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BPU ORDERS JCP&L TO FILE PETITION SEEKING RATE REVIEW


September 27, 2012
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In an unusual move – indeed, believed to be the first time ever – the New Jersey Board of Public Utilities (“BPU” or “Board”) has issued an Order directing a public utility to file a base rate case petition so that the BPU can determine whether the company’s rates for electric service are just and reasonable.

The proceeding was initiated at the instance of the Division of Rate Counsel (“Rate Counsel”), which filed a petition asserting that, based upon publicly available data, Jersey Central Power & Light Co. (“JCP&L” or “Company”) is earning an unreasonable rate of return. Noting that more than six years had elapsed since the Company’s last base rate case, Rate Counsel contended that a new rate proceeding would help ensure that JCP&L makes needed capital investments so as to allow it to provide safe, adequate and proper service. Rate Counsel also requested that the Board direct JCP&L to utilize a 2010 historical test year in its rate case.

In response, JCP&L argued that Rate Counsel had failed to demonstrate that the Company’s rates were unjust and unreasonable and that Rate Counsel had not provided sufficient reason for the Board to order JCP&L to file a base rate case at this time. JCP&L also asserted that Rate Counsel’s analysis was flawed and that it inappropriately focused on the Company’s overall rate of return (“ROR”) rather than its achieved return on equity (“ROE”), which the Company maintained is the primary factor considered in base rate cases.

Rate Counsel utilized data from JCP&L’s filings with the Federal Energy Regulatory Commission, concluding that the Company has exceeded its allowed ROR of 8.5%, as established in JCP&L’s last base rate case. It also argued that data relied upon by JCP&L were “flawed” and “unsupported.” It further posited that JCP&L’s “history of reliability problems warrant[ed] a base rate case review of the Company’s captial spending and investments.”

In turn, JCP&L argued that the data utilized by Rate Counsel were improper. JCP&L argued that the Board should examine data based upon the Company’s 2012 budget, adjusted for a revised sales forecast and for known, actual results through March 31, 2012, including weather-adjusted revenues and pro forma and post-test year adjustments. Its ROE, which, according to JCP&L, is the proper matrix upon which the Board should base its decision, was 10.1% for the 12-month period ended June 30, 2011, a rate within a “zone of reasonableness.” Using the same methodology, JCP&L stated that for the 12 months ended December 31, 2011, its ROE dropped to 9.29%

JCP&L also argued that Rate Counsel’s filing utilized “stale” 2010 data and that it “contain[ed] numerous manifest errors.” It argued that “using 2010 data to determine whether a utility’s rates are just and reasonable in 2012 would be akin to retroactive ratemaking.” JCP&L similarly argued that Rate Counsel’s petition “failed to make standard ratemaking adjustments.” In contrast, JCP&L claimed that its own analysis was “conservative,” as it included many ratemaking adjustments with which the Company disagreed and which it would not necessarily include in a rate filing, but which it believed Rate Counsel and Board Staff usually proposed. JCP&L contended that its analysis “on the ‘whole demonstrates that JCP&L’s rates are within the zone of reasonableness and there is no need for a base rate proceeding.’” Indeed, JCP&L pointed out that its rates have decreased “significantly” since 2002 and that they are the lowest electric rates among the four New Jersey electric distribution companies (“EDCs”).

JCP&L further argued that the fact that it had not filed a base rate case for several years should not be a reason to order that a new case be filed. It maintained that no legal or regulatory precedent or factual basis correlates the length of term between rate cases with the reasonableness of a utility’s base rates, and that the Company should not be penalized for effectively managing its business so as to avoid the need for frequent base rate cases. Similarly, JCP&L contended that the length of time since the filing of the Company’s last base rate case has not affected its system-wide reliability. It argued that its Annual System Performance Reports have shown an overall positive trend since 2002. Moreover, the Company contended that “it has improved system reliability since its last base rate case and that recent reliability investigations do not warrant a forced base rate case filing.”

Conceding that no reported cases exist regarding the burden of proof where a third party challenges Board-approved rates, JCP&L pointed to federal law as instructive, arguing that under the Federal Power Act, the burden of proof is on either the tribunal or the complainant “to establish that the current rate is unjust and unreasonable.”

An intervenor in the case, Gerdau Ameristeel Corporation (“Gerdau”), contended that there was no dispute as to the Board’s legal authority to issue an order directing the initiation of a base rate case and that, because material issues exist with regard to JCP&L’s current earnings, revenue requirements and the appropriate level of an allowed return, such an order should be issued. Gerdau also asserted that the Board should examine the “continuing justness and reasonableness of the cost allocation and rate design of JCP&L’s distribution rates.” Gerdau also contended that JCP&L’s comparison of its rates to other EDCs was irrelevant to the Board’s determination as to whether JCP&L’s revenues are in line with its actual costs.

Also participating in the case was AARP. Contending that JCP&L should be forced to file a base rate case, AARP asserted that ratepayers should not have to rely solely on a company’s desire to initiate such a proceeding in order for the Board to examine the reasonableness of its base rates.

In its decision, the Board noted its overarching mission to “ensure that regulated public utilities provide safe, adequate and proper service to the citizens of New Jersey” and that the Public Utilities Act, which vests the BPU with the power to generally supervise and regulate public utilities, should be read broadly and construed liberally. Issues involving rates, determined the Board, “must balance the interests of utility investors and ratepayers in determining what is ‘just and reasonable.’” Citing In re N.J. Power and Light Co., 9 N.J. 498, 534 (1952), the Board concluded that “[a] utility’s rate of return must fall ‘within the range of reasonableness, the zone between the lowest rate not confiscatory and the highest rate fair to the public.’” The Board analyzed the matter before it as presenting three general issues: JCP&L’s earnings, the lapse of time since the Company’s last base rate case, and reliability/infrastructure issues. Given the complexity of those issues and the fact that they would very likely be inter-related, the Board found that directing JCP&L to file a base rate case would be “the most efficacious method to address a number of regulatory concerns.”

As to earnings, the Board concluded that, “at this time, [it could not] properly evaluate any claims that JCP&L is overearning.” It also concluded that “[a] base rate case will clarify the zone of reasonableness for this company under current economic conditions, and allow the Board to set just and reasonable rates on a prospective basis, and provide JCP&L with revenues necessary to attract capital on reasonable terms.”

While determining that not filing a base rate case for a long period of time is not an indication of mismanagement, and may in fact reflect good management, the Board nevertheless determined that “an absence as long as JCP&L’s” impacted the opportunity to thoroughly examine JCP&L’s finances and operations.

The Board also addressed the question of JCP&L’s service related issues, noting that it had determined JCP&L to be deficient in certain respects with regard to storm restoration, planning and preparation. The Board did note that JCP&L had committed to implementing certain recommendations presented to the Board with regard to service and facilities, but concluded that, “[g]iven the extent of reliability concerns with JCP&L’s system, questions of system performance and investment would be best investigated in the context of a base rate case where the financial impact of any additional investments can be determined as an aid in decision-making.”

In sum, the Board determined that a base rate proceeding “will assure that JCP&L’s rates are just and reasonable, and that the Company is investing sufficiently to assure the provision of safe, adequate and proper utility service to its customers ….”

With regard to the test year, the Board concluded that it would be appropriate for JCP&L to utilize an historical test year of 2011 so as to better capture the Company’s spending patterns and capital needs. It further determined, however, that the Company should have the opportunity to establish “known and measurable” changes to the test year. The Company’s filing is due no later than November 1, 2012.