1 Gariety Werner BEFORE THE PUBLIC UTILITY COMMISSION OF THE STATE OF OREGON UE Marginal Cost of Service PORTLAND GENERAL ELECTRIC COMPANY Direct Testimony and Exhibits of Bonnie Gariety Bruce Werner February, 0
2 Werner Gariety / i Table of Contents I. Introduction and Summary... II. Distribution Marginal Cost Study... III. Customer Service Marginal Cost Study... A. PGE Accounts... B. Functionalization of Cost... C. Allocation of Cost... D. UE Stipulated Agreement... V. Qualifications... List of Exhibits...
3 Werner Gariety / I. Introduction and Summary 0 0 Q. Please state your names and positions. A. My name is Bruce Werner. I am responsible for the Distribution Marginal Cost Study in Section II. My name is Bonnie Gariety and I am responsible for the Customer Service Marginal Cost Study in Section III. We are Pricing and Tariffs Analysts in the Rates and Regulatory Affairs Department for PGE. Our qualifications are described in Section IV. Q. What is the purpose of your testimony? A. Our testimony describes the distribution and customer service marginal cost studies. PGE Exhibit 0 provides a summary of these marginal costs by component. The summary lists costs by PGE rate schedule for subtransmission, substation, feeder backbone and tapline, transformers, service laterals, meters and customer service costs. Generation Marginal Cost and rate schedule changes are discussed in PGE Exhibit 00. Q. What is the purpose of the distribution and customer marginal cost studies? A. The purpose is to calculate the incremental, or marginal, cost of service to each customer class. The starting point for calculating marginal costs is the identification of the fundamental cost drivers for the distribution facilities and customer services that cause PGE to incur costs. Marginal costs are used to calculate marginal cost revenues; that is, the revenues PGE would collect if all of its customers were charged rates that equal marginal costs. In practice, rates can deviate from marginal costs in order to establish charges that recover the authorized revenue requirement.
4 Werner Gariety / Q. Are marginal costs an important tool for setting prices? A. Yes. One of the primary goals of marginal cost theory is to encourage the efficient use of goods and services by pricing them at marginal cost. When utility rates are not set equal to marginal costs, users of these services may over consume or avoid otherwise economic consumption. Currently, there is growing interest in customer owned 0 distributed generation and other demand response initiatives. In this environment, inefficient pricing can lead to cross-subsidies or uneconomic bypass of utility facilities. Electric prices based on marginal costs are` an important tool for utilities and their customers to make financial decisions that reflect the most economic use of the services provided by PGE. Q. How are the results of the marginal cost studies used? A. PGE Exhibit 00 uses the results of this study to spread PGE s proposed revenue requirement across the relevant customer classes.
5 Werner Gariety / II. Distribution Marginal Cost Study 0 0 Q. Which marginal distribution costs do you calculate? A. We calculate marginal distribution costs (separately) for subtransmission, substations, distribution feeders (backbone facilities and local facilities), line transformers (including services), and meters. Q. How do you calculate the marginal unit costs of subtransmission and substations? A. We calculate subtransmission and substation marginal unit costs by first summing growth-related capital expenditures over the five-year period 0-0. We then annualize these capital expenditures and divide by the growth in system non-coincident peak. Customers served at subtransmission voltage are excluded from this calculation because they supply their own substation. Table in our work papers supports the PGE Exhibit 0 - summary of marginal subtransmission and substation costs. Q. How do you calculate the marginal unit feeder costs? A. We estimate distribution feeder unit costs in the following manner:. Perform an analysis that places customers on the distribution feeder from which they are currently served.. Eliminate any distribution feeders from which we cannot obtain customer information, and which do not conform to typical standards. Examples of these non-typical feeders are feeders serving customers at kv, or feeders that serve downtown core areas.. Perform an inventory of the wire types and sizes for each feeder. Standardize these wire types and sizes to current specifications and then calculate the cost of rebuilding these feeders in today s dollars.
