INTRODUCTION

Construction Work In Progress (CWIP) is a mechanism to allow utilities to charge ratepayers for the cost of financing new power plants during construction. As a result of such legislation, utility customers would experience periodic rate increases (probably quarterly) to pay interest to bondholders and returns to shareholders on capital invested in power plants before they are completed and providing electricity.

Cumulatively, these rate increases would be significant over the five to six year construction phase of a one-billion dollar baseload generating facility. Indeed, during the final year of construction, a CWIP tracker for such a facility would be expected to collect in excess of $100 million dollars from a utility’s customers.

Under former law, collecting CWIP during power plant construction was prohibited because utilities may only charge customers for the costs of plants which are “used and useful,” i.e. actually in service and producing electricity reasonably required to meet the needs of customers for reliable service. Utilities were only allowed to charge CWIP for environmental (air pollution control) investments at their power plants. Utilities were (and are still) also allowed to book an Allowance for Funds Used During Construction on debt incurred to construct power plants and to recover those amounts from customers over the useful lives of the plants.

Senate Bill 29, passed in 2002, allowed utilities to charge CWIP during the construction of coal-fired power plants.

Construction Work In Progress for power plant construction first became a controversial issue in Indiana in the late 1970s when the Public Service Company of Indiana (now PSI Energy) saw the projected cost to construct the ill-fated Marble Hill nuclear plant located near Madison, Indiana skyrocket from under $1 billion to over $7 billion. PSI-sponsored CWIP bills were defeated in the General Assembly in 1979, 1980 and 1982. An attempt to circumvent the legislative will was also defeated when the Attorney General ruled PSI’s so-called “trended rates” proposal to the IURC to be unlawful because it was no more than CWIP by another name.

PSI repeatedly sought passage of power plant CWIP because Wall Street investors had become increasingly skeptical of the viability of the Marble Hill nuclear plant due to construction problems, cost overruns, safety concerns, and reduced demand for electricity. As a result, financing the project through the sale of stocks and bonds became increasingly difficult and expensive. Indeed, after Governor Robert Orr endorsed the report of a Citizens Task Force concluding that it made more sense to cancel Marble Hill rather than finance its completion with ratepayer money, PSI abandoned the project due to its inability to secure the necessary capital from private investors.

The General Assembly rejected power plant CWIP three times because of intense and widespread opposition from all classes of utility customers. This opposition resulted primarily from strong ratepayer resistance to becoming involuntary financiers of Marble Hill, a project which most PSI customers viewed as unneeded and unwanted but one whose rapidly escalating costs they would ultimately have to pay if it was completed. In 2002 the legislature was unmoved by appeals from CAC and others to reject CWIP once again.

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Indianapolis Convention Center
October 31, 2007

It was appropriate for Jim Rogers, CEO of Duke Energy, to address the Economic Club of Indianapolis on Halloween last year. He came masquerading as a visionary and as a mechanism for positive change. Instead, what the audience heard was business as usual for utility executives.

The main challenge for utility executives is how to maintain a captive ratepayer base and the status quo with respect to their own investment patterns (namely, coal, nuclear and natural gas plants) while they attempt to convince the public that they are actually addressing affordability and global warming issues.

From Rogers’ speech it was not difficult to discern the utility business plan. The following is what utility executive rhetoric has to accomplish to maintain the status quo with respect to the utility/customer relationship and utility investment patterns:

• Convince People that New Central Station Power Plants Are the Only Means to Ensure Meeting Electric Energy Demand
• Make Sure the Public Ignores Solar Technology
• Pretend Wind Technology is Not Reliable
• Convince People that “Decarbonizing” the Economy Means Building More Coal Plants
• Convince People that Nuclear Power is the Only Reliable “Non-Carbon” Source of Electricity^*
• Convince People that New Coal and Nuclear Plants at Billions of Dollars Each are Cheap
• Turn Carbon Dioxide Into a Profit-Making Venture Through a Bogus Cap and Trade System
• Convince People that Dirty, Expensive Power is Actually Clean, Affordable Power
• Convince People that Consumers are Blocking Energy Efficiency Investments
• Convince People that They Should Pay Two Times the Actual Cost of Energy Efficiency Measures

The moral to the story is that if you are not actively following issues associated with greenhouse gas emissions, investor owned utility profit-making motives, blind coal promotion, unreasonable resistance to investments in efficiency and renewables, etc., Rogers makes Duke look like an environmental saint or savior. He probably came across that way to many of the folks in the audience.

