BEFORE THE GEORGIA PUBLIC SERVICE COMMISSION
POST HEARING BRIEF
OF GEORGIA POWER COMPANY
Kevin C. Greene
Brandon F. Marzo
Steven J. Hewitson
Jack E. Jirak
Attorneys for
Georgia Power Company
TROUTMAN SANDERS LLP
600 Peachtree Street, NE
Suite 5200
Atlanta, Georgia 30308-2216
(404) 885-3000
Dated:December 4, 2013
Post Hearing Brief of Georgia Power Company
GPSC Docket No. 36989
Page 1 of 18
BEFORE THE GEORGIA PUBLIC SERVICE COMMISSION
POST HEARING BRIEFOF GEORGIA POWER COMPANY
Georgia Power Company (“Georgia Power” or the “Company”) submits this brief in support of the Settlement Agreement, which was executed on November 18, 2013 by Georgia Power and the Georgia Public Service Commission (“Commission”) Public Interest Advocacy (“PIA”) Staff and subsequently signed by13 of the 15 intervenors in this proceeding:the Commercial Group;the Georgia Association of Manufacturers (“GAM”); the Georgia Industrial Group (“GIG”); Georgia Municipal Association (“GMA”);the Georgia Solar Energy Industries Association, Inc. (“GSEIA”); Georgia Watch; the Kroger Company; Metropolitan Atlanta Rapid Transit Authority (“MARTA”); Resource Supply Management; the Southern Alliance for Clean Energy (“SACE”); and the U.S. Department of Defense (on behalf of all Other Federal Executive Agencies) (“DOD”) (collectively, along with Georgia Power and PIA Staff, the “Stipulating Parties”).
I.SUMMARY OF THE ARGUMENT
The Commission should approve the Settlement Agreement, without modification, as a fair and reasonable resolution to this proceedingthat appropriately balances the interests of all parties to this proceeding. The Settlement Agreement will result in numerous benefits to both customers and the Company and will ensure that the Company can continue to meet its customers’ needs in a safe, reliable and cost-effective manner. No party received everything it asked for and all of the Stipulating Parties made reasoned and calculated compromises in order to achieve a settlement. While a particular Stipulating Party may disagree with a specific portion of the Settlement Agreement, all of the Stipulating Parties have nevertheless agreed that, when viewed as a whole, the Settlement Agreement achieves a fair resolution to this proceeding. The reasonableness of the Settlement Agreement is demonstrated by the breadth of support for the Settlement Agreement among a broad range of customer groups. In fact, the signatories to the Settlement Agreement sponsored 23 of the 24 witnesses providing testimony in this proceeding.
Approval of the Settlement Agreement would mark a continuation of the Commission’s constructive regulation, which created and continues to foster an environment that allows the Company to meet its customers’ needs, provide superior customer service and maintain rates below the national average. The Settlement Agreement provides for a three-year Alternate Rate Plan (“ARP”), which would mark the seventh consecutive rate case resolved by way of a stipulated three-year accounting period. Such three-year rate orders have provided stability and certainty for the Company and its customers and are a reflection of the collaboration and reasoned compromise that are the hallmark of the regulatory environment in Georgia.
The Settlement Agreement significantly reduces the Company’s initial requested increase but does so within a framework that will allow the Company to continue to provide reliable and cost-effective service,as well as meet the expectations of investors that supply the Company with much-needed capital. The authorized return on investment (“ROI”), including the authorized return on equity (“ROE”),represents a fair compromise between the positions of the parties, and, in conjunction with the entirety of theARP, will ensure that the Company can continue to access the capital markets at reasonable rates and on reasonable terms. Continued access to the capital markets is of particular importance as the Companycontinues one of the largestcapital construction programs in its history. The ARP provides forcontinuation of the earnings band, with two-thirds of any earnings above the top end of the band being directly returned to customers, and continuation of the Interim Cost Recovery (“ICR”) tariff mechanism in the event that earnings are projected to fall below the bottom end of the band. Finally, the Settlement Agreement also moves rates closer to parity, a policy that has long been supported by this Commission as well as many of the intervenors to this proceeding.
