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					                              STATE OF VERMONT
                             PUBLIC SERVICE BOARD



Docket No. 7336

Petition of Central Vermont Public Service
Corporation for Approval of an Alternative
Regulation Plan Pursuant to 30 V.S.A. § 218d




                          DIRECT TESTIMONY OF
                              RON BEHRNS
                            ON BEHALF OF THE
                  VERMONT DEPARTMENT OF PUBLIC SERVICE



                                   May 30, 2008




Summary:     The purpose of Mr. Behrns’ testimony is to present the DPS position
             regarding Central Vermont Public Service Corporation’s (CVPS) proposed
             Alternative Regulation Plan (ARP). Additionally, Mr. Behrns will provide
             recommended changes that are primarily focused on the formulation of
             cost caps and dead/sharing bands that if adopted by the Board, will help
             maintain a reasonable degree of fairness and consistency among the
             existing alternative regulation plans in Vermont and will ensure a
             reasonable sharing of risk between the company and ratepayers.
                                                                Vermont Department of Public Service
                                                                               Ron Behrns, Witness
                                                                                   Docket No. 7336
                                                                                      May 30, 2008
                                                                                       Page 2 of 17

 1                                     Direct Testimony
 2                                             Of
 3                                        Ron Behrns
 4
 5   I.   Introduction
 6
 7   Q.   Please state your name and your title.
 8   A.         My name is Ron Behrns and I am Director of Finance and Economics for
 9        the Vermont Department of Public Service (DPS)
10
11   Q.   What is the purpose of your testimony?
12   A.         The purpose of my testimony is (1) to present the Department’s position
13        on the Alternative Regulation Plan (ARP or “the Plan”) proposed by Central
14        Vermont Public Service Corporation (CVPS) and (2) provide recommendations
15        for changes to their Plan for adoption by the Board that are primarily focused on
16        the “Unicap” and “Subcap” cost caps and the earnings sharing adjustment dead
17        bands and sharing bands.
18
19   Q.   Please describe your business experience and educational background.
20   A:         My business experience, in broad terms, includes telecommunications,
21        entrepreneurial   business   ventures,   consulting    services     and     regulation.
22        Functionally, my business experience includes policy formulation, strategic
23        planning, finance, regulation, taxes, accounting and marketing. I hold a B.S.
24        degree in Accounting and Management Science from Eastern Illinois University
25        and an M.B.A. degree with concentrations in Finance and Economics from Illinois
26        State University. Additionally, I hold CMA certification; serve on the Finance and
27        Accounting Sub Committee of NARUC and am a member of the Institute of
28        Management Accountants, the Society of Utility and Regulatory Financial
                                                                                Vermont Department of Public Service
                                                                                               Ron Behrns, Witness
                                                                                                   Docket No. 7336
                                                                                                      May 30, 2008
                                                                                                       Page 3 of 17

 1           Analysts, the International Association for Energy Economics and Tax Executives
 2           Institute.
 3
 4   Q.      Have you previously testified before this Board?
 5   A.               Yes. I have testified on several occasions, dating from December of 2002.
 6           I testified most recently in the Verizon/FairPoint spin-off and merger case in
 7           Docket 7270.
 8
 9   II.     Summary
10   Q.      Please summarize the Department’s position.
11   A.               The Department supports the implementation of a reasonable Alternative
12           Regulation Plan (ARP) as beneficial to ratepayers and the general good of the
13           state, and acknowledges that adoption of such a Plan is desirable for CVPS.
14           The Department has reviewed the proposed plan filed August 31, 2007 (Original
15           Plan) along with modifications filed with their testimony on March 28 (The
16           Modified Plan or The Plan) and in general supports most of the plan.                              The
17           Department has worked closely with CVPS for well over a year and during that
18           time agreement has been reached on most of the important aspects of the
19           Modified Plan, but two critical issues remain unresolved: cost caps related to
20           non-power costs and dead/sharing bands1 related to earnings sharing
21           adjustments. Cost caps are central to fostering cost discipline, and therefore are
22           fundamental to deriving value from alternative regulation for ratepayers. Beyond
23           these two issues and a few minor other changes the Department supports the
24           Modified Plan.


