[Watchdogs] C. H. Guernsey Cost of Service and Rate Design Study
mlmoden at texas-skies.com
mlmoden at texas-skies.com
Fri Apr 24 23:37:40 CDT 2009
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
(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
(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
Mr. Merle L. Moden
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