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The Ohio Senate
Public Utilities Committee

Testimony on House Bill 422
Jeff Jacobson
Strategic Insight Group, Ltd.

On Behalf of
Office of the Ohio Consumers’ Counsel

June 7, 2018

Vice-Chair McColley, Ranking Minority Member Williams, and members of the Committee. My name is Jeff Jacobson. I am testifying on behalf of the Office of the Ohio Consumers’ Counsel. OCC is the state’s representative of residential utility consumers. Utility consumer bills could be increased by House Bill 422 (the Bill). Thank you for this opportunity to testify.

The Bill would diminish longstanding protections for water consumers in Ohio’s ratemaking law (when a water utility acquires other water systems). That could increase rates for Ohio water consumers. I recommend that the Bill not be enacted. At a minimum, the bill should be modified to add consumer protections.

Specifically, our concern includes that the Bill would undermine the consumer protection in O.R.C. Title 49 that Ohio utility consumers should not pay rates based on more than the “original cost” of acquired utility plant (assets). (See lines 173 through 212)

The use of original cost as a fair ratemaking method for consumers is described in a classic ratemaking treatise. That treatise, “Principles of Public Utility Rates,” describes the original cost as a ratemaking method as follows: “Original cost, in public utility accounting has now become a term of art. It means the cost of an asset when first devoted to the public service rather than the cost to a transferee company.” [James Bonbright, p. 174 (1969) (emphasis added).]

The use of original cost for ratemaking, in O.R.C. 4909.05, is fair to utilities and to consumers. But the Bill would redefine original cost in a way that can lead to higher valuations of acquired utility plant and thus higher rates for Ohio consumers to pay. And the protective mechanism of original cost will then exist in name only, where original cost is no longer the original cost of utility plant assets.

The Bill, by modifying the definition of original cost (lines 107-108), would undermine traditional consumer protections. Specifically, the revised definition in the Bill will allow the water utility to charge the market value for monopoly plant as opposed to its actual original cost. In this regard, the market value can inflate the true cost to consumers. More specifically, the Bill would allow the regulated water utility to charge consumers higher rates than the utility would be able to charge otherwise, where the acquisition cost of plant is inflated above true original cost.

I will reference A 2004 Regulated Utilities Manual, by Deloitte, that discusses utility ratemaking methodologies and alternative methods of addressing ratemaking that deviate from the original cost ratemaking principle:

At page 9 of the Manual, Deloitte states as follows on this subject:

Balancing the interests of the customer and the utility is the basic objective in selecting a costing method. The two historic measures have been fair value and original cost. The “end-result doctrine” holds that the propriety of the choice in any given case lies in which of the two produces results that are both fair to the consumer and reasonable for the investor. As a practical matter, the fair-value concept has been abandoned, and original-cost concepts dictate the results of the ratemaking process.

At page 10 of the Manual, Deloitte states that (as of 2004) the use of original cost is predominant in the United States for utility ratemaking purposes. And Deloitte states that, where original cost was not used, consumers typically were given protection from higher rates by a requirement to lower the utility’s rate of return that consumers pay:

Original-cost ratemaking is the formal posture for rate-base determination by all federal jurisdictions and most states, probably in large part because the amounts involved are readily accessible, and their use minimizes the expense and controversy entailed by plant measurement under fair value. The remaining states, even though labeling their process as representing fair value or some other standard, in fact typically produce original-cost results by adjusting the rate of return.

At a minimum, the General Assembly should amend the Bill to require the PUCO to reduce the utility’s rate of return if valuations for acquired assets are allowed at above original cost. As stated in the Deloitte Manual, reducing the utility’s rate of return would simulate for consumers the protections of original cost.

In Pennsylvania, legislators enacted a statute in 2012 that provides extra protection for consumers when utilities deviate from original cost in acquiring property. (66 PaC.S. §1327) The statute is attached. Consumer protections in the Pennsylvania law require utilities - that want to charge consumers for acquired property above the value of original cost - to show that the seller of the property was not “furnishing and maintaining adequate, efficient, safe and reasonable service and facilities, ...” (66 Pa.C.S. §1327(a)(3))

At a minimum, the General Assembly should amend the Bill to require the PUCO to add this consumer protection and other consumer protections in the Pennsylvania law, when acquired assets are to be allowed at above original cost in the rates the utility charges to consumers.

In this regard, the Bill actually prevents consumer protection where it provides that the "original source of funding for any part of the tangible assets shall not be relevant to the determination of the value of those assets." (Lines 206-208) The Bill should be amended to delete this provision.

Please also be aware that the Ohio water utility industry has been successful at chipping away (toward dismantling) some of the long-standing ratemaking principles in Ohio law that have protected Ohio consumers for decades. In 2004, Senate Bill 44 provided water utilities with the ability to collect additional charges from consumers outside of a rate case process, up to three percent for infrastructure improvements related to distribution systems. In 2012, House Bill 379 amended the law to increase these charges to customers up to four and a quarter percent for water companies and expanded the list of the type of plant that qualifies, to include production plant. House Bill 379 also provided water utilities the ability to propose rate increases by expanding the test year concept of ratemaking to include the costs incurred for an additional 12- month period after the test year. And, House Bill 379 permitted a water utility to select a date certain that is farther in the future than what is currently allowed for other utilities, so that more assets can be included in rate base on a projected basis (without actual cost figures). The date certain is the date for determining whether plant is used or useful in providing service, and if so, for ascertaining the value of the plant for which customers will pay. House Bill 422 is yet another attempt by the water industry to deviate from long-standing consumer protection principles with the result of allowing higher charges to consumers with less process.

Accordingly, we recommend that House Bill 422 not be enacted. The Bill’s change to the meaning of “original cost” in the ratemaking statutes would result in higher water bills for Ohio utility consumers. And please note that our position would not prohibit a water utility from acquiring plant for more than original cost; our recommendation is focused on limiting to original cost what the utility can charge its customers for acquired assets.

Again, I thank the Committee for this opportunity to make recommendations for protection of Ohio utility consumers. We look forward to making further recommendations during any process for this legislation.