COMMITTEE ON LEGISLATIVE RESEARCH

OVERSIGHT DIVISION

FISCAL NOTE

L.R. No.: 0941-014

Bill No.: Truly Agreed To and Finally Passed SS for SCS for HB 208

Subject: Public Service Commission; Utilities

Type: Original

Date: May 21, 2003

FISCAL SUMMARY

*Assumes costs to the Fund of $448,037, $509,890, and $523,152 and offsetting increases in assessments against regulated utilities in the next three fiscal years.

Numbers within parentheses: ( ) indicate costs or losses.

This fiscal note contains 12 pages.

ASSUMPTION

Officials from the Department of Economic Development, Office of Public Counsel (OPC) state Section 393.1009 through 393.1015 of this proposed legislation would significantly increase the work load associated with the review of natural gas company investments and expenses for the five major natural gas utilities (three having multiple operating divisions with separate tariffs). This bill would provide for, on a stand-alone basis, semi-annual reviews and investigations of various investments in plant in service and related expenses along with investments and investment related expenses in security measures and direct expenses for security measures. These investigations are normally performed during rate cases whose frequency ranges from once a year to up to once every seven to ten years depending on the utility involved. OPC does not currently have sufficient resources to take on these additional tasks.

Sections 393.1000 through 393.1007 would allow a water corporation to request large increases in water rates from the Public Service Commission (PSC) within a short time frame. The Office of the Public Counsel would have a duty to conduct a detailed analysis in any case based upon such requests. The bill provides for charges related to infrastructure main replacements for water corporations outside the normal rate case procedures, through the addition of a surcharge to customers' bills.

ASSUMPTION (continued)

This substitute does not provide for any review of the reasonableness and prudence of costs associated with water mains for which an Infrastructure System Replacement Surcharge (ISRS) is allowed until the company files a general rate increase case, or if the ISRS surcharge exceeds 10% of base revenue. At such time, OPC would anticipate the need to review the prudence of the costs incurred relating to the water main replacements and the associated planning process would occur in the general rate proceeding.

In the past, OPC has filed extensive engineering testimony relating to water main replacement programs and participated in extensive negotiations and planning of how the company should address the problem. The issue of developing a systematic plan to address the decision process of when to replace water mains was first raised by OPC in the mid 1990s. OPC no longer has an engineer on staff; therefore, it would be required to either hire an engineer or retain a consultant in this field of expertise in order to provide analysis in any water rate case in which a company has implemented an ISRS surcharge. Based on past practices and current planned replacement rates, OPC would anticipate that a case containing this issue would arise at least once every other year.

In addition, imposing an ISRS would likely require OPC to investigate and audit water and gas corporations that would impose such surcharges to ensure that corresponding decreases in other costs are recognized in rates. This will shift the burden to consumers to prove in earnings complaint cases that rates need to be reduced to reasonable levels. There is a potential for complex issues to develop in these cases involving the interplay of the single-issue ISRS increases and general water rate issues. OPC anticipates being able to address these issues with current accounting expertise; however, the nature and frequency of these issues could strain current resources and require further fiscal impacts in the future.

This bill dramatically increases the workload for OPC. This bill would result in increased bills for all customer classes that receive service from Missouri natural gas utilities and Missouri's largest water district. This bill requires customers to pay higher rates without consideration of offsetting factors which are directly created by the investments this bill would allow natural gas and water utilities to raise rates and thereby customers bills. This legislation would require OPC to participate in additional rate cases because the bill mandates those cases to bring rates back into balance with the necessary overall revenues. This bill also creates the potential for unforeseen complex issues to develop in these cases due to the interplay of the single-issue nature of the ISRS increases, or infrastructure rate increases and general rate cases (and complaint cases to reduce rates).

