At a session of the PUBLIC SERVICE COMMISSION OF WEST VIRGINIA in ... establish regular review of the VMP and its costs
PUBLIC SERVICE COMMISSION OF WEST VIRGINIA CHARLESTON At a session of the PUBLIC SERVICE COMMISSION OF WEST VIRGINIA in the City of Charleston on the 18thday of March 2014. CASE NO. 13-0557-E-P APPALACHIAN POWER COMPANY and WHEELING POWER COMPANY, both dba AMERICAN ELECTRIC POWER Petition for Commission review and approval of a comprehensive, end-to-end time cycle-based right-of-way vegetation control program. COMMISSION ORDER
The Commission approves a Vegetation Management Program (VMP) for Appalachian Power Company (APCo) and Wheeling Power Company (WPCo), both dba American Electric Power (collectively Companies or AEP), that is expected to increase electric service reliability and lessen the impact and recovery time for service interruptions related to major weather events in the future. The Commission will, in the upcoming base rate case for the Companies, implement a cost recovery mechanism to address the prudently incurred incremental Operation and Maintenance expenses for which rate recovery will be deferred between the date of issuance of this Order and the conclusion of the base rate case, and the ongoing VMP costs. The Commission will also establish regular review of the VMP and its costs to ensure that rate recovery will match expenditures through a periodic review proceeding.
INTRODUCTION The Commission has before it in this case a proposal by AEP to initiate a periodic and end-to-end VMP designed to provide for systematic and regular treatment and control of vegetation along distribution and transmission lines and to provide for rate recovery for the actual cost of that tree trimming program. Both AEP, in this proceeding and Monongahela Power Company (Mon Power) and The Potomac Edison Company (Potomac Edison) (collectively First Energy) in Commission Case No. 13- 1064-E-P, have offered those proposals for Commission consideration.
The Commission will examine the specifics and ratemaking implications of the AEP VMP more closely in this Order. As a predicate to that examination, however, some recent historical context for the need and purpose for the VMP would be helpful.’ A.
North American Blizzard of 2009
On December 16, 2009, a major storm formed in the Gulf of Mexico, produced record rainfall in Texas and continued into Georgia and Florida and further north. By the afternoon of December 19, 2009, it had (i) moved off the East coast, (ii) met with a cold air mass and (iii) retained its heavy precipitation. This storm moved northward along the East coast and turned into a monstrous winter storm measuring over 500 miles and spreading across 14 states, including West Virginia. That storm, often described as the “North American Blizzard of 2009” (2009 Winter Storm) created havoc in West Virginia for both AEP and First Energy, resulting during its worst with (i) more than 335,000 customers being without electric service for an extended period of time including for many customers the Christmas holidays, (ii) countless downed lines, (iii) a fifteen hour closure of the West Virginia Turnpike, and (iv) the stranding of thousands of motorists due to impassable roads. The Commission investigated that storm and its impact on the electric distribution systems of APCo and WPCo, Mon Power and Potomac Edison, Black Diamond Power Company, Elk Power Company, and Union Power Company, Commission Case No. 1000 19-E-GI. During the investigation, the Commission heard public comments from customers who lost food to spoilage, lost home heating for days during freezing temperatures and incurred various other inconveniences and costs related to the 2009 winter storm. Customers also incurred higher than usual heating costs to re-heat the homes once power was restored. That case ultimately resulted in the Commission, with the assistance of the electric utilities, the Staff, the CAD and interested intervenors, agreeing to the implementation of certain reporting metrics to be imposed on the electric utilities in the State. Those metrics are currently in place and require electric utilities to make annual filings relating to their compliance with those metrics. General Order No. 259, Commission Order July 28, 201 1; Rules for the Government of Electric Utilities, 150 C.S.R. 3 (Electric Rules). B.
June 20 12 North American Derecho
The 2009 Winter Storm was a storm of enormous proportion, and was not one that would likely be repeated often (or so the experts stated). In late June 2012, however, the Mid Atlantic and Midwest derecho (Derecho) tracked across 800 miles of the United States Midwest and the Mid Atlantic areas for a period of 18 hours. The Derecho caused
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The following descriptions of these storms have been drawn from prior Commission proceedings and various public sources, including descriptions of these events contained in Wikipedia. The Commission believes these descriptions are accurate.
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twenty-two deaths, widespread damage and power outages, including outages to sixtythree percent of customers in West Virginia. United States Department of Energy Report titled, “A Review of Power Outages and Restoration Following the June 2012 Derecho” dated August 2012 at page 3. The United States Department of Energy reported that of the States with the highest absolute number of outages (Maryland, Ohio, Virginia, and West Virginia), restoration in Maryland and Virginia proceeded at a faster rate, with more than 80 percent of customers who lost power in those States restored after four days, compared with restoration rates of roughly seventy-one percent for Ohio and fiftyone percent in West Virginia, respectively. Id,at 5. The Derecho also caused some residents to lose landline telephone service and, because of the loss of power and road blockages, access to water during extremely hot weather. Customers who suffered the extended outages lost thousands of dollars of food to spoilage and suffered other costs related to the need to travel and find alternative lodging. C.
Hurricane Sandy
While the Commission was still dealing with the aftermath of the Derecho, Hurricane Sandy (Superstorm Sandy) formed during the 20 12 Atlantic Hurricane season, became the largest Atlantic Hurricane on record, emerged from the Caribbean Sea, and curved north-northwest until it moved ashore just northeast of Atlantic City. Superstorm Sandy affected twenty-four states, including the entire eastern seaboard from Florida to Maine. Superstorm Sandy impacted portions of West Virginia and left two to three feet of snow and approximately 271,800 customers without power. There were seven fatalities in West Virginia related to Superstorm Sandy and its remnants in West Virginia. D.