That’s why it is so important for organizations like CAC to exist. We can no longer afford the “Blind-Leading-the-Blind” mentality that surrounds energy policy. The inauguration of a new era of zero-carbon technology cannot be punctuated by a coal-fired building binge and marginalization of investments in the very technologies that will ultimately define that era.

Grant Smith
CAC Executive Director

^*Coal-fired power is used to manufacture nuclear fuel rods

I attended the Winter Preparedness meeting yesterday, October 12, 2007, at the IURC. Of course, the suits were all in order when I first walked in and I received my usual glances of "who is this guy who keeps showing up?"

A quiet hush always follows my entrance as they recognize me but have no idea who I am. Dave has introduced me several times to many of these folks, but I imagine it’s quite easy and convenient to not add me to their memory bank as I would interfere with visions of de-coupling and trackers dancing thru their heads.

The event was covered by all four network TV outlets in Indianapolis, and attended by the usual suspects of Utility reps, lawyers, and analysts. The Consumer Counselor from the OUCC, Susan Macey, as well as other members of the OUCC were in attendance as well. No concerns were given on the supply side as all three companies stated the natural gas market has stabilized and supply was good. The company’s storage tanks were near capacity going into the winter months and prices were much less volatile on the open market. All three companies gave presentations relating to their individual companies preparedness and outlook for the upcoming season.

Citizens Gas was first up and I was actually quite impressed with their presentation. They started out by saying they are projecting their average heating bill to decrease by 9%. They are weatherizing 150-200 low-income homes per year at an average reduction of around 37% in energy consumption per year. Commissioner Hardy and Ziegner both inquired why that number has remained stagnant for the last 4-5 years to which Citizens Gas responded they are working with a coalition of groups to increase the number of homes and are hoping to increase that number, although they would not commit to anything. I took from that they were spending all they could and if someone wanted to give them some cash to increase that, then go ahead. They spent a lot of time discussing low-income issues, Hispanic issues, and conservation/efficiency. Citizens Gas has approximately 2100 customers currently disconnected and they vowed they will do everything they can to get those folks back online. They discussed the LIHEAP funding in depth. Apparently the Senate has passed an amount of $2.1 billion and the House has passed $2.6 billion. Mr.Lykins then added that the President has promised to veto anything over $1.7 billion. Mr. Lykins then continued by saying how Citizens Gas has around 100,000 customers below the Federal poverty threshold who are subjected daily to many regressive taxes and trying to deal with rising health costs and dropping wages and that it was shameful that the President would take the LIHEAP funding to the same levels of 25 years ago, when gas prices were much lower. (I understand that the funding was over $5 billion two years ago) I have been told Mr. Lykins has not been a strong ally in the past, but I felt his remarks were well said and needed, even if he may be schilling for the cameras. The shock and awe on Hardy’s face alone after the criticism of King George was worth the price of admission.

Next up was NIPSCO (or Nisource). The NiSource representative blew thru his power point, trying, it seemed, his best to act like he cared. The only highlight being when he indicated he expected Nipsco rates to increase 20.3% this winter despite a stable market on gas prices. Susan Macey (the Consumer Counselor) attacked him asking why Citizens indicated a decrease, and she was already aware Vectren rates were dropping. His response was some convoluted answer about they just finished paying off the settlement on a reverse rate case (which was electric, not NG) and some gibberish about an efficiency agreement or something. I was disappointed when Ms. Macey said, “Oh, ok”. (Dazzle them with nonsense someone once said). To me, he came across as arrogant, condescending, and disingenuous. It’s fairly obvious why we are fighting NIPSPCO all the time.

Vectren’s presentation was brief and concise. They expect Vectren South (Southern Indiana Gas and Electric) prices to remain the same (the lowest in the state) and Vectren North (Indiana Gas) to drop around 6% or so. They talked a lot about their Conservation Connection program, which I’m not that familiar with but which was praised by both the Office of Utility Consumer Counselor and Indiana Utility Regulatory Commission. They are getting about a 50% return on the residential end and Commissioner Hardy stated if that is the best bang for the buck, perhaps they should invest more into the program. At this point, Susan Macey stepped in and said they have to figure out a way to involve the small commercials in the program as that is where the real returns will be seen, but they have been unable to figure out how to do it without using residential funds? She asked for any suggestions on how to do that.

I will wrap this up with a few additional observations. I was obviously not that impressed with the NIPSCO representative. There was a marked difference in the way he carried and presented himself as compared to the Citizens Gas and Vectren folks. I also continue to be amazed at the need for these regulated utilities to show up with an army of individuals to make a simple presentation. What makes it worse in my eyes, is that ratepayer dollars are paying for all this excess.

