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.