STATE OF MAINE PUBLIC UTILITIES COMMISSION DOCKET NO. 2018-00194 CENTRAL MAINE POWER COMPANY 2018 DISTRIBUTION RATE CASE January 23, 2020 EXCEPTIONS TO EXAMINERS’ REPORT On behalf of Central Maine Power Company 83 Edison Drive Augusta, ME 04336 11648975.1 Table of Contents I. II. III. IV. INTRODUCTION............................................................................................................. 1 POINTS OF AGREEMENT ............................................................................................ 5 UNPROTECTED EXCESS ADIT INCONSISTENCY ................................................ 6 EXCEPTIONS................................................................................................................... 7 A. Rate-Effective Year ............................................................................................... 7 B. Rate Base.............................................................................................................. 10 C. Affiliate Service Costs ......................................................................................... 12 1. The affiliate service charges represent actual costs to CMP for service to customers. .......................................................................................................12 2. CMP has met its burden of proof to demonstrate the reasonableness of the affiliate service charges proposed for inclusion in the revenue requirement. ...................................................................................................13 3. The record does not otherwise support the blanket disallowance of all affiliate service charges above the 2013 cap. ...............................................16 4. Based on the record evidence, the Commission should also eliminate the cap on affiliate services or at least increase it to an appropriate level going forward. ................................................................................................18 5. CMP’s delay in seeking recovery for affiliate service charges did not result in harm to customers. .........................................................................19 6. A further audit of CMP’s management structure and affiliate charges is unnecessary. ....................................................................................................20 D. Costs to Maintain Legacy Billing System ......................................................... 23 E. Cost of Capital and Capital Structure .............................................................. 24 1. The range of ROEs considered by the Examiners, although flawed, supports an ROE of at least 9.42%. .............................................................24 2. Excluding the unreasonable ROE values that the Company’s and the OPA’s expert witnesses expressly rejected, but that the Examiners included, results in an ROE of at least 9.92%. ............................................25 3. The results of the CAPM analyses of the Staff, the Company, and the OPA, justify authorizing an ROE at or above the midpoint of the reasonable range. ...........................................................................................26 4. Average ROEs authorized in other jurisdictions likewise support an ROE of at least 9.42%. ............................................................................................29 5. The Company’s overall cost of capital, which necessarily includes its authorized equity ratio, should be forward looking and designed to allow the Company to attract capital. ....................................................................30 F. Customer Service Issues ..................................................................................... 31 i 1. Call-Center Performance ..............................................................................32 2. CMP’s Response to Customer Service Issues ..............................................32 3. Staff’s Proposed ROE Adjustment and CMP’s Proposed Customer Benefit Fund ...................................................................................................33 4. Service-Quality Indices (SQI) and Benchmarks .........................................34 V. POINTS FOR CLARIFICATION ................................................................................ 35 A. Storm-Cost Recovery Timing ............................................................................ 35 B. RDM ..................................................................................................................... 35 C. Service-Quality Indices (SQI) and Benchmarks .............................................. 36 D. Distribution Related Deferrals........................................................................... 37 E. Pricing Flexibility Guidelines............................................................................. 37 ii Central Maine Power Company (“CMP” or the “Company”) submits the following comments and exceptions to the Examiners’ Report dated January 9, 2020. I. INTRODUCTION CMP acknowledges that the overlapping adjudication of this rate case and the billing and metering investigation in Docket No. 2019-00015 has been a significant undertaking from both a substantive and procedural perspective. The Company recognizes the considerable efforts of the Commission, the Examiners, and other Commission Staff in soliciting input from all interested parties and conducting thorough and detailed investigations of the important issues raised in both dockets. CMP concurs with the Examiners’ articulation of the Commission’s statutory and Constitutional obligations in deciding the issues presented in this distribution rate case proceeding. The Examiners’ Report correctly recognizes that the Commission’s fundamental duty is to ensure that the rates determined in this proceeding are just and reasonable to both customers and the public utility.1 As the Examiners’ Report aptly states, “[t]he Commission cannot . . . fulfill its obligations under statutes and the U.S. Constitution by denying CMP any rate increase.” 2 Given the evidence before the Commission that demonstrates that current rates do not permit the Company sufficient revenues to cover its costs and realize a reasonable return on its investments, “doing so would be legally indefensible.”3 This conclusion is legally and factually correct, notwithstanding the opposition to CMP and any rate increase presented in the public witness testimony in this proceeding and in the public comments and press statements made since the issuance of the Examiners’ Report. The Examiners’ recommended revenue 1 Examiners’ Report at 19-21. 2 Id. at 206. 3 Id. 1 requirement provides the Commission a good platform for determining the level of rates that complies with the Commission’s statutory and Constitutional obligations. As discussed in Section II below, CMP accepts certain of the Examiners’ recommendations regarding revenue requirement issues, but also takes exception to certain of the Examiners’ recommendations which are materially financially punitive to the Company. CMP has also discovered a significant financial inconsistency between the words in the Examiners’ Report and the revenue requirement model presented in Appendix C to the Examiners’ Report. This inconsistency results in a $9.353 million shortfall in the rate increase if the words in the Examiners’ Report are accepted. The inconsistency relates to the amortization period associated with Unprotected Excess Accumulated Deferred Income Taxes (“ADIT”) and is described in more detail in Section III below. This inconsistency should be addressed in the Commission’s order. CMP takes exception to certain of the Examiners’ recommendations, including in particular the recommendations with respect to the timing of the rate-effective year and associated financial implications, the disallowance of actually incurred affiliate service charges above the cap last approved in 2013 (the “2013 cap”),4 and the appropriate cost of capital and capital structure for CMP. These exceptions, and others, are discussed in Section IV below. The Company also takes exception to the total magnitude of the financial impact of the recommendations in the Examiners’ Reports in this proceeding and in Docket No. 2019-00015. As stated in its testimony and again in its briefs, CMP acknowledges that its customer service performance since the implementation of the SmartCare system has fallen short of what customers deserve, and the Company takes full responsibility for these shortcomings, as the 4 Petition to Increase the Annual Dollar Limit for the Iberdrola USA Management Corporation Support Services Agreement with Certain Iberdrola Affiliates, Docket No. 2012-00530, Order Approving Stipulation at 1 (July 2, 2013). 2 Examiners’ Report acknowledges.5 CMP has worked hard to address its acknowledged shortcomings6 and taken numerous concrete actions to restore its customer service performance to acceptable levels, including those outlined in the Company’s Post-Hearing Brief and more since the close of the record in this proceeding. CMP’s customer service performance has improved as demonstrated in CMP Hearing Exhibit-2 and the even more up to date customer service performance data presented in Docket No. 2019-00015. CMP proposed a Customer Benefit Fund as the appropriate remedy for its customer service shortcomings and continues to believe that such a fund would be the best and most flexible remedy for the reasons discussed on pages 88 to 96 of the Company’s Post-Hearing Brief. The Examiners recommend a 75 basis point downward Management Efficiency adjustment to the Company’s allowed return on equity (“ROE”). The Company defers to Commission on the determination of the best structure for the remedy for CMP’s customer service performance under the circumstances. However, the Commission should recognize that the financial impact to CMP’s earnings imposed by the Examiners’ Reports in both dockets as a consequence of the Company’s performance shortcomings far exceeds the $4.9 million annual reduction that will result from the recommended ROE adjustment. In fact, as shown in the Figure 1 below, after the recommended disallowance of certain legitimately incurred costs, the imposition of the costs to comply with the various other remedies recommended in the Examiners’ Reports, and the delay in the implementation of the necessary rate increase, all on top of the ROE adjustment, the negative 5 Examiners’ Report at 175. 