Attachment A

Agenda Date: 7/16/03Agenda Item: 2A

STA TE C)F NEW JERSEYBoard of Public Utilities

Two Gateway CenterNe'~ark, NJ 07102

~!~state.ni. us

ENERGY

FINAL DECISION AND ORDERIN THE MATTER OF THE VERIFIED PETITIONOF ROCKLAND ELECTRIC COMPANY FOR THERECOVERY OF ITS DEFERRED BALAN(:;ES AND)THE ESTABLISHMENT OF NON-DELIVERYRATES EFFECTIVE AUGUST 1, 2003 .

DOCKET NO. ERO2080614

IN THE MATTER OF THE VERIFIED PETITIONOF ROCKLAND ELECTRIC COMPANY FORAPPROVAL OF CHANGES IN ELECTRIC: RATES,ITS TARIFF FOR ELECTRIC SERVICE, I-rsDEPRECIATION RATES, AND FOR OTHERRELIEF DOCKET NO. ER021 00724

(SERVICE LIST ATTACHED)

BY THE BOARD:

This Final Decision and Order memoriializes and provides the reasoning for the actiontaken by the Board of Public Utilities ("BPU" or "Board") in the above captioned matters,by a vote of five Commissioners at its July 16, 2003 public agenda meeting, whichaction was summarized in the Board's Summary Order dated July 31, 2003. This FinalDecision and Order supersedes the Bolard's July 31,2003 Summary Order.

treatment of these items because the:~ are not sufficiently "known and measurable" atthis time, the Board is extremely sen:sitive to and concerned about issues relating tosystem reliability and, thus, .t!.SB§~ AUTHORIZES RECO to file a Phase IIproceeding on or before September 1, 2004 to address the Upper Saddle River and theDarlington projects and the associated flow-through impacts that the record reflects andthe ALJ properly found were not cornpleted in the test year. The Board HEREBYORDERS that RECO shall be permitt'ed to include in this Phase II filing a request forrecovery of the costs of completed reliability enhancements, which enhancements it hadsought in this case, but which the rec<)rd reflects and the ALJ appropriately concluded,had not actually been performed. The Board FURTHER ORDERS that the Phase IIproceeding include consideration of v{hether the Upper Saddle River and Darlingtonprojects provide plant additions necessary for transmission (in which case, they couldpossibly be subject to FERC regulation) or distribution (in which case, they could besubject to Board scrutiny). RECO shall have the burden of proof with respect to theclassification of these facilities, inc:luding the appropriateness of including anytransmission related investment or E~xpense in distribution rates versus the FERCtransmission rate.

b. Consolidated Tax Adjustment

As discussed ~, 8taff proposed a consolidated tax savings adjustment reducingRECO's rate base by $1.329 trillion. (8RB at 13). The supplemented record reflectsthat, since 1999, RECO has been included in the consolidated federal income tax filingsof GEl, along with GEl's other subsidiaries. (8-22). Moreover, even before GEl acquiredRECO's parent company, ~R, RECal was included in O&R's consolidated tax returns.(8-19). As a result of filing on a consollidated basis, GEl pays less federal income taxesthan it would if each of its subsidiariE!s filed separately, thus receiving significant tax

savings.

Staff asserted that if tax savings have been achieved by GEl by offsetting the taxlosses of the Company's affiliates wiith positive taxable income from RECO, thesesavings should be shared with ratepayers. The tax savings are appropriately sharedwith RECO's customers because, wer,e it not for the positive taxable income collectedfrom ratepayers by RECO and the other regulated utiJities within the group, GEl's taxsavings would be significantly reduced. (SIB at 64).

It is well-settled law and Board policy that consolidated tax savings are to be sharedwith customers. I/M/O the Petition of: Atlantic City Electric Company for Approval ofAmendments to its Tariff to Provide fair an Increase in Rates and CharQes for ElectricService. Phase II, Docket No. ER90091090J (Order dated October 20, 1992) ("1992Atlantic Electric Order"); I/M/O the Petition of Jersey Central Power and LiQht Company

Tariff Revisions, Docket No. ER91121 ~~20J (Order dated June 15, 1993) ("1993 JCP&LOrder"). The New Jersey courts have confirmed that the BPU has "the power and thefunction to take into consideration the tax savings flowing from the filing of aconsolidated return and determining what proportion of the consolidated tax isreasonably attributable to [the utility]." Lambertville Water Company v. New Jersey Bd.

