REBUTTAL TESTIMONY OF PSEG LI IN RESPONSE TO THE PREPARED TESTIMONY OF HON. GEORGE MARAGOS, COUNTY COMPTROLLER, NASSAU COUNTY

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1 BEFORE THE LONG ISLAND POWER AUTHORITY IN THE MATTER of a Three-Year Rate Plan Case REBUTTAL TESTIMONY OF PSEG LI IN RESPONSE TO THE PREPARED TESTIMONY OF HON. GEORGE MARAGOS, COUNTY COMPTROLLER, NASSAU COUNTY Date: June 0, 0

2 0 0 WITNESS QUALIFICATIONS AND DESCRIPTION OF TESTIMONY Q. Please state the names of the members of this Rebuttal Panel (the Panel ). A. We are John O Connell, Daniel Eichhorn, Lisa Figliozzi, and Christopher Hahn. Q. Have you previously provided testimony in this proceeding? A. Yes, with the exception of Mr. Hahn, we have testified as members of other panels that have pre-filed testimony in this proceeding. Q. Mr. Hahn, please state your full name and business address. A. My name is Christopher Hahn. I am employed by PSEG Long Island LLC ( PSEG LI or the Company ) and my business address is PSEG LI, Suite 0, Earle Ovington Boulevard, Uniondale, NY. Q. In what capacity are you employed by the Company? A. I am employed by the Company as Director of External Affairs. I have been employed by PSEG LI since March, 0. Q. Please summarize your educational background and professional experience. A. I am responsible for Government & Community Relations. I have over 0 years of professional experience in government, non-profit management and politics. I hold a Juris Doctor degree in Law from St. John s University, School of Law Q. Have you ever testified before? A. No. Q. What is the purpose of your rebuttal testimony? A. We are responding to the prepared testimony of Hon. George Maragos, County Comptroller of Nassau County in this proceeding. Mr. Maragos disagrees with - -

3 0 0 certain revenue requirement items and calculations. We have reviewed his testimony and will explain why those revenue requirements and calculations are correct in PSEG LI s rate plan submission. Q. Mr. Maragos states in his testimony that he provided statements on March, 0 at the DPS Hearing in Mineola and that neither PSEG LI nor LIPA have responded to those statements. Please respond to that contention. A. Under the schedule established by the Administrative Law Judges in their Ruling on March, 0, all testimony was to be submitted by the DPS Staff and any intervener parties on May, 0. We are unaware that Mr. Maragos submitted any testimony on that date to which PSEG LI would be obligated to respond. Q. Mr. Maragos also contends that that on April, 0, representatives of PSEG LI met with Mr. Maragos and his staff to discuss PSEG LI s rate plan filing and that they would follow-up with additional supporting information. He further states that the additional information was not provided. Please provide the context of that exchange. A. Representatives of PSEG LI visited Comptroller Maragos at his office to brief him and his staff on PSEG LI s three-year rate plan filing. A representative of PSEG LI made attempts to contact the Comptroller s Office (by both electronic mail and telephone) to schedule a follow-up meeting to provide additional supporting information in response to Mr. Maragos s questions. We have no record, however, of any reply from the Comptroller s Office in response to PSEG LI s requests for a follow-up meeting. We regret if there was a misunderstanding but we always stand ready to provide the County with information in response to its requests. Q. Did the Comptroller s Office submit any formal discovery requests in this rate plan proceeding. A. No, they did not. - -

