Case Background
On August 30,
2019, Peoples Gas System (Peoples or utility) filed a petition for approval of
its final 2018 true-up, projected 2019 true-up, and 2020 revenue requirement
and surcharges associated with the cast iron/bare steel replacement rider
(Rider CI/BSR or rider). The rider was originally approved in Order No.
PSC-12-0476-TRF-GU (2012 order) to recover the cost of accelerating the
replacement of cast iron and bare steel distribution pipes through a surcharge
on customers’ bills. Peoples’ current surcharges were approved
in Order No. PSC-2018-0540-TRF-GU. In the 2012 order, the Commission found
that “replacement of these types of pipelines is in the public interest to
improve the safety of Florida’s natural gas infrastructure, and reduce the
possibility of loss of life and destruction of property should an incident
occur.”
In Order No.
PSC-17-0066-AS-GU the Commission approved a comprehensive settlement agreement
between Peoples and the Office of Public Counsel (OPC). The settlement agreement, in part, added
problematic plastic pipe (PPP) installed in the company’s distribution system
to eligible replacements under the rider. PPP was manufactured before 1983 and
has significant safety concerns. In certain areas, the PPP is interspersed
with, or connected to, the cast iron/bare steel pipe that is being replaced
under the rider. As provided for in the settlement agreement, PPP replacements
are included in the calculation of the 2020 rider surcharges.
On September 12,
2018, the Commission approved a settlement agreement between Peoples, OPC, and
the Florida Industrial Power Users Group in Docket No. 20180044-GU addressing
certain impacts of the Tax Cuts and Jobs Act of 2017 on Peoples. The settlement agreement provides for a
reduction of Peoples’ 2019 depreciation expense of approximately $10.3 million
resulting from extending the lives of certain mains and service assets, which,
consequently, reduces the depreciation expense collected through the rider.
Additionally, the settlement agreement provides that Peoples’ revenue
requirement calculations incorporate the lower federal income tax rate
effective February 6, 2018.
In
its petition, the utility waived its 60-day file-and-suspend provision of
Section 366.06(3), Florida Statutes (F.S.). Peoples filed its response to
staff’s first data request on September 27, 2019. With the responses, the company
utility filed revised tariff Sheet No. 7.806 which is contained in
Attachment B to the recommendation. On October 14, 2019, Peoples filed
responses to staff’s second data request. On November 4, 2019, Peoples
requested the staff recommendation dated for the November 5, 2019 Agenda
Conference be deferred to the December 10, 2019 Agenda Conference. The deferral
was to allow the utility additional time to evaluate its calculations related
to its Weighted Average Cost of Capital (WACC) and treatment of Accumulated Deferred
Income Taxes (ADITs) in the instant docket. On November 12, 2019, Peoples filed its
amended petition including the Ninth Revised Sheet No. 7.806 in the subject docket,
which is contained in Attachment B to this recommendation. On November 18,
2019, Peoples responded to staffs’ follow-up questions by e-mail, and the
e-mail has been placed in the docket file. The Commission has jurisdiction
over this matter pursuant to Sections 366.03, 366.04, 366.05, and 366.06, F.S.
Discussion
of Issues
Issue 1:
Should the Commission approve Peoples proposed Rider
CI/BSR surcharges for the period January through December 2020?
Recommendation:
Yes, the Commission should approve Peoples’ proposed
Rider CI/BSR surcharges for the period January through December 2020. (Guffey, Hightower)
Staff Analysis:
The Rider CI/BSR charges have been in effect since
January 2013. Rider PPP charges have been in effect since 2017. In 2019,
Peoples’ cast iron and bare steel replacement activity focused in the areas of St.
Petersburg, Tampa, Miami, Jacksonville, and Sarasota, while PPP projects were
in Daytona, Eustis, Pompano Beach, and Orlando. In 2020, Peoples states it will
focus on replacement projects in St. Petersburg, Tampa, Orlando, Miami,
Jacksonville, and Ocala. The original projected completion date for the CI/BSR
replacement program was 2022 for mains and services; however, Peoples now
expects to complete the mains and services replacement in 2021. The replacement
of PPP is expected to continue until 2028.
