projects completed below budget.. At year-end, NSP zeroes outLtheselfund balances. The Department,was concerned that funds already included in the y forecast and in test year rate base cou.A be=zerood out and

. diverted to;non-utility or:nmn-Minnesota operations. The.

-Department. indicated that-tha total. draw-downsLfor the corporate:

l fund in 1989"were;over $58;million.

i B. The 1990 Forecast The: Department was unable to sample NSP's 1990 capital expenditure' forecast, used to develop and of test year rate base, because11990 actual-data was not in existence. Instead, the

~

g Department examined the11989 second year budget, in which thel y Company-over-forecasted by 28.27: percent above 1989; actual '

L . expenditures.

h 1The Department recognized that-the accuracy of NSP's: forecasts q improves ~as the-period;being: forecasted gets closer. Since=the -!

rate caseL199.0 test year forecast was constructed using-several- il i 3 .

monthsofactual'ig69 data,theDepartmentconstructeda-mathematical model -to lucorporate assumed improvediaccuracy. As-  ;

a result, the, Department cocommended that the forecasted capital- j

. expenditures during thel 1990 test year be reduced by 23.08- j B'q-o

. percent.

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C. Commission Conclusions- A When~ determining just and reasonable-rates, the Commission is. 't directed by;Minn. Stat'. $'216B.16, subd. 6;(1988) toLgive'due L consideration to' property used and useful in utility' service.~.

l Such property-must also be: prudently acquired ~. In order.to' meet ';

L that statutory directive, the-Commission must be able to

l. determine the proper amount to include in rate base for the test k year. ,

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 7 trends' point to increasing inaccuracy and'unreliability in1NSP's first and second' year. budgets used to forecast future capital-budgets.- The sample conducted by the DPS has revealed many *

individual and specific errors, which the Company has the burden of explaining.

7 DPS Exhibit 16.0, Vincent C. Chavez Surrebuttal, VCC-82

-Corrected.

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1. TheLCompany's Position

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a. Past Practice  !

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'NSP-indicated that.it has based its plant and CWIP'amounti on capital expenditure forecasts since its first rate case ins 1975.- .

-The Commission.doesunot dispute that it has' accepted, and-will i

continue to accept,-forecasted test' year data. However, the

! - 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, 3 at 8-(June 2, 1986). Further,.the Commission will notisimply  ;

accept forecasted data without review becausecit has accepted: .;

, such data'in the past. Each case'will be reviewed according:to- t its own-merits. ~In this cas'. serious questions concerning the capital expenditures have bee; raised which cast serious' doubt: i f' -over the reasonableness of tne rate base proposed by NSP. 1 L

b. The Significance of Actual Data and ,

L Specific Projects >

l The Company argued that the updated "actuals".for 1989 show that its projections for1989 are accurate and reliable. The- j Commission agrees with the Department and other parties th'at the use of unaudited-actuals. filed 13-days prior to the hearing does -i not' bolster.the forecast in this case. NSP's reliance on-1989 actual' data to support its 1989 forecast ignores the. purposes' for- c 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 i j

, supplied by NSP'in rebuttal are probative of the issue in the' case.-  !

NSP: argued'that the'Depa'rtment's sampleffailed'to accurately predict what the actual capital expenditures =for 1989 would'be.

The Commission notes that the sample-was conducted to-determine how wellLNSP budgets capital expenditures, not to determine what the actual 1989' expenditures would be. The record shows that many projects that wer forecasted were later cancelled or >

otherwise adjusted.

The Company argued that the Department did.not identify specific forecasted capital expenditures as. unnecessary or unreasonable.-

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 i

, 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 a comparison between forecasted amounts and actual expenditures.

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{ c.- The Appropriateness ofLthe~ Sample-e *.3?

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rNSP. argued?that=the discovery' sample was'not representativeof, L 'the total population,of irs._ The Commission-recognizes that 1the-t .Departmentsmade many1 adjustments in arriving at.the subpopulation

~andthas not demonstrated.that the sample is totally representative of the entire population of irs. 'However,'the sample didffocus.on projects beginning and ending within 1989.and' revealed many errors. Furthermore,-.thersample included three-projects, all withEindividual budgets 3.n 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 QL by attacks: en the Department's methodological' rigor. . _ WhLtever - '

.the marginLof error inherent in the Department's-sampling

. . technique,rthe Department's* investigation demonstrates that there- i are--serious inadequacies in the Company's capital budgeting process. Those inadequacies infect the-test. year. rate base and j

make it1 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 2,60' TRs associated with.the U Minnesota: Company. The Commission v as that the Company could j have chosen:to rebut the s--tic -y pplying complete;information H on'all-the. irs. The Comp, .y contross that information and.is in. 1 the best position.to. offer such evidence. Instead,.the Company. a chose to argue that the sample was inappropriate, leaving the - si 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. Tne  ;

Commission' finds it more likely than not that the kinds of errors t

.which affect the sample affect the Company's entire capital '

budget.

The Companycargued that there was no need to sample, because rie .

. actual results for 1989 were known. The Company-contends that.,. i based on 1989 actual results, the Minnesota Company forecast was.

only-overstated by 0.55 percent, not the 27.12 percent the' sample ;l suggests. Again, however, rather than address the results '

related to the specific 4,000 irs upon which the test year q capital forecast was based, the Company chose to rebut by filing.

E additional unaudited information relating to aggregate  :

L  ; expenditures. The Company filed 600 pages.of testimony and Lexhibits, including unaudited updated data to replace the seven L  ;

L months'of projected data the Company had used to calculate its F , January 1, 1990 rate base. Since the Company did not address the j ly, specific 4,000 irs upon which the test year capital forecast was '

o

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 changes are found in the forecast, the Commission is asked to

-accept unaudited 1989 data, which at most establishes only that

-the money was spent. The filed data does not identify the 16 t q

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,purposesifor-whichiit_was' spent, or even confirm that it was s

D-4; :spentifor: regulated Minnesota electric utility l operations.- ,

d." Significance of Cancelled' Projects lThe LCompany argued that there is; no' adverse' impactf on ratepayers:

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if anEitem included in the rate case' forecast is-cancelled and

< channeledLthrough *.he contingency fund to-a non-utility project 1

asilong as-the: expenditures were not included in test year actual-expenditures.. The Commission findsnthis 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 1that is not used and useful in providing. utility service.<

n ApparentlyLNSP.' 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- l Commis sion 's ' concern. It does not allow the Commission to d L 1 fu1~ fill its statutory duty to ensure that-rate base. includes only property usedJand useful in providing service to the public.

