IS CHANGE COMING? TRANSMISSION RATE FILINGS AT THE PUC CODY FAULK, - - PowerPoint PPT Presentation

IS CHANGE COMING? TRANSMISSION RATE FILINGS AT THE PUC

CODY FAULK, Lloyd Gosselink Rochelle & Townsend, P.C. GRANT RABON, NewGen Strategies & Solutions

Texas Public Power Association 2018 Annual Meeting

CODY FAULK

Energy – Utility Associate at Lloyd

Gosselink Rochelle and Townsend P.C. in Austin, Texas.

Represent municipally owned utilities

(MOUs), cities, and investor owned water utilities in proceedings at the Public Utility Commission.

Rulemakings Service Area disputes Integration into ERCOT Transmission Line Routing

Fun Fact: Has only ever been a TPPA

Member City customer.

TPPA 2018 ANNUAL MEETING

GRANT RABON

Has provided management and financial

consulting services to public utilities since 2005, including:

Financial risk assessments and feasibility Valuations/appraisals Litigation support Cost of service and rate design

B.S. in Chemical Engineering and MBA. Has testified at the Public Utility

Commission of Texas.

One of less than 20 individuals in the

nation with an Accredited Senior Appraiser (ASA) designation in Public Utilities from the American Society of Appraisers.

TPPA 2018 ANNUAL MEETING

TRANSMISSION COST OF SERVICE RULES

• 16 TAC § 25.192 – Transmission Service Rates
• A TSP's transmission rate shall be calculated as its commission-approved transmission cost
• f service divided by the average of ERCOT coincident peak demand for the months of June,

July, August and September (4CP), excluding the portion of coincident peak demand attributable to wholesale storage load. A TSP's transmission rate shall remain in effect until the commission approves a new rate. The TSP's annual rate shall be converted to a monthly

• rate. The monthly transmission service charge to be paid by each DSP is the product of each

TSP's monthly rate as specified in its tariff and the DSP's previous year's average of the 4CP demand that is coincident with the ERCOT 4CP.

• The transmission cost of service for each TSP shall be based on the expenses in Federal

Energy Regulatory Commission (FERC) expense accounts 560-573 (or accounts with similar contents or amounts functionalized to the transmission function) plus the depreciation, federal income tax, and other associated taxes, and the commission-allowed rate of return based on FERC plant accounts 350-359 (or accounts with similar contents or amounts functionalized to the transmission function), less accumulated depreciation and accumulated deferred federal income taxes, as applicable.

• Each TSP in the ERCOT region shall periodically revise its transmission service rates

to reflect changes in the cost of providing such services.

• The commission may prescribe a schedule for providers of transmission services to

file proceedings to revise the rates for such services.

TPPA 2018 ANNUAL MEETING

16 TAC § 25.192 – Return Determination for MOUs

For municipally owned utilities, river authorities, and electric cooperatives,

the commission may permit the use of the cash flow method or other reasonable alternative methods of determining the annual transmission revenue requirement, including the return element of the revenue requirement, consistent with the rate actions of the rate-setting authority for a municipally owned utility.

For municipally owned utilities, river authorities, and electric cooperatives,

the return may be determined based on the TSP's actual debt service and a reasonable coverage ratio. In determining a reasonable coverage ratio, the commission will consider the coverage ratios required in the TSP's bond indentures or ordinances and the most recent rate action of the rate- setting authority for the TSP.

TPPA 2018 ANNUAL MEETING

TRANSMISSION COST OF SERVICE RULES

16 TAC § 25.192 – Interim TCOS Filings

Each TSP in the ERCOT region may apply to update its transmission rates

• n an interim basis not more than once per calendar year to reflect

changes in its invested capital.

An interim update of transmission rates action shall be subject to

reconciliation at the next complete review of the TSP's transmission cost of service, at which time the commission shall review the costs of the interim transmission plant additions to determine if they were reasonable and necessary.

Any amounts resulting from an update that are found to have been

unreasonable or unnecessary, plus the corresponding return and taxes, shall be refunded with carrying costs.