The compromises reflected in the Settlement Agreement allowed a broad and diverse set of parties to reach a fair resolution in this proceeding, a resolution that will ensure that the Company is able to continue to provide reliable and cost-effective service to its customers now and into the future. Therefore, the Commission should approve the Settlement Agreement in its entirety, without any modifications either to its express terms or by nature of additional conditions or exceptions.
II.PROCEDURAL BACKGROUND
This 2013 Rate Case was filed pursuant to the terms and conditions of the Commission’s final order in Georgia Power’s 2010 Rate Case, which required the Company to file a general rate case by July 1, 2013. The Company’s June 28, 2013filing included the minimum filing requirements specifiedby Commission Rule 515-2-1-.04, along with the direct testimony and exhibits of Ron Hinson, the panel of Laura I. Patterson and Elliott L. Spencer,James H. Vander Weide,Ph.D., Steven M. Fetter,Michael T. O’Sheasy,and Gregory N. Roberts. Hearings regarding the Company’s direct case were held on October 1-3, 2013. On October 18, 2013, PIA Staff filed the direct testimony and exhibits of Sheree W. Kernizan, Charles W. King, Michael J. McGarry, Sr.,Tom J. Newsome, David C. Parcell, and the panel testimony of Glenn A. Watkins and Jamie C. Barber. Numerous intervenors also filed direct testimony. On October 22, 2013, PIA Staff filed the direct testimony and exhibits of Ralph C. Smith. Hearings regarding the direct testimony of PIA Staff and intervenors were held on November 5-7, 2013.
On November 15, 2013, the Company filedrebuttal testimony in response to the positions of PIA Staff and various intervenors. However, late that afternoon, the Company and PIA Staffreached an agreementresolving the issues in contention between the two parties. On November 18, 2013, the Company and PIA Staff formally executed the Settlement Agreement, and the Company withdrew its previously filed rebuttal testimony andfiled the rebuttal testimony of the panel of Laura I. Patterson, Elliott L. Spencer, Gregory N. Roberts, and Steven M. Fetter in support of the Settlement Agreement. Subsequently, the Settlement Agreement was executed by all but two of the intervenors. A hearing regarding the Company’s rebuttal testimony and the Settlement Agreement was held on November 25, 2013.
III.ARGUMENT
A.The Settlement AgreementPresents a Fair And ReasonableResolution to This Proceeding.
The Settlement Agreement achieves a fair compromise that will benefit customers and the Company alike and marks a continuation of the long-standing history of collaboration and compromise between the Company and the PIA Staff. (Tr. 2263.) Under the Settlement Agreement, customers will benefit from stable and predictable rates and from the continued financial health of the Company, which will enable the Company raise the capital needed to continue to provide cost-effective, safe, reliable service. (Tr. 2263.) Furthermore, settlement of contested proceedings is generally viewed favorably by the investment community because such settlements are generally reflective of a supportive regulatory environment. (Tr. 2266.) Therefore, the Settlement Agreement should be adopted by this Commission in its entirety.
B.The ARP Provides a Reasonable Structure for Recovery of the Company’s Costs Over the Three-Year Period.
The ARP established by the Settlement Agreement reflects a reasonable compromise that will allow the Company to recover its costs in a timely fashion. The initial rate increase authorized by the Settlement Agreement is $110 millionfor 2014, followed by step increases in 2015 and 2016. The $110 million increase in 2014 is comprised of $79.6 million through the traditional base tariffs, $25 million through the Environmental Compliance Cost Recovery (“ECCR”) tariff, $1.5 million through the Demand Side Management (“DSM”) tariffs, and $3.9 million through the Municipal Franchise Fees (“MFF”) tariff. (Tr. 2260.)
Prior three-year rate orders have used both incremental step increases and levelized rate increases. In this case, however, the Stipulating Parties agreed to utilize incremental step increases only. Such step increases, which are described in more detail below, are needed in 2015 and 2016 to account for new power purchase agreements, wholesale to retail capacity and additional incremental ECCR, DSM (the DSM tariff will be in increased in 2015 and decreased in 2016), and MFF costs. (Settlement Agreement, Para. 6).