Kerwin Olson
CAC Public Outreach Coordinator

Indiana’s major utility companies (Duke, AEP, IPL, Vectren, NIPSCO) provide retail electric service essential to the health and vitality of Indiana, its economy, and its citizens. It is a business that has public interest mandates, and they have been granted state franchised monopolies that protect them from competition and guarantee them an opportunity for profit under cost-plus regulation in exchange for a requirement they provide adequate and reliable electricity service at the lowest reasonable cost to the public.

However, once local utilities are now part of growing corporate empires that stretch over many states. As a result, the public service aspect of their business has virtually disappeared. Moreover, the lobbying efforts of these monopoly utilities is erasing the regulatory compact and legal balancing act between utilities and ratepayers interests.

Significant deregulation occurred during the 1990s under the pretense of competition. Ratepayers were going to have a choice of supplier and those owning power plants would compete for customers. What happened, however, was further consolidation of the industry and entrenching of monopolies who gamed the deregulated system to receive windfall profits. The manipulation of gas markets and electric wholesale markets continues on a smaller, but still, detrimental scale today.

Indiana avoided the catastrophe of near total deregulation the utility industry won in other states. However, Indiana’s utility industry has found ways to force, through law and regulation, virtual (or backdoor) deregulation.

CAC, with the critical and necessary support of its members and other citizens, has kept the floodgates from opening. However, as a spokesperson for some of Indiana’s industrial energy consumers once quipped, the current utility deregulation approach is "like being nibbled to death by ducks."

Since 2002, Indiana’s large gas and electric utilities have aggressively implemented the following strategies:

• Recover costs from ratepayers as quickly and automatically as possible;
• Reduce or eliminate regulatory oversight of planning, revenue, and profits;
• Create new incentives on top of their cost-plus rates to increase their rate of return (profit) for making investments they are already obligated to do under the law.

The preferred, utility regulatory and legislative approach that forms the basis for accomplishing these goals is the imposition of "automatic rate adjustment mechanisms" or "trackers."

Although trackers may be appropriate at times and under strict parameters, utilities are attempting to abuse this cost recovery mechanism.

Trackers work like this:
A company in a competitive market has to compete for your business and therefore must carefully manage its costs in order to stay competitive. However, a regulated monopoly utility has no competition, and regulation of rates and services is necessary. Under regulation, a regulated monopoly utility is entitled to recover its prudently incurred costs plus a return on the capital invested by its shareholders. The utility’s costs are determined by looking at a test year – 12 consecutive months of the utility’s operations – and adjusted for known and measurable changes to costs. Regulators also determine a fair return for shareholders by looking at the utility’s risk profile compared to similar ventures. Regulators then determine a revenue requirement, or yearly income amount that would allow the utility to recover its costs plus the authorized return. The revenue requirement is then divided among the customers and the energy (amount of gas or electricity) that the utility’s customers use.

Between rate cases, the utility has to manage its costs. Because it takes time for regulators to approve new rates (called regulatory lag), the utility has an incentive to manage its operations and reduce costs. Because there can be regulatory lag in cost recovery, and there is some risk a utility may not be able to recover its costs and generate the full return authorized by regulators, the utility’s return includes a "risk premium."

Trackers allow the utility to recover expenditures on an on-going basis by adjusting rates on a quarterly or biannual basis for certain categories of costs, which means utilities do not have to wait for the next rate case to recover those costs.

An example of costs that can reasonably be tracked is fuel costs. Since the 1980s, utility companies have been able to “track” fuel costs on a quarterly basis. This was thought to be sound because fuel costs are large, not under the utility’s control and volatile (they fluctuate significantly).

An example of costs that should not be tracked is capital or construction costs of power plants. These costs are under the utility’s control to the extent the utility, as provided by law, is properly planning its resource mix and regulators enforce this provision of the law. Tracking the capital costs of power plants is called construction work in progress (CWIP). CWIP allows electric utilities to recover the capital costs of a power plant as the plant is being built, making ratepayers the financing mechanisms for the plants instead of stockholders and the utility. Duke Energy has requested the IURC to grant them this financing mechanism for the coal gasification plant they’ve proposed at Edwardsport.

The other key feature of trackers is that they tend to greatly reduce oversight of the utility’s costs. Once a particular tracker mechanism is approved, review of actual costs on an ongoing basis is typically done in an expedited or fast-tracked proceeding.

