N. Carolina Supreme Court Reverses State PSC Approval of Duke Power Electric Rate Settlement Finding Insufficient Review of 10.5% Profit and Customer Impact

The North Carolina Supreme Court on April 12, 2013 issued an opinion nullifying a Duke Power rate settlement approved by that state's Public Service Commission (PSC).  Duke Power in its initial rate case filing had asked for an increase of $646,057,000, to cover anticipated future costs of operation and maintenance and an profit allowance of 11.5%, representing an allowed return on investors' equity (ROE).  The PSC's Public Staff expert witness testified that the ROE should be 9.25%.  A non unanimous settlement agreement was eventually reached between the utility and the PSC's Public Staff for a rate increase of $309,033,000 -- less than half what the utility asked for, but still an annual rate increase of 7.21% faced by consumers.  The settlement amount was based in part on an agreed-upon ROE (profit) of 10.5%.  The estimated difference between the recommended ROE of 9.25% and the agreed-upon ROE of 10.5% in the settlement was approximately $100,000,000.

In its opinion, a resounding victory for consumers, the Court reversed the PSC order approving the settlement deal, and remanded the case to the PSC for further proceedings.  The Court faulted the PSC approval of the settlement because it lacked any independent determination of ROE when not all parties had settled the issue: 

Without sufficient findings of fact as to these issues, we cannot say that the Commission ―ma[de] ‗its own independent conclusion‘ . . . that the propos[ed] [ROE] [wa]s just and reasonable to all parties in light of all the evidence presented.* * * *  Instead, it appears that ―the Commission adopted wholesale, without analysis or deduction, the 10.5% stipulated ROE, ―as opposed to considering it as one piece of evidence to be weighed in making an otherwise independent determination.* * * *  Accordingly, the Commission‘s order must be reversed and this case remanded to the Commission so that it can make an independent determination regarding the proper ROE based upon appropriate findings of fact that balance all the available evidence.

In addition, the Court chastened the Commission in its focus on investor interests in setting the ROE. Citing the North Carolina statutes, the Court made clear that there must be consideration not only of investor interests, but also the impact of changing economic conditions on customers:

Given the legislature‘s goal of balancing customer and investor interests, the customer-focused purpose of Chapter 62, and this Court‘s recognition that the Commission must consider all evidence presented by interested parties, which necessarily includes customers, it is apparent that customer interests cannot be measured only indirectly or treated as mere afterthoughts and that Chapter 62‘s ROE provisions cannot be read in isolation as only protecting public utilities and their shareholders. Instead, it is clear that the Commission must take customer interests into account when making an ROE determination. Therefore, we hold that in retail electric service rate cases the Commission must make findings of fact regarding the impact of changing economic conditions on customers when determining the proper ROE for a public utility.

The North Carolina Attorney General's Utilities Section participated as an active party in the case.  The office, which is empowered to seek judicial review of the state PSC's decisions, is an independent utility consumer advocate and member of NASUCA, The AARP Foundation filed a brief amicus curiae with the North Carolina Supreme Court urging the Court to reverse the PSC order that had approved the rate case settlement.

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PSC Begins Proceeding to Review and Possibly Reduce National Fuel's Natural Gas Rates, based on Estimate of 13.15% ROE Under Current Rates

The PSC has issued an order to show cause commencing a rate review proceeding to review reasonableness of the rates, terms and conditions of service of National Fuel, which serves  natural gas customers in the Buffalo area.  The Commission order indicates the possibility that the rates, last set by PSC order in 2007, are now too high and that they may be lowered:

In the 2007 Rate Order, the rates set for National Fuel were expected, among other things, to permit National Fuel to earn a return on equity (ROE) of 9.10% for the rate year ended December 31, 2008 based on a 44.35% common equity ratio. Under the 2007 Rate Order, there is no ROE earnings sharing mechanism, and, therefore, National Fuel retains all excess earnings when they occur. The rates and other terms prescribed in the 2007 Rate Order remain in effect today.  A review of the Company’s more recent financial statements by Department of Public Service Staff (Staff) indicates that National Fuel may now be earning in excess of the 9.10% ROE envisioned by the 2007 Rate Order, and in excess of a reasonable return. Staff’s projection forward suggests that this condition may continue in the future.
Specifically, National Fuel measures its annual earnings on a fiscal year basis that ends September 30th. The latest earnings calculation provided by the Company based on a 50% equity ratio, for the twelve months ended September 30, 2012, showed an earned unadjusted ROE of 12.77%. National Fuel made normalizing adjustments that appear to reduce the ROE to 11.87%. However, after adjusting the Company’s calculation for the 44.35% equity ratio allowed in its current rates and removing executive restricted stock and stock option compensation expense not allowed in current rates, Staff calculates that National Fuel earned a 13.15% equity return for the twelve months ended September 30, 2012.