The Impact of These Storms
These storms exhibited a common denominator in their impact on the electric utility customers and the electric utilities in West Virginia. These storms had a disproportionate impact on West Virginia utilities and their customers, particularly given the rural nature of the service territories, the extent and growth of its forests and vegetation, the age of electric infrastructure, and the severity and frequency of these storms (which cannot now be considered rare freaks of nature or isolated acts of God). During our examination and evaluation of the steps taken to deal with these storms and the service disruptions and aftermath of those storms, it became apparent to the Commission that nothing short of complete removal of all trees and vegetation on or near electric utility right of ways and complete “hardening” of the systems would eliminate the risk of damage and loss from these storms (and even that would not eliminate all risk). It is also clear that the costs and legal implications of that particular approach, as a practical matter, make it infeasible.
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Nothing can stop these mega-storms or prevent all related service interruptions. That does not mean, however, that the Commission and the utilities should not take steps to attempt to dampen or ameliorate the impact of these mega-storms. Although it is difficult to quantify or estimate with precision the positive impact of more extensive regular and periodic vegetation management programs or to conduct a precise cost benefit analysis of cycle-based programs, there is evidence that the programs do have a positive impact. Exh. PAW-D at 7-9; Wright testimony, September 24, 2013, Hearing Transcript at 60-61. Further, although the Commission cannot measure in advance the precise economic impact of those types of programs, we have heard evidence regarding the estimated rate impact and have the ability to examine the cost of the programs and weigh those costs against the staggering costs incurred by utilities, their customers and the State in responding to these mammoth storms. Given all of that, the Commission has concluded that something more must be done than has been done in the past to make the utility systems more resistant to damage from vegetation and tree damage during those storms. All West Virginia electric utilities should be required to have an aggressive, periodic, end-to-end vegetation management program. That will cost money, but doing nothing, in our opinion, costs even more, It would not be reasonable to expect the costs of a comprehensive, end-to-end, cycle-based right-of-way trimming program covering all distribution and transmission lines to be the same as historical costs incurred while the Companies used the less expansive and less expensive approach called performance based vegetation management.2 As a consequence, the Commission, in this Order, approves a VMP for immediate implementation by AEP and states that the Commission will in the upcoming base rate case, develop a VMP cost-recovery mechanism to adequately compensate the Companies for prudently incurred incremental VMP O&M expenses and to address both actual and reasonable O&M and capitalized VMP costs going forward. The annual reporting requirements of the Electric Rules with respect to reliability metrics will enable the Commission to monitor improvements in the general reliability of the ~ y s t e m . ~ PROCEDURAL BACKGROUND
On April 19, 2013, AEP filed a petition for review and approval of a comprehensive, end-to-end, cycle-based right-of-way VMP. With the petition, the Companies filed the direct testimony of Philip A. Wright and Charles W. Gary.
The adequacy of performance based vegetation management was called into question in recent proceedings. See Case No. 10-0019-E-GI and 12-0993-E-T-W-GI. 3 Electric Utilities are required by the Electric Rule 2.7.c. to report significant interruptions to the Commission when they occur, and to file a report regarding restoration of service after major events to the Commission within forty-five days after an event is over. The Annual Reliability Reports required by Electric Rule 2.7.d, however, presently exclude Major Event Days from the System Average Interruption Frequency Index (SAIFI) the System Average Interruption Duration Index (SAIDI) and the Customer Average Interruption Duration Index (CAIDI).
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The filing was made in response to the Commission Order issued on January 23, 2013 in Case No. 12-0993-E-T-W-G1, Investigation into Utility Response and Practices regarding the Recent Summer Storm. In that general. investigation proceeding, the Commission ordered each electric utility operating in West Virginia to file a petition to implement a reasonable vegetation trimming program assuring all rights-of-way will be maintained over a proposed period of time. In addition, the Commission required utilities to propose a method for rate recovery of the increased costs related to vegetation trimming and, if a surcharge mechanism was proposed, the utility was to provide estimates of the proposed annual increase in revenue. The instant petition stated that AEP proposes to implement a VMP that when fully implemented will be based on a four-year ongoing cycle. Vegetation on each distribution circuit under 200 kV would be addressed on a regularly scheduled basis. All distribution circuits under 200 kV would have vegetation managed at least once every four years, The petition stated that transmission circuits 200 kV and higher are already maintained under a cycle-based vegetation management program and are not subject to this petition. Petition at 2. The Companies proposed to move the current costs associated with vegetation control from base rates into the VMP surcharge (VMP Surcharge) upon filing of their next base rate case. For the first full year that the VMP is in effect, the Companies estimated that the incremental increased revenue requirement would be $26,744,803 and the incremental increased revenue requirement related to transmission lines would be $1,823.875. According to the Companies' estimates, a residential customer using 1,000 kWh per month would see an increase of $2.38 per month in his or her electric bill. at 3.
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On April 26, 2013, the Commission Consumer Advocate Division (CAD) petitioned to intervene. On May 23, 2013, the West Virginia Energy Users Group (WVEUG) petitioned to intervene. On May 24, 2013, Commission Staff filed an initial memorandum summarizing the Companies' filing and stating that Staff would file its substantive recommendation at a later date. By Orders issued July 9 and July 19, 2013, the Commission set the procedural schedule including the hearing date, ordered public notice and granted petitions to intervene filed by CAD and WVEUG. Approximately twenty letters of public protest were filed in this case. All parties filed direct testimony. APCo and WPCo also filed rebuttal testimony. On September 24, 2013, the Companies filed the required affidavits of public notice publication. 5
The Commission held a hearing as scheduled on September 24, 20 13. The parties all filed both initial and reply briefs.
