EXECUTIVE SUMMARY OF THE TESTIMONY FILED ON BEHALF
OF THE RATEPAYER ADVOCATE I/M/O THE PETITION OF ATLANTIC CITY ELECTRIC COMPANY,
AND CONECTIV COMMUNICATIONS, INC. AND NEW RC, INC. FOR APPROVAL UNDER N.J.S.A.
48:2-51.1 AND N.J.S.A. 48:3-10 OF A CHANGE IN OWNERSHIP AND CONTROL
Filed May 11, 2001, BPU Docket No. EM01050308, OAL
Docket No. PUC-04036-01
Introduction
On May 11, 2001, Joint Petitioners Atlantic City Electric Company
("ACE"), Conectiv Communications, Inc. ("CCI") - both
subsidiaries of Delaware corporation, Conectiv - and New RC, Inc. ("New
RC"), a recently formed subsidiary of the Potomac Electric Power Company
("Pepco"), located in the District of Columbia ("D.C.") and
Virginia, filed a petition before the New Jersey Board of Public Utilities
("BPU" or "the Board") requesting approval for merger
between Conectiv, Pepco and New RC. In this proposed merger, New RC would become
a registered public utility holding company and the owner of Conectiv and Pepco,
and thereby the indirect owner of ACE and CCI. Final regulatory approval of this
merger would constitute the second change of control of ACE since Conectiv
obtained Board permission to acquire both ACE and the Delmarva Power & Light
Company ("Delmarva") - a regulated public utility entity serving
customers in Delaware, Maryland and Virginia - by Order dated January 7, 1998,
Docket No. EM97020103. Pepco is headquartered in D.C. and distributes
electricity to approximately 700,000 customers in D.C. and Maryland.
On September 21, 2001, the Division of the Ratepayer Advocate
("Ratepayer Advocate") filed the written testimony of expert
consultants David Peterson, Barbara Alexander, James Rothschild and the joint
testimony of experts David Schlissel and Bruce Biewald in response to the
petition submitted by the Joint Petitioners. Administrative hearings are
scheduled before the Office of Administrative Law in Newark, NJ on November
13-20, 2001. A Public Hearing for comments from consumers will be held on the
evening of either Tuesday, November 27 or Wednesday, November 28, 2001.
The Ratepayer Advocate opines that the proposed merger should not be approved
unless it is conditioned upon several commitments from the Joint Petitioners.
The Petitioners must state, comprehensively, the estimated costs and savings of
the merger, how New Jersey ratepayers will benefit and not be harmed, how there
will be no adverse impact on rates, competition, or New Jersey employees, and
Petitioners must also prove that safe, adequate and proper service to ratepayers
will continue to be provided. The Petitioners must demonstrate how New Jersey
ratepayers will benefit and not be harmed by the disproportionate representation
of Conectiv on the New RC Board of Directors. Additionally, the Petitioners must
implement service quality standards that will protect New Jersey ratepayers from
deterioration in service reliability and encourage service quality improvement
as a result of the merger. Finally, the Ratepayer Advocate is concerned that
market concentration and market power issues have not been adequately addressed
by the Petitioners' filing and further analysis should be required prior to
Board approval.
Testimony of David Peterson
Mr. Peterson is a public utility rate consultant at Chesapeake Regulatory
Consultants, Inc. He has appeared in 75 proceedings before 16 different state
regulatory commissions and the Federal Regulatory Energy Commission addressing
topics including but not limited to capital structure, affiliate transactions,
mergers and acquisitions, and cost-tracking procedures.
- Mr. Peterson addressed the general regulatory policy concerning the
Petition and, specifically, rates, employees and the accounting order
regarding the tracking of merger-related costs that ACE has requested of the
Board.
- Mr. Peterson focused on four specific questions:
1. Will the merger provide benefits for New Jersey ratepayers not
possible without the merger?
2. Will New Jersey ratepayers see benefits contemporaneous with the
merger or at a later time?
3. Does the merger agreement give adequate protection to ACE workers?
4. Will the merger impede Board regulation?
Question 1. Benefits
- Petitioners have alleged that the merger meets the no harm standard.
However, the position of the Ratepayer Advocate is that positive benefits
should be the standard -- after all, utilities use this standard when
evaluating construction, research & development, investments -- and the
Board should look at this $2.2 billion merger with no less scrutiny.
- There has been no positive benefits calculation performed. This requires
detailed assessment of:
1. The potential for synergy savings
2. Transaction costs
3. Transition costs
- There has been no comprehensive study that quantifies merger-related
savings and no comprehensive estimate of transition costs, only
"sketchy" estimates. The Board needs to know this to determine if
the costs are legitimate and reasonable.