ASSUMPTION (continued)

This bill also mandates a rate design for ISRS charges that places a disproportionate share on low use customers relative to the demand they place on the system. Thus more frequent general rate cases would be necessary to eliminate the excess rates paid by small customers. These cases would most likely need to be initiated by OPC and require additional expert testimony to provide the requisite burden of proof.

This legislation would also create the need for additional rate investigations to determine if rate increases associated with Section 393.1018 should be offset with rate decreases related to other financial or operational factors.

The Office of the Public Counsel would require one additional FTE (Public Utility Engineer) as a result of the annual duties created by this legislation. OPC anticipates the need to perform approximately four additional general rate investigations per year along with resulting complaint cases (two natural gas and one water). OPC would therefore also require approximately $30,000 in consulting expenses to perform these audits and investigations of the overall cost of service, this being the most economical method of addressing this need.

As to accommodating 1 new employee within the Office of Public Counsel, current workspace would be adequate. A cubicle already exists for a position. Minimal equipment would need to be purchased.

An engineer would be required to analyze the various planning and implementation procedures associated with the construction of plant in service. This position could also be utilized to coordinate and supplement testimony on the prudence of security measurers and relating to the relocation issues mentioned in Section 393.1010. In addition, the bill provides for expedited PSC review of any matter associated with questions of prudence of the plant in service. Additional outside consultants would not likely be able to respond in time to infrastructure issues, given the time periods provided for in the bill, the learning curve associated with each utilities specific circumstances, and the time period related to procuring the services of outside consultants.

Officials from the Department of Economic Development, Public Service Commission (PSC) state the following:

Summary of Staffing Assumptions for FN 0941-14N (w/Amendments):

In looking at the needed staff to perform the tasks required by this bill it is important to consider the existing regulatory environment. Surcharges that cover certain portions of utility expenses

ASSUMPTION (continued)

and ignore others create incentives to shift costs to areas where they can be assessed through surcharges to increase revenues. The definitions of costs in the current legislation are broad enough that staff is relatively certain that efforts to shift costs to surcharges will take place. In fact, staff regularly deals with efforts by parties to broaden the definition of what costs can be passed through the Purchased Gas Adjustment surcharge. Each of these surcharges will require significant effort to evaluate, monitor and review if they are to work as the bill intends.

The analysis of SA 1 has been broken out below. In addition to the FTEs identified below it is expected that 1 Regulatory Law Judge will be required. This brings the total number of FTEs requested for this effort to seven (7).

Water Utility Infrastructure System Replacement Surcharge (ISRS)

Fiscal Note Impact: Additional Workload

New semi-annual (2 times per year) filings from qualifying water utilities (1 utility with 1 operating district -- American Water) that will include assessments of ISRS costs by staff within 60 days and which must have a determination made by the PSC within 120 days.

New annual reviews of ISRS true-up reconciliations with staff recommendations and PSC determinations on refund or collection balances. (As the bill is currently written, it appears these reviews will also be subject to the 60-day and 120-day time limits.)

New regular (during rate cases -approximately every 3 years) prudence audits on ISRS expenses and charges.

Increase in level of consumer inquires and complaints. Changes to customer bills and surcharges often result in an increased number of complaints and inquiries.

PSC does not expect any significant reductions in rate cases since the bill includes provisions requiring a 3-year rate case cycle for the utility that qualifies for participation in this surcharge provision, and because that utility is currently filing rate cases every two or three years.

Additional Number of Filings Estimate:

Infrastructure Surcharge (Missouri-American Water Company)

First year = 4 filings (original petition, 2 adjustments and reconciliation for the former St. Louis

ASSUMPTION (continued)

County Water Company service area)

Ongoing = 3 filings annually (2 adjustments and reconciliation for the former St. Louis County Water Company service area)

Requested FTEs:

Currently asking for 3 FTEs, based on the additional number of filings and issues to be addressed in an expedited time frame, and due to the type and amount of work that will need to be done between the additional filings. Additionally, synergies with existing staff were taken into consideration, which resulted in requests not being included in the analysis for this portion of the bill for a Consumer Service Specialist and an attorney for the General Counsel's Office.