BPU Docket Nos. ERO2080614 & ER021 0072462

of Public Utility Com'rs, 153 N.J. Su~ 24, 28 (App. Div. 1977), reversed on otherarounds, 79 ~ 449(1979), (citing B)C v. United Gas Pioe Line Co., 386 ~ 237,87~ 1003,18 L.Ed.2d 18 (1967)).

In the Board's 1993 JCP&L Order, .§Y.Q@, the Board clearly explained that:

The Board believes that it is appropriate to reflect a consolidated taxsavings adjustment where, as here, there has been a tax savings as aresult of the filing of a cons,olidated tax return. Income from utilityoperations provides the ability jto produce tax savings for the entire GPUsystem because utility income is offset by the annual losses of the othersubsidiaries. Therefore, the ratepayers who produce the income thatprovides the tax benefits should share in those benefits. The AppellateDivision has repeatedly affirmed the Board's policy of requiring utility ratesto reflect consolidated tax savings and the IRS has acknowledged thatconsolidated tax adjustments can be made and there are no regulationswhich prohibit such an adjustmE~nt. The issue, in this case, is not whethersuch an adjustment should be rnade, but rather, what methodology shouldbe used to make such an adju~;tment. In this area, the courts have heldthat the Board has power and discretion to choose any approach whichrationally determines a subsidic3ry utility's effective tax rate. Toms RiverWater Company v. New Jersey Public Utilities Commissioners, 158 ~

~57 (1978). ,.

Based on our review of the record in this case, the Board REJECTS theALJ's recommendation to acc,ept the income tax expense adjustmentproposed by Petitioner and, instead ADOPTS the position of Staff that therate base adjustment is a more appropriate methodology for the reflectionof consolidated tax savings. The rate base approach properlycompensates ratepayers for thlB time value of money that is essentiallylent cost-free to the holding companies in the form of tax advantages usedcurrently and is consistent with our recent Atlantic Electric decision(Docket No. ER9009190J). Moreover, in order to maintain consistencywith the methodology applied in the Atlantic decision, we modify the Staffcalculation and find that a rate base adjustment which reflectsconsolidated tax savings from 1!~90 forward, including one-half of the 1990savings, is appropriate in this case.

f1993 JCP&L Order at pages 7 -l~].

In this proceeding, RECO argued that: (1) it has had negative taxable income due to itsdeferred BGS balances; and (2) it has not contributed any income to offset losses fromunregulated affiliates on a consolidatedl basis. (Cross-Motion, at 12). Although the ALJwas persuaded by these arguments, for the reasons discussed herein, the BoardHEREBY REJECTS the ALJ's determination on this issue.

BPU Docket Nos. ERO2080614 & ER021 0072463

The Board FINDS that RECO's arguments were incorrectly based upon data from onlythe two most recent years. The 1991-2001 time period utilized by Staff is consistentwith both the 1992 Atlantic Electric Order, and the 1993 JCP&L Order, supra, andappropriately compensates ratepayer~, for the value of money that has essentially beenlent cost-free to the parent holding companies in the form of currently used taxadvantages. In the 1993 JCP&L caS~3, the Board determined that it was appropriate toutilize data from 1990 forward, includirlg one-half the1990 savings. In the 1992 AtlanticElectric case, the Board explained that there may have been a period of time in themind.-to-late 1980's where investors might have reasonably expected that the BoarQwould not make consolidated tax adjustments because of certain IRS private letterrulings and they may have devised ilnvestment strategies based on that expectation.However, the Board further found that, "it is clear that at some point during the 1988-1991 timeframe, investors should reasonably have expected that prospectiveconsolidated tax adjustments would air at least could be made." Therefore, the Boardutilized data from 1991 forward, inclu,ding one-half of the 1990 savings. In this case,Staff used a similar starting point, but began with 1991, in order to start with a full yearperiod.

The Board agrees with Staff that RECO's argument that it would be improper toconsider data from the period prior to jthe date of the merger between O&R and Con-Ed~ July 1999) is not valid. RECO's positive net income during the years 1991-1999clearly produced tax savings for its parent company in those years, and RECO'scustomers srould not be denied their share of these savings simply because of asubsequent merger of its parent with C;orrEd.