EVIDENCE The Proposed Four-Year Cycle Based VMP program Companies’ witness Mr. Wright testified that the proposed VMP fulfills the mandate of the Commission in the storm General Investigation, Case No. 12-0993-E-TW-GI, Investigation into Utility Response and Practices regarding the Recent Summer Storm, Commission Order issued January 23, 2013. Wright, Exh. PAW-D at 2; PAW-R at 5. Mr. Wright testified that the VMP will occur on distribution circuits and transmission circuits of less than 200 kV. Wright, Exh. PAW-D at 3. The Companies plan to apply the standard vegetation management procedures discussed in Exh. PAW Exh. No. 2 titled “AEP Forestry-Goals, Procedures & Guidelines for Distribution and Transmission Line Clearance Operations.’’ a. The new VMP implementation will initially occur over a six-year transition period; thereafter, the program will continue on a four-year cycle. The VMP will focus on three major components: 1) reliability analysis and prioritization; 2) vegetation inventory; and 3) resources. The VMP will require that the Companies contract for additional vegetation management crews and hire oversight employees. Mr. Wright testified that the Companies plan to conduct a gradual ramp-up of resources over time to increase staff and train additional crews. Id.at 4-5. The Companies anticipate that the VMP will align with the reliability targets adopted by the Commission in Case No, 12-0014-E-PC. The VMP should result in moderated outages from vegetation located within the right-of-way and enable the Companies to restore service more quickly following extreme weather events than it could before implementation of the VMP. The Company acknowledged that the VMP will not prevent all outages from future major weather events, a.at 5-7; Hr. Tr. at 60-62. Mr. Wright stated that the Companies will attempt to address hazard trees located outside the right-of-way, but he expects that the Companies will continue to suffer outages from those trees because of landowners’ rights and intensifying weather patterns. Wright, Exh. PAW-D at 7, 9-10. At the hearing, in response to cross examination by the CAD, Mr. Wright stated that affiliated utilities of APCo have implemented cycle-based vegetation management programs in other jurisdictions with surcharge riders within the past five years and have experienced reliability improvement with fewer tree-related outages. For example, he 6
stated that the Public Service Company of Oklahoma, an APCo affiliate, has experienced a fifty percent improvement in reliability performance. Hr. Tr. at 43-44, 62. The Companies agreed, as part of an annual VMP review process, to provide a report of the circuit miles managed per year, the specific circuits or portions of circuits managed, and the actual costs with respect to those circuits. Wright, Exh. PAW-D at 23. The CAD position on the proposed four-year, cycle-based VMP was that it will not materially affect reliability relating to storm-related service interruptions. In its reply brief, CAD stated that the Commission desire to find a better way to prevent significant storm interruptions will not be alleviated by the VMP. CAD cited testimony by Mr. Wright that the Companies cannot prevent storm interruptions. Hr. Tr. at 38-40. CAD argued that customers cannot afford, and should not pay for, the expensive program proposed by the Companies if the program cannot directly improve service quality.
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Staff did not agree with the CAD criticism of the VMP and its impact on reliability. Staff witness Perdue testified that the Staff Engineering Division supported approval of the VMP because it will enhance the ability of the Companies to identify and repair faulty or failed equipment and will take a proactive approach. Exh.WMP-1 at 5; Hr. Tr. at 131, 132, 137. The Staff brief states that implementation of a four-year cycle VMP will improve customer service and reliability. Mr. Perdue was in favor of the program because the general reliability of the Companies’ electric distribution system has trended downward in recent years, and the VMP should help improve reliability. Hr. Tr. at 135, 136. In its reply brief, the Companies argued that the VMP will lessen future storm impacts with regard to the frequency and duration of outages and the resultant impact on customers by enhancing storm recovery efforts and by providing for the management of trees that pose particular risks to lines, citing Wright Direct, Exh. PAW-D at 6-7, 11. The Companies also argued that the Commission did not require the utilities to adopt a program that would prevent every outage, especially from the most severe storms. They believed, however, that the VMP will lessen the impact of storms on numbers and duration of outages. VMP Cost Projections Companies’ witness Wright testified that for the last three years, 201 1-2013, APCo has spent between $12.75 million and $14.45 million per year on vegetation control costs charged to maintenance expense on distribution lines and between $2.35 million and $6.15 million per year on distribution line capital costs related to vegetation control. On transmission circuits, APCo has spent between $0.61 million and $1.40 million per year on vegetation control costs charged to maintenance expense, and up to approximately $0.22 million per year in related capital expenditures. WPCo has spent 7
between $0.60 million and $1.18 million per year in vegetation control maintenance expense and between $0.19 million and $0.43 million per year in capital expenditures, WPCo spent between $0.09 million and $0.12 million per year on vegetation control maintenance expenses on transmission facilities. Exh. PAW-D at 11, 12. The Companies’ total year-one combined maintenance expense and capital investment is estimated to be $58,020,015. Exh. PAW-D at 16. Mr. Wright explained that the Companies determined the projected expenditures using historic, current and projected expenditures for vegetation control, taking into consideration contractor rates, volume of work, and cost increases for labor and equipment. The Companies applied a two percent annual inflation factor to the projections for years two through six. a. at 13, 14, 17, 2 1. The APCo average cost per circuit mile for proposed vegetation control work to be charged to maintenance expense is $11,000 for distribution and $12,000 for transmission. The WPCo average vegetation control expense per circuit mile is $8,400 for distribution and $14,400 for transmission. The APCo average projected capital investment per circuit mile for distribution under the proposed VMP is $4,950 and for transmission is $2,200. The WPCo average projected vegetation control capital cost per circuit mile for distribution is $2,436 and for transmission is $2,900. a. at 14. The Companies project that the grand total VMP combined expenses and capital expenditures for years one through six will be $366 million. Id.at 17, Mr. Wright testified that since the time that the Companies last presented an estimate of the costs to implement a four-year cycle based