While providing for timely recovery of costs for the Company, the ARP also provides rate certainty for customers because the Company relinquishes its right to file a full rate case during the course of the three year period (except in the event that the Company forecasts its earnings to be below the bottom end of the ROE band). (Settlement Agreement, Para. 2.) In addition,the ARP provides for continuation of the ICR tariff mechanism first adopted in the 2010 Rate Case, whichcan be utilized to grant rate relief to the Company in the event of any significant unforeseen circumstances. (Settlement Agreement, Para. 11.) The ARP also benefits customers by continuing the earnings sharing mechanism utilized in the Company’s prior rate plans. If the Company’s actual earnings exceed the top end of the authorized earnings band, as determined in the Company’s Annual Surveillance Report, the Company will directly refund to customers two-thirds of any earnings above the authorized band. (Settlement Agreement, Para. 2.) Accordingly, customers will retain a substantial majority of the benefit from any such earnings, while the Company will remain incented to pursuing efficient operations. (Tr. 2265.) Because the Company surrenders its right to file a rate case during the three-year period (thereby taking on the risk that costs and revenues will differ materially from the forecast levels over the three-year period) and agrees to share revenues above the top end of the band, the three-year rate orders must be agreed to by the Company and are therefore always a product of settlement. (Tr. 2266.)
C.The Settlement Agreement Sets Just and Reasonable Rates.
The Settlement Agreement sets just and reasonable rates for Georgia Power’s customers. The Company’s rates are expected to remain competitive throughout the term of the ARP while providing sufficient revenue to the Company to allow it to continue to provide safe and reliable service to its customers. (Tr. 2265.) Even with the rate increase, the base rates charged to customers are still projected to be below the national average and will be lower than they were in 1991 on an inflation-adjusted basis. (Tr. 60.)
1. The Allowed ROI and ROEEstablished in the Settlement Agreement Are Just and Reasonable and Will Continue to Support the Company’s Ability to Access the Credit Markets at Reasonable Rates to the Benefit of Customers.
The Settlement Agreement sets the Company’s ROI at 7.71% with a 50.84% equity level and an ROE of 10.95%. (Settlement Agreement, Para. 2.) The Company’s overall ROI (which is a product of the Company’s cost of debt, capital structure and authorized ROE)is used to determine the revenue requirement and reflects the total cost of the Company to finance its capital investments. (Rebuttal Testimony at 10-11.) Therefore, it is appropriate to consider the Company’s overall ROI when reviewing the ROE requested in this case. (Id.) And as shown in GPC Exhibit 34, the ROI authorized under the Settlement Agreement is below the median of peer utilities.
The ROI and ROE as agreed to in the Settlement Agreement is a reasonable compromise for several reasons. First, the Company agreed to a 55 basis point reduction in the authorized ROE from its initial request, which also represents a 20 basis point reduction from the ROE authorized in the Company’s last base rate case. (Tr. 2265.) Second, the authorized ROE is a fair compromise between the recommendations made by the only two witnesses in this case whoperformed anydetailed econometric analysis of the market’s required return—PIA Staff witness Mr. Parcell and Georgia Power witness Dr. Vander Weide. (Tr. 2268.) Moreover, it is important to note that the ROE earnings band encompasses the recommended ROE of both the Company and Staff’s ROE expert witnesses. (Id.) Third, while the reduction is significant, the Company nevertheless believes that the authorized ROE will, within the context of the entire ARP, enable the Company to continue to access the capital markets at reasonable rates and on reasonable terms. (Id.) Fourth, the amount of change from the ROE authorized in the 2010 Rate Case is not so significant as to signal a dramaticdeparture from the Commission’s consistent regulation, which is an important factor considered by the investment community. (Tr. 2268.) Finally, as discussed above, the authorized ROI of 7.71%, which incorporates the authorized ROE,is well below the median of other authorized ROIs among the Company’s peer utilities in the last year-and-a-half. (Id.)
2.The Settlement Agreement Significantly Reduces the Company’s Requested Revenue Requirement and Presentsa Fair and Reasonable Compromise of the Requests of Several Customer Groups.
The Settlement Agreement reduces the Company’s overall requested increasefrom $482.279 million to $110.000 million. (Tr. 2273.) This reduction is the product of a number of recommendations made by PIA Staff witnesses and other parties that were incorporated into the Settlement Agreement.
