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THE COMMONWEALTH OF MASSACHUSETTS OFFICE OF THE ATTORNEY GENERAL ONE ASHBURTON PLACE BOSTON, MASSACHUSETTS 02108 (617) 727-2200 (617) 727-4765 TTY www.mass.gov/ago July 21, 2017 Mark D. Marini, Secretary Department of Public Utilities One South Station, 2nd Floor Boston, Massachusetts 02110 Re: NSTAR Electric Company and Western Massachusetts Electric Company d/b/a Eversource Energy, D.P.U. 17-05 Dear Secretary Marini: Enclosed please find the Office of the Attorney General’s Initial Brief. Thank you for your attention to this matter. Please do not hesitate to contact me if you have any questions about this filing. Sincerely, Joseph W. Rogers Assistant Attorney General Enclosure cc: Mark Tassone, Hearing Officer Cheryl Kimball, Esq. Service List

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THE COMMONWEALTH OF MASSACHUSETTS

OFFICE OF THE ATTORNEY GENERAL

ONE ASHBURTON PLACE

BOSTON, MASSACHUSETTS 02108

(617) 727-2200

(617) 727-4765 TTY

www.mass.gov/ago

July 21, 2017

Mark D. Marini, Secretary

Department of Public Utilities

One South Station, 2nd Floor

Boston, Massachusetts 02110

Re: NSTAR Electric Company and Western Massachusetts Electric

Company d/b/a Eversource Energy, D.P.U. 17-05

Dear Secretary Marini:

Enclosed please find the Office of the Attorney General’s Initial Brief.

Thank you for your attention to this matter. Please do not hesitate to contact me if you have any

questions about this filing.

Sincerely,

Joseph W. Rogers

Assistant Attorney General

Enclosure

cc: Mark Tassone, Hearing Officer

Cheryl Kimball, Esq.

Service List

COMMONWEALTH OF MASSACHUSETTS

DEPARTMENT OF PUBLIC UTILITIES

__________________________________________

)

NSTAR ELECTRIC COMPANY AND )

WESTERN MASSACHUSETTS ELECTRIC ) D.P.U. 17-05

COMPANY d/b/a EVERSOURCE ENERGY )

__________________________________________)

CERTIFICATE OF SERVICE

I certify that I have this day served the foregoing documents upon each person designated

on the official service list compiled by the Secretary in this proceeding. Dated at Boston this

21st day of July, 2017.

Joseph W. Rogers

Assistant Attorney General

Massachusetts Attorney General

Office of Ratepayer Advocacy

One Ashburton Place

Boston, Massachusetts 02108

(617) 727-2200

cc: Service List

COMMONWEALTH OF MASSACHUSETTS

DEPARTMENT OF PUBLIC UTILITIES

_________________________________________

)

NSTAR ELECTRIC COMPANY AND )

WESTERN MASSACHUSETTS ELECTRIC ) D.P.U. 17-05

COMPANY d/b/a EVERSOURCE ENERGY )

_________________________________________)

INITIAL BRIEF OF THE OFFICE OF THE

ATTORNEY GENERAL

Respectfully submitted,

MAURA HEALEY

ATTORNEY GENERAL

By: Joseph W. Rogers

Assistant Attorneys General

Office for Ratepayer Advocacy

One Ashburton Place

Boston, MA 02108

(617) 727-2200

July 21, 2017

TABLE OF CONTENTS

Page

I. INTRODUCTION .................................................................................................................. 1

II. OVERVIEW ........................................................................................................................... 3

III. DESCRIPTION OF THE COMPANY ............................................................................... 6

IV. STANDARD OF REVIEW ................................................................................................ 7

V. ARGUMENT .......................................................................................................................... 9

A. ALTERNATE REGULATORY MECHANISMS ............................................................. 9

1. The Department Should Reject The Company’s Proposed Performance-Based

Ratemaking Mechanism Because It Will Not Produce Just and Reasonable Rates ............... 9

a) Introduction ............................................................................................................... 9

b) The Company’s Proposal Is Inconsistent with Established Department Policy ..... 11

c) The Company’s Proposal Will Allow Near-Guaranteed Rate Increases at

Abnormally High Rates .................................................................................................... 20

d) The Company’s Proposal to Have a Separate Adjustment for Capital Investments

Undermines the Purpose of A PBRM Formula and Allows Dollar-For-Dollar Recovery

Without a Prudence Review.............................................................................................. 22

e) The Company Has Not Provided Any Evidence That The PBRM Is Necessary to

Fund Grid Modernization Investments ............................................................................. 23

f) The Company’s Proposed PBRM Includes a Negative X Factor Far Lower Than

That Approved for Any North American Energy Utility .................................................. 24

g) The Company’s Total Factor Productivity (“TFP”) Study Is Flawed and Provides

an Inadequate Analysis of the Company’s Costs .............................................................. 28

h) The Company’s Proposed Earnings Sharing Mechanism (“ESM”) Has A Number

of Deficiencies .................................................................................................................. 32

i) The PBRM Stay-Out Provision .................................................................................. 33

2. Grid Modernization Base Commitment ........................................................................ 34

a) Proposed Grid Modernization Investments ............................................................ 35

(1) Introduction and Background .............................................................................. 35

(2) The Company’s Proposed Grid Modernization Investments Do Not Qualify for

Exceptional, Targeted Cost Recovery Mechanisms ..................................................... 38

(3) The Department Need Not Approve the PBRM nor the GMBC to Move Forward

with Grid Modernization............................................................................................... 38

(4) Many of the Proposed Investments Are Not “Grid Modernization” Investments

39

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b) Energy Storage ........................................................................................................ 40

c) EV Charging Infrastructure..................................................................................... 43

(1) The Department Should Consider the Company’s Make-Ready Electric Vehicle

Infrastructure Program in a Separate Proceeding Outside of this Rate Case ................ 43

(2) The Department Should Establish Statewide Goals and Standards Before

Approving Any EV Charging Proposal ........................................................................ 46

(3) If the Department Decides to Review Eversource’s EV Proposal in this

Proceeding, it Should Adopt Several Modifications..................................................... 48

(a) The Company Should Not Be Permitted to Own Infrastructure Behind the Meter ... 48

(b) Recovery of Make-Ready Infrastructure Should Occur in the Normal Course of

Ratemaking ............................................................................................................................. 50

(c) Electrification of the Company’s Own Fleet Should Not Be Included as Part of the

Make Ready Program .............................................................................................................. 51

(d) The Department Should Put Other Mechanisms in Place to Ensure Greater

Accountability and Program Coordination ............................................................................. 53

d) The Department Should Reject the GMBC Performance Metrics as Proposed

Because They Do Not Meaningfully Assess Company Performance or Mandate Good

Performance ...................................................................................................................... 54

(1) The Department Should Include Performance Penalties and/or Incentives. ....... 55

(2) The Company’s Proposed Performance Metrics Are Deficient. ......................... 56

(3) The Company Should Add to Its Performance Metrics. ..................................... 58

e) The Company’s Annual Stakeholder Process Will Not Provide an Opportunity for

Meaningful Stakeholder Participation or Comment ......................................................... 59

B. CAPITAL STRUCTURE AND COST OF CAPITAL .................................................... 62

1. Introduction ................................................................................................................... 62

2. Capital Structure ........................................................................................................... 64

a) The Company Failed to Include NSTAR’s Most Recent Long-Term Debt Issuance

in Its Capital Structure ...................................................................................................... 65

b) The Company’s Embedded Cost Rate of Long-Term Debt Is Miscalculated ........ 66

3. Return on Common Equity ........................................................................................... 67

a) Proxy Groups .......................................................................................................... 67

b) Discounted Cash Flow Analysis Results ................................................................ 70

c) Capital Asset Pricing Model Analysis Results ....................................................... 76

(1) Mr. Hevert’s CAPM Analysis Is Fatally Flawed ................................................ 79

(2) Mr. Hevert’s Market Risk Premium Is Grossly Over-Inflated............................ 79

d) The Department Should Reject Mr. Hevert’s Bond Yield Risk Premium Approach

82

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4. Other Cost Of Equity Issues ......................................................................................... 84

a) Capital Market Conditions ...................................................................................... 84

b) Rate Making Mechanisms....................................................................................... 86

5. The Attorney General’s Position on Massachusetts ROEs ........................................... 88

6. The Attorney General’s Recommendation. .................................................................. 98

C. RATE BASE ................................................................................................................... 101

1. The Company Over-Inflates Its Cost of Service ......................................................... 101

2. The Company’s Proposal to Adjust its Rate Base for Post-Test Year Plant Additions

Should Be Rejected ............................................................................................................. 104

D. OPERATIONS AND MAINTENANCE EXPENSES ................................................... 109

1. The Pro Forma Test Year WMECo Payroll Expense Should Not Be Annualized to

Reflect the Employee Complement as of the End of the Test Year ................................... 109

2. Test Year Insurance Policy Surplus Payments Are Recurring and Should Not be

Removed from the Test Year .............................................................................................. 109

3. Overhead Costs Charged by ESC During the Test Year Should be Reduced to Reflect

the Return on Equity Approved by the Department in This Proceeding ............................ 111

4. The Test Year Charges from Eversource Service Company Should Be Reduced for the

Impacts of the Acquisition of the Aquarion Water Companies .......................................... 112

5. Pursuant to Department Precedent, the Department Should Disallow the Company’s

Incentive Compensation Based on Financial Goals............................................................ 118

6. The Company’s Inflated Medical Expense Projection Result in the Company Over-

Stating Its Future Employee Medical Costs........................................................................ 122

7. The Department Should Reject the Company’s Proposal to Increase Information

System Expense Charged from Eversource Service Company for a Post-Test Year

Information System Plant Addition .................................................................................... 125

a) The Supply Chain Project Is a Post-Test Year Plant Addition at the Service

Company Level That Was Not Placed into Service Prior to the End of Hearings in This

Case 127

b) The Amount of Costs Associated with the Supply Chain Project to Be Charged to

NSTAR and WMECo in the Rate Effective Period Are Not Known and Measurable ... 127

c) The Company’s Expected Cost Savings Associated with the Supply Chain Project

Implementation Exceed the Annual Revenue Requirements Associated with the ESC

Plant Addition ................................................................................................................. 129

d) The Company Has Failed to Consider the Impact That the Company’s Acquisition

of the Aquarion Water Companies Will Have on the Amounts to Be Charged to NSTAR

and to WMECo ............................................................................................................... 131

e) The Company Overstates the Expected Costs of the Supply Chain Project ......... 131

f) Summary and Recommendation ........................................................................... 133

3

8. Customers Should Not Have to Pay for Two Corporate Headquarters ...................... 133

a) The Hartford, Connecticut Headquarters is Unnecessary to Provide Electric

Distribution Service to Massachusetts Customers .......................................................... 134

b) The Connecticut Public Utility Regulatory Authority Has Disallowed Costs

Associated with the Unneeded Hartford Headquarters ................................................... 135

9. The Department Should Deny the Company’s Proposed 2018 Non-Union Payroll

Expense Adjustment ........................................................................................................... 136

10. “Fee Free” Credit/Debit Card Payment System ....................................................... 138

a) The Department Should Reject the Company’s Proposed “Fee Free” Credit/Debit

Card Payment System Because It Is Inconsistent with the Provision of Least-Cost

Service, creates a Cross-Subsidy, and Could Result in More Customers Paying High

Credit Card Interest Rates ............................................................................................... 138

b) The Proposed Pro Forma Adjustments for Fee Free Payment Processing Are

Speculative and Should Be Rejected .............................................................................. 141

11. The Department Should Reject the Company’s Proposal To Assign One Third Of

Regulatory Assessments To Basic Service Customers ....................................................... 142

12. The Proposed Pro Forma Adjustment for GIS Verification Costs is Speculative and

Should be Rejected ............................................................................................................. 146

13. Rate Case Expense .................................................................................................... 147

a) Ratepayers Should Not Pay for Rate Design Twice ............................................. 148

b) The Company’s Rate Case Expense for its PBRM and Allocated Cost of Service

Experts Is Excessive ....................................................................................................... 150

c) The Company Should Not Recover Rate Case Expense for Its Temporary

Employees ....................................................................................................................... 151

E. DEPRECIATION ........................................................................................................... 154

1. Eversource’s Percent Reserve Is Large and Growing ................................................. 154

2. The Company Proposes to Charge Ratepayers Almost Three Times the Net Salvage

Actually Incurred ................................................................................................................ 156

3. Mr. Spanos Inappropriately Charges Today’s Ratepayers for Future Inflation .......... 158

4. Ratepayers Will Be Harmed by the Company’s Proposal .......................................... 160

5. The Department Should Adopt Mr. Dunkel’s Recommendations .............................. 161

6. In the Alternative, the Department Should Employ Gradualism and Not Adopt All of

the Company’s Proposed Net Salvage Factors ................................................................... 163

F. VEGETATION MANAGEMENT ................................................................................. 164

1. Introduction ................................................................................................................. 164

a) Reliability Indices for Eversource ........................................................................ 165

b) Eversource Arborists ............................................................................................. 166

2. RTW Pilot Program .................................................................................................... 167

4

a) 2017 RTW Pilot Program ..................................................................................... 168

b) 2018 RTW Pilot Program ..................................................................................... 169

3. LiDAR......................................................................................................................... 171

4. Accounting for NSTAR’s First-Cycle Enhanced Vegetation Management Activities

173

a) Capitalization of ETT and ETR Costs .................................................................. 174

5. Maintenance of Overhead Lines and Devices ............................................................ 175

a) Account 593 – Maintenance of Overhead Lines ................................................... 175

b) Account 365 – Overhead Conductors and Devices .............................................. 177

G. STORM FUND PROPOSAL ......................................................................................... 178

1. The Department Should Not Allow the Company to Recover Deferred Costs Through

the Replenishment Factor ................................................................................................... 179

2. Carrying Charges for Deferred Amounts Not Eligible for Storm Fund Recovery Must

Not Be Collected in the Replenishment Factor ................................................................... 180

3. The Department Should Reject the Company’s Request to Recover Certain Lean-in

Costs Through Its Storm Fund ............................................................................................ 181

4. Recovery of Outstanding Storm Cost Balance ........................................................... 182

5. Billings to Verizon for Jointly Operated Poles ........................................................... 183

H. TAXES ............................................................................................................................ 186

1. Income Taxes .............................................................................................................. 186

a) There is No Evidentiary Support for WMECo’s Increase to Taxable Income for

“Property Tax Expense” ................................................................................................. 186

2. Property Taxes ............................................................................................................ 188

a) The Company’s Projected Property Tax Calculations Are Inconsistent with

Department Precedent ..................................................................................................... 188

b) The Department Should Ensure There Are Appropriate Property Tax Allocations to

Other Businesses ............................................................................................................. 190

c) WMECo’s Deferred Property Tax Claims ............................................................ 191

(1) WMECo’s Deferred Property Tax Claims for 2012-2015 Should Be Adjusted to

Net Out State and Federal Income Tax Benefits ........................................................ 191

(2) The Company Is Not Entitled to Deferral of WMECo ’S 2016 Property Taxes

192

(a) WMECo’s 2016 Distribution-Related Property Tax Increment Does Not Represent an

Extraordinary Expense .......................................................................................................... 193

(b) The Company Has Failed to Demonstrate That the Denial of the Request for Deferral

Would Significantly Harm the Overall Financial Condition of the Company ........................ 194

5

(c) WMECo’s 2016 Incremental Tax Obligation Was Not Likely to and Did Not Prompt

the Filing of a Rate Case ........................................................................................................ 195

I. OTHER REVENUES ..................................................................................................... 196

1. The Pro Forma Adjustment to Eliminate Belmont Wholesale Distribution Contract

Revenues from Test Year NSTAR Miscellaneous Revenues is Selective and Speculative 196

2. The Department Should Adjust the Company’s Pole Attachment Revenues to Reflect

the Number of Pole Attachments at Test-Year End ............................................................ 199

J. CONSOLDATION OF THE COMPANY’S TERMS AND CONDITIONS TARIFF.. 200

1. Introduction ................................................................................................................. 200

2. Eliminate the Company’s Proposed Force Majeure Provision ................................... 202

3. Limit the Company Obligation for Meter and Communication Device Installation to 30

Days .................................................................................................................................... 204

4. Eliminate the Limitation of Liability Provision for Curtailment of Service ............... 204

5. Fee Increases ............................................................................................................... 206

6. The Department Should Require Additional Customer Education, Outreach, and

Company Ownership of Private Poles ................................................................................ 207

K. MERGER REVIEW - SECTION 96 .............................................................................. 210

1. Background ................................................................................................................. 210

2. The Department Should Consider Rate Impacts Before Approving the Company’s

Section 96 Petition .............................................................................................................. 211

VI. CONCLUSION ............................................................................................................... 213

6

COMMONWEALTH OF MASSACHUSETTS

DEPARTMENT OF PUBLIC UTILITIES

_________________________________________

)

NSTAR ELECTRIC COMPANY AND )

WESTERN MASSACHUSETTS ELECTRIC ) D.P.U. 17-05

COMPANY d/b/a EVERSOURCE ENERGY )

_________________________________________)

INITIAL BRIEF OF THE OFFICE OF THE

ATTORNEY GENERAL

I. INTRODUCTION

Pursuant to the briefing schedule established by the Department of Public Utilities

(“Department”) in this proceeding, the Office of the Attorney General (“AGO”) submits its

Initial Brief. On January 17, 2017, NSTAR Electric Company (“NSTAR”) and Western

Massachusetts Electric Company (“WMECo”) d/b/a Eversource Energy (together, “Eversource”

or the “Company”), pursuant to G.L. c. 164, § 94 (“Section 94”), filed two requests seeking

approval from the Department for a general increase in base rates. Specifically, Eversource

seeks an increase of $61.6 million for the three divisions of NSTAR and $35.8 million increase

for WMECo.1

In addition to the proposed rate increases, the Company seeks Department approval for

numerous significant changes in its electric distribution companies’ operations and finances.

First, the Company requests to implement revenue decoupling for NSTAR. See Rate Structures

1 These are the updated number provided in the Company’s May 25, 2017 Update to its revenue requirements. See

Exh. ES-DPH-2 (East) and (West) May 25, 2017 Update.

2

that will Promote Efficient Deployment of Demand Resources, D.P.U. 07-50-A (2008).2 Second,

the Company proposes an “Eversource Grid-Wise Performance Plan,” which includes a

performance-based ratemaking mechanism (“PBRM”) that would adjust rates annually in

accordance with a formula to be approved by the Department. Third, within the PBRM formula,

the Company proposes a Grid Modernization Base Commitment (“GMBC”) of $400 million in

incremental capital investment over the next five years. Fourth, the Company proposes to make

major changes in its existing rate designs to streamline and align rate classifications between

western and eastern Massachusetts.3 Fifth, the Company seeks to recover merger related costs.

The Company asserts that the annual pro forma amortization for merger-related costs to achieve

is $2,621,089 for NSTAR and $442,169 for WMECo over the next ten years. Sixth, the

Company proposes changes to its storm fund.

In addition to the rate increase requests under Section 94, the Company requests that the

Department review and approve the corporate consolidation of NSTAR and WMECo in this

proceeding pursuant to the Department’s authority under G.L. c. 164, § 96 (“Section 96”).

Thus, although the Company chose to package its requests in a single docket, the

Company has actually filed three cases with the Department: two Section 94 rate cases and one

Section 96 merger. In support of its three cases, the Company’s filing includes fourteen (14)

pieces of testimony by eighteen (18) witnesses.

2 WMECo implemented revenue decoupling in 2011, following the Department’s decision in Western

Massachusetts Electric Company, D.P.U. 10-70 (2011). 3 Specifically, the Company proposes a Transition Period over which it will eliminate the four legacy rates (Boston

Edison, Cambridge, Commonwealth and WMECo) and transition to one statewide rate for each of the proposed rate

classes. On June 9, 2017, the Department established a separate procedural schedule for rate design issues.

Interlocutory Order on Attorney General’s Motion to Protect Intervenors’ Due Process Rights, D.P.U. 17-05 (June

19, 2017).

3

II. OVERVIEW

Over the next five years, Eversource’s proposed rate plan will raise customers’ rates by

$284 million, an increase of nearly 20 percent. If the Department approves Eversource’s multi-

year ratemaking proposal, rates will immediately increase by $96 million on January 1, 2018,

and then will continue to increase, by an additional $188 million over the next four years. The

Department should deny Eversource’s $284 million rate increase and, instead, order Eversource

to decrease its existing rates.

Eversource does not claim that its Massachusetts electric distribution companies have

failed to earn a reasonable return in prior years—and indeed, it could not possibly make that

claim, since in both 2015 and 2016, Eversource’s shareholders earned far more on their

investments than others who made similar investments with similar risks. NSTAR’s reported

returns for those years were 13.2 and 11.3 percent, respectively, and WMECo’s reported returns

were 8.9 and 9.1 percent, respectively. Nor does Eversource claim that it needs to raise rates so

dramatically because it is suffering financially. In fact, Eversource’s stock price currently trades

at its all-time high, and the Company has embarked on a spending spree over the last year,

paying $800 million in cash for a water company and acquiring a fifty-percent interest in an

offshore wind partnership that could cost billions of dollars.

Indeed, rather than causing Eversource to under-earn, the Company’s existing rates are

more than sufficient to cover its Massachusetts expenses and reap returns for shareholders that

are higher than the national average. But for its statutory obligation to file a rate case this year,

one questions whether the Company would have filed a rate case at all. Nonetheless, looking to

turn this statutory obligation into an opportunity, Eversource seeks to lock in its high rates,

4

further increase its revenue, and reduce its risk with automatic cost of living-plus yearly rate

increases.

In the Sections below, the AGO outlines the numerous unsupported elements of the

Company’s proposed revenue requirement. One significant cost is the Company’s request for an

authorized return on equity of 10.5 percent. If approved by the Department, this return would be

the highest allowed return in New England, and significantly higher than the average return on

equity (9.3 percent) allowed by state commissions throughout the country last year. Department

approval of Eversource’s requested 10.5 percent return on equity would continue the

Commonwealth’s upward trend in allowed return on equity, while the rest of the country is

experiencing a downward trend. If, however, the Department rejects Eversource’s proposal and

instead approves the reasonable return on equity proposed by the AGO, 8.875 percent, customers

will save $42 million, almost half of the requested first-year rate increase.

To raise further revenue and reduce its risk, the Company proposes its “Grid-Wise

Performance Plan,” which is a “performance” based rate plan in name only. Although the

Company’s proposed plan has a complex formula with component parts traditionally debated in

performance based rate (“PBR”) proceedings, its likeness to a PBR ends there. The Company’s

proposal is not tied to quantitative improvements in service reliability, resiliency, energy

efficiency, environmental benefits, or resource diversity. In fact, it is not tied to any aspect of

the Company’s performance, at all.

The Company’s proposed PBRM is nothing more than a multi-year “rate increase plan”

consisting of a series of automatic annual rate increases that have no measurable tie-in to cost

incurrence and no connection to actual performance. Rates that lack any measurable connection

to costs incurred or performance are not just and reasonable. Indeed, the Company’s proposal

5

creates an up-front guessing game that creates substantial risks for ratepayers that Eversource’s

electric distribution companies will be over-compensated, with very little risk for Eversource that

it will suffer low returns. The Department should deny the Company’s request for a $96 million

rate increase and four yearly rate increases through the PBRM because it will result in unjust and

unreasonable rates.

The Company claims that its Grid-Wise Performance Plan will enable investment in grid

modernization, electric vehicles and storage, and help meet Massachusetts’ clean energy goals.

The AGO strongly supports the Commonwealth’s efforts to meet its statutory obligation to

reduce greenhouse gas emissions and to invest in our clean energy future. However, the

Department need not approve a $284 million rate increase nor pre-approve a $400 million

investment plan lacking in critical details and providing no guarantee that ratepayers will benefit

from the proposed investments, essentially amounting to a request for a blank check. The

Department and the Department of Energy Resources have established proceedings and

regulatory constructs to address grid modernization, electric vehicles and storage, and the role

that utilities should play in their advancement. Rather than working within the existing

framework, the Company chose to include them in its rate case filing, perhaps seeking to obscure

or deemphasize the magnitude of the large proposed rate increases and bill impacts on customers

with the promise of green benefits. Yet, with or without the Grid Wise-Performance Plan and

the GMBC, the Company is free to move forward with its “grid facing” grid modernization

investments for its distribution system and seek recovery as it would for any other capital

investment. And, the Department can—and should—address electric vehicle and storage

investments, as it has with similar investments, by developing statewide policies, followed by the

individual review of specific proposals.

6

These are important investments for our future. Before pre-authorizing $400 million of

investment, the Department should take the time outside of this rate case to: (1) determine how

the proposed investment fits within the state’s overall clean energy and greenhouse gas emission

reduction strategies; (2) compare it to alternatives; and (3) ensure that the Company is buying the

right equipment, locating it in the best places, and providing real benefits to customers at the

lowest possible cost.

For these reasons and the reasons set forth below, the Company’s petition will result in

unjust and unreasonable rates. The Department should deny the petition and order Eversource to

decrease its rates.

III. DESCRIPTION OF THE COMPANY

NSTAR and WMECo are affiliated Massachusetts electric and gas distribution

companies. In addition to NSTAR and WMECo, Eversource Energy owns affiliated electric

distribution companies operating in Connecticut, Massachusetts and New Hampshire. In

Massachusetts, Eversource operates NSTAR and WMECo electric distribution systems on a fully

consolidated basis. For purposes of this docket, the Company has designated these two

geographic areas as “Eversource East” and “Eversource West.” Through its Massachusetts

electric operations, Eversource serves approximately 1.4 million customers in 139 cities and

towns.

The service area designated as NSTAR/Eversource East encompasses the City of Boston

and 20 surrounding communities, extending west to Sudbury, Framingham, and Hopkinton, as

well as communities in southeastern Massachusetts extending from Marshfield south through

Plymouth, Cape Cod and Martha’s Vineyard, and through New Bedford and Dartmouth. Within

this geographic area, the Company serves approximately 1.2 million residential, commercial and

7

industrial customers in approximately 80 communities, covering approximately 1,700 square

miles. The customer base includes approximately 1,013,077 residential customers and 164,869

business customers.

The service area designated as WMECo/Eversource West encompasses the City of

Springfield and surrounding communities, extending west to the New York border and north to

Greenfield and the Vermont border. Within this geographic area, the Company serves

approximately 209,000 residential, commercial and industrial customers in approximately 59

communities in western Massachusetts, covering approximately 1,500 square miles. The

customer base includes approximately 189,507 residential customers and 18,961 business

customers.

IV. STANDARD OF REVIEW

The Department must review the “propriety” of general rate increases under Section 94.

In reviewing the “propriety” of a proposal by a utility under Section 94, the Department must

determine whether the proposed rates are just and reasonable. Attorney General v. Department

of Telecommunications and Energy, 438 Mass 256, 264 n. 13 (2002); Berkshire Gas Company,

D.P.U. 96-67, p. 6 (1996). An application of a generic public interest test derived from organic

authority must give way to the specific statutory just and reasonable analysis required when

examining a request for a general increase in rates. Attorney General v. Department of

Telecommunications and Energy, 438 Mass at 270; see also Cambridge Electric Light Company

v. Department of Public Utilities, 333 Mass. 536 (1956).

The party seeking the rate increase bears the burden of proof. Town of Hingham v.

Department of Telecommunications and Energy, 433 Mass. 198, 213-14 (2001), citing

Metropolitan District Commission v. Department of Public Utilities, 352 Mass. 18, 24 (1967);

8

Wannacomet Water Company v. Department of Public Utilities, 346 Mass. 453, 463 (1963).

Included in that burden is a responsibility to develop a record sufficiently complete to support a

Department order in its favor on any contested issue. Fitchburg Gas and Electric Light

Company, D.T.E. 99-118, p. 7, n.5 (2001) (the Company bears the burden of proving each and

every element of its case by a preponderance of “such evidence as a reasonable mind might

accept as adequate to support a conclusion.”); G. L. c. 30A, § 11(6); P. LIACOS, HANDBOOK OF

MASSACHUSETTS EVIDENCE, § 14.2 (7th ed. 1999). In Section 94 proceedings, the intervenors

have neither the burden of production nor the burden of proof. D.T.E. 99-118, p. 7 (2001). To

prevail, however, intervenors must produce evidence necessary to rebut a Company’s

allegations. D.T.E. 99-118, p. 9.4 G.L. c. 30A, §§ 10, 11.

The Department must evaluate all evidence, including rebuttal evidence and negative

evidence, and make findings that result in just and reasonable rates.5 The Department, however,

cannot validly do so without furnishing detailed and subsidiary findings of fact and conclusions

of law sufficient to demonstrate that the overall rate determination is just and reasonable.6 “G.L.

c. 30A, s 11(8), requires the decision of the Department to ‘be accompanied by a statement of

reasons ... including determination of each issue of fact or law necessary to the decision.’”

4 “[T]he burden of proof is the duty imposed upon a proponent of a fact whose case requires proof of that fact to

persuade the factfinder that the fact exists or, where a demonstration of non-existence is required, to persuade the

factfinder of the non-existence of that fact.”). Fitchburg Gas and Electric Light Company, D.T.E. 99-118, p. 7,

(2001.) 5 The Department must weigh all of the evidence, not just the evidence that supports the conclusion reached, but also

contrary evidence that derogates from that conclusion.” Town of Hingham v. Department of Telecommunications

and Energy, 433 Mass. 198, 215 (2001). 6 “[W]e have insisted that the agency make subsidiary findings of fact on all issues relevant and material to the

ultimate issue to be decided, and that it ‘set forth the manner in which it reasoned from the subsidiary facts so found

to the ultimate decision reached’.” Massachusetts Institute of Technology v. Department of Public Utilities, 425

Mass 856, 871 (1997) citing School Comm. of Chicopee v. Massachusetts Commission Against Discrimination, 361

Mass. 352, 354-355 (1972).

9

Massachusetts Institute of Technology v. Department of Public Utilities, 425 Mass 856, 867

(1997). NSTAR Electric Company v. Department of Public Utilities 462 Mass. 381, 387 (2012).

A rate is not just and reasonable simply because a utility says so. If the Company fails to

carry its burden by a preponderance of the evidence, the Department must deny the Company’s

requested rate treatment for the proposed adjustment. Fitchburg Gas & Electric Light Company

v. Department of Public Utilities, 375 Mass. 571, 582-583 (1978). The Department should be

guided by its duty to protect public interests and not promote private interests. Mass.-American

Water Company, D.P.U. 95-118, p. 77 (1996). Fitchburg Gas and Electric Light Company,

D.P.U. 09-09 pp. 22-23, citing Commonwealth Electric Company v. Department of Public

Utilities, 397 Mass. 361, 369 (1986); Attorney General v. Department of Pub. Utilities, 390

Mass. 208, 235 (1983); Lowell Gas Light Company v. Department of Pub. Utilities, 319 Mass.

46, 52 (1946).

V. ARGUMENT

A. ALTERNATE REGULATORY MECHANISMS

1. THE DEPARTMENT SHOULD REJECT THE COMPANY’S PROPOSED

PERFORMANCE-BASED RATEMAKING MECHANISM BECAUSE IT WILL

NOT PRODUCE JUST AND REASONABLE RATES

a) Introduction

Eversource, in its first post-merger rate case proceeding, proposes to implement its “Grid-

Wise Performance Plan.” Exh. ES-GWPP-1. The Grid-Wise Performance Plan encompasses

two major components. First, the Company proposes to implement what it calls a performance-

based ratemaking mechanism (“PBRM”) that would allow the Company to increase rates

significantly each year until the Company’s next rate case, pursuant to a proposed revenue-cap

formula. Exh. ES-GWPP-1 and Exh. ES-PBRM-1. As stated by the Company, the PBRM

10

would substitute for a capital-cost recovery mechanism, while furthering policy goals of the

Commonwealth. Exh. ES-CAH-1, pp. 5-6. Second, the Company proposes a Grid

Modernization Base Commitment (“GMBC”) of $400 million in incremental capital investments

over the next five years without a new or separate cost recovery mechanism. Exh. ES-GMBC-1.

The Company asserts that the adoption of the PBRM allows its proposed GMBC investments.

Id.