vegetation management program in November 201 1, the distribution-only costs had increased by $6.4 million. Exh. PAW-D at 18-21, After completion of the initial vegetation management cycle in year six, the Companies expect ongoing maintenance costs of the VMP to decrease and continue at a reduced level. a.at 22. CAD believes that based on historical costs per mile, the Companies overstated the costs of the VMP. Mr. Harris stated that although the Companies assert that the combined VMP maintenance expenses alone will be $1 1,000 per mile, annual historical expenses since 2010 have averaged only $8,288 per mile. EXh. BLH at 8, 9; Hr. Tr. at 105-107. CAD argues that the Companies have not provided any information on how they determine what maintenance expenses in account 593 constitute vegetation management. Similarly, CAD argues that the Companies do not identify the plant account(s), or what portion of certain plant accounts, comprise or include capitalized vegetation management costs. Only capitalized vegetation management costs charged to FERC account 107 (construction work in progress) was identified in Case No. 12-0993E-T-W-GI. Absent more detail regarding the accounts or sub-accounts to be used, Mr. Harris believes the Commission cannot know whether capital expenditures qualify as VMP costs.
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Staff asked that the Commission require the Companies to clearly segregate the WMP labor costs to avoid double recovery and that capital costs be either excluded from the surcharge or that the Companies books strictly segregate capitalized VMP costs from other plant additions. Staff Exh. ELO-1 at 5-6. In rebuttal testimony, Mr. Wright stated that Mr. Harris failed to recognize that historical costs cannot reflect the costs of the major new VMP. Exh. PAW-R at 5; Hr. Tr. at 69. The new VMP will address a greater number of circuit miles and focus on remote areas that are harder to access and have greater vegetation growth than is present at stations or other high priority zones. These locations will involve more debris, herbicide application, and labor. The VMP proposal covers a forward-looking ten-year period over which costs will inflate, and for which it would be unreasonable to assume that historic costs will remain flat. Exh. PAW-R at 5-7. Mr. Wright acknowledged that the costs are projections, but stated that they are based on extensive knowledge and experience and the Companies are confident in the projections. at 7. Mr. Wright testified that the Companies are willing to provide additional information to facilitate Commission review of the VMP activities. Exh. PAW-R at 8. The Companies criticized the CAD insistence that costs be based solely on historical vegetation management costs as unreasonable because the CAD method would not reflect the added costs of managing more remote circuits with higher needed levels of vegetation management. The Companies also argued that the surcharge mechanism will render disagreement of the accuracy of the Companies‘ cost estimates moot because of the annual review and true-up. The Proposed VMP Surcharge Mr. Wright testified that the Companies propose a VMP Surcharge instead of base rate treatment of VMP costs because waiting for adjudication of a base rate case is “a lengthy and expensive undertaking that would delay the implementation of the Companies’ proposed [VMP], leading to potential cost increases.” Exh. PAW-R at 9; Wright Cross, Hr. Tr. 50-51. Mr. Wright testified that if the companies are required to request base rate recovery of VMP costs, the Companies will not implement the VMP between now and the time recovery is allowed. Hr. Tr. at 52. Mr. Gary testified that the Companies propose that the VMP Surcharge be subject to an annual review and true-up of any over or under-recoveries, Exh. CWG-D at 3. In the next base rate case, the Companies propose moving embedded vegetation management costs into the VMP Surcharge. a.at 4. Mr. Gary explained his calculation of the VMP revenue requirement and rates. Id.at 4, 5; Exhs. CWG-D4, CWG-D5, and CWG-D6. I
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The WVEUG, CAD and Staff witnesses testified that the Companies should not be allowed a VMP Surcharge. They all stated that the proper way for the Companies to recover costs of the VMP is in a Rule 42 base rate case. WVEUG witness Baron testified 9
that it would be unreasonable to add another surcharge mechanism when the Companies already recover a significant portion of the overall revenue requirement through various surcharges. Exh. SJB at 6. Mr. Baron also stated that the addition of another surcharge would be particularly unnecessary given the expectation that the Companies will file a base rate case before the summer of 2014. Id.at 6 , 7 . CAD suggested that the Commission consider requiring the Companies to submit testimony in future Rule 42 proceedings on the metrics and the distribution and transmission maintenance activities. Additionally, CAD argued that the Commission should require VMP expenses to be incurred before they may be recovered, but then curiously stated that the Commission should establish a going-level amount of VMP expense in the next base rate case, The Companies could then request recovery of additional expenses on an annual basis for costs incurred the prior year above the (forecasted) going-level amount. Mr. Harris also stated that the surcharge should exclude transmission related VMP expenses and all VMP capital costs. Exh. BLH at 12-14 Staff witness Oxley testified that the VMP Surcharge would produce approximately $28,568,678 in additional annual revenues in year one, or an increase of 2.2 percent over current rates, Staff Exh. ELO-1 at 3. Mr. Oxley stated that Staff objected to the VMP Surcharge because it would isolate a single rate component instead of weighing that component with all of the Companies’ components of cost of service. Id. at 4. Staff also objected to the fact that the surcharge mechanism, as proposed, has no end date. Mr. Oxley testified that surcharges are more appropriate for distinct elements of cost of service, such as municipal tax, debt payment arrearages and scrubber debt. Abbreviated rate proceedings, such as the gas utility Rule 30C and the electric utility ENEC, are appropriate for tracking embedded rate components against actual costs because gas and coal costs can fluctuate significantly from year to year. Staff Exh. ELO1 at 4, 5 . Mr. Oxley stated VMP costs differ from fluctuating costs such as fuel costs because they are projected to increase initially and then level off, Furthermore, with a surcharge, ratepayers bear a greater risk of overpaying for payroll and labor costs associated with the VMP. Id.at 5. In response to the Companies’ testimony, WVEUG pointed out in its briefing that the Companies have given notice of a base rate case filing by mid-2014. The call for an immediate surcharge, therefore, is not necessary. WVEUG urged the Commission to approve the VMP and require immediate implementation, but reject the VMP Surcharge.