1 Rate & Tariff Examiner II for regular and semi-annual needs assessments, cost eligibility, true-up audit assistance, review of necessary tariff revisions (which will occur with every filing) and presentation of testimony related to ISRS filings in hearings before the PSC.

1 Utility Engineering Specialist II for regular and semi-annual needs assessments, cost eligibility, true-up audit assistance, review/inspection of facility installations being recovered through an ISRS and presentation of testimony related to ISRS filings in hearings before the PCS.

1 Auditor IV for work related to the regular and semi-annual construction cost audits, true-up audits and prudence assessments.

Natural Gas Utility Infrastructure System Replacement Surcharge (ISRS)

Fiscal Note Impact: Additional Workload

New semi-annual (2 times per year) filings from gas utilities that will include assessments of ISRS costs by staff within 60 days and must have a determination made by the PSC within 120 days.

New annual reviews of true-up reconciliations with staff recommendations and PSC determinations on refund or collection balances.

New regular (during rate cases - maybe every 3 years) prudence audits on ISRS expenses and charges.

ASSUMPTION (continued)

Increase in level of consumer inquires and complaints.

Unlikely reduction in natural gas rate cases since most LDCs don't come in more often than every 3 years.

Additional Number of Filings Estimate:

Natural Gas ISRS Cases (and project relocations)

PSC assumes that the three largest gas utilities will file every 6 months and at least one of the smaller gas utilities will file once per year. This adds up to 7 filings per year. All of the filings above will be accompanied with annual true-up audits. This adds up to 4 filings per year. Total Number of Filings Used for FN Estimate = 11 per year (3x2 + 1 + 4)

Requested FTEs:

PSC is currently asking for 3 FTEs. This is based on additional number of filings and issues to be addressed in an expedited time frame.

1 Rate & Tariff Examiners - For regular and semi-annual need assessments (with help of other staff), cost eligibility, and true-up audit assistance.

1 Auditor - For regular and semi-annual construction cost audits, true-up audits, and prudence assessments with significant assistance from other staff (as available).

1 Senior General Counsel - Responsible for coordinating cases before the PSC with involved staff and representing staff in hearings before the PSC.

PSC did not ask for the following additional FTEs based on existing staff synergy:

1 Regulatory Engineers II - Assumed that existing Staff engineers in Gas Safety and Engineering will be at least partially available to assist in eligibility of ISRS cost, construction cost audits, and prudence reviews.

1 Regulatory Auditors III - Assumed existing auditors would be at least partially available to assist the auditor listed above.

ASSUMPTION (continued)

1 Consumer Service Specialist I/II - Assumed existing consumer service specialists would be at

least partially available to handle additional number of calls on natural gas and electric surcharges.

In response to HB 635, officials from the Office of the Attorney General assumed that any potential costs arising from this proposal can be absorbed with existing resources.

FISCAL IMPACT - Small Business

Water, gas and electric districts that are small businesses could be expected to have a fiscal impact as a result of this proposal. Also, small businesses served by the electric, gas and water corporations that qualify for the use of the provisions of this bill could see their rates for service increase and vary periodically.

DESCRIPTION

Sections 91.026 and 91.030 (Aluminum Smelting)

This proposal allows certain aluminum smelting facilities to purchase electrical power on the open market without regulation by the Public Service Commission. To be eligible, the facility

must be in a county of the second classification, must have used more than three million megawatt hours of electricity in a calendar year, and must have been served by a municipally owned utility and an electric generating cooperative owned by rural electric cooperatives. The initial unregulated contract must not have a negative financial impact on previous power suppliers or their customers, reduce service reliability to other customers, or reduce local or state tax revenue.

The smelting facility cannot resell such electric power to anyone except the original provider. Local or past suppliers of electrical power will no longer have any obligation to provide service to the facility.

