DR 98-049
Northern Utilities, Inc.
Recovery of Environmental Response Costs
Order Approving Settlement Agreement
O R D E R N O. 23,046
October 27, 1998
APPEARANCES: LeBoeuf, Lamb, Greene & MacRae by Meabh
Purcell, Esq. for Northern Utilities, Inc.; the Office of the
Consumer Advocate by Kenneth E. Traum on behalf of residential
ratepayers; and Michelle A. Caraway and Stephen P. Frink for the
Staff of the New Hampshire Public Utilities Commission.
I. PROCEDURAL HISTORY
On April 13, 1998, Northern Utilities, Inc. (Northern)
filed with the New Hampshire Public Utilities Commission
(Commission) a Petition for Approval of an Environmental Response
Costs (ERC) Rate Adjustment Tariff establishing a mechanism for
recovery of Northern's ERC and other related tariff changes.
ERCs are incurred in the assessment, remediation, and monitoring
of Northern's former manufactured gas plants (MGPs) in New
Hampshire.
Pursuant to federal and state environmental laws,
Northern is required to investigate and remediate the sites of
former MGPs in Rochester and Exeter, New Hampshire, owned and/or
operated by Northern's predecessors, on which hazardous materials
from the MGP operations have been found. The proposed recovery
mechanism as filed was designed to recover actual annual ERC
expenditures including carrying costs over a five-year period,
plus one-half of related insurance and third-party expenses, and
less one-half of related insurance and third-party recoveries.
On May 11, 1998, the Commission issued an Order of
Notice which scheduled a Prehearing Conference for June 10, 1998.
The Order of Notice also set deadlines for intervention requests
and objections thereto and outlined a proposed procedural
schedule. No Motions to Intervene were filed. The Office of the
Consumer Advocate (OCA) is a statutorily recognized intervenor.
On June 23, 1998, the Commission issued Order No. 22,962
approving the procedural schedule.
On August 6, 1998, Northern filed a Motion for
Protective Order pertaining to Northern's efforts to seek
insurance recovery of the costs it incurs to remediate its former
MGP sites, including but not limited to details of Northern's
negotiations, settlement discussions, and dealings with its
insurance carriers, as well as those of its parent company, Bay
State Gas Company. On September 1, 1998, the Commission issued
Order No. 23,006 granting Northern's request for confidential
treatment.
On August 13, 1998, the Commission approved Staff's
request to change certain dates of the procedural schedule. Also
on August 13, 1998, a technical session/settlement conference was
held at which Northern, the OCA and Staff reached an agreement in
principle.
Subsequent to the technical session/settlement
conference, Northern, the OCA and Staff entered into a Settlement
Agreement (Settlement). On October 1, 1998, Northern filed the
Settlement, which was executed by Northern, the OCA and Staff.
The Settlement resolves all of the issues in this proceeding. On
October 7, 1998, a hearing was held before the Commission at
which time testimony supporting the Settlement was presented to
the Commission.
II. SETTLEMENT AGREEMENT
Northern, the OCA and Staff agree that Northern's
petition, as set forth in the April 13, 1998 filing, is in the
public interest and should be approved, subject to the following
modifications contained in the Settlement Agreement:
1. Prudence of MGP Operations.
Northern and Staff agree that based upon the information
submitted by Northern, the Commission should find that the waste
products from the MGPs were disposed of by Northern's
predecessors in a prudent manner and in accordance with the
practices of the time, and that the resulting condition of the
properties is consistent with such operations. The OCA takes no
position with regard to the foregoing.
2. Implementation Date.
An Environmental Response Cost Adjustment (ERCA) rate developed
to recover ERCs, consistent with the provisions of this
Settlement, shall be charged to firm gas sales and transportation
customers on a per therm basis and shall take effect on November
1, 1998. The ERCA is described in complete detail in the
proposed ERCA tariff, N.H.P.U.C. No. 8-Gas, Original Pages 67 and
68.
3. Environmental Response Cost Recovery Mechanism.
Beginning on November 1, 1998, Northern shall recover from its
firm gas sales and transportation customers over a seven year
amortization period, without carrying charges, the unamortized
balance of the deferred ERCs of approximately $517,095 that it
has incurred through June 30, 1998. Following Commission
approval of this Settlement, Northern shall also defer and
recover through the ERCA, over separate seven year amortization
periods, without carrying charges, all prudent and reasonable
ERCs that it incurs after June 30, 1998. The annual cost period
shall be from July 1 through June 30 (Annual ERC Period) and the
annual recovery period shall be November 1 through October 31
(Annual ERC Recovery Period).