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WVEUG acknowledged that requiring recovery of VMP through a base rate case involves regulatory lag and risk to the Companies. WVEUG argues that regulatory lag protects ratepayers because the utility has an incentive to minimize risk associated with its investment, WVEUG proposed a mechanism for the Companies to implement the 10
VMP and defer recovery of all costs of the VMP to the date that new base rates take effect following the next base rate case proceeding and the Commission could also consider allowing the Companies to earnhecover interest on the deferred amounts. Exh. SJB-D at 7-9; Hr. Tr. at 128. In response to the position of WVEUG, CAD and Staff, Companies’ witness Gary testified that the Companies interpret the Commission Order in Case No. 12-0993-E-TW-GI to indicate that implementation of a surcharge mechanism may be appropriate. Commission Order issued January 23, 2013. CWG-R at 1. In the reply brief the Companies stated that WVEUG, CAD and Staff did not indicate a willingness to modi@ their usual approach to analyzing “known and measurable changes to an historical test year.” See Harris Cross, Hr. Tr. at 108-110; Oxley Cross, Hr. Tr. at 141-143. Companies asserted that using a base rate case to recover VMP costs would be problematic because there will be little or no actual VMP costs reflected in the 2013 test year; rates will still have to be established based on cost projections and there would not be an opportunity for true-up. The Companies believe that deferring the VMP costs to the rate case is therefore an unsuitable and inferior option to the surcharge mechanism. Companies Reply Brief at 7-9.
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In response to the suggested modifications to the surcharge mechanism, the Companies argued in their reply brief that most of the CAD suggestions seem to be proposed punishments. The suggestion that the surcharge exclude transmission-related costs is contrary to the Commission’s express order that the proposed programs include both distribution and transmission lines. Companies Exh. CWG-R at 2, Citing Case No. 12-0993-E-T-W-G1, Commission Order, January 23, 2013 at 3 and Conclusion of Law 2. The suggestion that the Commission revise service quality metrics is contrary to the Commission Order that the metrics be in effect from 2014-2018. Case No. 12-0014-EPC, Commission Order November 7, 2012 at Conclusion of Law 2; see also, Wright cross, Hr. Tr. at 45-46. It is also logical that the service quality metrics adopted in Case No. 12-00 14-E-PC were intended to stimulate utilities to achieve better vegetation management. If the Companies could achieve the higher standards using existing methods, there would have been no need for the adoption of new standards. The VMP is how the Companies intend to improve reliability and the VMP Surcharge is how the Companies suggest recovering VMP costs. The Companies asserted that ratcheting the approved reliability index targets still higher will only result in the Companies being unable to achieve them. In response to Mr. Harris and Mr. Oxley’s suggestion that the surcharge should exclude capital costs, Companies’ witness Gary testified that it would be illogical to exclude capital costs when the more aggressive VMP will obviously include both increased maintenance expenses and capital costs. The annual review would involve scrutiny of all the VMP costs, including capital costs. Exh. CWG-R at 3. In the Companies’ reply brief, the Companies argued that the Commission Order permitting 11
utilities to request rate recovery did not exclude capital elements of any utility program. The Companies believe it would be a mistake to discourage the use of effective capital measures to deal with vegetation management needs. WVEUG argued that the VMP Surcharge should not result in a rate allocation that would have a discriminatory impact on large customers. WVEUG witness Baron stated that the proposed energy allocation of distribution-related VMP costs to rate classes is unreasonable. Exh. SJB at 8, 9; Hr. Tr. at 123-126. Mr. Baron stated that no utility in the AEP system has ever had vegetation management costs considered as energy-related. Baron, Hr. Tr. at 125. In briefing, WVEUG stated that there is no correlation between the number of trees the Companies need to remove and the amount of energy a ratepayer consumes. Mr. Baron testified that the Companies should instead allocate the VMP costs to secondary and primary voltage customers by using a demand factor, the same way as the demand factors are used in ENEC proceedings. Id.at 9, 10. In response to the WVEUG concerns regarding whether it would be proper to allocate the VMP Surcharge based on energy usage, Mr. Wright testified that the Companies would not oppose a revised approach to allocate away from industrial customers and toward residential and small commercial customers. CWG-R at 4. Amount Currently Embedded in Base Rates for Vegetation Control Companies? witness Gary testified that $1 1,605,421 of vegetation management costs charged to maintenance expense is embedded in base rates. Of that amount, $10,378,951 is for distribution and $1,226,470 for transmission. Exh. CWG-D at 3. Mr. Harris and Mr. Oxley testified that the Companies inflated the VMP Surcharge by using too low a figure ($1 1,605,421) for vegetation management expenses that are already embedded in base rates. Mr. Harris testified that he calculated the correct amount at $14,056,708 and Mr. Oxley stated a similar figure based on the 2010 base rate case. Exh. BLH at 8, 10; Staff Exh. ELO-1 at 6. CAD witness Harris' asserts that the $14,056,708 represents the vegetation management operating expenses for 2009, the testyear in the last base rate case, Case No. 10-0679-E-42T, Commission Order March 30, 201 1 (2010 Rate Case). CAD Exhibit BLH-D, Exhibit BLH-3. No party disputed or contested that $14.056 million of vegetation control expenses were included in the 2009 test-year. CAD and Staff agree that if the Commission allows a surcharge it is necessary to accurately determine the dollar amount of vegetation management costs that are already embedded in base rates. Mr. Gary testified that the Companies correctly calculated the surcharge by using $1 1,605,421 as the amount of vegetation management cost currently embedded in base rates. Exh. CWG-R at 2. The Companies argued that Commission adoption of a settlement in the 2010 Rate Case did not result in a higher amount of vegetation 12
management costs being embedded in base rates. The parties settled that case by agreeing on an amount for the total cost of service, and the settlement did not constitute agreement on many of the specific contested rate components. Neither the settlement document nor the Commission Order mentioned vegetation management expense. The 2005 base rate case, therefore, was the most recent case to establish a specific vegetation management expense in the revenue requirement. a.
