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LCEC responds to city regarding PSC complaint

By Staff | Apr 4, 2016

(Updated to include a response from the city)

LCEC responded to the city of Cape Coral’s petition for a rate structure analysis today, saying a deeper look into the city’s “unconventional” argument that a density-based methodology would provide for fairer costs is not a practice commonly used, does not take into account the greatest cost associated with providing service, and could result in higher rates to city residents if emergency repair costs ever became part of the equation.

The letter also reiterates to the city LCEC’s position that any analysis breaking out cost of service within the city boundaries would be time consuming and expensive and further, proposes … “that LCEC abandon its long-standing, PSC-approved customer classification system in favor of a radically different system designed around geographically differentiated rates based on customer densities,” a matter not for the Public Service Commission but for LCEC’s member-elected Board of Trustees.

…” While we can certainly appreciate how a municipality might think geographically differentiated rates would be sensible, a deeper look at the issue shows why that is not the case,” the April 4 letter from LCEC Executive Vice President and CEO Dennie Hamilton to Cape Coral City Manager John Szerlag states.

Monday’s letter is only the electric co-op’s response to the city. LCEC’s response to the Public Service Commission, to which the city submitted its complaint and petition last month, is still pending.

“This is a response to the city and not a response to the Public Service Commission,” LCEC spokesperson Karen Ryan said.

City officials said Tuesday they will wait for that filing to the PSC before responding.

“We will be filing a formal response once LCEC has filed their formal response with the PSC,” city spokesperson Connie Barron said via email Tuesday.

Among the points LCEC outlined in the three-page letter also copied the PSC and the city’s special utility counsel, Brian Armstrong:

* None of LCEC’s prior cost-of-service studies, including one begun in 2015 and still pending, “has ever addressed this unconventional theory” of density-based rates.

* …the “standard treatise on cost-of-service studies,” published by the National Association of Regulatory Utility Commissioners, “does not even consider methodologies that classify and allocate fixed costs to rate classes on the basis of customer densities.”

* The largest cost component of electric utility service is generation supply, and generation supply costs “have nothing whatsoever to do with customer density.”

* Customer density varies within the city as it does in other parts of the five-county area the co-op serves.

“The City itself has a wide diversity of customer densities, including many undeveloped areas, and thus is not a homogenous area that would warrant a separate rate classification. LCEC also serves a number of areas such as Marco Island, Matlacha, Captiva, and Everglades City that have customer densities higher than the City,” the letter states.

* A density-based rate methodology would not only be expensive to determine, it would be cumbersome to implement. Any such methodology would have to be implemented across the board and then monitored, placing rates in “constant flux due to ongoing development. This model would continually beg the question of where, and how often, to draw the dividing line between more ‘dense’ areas,” according to LCEC.

* Applying a density-based methodology could result in higher costs, if risk and repair costs in an emergency are also factored in.

“Finally, you may be unaware of the risks of a ‘city-only’ rate classification and the potential harm this policy shift could pose to members located within the City limits, particularly since the risk of storm damage to utility infrastructure within the City may be higher than the risk of storm damage in more inland areas. For example, if the rates paid by those members within the City are based on the costs of serving just that isolated area, and a tropical storm were to damage utility infrastructure within the City disproportionately, members within the City could experience rate shock resulting from such costs not being spread more evenly across the entire system,” LCEC states.

In addition to addressing issues raised by the city in its petition, the letter also points out some some of the city’s concerns are being, or have been, addressed.

For example, LCEC’s current contributions in aid of construction levy – fees charged to new construction for such things as additional utility poles to bring service into neighborhoods where lines have not been run – is scheduled to be discussed by LCEC’s Board of Trustees next month.

“In particular, we note that your Complaint raises concerns about LCEC’s current contributions-in-aidof-construction (CIAC) charges . Before the City filed its Complaint, other members had previously voiced similar concerns, and LCEC has been actively reviewing its CIAC practices since July of 2015,” the letter states. “More importantly, LCEC has been considering a change in its current CIAC policy since November of 2015. The change being considered would effectively mirror the CIAC policies of investor-owned utilities that have been approved by the PSC. This issue will be addressed by the LCEC Board of Trustees at its open meeting on May 19. Thus, we believe it is premature to seek relief from the PSC on this issue while it is under consideration. “

“For all of these reasons, we believe that preserving the existing customer classifications and continuing with uniform rates and single tariff pricing is far more cost-effective and consistent with widely-accepted electric utility practices. It spreads risks and costs across the system as a whole, is more efficient to administrate, and results in stable, predictable, and fairly allocated rates,” the letter states.

“We hope that this helps explain LCEC’s reluctance to invest substantial amounts of its limited resources to investigate the density-based rate classification proposed by the City. Because this would represent a dramatic departure from normal utility practices and could lead to increases in rates to some of LCEC’s members, including those inside the City, we believe this is an issue more appropriately resolved by the local cooperative membership and not by the PSC.”

The city’s petition and complaint, filed March 15, asks the Public Service Commission to “Require LCEC to conduct and file, on an expedited basis, a fully allocated cost of service study which justifies its current rate structure and rate design, including, but not limited to justification for its use of uniform rates and charges for in City and out of City service, including CIAC charges, and LED lighting charges that disproportionately impact the City, as well as inhabitants and businesses located within Cape Coral’s municipal boundaries.”The complaint also asks the PSC to “Initiate a hearing process on an expedited basis for review of LCEC’s cost of service study by the Commission as well as the City of Cape Coral and other interested persons impacted by LCEC’s current unfair, unjust, unreasonable and discriminatory rate structure” based on the city premise that ratepayers within the city are subsidizing ratepayers in other areas served by LCEC because the city has more ratepayers per mile.

The city maintains there is precedent for a density-based rate structure and that LCEC ratepayers within the city are subsidizing ratepayers outside the city. There are approximately 750 customers per mile within Cape Coral as compared to approximately 55 per mile in the remainder of LCEC’s 2,100 square mile service area, according to the city’s filing.

The city of Cape Coral’s franchise agreement with LCEC expires this year. That 30-year-old agreement includes a provision that allows the purchase the utility’s assets in the city and the city staff began last year to request information it says it needs to evaluate that option.

LCEC, meanwhile submitted a “boilerplate” franchise document for consideration, also last year.

The process has been bumpy.

The city maintains LCEC has been non-responsive to its information requests; LCEC maintains it has supplied all available non-proprietary information while it took the city a year to provide a franchise counter.

The city’s PSC petition and complaint provides for the possibility of some third-party review.