     1
       Dead bands are generally defined as a range where the company has upside opportunity or downside risk that is
     NOT shared with ratepayers and is structured to incentivize an improved and more efficient and effective
     level of performance that serves as a surrogate for competition. Sharing bands are structured similarly to
     dead bands and are generally defined as a range outside of dead band ranges where the company and
     rate payers SHARE in upside opportunity or downside risk.
                                                            Vermont Department of Public Service
                                                                           Ron Behrns, Witness
                                                                               Docket No. 7336
                                                                                  May 30, 2008
                                                                                   Page 4 of 17

 1          With one condition and with the Public Service Board adoption of DPS
 2   recommended revisions to the Modified Plan, that are summarized below and are
 3   described more fully later in my testimony, the Department recommends the
 4   revised Modified Plan (the Revised Modified Plan) be implemented as soon as
 5   possible and no later than January 2009.
 6          The DPS’s support for the Plan is conditioned upon CVPS compliance
 7   with the CVPS Rate Case MOU in Docket 7321. (Items 16 through 18, page 6
 8   and 7, of the Memorandum of Understanding.)            This MOU provided for the
 9   integration of CVPS’s rate case (Docket 7321) and their Alternative Regulation
10   Case (Docket 7336) and included (1) an agreed upon Cost of Service for the
11   initial year of the Alternative Regulation Plan that will result in a .5% ($1,379,000)
12   rate reduction based on a 2008 rate year, (2) an initial authorized ROE of 10.21%
13   for the 2008 rate year, and (3) carry over provisions from the Docket 7191 MOU
14   that would be applicable under an Alternative Regulation Plan.          The MOU also
15   identified two remaining issues that needed to be resolved before an Alternative
16   Regulation Plan could be fully supported by the Department. It stipulated that if
17   either of the two issues were not resolved by December 31, 2007, they would be
18   submitted to the Board for resolution to avoid any undue delay in implementing
19   the Modified Plan.
20          It has come to pass that the two outstanding issues - (1) the formulation of
21   cost cap(s) and (2) the formulation of dead bands/sharing bands - now need to
22   be resolved by the Public Service Board (PSB). These issues are the focus of
23   my testimony here since all of the other issues have been resolved as provided
24   for in the Modified Plan and in the Docket 7321 MOU.
25          The DPS recommends that the Board adopt the following revisions
26   (summarized) to the Modified Plan:
27   1. Adopting a “non-power cost cap” in lieu of the “Unicap” and the “Sub Cap”.
                                                                Vermont Department of Public Service
                                                                               Ron Behrns, Witness
                                                                                   Docket No. 7336
                                                                                      May 30, 2008
                                                                                       Page 5 of 17

 1               a. If the PSB determines the “Subcap” feature should be retained, the
 2                  basis for determining the 2009 “Subcap” should be based on the 2008
 3                  rate year cost of service as agreed in the rate case MOU.
 4        2. Modifying the “earnings sharing bands” by eliminating the proposed below-
 5           investment-grade bands.
 6        3. Other recommended changes:
 7               a. Recovery of unanticipated efficiency or other distributed resource costs
 8                  not included in EEC charges or in base rates should be evaluated to
 9                  determine if amendments to the Plan should be proposed to the PSB,
10                  as opposed to CVPS requesting accounting deferrals for such costs.
11               b. The earnings sharing adjustment should be made only once per year.
12               c. The handling of exogenous event costs under the Modified Plan needs
13                  to be clarified to avoid any potential future difficulties regarding the
14                  proper accounting for, reporting and recovery of such costs.
15
16               These revisions to the Modified Plan will provide just and reasonable rates
17        for Vermont rate payers, will help maintain a reasonable degree of fairness and
18        consistency among the existing alternative regulation plans in Vermont, will
19        provide CVPS with a comparable level of business and financial risk that exists in
20        other alternative regulation plans and will satisfy the statutory requirements for an
21        acceptable alternative regulation plan.
22
23   Q.   Who else is testifying in this case on behalf of the Department?
24   A.          I am the only DPS witness and will testify about the entire plan but will
25        focus primarily on the DPS recommended changes. The Modified Plan is similar
26        in most material aspects to those plans approved by the Board for Vermont Gas
27        Systems and Green Mountain Power; however, there are a few changes that are
28        needed before the DPS can fully support the Plan.
                                                                   Vermont Department of Public Service
                                                                                  Ron Behrns, Witness
                                                                                      Docket No. 7336
                                                                                         May 30, 2008
                                                                                          Page 6 of 17