The substitute also allows municipalities to purchase electricity and ancillary services from any supplier without regulation beyond the approval of the governing board of the municipality.

Sections 386.135, 386.210 and 393.110

The proposal gives the PSC Commissioners authority to have a technical advisory staff. This staff would consist of a pool of up to six full time employees and each commissioner could hire up to one personal advisor. Before these employees could be hired the PSC would have to correspondingly eliminate comparable positions within the PSC staff to accommodate the hiring

DESCRIPTION (continued)

of the technical advisory staff such that there would be no net gain of employees to the PSC as a whole and at a cost neutral level. Technical advisory staff must be hired by July 1, 2004.

The technical advisory staff would render advice and assistance to the commissioners and provide relevant updates to the PSC. Each of the technical advisory staff would be subject to the same ex parte communication and conflict of interest requirements as the commissioners. No person could be hired as part of the technical advisory staff within two years of employment with certain divisions of the PSC, corporations regulated by the PSC or the Office of Public Counsel. The technical advisory staff will never be a party to proceedings before the PSC.

The proposal also delineates standards for the PSC regarding ex parte communications. Commissioners may confer with members of the public, any public utility or similar commission and the proposal sets for the procedural guidelines for these communications.

This proposal prohibits the Public Service Commission from regulating consumer-owned electric corporations that are required to operate on a not-for-profit cooperative basis and, as of August 28, 2003, hold a certificate of public convenience and necessity to serve a majority of their consumer-owners in third classification counties.

Section 386.210 (HVAC services)

Under current law, electric, gas and heating utilities are prohibited from offering heating, ventilating and air conditioning (HVAC) services unless the company was providing these services for the five years prior to August 28, 1998. This proposal clarifies that the exemption only applies to areas being served on a daily basis on August 28, 1993.

The proposal also requires utilities to comply with the same state and local requirements as other HVAC contractors and authorizes the Attorney General to enforce pertinent statutes.

Section 392.200

This proposal authorizes telecommunications companies to offer discounted rates or other special promotions on its telecommunications services to any new or former customer.

Section 393.110

This proposal states that the PSC shall not have jurisdiction over the rates, financing, accounting, or management of any electrical corporation operating on a non-profit cooperative business plan,

DESCRIPTION (continued)

with its consumers who receive service as the stockholders of such corporation, and which holds a certificate of public convenience and necessity to serve a majority of its consumer-owners in counties of the third classification as of August 28, 2003.

Section 393.310 (Gas Corporations)

This proposal requires PSC to treat a gas corporation's pipeline capacity costs for associated eligible school entities in the same manner as for large industrial or commercial basic transportation customers.

Section 393.1000, 393.1009, 393.1012, and 393.1015 (Water & Gas ISRS)

This proposal allows gas and water corporations to file a petition with the Public Service Commission to recover costs associated with certain infrastructure system replacements once per year. This charge is referred to as an infrastructure replacement surcharge (ISRS). The ISRS must produce at least $1,000,000 in revenues but not in excess of 10% of the water or gas corporations' base revenue level. A company seeking approval of an ISRS must have had a general rate proceeding within the last three years to begin or continue collecting the ISRS.

Petition filing requirements for the ISRS are specified in the proposal as well as factors which may be considered by the PSC in its evaluation of the petition. The corporation is required to reconcile the revenues generated with the underlying costs of the infrastructure replacements. The PSC is given authority to promulgate rules for the implementation of these provisions

Section 1

Allows any steam heating company with fewer than one hundred customers in Missouri to file under the small company rate procedure with the PSC.

Section B

This legislation contains an emergency clause.

This legislation is not federally mandated, would not duplicate any other program and would not require additional capital improvements or rental space.

SOURCES OF INFORMATION

Department of Economic Development

Public Service Commission

Office of Public Counsel

Office of the Attorney General

Mickey Wilson, CPA

Director

May 21, 2003