Legislatively, electric utilities have tried to pass laws to provide trackers for:

• Transmission and distribution lines, which should not be tracked because utilities can properly plan for these investments and assess the costs;
• Broadband over power lines, which has nothing to do with providing electric service;
• Any costs that are the result of a government mandate, which, for a regulated utility, covers just about all core costs since they involve providing service.

In addition, electric utilities have imbedded sweeteners for themselves in their proposed tracking legislation. These include:

• Deregulating revenue that is generated from trackers, which means as the number of and revenue from trackers increase the less regulatory oversight of profits.
• Automatic, monetary incentives for trackers that have been approved. Under the proposed incentives, the IURC would have to automatically increase the utility’s rate of return if the proposed tracker were approved. The IURC would have no discretion in these cases.
• Reduced regulatory oversight of utility investments and costs.

The issue here is that trackers, once approved, virtually guarantee, with perhaps minor adjustments, recovery of costs going forward. This reduces the company’s risk in terms of the potential of not being able to recover those costs in a future rate case. Wall Street investors and lenders then view the utility as a less risky investment, which means:

• That the utility will receive more favorable interest rates on any borrowed money; and
• That their rate of return should be lowered, not increased with incentives, because there is less financial risk to the company. That is, ratepayers should not have to pay a risk premium on that investment when risk related to cost recovery for that investment is essentially nonexistent. Adding an incentive on top of the rate of return is adding insult to injury.

Click here to view CAC’s power point on trackers for further information.

Citizens Action Coalition of Indiana
5420 North College Ave. Suite 101
Indianapolis, IN 46220

(Also see the Office of Utility Consumer Counselor website)

10-14-05

Comments to the IURC Rulemaking No. 0503

The Citizens Action Coalition of Indiana has worked for more than thirty years on behalf of rate payers in this state. One of the first issues we worked on was a moratorium on winter shut offs. More recently, we have worked with the Consumer Counselors office and the utilities to develop programs to help low and fixed income customers afford their bills and weatherize their homes with the overall goal of keeping customers connected.

CAC opposes this new deposit rule in its current form. The role of regulators is often defined as balancing the interests of utilities and their shareholders with those of the public. This rule however fails to strike that balance by maintaining the current unreasonable practice of charging up to one third or four months of the average annual bill for deposits. This has led to deposits of as much as $800 to, in some cases, $1200 dollars. With prices projected to increase this winter and next by as much as 70%, those figures could go much higher.

Monopoly gas utilities are in a unique position of being the sole provider of an essential service. Their risk is minimal compared to other types of business. While utilities point to rising bad debt, it is important to remember that less than 20% of that debt is attributable to low-income customers. Meanwhile, utility CEO’s are earning six and seven figure salaries and in some cases earn more than all of the utilities bad debt.

This disparity is not in the interests of ratepayers or shareholders. Raising deposits for those who are already struggling to pay is not in the public interest when the consequences of living without heat are weighed against rate payer exposure. Public safety and stability have a far greater value than any incremental savings.

As we tread toward another winter we find ourselves faced with a more dire situation than we did two and three years ago when the public and honorable legislators such as Winfield Moses, offered legislation to limit deposits to one months average annual bill. That legislation prompted this body to propose new rules last years, but after the public spoke loud and clear, the Commission failed to act.

Now we are presented with a limited rule that does little to change the situation. Thousands of customers who may or may not qualify for energy assistance are currently disconnected around the state. Since utilities are only offering limited programs to help some of those customers restore service, the law must change to ensure the forty percent of the public that is at or below 200% of the federal poverty level are not priced out of an essential service.

This commission should demand that gas utilities help all of their customers reestablish service before it is freezing outside and rewrite a rule that protects the public and in particular those who are poor among us.

The Citizens Action Coalition supports a rule that would limit deposits to no more one month of the average annual bill for those who qualify as low-income year round and no more than two months for everyone else. While the proposed rule would limit deposits for low-income customers from December thru March, this limitation fails to recognize that a customer must have service reestablished to qualify for the Energy Assistance Program (EAP). EAP has failed to keep up with inflation let alone the increases of the past five years or those projected for this winter. EAP will not pay deposits or past due arrears unless the available dollars are enough to reestablish service. Therefore, the apparent reduction for low-income households rings hollow.

Indiana National Farmer’s Organization (NFO) supports Citizens Action Coalition (CAC) efforts with the deposit rule. Indiana’s NFO feels that it is important for the commission to understand that while the deposit rule does not directly affect Indiana’s rural communities, an issue such as this can have a ripple throughout our state.

The scope of this issue has the potential to devastate the livelihood of rural Indiana farmers; therefore we support CAC in this effort.

This concludes our comments.