A copy of the Order to Show Cause is here.   The proceeding will take about a year. If current rates are reset as temporary rates, potential refunds could be made retroactive to the date when temporary rates are set, if rates are eventually lowered at the conclusion of the case.

In March, National Fuel floated a proposal to keep in place its current rates and share any overearnings over a threshold (calculated generously high for the utililty) with customers, with the customer share of overearnings allocated to certain purposes other than reducing rates.   Also the proposal would reallocate certain unspent funds to the utility's low income customer assistance program to offset sharp reductions in LIHEAP assistance.  Apparently the utility anticipated it would be called in for a rate review, and sought to forestall rate case litigation with some concessions that were insufficient.

The PSC webpage for the case, which will contain documents from the case, is here.

In a rate review proceeding, the utility has the burden to show that its rates, terms and conditions of service are just and reasonable. Customers and the general public can make their views known to the PSC regarding the rates, terms and conditions of service and practices of the utility by filing their comments here.

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PSC Warns Landlords to Follow Submetering Orders Allowing Sale of Electric Service to Residential Tenants

Landlord submetering of utility service to residential customers can rob end users of their consumer sovereignty by controlling the energy sources they need to sustain themselves.  Historically, in response to landlord abuses in tying their tenants to landlord designated suppliers of essential services, the legislature prohibited landlords from requiring tenants to buy fuel, ice or food exclusively through the landlord or his designated suppliers.    Submetering of electricity to residential tenants, however, was not subject to the ban against tied fuel services, and was allowed in the first half of the twentieth century. This led to overcharges, rampant abuses and chronic problems for tenants which surfaced prominently in the 1920's, 1930's, and 1940's.   

These problems culminated in the PSC’s eventual prohibition of submetering to residential tenants in 1951.   The courts upheld that ban in Campo v. Feinberg.   

The PSC, however, in the 1970’s revisited the issue out of environmental concern that tenant users were not directly financially responsible for electric usage.  Over the opposition of its staff, which preferred direct utility metering and predicted the recurrence of chronic landlord tenant disputes at the PSC over submetered electric service charges, the Commission  allowed landlords to petition for relaxation of its submetering ban, on a building by building basis. 

Commission regulations on the subject mainly prescribe the content of landlord petitions to waive the ban on submetering.  They impose few substantive requirements, other than a requirement that owners not charge more than the utility would charge a direct metered customer (the "rate cap").   In 2002, the Home Energy Fair Practices Act was amended to clarify that all electric service to residential customers, whether provided by traditional utilities, ESCOs, or by submetering landlords, must be provided in accordance with the consumer protections and complaint adjudication procedures of HEFPA.

In a recent  PSC decision resolving the complaint of the Hazel Towers Tenants Association, in which the landlord had failed to comply fully with a 2001 Submetering Order, the PSC sent a clear warning to submetering landlords that they may incur civil liability for HEFPA violations or for failing to adhere to promises in their petitions, in the form of stiff penalties.  The Hazel Towers ruling emphasizes that landlords who have overcharged who then provide a retroactive refund to tenants for any improper billings will not necessarily avoid liability:

Notwithstanding that tenants have been, or will be, provided with refunds to which the record before us shows them to be entitled, the owner’s failure to comply properly and in a timely manner with the 2001 Submetering Order is a serious matter. Such failure, like the failure to timely comply with any provision of a submetering order, could subject the submeterer to a penalty pursuant to PSL §25.

The PSC explains that landlords carry the burden to accurately assess the rate cap, which bars any charges which are more than what the utility would charge its direct service residential customer for the same usage:

an owner is required to ascertain the rate cap correctly for each residential occupant’s bill and to properly reduce the occasional bill, whenever there is one, that exceeds the correctly-calculated rate cap.

The rate cap is an essential component of the submetering regime, which may thwart the tenant's normal right to service upon demand from the utility: if the submetering rate cap is observed, claims of economic injury from landlord-provided service are avoided.  The PSC further stated that landlords have an affirmative duty to work with the utility in verifying that tenants are not being charged any more than they would if they had been directly billed by the utility:

However, a submetered customer is entitled to no less than an electric bill calculated with the same accuracy as would be provided had the occupant been directly metered by Con Edison. Moreover, these failures indicate a problem that should be addressed in the first instance by submeterers and by Con Edison.
In earlier phases of the PSC complaint proceeding, refunds of over $35,000 were made to the complaining tenants.  In the final decision, the PSC found additional, small overcharges had not been corrected.  The decision stressed that even seemingly small or innocuous violations can subject the landlord to strict civil liability.

This owner and other submeterers, should be aware that, in the future, even a violation of a submetering order which causes no financial harm or penalty to tenants or which is based on a failure to timely comply and is subsequently addressed by a later, untimely action, may, in appropriate circumstances, be the basis of a penalty action against the submeterer pursuant to PSL §25.