The Department should reject the proposed PBRM because it is fatally flawed. The

Department is no stranger to performance-based ratemaking (“PBR”), having experience with

such mechanisms that dates back many years. See e.g. Bay State Gas Company, D.T.E. 05-27

(2005); Boston Gas Company, D.T.E. 03-40 (2003); Berkshire Gas Company, D.T.E. 01-56

(2001); and Boston Gas Company, D.P.U. 96-50 (1996). Recent Department policies date back

to at least the mid-1990s.7 The Department has previously held, in part, that proposed PBR

mechanisms should be designed to achieve specific, measurable results, and not focus

excessively on cost recovery issues. Id. The Company’s proposed PBRM satisfies neither of

those criteria, being superficially concerned with capital cost recovery issues, and devoid of any

serious proposal to assure definitive benefits to ratepayers. Furthermore, the PBRM ignores the

Department’s past experience with PBR and its concern with the appropriateness of the type of

PBR proposed here, as well as the criticism such approaches have received in the

Commonwealth and other states. See e.g. Bay State Gas Company, D.P.U. 09-30, pp. 19-25

(2009) and Boston Gas Company, D.P.U. 10-55 (2010). At bottom, while the Company urges

approval of the PBRM on the ground that it is necessary to further investment in grid

modernization, the Company has failed to demonstrate that it lacks the ability to finance these

7 Incentive Regulation, D.P.U. 94-158 (1995).

11

important investments under traditional cost-of-service regulation. The Company can and should

make those worthy investments—but the evidence clearly shows that the PBRM is not needed to

enable it to do so.

b) The Company’s Proposal Is Inconsistent with Established

Department Policy

The current proceeding is not the Department’s first experience with incentive regulation

or PBR. The Department observed over a decade ago that electric and gas utility industries were

becoming increasingly more competitive starting with the Public Utility Regulatory Policies Act

(“PURPA”) of 1978 through the Energy Policy Act of 1992 (“EPAct 92”). The scope of utility

services that had historically been regulated as a monopoly, were opening to competition and

competitive pressures raising questions about the role that traditional regulation would play in

this new competitive environment. It was against this backdrop that the Department opened an

investigation in Incentive Regulation, D.P.U. 94-158 to make certain that its ratemaking policies

were compatible with these competitive trends.

Within D.P.U. 94-158, the Department set forth several general and specific criteria that

it would apply in evaluating incentive regulation proposals from electric and gas utilities.

Similar to traditional cost of service regulation, rates charged under an incentive regulation

proposal would be judged against the “just and reasonable” standard. In addition, the

Department required all petitioners to show that proposals would advance the Department’s

long-standing goals of safe, reliable, and least-cost energy service. Proposals must also promote

the objectives of economic efficiency, cost control, lower rates, and reduced administrative costs.

A well-designed proposal would provide a utility with an opportunity to earn higher rewards than

under traditional regulation, but also assume higher risks as well. Compared with traditional

regulation, the Department noted that an appropriately designed incentive plan should provide a

12

greater incentive to reduce costs for the utility while concurrently providing greater benefits to

ratepayers through lower prices or better service. In addition to these general criteria, the

Department held that a well-designed proposal must meet the following specific criteria:

(1) A proposal must comply with Department regulations, unless

accompanied by a request for a specific waiver. The Department

added that proposals that comply with statutes and governing

precedent are strongly preferred;

(2) A proposal should be designed to serve as a vehicle to a more

competitive environment and to improve the provision of monopoly

services. Incentive proposals should avoid the cross-subsidization of

competitive services by revenues derived from the provision of

monopoly services;

(3) A proposal may not result in reductions in safety, service

reliability or existing standards of customer service;

(4) A proposal must not focus excessively on cost recovery issues.

If a proposal addresses a specific cost recovery issue, its proponent

must demonstrate that these costs are exogenous to the company's

operation;

(5) A proposal should focus on comprehensive results. In general,

broad-based proposals should satisfy this criterion more effectively

than narrowly-targeted proposals;

(6) A proposal should be designed to achieve specific, measurable

results. Proposals should identify, where appropriate, measurable

performance indicators and targets that are not unduly subject to

miscalculation or manipulation; and

(7) A proposal should provide a more efficient regulatory approach,

thus reducing regulatory and administrative costs. Proposals should

present a timetable for program implementation and specify

milestones and a program tracking and evaluation method.

Boston Gas Company, D.P.U. 96-50 (Phase 1), p. 242 (1996); citing Incentive Regulation,

D.P.U. 94-158, pp. 58-64.

The Company’s proposal in this proceeding fails to comply with several of those criteria.

While the Department has made clear that PBR proposals “must not focus excessively on cost

recovery issues,” the Company’s proposed PBRM appears to be focused nearly exclusively on

cost recovery. In its initial petition to the Department, the Company presented the PBRM as a

13

substitute for a capital-cost recovery mechanism, Tr. Vol. III, pp. 522-523, a ratemaking

mechanism that would allow the Company to adjust rates to recover costs associated with capital

investments outside a normal, traditional rate case.

[T]he Company is proposing to implement performance-based

ratemaking mechanism (“PBRM”) that would adjust rates annually

in accordance with a revenue-cap formula to be approved by the

Department in this case. The PBRM would substitute for a capital-

cost recovery mechanism with the goal of furthering the

Commonwealth’s clean energy goals, creating stronger incentives

for cost efficiency, and assuring continued achievement of top-tier

service-quality performance.

Petition for Approval, p. 3 (emphasis added).

Similar language is included within the Direct Testimony supporting the Company’s

filing. Exh. ES-GWPP-1, p. 9. Likewise, elsewhere within the Direct Testimony supporting the

Company’s filing, Eversource presents the “revenue cap” formula of its PBRM as allowing the

Company to adjust rates on an annual basis in lieu of a potential capital cost recovery

mechanism.

The Company’s proposed PBRM is designed as a “revenue cap”

formula that would be used to adjust rates on an annual basis in lieu

of an annual capital cost recovery mechanism.

Exh. ES-GWPP-1, p. 10.

Indeed, the desire to mitigate Company risks through a regulatory mechanism to assist in

the recovery of capital costs appears to have predated the formulation of the PBRM. In

examining potential options before hiring its outside consultant for the PBRM, the Company

requested the consultant assist the Company in evaluating ratemaking alternatives, which

included discussions of potential capital funding options. Tr. Vol. III, p. 527. As described by

Eversource itself, these discussions prior to the creation of the PBRM included consideration of

14

whether to propose a traditional capital cost recovery mechanism in conjunction with its

proposed revenue decoupling mechanism, or to propose a PBR mechanism. See Exh. AG-28-1.

The terms of the arrangement between Dr. Meitzen and the

Company regarding his work related to the development,

implementation, testimonial, and/or analytical support of the

Company’s PBRM were provided in response to Information

Request AG-4-5, as Attachment AG-4-5(n). Prior to final execution

of the arrangement, the Company requested Christensen Associates

to assist the Company in evaluating ratemaking alternatives,

including consideration of whether the Company would propose a

traditional capital cost recovery mechanism in conjunction with

revenue decoupling or performance-based ratemaking mechanism.

Id., (emphasis added).

Furthermore, the Department’s fourth criteria notes that “[i]f a proposal addresses

a specific cost recovery issue, its proponent must demonstrate that these costs are

exogenous to the company’s operation.” The Company has not demonstrated or even

attempted to demonstrate that the cost in question are exogenous to the Company. Tr.

Vol. III, pp. 529-530. This is for the simple reason that it is impossible to make such an

argument. The cost recovery issue the PBRM is intended to address is nothing less than

all of the capital spending of the Company.

The Department also requires an incentive regulation proposal to be designed to

achieve “specific, measurable results,” and to identify metrics to measure progress

towards utility targets. D.P.U. 96-50. First, the Company has not identified any targeted

results for its proposed PBRM. The Company claims that its proposal will help the

Company in furthering the Commonwealth’s clean energy goals, while creating stronger

incentives for cost efficiency, and assuring continued achievement of top-tier service-

quality performance. Exh. ES-CAH-1, pp. 5-6. Elsewhere, the Company claims that the

GMBC portion of its proposed Grid-Wise Performance Plan will advance three key

15

characteristics necessary for the modern grid: (1) system resiliency and carbon-emissions

reduction; (2) integration of distributed energy resources (“DER”) and visibility into the

performance and impact of DER on the Company’s system real-time; and (3) facilitation

of DER customer engagement. Exh. ES-GWPP-1, p. 16. These broad general goals do

not constitute a design sufficient to achieve “specific, measurable results.” Indeed,

Eversource candidly admits that its proposal is not designed to achieve specific results:

As a first-step grid-modernization enablement plan, the GMBC is

not designed to achieve a specific end-state vision, nor is it intended

to confine the scope of the Company’s work to reach a specific end-

state. To the contrary, the Company fully anticipates that the

GMBC will be expanded upon, modified and supplemented in

significant dimension into the future.

Exh. ES-GWPP-1, pp. 16-17.

Yet, the Company is unable to identify basic measurable improvements that should result

from the Company’s proposal if it is to accomplish the goals outlined by the Company.

Eversource claims that its proposal will advance distribution system resiliency, i.e., the ability of

Eversource’s distribution system to withstand and adapt to potential future severe weather events

such as hurricanes and northeasters. However, the Company is unable to identify, specifically,

the expected improved system reliability during severe weather events, and did not even prepare

any forecasts of future system reliability performance where maximum event days are included.

See Exh. AG-18-14. Likewise, Eversource claims that its proposal will assist the

Commonwealth in reducing greenhouse gas emissions, but has not prepared any analysis

examining future emissions with and without adoption of its proposal. Id. Finally, the Company

claims its proposal will assist in promoting the adoption of DERs within its service territory, but

has again not identified with specificity the number of additional DERs or increase in DER

adoption rate the Department can expect to see with the adoption of its proposal. Id. When

16

asked for his opinion on whether the Company’s proposals identified appropriate measurable

performance indicators and targets, the Company’s outside consultant responded that he had no

opinion on the matter. Tr. Vol. III, pp. 36-37.

To the extent the Company has identified what it refers to as performance metrics, they

are wholly inadequate and inconsistent with the clear intentions of the Department’s guidelines.

Within the current proceeding, the Company first provided a set of fourteen parameters the

Company referred to as performance metrics for customer benefits. Exh. ES-GMBC-3. These

metrics, however, only address reporting requirements the Company proposed to commit to,

without identifying any threshold level for the Department to identify whether the Company was

sufficiently meeting its requirements. For example, with regard to measuring the Company’s

success involving its improvements to distribution system load flow operations, Eversource

merely stated that it would “measure average [distributed generation] application by type.” Id. p.

1. Indeed, the Company proposes to spend $111 million on what Eversource has termed

“Foundational Technology for DMS and Automation,” yet the Company does not propose any

performance metric to measure customer benefits associated with any of these expenditures,

instead providing a nebulous note that benefits will be seen in other activities:

Benefits of foundational investments are realized without other

investments […], primarily the effectiveness and reach of advanced

distribution system.

Tr. Vol III, p. 550.

In response to discovery, the Company included new metrics to measure both the

Company’s implementation efforts and customer benefits. Exh. DPU-41-7,

Supplemental 1. Specifically, the Company identified thirty additional possible metrics

that it could add to the fourteen metrics proposed by the Company in its initial filing,

finding that it would only be able to track data in relation to fourteen of the thirty

17

additional metrics. Id. Eversource explicitly stated that some of the additional metrics

measure customer benefit and/or progress towards meeting the Commonwealth’s energy

policy goals. Id. However, these new possible metrics still fail to identify target

performance, and thus are inconsistent with the Department’s criteria requiring “specific

and measurable results.” For example, the first of the new benefit metrics states that the

Company will measure the increase in feeders with DMS control. Id. Eversource

identifies no target level of increase in the number of feeders on its system with DMS

control. Likewise, the Company proposes to measure both reductions in carbon-dioxide

emissions and improvements in customer service reliability. Id. Again, the Company

provides no target improvement for the Department to measure potential future

improvements against.

The proposed PBRM also fails to provide a more efficient regulatory approach,

including reducing regulatory and administrative costs. D.P.U. 96-50. The Company

states in its filing that the proposed regulatory mechanism will produce a number of

potential regulatory cost savings for both the Company and the Department. Tr. Vol. III,

p. 538. Yet, when asked to identify specific filings the Company has made in the last five

years that the proposed mechanism would have allowed Eversource and Department to

avoid, the Company could not identify a single filing that the proposed mechanism would

have avoided. Tr. Vol. III, pp. 539-540. It is undisputed, however, that the proposed

mechanism will add new annual compliance filings that the Company must make. Tr.

Vol III, p. 541.

The Company’s proposal also ignores the experiences the Department has

encountered in the past regarding PBR. In 1996, the Department approved Boston Gas

18

Company’s (“Boston Gas”) request to implement a PBR mechanism. D.P.U. 96-50

(Phase 1).

After the expiration of its initial five-year term in the early 2000s, the Department

approved a new 10-year PBR for Boston Gas. D.T.E. 03-40. In 2010, however, Boston

Gas sought to terminate its PBR mechanism, due in part to its admission that the

available cost-reduction alternatives were not sufficient to reduce, or even hold constant,

Boston Gas’ overall O&M expenses. D.P.U. 10-55. Importantly, Boston Gas’ decision

came after the Department’s 2009 decision to terminate early a PBR mechanism in use by

then-Bay State Gas Company. D.P.U. 09-30. The Department was clear in its decision

that the PBR plan in question was not working as intended, requiring Bay State Gas

Company to seek relief under the exogenous cost, earnings sharing mechanism, and

extraordinary economic circumstances provisions of the plan on several occasions during

its implementation. Furthermore, the Department found that there was nothing in the

record of the proceeding that convinced it that Bay State Gas’ historic initiatives to

promote operational efficiencies and cost reductions would not have been undertaken

absent a PBR mechanism, and that Bay State Gas’ was unable to quantify any significant

cost savings or benefits to ratepayers associated with continuing its PBR plan.

[…] [W]e find that the Company’s PBR plan is not working as

intended. Although the Company advocates for the continuation of

PBR plan or, at least the continued applicability of the earnings

sharing mechanism, exogenous cost recovery mechanism and the

PBR rate adjustment formula, it is evident that Bay State’s

experience with the PBR plan has been less than successful. The

Company concedes that the PBR plan has failed to provide sufficient

revenues to cover the Company’s operating and maintenance costs,

declining use per customer, and capital investment needs.

Additionally […] the Company has, on several occasions in the past

four years, sought relief under the exogenous cost, earnings sharing

19

mechanism, and extraordinary economic circumstances provisions

of the PBR plan. The Company provides numerous reasons for the

rate plan’s substandard performance, such as the historic time frame

underlying the construction of PBR, fundamental changes in the

utility industry, the lengthy term of the PBR, and capital investment

demands. Regardless of the reasons, the fact remains that the

Company has been unable to effectively and efficiently operate

within the parameters of the existing PBR plan.

In addition, although the Company identifies various efforts to

promote operational efficiency and/or reduce its costs, we are not

persuaded that the tangible benefits to ratepayers, if any, flowing

from the continuation of the PBR plan, including the establishment

of new base rates, outweigh terminating the PBR plan. There is

nothing in the record to convince us that such initiatives would not

have been undertaken absent the PBR. Indeed, the Company is

unable to quantify any significant cost savings and benefits to

ratepayers associated with its PBR plan.

Bay State Gas Company, D.P.U. 09-30, pp. 24-25 (emphasis added).

As in Bay State, Eversource’s PBRM does not deliver adequate benefits for

utility customers. The Company fails to “quantify any significant cost savings and

benefits to ratepayers associated with its PBR plan.” Bay State Gas Company, D.P.U.

09-30, pp. 24-25. Indeed, the record here is near-exclusively focused on capital cost

recovery matters. As discussed further below, the proposed capital addition can be made

absent the PBRM.

As of today, there is no major U.S. utility providing electric or natural gas

distribution service that currently operates under a PBR mechanism like Eversource

proposes here. The only exception is a single California electric utility whose mechanism

terminates at the end of this year. Exh. AG/DED-1, Sch. DED-1. The Company does not

dispute this reality. Tr. Vol. III, pp. 620-621. It offers no reason why the Department

should return to the past.

20

The Department should also reject the proposed PBRM on the grounds that it is

inconsistent with the Department’s established criteria in D.P.U. 96-50 that incentive

regulation proposals in part (1) not focus excessively on cost recovery issues; (2) be

designed to achieve specific and measurable results; and (3) provide regulatory and

administrative cost efficiencies. The proposed PBRM accomplishes none of these.

c) The Company’s Proposal Will Allow Near-Guaranteed Rate

Increases at Abnormally High Rates

The Company proposes to implement the PBRM in the current proceeding in lieu of an

annual capital cost recovery mechanism. Exh. ES-CAH-1, p. 5. The proposed mechanism

would be used to adjust rates on an annual basis through the use of a “revenue cap” formula that

is derived through economic analysis of utility cost trends as indicated by measures of inflation,

input prices, and total factor productivity. Exh. ES-GWPP-1, p. 10. Through the PBRM, rates

would be allowed to increase by the rate of inflation as measured by the Gross Domestic Product

Price Index (“GDP-PI”) published by the U.S. Department of Commerce, Bureau of Economic

Analysis (“BEA”) plus 2.56 percent, Eversource’s proposed “X factor” based upon a Total

Factor Productivity (“TFP”) analysis. Id., pp. 46-47. Assuming that inflation as measured by the

GDP-PI is greater than 2 percent, the Company proposes to subtract 0.25 percent from this rate

escalation to service as a Consumer Dividend (“CD”). Id., p. 54. This calculation does not

include the possibility of any potential recovery of GMBC expenses above the Company’s

committed $400 million, exogenous cost increases, or the potential interaction of the Company’s

Earnings Sharing Mechanism (“ESM”).

Large rate increases are embedded in the Company’s proposal. If GDP-PI is assumed to

be 2 percent per year for the four years following the rate year, increases in GDP-PI alone would

21

cause rates to rise by 8.24 percent over those four years.8 The Company’s proposal, however,

would allow Eversource’s rates to increase by 4.56 percent, each year. Over the course of four

years, Eversource’s customers will see rates increase by nearly 19.53 percent under the

Company’s proposed formula.9 Starting with the pro forma revenue requirement proposed by

the Company in its initial filing, the rates would increase $96 million in the first year and then

increase another $188 million over the next four years for a total of $284 million over the five

year term of the rate plan, without accounting for the Company’s various riders potentially

leading to even further increases.10 [ $96 million + $188 million = $284 million ].

The Department should reject Eversource’s proposed PBRM parameters for the simple

fact that they result in unjustifiable rate increases over the proposed term of the mechanism. The

Company has not provided sufficient justification to warrant such a large allowed increase in

rates, especially in the context of irregular aspects of the proposed mechanism such as a

proposed X factor far greater than any other recently accepted proposal for any North American

regulatory body, or a similarly unprecedented inflationary floor or CD factor tied to inflation

levels.

8 The effect of the annual two percentage increases over four years can be calculated as follows:

1.02 x 1.02 x 1.02 x 1.02 = 1.0824

9 The effect of the annual 4.56 percent increases over four years can be calculated as follows:

1.0456 x 1.0456 x 1.0456 x 1.0456 = 1.1953

10 The total affect would be $ 962,108,023 x 0.1953 = $188 million. Exh. ES-DPH-2 (Consolidated), Sch. DPH-33,

p. 9.

22

d) The Company’s Proposal to Have a Separate Adjustment for

Capital Investments Undermines the Purpose of A PBRM Formula and

Allows Dollar-For-Dollar Recovery Without a Prudence Review

The Company’s PBRM proposal essentially creates a separate tracking mechanism for

capital additions occurring after the test year. The Company’s inclusion of a capital investment

adjustment weakens the effect of regulatory lag and undermines the purpose of the PBRM and its

ability to control potential over-capitalization.

The Company has admitted that its Grid-Wise Plan is being proposed to adjust rates on

an annual basis, “in lieu of an annual capital cost recovery mechanism”, and as a “substitute for a

capital-cost recovery mechanism.” Exh. ES-GWPP-1, p. 10, and Exh. ES-PBRM-1, p. 4. The

proposed PBRM formula includes a component called the “grid modernization factor” (“GMF”),

which will be set to zero unless and until grid modernization investments are beyond the GMBC

of $400 million. Exh. ES-PBRM-1, p. 8. However, if the Company incurs more than $400

million in grid-modernization investments over the next five years, the GMF will allow for

automatic dollar-for-dollar recovery for these investments, without any regulatory review of the

propriety of such investments. Exh. ES-GWPP-1, p. 53. The GMF embedded in the PBRM acts

like a capital tracker by allowing all modernization investments above $400 million to go

directly into rates. As provided in the Direct Testimony of AGO witness, Dr. David Dismukes,

PBRs are not typically designed to include tracker-like characteristics. Exh. AG/DED-1, p. 35.

Generally, if capital adjustments are included, it is for those that are outside the Company’s

control and normal course of business operations. Id. However, the Company’s GMF will allow

23

it to recover all capital investments, including those that are not beyond the Company’s control,

in excess of its GMBC “stretch factor” 11 credit on a dollar-for-dollar basis. Id.

Furthermore, the Company’s proposed capital investment adjustment allows the

Company to act uneconomically and inefficiently, increases rates to the detriment of ratepayers,

and shifts capital development and regulatory risks to ratepayers. As explained in the Direct

Testimony of Dr. Dismukes, allowing these capital expenditures to be recovered separately,

through a tracker mechanism embedded in a PBR, will reduce capital expenditure discipline

since rates will be allowed to increase on a dollar-for-dollar basis with the capital investments

rather than having the utility fund those capital investments through efficiencies and its allowed

formula-based revenue increases. Exh. AG/DED-1, p. 39.

Ultimately, the GMF will allow the Company’s PBR mechanism to act as a capital

tracker recovering large undefined capital investments on dollar-for-dollar basis without the

benefits of a prudence or other regulatory review process common in a traditional capital

investment tracker.

e) The Company Has Not Provided Any Evidence That The PBRM

Is Necessary to Fund Grid Modernization Investments

The Company proposes the PBRM as a “substitute for a capital-cost recovery mechanism

with the goal of furthering the Commonwealth’s clean energy goals, creating stronger incentives

for cost efficiency, and assuring continued achievement of top-tier service-quality performance.”

Petition for Approval, p. 3. In particular, the Company states that the proposed PBRM will allow

the Company to invest in emerging technologies through the GMBC. Exh. ES-GWPP-1, p. 11.

11 A stretch factor has also been termed a consumer productivity dividend, and represents, in part, the accumulated

inefficiencies in cost-of-service regulation that are anticipated to be eliminated with a movement to incentive-based

regulation. See Exh. ES-PBRM-1, p. 54, and Exh. AG/DED-1, p. 15.

24

However, there is no record evidence that Eversource requires the PBRM to fund its proposed

$400 million GMBC or even its normal capital additions. Existing rates are sufficient to allow

the financing of grid modernization activities.

The evidence in the record shows that the Company’s current cost of service recovers

$183 million per year in depreciation expense or capital recovery for the combined services of

WMECo and NSTAR, which will yield approximately $915 million over the next five years.

Exh. ES-DPH-2 (Consolidated), Sch. DPH-33, p. 3. [ $915 million = $183 million x 5 ].

Recovery of depreciation expense reduces net plant investment and the utility’s corresponding

rate base as existing plant investments are depreciated. Incremental new rate base investments

offset this decrease – i.e. depreciation expense, and the buildup of accumulated depreciation

reserve. Exh. FEA-MPG-1, p. 23.

Therefore, since the Company’s existing capital recovery is so many times greater than

the proposed investment under the GMBC, the Department should reject the arguments that

existing rates are insufficient to allow the financing of GMBC investment, and that the proposed

PBRM is required to support the Company’s proposal to invest in grid modernization activities.

f) The Company’s Proposed PBRM Includes a Negative X Factor

Far Lower Than That Approved for Any North American Energy Utility

The Company’s proposed PBRM formula includes a productivity adjustment known as

the “X-factor.” The X factor is an adjustment in a PBR formula that often “tempers” the degree

to which a utility can increase its rates (or revenues) due to changes in inflation alone. The

higher the X factor, other things being equal, the lower the overall net increase in rates

(revenues) that will be allowed through the PBR formulation.

25

Eversource has failed to show that its proposed X factor is a reasonable productivity

offset for the Department to utilize in setting rates for the Company’s distribution services. The

Company proposed a productivity factor of negative 2.56 % (-2.56), Exh. ES-PBRM-1, p. 61,

comprised of a negative 1.37 % (-1.37) TFP differential and an input price differential of

negative 1.19 % (-1.19). Because the Company’s proposed X factor adjustment is negative, it

will not offset the annual inflation adjustment made to rates relative to industry inflation. Rather,

it is a supplement to allow additional increase over industry inflation rates under the PBRM.

The record demonstrates that, if accepted, the Company’s proposed X factor for the

PBRM would be by far the lowest X factor accepted in at least the last ten years for a U.S.

electric or natural gas utility and no company currently is operating with a negative X factor.

Exh. AG/DED-1, pp. 13-14. Including recent Canadian regulation, the proposed PBRM would

be the only incentive regulation mechanism in North America that is designed with a negative X

factor. Exh. AG/DED-1, pp. 47-48. The record shows that the use of negative X factors is an

outcome most regulatory jurisdictions have avoided. For example, in a recent Alberta Utilities

Commission (“AUC”) consideration of PBR plans, the AUC found that the range of acceptable

X factors based on its evidentiary record was anywhere from -0.79 to +0.75 %. Even when faced

with a potential finding of an ‘acceptable’ negative X factor, the AUC decided upon a positive X

factor, inclusive of a stretch factor, of +0.3 %. Exh. ES-12, pp. 44-45.

Indeed, in considering its record evidence, the AUC specifically noted the problematic

policy consideration of allowing utility rates to increase faster than general inflation through a

negative X factor. Id.

26

The Commission is aware that the value of the X factor can be

negative, and there was considerable discussion of this issue in

Decision 2012-237, as well as in this proceeding. However, given

the manner in which TFP growth is calculated in the studies in

evidence, negative values of TFP growth mean that more inputs are

used to produce the same amount of output or that less output is

produced using the same amounts of inputs. Any industry, including

the electricity (and gas) distribution industry, may have periods

when this phenomenon is observed, but it is not clear why such a

phenomenon should persist over a long period. In the Brattle and

Meitzen studies, TFP growth is negative in nine of the last 15 years,

and more particularly, in seven of the last nine years. Yet, many of

the utilities in the current proceeding went to great lengths to explain

some of the efficiency-improving procedures (productivity

improvements) they have adopted, and there is no reason to expect

that at least some of this type of behaviour would not be observed in

many of the U.S. firms in the sample used in the TFP growth

calculations being examined here. These findings suggest that there

may be some concerns with the calculation of TFP growth using

only volume as the measure of output, whatever the time period

used, especially when combined with the particular data and input

growth assumptions utilized in the Brattle and Meitzen studies, with

the sample of U.S. electric distribution utilities. The evidence is not

conclusive, but it does cause the Commission to be mindful of the

extent to which the results differ with different choices of

assumptions, including output measures.

Id. (emphasis added). 12

The Company has premised a great deal of the specifics of its proposed PBRM on the

idea that the utilities industry is currently seeing a prolonged period of negative productivity

growth relative to the economy as a whole. However, this position is not supported by the

Bureau of Labor Statistics (“BLS”) which measures productivity growth in America industries.

In rebuttal, the Company provided information which it argued supported the notion that

negative productivity growth occurs in numerous U.S. industries. Exh. ES-PBRM-Rebuttal-1,

pp. 17-18. Specifically, the Company produced analysis of productivity growth from the years

12 2018-2022 Performance-Based Regulation Plans for Alberta Electric and Gas Distribution Utilities, Alberta

Utilities Commission Proceeding ID No. 20414, Decision 20414-D01-2016 (Errata), ¶167, emphasis added.

27

2000 through 2014 from the BLS, which produces a multifactor productivity (“MFP”) measure,

a version of a TFP. The analysis showed sixteen separate American industries that have a

negative MFP according to BLS. Included in this presentation was North American Industry

Classification System (“NAICS”) sector 22, which covers the utilities sector. The Company’s

analysis found that the BLS had estimated that the average productivity growth in the utilities

sector over the years 2000 through 2014 was negative 0.42 percent (-0.42).

The Company’s analysis, however, actually did not show the wide-spread negative

productivity growth claimed in the Company’s narrative rebuttal. The Company inadvertently

used BLS measures for changes in sector output for the presented industries, and not MFP as is

claimed. Exh. VS-RB-Surrebuttal-1, pp.7-8. The Company admits that, due to its mistake, any

analysis based on the Company’s original table presented in its rebuttal filing would be

“nonsense.” Tr. Vol. III, p. 502.

A corrected version of the Company’s rebuttal Figure 1 showed that half of the industries

the Company originally presented as having negative productivity growth actually have positive

productivity growth. The Company finds no significance in its correction, as the purpose of its

rebuttal analysis was simply to show that negative productivity growth exists for certain

industries. Tr. Vol. III, p. 502. Apparently lost on Eversource, however, are the specifics of its

own analysis. Once corrected, according to the BLS, the average productivity growth for the

utilities sector over the years 2000 – 2014 is 0.94 percent. Exh. VS-RB-Surrebuttal-1, p. 9. This

is a positive productivity value, and indeed, is the second highest, after pipeline transportation, of

the industries chosen by the Company in its rebuttal analysis.

28

g) The Company’s Total Factor Productivity (“TFP”) Study Is

Flawed and Provides an Inadequate Analysis of the Company’s Costs

The Company’s TFP study has a number of deficiencies and fails to provide an accurate

analysis of the Company’s costs. A productivity analysis of the distribution service should

include an analysis of all of the costs of providing that service, including the capital costs, the

operations and maintenance expenses, as well as other labor and materials accounts such as

customer accounts, sales and a portion of Administrative and General (“A&G”) expenses. Exh.

AG/DED-1, p. 50. However, the Company only considers operations and maintenance expense

and distribution capital costs in its analysis. Id., pp. 53-54. The Company has provided a limited

analysis that therefore does not reflect the Company’s true costs and cannot be used to compare

its total productivity to the total productivity of its peers in the industry. Id. The Company’s

exclusion of customer accounts, sales and a portion of A&G expenses fails to recognize that the

Company’s revenue cap formula is applied to all distribution revenues which recover costs from

these accounts (customer accounts, sales, A&G, and general plant). Id. Omitting these accounts

biased Dr. Meitzen’s analysis, since it excludes major productivity improvements created by

technological advancements. For instance, Dr. Meitzen stated that by excluding certain customer

expense accounts in his productivity analysis, particularly as it relates to meter reading expenses,

the analysis includes the higher costs associated with smart meters, but does not account for any

of the cost savings associated with meter reading. Tr. Vol. 8, p. 1523-1524.

Likewise, Dr. Meitzen’s analysis leaves out major improvements in non-distribution plant

and labor productivity associated with, for example, the addition of electronic bill payment, the

outsourcing of customer billing, historical cost reductions in computer systems, and information

technology. As shown by Dr. Dismukes, the inclusion of these additional accounts (customer

29

accounts, sales, A&G, and general plant) increases the industry average from -2.56 in the

Company’s analysis to -1.95, further illustrating that the Company’s proposed productivity factor

is inaccurate. Exh. AG/DED-1, p. 55.

The Company attempts to confuse the issue by asserting that Dr. Dismukes’s allocation

of A&G and general plant is unnecessary because A&G and general plant are reported on a

disaggregated basis in the FERC Form 1. Tr. Vol XIII, p. 2686. This simply is not true. A&G

expenses and General plant are not reported on a disaggregated basis by function in the FERC

Form 1. The Company then attempts to show that Dr. Dismukes incorrectly allocated A&G

expenses using distribution, customer accounts and sales expenses, and by excluding customer

service expenses. Tr. Vol XIII, pp. 2689-2693. Customer service expense was excluded from

the allocation of A&G because for some companies, the cost of energy efficiency programs

implemented during the sample period were booked to this account. And, as Dr. Dismukes

explained even if a cost category was increasing, the relevant share applied to A&G would

decrease, holding the allocated expense relatively constant. Tr. Vol XIII. p. 2693.

Likewise, the Company mischaracterizes Dr. Dismukes’ calculation of plant amounts that

included an allocation of general plant. In his surrebuttal testimony, Dr. Dismukes revised his

capital quantity calculation to include only a portion of general plant. Exh. AG/DED-

Surrebuttal-1, p. 8. This calculation was provided in a workpaper labelled WP Revised TFP

Input Capital. Tr. Vol. XIII, p. 2694. In the spreadsheet tab labelled “Capital Calc,” Column

AA contains the values used for the general capital stock. The calculations in this column are

linked to a “% of Distribution Plant in Service” column (Column G) of the Company’s own

capital stock calculation and is used to allocate the portion of general plant. Therefore, the

30

Department should reject the Company’s mischaracterizations of Dr. Dismukes’ calculation of

general plant allocations.

The Company’s analysis also fails to include in its peer group utilities that are suitable for

an analysis of an appropriate productivity factor and the use of PBR mechanisms. It appears that

the Company has simply updated a previous analysis that its witnesses used in another

proceeding, and neglected to add relevant utilities to the peer analysis. Tr. Vol. VIII, pp. 1475-

1477. For instance, the Company has not included any utilities operating in Maine in its

analysis. A utility such as Central Maine Power that operated under a PBR mechanism during

the study period would certainly be a suitable utility to include in the Company’s peer group

analysis. The Company’s failure to include pertinent comparable utilities in its analysis further

illustrates the flaws in the Company’s analysis and the questionable reliance on a peer average

that does not represent the Company’s own productivity and may not actually be representative

of comparable peers.