Minn. Stat. $ 216B.16, subd. 6 (1988). The' Company's1 approach provides no certainty on what the rate base will include. All" '

]

that' is known is that rate base is likely to not include many of- i Sthe projects-the forecast said it would include. 1 NSP' argued that_the Department's recommended adjustment of'23.08.

percent to the 1990 capital expenditures forecast should have

]1

-been based on a project by project evaluation, including 1

' determinations on the reasonableness _of. individual projects'. _The Commission notes that the Department's-adjustment ^1s' based en a historical deviation between second year budgets'and' actual 3

capital. expenditures for 1989. That deviation was shown-above as-28.27 percent, adjusted to 23.08 percent to allow for improvement K

with the - passage;of time.- That_ adjustment:..does not address the j,

v 1 reasonableness of individual projects, but does attempt.to adjust j L the test year rate base to represent only those projects that

~

will actually be carried out. 'l

e. Reference Points-for Budget Comparisons l The Company argued that the first year budget for 1990 would have y

been a more appropriate comparison for the test year capital expenditures forecast. There, NSP stated that the 1990 test year

.  ; forecast exceeded the 1990 first year budget by approximately-6 percent. Further, the Company argued.that it was inappropriate to compare to the 1990 second year budget since the test year. 1

. 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 se'cond year budget in the aggregate. However, overall review demonstrates that second year budgets have recently exceeded actual results by a wide margin. The sample conducted on the 1989 capital forecast also showed a wide margin 17

.p 7

,6, yfr f , ,

, l, m *

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[

,t .: a '

1: ;of l deviation;. . First year _budgetsLalso.show:a recent trenditof s _

<c., :overbudget,;with 1988's-(another. test; year) fi y exceedingiactual,resultsbynearly25 percent.gst'yearbudgetr

= Tse first year i budget 1to'. test year forecast deviation of 6:percentEtonds-to ,

support the concern regarding forecastingierror. Furthermore, l TJ comparisonsito;the_1990-first year budgets may be skewed,-since-  :

u ,

NSP knows what the target is from the test year" forecast. These i f' facts raise serious doubts'about the 1990ccapital_ expenditures-l forecast as well.  ;

The. Company argued that the mathematical formulaLemployed to reflect-improved forecasting accuracy _as the forec.asted'periodi '

gets. closer was based on improper assumptions.- The Company argued that the. formula was skewed because the Department chose. .

to base"itaonLthe' year with the most extreme _ deviation (1989),

a The. Commission' assumes that the formula 11sjnot precise and'that D there~isiroomtto question the Department's choice of 1989 as the.

basis'for measuring improved accuracy. This is a. minor concern,_- t however, and~should.not obscure the central fact that there is a dis'turbing gap'between forecasted expenses and: actual- '

expenditures.

s i p 2.- The ALJ's Recommendations l '

Ja. Comparisons with Actual Data g

The ALJ suggested that the Department could have performedLaL

~ ~

4

. comparison of aggregate forecasted expenditures-with the actual L 1989_results, as did NSP. However, as discussed above, this comparison-determines only that the money was spent, not how it

.,- ;was spent.? Onlysan itemization by the company,.with audit'ing, '

would have shown.how-it was spent, and the 13 days between the -

' filing of the:information and the-opening of evidentiary' hearings-were insufficient timeLto conduct'an audit.

L The.1989 actuals do not address'the more fundamental concern L . raised-by the' Department and other parties about the reliability L of the August E1989 capital budget / forecast 'for- 1a90. Nor do they l

addressz the underlying concern about the forecasting method. The- l' 1989?actuals are only probative of theLreliability and accuracy of projections made for 1989. ,

o The fact that ASP's August 1989 forece.st 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

• ablet to stay within its. budget target for the remainder of_the

-year. The 1989 data also raised a set of its own questions, such as whysspending in December 1989 exceeded budgeted spending for the first time in three years. Since the Company was planning to file e 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 ii.) .

i

j f l .,

7., ,

t i~ ,

f inot dispel!theyconcern that'the; forecast and the data-were- ]

, Emanipulated'and preparedfin anticipation 1of1NSP's decision to -i i

seek a: rate increase., The Commission cannot discount the' 4'

possibilityLthat: spending _wastmotivated'by the need-to fulfill 1.a 1 Jrate case = forecast,--whichlthe; Company:know could'not,be/ audited within Lthe L time < framesnimposed by the rateccase : statute.

Tb. - The Representative Character of1 the '

l

. Sample  ;

4 'The ALJ'foundLthat there was enough doubt about the' 1 representative character of the Department's: sample to . conclude Lthat the'results.of:the audit.could nots be.-reliably applied to-  :;

x 'the total capital forecast. The Commission disagrees. NSPl _

submitted no-information on the total' population to'show that<the sampls : was : seriously: unrepresentative . NSP chose'instead to +

rebut by: showing that the Company actually spent the. entire ,

4

-amount it-had: forecasted for.1989. Given the serious.

discrepancies disclosed in the sample audit, however,-this issnot

.reassur ing. Without detailed explanations of individual budget' 1

, items, the Commission has no verification that these monies were

spent on-projects usad and useful'in'the Company's regulated ,

Minnesota-electric utility operations.' The presence.of; unregulated, , reimbursable, and 'eancelled projects 11n the sample,s s anduin test year rate-base, is not reassuring. Neither.is-the- J g

. fact that theofunds. flow through the' Corporate Fund for regulated 4 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 aboutz its need forLthe requested rate increase. Fortthese reas'ons,:the. i fact'that the 1989' forecast wasispent in full does not discredit' 4 theJresults of the Dep'artment's audit.

L The ALJ gave a-great deal of weight to.the testimony 1of NSr 1

! ' witness = Campbell,'who'statedEtherstatistical"probabilityrthat the 4 sample is comparable to:the total population is so remote as'to -

be meaningless. The Commission finds this cause fortconcern.- At the same time, however, the errors the sample disclosed in the capital forecast are real. Furthermore, when1the Company, ,

examined the 1989 capital forecast in light of the sample's .!

' findings, more of'the same errors appeared. For example, t

h. reimbursable projects,. unregulated projects, and cancelled L projects were found in the 1989 capital forecast, .in significant i L numbers. The Commission does not find that the Department's audit, and the sample on which it was based, directly reflect the i L

.ntunber of errors in the Company's 1989 capital forecast. The.

L Commission does find, however, that the audit demonstrates the.

L, -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. l 7

19

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.c. :The Sample's Exclusion of' Multi-yeari E j

, Projects' n wo j

. . .' 2 m The"ALJ: stated that:theiexclusion'ofumulti-year = projects-fromathe EDepartment'sLsampleqtends to bias the results. There~are no hu <

l comparisons;of.such budgets.in the recordo.however, to showLthat budgets : for: multi-year- projects are- more -accurate than those for:

, . projects _ scheduled to be completed in a: single year. .It~ i s ' n o t

'self-evident that such budgets would be more= accurate.: In fact,-

-it can be-argued that budgets.for discrete' projects lasting.less: 1 than-a:yearfwould be easier to project. Furthermore,- the sample

' ~

, ~didEinclude,three projects with budgets in excess of $1 million  ;

each. . Those ' projects also recorded-large deviations. The 1 Commission ' is therefore unconvinced that e the ' exclusion: of multi- 1

year projects from the sample requires ^1tscrejection.' a l" id. Witness Integrity l t

The ALJ stated one reason he' declined to apply'the resultsfoflthe

• Department's audit to the Company's filing was that.he_did not ,

find'thertraits of dishonesty or incompetence in NSP's witnesses. tr 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 thel 1 foundation for a Commission i determination:of just and reasonable ,

rates. The: Commission finds that.the Company has failedito meet t this burden.

