STATE OF VERMONT PUBLIC SERVICE BOARD I. INTRODUCTION

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1 STATE OF VERMONT PUBLIC SERVICE BOARD Docket No Investigation into Village of Jacksonville Electric ) Company's tariff filing requesting a 24.97% ) rate increase, to take effect March 1, 2004 ) Docket No AND Investigation into Village of Jacksonville Electric ) Company's tariff filing requesting a 12.72% ) increase in base rates (resulting in a 9.81% ) reduction in revenues currently collected), to ) take effect July 1, 2005 ) Order Entered: 3/22/2006 I. INTRODUCTION On January 15, 2004, the Village of Jacksonville Electric Company ("JEC" or "Company") filed revised rate schedules and supporting documents reflecting a $151,164 or percent increase in its rates, to take effect on a service-rendered basis commencing March 1, 2004, for bills rendered April 1, Pursuant to 30 V.S.A. 226(b), JEC implemented the rate increase by imposing a temporary surcharge on existing base rates. On February 26, 2004, the Vermont Department of Public Service ("DPS"), pursuant to 30 V.S.A. 225, filed a letter recommending that the Board open an investigation into the justness and reasonableness of JEC's tariff filing. The Vermont Public Service Board ("Board") opened such an investigation on March 1, 2004 (Docket 6927), and appointed Ennis John Gidney, Chief Economist, as Hearing Officer in that proceeding. A prehearing conference was held in Montpelier, Vermont, on March 12, A duly warned public hearing was held in Jacksonville, Vermont, on April 27, On December 20, 2004, and June 13, 2005, status conferences were held to discuss the

2 Docket Nos. 6927/7078 Page 2 progress in Docket On June 24, 2005, JEC filed revised rate schedules and supporting documents reflecting an increase of 12.72% over base rates, to take effect with service rendered July 1, 2005, for bills rendered August 1, In light of the surcharge under investigation in Docket 6927, this constituted a $76,285 or 9.81% reduction in revenues being collected from ratepayers. JEC requested a waiver of the 45-day notice period for this rate change, and that an investigation into the new request be consolidated with Docket The DPS supported these requests, and they were granted by the Board. The Board opened Docket 7078 to investigate the new rate change, and appointed Ennis John Gidney, Chief Economist, as Hearing Officer in the proceeding. Pursuant to 30 V.S.A. 226(b), JEC implemented the new rate change by imposing a temporary surcharge of 12.72% on existing base rates; this replaced the earlier surcharge of 24.97%. On June 13, 2005, a status conference was held to discuss the progress in these dockets. On July 12, 2005, a prehearing conference was held to establish a schedule in Docket On September 14, 2005, a public hearing in both dockets was held at the Jacksonville Municipal Center. On November 21, 2005, JEC and the DPS filed a settlement that, if approved by the Board, was intended to resolve all remaining issues associated with the tariff filings ("Stipulation"). However, the Stipulation did not clearly address whether the rates that were the subject of Docket 6927 were just and reasonable during the time period they were in effect, or whether JEC's customers were owed a refund pursuant to 30 V.S.A. 226(b). On November 29, 2005, the Hearing Officer requested: (1) a clarification of the just and reasonableness of the Docket 6927 surcharge of percent; and (2) responses to several questions regarding whether refunds were due to JEC's customers, and if so, how they could be paid. On December 20, 2005, JEC and the DPS filed a Supplemental Stipulation ("Supplemental Stipulation") that stated the rates that were the subject of Docket 6927 were just and reasonable during the period they were in effect and therefore no refunds were due to JEC's customers.