Attachment A to this recommendation contains tables which
display the replacement progress and forecasts for Rider CI/BSR (Table 1) and
for PPP (Table 2). Additionally, Peoples provided Table 3 which consolidates
actual and projected CI/BSR and PPP miles replaced investment and revenue
requirements for each year of the replacement program.
True-ups by Year
Peoples’ calculation for the 2020 revenue requirement and
surcharges includes a final true-up for 2018, an actual/estimated true-up for
2019, and projected costs for 2020. Pursuant to the 2012 order, the capital
expenditures for 2017 through 2019 exclude the first $1 million of facility
replacements each year because that amount is included in rate base. Peoples
has included depreciation expense savings as discussed in the 2012 order;
however, the utility has not identified any operations and maintenance savings.
Final True-up for 2018
Exhibit A of the petition shows that the revenues collected
for 2018 were $10,399,354 compared to a revenue requirement of $9,359,024,
resulting in an over-recovery of $1,040,330. The final 2017 under-recovery of $1,030,552,
2018 over-recovery of $1,040,330, and interest of $6,108 associated with any
over- and under-recoveries results in a final 2018 over-recovery of $15,886.
Actual/Estimated 2019 True-up
In Exhibit B of the petition, Peoples provided actual
revenues for January through July and forecast revenues for August through
December of 2019, totaling $11,484,578, compared to an actual/estimated revenue
requirement of $13,382,287, 13,641,293, resulting in an under-recovery
of $1,897,709 2,156,715. The final 2018 over-recovery of $15,886,
2019 under-recovery of $1,897,709 2,156,715, and interest of $9,684
12,368 associated with any over- and under-recoveries results in a total
2019 under-recovery of $1,891,507 2,153,196.
Projected 2020 Costs
Exhibit C of the petition shows Peoples projects
investment or capital expenditures of $35,013,339 for the replacement of cast
iron/bare steel infrastructure and PPP in 2020. As shown in Table 3 of
Attachment A of the recommendation, this consists of the CI/BSR investment of $19,328,072
and the PPP investment of $15,685,267. The return on investment (which includes
federal income taxes, regulatory assessment fees, and bad debt), depreciation
expense (less savings), and property tax expense associated with that
investment are $17,324,344 17,840,500. After adding the total 2019
under-recovery of $1,891,507 2,153,196, the total 2020 revenue
requirement is $19,215,851 19,993,696. Table 1-1 displays the 2020
revenue requirement calculation.
Table 1-1
2020 Revenue Requirement
|
2020 Projected Expenditures
|
|
$35,013,339
|
|
Return on Investment
|
$12,443,492
|
12,959,646
|
|
Depreciation Expense (less savings)
|
2,340,490
|
|
|
Property Tax Expense
|
2,540,364
|
|
|
2020 Revenue Requirement
|
$17,324,346
|
17,840,500
|
|
Plus 2019 Under-recovery
|
+1,891,507
|
2,153,196
|
|
Total 2020 Requirement
|
$19,215,852
|
19,993,696
|
Source: Page 1 of 2 in Exhibit C in amended petition
(Docket No. 20190171-GU)
Proposed Surcharges
As established in the 2012 order, the total 2020 revenue
requirement is allocated to rate classes using the same methodology that was
used for the allocation of mains and services in the cost of service study used
in Peoples’ most recent rate case. After calculating the percentage of total
plant costs attributed to each rate class, the respective percentages were
multiplied by the 2020 revenue requirement resulting in the revenue requirement
by rate class. Dividing each rate class’s revenue requirement by projected
therm sales provides the rider surcharge for each rate class.