The Board continues to believe that if a utility is part of a conglomerate which profits byconsequential tax benefits from the utility's contributions, the utility customers areentitled to have a computation of their fair share of those benefits reflected in their utilityrates. This ensures that the COmpan)f receives the use of the actual tax dollars saved,while ratepayers are not put in the po~;ition of providing the utility with a return on thesedollars. Accordingly, the Board tlill~ ADOPTS the position of Staff that the $1.329million rate base adjustment, calculat:ed in accordance with well-settled Board policy,appropriately reflects consolidated tax savings achieved by RECO through offsetting taxlosses of affiliates with RECO's positpi/e taxable income. Further, the Board ORDERSRECO to submit a consolidated tax adjustment in every future base rate case filing.The future consolidated tax adjustments are to be made utilizing the methodology thatStaff utilized to calculate its $1.329 rnillion adjustment as shown on Exhibit 4 of thisorder.

3.

Pro Forma Operating Income

With the exception of certain specific issues discussed in this section, the BoardHEREBY ADOPTS and incorporates by reference as if completely set forth herein, theALJ's Initial Decision with respect to RIECO's pro forma operating income.

BPU Docket Nos. ERO2080614 & ER021 0072464

g) Rate Design

The ALJ having made no finding on rate design, the Board HEREBY ADOPTS therecommendation of Staff and the Cornpany, and HEREBY DIRECTS that the $7.217million base rate reduction be implemented on an across the board basis, with theexception of a nor.-contested reductioln in the differential in the winter tail block rate forService Classification No.5.

VI. EFFECTS OF ALL RATE CHANGiES

In addition to reflecting the base rate reduction, the interim recovery of the deferredBGS balance, the revised SBC, the unchanged ECA, as well the expiration of theTemporary Credit implemented as part of the year-four rate reduction mandated by theEDECA, all as provided herein, the (~ompany will rmplement an increase in its BGScharges effective August 1, 2003 to reflect the results of the statewide auctionpreviously approved by the Board by Order in Docket No. EX01110754 datedFebruary 6, 2003. The Company estimates that for its customers taking "fixed price"BGS service, the effect of all rate chianges will be to increase its annual revenue by$19.929 million before application of the 6% New Jersey Sales and Use Tax, and$21.125 million with the tax include(j, or by approximately 16%. For the averageresidential customer (SC-1) using 880 kwh per month, the increase is estimated to beabout 15.4% (from $85.21 per month to $98.36 per month).

DATED: 4/20/04 BOARD OF PUBLIC UTILITIESBY: II

SIGNED

JEJ~NNE M. FOXF)RESIDENT

SIGNED SIGNED

FREDERICK F. BUTLERCOMMISSIONER

CAROL J. MURPHYCOMMISSIONER

SIGNED SIGNED

CONNIE O. HUGHESCOMMISSIONER

JACK ALTERCOMMISSIONER

ATTEST:

SIGNEDKRISTI IZZDSECRETARY

BPU Docket Nos. ERO2080614 & ER021 0072475

..

>-z~a.~0uu-s~~1-0

UB

w~

..J~W0Z~~U0~

~

N~

"0

.c N

.-81.c

Q>

C

CO

W

n.

~

~

i&

.~

f!

:..>

- 'l~

~

~Q

I!I 5~ J

~ i~

i~

il js

-.u.~:§

r ~

gi.n

~~

~

II!

!ii!fJ~

g~f

!~~

ltE

fl~~

f~i~

J!~

jIW

fY

~~

~

~~

~~

~J!~

~~

§ii~§

~~

1]81

~~

~

~~

~~

~.1~

~i.~

~~

~~

-~

, w

~

~au~

~~

'~~

i~~

w

ww

~w

-

t !i~

~

~~

~~

~f~

jj~~

dw~

~~

~~

x.....~a:a:a:

.!c2 G

A

off~

1

G I J 1 ,0;

~II

!A

I 3

0-0- Iia i

i

"i,~~~M

!.:.~>-

wII:II)Ii>8w~C~.r~=0(

..-Ii>".!J

.3g'~~~'"0Z~C

'l'J2-~...s~

j.!!.31~~

w

J~

~~.-.CO

)

e~~

~

at at ci at

:1~

~D

~8

I"""0';'