3 Docket Nos. 6927/7078 Page 3 The November 21, 2005, Stipulation provides that the testimony and exhibits filed by JEC, the Audit Reports, Internal Control and Compliance Findings, Management Letter, and any other deliverable final documents produced by R.F. Lavigne & Co. as described in the December 1, 2004, Engagement Letter in connection with that firm's review of JEC's records and practices, may be admitted into evidence and considered by the PSB in connection with the Stipulation. 1 Accordingly, I am admitting all of the documents described above into the records of both Dockets 6927 and 7078, irrespective of whether those documents were originally filed in one or the other or both of those dockets. I have reviewed the accompanying tariffs and documents in these filings and based upon the evidence of record, the testimony and exhibits presented in these dockets, and the stipulations entered into by JEC and the DPS on November 21, 2005, and December 20, 2005, I hereby report the following findings and conclusion to the Board in accordance with 30 V.S.A. 8. II. FINDINGS 1. JEC and the DPS have reached a settlement that resolves all issues associated with these tariff filings. Stipulation and Supplemental Stipulation, generally. 2. The adjusted test year in Docket 6927 is March 1, 2004, to February 28, JEC's proforma cost of service for this adjusted test year is $756,635. Docket 6927 tariff filing cost of service study. 3. The adjusted test year in Docket 7078 is July 1, 2005, to June 30, JEC's proforma cost of service for this adjusted test year is $701,696. Docket 7078 tariff filing cost of service study. 4. During the Docket 7078 adjusted test year, JEC is projected to have power costs of $447,712 at a cost of $ cents per kwh. Docket 7078 tariff filing at Attachment A. 5. Review of the rate requests was complicated by serious irregularities in JEC's financial books and records. In February 2002, a new clerk and treasurer was elected. This clerk/treasurer lacked the training and experience necessary for that position, resulting in numerous billing and accounting errors. The accounting records for calendar year 2002 (the test year in Docket 6927) 1. Stipulation at 3 4.

4 Docket Nos. 6927/7078 Page 4 were not adequately maintained, many customers did not receive bills for service, and the validity and reliability of JEC's financial records were questionable. Docket 6927 Accounting Panel pf. at Although the clerk/treasurer regularly reported to JEC's Board of Trustees, the trustees were not aware of any problems until October 2002, and did not realize the severity of the problems until January Docket 6927 Board of Trustees Panel pf. at Audits were performed by an independent auditor, R. F. Lavigne & Co., of JEC's financial statements for 2002, 2003 and The auditors also reviewed JEC's internal controls. The results of those audits and reviews have been provided to the DPS and the PSB. Docket 6927 Board of Trustees Panel pf. at 5; Audit Reports for 2002, 2003, and The audits showed significant operating losses in 2002 ($66,079), 2003 ($37,166) and 2004 ($51,552). 2 When the total non-operating income and expenses are recognized, the net losses are ($73,045) in 2002, ($22,162) in 2003, and ($42,833) in The audits also showed accounts receivable (net of reserve for uncollectibles) of $110,018 at year-end 2002, $154,241 at year-end 2003 and $120,669 at year-end In 2005, JEC subsequently wrote off $72,000 of uncollectible accounts receivable in the 2002 financial statements. Audit Reports for 2002, 2003, 2004 at Exh. B. 9. The operating losses and write-off referred to above are substantially attributable to the clerk/treasurer's lack of training and experience, and to inadequate oversight by the Board of Trustees. Stipulation at In traditional ratemaking, test year loads are held unchanged, while test year costs are adjusted for known and measurable changes. Stipulation at The parties agree that the surcharge in effect from March 1, 2004, through June 30, 2005 (which is the subject of Docket 6927), resulted in rates that were just and reasonable during that time period. Supplemental Stipulation at The parties agree that approval of the currently effective surcharge (which is the subject 2. Paragraph 6 of the Stipulation states that the 2004 audit showed operating losses of $42,833. I assume this is a typographical error because Exhibit B of the 2004 Audit shows operating losses of $51,552, with $42,833 being the net loss after adding non-operating income and expenses to the operating losses. If this assumption is incorrect, parties shall inform the Board so that an appropriate correction to this Order can be made.

5 Docket Nos. 6927/7078 Page 5 of Docket 7078) results in rates that are just and reasonable. Stipulation at JEC agrees to require all members of its Board of Trustees to participate in training in reading and using financial statements. JEC will inform the DPS and Board in advance, in writing, of its plans for fulfillment of this condition, and shall report by March 31, 2006, as to whether this condition has been met. If it has not been met by that date, JEC's report will state when it expects the condition to be met. Stipulation at JEC represents that it has implemented accrual accounting that complies with Government Accounting Standards Board Statement 34, Generally Accepted Accounting Principles (GAAP), and the FERC Uniform System of Accounts. Stipulation at JEC agrees to respond in writing, no later than December 31, 2005, to each of the internal control recommendations made by the Independent Auditor in its letter of May 31, 2005, or any superceding letter, and to implement promptly all such recommendations deemed feasible by JEC. If JEC considers any of the recommendations to be infeasible, it will explain in detail why it should not be required to implement them. Stipulation at JEC agrees to file by December 31, 2005, a financial budget for the calendar year 2006 that identifies any and all estimated changes in power supply costs, operating expenses, financing and capital expenditures. Stipulation at JEC agrees to prepare and annually update monthly financial plans and projections (budgets) for not less than a three-year planning period (the last two years to be prepared on a quarterly or annual basis). JEC further agrees to prepare, and the Village Trustees to use, monthly and quarterly financial statements (Balance Sheet, Income Statement and Cash Flow Statement) that compare actual with budgeted or planned results for the period. JEC will promptly provide to the DPS all documents prepared pursuant to this paragraph during calendar years 2005 and Stipulation at The parties agree that the testimony and exhibits filed by JEC, as well as the Audit Reports, Internal Control and Compliance Findings, Management Letter and any other deliverable final documents produced by R. F. Lavigne & Co. as described in the December 1, 2004, Engagement Letter in connection with that firm's review of JEC's records and practices, may be admitted into evidence and considered by the PSB in connection with this Stipulation.