TPPA 2018 ANNUAL MEETING

TRANSMISSION COST OF SERVICE RULES

ORIGINALLY PROPOSED RULEMAKINGS REGARDING TCOS ISSUES

PUC Project No. 46393 - RULEMAKING PROCEEDING TO REPEAL AND

REPLACE 16 TEXAS ADMINISTRATIVE CODE § 25.192, RELATING TO TRANSMISSION SERVICE RATES

PUC Project No. 47545 - RULEMAKING PROCEEDING TO ESTABLISH

FILING SCHEDULES FOR INVESTOR-OWNED ELECTRIC UTILITIES OPERATING SOLELY INSIDE ERCOT AND NON-INVESTOR-OWNED TRANSMISSION SERVICE PROVIDERS OPERATING WITHIN ERCOT

TPPA 2018 ANNUAL MEETING

PUC PROJECT NO. 46393

Proposed rules would include the following provisions for non-IOUs:

Eliminate the cash flow method for revenue requirement determination. Transmission rate of return may not exceed the overall rate of return for all

the entity’s services.

Not certain how this would be applied to municipal utilities (e.g., just the electric

utility functions only or might it also reference other city utilities or services?).

Requirement for ’baseline values’ to be established in any future full TCOS

filing, including those approved by stipulation or litigation.

Interim filings limited to only one per year. No interim rate increase if utility is over-earning according to its most recent

Earnings Monitoring Report (with adjustment for weather-normalized data).

TPPA 2018 ANNUAL MEETING

(continued)

Adjust the cost of debt for an interim filing to reflect what was reported in the

most recent EMR.

No increases in joint or common costs associated with substations that serve

load at distribution voltage, including costs associated with land or equipment, in an interim filing.

Any utility that has not had an approved case within the last 36 months of the

effective date of the rule changes must submit a TCOS filing based on the following schedule:

If no rate approved in a full case since before December 31, 2009, must file a full

• r interim case within one year of the effective date of the rule changes.

If have had a rate approved in a full case since December 31, 2009, must file a

full or interim case within two years of the effective date of the rule changes.

TPPA 2018 ANNUAL MEETING

PUC PROJECT NO. 46393

LEGISLATIVE CHANGE

During the pendency of Project 46393 the Legislature enacted Senate Bill 735. The Legislature provided the following as basis for the enactment:

As part of the 2016 annual Earnings Monitoring Report (EMR), PUC staff noted that

within a certain class of utilities, a large percentage had not been subject to a comprehensive or even cursory review by PUC for many years.

Specifically, of the 38 utilities considered in this class, 19 had not had a

comprehensive rate proceeding in over 10 years, and of these, eight had not been reviewed in over two decades. In this report, PUC also identified some structural deficiencies with the current cost recovery system.

The Legislation was intended to address the PUC's recommendations by establishing

a requirement for PUC to periodically and efficiently review all electric utility rates, including a periodic adjustment of transmission rates to reduce rates as certain costs go down.

The bill allows the current periodic rate adjustment for distribution costs to

become a permanent expedited recovery mechanism to reduce regulatory lag in the build out of infrastructure.

TPPA 2018 ANNUAL MEETING

PROJECT 47545

Proposed new rule 25.247 will establish a schedule requiring periodic

filings for rate proceedings by investor-owned electric utilities operating solely inside ERCOT, as required by Senate Bill 735 (SB 735).

Staff’s initial proposed rule would require each non-investor-owned

transmission service provider to submit a complete application for an interim update under §25.192 (relating to Transmission Service Rates) within 48 months of its most recently approved change in network transmission-service rates under §25.192.

TPPA 2018 ANNUAL MEETING

COMMENTS FILED IN PROJECT 47545

Multiple stakeholders participated, including:

TPPA LCRA Floresville Electric Light & Power City of San Marcos Texas Electric Cooperatives, Inc. Texas Industrial Electric Customers (TIEC)

TPPA 2018 ANNUAL MEETING

TPPA COMMENTS

• As a general matter, TPPA believes that ERCOT planning processes and PUC
• versight of transmission providers have been successful in ensuring necessary

infrastructure at a reasonable costs.

• TPPA disagrees with proposals to have regularly scheduled rate hearings in

§ 25.247(d)(1).

• Existing earnings monitoring process has worked well and there is no clear need

for mandatory rate proceedings.

• An inflexible schedule for regulatory proceedings would involve significant costs

for the regulated entities and demand considerable Commission resources to process.

• The PUC already has the power to initiate the filing of applications by TSPs if

necessary.

• The draft rule would be a particular burden for small entities with small amounts of

transmission assets.

• TPPA suggests that provisions dealing with non-investor-owned utilities be

dropped from rulemaking because the current process is effective for identifying

• verearnings and for follow-up investigations.