Thexrecord shows.that NSP's-capital expenditure

• budgets are-  ;

becoming. increasingly. inaccurate, with deviations between  ;

budgeted: and actual expenditures approaching 30' percent. Not-  !

., only do'second year budgets suffer:from such' deviations, but- 3' first year budgets are also beginning to be affected. According

'to NSPLvitness Foss,< Exhibit 57,_ Schedule 9, page 1 oful,-first year budgets overestimated' capital expenditures.only once'from-K 1980 through 1987. However,/in 1988'(a-test year) therfirst. year 1.

budget overestimated actual expenditures by nearly 25' percent. . 2 In 19 89,: the first year budget overestimated- bycnearly 9~ percent. [

p While;such. budgets may be sufficient for the purpose ot day-to-

day operations of the Company, the Commission cannot depend on-such information when setting rates, j

.e

3. The *- *any's Need for Flexibility I

L =The' Commission recognizes that flexibility is necessary when' operating the Company. It would not be wise or prudent to L implement erroneous budgets. .The Company needs the freedom to '

L underspend its budget when projected spending proves to be L unnecessary. Much less flexibility can be tolerated when forecasts and budgets are used as the foundation for rates. Once

-rates are set, ratepayers will not have the opportunity to make day-to-day adjustments to rates to reflect flexibiltty in operations. Rates must be based on data which reasonably  ;

represents the needs of the Company in providing service. To  !

20 t a 1

.. m

. _ - .a

'".n 1 g .

r 1

jase: rates 1oniforecastswhichmayallowthe(Companyflexibility:

lof up;to 30 percentfdoes not: result in just and reasonable; rates.

3 NSP;cannot pass;its' budgeting and' forecasting risks on,to-thei- 1 4  ; ratepayers.' Li

.t Subst'antiation: Required

~

4 '.

LMinn. Stat.ml.216B.16, subd. 1 (1988) provides thata: change of l

rate' notice-shall include: substantiating documents and-exhibits.

1

.Those. substantiating. documents are to be included with the.

filingF 'Withierrers and deviations of the magnitude discovered. ,

T ?in the-forecasted material supplied,.NSP.has not met.its burden j L of supplying. adequate' substantiating evidence with its notice-of~ '

/*

change:in rates. q

=i The Commission is not convinced that the Company has shown that its_ capital budget / forecast and its forecasting; method are 6- ,

accurate and reliable or that:its 1990 forecast is evidence ~of a

~

l, need for an increase in rates. NSP has,not provided sufficient 7 lf detail in regard to how it arrived at its 1990 forecast or how:it j j

~ in determined that-it needed an increase in rates, ,

b, -T1.e most straightforward attempt to.' secure information en this  :

l subject was made by North Star Steel. That intervenor' served 4

L L -.information requests' intended;to confirm or allay.its suspicion' that theJ1990 forecast was designed to conform'with rate case 3 l goals, instead-of the rate case being designed to conform with an d objectively! prepared 1990 forecast. North Star was unsuccessful,

.however. 'The Company refused to replykciting attorney-client

-privilege _andl attorney work product privilege,-and the ALJ upheld

. the Company's objection. , .

i I

5. The*Intervenors"" Proposed-Adjustments l

? .

The' Commission does not believe.just and_ reasonable rates canube set by_ accepting or modifying the~ adjustments proposed by .the intervenors. Historically,,the Commission has adjusted proposed 4

$ *. rate bases and operating budgets based on review of specific ,

issues.-_Here, the adjustments _ proposed represent "across the t

. board" adjustments.hased on-a sample and historical trends.. The

Commission believer ratemaking requires more reliable facts andz

greater certainty chan~this record provides. The information in this record does not allow calculationlof a rate base which is sufficiently ver!.fiab1w 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 1 'a-preponderance of the evidence that existing rates are unjust

.and unreasonable. Minn. Stat. 5 216B.16,*subd. 5 (1988). The Commission concludes that it cannot proceed with ratemaking on

- the bcsis of the existing record.

21

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ZIV. .' OPERATING AMD. EXPENSES -

c 0

In'itsforiginal'filingiNSP claimeditest year total operating ^

j

, expenses L of: 51,195'737,000. --This representstan increase of-o ^

i approximately;17%tover the-$1,023,766,000 stipulated to;and

allowed:inLtherlast' rate case. In' supplemental,and rebuttal s' ' filings, the: Company. increased its estimate of-necessary .

operating expenses: to $1,199,777,000,- Commission discussion-will genera 11yrfocusson the first number, as-theTintervenors did, g The. company also forecasted; test year' revenues of $1,358,824,000, an increase of approximately $85,000,000 over revenues :aut' 'rized'  ;

in-the.last rate case. The recorderoflects little disagreement with~the forecasted. test 1 year revenues.

J As discussed' earlier in the order, NSP's rate. case test year'

~

expense 1 forecast is devel'oped using its

budgeting and forecasting, i l systems'. 1990-test year: expenses-were~ forecasted'in u approximately August of-1989,'with the rate case filed on w November.2,=1989. Parties:have raised serious concerns regarding ]

the_ forecasted expenses. Those concerns will be addressed below. &

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 3 inacessary to eliminate costs deferred into the test-year from i earlier periods, Land to reflect historical deviations in NSP's L budget.-

3 The-Company's 1990 test year DOE'(departmental operating expense)

E  ;

p forecast projected operating; expenses-7.8 percent higher than the L

h

-operating expenses: projected in the second year budget for 1990, originally. prepared in the fall of 1988. To put the matter in 1

perspective, the-Department studied the-historical deviation of second year b?,dgets to actual expenses over the years 1986-1989. t This review indicated that actual expenses exceeded second year budgetrexpenses by 2.4 percent in 1986, 3.64 percent in 1987, and.

L 6.9 percent in'1988 (the' test year in the last rate case).

l 4

However, in 1989, second: year. budget expenses exceeded actual expenses'by 2.7 percent. Based on Department calculations, f

\

.9' Operating and maintenance expenses are frequently categorized;es the' production, transmission, distribution,

. customer accounts, sales, customer information, and administrative and general items in the income statement. In the L original filing, those items totalled $850,116,000 compared to E

$713,091,000 in BSE, Docket No. E-002/GR-87-670, (August 23, 1988 at 29), with slight modification on reconsideration.