6 Werner Gariety / 0. Segregate the wire types and sizes into mainline feeders and taplines. Mainline feeders are typically capable of carrying larger loads and are generally closer to the substations from which they originate. Taplines are typically capable of carrying smaller loads and can be remote from substations.. For each feeder, allocate the mainline cost responsibility of each rate schedule based on the rate schedules proportionate contribution to non-coincident peak (NCP). Calculate a unit cost per kw by totaling the feeder cost responsibilities and dividing by the sum of each schedule s NCP.. For each feeder, allocate the tapline cost responsibility of each rate schedule based on the rate schedules proportionate design demand (estimated peak at the line transformer). Calculate a unit cost per kw for both poly and single phase customers by totaling the feeder cost responsibilities and dividing by the sum of each schedule s design demand.. Annualize the mainline and tapline unit costs by applying an economic carrying charge.. Separately estimate the unit costs of customers greater than MW who are typically on dedicated distribution feeders. Calculate these marginal unit costs (per customer) as the average distance between the substation and the customer-owned 0 facilities. customer. Finally, apply the annual carrying charge to annualize the cost per. Separately estimate the per-customer costs of customers served at subtransmission voltage. This is done by first calculating the average distance from the point at which subtransmission voltage customers connect into the subtransmission system
7 Werner Gariety / 0 0 from their substation. Then multiply this average distance by the current cost per wire mile and annualize the costs. Table in our work papers supports the PGE Exhibit 0 - summary of marginal distribution feeder costs in. Q. Please describe any other considerations in calculating unit feeder costs. A. Currently, many municipalities require undergrounding of taplines within subdivisions and commercial areas. Therefore, we used the current cost of underground facilities exclusively in our marginal feeder tapline cost calculations. Q. How do you calculate marginal transformer and service costs? A. We calculate each schedule s marginal transformer and service costs by estimating the cost of providing the average customer within a class with a service lateral and a line transformer (secondary delivery voltage only). We also include the service design costs and any wire costs not captured in the feeder portion of the study. For smaller customers such as those on Schedules and, we estimate the average number of customers on a transformer in order to appropriately calculate the per customer share of service and transformer costs. Table in our work papers supports PGE Exhibit 0 - summary of marginal transformer and service costs. Q. Please describe how you calculate the marginal costs of meters. A. We calculate marginal meter costs as the installed cost of an Advanced Metering Infrastructure (AMI) meter for each customer and then apply an annual carrying charge. Table in our work papers supports the PGE Exhibit 0 - summary of meter marginal cost.
8 Werner Gariety / Q. How do you allocate distribution O&M to each distribution category and ultimately to each rate schedule? A. We allocate test-period distribution O&M by distribution category to the rate schedules in proportion to each schedule s respective usage added to the per unit marginal capital cost. Table in the work papers provides the details of this allocation and the final summary of distribution marginal costs by functional category in PGE Exhibit 0. Q. Does this conclude your description of distribution marginal costs? A. Yes.
9 Werner Gariety / III. Customer Service Marginal Cost Study 0 Q. How are the customer service marginal costs used in the rate design process? A. Marginal cost are considered when designing rates (for each rate group) to recover the allocated revenue requirements. PGE uses marginal/cost the study to guide the allocation of the customer service functional revenue requirements in the ratespread process. Q. What are the fundamental cost drivers for customer service marginal cost? A. The number of customers is a cost driver since each customer requires an interconnection with the PGE system. Also, PGE incurs cost in managing its relationship with customers, including handling customer communications, measuring usage, maintaining records, and billing. Q. Briefly describe how you calculate the marginal cost. A. The forecasted 0 cost for each rate schedule is divided by the 0 forecasted customer counts to derive the marginal cost per customer for each rate schedule. Q. Do you calculate the marginal costs for metering, billing and other services? A. Yes. PGE calculates the marginal customer costs by PGE Standard Service Rate Schedule for metering, billing and other expenses. It also provides the total customer expense, which is the total of the metering, billing and other expenses. Exhibit 0 provides details on these costs. Q. Does PGE use a forecasted test year in the customer marginal cost study? PGE 0 A. Yes. PGE uses forecasted costs for the 0 test period and 0 actual costs to develop the 0 test year customer marginal costs (CMC). The 0 forecasted costs are also referred to as budget amounts in this testimony.
