State Regulatory Relations

NARUC Welcomes Pascrell Water Infrastructure Financing Bill

The nation's state regulators applauded Rep. Bill Pascrell, Jr., (D-N.J.), for introducing legislation that addresses the critical need to upgrade the nation’s water and wastewater infrastructure.

Rep. Pascrell’s "Sustainable Water Infrastructure Investment Act," introduced June 5, would bring water and wastewater projects out from under federally mandated volume caps on qualified private-activity bonds (PABs).

Removing this cap, the National Association of Regulatory Utility Commissioners (NARUC) said, will result in lower-cost financing for new water projects, resulting in lower bills for water and wastewater customers throughout the country.

“With cities, towns and utilities facing major challenges over the next several years to replace aging and deteriorating water infrastructure, this legislation will go a long way to ensure that infrastructure projects can get the financing they need,” said NARUC President Marsha Smith of Idaho. “Rep. Pascrell is to be commended for introducing this important legislation and we look forward to working with the Congressman as this issue moves forward.”

NARUC in July 2007 passed a resolution urging Congress to address this issue. The resolution recognizes the high costs that communities and utilities are facing because of their compliance with stringent regulations from the Safe Drinking Water Act, the Clean Water Act, and other important health and environmental standards.

“Because private-activity bonds can be financed with low interest rates, lifting the State volume cap will allow utilities to make the needed updates to the infrastructure at a reasonable cost to the ratepayer,” said NARUC Committee on Water Chairman David King of New Mexico.

MARC Hosts Successful ‘Regulatory Roundup’

More than 400 attendees heard from more than 65 top leaders in the utilities and energy sectors when the Oklahoma Corporation Commission hosted the 53rd annual meeting of the Mid-America Regulatory Conference (MARC) June 14-18 in downtown Oklahoma City. The year’s theme was “The Regulatory Roundup.”

MARC is comprised of the commissioners and staff that oversee energy, utility and transportation matters for their respective states. These include Oklahoma, Texas, Missouri, Arkansas, Kansas, Nebraska, North Dakota, South Dakota, Minnesota, Iowa, Wisconsin, Illinois, Indiana, Ohio and Michigan.

NAWC members had a prominent role in this conference. Larry Schumacher, president and CEO, Utilities Inc., participated in the opening general session, “Energy-Water Nexus” moderated by Commissioner Fred Butler; Robert Iacullo, COO, United Water, participated in the panel, “Identifying and Mitigating Risks for Energy and Water Utilities” moderated by Commissioner Connie Murray; David Baker, president, Indiana American Water participated in the general session panel, “Infrastructure: Electricity, Natural Gas, Water, Telecom and Financing”; and Terry Gloriod, president, Central Region, American Water participated in the closing general session, “CEO Roundup and the Federal Perspective.” Other CEOs that followed Gloriod on the panel were: John Gibson, CEO, ONEOK, Inc.; Randall Stephenson, Chairman/CEO and president, AT&T; Ted Craver, Jr., president, Edison International and chairman/CEO and president, Edison Mission Group and Larry Nicholas, chairman/CEO, Devon Energy Corporation.

Additional information on the conference can be found at www.marc2008ok.com.
Presentations from the meeting should be posted shortly at www.occeweb.com.

Montana PSC Hosts Successful Western Conference

The Western Conference was held June 15-18, in White Fish, Mont.

Floyd Wicks, Golden State Water Company, participated in the opening general session with other utility sectors CEOs to provide an overview of the water industry.

Commissioner David King, chair of the National Association of Regulatory Utility Commissioners (NARUC) Water Committee moderated the panel, “Water - Future Demand, Drought, Energy.” Participants included: Kent Turner, California American Water Company; Chris Rayburn, American Water Works Research Foundation; Thomas Veselka, Argonne National Laboratory; and Commissioner John Bohn.

Presentations from the meeting will be posted at http://psc.mt.gov/wcpsc2008/.

NRRI Paper on Reducing Electricity Used for Water Production

The National Regulatory Research Institute’s (NRRI) Water Director David Denig Chakroff has authored a paper that will assist regulators wishing to develop policies to reduce electricity use by water utilities. It provides regulatory commissions with information about the electricity requirements for producing and delivering drinking water to customers and effective practices water utilities should use to reduce and manage use of electricity. Since only about 15 percent of water utilities are regulated by state commissions, the paper discusses how commissions can affect the practices of the non jurisdictional water utilities through commission regulation of the electric utilities that serve those water utilities. Finally, the report suggests questions commissions should ask of water and electric utilities to evaluate the effectiveness of electricity use by water utilities. Mr. Denig Chakroff presented the paper at the Mid-America Regulatory Commissioners conference June 18, 2008.

