[Watchdogs] C. H. Guernsey Cost of Service and Rate Design Study

[mlmoden at texas-skies.com]

Watchdogs:

I attempted to perform a cursory review of the C. H. Guernsey 
(Guernsey) Cost of Service and Rate Design Study commissioned by the 
PEC management and approved by the PEC Board of Directors.  While I 
was afforded the opportunity to review Guernsey's cost of service 
study (COSS) binder, and question Guernsey consultants via 
teleconference during a two-hour meeting with PEC staff, I was unable 
to obtain a copy of the COSS for such a cursory review. 
Subsequently, PEC staff did provide me with copies of certain 
schedules in the COSS.  The obstacle, and apparent violation of PEC's 
open records policies, is that PEC management ruled that the Guernsey 
COSS was confidential until such time that it was approved by the PEC 
Board of Directors.  It is difficult to swallow the idea that a 
proposed cost of service study would be declared confidential while 
at the same time requesting member feedback.  PEC says that you can't 
see the proposal, but wants your feedback on the proposal.  What?

Nonetheless, I managed to a perform a sketchy, cursory review of the 
COSS sufficient to get a bitter taste in my mouth.  Here are few of 
my findings.
(1)  The use of the term "cost of service" is a misnomer.  Guernsey 
did not analyze the economic costs of an economic and efficient 
producer of goods and/or services, it analyzed the "expenses" 
incurred by the PEC, so its an "expense" of service study, not a 
"cost" of service study.
(2)  The Navigant Report shows that PEC operating costs are 
substantially higher than electric cooperatives serving 100,000 
members or more.  These PEC operating costs contain excessive 
expenses of over $34 million per year.  Although PEC is the largest 
electric cooperative in the U.S., it fails to gain the advantages of 
economies of scale that its size would allow.  These excessive 
expenses are the product of  the PEC empire that Bennie Fuelberg was 
bent on building.
(3)  The allocators used to allocate costs to rate classes are 
demand, energy, and customer and their variants.  The residential 
class accounts for about 71% of average non-coincident peak demand, 
about 72% of energy consumption, and about 90% of customers.  I would 
like to say that the methods employed by consultants to use these 
allocators were handed-down from campfire to campfire, or that they 
are derived from myth and fable.  The truth, however, is that the 
methods employed to allocate some costs according to "industry 
standards" are acts of fraud and corruption.  Many of the allocators 
used do not capture the underlying cause-and-effect relationship that 
governs the level of cost incurred.  They have been used for many 
years fraudulently by consultants for large power and industrial 
customers to shift costs away from their clients, and put them on the 
backs of residential customers, especially the smallest residential 
customers.  Subsidized electric rates for large power and industrial 
customers appear to be the norm due to the corrupting influence of 
local chamber of commerces, business leaders, politicians, etc. 
desiring to entice businesses to locate their plants in the area. For 
example, Austin Energy sells power below cost to its industrial 
customers which, of course, is not only unfair and inequitable, but a 
violation of the Texas Constitution.
(4)  Guernsey utilizes inappropriately customer allocators to 
allocate costs.  A lot of the $34 million in excessive expenses are 
allocated in this fashion.  The effect is to allocate a 
disproportionate amount of the these excessive expenses to members 
using the lowest amounts of power. Guernsey's inappropriate use of 
customer allocators plus the excessive expenses are the primary 
reasons why their initial results showed a $39.00 per month customer 
cost for residential ratepayers.
(5)  Guernsey failed to adjust the power factors for large power, 
industrial, and power plant customers which resulted in these rate 
classes not bearing their true share of demand and energy costs.
(6)  Guernsey failed to include line losses for industrial and power 
plant customers resulting in lower shares of energy costs for these 
customers.
(7)  Guernsey allocated single and three phase wire costs using 
customer allocators.  Customer-specific wire costs, i.e., those wires 
on the customer's property, are appropriate for a customer allocator. 
The costs of wires between the customer and the substation are common 
costs.  Any common costs incurred are not attributable to the number 
of customers, but to the customers who use these wires.  The 
residential rate class received about 90% of the costs in this 
allocation instead of the more appropriate 72%, based upon actual 
usage of the wires.
(8)  Guernsey misclassified cost incurred in the satellite offices. 
The costs of land and office space used for transmission and 
distribution purposes were a allocated to "general plant" instead of 
transmission and distribution resulting in further distortions in the 
true cost of service.  A significant amount of general plant costs 
use customer allocators.

The COSS performed by Guernsey is not a fair and equitable cost of 
service study.  Even PEC management has distanced themselves from 
their initial erroneous conclusions.  Rate design proposals presented 
at the March 23, 2009 presentation have been replaced with a much 
more reasonable set of proposed rates.  Gone is the option of 
charging residential ratepayers a $35.00 per month customer charge, 
based upon an erroneous cost of $39.90 per residential customer.  The 
two customer charge alternatives presented now are $20.00 per month 
and $22.50 per month.

While cost of service studies are complex, complicated, and tedious, 
it's unfortunate that PEC does not build its own cost of service 
model, and run its own analyses.  When you hire consultants to do 
this work, you pay for a lot of  unnecessary baggage, including those 
fraudulent allocators.  PEC can establish its own cost of service 
model through an open and transparent process which, hopefully, would 
result in fair and equitable allocations of costs to rate classes.

For the adventurous among you, I have attached a pdf file of my 
letter to the PEC Board of Directors laying out my views in a 
problem-solution format.

Mr. Merle L. Moden


-------------- next part --------------
A non-text attachment was scrubbed...
Name: Recommendsfor2009CostofServicetoWatchdogs.pdf
Type: application/pdf
Size: 124358 bytes
Desc: not available
URL: <http://103.greenbuilder.com/pipermail/watchdogs/attachments/20090424/977e69ce/attachment.pdf>