7/25/19 Hearing Tr. at 154:14 – 155:3 (MS. KELSALL: “I would say I'm not proud of the service that we gave to customers last year, but I would say that we worked tremendously hard to resolve some of the issues post-go live of a brand new billing system and the settling in that that takes. And I believe that we have improved significantly from the implementation of SmartCare, and certainly the end of 2018 and this year we are achieving the service levels that we've set, our quality standards have improved, and I feel encouraged where we are. . . ”). 6 3 financial impact to CMP is over $22.2 million. Moreover, the Company’s ROE for the rateeffective year is forecast to be only 6.89%; a reduction of 236 basis points below the base 9.25% ROE recommended by the Examiners. An ROE at this level is materially below the return legally necessary for establishing “just and reasonable” rates. Figure 1: Impact of Examiners’ Reports Recommended Management Efficiency Adjustment, Disallowances and Remedies on Distribution Earnings (Dollars in Thousands) CMP respectfully asserts that financial consequences of this magnitude, as recommended in the Examiners’ Reports in both proceedings, would be unduly punitive and unwarranted. CMP accordingly urges the Commission to reject the Examiners’ recommendations in certain key areas and consider the total impact on the Company of all of the recommended 4 disallowances and remedies, and not just the downward ROE adjustment, in determining just and reasonable rates. Finally, in Section V below, CMP requests clarification of certain points of the Examiners’ Report. In seeking these clarifications, CMP hopes to minimize the potential for confusion and misunderstandings in the application of the Commission’s Order going forward. II. POINTS OF AGREEMENT CMP agrees with the articulation in Section VI of the Examiners’ Report of all “issues not in dispute.” CMP accepts the Examiners’ Report recommendations regarding Bonus Compensation, relieving CMP of the obligation to file a market study in future rate cases, Electric Operations staffing levels, Pension (ASC 715) Costs, and Rate Case Expenses set forth in Section VII of the Examiners’ Report. CMP also supports the Examiners’ recommendation that the Commission decide on the responsibility for the costs of the Liberty’s audit after the parties are provided an opportunity to submit comments on the recoverability of the audit costs. Under 35-A M.R.S. §113, as amended by Public Law 2017, Chapter 448, enacted in 2018, the full cost of a management audit must be recovered from customers, except that if the audit contributes to a Commission finding of imprudence that results in a cost disallowance, the Commission is charged with fairly allocating the management audit costs between customers and shareholders.7 Based on a preliminary review of Liberty’s invoices, it appears that the vast majority of Liberty’s time (and resulting charges) was spent conducting its forensic audit of the Company’s metering and billing systems, as opposed to its review of the Company’s implementation of the 7 35-A M.R.S. § 113(3); see also S-467, L.D. 1729, 128th Legis., Sec. Reg. Sess. (2018). 5 SmartCare system and customer service performance. CMP, in fact, estimates that approximately three-quarters of Liberty’s charges were for the forensic audit. Given the recommendations in the Examiners’ Report in Docket No. 2019-00015 concerning the accuracy of the Company’s metering and billing systems, CMP respectfully submits that customers should be allocated a significant portion of Liberty’s charges, representing at least all of Liberty’s charges related to the forensic audit of the Company’s metering and billing systems. CMP will refine its proposed allocation as part of its subsequent comments. To assist the Commission, CMP and the other parties in arriving at the appropriate allocation, the Company also recommends that the Commission ask Liberty to provide a more detailed breakdown of its monthly charges by subject area. CMP also accepts the Examiners’ Report recommendations that the Commission direct CMP to file a proposal for hiring, at shareholder expense, a third-party entity with expertise in call-center operations and credit and collections to review the Company’s quality assurance/quality-control policies and procedures and to make recommendations for improving them. III. UNPROTECTED EXCESS ADIT INCONSISTENCY As mentioned above, the Examiners’ Report contains a significant and material inconsistency between the language in the Report and the financial treatment in the revenue requirement model. This inconsistency results in a $9.353 million shortfall in the rate increase if the words in the Examiners’ Report are accepted. The inconsistency is associated with the amortization treatment of the Unprotected Excess ADIT. In the revenue requirement model presented in Appendix C to the Examiners’ Report, the amortization period for the recovery of the Unprotected Excess ADIT regulatory assets from customers was set at ten years, while the 6 amortization period for the return of the Unprotected Excess ADIT regulatory liabilities to customers was set at five years, consistent with the Company’s recommendation. However, the Examiners’ Report on page 110 recommends that a five-year amortization period be used for both the recoverable and returnable excess ADIT. This amortization period recommendation is not consistent with how the Unprotected Excess ADIT was modeled in the revenue requirement model. If the revenue requirement model is modified to conform to this recommendation with both the Unprotected Excess ADIT regulatory assets and regulatory liabilities amortized over five years, the revenue requirement would need to increase by $9.353 million. Likewise, should the Unprotected Excess ADIT regulatory assets and liabilities both be amortized over ten years, the revenue requirement would need to increase by $4.677 million. CMP does not seek to modify its position on amortizing the Unprotected Excess ADIT regulatory assets over ten years and the Unprotected Excess ADIT regulatory liabilities over five years. CMP respectfully suggests that the Commission modify the language in the Commission’s order describing the treatment of the Unprotected Excess ADIT regulatory assets and liabilities to reflect the amortization periods used in the revenue requirement model. IV. EXCEPTIONS CMP presents the following exceptions to the Examiners’ Report in the order the challenged recommendations appear in the Examiners’ Report and identifies them by the Section headings used therein. A. Rate-Effective Year On page 29 of the Examiners’ Report, the Examiners recommend that the Commission adopt a rate-effective date of February 1, 2020. Elsewhere in the Examiners’ Report, including Ordering paragraph 1 on page 206, March 1, 2020, is identified as the date that CMP’s new 7 distribution rates will go into effect. CMP requests confirmation that (i) the approved rate increase is effective as of February 1, 2020, making the rate-effective year February 1, 2020 through January 1, 2021, and (ii) the Company may defer for recovery the lost revenue not received after the February 1, 2020 rate-effective date and before March 1, 2020, when the new rates will go into effect. CMP requests that the Commission’s order make clear when and how this deferral will be put in rates. The Company recommends recovery of this deferral as part of 2020 Annual Compliance Filing. CMP takes exception to the Examiners’ recommendation to deny deferral of the lost revenue not recovered from October 1, 2019 through the February 1, 2020 rate-effective date. The revenue requirement calculated in the Examiners’ Report (like that presented in CMP’s rebuttal case and in OPA Witness Morgan’s surrebuttal testimony) is based on an October 1, 2019 through September 30, 2020 rate-effective year. As such, the Examiners’ Report demonstrates that CMP’s distribution rates as of October 1, 2019 needed to be increased by at least $20.46 million in order to meet the legal requirements for just and reasonable rates. As quantified in Figure 1 above, had the Company’s distribution rates been increased by this amount effective October 1, 2019, CMP would have received approximately $1.7 million more in revenue on a monthly basis since October, for a total of $6.8 million before the commencement of the recommended February 1, 2020 rate-effective year. The Examiners’ recommended deferral denial, therefore, will result in the permanent loss of this $6.8 million in revenue for CMP. The Commission should permit CMP to defer this lost revenue for future recovery. Contrary to the Examiners’ Report, allowing the recovery of this lost revenue would not 8 constitute retroactive ratemaking.8 Rather, denying CMP the right to recover this lost revenue would mean that the Commission is requiring, contrary to the law, CMP to operate at unjust and unreasonable rates for the period from October 1, 2019 through January 31, 2020. Likewise, the Commission’s order to stay this proceeding expressly did not deny CMP’s request for this deferral, instead holding the decision on the deferral until the Commission’s final order in this proceeding.9 The purpose of the stay was to delay the decision in this rate case until the Commission decided the billing and metering investigation in Docket No. 2019-00015 so that any financial consequences from the investigation could be addressed in the new rates established in this proceeding. The stay was not to provide a justification to mandate, contrary to the applicable statutory and Constitutional law discussed in the Examiners’ Report, that CMP be forced to operate under rates that are unjust and unreasonable based on the evidence presented in this proceeding. Should the Commission, however, accept the recommendation in the Examiners’ Report to deny the Company a deferral for its lost revenue since October 1, 2019, then the Commission must adjust CMP’s allowed revenue requirement