10 Werner Gariety / Q. Is the study s methodology the same as in PGE s last rate case UE? A. Yes. The methodology is the same. There are some variations in the calculations that are discussed in this testimony. As in UE, the costs are allocated by PGE accounts directly on the basis of cost causation and a few are allocated based on sub-allocation of the other account costs. After the costs are spread across rate schedules, the final result is marginal costs for each rate schedule by the three functionalized categories: billing, metering, and other services. A. PGE Accounts 0 Q. What PGE Accounts are used in the study? A. The 0 actual and 0 forecasted costs for the study are collected for PGE accounts 0000, 0000, 0000, 0000, and This set of data is the basis for determining marginal cost by PGE Rate Schedule. Q. Are descriptions and titles provided for each of the account numbers? A. Yes. Descriptions and titles for the account numbers listed above are shown in PGE Exhibit 0. Account numbers 0000, 0000 and 0000 are customer account expenses and account numbers 0000 and 0000 are customer service and informational expenses. B. Functionalization of Cost 0 Q. Are the costs further categorized before determining the final marginal costs? A. Yes. The costs are functionalized into metering, billing and other services categories. The purpose of functionalization is to improve the accuracy of the cost allocation process.
11 Werner Gariety / 0 0 Then, the costs are further segmented by PGE department. A department is also referred to as a Responsibility Center (RC). In the work papers the departments are identified by RC number and department title. This is the same approach as in our previous general rate case. Q. Briefly describe which accounts and departments contribute to the metering? A. Metering costs consist of PGE account The metering 0 budget amounts are allocated by rate schedule based on various cost-causation principles. Q. Can you provide an example? A. Yes. The 0 forecasted budget amount for PGE account 0000, Field Collection Department (RC ), is allocated based on a weighted percentage of customers (less unmetered lighting and signals) and manual meter reads. In terms of manual meter reads, PGE projects in 0 that the AMI network upgrades will be completed; therefore, fewer marginal costs are attributed to metering than in the previous rate case. Q. Briefly describe which accounts and departments contribute to billing. A. Billing costs consist of PGE account The billing 0 budget amounts of the departments are allocated by rate schedule based on cost causation. Some of the costs are allocated directly on the basis of cost-causation and some of the other accounts are allocated on a sub-allocation of the other accounts within billing. Q. Can you provide examples? A. Yes. The department costs for Retail Receivables and Field Collections are allocated based on percentage of adjusted write-offs by rate schedule.
12 Werner Gariety / The department costs for Specialized Billing are allocated by the number of customers on direct access. The department costs for the Business Services Group are allocated by number of customers. Customer Information System billing costs are allocated by the number of customers, except streetlights and signals. Q. Briefly describe which accounts and departments contribute to other services? A. Other services costs mainly consist of PGE accounts 0000 and The marginal costs are calculated in the same manner as billing and are based on cost-causation principles. Q. Can you provide examples? A. Yes. The budget amount associated with the Customer Contact Operations is allocated by the number of customers on rate schedules using up to 00 kw. The budget amount for the Direct Access Operations Department is allocated by the number of customers participating in the direct access program. The budget amount for the Special Attention and Customer Channels Departments are allocated based on the customer counts. The Solar Payment Option and Net Metering Operations budget amounts are allocated by the number of customers participating in the programs. The Distributed Resources Department is allocated by customer accounts because all customers accrue benefits of this program.
13 Werner Gariety / 0 The Business Model budget amount is allocated by a percentage split between residential and nonresidential customers. The percentage split is based on how much of the budget is attributed to serving residential or non-residential customer groups. Q. Were any adjustments made to these categories? A. Yes. One adjustment was made. As in UE, the Business Customer Department, PGE account 0000 is removed from the billing category and placed in the other services category since this department provides customer service and manages relationships with PGE s largest customers. Q. How are the marginal costs by functionalized category determined? A. After the forecasted 0 budget amounts for each department are allocated across the PGE rate schedules, the dollar amounts are summed by rate schedule and divided by the number of customers. This result is a marginal cost for each rate schedule by the functionalized category. C. Allocation of Cost 0 Q. What is the purpose of the allocation of costs? A. The purpose is to assign costs among more than one customer class. Allocation occurs by developing mathematical factors that distribute costs to the customer classes according to how they cause PGE to incur costs. Q. What are the typical factors used to allocate costs? A. For the most part, the number of customers being served under each rate schedule is used to allocate costs. In the billing category, some support costs are based on sub-allocations within the functional category. In one instance, a weighted average of number of customers and energy is used. Finally, the dollar amount of unpaid bills over
14 Werner Gariety / 0 0 a three-year period, which is referred to as write-offs, is used to determine a percentage of write-offs by rate schedule. Q. Have any of the allocations changed since the last rate case in UE? A. Yes. The Business Customer Group is the PGE department (RC ) that serves PGE s largest industrial and business customers. In recent rate cases, the allocation was based on a 0/0 percent weighted average between the number of accounts and total energy amounts by rate schedules. The costs for this department are allocated to all schedules (except residential), including small non-residential customers (Schedule ). Some very large customers have hundreds of accounts ranging from Schedules to and a Business Customer Representative serves that large customer and all the associated accounts. Typically, one stand alone small non-residential customer (Schedule ) customer would not be served by this department. Q. How was the allocation modified? A. To ensure that the appropriate amount of costs are allocated to Schedule and the other larger schedules, the allocation is now based on a weighting between number of high-level customer names (%) and energy (%). By using the high-level customer name rather than the number of accounts results in a reasonable allocation of costs based on the way the PGE representatives serve customer accounts. Using this revised percentage split results in similar percentages as in the last general rate case for most Schedules, particularly the lighting Schedules (Schedule,, and ). However, the percentage for Schedule significantly decreases. Q. How are the marginal costs determined for the large account schedules?