Additionally, the Company has inappropriately weighted the Company’s peer group

average. The Company has made an incorrect adjustment in determining the peer group average

such that even if the basis for the adjustment were correct, it is limited and selective. Exh.

AG/DED-1, pp. 55-56. The TFP estimates included in the Company’s analysis are already

scaled for size since productivity is a relative measure comparing a utility’s inputs to its outputs.

Id. The Company appears to selectively weight the productivity estimates as there is a wide

range of differences between utilities which could also impact these productivity estimates

including regional differences, regulatory differences, geography, service territory

characteristics, and variations in the extent of vertical integration, among other factors. Id.

31

Although the Company adjusts for size, it fails to adjust for many of these other factors resulting

in a weighted average that is selective and arbitrary. Id.

The Company’s analysis fails to account for customer peak demands when applying an

appropriate measure of output in its TFP study. The Department has found that relying solely on

the number of customers and excluding customer usage from the productivity analysis results in

a downward bias in productivity growth levels. Boston Gas Company, D.P.U. 96-50 (Phase 1),

p. 277. Despite this finding the Company rely solely on the number of customers as an output

measure in its productivity analysis. Exh. ES-PBRM-1, p. 68. The Company’s own cost of

service study shows that non-customer related parameters are important in determining its costs

to serve its customers. Exh. AG/DED-1, pp. 58-59 (citing Exh. ES-ACOS-1 and Exh. ES-

MCOS-1). The TFP measure estimated by the Company inappropriately uses customers as the

one and only measure of output rather than some combination of sales and customers, some

combination of sales and peak demand, or just sales alone. Id., p. 59. Distribution utilities

“produce” distribution services (sales), not customers, thus, the measure of output used in

developing a productivity factor should reflect a true measure of the services (output) being

offered by the Company. Exh. AG/DED-1, p. 62-63. While the number of customers can be an

important cost determinant, the number of customers is not the sole determinant of costs. Id.

Indeed, Dr. Meitzen admitted that the number of customers is not the primary driver of costs for

electric distribution. He noted that a large portion of cost to such companies now is replacement

of infrastructure, which is not well correlated with either growth in customers or growth in their

load. Tr. Vol. III, pp. 494-496. Therefore, the Department should reject the Company’s analysis

that is based on the number of customers only and accept the alternative analysis conducted by

32

Dr. Dismukes, which appropriately uses a combination of number of customers and peak

demand in the determination of a productivity factor.

Furthermore, the Company used an incorrect method in calculating its capital quantity

index. The Company’s capital quantity index does not consider gradual depreciation of capital

but, instead, assumes a capital stock that faces no depreciation until an asset is retired. Exh.

AG/DED-1, pp. 63-64. This will tend to overstate capital inputs, other things being equal, and

result in estimates that suggest a higher degree of utility inefficiency. Id. The capital quantity

index should be derived using a geometric-decay method. Id. Such an approach assumes a

current valuation of capital and constant rate of depreciation. Id. The geometric-decay method

is also much more widely used in productivity studies and academic research and has been used

by the Department in its prior-approved PBRs. Id. In addition, the Company’s capital quantity

estimates only consider distribution plant. Id. Dr. Dismukes’ analysis includes general plant as

well as the inclusion of these costs. This is necessary given the fact that the Company’s revenue

cap formula is applied to all distribution revenues which recover costs from these accounts

(customer accounts, sales, A&G, and general plant). Id. Therefore, if the Department accepts a

PBRM for the Company, which it should not, it should reject the Company’s TFP analysis and

accept the analysis of Dr. Dismukes which more properly determines a productivity factor.

h) The Company’s Proposed Earnings Sharing Mechanism

(“ESM”) Has A Number of Deficiencies

The Company’s proposed ESM is asymmetrical, giving too much upside earnings

opportunities to the Company and its shareholders relative to ratepayers. The sharing bands,

particularly the dead-band, are set at a level that is too large and could result in outcomes where

ratepayers see little to no benefits from the adoption of the PBRM. Additionally, the Company’s

proposed actual sharing percentages move in directions that will not send strong efficiency

33

incentives. Earning sharing percentages should increase, not decrease, as the Company’s

achieved earnings exceed allowed returns. However, the Company proposes sharing percentages

that decrease, not increase, as its achieved earnings exceed those allowed under the PBR. Thus,

the Company will earn fewer rewards, not a greater level of rewards, as it assumes more risks,

and incurs more costs, during its PBR term. This type of ESM design is not productive and

creates negative incentives for the Company to push the “edge of the envelope” in terms of its

efficiency activities since, at the margin, it will get fewer rewards for more difficult and likely

outcome-uncertain efforts. Furthermore, the Company has indicated a willingness to include a

rate moratorium in its PBR, if an “off-ramp” rate case condition is included in the ESM. As a

result of this condition to file a rate case, the Company will not assume any significant degree of

under-earnings if it’s PBR is approved since, if it finds itself in any under-earnings position, the

Company can simply file a rate case at any time. The inclusion of the Company’s rate case

provision, without significantly redefining the ESM dead-band, requires ratepayers to assume too

much risk with the Company’s PBR, and will give the Company a very large reward for

assuming little to no down-side earnings risk.

i) The PBRM Stay-Out Provision

As originally filed, Eversource “didn’t include a stay-out provision” as part of its PBRM

proposal. Tr. Vol. VIII, p. 1586. At some point in the proceeding, the Company decided that it

“would accept a stay-out provision of five years under the plan with an earnings sharing band as

[it] had proposed, with sharing on the upper end, and allows us to file a rate case if earnings fall

below the band, which is what is articulated in the response to AG-33-8.” Id. However, as Mr.

Horton testifies, this assumes that the “proposal is not modified from what we have presented in

this proceeding.” Tr., Vol V., p. 1019. Further cross-examination of Mr. Horton revealed that

34

this stay-out promise is not a real stay-out. “Well, I think all companies would have the ability to

file for a rate case at whatever time they choose.” Tr., Vol. V, p. 1019.

Mr. Horton is correct. The Department has previously found:

a ten-year PBR plan would not alter substantive rights retained by

Boston Gas by statute to file a rate case if rates are not just and

reasonable. Department actions cannot abrogate statutory rights in

rate setting.

Boston Gas Company d/b/a KeySpan Energy Delivery New England, D.T.E. 03-40, p. 496

(2003). Thus, the Department's approval of a PBR mechanism cannot trump the statutory rights

granted as a part of G.L. c. 164, § 94. Bay State Gas Company, D.P.U. 09-30, p. 21 (2009).

The Department should not base a decision on whether to approve the proposed PBRM

upon the Company’s unsupported assertion that a five-year stay-out provision provides value to

customers. The Company can lawfully file a rate case whenever it determines it is not earning a

reasonable return, even during the term of a PBR plan. Boston Gas Company, Essex Gas

Company and Colonial Gas Company, each d/b/a National Grid, D.P.U. 10-55, p. 10 (2010).

2. GRID MODERNIZATION BASE COMMITMENT

Eversource’s initial filing includes the Company’s unsolicited offer to commit a

minimum of $400 million in future grid modernization capital investments and improvements

over the five-year term of the proposed Grid-Wise Performance Plan. The combined spending

proposal would, if approved, direct approximately $250-260 million towards conventional “grid-

facing” modernization improvements; $100 million towards proposed energy storage

35

demonstration offerings; and $45 million to support future potential electric vehicle (“EV”)

infrastructure.13 Exh. ES-GMBC-1, p. 10, Table 1.

a) Proposed Grid Modernization Investments

(1) Introduction and Background

The Department, in a series of orders in both D.P.U. 12-76 and in its associated

investigation in D.P.U. 14-04 into time-varying rates (“TVR”), described its vision for a modern

electric system thoughtfully planned to be “cleaner, more efficient and reliable, and [able to]

empower customers to manage and reduce their energy costs.” D.P.U. 12-76-B, p. 1. In setting

forth its modernization vision, however, the Department also opined that modifications to

conventional regulatory treatment of grid modernization capital expenditures may be warranted

“to remove what may be impediments to some grid modernization investments” under

traditional, customary ratemaking practices governing incremental capital investments. D.P.U.

12-76-B, p. 4; p. 19; p. 22. Accordingly, in D.P.U. 12-76-B the Department established a

targeted capital cost recovery mechanism – termed the Short Term Investment Plan, or “STIP” –

to allow for periodic interim adjustments in rates for qualifying, incremental grid modernization

capital spending without the need for a full Section 94 revenue requirement determination.

However, the STIP allows for rate adjustments only in limited circumstances.

First, STIP-eligible investments must advance measureable company progress towards

the Department’s four grid modernization objectives and the individual projects must be

proposed and incurred within the first five years of a company’s GMP. D.P.U. 12-76-B, pp. 22-

13 The Department defined “grid-facing” modernization investments as technologies that automate grid operations

and allow distribution companies to monitor and control grid conditions in near real time. “Customer-facing” capital

initiatives, by contrast, are technologies primarily associated with customer metering and related investments, such

as two-way communications systems, internet-based information portals, wireless applications, direct load control

technologies, and smart appliances and electronics. See Modernization of the Electric Grid, D.P.U. 12-76-A at 2, n.

4 (2013).

36

23. Although the Department’s initial STIP proposal would have limited eligible STIP

investments solely to capital additions to deploy advanced metering functionality (“AMF”), the

Department in D.P.U. 12-76-B subsequently allowed recovery for other grid modernization

investments provided the GMP includes a plan to achieve AMF within five years of Department

approval of the GMP, or an alternative proposal to achieve AMF across a longer timeframe. 14

Id., p. 17. “In other words,” the Department determined, “targeted cost recovery will not be

available for other [non-AMF] capital investments if the company is not also investing in

advanced metering functionality.” Id., p. 20.

Second, the Department restricted qualifying STIP investments to capital expenditures

only. Thus, a company may not recover projected O&M expense increases through the STIP.

D.P.U. 12-76-B, pp. 16, 19.

Third, a company may recover only incremental grid modernization capital spending

through the STIP. The Department explained that the “incremental” prerequisite means either

proposed capital investment in new system technologies, or an incremental level of proposed

capital spending relative to a company’s current capital expense program. D.P.U. 12-76-B at pp.

19-20. The Department cautioned, however, that the incremental limitation in the STIP means

the proposed STIP spending “must be incremental to those [capital expenditures] recovered in

base rates to be recovered in a capital tracker” and that “[c]ompanies will be required to

14 The Department took care to define “advanced metering functionality” (or “AMF”), as opposed to pre-

determining specific characteristics of advanced metering infrastructure (or “AMI”). The Department defines AMF

as:

(1) the collection of customers’ interval data, in near real time, usable for settlement in the

ISO-NE [wholesale] energy and ancillary services markets; (2) automated outage and

restoration notification; (3) two-way communication between customers and the electric

distribution company; and (4) with a customer’s permission, communications with and

control of appliances.

D.P.U. 12-76-B, p. 15.

37

demonstrate that such [proposed STIP] costs are not already included in rates.” D.P.U. 12-76-B,

p. 23.

Fourth, STIP-eligible investments must be prudently incurred. The Department

explained that its review of the GMP and approval of proposed capital spending within the STIP

would effectively serve as “pre-authorization” of STIP-eligible investments, foreclosing

subsequent ratemaking challenges regarding whether the company should have proceeded, as a

matter of necessity, with the STIP investments. D.P.U. 12-76-B, p. 19. But pre-authorization of

STIP investments, the Department cautioned, would not foreclose subsequent inquiry and

determination whether a company’s spending in furtherance of the investment was prudent. Id.,

p. 24. “[T]he company will bear the burden of demonstrating that all of the costs it seeks to

recover through its [STIP] tracker was undertaken in a prudent manner.” Id. In addition,

Department pre-authorization through the STIP does not negate the ratemaking prerequisite that

investments included in rates must be “used and useful.”

The Department also stated that its consideration and pre-authorization of a company’s

STIP-eligible investments must be supported with a comprehensive business case analysis.

D.P.U. 12-76-B, p. 17. The specific provisions and parameters of the required business case

analysis are described at length in a subsequent Department order, D.P.U. 12-76-C. The

Department underscored the importance of the business case analysis by stating that it “intends

to look to the business case analysis as the primary lens for deciding whether to accept, reject, or

require modifications to the STIP.” D.P.U. 12-76-B, p. 17. It is through the business case

analysis that a company demonstrates that the benefits of its STIP investments justify the costs.

D.P.U. 12-76-C, pp. 3, 8, 12.

38

(2) The Company’s Proposed Grid Modernization Investments

Do Not Qualify for Exceptional, Targeted Cost Recovery

Mechanisms

The Company disregards the Department’s requirement that expedited recovery of grid-

facing investments only occur where the Company also submits a compliant plan for AMF

deployment, supported by a business case analysis. D.P.U. 12-76-B. The Department has

conveyed that it is not prepared to authorize any accelerated cost recovery for non-AMF

modernization investments if a company is not also spending to deploy AMF. Id. As noted in

the AGO’s presentation and briefs in D.P.U. 15-122, Eversource’s proposed Incremental Grid

Modernization Plan (“GMP”) fails the requirement to fully deploy AMF.

Moreover, the Company has no business case analysis in this proceeding to support its

proposed GMBC investments, despite the Department’s directive in D.P.U. 12-76-B that the

business case analysis serves as the “primary lens for deciding whether to accept, reject, or

require modifications to” planned grid modernization improvements. D.P.U. 12-76-B, p. 17.

Accordingly, the Company’s presentation of its GMBC gives the Department no basis to approve

proposed GMBC spending as eligible for accelerated regulatory cost recovery.

(3) The Department Need Not Approve the PBRM nor the

GMBC to Move Forward with Grid Modernization

The Department has numerous options for moving forward with grid modernization

without approving Eversource’s request for a $284 million rate increase and the GMBC. First,

the Company should comply with D.P.U. 12-76-B and the Department’s decision regarding the

most appropriate regulatory construct to foster and encourage wide-scale progress on the

Department’s grid modernization policy objectives. Specifically, in D.P.U. 12-76 and in the

related exploration of AMI-enabled time of use rates (Investigation Into Time Varying Rates,

39

D.P.U. 14-04), the Department concluded that the combination of presenting a long-term (ten-

year) grid modernization planning budget, coupled with the STIP cost-recovery mechanism

represents the best way forward in achieving the grid modernization objectives of: (i) reducing

the effects of outages; (ii) optimizing demand; (iii) integrating distributed resources; and (iv)

improving workforce and asset management. Plainly, the surest path towards achieving more

rapid grid modernization is the one the Department has already established. Thus, the Company

could cure the deficiencies in its Grid Modernization filing and re-file its proposed grid

modernization investment plans with the criteria required by D.P.U. 12-76-B.

Second, the Company is free to move forward at its own pace with grid modernization

investments and seek cost recovery for its investments as it would for any other capital additions.

Third, if the Department approves a capital tracker in this proceeding and wanted to authorize the

Company to utilize the capital tracker process for certain grid modernization investments, the

Department could revisit its prior orders and make modifications to D.P.U. 12-76-B as required.

(4) Many of the Proposed Investments Are Not “Grid

Modernization” Investments

If the Department accepts the GMBC as part of the proposed Grid-Wise Performance

Plan, or authorizes special accelerated rate recovery for grid modernization investments, the

Department should take care not to include or pre-approve “business as usual” capital

investments. The Department designed its grid modernization regulatory initiative to accelerate

“incremental” modernization investments, meaning those investments representing a new, more

advanced technology than the utility would otherwise deploy, or capital spending at a pace or

level higher than that supported by underlying base distribution rates. D.P.U. 12-76-B, p. 19.

The STIP was designed to “eliminate barriers to grid modernization.” D.P.U. 12-76-B, p. 22. If,

40

however, the proposed modernization investment represents nothing more than what the

Company would purchase in any event in the ordinary course of capital planning and acquisition,

plainly no such “barrier” exists.

Additionally, the Department emphasized that expedited regulatory cost recovery of

modernization investments must “be incremental to costs recovered in base rates.” Id., p. 23. A

Company’s ordinary capital construction program and spending levels is already “built into”

base distribution rates (via a ratemaking allowance for both depreciation expense, taxes, and a

return on net investment). Accordingly, incorporating the same “business as usual” capital

projects into an incentive regulatory construct would over-compensate the Company and force

customers to unreasonably pay twice for the same investment. Thus, to the extent that the

Department provides for special regulatory treatment for certain grid modernization investments,

it should do so in accordance with the recommendations of AGO witness Mr. Booth.

b) Energy Storage

The Company’s GMBC capital spending commitment also includes a proposal to invest up

to $100 million during the five-year term of the proposed Grid-Wise Performance Plan in grid-

scale energy storage demonstration offerings. Exh. ES-GMBC-2, p. 56. The Company has

preliminarily identified four particular grid locations as potential candidates for implementing the

proposed $100 million storage commitment: Martha’s Vineyard (5-10 MW); Wellfleet (12 MW);

New Bedford (6 MW); and Pittsfield (6 MW). Id., pp. 56-59; Exh. ES-GMBC-1, pp. 80-84.

The Company’s energy storage proposal makes clear that these four projects are not yet

fully developed, as the Company lacks both specific details related to each location’s costs as well

as any data to estimate potential storage benefits. Thus, these projects are purposefully labelled

“demonstration offerings” by the Company and are not yet sufficiently informed as to be called

41

“pilots.” Tr. Vol. 1, p. 180. The Company is not at this time requesting Department approval of

the specific individual projects, nor is the Company at this time seeking “pre-authorization” of this

initiative, as that term is employed in D.P.U. 12-76-B. Instead, the Company seeks only that the

Department approve, as a “concept” undergirding its PBRM formula, the Company’s proposal to

spend $100 million for energy storage projects to be selected and approved by the Department at

a later date. The Department must deny the Company’s request.

The Department has no record on which to approve the “concept” of $100 million in grid-

side energy storage projects. The Company freely admits that storage technology is “nascent” and

that costs and benefits to deploy are unknowable at this juncture. Tr. Vol. 1, p. 29; Tr. Vol. 7, p.

1372. Although the Company repeatedly commits to completing and presenting to the Department

and stakeholders full cost development before proceeding with actual construction of a storage

project, the Company makes no similar commitment to develop, in advance of construction,

comparable details on benefits. The Company does not know the benefits prior to implementing

the projects. It is the Company’s intent that the demonstration offerings will provide the

information on benefits. Thus, the storage proposals are not properly “pilots,” in which Company

projections on equipment costs, benefits, and system performance are confirmed. Rather, these

are $100 million of proposed investment forays (the Company preferred the term “learnings”)

meant to test various “hypotheses” about the projects and to confirm only if there are benefits. See

Exh. ES- GMBC-7 (laying out the various “hypotheses” the Company intends to test through the

four proposed storage projects). See also Tr. Vol. 10, p. 2016 (indicating that the Company did

not prepare quantifiable estimates of the benefits flowing from any of the proposed GMBC

investments). Absent verifiable Company data on cost or benefits or some kind of business case

42

analysis, it is impossible for the Department to determine whether such energy storage investments

are reasonable, prudent, or in the best interests of ratepayers.

The Company further contends that its proposed $100 million commitment to energy

storage projects is essential to aid the Commonwealth’s achievement of its storage targets,

referencing DOER’s recent “State of Charge” Report. Exh. ES-GMBC-6. On closer examination,

however, the Company’s contentions lack merit. First, the initial statewide storage goal suggested

for investor-owned utilities discussed in the State of Charge Report was 707 MW at a cost of $387

million. Id., p. 20. That would make Eversource’s likely financial share of the total statewide

storage goal suggested in the State of Charge Report roughly $200 million and the storage target

roughly 350 MW. Against that statewide goal, it would make little sense for the Company to

proceed to spend nearly half of that commitment, or $100 million, on storage “demonstrations”

that entail only 30-40 MW in “demonstration offerings” that have no assurance of customer

benefits or operational success.

In addition, subsequent to the issuance of the State of Charge Report, DOER fulfilled its

statutory obligation to identify near-term storage procurement targets for the state’s investor-

owned utilities. See An Act Relative to Energy Diversity, C. 188, St. 2016, Section 15(b). After

careful deliberation of a broad array of industry comments, DOER did not adopt a storage target

of 700 MW, as set forth in the State of Charge study. Instead, DOER set forth an “aspirational”

200 MWh target for electric distribution companies to procure “viable and cost-effective” energy

storage systems.15 DOER states that the purpose of the target is to fulfil the intention of the

15 See DOER correspondence to the Legislature’s Conference Committee Members, available at

http://www.mass.gov/eea/docs/doer/letter-to-legislature-notice-of-energy-storage-target-adoption.pdf

43

legislature in a way that compliments the planned course of the Massachusetts Energy Storage

Initiative.

The Commonwealth is moving forward with energy storage deployment. Eversource

should be working within the framework established by DOER and the Department to ensure that

the Company is procuring viable and cost-effective energy storage, consistent with statewide

policies. Spending $100 million over five years to pursue “learnings” associated with roughly 30-

40 MW of storage, with no showing of the costs and benefits or any business case analysis, is not

consistent with state policies. In fact, AGO Witness Booth testified that it is just as likely that

storage investments in the $10 million range will provide the same information on benefits and

cost as the Company’s much riskier proposal to commit $100 million. See Exh. AG-GLB-1, p.

63. The Department must reject the Company’s “concept” to pre-approve a $100 million “bucket”

of storage-related spending to be incurred over five-year term of the proposed PBRM.

c) EV Charging Infrastructure

(1) The Department Should Consider the Company’s Make-

Ready Electric Vehicle Infrastructure Program in a Separate

Proceeding Outside of this Rate Case

As part of the Company’s GMBC, the Company proposes to spend approximately $45

million in capital expenditures on infrastructure upgrades in an attempt to expand the network of

EV charging stations in its service territory. Exh. ES-GMBC-1, pp. 90–91, 114. The proposal,

which the Company refers to as a “Make Ready” program, would allow the Company to own all

of the infrastructure required to install an EV charger, excluding the charger itself. Id.; Tr. Vol. 1,

p. 197. In addition, the Company proposes to spend another $9.9 million on O&M and marketing

expenses, adding up to a total EV program budget of $54.9 million. Exh. ES-GMBC-1, p. 114;

Tr. Vol. 1, p. 191. The Company has a proposed five-year timeline for its EV infrastructure

44

program, with Phase 1 beginning on January 1, 2018 and Phase 2 beginning on January 1, 2020.

Tr. Vol. 1, p. 193.

While the AGO strongly supports the goal of encouraging more EV adoption in the

Commonwealth, utility funded programs such as the one proposed by the Company must be

thoughtfully planned out and considered in light of all of the information available in the evolving

market. The Company proposes to spend significant ratepayer funds on its EV charging program

but has failed to adequately explain in this proceeding how its program would work in conjunction

with other EV initiatives in the state. The Company’s proposal also raises numerous issues

regarding: the proper role of utilities in the competitive EV charging market; the appropriate size

and scope of a utility supported program; as well as questions as to whether the proposed costs and

purported benefits will be appropriately distributed. See Exh. AG-GLB-1, p. 64 (noting that there

needs to be more consideration of the actual costs and that any EV service extension benefits flow

to ratepayers). In addition, there are various programs in place now and others set to begin in the

near future which further contribute to the uncertainty regarding how best to advance EV adoption

and EV charger penetration. Ultimately, more time is needed to consider Eversource’s proposal

in light of these other programs and the rapidly changing EV market.

The coming changes to the charging infrastructure market are not theoretical. National

Grid has proposed its own program to encourage site owners to install EV chargers, which the

Department has docketed as D.P.U. 17-13. Exh. AG-4 (National Grid, D.P.U. 17-13, Revised

Exhibit KAB/BJC-1). National Grid proposes to spend approximately $25.1 million to operate its

program over an eight-year period, which is about half as much as Eversource’s proposed initiative

costs. Id., pp. 26, 30. The Department, AGO and other intervenors are currently reviewing

National Grid’s proposal in D.P.U. 17-13 – a standalone proceeding solely dedicated to issues

45

surrounding National Grid’s EV program.16 Notably, Eversource’s pre-filed testimony in this

proceeding makes no mention of National Grid’s proposal, any discussions the two companies

have had on EV issues, or how Eversource will coordinate with National Grid on the

implementation of its program. On cross examination of the GMBC Panel, Company Witness

Eaton confirmed that he had not reviewed National Grid’s proposal “in any detail” and seemed to

lack knowledge on particular aspects of National Grid’s program. Tr. Vol. 1, pp. 190, 199.

Similarly, the Company’s initial filing contains no information as to how its program would

work with other EV initiatives in the Commonwealth, and the Company did not provide more

detail when given the opportunity in discovery. When asked in an information request how the

Company’s proposal would take advantage of synergies with existing EV programs, including the

Massachusetts Offers Rebates for Electric Vehicles (“MOR-EV”) rebate, the Massachusetts

Electric Vehicle Inventive Program (“Mass EVIP”), and the Volkswagen Clean Air Act civil

settlement,17 among others, the Company offered scant details other than that these programs

“further support the objectives” of Eversource’s program “by decreasing or deferring the costs to

potential site hosts and EV drivers.” Exh. ME-1-26. The Company failed to provide a description

in its initial filing regarding whether and to what extent it considered these other programs during

the design phase of its program. Furthermore, the Company provided no explanation in this

16 The procedural schedule in D.P.U. 17-13 allows for substantially more opportunity to consider the complex issues

involved. National Grid made its initial filing in January 2017 and the Department set a procedural schedule

allowing for pre-filed direct testimony, rebuttal testimony, and sur-rebuttal testimony, potentially two days of

hearings, and briefing going through the end of October 2017. See D.P.U. 17-13. 17 As a result of the Volkswagen Settlement, Massachusetts will be able to spend up to 15% of its allocation of

environmental mitigation trust funds on light duty ZEV charging infrastructure. Tr. Vol. 7, pp. 1439–1440; see

Partial Consent Decree, In re: Volkswagen “Clean Diesel” Marketing, Sales, Practices, and Products Liability

Litigation, MDL No. 2672 CRB (JSC) (N.D. Cal., Oct. 25, 2016); Second Partial Consent Decree, In re:

Volkswagen “Clean Diesel” Marketing, Sales, Practices, and Products Liability Litigation, MDL No. 2672 CRB

(JSC) (N.D. Cal., May 17, 2017). This amounts to approximately $11.26 million of Massachusetts’s approximately

$75 million allocation. Id. In addition, Volkswagen has selected Boston as one of ten metro areas where the

company will invest a share of $250 million in ZEV infrastructure during the first funding cycle for its required

investments in ZEV infrastructure, education, and access under the settlement. Exh. AG-18 (Volkswagen Group of

America, National ZEV Investment Plan: Cycle 1), pp. 4–5; Tr. Vol. 7, pp. 1437–1439.

46

proceeding as to how the existence of these other programs will affect future site host recruitment,

location of chargers, or investment it its own fleet. 18 This lack of information suggests that the

Company did not fully consider how its program will operate in the broader EV charging market.

The Department should require the Company to demonstrate that it has taken all of the relevant

programs into account before considering the Company’s program.

(2) The Department Should Establish Statewide Goals and

Standards Before Approving Any EV Charging Proposal

Both Eversource and National Grid are proposing large EV infrastructure roll-outs in

separate Department proceedings. In order to create a degree of uniformity and coordination

among these programs and others, the Department should open a proceeding to establish a

statewide plan on utility involvement in EV charging infrastructure. Such a proceeding could help

ensure that the companies are working under a similar set of assumptions, coordinating to site EV

chargers in the most optimal locations, and using similar metrics for evaluation. Perhaps most

importantly, a statewide proceeding would give the various interested stakeholders the opportunity

to more directly engage and participate in the development of a broader EV infrastructure plan for

the Commonwealth. A statewide proceeding could also be an opportunity for a meaningful

discussion of EV rate design issues – something that is noticeably absent from Eversource’s

proposal, but has been highlighted by many intervenors in this proceeding. See ME-1, p. 46; Exh.

AC-ML-1, p. 39; Exh. TEC-JB-1, p. 26; Exh. SREF-TW/MW-1, p. 64; Exh. CP-MKW-1, p. 35.

To date, the Department has not laid out a comprehensive set of policy goals regarding

utility involvement in the deployment of EV charging infrastructure, but has noted some areas of

18 One reason for the lack of consideration could be the fact that the Company’s program has a built-in back-up plan

if the Company fails to recruit enough site hosts to participate in the program – in that case the Company can simply

start spending GMBC money on electrifying its own fleet, without restriction. Tr. Vol. 7, pp. 1281–1287. This is

discussed in more detail in Section 3(a) below.

47

concern. In D.P.U. 13-182-A, the Department stated that “distribution companies may have a

competitive advantage in owning and operating EVSE that may adversely affect the development

of a competitive market for EV charging,” and went on to note that the Department “will not allow

recovery of costs” except in certain situations. 19 D.P.U. 13-182-A, p. 13. Among these exceptions

were the Company’s fleet and employee charging, research and development, and in response to

a company proposal which: (1) is in the public interest; (2) meets a need regarding the advancement

of EVs in the Commonwealth that is not likely to be met by the Competitive EV market; and (3)

does not hinder the development of the competitive EV charging market. Id. G.L. c. 25A, § 16(f),

added by Chapter 448 of the Acts of 2016, largely codifies the Department’s standard of review in

D.P.U. 13-182-A, but includes the caveat that charging stations be “publicly available.” Beyond

this baseline, neither the Department nor the legislature has provided any further direction as to

the items that should be included in a proposal for a utility-supported EV charging program.

The Department should establish a set of goals and standards before the companies spend

tens of millions of dollars in ratepayer funds on EV infrastructure programs. The programs being

proposed by Eversource and National Grid contain substantial differences including the overall

size, number of each type of charger, utility ownership of infrastructure upgrades behind the meter,

recovery method, program length, and evaluation metrics. All of these items should be

standardized and coordinated, to the extent possible, so that the costs and benefits of the

companies’ EV charging programs are spread out equitably across the state. Customers who

happen to reside in one utility’s service territory, versus another, should not have to shoulder more

than their share of the burden to install EV chargers. At the very least, these issues need to be

considered in a comprehensive and holistic manner.

19 EVSE stands for “electric vehicle supply equipment” and refers generally to the infrastructure necessary for EV

charging. D.P.U. 13-182-A, p. 2.

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For the reasons discussed above, the Department should not approve the Company’s

proposal as part of this rate case proceeding. Rather, the Department should open an investigation

to establish a statewide policy on utility-supported EV charging. At the very least, the Department

should fully consider the Company’s proposal in a standalone docket to allow more time to

consider the complex issues involved and allow for more meaningful stakeholder input.

(3) If the Department Decides to Review Eversource’s EV

Proposal in this Proceeding, it Should Adopt Several Modifications

As stated previously, the Department should review the Company’s EV charging proposal

in a separate proceeding after the Department establishes a statewide plan on advancing EV

infrastructure. However, should the Department elect to review and approve the Company’s

proposal in this proceeding, it should: (1) not permit the Company to own any infrastructure behind

the meter; (2) only allow recovery through normal ratemaking; (3) not allow the Company to spend

program money on electrifying its own fleet; and (4) put other mechanisms in place to ensure

greater accountability and program coordination. Each of these items is discussed in more detail

below.

(a) The Company Should Not Be Permitted to Own

Infrastructure Behind the Meter

The Company proposes to install and own all of the infrastructure required to install an EV

charger, except for the charger itself. Exh. ES-GMBC-1, pp. 90–91, 114; Tr. Vol. 1, p. 197. This

includes owning items on the utility side of the meter, such as the distribution primary lateral

service feed, transformer and transformer pad, and new service meter, as well as owning items on

the customer side of the meter, such as the service panel, associated conduit and conductor, and

the pedestal on which the charger sits. Id. A substantial portion of the Company’s proposed capital

expenditure budget for its Make Ready program is devoted to infrastructure behind the Company

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meter. See Exh. Att. AG-23-15. In contrast, under normal business-as-usual circumstances, a

customer looking to install an EV charger would be required to pay for the full cost of a new meter,

and would also need to install and own the remaining infrastructure downstream of the meter. Tr.

Vol. 1, pp. 200–201. The Company’s proposal would therefore allow it to eventually include

substantial capital investments in infrastructure benefiting individual customers in rate base which

utilities do not typically own.

Eversource has failed to demonstrate in this proceeding that ownership of infrastructure

behind the meter is in the public interest; meets a need regarding the advancement of EVs in the

Commonwealth that is not likely to be met by the Competitive EV market; and does not hinder the

development of the competitive EV charging market. See D.P.U. 13-182-A, p. 13. Indeed, the

Company has only claimed that its program, overall, meets the Department’s standard of review,

but has not specifically shown how facilities ownership behind the meter meets these criteria. See

Exhs. ES-GMBC-1, pp. 93–96; DPU-27-1. Even assuming that the Company’s overarching plan

to encourage the deployment of EV chargers in the state is in the public interest, fulfills an unmet

need, and does not hinder the competitive market (all of which is far from clear), it does not

automatically follow that each aspect of the Company’s proposal – in particular owning

infrastructure behind the meter – is the best way or even necessary to achieve the ultimate goal.