to reflect the full costs the Company will incur 8 The Examiners appear to acknowledge that, as is the case here, a rate case that is not initiated under 35-A M.R.S. § 310 “has no clock.” Examiners’ Report at 28. As such, “the passage of time leads to increases in costs” that “accumulate and need to be recovered.” Id. at 29. The Law Court and Commission precedent allow for such prospective recovery through deferral mechanisms used during the pendency of the proceeding at issue, while the rule on retroactive ratemaking prohibits the Commission from retroactively changing rates fixed in a final order in a prior proceeding. See Maine Pub. Advocate v Pub. Util. Comm'n, 476 A.2d 178, 183 (Me. 1984) (In determining that the Commission could not authorize an adjustment mechanism in a new proceeding to correct errors in a rate proceeding in which a final order had been issued, the Law Court stated, “[i]t is well established that errors made in the calculation of a utility's base rates may be remedied only prospectively.”) Consistent with the Law Court’s precedent, the Commission interprets the prospective nature of such remedies to mean implementing adjustment mechanisms during the pendency of a then-active proceeding. See, e.g., Re Consumers Maine Water Company, Docket No. 93-145, Supplemental Amended Order at 2 (Oct. 24, 1994) (“We have ordered the deferral of expenses in many rate cases and in many accounting orders. We do not consider that the deferral of expenses constitutes retroactive ratemaking.”). Order on Motion to Stay at 3 (Aug. 7, 2019) (“Finally, the Commission does not at this time address CMP’s request to defer lost revenues with carrying costs or its request that the proposed service quality metrics and other tracking mechanisms be effective October 1, 2019. Those matters will be addressed in the context of the Commission’s ultimate decision in the rate case.”). 9 9 during the rate-effective year. At a minimum, this adjustment should reflect the increases for the period from October 1, 2019 to the beginning of the authorized rate-effective year in both the Company’s rate base (as calculated using the allowed Attrition Adjustment) and in the Company’s operating expenses (using the agreed upon measure of inflation). During the proceeding, Staff acknowledged this impact when the start of the rate-effective year was delayed from July 1, 2019 to October 1, 2019 by agreeing that the revenue requirement needed to be increased to capture the increase in rate base and the escalation of operating expenses during this period due to inflation.10 As the Examiners expressly acknowledge, “the passage of time leads to increases in costs” that “accumulate and need to be recovered.”11 CMP has estimated that the increase in plant in service forecast using the Attrition Adjustment and the inflation impacts of delaying the rate-effective date an additional four months until February 1, 2020 result in an increase in the Company’s revenue requirement of $2.9 million.12 The Commission should include this amount in the revenue requirement determined in the Commission’s order B. Rate Base For the most part, CMP, the Staff and the OPA are in agreement regarding CMP’s rate base. The Company, however, takes exception to the Examiners’ recommendations on two of the points in dispute. Specifically, while the Company agrees with the Examiners’ rejection of the recommendations of OPA witness Robert Rosenkoetter, CMP takes exception to the Examiners’ recommendation that the Commission approve Staff’s proposed 4.11% Attrition Adjustment, 10 Revenue Requirement Rebuttal at RRP-REB-22, Table 20. 11 Examiners’ Report at 29. 12 Approximately $2.7 million of this increase is attributable to increased rate base. This calculation is performed by applying the Attrition Adjustment for the additional four months through the end of January. The remainder of the increase is attributable to escalating only those costs subject to using the agreed-upon general inflation escalator. Should the rate-effective date be delayed to March 1, 2020, the necessary adjustment would increase to $3.6 million. 10 rather than the Company’s proposed 4.26% Attrition Adjustment. The reasons for this exception are discussed in detail on pages 44-46 of CMP’s Post-Hearing Brief, and those arguments are incorporated herein. Likewise, CMP takes exception to the Examiners’ recommendation that the Commission reject the Company’s proposal for incremental funding for the identified resiliency projects targeting the Company’s 12 worst performing circuits. The Examiners expressly recognize that the resiliency investments proposed for the Jackman area in Docket No. 2019-00047 are prudent. CMP agrees and the Commission should concur in its order. The Jackman resiliency investments are a subset of those proposed in the Company’s Resiliency Plan submitted as Exhibit OAR-REB-3. The resiliency investments proposed for installation in 2020 on the Company’s other worst performing circuits, as outlined in the Resiliency Plan, are likewise appropriate and should be approved for the reasons discussed at length on pages 52 to 60 of CMP’s Post-Hearing Brief. Approving these targeted capital investments would represent a forward looking and proactive first step in supporting CMP’s efforts to make its distribution system more resilient, through increased hardening and automation, to the ever more frequent and intensifying storms hitting Maine. If the Commission limits the Company’s capital investment funding based on the Company’s historical spend, as the Examiners recommend, CMP would not be positioned to make significant progress in making its distribution system more resilient, as the proposed incremental hardening and automation investments are not reflected in the historical investment levels used to calculate the Attrition Adjustment. As such, by accepting the Examiners’ recommendation, the Commission would effectively reject funding for these projects. In doing so, the Commission would signal that increased system hardening and automation to strengthen 11 CMP’s distribution system are not viewed as valuable to customers, notwithstanding the findings of the cost benefit analysis the Company presented in this proceeding and the Commission’s findings in approving the Stipulation in Docket No. 2019-00047. By denying funding in this proceeding, the Commission would also necessarily create a regulatory lag, whereby CMP, should it decide nonetheless to move forward with these incremental resiliency investments, is forced to come back in quickly for a new rate case to minimize the delay in the Company’s recovery of these investments and the risk of their non-recovery. C. Affiliate Service Costs For the following reasons, CMP takes exception to the Examiners’ recommendations that (i) all of the affiliate service charges above the 2013 cap should be disallowed; (ii) the 2013 cap on affiliate service charges should remain in effect; and (iii) the Commission should initiate a management audit of CMP and its affiliate service companies to determine whether CMP’s current management structure is appropriate and in the interests of customers. 1. The affiliate service charges represent actual costs to CMP for service to customers. All of the affiliate service charges that CMP seeks to include in rates are for actual costs incurred by CMP to provide service to customers. These charges are for management functions and back-office shared utility services, including accounting, finance, human resources, regulatory services, legal, risk management, building and fleet services, information technology, and security, provided to CMP by affiliates for the benefit of customers, and, therefore, are appropriately included in the Company’s cost of service.13 It is undisputed that CMP requires these services, many of which are provided by Avangrid employees located in Maine,14 in order 13 Policy Rebuttal at POL-REB-25:20-26:2. 14 Market Information Testimony at MKTI-10. 12 to provide service to its customers, and by obtaining them through Avangrid’s shared services model, the Company receives them at cost and in an efficient manner for the benefit of customers. Mr. Flaherty, in fact, testified that the current shared services arrangement provides the most economic option for CMP’s customers.15 2. CMP has met its burden of proof to demonstrate the reasonableness of the affiliate service charges proposed for inclusion in the revenue requirement. Contrary to assertions in the Examiners’ Report, CMP has met the burden of proof required to demonstrate the reasonableness of the affiliate service charges proposed for inclusion in the revenue requirement. In demonstrating the reasonableness of the affiliate service charges, CMP presented the analysis and resulting testimony of Mr. Flaherty which made clear that CMP’s “existing customer base benefits most from the current arrangement.”16 The Strategy& Market Study, offered as part of the Company’s supporting “market information” is without precedent, unique in scope and purpose, as Staff and Liberty acknowledged during the proceeding.17 Scoped by the Company in collaboration with Staff, Liberty, and the OPA, the Market Study presented a thorough review of the existing financial and management controls of $142.4 million in total (prior to allocation to CMP) Avangrid Service Company (“ASC”) and Avangrid Management 15 Flaherty Direct at TJF-40. 16 Id. at TJF-53. 17 3/27/19 Tech. Conf. Tr. at 32:6-34:7 (MR. FITZGERALD: . . . I won't put words in Liberty's mouth, but I think they agreed that they couldn't find an example of something that fits the mold we're trying to achieve here.); 12/20/18 Tech. Conf. Tr. at 39:20-41:20 (MS. KELLY: Have you seen a market study that you have liked? MR. COHEN: I've never seen one so -- I guess if we don't count the last one as a market study, I've never seen one. So I think that's the point of the exercise and, you know, the Commission's retained consultants who have fairly extensive experience in this area . . . MR. ANTONUK: We have done a lot of work looking at costs and looking at internal versus external. So we've seen it done effectively at a variety of functions, whether it's engineering, construction management, legal services, some elements of auditing and accounting. But I have not seen one done across this broad a scope.). 