Discussion
of Issues
Issue 1:
Should the Commission approve the Companies’ request
for approval to establish regulatory assets for recording the deferral of certain
costs attributable to COVID-19?
Recommendation:
The Commission should approve the Companies’ request to
establish regulatory assets for the accounting purpose of recording the
deferral of costs associated with (1) incremental bad debt expense incurred due
to COVID-19, and (2) safety-related costs incurred due to COVID-19; however,
the Commission should expressly limit the inclusion of safety-related costs to
those expenses that are directly and solely attributable to the health and
safety of the Companies’ employees and customers during the COVID-19 pandemic.
Additionally, the Commission should deny the Companies’ request to establish
regulatory assets for recording the deferral of lost revenue. The approval to
establish the regulatory assets, for accounting purposes, does not limit the
Commission’s ability to review the amounts, recovery method, scope of financial
impact, recovery period, specific types or subsets of proposed costs within an approved
category of costs, and other related matters for reasonableness in a future
proceeding in which the regulatory assets are included.
The Companies should be required to track any assistance
or benefits received in connection with COVID-19, regardless of form or source,
that would offset any COVID-19-related expenses. This would include, but is not
limited to, any cost savings directly attributable to the suspension of
disconnections or other activities as a result of the pandemic. The regulatory
asset costs and offsets should be recorded and maintained in a detailed manner
that will allow incremental costs and any benefits and savings to be readily
identifiable in a future proceeding. In
addition, FPUC and CFG should be prepared to explain what actions and efforts
they have undertaken to reduce or minimize these costs and to maximize the
receipt of any available COVID-19 assistance or benefits. Finally, the
Companies should be required to file monthly reports identifying the amounts of
the costs incurred, any assistance or benefits received, and any cost savings
realized that have been recorded in the regulatory assets. The first set of COVID-19
regulatory asset reports should be filed on December 1, 2020, and every month
thereafter until the Companies present the regulatory assets for Commission
consideration. (Sewards)
Staff Analysis:
The Commission is charged with the duty of ensuring that utilities
provide safe, adequate, and reliable utility service at reasonable rates. By
law, such rates must allow utilities the opportunity to recover the prudently
incurred costs and a fair rate of return on capital invested by utilities for
the purpose of providing such service. In turn, utilities have a responsibility, and are expected, to
manage their business in a manner that addresses changes in costs and
variability in sales.
On August 11, 2020, the Companies filed a joint petition
for approval to establish regulatory assets for each entity included in the
joint petition to defer certain costs incurred due to COVID-19. Specifically, the
Companies have requested approval to record and defer the following categories
of costs in the regulatory assets: incremental bad debt expense, lost revenue, specifically
the type attributable to the suspension of charging late fees, and
safety-related costs, all of which are claimed to be attributable to the COVID-19
pandemic.
The Companies state they have seen an increase in customer
account arrearages as a result of the COVID-19 pandemic. As of June 2020, aged
accounts receivable of 61 days or more are approximately 243 percent, or $1.2
million higher than normal levels. The Companies anticipate that the
COVID-19-related bad debt expense will continue to increase as the levels of
write-offs for uncollectible accounts increase. In addition to the increase in
bad debt expense, the Companies expect to experience a loss of revenue
attributable to the suspension of customer disconnects and the charging of late
fees that would have coincided with those disconnections.
FPUC and CFG state they have incurred additional costs
associated with the actions to preserve the health and safety of its employees,
contractors, and customers. The Companies’ actions include, but are not limited
to, the following types or subsets of safety-related costs: COVID-19 testing for at-risk employees, the
purchase of personal protective equipment, the purchase of other materials and
supplies to protect employees’ and customers’ health and safety, the purchase
of additional cleaning and sanitation supplies, as well as incurring other
miscellaneous safety-related expenses. Additionally, the Companies state that as
they provide essential services, they have found it necessary to compensate
employees that are forced into harm’s way to perform their jobs. As such, FPUC
and CFG have incurred additional expense for hazard pay to compensate these
employees.
The concept of deferral accounting allows companies to
defer costs due to events beyond their control and seek recovery through rates
at a later time. If the subject costs are significant, the alternative would be
for a company to seek a rate proceeding each time it experiences an exogenous event.
The costs in the instant docket are attributed to the COVID-19 pandemic. Due to
the uncertainty of this situation, staff believes that it is not possible to
fully anticipate the scope or timeframe of the financial impact on FPUC and CFG
and their customers related to COVID-19. Because of the unique circumstances
resulting from the global pandemic, staff recommends that the Commission
approve the Companies’ request to establish regulatory assets for each entity
included in the joint petition for recording costs incurred due to COVID-19 and
defer Commission consideration of the potential recovery of the amounts
recorded in the regulatory assets to a future proceeding. For the same reasons,
it is too early to determine if the total amount and/or all types or subsets of
proposed costs within an approved category of costs will be permissible for
recovery Therefore, it is staff’s recommendation the Commission approve the
recording of incremental bad debt expense associated with COVID-19, and safety
related costs that are limited to those expenses that are directly and solely
attributable to the health and safety of the Companies’ employees and its
customers during the COVID-19 pandemic. By way of example, staff believes that safety-related
costs could consist of expenditures associated with testing and monitoring
employees, purchase of personal protective equipment, and incremental amounts
related to sanitization efforts and other safety protocols.
On the other hand, staff recommends that the category of
lost revenue is not an appropriate category to be included within a regulatory
asset. This is because an inherent risk for any company is the loss of revenue
due to reasons such as economic downturns, competition, conservation,
alternative suppliers, and other events. The return on equity includes a
component to compensate equity investors for business risks such as lost
revenue. It would be unreasonable for customers to potentially be charged extra
to make a company whole for lost revenue. As such, staff recommends that lost
revenue not be permissible for inclusion in the regulatory assets. The approval
to establish the regulatory assets, for accounting purposes, does not limit the
Commission’s ability to review the amounts, recovery method, scope of financial
impact, recovery period, specific types or subsets of proposed costs within an
approved category of costs, and other related matters for reasonableness in a
future proceeding in which the regulatory assets are included.
In addition, staff recommends that FPUC and CFG be
required to track any assistance or benefits received by the Companies in
connection with COVID-19, regardless of form or source, that would offset any
COVID-19-related expenses. This would include, but is not limited to, any cost
savings directly attributable to the suspension of disconnections or other
activities as a result of the pandemic. The regulatory asset costs and offsets
should be recorded and maintained in a detailed manner that will allow incremental
costs and any benefits and savings to be readily identifiable in a future
proceeding. In addition, the Companies should be prepared to explain what
actions and efforts they have undertaken to reduce or minimize these costs and
to maximize the receipt of any available COVID-19 assistance or benefits.
Finally, the Companies should be required to file monthly reports identifying
the amounts of the costs incurred, any assistance or benefits received, and any
cost savings realized that have been recorded in the regulatory assets. The
first set of COVID-19 regulatory asset reports should be filed on December 1,
2020, and every month thereafter until the Companies present the regulatory assets
for Commission consideration.
Issue 2:
Should this docket be closed?
Recommendation:
If no protest is filed by a substantially affected
person within 21 days of the issuance of the order, a consummating order should
be issued. If the Commission approves the staff recommendation in Issue 1, the
docket should remain open for the filing of the required monthly reports. (Stiller)
Staff Analysis:
If no protest is filed by a substantially affected
person within 21 days of the issuance of the order, a consummating order should
be issued. If the Commission approves the staff recommendation in Issue 1, the
docket should remain open for the filing of the required monthly reports.
