Thursday, May 30, 2013

After Final Submissions on Prior Proposal, Fortis, Central Hudson File New Plan With PSC for Fortis Acquisition

"The game's isn't over until it's over."

After more than a year of proceedings involving the proposed acquisition of Central Hudson by Fortis, Inc., after months of review of a contested Joint Proposal put forward by some parties, after a Recommended Decision of two Administrative Law Judges that the PSC reject the proposal, and after final submissions of parties opposing and supporting the proposal were made to the PSC, in a last-minute stratagem, on May 30, 2013, Central Hudson and Fortis filed a letter to PSC Commissioners containing a new proposal.

The Central Hudson Press Release touts the new offer in the latest gambit, direct bargaining with the Commission, as containing "enhancements" to the joint proposal that was previously litigated without hearings.  Last minute changes proposed in the plan include continuation of the current multi-year rate plan adopted in 2010, which otherwise expires June 30, 2013, through July 1, 2015, capital investment of $215 million, hiring of additional employees,  a four-year no layoff provision, and other "enhancements".

While parties have not had an opportunity to fully assess the proposal, the "sweeteners" touted by Central Hudson's latest filing may not be so sweet for customers. For example, added capital investment means that in the future customers will pay for it and will pay the utility a return on its investment, so without careful scrutiny, simply pouring more money into the utility is a recipe for future rates that will be higher than otherwise.  See Canadian customers assail Fortis rate hikes.

With borrowing costs low, and low inflation, it may be that Central Hudson's rates deserve a trimming, not a "freeze" at what may be an excessive level. Continuing the generous 2010 rate plan that allows the company to earn 10.5% - and even more after sharing part of the excess above 10.5% with customers -- by extending the plan to July 1 2015 may be more of an "enhancement" to Fortis' earnings than to customer benefits.

Under the current rate plan, Central Hudson appears to be earning more than the returns on equity (ROE) allowed by the PSC in recent cases, which have been in the low to mid-9% range.  Based on Central Hudson's financial reports filed with the SEC, the trailing four quarters' earnings as of June 30, 2012 -- the end of the second Rate Year in the current rate plan -- were 10.5%, just at the 10.5% threshold at which Central Hudson's would begin to be shared with customers, and at September 30, 2012 they were at 10.7%.  While the periods covered in the SEC reports may be slightly different from Rate Year, and the books of account kept for PSC regulatory purposes may differ from the SEC filing data, and the earnings have dipped since September 2012, earnings of this magnitude nonetheless raise questions about the advisability of approving the acquisition and extending the rate plan without a fuller record, evidentiary hearings and full rate review.

What is the "enhancement" to customer benefits in extending a rate plan that would just enshrine for another year an earnings sharing mechanism that begins at 10.5%?. The PSC has not been so generous in its ROE and sharing decisions in more recent rate cases.

For example, in the 2013 PSC Order in the recent Niagara Mohawk case,  50/50 sharing of earnings with customers begins at 9.3%, with no "deadband" in which the company keeps earnings above the intended ROE.  Also, in the June 2011 PSC Order setting Orange and Rockland rates, ROE was set at between 9.4 and 9.6% over the three years, with 50/50 sharing of earnings with customers beginning at 10.2%.

Other flaws in the current rate plan, such as the lack of any curb on the tactic of service interruption to collect overdue bills, and the shifting of storm outage risks and costs to customers, make its further extension a dubious "benefit".

Finally, even if a modified extension of the rate plan were a good deal in the short run, it does not outweigh the long term risks of this holding company's proposed acquisition of the local utility.


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