To access the paper, please click here. If you have any questions, please e-mail David at ddenig-chakroff@nrri.org.

Hurricane Restoration Costs Drive Rate Hike

As reported in PUR’s Utility Regulatory News, the Florida Public Service Commission (PSC) has authorized the Florida Public Utilities Co. to increase rates for electric service by $3.86 million. It approved an increase in revenues for costs associated with storm restoration expense as well as preparedness plans imposed after two recent hurricane events. At the same time, the PSC lowered the revenues required to cover the company's cost of equity from 11.5 percent to 11 percent.

According to the PSC, the hurricanes of 2004 and 2005 that made landfall in Florida resulted in extensive storm restoration costs and long-term electric service interruptions for millions of electric investor-owned utility (IOU) customers. In 1996, the PSC issued an order requiring the IOUs to begin implementing an eight-year inspection cycle of their wooden poles. Shortly thereafter, it issued another ruling requiring the investor-owned electric utilities to file plans and estimate implementation costs for 10 ongoing storm preparedness initiatives. In applying for the rate increase, the utility stated that the incremental cost of each initiative would have a substantial financial impact on the company. It proposed that the PSC provide the company with rate relief to reduce the financial hardship.

The PSC concluded that it is clear that the implementation of the utility's plan will result in additional costs to the company, and that the costs incurred by the utility are reasonable. It said that the adjusted costs to implement the plan for 2008 are $332,513. This represents a cost per customer of approximately $12 a year.

The utility argued that the PSC should leave its return on equity (ROE) figure at the current level of 11.5 percent. The PSC noted, however, that the company's recommendation was heavily influenced by a reliance on two approaches, the ex-post risk premium model and the realized historical returns approach, both of which are based on historical earned returns in the regulated utility field. At the same time, the PSC said that a financial expert sponsored by the state Office of Public Counsel (OPC) representing ratepayer interests in the case had testified that there are a number of flaws in using historical earned returns over long periods of time to estimate expected equity returns. The OPC expert cited numerous academic studies that highlight the many problems and errors associated with using historical earned returns to measure expected equity returns. The PSC concluded that for the reasons advanced by the OPC witness, it would exclude the results of the two approaches when calculating the cost of equity capital.

The PSC said that after a full review of the general level of capital costs, the signals that commission decisions regarding ROE send to the capital markets, and the risk and return characteristics specific to this company, an ROE of 11 percent is appropriate for the utility. At the same time, it noted that the company had proven that it is very efficient in its operations and has kept rates relatively low. Nevertheless, the record in this case supports a recognition that required returns are lower than they were when the utility's ROE of 11.50 percent was last authorized, the PSC concluded.

In a dissenting opinion, Commissioner Skop opined that the 50 basis point reduction to the utility's current ROE was excessive, and that the appropriate ROE should have remained at, or slightly below, the previously established level of 11.50 percent. He explained that in his view many of the discretionary factors that weigh in favor of adjusting the ROE downward (e.g., corporate risk profile, prevailing interest rates and ROE benchmarking trends) are effectively mitigated by other factors that weigh in favor of maintaining the previously established ROE level (e.g., risk profile adjustment reflecting the small size/market capitalization of the utility in relation to benchmarks, access to market capital, the potential for interest rates to rise significantly from historic lows during a period of inflation following an economic downturn, the sound regulatory policy of not setting rates at the bottom of an interest rate trough, and the significant cost associated with another rate case if rates were set too low). Furthermore, sound regulatory policy considerations recognize the fact that consumers directly benefit from ensuring the continued financial integrity of a public utility to the extent that it allows the utility to access capital at a lower borrowing rate, Commissioner Skop added. Re Florida Pub. Utilities Co., DocketNos. 070300 EI and 070304 EI,Order No. PSC 08 0327 FOF EI, May 19, 2008 (Fla.P.S.C.).