13 Company (“AMC”) costs18 and directly tested $16.1 million of such costs.19 As discussed extensively in the Company’s Market Study Brief, as a result of the various reviews and analyses, Mr. Flaherty concluded “that ASC costs, and AMC costs that flow through ASC, are reasonable and compare favorably against other options available in the market for measuring such costs.”20 More specifically, Mr. Flaherty also concluded that “the body of evidence that has been developed through [the Market Study] analysis clearly establishes that continued ASC and AMC performance of service company activities would be beneficial” and “when compared to market alternatives for performance, the AMC, ASC, and CMP costs compare favorably and provide direct economic advantage to CMP when measured against a third-party test.”21 In fact, the Market Study found that sourcing ASC and AMC services in the market would add $13.4 million to $19.5 million in incremental costs, increasing CMP’s costs recoverable from customers by approximately $2.7 million to $3.8 million.22 CMP further relied on the results of Avangrid’s annual compensation study and a review of Avangrid’s robust outsourcing process, as discussed in the Company’s Market Study Brief on pages 3 to 6. A significant portion of the affiliate service charges are attributable to employee compensation and related employee expenses.23 Avangrid’s annual employee compensation assessment, conducted using market compensation data provided by an independent third party, demonstrated that ASC’s and AMC’s compensation costs are uniformly below the median 18 Market Study at 61-65. 19 Id. at 68-89. As noted later, most of the ASC and AMC costs are already subject to compensation study tests or competitive bids submitted from the market. 20 Flaherty Direct at TJF-53. 21 Id. at TJF-52. 22 Market Study at 14. 23 See Market Study Brief at 4. 14 compensation for comparable positions by $6.9 million in total and $9,938 on a per employee basis.24 Additionally, the Company testified that services provided by ASC or AMC and fulfilled through third-party agreements are subject to the Avangrid procurement process.25 This “robust global purchasing framework”26 relies on an evaluation of competitive bids submitted from the market, requires purchasing agents to evaluate bids based on the quality of technical services provided and financial competitiveness, and subjects the final approval to varying levels of management approval, depending on the “competitiveness and the value of the contracts” under consideration.27 Throughout this proceeding CMP has provided ample evidence that both “CMP and Avangrid regularly engage in efforts to ensure that the Company’s services are reasonable relative to market rates, managed at the appropriate levels, and provide adequate and reasonable service for customers.”28 In short, CMP has met its burden of proof regarding the reasonableness of its affiliate service charges. Likewise, contrary to the Examiners’ characterization of CMP’s testimony and briefs, 29 CMP did not rely on intuition to establish that shared services are more efficient than having the service provided by CMP on a standalone basis. Instead, the Company relied on the significant evidence and studies, developed over many years, quantifying the efficiencies and savings produced by the shared services model, including the Merger Study offered in Docket No. 200700215, the Benchmarking Study prepared and submitted by PA Consulting in Docket No. 2013- 24 Market Information Testimony at MKTI-9. 25 Id. 26 Market Study at 64. 27 Id. at 64-65. 28 Market Information Testimony at MKTI-9. 29 See Examiners’ Report at 82. 15 00168, and the Market Study prepared and submitted by Strategy& in this proceeding, as well as on the Commission’s own prior recognition that the shared service model provides services in an efficient manner for the benefit of customers.30 In fact, as discussed in CMP’s Market Study Brief on page 7, the Commission recently recognized the benefits of the shared service model in Docket No. 2017-00262 when it modified the Chapter 308 affiliated generation standards of conduct to allow “Maine ratepayers to benefit from the efficiencies and lower costs that can result from a T&D utility’s corporate affiliations.”31 The Commission’s recent statements are consistent with its prior orders approving stipulations to increase the cap on the Company’s affiliate service charges.32 All of this evidence demonstrates that the affiliate service charges proposed for inclusion in the revenue requirement are reasonable. 3. The record does not otherwise support the blanket disallowance of all affiliate service charges above the 2013 cap. As discussed on pages 14 to 16 of CMP’s reply brief, the record in this proceeding does not support the blanket disallowance of all of the affiliate service charges in excess of the 2013 cap ($5.376 million annually for distribution and a total of $10.278 million annually including transmission). The Company has documented, through the Market Study and the testimony and underlying data supporting it, the management and other back office support services are provided to CMP in order to permit the Company to provide distribution and transmission service to customers. As discussed above, the charges for these affiliate service are reasonable 30 See, e.g., Central Maine Power, et al., Request For Approval of Affiliated Interest Transaction For Two Service Agreements with Energy East Management Corporation, Docket No. 2001-00178, Order Approving Stipulation at 6 (Jul. 10, 2001). 31 Market Information Testimony at MKTI-10 and 11 (citing Standards of Conduct for Transmission and Distribution Utilities and Affiliated Generators (Chapter 308), Docket No. 2017-00262, Order Provisionally Adopting Rule and Statement of Factual and Policy Basis at 9-10 (Jan. 5, 2018)). 32 Central Maine Power, et al., Request For Approval of Affiliated Interest Transaction For Two Service Agreements with Energy East Management Corporation, Docket No. 2001-00178, Order Approving Stipulation at 6 (Jul. 10, 2001). 16 and appropriate as demonstrated by the prior studies and the market information, including the Market Study, offered by the Company in this proceeding, for the reasons discussed at length in the Company’s briefs.33 There has been no showing, including in the Examiners’ Report that any of the affiliate services provided or the charges for those services were imprudent or unreasonable.34 At most, the Staff questioned the appropriateness of the charges for services provided by Iberdrola, S.A (the “IBSA charges”) and the charges for technical services provided in the areas of customer service and electric operations. The Company addressed these charges, which represent in total less than $5.7 million of the total $41.646 million allocated to CMP, in detail in Mr. Flaherty’s Response to Liberty Consulting Group dated September 24, 2019 and its Market Study Brief. Given the lack of evidence establishing the imprudence or unreasonableness of the affiliate services provided for the benefit of CMP’s customers or the charges for such services, there is no rational basis for disallowing all of the affiliate service costs above the 2013 cap. As discussed in CMP’s Market Study Brief on pages 30-31, doing so would be arbitrary and violate the Commission’s duty in setting rates to provide the utility “sufficient revenue” to cover its “total cost of service.”35 While CMP respectfully urges against any disallowance based on the record, should the Commission agree with the Examiners’ Report that the disallowance of some affiliate service costs is justified, then the Commission should limit the disallowance to no more than $2.925 million which represents the distribution share of the $4.9 million in IBSA charges allocated to 33 See, e.g., CMP Reply Brief at 13-14; CMP Market Study Brief at 10-12. 34 CMP Reply Brief at 14-16. Cent. Me. Power Co. v. Pub. Utils. Comm’n, 455 A.2d 34, 38 (Me. 1983); Pub. Advocate v. Pub. Utils. Comm’n, 1998 ME 218 ¶6. 35 17 CMP and the approximately $756,00036 of technical service charges related to CMP’s customer service and electric operations, as those are the only areas of affiliate service charges that have been questioned in this proceeding.37 4. Based on the record evidence, the Commission should also eliminate the cap on affiliate services or at least increase it to an appropriate level going forward. The Examiners also recommend that the 2013 cap be maintained pending the recommended management audit. For the reasons presented on pages 19 to 20 of the Company’s reply brief and pages 32 to 33 of the Company’s Market Study Brief, the Commission should reject this recommendation and instead conclude that a fixed cap on affiliate service charges is no longer necessary. As amply detailed above and in the pages of the cited briefs, the affiliate service company model for the provision of management and back-office services is efficient and represents the industry standard.38 It is for these reasons that no other state in which Avangrid operates imposes a hard cap on affiliate service charges that may be included in rates, and, in fact, other jurisdictions promote the increased use of the service company model to drive efficiency in the provision of utility services, thereby lowering costs for customers.39 Moreover, the charges for services from the shared service model are reasonable, costeffective when compared to alternate service models, and are subject to appropriate Commission control and oversight. Under Maine law, all of the Company’s O&M expenses, including the affiliate service charges, are subject to a “just and reasonable” standard of review. Any charges recovered in rates, including affiliate service charges, are, therefore, reviewable by the Commission as part of the ratemaking process and must continue to meet the just and reasonable 36 ODR-016-001, Attachment 1. 37 Reply Bench Analysis at 13; 7/12/19 Tech. Conf. Tr. at 100:9-24. 38 Market Study Brief at 12; CMP Reply Brief at 19. 39 Policy Rebuttal at POL-REB-32:2-8. 