6 Docket Nos. 6927/7078 Page 6 Stipulation at JEC will provide the Department with a copy of, and the Department shall have an opportunity to review and comment on, any filings made with the Board under the Stipulation. Stipulation at The parties acknowledge the Board's continuing jurisdiction to resolve any disputes arising under this Stipulation. Stipulation at 4. III. DISCUSSION I have reviewed all the evidence in these dockets and conclude that the overall settlement in the Stipulation and the Supplemental Stipulation is reasonable. Approval of these stipulations will result in rates that are just and reasonable and will promote the general good of the state. Accordingly, I recommend that the Board approve the Stipulation and the Supplemental Stipulation, in their entireties. One issue deserves discussion the serious irregularities in JEC's financial books and records in 2002, and the inadequate internal controls in place at JEC at that time. These financial problems adversely affected the quality of service JEC provided its customers (particularly with regard to billing), and they revealed significant issues with the oversight that was supposed to be provided by JEC's Board of Trustees. Utilities must keep accurate books and records. 30 V.S.A. 229 prohibits a utility from charging rates that deviate from its approved tariffs without the advance approval of the Board. Without accurate accounting records, it is impossible to determine whether customers are being appropriately billed. And in fact, as explained in the auditor's 2002 Internal Control and Compliance Findings, JEC did make billing errors in 2002 and early 2003, and JEC's accounting records were too incomplete to determine what customers had actually paid during certain periods of This led directly to the $72,000 write-off of uncollectible accounts receivable 3. Finding of the auditor's 2002 Internal Control and Compliance Findings states, in relevant part: Vermont Public Power Supply Authority personnel identified billing errors in the months of April and December 2002 and January It is unknown as to how many of the January 2003 customer billings were mailed, as many customers indicated that they had not received January invoices. The Company, with the assistance of Vermont Public Power Supply Authority, recreated the corrected invoices for the year A detail of monthly charges was sent to each electric

7 Docket Nos. 6927/7078 Page 7 referred to in Paragraph 7 of the Stipulation. Furthermore, as the Board has previously stated: It is incumbent upon the regulated industries of this state to maintain their books and records so that charges that the companies seek to have recovered from ratepayers can be analyzed expeditiously and thoroughly. 4 The Board must be able to assure JEC's ratepayers that JEC's rates are based upon proper accounting practices. In addition to the impact on customers and the financial status of JEC, the inadequacy of JEC's 2002 financial records hampered state regulators' review of the tariff filing that is the subject of Docket 6927 (2002 is the test year in that docket) and caused a significant delay in the resolution of that docket. The schedule in Docket 7078 was also affected by the need to resolve the problems with JEC's accounting records. Given the importance of accurate utility books and records, I am very pleased that JEC has agreed to make (and in some cases has already made 5 ) major changes to its accounting practices and internal controls. The Stipulation explicitly states many of the changes that JEC will make (or has made), including: implementing accrual accounting that complies with Government Accounting Standards Board Statement 34; promptly implementing all internal control recommendations made by the auditor that JEC deems feasible; 6 customer for the December 2001 billing, all of 2002, and January and February of Past due balances for 2001 were not included. Since a detailed record of payments was unavailable during certain periods of 2002, the Company relied on payment information provided by customers to determine payments during the periods lacking information. Our calculation of the loss is approximately $77,000 for the period ending February This consists of past due accounts from 2001 that were not included in the detail of charges sent to each customer. The amount attributed to 2001 is not known. It also consists of $17,600 of invoices for line extension and other services that could not be traced to a payment due to lack of detail cash receipt records. Lastly, it consists of customer accounts for electric billings during 2002/2003 that were not paid. The amount attributed to the 2002/2003 electric billing is not known. 4. Dockets 5841/5859, Order of 6/16/97 at Finding of the auditor's 2004 Internal Control Findings states, in relevant part, that "The Company has implemented significant improvements in internal control during 2004 and early 2005." 6. According to a December 22, 2005, letter from JEC's President, JEC has already implemented seven of the independent auditor's internal control recommendations, and is expected to implement the last recommendation by the end of March This letter was written to satisfy the requirement of Paragraph 12 of the Stipulation, and was attached to a letter from Elijah D. Emerson, Esq., Primmer & Piper, to Susan Hudson, Clerk, Board, that was filed on January 3, 2006.