DISCUSSION The Proposed Four-Year Cycle Based VMP program The Commission agrees with the Companies and Staff Engineering Division that the proposed VMP is a significant expansion of the present vegetation management practiced by the Companies, and the proposed VMP is responsive to the Commission mandate in this proceeding. The VMP is an appropriate approach to improve reliability and to lessen the impact of future storms. The Commission concludes that the implementation of a four-year, cycle-based VMP will (i) enhance the ability of the Companies to identify and repair faulty or failed equipment, (ii) improve customer service and reliability, and (iii) will initiate a more proactive approach to vegetation management. The Commission did not require the utilities to adopt a program that would prevent every outage, especially from the most severe storms, but concludes that the enhanced VMP will lessen the impact of storms on numbers and duration of outages. The Commission determines that the enhanced VMP will beneficially impact customer service, reliability, and lessen the frequency and duration of outages during major storm events, therefore, the Commission authorizes the enhanced VMP to commence immediately upon the effective date of this Order. Recovery in rates of the increased VMP costs is addressed below. VMP Cost Projections The Commission understands that implementation of a periodic, cycle-based VMP as proposed by the Companies comes with an increase in cost over the historical amounts spent on vegetation control. The Companies estimated total expenditure of $5 8.020 million in year one of the VMP is more than triple the historical average expenditure of approximately $17.350 million from 2007-201 1 identified in Mr. Harris’ testimony. CAD Exh.BLH-D, Exh. BLH-4. The Commission also understands that the enhanced VMP costs are based on estimates and little, if any, of the VMP costs will be embedded in the historical test year utilized in the upcoming rate case. The Commission, however, concludes that the public service benefits of the four-year, cycle-based end-to-end VMP discussed above indicate that the level of vegetation management efforts of the Companies as proposed in the VMP should be authorized to commence immediately. 13
Rate recovery of the increased VMP expenditures will be better addressed in the upcoming base rate case through a VMP cost recovery mechanism and periodic review process that is described in more detail below. To facilitate the upcoming base rate case process, the future periodic review o f the VMP cost recovery mechanism, and periodic review of the service impacts of the VMP, the Commission will require that upon implementation of the enhanced VMP, the Companies also establish and maintain on their books numbered sub-accounts for all O&M expenses and capital expenditures related to the VMP. The books and records of the Company must be maintained in such a manner as to facilitate easy identification and audit of all VMP costs. The Proposed VMP Surcharge The parties and the Commission have identified a public service need to implement an enhanced VMP, and it is not unreasonable to authorize the Companies to commence the enhanced VMP with the effective date of this Order and incur the related increase in costs in advance of specific recovery in rates in the upcoming general rate case, particularly when a rate case is to be filed in the near future. The issues raised by the parties regarding cost estimates, capital costs versus maintenance expenses, and cost allocation of VMP related costs can and should be further analyzed in the context of a base rate case. The Commission concludes, therefore, that it is reasonable to defer the recovery of prudently incurred incremental increases for VMP O&M expenses that the Companies incur between issuance of this Order and the conclusion of the upcoming base rate case. The Commission will permit the Companies to include in that deferral a carrying cost of four percent (annual rate) given the short timeframe between the effective date of this Order and the establishment of the VMP cost recovery mechanism in the upcoming base rate case. Several of the parties have raised concerns about the fact the VMP costs presented in this proceeding are estimates, and the costs in future proceedings will be part actual and part estimates. Hence, the costs may not meet the traditional "known and measurable" standard we generally employ in our ratemaking approaches. Inasmuch as we are not implementing the surcharge in this proceeding, we do not need to address that issue at this time, but some comment to frame this issue for future proceedings and considerations is appropriate. It would be wonderful if all VMP costs could be precisely determined in advance but they ~ a n n o t . It~ is the tension between the "known and measurable" standard for 4
The Commission is charged with devising rates based generally on costs. Specifically, W.Va. Code 524-2-2 states:
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We understand that.