18 standard. This standard applies even in the absence of a cap, rendering continued imposition of a cap unnecessary and duplicative of the controls that already exist within the Commission’s ratemaking process. As it considers the appropriateness of maintaining the 2013 cap going forward, the Commission also should be mindful that the cap applies to the affiliate service charges allocated to both transmission and distribution. As such, by maintaining the 2013 cap, the Commission will deny CMP recovery not only of the affiliate service charges in excess of the cap allocated to distribution, but also the affiliate service charges in excess of the cap allocated to transmission. In doing so, the Commission would impermissibly encroach on FERC’s jurisdiction under the Federal Power Act to set transmission rates, which the Commission has previously recognized.40 As such, the Commission’s order should eliminate the cap entirely or at least raise the cap to $42.8 million, which would be a level sufficient to permit CMP to recover the affiliate service company charges at issue in this proceeding, subject to the Commission’s disallowance determination regarding the IBSA charges and customer service and electric operations related charges. Moreover, and in any case, in the event that the Commission maintains a cap, it should make the cap only applicable to the affiliate service charges allocated to distribution and therefore within the Commission’s rate-setting jurisdiction. 5. CMP’s delay in seeking recovery for affiliate service charges did not result in harm to customers. The Examiners recommend that the Commission disallow the current affiliate service charges above the 2013 cap and deny CMP’s request to remove the cap on a going forward basis, Maine Yankee Atomic Power Co. v Maine Pub. Util. Comm'n, 581 A.2d 799, 803 (Me. 1990) (“It is undisputed that FERC has jurisdiction for setting rates for “the transmission and sale (wholesale) of electricity by investorowned utilities in interstate commerce.”). See also Mississippi Power & Light Co. v. Moore, 487 U.S. 354, 355 (1988) (“FERC has exclusive authority to determine the reasonableness of wholesale rates.”)); In Re Cent. Maine Power Co., Docket Nos. 94-475 and 94-476, Order at 6 (Mar. 30, 1995) (finding that FERC has “exclusive jurisdiction” over the determination of wholesale rates). 40 19 in part, because of “how the Company has presented the evidence.”41 By this, the Examiners refer to the Company’s delay in seeking recovery for its affiliate service charges. 42 Whether requested in this proceeding or any other, recovery of the affiliate service charges is subject to the same regulatory oversight and inquiry process. CMP’s delay in seeking recovery of these charges in rates did not harm customers because only the amount of affiliate services approved in CMP’s last rate case are currently in rates. Customers clearly benefited from CMP not filing earlier to raise the cap. The Examiners instead attribute the delay in not seeking a change in the cap as being detrimental to customers and a basis for denying an increase in the cap in this proceeding. The Market Study presented in this proceeding was extensive with a thorough review by Staff and parties, including technical conferences and consultation prior to and after the study was performed. Neither Staff nor the OPA were disadvantaged by the timing of CMP’s request as they participated fully in the scoping of the Market Study and the consideration of its results and the other market information presented by the Company in this proceeding. 6. A further audit of CMP’s management structure and affiliate charges is unnecessary. A management audit to consider CMP’s current management structure is unnecessary in CMP’s view and represents yet another effort by Staff to change the showing the Company must make to recover affiliate service charges in rates. 41 Examiners’ Report at 79. 42 Id. at 78-79. 20 In Docket No. 2007-00215, the Company provided the Merger Study quantifying the “savings from shared services” that customers have realized since the CMP/Energy East merger.43 Staff continues to attempt to discount the importance of the findings of this study.44 In Docket No. 2013-00168, CMP offered the PA Consulting Benchmarking Study, which compared the Company’s affiliate service charges against other utilities that employ the service company model, to demonstrate the reasonableness of its affiliate service charges. This study showed that CMP’s affiliate service costs were 11.6% below the costs of other utilities.45 Even so, Staff disregarded the results of the Benchmarking Study, concluding that such benchmarking did not provide appropriate market information.46 In this proceeding, CMP offered the Market Study as part of the Company’s market information. Despite the participation of the Staff and the OPA in developing this study, Staff found the Market Study to be of little value since it did not address the “quality” and “costeffectiveness” of the affiliate services.47 And now, despite having before it all of the Company’s market information, including the Market Study, which neither Staff nor Liberty materially challenges on the merits, that shows that the rates charged CMP for affiliate services are reasonable and millions of dollars below market, and having conducted discovery on this evidence with the aid of Liberty, the Examiners advocate for a management audit to consider CMP’s management structure, including the affiliate service company model through which CMP receives management and back office 43 Market Information Testimony at MKTI-12:4-13:13. 44 Reply Bench Analysis at 12. Central Maine Power Co., Request for New Alternative Rate Plan (“ARP 2014”), Docket No. 2013-00168, Bench Analysis, Appendix F at 1 (Dec. 12, 2013). 45 46 Id. at 59-60. 47 Reply Bench Analysis at 10, 12. 21 support.48 Such an audit will be a time-consuming and likely expensive effort to reaffirm that the service company model used by Avangrid represents the industry standard49 and produces significant savings for the benefit of customers.50 As such, CMP respectfully advocates against the initiation of such an audit, and encourages the Commission instead to decide the reasonableness and appropriateness of the affiliate service charges for inclusion in rates and whether to maintain a cap on such charges based on the record in this proceeding.51 In the event the Commission concludes that a management audit of CMP’s management practices is appropriate, the Commission should at a minimum increase the cap on affiliate service charges, as discussed above, to permit the Company to recover in rates all of the affiliate service charges evaluated as part of the Market Study. In this way, CMP would not be deprived of the revenue it needs to cover its total cost of service in providing both distribution and transmission service, pending the audit. Should the Commission deny this adjustment to the cap pending the audit, then the Commission should make clear in its order the procedural paths by which, upon the completion of the audit, the 2013 cap will be adjusted and CMP will be permitted to seek recovery of its affiliate service company charges disallowed in this proceeding. The Company respectfully submits that such clarity is appropriate given the magnitude of the recommended disallowance of In ODR-020-006, Attachment 1, the Company also provided a 2017 memorandum by Ernst & Young (“EY”) analyzing the cost of corporate services provided by Iberdrola to Avangrid. EY concluded that the allocation methodology and allocated amount was “reasonable” and “priced consistent with the arm’s length principle as defined in the 482 Regulations.” ODR-020-006, Attachment 1 at 1-2. See also Internal Revenue Code § 482 (“482 Regulations”), specifically Treas. Reg. §1.482-9(k). 48 Flaherty Direct at TJF-20 (“The service company model is commonly used within the utility industry and AMC and ASC perform similar functions to those currently performed by these services companies, e.g., finance, human resources, information technology, etc. AMC’s structure and operating models are also generally consistent with how other utility holding companies provide services to their operating companies.”) 49 50 Market Study at 14. 51 See Camden and Rockland, Maine and Wanaka Water Companies; Re: Proposed Increase in Rates, Docket No. 93-245, Order Denying Motion for Management Audit (Mar. 25, 1994) (denying request for management audit because the issues were properly addressed in then pending rate case). 22 affiliate service charges and its continuing impact during the audit and any necessary future regulatory processes. D. Costs to Maintain Legacy Billing System CMP takes exception the Examiners’ recommendation that the Commission disallow the amount ($484,000) currently included in rates for the maintenance of CMP’s legacy CSS billing system on a retroactive basis to July 1, 2019. Instead of disallowing these costs, the Commission should order that the determination of whether these costs should be recovered from customers will be decided in a follow-on proceeding in the same way that the cost recovery for the Liberty audit costs will be determined per the Examiners’ Report. On page 99 of the Examiners’ Report, the Examiners identify a number of questions germane to the determination of whether customers or CMP’s shareholders should bear the ongoing maintenance costs for the legacy CSS system and acknowledge that the Commission does not have answers to these questions. The record does not include information answering these questions because CMP agreed, at the Staff’s request, to remove the legacy CSS costs from its revenue requirement in this case and instead to address those costs as part of the 2019 Annual Compliance Filing proceeding.52 With this change, CMP understood that the legacy CSS costs were no longer part of this proceeding and for this reason did not address them further. Accordingly, it would be unfair for the Commission to find here that the Company has not met its burden with respect to these costs and disallow them retroactively to July 1, 2019, the effective date of the 2019 price change addressed in the 2019 Annual Compliance Filing. This is particularly true since the Company maintained the legacy CSS system at least in part in order to comply with the Examiners’ June 6, 2018 Procedural Order (Record Retention) in Docket No. 52 See Central Maine Power Company’s Revenue Requirement Update at 2-3 (Jun. 7, 2019). 