TPPA 2018 ANNUAL MEETING

TEXAS ELECTRIC COOPERATIVE COMMENTS

• Non-IOUs should have to file an interim transmission cost of service update every

48 months.

• An interim transmission service rate update is generally less involved than a full

transmission cost of service rate proceeding, but still often requires the expense of

• utside lawyers and consultants.
• Non-IOUs have collectively come to the conclusion that lawyers and consultants are

necessary to help comply with PUC rules and procedures.

• In 2015-2017, all interim cases filed by non-IOUs involved a lawyer representing the
• applicant. Half involved an outside consultant.
• While the expenses incurred by a non-IOU may be dwarfed when compared to an

IOU costs, the expense can be significant for small non-IOUs.

• The proposal makes no attempt to weigh costs and benefits; a non-IOU will incur

the cost of the filing even if there is no change in rates.

• The existing process has worked well without need for new costs to regulated

entities and commitment of PUC resources. TPPA 2018 ANNUAL MEETING

LCRA COMMENTS

PURA § 36.167 applies “only to an electric utility, other than a river authority,

that operates solely inside [the Electric Reliability Council of Texas]”. It therefore does not apply to municipally-owned utilities, electric cooperatives, or river authorities.

The draft rule constitutes a structured, inflexible approach to modifying and

reviewing rates for non-IOUs and exceeds the Commission’s authority.

It was evident at the workshop that the draft rule was written by counsel for the

Texas Industrial Energy Consumers, and represents an improper attempt by stakeholders to renegotiate a policy decision that had already been made by the Legislature.

Rulemaking should be re-focused and the rate filing schedules for non-IOUs

abandoned.

TPPA 2018 ANNUAL MEETING

LCRA LEGAL CHALLENGES

The draft rule oversteps the limitations of PURA § 36.157

As a statutorily created agency, the PUC has only the authority that the Legislative

expressly confers on it by statute. An agency cannot exercise what is effectively a new power on the theory that it would be expedient for administrative purposes.

The PUC’s authority to initiate rate proceedings is governed solely by PURA

Chapter 36. SB 735 expanded authority with respect to specific regulated electric utilities.

The clear and unequivocal exclusion of river authorities from PURA § 36.157 must

be given effect.

The Commission does not have general authority to require electric utilities to make

periodic rate filings outside of the powers conferred in PURA Chapter 36.

The Commission does not have authority under Chapter 35 to set wholesale

transmission rates despite other powers conferred by that chapter. No other provision of PURA that speaks to the Commission’s authority over electric utilities can be construed to confer the necessary authority.

TPPA 2018 ANNUAL MEETING

LCRA POLICY ARGUMENTS

An overall mandate for cost of service proceedings may not benefit the public

interest.

An expansion of PURA § 36.157 to include all TSPs in ERCOT may not necessarily

lead to decreased costs over time to be realized by ERCOT rate payers.

More frequent rate proceedings will lead to a commensurate increase in expenses,

and there will be a reduced incentive for TSPs to engage in settlement discussions.

Increased rate case expenses and associated uncertainty about rates may have

the opposite effect on rate payers than what is the intent of the rulemaking.

More frequent rate proceedings will also have an impact on PUC Staff in terms of

resources and costs, which will be borne by the citizens of Texas.

These and other concerns may have informed the Legislature’s decision to

limit the applicability of § 36.157 and its decision to eliminate parallel provisions in Chapter 35.

TPPA 2018 ANNUAL MEETING

RELATIVE IMPACT OF MOST NON-IOUS

Requirement for all non-IOUs to file

Excluding the 5 largest non-IOUs, the remaining 33 non-IOUs represent

less than 10% of the total transmission cost of service (2016).

The 5 largest non-IOUs represent approximately 25% of the total

transmission cost of service (2016).

By comparison, the 10 largest IOUs represent approximately 60% of the total

transmission cost of service (2016).

Requiring smaller non-IOUs to file is not likely the best use of time and

limited resources (assuming lowering the postage stamp rate is the goal).

Will this be a repeat of 2002 when non-IOUs were called in over modest

amounts?

TPPA 2018 ANNUAL MEETING

WHAT HAPPENED TO THE RULEMAKINGS?