8I

'" "-~

-~~

- -~

---~--

--~

~-

N_m

~

~N

~~

~N

" --~

~~

~

~

1 ~

~~

81 ~

~.i.8.~

~.~

.~.~

~.~

i.~o~

~~

.~~

~~

~

~

1 ~

:m

"'~g:~

'- 8;"';:.Ie"'~

~--"i~

-~X

~~

;S

ori~

:m

..;~

~

-"'I~

..-~

"'-~~

~

~;z__.~

ma;"""G

~~

~

"3 ~

E

~

..' ~

O

~

~

.'-~

~-~

N

-~N

~G

"~

~~

e

-5

~-.G

~

--~N

..G

~U

~

N

O

N...N

U

N

-N

2 ~

i~~

; ~

io"oooO

~iQ

Q8~

~~

:~~

~

~

2~~

-~

G

-~M

. .-~

...~

-~

"'~Q

~N

N

~

~M

~

~$~

g~

i ~

~

~

'i ~

.~~

~~

~~

~

~

~~

a;

N

.-N~

.Ie~~

- 5~

~

~~

--i

~

-' ~

o~'~

mQ

~

G

~N

In

-GI

-G

~-~

--G

'" N

8 ~

~~

~..

~~

~Q

~Q

ooo~~

~~

i~~

~oG

~

R~

8at~

-~

~

~~

~I

~~

~

-N~

~~

O~

--~-G

~

5 ~

~~

NN

ori~...

~.~.

0 ~

o~-'~

~'N~

8°-. ~i

'S.

N~

N~

N

0 -c---~

"~..

G"'~

GG

G

~

~M

G

N

~~

~-

~'"

~

--~ori~

o~~

c~

~

...,-

go ~

-('0

0 G

'" ~

~

g ~

c~

~~

-0~coooQ

~m

~8-~

N.Q

~O

-!

~.

~#G

N

~

.,-~

m~

- G

."'-

-~~

~-('o~

~

- ~

~~

-~.-.~

. ~

~.~

~

~

.Q.~

."'.-.~

.-.~~

.~

..". -M

~.

~~

~~

- ~

o~

C~

~N

~~

~~

.O§

~

~O

0

..~..-

c- ~

-~

-~G

I~N

C

C

N.

.

mN

~O

~

0 ~

. --N

-~

...G-

-N

ori ~

~

~

~.

---~.o

~

~I.

~.11'-

o~

---N

~N

G

~

--~

; 288

~

~~

~O

iQO

O~

i~~

~i

~~

I#~

o-~

-. -8~

~

~

~..5~

N~

o~

-~

G

~o_o

~

ori-'~

~

~~

~ :'N

~.&.~

.0 ~

-oo 0

N"""

~

~-~

-,

'"G

O-

-m

~

---0re~

~

=

=

~

---*:::"

~

""'N~

..,-oonOO

O~

N.~

N~

"-

~#m

oQ

~

~o-=

ID

~"

~

-~"'_m

'" o~

~

"'~-N

II'~.

~o...

--~N

~C

~

~~

-~

~

~G

~

m~

'GN

ori

.-~N

.~G

G

~

~~

"'~

-G

~

-~~

Q--

go'--m

~

~

r;:.-

...~

~N

G

0 II'

N-Il)

=-

"--

I ~

~e

~

e~~

oiooo.~iO

Q

"'S

~~

~~

-~O

N

~

~~

~...

8~..

8m

-!"C_o""N

~

~

ov;~

~"" c

~.

~

'" Q

Il)Q

~

-0 -

"'G

~

10 .~

-.-~

.- '"

..G'

--ori .ori

~

v;~

--~u~

"-~

N

-~

~O

~O

~Q

CO

~O

Q

-~

~~

#"~'&

M

~'"

..0"-0 --on~

- 80

(,)OI~

~~

-O.

~.~

0

-.~."-.

~

~

-.~.~

~

-. ~

r ~ ~

~~

..."ID

~

-.Ie ~

on~

...~

-"'N~

.i.~

I ~

-~

a -8o~

- ~

~

~

~~

N

C

N~

~

-~

- ~

..

~

M~

~

ocoo~o=

C~

C

QO

~"'0

S~

atNC

G'

~

10 M

C

'" '"

~

oc ~

-.e

-'A

0) on

e ~

-~

""'.~.

-."" "l

on. -""~

"""~."'.

~~

~

~

~-m

e

OC

N

...,

C'"

-N

_..,0 C

c~

... ~

0

G

~

.-~

~~

...0- Il)

---~

.~

-N

~e

~-

0 ,.,.

~10

~

.0'" ...

~

M"'~

0 ~

~~

O.O

~Q

- ~

QQ

m~

...~#"'C

~

~...

..O~

C

on

~

~

~

~~

~

8--0."'..

ID

o.~~

m

. "'.

Q.

~.

~

~'.

~ ~

.-.