The proposed 2020 rider surcharge for residential
customers is $0.08845 0.09203 per therm (compared to the current
surcharge of $0.05274). The 2020 monthly bill impact will be $1.77 1.84
for a residential customer who uses 20 therms. The proposed revised tariff
page as revised on September 27, 2019, is provided in the amended
petition of November 12, 2019, is Attachment B to this recommendation.
Accounting and Tax Considerations
The state corporate income tax
rate changed from 5.5 percent to 4.458 percent beginning on January 1, 2019
through January 1, 2022. The change in tax rate was announced by the
Department of Revenue’s Tax Information Publication on September 12, 2019. In
its amended petition, Peoples proposes 2019 and 2020 factors that reflect the
lower state corporate income tax rate change from 5.5 percent to 4.458 percent.
Therefore, the proposed 2020 factors that are addressed in this
recommendation do not reflect the lower tax rate. In a noticed informal meeting
on October 15, 2019, Commission staff, utility representatives, and interested
persons discussed the change in the tax rate. Based on the discussions and
comments made by the utilities, staff recommends that Peoples address the
impact of the lower tax rate in the 2019 true-up calculations provided in the
surcharge petition that will be filed in September 2020 for 2021 factors.
Calculation of Weighted Average Cost of
Capital
Peoples has determined that in
calculating its WACC, it has been removing plant from rate base for recovery
through the CI/BSR recovery clause without removing the associated accumulated
deferred income taxes (ADITs), which may lead to a normalization violation. In
its amended petition, Peoples requests to modify its weighted average cost of
capital (WACC) to avoid a potential normalization violation and remain
compliant with Internal Revenue Code (IRC) §167 and §168. Peoples specifically
requests approval to modify its WACC to reflect that plant removed from rate
base for recovery through the CI/BSR be removed from the capital structure
through a specific adjustment to remove ADITs associated with the CI/BSR. The
remaining plant balance is removed through a pro-rata adjustment applied to all
other sources of capital.
Commission Sstaff
reviewed Peoples’ WACC, as filed in its amended petition with its
proposed methodology and supporting documentation and believes that the
calculations are reasonable and appropriate. Staff determined Tthe
utility did not make a consistency and proration adjustment to the projected
ADIT balance as described in Internal Revenue Code §1.167(l)-1. In its response
to staff’s second data request, Peoples stated that per Internal Revenue
Service (IRS) normalization rules, prorating the ADITs is only required if a
utility does not meet or exceed the limitation provision. Peoples explained
that it did not make a consistency and proration adjustment to the WACC in the
2020 projection filing because the utility is currently meeting or exceeding
the limitation provision and is therefore not in violation of the IRS
normalization rules. If an adjustment to the WACC is necessary, staff
recommends any adjustment be made in a subsequent true-up filing.
Conclusion
Staff reviewed Peoples’ filings and supporting
documentation and believes that the calculations are consistent with the
methodology approved in the 2012 order and are reasonable and accurate. Staff
reviewed Peoples’ calculation of the 2019 true-up and 2020 projected cost calculations
and verified that the calculation
includes the 21 percent federal tax rate starting February 6, 2018. Staff also
verified that Peoples lowered the depreciation expense effective January 2019.
Therefore, staff recommends approval of Peoples’ proposed 2020 Rider CI/BSR
surcharges as revised on September 27, 2019 in the amended petition
of November 12, 2019, to be effective for the period January through
December 2020.
Issue 2:
Should this docket be closed?
Recommendation:
Yes. If Issue 1 is approved and a protest is filed
within 21 days of the issuance of the order, the tariff should remain in
effect, with any revenues held subject to refund, pending resolution of the
protest. If no timely protest is filed, this docket should be closed upon the
issuance of a consummating order. (Lherisson)
Staff Analysis:
If Issue 1 is approved and a protest is filed within
21 days of the issuance of the order, the tariff should remain in effect, with
any revenues held subject to refund, pending resolution of the protest. If no
timely protest is filed, this docket should be closed upon the issuance of a
consummating order.