Pursuant to PSL §25 landlords knowingly failing to or neglecting to obey or comply with the rules and regulations or orders of the Public Service Commission may result in fines up to $100,000. The fines increase to up to $250,000 when human safety is compromised and jumps to $500,000 if the overall reliability and continuity of electric service is constrained. In the case of a continuing violation, each day shall be deemed a separate and distinct offense, thus massive fines can accrue quickly.

Landlords engaging in submetering should as a precaution be very mindful of the PSPC requirements in the orders and regulations, take all necessary steps to comply with them, and to work with the utility company to ensure that price caps are being adhered to before billing tenants.  PULP has urged the PSC to require utilities to provide bill calculators on their websites, so that submetered tenants could compare the bills they receive from landlords with what the utility would charge for the same usage in the same period of time.

Major submetering problem areas remain.  For example, landlords often do not provide personal service of their petitions upon tenants of the pendency of the PSC proceeding in which their leases will be affected, so most orders are issued without any tenant participation.   DHCR rent reduction guidelines give smaller rent reductions to tenants when an owner is allowed to convert from master metering to submetering, compared with the reductions when a conversion is to direct utility metering.  This discrepancy is based on DHCR's questionable methodology which assumes that the bulk rates for the master metered service are 20% less than utility rates for individual direct service to residential customers.  Subsequent changes in electric rates since the DHCR methodology was adopted may have rendered obsolete the assumption that submetering bills are always significantly lower than direct service.  Also, since there is no routine outside audit of landlord charges, when bulk metering charges are less than what the utility would charge its residential customers, there is no way for tenants to know whether instead of passing through the bulk metering costs (plus a $4 billing charge) without profit or markup, as PSC orders require, a landlord is marking up costs while staying under the maximum rate, which in theory can be independently checked by comparison with Con Edison charges.  The DHCR rent reduction methodology also assumed, without independent research to back it, that customers use 20% less electricity after conversion to metering. More realistic assumptions are in the area of 0 to 7%. As a consequence, landlords do not need to reduce the rent as much and receive a windfall when they shift responsibility for electric bills to tenants.

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PSC to Hold Additional Hearings April 17 and 18 on Proposal to Approve Fortis Acquisition of Central Hudson

On April 2, the PSC issued a Notice that additional public hearings will be conducted regarding a proposed settlement regarding the acquisition of Central Hudson Gas & Electric Company by Fortis, Inc.  The Notice states that

"The purpose of these hearings is to allow interested members of the public to provide their views personally before an Administrative Law Judge assigned by the Commission to the case. A verbatim transcript of each hearing will be made for inclusion in the record of the proceeding. 

It is not necessary to be present at the start of the hearing or to make an appointment in advance in order to speak. Persons interested in speaking will be asked to complete a card requesting time to speak when they arrive at the hearing, and will be called in the order in which the cards are received. Speakers are not required to provide written copies of their comments."

The hearings are scheduled as follows:

Poughkeepsie Wednesday, April 17, 2013

7:00 p.m.
Common Council Chambers
Municipal Building, 3rd Floor
62 Civic Center Plaza

Kingston Thursday, April 18, 2013

7:00 p.m.
Council Chambers
Kingston City Hall
420 Broadway

The PSC Notice also provides information about the Joint Proposal of some parties in the case for settlement of the merger case, and about other ways, in addition to personally speaking at the hearings, for people to make their views known to the Commission before it decides whether to approve the proposed merger:

Other Ways to CommentInternet or Mail: Those who cannot attend or prefer not to speak at a public statement hearing may comment electronically to Hon. Jeffrey C. Cohen, Acting Secretary, at secretary@dps.ny.gov or by mail or delivery to the Acting Secretary at Public Service Commission, Three Empire State Plaza, Albany, New York 12223-1350. Comments should refer to "Case 12-M-0192 - Central Hudson/Fortis Merger.”

Toll-Free Opinion Line: You may call the Commission's Opinion Line at 1-800-335-2120. This number is set up to take comments about pending cases from in-state callers, 24 hours a day. Press "1" to leave comments, mentioning the Central Hudson/Fortis merger.

All comments provided through these alternative methods should be submitted, or mailed and postmarked, no later than May 1, 2013. All such statements and comments will become part of the record and be reported to the Commission for its consideration.

All submitted comments may be accessed on the Commission’s Web site at www.dps.ny.gov, by searching Case 12-M-0192. Many libraries offer free Internet access.

In addition, comments from the public can be filed electronically at the Commission's website page for the Central Hudson/Fortis merger case, by using the comment filing form.

Background.
PSC Extends Time for Public Comment on Fortis' Proposed Acquisition of Central Hudson Gas & Electric to May 1

PULP Comments Oppose Central Hudson/Fortis Merger Case Settlement Proposal. 

Proposed Central Hudson/Fortis Merger Offers Little for Consumers; Shutoffs Up 171% Since 2005, PULP Urges Reforms

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