Decision in Project 46393 –

Commissioner Marquez “We should not be taking this up right now…this will be

horribly tortured…if these are issues they need to come from the Commission, the people sitting up here…we don’t need to think about how they are doing cost allocation…we need to give the industry time to adjust to SB 735.”

Commission concluded the project with no rule being adopted.

Decision in Project 47545 –

Chairwoman Walker “Adding the non-IOUs to this would be fairly vigorously

contentious…a lot of concerns…concerns about Staff’s amount of workload.”

More importantly, she believes that the PUC has the authority to create a rule to

have a schedule for non-IOUs.

The proposed rulemaking was relegated solely to IOUs, and the non-IOU language

was eliminated from publication.

Commission Marquez “It will get messy if we get everybody in.” Rule 25.247 ultimately adopted and in effect.

TPPA 2018 ANNUAL MEETING

WHERE ARE WE TODAY?

Project No. 48377—Rulemaking Proceeding to Amend 16 TAC §

25.247 to Establish a Filing Schedule for Non-Investor-Owned Transmission Service Providers Operating Within ERCOT

Opened on May 18, 2018. The proposed rule was published July 13, 2018. Comments are due August 13, 2018. No final date or time has been set for an open meeting to permanently

adopt the proposal.

TPPA 2018 ANNUAL MEETING

PROJECT NO. 48377 - PROPOSED RULE

• It amends 16 TAC § 25.247.
• Each non-IOU must file an interim filing within 48 months of its most recently approved change in

rates (PUCT can still initiate a rate proceeding at any time).

• Any non-IOU that has not had an approved case within the last 36 months of the effective date of

the rule changes must submit a TCOS filing based on the following schedule:

If last rate approved in a full case was Must file a full or interim case

Prior to January 1, 1999 Within one (1) year of the effective date

• f the rule changes

Between January 1, 1999 and January 1, 2006 Within two (2) year of the effective date

• f the rule changes

Between January 2, 2006 and March 30, 2011 Within three (3) year of the effective date of the rule changes Between April 1, 2011 and January 1, 2013 Within four (4) year of the effective date

• f the rule changes

Between January 2, 2013 and 36 months before the effective date of the rule changes Within five (5) year of the effective date

• f the rule changes

TPPA 2018 ANNUAL MEETING

WHAT CAN PUC STAFF DO ALREADY?

Earnings Monitoring Reports (EMRs) Informal Discovery Interim Rate Filings Petition for Rate Review

TPPA 2018 ANNUAL MEETING

EMRs

These reports are required pursuant to Title 16 TAC § 25.73. A docket is created at the Commission where parties will file their

annual EMR, with the option to file both public and confidential data.

By creating a docket for filing, it allows for an Omnibus of data for

all filing utilities.

It also provides Commission Staff the ability to conduct discovery. TPPA 2018 ANNUAL MEETING

COMMON MISTAKES IN EMRs

Not using the most recent version of the EMR form. Improper treatment for FERC 565 (cost of wheeling by others).

Note: adjust to remove (rather than functionalizing to distribution).

Inclusion of franchise fees (which should be functionalized to

distribution).

Note: if it is actually PILOT, then put it under Taxes Other than Income

Taxes on Schedule II-C (in lieu of including it within FERC 927).

TPPA 2018 ANNUAL MEETING

(continued)

Failure to provide complete contact information for designated contact person. Failure to include an electronic version of the EMR in native Excel format, with

all cell references, formulas, links, and other electronic information intact.

Failure to include information responsive to questions 1 through 4 (related to

various information pertaining to the utility’s Commission-authorized rate of return) in the bottom portion of Schedule IV.

Failure to complete both pages of Schedule V.

Page 1 – Related to historical financial statements Page 2 – Related to historical capital assets

Failure to update allocation factors.

TPPA 2018 ANNUAL MEETING

COMMON MISTAKES IN EMRs

INFORMAL DISCOVERY

Despite Staff’s ability to conduct formal discovery in the EMR dockets,

traditionally if they have need additional information from reporting entities they send informal discovery request.

As part of their review, a limited amount of discovery for purposes of clarifying

certain reported information and, as necessary, requesting additional information.

Staff consider these questions to be informal discovery—that is, they are do

not file the questions in the docket, nor are they asking the utility to file their

• responses. Instead, simply sending responses via email.

These questions can range from data underlying the EMR to changes in

circumstances of the utility from prior rate proceedings and prior EMR filings.