 1
 2   Q.     What do you conclude about the Modified Plan regarding the required statutory
 3          criteria for an ARP?
 4   A.            The statutory criteria will be satisfied, provided the Modified Plan is
 5          revised to include the DPS recommended changes (Revised Modified Plan). The
 6          revisions are needed to ensure just and reasonable rates and to ensure the Final
 7          Plan includes effective incentives and motivation to control costs.
 8                 I will not cover each individual statutory requirement since the company
 9          has already addressed the statutory provisions in its testimony which the
10          Department generally agrees with except, of course, in those areas covering cost
11          caps and dead/sharing bands.
12
13
14   III.   The Modified Plan
15   Q.     Please summarize the major provisions of the CVPS proposed Modified ARP.
16   A.            The CVPS ARP is the second alternative regulation plan proposed for a
17          Vermont electric utility and the third by a Vermont energy utility.
18                 The Modified Plan covers a three year period with two optional one year
19          extensions which is common among Vermont alternative regulation plans.
20                 The Modified Plan provides for annual base rate adjustments through an
21          annual cost-of-service filing that is based on traditional Vermont ratemaking
22          principles and practices except for revenue and kWh units sales forecasts..
23                 With respect to the more salient elements of the Plan that depart from
24          traditional ratemaking, and which make it an Alternative Regulation Plan, the
25          Modified Plan includes:
26                    1. A Power Cost Adjustment Mechanism ("PCAM") that allows for the
27                        timely recovery of essentially all power costs, and shifts regulatory
28                        lag risks and / or benefits to ratepayers;
                                                                    Vermont Department of Public Service
                                                                                   Ron Behrns, Witness
                                                                                       Docket No. 7336
                                                                                          May 30, 2008
                                                                                           Page 7 of 17

 1                     2. An Earnings Sharing Adjustment Mechanism ("ESAM") that
 2                        provides an incentive to improve overall financial performance
 3                        levels, but which limits, both the upside and downside financial
 4                        risks of the company while shifting some potential upside and
 5                        downside financial risk to rate payers.
 6                     3. The Modified Plan includes a universal cost cap called a “Unicap”
 7                        that limits annual base rate increases in the overall revenue
 8                        requirement. This cap was designed as an incentive to manage
 9                        costs.
10                     4. The Modified Plan includes a “Subcap” on some of CVPS’s
11                        controllable expenses (general and administrative, customer
12                        service, customer accounting and sales expenses) that is designed
13                        to provide an added incentive to stimulate the efficient management
14                        of those costs.
15
16   IV.   DPS Concerns with the Modified Plan
17   Q.    Please describe the Department’s general concerns with the Modified Plan.
18   A.             The Department has concerns about two aspects of the Modified Plan.
19         The first is a concern about the Unicap and Subcap. The second is a concern
20         about the dead bands and the sharing bands proposed for the Earnings Sharing
21         Adjustment Mechanism (ESAM).
22                  When reviewing any proposed Alternative Regulation Plans, it has been
23         the practice and objective of the Department to strive for and maintain some
24         degree of consistency among the plans especially as it relates to incentives, the
25         amounts of the incentives and the level of business and financial risk the
26         companies and rate payers would be exposed to. All of the plans do not have to
27         be exactly alike, but there should be these common threads running through the
28         plans.
                                                                Vermont Department of Public Service
                                                                               Ron Behrns, Witness
                                                                                   Docket No. 7336
                                                                                      May 30, 2008
                                                                                       Page 8 of 17