One hundred percent (100%) of the reasonable external
costs/expenses of any amounts resulting from any claims that
Northern has pursued or will pursue against insurance companies
that might have insured Northern (or its predecessors) for the
risks and/or costs now being recovered through the ERCA
(Insurance Claims) and/or against third parties that might bear
responsibility for any ERCs that are or will be incurred by
Northern (Third Party Claims) shall be included in the
calculation of the ERCA.
One hundred percent (100%) of any recoveries or other
benefits received by Northern as a result of a judgment,
settlement or otherwise from Insurance or Third Party Claims
shall be credited to its ratepayers by reducing the unamortized
balance of the ERCs, thus shortening the amortization period
rather than reducing the per therm amount of the ERCA.
Commencing July 1, 1999, Northern shall credit to ratepayers the
amount of any carrying charges, calculated at the prime rate
reported in the Wall Street Journal, earned on average monthly
over-recoveries until such time as the over-recoveries are offset
by ongoing ERC expenditures. The interest rate is to be adjusted
each quarter using the prime interest rate as reported in the
Wall Street Journal on the first date of the month preceding the
first month of the quarter.
Prior to filing its next ERCA and for purposes of future
ERCA calculations, Northern will apply the recoveries associated
with Insurance and Third Party Claims received during the prior
Annual ERC Period by reducing or eliminating the one-seventh
amortized amount scheduled to be recovered in the most future
Annual ERC Recovery Period, and then reducing or eliminating the
one-seventh amount scheduled for recovery in the next most future
Period, and so forth. Whenever there are more than one
one-seventh amortized amount in any Period, the first amount to
be reduced or eliminated will be the one associated with the most
historical Annual ERC Period, followed by the next most
historical, and so forth.
Northern shall file and have in effect a tariff establishing
an ERCA. The ERCA will be an adjustment added to base rates. In
addition, Northern shall file, and have in effect, rate schedules
for all firm sales and transportation rates which incorporate a
provision allowing for the applicability of the ERCA. The ERCA
is designed to recover annual historical actual ERCs without
carrying costs, including one hundred percent (100%) of insurance
and third-party costs, over a seven year amortization period with
one hundred percent (100%) of insurance and third-party
recoveries to be applied to reduce the amortization period.
Actual ERCs shall be accumulated in twelve month periods ending
each June 30. One seventh of each annual actual ERC expenditure
will be collected every year over seven annual periods beginning
each November 1 and extending through October 31, the Annual ERC
Recovery Period.
The ERCA rate shall become effective each November 1,
coincident with the winter period cost of gas adjustment (CGA).
The ERCA rate shall be adjusted each November 1. On or before
each September 16, at the same time Northern makes its winter CGA
filing, Northern will seek Commission approval to adjust its ERCA
to be effective on the upcoming November 1. The adjusted ERCA
will reflect one-seventh of the ERCs incurred for the latest
Annual ERC Period, the expiration of any ERCs that have been
fully recovered over a seven year period, or eliminated by
application of insurance and/or third party recoveries, and the
reconciliation of the recovery of the ERCs over the previous
Annual ERC Recovery Period (reflecting projected collections for
September and October). The reconciliation is derived by
determining the difference between the historical amortized costs
intended to be recovered in the Annual ERC Recovery Period and
the actual annual ERC collections. Any under- or over-recoveries
will be charged or credited towards the actual ERCs to be
collected during the upcoming Annual ERC Recovery Period
effective November 1.
The total amount of costs to be recovered during any Annual ERC Recovery Period shall not exceed five percent (5%) of
Northern's total firm revenues from gas sales customers during
the most recent Annual ERC Period plus total firm revenues from
gas transportation customers during the most recent Annual ERC
Period, adjusted to include Northern's unit gas supply costs by
rate class or system average gas costs. If this 5% cap is
projected to be exceeded, Northern shall defer any excess ERC
amount for recovery during the next Annual ERC Recovery Period in
which deferred amounts can be collected under the 5% cap.
Northern shall recover carrying charges on the unamortized
balance of the amounts deferred due to exceeding the cap.
On or before each September 16, Northern shall file with the
Commission and the Parties all bills and receipts relating to, as
well as depicting the particular purpose for, any ERCs including
costs for preliminary testing and site evaluation incurred in the
preceding historical Annual ERC Period for which it seeks to
begin recovery through the ERCA. In that same filing, Northern
shall include similar material and information to support any
costs/expenses and/or recoveries resulting from Insurance and/or
Third Party Claims pertaining to the same preceding historical
Annual ERC Period. The Parties may contest the reasonableness
and prudence of the specific ERCs described on the bills and
receipts but may not contest the general framework for ERC
recovery established by this Settlement.