- There has been no estimate of transaction costs from the merger. However,
pursuant to Board policy, transaction costs are not recoverable from
ratepayers. Also, Petitioners have not provided an estimate of transition
costs, which they will seek to recover from New Jersey ratepayers.
- There has been no synergy savings study, and this is critical to meet the
positive benefits or no harm standard.
Question 2. Rates
- Petitioners do not intend to modify ACE rates due to merger. However, if
the merger reduces the ACE cost of service in a measurable way, but savings
are not passed on to ratepayers, then there is an adverse rate impact. In
this scenario, ACE rates would not reflect the underlying cost of service
and could not be considered just/reasonable.
- If the Board decides that the merger would be of positive benefit to
ratepayers, the Ratepayer Advocate recommends that the merger should be
conditioned on the passthrough of 100% of annualized savings as reduction in
distribution rates contemporaneously with the closing of merger transaction
Question 3. Employees
- The Petitioners say only a small number of corporate positions will be
eliminated due to redundancy.
- Conectiv's disproportionate representation on the New RC Board of
Directors may adversely affect New Jersey ratepayers. The Board of Directors
will consist of ten (10) Pepco representatives but only two (2) Conectiv
representatives.
Question 4. Regulatory Oversight
- Maintaining the company headquarters in DC may be a problem for New Jersey
regulators, as the distance would make Board regulatory oversight that much
more difficult. This may increase audit burdens/costs for Board and
Ratepayer Advocate.
- We recommend that, as a condition of merger, the Board should require
Petitioners to:
1. File for Board approval for the structure/creation of new post-merger
service company
2. Subject themselves to Board jurisdiction for filing/review/approval of any
cost allocation manual or formulas that New Service Co will use, in addition to
other necessary regulatory approvals
ACE Merger Cost Tracking Request
- ACE's request for this should be denied. Cost deferral is permitted only
when it is "probable" that deferred costs will be recovered in
future rates.
Mr. Peterson concludes that the Petitioners have not shown benefits for
customers, have not stated how much savings to expect, and have not documented
how much it will cost to close the merger or achieve the anticipated savings.
He recommends that the petition be re-filed with comprehensive estimates of
transaction and transition costs (with documentation) and comprehensive
estimates of merger savings (with documentation).
- If Board allows the merger, ACE should be required to reduce the
distribution rates with 100% of annualized net savings.
Testimony of Barbara Alexander
Barbara Alexander is in private practice as a Consumer Affairs Consultant,
after spending almost ten years as the Director of the Consumer Assistance
Division of the Maine Public Utilities Commission. Her expertise includes
restructuring activities in both the electric and natural gas industries. Ms.
Alexander also holds a law degree.
- Ms. Alexander has two basic proposals as conditions of merger.
1. The Board should require the Petitioners to implement a Reliability and
Customer Service Quality Index (SQI), referred to as the Ratepayer plan.
2. ACE must implement a universal service program similar to that of GPU/FirstEnergy
agreement.
Service/Reliability Issues
- The current (interim) system-wide reliability rules promulgated by the
Board have no automatic enforcement/penalty provisions if reliability falls
below minimum level.
- The system-wide measurements are CAIDI (Customer Average Interruption
Duration Index) and SAIFI (System Average Interruption Frequency Index). The
rules establish a minimum reliability level of a 10 year average of CAIDI/SAIFI
plus two standard deviations.
- To put the Ratepayer plan in place would (1) reduce the risk of service
quality deterioration with little/no cost to ratepayers and (2) complement
the Petitioners' program. This would mean baseline standards and customer
restitution payments for failure to maintain these standards.
- The Ratepayer plan would measure key attributes of ACE's service quality
and reliability of service with regard to:
1. CAIDI/SAIFI
2. Call Center performance
3. Service installation and repair time
4. Disconnection rate
- With respect to reliability performance (CAIDI/SAIFI), according to the
Ratepayer plan, Petitioners must maintain their current level as a minimum
and the Ratepayer plan would reflect the promise of Petitioners to improve
service via the implementation of "best practices" from each
company and new technology.
- The performance targets proposed by Petitioners are in the Petitioners'
plan:
- This plan contains a combination of individual customer-specific credits
if certain service quality failures occur with promises to submit
plans/programs with deadlines if system-wide failures occur.
- Customer-specific means a missed appointment, an inaccurate bill that ACE
has to adjust, an outage for more than 24 hours, etc. Individual affected
customers will receive monetary reparation.
- System-wide performance is subject the creation of remedial plans and
programs, but no penalties or customer rebates. Their system-wide standards
include Call Center performance below 70% calls answered within 30 seconds,
a 10% call abandonment rate, CAIDI or SAIFI over 2 standard deviations from
historical mean, and the presence of individual circuits on
"worst" list for >2 years. However, in this plan there is no
system-wide compensation to ratepayers. ACE would merely submit a plan for
improvement to the Board.