Ownership of customer facilities behind the meter is not in the public interest under these

circumstances because it would allow the Company to eventually earn a return on infrastructure

investments beyond which the Department typically allows and it is not required to achieve the

objectives of the Company’s EV charging program. While the Company is seeking to “offer a

full-service, turn-key solution” to incent customer participation, there are alternatives to utility-

ownership behind the meter. In addition to simply requiring a customer seeking to install a charger

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to pay for and own the necessary upgrades, the Company could have explored incenting customers

by offering to reimburse them for upgrades between the meter and the charger. This is the method

National Grid proposes in D.P.U. 17-13, which maintains the traditional boundary between utility-

owned infrastructure and customer-owned infrastructure. Exh. AG-4, pp. 28, 33. The Company,

however, did not pursue this option. Indeed, the Company did not even analyze what the costs of

its program would be under a business-as-usual model or a customer reimbursement model. Tr.

Vol. 1, pp. 203–204. Furthermore, another alternative to owning the infrastructure upgrades could

be to offer a financing program or “on-bill amortization of constructions costs.” Exh. TEC-JB-1,

p. 26. Again, there is no indication that Eversource considered this as an option.

The Company has not provided evidence that ownership behind the meter is necessary to

accelerate EV adoption nor has it demonstrated that such ownership is superior to other available

options. Furthermore, National Grid’s EV Program, if approved, would only permit utility

ownership of infrastructure up through the meter. Given these issues, the Department should not

allow Eversource to own infrastructure upgrades behind the meter. Absent a showing of need, the

Department should maintain the traditional boundaries between utility and customer infrastructure

and should have a consistent statewide policy on exactly which types of EV-related infrastructure

utilities are permitted to own.

(b) Recovery of Make-Ready Infrastructure Should

Occur in the Normal Course of Ratemaking

The $45 million the Company has allocated to its Make Ready EV infrastructure program

is part of the Company’s proposed $400 million in GMBC capital spending, and tied to the annual

rate increases the Company hopes to receive under its Grid-Wise Performance Plan PBR

mechanism. As discussed elsewhere in this Brief, the Company does not need approval of its PBR

or GMBC to make these investments. The Company should treat EV-related utility infrastructure

51

the same way it would any other capital investment – it should put these items into rate base after

the investments are made and seek recovery in its next rate case. The Company has not provided

a convincing reason as to why, absent further incentive, EV infrastructure investment is not

feasible.

Under the ordinary ratemaking scenario, the Company would still be justly compensated

in the form of its ROE for any EV charging investments found to be appropriate utility investments,

prudent, and used and useful.20 The Company has simply not provided sufficient reason in this

proceeding to depart from the traditional regulatory model. Therefore, if the Department allows

the Company to go forward with its program, the Department should only allow recovery through

normal ratemaking.

(c) Electrification of the Company’s Own Fleet Should

Not Be Included as Part of the Make Ready Program

The Company proposes to electrify its own vehicle fleet if it is unsuccessful in attracting

enough site hosts to participate in its EV charging program. Exh. ES-GMBC-1, p. 125.

Specifically, “if potential site hosts are slow to respond to the Company’s marketing efforts,” the

Company will repurpose GMBC money to electrify the hydraulics function in the Company’s

bucket trucks and install additional infrastructure and charging stations to charge these vehicles.

Id. The Company states that it will do this only if it is “unable to attract sufficient Level II site

hosts in each phase of the program,” but does not indicate a specific threshold for when it will start

investing in its fleet, versus continuing its marketing efforts. Id., p. 27. For the reasons discussed

below, the Department should reject this proposal.

20 It should be noted that National Grid has proposed a separate reconciling mechanism to recover the annual

revenue requirement associated with its EV program in D.P.U. 17-13. Exh. AG-4, p. 61. While the AGO makes no

determination on the reasonableness of that approach here, it does show that there are other options that the

Department could consider.

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The AGO generally supports Eversource’s initiative to electrify its own vehicle fleet and

to own and operate chargers on Company property to charge these vehicles. However, pursuant

to D.P.U. 13-182-A, companies are already permitted to recover the costs of charging

infrastructure associated with their own fleets without additional approval from the Department.

D.P.U. 13-182-A, p. 13. In addition, the Company acknowledges that electrification of its fleet is

a “standard capital expenditure that should be authorized for cost recovery under the Department’s

prudence review that is applicable to all capital expenditures.” Exh. DPU-27-1. Thus, the

Company should be undertaking electrification efforts in its operations in the normal course of

business, without additional contribution from ratepayers.

Furthermore, under the Company’s proposal, the Company would, in its sole discretion,

make the decision to electrify its fleet and would not be subject to any cap on the amount it spends

on its fleet. Tr. Vol. 7, p. 1282–1285; 1287. However, the Company has not described in any

detail what criteria it would use to reach such a decision other than the arbitrary and self-serving

determination that site hosts are “slow to respond” or recruitment is “measurably below the

Company’s plan….” Exh. ME-3-11; Tr. Vol. 7, p. 1282. The Company provides no information

as to how far below expectations site recruitment would need to be nor does it provide any detail

as to the specific factors its decision making process will employ. Moreover, the Company

acknowledges that without a cap it could, in theory, spend more money on its fleet electrification

than on public charging infrastructure. Tr. Vol. 7, pp. 1288–1289. The Department should not

allow the company this degree of “flexibility” which essentially would reward the Company for

failing to meet program expectations. Ultimately, removing this back-up plan from the Company’s

proposal may incent the Company to work harder at site host recruitment.

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(d) The Department Should Put Other Mechanisms in

Place to Ensure Greater Accountability and Program

Coordination

If the Department decides not to open an investigation or review Eversource’s proposal in

a separate docket, it should put additional safeguards in place to ensure that the Company’s EV

program is operating as intended and is properly integrated with other Massachusetts programs.

First, the Department should make clear that stakeholders will have the opportunity to

evaluate the Company’s progress on its EV program and propose modifications to the Company’s

approach in the proposed annual compliance filing proceeding. The Company has made much of

its “annual stakeholder process” throughout this proceeding, but the degree to which changes to

the Company’s EV proposal would be possible in the annual proceeding is unclear. See Tr. Vol.

1, pp. 181–184. Allowing stakeholders to give immediate feedback to the Company annually

could help to ensure that the Company is operating its program in the most effective manner.

Second, in addition to the annual review discussed above, the Department should consider

requiring a more formal review of the Company’s EV program around the mid-point of the

program to evaluate its effectiveness and decide whether it should continue. See Exh. ME-1, p. 70

(recommending a formal review and approval after three years). This would allow the Company,

Department and intervenors to propose significant changes to the structure of the Company’s

program, if needed.

Third, the Department should require Eversource to establish joint working group meetings

or stakeholder outreach meetings with National Grid to coordinate on issues of commonality

between the two companies’ EV programs (assuming both programs are approved) and allow for

stakeholder input. Areas of cooperation could include: public marketing and site host recruitment

strategies; coordination of site locations; identifying and utilizing outside funding sources;

54

coordinating with other Massachusetts EV initiatives; and any other opportunities which may arise

during the course of implementing the two EV programs. Requiring the companies to engage

jointly with stakeholders would allow issues of commonality to be addressed in a comprehensive

manner and ensure that the companies are apprised of each other’s progress. The Department

could open a docket to facilitate this dialogue as it has in other contexts. See, e.g., Smart Grid

Pilot Evaluation Working Group, D.P.U. 10-82; Investigation on Distributed Generation

Interconnection, D.P.U. 11-75; Investigation into Modernization of the Electric Grid, D.P.U. 12-

76. Ultimately, it is important that EV issues be discussed, and programs be implemented, on a

statewide basis with multiple opportunities for stakeholder engagement and input.

d) The Department Should Reject the GMBC Performance Metrics

as Proposed Because They Do Not Meaningfully Assess Company

Performance or Mandate Good Performance

The Company proposes to use fourteen performance metrics across six investment

categories to monitor and evaluate the Company’s progress with its GMBC. Exhs. ES-GMBC-1,

p. 132; ES-GMBC-3. As proposed, the metrics do not provide any assurances or commitments

that its investments will produce sufficient levels of benefits to ratepayers or any ratepayer

benefits at all. Exh. AG/DED-Surrebuttal-1, p. 4. The Department should reject the

performance metrics as proposed because they (1) lack financial penalties or incentives and are

therefore rendered ineffective and (2) fail to focus on customer benefit outcomes. The

Department should instead order the Company to (1) implement metrics that meaningfully

measure customer benefits and (2) strengthen and expand the metrics by incorporating

intervenors’ recommendations. Moreover, the Department should establish a penalty/incentive

structure that is based on the Company’s performance.

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(1) The Department Should Include Performance Penalties

and/or Incentives.

As noted above, the Company does not propose that it suffer any penalties or receive any

financial incentives in connection with its performance metrics. Exh. ES-GMBC-1, p. 135.

Indeed, the Company concedes that its proposed performance metrics “are not designed to secure

specific outcomes for the grid-modernization effort.” Id., p. 134 (emphasis in original). The

Company’s proposed metrics do not provide any recourse for ratepayers or the Department if the

Company fails to meet them or implement the GMBC properly.

The Company argues that incentives and penalties for GMBC performance metrics are

unnecessary because such incentives are “inherent in the Eversource Grid-Wise Performance

Plan, and accordingly, that the incentive to succeed with the GMBC is inherent in the

authorization of the PBRM.” Exh. ES-GMBC-1, p. 135-36. Any incentives and penalties that

may be inherent in the Eversource Grid-Wise Performance Plan are insufficient to hold the

Company responsible for the proper execution and acceptable performance of its GMBC

commitments. Although the Department will have an opportunity to review the Company’s

progress in its Annual Grid-Wise Performance Plan Compliance Filing, the Company has not

proposed a framework by which the Department can directly hold the Company accountable for

good or poor performance in implementing the GMBC proposal and/or achieving the GMBC’s

investment goals. In order for the Company to be truly held accountable, the Department must

have the ability to evaluate, modify, reward, and/or penalize the Company’s progress on the

GMBC as measured through performance metrics.

If the Department authorizes the Company’s proposed PBRM with its associated GMBC,

the AGO recommends that the Department couple that authorization with performance metrics

that are backed by financial penalties for poor performance and/or incentives for excellent

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performance. Appropriate financial penalties or incentives could include spending caps on the

investment categories or individual projects, a condition that the Company will only receive its

annual PBRM adjustment upon reaching GMBC progress goals, and a condition that the

Company will only earn its full rate of return on the GMBC if it meets the GMBC metrics and

achieves net benefits for customers. Without such penalties or rewards it remains unclear what,

if any, negative economic or regulatory consequences the Company would face if it fails to meet

the goals set forth in the GMBC and the performance metrics.

The Company acknowledges that it is within the Department’s authority to condition the

approval of the Annual Grid-Wise Performance Plan Compliance Filing and the annual PBRM

adjustment on reaching GMBC progress goals. Mr. Hallstrom admitted on cross-examination

that such a result was possible if the Company failed to meet its GMBC targets. Tr. Vol. I, p. 84.

Because the Company acknowledges that it runs this risk and that the Department has the

requisite authority, this new provision should be set forth explicitly in the GMBC.

(2) The Company’s Proposed Performance Metrics Are

Deficient.

The Company’s proposed performance metrics do not focus sufficiently on customer

benefits and outcomes. See Exh. ES-GMBC-3. Instead, many of the performance metrics are

process-based and focus more on the Company’s ability to spend its planned budget, deploy

technology, and build infrastructure. Exhs. CLC-KRR-1, p. 22; AC-AA-1, p. 11. As a result,

the Company need only perform certain actions in order to satisfy the Company’s proposed

metrics, regardless of whether or not the Company performs those actions well, achieves any

given outcome, or provides value to ratepayers.

The Department should order the Company to submit a revised performance metrics

proposal that focuses on outcome-based metrics that require the Company to actually deliver the

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Company’s promised customer benefits. For example, one of the six investment categories

proposed by the Company is “Customer Tools for Distributed Energy Resources Integration.”

Exh. ES-GMBC-3, p. 5. In this category, the Company proposes to measure the following

investments as a metric: a customer portal, hosting capacity maps and tools, and automated

billing. Under the Company’s proposal, the Company would meet its performance metric by

making those particular investments, regardless of whether the Company implements those

investments well or whether they succeed in delivering benefits to ratepayers. There are very

few targets that focus on the performance of the portal or that incorporate how well the portal

functions, what value it adds, or whether it improves the customer experience. Exh. SREF-

TW/MW-1, p. 60. Several intervenors have suggested improvements to the metrics in order to

measure customer benefits. For example, a performance metric could measure the effectiveness

of the customer portal by tracking reduced development time and measuring whether the number

of deployments have increased or whether distributed generation customers have experienced

savings. Exh. CLC-KRR-1, p. 25.

Through testimony, discovery, and cross-examination, the Department and several

intervenors made other thoughtful and reasonable recommendations that would improve the

effectiveness of the Company’s performance metrics. See, e.g., Exhs. AC-AA-1, pp. 11-13; ME-

1, p. 71; RR-CLF-2; RR-DPU-2. The AGO supports these recommendations and requests that

the Department order the Company to submit revisions to its original metrics that focus on

customer benefits achieved in the implementation of the GMBC rather than simply measuring

whether money was spent and actions were taken.

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(3) The Company Should Add to Its Performance Metrics.

During the course of discovery and evidentiary hearings, multiple intervenors asked the

Company to consider additional metrics not included in the Company’s initial filing. Exh. DPU-

41-7 (Supplemental 1). As a result, the Company prepared an analysis of the range of suggested

metrics and chose an additional fourteen potential metrics based on the Company’s ability to

produce the information necessary to track the data for those metrics. Exhs. DPU-41-007

(Supplemental 1); Att. DPU-41-7 (Supplemental); Tr. Vol. I, p. 134. Nonetheless, the Company

does not propose to include the additional fourteen metrics in its initial performance metrics

report to stakeholders and the Department. Tr. Vol. I, pp. 135, 137.

The Company’s claims that it did not immediately include the additional metrics

identified in Exh. Attachment DPU-41-7 (Supplemental) becuase it wants to evaluate, through a

stakeholder process, whether the metrics are “of interest” and provide value to the stakeholders.

Tr. Vol. I, p. 135. However, it was the stakeholder-intervenors that suggested the additional

metrics and recommended that the Company incorporate performance metrics from D.P.U. 12-

76-B and D.P.U. 15-122. Tr. Vol. I, p. 133. Nothing prevents the Company from hearing other

views and incorporating additional metrics in the future, but there is no reason to delay

implementation of the useful measures identified in this proceeding. Accordingly, the

Department should order the Company to include these additional fourteen metrics as part of its

initial performance metrics report to stakeholders and its Annual Grid-Wise Performance Plan

Compliance Filing. This directive would increase the number of performance metrics from

fourteen to twenty-eight.

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e) The Company’s Annual Stakeholder Process Will Not Provide an

Opportunity for Meaningful Stakeholder Participation or Comment

Eversource proposes to conduct an annual stakeholder process to provide information and

obtain stakeholder input on the direction, progress and achievement of the GMBC, in advance of

its Annual Grid-Wise Performance Plan Compliance Filing. Exh. ES-GMBC-1, p. 88. As

proposed, the stakeholder process is underdeveloped, ill-timed, and risks not providing

stakeholders with the information needed to participate meaningfully, or sufficient opportunity to

provide comment to the Company and to the Department.

If the Department allows the PBRM – which it should not – the Department must direct

the Company to develop a more robust stakeholder participation framework, based on

information received during cross examination and intervenor testimony and briefs, as discussed

herein. A robust stakeholder framework that ensures stakeholders will play a meaningful role in

the implementation of the GMBC will benefit customers, the Company, and the Department.

The Company’s proposed annual stakeholder process is underdeveloped. The

stakeholder process is referred to only in passing in the Company’s testimony, then expanded

upon slightly in a discovery response. Exhs. ES-GMBC-1, p. 88; DPU-57-9, p. 3. The

Company has proposed to conduct a stakeholder meeting in the first six months of the year, at

which time it will provide progress reports and obtain stakeholder input on the direction and

progress of the Company’s GMBC, as well as provide specifics on selected projects. Exhs. ES-

GMBC-1, p. 89; DPU-57-9, p. 3. However, the Company has not identified: which stakeholders

will be involved in the process; how it will reach out to existing and new stakeholders; the length

of prior notice it will provide to stakeholders; whether it will provide any substantive information

in advance of the meeting; how it will accept comment; and how it will incorporate stakeholder

comments and recommendations for Department review in the Annual Grid-Wise Performance

60

Plan Compliance Filing. Accordingly, the AGO recommends that the Department require the

Company to further develop its stakeholder process by specifically defining the proposed due

process-related recommendations listed above.

Specifically, the AGO recommends that, to identify stakeholders, the Company contact

stakeholders on related Department service lists, as well as post notice on its website. The

Company should provide at least two weeks’ notice of the annual stakeholder meeting. The

notice should include a detailed description or agenda of the items to be discussed at the meeting

including when and how stakeholder comment will be taken. The materials the Company

intends to present at the meeting also should be available to the stakeholders in paper and

electronic form, on the Company’s website. Importantly, to provide stakeholders with the

opportunity to review the meeting materials and to submit thorough and meaningful comments

and suggestions the Company should accept written stakeholder comment for two to three weeks

following the annual stakeholder meeting. Alternatively, the Company could provide the

substantive materials in advance of the meeting and accept oral and written comments at the

meeting. Finally, the Department should require the Company to summarize the stakeholders’

comments and discuss in its Annual Grid-Wise Performance Plan Compliance Filing to the

Department how the Company addressed the comments.

The Company’s annual stakeholder process also is ill-timed. The Company proposes to

hold the annual stakeholder meeting in the first two quarters of the year. Exh. DPU-57-9, p. 3.

Based on the annual September 15 deadline to file the Annual Grid-Wise Performance Plan

Compliance Filing and the requested Department approve-by date of December 31, if the

stakeholder meeting is held in the first quarter of the year it is unclear how the information to

review would differ from the information contained in the recently approved filing. Exh. DPU-

61

57-9, p. 3. Further, feedback obtained from customers in the first quarter of the year may be

stale by the time it is filed at the end of the third quarter.

During evidentiary hearings, Mr. Eaton advised that the first annual stakeholder meeting

would likely be held in the spring of 2018. Tr. Vol. I, p. 177. While holding the meeting at the

beginning of the second quarter of the year is an improvement, to maximize the relevance of

stakeholders’ input, the annual stakeholder meeting should be held annually in mid-June. If

followed by a two or three-week stakeholder comment period, this schedule would permit the

Company sufficient time to review and summarize comments as well as to deliberate internally

over proposed modifications to the GMBC projects, performance metrics, or other aspects of

stakeholder interest in advance of the Annual Grid-Wise Performance Plan Compliance Filing.

Finally, the AGO recommends that the Department hold a public hearing and set a public

comment period for the Company’s Annual Grid-Wise Performance Plan Compliance Filing. A

public process would hold the Company accountable for accurately characterizing and

addressing stakeholders’ comments, and provide stakeholders with the opportunity to comment

on the final filing to the Department.

The Company’s annual stakeholder process does not hold it accountable to stakeholders

and is unlikely to result in meaningful input to either the Company or the Department.

Accordingly, if the PBRM/GMBC goes forward the Department should order the Company to

develop a more robust annual stakeholder framework based on the recommendations herein, and

on the input provided by other intervenors. Only a robust stakeholder framework will ensure that

stakeholders play a meaningful role in the GMBC.

62

B. CAPITAL STRUCTURE AND COST OF CAPITAL

1. INTRODUCTION

The Department determines a utility’s overall cost of capital by “weighting” the

individually determined cost rates for a utility’s equity capital and debt capital by the relative

percentages of equity and debt in its capital structure that are outstanding. This overall

composite weighted average cost of capital (“WACC”) is then applied to the utility’s test year

end rate base to determine the dollar amount of the return on rate base component of the cost of

service used to determine base rates in this proceeding.

The cost of capital rate that the Department ultimately uses to determine the cost of

capital in rates must meet the standards for determining the allowed rate of return on common

equity (“ROE”) as set forth in Hope and Bluefield.21 The allowed ROE should preserve the

Companies’ financial integrity, allow it to attract capital on reasonable terms, and be comparable to

returns on investments of similar risk.

The Company has proposed a capital structure consisting of 45.69 percent long-term

debt, 0.94 percent preferred stock, and 53.37 percent common equity for NSTAR, and of 46.66

percent long-term debt and 53.34 percent common equity for WMECo. Exh. ES-DPH-2 (East

and West), Sch. 31, p. 1. The Company also has proposed a long-term debt cost rate of 4.32

percent for NSTAR and 4.07 percent for WMECo. Id. The Company has proposed a preferred

stock cost rate of 4.56 percent for NSTAR. The Company-sponsored testimony of witness

Robert Hevert estimates an equity cost rate of 10.50 percent for both the Companies. Exh. ES-

RBH-1, p. 3.

21 Federal Power Commission v. Hope Natural Gas Company, 320 U.S. 591 (1944) (“Hope”) and Bluefield Water

Works & Improvement Company v. Public Service Commission of West Virginia, 262 U.S. 679, 692–93 (1923)

(“Bluefield”).

63

The Attorney General sponsored the testimony of Dr. J. Randall Woolridge regarding the

appropriate rate of return for NSTAR and WMECo. Exh. AG/JRW-1. Dr. Woolridge has

adjusted the capital structure ratios of NSTAR and WMECo to be more reflective of the capital

structures of electric utility companies. Id., p. 5. This capital structure includes common equity

of 50.0 percent. Id.

Dr. Woolridge estimates an equity cost rate for NSTAR and WMECo by applying the

Discounted Cash Flow Model (“DCF”) and the Capital Asset Pricing Model (“CAPM”) to a

proxy group of electric utility companies (“Electric Proxy Group”) as well as to Mr. Hevert’s

proxy group (“Hevert Proxy Group”). Exh. AG/Exh JRW-1, p. 2. Dr. Woolridge’s analyses

resulted in an appropriate cost of equity capital rate in the range of 7.9 to 8.95 percent. Because

he relies primarily on the DCF model, Dr. Woolridge recommends a Return on Equity (“ROE”)

of 8.875 percent. Id., p. 60.

Dr. Woolridge identifies several errors in NSTAR’s and WMECo’s analyses in the

Company’s cost of capital recommendation. Id., pp. 5 and 78. These include:

The Company and the AGO have opposing views regarding the state of the

markets and capital costs;

The Company’s proposed capital structure includes an excessive common equity

ratio;

The Company does not recognize that investment risk of NSTAR Electric and

WMECo, as indicated by their S&P and Moody’s credit ratings, is below the

averages of other electric utilities;

The Company’s DCF equity cost rate estimates are excessive because Mr. Hevert:

(a) has given little (if any) weight to his constant-growth DCF results, (b)

exclusively uses the earnings per share growth rates of Wall Street analysts and

Value Line; (c) used an inflated terminal GDP growth rate of 5.36 percent in his

multi-stage DCF model; and (d) included a flotation cost adjustment;

The base interest rate and market or equity risk premium in Mr. Hevert’s CAPM

64

and Bond Yield Risk Premium (“BYRP”) approaches are excessive and result in

an overstated equity cost rate; and

The Company does not recognize that its proposed rate mechanisms result in a

lower level of risk for the Company relative to the proxy groups of electric

utilities.

Id.

2. CAPITAL STRUCTURE

As set forth above, the Company has proposed a capital structure consisting of 45.69

percent long-term debt, 0.94 percent preferred stock, and 53.37 percent common equity for

NSTAR and 46.66 percent long-term debt and 53.34 percent common equity for WMECo. The

Company has proposed a long-term debt cost rate of 4.31 percent for NSTAR 4.32 percent for

WMECo. The Company has proposed a preferred stock cost rate of 4.56 percent for NSTAR.

Exh. AG-JRW-1 p. 35.

Dr. Woolridge demonstrated that these proposed capital structures have more common

equity and less financial risk that the capital structures of other electric utilities. Specifically, Dr.

Woolridge shows that the average capitalization ratios for the companies in his Electric Proxy

Group are 5.78 percent short-term debt, 48.76 percent long-term debt, 0.12 percent preferred

stock, and 45.33 percent common equity. Id. As such, Dr. Woolridge concludes that the Electric

Proxy Group has, on average, a much lower common equity ratio than proposed by the

Company. Id., p. 36.

Dr. Woolridge explains that when a regulated electric utility’s actual capital structure

contains a high equity ratio, the options are: (1) to impute a more reasonable capital structure and

to reflect the imputed capital structure in revenue requirements; or (2) to recognize the

downward impact that an unusually high equity ratio will have on the financial risk of a utility

and authorize a lower common equity cost rate. Id. p. 38.

65

Given these two alternatives, Dr. Woolridge proposes that the Department use a capital

structure with an imputed common equity ratio of 50.00 percent. In other words, as provided in

Panel C of Exhibit JRW-5, Dr. Woolridge lowered the common equity ratio from 53.57 percent

to 50.00 percent for NSTAR and from 53.34 percent to 50.00 percent for WMECo. Then he

made a proportional increase in the ratio for long-term debt (45.69 percent to 48.99 percent) and

preferred stock (0.94 percent to 1.01 percent) for NSTAR and in the ratio for long-term debt

(46.66 percent to 50.00 percent) for WMECo. Dr. Woolridge emphasizes that this capital

structure includes a common equity ratio (50.00 percent) that is still above the averages of the

two proxy groups (45.30 percent and 45.90 percent). Id. p. 39.

a) The Company Failed to Include NSTAR’s Most Recent Long-

Term Debt Issuance in Its Capital Structure

NSTAR issued $350 million in a long-term bond issuance on May 6, 2017 with an

interest rate of 3.20 percent. See Exh. AG-26 (Compliance filing in from NSTAR Electric

Company, D.P.U. 16-189). Although the Company had the terms of the debt issuance available

when it filed its latest revenue requirement calculation on May 25, 2017, it failed to include the

issuance in the determination of the capital structure and revenue deficiency in this case. See

Exh. ES-DPH-2 (East and West), Sch. 31, pp. 1-2. The Company’s failure to include the

issuance is not without consequence; the addition of the new debt issue will increase the

outstanding balance of long-term debt and the ratio of long-term debt used in the weighted cost

of capital calculation. The amount outstanding and the interest rate of the new issue of long-term

debt is known and measureable

Further, the Department’s long-standing precedent plainly requires the Company to

adjust its capital structure for long-term debt issued after the end of the test year. Massachusetts

Electric Company, D.P.U. 15-155, pp. 343-344 (2016); Aquarion Water Company of

66

Massachusetts, Inc., D.P.U. 11-43, pp. 204-205 (2012); Fitchburg Gas and Electric Light

Company, D.P.U. 07-71, pp. 122-123 (2008); Bay State Gas Company, D.T.E. 05-27, p. 272

(2005); and Colonial Gas Company, D.P.U. 84-94, pp. 52-53 (1984).

Therefore, Department should include NSTAR’s $350 million debt issue in the

calculation of the capital structure and the cost of debt when it determines the Company’s overall

weighted cost of capital.

b) The Company’s Embedded Cost Rate of Long-Term Debt Is

Miscalculated

Eversource inappropriately applies carrying charges on the unamortized issuance costs

that the Companies incurred in issuing its long-term debt. The Company includes these carrying

charges in its calculation of the embedded cost of long-term debt by dividing the sum of the

annual interest expense and amortization of issuance expense by the balance of long-term debt

less the unamortized issuance costs. See Exh. ES-DPH-2 (East and West), Sch. 31, p. 2. Tr.

Vol. XIII, pp. 2802-2803.22

22 Mr. Horton described the Company’s calculation as follows:

Q. Now, to calculate the overall embedded cost rate, you look at the annual interest and amortization

expense amount that you show in Column H and divide it by the 6/30/2016 carrying value from Column G; is that

correct?

A. It's taking Column H divided by Column G. Is that what you said?

Q. Yes, H over G equals I.

A. That's correct.

Q. That carrying value -- and then that carrying value was determined on Lines 31 through 40; right?

A. That's right.

Q. And in reading across, the carrying value is determined by removing the premium or discount --

removing the premium or discount and issuance expenses from the principal amount for each issuance; is that right?

A. Correct.

67

The precedent regarding the treatment of carrying charges on issuance costs is well

established. The Department has found that the appropriate treatment of issuance costs is to

allow their recovery as a straight line amortization over the term of the debt issuance without

carrying charges on the unrecovered balance. Massachusetts Electric Company, D.P.U. 15-155,

pp. 343-344 (2016); Bay State Gas Company, D.T.E. 05-27, pp. 269-272 (2005); Boston Gas

Company, D.T.E. 03-40, pp. 319-324 (2005); and Colonial Gas Company, D.P.U. 84-94, pp. 51-

52 (1984).

The Department should correct the errors in the Company’s calculation of the embedded

cost of long-term debt for both NSTAR and WMECo. For each Company’s cost of debt, the

Department should use the total amount of debt outstanding, rather than the so-called “carrying-

value” to determine the denominator and use the sum of the annual interest expense and the

amortization of the issuance expense to determine the numerator in the ratio. Only then will the

embedded cost of debt be in conformance with the Department’s precedent. Id.

3. RETURN ON COMMON EQUITY

a) Proxy Groups

NSTAR and WMECo do not issue common stock that is traded in the market place as all

of the common stock is held directly or indirectly by the holding company, Eversource Energy.

Since the cost of capital is estimated using capital market data, it is appropriate to evaluate the

cost of capital based on a group of utilities of similar investment risk profile. See Bluefield and

Hope, supra.

The Department has accepted the use of a comparison group of companies for evaluation

in a cost of equity analysis, when a distribution company does not have common stock that is

publicly traded. See New England Gas Company, D.P.U. 08-35, pp. 176-177 (2008);

68

Massachusetts Electric Gas and Electric Light Company, D.T.E. 99-118, pp. 80-82 (2001);

Massachusetts Electric Company, D.P.U. 92-78, pp. 95-96 (1992). The Department has also

generally rejected the inclusion of non-regulated entities in the comparison group. Berkshire

Gas Company, D.T.E. 01-56, p. 116 (2002); Boston Gas Company, D.P.U. 96-50, Phase I, p. 132

(1996); Cambridge Electric Light Company, D.P.U. 92-250, pp. 160-161 (1993); Massachusetts

Electric Gas Company, D.P.U. 92-111, pp. 280-281 (1992); Berkshire Gas Company, D.P.U.

905, pp. 48-49 (1982).

To estimate an equity cost rate for setting electric distribution service rates, Dr.

Woolridge evaluated the return requirements of investors on the common stock of the companies

in two proxy groups of publicly-held electric utility companies: the Electric Proxy Group he

developed, and Mr. Hevert’s proxy group (“Hevert Proxy Group”). Exh. AG-JRW-1, pp. 32-35

and Att. JRW-4.

The Electric Proxy Group includes twenty-six companies that meet the following

requirements:

1. At least 50 percent of revenues from regulated electric operations as reported by

AUS Utilities Report;

2. Listed as an Electric Utility by Value Line Investment Survey and listed as an

Electric Utility or Combination Electric & Gas Utility in AUS Utilities Report;

3. An investment grade issuer credit rating by Moody’s and Standard & Poor’s

(“S&P”);

4. Has paid a cash dividend in the past six months, with no cuts or omissions;

5. Not involved in an acquisition of another utility, the target of an acquisition, or in

the sale or spin-off of utility assets in the past six months; and

6. Analysts’ long-term earnings per share (“EPS”) growth rate forecasts available

from Yahoo, Reuters, and/or Zacks.

Exh. AG-JRW-1, p. 33.

69

Dr. Woolridge presents the summary financial statistics for the Electric Proxy Group in

Panel A of page 1 of his Exhibit JRW-4.23 The median operating revenues and net plant among

members of the Electric Proxy Group are $6,237.5 million and $17,722.5 million, respectively.

The group receives 82 percent of its revenues from regulated electric operations, has a BBB+

bond rating from Standard & Poor’s and a Baa1 rating from Moody’s, a current common equity

ratio of 46.9 percent, and an earned return on common equity of 9.3 percent. Exh. AG-JRW-1,

pp. 33-34.

Dr. Woolridge presents the summary financial statistics for the Hevert Proxy Group in

Panel B of page 1 of Exhibit JRW-4. The median operating revenues and net plant for the

Hevert Proxy Group are $2,789.6 million and $8,987.7 million, respectively. The group

receives 87 percent of its revenues from regulated electric operations, has a BBB+ bond rating

from Standard & Poor’s and a Baa1 rating from Moody’s, a common equity ratio of 46.9

percent, and a current earned return on common equity of 9.3 percent. Id.