8 Docket Nos. 6927/7078 Page 8 filing a financial budget for 2006; 7 preparing and annually updating monthly financial plans and projections for not less than a three-year planning period; preparing and using monthly and quarterly financial statements that compare actual with budgeted or planned results for the period; and requiring all members of JEC's Board of Trustees to participate in training in reading and using financial statements. These aspects of the Stipulation are critical to resolving many of the issues in these two proceedings, and are a key reason why I conclude that the settlement embodied in the Stipulation and the Supplemental Stipulation is reasonable. JEC is taking appropriate steps to address the inadequacies of its financial and accounting systems, and the oversight provided by its Board of Trustees. These actions will benefit ratepayers. IV. CONCLUSION I have reviewed the Stipulation, the Supplemental Stipulation, and the record of these proceedings. I find that based upon all of the foregoing and the evidence in the record, the Stipulation and the Supplemental Stipulation, taken as a whole, promote the general good of the state and resolve all issues in Dockets 6927 and I, therefore, recommend that the Stipulation and the Supplemental Stipulation be approved by the Board in their entirety. The parties have waived their right to service of the Proposal for Decision in accordance with 3 V.S.A Dated at Montpelier, Vermont, this 10 th day of January, s/ennis John Gidney Ennis John Gidney Hearing Officer 7. This accompanied the letter from Elijah D. Emerson, Esq., Primmer & Piper, on behalf of JEC, to Susan Hudson, Clerk, Board, that was filed on January 3, Stipulation at 4.

9 Docket Nos. 6927/7078 Page 9 V. BOARD DISCUSSION After reviewing the Hearing Officer's Proposal for Decision, we had questions for the parties regarding the appropriateness of all JEC ratepayers bearing the $72,000 in additional costs that are "substantially attributable to the clerk/treasurer's lack of training and experience, and to inadequate oversight by the Board of Trustees." 9 As a result, we scheduled a technical hearing on the Stipulation. On February 23, 2006, JEC filed a Second Supplemental Stipulation between itself and the DPS which was intended to address our concerns about the $72, The Second Supplemental Stipulation states that ratepayers outside of the Village of Jacksonville are not paying any share of the $72,000 because that amount has not been, and will not be, recovered in rates. Rather, according to the Second Supplemental Stipulation, the $72,000 is a reduction to an asset account that has been treated as a corresponding reduction in the electric company's equity, which belongs to the Village and therefore only affects Village residents. 11 The Second Supplemental Stipulation also states that the uncollectible accounts come from both inside and outside the Village. But, according to the Second Supplemental Stipulation, due to the accounting errors and inadequate bookkeeping referred to in the original Stipulation, it is not possible to identify which customers did not pay their bills. Thus, any refund would provide an undeserved benefit to some customers who did not pay their bills and thus contributed to the $72,000 write-off, according to the Second Supplemental Stipulation. 12 On February 24, 2006, we sent the parties written questions regarding the Second Supplemental Stipulation that we expected witnesses to address at the upcoming technical hearing. On March 1, 2006, we held a technical hearing on the original Stipulation and the Second Supplemental Stipulation. A witness for JEC responded to our questions. The DPS had a witness present, but he did not testify. After considering the Second Supplemental Stipulation and the additional evidence 9. Stipulation at We hereby admit the Second Supplemental Stipulation into the records of both Docket 6927 and Second Supplemental Stipulation at Second Supplemental Stipulation at 5.