L 22 i

f" SJ ic ,l

'l

~

{ 7( ,

3p 1

-- = .

7. ' , actual expenses' exceeded theEsecond year: budget by'an average of ]

c2.5: percent for the years 1986-1989. 1 l

The Department recommended that' test year operating expenses be.

> l limited to 2.5 percent over the second year budget for.1990- .

' prepared 11n the' fall of 1988. -This was based on reducing the 7.8 l vpercent amount that the' test-year forecast exceeded the original. )

-1990 second year budget.to-the 2.5Lpercent amount <that actual

. expenses have historically exceeded second year-budgets on average.' The Department then calculated a. reduction to operating-  ;

expenses-(adjusted to exclude fuel, purchased-power,and other j items). by. applying the'5.3 percent adjustment.-

y

2. . Minnesota Energy Consumers j Minnesota.-Energy Consumers (MEC) recommended that operating expenses be reduced by $2,997,000 to remove costs deferred into the test' year from prior periods. MEC also recommended a ..

S20',108,000 normalization adjustment to insure that-rates only .

T ,

L -reflect the cost of providing efficient electric service for the ,

test period.

MEC: calculated its adjustment by reviewing specific items-and g

identifying. specific items it believed had been deferred into the-test year. Those items included amounts for:line clearance, 't delayed commitments, deferred maintenance,-deferred outage, and '

L deferred costs l U. MEC contended NSP should be held to its goal-

=of maintaining cost increases within the general rate of inflation. KEC calculated"its adjustment"by.beginning with the ,.

g accual operating expenses for 1987 'and escalating ghose costs by  ;

the Consumer Price Index (CPI)-Urban rate to 1990 .

I

3. North' Star Steel-Company-1' North' Star Steel Company (NSS) recommendednthat 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.

[

'NSS. stated-it was unable to produce an alternative historical test year analysis.due to lack of time and data. NSS did- 3 n " illustrate the volatility of departmental operating: expenses,- 'l showing that expenses' increased 11.5 percent from 1987 to 1988-(a 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 j this case). .

10 MEC Exhibit 114, Direct Testimony of Stephen R. Yurek, t Schedule 8.

11 MEC Exhibit 114, Direct Testimony.of Steven R. Yurek, Schedules 9 and 10.

23 o-

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~ pt 4 '. . The:ALJ:

v ,

' The?ALJi recommended no a'djustment'"to operating _ expenses,cfinding~

that,the Company'sLwitnesses were not dishonest orLincompetent.~ <

He>also?found that.the. Company'sLoperating expcnsesLin the~1ast-

.jl . fiscal: year,were notfa? reliable indication ofo reasonable and-necessary operating expenses, because the Company had' deferred many.cxpenses that year to avoid filing-a rate case.

?- B. The Company's Position -

1. Historical-Dependability NSP argued that it has consistently' filed'its' rate cases usingL forecasted operating expenses and that history will show the

. dependability of the forecasts. The Commitrion notes,-however, that-the intervenors'have raised' serious-questions about the forecasts in this case. The evidence is clear.that expenses:are l exhibiting roller coaster characteristics over the past four ,1 years,1with the highest levels being raa'ched in rate case test. u 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.-

l Rates are' set on=a prospective basis and cannot be justified on-the basisi that distant history was' dependable.

, 1 Furthermores 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 q located on~the roller coaster, i D .

The Commission cannot determine just and reasonable rates based 4 on the mere fact that.NSP_has spent, or promises that it will u

spend, the1 forecasted expense money.' Under Minn. Stat. $

216B.16,.subd. 6 (1988) the Commission is' directed to' consider i the-need'for revenue sufficientufor 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 p '

months later the Company asked for new rates which would include L' an increase in total operating expenses of approximately

• L $170,000,000. Of:this amount, nearly $140,000,000 is Li , , attributable to operating and maintenance expense, although the t' intervening time was a period of relatively stable prices, >

increased sales, no major plant additions, automatic fuel

> adjustments, and a conservation cost tracker account. This

necessitates careful review of the requested increase.

,+

24

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A: , L . .- . .. . -. - - - - - .- _ _ _ _ - - - - - - - -

i" ,

j

~ ~,.

.a .t 2.- Actual' Financial Results- ,

1The: Company contended-at oral' argument thatLit was difficult to.  :

support its budgets without being_ allowed to: introduce actual- -t data.1~The, Company's~ ability.to introduce 1989; actual data was 4

" restricted-by.the ALJ,fwho refused to allow its= introduction for' updating-purposes, but allowed limited portions into the record'

.f or rebuttal - purposes . - Mr. Flaherty testified:that a budget-

~

shouldgecomparedtoactualresultsduringthe.yearitis'in effect1 .- At the hearing,:however, Mr. Flaherty calculated'that, a

based on the.first two. months of 1990 actual' financial data, NSP '

wouldLunderspand itsDforecasted test year expenses'by S85.8.

million. .At the same time'Mr. Flaherty cautioned against using i partial budget periods for comparison.

' 4 loc. Flaherty's testimony underscores the difficulty f aced by. the e Commission. 'The Company finds it' difficult to support its j 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 l unavailable, but actual data from a partial period indicates .

overbudgeting of;approximately.S85.8 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'apprJpriate basis.for comparison with the test year forecast because the test year;was-not based on the second--year-budget. The Company l 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 11s reasonable. With the second year budget completed many months prior to the filing of the rate case,_it.is.lessalikely to  :

i be influenced by the information filed;in the rate case.

In response to MEC's argument that increases in its costs should not exceed increases in the Consumer Price'Index (CPI), NSP 3

.arguadithat MEC erred in beginning its calculations with fiscal. t year '1987. The Company pointed out that its newest major generating facility, Sherco 3, was in service for only part of- ,

that year, and that " Operating costs natu major generating unit goes into service."{gilyHowever, rise as awhen new explaining why operating costs have increased so much when no major facilities have been added, NSP argued that increases in operating expenses in excess of the CPI can reduce the need for i

12 Thomas J. Flaherty, Transcript Vol. 12, page 45.

13 NSP Exhibit No. 54, Jackie A. Currier, Rebuttal Testimony, Page 11, 25

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f ' +, >

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~

,  ; hy 7 c.

7 % 4 NI _ '.

increases inl capital cos'ts 14 ~ The Commission does not believe:  :

100~+ cthe Company,can haveDit=both' ways.- >

"V m A'* .' '

-When1theiparties/ focused on.the: major increase.in expenses fromL j; e

21989Eto'the test; year', NSP' filed:a massive: rebuttal comparingi ,

' ' ~"

test? year z costs,toJ1988. Compared <with 1988, the-Company '

claimed, costs increased;only slightly more thanLthe CPI. IThei .)