TPPA 2018 ANNUAL MEETING

PETITION FOR RATE REVIEW

The PUC traditionally elects to “call in” electric utilities on the recommendation

• f its Staff. Staff analyzes Earnings Monitoring Reports filed by electric utilities,

and then makes recommendations to the Commissioners as to those utilities that may be overearning, and should be “called in.”

If “called in,” the statute requires the electric utility to file a rate-filing package

no later than the 120th day after the date the PUC notifies the utility of a rate inquiry proceeding. See PURA § 36.153(a).

The Commission then has 185 days after that filing to make a “final

determination.” See PURA § 36.154(a).

This 185-day deadline tracks the statutory jurisdictional deadline for the PUC to

process a rate application filed by an electric utility. PURA §§ 36.102(a) and 36.108(a)(2).

TPPA 2018 ANNUAL MEETING

HISTORY OF CALLING IN UTILITIES

In the 2014 and 2015 Earning Monitoring Report projects, Staff identified three

electric utilities as having excess earnings and recommended that the PUC require each of the companies to file for a comprehensive rate review.

ETT (2014) had revenue 15.3% higher than Staff's estimated reasonable revenue

requirement.

Cross Texas and Lone Star Transmission (2015) having revenue 11.2% and 6.6%

higher than their estimated reasonable revenue requirement, respectively.

Staff reached that conclusion by examining the utilities’ reported actual capital

structure versus what Staff believed was an “appropriate capital-structure benchmark” and determined the utilities’ return on equity (“ROE”) based on Staff’s capital structure, which resulted in ROEs for those utilities that Staff deemed excessive.

TPPA 2018 ANNUAL MEETING

Docket No. Utility Date of Staff Memo & Project No. Estimated Excess Revenues Estimated Percentag e Excess Revenues Result 27789 Greenville Electric October 2002, Project

• No. 25591

$500,988 46% Settlement agreement resulting in reduction in revenue requirement

• f $346,806. (March 15, 2004)

27712 San Miguel Electric October 2002, Project

• No. 25591

$882,737 54% Settlement agreement resulting in reduction in revenue requirement

• f $363,000. (March 3, 2004)

27881 Grayson-Collin Electric October 2002, Project

• No. 25591

$163,000 48% Staff approved utilities requested increase in cost of service of $336,601. (October 20, 2003.) 27575 Southwest Texas Electric October 2002, Project

• No. 25591

$15,000 90% Settlement agreement resulting in reduction in revenue requirement

• f $10,000. (August 18, 2003)

32093 CenterPoint Energy October 2005, Project

• No. 30805

$105 million 9.40% Settlement Agreement providing for a reduction in CenterPoint Houston’s base rates for retail and wholesale customers reflecting an

• verall

decrease in CenterPoint Houston’s annual revenue requirement of $67.86 million. The Settlement Agreement required CenterPoint Houston to file to revise its system-wide rates no later than June 30, 2010, based on a test year ending on December 31,

• 2009. (September 5, 2006)

34040 Oncor November 2006, Project No. 32534 $80 million 4.10% Resolved in settlement in Oncor’s merger with Texas Energy Future Holdings, in Docket No. 34077. 46817 ETT October 2015, Project

• No. 44550

$38 million 15.30% $46,216,009 reduction to revenue requirement via tariff amendment, or 12.39%, from ETT’s most recent interim transmission cost of service filing, in Docket No. 46817. 46585 Lone Star October 2016, Project

• No. 45636

$6.3 million 6.60% $6,000,000 decrease in Lone Star’s transmission cost of service via a credit rider in its tariff, in Docket No. 46585. 46481 Cross Texas October 2016, Project

• No. 45636

$7.1 million 11.20% $6,500,000 decrease in Cross Texas’ revenue requirement. (January 1, 2017)

CONCLUSION

There is a desire on the part of the Commission and its Staff to require non-

IOUs to, at the very least, file interim TCOS packages on a routine basis.

The new proposed rule change raises the question as to whether there is still

a desire on the part of the Commission to eliminate the cash flow method.

Non-IOU utilities need to remain vigilant of attempts to restructure how their

transmission cost of service is determined, and potentially adverse effects of such restructuring to the non-IOUs ability to recover compensatory rates.

TPPA 2018 ANNUAL MEETING

QUESTIONS?

CODY FAULK wfaulk@lglawfirm.com 512.322.5817 GRANT RABON grabon@newgenstrategies.net 512.900.8322