Alaska Rejects LDC’s Suggested Form of Gradualism

Finding that a natural gas local distribution company’s (LDC’s) plan to phase in a proposed rate increase was more apt to create improper cross-subsidies between customer classes than to accomplish gradualism, the Regulatory Commission of Alaska (RCA) has declined to institute the company’s proposal. The commission also denied several other recommendations put forth by the LDC, ENSTAR Natural Gas Company, deeming them to violate the commission’s longstanding precepts of rate making. 

In filing for rate relief, ENSTAR had asked for an overall increase in revenues of about 5.82%. Recognizing that it separately adjusts its cost-of-gas rider every year, the LDC had sought to temper the impact of the increase by spreading it out over a period of time and by capping the amount by which any one class’s rates would be raised. With respect to allocation of the rate increase, ENSTAR had proposed that its new schedules accommodate movement toward costbased rates while not necessarily setting rates for each individual customer class on strictly cost-based grounds. 

That is, the company put forth a rate plan that would set aside certain data from its cost-of-service study (COSS). Instead, the LDC asked that it be permitted to modify its rates so that no single class would experience an increase more than 50% higher than the system average increase. ENSTAR attested that to the extent its COSS indicated that a particular class’s rates should actually be raised even more, that excess would be apportioned among the other classes in proportion to their own respective costs of service. 

In rejecting the LDC’s proposal, the commission observed that most utilities, when considering a rate mitigation plan, opt to simply forgo some portion of their claimed revenue requirement. But in ENSTAR’s case, the RCA said, the company appeared unwilling to give up even one dollar. To the contrary, the commission stated that it seemed that the LDC was attempting to recover its full revenue requirement by adjusting downward the otherwise justified rate increase for certain classes at the expense of other classes. 

The commission related that its calculations showed that under the LDC’s rate design plan, the company’s very large firm transportation (VLFT) customers as well as its interruptible industrial transportation and interruptible transportation service (IIT/ITS) customers would be the only ones to benefit from the socalled gradualism scheme. From the RCA’s perspective, however, it would be patently inequitable for those classes to face significantly lower rate increases than indicated by the COSS while other ratepayers would receive future bills substantially above what was indicated by the COSS. 

The commission told ENSTAR that not only had the LDC failed to document the need for the VLFT and IIT/ITS customer classes to be shielded from COSS-based rate increases, but that the company also had not adequately explained how the resulting cross-subsidies were not unduly discriminatory or preferential. The commission therefore ruled that the LDC’s proposed approach to gradualism could not be approved. 

Besides the company’s recommended cost allocation scheme, the commission also denied both ENSTAR’s proffered time period for valuing its rate base and its proposed rate of return on common equity (ROE). As to the former, the company had petitioned for authority to depart from the RCA’s traditional reliance on a 13-month average rate base. Instead, the company wanted to use a year-end rate base, which was predicated on a 2015 test period. 

The commission noted that it has a long and consistent history of utilizing a 13-month average in calculating rate base and that exceptions to that method have been granted only sparingly. The commission recounted that it generally has allowed a waiver only if a utility could demonstrate an extraordinary increase in plant and customers or, conversely, an extraordinary decrease in customers and a substantial drop in revenues. In the RCA’s view, neither criterion was relevant to ENSTAR. 

The commission elaborated that while the company had proven that it had invested $40.7 million in plant and facilities in the test year, its actual net change in plant for the year was $31.7 million, translating into an increase of about 10.15% in overall rate base. During that same period of time, the RCA said, the record showed that ENSTAR’s customer base had risen by about 1.4%. 

While deeming such growth in customers and rate base assets to be steady and healthy, the commission said that the additional plant and customers were not so great as to meet the threshold requirement of being “extraordinary.” Citing to several of its past orders in which it had approved an exception to the 13-month average formula, the RCA observed that most of those involved growth that was far more explosive, being well in excess of 10% and usually between 20% and 30% at a minimum. As a result, the commission ruled that ENSTAR’s growth did not rise to a level that would qualify it for use of a year-end rate base. 

As to the issue of ROE, the commission related that the LDC had sought a 12.55% ROE. In support of that value, ENSTAR had pointed out its relative isolation geographically, its small number of customers, the climate extremes under which it operates, and its widespread pipeline system, which encompasses approximately 3,000 miles of line. Although other parties conceded that providing utility service in Alaska brings with it various unique operating characteristics and risks, no other party recommended a ROE higher than 10%. 

Upon weighing the various party positions, the commission concurred with the company that Alaska presents utilities with both operational and economic challenges not faced by utilities in the Lower 48. But, the RCA cautioned, although it agreed that the risk factors identified by ENSTAR do increase the LDC’s risk profile, the commission generally does not attempt to engage in a factor-by-factor quantification of the impacts thereto. 

Instead, the commission stated, it merely applies its “reasoned judgment” to the evidence on record to arrive at an appropriate ROE value. For ENSTAR, the commission held that that value should be 11.875%. Re ENSTAR Natural Gas Co., a Division of SEMCO Energy, Inc., U-16- 066, Order No. 19, Sept. 22, 2017 (Alaska R.C.).