Commission' sees no. reasoned basis for mnking actual ~19881 costs , j the primary reference point.for~ test. year costs. 1988 is not: the; i most-recent; year for which' actual dataris.available. -1988 actuali 1 expenditures =have.not been approved by this Commission as

. .easonable'and necessary in the provision of service. i

'srthermore, intentionally or not,- by shifting the focus.to)1988l R. rebuttal,;just days before hearings began, the Company

idr9 rived therparties~of meaningful ~ opportunity.to review, 1 analyze, and audit the actual expenses on which the Company 1tried 'l fto rest

its case.- ,

j 1

'While-the record contains massive testimony arguing that costs- )

have-increased only.slightly over the' change in the CPI between< u h actual'1988-data and the test year forecasts, that is.not the

' i issue. NSP.is requesting an increase over the rates set in'its:  ; ~1 B :last. rate case,;not antincrease over actual 1988' data. When comparing costs in the last rate case order to the originally

, . filed forecasted;tect. year data in this case, NSP is requesting?

q an4 increase.in jurisdictional operating expenses of nearly 20 Lpercent, including an approximately $30 million-increase in-se

' administrative 1and general expenses. On a total operating-expense basis,JNSP has requested an increase far in' excess of the-change.in the CPI. NSP'has not explained or justidled the need" "l 1 for these mass'ive increases in this record.

L 19 ) was the test year in the last rate case. Throughout this d record,.NSP;has' insisted that to evaluate the earned rate of i return for-any given year, the actual data must be' normalized..

The August 23,.1988 rate case order ~contains the 1988Enormalized

-data, which the Company; stipulated to as representing the-necessary-and reasonable costs of.providing service in 1988. The i 1 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 q earn in exce.ss gf its authorized rate of return on an actual i basis for 1988 13 '

4. Competitive Pressures

=Mr.-Flaherty testified that competitive pressures mandate low  :

4 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. . , -

26

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A]! ,!' , 1 5

i f f.

forecasts 16( LAt hearing',xhowever,:Mr. Flaherty_ testifiedthat he:-

%g$kg  ; 7 4

area <had

.

Thegt perf ormeds Commission a' review; notes =that,~for ofi competition; the most;part,; w L q $ electricityJis'atill provided,in'_a monopoly 2 environment. The p .j Commission- finds?that: the Company has not: presented credible- j U

• evidence establishing that competitive: pressures p ayEa_ma l or ?

role in protecting the; general body of~ratepayers fromtexcessive' H

~. . rates. l a

, [*

' I 5.. Budget Bases l

2r W

cw -historical NSPjwitnessLFlahertyindicated.thatthebudget.shoulp8.eflect:

performance and should be well' documented Yete the  ;

' record clearly; indicates that various r.esponsibility centers a

. Lbeginitheir' respective' budget processes'with different bases.- l' 3 LThe Commission recognizes that the Company'may be:able to.runLits e n . . day-to-day operations with/such budget procedures. However, withi A 1

.different responsibility. centers using different starting points,.

xt there.is no continuity of basic assumptions"in the overall " e

" budget..;Without,this continuity, the' Commission is' prevented' Lfrom. tying the forecast to historical performance.

D Determining.thefassumptions.o'n.which the overall budget in' based

.isafurther complicated-by Company statemente that the11990 test cc Lyear' forecast 1 1s-bas

asnecessaryin1990g[ontheexpensesthattheCompany-foresees

.. Despite the admitted need to compare to'~ 9

-"' history, it is not clear what the test-year data is based onL li

.This further amplifies the'need for_ support;of the projected-a ,

numbers.' When the. Company files a rate case requesting the ej

' largest rateLincrease in its history based on a vision of whatuis!

~

1 needed.in:theffuture, the need'for justification,. verification, u

)

.and testimony supporting-the vision are great.

4 NSP= stated.thatiits/ budgeting and,forecastingr system _ includes n . continuous updates. While this:may'be.very useful.for day-to-day 3 '

-operations, the Commission' finds little' comfort in.continuousi 1 updates to. forecasts once rates are set. It is critical that.the-E expense forecasts used in the rate case reflect the actual' costs- 1 e of,providing service. Once' rates are.. set, they cannot be adjusted up or down to reflect continuous. updating.

i L..

t

[ 16 .NSP. Exhibit 82, Thomas J. Flaherty, Rebuttal Testimony,  !

Page 58.

J l

L

'I 17~ Thomas J. Flaherty, Transcript Vol. 12, Page 44.

7 18 NSP Exhibit 82, Thomas J. Flaherty, Rebuttal Testimony, Page 20.

L 19 Ronald H. Clough, Transcript Vol. 6, Page 26. 7

,+

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6.' . Deferred. Expenses:

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_ Parties raisedsconcernt that" test; year l expenses;are considerablyL higher;than expenses 1for:1989, and that certain costs have beenn V  ? deferred"into5the: test' year. NSP' responded'with a massive rebut *.al filing:en March 27, 1990. That filing included rebuttal ,

-testimcnyf,omatleastsevenwitnesses:addressingoperating expenses .- In general',-NSP chose'to rebut the concerns raised-by the parties by; arguing that.1989:is not a: normal year for-

-purposesLof comparison with test year expenses. The Company. . a 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 j longer defer.certain costs, the-costs were reinstated and the . '

present rate case wasEfiled.- NSP stated that those: cost-cutting. f n '

efforts.also explain the< roller: coaster.naturolof expenses ~in-the .

'M years before and after 1989.-

NSPiargued in its rebuttal that 1988 was a~more appropriatei 4

' comparison for-testiyear expenses. Witnesses thensexplainedithat in comparison to 1988 actual expenses,Ltest year-DOE expenses,are only 12.7 percent higher, and represent an annual increase of: l only 6.'2 percent. The witnesses also discussed specific new cut ,

unusual expenses in their. responsibility areas which;would show. i l

thatLthe increase in expenses was even less if the'effect of the '

new and unusual? items:were' removed. -

r One of the' areas in_which the' Company allegedly cut back in 1989:

was vegetation control. NSP witness Clough testified;that " Trees .

obvioun grow each year and it's necessary to trim back that growth.g{"-Hethen' stated ~that-trimmingcostswere1reducedin

1989 to avoid a rate case.. Clearly,Lhowever,-there is a normal

., level of trimming cost in every year, and that is1the amount to-be-built'into rates. LThe test year concept rests on the notion

that the normal and ongoing costs of operating a-utility can be ~

. determined with reasonable accuracy and-built'into rates. Rates  ;

.. areinot1 set-on.the basis of extraordinary-expenses,,or on the 4

' basis of a need to " catch up" from having delayed normal.and i

-ongoing expenses:in the past.

H NSP~ minimized trimming costs in 1989 to avoid a rate egge; this

. caused an increase in trimming' costs for the test yeardd. The i Commissiogfacedthisidentical!ssueinMinnesotaPower'slast rate case In that case, the Commission adjusted the test year l_ 4 .