establishing base rates and the need for timely recovery of costs of a new and beneficial program, such as the VMP, that requires consideration of a rate recovery mechanism that is not tied to traditional base rate standards. We must consider the best ratemaking approach that will provide reasonable assurance to the utility of timely recovery of prudently incurred costs, while at the same time, providing reasonable assurance to the customers that they are paying for no more than the prudent and efficient implementation of the VMP. In the upcoming base rate case, the Commission will further develop a VMP cost recovery mechanism to address both the prudently incurred deferred VMP expenses and the ongoing VMP costs. This cost recovery mechanism may include a surcharge mechanism, a base rate increment, or some combination thereof. The cost recovery mechanism will include a periodic review process to assure proper matching of actual, prudently incurred, costs to the VMP rate recovery. The periodic review will also provide an opportunity for the Commission to receive specific reliability data related to line segments already cleared under the VMP, as compared to those not yet affected by the VMP. The timing and scheduling of the review process will be determined b y the Commission in future orders addressing the VMP. Amount Currently Embedded in Base Rates for Vegetation Control The Commission determines that $14,056,708 is the amount currently embedded in base rates for vegetation control. The Commission reviewed the record from the 20 10 Rate Case and confirmed that no party proposed an adjustment to the normal, ongoing 2009 test-year vegetation control expenditures. Vegetation control costs were not a contested issue in the 2010 Rate Case as implied in the testimony of Companies' witness Gary. CAD witness Harris testified that the 2009 test-year unadjusted maintenance expenses (account 593) for vegetation management was $14.056 million and no party contested the validity of that testimony, CAD Exhibit BLH-D, Exhibit BLH-4. The The commission may change any intrastate rate, charge or toll which is unjust or unreasonable or any interstate charge with respect to matters of a purely local nature which have not been regulated by or pursuant to an act of Congress and may prescribe a rate, charge or toll that is just and reasonable, and change or prohibit any practice, device or method of service in order to prevent undue discrimination or favoritism between persons and between localities and between commodities for a like or contemporaneous service. But in no case shall the rate, toll or charge be more than the service is reasonably worth, considering the cost of the service. The Commission has the authority under the provisions of W.Va. Code §24-1-(a)(5) to "[e]ncourage . . . the effective and efficient management of regulated utility enterprises . . ." and "to exercise the legislative powers delegated to it" W.Va. Code §24-1-1(b). It strains credibility to suggest that the Commission does not have the authority to implement a structured utility cost recovery mechanism that includes future reviews and determination of actual costs, for the timely recovery of VMP costs, even if some, or even all, of the costs are based on estimates.
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Commission also notes that the Companies consistently expensed more for vegetation management from 2007-201 1 than the $1 1.605 million claimed as the base rate level included in the 2005 Rate Case: 2007 - $14.561 million; 2008 - 15.004 million; 2009 $14.069 million; 2010 - $14.206 million; and 201 1 - $14.116 million. Id. It is reasonable to conclude that there is currently $14.056 million in base rates for recovery of vegetation control expenses, as proposed by CAD and supported by Commission Staff. The position of the Companies that only the $11.605 million of vegetation costs were included in the 2005 rate case is not reasonable. The prudently incurred VMP incremental O&M expenses that will be eligible for deferred rate recovery in the upcoming base rate case will be those that exceed the base level of $14.056 million annually. Conclusion The impact of the severe weather incidents that have occurred since 2009 have made it clear that the APCo and WPCo utility distribution and transmission systems should be made more resistant to damage from vegetation and tree damage during major storms. It is in the public interest to institute an aggressive, periodic, end-to-end vegetation management program. The enhanced VMP will cost money, but doing nothing, in our opinion, costs even more. As a consequence, the Commission, in this Order, authorizes the Companies to immediately implement a VMP and the Commission will, in the upcoming base rate case, develop a VMP cost recovery mechanism to timely and adequately compensate the Companies for prudently incurred deferred VMP expenses, capital costs expended through conclusion of the upcoming base rate case, and an appropriate level of ongoing VMP costs. The VMP cost recovery mechanism will include a periodic review to properly match VMP expenditures to the revenue recovered from customers. In addition, the annual reporting requirements of the Electric Rules with respect to reliability metrics will enable the Commission to monitor improvements in the general reliability of the systems expected from implementation of the end-to-end, cycle base VMP.
FINDINGS OF FACT 1. The enhanced VMP will be a significant expansion of the present vegetation management practices of the Companies. 2. The VMP will require that the Companies contract for additional vegetation management crews and hire oversight employees.
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Implementation of a periodic, cycle based VMP as proposed by the 3. Companies comes with a significant increase in cost over the historical amounts spent on vegetation control. The VMP will enhance the ability of the Companies to identify and repair 4. faulty or failed equipment, improve customer service and reliability, and will initiate a proactive approach to vegetation management, Exh. WMP-1 at 5 ; Hr. Tr. at 131, 132, 137.
5. The Companies have spent between $14.050 million and $17.150 million on non-storm related vegetation management expenses and capitalized between $2.760 million and $6.8 million of vegetation management expenditures over the last three years. Exh. PAW-D at 11, 12. The Companies project the total first year expenditures for the enhanced 6. VMP, both expensed and capitalized, will be approximately $5 8.02 million. Exh. PAW-D at 12.