Dr. Woolridge also uses credit ratings as measures of investment risk in comparing

NSTAR and WMECo to both the Electric and Hevert Proxy Groups. . Exh. AG-JRW-4, p. 1.

The S&P and Moody’s issuer credit ratings for NSTAR and WMECo are, respectively, A and

A2. Exh. AG-JRW-1, p. 73. The averages for the Electric and Hevert Proxy Groups are,

respectively, BBB+ and Baa1. Exh. AG-JRW-4, p. 1. This means that NSTAR and WMECo’s

S&P and Moody’s issuer credit ratings are two notches above the averages of the proxy groups

(S&P: A vs. BBB+ - Moody’s: A2 vs. Baa1). That is, the investment risk of NSTAR and

WMECo is below that of the electric utilities in the two proxy groups. Exh. AG-JRW-1, p. 73.

23 Dr. Woolridge presents financial results using both mean and medians as measures of central tendency. However,

due to outliers among means, he reports the median as a measure of central tendency. Exh. AG-JWR, p. 33, n. 24.

70

b) Discounted Cash Flow Analysis Results

Dr. Woolridge estimates DCF equity cost rates of 8.65 percent and 8.85 percent for the

two Proxy Groups. Exh. AG-JRW-1, p. 61. Table 3 below provides the dividend yield and

growth rate inputs for these DCF results. Id.

Table 3

Summary of Dr. Woolridge’s DCF Results

Dividend

Yield

1 + ½

Growth

Adjustment

DCF

Growth Rate

Equity

Cost Rate

Electric Proxy Group 3.45% 1.02625 5.25% 8.80%

Hevert Proxy Group 3.35% 1.02750 5.50% 8.95%

Dr. Woolridge made a one-half year adjustment to the spot dividend yield to reflect investor

expected growth in the dividend into the next year. Id., p. 52. As Dr. Woolridge explains, a one-

half year growth adjustment is appropriate because companies change their dividend payouts at

different times during the year. Id.

To estimate the DCF growth rate, Dr. Woolridge reviewed both historical and projected

growth rate measures, and evaluated growth in dividends per share (“DPS”), book value per

share (“BVPS”), and earnings per share per share (“EPS”). Id., pp. 53-61. He applied the

forecasted five-year EPS growth rates of Wall Street analysts and the projected growth in EPS,

DPS, and BVPS of Value Line in estimating a DCF equity cost rate. Id. Dr. Woolridge provided

empirical evidence that demonstrates the five-year EPS growth rates of Wall Street analysts are

overly optimistic and upwardly-biased. Id., p. 57. Ultimately, Dr. Woolridge considered a wide

range of historical and forecast data regarding the DCF growth rates for the proxy groups. Id., p.

53. For the Electric Proxy Group, he concludes that a DCF growth rate of 5.25 percent was

appropriate. He summarized his growth rate analysis as follows:

71

The historical growth rate indicators for my Electric Proxy Group

imply a baseline growth rate of 4.4%. The average of the projected

EPS, DPS, and BVPS growth rates from Value Line is 4.7%, and

Value Line’s projected sustainable growth rate is 3.8%. The

projected EPS growth rates of Wall Street analysts for the Electric

Proxy Group are 4.6% and 5.4% as measured by the mean and

median growth rates. The overall range for the projected growth

rate indicators (ignoring historical growth) is 3.8% to 5.4%. Giving

primary weight to the projected EPS growth rate of Wall Street

analysts, I believe that the appropriate projected growth rate is

5.25%. This growth rate figure is in the upper end of the range of

historic and projected growth rates for the Electric Proxy Group.

Exh. AG-JRW-1, p. 60.

Dr. Woolridge, using the same methodology as for the Electric Proxy Group, concluded

that a DCF growth rate of 4.875 percent was appropriate for the Hevert Proxy Group:

For the Hevert Proxy Group, the historical growth rate indicators

indicate a growth rate of 4.6%. The average of the projected EPS,

DPS, and BVPS growth rates from Value Line is 4.9%, and Value

Line’s projected sustainable growth rate is 3.9%. The projected EPS

growth rates of Wall Street analysts are 5.8% and 5.8% as measured

by the mean and median growth rates. The overall range for the

projected growth rate indicators is 3.9% to 5.8%. Giving primary

weight to the projected EPS growth rate of Wall Street analysts, I

believe that the appropriate projected growth rate is 5.5% for the

Hevert Group. This growth rate figure is in the upper end of the

range of historic and projected growth rates for the Hevert Proxy

Group.

Id., pp. 60-61.

Mr. Hevert developed an equity cost rate by applying the DCF model to his proxy group.

Exh. ES-RBH-1, pp. 23-37, Exh. ES-RBH-2 and ES-RBH-3. His proxy group consists of twenty

electric utility companies, the vast majority of which are also in Dr. Woolridge’s Electric Proxy

Group. Mr. Hevert used both constant-growth and multistage growth DCF models. Id. Mr. Hevert

uses three dividend yield measures (30, 90, and 180 days) in his DCF models. In his constant-

growth DCF models, Mr. Hevert relied on the forecasted EPS growth rates of Zacks, First Call,

72

and Value Line, and a retention growth rate measure. Id. Mr. Hevert’s multi-stage DCF model

uses analysts’ EPS growth rate forecasts as a short-term growth rate and a projected GDP growth

of 5.23 percent as the long-term growth rate. Id. For all three models, Mr. Hevert reports Mean

Low, Mean, and Mean High results. Dr. Woolridge summarizes Mr. Hevert’s DCF results in

Panel A of Exhibit AG-JRW-13.

Dr. Woolridge demonstrates that Mr. Hevert’s DCF equity cost rate must be rejected for

three reasons: (1) Mr. Hevert has given very little weight to his constant-growth DCF results; (2)

Mr. Hevert has relied exclusively on the overly optimistic and upwardly-biased EPS growth rate

estimates of Wall Street analysts and Value Line; and (3) Mr. Hevert’s GDP growth rate of 5.36

percent in his multi-stage DCF model is excessive, does not reflect the economic growth in the U.S.,

and is about 100 basis points above projections of GDP growth. Exh. AG-JRW-1, pp. 60-61.

Each of the flaws in Mr. Hevert’s DCF analysis is discussed below.

Little Weight Given to Constant-Growth DCF Results – Mr. Hevert gives very little

weight to his constant-growth DCF results. Id., p. 78. Dr. Woolridge has shown that the average

of Mr. Hevert’s mean constant-growth stage DCF equity cost rates are only 8.9 percent. Id. As

Dr. Woolridge states, had Mr. Hevert given these results more weight, or even any weight, he

would have arrived at a much lower equity cost rate recommendation. Id.

Sole Reliance on the Overly-Optimistic and Upwardly Biased EPS Growth Rates of Wall

Street Analysts and Value Line – Another error in Mr. Hevert’s DCF analysis is his exclusive use

of the forecasted EPS growth rates of Wall Street analysts and Value Line. Exh. AG-JRW-1, pp.

78-81. Dr. Woolridge provides ample empirical evidence that demonstrates that the five-year

earnings growth rates of Wall Street analysts and Value Line are overly optimistic and upwardly-

biased. Id., pp. 56-7.

73

On this issue, Dr. Woolridge also cites two recent studies that highlight some of the

issues with sole reliance on these forecasts: (1) a study by Lacina, Lee, and Xu (2011) has shown

that analysts’ five-year earnings growth rate forecasts are not more accurate at forecasting future

earnings than naïve random walk forecasts of future earnings;24 and (2) a study by Easton and

Sommers shows that using the five-year EPS growth rate forecasts of Wall Street analysts as a

DCF growth rate leads to an upward bias in estimates of the cost of equity capital of almost 3.0

percentage points.25 Id.

Mr. Hevert’s Long-Term GDP Growth Rate of 5.36 percent in Multi-Stage DCF Model –

Mr. Hevert’s multi-stage DCF model employs analysts’ EPS growth rate forecasts as a short-

term growth rate and a projected GDP growth of 5.36 percent as the long-term growth rate. Id.,

pp. 80-84. The 5.36 percent GDP growth rate is based on (1) a forecasted real GDP growth rate

of 3.26 percent, which he derived from the historical growth rate over the 1929-2015 period, and

(2) a forecasted inflation rate of 2.05 percent from market and investor derived forecasts. Exh.

ES-RBH-1, p. 36.

There are two major errors with Mr. Hevert’s multi-stage DCF analysis. First, he has not

provided any theoretical or empirical support for his assumption that the long-term historical GDP

growth is a reasonable proxy for the expected growth rate of the companies in his proxy group. Dr.

Woolridge provides five-year and ten-year historic measures of growth for earnings and dividends

for the proxy group companies on page 3 of his Exhibit JRW-10. These data suggest growth that is

more than 100 basis points below Mr. Hevert’s 5.36 percent GDP growth rate. Exh. AG-JRW-1, p.

81.

24

M. Lacina, B. Lee and Z. Xu, Advances in Business and Management Forecasting (Vol. 8), Kenneth D.

Lawrence, Ronald K. Klimberg (ed.), Emerald Group Publishing Limited, pp.77-101 25

Easton, P., & Sommers, G. (2007). Effect of analysts’ optimism on estimates of the expected rate of return

implied by earnings forecasts. Journal of Accounting Research, 45(5), 983–1015.

74

The second and more significant error is the magnitude of Mr. Hevert’s long-term GDP

growth rate estimate of 5.36 percent. Dr. Woolridge provides an analysis of historical and

projected GDP growth in Exhibit JRW-14, page 5. The analysis shows that historic and projected

GDP growth rate of 5.36 percent is about 100 basis points above recent trends in GDP growth and

projections of GDP growth. Exh. AG-JRW-1, pp. 81-83.

Dr. Woolridge analyzes historical GDP growth since 1960. Nominal GDP growth grew

from 6.0 percent to over 12 percent from the 1960s to the early 1980s due in large part to

inflation and higher prices. Exhibit JRW-14, p. 2. However, with the exception of a brief uptick

during the mid-2000s, nominal GDP growth rates have declined over the years and have been in

the 3.5 to 4.0 percent range over the past five years. Id. This decline is due to both lower real

GDP growth as well as lower inflation. Id., and Exh. AG-JRW-14, pp. 3-4.

The decline in nominal GDP growth is shown in Table 4, below which shows the

compounded GDP growth rates for 10-, 20-, 30-, 40- and 50- years. Id., p. 5. Whereas the 50-year

compounded GDP growth rate is 6.45 percent, there has been a monotonic and significant decline in

nominal GDP growth over subsequent 10-year intervals. Exh. AG-JRW-1, p. 82. These figures

demonstrate that nominal GDP growth in recent decades has slowed and that a figure in the range of

4.0 percent to 5.0 percent is more appropriate today for the U.S. economy.

75

Table 4

Historic GDP Growth Rates

10-Year Average 2.97%

20-Year Average 4.23%

30-Year Average 4.77%

40-Year Average 5.90%

50-Year Average 6.45%

Dr. Woolridge also shows that a long-term GDP forecast in the 4.0 percent to 5.0 percent

range is in line with forecasts of economic growth. Id. He indicates that there several forecasts

of annual GDP growth that are available from economists and government agencies.

Specifically, he notes the following: (1) the mean 10-year nominal GDP growth forecast (as of

February 2017) by economists in the recent Survey of Professional Forecasters is 4.7 percent; (2)

the Energy Information Administration (“EIA”), in projections used to prepare the Annual

Energy Outlook, forecasts long-term GDP growth of 4.3 percent for the period 2015-2040;26 (3)

the Congressional Budget Office (“CBO”), in its forecasts for the period 2016 to 2026, projects a

nominal GDP growth rate of 4.1 percent;27 and (4) the Social Security Administration (“SSA”),

in its Annual OASDI Report, provides a projection of nominal GDP from 2016-2090.28 SSA’s

projected growth GDP growth rate over this period is 4.4 percent. Id. pp. 83-4, and Exh. AG-

JRW-14, p. 5. Based on the trends on GDP growth and the projections of GDP growth, Dr.

Woolridge concludes that Mr. Hevert’s long-term GDP growth rate of 5.36 percent is overstated

by almost 100 basis points. Exh. AG-JRW-1, p. 80.

26Energy Information Administration, Annual Energy Outlook, http://www.eia.gov/outlooks/aeo/pdf/0383(2016).pdf 27

Congressional Budget Office, The 2016 Long-term Budget Outlook, July 2016.

https://www.cbo.gov/publication/51129. 28 Social Security Administration, 2016 Annual Report of the Board of Trustees of the Old-Age, Survivors, and

Disability Insurance (OASDI) Program. https://www.ssa.gov/oact/tr/2016/X1_trLOT.html.

76

Finally, Dr. Woolridge concludes Mr. Hevert’s DCF approaches are inconsistent in their

use of historic and projected data. Specifically, Dr. Woolridge notes that, in developing a DCF

growth rate for his constant-growth DCF analysis, Mr. Hevert has totally ignored historical EPS,

DPS, and BVPS data, instead relying solely on the five-year EPS growth rate projections of Wall

Street analysts and Value Line. However, in developing a terminal DCF growth rate for his multi-

stage growth DCF analysis, Mr. Hevert has totally ignored the well-known long-term real GDP

growth rate forecasts of the Congressional Budget Office and the Energy Information

Administration and instead relied solely on historical data going back to 1929. Id., p. 84.

c) Capital Asset Pricing Model Analysis Results

Dr. Woolridge estimates equity cost rates of 7.90 percent for both his Proxy Group of

Electric Companies and Mr. Hevert’s Proxy Group using the CAPM. Exh. AG-JRW-1, pp. 62-

71. The CAPM requires an estimate of the risk-free interest rate, beta, and the market risk

premium. Exh. AG-JRW-1, pp. 62-63. Table 5 below provides the risk-free, interest rate, beta,

and market risk premium inputs for these CAPM results.

Table 5

Summary of Dr. Woolridge’s CAPM Results

Risk-Free

Rate

Beta Equity Risk

Premium

Equity

Cost Rate

Electric Proxy Group 4.0% 0.70 5.5% 7.9%

Hevert Proxy Group 4.0% 0.70 5.5% 7.9%

Exh. AG-JRW-1, p. 71.

The Risk-Free Rate, which is based on the yield on 30-year Treasury bonds has been in

the 2.5 percent to 4.0 percent range over the 2013-2017 period. Id., p. 63. Given the recent

range of yields, and the prospect of higher rates in the future, Dr. Woolridge chose to use 4.0

77

percent interest rate, which provides a conservatively high estimate of the risk-free rate (“Rf”)

for the CAPM. Id.

Beta (ß) is a measure of the systematic risk of a stock. Id., pp. 64-65. The market,

usually approximated by the S&P 500, has a beta of 1.0. Id. The beta of a stock with the same

price movement as the market also has a beta of 1.0. Id. A stock whose price movement is

greater than that of the market, such as a technology stock, is riskier than the market and has a

beta greater than 1.0. Id. A stock with below average price movement, such as that of a

regulated public utility, is less risky than the market and has a beta less than 1.0. Id. Estimating a

stock’s beta involves running a linear regression of an individual stock’s return on the market

return. Id.

Dr. Woolridge used the betas for the companies in the two proxy groups as provided in

the Value Line Investment Survey. Id. The median beta for the companies in Electric and Hevert

Proxy Groups are 0.70 and 0.70. Exh. AG-JRW-1, Exh. JRW-11, p. 3.

The major issue in using the CAPM is the measurement and the magnitude of the equity

risk premium. Exh. AG-JRW-1, pp. 65-71. There are typically three procedures that can be

used to estimate the market or equity risk premium–historical return analyses, surveys, and

expected return models. Id. Dr. Woolridge incorporated all three in his analysis. Id.

To estimate the equity risk premium, Dr. Woolridge initially reviewed the results of over

thirty equity risk premium studies and surveys performed over the past decade. Id., p. 66-69. These

studies are presented on page 5 of Exh. AG-JRW-1, Exh. JRW-11 and include the summary equity

risk premium results of (1) the annual study of historical risk premiums as provided by Morningstar

(formerly Ibbotson Associates); (2) ex ante equity risk premium studies commissioned by

academics and consulting firms, (3) equity risk premium surveys of CFOs, analysts, business

78

financial forecasters, as well as academics; and (4) Building Block approaches to the equity risk

premium. Id. The median equity risk premium of these studies is 4.63 percent. Id. p. 68, and Exh.

AG-JRW-1, Exh. JRW-11, p. 5.

Due to the impact of the recent financial crisis, Dr. Woolridge also observed only the results

of equity risk premium studies and surveys that were published after January 2, 2010. Id. These

results are presented on page 6 of Exhibit AG-JRW-1, Exh. JRW-11. The median for the equity

risk premium studies published in the 2010-2016 time period was 4.76 percent. Id. p. 69. Exh. AG-

JRW-1, Exh. JRW-11, p. 6. From these sources, Dr. Woolridge concludes that much of the data

indicates a market risk premium in the range of 4.0 percent to 6.0 percent, but recent studies suggest

a market risk premium in the higher end of the range. Id. Therefore, Dr. Woolridge uses 5.5

percent as the market risk premium in his CAPM. Id. An equity risk premium of 5.5 percent is

consistent with the following studies of equity risk premiums:

(1) a market risk premium of 5.6 percent discovered in a 2016 survey

of financial analysts, companies, and academics conducted by Pablo

Fernandez;

(2) a market risk premium of 4.20 percent employed by CFOs as

reported by John Graham and Campbell Harvey of Duke University

from their survey of CFOs in March, 2017;

(3) a market risk premium of 1.92 percent as forecasted by leading

economists in the Federal Reserve Bank of Philadelphia’s annual

Survey of Professional Forecasters which was published February,

2017; and

(4) a market risk premium of 5.50 percent as developed and

published by the financial advisory firm Duff & Phelps as of January

2017.

Exh. AG-JRW-1, pp. 69-71.

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For all of the above reasons, the Department should use a market equity risk premium no

higher than 5.5 percent in any CAPM analysis that it uses to determine the cost of equity capital

for the Company. The result of Dr. Woolridge’s CAPM analyses, incorporating the components

discussed above, are cost of equity capital estimates of 7.9 percent for both the Electric and Hevert

Proxy Groups. Id. p. 83 and Exh. AG-JRW-1, Exhibit JRW-11, p. 1.

(1) Mr. Hevert’s CAPM Analysis Is Fatally Flawed

Mr. Hevert estimates an equity cost rate by applying a CAPM model to his proxy group.

Exh. ES-RBH-1, pp. 37-40 and Exh. ES-RBH-5, ES-RBH-6, and ES-RBH-7. The CAPM

approach requires an estimate of the risk-free interest rate, beta, and the equity risk premium.

Mr. Hevert uses: (a) two different measures of the Risk-Free Rate in the current yield of the 30-

year U.S. Treasury bond of 2.65 percent and a near-term projected yield of 3.15 percent; (b) two

different betas (an average Bloomberg Beta of 0.603 and an average Value Line Beta of 0.7); and

(c) two market risk premium measures - a Bloomberg, DCF-derived market risk premium of

10.19 percent and Value Line derived market risk premium of 11.21 percent. Id. Based on these

inputs, Mr. Hevert finds a CAPM equity cost rate range from 8.90 percent to 11.21 percent. Id,

p. 40.

(2) Mr. Hevert’s Market Risk Premium Is Grossly Over-

Inflated

Dr. Woolridge indicates that the primary error with Mr. Hevert’s CAPM analyses are his

market risk premiums of 10.19 percent and 11.21 percent. Exh. AG-JRW-1, pp. 86-88. He

indicates that Mr. Hevert develops an expected market risk premium by: (1) applying the DCF

model to the S&P 500 to get an expected market return; and (2) subtracting the risk-free rate of

interest. Id. Mr. Hevert’s expected EPS growth rates are the five-year expected EPS growth rates

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from Wall Street analysts as provided by Bloomberg (11.04 percent) and Value Line (12.00

percent). Exh. AG-JRW-1, p. 77. These growth rates produce estimated market returns of 12.94

percent from Bloomberg and 13.96 percent from Value Line. Id.

As set forth above, the EPS growth rate forecasts of Wall Street securities analysts are

overly optimistic and upwardly biased. Exh. AG-JRW-1, pp. 88-89. Furthermore, as Dr.

Woolridge indicates, Mr. Hevert’s long-term EPS growth rates of 11.04 percent and 12.00

percent are not consistent with historic or projected economic and earnings growth in the U.S.

Id. He notes that: (1) long-term growth in EPS is far below Mr. Hevert’s projected EPS growth

rates; (2) more recent trends in GDP growth, as well as projections of GDP growth, suggest

slower long-term economic and earnings growth in the future; and (3) over time, EPS growth

tends to lag behind GDP growth. Id.

Dr. Woolridge performs a study of the long-term economic, earnings, and dividend

growth rates in the U.S. He evaluates the growth in nominal GDP, S&P 500 stock price

appreciation, and S&P 500 EPS and DPS growth since 1960. The results are provided on page 1

of Exh. AG-JRW-1, Exh. JRW-14, and a summary is given in Table 6. Id.

Table 6

GDP, S&P 500 Stock Price, EPS, and DPS Growth

1960-Present

Nominal GDP 6.51%

S&P 500 Stock Price 6.74%

S&P 500 EPS 6.56%

S&P 500 DPS 5.74%

Average 6.39%

These results show that the historical long-term growth rates for GDP, S&P EPS, and S&P DPS

are in the 5.0 to 7.0 percent range. These results also demonstrate the close relationship between

GDP and EPS growth. Exh. AG-JRW-1, p. 89.

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However, the more recent trends suggest lower future economic growth than the long-term

historic GDP growth. The historic GDP growth rates for 10-, 20-, 30-, 40- and 50- years, which

were presented in Table 4, above, show that nominal GDP growth in recent decades has slowed and

that a figure in the range of 4.0 to 5.0 percent is more appropriate today for the U.S. economy. Exh.

AG-JRW-1, pp. 89-90. In addition, Dr. Woolridge testified that the projected long-term GDP

growth rate forecasts by economists and government agencies is in the 4.0 to 5.0 percent range. Id.

Long-term GDP growth is critical on this issue, according to Dr. Woolridge, because

prospective economic growth is the key driver of long-term earnings growth. A study by Brad

Cornell of the California Institute of Technology on GDP growth, earnings growth, and equity

returns finds that long-term EPS growth in the U.S. is directly related to GDP growth, with GDP

growth providing an upward limit on EPS growth. Cornell concludes with the following

observations:

The long-run performance of equity investments is fundamentally

linked to growth in earnings. Earnings growth, in turn, depends on

growth in real GDP. This article demonstrates that both theoretical

research and empirical research in development economics suggest

relatively strict limits on future growth. In particular, real GDP

growth in excess of 3 % in the long run is highly unlikely in the

developed world. In light of ongoing dilution in earnings per share,

this finding implies that investors should anticipate real returns on

U.S. common stocks to Average no more than about 4–5 % in real

terms.

Exh. AG-JRW-1, pp. 90-91.

In summary, Dr. Woolridge highlights three facts regarding Mr. Hevert’s CAPM market

risk premium; (1) long-term earnings growth is directly tied to long-term GDP growth; (2) the

trend in GDP growth, and the projections of nominal long-term GDP growth both point to long-

term GDP growth of 4.0 to 5.0 percent; and (3) issues (1) and (2) demonstrate that Mr. Hevert’s

long-term EPS growth rates of 11.04 percent and 12.00 percent are highly overstated. Id.

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Therefore, the Department should reject Mr. Hevert’s projected earnings growth rates, implied

expected stock market returns, and equity risk premiums, since they are not indicative of the

realities of the U.S. economy and stock market. Id., p. 91.

Dr. Woolridge concludes his discussion on Mr. Hevert’s excessive equity risk premium with

the following:

Mr. Hevert’s market risk premiums derived from his DCF

application to the S&P 500 are inflated due to errors and bias in his

study. Investment banks, consulting firms, and CFOs use the equity

risk premium concept every day in making financing, investment,

and valuation decisions. On this issue, the opinions of CFOs and

financial forecasters are especially relevant. CFOs deal with capital

markets on an ongoing basis since they must continually assess and

evaluate capital costs for their companies. They are well aware of

the historical stock and bond return studies of Ibbotson. The CFOs

in the March 2017 CFO Magazine – Duke University Survey of

about 300 CFOs shows an expected return on the S&P 500 of 6.60%

over the next ten years. In addition, the financial forecasters in the

February 2017 Federal Reserve Bank of Philadelphia survey expect

an annual nominal market return of 5.60% over the next ten years.

As such, with a more realistic equity or market risk premium, the

appropriate equity cost rate for a public utility should be in the 8.0%

to 9.0% range and not in the 10.0% to 11.0% range.

Exh. AG-JRW-1, p. 92.

For all of the reasons discussed above, the Department should reject Mr. Hevert’s equity

risk premium analysis and his associated CAPM findings and recommendations.

d) The Department Should Reject Mr. Hevert’s Bond Yield Risk

Premium Approach

Mr. Hevert also employs a utility Bond Yield Risk Premium (“BYRP”) approach to

estimate the cost of common equity. Mr. Hevert develops this cost rate by: (1) regressing the

authorized returns on common equity for electric distribution companies on the thirty-year U.S.

Treasury Yield for the period beginning January 1, 1980 and ending November 2016; and (2)

adding the risk premium established in step (1) to three different thirty-year U.S. Treasury yields: a

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current yield of 2.75 percent; a near-term projected yield of 3.13 percent; and a long-term projected

yield of 4.35 percent. Exh. ES-RBH-1, pp. 40-44, Exhibit ES-RBH-8. Mr. Hevert reports risk

premium equity cost rates ranging from 10.01 to 10.34 percent. Id.

Dr. Woolridge demonstrates that the projected long-term base yield and risk premium

that Mr. Hevert derived in his BYRP analyses are overstated. Dr. Woolridge initially criticizes

Mr. Hevert’s use of a long-term projected Treasury bond yield of 4.35 percent which Dr.

Woolridge indicates that, at 100 basis points above current yields, is not reasonable. Exh. AG-

JRW-1, p. 93. For this reason alone, the Department should reject Mr. Hevert’s BYRP analysis

and recommendation. However, there are many problems with the assumptions underlying Mr.

Hevert’s conclusion and his measurement of the risk premium itself.

There are three primary errors with Mr. Hevert’s BYRP risk premium. First, as Dr.

Woolridge testified, Mr. Hevert’s methodology produces an inflated measure of the risk premium

because that approach uses historic authorized ROEs and Treasury yields, and the resulting risk

premium is applied to projected Treasury Yields. Id, pp. 93-94. As Dr. Woolridge explains, since

Treasury yields are always forecasted to increase, the resulting risk premium would be smaller, if

Mr. Hevert had used projected Treasury yields to estimate the risk premium and not historical

Treasury yields. The net result if Mr. Hevert’s analysis is an overstatement of the risk premium.

Id. Second, Dr. Woolridge suggests that the overall approach is misguided:

In addition, Mr. Hevert’s RP approach is a gauge of commission

behavior and not investor behavior. Capital costs are determined in

the market place through the financial decisions of investors and are

reflected in such fundamental factors as dividend yields, expected

growth rates, interest rates, and investors’ assessment of the risk and

expected return of different investments. Regulatory commissions

evaluate capital market data in setting authorized ROEs, but also

take into account other utility- and rate case-specific information in

setting ROEs. As such, Mr. Hevert’s approach and results reflect

other factors such as capital structure, credit ratings and other risk

84

measures, service territory, capital expenditures, energy supply

issues, rate design, investment and expense trackers, and other

factors used by utility commissions in determining an appropriate

ROE in addition to capital costs. This may especially true when the

authorized ROE data includes the results of rate cases that are settled

and not fully litigated.

Exh. AG-JRW-1, p. 94.

Third, the errors of Mr. Hevert’s approach are exemplified by his risk premium results

relative to the actual authorized ROEs for electric companies. While Mr. Hevert’s BYRP equity

cost rate estimates range from 10.05 to 10.59 percent, the average authorized ROEs for electric

utilities have declined from 10.01 percent in 2012, to 9.8 percent in 2013, to 9.76 percent in

2014, 9.58 percent in 2015, and to 9.60 percent in 2016 according to Regulatory Research

Associates. Exh. AG-JRW-1, p. 14. Therefore, for no other reason, the Department should

reject Mr. Hevert’s BYRP analysis, since his results are clearly overstated when compared to the

actual level of state authorized returns. Id.

The Department should reject Mr. Hevert’s BYRP cost of equity analysis, since it has many

flaws that cause his recommendation to be overstated.

4. OTHER COST OF EQUITY ISSUES

a) Capital Market Conditions

Mr. Hevert bases his equity cost rate analysis and ROE recommendation on the premise

that interest rates and capital costs are increasing. Exhibit ES-RBH-1, pp. 55-70. He

specifically notes: “It also is clear that investor expectations, as measured by forward Treasury

yields and the implied probability of Federal Funds rate increases, suggest rising capital costs in

the near term.” Id., p. 67.

Dr. Woolridge comes to a much different conclusion on interest rates and capital costs.

Dr. Woolridge highlights that interest rates and capital costs remain at historically low levels and

85

are likely to remain so for some time. Exh. AG-JRW-1, pp. 21-32. He specifically notes the

fundamental factors that drive interest rates, capital costs, and GDP growth remain at low levels.

Id.

To support his contention that high interest rates are imminent, Mr. Hevert cites the Federal

Reserve’s moves to increase the federal fund rate as well as forecasts of higher interest rates. Exh.

ES-RBH-1, pp. 56-57. Dr. Woolridge demonstrates that Mr. Hevert thesis of higher interest rates

and capital cost is wrong on all counts. Id., pp. 24-26. First, as with the end of the Fed’s

Quantitative Easing III (“QEIII”) program and with increases in the Federal Funds rate, there

have been forecasts of higher long-term interest rates. Id. However, actual interest rates have

gone down and not up. Id. With respect to economists’ forecasts of higher future interest rates,

Dr. Woolridge shows that these economists have consistently forecast higher interest rates over

the past decade, and they consistently have been wrong. On this issue, Dr. Woolridge highlights

four recent studies:

(1) After the announcement of the end of QEIII program in 2014, all the economists in

Bloomberg’s interest rate survey forecasted interest rates would increase in 2014, and

100 percent of the economists were wrong;

(2) Bloomberg reported that the Federal Reserve Bank of New York has gone as far as

stopping use of interest rate estimates of professional forecasters in its interest rate

model;

(3) A study entitled “How Interest Rates Keep Making People on Wall Street Look Like

Fools,” which evaluated economists’ forecasts for the yield on ten-year Treasury bonds at

the beginning of the year for the last ten years. The results demonstrated that economists

consistently predict that interest rates will go higher, and interest rates have not fulfilled

the predictions; and

(4) A study that tracked economists’ forecasts for the yield on ten-year Treasury bonds on

an ongoing basis from 2010 until 2015. The results of this study, which was entitled

“Interest Rate Forecasters Are Shockingly Wrong Almost All of the Time,” demonstrate

that economists continually forecast that interest rates are going up, and they do not.

Exh. AG-JRW-1, pp. 22-23.

86

The bottom line is that Mr. Hevert’s ROE analyses and recommendation are based on the

premise of anticipated higher interest rates and capital costs. As demonstrated over the past

decade, the forecasts of higher interest rates and capital costs have proven wrong as slow

economic growth and low inflation have kept interest rates and capital costs low at historical low

levers. The Department should ignore these consistently incorrect interest rate forecasts and the

over-inflated ROE recommendations Mr. Hevert makes based on them.

b) Rate Making Mechanisms

Mr. Hevert discusses the Company’s proposed rate mechanisms and their impact on the risk

of the Company relative to the proxy group. Exh. ES-RBH-1, pp. 44-49 and Exh. ES-RBH-10.

The Company proposes a revenue decoupling mechanism (“RDM”) along with a performance-

based rate mechanism, (the “PBRM”). In Exh. ES-RBH-10, Mr. Hevert shows the rate making

mechanisms reported by the utilities in his proxy group in their SEC 10-K reports. He makes the

following assessment of the results:

I have addressed the question of the extent to which revenue

stabilization mechanisms are in place at comparable companies in

Exhibit ES-RBH-10. There, I note that all of the 20 proxy companies

have such mechanisms in place in at least one jurisdiction. Because

revenue stabilization mechanisms are so common among electric

distribution utilities, there is no reason to believe that the Company

is less risky than its peers. I therefore do not believe it would be

appropriate to reduce the Company’s ROE in connection with its

rate mechanisms, including its proposed decoupling mechanism.

Id., p. 48.

He concludes that, since his proxy group companies have rate making some mechanisms in place,

the risk of those companies is on par with the Company and, therefore, there is no reason to adjust

his ROE recommendation.