20 Currier, Doudiet, O' Leary, Larson, Clough, Tacheny, and .

4 Caskey.

f 21 Ronald H. Clough, Transcript vol. 6, Page 31 and 3'2.  !'

L 22 Ronald H. Clough, Transcript Vol. 6, Page 32.

23 In the Matter of the Petition of Minnesota Power & Licht h Comoanv, d/b/a/ Minnesota Power, for Authority to Chance its Schedule of Rates for Retail Electric Service in the State of I~

28 e

a-

Eu s

/ .

1

} _n j

• I

's 4 Lvegetationicontrolibu$get,because it,was-skewed by: reduced- .;

, control:in:the prior.yeer.. This. case is much~more difficult,. j

? ;however, because individusl line-items are not identifiable and'

< adjustable,7aszthey were.in Minnesota Power.- ~NSP; filed. aggregate ,

. budgets containing.much.less detail.. At thel same' time',.-- the ,

j Company's historical budgeting' and spending ' patterns stronglyL g' .

suggest'a practice:of." loading' expenses into test' years. The: 1 Commission cannot ascertain'with.' reasonable accuracy how much of 1

-the' requested increase is attributable.to normal and ongoing-operating expenses,;and how much to_" carryover" expenses. This contributes to'tha Commission's intbility.to rely on the .,

Comp,any's forecasted expenses to not new. rates. j 1

7. The Reasonableners of-Specific Bbdget_ Items d 1

The ALJ and NSP emphasized that the~ parties by and large did not l identify specific expense items as being unreusonable, d a

ennecessary, or-inflated. The reason for this,.however', wasLthe'

, Com'pany's decision to file aggregate budgets which prevented-identification of individual line items without great' difficulty,- l L .and sometimes prevented'it altogether. This decision made the credibility and reliability of the' Company's budgets the major, y'

' issue in.the case, not the propriety of individual line-items.

t

.For example, when asked for an itemization of' forecasted expenses- j bytheFERCUniformSystemofAccounts(USOA),NSPrespondedghat- g it does not go into that much detail for ratemaking purposes J This precluded systenatic examination of commonly understood; ,

categories of expenses., q 3 Similarly, the Commission itself queried the Company regarding 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 1the> costs proposed for:

.the Manitoba line repair. The CompanyJresponded that it'did not have a breakdown in the forecast for maintenance.

o 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 di'sadvantage.to othe 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 FIRC and other jurisdictions on a USOA r 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. ,

29

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5 -

-prevents:any reasonablesreviewfoffthe item's: making (up"thefmajor J% "

. utility - functions : suchf asl production, : transmis sion, J distribution ,

tand administrative and' general expenses? Forecastingcdatat

alreadyLremoves,manyfof;the normal' controls associated withi accounting data.- Generally.acceptod accounting' principles do>not; guide forecasting, and_ forecasts <are not audited for presentation-

to the financial, community... The absence of these formal accounting, controls allows:significant subjectivity.in tho' development'of test year data.. To' forecast withoutithe detail' 7' required _by the-Uniform System of Accounts-leavestthe forecast" '

~

t

.^:

cvirtually unverifiable. -

-Inf lieu;of detailed financial: testimony,lthe Company. tended to support its operating expense. budget with-testimony.such as "th case involves the essential.. costs toirun an excellent utility;"gg "

or. "the test year forecast 11s: based en what we:

'- necessary.expensesto_run.this>companyin1990"jgreseeare.the . The Commission does.not believe the. Company provided sufficient 4

[

, substantiation of its alleged need.for a rate increaseLto cover:

increases in operation and maintenance expenses.- q NSP forecasted operating and maintenance' costs-in the'aggregatei j without.the-detail normally associated with; utility accounts.- 1 The Commission-must determine the reasonableness,7 prudence,.and: H q necessity of the costs included'in-this rate case.- It cannot1 do H L.

~

'this without more detailed information than that presented-by the l Company.:

]

Unorthodox Accounting' Methods <

L 8.  ;

Determining thw accuracy and reliability ofithe Company's

-forecasted budgets was;further complicated'in certain instances. ll by:the Company'aruse of unorthodox accounting methods.- l E' _

7 l thSP chose to-discuss expense: items,on=aLMinnesota; Company. basis',

L rather- than onf af jurisdictional basis.: However,fmany of the. a schedules-were headed Northern St'ates' Power'Comeany (Minnesota) I I

l Electric Utility-state of Minnesota. This heading suggests 7that the' schedule is presenting data at'the Minnesota jurisdictional- J L level, when it is not.- NSP. witness Fulton agreedithat the I headings'on schedules shouldfindicate on.what basis the schedules 'j

arereporg{ng,butdo-not'inthe>caseofMs. Currier's t M schedules The same problem exists with'the schedules t off many  ;

other.NSP witnesses. Then, NSP chose to file rebuttal in a l different format from that used by the intervenors, reporting '

electric 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, t

27 Dennis C. Fulton, Transcript Vcl. 13, pages 9 and 10. -

30 4

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Business-Unit'and Corporate' areas 28 Although these issuestare- i' tnot-substantive,'they consumed over:50 pages of, Transcript' volume (7 as?intervenors. struggled:to understand;which numbers'

< :1 belonged 1with which accounts.- This diversionLof intervenors'- .. r

,timoland' resources: compounded the usual dif ficulties of analyzing'- '

d and. trying a rate case within - the statutory ten l month time ,

period.

'Minn.Estat. 5: 216B.16,.subd. 2 (1988);..  ;

Furthermore, approximately $3.9 million of-items which.would' fnormally~beTeapitalized29were shifted to' operating expense,;a

major accounting: change iThe witness on this issue did not ,;

iknow whether or not the Commission has been notified of the '

a "accougting change. This is. highly improper. Statutes andt -

rulesaU give the Commission authority over. utility accounts.. The j Commission must be petitioned.forLaccounting, changes by'the .

j utilities. Without direct Commission oversight, utilities could;

. manipulate'their accounts in a manner contrary;to the:public j

Again, the Company's failure to present informat'ioni in

' interest.-

recognizable and usable form compounded the-complexity of this g case,.which would have been complex under the most. favorable- ,

i circumstances. ,

9. . Forecasted Property Tax Increase ,

The Company pointed to an expected $17 million. property tax  !

'increaseLas one factually supported increase.in test year 4

expenses.. AAthouga the property tax increase 11s also a

' forecasted amount, it does have some factual support'in the ,

record..

General rate increases require more than one cost increase to ;l support .them, however. While property-tax expenses increase,-

D

-other expenses may decrease. The.Cempany's total gas'and  !

-electric-depreciationDexpense',.forexample,_. dropped,$9.0milljgn 1 in September of 1989, with no" concomitant'reductioniin rates. -

g '

p Revenues may increase or decrease as well~. LThe Company' a 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 i solve the equation.