- The individual compensatory scheme of Petitioners' plan is good. However,
the proposal regarding system-wide indicators (CAIDI/SAIFI and call center)
are inadequate in terms of both proposed standards and the type of action
that should occur if standards not met.
- The difference between Petitioners' plan and Ratepayer plan:
The Petitioners' plan does not protect ratepayers from an overall
deterioration in service. Whereas the Petitioners' plan does compensate
individuals for individual lapses in company service, their plan does not
contain a system-wide compensation plan for all ratepayers in the event that
system-wide standards (i.e., CAIDI, SAIFI and Call Center standards)
deteriorate. The Ratepayer plan calls for system-wide compensation when
system-wide performance falls beneath a certain level. While we agree with the
Petitioners' individual compensation component, this plan needs to be
supplemented with a system-wide service index plan that protects ratepayers on a
system-wide basis.
Universal Service Program
("USF")
- On October 25, 2001, the New Jersey Board of Public Utilities rendered an
oral decision to create and implement an interim Universal Service Fund to
assist low-income consumers with their electric and gas bills and to educate
low-income customers about the availability of this type of assistance. The
interim program will provide assistance to these customers while the
permanent program is established. The permanent program is to be submitted
for Board review on or before March 1, 2002, with implementation to begin by
July 1, 2002. The Ratepayer Advocate proposes that as part of this
proceeding, in order to ensure safe, adequate and proper service to all
classes of customers, including low-income, the ALJ and the Board require
immediate implementation of a bill payment assistance program modeled on the
Customer Assistance Program ("CAP") in effect at Pennsylvania's
two GPU Energy distribution facilities. This program will be implemented per
Board Order, dated October 9, 2001, as part of the GPU/FirstEnergy merger
approved here in New Jersey, BPU Docket No. EM00110870.
- This comprehensive program is a form of a Percentage of Income Payment
plan in which the amount of assistance given is based on household income as
compared to the federal poverty guidelines. The amount of the electric bill
for eligible customers is a sliding-scale percentage of the annual household
income. Certain eligible customers are given a monthly subsidy and debt
forgiveness (if their gross household income is at or below 150% of the
federal poverty guideline), while others receive debt forgiveness on a
one-time basis (if their gross household income is between 151% and 200% of
the federal poverty guideline). Customers can enroll in the program through
local community organizations that administer LIHEAP and other aid programs.
- Why should a USF be considered as part of a merger application?
- Low-income customers are more likely to suffer consequence of degraded
service and reliability. These customers are more likely to seek service
centers, payment options, etc.
- Low-income customers are the first to see impact of changes in internal
management structure and merger-related cost-cutting. Also, low-income customers
experience more frequent outages due to lack of investment in distribution
facilities in their neighborhoods.
- Program currently in place at ACE:
The Comfort Partners plan is in development, and is targeted to low-income
customers with electricity-heated homes. This is in compliance with the
Comprehensive Resource Analysis Board Order of 3/9/01. Also, the NJ SHARES
Program provides crisis assistance for those in danger of disconnection.
However, there is currently no bill payment assistance program for low-income
customers.
- The ACE USF program is very small compared with Delmarva and Pepco
programs. ACE knows very little about its low-income customers.
- The Ratepayer Advocate suggests that ACE integrate its Comfort Partners
plan with a plan modeled on the GPU Customer Assistance Program.
- The Ratepayer Advocate recommends a hot weather moratorium.
- The Ratepayer Advocate recommends the aggregation of low-income customers.
- ACE should have an affirmative obligation to educate customers about these
programs.
Testimony of James Rothschild
Mr. Rothschild is a financial consultant specializing in utility regulation.
He is president of his own consulting firm, and has an MBA from Case Western
University.
- This merger would add to the complexity of the corporate structure, making
it that much harder to determine the true capital structure of a regulated
subsidiary.
- If the Board approves the merger, procedures should be implemented
immediately to minimize the ability of the new company to use capital
structure as "a tool to mask the true level of earnings that are being
achieved by its regulated New Jersey operations."
Testimony of David Schlissel and Bruce
Biewald
Mr. Biewald is the President of Synapse Energy Economics, Inc., and Mr.
Schlissel is a Senior Consultant at Synapse Energy Economics, Inc. The firm is a
research and consulting firm specializing in economic and policy analyses of the
electricity industry.
- The merger should not be approved in its current form. Petitioners have
not proved that the merger will benefit ratepayers or that competition will
not be harmed by the merger.
- Petitioners have not presented a detailed assessment of market
concentration and market power, looking at the hourly behavior of the market
under a wide variety "of physical conditions, contractual situations
and bidding behaviors."
- If the Board approves the merger, it should require "full on-going
disclosure of the activities of the Petitioners' affiliates" and create
a mechanism to address market power.
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