 1               While the CVPS Modified Plan is similar in most material aspects to the
 2        GMP (Docket 7176) and VGS (Docket 7109) plans approved by the Board, it is
 3        seriously flawed with regard to the formulation of the cost caps and the ESAM
 4        dead bands and sharing bands. These flaws have the potential to result in unjust
 5        and unreasonable rate increases; create a degree of unfairness among Vermont
 6        alternative regulation plans and do not appear to accomplish the objectives of an
 7        alternative regulation program.
 8               Most importantly, the Modified Plan formulation of cost caps and ESAM
 9        dead bands and sharing bands essentially do not appear to provide incentives or
10        motivation to control costs (operating expenses or rate base additions), stimulate
11        efficiencies and superior earnings performance. Rather they appear to result in a
12        relatively “risk free” level of business and financial risk that is inconsistent with
13        sound and responsible regulatory policy.
14
15   V.   CVPS’s Proposed Unicap and Subcap
16   Q.   Please describe CVPS’s proposed Unicap and Subcap and explain the areas of
17        concern.
18   A.          Regarding the Unicap, CVPS proposes to cap base rate changes using a
19        “Unicap” limit of 8 mils per kWh for the rate year forecasted kWh sales. There
20        are several aspects of this Unicap that raise concerns at the Department that I
21        will discuss.
22               First, the filing indicates this is an aggregate cap covering the total power
23        and non-power components of the revenue requirement. In reality it appears to
24        cover only non-power cost increases.        Power costs have a separate track
25        through the power cost adjustment mechanism.
26               In reading the detailed plan the application of the Unicap appears to
27        exclude changes in costs that can be recovered or deferred through the power
28        adjustor. The Modified Plan states that “COS amounts greater than the Unicap
                                                              Vermont Department of Public Service
                                                                             Ron Behrns, Witness
                                                                                 Docket No. 7336
                                                                                    May 30, 2008
                                                                                     Page 9 of 17

 1   are not deferred to subsequent rate adjustment periods unless such costs are
 2   eligible for recovery in the Power Cost Adjustment Mechanism”. (See Alternative
 3   Regulation Plan Filed August 31, 2007; Exhibit CVPS-WJD-2; page 5, item iii).
 4   This says the Unicap functions as a cap on non-power costs and not on the total
 5   revenue requirement and not on power costs.             So, in essence, though the
 6   Modified Plan refers to the Unicap as a cap on the total revenue requirement,
 7   when it is applied it results in a cap related only to non-power costs.                This
 8   application of the Unicap then becomes similar to the GMP non-power cost cap
 9   except that it is a substantially higher amount for CVPS. Otherwise, it will be
10   difficult or impossible to determine how much of the Unicap limit is applicable to
11   power and how much is applicable to non-power. In summary, with the changes
12   made in the Modified Plan, the Unicap will be difficult to apply in a meaningful
13   sort of way that will result in actual effective cost caps.
14          Second, CVPS has provided no creditable supporting detail regarding how
15   the 8 mil Unicap rate was determined and there are no provisions under the
16   Modified Plan to update the Unicap rate for changes in operations, in rate base
17   additions or for productivity impacts, power costs or for price level changes that
18   may occur over the remaining life of the plan.
19          Third, when applying the 8 mil Unicap, CVPS testimony does not
20   convincingly and clearly support the need for 7+% annual rate increases due to
21   potential 16% annual increases in non-power costs (expenses and rate base
22   changes) for rate years 2009 and 2010.             The information in the filing is
23   presumably intended to support this level of cost increases; however, the
24   Department does not believe the information provided adequately accomplishes
25   that objective. Our examination of the supporting testimony does not comport
26   with the “known and measurable” and “used and useful” requirements associated
27   with traditional Vermont rate making where such prospective costs would be
28   included in a rate year cost of service. The information provided simply does not
                                                         Vermont Department of Public Service
                                                                        Ron Behrns, Witness
                                                                            Docket No. 7336
                                                                               May 30, 2008
                                                                               Page 10 of 17