By agreeing to the use of step increases, the 2014 rate increase was reduced by $149.019 million. (Tr. 2273.) The Company also acknowledged filing corrections that reduced the revenue requirement by $4.935 million. (Id.) The reduction in the requested authorized ROE results in a $71.956 million reduction in the Company’s revenue requirement. (Id.)
The Company reduced its requested depreciation expense by $87.429 million. (Settlement Agreement, Para. 5c.) While the Company believes its estimate of the depreciation expense was appropriate and supported by the evidence, the parties agree that depreciation cannot be calculated with precision and requires application of expert judgment. (Tr. 1137-38.) Mr. James Garren, testifying on behalf of PIA Staff in place of Mr. King,admitted “that with any statistical analysis, you can have a substantial disagreement.” (Tr. 1138.) Therefore, in the spirit of compromise, the Company has accepted the $87.429 million reduction specified in the Settlement Agreement.
The Company also agreed to accept Mr. Smith’s recommendation to remove stock-based compensation expense, thereby reducing the revenue requirements by $16.509 million. (Settlement Agreement, Para. 5d.) Though the Company continues to believe that such expense is a reasonable cost of service necessary to attract and retain highly-skilled employees, the Company has agreed for purposes of the Settlement Agreement to remove the stock-based compensation from the revenue requirement during the ARP period.
In addition, in an effort to mitigate the effects of the rate increase on customers (Tr. 2283), the Company agreed to extend the period over which the Company will be allowed to recover certain environmental construction costs from three to nine years, for a reduction of $13.884 million in the revenue requirement. (Settlement Agreement, Para. 5e; Tr. 2273.) The Company also agreed to extend the time period over which it recovers previously incurred storm damage costs from 3 to 6 years, reducing the revenue requirement by $6.891 million. (Settlement Agreement, Para. 5f; Tr. 2274.) These amortization periods are generally set at the discretion of the Commission and such extensions will alleviate the impacts of the rate increase on the Company’s customers. (Tr. 2283.)
The Company also agreed to reduce DSM costs to reflect the costs approved by the Commission in Docket No. 36499, resulting in a $3.529 million reduction in the revenue requirement. (Settlement Agreement, Para. 5g; Tr. 1764.) The Company accepted a decrease of $14.175 million for purposes of compromise and settlement related to various other issues raised by PIA Staff, but without any specific allocation to any particular item and without any concession by either party regarding the merits of their respective positions. (Settlement Agreement, Para. 5h.) Finally, collections under the MFF tariff decreased by $3.952 million as a result of the agreed upon changes.
3. The Step Increases Provided for in the Settlement Agreement are a Fair Compromise and Will Provide Customers Rate Stability and Predictability While Affording the Company a Fair Opportunity to Recover Its Costs.
In 2015 and 2016, the Company will incur costs related to matters the Commission has already reviewed and approved, including environmental compliance activity approved in the Company’s 2013 Integrated Resource Plan (“IRP”), Docket No. 36498, new capacity additions certified in the 2011 IRP Update, Docket No. 32418 and in Docket Nos. 27488 and 26550, and DSM program costspreviously approved in the Company’s DSM Proceeding in Docket No. 36499. (Tr. 2264.) As a result, additional increases will be needed in 2015 and 2016.
In its initial filing, the Company requested a one-time increase that included a levelization component to account for the cost increases that would occur in 2015 and 2016. (Tr. 356.) PIA Staff and certain intervenors objected to the levelization adjustment. (Tr. 898.) As a result, the Settlement Agreement provides for step increases in 2015 and 2016. Under the terms of the ARP, on January 1, 2015 and January 1, 2016, the traditional base tariffs will increase by an estimated $101.431 million and $36.310 million, respectively, to reflect the costs associated with additional capacity resources, and the ECCR tariff will increase by an estimated $75.698 million and $131.023 million, respectively, to reflect additional environmental costs. (Settlement Agreement, Para. 6; Tr. 2260-61.) On January 1, 2015 the DSM tariff will be increased by $5.684 million to reflect the additional approved DSM costs and, on January 1, 2016, the DSM tariff will be decreased by $1.182 million to reflect the reduction in approved DSM costs as agreed to in Docket 36499. (Id.) Finally, increases in the MFF tariff will be needed as a result of the other incremental increases. (Id.)