In the event that Northern should, after this Settlement,
sell, lease, or transfer all or part of the properties acquired
in the course of remediation whose costs have been recovered
through the ERCA, Northern shall flow the net proceeds to
customers through the ERCA. In the event that Northern should,
after the date of this Settlement, sell, lease, or transfer to a
non-utility all or part of affected properties which are in rate
base, customers would have the benefits associated with utility
ownership of the property.
III. COMMISSION ANALYSIS
After careful review of the Settlement Agreement and
the testimony and exhibits offered at the October 7, 1998
hearing, we find that the Settlement Agreement is reasonable and
in the public good. We agree with Northern and Staff that the
waste products from the Rochester and Exeter, New Hampshire MGP
sites were disposed of by Northern's predecessors in what was
considered at that time to be a prudent manner and in accordance
with the practices of the time. Therefore, we approve the
recovery mechanism agreed to by Northern, the OCA and Staff and
will evaluate the actual rate itself within the context of
Northern's winter 1998/1999 cost of gas adjustment proceeding.
We are pleased that Northern is aggressively pursuing
avenues for insurance and third party recoveries. Any recoveries
obtained by Northern have the potential to significantly reduce
the remediation costs Northern seeks to recover from its
ratepayers, thereby providing a real benefit to Northern's
customers. Therefore, we encourage Northern to continue pursuing
recoveries which are prudent and in the public good.
Consistent with prior decisions regarding EnergyNorth
Natural Gas, Inc.'s (ENGI) Concord MGP site, we find that some
sharing of the burden of the remediation costs between ratepayers
and shareholders is appropriate. The recovery mechanism in the
Settlement which prohibits carrying costs or rate base treatment
of the deferred asset ensures that remediation costs shall be
borne by both ratepayers and shareholders. It is also consistent
with our decision for ENGI in Order No. 21,710 (June 26, 1995)
which states:
Consistent with the recovery mechanism approved in DR 93-168, any
recovery, such as settlement with UGI, net of costs, will reduce
the total amount to be recovered through rates. But rather than
simply lowering the amount to be collected over the remaining
amortization period, we will require ENGI to credit the recovery
to the end of the amortization period, thereby shortening the
time of ratepayer recovery. This should serve as an additional
incentive to ENGI to obtain any potential recovery quickly, as
the amount recovered will reduce the carrying costs being
absorbed by shareholders.
We continue to believe that our decision in Order No. 21,710 to
apply third party recoveries to reduce the amortization period
serves as a strong incentive for the utilities to reduce the
costs borne by its ratepayers for environmental remediation.
Northern's witness Mr. Ferro testified that over a
seven-year period, shareholders will absorb approximately 25% of
the remediation costs by not allowing carrying costs on the
unamortized balance of the deferred asset. Additionally, Mr.
Ferro stated that shareholders have borne the carrying costs
associated with the environmental and recovery effort expenses
incurred since the Commission last authorized recovery in
Northern's last rate case (DR 91-081).
Consistent with our conclusions in Order No. 21,710 and
22,943 (May 19, 1998) for ENGI, we will require Northern to
report each year, as part of its winter cost of gas adjustment
proceeding, the status of the cleanup recovery efforts with third
parties. If there are adjustments necessary to the ERCA,
Northern and any other party or Staff should make recommendations
as part of that proceeding.
Finally, the Settlement Agreement proposed that the
ERCA take effect November 1, 1998. We waive the application of
N.H. Admin. Rules, Puc 1203.05(a), which requires generally that
rate changes be implemented on a service-rendered basis, and will
allow Northern to implement its ERCA on a bills-rendered basis.
This waiver, pursuant to Puc 201.05, produces a result consistent
with the principles embodied in Puc 1203.05(b), which sets forth
exceptions for allowing rate changes on a bills-rendered basis,
and is in the public interest because it eliminates customer
confusion and reduces administrative costs.
Based upon the foregoing, it is hereby
ORDERED, that the Settlement Agreement is APPROVED;
and it is
FURTHER ORDERED, that Northern's Environmental Response
Charge Adjustment shall be effective with bills-rendered for the
first November 1998 billing cycle; and it is
FURTHER ORDERED, that the ERCA rate and supporting
documentation be reviewed by Staff in Northern's winter 1998/1999
cost of gas adjustment proceeding (DR 98-161) in which docket the
rate for the November 1, 1998 through October 31, 1999 period
will be approved; and it is
FURTHER ORDERED, that Northern shall file compliance
tariff pages within ten days of the date of this order.
By order of the Public Utilities Commission of New
Hampshire this twenty-seventh day of October, 1998.
________________ ________________ ________________
Douglas L. Patch Susan S. Geiger Nancy Brockway
Chairman Commissioner Commissioner
Attested by:
Thomas B. Getz
Executive Director and Secretary