 1   support this level of cost increases, notwithstanding the need for an increased
 2   level of capital spending and the Asset Management Plan included in the
 3   testimony.
 4         Fourth, the filing does not demonstrate how the Unicap or Subcap will
 5   function as an incentive to stimulate cost control and bring about effective
 6   efficiency improvements.    The Unicap of 8 mils per kWh, if adopted may
 7   stimulate inefficiencies and encourage a lack of cost control. Further and most
 8   importantly Mr. Deehan’s testimony indicates that one of the reasons for the
 9   design of the Unicap was to “provide incentives for the Company to operate
10   efficiently” (Deehan PF Page 4, Line 2). The Department agrees that a cost or
11   revenue cap including a non-power cost cap should be designed and should
12   function as an incentive to stimulate and motivate the management and control of
13   costs (expenses and rate base investments).          However, it is difficult to
14   understand how that will be accomplished with the 8 mil Unicap. The proposed
15   Unicap will accomplish exactly the opposite of its intended and stated purpose.
16         Fifth, the Unicap, as proposed by CVPS, has a dual purpose of limiting
17   power cost increase recovery during the rate year and to limit overall non-power
18   cost increases in a subsequent rate year. This is confusing and needs to be
19   clarified. Mr. Deehan’s testimony indicates the Unicap will provide rate payer
20   “protection against the potential of an unexpected large rate increase”. (Deehan
21   PF, page 3, line 21). This presumes a 7%+ annual increase in rates over the
22   plan period would not represent an unexpectedly large rate increase each year
23   not withstanding a CVPS growth rate of less than 1% and a power portfolio that
24   exceeds resource requirements.     This clearly indicates that in a given rate year
25   power cost adjustments will be limited to 8 mils, however, the Modified Plan
26   indicates if actual power costs exceed 8 mils the excess is deferred for later
27   recovery (See Alternative Regulation Plan Filed August 31, 2007; Exhibit CVPS-
28   WJD-2, page 5, item iii and page 10, item b. i.). In this scenario, the 8 mils
                                                          Vermont Department of Public Service
                                                                         Ron Behrns, Witness
                                                                             Docket No. 7336
                                                                                May 30, 2008
                                                                                Page 11 of 17

 1   functions as a cap on the change in the power cost adjustment mechanism/rate
 2   that can be recovered in a single rate year but it does not function as a cap on
 3   actual power cost recovery. Any power cost increases not recoverable through
 4   the Unicap in a current rate year will be recovered in a later rate year.          This
 5   effectively excludes the power cost adjustments from the Unicap, with the Unicap
 6   then meeting its second function of limiting non-power cost changes in the rate
 7   year. There are no provisions under the Modified Plan to defer any non-power
 8   cost recovery to a later rate year.
 9          Finally, regarding the Unicap, if the Board adopts the Modified Plan,
10   CVPS’s non-power costs could increase up to approximately $19 million or 16%
11   per year while power cost increases are deferred. This translates into
12   approximately a $19 million dollar or 7% annual rate increase for 2009 and 2010
13   and potentially for two additional years if the plan is extended.        This seems
14   excessive when considering the company has a growth rate of less than 1%.
15   Further, the MOU provides that 18 additional full time equivalent employees may
16   be added to the Cost of Service depending upon the assessment of need by the
17   business process review (BPR) team (See MOU in Docket 7321).                     If the
18   consultants determine that CVPS does in fact need an additional 18 employees,
19   this would boost the 2009 rate increase by approximately $2.4 million for a total
20   rate increase of about $21 million or 8% and an overall increase in non-power
21   costs of $21 million or 18%.          These rate increases do not include CVPS
22   forecasted increases in power costs over the remaining term of the plan.           This
23   annual level of overall rate increase and the annual overall level of non-power
24   cost increases are excessive and has not been justified, even considering and
25   including the potential impact of BPR recommendations and the Asset
26   Management Plan.
27          Existing Alternative Regulation Plans at VGS and GMP have revenue/cost
28   caps that limit the change that can occur in base rates due to changes in non-
                                                             Vermont Department of Public Service
                                                                            Ron Behrns, Witness
                                                                                Docket No. 7336
                                                                                   May 30, 2008
                                                                                   Page 12 of 17