4 L 28 NSP Exhibit No. 54, Jackie A. Currier, Rebuttal, Page 5.

i l.

L 29 NSP Exhibit No. 31, Ronald H. Clough, Rebuttal, Page 6.-

u '

- 30 .Minn. Stat. 5 216B.10. Minn. Rules 7825.02-7825.04.

E .

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).

o 31 l-I-

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. ,(

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. L-y 7 -

.10..lThe' Company's Maintenance of comparatively: ~

Low Ratest ,

NSP/ frequent., , 'inted out that its. rates are; low in: comparison; .

,- with those of ~..er-utilities. The-Company.does1have a1 record of 1 J6 ,

providingigooc' service'atfrelatively low rates; the.Commissione .

. prides? itself on its ' role' in' that accomplishment. : . Low rates do:

inot. constitute' grounds for a rate' increase,;however._.To: justify-1 la rate 1 increase, the-Company must show by.a' preponderance of the.  ;

' evidence that: existing rates are unjust,and unreasonable ~.  ;

C. Conclusions 1

, Based on the-information in thisirecord,.the Commission cannot:

determine with reasonableJcertainty the amount _of operating

"'[

N 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.

exp'nses. e .If Mr.-Flaherty's ca]culations , hold true, NSP's> '

expenses may be'S85 million less than claimed--in the-forecast, an o amount sufficient to more than eliminate the' entire increase L. -recommended by the ALJ. The Commission simply.cannot set rates based on-this degree of uncertainty and still satisfy its  ;

L statutory responsibility.

The> roller coaster spending and--forecast pattern, the admitted  ;

~

deferral.of'1989 costs into the test year, and=Mr.oDoudiet's . -

E comments 1thatit.isvery>difficultfgyhim'tomanagecoststnot Lknowing what the final races will be suggest that there is.a :l L

,7 greattdeal.of' flexibility in the Company's operating and_ s c .; maintenanc e budget. The statutes require the Commission.to set- ,

o just and reasonable rates at a level-which'will allow the company "

t n to meet'the cost.of furnishing service. Minn. Stat. I 216B.16, .

subd . L 6 - ( 19 8 8_) . The Commission cannot determine-from-this record .

? whatLthat' cost is. .

IV. ' PROJECTED TEST ~ TEARS AND THE BURDEN OF PROOF .

? The Company'has characterized intervenors' concarns about the 4 s

, 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 3 that it is'more likely than not that a rate increase is -

.32 James T. Doudiet, Transcript vol. 3, Pages 31-32.

32 gk '

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, 'e ;necessary. 1The Company's; failure to, carry this. burden. stems 11n' )

, part'from theispecial proof!ProblemsLpresented by projected: test j

, years.;

a h'v

. Traditionally, regulatory commissions have set. rates. based-on i

~

detailed 7 review of a; company's finances over a

twelve month" period, or=" test year." .OneLtreatise on utilityfregulation. J explains-the test year concept-as follows: }

~

.The company, with the concurrence of the._ commission,or3 j

'its staff, will-generally select a " test year,"

frequently the, latest 12-month period for.which complete dataLare'available. . - . . More recently, due'  :

E ilargely;to inflation, a few commissions nave modified: ,

the traditional historic test-year approach by using a

forwkrd-looking. test-year (either a partial or a full forecast) or by permitting pro forma expense'and -

revenue adjustments- .

i a

Phillips, Charles F., The Reculation of Public L

. Utilities,-Public Utilities Reports, Inc., Arlington, t

-Virginia, 1984,-at 182.

The projected (test ~yeak is an attempt to improve ratemaking L accuracy and; fairness. It is not a retreat from basing revenue j

+

l requirementsion actual financial information, but an. attempt to improve the predictiveivalue-'of that information by. adjusting,for '

changes which.can reasonably be expected to occur. ,

G L 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 historic or projected test, years..-See, for example,;Minn. Rulos, partL7825.4000, A.,-requiring companies to: file-unadjusted .

average raterbassifor the-most recent-fiscalayear,.the. projected- ,

fiscal year, and'the test year; Minn. Rules, part;7825.4100, A.,,

-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 H capital schedules for the most recent fiscal year, the projected i

-fiscal-year, and the' test year. Clearly, the rules-anticipate an '

examination of both historical data and projected data, when s L~ 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.

g 10, subp. 11 ', subp. 12; Minn, Rules, part 7825.4000, subps. A, B, L

.and D;:Minn.-Rules, part 7825.4100, subps. A, B, E (1989). The l

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 4

!~

data for the fiscal year in which the rate case is filed is 33 m;

m ,; - - -~ --

3 .n "

. ,)-

m ,-

$gr  ;

10 ,

n 49~ *1

. (probative to;showsthe-accuracyJand reliability'of projected data, ias yellias to provide"a historical basis:for the test, year:

' forecast; upontwhichothe. Commission muste rely in settingirates. *

Furthermore^,rCommission~ Orders in' general'ratmicasesnhave consistently expressed

concern that projected testtyears be --

,: substantiated byfas much actual. data as possible ard>betbased r onE s

reliable forecasting techniques. The Commission's 1980 OrderVin a=GreatLPlai.ns: natural gas rate case, for example, traced a

pattern 0of concerniabout the reliability of projected test years, citing an earlier;NSP' case!in'which such= concerns were raised.

The Commission"has<hadt to face-problems with projected:

, test years in-previous cases.

- In Northwestern Bell Telechone Comnany,-Docket No. 0-421/Ga-77-1509, the Commission noted it might have dismissed:the proceeding based.upon lack offsufficient' foundation for. test year-projections-had-the question been certified to it. ~In E1 '.

E

-Northern States Power comoany, Docket No.'E-002/GR  ;

611. the Commission ~ admonished the: parties that it cculd not make a specific adjustment to budgeted data j to include l actual-data when it was working with a  !

projected test year'without having comparable'  !

-adjustments for;all related accounts. In Northwestern

' Bell:Teleuhone'Commanv,' Docket No. P-421/GR-79-388, the .

Commission refused.toJallow updating of!a. future test-

-j aear beyond oneyupdating to seven months: actual-figures, noting'the unreasonable time burden on intervenors trying-to analyze and evaluate tht'new-figures. .. .'

E u However, it would not be-possible for this' Commission' 1

, to reach any conclusion on a1 company's revenue -l deficiency untiljand unless-it had an~ accurate and j reliable test year fromTwhich'to startr- The test year.. .j

.must be believable'to-have'any usetin rate-making.--The' 1

lack of a trustworthy test year was the cause?of the Commission's initial rejectionfof this case, Land:only 6 the' substitution of a 1978~ actual test year, which.has been'found to be reliable,-has made possible a-decision-on a revenue deficiency now.