15 Werner Gariety / 0 0 A. A new Schedule 0 for very large non-residential accounts became effective in January 0. The Schedule 0 customer was previously on Schedule. The service characteristics are very similar for Schedule 0 and Schedule. Given these similar characteristics it s reasonable to expect similar marginal costs results. However, because Schedule 0 has a very small number of accounts, the Other Services marginal cost for Schedule 0 is considerably higher in comparison to Schedule and the Billing marginal cost is very low. To align the marginal costs with the service characteristics of the two schedules, the allocated costs and customer counts are combined; thereby, producing the same marginal cost for Schedule (over KW) and Schedule 0. Q. How is the percentage of write-offs by rate schedule calculated? A. As in previous rate cases, the dollar amount of write-offs over a three year period is totaled by rate schedule. Then the three-year dollar amount per rate schedule is divided by the total write-off amount to arrive at the percent of write-offs by rate schedule. Q. What is the purpose of the write-off percentages? A. These percentages are used to allocate the O&M budget amounts for the Field Collections and Retail Receivables Departments. Q. Do you continue with the adjusted write-off method? A. Yes. In UE an adjusted write-off amount was used which excluded Schedules and because the Key Customer Group manages large customer accounts and any bill collections or write-offs that occur. The adjustment is made to ensure costs are only The adjusted write-off approach was first employed in UE. Staff s position was this method is appropriate. The O&M budget costs for Field Collection and Retails Receivables is not spread to large customer groups.
16 Werner Gariety / 0 spread to customer groups managed by the Field Collections and Retail Receivables Departments. Q. How is the percentage of meter reads by rate schedule calculated? A. By 0 some manual meter reads may still occur, but the number of manual reads will be minimal as PGE fully transitions to AMI. The decline in metering expenses in 0 reflects this transition. The number of manual meter reads from 0 is used to allocate the remaining metering costs. The number of manual meter reads on an annual basis is grouped by meter type (kwh, demand, kvar, time of use, and net meters) and by rate schedule. Then a percentage by rate schedule is determined. The percentage of meter reads is weighted with number of customers (less unmetered and signals) to arrive at a weighted percentage. Q. What is the basis of the weighted customer counts? A. A weighting methodology is applied to the billing and other services categories. The weights are based on 0 costs per customer. The 0 weight is then multiplied by the forecasted 0 number of customers, resulting in an adjusted 0 customer count. Then the adjusted 0 customer count is divided by the total number of customers to arrive at a percentage. Finally, that percentage is multiplied by the 0 costs. This is the same approach employed in the previous rate case. D. UE Stipulated Agreement 0 Q. In UE Parties agreed to adjust the total dollar amount for the Customer Engagement Transformation Initiative to $. million for five years. Was this adjustment applied in the 0 test year?
17 Werner Gariety / 0 A. No. The $. million adjustment was removed entirely. All costs associated with the Customer Engagement Transformation (CET) initiative are not included in the CMC study. The initiative is a multi-year development program and it is expected to be completely operational in 0 or 0. Therefore, the development operations and maintenance costs are fixed and are removed. Q. If a decision were to be made to include the CET costs in the CMC, how should the allocation be made? A. In UE the general suballocation approach was applied to the CET costs. For the 0 test year, PGE would spread the costs based on the number of customers participating on each rate schedule. Q. Does this conclude your description of customer service marginal costs? A. Yes.