~"'aI

, \0

,., .~

~~I

~. ~

M

" ~

...'"

c -..,

G

G'

.'. O

IO~

~

~-

r"o..-~

- ~

-I

~~

::)

~

~ ~

~

~

...2 ~ f. i

0 ~ 0 ~

fi

I~

' ~

s

i #

N

~

-o. "'.

~

~

~.

~

~.

~.

~

~

~

~

-.~~

G. .0

-~

~.~

.~

NC

0

..,-~-~

-'" -e

~.~

-C~

Q~

m

ID

~~

~~

-~

e .C

~

~

~...

~-

.~

.--~o

~

-~."'--

~

---~

N

.".~

~~

;

1D.o-

ID

~G

~~

~N

~C

'" C

G

"'. =

#~~

~

e ~

~..~

-~~

..,.., 0

"'..~

-_~e

-~.Q

... .~

.~-.~

~

.~.~

~.

". ~

~

~

~~

~~

.i

~S

mM

.~O

~Q

~m

~

~-~

-~

"'1Q~

-~eo

N

-NG

.-"'...

~

..,-"'- Q

--~

~-

mN

~

~

--~

.,: -0"-

, I'I~

-/

--I ~

- ~

T

>-zoct:

0..-~

~o~U

:g.u<-III

~.~

.->()~W

x-J~W

-go~z=:S

"~~

8u0~

~

N.._

0.-.a -~

8.

)( fa

W

r..

...::=

-;ita...

...~.o.

wa."""

~

...IX_0'"

(Q"'.

(Q

In,...,..:

~

N

N

~;.~

. ~

~

~

C

)c

..c.)

-..UJ

~~

:--K

~; ~

c-.

~

II I

--~i

...§- ..1-

'j!

~;

&

c -

-' x

~.~

... a

...t~z,

-..~e

(.) -cE

~~

.;!

i JW

~

i ~

~~

o.~i

i ;

~E

!.!a

ji-'~

~rl.

i! "'R

!"~

._<~

f

;'i~'::

0 .!~

-~

~~

~

~

0 rj

~t

~j

21~".~

i.~ci:o

~"S

j~j

0;~

~

C"'li~

ij;~

l~!~

~

~:

Ii ifif~

~!8;

J1~~

lg:8~

~

al ~

J~

I! c;! ~

~J

w~

~

~

;

:i! ;

IX...

~

c) ...~

...

g"'~

.qae,,"C,,"

-~~

~

~~

~

: 0

...Q

~

C

~'"

~ci~

i~~

i~

~o~

-""0 ~

~N

'"

ri~

.ri ...

Nil!

~

~...~

~

~

-=

~

fa

i~N

i~

~o~

_.~

."'OD

~

..:8...: :

'" 0

9 .

0 ':e ---

OD

~"G

;:~

8;O8;

g,--., oa""

In~

CD

'" ~

..,~

~

g~ !

~ ~

"';' ~

~

~

!...~

i:~eom

_8~

~~

~

~,.

..,. ,.;

,.;~

i :8

~

~"'-0,"

~"' i

;::~O

CQ

O

J'" V

1V1--

-~

'" '"

G ..."

--po" ..;

"'... G

..m

...m

m

9i-- 9i

on" on"

V1 ::.

--

~~~~

..~

NO

N~~

c >

m"

~N

""":igx'

g~~

~~

~-~

"'I')~

I')

~;~

.1"oii

~U

0

--

,2:'i,o ;;;$~

o~~

..~

~~

~

g-t,.;

:...~

;:

~

~,.; --.I')

I')

g-c,", o~

;;;o;;;~

~::

~~

g ~

g§ ~ i

ioi.:

,.; oi

oi-2

E

~

~

i~a;

~~

§'a~-~

- "'~

N

N~

o 0"

.,; ai

N~

~

~

~

~t

f. ~

~

o. -S

§c

;;;~N

O"

5 ..~

1rI1') I')

~

G

ml'l-

-oi,.;

.1" P

i oS

G

8

8

.., .".

"OoQ

iD~

~~

~-h"'~

~

hGQ

)IlIO'

wi"': ~

. ci ~

hG

g"..O -

N~

-.. ...

!Gi ~

-

~I8.g

go.m

..~

.

.:;;s:~~

:!29-

i ~-.I~x

!J!J .to ,?;>

-~

5~

~a

is~f...

il==~ ~

to to

'Ii 'Ii~

~& ~

.::..N

.~

!.1-1-

rr~6

Ii-,..jj~~!B'a 'a

5 ~"""£fi