Docket UE30902.1
Order UE94-2IN THE MATTER of an application by the Town of Summerside for a review of Order UE93-1 as it relates to the (1) municipal guarantee fee, (2) rate of return on common equity and (3) rate adjustment limits.
BEFORE THE COMMISSION
on Friday, the 18th day of February, 1994.
Linda Webber, Chair
John L. Blakney, Vice-Chair
Deborah MacLellan, Commissioner
Order
Contents
Reasons for Order
Part One
The Application
Part Two
Findings
2.1 The Issues
2.2 Criteria For Review
2.3 Guarantee Fee
2.4 Rate of Return
2.5 Rate Adjustment Limits
2.6 Disposition
Order
Reasons for Order
Part One
The Application
This is an application under section 12 of the Island Regulatory and Appeals Commission Act (the "Act") by the Town of Summerside ("Town", "Applicant", "Summerside") seeking a review of three specific components of Order UE93-1. Under section 12 of the Act:
12. The Commission may, in its absolute discretion, review, rescind or vary any order or decision made by it or rehear any application before deciding it.
Order UE93-1 documents the Commission's findings on the 1992-93 General Rate Application of the Town of Summerside which covers the rates charged to the Town's Rural customers. In that application, the Town requested revised rates for 1992 and 1993 based on the increased costs of operating the Town Utility and a proposed net income allowance based on a debt guarantee fee and a return on equity. The Commission, in Order UE93-1, rejected the debt guarantee fee and accepted the provision for a net income allowance, but on a basis different from that proposed by the Town. The Commission also limited the amount by which the rates of individual customer classes could be adjusted in order to temper certain proposed rate increases.
On June 4, 1993, the Town applied to the Commission to review and vary the following components of UE93-1:
1. The guarantee fee,
2. The rate of return, and,
3. The rate adjustment limits referred to as the 0.5 - 1.5 rule.
Commission staff subsequently requested the Town's evidence in support of the application and the evidence was filed on August 16, 1993. The application and evidence were forwarded to Maritime Electric Company, Limited ("Maritime Electric"), the intervener in the original application, and the Town and Maritime Electric were asked for submissions on whether a prima facie case for review had been demonstrated by the Town. A submission was received from the Town on October 28, 1993 and Maritime Electric advised the Commission that it did not wish to respond.
Part Two
Findings
2.1 The Issues
Based on the application of the Town, the following issues are identified for disposition:
1. Has the Town demonstrated that a prima facie case for review exists for any or all of the issues raised? and,
2. If so, is the Commission convinced that it should review, rescind or vary the respective components of Order UE93-1?
2.2 Criteria For Review
The criteria for a review were last addressed by the Public Utilities Commission, the predecessor of the Island Regulatory and Appeals Commission, in Order E90-8, dated May 2, 1990. In that order, the Commission made the following comments:
The Commission is of the view that, as a matter of law and practicality, minimum criteria must be satisfied before the Commission will proceed with a review or rehearing under s.16 of the Public Utilities Commission Act. We agree with the National Energy Board in Newfoundland & Labrador Hydro, supra, that the power to review is a discretionary and unusual one which should be exercised sparingly and that the onus is on the Applicant to satisfy the Commission that a prima facie case for review exists in the particular circumstances of any case.
What, then, constitutes a prima facie case?
Case law appears to support the proposition that the Commission's power to review should be exercised only to correct an error by the Commission or to meet changed circumstances. Changed circumstances may encompass either a situation which has developed after the decision or where new evidence emerges which was not known or available at the time the original evidence was adduced. Changed circumstances must be material.
The Commission believes these factors to be relevant to s. 16 of the Public Utilities Commission Act, and we conclude that the Company's s.16 application must satisfy these criteria. ...
(Order E90-8, pp. 13-14)
Section 12 of the Island Regulatory and Appeals Commission Act provides a similar mechanism for review and, in the opinion of the Commission, the applicable law is the same. Therefore the authority under s. 12 should only be exercised sparingly and when certain minimum criteria are met, as set out above.
In its submission of October 28, 1993, the Town expressed some surprise that the Commission was requesting argument on whether a prima facie case for review had been demonstrated given that the Town had submitted both an application and a number of pages of evidence. In the view of the Commission, the Town appears to consider the application for review to be similar to other applications where consideration by the Commission is virtually automatic. As discussed above, the review mechanism should be used sparingly and the Commission will only consider a review when the applicant has demonstrated that at least certain minimum criteria are met. The Commission gives serious consideration to all of its decisions and will not review them without a reasoned case being made.
2.3 Guarantee Fee
The Town originally proposed a guarantee fee based on the belief that the Town's taxpayers pass on a benefit to the electrical customers by virtue of implicitly guaranteeing the debt of the Utility. This proposal was rejected by the Commission on the basis that the Town would receive sufficient compensation for risk through the income allowance that we were prepared to allow.
In the evidence supporting its application for review, the Town generally appears to repeat the arguments it previously made for a guarantee fee and then to introduce additional evidence on practices in other jurisdictions. Most of the later evidence was available at the time of the hearing and relates to situations which, in varying degrees, differ from that of the Town. On reviewing the submissions of the Town, the Commission does not see any material evidence in the Town's submissions that is either new or that leads us to believe that we have made an error in our original determination. We therefore find that the evidence is insufficient to reopen the issue given the number of considerations made when the original decision was reached.