7. The Companies used the cost of the various right-of-way clearing components to calculate costs to implement the proposed VMP. PAW-D at 14-16. The Companies projected estimates for the increased year one VMP costs 8. using historic, current and projected expenditures for vegetation control, taking into consideration contractor rates, volume of work, and cost increases for labor and equipment. Exh. PAW-R at 7. 9. The increased VMP costs include managing more remote circuits with higher needed levels of vegetation management and will result in VMP costs higher than historical levels. 10. The Companies have given notice of a base rate case filing by mid-2014. WVEUG Initial Brief at 6. 11. Absent a known, imminent base rate case filing, waiting to recover VMP costs through a base rate case involves regulatory lag and risk to the Companies. WVEUG Exh. SJB-D at 7-9. 12. Vegetation management expenses for 2009, the test-year in the 2010 Rate Case, were $14.056 million. CAD Exhibit BLH-D, Exhibit BLH-3. 13. No party disputed or contested that $14.056 million of O&M vegetation control costs were included in the 2009 test-year.
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14. Vegetation control costs were not a contested issue in the 2010 Rate Case as implied in the testimony of Companies’ witness Gary.
CONCLUSIONS OF LAW The proposed enhanced VMP is responsive to the Commission mandate in 1. this proceeding and is an appropriate approach to improve reliability and to lessen the impact of future storms on the Companies’ ability to maintain service and repair damage on its system. The enhanced VMP will lessen future storm impacts with regard to the 2. frequency and duration of outages and will lessen storm impacts by enhancing storm recovery efforts and by providing for the management of trees that pose particular risks to lines. A rate recovery mechanism is not necessary at this time given the expected 3. filing date of the Companies’ next base rate case being mid-2014. The Commission has identified a public service need to implement an 4. enhanced VMP, and it is reasonable to authorize the Companies to commence the enhanced VMP with the effective date of this Order and incur the related increase in costs in advance of a specific VMP cost recovery mechanism to be established in the upcoming general rate case, particularly when a rate case is to be filed in the near future. The issues raised by the parties regarding cost estimates, capital costs 5. versus maintenance expenses, and cost allocation of VMP related costs can and should be further analyzed in the context of a base rate case. It is reasonable to defer the recovery of prudently incurred incremental 6. increases for VMP O&M expenses that the Companies incur between the issuance of this Order and the conclusion of the upcoming base rate case. It is reasonable for AEP to include in that deferral a carrying cost of four 7. percent (annual rate) given the short timeframe between the effective date of this Order and the cost recovery mechanism for VMP costs to be established in the upcoming base rate case. In the upcoming base rate case, the Commission will develop a cost 8. recovery mechanism to address both the prudently incurred deferred VMP O&M expenses and the ongoing VMP costs.
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The cost recovery mechanism to be developed for VMP cost recovery is 9. intended to encourage APCo and WPCo to adhere to the VMP Program and allow the Companies to timely recover their VMP costs in a manner that is consistent with the legislative mandate that the Commission authorize rates based generally on costs. W .Va. Code $24-2-2. 10. The cost recovery mechanism for VMP costs will include a periodic review process that will assure proper matching of actual expenditures to VMP rate recovery and that the VMP program is effective in increasing service reliability.
11. It is reasonable to authorize the Companies to commence with implementation of the VMP without an immediate surcharge recovery in order to fulfill the Companies’ public service obligation to provide safe, reliable electric service. 12. It is reasonable to require the Companies upon implementation o f the enhanced VMP to establish and maintain on their books numbered sub-accounts for all O&M expenses and capital expenditures related to the VMP in such manner as to facilitate easy identification and audit of all VMP costs.
13. It is reasonable to conclude that the amount of $14.056 million in vegetation management expenses is currently embedded in the base rates o f the Companies. 14. The position of the Companies that current base rate recovery of vegetation management expenses is $1 1,605 million based on the level of vegetation control costs included in the 2005 rate case is not reasonable.
15. It is reasonable that deferral of prudently incurred VMP O&M expenses that will be eligible for deferred rate recovery in the upcoming base rate case be limited to the incremental monthly expenses that exceed the base level of $14.056 million annually. ORDER IT IS THEREFORE ORDERED that the four-year cycle based VMP to be implemented over an initial six-year transition period proposed by the Companies is approved and the Companies are authorized to commence the VMP with the effective date of this Order. IT IS FURTHER ORDERED that the VMP Surcharge proposal of the Companies is denied.
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IT IS FURTHER ORDERED that rate recovery by the Companies of the prudently incurred incremental VMP O&M expenses is deferred to the upcoming base rate case that the Companies expect to file in mid-20 14. IT IS FURTHER ORDERED that the Companies may defer prudently incurred incremental increases for VMP O&M expenses that the Companies incur between the issuance of this Order and the conclusion of the upcoming base rate case, and that deferral may include a carrying cost of four percent (annual rate) given the short timeframe between the effective date of this Order and the cost recovery mechanism for VMP costs to be established in the upcoming base rate case. IT IS FURTHER ORDERED that that deferral of prudently incurred VMP incremental O&M expenses that will be eligible for deferred rate recovery i n the upcoming base rate case be limited to the incremental monthly expenses that exceed the base level of $14.056 million annually. IT IS FURTHER ORDERED that the Companies shall on implementation o f the enhanced VMP establish and maintain on their books numbered sub-accounts for all O&M expenses and capital expenditures related to the VMP in such manner as to facilitate easy identification and audit of all VMP costs.
IT IS FURTHER ORDERED that the Executive Secretary of the Commission serve a copy of this Order by electronic service on all parties of record who have filed an e-service agreement, by United States First Class Mail on all parties of record who have not filed an e-service agreement, and on Staff by hand delivery. IT IS FURTHER ORDERED that on entry of this Order this case shall be removed from the Commission docket of open cases.
A True Copy, Teste,
Ingrid Ferrell Executive Secretary
130.557~~ JML/rmt 20