23 2018-00052, which expressly required CMP to maintain all data contained in the legacy CSS system.53 For these reasons, the Commission should order that the parties make supplemental filings within 30 days of the date of the Commission’s order which provide information responsive to the Examiners’ questions on page 99 of the Examiners’ Report and otherwise state their positions with respect how the legacy CSS costs should be addressed in rates. Any change in rates related to the legacy CSS system costs can then be made as part of the 2020 Annual Compliance Filing proceeding. E. Cost of Capital and Capital Structure CMP takes exception to the Examiners’ recommendations of a 9.25% ROE54 and a 50% equity ratio for the following reasons. 1. The range of ROEs considered by the Examiners, although flawed, supports an ROE of at least 9.42%. The Examiners assert that based on their “assessment of the expert ROE testimony and analysis in this case . . . a reasonable ROE could fall within a range from as low as 6.46% to as high as 12.37%.”55 The Examiners use this assessment to support their assertion that although the Examiners recommend a 9.25% ROE, “the record could support a lower ROE.”56 The Company believes the Examiners’ stated range is flawed and inappropriate for the reasons discussed below. Should the Commission, however, accept this range – which includes the 53 Central Maine Power Company, Investigation of Central Maine Power Company Metering, Billing and Customer Communication Issues, Docket No. 2018-00052, Procedural Order (Record Retention) at 1 (Jun. 6, 2018). The Examiners’ recommended ROE is prior to the management efficiency adjustment recommended on page 178 of the Examiners’ Report. 54 55 Examiners’ Report at 146. 56 Id. at 127. 24 undisputed 11 basis points flotation costs – the midpoint of this range is 9.42% and supports an ROE of at least the same. 2. Excluding the unreasonable ROE values that the Company’s and the OPA’s expert witnesses expressly rejected, but that the Examiners included, results in an ROE of at least 9.92%. The range relied on by the Examiners includes unreasonably low values that the expert witnesses specifically excluded. In his testimony, the lowest DCF value that Dr. Griffing considered in reaching his recommended ROE for the Company was 8.89%.57 Dr. Griffing testified that he excluded ROE values that he considered too low to provide a reasonable return for the Company.58 Yet, on page 122 of the Examiners’ Report, the Examiners indicate that Dr. Griffing’s relied on results as low as 6.95% in his direct testimony and as low as 6.46% in his surrebuttal testimony.59 These assertions directly contradict Dr. Griffing’s submitted testimony in this proceeding. Similarly, Ms. Bulkley testified that the low DCF results in her analysis did not “provide a reasonable spread over the expected yields on Treasury bonds to compensate investors for the incremental risk related to an equity investor.”60 As such, Ms. Bulkley excluded the mean-low results (8.79% to 9.06%) and considered the range of mean and mean-high results (9.56% to Dr. Griffing’s direct testimony included an acknowledged error in his DCF calculation that resulted in understated values. See OPA Surrebuttal at 18-19 (“I used incorrect Value Line EPS estimates [for four proxy group companies]. The incorrect values caused my DCF results for the group to be understated.”) Dr. Griffing corrected this error in his surrebuttal testimony. Id. at 19. In his surrebuttal testimony, Dr. Griffing relied on his Electric DCF and Electric and Gas DCF results, the lowest of which was 8.89%. See MFG-18, Schedule 1–ROE. See also CMP019-006 (“Dr. Griffing did not rely on the results of his multi-stage DCF model in his final recommended ROE for CMP. The Electric Group ROE results of an 8.58 percent mean and 8.64 percent median were at the time of the analysis too far outside the lower value of 9.10 percent for authorized ROEs in recent fully litigated rate cases to be a reasonable return for CMP. The same was true of the 8.39 percent mean and 8.35 percent median ROEs for the Electric and Gas Group.”); Griffing Direct at 52 (“My multistage DCF results and the historical CAPM results are too far outside this lower boundary of recent results to be considered reasonable. Therefore, I have not given any weight to these results.”) 57 58 See Griffing Direct at 52; CMP-019-006. 59 Examiners’ Report at 122. 60 Bulkley Direct at ROE-48. 25 10.94%) to reflect a reasonable ROE for the Company.61 Despite Ms. Bulkley’s clear testimony, the Examiners state that “[b]ased on [Ms. Bulkley’s testimony], an indicated ROE would fall in the range of a low of 8.79% to a high of 10.94%.”62 As with Dr. Griffing, the Examiners’ assertion directly contradicts Ms. Bulkley’s testimony in this proceeding. As a result, the Examiners puts forth (inappropriately in the Company’s view) for the Commission’s consideration ROE values that both Ms. Bulkley and Dr. Griffing expressly rejected as unreasonably low. Based on Ms. Bulkley’s and Dr. Griffing’s testimonies, it is more appropriate for the Commission to consider ROEs in the range of 8.89%, which is the low end of Dr. Griffing’s recommended results, to 10.94%, which is the high end of Ms. Bulkley’s results.63 This range, although more narrow than the range suggested by the Examiners, is more reasonable and supported by the evidence in the record. This more reasonable and supported range justifies an ROE of at least 9.92%,64 which is close to the ROE proposed by the Company. 3. The results of the CAPM analyses of the Staff, the Company, and the OPA, justify authorizing an ROE at or above the midpoint of the reasonable range. As set forth above, based on the evidence before it, the Commission is justified in authorizing an ROE for the Company of at least 9.42%,65 but more reasonably 9.92%.66 Both 61 Id. 62 Examiners’ Report at 121. For the reasons discussed in CMP’s opening brief, the Staff’s DCF results are unreasonably low. The unmodified range of Staff’s DCF results reach a low end of 4.94% - a mere 55 basis points above the Company’s long-term cost of debt. See Reply Bench Analysis at 58. Even though Staff appropriately excluded individual results below 7.00% in the Reply Bench Analysis, its modified low end remains 176 basis points below the low end of the reasonable range established by the Company’s and the OPA’s witnesses. As such, the Company contends that the Staff’s DCF results remain unreasonably low and warrant less weight than the other analyses. 63 This value represents the midpoint of the Examiners’ range, as modified by the Company herein. Since Ms. Bulkley’s and Dr. Griffing’s DCF analyses included flotation costs in the reported results, further adjustment to account for flotation costs is unnecessary. 64 65 This value reflects the midpoint of the range of ROEs set forth by the Examiners. 26 Ms. Bulkley and Dr. Griffing testified that their CAPM analyses warrant placing the authorized ROE above the midpoint of the reasonable range, and their ROE recommendations reflected such placement.67 Ms. Bulkley conducted a CAPM analysis and a bond risk premium analysis as a check on the reasonableness of her DCF results. Based on the results of these analyses, Ms. Bulkley concluded that “the DCF model is understating investors’ return requirements under current market conditions” and that an ROE above the midpoint of her DCF results is warranted.68 Dr. Griffing similarly recommended that the Commission authorize an ROE at the high end of the DCF results based on the results of his CAPM analysis. When describing how he used his CAPM analysis as a check on his DCF results, Dr. Griffing stated “the CAPM results overall support setting the CMP ROE at the higher end of the constant-growth DCF results range.”69 More specifically, when contextualizing his recommended ROE within his analytic results, Dr. Griffing stated he “moved to the top” of his constant-growth DCF range “because the CAPM results are higher than the DCF results.”70 Similarly, in his updated analysis in his surrebuttal testimony, Dr. Griffing stated that his “CAPM results indicate that a value toward the upper end of [the considered ROE] range is justified.”71 Ms. Bulkley’s and Dr. Griffing’s ROE 66 This value reflects the midpoint of the range of ROEs set forth by the Examiners, as adjusted by the Company to remove values that the expert witnesses excluded. 67 The Commission has also historically and consistently moved above the midpoint when authorizing an ROE when the Company’s risk profile differs significantly from its proxy group. The risk profile of the Company relative to proxy group is a separate and distinct basis for a Commission determination to authorize an ROE above the midpoint. The Examiners’ treatment of this basis on page 126 of the Examiners’ Report does not implicate or address how or whether the Examiners’ used CAPM as a meaningful check on the reasonableness of its DCF results. See CMP Post-Hearing Brief at 69-72. See Bulkley Direct at ROE-49, 58. It is important to note that Ms. Bulkley’s analysis led her to conclude that an ROE range of 9.56 to 10.54 was reasonable and to recommend that the Company propose an ROE of 10.30. 68 69 Griffing Direct at 51-52. 70 Id. at 73. 71 Griffing Surrebuttal at 22. 