Oregon Rejects PGE Adjustment Proposal

As reported in PUR’s Utility Regulatory News, the Oregon Public Utility Commission (PUC) has ordered Portland General Electric Company (PGE) to refund its customers $37.2 million for excess amounts collected in rates for federal, state and local income taxes. According to the PUC, a law passed by the state legislature in 2005 established a new method for the rate treatment of utility income taxes. The law (SB 408) requires a utility to true-up any differences between the amount of income taxes authorized to be collected in rates from customers and the amount of taxes actually paid that are "properly attributed" to the utility's regulated operations. Utilities must make annual tax filings reporting these amounts on October 15 of each year. If amounts collected and amounts paid differ by more than $100,000, the PUC must order the utility to establish an automatic adjustment clause to account for the difference, with a rate adjustment to be effective June 1 of each year.

In the current case, PGE objected to its customers receiving the tax benefit associated with the sale of a non-utility asset (a gas turbine generator) as inappropriate and unconstitutional, arguing that ratepayers were insulated from the cost of the unregulated asset and were never at risk for any loss associated with the sale. Although PGE agreed that the refund amount of $37.2 million was consistent with the tax expense law and regulations, it asserted that removal of the tax benefit from the sale of the turbine would reduce the refund by $4.9 million, to a net refund of $32.3 million.

According to the commission, PGE contracted to purchase the turbine for $16.8 million and an associated transformer for $414,800, for its proposed Port of Morrow natural gas-fired generating project. Although it purchased the turbine and transformer with shareholder equity, it did not proceed with the project. Instead, it retained the transformer and transferred the turbine to Portland General Resource Group, Inc. (PGRG), a non-regulated PGE subsidiary. All costs associated with the turbine were recorded in non-utility accounts. In 2006, PGRG sold the turbine for $6.1 million, resulting in a $12.3 million tax loss. The combined tax loss from the sales decreased PGE's consolidated 2006 income tax liability by $4.9 million, the first year PG&E was required to issue a tax-related refund or surcharge to customers.

In pressing for a downward adjustment to the tax refund amount, PGE argued that the impact of the new law is unlawful and unjust. It pointed out that the law would require its customers to receive the full $4.9 million tax benefit of the turbine loss, while the shareholders who actually paid for the turbine and took the risk will receive nothing. According to PGE, the net effect is an unconstitutional taking under the Fifth and 14th Amendments to the U.S. Constitution.

PGE argued further that SB 408 is flawed because it "creates two different methodologies, depending on whether the unregulated asset is sold for a loss or sold for a profit, such that tax effects that prove beneficial at a consolidated level go entirely to customers while tax effects that prove detrimental at a consolidated level are borne entirely by PGE and its shareholders." PGE also averred that federal tax law pre-empts SB 408, giving PGE the benefits provided to companies that file consolidated federal tax returns. More specifically, PGE contended that federal tax law preempts allocation of the tax benefits to corporate subsidiaries like PGE that file a consolidated tax return.

Rejecting those arguments, the PUC said that the Oregon law is premised on a comparison of actual taxes paid to governmental agencies versus tax-related revenues collected in utility rates, with the difference required to be refunded. The PUC agreed with an intervener that PGE essentially was claiming a property interest in those monies collected from ratepayers but not actually forwarded to the government as taxes, and it distinguished that property interest from a property interest in the actual tax benefit itself. The PUC stated that it had found no independent source of law that would grant PGE a property interest in those "phantom" taxes. Moreover, the PUC said, the company presented no data to show that it had been prevented from earning a reasonable rate of return. Such a showing is required to support a claim that rates are confiscatory, the PUC said. The commission added that calculation of utility tax expense is unrelated to any federal tax regulation and is not a matter subject to federal preemption. Re Portland General Electric Co., No. UE 178, Order No. 08-204, Apr. 11,2008 (Ore.P.U.C.).

WEF Announces Water Sector Interdependency Training

The Water Environment Federation (WEF) has been awarded a cooperative agreement by the Federal Emergency Management Agency (FEMA) of the Department of Homeland Security (DHS), to develop and deliver a cross sector emergency response training program for water sector utilities. The primary objective of this training is to assist water sector utilities in building sustained, resilient local and regional partnerships across critical infrastructures and key resources. These partnerships will align closely with the National Preparedness Framework and with other federal, state and local guidelines in an effort to provide a comprehensive, consistent response to all hazards and reduce impacts and recovery times.

Eligible participants are water and wastewater utility executives and managers, as well as leaders from other critical infrastructures. The training is provided at no cost to the participant.

For program and registration information, please click here.