 1        power/non-commodity costs.     The caps are determined on a formulaic basis
 2        using a CPI that is adjusted for changes in productivity.        These caps are
 3        established as an incentive to motivate the companies to effectively and
 4        efficiently manage their non-power costs.   In general, GMP’s non-power cost
 5        cap is determined by using a formula that adjusts non-power costs by
 6        approximately half of the change in the CPI adjusted for diminishing returns
 7        associated with ongoing productivity programs and consideration for rate base
 8        changes. For GMP, in their most recent base rate filing, their non-power cost
 9        increases were targeted to be limited to $1.250 million or about 2%, however, in
10        their filing they were able to achieve an actual reduction in non-power costs
11        rather than an increase up to the maximum amount.        This demonstrates that
12        CPI-based non-power cost caps can be effective incentives to manage expenses
13        and rate base changes.
14              Regarding the Subcap, CVPS has proposed a cap on some of their non-
15        power controllable operating expenses, including general and administrative,
16        customer service, customer accounting and sales expenses. These costs make
17        up about $40 million or 54% of non-power controllable operating expense of the
18        company based on the 2008 rate year cost of service. The Subcap excludes
19        approximately $35 million or 46% of total non-power operating expenses that are
20        controllable (local transmission expense and all distribution related expenses).
21        To establish the cap, CVPS proposes to use the change in the consumer price
22        index (without adjustments). The Subcap is subordinate to the Unicap and the
23        Unicap is subordinate to the earning sharing adjustment mechanism.
24
25        Proposed Cost Cap Revisions
26   Q.   Please describe the Department’s proposed cost cap revisions.
27   A.      The Department proposes that the Modified Plan be revised to replace the
28        Unicap and the Subcap with a Non-power Cost cap similar to existing non-power
                                                         Vermont Department of Public Service
                                                                        Ron Behrns, Witness
                                                                            Docket No. 7336
                                                                               May 30, 2008
                                                                               Page 13 of 17

 1   cost caps used in other Vermont utility alternative regulation plans. The non-
 2   power cost cap would be formulaically determined by using a lagging consumer
 3   price index, prospectively adjusted for the rate year (1) targeted productivity
 4   changes and (2) any unusual rate base changes occasioned by known and
 5   measurable and used and useful net plant and other rate base additions. These
 6   revisions will provide just and reasonable rates for Vermont rate payers over the
 7   duration of the plan and will be formulaically determined to avoid extensive
 8   debate and litigation. With these revisions, CVPS will have a clear unambiguous
 9   rate path over the term of their plan that will aid them in securing a corporate
10   investment grade credit rating while meeting service quality and reliability
11   requirements.
12         The Department proposes that the CVPS non-power cost cap be set at
13   $6.2 million for 2009 and $8.7 million for 2010. These caps have been calculated
14   using the formulaic approach recommended in the preceding paragraph and
15   were applied to the 2008 alternative regulation cost of service agreed upon in
16   Docket 7321. This formulaic approach has been used to determine the total
17   dollar amount of non-power cost caps for 2009 and 2010.
18         The non-power cost cap dollar amounts were determined using the 2007
19   annual percentage change in the CPI of 4.05% that was adjusted downward for a
20   targeted 50% productivity improvement resulting in a base level non-power cost
21   cap rate of 2.025%. This results in a non-power CPI cost cap of $2.5 million for
22   2009 and $2.6 million for 2010. (The 2010 CPI cost cap will be adjusted upon
23   the release of the 2008 CPI information.) This cap has been further adjusted to
24   accommodate the need for unusual rate base additions that total $24.4 million for
25   2009 and $40.9 million for 2010.     These rate base additions give rise to an
26   additional revenue requirement of $3.8 million in 2009 and a $6.1 million increase
27   in 2010. These values are summarized in the table below.
28
                                                                                  Vermont Department of Public Service
                                                                                                 Ron Behrns, Witness
                                                                                                     Docket No. 7336
                                                                                                        May 30, 2008
                                                                                                        Page 14 of 17