4 0 0 0 Q. Mr. Maragos states that he raised concerns regarding cost-reduction and management practices outlined in my March th testimony and that although representatives of PSEG LI with whom he met stated that PSEG LI had, in fact, implemented numerous measures to reduce costs and make management more efficient information concerning those productivity initiatives was not provided. Please respond to that contention. A. The entire rate plan submission by PSEG LI and LIPA, as well as the voluminous discovery responses provided throughout this proceeding, is a compendium of the management changes and technological innovations that PSEG LI has implemented in the short time it has been operating the LIPA system commencing on January, 0. Witnesses on behalf of PSEG LI have demonstrated that in the relatively brief time that it has operated the transmission and distribution system for the Long Island Power Authority ( LIPA or the Authority ), PSEG LI has met or exceeded nearly all of the numerous performance standards established in the Amended and Restated Operations Services Agreement between Long Island Lighting Company d/b/a LIPA and PSEG Long Island LLC, dated as of December, 0 ( OSA ). Among other things, PSEG LI has achieved: Better than. percent overall system reliability, through enhanced maintenance and tree-trimming, and a variety of other activities; Implementation of a new Outage Management System providing o Improved accuracy in identifying where outages have occurred; o Quick and accurate estimates of when service will be restored; and o Better ability to communicate restoration progress. Flawless implementation of other new systems and applications, including a system to enhance emergency liaison with municipalities, a new interactive voice response unit supporting our call center operations, an industry-leading SAP enterprise resource planning system, and the migration of over 00 other business applications to PSEG LI s platforms; The launch of state-of-the-art telephone technology to reduce customer wait times; - -

5 0 0 0 Opening of two new Customer Service Centers; The launch of an Integrated Resource Plan ( IRP ) process, with the objective of determining how future power supply needs can be met in a manner that maintains system reliability at the lowest reasonable cost; Implementation of award-winning energy efficiency programs in its first year, PSEG LI customers saved enough energy to remove the equivalent of 0,000 cars from the road; Installation of Long Island s 0,000th rooftop solar PV system in December 0, with an expectation to hit,000 in 0; Continued improved performance in key areas such as reliability and storm recovery; deployment of additional renewable resources that further transition to a power system based on clean, distributed resources; improved call center performance; and greater responsiveness to public concerns; Improved customer satisfaction, continuing the significant improvement in PSEG LI s overall customer satisfaction during 0, when PSEG LI registered the largest gain of any large electricity provider in the nation; Improved power supply and fuel purchasing decisions, such as decisions saving customers millions of dollars that would have been required during the Rate Plan years by determining that certain plants did not need to be built at this time; Increased benefits for less fortunate customers, including a proposal to double the existing low-income discount; and Targeted infrastructure investment in the electric system on Long Island during the Rate Plan to improve reliability and resiliency. We would direct the parties to the entirety of the rate plan submission for a complete understanding of the length and breadth of the efforts of PSEG LI and the Authority to contain costs and bring the most efficient practices to the LIPA system. Q On pages - of his testimony, Mr. Maragos states that his Office reviewed PSEG LI s Exhibit (CBP-) and that the $. million Enterprise Resource Planning ( ERP ) system capital budget expense stated therein should be the responsibility of PSEG LI under its OSA with LIPA. Do you agree with this position? A. No, for a variety of reasons. First, the ERP system described is denoted as being in the 0 capital budget and so it does not form a part of this rate plan, which covers - -

6 0 0 the years 0 to 0. The capital budget for 0 was approved by the Authority as part of its normal processes and that budget was subject to public scrutiny and hearings. Second, capital expenditures such as this do not translate one-for-one into revenue requirement. It is only the annual debt cost on capital items that is recovered in rates. Given that LIPA s borrowing cost is less than %, even if the Comptroller were correct that the ERP costs should be the responsibility of PSEG LI (and he is not), the rate effect of the ERP is not the capital cost but only the debt service on that capital cost. Third, the OSA provides that PSEG LI is to be compensated for all costs incurred in performing Operations Services, which include the cost of Capital Improvements needed to provide LIPA with the requisite information systems to track, among other things, financial data, which is what the ERP does. Q. On page of his testimony, Mr. Maragos claims that nearly $ million in Management Fees may have been miscalculated and based on productivity incentives which have not been earned and may include up to $0 million in duplicative senior management expenses. Do you agree with his conclusion? A. No, this is a vague assertion that is unsupported by any reference to the detailed calculations set forth in Section of the OSA as to how the Management Fee is to be calculated, which is demonstrated in the filing and has been checked and approved by LIPA. The OSA, we would also note, has been approved by the LIPA Board of Trustees and by the New York Public Service Commission. The Management Fee is, indeed, higher in 0 and later years because it was initially kept lower in 0 and 0 in order to accommodate the rate freeze that was in effect at that time. The full incentive payment to PSEG LI is included in the base rates. If PSEG LI does not earn - -

