In Rate Case, NRG Says PECO "Misallocated" $100 Million In Default Service Expenses To Distribution Rates
NRG Proposal Would Increase Residential Price To Compare By 1.25¢/kWh
September 10, 2018 Email This Story Copyright 2010-17 EnergyChoiceMatters.com
Reporting by Paul Ring • email@example.com
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In an electric rate case for PECO, NRG Energy, Inc. alleges that PECO has improperly allocated $100 million in indirect costs to residential distribution service rather than default service, and is seeking a re-allocation of such costs.
PECO and the Office of Consumer Advocate oppose NRG's proposal, stating that NRG's proposal is inconsistent with basic principles of utility cost allocation and that NRG did not show that any of the at-issue costs are related to the default service function.
In a post-hearing brief, NRG said, "It is undisputed that PECO Energy Company ('PECO') allocates zero indirect expenses to residential default service. This is true despite the fact that PECO projects the sale of 8.6 billion kilowatt hours ('kWh') of electricity to over one million residential default service customers and projects to collect over $637 million in annual default service revenues from this business. As a result of allocating no indirect expenses to residential default service, PECO's current price to compare ('PTC') reflects zero information technology ('IT') costs, zero regulatory commission costs and zero consumer education costs. Notably, this means that PECO is supposedly operating a business upon which over one million residential customers rely for generation supply service without incurring any IT costs. It is unfathomable to accept the notion that PECO incurs no IT costs to provide essential electricity services as the default service provider for two-thirds of its residential customers. Indeed, PECO's entire 'administrative costs' to run this massive default service business during the present quarter amount to a mere $118,314. Astonishingly, PECO's current PTC reflects negative administrative and general ('A&G') expenses related to default service. Common sense dictates that it would be impossible to run any business, let alone a business that is selling 8.6 billion kWh of electricity and generating hundreds of millions of dollars in revenues, with negative A&G expenses."
In its brief, NRG said, "When a reasonable portion of PECO's indirect costs is reallocated from residential distribution service to residential default service, consistent with widely accepted accounting principles and standard business practices, PECO's revenues from distribution charges, using proposed rates for the Fully Projected Future Test Year ('FPFTY') 2019, would be reduced by $101 million. This would equate to an average reduction in residential distribution charges in the amount of .76 cents per kWh."
In its brief NRG said, "The effect of this reallocation, which relies on commonly utilized allocators of revenues and number of customers, would be an increase in the PTC for residential default service from 7.15 cents per kWh to 8.40 cents per kWh, a 15 percent increase."
In its brief NRG said, "PECO has not carried its burden of proving that the allocation of all indirect costs associated with the residential rate classes to residential distribution service is just and reasonable or in the public interest. By contrast, NRG has presented compelling evidence and analysis showing that PECO's proposal to allocate no indirect costs to residential default service is not just and reasonable or in the public interest."
In its brief NRG said, "Chris Peterson, a forensic accountant, certified public accountant and expert witness in this proceeding, testified on behalf of NRG Energy, Inc. ('NRG') that it is common business practice across a variety of industries to allocate indirect costs to different segments or lines of a business."
In its brief NRG said that failing to allocate indirect costs to default service, PECO's Price to Compare (PTC) is artificially lower
In its brief NRG said, "The lower PTC ... enhances PECO's ability to attract and retain default service customers, making it more difficult for EGSs to compete in the retail market. In addition, the disproportionate allocation of indirect costs to residential distribution service results in shopping customers who receive their generation supply from EGSs paying too much for distribution service. The reallocations proposed by NRG, along with the commensurate reductions to distribution charges and increases to the PTC, would begin to rectify PECO's misallocation of costs to residential distribution service, improve the functioning of the competitive market and be in the public interest."
In its brief NRG said, "The indirect expenses that PECO allocates solely to residential distribution service include A&G, as well as Customer Service, Sales, and Intangible Plant, General Plant and Common Plant Depreciation/Amortization. By allocating these indirect expenses entirely to residential distribution services, PECO fails to address that a significant portion of these costs are incurred to provide residential default service. For instance, if PECO were to operate a separate functional division that provides default service -- a standard employed by the Commission during PECO's 1997 restructuring proceeding -- it would necessarily incur these types of expenses. In that proceeding, the Commission noted that a separately-functioning generation division would require A&G services and therefore directed an adjustment so that some level of A&G costs would be removed from transmission and distribution ('T&D') rates. Further, PECO's failure to allocate indirect costs to default service is contrary to the Commission's 2007 Policy Statement, which identifies A&G expenses related to default service as a necessary component of the PTC, yet PECO's current PTC reflects negative A&G expenses related to default service."
In a post-hearing brief, PECO said that, "NRG’s proposal to allocate over $100 million in distribution system costs to distribution service customers who receive default service and thereby raise the price of default service by fifteen percent is inconsistent with basic principles of utility cost allocation."