27 recommendations use the CAPM as a meaningful check on their respective DCF results, consistent with Commission precedent.72 In contrast, the Examiners have recommended a 9.25% ROE which is below the 9.42% midpoint of the range considered by the Examiners (6.46% to 12.37%) and significantly below the 9.92% midpoint of the corrected range discussed above (8.89% to 10.94%). In reaching their recommendation, the Examiners principally relied on Dr. Griffing’s CAPM analyses.73 Contrary to the analysis in the Examiners’ Report, which appears to suggest a CAPM range of 9.26% to 9.55%, the full range of results from Dr. Griffing’s CAPM is 9.26% to 10.35%.74 While the Examiners state that they used the results of the CAPM analysis “as a check to the DCF results,”75 their conclusion that 9.25% represents a reasonable ROE is contrary to the analytical results which clearly indicate that the Commission should authorize a higher ROE. 72 See, e.g., Northern Utilities, Inc. d/b/a Unitil, Request for Approval of Rate Change Pursuant to Section 307, Docket No. 2017-00065, Order at 10 (Feb. 28, 2018) (“As noted, the Commission’s practice is to rely primarily on the DCF methodology results and to use the CAPM results as a check on the reasonableness of the DCF results. The DCF analyses produce an indicated range of ROEs from 7.19% to 11.26% with a mid-point of 9.23%. Although the low end of the CAPM results [which ranged from 9.77% to 11.64%] overlap with the high end of the DCF results, generally, the CAPM results suggest a higher ROE range and indicate that it may be appropriate to adjust Northern’s awarded ROE to a level that is above the mid-point of the DCF results.”); see also, e.g., Emera Maine, Request for Approval of a Proposed Rate Increase, Docket No. 2015-00360, Order-Part II at 80 (Dec. 22, 2016) (“The CAPM analyses confirm the DCF results with the mid-point of the DCF analysis lying within the CAPM range.”); In Re Bangor Hydro Electric, Docket No. 97-116, Order at 26-27, 31, 33 (Feb. 9, 1998) (The Commission relied on Staff’s ORE analysis, which resulted in a DCF midpoint of 11.60% and a low-end CAPM result of 11.41%.); Pease v. New England Tel. and Tel. Co., Docket No. 94-254, Order at 10-11, 14 (Staff’s witness recommended a DCFbased ROE of 11.25%, noting that his CAPM results, with a low-end of 10.25%, were “consistent with his recommended cost of equity return.”) While the Company does not agree with the Examiners’ implicit and unstated finding that the Company’s CAPM value is unreasonable and believes that such a position contradicts the Examiners’ statement in the preceding paragraph that it “does not find any basis to disregard the results of any analysis,” the Company believes that Dr. Griffing’s CAPM analysis generally supports the ROE recommended by the Company in these exceptions. See Examiners’ Report at 127. 73 Consistent with Examiners’ approach to establishing the range of DCF values which reflected the low and high DCF values from the results of all of the analyses presented in this proceeding regardless of the timing of such analysis, the range of Dr. Griffing’s CAPM values includes the results of his direct and surrebuttal testimonies. See Griffing Direct at 45; Griffing Surrebuttal at 21. 74 75 Examiners’ Report at 127. 28 For all these reasons, the Company maintains that the proposed ROE of 9.25% is unreasonable, and that the record in this proceeding supports an ROE in the range of 9.42% to 9.92%. 4. Average ROEs authorized in other jurisdictions likewise support an ROE of at least 9.42%. All parties submitting ROE recommendations in this proceeding cited to and relied on data provided by Regulatory Research Associates (“RRA”).76 According to the RRA data submitted in this proceeding, the 2018 year-end average ROE for fully litigated electric utilities was 9.63%,77 and the Q1 2019 average was 9.78%.78 While the Company believes it is inappropriate to compare the reasonableness of an ROE authorized in this proceeding to a single commission decision from another jurisdiction, the Commission should be mindful of the ROEs recently authorized for electric utilities in Massachusetts and Maryland, which are in line with the RRA reported averages.79 On August 12, 2019, the commission in Maryland authorized a 9.60% ROE. 80 Similarly, on September 30, 2019, the commission in Massachusetts also authorized a 9.60% ROE. 81 The reported RRA 76 See, e.g., Bulkley Direct at ROE-68, Bench Analysis at 57, and Griffing Direct at MFG-10, Schedule 2. CMP-017-020, Attachment 1 at 1; Examiners’ Report at 117. The average authorized ROEs for all electric utilities rate cases, included limited-issue cases as well as those settled by stipulation, was 9.60%. 77 78 CMP-017-020, Attachment 1 at 1. 79 When considering ROEs authorized in other jurisdictions, the Commission should not give any weight to the “[Otter Tail] case in South Dakota in which the utilities commission approved an ROE of 8.75%” which, according to the OPA, establishes “a ‘new low end to the range of recently authorized ROEs.’” Examiners’ Report at 114 (quoting OPA Brief at 90-91). As discussed on pages 23 to 25 in the CMP Reply Brief, Dr. Griffing’s testimony regarding Otter Tail is contradictory and unreliable. CMP Reply Brief at 23-25. 80 In the matter of the Application of Potomac Elec. Pwr. Co. for adjustment to its retail rates for distribution of electric energy, c-9602, Order No. 89227 at 2 (Aug. 12, 2019) (denying staff and intervenor’s appeal of the administrative law judge’s proposed order and instead affirming the proposed order which recommended an increase in the Company’s ROE to 9.60%). Petition of Massachusetts Elec. Co. and Nantucket Elec. Co., each doing business as Nat’l Grid, pursuant to G.L. c. 164, § 94 and 220 C.M.R. 5.00, for approval of generic increases in base distribution rates for electric service, DPU 18-150, Order at 497-498 (Sep. 30, 2019) (finding that a 9.60% ROE was “within the reasonable range of rates”). 81 29 averages and the referenced recent commission orders serve to underscore and confirm the reasonableness of the analytical results in this proceeding which support an ROE between 9.42% and 9.92%. 5. The Company’s overall cost of capital, which necessarily includes its authorized equity ratio, should be forward looking and designed to allow the Company to attract capital. The Examiners appropriately recognize that the Commission must authorize an overall rate of return that “‘should be reasonably sufficient to assure confidence in the financial soundness of the [Company] and should be adequate, under efficient and economical management, to maintain and support is credit.’”82 It is well established that “combining the capital structure of the utility with the proper cost of capital” determines the Company’s overall rate of return which is forward looking and should provide “sufficient revenue to cover the [C]ompany’s total cost of service.”83 Determining this rate of return is “an essential function” of the Commission.84 Both the Company’s and the OPA’s witnesses testified that a 55% equity ratio results in a more appropriate forward-looking cost of capital and is more reasonable under current market conditions.85 As discussed in Ms. Bulkley’s direct and rebuttal testimony, the credit rating agencies – Moody’s in particular – have been downgrading companies and the industry as a whole based on changes to cash flow metrics and concerns about financial stability.86 The Examiners’ Report at 115 (quoting Bluefield Water Works & Improvement Co. v. Pub. Serv. Comm’n of W. Va., 262 U.S. 679, 692 (1923)). 82 83 New England Tel. & Tel. Co. v Pub. Util. Comm'n, 448 A.2d 272, 284 (Me. 1982). 84 Id. 85 Griffing Direct at 10, 53-54. 86 Bulkley Rebuttal at AEB-REB-4. 30 Commission has customarily considered such rating agency reactions when imputing a capital structure for ratemaking purposes.87 Despite this, the Examiners have adopted Staff’s recommendation to maintain the Company’s imputed 50% equity ratio that, as reported in Figure 18 of the Examiners’ Report, results in an 8.60% pre-tax weighted cost of capital and a 6.80% weighted cost of capital before imposing the management efficiency adjustment, cost disallowances and other remedies recommended in the Examiners’ Report in this proceeding and in Docket No. 2019-00015.88 The Examiners’ Report relies on and adopts Staff’s rationale which, in large part, is historically based. The Examiners state, “[a]s noted in the Bench Analysis, CMP’s rates have been set based on a capital structure that includes a 50% equity layer for many years. During that time, CMP has been able to maintain its credit rating and to attract capital.”89 While the Examiners appropriately recognize that the Company’s current equity ratio has been in place by stipulation since 2014,90 a backward-looking rationale is contrary to the intended forward-looking nature of the cost of capital components and does not appropriately reflect the record in this proceeding, particularly given the recent scrutiny the credit rating agencies are applying to public utility finances and the resulting credit downgrades. For these reasons, the Company requests the Commission authorize a 55% equity ratio. F. Customer Service Issues Regarding the Examiners’ recommendations on customer service issues, CMP takes the following exceptions. See, e.g., Public Utilities Commission, Investigation of Central Maine Power Company’s Stranded Costs, Transmission and Distribution Utility Revenue Requirements, and Rate Design, Docket No. 97-580, Order at 47 (Mar. 19, 1998). 87 88 Examiners’ Report at 130, Figure 18. 89 Id. at 129 (quoting Bench Analysis at 63). 90 Docket No. 2013-00168, Stipulation at ¶ 33. 31 1. Call-Center Performance CMP takes exception to the statement on page 136 of the Examiners’ Report taken from the Liberty Report and the inference drawn therefrom that CMP’s call-center performance had degraded prior to SmartCare Go-Live. In fact, CMP did not fail to meet its call-answer goal of 80% of calls answered within 45 seconds prior to implementation of SmartCare. As shown in Table 1 to the Company’s Customer Service Rebuttal Testimony, CMP consistently met this metric which is measured on a 12-month basis, in the years before SmartCare implementation and its year to date service level through November 2017 was 80%.91 Contrary to the inference Liberty appears to have drawn from the data reflected in Figure 21 of the Examiners’ Report, this metric is not, and has never been, measured on a daily or weekly basis, because doing so would require the Company to staff its call-center to meet the metric in all hours, including those of peak customer calling. This would be inefficient and significantly increase the number of needed customer service representatives and in turn the Company’s revenue requirement. Moreover, and in any case, as demonstrated in CMP Hearing Exhibit-2 and the Metering and Billing Panel’s rebuttal testimony in Docket No. 2019-00015, the Company’s call-center performance has returned to historically appropriate levels and is well on its way to meeting the more stringent 80% of agent only calls answered within 30 seconds.92 2. CMP’s Response to Customer Service Issues On pages 151 to 161, the Examiners’ Report quotes excerpts of testimony from customers who testified at the public witness hearings. CMP provided its response to the testimony of these witnesses through the detailed case studies offered as Exhibit MB-8 in Docket No. 2019-00015. Due to the fact that the public witness hearings took place long after the 91 Customer Service Rebuttal at CS-REB-20, Table 1. 