1. The Town's application for review of the guarantee fee is dismissed.
2.4 Rate of Return
The Town, in its original application, proposed that it be viewed like an investor-owned utility and allowed to earn a return on equity as well as on a portion of its debt which was proposed as deemed equity. The Commission disallowed the return on deemed equity and accepted a net income allowance based, in part, on the return on equity proposal, as adjusted by the Commission.
In its evidence supporting the request for review, the Town submits that when the Commission rejected the deemed capital structure, the risk of the Town's investment increased and its return on equity should have been increased. The Commission is prepared to accept that the Town presented its case based on the proposal for a deemed capital structure and did not have an opportunity to discuss how its other evidence might change if the deemed capital structure was rejected. While we do not believe that the Town has provided material new evidence or strictly demonstrated the other criteria for review, we are prepared to accept that an applicant, in presenting its case, cannot reasonably be expected to anticipate every decision that the Commission might make and address the impact that the decision might have on other parts of the evidence. This would suggest that there may be justification, on a prima facie basis, for reviewing this aspect of the decision.
However, on reviewing the application in detail, it appears that the Town has reiterated the evidence that was presented in the original proceeding and that was duly considered by us at the time we made our decision. The reasons for that decision read, in part, as follows:
... The capital structure of the utility is a product of its own financial policy with respect to investing equity and withdrawing or retaining earnings. The Town has, over time, withdrawn virtually all of its excess of revenue over expenditures and therefore has chosen not to reinvest in its own utility except to the extent that results from past accounting practices which would be considered inappropriate for the purposes of assessing rate of return. As a result, providing a return on deemed equity would reward the Town for what could be viewed as imprudent financial practices. Secondly, the Town does not have to raise equity capital on equity markets and does not have to meet the same tests which are normally used for investor-owned utilities. The Commission cannot therefore accept Mr. O'Rourke's proposal to deem an equity component comparable to investor-owned utilities. ...
(UE93-1, pg. 23 and reproduced in the testimony of Robert O'Rourke)
Unfortunately, while Town witness Robert O'Rourke submits that since the deemed capital structure was not accepted, the Town's rate of return should be increased by 75 to 100 basis points to reflect the higher risk of the lower equity structure, we do not find that the Town has provided any new evidence to support this opinion.
The evidence before us indicates that the Town continues to believe that its electric utility can be equated to an investor-owned utility and allowed to earn a rate of return determined on a comparable basis. Its initial evidence and evidence in support of the request for review appear to be based solely on this premise. The Commission's decision was not based on this premise, for reasons set out in our original decision. We evaluated the evidence on rate of return in light of the sources of the capital invested in the Town utility and the inherently different nature of a municipally-owned utility. We have seen no new evidence from the Town that would support a change to our decision on this issue. We continue to believe that the "Net Income Allowance of $210,832 is ... just and reasonable and sufficient to maintain the financial integrity of the Town utility" (Order UE93-1, pg. 25), as originally determined.
2. The Net Income Allowance provided for in Order UE93-1 is affirmed.
2.5 Rate Adjustment Limits
The original application of the Town proposed moving rates for each rate class to the estimated revenue-cost ratio of one over a short period of time. Under the proposal, industrial customers would have seen their rates increase more than 25% over a period of less than one year. The Commission tempered this movement by limiting rate adjustments to no more than 1.5 times and no less than 0.5 times the average rate increase. An exception was made which allowed industrial rates to increase by 2.0 times the average rate increase or approximately 8%.
The Town submitted a number of excerpts from other proceedings in support of its request to review the Rate Adjustment Limits. While certain of these items occurred after the hearings, the Commission is unable to identify any material new evidence or other justification for reviewing this issue.
3. The Town's application for review of the rate adjustment limits is dismissed.
2.6 Disposition
An Order will therefore issue.
IN THE MATTER of an application by the Town of Summerside for a review of Order UE93-1 as it relates to the (1) municipal guarantee fee, (2) rate of return on common equity and (3) rate adjustment limits.
Order
WHEREAS the Town of Summerside ("Town") has applied to the Commission for a review of Order UE93-1 as it relates to the debt guarantee fee, return on equity and rate adjustment limits;
AND WHEREAS the Commission reviewed the application and written evidence filed by the Town;
AND WHEREAS the Commission has issued its findings in this matter in accordance with the Reasons for Order issued with this Order;
NOW THEREFORE, pursuant to the Island Regulatory and Appeals Commission Act
IT IS ORDERED THAT
1. The Town's application for review of the guarantee fee is dismissed.
2. The Net Income Allowance provided for in Order UE93-1 is affirmed.
3. The Town's application for review of the rate adjustment limits is dismissed.
DATED at Charlottetown, Prince Edward Island, this 18th day of February, 1994.
BY THE COMMISSION:
Linda Webber, Chair
John L. Blakney, Vice-Chair
Deborah MacLellan, Commissioner