87

Dr. Woolridge strongly disagrees with this assessment of the impact of the rate making

mechanisms on the riskiness of the NSTAR and WMECo for several reasons. Exh. AG-JRW-1,

pp. 95-97. First, Dr. Woolridge highlights that the companies in the proxy groups do not receive

100 percent of their revenues from regulated operations. Exh. JRW-4. Therefore, not all the

proxy company revenues are covered by rate mechanisms. Id. p. 96.

Second, Dr. Woolridge notes that even the regulated utility revenues are not all covered

by rate mechanisms, because the rate making mechanisms in place at his proxy companies vary

widely and not all of the regulated operating subsidiary utility companies have rate mechanisms.

This is acknowledged by Mr. Hevert in his testimony:

Nearly all of the proxy companies’ operating subsidiaries recover

fuel, as well as energy efficiency costs through a cost recovery

mechanism; and 14 of the 20 proxy companies have mechanisms in

place to recover costs of renewable energy projects, such as the

Commonwealth’s Renewable Portfolio Standard (“RPS”). As to

decoupling mechanisms, ten of the 20 proxy companies have either

full or partial decoupling mechanisms in place in at least one

operating subsidiary.

Exh. ES-RBH-1, p. 47.

Finally, and most significantly, Dr. Woolridge highlights that the lack of application of

the proxy company’s revenues to rate making mechanisms contrasts to the percent of revenues

covered as proposed by the Companies. Specifically, Dr. Woolridge notes that a total of 97

percent of NSTAR’s distribution revenues and 95 percent of WMECo’s distribution revenues

will be affected by the Company’s proposed Revenue Decoupling Mechanism. Exh. AG-14-9.

In addition, in response to Exh. AG-14-10, Mr. Hevert indicated that he had not conducted a

study to determine the percent of proxy company’s revenues that are impacted by rate

mechanisms. Exh. AG-14-10. Furthermore, the Company acknowledged that, to its knowledge,

“. . . no other utility company in the U.S. has a revenue decoupling mechanism (“RDM”) in

88

place along with a performance-based rate mechanism (“PBRM”), similar to the Company's

proposal.” Exh. AG-14-9. Ultimately, as Dr. Woolridge testified, the Company will be less

risky, since the Company’s proposed RDM and PDRM impact at least 95 percent of its revenues,

while there is some unknown percent of the Hevert Proxy Group revenues that are impacted by

similar rate mechanisms.

Finally, Dr. Woolridge also testified that credit ratings can be used as a measure of

investment risk. Exh. AG-JRW-1, p. 97. The S&P and Moody’s issuer credit ratings for

NSTAR and WMECo, A and A2, respectively, are two notches above the averages for the

Electric and Hevert Proxy Group of BBB+ and Baa1. Id. Therefore, Dr. Woolridge concludes

that NSTAR and WMECo are less risky than either of the proxy groups and that the Commission

should take that fact into consideration in its ROE analysis and find a lower allowed return for

the Company as compared to the proxy groups. Id.

5. THE ATTORNEY GENERAL’S POSITION ON MASSACHUSETTS

ROES

Recently the AGO asked the Department to investigate “ . . . ways to increase

transparency, efficiency, and public awareness and confidence” in the process for setting the

authorized ROEs for electric and gas companies in the Commonwealth.29 In its request, the

AGO noted that authorized ROEs in the U.S. have declined and cited five reasons given in recent

rate cases for the downward trend in authorized ROEs:

1. The utility industry has been, and remains at the lowest level of risk for equity

investment;

2. Capital costs for utilities, as indicated by long-term bond yields and interest rates

29 Letter from Massachusetts Attorney General Maura Healey, RE: Request of the Office of Attorney General, Office

of Ratepayer Advocacy for Investigation into Ways to Increase Transparency, Efficiency and Customer Awareness

Regarding the Level of Profits Earned by Massachusetts Electric and Gas Distribution Companies, December 19,

2016.

89

have been and remain at historically low levels;

3. Although economic conditions have recovered significantly over the past five

years from the Great Recession, the annual growth of the United States economy

remains tepid at 2.00 to 2.50 percent;

4. The forecast for growth in the United States and world economies is expected to

remain low compared to historical averages; and

5. Revenue decoupling and cost reconciling rate adjustment mechanisms have

greatly reduced investment risk in utilities.

In his direct testimony, Mr. Hevert provided a response to the claims of the AG. Exh. ES-RBH-

1, pp, 9-16. Dr. Woolridge addressed the testimony of Mr. Hevert on these issues. Exh. AG-

JRW-1, pp. 8-17.

Issue 1. The utility industry has been and remains at the lowest level of risk for equity

investment. On this issue, Mr. Hevert acknowledged that utilities may be less risky than non-

regulated companies and he notes that, by one investment risk measure, beta, utilities are less

risky than other industries. To assess the relative riskiness of utilities to other industries as

measured by beta, Dr. Woolridge conducted a study of the betas of ninety-seven different

industries as published by Value Line in Exh. AG-JRW-1, Exh. JRW-8. The betas for natural

gas utilities, water utilities, and electric utilities are 0.76, 0.73, and 0.69.30 Id. These are the

lowest betas of the ninety-seven industries covered by Value Line. Id., p. 9, Exh. AG-JRW-1,

Exh. JRW-8.

Dr. Woolridge also demonstrates that the trend in credit-rating upgrades and downgrades

indicates that the investment risk of utility companies is declining. Exh. AG-JRW-1, pp, 9-10.

He notes that in January of 2014, Moody’s upgraded nearly 100 electric and gas companies due

to the lower investment risk of the energy business. Id. He also showed that the overall

30 The market average beta is 1.0, and so a beta less than 1.0 indicates low risk relative to the market. Exh. AG-

JRW-1, p. 9, n.

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direction of credit ratings as being in a positive and not in a negative direction. Id. The Edison

Electric Institute (“EEI”) tracks the rating actions of S&P, Moody’s, and Fitch over time. Id.

Figure 1, below shows the Electric Utility Rating Actions and percentage of Credit Upgrades

from 2003-2016. Id. The bottom line in the figure is the number of rating actions, and the top

line is the percentage of upgrades. As Dr. Woolridge notes, the figure shows that the percentage

of upgrades has been at least 70 percent over the past four years. Id. Dr. Woolridge concluded

that, taken together, the betas and the credit ratings show that the investment risk of utilities is

below that of other industries and has declined in recent years. Id.

Figure 1

Electric Utility Rating Actions and Percentage of Credit Upgrades

2003-2016

Source: Edison Electric Institute, 2017.

Exh. AG-JRW-1, p. 10.

Issues 2 - Capital costs for utilities, as indicated by long-term bond yields and interest

rates have been and remain at historically low levels. In support of this observation Dr.

Woolridge presented Figure 2, as shown below, which shows the yield on long-term, ‘A’ rated,

public utility bonds from 2000-2016. Exh. AG-JRW-1, pp. 10-11. After peaking in the 8

percent range during the financial crisis, these rates have generally declined and remain very low

by historic standards.

91

Figure 2

Long-Term, ‘A’ Rated, Public Utility Bond Yields

2000-2017

Issue 3 - Although economic conditions have recovered significantly over the past five

years from the Great Recession, the annual growth of the United States economy remains tepid at

2.00 to 2.50 percent. Dr. Woolridge supports this statement with Figure 3, shown below, which

shows quarterly real GDP grow rates from 2008 to 2016. Exh. AG-JRW-1, pp. 11-12. He notes

that while real GDP growth reached 3.50 percent in a couple quarters over this time period, the

average real GDP growth rate has been about 2.0 percent. Nominal GDP growth is a function of

real GDP growth and inflation. Id. With real GDP growth of about 2.0 percent, and an inflation

rate of about 2.0 percent, the nominal GDP growth rate has been in the 4.0 percent range in

recent years. Id.

92

Figure 3

Quarterly Real GDP Growth Rates

2008-2016

Exh. AG-JRW-1, p. 11.

Issue 4 - The forecast for economic growth in the United States and world economies

indicates that GDP growth is expected to be well below historical GDP growth rate averages.

On this issue, Dr. Woolridge notes that while, historically, the U.S. economy, as measured by

nominal GDP, has grown at about 7.0 percent, the trend in historical GDP growth has declined.

Exh. AG-JRW-1, pp. 11-12. Over the past ten years, nominal GDP growth has only been about

3.0 percent. Furthermore, Dr. Woolridge highlights that forecasts of long-term nominal GDP

growth are also well below the historical average. Id. He notes that GDP growth rate forecasts,

for periods ranging from ten to ninety years, as provided by various government agencies and

investment sources, show projected nominal GDP growth rate range is in the 4.0 to 4.5 percent.31

Id., p. 12.

Issue 5 - Revenue decoupling and cost reconciling rate adjustment mechanisms have

greatly reduced investment risk in utilities. To support this observation, Dr. Woolridge

highlighted a Moody’s publication on utility ROEs and credit quality. Exh. AG-JRW-1, pp. 12-

13. In the article, Moody’s recognizes that authorized ROEs for electric and gas companies are

31 These include the Survey of Professional Forecasters, the Energy Information Administration, the Congressional

Budget Office, and the Social Security Administration.

93

declining due to lower interest rates and the cost recovery mechanisms.

The credit profiles of US regulated utilities will remain intact over

the next few years despite our expectation that regulators will

continue to trim the sector’s profitability by lowering its authorized

returns on equity (ROE). Persistently low interest rates and a

comprehensive suite of cost recovery mechanisms ensure a low

business risk profile for utilities, prompting regulators to scrutinize

their profitability, which is defined as the ratio of net income to book

equity. We view cash flow measures as a more important rating

driver than authorized ROEs, and we note that regulators can lower

authorized ROEs without hurting cash flow, for instance by

targeting depreciation, or through special rate structures.

Exh. AG-JRW-1, p. 12.

Moody’s indicates that with the lower authorized ROEs, electric and gas companies are

earning ROEs of 9.0 to 10.0 percent, yet this is not impairing their credit profiles and is not

deterring them from raising record amounts of capital. Id., p. 13. With respect to authorized

ROEs, Dr. Woolridge noted that Moody’s recognizes that utilities and regulatory commissions

are having trouble justifying higher ROEs in the face of lower interest rates and cost recovery

mechanisms.

Robust cost recovery mechanisms will help ensure that US regulated

utilities’ credit quality remains intact over the next few years. As a

result, falling authorized ROEs are not a material credit driver at this

time, but rather reflect regulators' struggle to justify the cost of

capital gap between the industry’s authorized ROEs and persistently

low interest rates. We also see utilities struggling to defend this gap,

while at the same time recovering the vast majority of their costs

and investments through a variety of rate mechanisms.

Id.

Overall, Dr. Woolridge concludes that this article further supports the notion that the lower

investment risk justifies lower authorized ROEs. Id.

In his testimony, Mr. Hevert attempts to counter the AGO’s contention that: (1) the trend

in authorized ROEs nationally is for lower ROEs; and (2) the authorized ROEs for electric and

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gas utility companies in Massachusetts are out-of-line with other states. Exh. ES-RBH-1, pp. 10-

11.

On the first issue, Mr. Hevert presents a scatter gram of authorized ROEs for electric and

gas companies over the 2010-2016 period. Exhibit-ES-RBH-1, p. 11. He suggests that there is

“no discernable trend” in the authorized ROEs and that the average authorized ROE for electric

and gas companies is about 10.0 percent. Id.

Dr. Woolridge highlights several issues with Mr. Hevert’s analysis and conclusions. Exh.

AG-JRW-1, pp. 13-14. First, Dr. Woolridge demonstrates that even using Mr. Hervert’s chart,

there is, in fact, a slight downward trend in authorized ROEs. Id. Second, Dr. Woolridge notes

that Mr. Hevert’s ROE results include the authorized ROEs from Virginia which include a

generation rider of up to 200 basis points. Id. He notes that these are the highest ROEs and are

in the 11.0 to 12.0 percent range, skewing the overall results. Id. Finally, Dr. Woolridge

graphed the quarterly authorized ROEs for electric and gas companies from 2000 to 2016. Id.

This is provided in Figure 4, below. As he notes, there is clearly a downward trend in the data.

Id.

95

Figure 4

Authorized ROEs for Electric Utility and Gas Distribution Companies

2000-2016

Exh. AG-JRW-1, p. 14.

On the second issue, Mr. Hevert shows the median, maximum, and minimum, authorized

ROEs for six New England states and claims that the authorized ROEs in Massachusetts are

“comparable” to other New England states (except Connecticut) and are below national

authorized ROEs. Exh. ES-RBH-1, p. 13.

Again, Mr. Hevert’s analysis and conclusions are wrong. Exh. AG-JRW-1, p. 15. Dr.

Woolridge indicates that the data as presented are distorted for several reasons. First, the data

represent the results of rate cases over a nine-year period during which there has been a

significant decline in interest rates and capital costs. Id. Hence, Dr. Woolridge suggests, the

date of the authorized ROEs used is significant. Id. Second, by combining the data over this

nine-year period, as Dr. Woolridge indicates, there is no way to assess the trend in the data. Id.

Third, since several of the New England states have only a few rate cases over the time period, it

makes the first two issues even more of a factor. Id. Fourth, while the authorized ROEs in

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Connecticut are lower than the national averages, it does not mean they have impaired the

financial health of utilities in the state. Id. For example, Connecticut Light & Power (“CLP”),

an affiliate company of NSTAR and WMECo, has issuer credit ratings of A from S&P and Baa1

from Moody’s, and earned a ROE of 9.83 percent in 2016. Id. Fifth, the national ROEs cited in

comparison to the New England authorized ROEs, include the Virginia rate cases with the

generation riders. Id. Finally, despite these issues that distort the data, analysis and conclusions,

the median authorized ROE in Massachusetts is still above all the other restructured New

England states. Id.

Dr. Woolridge also performs a study to compare the Massachusetts’ authorized electric

ROEs to the authorized ROEs of other electric distribution companies and the Massachusetts’

authorized gas distribution ROEs to the authorized ROEs of other gas distribution companies.

Exh. AG-JRW-1, pp. 16-18. As shown in Figure 5 below, Dr. Woolridge provides the

Massachusetts’ authorized electric ROEs over the 2011 to 2016 timeframe and the average

authorized ROEs for electric distribution companies in the U.S., excluding the Massachusetts

ROEs. The trend in the Massachusetts’ ROE decisions has been upwards, going from 9.20

percent in 2011 to 9.90 percent in 2016. As Dr. Woolridge notes, this is in contrast to national

trend in the authorized ROEs for electric distribution companies (without Massachusetts), which

has gone from 9.90 percent in 2011 to 9.20 percent in 2016. Id., p. 16.

97

Figure 5

Authorized ROEs for Massachusetts Electric Utilities

and Average Annual U.S. Electric Distribution Companies

(Excluding Massachusetts)

2011-2016

Below, Figure 6 shows Dr. Woolridge’s analysis of Massachusetts’ authorized gas

case ROEs over the 2011 to 2016 period and the average authorized ROEs for gas

distribution companies in the U.S., excluding the Massachusetts’ ROEs. Exh. AG-JRW-

1, p.17. As in the case with the electric utility ROEs, the trend in the Massachusetts’

ROE decisions has been upwards, going from 9.20 percent in 2011 to 9.80 percent in

2016. This is in contrast to national trend in the authorized ROEs for gas distribution

companies, which has gone from 10.0 percent in 2011 to 9.50 percent in 2016. Id., pp. 17-

18.

98

Figure 6

Authorized ROEs for Massachusetts Gas Distribution Companies

and Average U.S. Gas Distribution Companies

(Excluding Massachusetts)

2011-2016

Based on his study of Massachusetts authorized ROEs relative to those in other states for

electric and gas distribution companies, Dr. Woolridge concludes that the magnitude and trend of

the Department’s authorized ROEs have been out of step with those nationally. Exh. AG-JRW-

1, p. 17. For both electric utility and gas distribution companies, the downward trend in national

ROEs over the past five years is in contrast to the upward trend in the Massachusetts’ authorized

ROEs.

6. THE ATTORNEY GENERAL’S RECOMMENDATION.

The Department should reject NSTAR’s and WMECo’s proposed cost of capital, because

the analyses that were used to develop that cost were fatally flawed in myriad ways. Instead, the

Department should rely on the testimony and analysis of Dr. Woolridge. Exh. AG-JRW-1, pp

72-74.

99

First, NSTAR and WMECO have higher common equity ratios and, therefore, lower

financial risk than the capital structures of either of the two proxy groups;

Second, as shown in Exh. AG-JRW-1, Exh. JRW-2 and Exh. AG-JRW-1, Exh. JRW-3,

capital costs for utilities, as indicated by long-term bond yields, are still at historically low levels.

In addition, given low inflationary expectations and slow global economic growth, interest rates

are likely to remain at low levels for some time.

Third, as shown in Exh. AG-JRW-1, Exhibit JRW-8, the electric utility industry is among

the lowest risk industries in the U.S. as measured by beta. As such, the cost of equity capital for

this industry is amongst the lowest in the U.S., according to the CAPM.

Fourth, the investment risk of NSTAR and WMECo, as indicated by their S&P and

Moody’s issuer credit ratings is below the investment risk of the two proxy groups. Id. The

S&P and Moody’s issuer credit ratings for NSTAR and WMECo are A and A2, respectively,

while the averages for the Electric and Hevert Proxy Groups are BBB+ and Baa1. This means

that NSTAR and WMECo’s S&P and Moody’s issuer credit ratings are two notches above the

averages of the proxy groups (S&P: A vs. BBB+ - Moody’s: A2 vs. Baa1). This indicates that

the investment risk of NSTAR and WMECo is below that of the electric utilities in the proxy

groups;

Fifth, the average authorized ROEs for electric utilities have declined from 10.01 percent

in 2012, to 9.8 percent in 2013, to 9.76 percent in 2014, to 9.58 percent in 2015, and 9.60 percent

in 2016, according to Regulatory Research Associates. Id., p. 14. The average authorized ROE

for Massachusetts electric distribution companies were below those of the national averages of

all electric utilities five years ago, but are now well above those averages.

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Dr. Woolridge makes three observations on these authorized ROEs. Exh. AG-JRW-1, p

74. First, he believes that these authorized ROEs have lagged behind capital market cost rates, or

in other words, authorized ROEs have been slow to reflect low capital market cost rates. Id.

Second, Dr. Woolridge indicates that this has been especially true in recent years as some state

commissions have been reluctant to authorize ROEs below 10 percent. Id. Third, Dr. Woolridge

states that the trend has been towards lower ROEs, and the norm now is below ten percent. Id.

Accordingly, Dr. Woolridge believes that his recommended ROE reflects present historically

low capital cost rates, which have been recognized by state utility commissions and reflected in

the ROEs set by them. Id.

In addition, Dr. Woolridge emphasizes that his recommendation, while low by historic

standards, does indeed meet Hope and Bluefield standards:

As previously noted, according to the Hope and Bluefield decisions,

returns on capital should be: (1) comparable to returns investors

expect to earn on other investments of similar risk; (2) sufficient to

assure confidence in the company’s financial integrity; and (3)

adequate to maintain and support the company’s credit and to attract

capital. The S&P and Moody’s issuer credit ratings for NSTAR

Electric and WMECo are A and A2, which is above those of the

Electric and Hevert Proxy Groups. And while my recommendation

is below the average authorized ROEs for electric utility companies,

it reflects the downward trend in authorized and earned ROEs of

electric utility companies. As is highlighted in the previously-cited

Moody’s publication cited above that states, despite authorized and

earned ROEs below 10%, the credit quality of electric and gas

companies has not been impaired but, in fact, has improved and

utilities are raising about $50 billion per year in capital. Major

positive factors in the improved credit quality of utilities are

regulatory ratemaking mechanisms. Therefore, I do believe that my

ROE recommendation meets the criteria established in the Hope and

Bluefield decisions.

Exh. AG-JRW-1, pp. 74-75.

101

Therefore, the Department should make the proposed adjustments to NSTAR’s and

WMECo’s capital structures and calculation of the embedded costs of debt as described above.

Furthermore, for both companies, the Department should authorize an allowed return on common

equity no higher than 8.875%.

C. RATE BASE

1. THE COMPANY OVER-INFLATES ITS COST OF SERVICE

The Department’s review of the Company’s proposed PBR Rate Plan and Grid

Modernization Investments are important elements of the Company’s Petition. However, one

must not lose sight of the proposed cost of service which has many troubling components that the

Department should reject. Eversource over-inflates its cost of distribution service by: (1)

including deferred expenses from previous years as additions to the test year cost of service; (2)

going on a spending spree during the test year; and (3) improperly including post-test year

adjustments to its test year costs. By doing so, the Company presents a pro forma cost of service

that is unrepresentative of, and greatly exceeds, the Company’s normal costs. These accounting

schemes, the overspending, and the grandiose spending proposals, collectively, create a revenue

deficiency, when, in fact, the Company is comfortably earning much more than its required cost

of capital.

First, the Company’s test year includes costs that the Company inappropriately deferred

from previous years. These costs include:

Deferral of Tree Trimming and Tree Removal Expenses $49 million

Deferral of the Income Tax Deduction of Property Tax $11 million

Deferral of 2016 Property Taxes $2 million.

All of these costs should have been recognized by the Companies in previous years.

102

Second, the Company went on a spending spree during the test year. The Company spent

on average, $265 million on capital additions in the three years leading up to the test year (i.e.

2012-2014). In the test year, however, the Company spent more than $400 million on capital

additions. Exh. AG-1-17, Atts AG-17 (a)-(b).

103

Eversource

Capital Additions

FERC Acct. Additions 2012 2013 2014 TY 15/16

303 Misc. Intangible Plant 9,205,435 2,860,782 1,248,030 26,625,431

360 Land 108,665 0 1,495 1,771,559

361 Structure and Improvement 1,529,319 1,180,414 975,343 278,972

362 Station Equip. 26,016,013 39,143,679 27,626,928 84,427,412

364 Pole, Towers, and Fixtures 11,770,268 12,615,062 26,243,989 36,133,756

365 Overhead Conductors 63,211,116 27,453,543 63,757,299 48,461,536

366 Underground Conduit 29,615,338 36,386,485 36,508,753 24,051,420

367 Underground Conductors 70,706,820 48,796,149 63,712,269 76,320,737

368 Line Transformers 27,074,901 26,090,058 29,139,800 25,909,572

369 Services 7,392,552 20,842,226 (7,221,985) 12,075,781

370 Meters 5,901,861 6,738,513 14,662,367 11,125,160

371 Installations 405,123 380,235 313,613 278,110

373 Street Lighting and Signals 1,644,513 1,729,020 1,202,842 1,377,422

374 Asset Retirement Costs 956,260 (7,377) 0 3,348,432

Total Distribution Plant 246,332,749 221,348,007 256,922,713 325,559,869

389 Land and Land Rights 0 0 447,948 (431,718)

390 Structures & Improvement 6,719,320 5,226,585 4,478,989 8,122,864

391 Office Furniture and Equip. 4,057,323 764,069 371,793 6,012,476

392 Transp. Equip. 1,050,254 1,195,136 402,212 11,904,448

393 Stores Equip. 114,943 77,036 12,566 532,464

394 Tools, Shop/Garage Equip. 950,508 2,062,294 1,112,450 2,181,263

395 Laboratory Equip. 73,920 0 17,790 21,935

396 Power Operated Equip. 0 2,849 0 0

397 Communication Equip. 8,291,088 17,178,414 1,596,271 23,747,292

398 Misc. Equip. 417 866,894 (224,039) 315,835

399.1 Asset Retirement Costs 0 0 0 (30,851)

Total General Plant 21,257,773 27,373,277 8,215,980 52,376,008

Total $276,795,957 $251,582,066 $266,386,723 $404,561,308

See also Exh. ES-GWPP-1, p. 30, Table ES-GWPP-1 (Total capital additions plus cost of

removal).

104

Similarly, the corporate service company that charges its costs to all of Eversource’s

operating companies, NUSCO Service Company and now Eversource Service Company

(“ESC”), followed suit and increased capital spending by 100 percent during the test year from

$50 million to $100 million. See Exh. AG-1-2, part 5, (Compare the FERC Forms 60, p. 103 for

the years 2012 through 2016).

Third, the Company shreds any notion of a historical test year and the use of a year-end

rate base by proposing more than $100 million of post-test year capital additions. The in-service

dates for these projects are after the test year, and, in some cases, not until two and a half years

after the end of the test year. See the Sections for Post-Test Year Additions to Rate Base, the

GIS Verification, and the Supply Chain discussion, below.

Finally, the Company proposes the addition of millions of dollars in new costs associated

with questionable new programs, including the more than $130 million Vegetation Management

RTW pilot program and the $30 million “Fee Free” Credit/Debit Card Payment Program.

As is its practice, the Department should carefully review and consider the necessity of

each of the costs that go into the Company’s pro forma revenue requirement. As will be

discussed further below, many of the costs proposed by the Company are inappropriate or

unnecessary and wasteful.

2. THE COMPANY’S PROPOSAL TO ADJUST ITS RATE BASE FOR

POST-TEST YEAR PLANT ADDITIONS SHOULD BE REJECTED

The Company proposes to include certain post-test year plant additions in the test year

end rate base used to develop the return requirement component of its total revenue requirement.

The Company refers to these adjustments as “pro forma adjustments made to the per-books

balances to develop the requested post-test year (“PTY”) rate base amounts.” Exh. ES-DPH-1,

p. 178. There are three separate post-test year plant additions for NSTAR: (1) $32.9 million

105

related to the Electric Avenue substation; (2) $29.9 million related to the New Bedford Area

Work Center; and (3) $42.7 million related to the Seafood Way substation. Exh. ES-DPH-3

(East), WP DPH-28, May 25, 2017 Update. The effect of these additions on the NSTAR rate

base is offset by an increase of $16.8 million to the balance of accumulated deferred income

taxes (“ADIT”) associated with these plant additions. Exh. ES-DPH-2 (East), Sch. DPH-30,

May 25, 2017 Update. The Company also includes the depreciation expense associated with

these post-test year plant additions in the NSTAR cost of service.

There is one post-test year plant addition for WMECo: $3.8 million related to the

Montague substation rebuild project, including a corresponding retirement of $0.3 million, and

cost of removal of $0.2 million. Exh. ES-DPH-3 (West), WP DPH-28-29, May 25, 2017 Update.

The effect of this addition on the WMECo rate base is offset by an increase of $0.7 million to the

balance of ADIT associated with this plant addition. Exh. ES-DPH-2 (West), Sch. DPH-30, May

25, 2017 Update. Again, the Company also includes the depreciation expense associated with

this post-test year plant addition in the WMECo cost of service.

The Department does not recognize post-test year additions, unless the utility

demonstrates that the addition or retirement represents a significant investment which has a

substantial effect on its rate base. Boston Gas Company, D.P.U. 96-50-C, pp. 16-18, 20-21

(1997); Boston Gas Company, D.P.U. 96-50, pp. 15-16 (1996). It is the size of the addition in

relation to rate base, and not the particular nature of the addition, which determines whether or

not inclusion as a post-test year addition is warranted. Western Massachusetts Electric

Company, D.P.U. 1300, pp. 14-15 (1983).

The Department should reject these post-test year additions to rate base. As AGO

witness Effron testified:

106

The Company is proposing to make selective adjustments to the

NSTAR Electric and WMECO test year rate bases that have the

effect of increasing the calculated revenue deficiency while ignoring

other post-test year changes that will have the opposite effect. The

purpose of the test year is to achieve a balance among rate base,

expenses, and sales in the determination of the revenue deficiency

and revenue requirement. By choosing to update only selected

elements of the actual test year costs and revenues, the Company’s

proposal upsets that balance and distorts the determination of the

Company’s revenue requirements.

For example, as the post-test year plant goes into service in 2016

and 2017, the reserve for accumulated depreciation for both NSTAR

Electric and WMECO will also be growing. However, the Company

does not take any account of post-test year growth in the reserve for

accumulated depreciation, which is deducted from plant in service

and will offset the growth in rate base from additions to plant in

service taking place after the end of the test year.

In addition, as described in Exhibit ES-LML-1, NSTAR Electric’s

Electric Avenue substation project ($31.8 million) is being

“installed to support increased load requirements for portions of the

City of Boston neighborhoods of Brighton, Allston, Longwood

Avenue Medical and the Town of Watertown” (Exhibit ES-LML-1,

p. 43). Yet, the Company makes no adjustment to test year sales to

recognize any load growth that this substation is being installed to

support.

Similarly, NSTAR Electric’s Seafood Way substation project ($44.5

million) is described as “a major new substation to serve the Seaport

area in Boston,” an area that “has experienced enormous load

growth in recent years” (Exhibit ES-LML-1, p. 44). Again,

Company makes no adjustment to test year sales to recognize the

“enormous load growth” in the area that this substation is being

installed to serve.

Exh. AG-DJE-1, pp. 12-13.

On cross examination, Mr. Horton acknowledged that the Company made no adjustment

to growth in the depreciation reserves that would take place after the end of the test year as the

post-test year plant additions take place. Tr. Vol. XIII, pp. 2767-2768. In addition, certain other

inconsistencies were noted. For example, the Electric Avenue substation project described at

107

Exh. ES-DPH-1, p. 178 (see also Exh. ES-LML-1, pp. 43-44) includes inventory items totaling

approximately $10 million delivered from the warehouse in Avon, Massachusetts to the job site

at Station 315 Electric Ave., Boston in August 2015. Tr. Vol. XIII, pp. 2668-2770; Exh. AG-19-

1. No adjustment was made to annualize the effect of this transfer on the balance of materials

and supplies included in the NSTAR rate base. Tr. Vol. XIII, pp. 2668-2770. Thus, there is a

partial double counting of the $10 million transferred from the materials and supplies inventory

to the Electric Ave. substation in the pro forma rate base proposed by NSTAR.

Further, these post-test year projects are not of such a magnitude that they individually

distort the test year relationships between plant in service and the other elements of the

Company’s revenue requirements as they go into service. The Electric Avenue substation

represents only 0.61percent of the actual NSTAR test year plant in service. Tr. Vol. XIII, pp.

2771-2772. The New Bedford Area Work Center represents only 0.46percent of the actual

NSTAR test year plant in service. Tr. Vol. XIII, p. 2772. And, the Seafood Way substation

represents only 0.86percent of the actual NSTAR test year plant in service. Id. Finally, the

Montague Substation project represents only 0.61percent of the actual WMECo test year plant in

service. Tr. Vol. XIII, p. 2773.

The Company has not established that departure from the Department’s test year

practices, to accommodate the proposed pro forma adjustment for post-test year plant additions,

is appropriate. As the Department found in D.P.U. 13-75:

The ratemaking process is intended to develop a representative level

of revenue requirement to be collected from customers and, absent

exigent circumstances, it is not intended to track and recover costs

on a dollar for dollar basis. D.P.U. 10-70, at 174; D.P.U. 07-50-A at

51. The normal ebb and flow of customers, plant investment, and

expenses make it impossible to capture every element of cost and

revenue that could in theory be included in rates. For example, post-

test year customer growth and post-test year plant additions are not

108

normally included in rates, unless they represent a significant

increase to year-end revenues or rate base. D.P.U. 10-70, at 174;

D.T.E. 96-50-C at 15-17; D.P.U. 85-270, at 141 n.21 (1986); Bay

State Gas Company, D.P.U. 1122, at 46-49 (1982).

Bay State Gas Company, D.P.U. 13-75, pp. 106-107 (2014).

The Department should reject the Company’s proposal to adjust the test year rate base for

post-test year plant additions. The individual projects are clearly not significant enough to meet

the Department’s standards for pro forma adjustments for post-test year plant additions. The size

of the additions in relation to rate base are not significant. Further, the proposed adjustments are

internally inconsistent. They take no account for other post-test year changes to rate base, such

as growth in the balance of depreciation that will be taking place as the plant additions go into

service. In addition, the Company makes no adjustments to test year sales to recognize load

growth although certain of the proposed plant additions are clearly described as being related to

load growth.

The post-test year plant additions and related expenses should be eliminated from the

Company’s revenue requirement. The elimination of the NSTAR adjustments for post-test year

plant additions reduces the NSTAR rate base by $88,718,397, and the NSTAR pro forma test

year depreciation expense by $1,919,677. The elimination of the WMECo adjustments for post-

test year plant additions reduces the WMECo rate base by $3,294,282, and the WMECo pro

forma test year depreciation expense by $96,992.

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D. OPERATIONS AND MAINTENANCE EXPENSES

1. THE PRO FORMA TEST YEAR WMECO PAYROLL EXPENSE

SHOULD NOT BE ANNUALIZED TO REFLECT THE EMPLOYEE

COMPLEMENT AS OF THE END OF THE TEST YEAR

WMECo’s pro forma adjustment to test year wages and salaries expense is shown on

Exh. ES-DPH-2(West), Sch. DPH-13, p. 2. The schedule includes a “pro forma” adjustment of

$173,600. This “pro forma” adjustment annualizes the effect of new union hires during the test

year. Exh. ES-DPH-1, p. 65, lines 10-12. On cross examination, Mr. Horton acknowledged that

this adjustment of $173,600 equates to approximately 0.75 percent of WMECo’s test year

distribution payroll of $22,999,430. Tr. Vol. XIII, p. 2779.