 1

                                DPS Proposed NON-POWER COST CAPS (dollars in thousands)
                                     2009                                                       2010
             Non-Power          Adj for Plt Ads         Total             Non-Power          Adj for Plt Ads       Total
              $2,462              $3,779               $6,241               2,588            $6,083               $8,671
               Adj CPI                                                     Adj CPI         To Be Adjusted based on 2008
               2.025%                                                      2.025%                       CPI
                   Percentage Change in Revenue Requirement (does not include power cost changes)
               0.87%        1.33%         2.20%         0.87%                2.06%               2.93%
 2
                                          CVPS proposed cost caps (dollars in thousands)
                                                        $19,000                                                    $19,200
                     Percentage Change in Revenue Requirement (does not include power cost changes)
                                                              7%                                                           7%
           Does not include the BPR assessment related to the potential addition of 18 additional FTE employees

 3
 4
 5   VI.      CVPS’s Proposed Earnings Sharing Adjustment Mechanism
 6   Q.                Please      describe       CVPS’s      proposed       Earnings       Sharing      Adjustment
 7            Mechanism (ESAM) and explain areas of concern.
 8   A.                CVPS’s ESAM has two sets of dead/sharing bands.                            One set will be
 9            applied while CVPS has a below investment grade corporate credit rating and
10            another when, and if, their credit rating is restored to investment grade.                          I will
11            briefly discuss each of these.
12                     While CVPS has a below investment grade corporate credit rating,
13            regulated earnings will be evaluated annually using a 50/50 basis point dead
14            band range where, if there is a variation of 50 basis points above or below the
15            authorized return on equity there will be no sharing. With the 50/50 dead band,
16            CVPS’s earnings will be subject to a relatively narrow range of variability and no
17            downside risk beyond the 50 basis point level. If earnings were to exceed 50
                                                                                   Vermont Department of Public Service
                                                                                                  Ron Behrns, Witness
                                                                                                      Docket No. 7336
                                                                                                         May 30, 2008
                                                                                                         Page 15 of 17

 1           basis points above the authorized ROE, the full excess will be returned to rate
 2           payers. Likewise, if Vermont regulated earnings2 were more than 50 basis points
 3           below the authorized return on equity, the rate payers would provide additional
 4           revenue and make up the difference thus assuring CVPS of a minimum ROE3 of
 5           9.71% for 2008. The Department’s concern with this set of dead bands is that
 6           they are too narrow and in effect shift financial risk associated with a below
 7           investment grade credit rating to rate payers when it appropriately belongs with
 8           CVPS management and shareholders.
 9                    The second set of dead/sharing bands would be applied when and if
10           CVPS receives an investment grade corporate credit rating.                             The dead band
11           range would increase to 75 basis points above or below the authorized ROE. In
12           addition, a 50/50 sharing would be applied to the next 50 basis point variation in
13           ROE. Variations beyond 125 basis points above the ROE would be returned to
14           rate payers while variations beyond 125 basis points below the ROE would be
15           paid by rate payers.           The Department has no concerns with the second set of
16           dead bands and sharing bands (75/75) as based on Vermont traditional
17           regulated earnings calculations.                 They are consistent with bands in other
18           alternative rate plans and result in a reasonable sharing of risk between the
19           company and the rate payers.
20
21           Proposed ESAM Revisions
22   Q.      Please describe the revisions the Department would like to propose for the
23           ESAM.
24   A.               The Department recommends that the Board adopt a single set of dead
25           bands and sharing bands that are consistent with other alternative regulation