11p che-Matter of a Petition by Great Plains Natural Gas j

Comnanv. 235 West Main Street. Marshall, MN 56258 for Authority to Chance its Gas Rates for Retail Customers l

'in the State of Minnesota, Docket'No. G-004/GR-78-690, l ORDERLAFTER REHEARING (May.9, 1980) at 13 and 14.

Similarly,.in NSP's~1ast-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 hagin until after the rate case had been filed:  :

34

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The5 Commission has difficulty with attest yearLthatL

• n 4 beginsDseveral monthsEsfter.the.date'of filings. This; '

1

]

J 'allowstonlyitwoLto~three months of' actual'dataito be '

.j s presentedi atz thef hearings anf axtendst almost ;fourl '

monthsrbeyond the Commission's a final order. :Although +

tho' Commission continues to: accept the' concept: ofLa-

-futureLor budgeted' test year, it-also believes:that<the-O ' period' selected must bear a reasonableirelationshipLto ,

the availableihistoric data'and the'~ filing date. The:

1 farther 1beyond 61ther that that' data is. selected ^means i

-thatiche budget:is less;1ikely to reflect actuall j results. ,

In the Matter of the Petition of' Northern' States-Power' Comeanv for Authority to Chance its Schedule of Rates- '

for Electric Utility Service for Customers'Within the; State of winnesota, Docket No. E-002/GR-85-558, 3 J FINDINGS OF FACT,1 CONCLUSIONS OF LAW,'AND ORDER-(June l 2, 1986) at 8 and19.

kn iL L . . In short, the Commiasion's concerns in this case about verifying. a

. and substantiating _the forecasted financial data'on which the test year rests do not come out of a void. . They-are part cf a" l longstanding Commission commitment'to ensuring:that projected-

-l; Q  : test:yearsfhave clear and substantial' links'with-actual I , historical experience. :In: this case those links were much too .

h tenuous for the_ Commission-to believe it could set just'and , 4

• . . reasonable' rates on the1 basis of-the; forecasted test year.

}

. XVI. INITIAL ACCEPTANCE OF THE FILING ,

The Company and.the ALJ relied in part on the Commission'sJ initial acceptance of the rate cace filing-as evidence that the  ;

3' Company's test year documentation was; adequate._ Suchlreliance 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~

requirem ne ts for general' rate cases are comp 1ex, the eviden".iary-

. hearing process is_ expensive _and time'-consuming, and the Commission is under a ten month statutory deadline to reach a It is therefore important to' detect and correct

~

' final decision.

any gross filing errors'immediately. The merits of the' rate requestiare extremely complex and are'beyond the scope of this-  ;

preliminary review.

The November 29,19&9 ORDER ACCEPTING FILING AND SUSPENDING RATES ,,

found only that the filing was " complete'and in proper form." It noted that contested case proceedings were necessary to determine  ;

the merits of the filing and that such proceedings would be ,

initiated by separate Order. The November 29 Order intimated

- nothing as to the merits of the filing, which were properly addressed in the contested case proceeding'and in this Order. .

35 ,

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=

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l

• XVII.- PJtGUIATORY FAIRNESS . D q

q The Company-explained in its initial' filing,:in'its briefs, ando 't R

atLoral argumentLthat it believed'the focus of?this

case should: Li c6 1be' regulatory; fairness'. ,The Company alleged that the:11.7% rate  !

q Lof return allowed in its;last general =~ rate-case was . inadequate-to 4

.tho' point; ofTunf airness and represented a longstanding ( . .

shortcoming of. Minnesota' regulation,/ failure;to reward 1 excellent d' Lutility: performance with commensurate ratesrof; return. '

L

, The Commission willinot engage in-detailed examination of the- 1

-Compan,y's regulatory fairness claim in~this rate: case'. It vould. ,l

+ be highly. unusual for the commission to examine authorized: rate.  !!

of return 1in' isolation lfrom other traditional rate case issues. o

t

~

4 ' Rate of. return is justione component of the ratemakingfprocess.

y , Rate base, revenues ~, expenses, capital structure, and rate design lunn other crucial components. Determining'one issue.in isolation  ;

v' from the=others would not allow the comprehensive review offthe Company's financial requirements necessary to set just and' 4 reasonabl-e rates.

There areino circumstances in this case justifying a-departure from these basic principles. The Company's existing rate of return was; set.oaiy two years ago,.in the Company's last' general j;

frate. case.- In the Mitter ' of the Anolication of Northern ' Sggggg  !

Power Comnany for Authority to Increase its Ratan_for Electrien j lSarvice-in Minnesota,1 Docket No. E-002/GR-87-670 FINDINGS OF 1

FACT,-' CONCLUSIONS OF LAW, AND ORDER (August 23, 1988). -The' .i

^._ current : rate of -return was requested. by the company itself, -in: a .

o . joint petition seeking approval of a revenue? requirements "

. stipulation it reached'with other, parties in the case. Since.

. ~that time,.there have been no dramatic changes in the Company's .,

Laccess 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, g j

iXVIII.. RATE DESIGN'AND CONSERVATION ISSUES

i

1. ~

Forithe.same reasons rate of return will not be addressed in this case,cthe Commission will not address rate design 1and q conservation issues. These issues were raised in or deferred to

'the' rate ~ case because that is the appropriate vehicle Ior their resolution. It continues to be the proper vehicle, and the 3; Commission will not attempt piecemeal resolution.

III . . CONCLUSION

, i

.The Commission concludes that the Company's filed information and o' 1 arguments d.o not provide a reliable foundation upon which to make a determination of just and reasonable rates. The adjustments proposed by the intervenors offer an alternative foundation.

Since the-Company's filing has so few links with historical experience, however, these adjustments are either arbitrary or

. 36 y:

OL -

. 1 extremely crude.. Instoad oferepresenting NSP management's .

unsubstantiated judgments, they represent the intervenors' l unsubstantiated judgments. Both are unsatisfactory. What is l lacking is a credible factual basis for setting just and 4 , reasonable rates.

+ .,

i The Commission will not proceed with a rate determination based '!

! upon1 financial information in which it has so little confidence.-  :

The statute governing general rate increases _provides that "The l

burden of proof to show that the rate change is just and ,

reasonable shall be upon the public utility seeking the change."

Minn. Stat. I 216B.16, subd. 4 (1988). Elsewhere, the Public- l b

Utility Act provides, ,

i Every rate made, demanded, or received by any public '

l utility, or by any two public utilities jointly, shall be just and reasonable. . . . Any doubt as to reasonableness should be resolved in favor of the

'. consumer. . . .

l Minn. Stat. i 216B.03 (1988). l The Commission has a statutory duty to reject the proposed rate f increase as unsupported by the record. The Commission will do so. .

i cama

, i

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 IWTERIM 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

J !Q. - '

Richard R. La a ter '

Executive Secretary i

(S E A L) t 37

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