There will always be some turnover of employees over time as new employees are hired

and others leave. As of June 2016 (the end of the test year), the total WMECo employee

complement was 298. Id. As of December 2016, the number of WMECo employees was down

to 288. Tr. Vol. XIII, p. 2784.

The adjustment proposed by WMECo does not reflect a change in the number of

employees that is outside the normal “ebb and flow” in the number of employees. The Department

should reject this pro forma adjustment and reduce the WMECo pro forma operation and

maintenance expense by $173,600.

2. TEST YEAR INSURANCE POLICY SURPLUS PAYMENTS ARE

RECURRING AND SHOULD NOT BE REMOVED FROM THE TEST YEAR

During the test year, Eversource Energy received $456,242 from Energy Insurance

Mutual (“EIM”) for its portion of a distribution of Policyholders’ Surplus to member companies.

These proceeds reduced the test year insurance expense by $158,407 for NSTAR and $22,675

for WMECo. Exh. AG-19-13, Att. AG-19-13(o). The Company increased test year insurance

expense by $158,407 for NSTAR and $22,675 for WMECo, contending that the amounts are for

110

“non-recurring distribution of insurance policy surplus received in the test year.” Exh. ES-DPH-

1, p. 42, lines 8-9 and p. 45, lines 14-15.

As discussed by AGO witness Ramas, the receipt of insurance surplus proceeds from

EIM are not non-recurring events. Ms. Ramas testified as follows:

The support provided by the Company for its normalization

adjustment in Attachment AG-19-13(o) indicates that EIM is two

years into a three-year strategic plan and during that time, EIM’s

surplus grew from $890 million to $972 million. In February 2016,

a $20 million distribution of Policyholders’ Surplus was declared.

The letter from EIM dated March 21, 2016 also indicates that the

distributions are “…intended to reflect long-term profitability and

growth resulting from the collaborative support of Member

Companies and risk managers, along with the Insurance Advisory

Committee and EIM Board of Directors.” The Company has not

demonstrated that the distribution of insurance policy reserve

surplus, which offsets the insurance costs, is a non-recurring event,

particularly since the March 21, 2016 letter from EIM indicates that

a substantial surplus still exists.

Exh. AG-DR-1, p. 12.

Attachments F and G to the response to Exh. AG 1-61 demonstrate that EIM consistently

provided both NSTAR and WMECo with policy surplus distributions in each of the last four

years, spanning 2013 through 2016.

Energy Insurance Mutual Distributions

NSTAR WMECO

2013 $ 113,553 $ 19,449

2014 131,340 21,413

2015 157,269 22,512

2016 158,407 22,675

When questioned by the Department, Company witness Horton concurred that

reimbursements from EIM were received in each year 2013 through 2016 and that “[c]learly

111

there’s a history of policyholder distributions, but there’s no guarantee of such distributions.”

Tr. Vol. V, pp. 1031-1032. Although Mr. Horton indicates that the distributions are not

guaranteed, such distributions have occurred for four consecutive years. Additionally, the

insurer—EIM—had a substantial policyholder surplus as of March 2016, and the surplus grew

from $890 million to $972 million. Exh. AG 19-13, Att. AG-19-13(o). Given the receipt of

policy surplus distributions offsetting insurance expense for four consecutive years, coupled with

a sizable policyholder surplus still existing, the surplus payments received during the test year

should remain in the test year, reducing the Company’s adjusted test year expenses by $158,407

and $22,675 for NSTAR and WMECo, respectively.

3. OVERHEAD COSTS CHARGED BY ESC DURING THE TEST YEAR

SHOULD BE REDUCED TO REFLECT THE RETURN ON EQUITY APPROVED

BY THE DEPARTMENT IN THIS PROCEEDING

Eversource Energy Service Company (“ESC”) charges for general service company

overhead (abbreviated as “GSCOH”) are applied with the ESC labor costs to the FERC accounts

in which the labor costs are charged to the operating companies. This overhead includes ESC

payroll taxes, insurance, employee benefits, depreciation of service company assets, rent, and a

return on equity on service company assets. The total amount of ESC overhead costs charged to

operation and maintenance expense accounts during the test year was $32,133,446 for NSTAR

and $6,653,794 for WMECo. Exh. AG 1-25, Atts. AG-1-25(a) and (b) and Exh. AG-DR-1, p. 4.

The response to Exh. AG 1-25 identifies $1,988,563 charged to NSTAR and $414,549 charged

to WMECo operation and maintenance expense accounts during the test year for the “[e]quity

rate of return component of total Service Co. Overhead.” These amounts remain in the

Company’s adjusted test year. The equity return that the Companies’ ratepayers pay on ESC

assets should be limited to the equity return found to be fair and reasonable by the Commission

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in this case. Exh. AG-DR-1, p. 5. Based on the 8.875% return on equity recommended by the

AGO in this case, the ESC overhead costs included in the test year O&M expenses should be

reduced by $307,754 for NSTAR and $31,307 for WMECo. Exh. AG-DR-1, p. 5 (the

calculation of which is provided in Exh. AG-DR-2, Sch. 2.) It would not be fair or reasonable to

require ratepayers to effectively pay a return on equity to the service company that is greater than

the return on equity found to be just and reasonable by the Department in this case. The

Company did not rebut the AGO’s recommendation that the ESC overhead costs be reduced to

reflect the AGO’s recommended ROE, nor did it rebut the calculation of the adjustment

presented by the AGO. If the Department ultimately approves a return on equity that differs

from the 8.875% rate supported by the AGO in this case, the information presented on Exh. AG-

DR-2, Sch. 2 can be used to calculate the appropriate adjustment to reflect the impacts of the

return ultimately adopted by the Department.

4. THE TEST YEAR CHARGES FROM EVERSOURCE SERVICE

COMPANY SHOULD BE REDUCED FOR THE IMPACTS OF THE

ACQUISITION OF THE AQUARION WATER COMPANIES

On June 2, 2017, less than a week before the start of the evidentiary hearings in this case,

Eversource Energy filed a Form 8-K with the Securities & Exchange Commission (“SEC”)

announcing its acquisition of Macquarie Utilities, Inc. for a total equity purchase price of

approximately $880 million in cash and $795 million of assumed debt. See Exh. AG-1, p. 2

(Eversource Energy, SEC 8-k, dated June 2, 2017). The parties executed the purchase and sales

agreement on or about June 1, 2017. Id.

On June 29, 2017, Eversource Energy and Macquarie Utilities, Inc. filed with the

Department a Joint Petition for a change in control associated with the Aquarion Water Company

of Massachusetts (the “Acquisition Petition”). The Department docketed that case as D.P.U. 17-

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115 and the case is set for hearing. In its Petition, the Company requests that the Department

approve its acquisition on or before November 1, 2017. See Acquisition Petition, p. 9 citing

Plymouth Water Company, D.P.U. 13-130, p. 1 (2014). Eversource Energy expects all

regulatory approvals by that date so that the closing can be consummated by December 31, 2017,

prior to the date that base rates from this case take effect. Exh. AG-1, p. 2.

The acquisition of Macquarie Utilities Inc. will result in Eversource Energy owning

Aquarion Water Company of Massachusetts, Aquarion Water Company of New Hampshire and

Aquarion Water Company of Connecticut (collectively referred to as “Aquarion” hereafter). Tr.

Vol. I, pp. 52-53 and Exh. AG-1. Aquarion has more than 300 employees and serves nearly

230,000 customers. Exh. AG-1.

The mergers and acquisitions of utility companies typically result in significant cost

savings for the post-merger and post-acquisition companies. For example, the merger between

Northeast Utilities and NSTAR resulted in significant cost savings. Company witness Horton

testified that the 2016 Merger Report shows that the cumulative net savings projection over a 10-

year period is currently estimated at $1,032.4 million, and that NSTAR and WMECo’s share of

those savings is $274 million and $46 million, respectively, over the 10-year period 2012

through 2022. He also testifies that the cumulative savings achieved through December 31, 2015

(approximately 3.5 years’ post-merger) is approximately $69 million for NSTAR and $11

million for WMECo. Exh. ES-DPH-1, pp. 154-55 and Exh. ES-DPH-4, Sch. DPH-10, pp. 9, 55.

Mr. Horton also testified that a significant portion of the merger savings resulted from merging

the service company functions and resulted in a net reduction in the allocation of service

company costs to each of the Eversource operating companies. Tr. Vol. IX, pp. 1887-1888.

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The Boston Edison Company / Commonwealth Energy merger and acquisition achieved

similar synergy savings. Joint Petition of Boston Edison Company, Cambridge Electric Light

Company, Commonwealth Electric Company and Commonwealth Gas Company for approval by

the Department of Telecommunication and Energy pursuant to G.L. c. 164, §94 of a Rate Plan,

pp. 68-73 (1999). The Northeast Utilities / Yankee Gas merger also resulted in significant cost

savings as a result of synergies. See Joint Application of Northeast Utilities and Yankee Energy

Systems, Inc. for Approval of a Change of Control, Connecticut Department of Public Utility

Control, Docket No. 99-08-02, December 29, 1999. Similarly, merger related savings were

achieved in Northeast Utilities acquisition of Public Service Company of New Hampshire. The

acquisition of Aquarion should result in consolidation of functions between Eversource and

Aquarion, and the allocation of Eversource Energy Service Company costs to the new operating

entities at Aquarion, thereby reducing the costs to be allocated to NSTAR and WMECo post-

acquisition.

Simply incorporating the Aquarion water companies into the ESC allocation factors will

result in reductions in cost allocations to NSTAR and WMECo of approximately $6.3 million

and $1.0 million, respectively, without consideration of cost savings from functional

consolidations between the entities post-merger. The Company provided a side-by-side

comparison of the allocations factors and percentages used by ESC in charging costs to NSTAR

and WMECo for 2015 through 2017. Exh. AG-26-23. The attachment to Exh. AG-26-23 lists

numerous allocation factors used by ESC. One of those factors—specifically, Allocation Code

C05—is based on (1) Gross Plant Assets, (2) Net Income and (3) Number of Customers.

Allocation Code C05 should incorporate multiple operating aspects in allocating costs because it

includes plant, revenues and expense (i.e., net income) and number of customers served. The

115

Company provided the calculation and workpapers for the determination of Rate Code C05 for

the current period in response to Record Request AG-22, with the following description:

The C05 allocation factor represents a 50/50 split between Rate

Codes C04 and B10. The 2017 C04 rate code is based on the

“Common-Gross Plant Asset & Net Income” methodology, which

is calculated using the prior year actual gross plant asset balances

and 12 month actual net income as of 12/31/2016. The 2017 B10

rate code is based on the “Customers” methodology and is

calculated using the actual 12 month rolling average number of

customers as of 12/31/2016.

Exh. RR-AG-22.

The use of the C05 allocation factor is a reasonable means of estimating the reductions to

the costs allocated (i.e., indirect charges) to NSTAR and WMECo as a result of the acquisition of

Aquarion for purposes of this rate case as it factors in numerous aspects of operations impacting

the allocation of costs. The 2016 Annual Reports for each of the Aquarion Water Companies

was provided in Hearing Exh. AG-19 (Aquarion Water Company of Connecticut), AG-20

(Aquarion Water Company of Massachusetts) and AG-21 (Aquarion Water Company of New

Hampshire). As indicated in the above quoted response to Exh. RR-AG-22, the C05 allocation

factors is based on a 50/50 split of the C04 and B10 allocation factors. Using the information

provided by the Company in response to Exh. RR-AG-22 and Hearing Exhs. AG-19, AG-20 and

AG-21, the impact of the inclusion of Aquarion on the C04 and B10 allocation factors can be

calculated as follows:

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Because the C05 allocation code (which factors in gross plant, net income, and

customers) is based on a 50/50 split of Allocation Codes C04 and B10, the impacts of the

inclusion of Aquarion in the Rate Code 05 allocation factor on NSTAR and WMECo can be

Service Company Allocation - Rate Code C04 Percentage

Net Income Gross Plant Assets 50/50

Total - All Entities in Code C04 899,367,634 26,600,134,942

Aquarion Water Company of Connecticut 39,720,687 1,343,233,459

Aquarion Water Company of Massachusetts 732,334 71,966,963

Aquarion Water Company of New Hampshire 1,666,537 41,938,420

Total With Aquarion Added 941,487,192 28,057,273,784

NSTAR Electric 290,745,433 7,785,346,085

- Percentage w/out Aquarion 32.33% 29.27% 30.80%

- Percentage with Aquarion included 30.88% 27.75% 29.31%

WMECO - Distribution 17,563,229 876,255,609

- Percentage w/out Aquarion 1.95% 3.29% 2.62%

- Percentage with Aquarion included 1.87% 3.12% 2.49%

Service Company Allocation - Rate Code B10

Customers

Total - All Entities in Code B10 3,683,125

Aquarion Water Company of Connecticut 197,071

Aquarion Water Company of Massachusetts 19,626

Aquarion Water Company of New Hampshire 9,418

Total With Aquarion Added 3,909,240

NSTAR Electric 1,197,387

- Percentage w/out Aquarion 32.51%

- Percentage with Aquarion included 30.63%

WMECO - Distribution 214,247

- Percentage w/out Aquarion 5.82%

- Percentage with Aquarion included 5.48%

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calculated as follows:

As shown above, including Aquarion in the calculation of the C05 allocation factor results in an

estimated 5.31% reduction in costs charged to NSTAR from ESC and an estimated 5.52 percent

reduction in costs charged to WMECo.

The Company’s response to discovery shows that the amount of test year operation and

maintenance expenses allocated to NSTAR during the test year was $118,294,789. See Exh.

AG-26-20, Att. AG-26-20, p. 12. Applying the estimated 5.31% reduction in costs allocated to

NSTAR from ESC to account for the impact of the Aquarion acquisition results in a $6,285,012 [

$118,294,789 x 5.31% ] reduction in test year O&M expenses. Similarly, the Company’s

response to discovery also shows that the amount of test year operation and maintenance

expenses allocated to WMECo during the test year was $19,109,090. See Exh. AG-26-21, Att.

AG-26-21, p. 12. The application of the estimated 5.52% reduction in costs allocated to

WMECo from ESC to incorporate the impacts of the Aquarion acquisition would result in a

$1,054,299 [ $19,109,090 x 5.52 percent ] reduction in test year O&M expenses.

The Department should reduce the Company’s pro forma cost of service to reflect these

cost reductions from Eversource Energy’s acquisition of Aquarion. The Company has requested,

and expects to receive, all regulatory approvals for the acquisition by November 1, 2017, the

same date that the order is due in this case. With those approvals in hand, Eversource expects to

Service Company Allocation - Rate Code C05 Percentage

C04 % B10 % 50/50

Nstar Electric w/out Aquarion 30.80% 32.51% 31.65%

Nstar Electric with Aquarion included 29.31% 30.63% 29.97%

Percentage Change in Allocation -5.31%

WMECO w/out Aquarion 2.62% 5.82% 4.22%

WMECO with Aquarion included 2.49% 5.48% 3.99%

Percentage Change in Allocation -5.52%

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close the acquisition before the end of the year, which means that it can begin reducing costs

before the start of the rate year in this case. As a result, the cost of service for both companies

will be known by the time rates from this case go into effect. Therefore, test year O&M

expenses be reduced by $6.3 million for NSTAR and $1.0 million for WMECo to reflect the

impacts of the inclusion of Aquarion in the allocation of ESC costs post-merger. If the impacts

of this merger, which is anticipated by the Company to be consummated prior to rates from this

case taking effect, are not considered in determining the fair and reasonable service company

costs to incorporate in base rates, Eversource shareholders will receive an earnings windfall at

the expense of Massachusetts ratepayers.

5. PURSUANT TO DEPARTMENT PRECEDENT, THE DEPARTMENT

SHOULD DISALLOW THE COMPANY’S INCENTIVE COMPENSATION BASED

ON FINANCIAL GOALS

The Department should eliminate executive incentive compensation based on the

attainment of financial goals from the Company’s revenue requirement because, as the

Department has previously held, these incentives do not provide benefits to ratepayers. The

Department has made clear that incentive compensation must be: (1) reasonable in amount and

(2) reasonably designed to encourage good employee performance. Massachusetts Electric

Company, D.P.U. 89-194/195, p. 34 (1990); Fitchburg Gas and Electric Light Company, D.P.U.

70-71, pp. 82−83 (2008). For an incentive plan to be reasonable in design, it must both

encourage good employee performance and result in benefits to ratepayers. Boston Gas

Company, D.P.U. 93-60, p. 99 (1993). With respect to individual performance goals that are

exclusively financial, such as earnings per share, the Department has held that “the benefit to

ratepayers is unclear” and the burden is on the company to prove a direct benefit. New England

Gas Company, DPU 08-35, p. 97 (2009).

119

In Massachusetts Electric Company, DPU 10-55, pp. 253−54 (2010), the Department

clarified that financial performance of the Company should not be a component of the formula to

determine individual incentive compensation. The Department stated:

Going forward, where companies seek to include financial goals as

a component of incentive compensation program design, the

Department would prefer to see the attainment of such goals as a

threshold component with job performance standards designed to

encourage good employee performance (e.g., safety, reliability,

and/or customer satisfaction goals) used as the basis for determining

individual incentive compensation. Companies that wish to

maintain the achievement of financial metrics as a direct component

of an incentive compensation award must be prepared to

demonstrate direct ratepayer benefit from the attainment of these

goals or risk disallowance of the related incentive compensation

costs.

Id. The Department has since confirmed that the limitation for financial goals is not a preference

but instead, an “expectation.” Fitchburg Gas and Electric Light Company, DPU 11-01, pp.

192−94 (2011). When companies have not modified their incentive compensation plans in

accordance with this expectation, the Department has denied recovery of the incentive

compensation. Id., pp. 199−200.

Here, the Company’s financial performance is a major factor in its incentive

compensation formula. The Company’s incentive compensation plan is based 70% on the

Company’s overall financial performance and 30% on the Company’s overall operational

performance. Id. For the financial component, the Company’s “earnings per share goal was

weighted at 70%, the dividend growth goal was weighted at 20% and the credit rating goal was

weighted 10%.” Exh. DPU-45-21, Att. DPU-45-21(a), p. 46. Incentive compensation for the

CEO is awarded based on earnings per share, dividend growth, and credit rating. Exh. DPU-45-

21(e); Tr. Vol. IV, p. 827. The CFO is awarded incentive compensation based on his or her

achievement of individual goals regarding “the achievement of overall corporate financial goals:

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earnings per share and credit rating.” Exh. DPU-45-21(e); Tr., Vol. IV, pp. 828–29. In addition,

“each named executive has goals appropriate for their respective area . . . [and t]hese goals are

designed to support . . . the overall corporate goals relating to the areas of Employee, Customer,

Operational Excellence, and Financial performance.” Id.

Pursuant to Department precedent, the Company’s request for recovery of incentive

compensation payments to its current CEO and CFO should be rejected because their individual

goals are tied to the overall corporation’s financial goals, and the Company did not satisfy its

burden by making any showing of a direct benefit to customers. Exhs. DPU-45-21(e); DPU-45-

21, Att. DPU-45-21. In particular, James Judge, the Company’s current CEO, received $379,086

in adjusted incentive compensation during the test year for NSTAR and $61,548 in adjusted

incentive compensation during the test year for WMECo. Exh RR-AG-4, Att. RR-AG-4, p. 2.

Likewise, Philip Lembo, the Company’s CFO, received $117,434 in adjusted incentive

compensation during the test year for NSTAR and $19,067 in adjusted incentive compensation

during the test year for WMECo. Id. Accordingly, the Department should remove, at a

minimum, $577,135 ($379,086 + $61,548 + $117,434 + 19,067) from the revenue requirement

for incentive compensation paid to the Company’s CEO and CFO.

In addition, the Department should remove 70% of the incentive compensation paid to

the Company’s other Named Executive Officers. As stated, the Company’s overall financial

performance accounts for 70% of the Company’s annual incentive performance goals. Exh.

DPU-45-21, Att. DPU-45-21, p. 46. In addition, “each named executive has goals appropriate

for their respective area . . . [and t]hese goals are designed to support . . . the overall corporate

goals relating to the areas of Employee, Customer, Operational Excellence, and Financial

performance.” Id. Moreover, Company Witness Horton testified, the “executive management

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team and leaders throughout the company . . . are responsible for maintaining a budget, and that

budget -- the expenses incorporated in that budget are a part of the overall plan of the company

to execute on an operating expense budget and a capital budget.” Tr., Vol. IV, p. 829. As

previously explained, the Company’s shareholders, and not ratepayers, should pay incentive

compensation tied to the Company’s overall financial performance.

Accordingly, in addition to removing costs for incentive compensation associated with

the CEO and CFO, the Department should also remove a total of $295,592, which is 70% of the

total $422,274 in incentive compensation paid to Leon Olivier, Executive Vice President Energy

Strategy and Business Development ($158,054); Werner Schweiger, Executive Vice President

and Chief Operating Officer ($147,995); and Gregory Butler, Senior Vice President & General

Counsel ($116,225), for their employment with NSTAR and WMECo. Exh. RR-AG-4, Att. RR-

AG-4.

An incentive compensation package that includes the achievement of financial targets

effectively requires customers to reward Company management on a contingency basis by

raising customers’ rates. This result is unfair to the Company’s customers and should not be

allowed by the Department. If an incentive compensation program is successful in increasing

earnings, the shareholders should be happy to reward employees accordingly and absorb the cost

of the program. Because shareholders are the primary beneficiaries of increases to earnings,

shareholders should bear the cost of the incentive compensation related to earnings, not the

Company’s customers. Accordingly, incentive compensation based on the attainment of

financial goals should not be included in the Company’s revenue requirement and recovered

from ratepayers. For these reasons, the Department should remove $577,135 for incentive

compensation paid to the Company’s CEO and CFO, and $295,592 for incentive compensation

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paid to the Company’s other Named Executive Officers, along with proportional adjustments for

the associated employee costs (e.g., FICA, 401K, and life insurance).

6. THE COMPANY’S INFLATED MEDICAL EXPENSE PROJECTION

RESULT IN THE COMPANY OVER-STATING ITS FUTURE EMPLOYEE

MEDICAL COSTS

The Company proposes pro forma adjustments to their test year medical expenses based

on inflated estimates of the rates of the growth in health care costs. As described below, the

Company’s health care growth rates are not supported by any record evidence and are clearly

unreasonable. Therefore, the Department should deny the Company’s proposed increase in

medical expenses and instead limit the health case growth rate to a more reasonable level.

Eversource self-insures its medical costs rather than having a third-party underwriting the

liability. Exh. ES-DPH-1, pp. 57-58.32 As a result, the Company’s year-to-year medical costs

are not based on the payment of any insurance premium, but rather, the actual costs that the

Company pays to medical providers. Id.

The Company’s pro forma medical expense is not based on any contractual or known and

measureable increase in costs. Rather, the increase is based on a so-called “working rate” that

the Company develops. Id. However, that working rate is nothing more than an estimate that the

Company uses as an accounting placeholder that is trued up later in the year after actual costs are

known. Id. The proposed working rate is based on a forecasted growth rate in health care costs

that Company creates and does not represent the actual increase in the Company’s employee

medical costs. See id.

32 The Company does employ an outside firm to administer the Company’s medical program, providing the interface

with employees and medical services providers. Id.

123

Eversource, in its original filing, proposed increases in its test year medical expense

levels of $1,304,895 and $260,108, for NSTAR and WMECo respectively. Exh. ES-DPH-2

(East and West), Sch. 11, p. 2. The Company bases these increases on assumed annual growth

rates in health care costs of 9 percent. See Exh. ES-MPS-2, line 9. In the May 25, 2017 Update

filings, NSTAR and WMECO increased those adjustments to $2,427,579 and $463,618,

respectively, based on an even higher annual growth rate in health care costs of 9.5 percent.

Exh. ES-DPH-2 (East and West), Sch. 11, p. 2. May 25, 2017 Update and Exh. DPU-45-31(b),

line 9.

The Department should deny the Company’s proposed increases in medical costs based

on its over-inflated working rate. The Department has found that utility proposed increases in

medical costs should not be based on working rates. Fitchburg Gas and Electric Light

Company, D.P.U. 13-90, pp. 94-96 (2013). To be included in rates, medical and dental insurance

expenses must be reasonable. Massachusetts Electric Company, D.P.U. 92-78, pp. 29-30 (1992);

Nantucket Electric Company, D.P.U. 91-106/91-138, p. 53 (1991). Companies must demonstrate

that they have acted to contain their health care costs in a reasonable, effective manner.

Berkshire Gas Company, D.T.E. 01-56, p. 60 (2002); Boston Gas Company, D.P.U. 96-50

(Phase I), p. 46; D.P.U. 92-78, p. 29; D.P.U. 91-106/91-138, p. 53. Finally, any post-test year

adjustments to health care expense must be known and measurable. Berkshire Gas Company,

D.T.E. 01-56, p. 60; D.P.U. 96-50 (Phase I), p. 46; North Attleboro Gas Company, D.P.U. 86-86,

p. 8 (1986).

The health care growth rates embedded in the medical cost working rates that the

Company proposes here are well beyond any credible growth rates that have been observed in

the market. The Company’s working rate health care growth rate is an astonishing 9.5 percent.

124

Exh. DPU-45-31. General inflation in the economy has been less than 2 percent recently and is

expected to be just 2.05 percent in the future. See Exh. AG-JRW-1, p. 82; Exh. AG-JRW-14, p.

6; Exh. ES-RBH-1, p. 35. Indeed, even the Company’s actuarial reports for retiree benefit costs,

whose medical costs grow faster than that of the general population, forecast a near term growth

rate of only 6.25 percent, trending to just 4.5 percent.33 Tr. Vol. VI, pp. 1113-15. Ultimately,

the Company provided no support for its 9.5 percent forecasted health care growth rate.

Given the Company’s failure to provide any support for the significant increase, the

Department should deny the Company’s proposed medical increases based on the 9.5 health care

growth rate. Instead, the Department, if it allows an increase in the Company’s medical expense

at all, should use an increase based on more reasonable health care cost trends. The Company

provided such a calculation, using a health care growth rate of 6.5 percent. RR-AG-6. A health

care growth rate of 6.5 percent, although still many times that rate of inflation, is more in line

with the actual growth rate experience and has some basis in record evidence. Tr. Vol. VI, pp.

1115.

Therefore, the Department should deny the Company’s proposed medical cost increases

based on a 9.5 percent inflation rates, since those working rates are not supported by any credible

record evidence, and instead limit the increases to those based on more reasonable growth rates

as provided in RR-AG-8. This adjustment would result in a medical cost increase of $1,668,140

for NSTAR and $329,237 for WMECO. Id.

33 The use of higher growth rates in the charges for retiree health care costs has less of an impact on customers, since

those costs are collected through the Pensions and Post-Retirement Benefits Other Than Pensions charge where

those charges to customers are trued up to actual costs.

125

7. THE DEPARTMENT SHOULD REJECT THE COMPANY’S PROPOSAL

TO INCREASE INFORMATION SYSTEM EXPENSE CHARGED FROM

EVERSOURCE SERVICE COMPANY FOR A POST-TEST YEAR

INFORMATION SYSTEM PLANT ADDITION

The Company has proposed to increase the test year information system expense charged

from ESC to include costs associated with a post-test year information system plant addition

being undertaken by its service company. ESC is currently implementing a new Supply Chain

Project, the costs of which will be allocated to the Eversource operating companies, including

NSTAR and WMECo, based on the projected costs, including a return on the new post-test year

addition to plant in service and depreciation. Although the project will be a post-test year capital

addition at ESC, the Company manipulates the costs so that they will be charged to the operating

companies as expenses.

According to the Company, the Supply Chain Project “will consolidate and standardize

all supply chain processes and practices across each Eversource Energy operating company in

order to eliminate redundancy, leverage industry-best practices and introduce state-of-the-art

technology to sourcing, contracting and materials management-related activities.” Exh. ES-

DPH-1, p. 94. The goal of the project is to reduce costs through standardization and

consolidation. The project was not completed and placed into service prior to the end of the

Phase 1 hearings in this case, which concluded on June 29, 2017. Although the initial filing

anticipated a mid-February 2017 go-live date, the Company indicated during hearings that the

revised go-live date for the implementation of the Supply Chain Project is July 3, 2017. Tr. Vol.

XV, p. 3054.

In the May 25, 2017 Update to its revenue requirement schedules filing, the Company

revised the ESC net rate base for the project, the pre-tax cost of capital applied to the project, and

the depreciation rate applied to the project. The May 25, 2017 Update shows the revised ESC

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rate base, net of accumulated depreciation and accumulated deferred income taxes (“ADIT”), of

$26,173,725 with a pre-tax cost of capital of 11.38% applied, resulting in a requested return on

the Supply Chain Project of $2,979,597. Exhs. ES-DPH-4, Sch. DPH-8 (East), pp. 1−2; ES-

DPH-4, Sch. DPH-8 (West), pp. 1−2. The May 25, 2017 Update also shows depreciation

expense of $3,178,237, resulting in a total ESC “Revenue Requirement” associated with the

project of $6,157,834 ($2,979,597 + $3,178,237). Id. After allocating the costs and applying the

O&M expense ratios, the Company requests inclusion of post-test year increases in information

system expense allocated from ESC of $1,248,167 for NSTAR and $237,936 for WMECo in its

updated filing. Id.

The Department should reject the proposed post-test year increases in charges from ESC

for several reasons, each of which provides an independent basis for rejection: (a) the Supply

Chain Project is a post-test year plant addition at the service company level that was not placed

into service prior to the end of hearings in this case; (b) the amount of costs to be charged to

NSTAR and WMECo are not known and measurable; and (c) the Company’s expected cost

savings associated with the Supply Chain Project implementation exceeds the annual revenue

requirements associated with the ESC plant addition. Moreover, even if the Department allows a

proposed test-year increase, it should reduce the amount of the proposed test-year increase

because the Company makes no adjustment for the impact that the Company’s acquisition of the

Aquarion Water Companies will have on the amounts to be charged to NSTAR and WMECo,

and the proposed post-test year service company information system adjustment significantly

overstates the costs of the project. Each of these problems with the Company’s Supply Chain

proposal will be discussed below.

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a) The Supply Chain Project Is a Post-Test Year Plant Addition at

the Service Company Level That Was Not Placed into Service Prior to

the End of Hearings in This Case

The Supply Chain Project did not go into service prior to the end of hearings in this case.

Although the Company provided an estimated timeline for completion of the project with a go-

live date in mid-February 2017 and extending into May 2017, Exh. DPU-9-7, Att. DPU-9-7, p. 5,

the go-live date was later changed to an anticipated date of July 3, 2017. Exh. AG-42-1. The

Company’s witness stated that at go-live, the process of interfacing systems with the application

will begin, so that the Company “will begin to cut those over, test them, make sure that the

interfaces are working properly and that the system is functioning as designed.” Tr. Vol. XV,

pp. 3054−3055. The Company’s witness also testified that after the go-live date, there is “user

acceptance testing . . . to assure, again, that all the interfaces are live and working and up and

running as designed.” Id., p. 3055. The Company’s witness confirmed that post-go-live support

will extend beyond July 2017, but did not state a date by which it will end. Id., p. 3064. Clearly,

the Supply Chain Project is not “in service,” but rather construction work in progress as the

Company goes about testing, retesting, training, and attempting to bring the system ups to that at

some point in the future, when employees actually will be able to use the system. Therefore, the

Department should deny the Company’s attempt to bootstrap the Service Company’s post-test

year project spending into rates in this case.

b) The Amount of Costs Associated with the Supply Chain Project

to Be Charged to NSTAR and WMECo in the Rate Effective Period Are

Not Known and Measurable

The Department should also not allow the adjustment for the Supply Chain Project costs

because those costs are not known or measurable. Proposed test year revenues and expense

require a finding that the adjustment constitutes a “known and measurable” change to test year

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cost of service. See Eastern Edison Company, D.P.U. 1580, pp. 13−17, 19 (1984); Western

Massachusetts Electric Company, D.P.U. 85-270, p. 141 n.21 (1987). A “known” change means

that the adjustment must have actually taken place, or that the change will occur based on the

record evidence. Fitchburg Gas and Electric Light Company, D.P.U. 98-51, p. 62 (1998). A

“measurable” change means that the amount of the required adjustment must be quantifiable on

the record evidence. Id.

Here, the expense associated with the Supply Chain Project is not known and measurable.

Company witness Horton indicated that the amount included in the May 28, 2017 Update for the

project is now based on actual expenditures on the project through April 30, 2017. Tr. Vol. VI,

p. 1216. Although the actual amount spent by the Service Company on the project through April

30, 2017, may now be a known amount, the amount that will be charged to NSTAR and

WMECo for this post-test year project during the rate effective period is not known or

measurable.