18 Werner Gariety / V. Qualifications 0 Q. Mr. Werner, please state your educational background and qualifications. A. I received a Bachelor of Arts degree with an emphasis in Fine Arts from Montana State University in. Since joining PGE in I have worked as an analyst on a variety of pricing issues in the Regulatory Affairs Department. From to I worked at PacifiCorp in several different capacities starting in energy efficiency and finishing in regulatory affairs. Q. Ms. Gariety, please state your educational background and qualifications. A. I received a Bachelor of Science and a Master of Science degree in Economics from the University of Wyoming. Since joining PGE in 00, I have worked as an analyst in the Rates and Regulatory Affairs Department. My duties at PGE have focused on power costs, solar, load curtailment, marginal/cost, and various regulatory issues. Previously, I was an analyst with the Iowa Utilities Board and the Office of Consumer Advocate under the Iowa Department of Justice. Also, I was an economist for the State of Oregon Employment Department. Q. Does this conclude your testimony? A. Yes.
19 Werner Gariety / List of Exhibits PGE Exhibit Description 0 Marginal Cost Study 0 Description of PGE Account Numbers
20 UE / PGE / Exhibit 0 Werner - Gariety Page PORTLAND GENERAL ELECTRIC SUMMARY OF MARGINAL COST STUDY FEEDER FEEDER SERVICE & SUBTRANSMISSION SUBSTATION BACKBONE TAPLINE TRANSFORMER METER CUSTOMER SCHEDULE COSTS COSTS COSTS COSTS COSTS COSTS COSTS ($/kw) ($/kw) ($/kw) ($/kw) ($/Customer) ($/Customer) ($/Customer) Schedule Residential Single-phase $. $. $. $.0 $0.0 $0. $. Three-phase $. $. $. $.0 $. $. $. Schedule Residential $. $. $. $. $. N/A $0. Schedule Commercial $. $. $. $. $. N/A $. Schedule General Service Single-phase $. $. $. $. $0.0 $. $. Three-phase $. $. $. $. $0. $. $. Schedule TOU Single-phase $. $. $.0 $. $. $.0 $. Three-phase $. $. $.0 $. $.0 $0. $. Schedule Irrigation Single-phase $. $. $. $. $. $. $. Three-phase $. $. $. $. $. $. $. Schedule Irrigation Single-phase $. $. $. $. $. $. $. Three-phase $. $. $. $. $.0 $. $. Schedule Secondary General Service Single-phase $. $. $. $. $. $. $.0 Three-phase $. $. $. $. $.0 $0. $.0 Schedule Secondary General Service $. $. $0. $. $,. $. $. Schedule Primary General Service $. $. $0. $. $. $,. $. Schedule Secondary - MW $. $. $. $. $,0. $. $,. Schedule Primary - MW $. $. $. $. $. $,. $,. ($/Customer) Schedule Secondary GT MW $. $. $, N/A $,. $. $,0. ($/Customer) Schedule Primary GT MW $. $. $, N/A $,0.00 $,. $,0. ($/Customer) Schedule Subtransmission N/A N/A $,0 N/A N/A $,.0 $,0. ($/Customer) Schedule 0 Primary $. $. $, NA $,0.00 $,. $,0. Schedules & Streetlighting $. $. $. $. $. N/A $. Schedules Traffic Signals $. $. $. $. $. N/A $.
21 UE / PGE / Exhibit 0 Werner - Gariety Page Customer Service Marginal Costs Account Definitions PGE Customer Accounts Expense Account Title Description 0000 CustAcct-Meter Reading Exp. Labor and expenses associated with on-and off-cycle customer meter reading. Expenses include any equipment / clothing requirments, vehicle use and fleet/fuel allocation, office data input 0000 CustAcct-CustRecords&Collect Includes the cost of labor, materials used and expenses incurred in work on customer applications, contracts, orders, credit investigations, billing and accounting, collections and complaints CustAcct- MiscCustomerAcctsExp Labor and expenses associated with answering residential and nonresidential general account questions (eg, open/close orders, name changes, account balances, outages, etc.). Also includes labor and expenses associated with special needs customer assistance such as social agency referrals and interventions. Customer Service and Informational Expense Account Title Description 0000 Customer Assistance Expense Labor and non-labor expenses associated with market research, promoting safe, efficient and economical use of electricity, managing energy efficiency programs and energy service supplier relationships and maintaining and enhancing customer program technology systems Information and Advertising Expense Labor and non-labor expenses associated with informational and instructional advertising that conveys information to customers to protect health and safety, to encourage environmental protection, to utilize their electric equipment safely and economically, or to conserve electric energy.