7 0 0 that entire incentive fee, a credit will be made to ratepayers. The Revised Testimony of DPS Staff s Policy, Overview and Revenue Requirement Panel (at p. ) has endorsed this proposed ratemaking treatment of the incentives under the OSA. Q. On page of his testimony, Mr. Maragos states that the LIPA Comprehensive Annual Financial Report ending December, 0 and 0 ( CAFR ), indicates Commodity Derivatives (Note ) were listed with a fair market value of +$. million (representing a gain of $. million over December, 0) or an average gain of $. million per year during the immediately preceding two years. He further states that it appears that no hedging benefits are being utilized in the Plan, and rather than accumulating this off budget gain, he believes that about $0 million should be used to help offset the proposed rate increase. Do customers realize the gains and losses from the commodity hedging program? A. Yes, those costs are passed through to customers in the power supply charge. They are not a component of delivery rates. Q. With regard to pages - of Mr. Maragos s testimony, do you have an opinion on the reasonableness of his request for a % productivity improvement over prior LIPA management and his request for a $ million reduction in revenue requirements? A. Yes, we do. Mr. Maragos merely states a belief that reasonable productivity improvements over the prior LIPA management, which align operating ratios to wellrun utilities, should have translated into at least % savings on the $. billion delivery charge producing $ million in alleged savings. First of all, we note that this conclusion is unsupported by any study. Second, applying a % productivity factor to an amount of $. billion is incorrect given that PSEG LI s entire operating budget is approximately ¼ of that amount. Third, evidence filed in this case refutes any claim that PSEG LI is not on a par with other well-run companies. For example, the T&D Budget and Operations Panel testified (p -) that: - -

8 0 0 0 There are several ways by which we have satisfied ourselves that we have an appropriate employee staffing level, both before we took over the operation of LIPA s system and since that time. Q. Please explain. A. There were a number of steps that were taken before PSEG LI assumed the role as the operator of LIPA s system, or even executed the OSA that governs our role as the Service Provider. The PSEG transition team looked very closely at all aspects of the then-current operations of National Grid, which was operating the LIPA system under a Management Services Agreement ( MSA ) arrangement and under which the employees providing the services were employees of National Grid. We evaluated the union and MAST positions, considered benchmark information, and determined that the union employee levels were appropriate, and we also validated the MAST staffing levels, even as we reshaped the management structure of the operation. Q. Were there other indications that the operations were appropriately staffed? A. Yes. NorthStar Consulting Group performed a Comprehensive Management and Operations Audit of Long Island Power Authority, providing a detailed Final Report on September, 0. Although the Final Report found fault with the MSA model, nothing in that Report provided any indication that National Grid s T&D operations were inappropriately staffed. Similarly, the testimony of the Customer Services Budget and Operations Panel demonstrates (at p. ) that PSEG LI s Customer Services operational staffing is among the most efficient utilities in the country: The Customer Services organization has full time employees ( FTEs ) in the base budget for 0. As explained in this testimony, modest increases are forecasted or headcount to FTEs in 0, FTEs in 0 and 0 FTEs in 0. PSEG LI s Customer Services headcount is within an industry top quartile benchmark range of 0- employees/million customers through 0 and will rise only slightly above that range in 0. Consequently, we believe that we have the right - -

9 amount of employees necessary to achieve the top quartile results that are expected of us. Q. Does this conclude your rebuttal to Comptroller Maragos? A. Yes. - -