In a post-hearing brief, PECO said that NRG's witness, "did not determine whether the costs he proposed to allocate were actually associated with any default service function performed by PECO employees, nor did he calculate the costs that PECO would not incur if it did not provide default service."
In a post-hearing brief, the Office of Consumer Advocate said that, "Mr. Peterson has not identified any avoidable costs of providing default service which are improperly recovered from customers of competitive EGS providers."
OCA in its brief said, "Further, PECO witness Cohn explained that 'all PECO customers -- whether they receive electric generation supply from EGSs or from PECO -- are distribution customers, and responsibility for distribution business costs should not vary based upon receipt of default service.'. As PECO witness Cohn stated, 'the distribution business costs Mr. Peterson proposed to allocate to default service customer are not a function of the number of distribution customers that receive default service or the amount such customers pay for default service."
In a post-hearing brief, PECO said that NRG's witness, "also conducted no analysis as to the effect of his cost allocations on PECO’s ability to recover its distribution system costs if the number of customers shopping for generation service increases, and he could only guess as to the level of shopping that would have an impact on the reasonableness of his proposed allocations."
In a post-hearing brief, PECO said that, "Mr. Peterson’s [NRG's witness] allocation reflected no assessment of the actual costs of PECO’s provision of default service – an unsurprising result in light of Mr. Peterson’s admission at hearing that he prepared his report before discovery in this proceeding. As noted supra, Mr. Peterson never sought to determine whether the costs he proposed to allocate were actually caused by any default service function; in fact, he testified that asking about different default service functions performed by PECO employees would be 'outside of the scope of what I was requested to do.'"
In a post-hearing brief, PECO said that, "Mr. Peterson’s choice of default service-based ratios for the allocation of such costs as PECO’s physical buildings and employee salaries do not correspond with cost causality. Mr. Cohn described how Mr. Peterson’s allocations would lead to PECO losing money as more customers shop, since PECO would continue to incur the costs that Mr. Peterson proposed to allocate to default service customers.58 These losses would increase as PECO continues to promote retail competition in accordance with Commission requirements and more customers shop for electricity."
In a post-hearing brief, PECO said that, "Allocating costs to default service that artificially inflate the PTC is fundamentally inconsistent with principles that properly should guide the development of a competitive retail electricity market. The Commission should reject Mr. Peterson’s suggestion that responsible 'leadership' would require the Commission to put a 'thumb on the scale' to drive the PTC above the level that is justified by sound and well-accepted cost-allocation principles that have been approved by this Commission in numerous base-rate and default-service proceedings."
In a post-hearing brief, PECO said that, "Mr. Peterson has no relevant utility experience."
In a post-hearing brief, PECO said that, "Mr. Peterson’s specific lack of expert ratemaking knowledge and experience was further demonstrated by his incorrect assertion that PECO earns a return on distribution charges, as well as by his acknowledgment on cross-examination that he was unaware of the standard practice of utilities in allocating indirect costs."
NRG issued the following statement upon the filing of its post-hearing brief.
PECO Rate Case – NRG Statement
"True energy competition can only be achieved if the rates and prices consumers see are accurate and fair.
"When PECO filed a new rate case with the Pennsylvania Public Utility Commission (PUC) in March, 2018, NRG intervened and retained UHY, LLP – an accounting firm specializing in providing fraud investigation, forensic accounting, and expert services in both the private and government sectors – to perform an analysis of PECO’s cost of service study and make recommendations regarding any costs found to be misallocated. The accountants’ analysis showed that the rate PECO charges all residential customers for distribution service is artificially high.
"'PECO is moving costs from one bucket to another at the expense of customers and taxpayers,' said Mike Starck, Vice President and General Manager of NRG Retail East division.
"The study concluded that PECO misallocated $101 million in indirect expenses – including expenses for information technology (IT), regulatory, and administrative and general costs, such as customer service. PECO allocated zero indirect expenses to residential default service, recovering all of its indirect expenses through distribution rates. The misallocation results in a distribution rate paid by all residential customers that is higher than it should be, meaning residential customers will overpay for distribution service under PECO’s proposal.
"'PECO claims to be operating a business upon which more than one million residential customers rely for generation supply service without incurring any IT costs,' said Starck. 'It is inconceivable that PECO incurs no IT costs to provide essential electricity services to two-thirds of its residential customers.'
"NRG’s consultant proposed that these indirect expenses be reallocated such that:
"• The distribution rate to residential customers should be decreased by .76 cents per kWh on average; a customer using 1,000 kWh per month would see a decrease in distribution charges of $7.64 per month, or $91.68 over the course of a year.
"• The PTC for residential default service customers should be increased by 1.25 cents per kWh, or 15%, to reflect the costs incurred by PECO to provide default service.
"'The bottom line is PECO electricity customers are paying more than they should for their electricity distribution because of PECO’s unfair and non-transparent misallocation of charges,' added Starck.
"NRG is urging the PUC to require PECO to reallocate its indirect expenses based on widely accepted accounting principles and standard business practices, so that the competitive electricity market can function as intended."