10 Docket Nos. 6927/7078 Page 10 presented at the technical hearing, we are persuaded that the three stipulations filed in these proceedings, taken as a whole, provide a reasonable resolution to the issues in these dockets, and that the Hearing Officer's Proposal for Decision should be accepted in its entirety. At the technical hearing, JEC's witness explained that the amount of the write-off was determined by JEC's outside auditor, and is the difference between the accounts receivable balance at the beginning of the audit ($174,811) and what could be identified as accounts receivable by JEC and the auditor at the end of the audit. The $72,000 figure included in the stipulation is an estimate that was provided by the auditor. Since the date the Stipulation was filed, the auditor has calculated the actual write-off to be $61, JEC's witness also clarified that the tariff filing in Docket 6927 was not based on JEC's inaccurate accounting records. Rather, according to JEC's witness, the filing was prepared using actual meter reading data for 2002, actual power supply budget information, and other actual cost information. 14 This means that there are no costs included in the rates for the time periods that are the subjects of either Dockets 6927 or 7078 that are directly attributable to the clerk/treasurer's lack of training and experience or to inadequate oversight by JEC's Board of Trustees. As JEC's witness pointed out, however, JEC is incurring costs that are the result of changes to its operating practices, such as the costs of the annual independent audit and new computer software. 15 Our questions about costs that are substantially attributable to the clerk/treasurer's lack of training and experience and to inadequate oversight by the Board of Trustees were not intended to encompass these or other costs associated with implementing the independent auditor's recommendations for changes to JEC's accounting practices and internal controls. We emphasize our agreement with the Hearing Officer's statements regarding the importance of accurate utility books and records. JEC's actions to address the inadequacies of its financial and accounting systems and the oversight provided by its Board of Trustees are critical to our acceptance of the settlement embodied in the three stipulations. 13. Tr. 3/1/06 at 4 5 (Underhill). 14. Tr. 3/1/06 at (Underhill). 15. Tr. 3/1/06 at 8 9 (Underhill).

11 Docket Nos. 6927/7078 Page 11 VI. ORDER IT IS HEREBY ORDERED, ADJUDGED AND DECREED by the Public Service Board of the State of Vermont that: 1. The Findings and Conclusion of the Hearing Officer are adopted. 2. The Stipulations filed November 21, 2005, December 20, 2005, and February 23, 2006, between the Village of Jacksonville Electric Company ("JEC") and the Vermont Department of Public Service ("DPS"), are approved in their entireties. 3. JEC is entitled to rates that will produce additional revenues in the amount of $151,164, or percent above current base rates, for service rendered from March 1, 2004, through June 30, JEC is entitled to rates that will produce additional revenues in the amount of $96,225, or percent above current base rates, for service rendered on and after July 1, JEC shall file appropriate tariffs consistent with the Findings and this Order within ten days of the date of this Order, to take effect on a service-rendered basis commencing July 1, JEC shall inform the DPS and the Vermont Public Service Board ("Board") in advance, in writing, of its plans for fulfilling the November 21, 2005, Stipulation's requirement that all members of JEC's Board of Trustees participate in training in reading and using financial statements. 7. JEC shall file a report with the DPS and the Board on or before March 31, 2006, stating whether all members of JEC's Board of Trustees have participated in training in reading and using financial statements. If they have not done so by that date, JEC's report shall state when JEC expects this condition to be met. 8. JEC shall use accrual accounting that complies with Government Accounting Standards Board Statement 34, Generally Accepted Accounting Principles, and the Federal Energy Regulatory System's Uniform System of Accounts. 9. JEC shall prepare and annually update monthly financial plans and projections (budgets) for not less than a three-year planning period (the last two years to be prepared on a quarterly or annual basis). JEC shall prepare, and its Board of Trustees shall use, monthly and quarterly

12 Docket Nos. 6927/7078 Page 12 financial statements (Balance Sheet, Income Statement, and Cash Flow Statement) that compare actual with budgeted or planned results for the period. JEC shall promptly provide to the DPS all documents prepared pursuant to this paragraph during calendar years 2005 and JEC shall provide the DPS a copy of, and the DPS shall have an opportunity to review and comment on, any filings made with the Board under the November 21, 2005, Stipulation. Dated at Montpelier, Vermont, this 22 nd day of March, s/james Volz ) ) PUBLIC SERVICE ) s/david C. Coen ) BOARD ) ) OF VERMONT s/john D. Burke ) OFFICE OF THE CLERK FILED: March 22, 2006 ATTEST: s/susan M. Hudson Clerk of the Board NOTICE TO READERS: This decision is subject to revision of technical errors. Readers are requested to notify the Clerk of the Board (by , telephone, or in writing) of any apparent errors, in order that any necessary corrections may be made. ( address: Clerk@psb.state.vt.us) Appeal of this decision to the Supreme Court of Vermont must be filed with the Clerk of the Board within thirty days. Appeal will not stay the effect of this Order, absent further Order by this Board or appropriate action by the Supreme Court of Vermont. Motions for reconsideration or stay, if any, must be filed with the Clerk of the Board within ten days of the date of this decision and order.