92 Id.; see also Billing and Metering Rebuttal (Docket No. 2019-00015) at 38-40, Figures 4 & 5. 32 deadline for the Company to submit pre-filed testimony and just days before hearings in this rate case, the Company did not have the opportunity to offer this same evidence into the record here. For the completeness of the record and out of fairness, CMP respectfully requests that the Commission’s order at least recognize the Company’s response to this customer testimony filed in Docket No. 2019-00015 to avoid the impression that CMP did not consider and value this important customer feedback sufficiently to merit a response in this proceeding. 3. Staff’s Proposed ROE Adjustment and CMP’s Proposed Customer Benefit Fund As stated in Section I above, CMP continues to believe that its proposed Customer Benefit Fund is an appropriate remedy for any imprudence on the Company’s part found by the Commission. CMP articulated the benefits of the Customer Benefit Fund relative to the Examiners’ recommended downward ROE adjustment on pages 88 to 94 of the Company’s PostHearing Brief. In any case, CMP takes exception to the total financial impact on the Company of the Examiners’ recommendations in the Examiners’ Reports in this proceeding and in Docket No. 2019-00015. As summarized in Figure 1 above, when all of the costs of the various mandated actions and the cost disallowances are considered on top of the recommended 75 basis point ROE adjustment, the negative financial impact to CMP is over $22.2 million and the Company’s ROE for the rate-effective year is forecast to be only 6.89%, which represents a reduction of 236 basis points from the ROE recommended by the Examiners. Financial consequences of this magnitude are unprecedented in Maine and will send a strong and negative signal to CMP’s credit rating agencies, thereby exposing the Company’s distribution and transmission customers to potential harm over the long-term. 33 4. Service-Quality Indices (SQI) and Benchmarks CMP agrees with the SQIs as articulated in Appendix B of the Examiners’ Report with one narrow exception to the proposed formula for the calculation of the percent of business calls answered within 30 seconds metric. Specifically, CMP disputes the inclusion of the “total calls that receive a courtesy message” in the denominator of the formula for calculating this metric. The “total calls that receive a courtesy message” does not belong in the calculation of this metric because this metric is intended to measure the time it takes CMP to answer calls after the customer selects to speak with an agent. Customers who receive a courtesy message never make a selection to speak with an agent. It is for this reason that such courtesy message calls have not historically been included in the calculation of this metric for CMP and are likewise not included in the industry standard for the calculation of the business calls answered. The exclusion of the “total calls that receive a courtesy message” from the denominator of this formula will not create any incentive for the Company to use courtesy messages to manage its compliance with the business calls answered metric because the “total calls that receive a courtesy message” are appropriately included in the numerator of the call abandonment rate SQI. Thus, any attempt to use courtesy messages to meet the business calls answered metric will only undermine the Company’s performance of the call abandonment rate metric. CMP also takes exception to the Examiners’ Report’s adoption of Staff’s recommended “all or nothing approach,” whereby CMP must meet each of the four SQIs for the same 12 consecutive months before seeking relief from the ROE adjustment. For the reasons discussed in the Company’s Post-Hearing Brief at pages 94-98, CMP respectfully urges the Commission to permit the Company to seek partial relief from ROE adjustment when it achieves each of the SQIs for 12 consecutive months on an individual basis. 34 V. POINTS FOR CLARIFICATION CMP seeks clarification from the Commission in its order of the following points included in the Examiners’ Report. A. Storm-Cost Recovery Timing The Examiners’ Report accurately reflects the modifications to the storm cost recovery mechanism agreed upon by CMP, the OPA and the Staff. The Company respectfully urges the Commission to approve these changes as part of its order. For the sake of simplicity and consistency, CMP also recommends that the Commission’s order specify that the modified storm cost-recovery mechanism, including the modifications to storm-cost recovery for Tier 1 storms, are effective as of January 1, 2020. In this way, the determination of any storm-cost related rate adjustments, including any sharing resulting from the application of the new Tier 1 deadband, will continue to be measured on a calendar year basis. For calendar year 2020, the Tier 1 calculations will need to reflect the portion of the $8.1 million actually included in rates during the year. B. RDM CMP agrees with the Examiners’ Report recommendation that the Revenue Decoupling Mechanism (“RDM”) be simplified based on an annual reconciliation done on a kWh and kW basis. CMP recommends that the Commission require the Company to make a compliance filing within 60 days of the order proposing a simplified reconciliation methodology done on a kWh and kW basis. CMP, Staff and the other interested parties can then work to reach agreement by July 1, 2020 on illustrative examples of such methodology and applicable RDM targets similar to Attachments 5 and 6 to the Stipulation in Docket No. 2013-00168. For the sake of simplicity and consistency, CMP also recommends that the RDM continue to be calculated on a calendar 35 year basis starting on January 1, 2020, with the applicable rates and targets updated to reflect the February 1, 2020 rate-effective year. C. Service-Quality Indices (SQI) and Benchmarks As discussed in Section III above, CMP agrees to the Service-Quality Indices set forth in Appendix B to the Examiners’ Report, with the exception to the proposed formula for the calculation of the percent of business calls answered within 30 seconds metric. CMP requests clarification of the precise date upon which the measurement of CMP customer service performance as measured by the SQIs is to commence. The Examiners’ Report on page 1 states that the measurement is to begin on March 1, 2020. The Examiners’ Report on page 193, however, states that the measurement of the SQIs “shall start on the date of this order.” Since the ROE adjustment will take effect on the rate-effective date,93 the Company recommends that SQI compliance measurement start on that date as well. CMP also requests clarification concerning the process for how the Company may seek relief from the ROE adjustment upon meeting the SQIs for 12 consecutive months and the timing of when such relief will take effect after it is granted. To minimize the risk of future disputes and delays, CMP respectfully requests that the Commission provide more guidance on the applicable process in its order. In doing so, it would be beneficial if the Commission at least identified the trigger and timing for when the Company can request relief, the standard applicable to the determination that the SQIs have been met, and whether the Commission will delegate the determination to Staff. The Commission should also recognize that the process will necessarily cause a regulatory lag between the date when CMP meets the SQIs for 12 CMP’s concurrence that measurement of the SQI performance should start on the rate-effective date in no way waives its position that the Company should be allowed to defer for later recovery the revenue it has lost since October 1, 2019 as a result of the delay in the rate-effective date, as discussed in Section IV.A above. The Company’s preferred position, which is supported by evidence in the record, would be that the rate-effective date and the commencement of the new SQIs both be set at October 1, 2019. 93 36 consecutive months (and is therefore eligible for relief) and the date on which the Commission grants the relief. Specifically, the Commission’s Order should permit CMP to defer for future recovery the revenues it does not recover after meeting the SQIs for the 12 month period before the date the Company adjusts, with the Commission’s approval, its rates prospectively to remove the ROE adjustment. D. Distribution Related Deferrals The Examiners’ Report appropriately contemplates that CMP may continue to make various deferrals but does not include a specific listing of such authorized deferrals. To promote clarity and minimize future misunderstandings, CMP recommends that the Commission require CMP to make a compliance filing within 60 days of the order proposing a list of distribution related deferrals that CMP is authorized to establish and continue for approval by Staff, similar to Attachment 3 to the Stipulation in Docket No. 2013-00168. E. Pricing Flexibility Guidelines The Examiners’ Report does not address CMP’s expiring pricing flexibility guidelines. CMP accordingly recommends that the Commission require the Company to make a compliance filing within 60 days of the order proposing new pricing flexibility guidelines for approval by Staff, similar to Attachment 8 to the Stipulation in Docket No. 2013-00168. 37 Respectfully Submitted, _______________________ Jared S. des Rosiers Krystal D. Williams Pierce Atwood LLP Merrill’s Wharf 254 Commercial Street Portland, ME 04101 (207) 791-1100 Richard P. Hevey Avangrid Service Company 83 Edison Drive Augusta, ME 04336 (207) 623-3521 Attorneys for Central Maine Power Company 38