Oklahoma Recognizes Post-Test-Year Payments to SPP

Although largely agreeing with an administrative law judge’s (ALJ’s) recommendations with respect to an electric utility’s request for $156 million in rate relief, the Oklahoma Corporation Commission has departed from some of the ALJ’s conclusions, thus adding somewhat to the $81.2 million in additional revenues proposed by the ALJ for the utility, Public Service Company of Oklahoma (PSO). Among the matters for which the commission made adjustments to the ALJ’s decision were the rate of return on common equity (ROE), proper regulatory treatment of a recently retired power plant, and inclusion in rates of fees paid to the Southwest Power Pool (SPP). For all three issues, the commission was more generous toward PSO than had been the ALJ.

With regard to cost of capital, the ALJ, citing the wide variance in the parties’ positions on ROE, had adopted a final ROE of 9.0%. According to the ALJ’s analysis, that value was at the upper end of the range of reasonableness of 8.83% to 9.0% as presented by the majority of ROE experts testifying in the proceeding.

By contrast, she said, the company’s proffered ROE of 10.0% was a clear outlier, especially since it incorporated an adder for financial risk or leverage. The ALJ asserted that such leverage adjustments are not widely used in the U.S. and almost always overstate a company’s required ROE.

While the commission concurred with the ALJ’s assessment of the 10.0% ROE sought by the utility as being too high, the commission at the same time deemed the ALJ’s suggested 9.0% ROE to be too low. The commission explained that when all of the ROE cost models are factored in, the ROE range of reasonableness was more expansive than what had been portrayed by the ALJ. The commission therefore moved to raise the utility’s ROE from the 9.0% put forth by the ALJ to 9.3% instead.

The commission stated that the higher ROE was consistent with longtime standards for ascertaining reasonableness. Moreover, it said, a 9.3% value would better balance the interests of investors versus customers. The commission elaborated that a 9.3% ROE would give PSO a fair return on its investments and was in line with returns granted other companies with similarly risky investments. The commission further ruled that a 9.3% ROE would inspire more confidence in the financial integrity of the utility and would better enable it to attract capital at a reasonable cost than would an ROE of 9.0%.

Turning to the matter of retired plant, the commission related that inasmuch as PSO had closed its Northeastern No. 4 unit in April 2016, the ALJ had reasoned that it would no longer be used and useful in service during the upcoming rate-effective period. As a result, the ALJ had allowed the utility to include in rates a return of the plant’s as yet unrecovered costs, but she denied the company authority to also earn a return on its investment in the plant. That is, the ALJ maintained that PSO should not be able to recoup from customers any carrying costs associated with the unit.

The commission, however, came to an opposite conclusion. The commission observed that the plant had been shut down prematurely due to action by the U.S. Environmental Protection Agency (EPA). Importantly, though, the utility had taken steps to comply with EPA’s air quality standards prior to its decision to retire the plant. It was those environmental compliance costs that PSO was trying to recover through future rates, the commission noted.

From the commission’s perspective, Northeastern No. 4 would likely still be in service but for directives from the EPA. Given the utility’s good-faith efforts to comply with EPA’s requirements, the commission held that the company should be permitted to recover the carrying costs on that work, even though PSO ultimately was unsuccessful in reaching compliance and keeping the plant open. Under the unique and unusual circumstances surrounding Northeastern No. 4, the commission found that an exception to the used and useful rule was warranted.

The commission again diverged from the ALJ on the issue of treatment of fees and expenses paid by the utility to SPP for transmissionrelated services. Whereas the ALJ had sided with the state attorney general and a consortium of industrial customers that such payments should be excluded from rates, the commission reinstated the SPP charges, pointing out that the disallowance ordered by the ALJ had been premised on a too-technical application of test-year expense policies.

The commission recited its standard rate-making practice of considering only those expenses incurred during the test year or within six months immediately following the end of the chosen test period. The commission explained that limiting such expenses would better ensure that only recurring, known and measurable expenses would be reflected in rates. But, the commission said, the notion of “known and measurable” is really the key to the standard, not the test-year-plus-six-months time frame. In the utility’s case, it had entered into an agreement with SPP for additional services during the six-month grace period after the official test year. However, the actual schedule of fees and charges set forth in that agreement did not actually go into effect until one day after the end of the six-month period. The ALJ had thus declined to include the $13.99 million in SPP costs that PSO had claimed in its rate application. In the commission’s view, though, the ALJ had erred in emphasizing the timeline over the fact that the SPP fees would be in place during the rate-effective period.

The commission contended that because there was no dispute as to the institution of the SPP charges, and because the level of fees had been set during the six-month post-test-year period, even if not yet in effect, the payments clearly were known and measurable, such that they should be reflected in the utility’s rates going forward. Expounding on its holding on the issue of SPP fees, the commission cited statutory language that requires rates to include any expense that is known and certain during the test year or the six months thereafter and is reasonably certain to occur on an ongoing basis. The commission affirmed that there was no doubt that the SPP charges qualified for rate recognition on that basis. Plus, the commission stressed, the law does not restrict consideration of expenses to only those test-year time frames.

The commission averred that it was more important for rates to reflect a utility’s actual, realistic ongoing costs of service than to limit such expenses to an artificial test period. As a result, the commission added back in to PSO’s revenue requirement the nearly $14 million in anticipated SPP fees and charges. Re Public Service Co. of Oklahoma, Cause No. PUD 201700151, Order No. 672864, Jan. 31, 2018 (Okla.C.C.).