     2
      Vermont regulated earnings are to be calculated as prescribed in Board Order 6545.
     3
      The authorized return on equity has been established at 10.21% for the 2008 rate year. This rate will be updated in
     October of the year preceding 2009 and 2010 based upon applying 50% of the annual percentage change in 10 year
     Treasury Bill yields to maturity.
                                                              Vermont Department of Public Service
                                                                             Ron Behrns, Witness
                                                                                 Docket No. 7336
                                                                                    May 30, 2008
                                                                                    Page 16 of 17

 1        plans in Vermont. More specifically, the Department recommends adoption of
 2        the second set of bands (75/75) described above on the basis that ratepayers
 3        should not be penalized or face higher costs as a result of a below investment
 4        grade corporate credit rating.   Further, CVPS has not demonstrated that the
 5        broader range of bands would be detrimental to the attainment of an investment
 6        grade corporate credit rating nor have they demonstrated that a more narrow set
 7        of bands will promote a credit rating upgrade.
 8
 9   Q.   Do you have any other revisions to propose to the Modified Plan?
10   A.         Yes, there are three other revisions the Department would like to propose.
11        Other revisions include:
12           1. Recovery of unanticipated efficiency or other distributed resource costs
13              not included in EEC charges or in base rates should be evaluated as they
14              arise to determine if amendments to the Plan should be proposed to the
15              PSB as opposed to CVPS requesting accounting deferrals for such costs.
16              (See the Alternative Regulation Plan, Filed August 31, 2007; Exhibit
17              CVPS-WJD-2; Page 4 paragraph e.)           With this revision unanticipated
18              efficiency, DR and any potential generation projects will be consistently
19              handled under the Alternative Regulation provisions for new power
20              sources and special ratemaking (See the Alternative Regulation Plan,
21              Filed August 31, 2007; Exhibit CVPS-WJD-2; Section III; paragraph E;
22              Page 11 and 12.)
23           2. The earnings sharing adjustment should be made only once per year. The
24              normal annual ESAM adjustment in rates is scheduled to occur on a bills
25              rendered basis on July 1 of each year. The Modified Plan also includes a
26              provision where CVPS may also “propose adjustment to ESAM” at the
27              time of the base rate filing in November (See the Alternative Regulation
28              Plan, Filed August 31, 2007; Exhibit CVPS-WJD-2; Section B.; paragraph
                                                                 Vermont Department of Public Service
                                                                                Ron Behrns, Witness
                                                                                    Docket No. 7336
                                                                                       May 30, 2008
                                                                                       Page 17 of 17

 1               1; page 5). This second adjustment in November should be eliminated. It
 2               will only add complexity to the determination of actual earnings; will
 3               require more estimating and subsequent true-up, while the need for the
 4               adjustment has not been shown.            This would require a subsequent
 5               adjustment of an initial adjustment that is not known or certain.
 6           3. The aggregate exogenous event cost provisions as shown in the proposed
 7               Modified Plan need to be clarified. The exogenous factor cost impact on
 8               regulated earnings when calculating the ESAM adjustment is limited to an
 9               aggregate amount of $600,000 according to the Modified Plan. (See the
10               Alternative Regulation Plan, Filed August 31, 2007; Exhibit CVPS-WJD-2;
11               Section d.; paragraph ii. page 7 and 8).           Other provisions include
12               quarterly reports and time lines for receipt of Board Orders. The import of
13               these provisions needs to be clarified.
14
15               With all of the revisions included herein, the Revised Modified Plan will
16        provide just and reasonable rates for Vermont rate payers, will help maintain a
17        reasonable degree of fairness and consistency among the existing alternative
18        regulation plans in Vermont, will provide CVPS with a comparable level of
19        business and financial risk that exists in other alternative regulation plans and will
20        satisfy the statutory requirements for an acceptable alternative regulation plan.
21
22   Q.   Does this conclude your testimony?
23   A.   Yes.

				
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