Mr. Horton indicated in his testimony that the project will consolidate and standardize the

supply chain process and practices “across each Eversource Energy operating company” and that

the associated costs are charged to the operating companies through the general service company

overhead (GSCOH), which is an adder to service company labor costs. Exh. ES-DPH-1, p. 94.

In calculating the amount of return and depreciation for the new system to be allocated to the

operating companies in this case, the Company’s adjustment includes a “Budgeted Labor

Allocator” for both NSTAR and WMECo. Exh. ES-DPH-4, Sch. DPH-8, May 25, 2017 Update,

pp. 1−2. The actual labor allocators that will be used in allocating these costs to NSTAR and

WMECo are not known and measurable at this time. It is obvious that the project’s costs in this

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case are in flux and there is no way to know what the actual costs to the Companies will

ultimately be.

c) The Company’s Expected Cost Savings Associated with the

Supply Chain Project Implementation Exceed the Annual Revenue

Requirements Associated with the ESC Plant Addition

The Company adjusted its test year operation and maintenance expense to reflect the

costs associated with the Supply Chain Project at the Service Company level, but it did not

consider the cost reductions associated with the project or reflect a reasonable rate of return. The

Company calculated an overall Service Company revenue requirement of $6,157,834 associated

with the project and after allocation to the NSTAR and WMECo operations and maintenance

expenses, the Company’s pro forma adjustments for the post-test year project increases

NSTAR’s pro forma operation and maintenance expense by $1,248,167 and WMECo pro forma

operation and maintenance expense by $237,936. Exh. AG-DR-1, p. 7.

These adjustments fail to recognize the benefits and savings associated with the Supply

Chain Project. In particular, the Project Authorization Form for the Supply Chain Project shows

that the project will achieve direct annual recurring savings at the Service Company level of $5.4

million plus one-time savings at the Service Company level of $2.8 million as a result of

efficiencies and reductions to materials and services. Exh. ES-LML-8, Supp. 1, pp. 141−51. In

addition to these quantified direct savings, the Project Authorization Form notes potential

indirect savings, such as reduced cost of compliance. Id. The cost savings calculations for the

project were conducted as part of the overall project evaluation in deciding to go forward with

the project, and the Company quantified the benefits to the extent that they could be associated

with the implementation. Tr. Vol. XV, pp. 3054−3058. The Company indicates that the cost

savings are anticipated to be real and was part of the lens through which the Company decided to

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initiate and implement the project. Tr. Vol. VI, pp. 1212−1213. The Company’s proposal to

include the return, taxes, and depreciation expense to be incurred by the Service Company for

this project, but not pass any of the resulting savings to customers until the next rate case is

unfair to ratepayers and the Department should not allow it.

As AGO Witness Ramas testified, “if 1) the annual recurring savings of the Supply Chain

Project are taken into account; 2) the one-time savings are spread over a reasonable period; 3)

indirect savings are recognized; and 4) the revenue requirement of the Supply Chain Project is

modified to reflect a more reasonable rate of return; then the savings and benefits for the Supply

Chain project could easily equal, or even surpass, the revenue requirement associated with the

project.” Exh. AG-DR-1, p. 8. In other words, the project is anticipated to have a net negative

impact on the overall revenue requirement if all impacts of the project are considered, reducing

the pro forma cost of service for both of the Companies in this case. The Company did not rebut

Ms. Ramas’ testimony asserting that the savings and benefits could easily equal or surpass the

increase in costs incorporated in the Company’s post-test year adjustment.

Assuming, arguendo, that projected post-test year costs associated with the Supply Chain

Project should be considered for recovery, it is unreasonable and unfair to consider these costs

while completely ignoring the cost savings that will result from the project. Here, the Company

proposed no such offsetting cost savings. The Company wishes to charge ratepayers for the

costs of the project but not allow them to share any of the benefits. Accordingly, the Department

should reject the Company’s one-sided pro forma adjustments to increase the Company’s

operation and maintenance expense.

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d) The Company Has Failed to Consider the Impact That the

Company’s Acquisition of the Aquarion Water Companies Will Have on

the Amounts to Be Charged to NSTAR and to WMECo

As noted above, Eversource Energy has entered into a Purchase and Sale Agreement to

acquire Macquarie Utilities Inc., which owns the Aquarion Water Companies in Connecticut,

Massachusetts and New Hampshire. The transaction is expected to close by December 31, 2017,

before rates go into effect in this case.34 Exh. AG-1. Because the new Supply Chain Project that

is being implemented at the Service Company level will consolidate and standardize the supply

chain process across all Eversource Energy operating companies, the Aquarion Water

Companies will also presumably benefit from this system in the future and will be allocated a

portion of the system costs. To increase expenses for a post-test year service company project

but to not also consider the reduction in the portion of such post-test year project costs that will

be allocated to the Massachusetts electric companies as a result of the Aquarion Water

Companies acquisition would not be fair or reasonable to ratepayers and should not be allowed.

e) The Company Overstates the Expected Costs of the Supply Chain

Project

Even if the Department allows a test-year increase in Service Company costs, which it

should not, the Department should allow only a portion of the proposed test-year increase

because the Company significantly overstates the projected costs of the Supply Chain project. In

its May 25, 2017 Update, the Company revised the rate of return it applies to the Service

Company Information System plant addition in order to base it on the proposed capital structure

and cost rates the Company requests for NSTAR and WMECo in this case. Exh. ES-DPH-4,

34 The prior section of this brief addressing the Aquarion Water Company acquisition does not include adjustments

for the Supply Chain Project since that section only includes adjustments for test year expense and this is a post-test

year addition.

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Sch. DPH-8, May 25, 2017 Update, p. 8. If the Department entertains the Company’s post-test

year adjustment, then at a minimum, it should: (1) reflect ESC’s capital structure; (2) reflect

ESC’s actual cost of debt; (3) reduce the return on equity to that approved in this case; and 4)

reduce the allocation factors used in the adjustment to reflect the impacts of the Aquarion Water

Company acquisition.

In its initial filing, the Company based its adjustment on a projected capital structure for

ESC using a projected equity ratio of 58.62 percent. In its updated filing, the Company revised

the equity ratio to 53.35 percent. However, the Company’s response to Exh. AG-26-2

demonstrates that the actual equity ratio for ESC was only 38.20percent as of December 31,

2015 and 40.28 percent as of December 31, 2016. Additionally, the Company’s updated filing

reflects a pro forma cost of debt of 4.26 percent. However, the response to Exh. AG-26-2 shows

that the actual cost of debt for the Service Company was 1.06percent at December 31, 2015 and

1.13percent at December 31, 2016. Finally, as Company witness Horton agreed, the rate of

return on equity to apply in the post-test year ESC information system adjustment should be

calculated to include the rate of return on equity ultimately approved by the Department in this

case. Tr. Vol. XV, p. 3067.

If the Department allows the adjustment, contrary to the AGO’s recommendation, then

the Department should use ESC’s capital structure (40.28 percent equity as of December 31,

2016) and ESC’s cost of debt rate (which was 1.13 percent as of December 31, 2016) to

determine the Company’s return on the post-test year plant addition. Determining the

Company’s return based on the service company’s capital structure and cost of debt rate is

consistent with the Department’s findings in D.P.U. 15-155 involving a post-test year

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information system plant addition for the National Grid Service Company35 in which the

Department held, “[t]o guard against Massachusetts ratepayers inappropriately subsidizing

operations of NGSC, the Department will recalculate the return on NGSC assets using NGSC’s

capital structure and the 9.9 percent ROE authorized in this instant case.” D.P.U. 15-155, p. 303;

Tr. Vol. IX, pp. 1833–34. Basing the adjustment in this case on an equity ratio that is higher

than the actual ESC equity ratio and on a cost of debt that is higher than ESC’s actual cost of

debt would result in an unfair subsidization of the Service Company’s operations.

f) Summary and Recommendation

The Department should reject the Company’s proposal to include costs associated with

the Service Company’s new Supply Chain information system in the cost of service because the

project is not complete, the total costs of the project are not known and measurable, the

Company has not recognized the savings associated with the implementation of the project that

exceed the project costs, and the Company significantly overstates the costs of the project.

Therefore, the Department should deny the Company’s proposed Supply Chain Project cost

adjustment.

8. CUSTOMERS SHOULD NOT HAVE TO PAY FOR TWO CORPORATE

HEADQUARTERS

Eversource Energy occupies two expensive corporate headquarters in high rent urban

areas, one in downtown Harford, Connecticut and a second at the Prudential Center in downtown

Boston, Massachusetts. The Company has included the lease and the operations and

35 Although the Department did allow the costs associated with a post-test year service company plant addition in

D.P.U. 15-155, the circumstances are much different in this case. Here for example, the post-test year information

systems project was not placed into service by ESC by the date of the hearings and the quantified and expected cost

savings for the project exceed the project expenses (i.e., return and depreciation) the Company is attempting to

include as a post-test year adjustment.

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maintenance expenses of both headquarters in the costs of service in this case. However, it is

neither just nor reasonable to ask Massachusetts customers to pay for the costs associated with

Connecticut.

The Company allocated costs associated with the Hartford, Connecticut headquarters at

56 Prospect Street facility based on the total square footage of floor space occupied by each

business unit. Exh. AG-50-13; Tr. Vol. IV, p. 831. For the rent expense associated with the

Hartford facility, the Company included $110,453 for NSTAR and $18,300 for WMECo. Exhs.

ES-DPH-2 (East), Sch. 18, May 25, 2017 Update, p. 2; ES-DPH-2 (West), Sch. 18, May 25,

2017 Update, p. 2; AG-50-12; Tr. Vol. IV, pp. 829−831. For facility operations and maintenance

expense associated with the Hartford facility, the Company included $89,369.99 for NSTAR and

$8,866.97 for WMECo. Exhs. ES-DPH-2 (East), Sch. 18, p. 2; ES-DPH-2 (West), Sch. 18, p. 2;

AG-50-12; Tr. Vol. IV, pp. 832−33. For the reasons discussed below, the Department should

exclude these costs from the Company’s revenue requirement.

a) The Hartford, Connecticut Headquarters is Unnecessary to

Provide Electric Distribution Service to Massachusetts Customers

The Company failed to provide any evidence that the Hartford headquarters is necessary

for providing electric distribution service to Massachusetts ratepayers. Furthermore, the

Company already has a Massachusetts headquarters location at the Prudential Center Tower in

Boston, Massachusetts with 25,676 square feet of space (more than half the size of a football

field), as well as significant additional office space in its Westwood and New Bedford facilities

for its operations in the Commonwealth. Exhs. ES-DPH-2 (East), Sch. DPH-18, May 25, 2017

Update, p. 2; ES-DPH-2 (West), Sch. DPH-18, May 25, 2017 Update, p. 2; AG-50-15; AG-26-

13; Att. AG-26-13 (a), (b). The Company has provided no evidence for why Massachusetts

ratepayers should pay for the Connecticut headquarters.

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b) The Connecticut Public Utility Regulatory Authority Has

Disallowed Costs Associated with the Unneeded Hartford Headquarters

The Connecticut Public Utility Regulatory Authority (“PURA”) has found that the

headquarters at 56 Prospect Street in Hartford, Connecticut is unnecessary for the operation of

the Company and ruled that Connecticut ratepayers should not pay for any expense associated

with that facility.

When the Company’s affiliate, the Connecticut Light & Power Company (“CL&P”),

tried to recover costs from customers associated with the Hartford headquarters, PURA rejected

the company’s request. Exh. AG-15; PURA 09-12-05, p. 40 (June 30, 2010); Tr. Vol. IV, p.

836. In making its determination, PURA stated, “[t]he Department concludes that CL&P

distribution does not need the additional office space it is allocated due to the purchase of 56

Prospect Street and ratepayers should not have to fund the additional cost.” Id. In a subsequent

rate case, CL&P did not request recovery of costs associated with the Connecticut headquarters.

Exh. AG-15; PURA 14-05-06, p. 81 (Dec. 17, 2014) (“In accordance with the determination in

Docket No. 09-12-05, CL&P did not include $622,939 representing its allocated amount for the

56 Prospect Street, Hartford Corporate Office.”); Tr. Vol. IV, pp. 836−38. PURA has made clear

that Connecticut ratepayers should not be responsible for costs at the Company’s unneeded

facility. Therefore, even in the State of Connecticut, the commission has denied recovery of the

costs of the corporate headquarters in Hartford, because those costs are superfluous and

unnecessary costs.

The Department should exclude all of the costs associated with the Company’s

Connecticut headquarters at 56 Prospect Street in Hartford, Connecticut. Massachusetts

ratepayers should not be required to pay for costs associated with a facility that is clearly

redundant and unnecessary for the provision of their electric distribution service in the

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Commonwealth. Indeed, even PURA has shielded Connecticut ratepayers from the costs of the

Hartford headquarters by denying CL&P’s recovery of those costs through rates. Massachusetts

ratepayers should not be given any less favorable treatment.

Accordingly, the Department should disallow rent expense associated with the Hartford

facility of $110,453 for NSTAR and $18,300 for WMECo, and facility expense of $89,369.99

for NSTAR and $8,866.97 for WMECo.

9. THE DEPARTMENT SHOULD DENY THE COMPANY’S PROPOSED

2018 NON-UNION PAYROLL EXPENSE ADJUSTMENT

The Companies are proposing to include pro forma adjustments to the cost of service for

estimated increases in non-union employee payroll expense that they claim will occur in 2018.

NSTAR is proposing a 2018 payroll adjustment of $1,305,870 for its non-union employees and

its share of Service Company non-union employee expenses. Exh. ES-DPH-2 (East), Sch. DPH-

13, p. 2, line 37. May 25, 2017 Update. WMECo is proposing a 2018 payroll adjustment of

$361,723 for its non-union employees and its share of Service Company non-union employee

expenses. Exh. ES-DPH-2 (West), Sch. DPH-13, p. 2, line 37. May 25, 2017 Update. The

Companies have provided no evidence to support these proposed increases.36

The Department precedent regarding post-test year adjustments for increases in non-

union salaries and wages is well-established. The Department permits such adjustments when a

company demonstrates that: (1) the proposed increase is a reasonable amount; (2) there is an

express commitment by management to grant the non-union increase; and (3) there has been a

historical correlation between non-union and union increases. Fitchburg Gas & Electric Light

Company, D.P.U. 1270/1414, p 14 (1983).

36 The Department allows union employee payroll increases when those increases are supported by contracts with

company management. Cambridge Electric Light Company, D.P.U. 92-250, p. 35 (1993).

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The Companies has not demonstrated that the proposed increases are reasonable. For

both companies, the Company is proposing 2.75 percent increases in salaries. Exh. ES-DPH-2

(East), Sch. DPH-13, p. 2, line 36. May 25, 2017 Update and Exh. ES-DPH-2 (West), Sch. DPH-

13, p. 2, line 36. May 25, 2017 Update. However, in both cases, the Company has not

demonstrated that raises of that magnitude in 2018 are reasonable or needed for that matter.

Indeed, as was demonstrated by the Company in its salary structure analysis, the non-union

employees, on average, are already making more than 2 percent above industry averages for

positions of similar responsibilities. See Exh. ES-SL-6 (NSTAR), Exh. ES-SL-7 (WMECO),

and Exh. ES-SL-8 (ESC). For that reason alone, the Department should deny the Companies

proposed 2018 non-union increases.

Furthermore, the Company has provided no evidence that Eversource’s senior

management is committed to the 2018 payroll increase. The Company provided no affidavit of

the commitment, nor has it provided any sworn testimony from senior management. Ultimately,

the Company provide no proof that the increase is contractual or required.

Therefore, since the Company’s has not demonstrated that the 2018 increases are

reasonable and that there are any contractual or firm commitments from senior management for

the proposed increases, the Department should deny the Company’s proposed 2018 non-union

employee payroll increases. Fitchburg Gas & Electric Light Company, D.P.U. 1270/1414, p. 14

(1983) and Boston Gas Company, D.P.U. 93-60, p. 95 (1992). Furthermore, since many other

adjustments are based on the proposed payroll increase, including the Variable Compensation,

the Life Insurance, the FICA Tax, etc. the Department should adjust those costs downward

proportionately.

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10. “FEE FREE” CREDIT/DEBIT CARD PAYMENT SYSTEM

a) The Department Should Reject the Company’s Proposed “Fee

Free” Credit/Debit Card Payment System Because It Is Inconsistent

with the Provision of Least-Cost Service, creates a Cross-Subsidy, and

Could Result in More Customers Paying High Credit Card Interest

Rates

The Company seeks Department approval of a “fee free” credit/debit card payment

system (“Fee Free Proposal”) that will allow customers to pay their bills electronically without a

transaction fee. Exh. ES-PMC-1, p. 5. The Department should reject the Company’s proposed

“Fee Free Proposal” because it is not “free.” Rather, it is one of the most expensive of the

various methods that customers can use to pay their bills. Customers who do not use the

credit/debit card payment method will be forced to subsidize those that do. This is not a least-

cost service option. The Company’s “Fee Free” Proposal is inconsistent with the Company’s

obligation to provide least-cost service to all of its customers.

Following two rounds of requests for proposals (“RFP”) the Company executed an

agreement with a third-party service provider, SpeedPay Inc., a subsidiary of Western Union, to

provide the services necessary to offer credit/debit card transactions. At the Company’s

expected migration rate of 30 percent of customers over five years, the Company has estimated

an average annual cost of $6 million, for a total five-year cost of $30 million. Exh. ES-PMC-1,

pp. 14-15. The Company proposes that it recover the $30 million cost of this agreement through

distribution rates to be collected from all customers. Exh. ES-PMC-1, p. 8.

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Paying by credit or debit card is currently the most expensive method of payment and

will remain so even after the implementation of the “Fee Free Proposal.”37 See Table 1 and

Table 2 below. Tr. Vol. VI, pp. 1048-49.

Exhs. DPU 13-2, DPU-13-3, AG-54-3, p.2

Exhs. DPU 13-2, DPU-13-3, AG-54-3, p.2. Implementing the “Fee Free Proposal” and

recuperating costs from all customers through base rates is not consistent with the Company’s

obligation to provide least-cost service to its customers.

37 The bank fee for wire transfer payments generally ranges from $25 to $35 at major banks. Although, wire transfer

fees make this method of payment the most expensive method, wire transfers are not often used and almost

exclusively made by business, not residential, customers.

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Furthermore, the “Fee Free Program” costs about 80 times the cost of online bank

transfers and ACH transfers. Because the Company proposes to recover the $6 million annual

cost of the “Fee Free Program” from customers through base rates, the cost of the “Fee Free

Program” will be imposed on all customers when only 30 percent of customers are expected to

adopt the payment method over the next five years. Exh. ES-PMC-1, p. 16. The Company

should instead encourage customers to move to on-line bank payments or ACH payments which

are made at a cost of one to three cents total, instead of the $2.26 cost of the “Fee Free Program.”

Exhs. DPU 13-2, DPU-13-3, AG-54-3, p. 2.

The “Fee Free Program” may even end up ultimately harming customers who pay by

credit card as well. Credit card interest rates typically range between 13 and 25 percent. Tr. Vol.

VI, p. 1064. In 2015, Eversource’s customers made less than 2 percent of their payments by

credit or debit card, but the Company projects that 30 percent of payments will pay by either

credit or debit card as a result of the implementation of the program. Exh. ES-PMC-1, pp. 14–

15, 30. Many of those new customers may ultimately end up paying the high 13 to 25 percent

interest rates on their credit card payment,38 which could end up more than offsetting any benefit

they receive from paying their electricity bills “fee free.” Thus, it is possible that not even

customers who pay by credit card will receive net benefits from the Company’s “Fee Free

Program.”

Accordingly, the AGO recommends that the Department reject the Company’s proposed

“Fee Free Proposal” because it is inconsistent with the Company’s obligation to provide least-

38 The Company did not provide a breakdown of what proportion of the 30 percent of payments it expects to be

made pursuant to the “Fee Free Program” would be made by credit and debit cards, respectively. However, the

Company’s witness did testify that customers currently make 1.02 percent of their bill payments by credit card and

0.66 percent by debit card. Exh. ES-PMC-1, p. 19.

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cost service to its customers, creates cross-subsidization by non-participating customers, and

encourages customers to pay their bills by credit card, which often have high interest rates.

Additionally, the Company also requests that the Department approve the “Fee Free

Program” for NSTAR Gas customers in this docket. Exh. ES-PMC-1, p. 18. The Department

should reject the Company’s request for approval on due process grounds because none of

NSTAR Gas, its customers, or other stakeholders are party to this proceeding. The AGO

recommends that the Department direct NSTAR Gas to submit a separate filing to request

approval of a “fee free” debit/credit payment system.

b) The Proposed Pro Forma Adjustments for Fee Free Payment

Processing Are Speculative and Should Be Rejected

As explained by Company Witnesses Horton and Conner, customers who use credit or

debit cards to pay their bills presently pay $2.25 per transaction to a third-party payment

processing agent to process those bills. The Company proposes to eliminate fees to customers

who use credit or debit cards to pay their bills and to include the cost of processing those

payments in the NSTAR and WMECo base rate revenue requirements. The Company will use a

third party, SpeedPay Inc., a subsidiary of Western Union, to process its customers’ credit and

debit card payments.

The estimated cost of the Fee Free payment processing is based on a proposed contract

with SpeedPay Inc. to process the payments. As explained by Mr. Horton, “[t]he cost for the

Company would be a per transaction amount subject to change over the term of the agreement.”

Exh. ES-DPH-1, p. 52. Based on assumptions regarding the cost per transaction, and the number

of transactions (including the migration of customers from other current payment methods), the

Company estimates that over the first five years of the agreement with SpeedPay Inc., the total

cost will be $30 million, resulting in an average cost of $6 million per year. Of this average

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annual expense, the Company allocates $5,093,091 to NSTAR and $906,909 to WMECo. In its

update of May 25, 2017, the Company recognized minor offsetting cost savings related to the

migration of customers to payment by credit or debit card from other payment methods. After

these offsets, the adjustments result in a net increase to pro forma operation and maintenance

expense of $5,040,200 for NSTAR and a net increase to pro forma operation and maintenance

expense of $897,171 for WMECo.

The proposed adjustments for fee free processing costs rest on uncertainties compounded

by speculation and are not known and measurable. As Mr. Horton acknowledged, at present, it is

not known how many customers will take advantage of the fee free payment option or what the

transaction fee per customer will be (which itself is partially dependent on the number of

customers that migrate to fee free payment processing). Tr. Vol. XIII, pp. 2774-75. In addition,

the Company can only estimate what the offsetting savings will be because it is not known how

many customers will migrate to fee free payment processing. Id., pp. 2775-76.

Given these uncertainties, the proposed pro forma adjustments for fee free payment costs

do not meet the Department’s known and measurable standard for pro forma adjustments and

should be eliminated from the NSTAR and WMECo revenue requirements. The effect of

eliminating these adjustments is to reduce pro forma NSTAR expenses by $5,040,200 and to

reduce pro forma WMECo expenses by $897,171.

11. THE DEPARTMENT SHOULD REJECT THE COMPANY’S PROPOSAL

TO ASSIGN ONE THIRD OF REGULATORY ASSESSMENTS TO BASIC

SERVICE CUSTOMERS

For the test year, NSTAR and WMECo booked $6,713,485 and $1,148,553, respectively,

in distribution-related regulatory assessments for the Department and the AGO. Exh. ES-DPH-

1, p. 90; Exh. ES-DPH-2 (East), Sch. DPH-17, column D; Exh. ES-DPH-2 (West), Sch. DPH-17.

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Those amounts were updated in the Company’s May 25 cost of service update, with totals of

$7,389,985.86 for NSTAR and $1,267,327.11 for WMECo. Exhs. ES-DPH-2 (East and West),

Sch. 17 (May 25 revision). The Company’s current method for allocating regulatory

assessments begins with allocation of a proportion of the assessments to the operating company

(NSTAR or WMECo) based on each company’s share of total intra-state operating revenues.

Exh. ES-DPH-1, p. 90. In discovery, the Company was asked how it currently allocates

regulatory assessments among the rate classes. It responded with an exhibit that shows that it

allocates 100 percent of amounts assigned to the operating company to the various rate classes

using rate base as the allocator. Exh. AG-61-1, Att. AG-61-1(a).

The Company has proposed a new, rather novel formula that first assigns regulatory

assessment costs to basic service customers and then allocates a portion of the remaining costs to

the same basic service customers. The Company proposes to assign approximately one-third of

the regulatory assessment costs to basic service customers and then recover those costs through

the basic service reconciling mechanism. Exh. ES-DPH-1, p. 91. The Company proposes to

allocate the remaining two-thirds to all of the classes, including the classes that contain basic

service customers, using rate base as the allocator. Exh. AG-61-1, Att. AG-61-1(b). The

Company would then recover that two-thirds share through base rates. The Company’s stated

rationale for this change is that 33 percent represents the portion of total intra-state operating

revenues related to basic service in 2015. Exh. ES-DPH-1, p. 91. Coincidentally, the

Company’s new proposal has the effect of artificially reducing its base rate revenue requirement

by a total of $2,563,192 in the initial filing and by $2,822,468 in the revised May 25 filing, while

increasing basic service charges by an equivalent amount.

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The Company’s proposal violates at least two of the Department’s ratemaking principles.

The Department’s rate design policy is based on principles of efficiency and simplicity as well as

continuity of rates, fairness between rate classes and earnings stability. Massachusetts Electric

Company and Nantucket Electric Company, D.P.U. 09-39, p. 401 (2009). The Department has

held that “[f]airness means that no class of consumers should pay more than the costs of serving

that class. Id., p. 402. The Company’s proposal is neither fair nor in accordance with cost

causation principles.

Singling out a particular group of customers from different rate classes for a rate increase

based on the revenues they generate rather than the cost of serving their rate classes is arbitrary

and unfair. The Company provided no evidence that one-third of the work of the Department

and the AGO, as represented by these assessments, is devoted to Eversource basic service

matters. Such evidence simply does not exist.

The specific work that the Department does for basic service customers is minimal

compared to all of work it does to oversee the Company. Regulating basic service should not

include much more than reviewing the responses to requests for proposals as well as the recovery

and reconciliation of the resulting costs. Indeed, basic service should require a relatively small

portion of the Department’s total resources, when compared to the resources required for the

base rate cases, the many reconciliation clauses, the financing cases, energy efficiency plans, and

all of the other proceedings and responsibilities that are required to oversee the Company. There

is no basis for the Company to assume that more than one-third of the Department’s resources

are required to oversee basic service.

Furthermore, the Company’s new assignment formulas falsely assume that customers on

competitive supply require absolutely no Department resources, when in fact, those customers

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require significantly more resources than basic service customers. First, the Department licenses

all competitive electric supply companies in the Commonwealth and plays a significant role in

their oversight. See, e.g., G.L. c. 164, § 1F; G.L. c. 164, § 102C(b); 220 CMR §§ 11.05, 11.07;

see also Interim Guidelines for Competitive Supply Investigations and Proceedings, D.P.U. 16-

156-A (July 6, 2017). Second, the Department has decided to gather data, operate, and maintain

a website to compile the competitive supplier offers to retail customers which again requires

significant resources. Energy Switch Massachusetts, http://www.energyswitchma.gov/ (last

visited on July 20, 2017). Third, the Department receives complaints from town officials and

customer complaints through its consumer division regarding competitive suppliers, which again

requires significant resources. See Initiatives to Improve the Retail Electric Competitive Supply

Market, D.P.U. 14-140, Vote and Order Opening Investigation, pp. 3, 12 (Dec. 11, 2014).

Fourth, the Department adjudicates an increasing number of dockets concerning municipal

aggregation plans. For example, the Department has received eighteen petitions seeking

approval for municipal plans that have been filed in just the first seven months of this year. See,

e.g., Town of Easton, D.P.U. 17-109 (June 30, 2017); City of Marlborough, D.P.U. 17-47 (April

20, 2017); Town of Billerica, D.P.U. 17-44 (April 20, 2017). Clearly, the Department employs

resources for competitive supply customers that equal, if not exceed those required for basic

service customers. Therefore, the Company’s assumption that competitive supply customers

should not be assigned regulatory costs is demonstrably wrong.

The Company’s proposed allocation of 33 percent of regulatory assessment costs to basic

service customers should accordingly be rejected as not supported by the evidence and not in

accordance with the Department’s ratemaking principles. Instead, the Department should order

the Company to continue to allocate all regulatory assessment costs and recover those costs

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through base distribution rates from all customers, using the general allocators that the

Department normally uses.

12. THE PROPOSED PRO FORMA ADJUSTMENT FOR GIS

VERIFICATION COSTS IS SPECULATIVE AND SHOULD BE REJECTED

As described by Company Witness Horton, NSTAR is planning to upgrade its current

Geographic Information System (“GIS”) to improve identification of and response to customer

outages, implement automated communication with customers, and manage the distribution

system. Exh. ES-DPH-1, p. 100. The GIS Verification Project will entail “a full system field

review, data collection, and data assembly into a format that can be uploaded into the Company’s

GIS system.” Id., p. 103. The project is estimated to cost $5,956,381. Exh. ES-DPH-2 (East),

Sch. DPH-20, May 25, 2017 Update. Because the cost will be a non-recurring expense, the

Company is proposing to amortize the cost of the GIS Verification Project over five years. The

annual amortization expense included in the NSTAR revenue requirement is $1,191,276. Id.

The Department should not allow the GIS Verification Adjustment, because the costs

associated with it are not known and measurable. A proposed adjustment to test year expense

requires a finding that the adjustment constitutes a “known and measurable” change to test year

cost of service. See Eastern Edison Company, D.P.U. 1580, pp. 13-17, 19 (1984); Western

Massachusetts Electric Company, D.P.U. 85-270, p. 141 n.21 (1987). A “known” change means

that the adjustment must have actually taken place, or that the change will occur based on the

record evidence. Fitchburg Gas and Electric Light Company, D.P.U. 98-51, p. 62 (1998). A

“measurable” change means that the amount of the required adjustment must be quantifiable on

the basis of record evidence. Id. At the time of the Company’s original filing, the actual cost of

the GIS Verification Project was not known. Exh. AG-19-26. In response to discovery, the

Company stated that it was still in the technical review stage of the project and still analyzing

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and reviewing vendor responses to the RFP to finalize vendor selection. Exhs. ES-DPH-1, p.

103; AG-19-26. Although NSTAR eventually submitted a contract for the GIS Verification

Project, the Company also acknowledged that the contract would be subject to regulatory approval.

Exhs. AG-42-17(c); AG-50-23; Tr. Vol. XIII, p. 2777. In addition, work on the project will not be

completed until 2018, which would be some one and a half to two and a half years after the end

of the test year, and costs associated with the project are likely to change during such a long

period of time. Tr. Vol. XII, pp. 2776−2777.

In addition, the Department should not allow the GIS Verification Adjustment because,

while an annual expense of $1,191,276 is not immaterial, it is not outside the normal “ebb and

flow” of changes in expenses over time for a company the size of NSTAR. See Dedham Water

Company, D.P.U. 1217, pp. 7−9 (1983); Bay State Gas Company, D.P.U. 1122, pp. 46-49 (1982)

(finding adjustments for post-test year changes in revenues should not be made unless the change

is significant).

The expense related to the GIS Verification Project will not be incurred until some two

years after the end of the test year, and is not known and measurable at this time. Further, the

increase in annual expense related to the GIS Verification Project is not outside the normal “ebb

and flow” of changes in expenses over time. Therefore, the Department should reject the pro

forma adjustment for the GIS Verification Project. The effect of eliminating this adjustment is to

reduce pro forma NSTAR expenses by $1,191,276.

13. RATE CASE EXPENSE

The Company has not carried its burden to justify full recovery of its rate case expenses.

The Department has made clear that it views with great and growing concern the costs borne by

electric and gas companies associated with rate case expense and has directed companies to

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control these costs. Massachusetts Electric Company and Nantucket Electric Company, each

d/b/a National Grid, D.P.U. 15-155, pp. 234-35 (2016); NSTAR Gas Company, D.P.U. 14-150,

pp. 224-27 (2015); Fitchburg Gas & Electric Company, d/b/a Unitil, D.P.U. 11-01/11-02, p. 270

(2011); Boston Gas Company/Colonial Gas Company/Essex Gas Company, D.P.U. 10-55, pp.

343-44 (2010). In seeking recovery of rate case expenses, companies must “provide an adequate

justification and showing, with contemporaneous documentation, [that] their choice of outside

services is both reasonable and cost-effective.” D.P.U. 15-155, p. 236, citing New England Gas

Company, D.P.U. 10-114, p. 222 (2010); Boston Gas Company, D.T.E. 03-40, p. 153 (2003).

The Department should disallow the Company’s rate case expense for (1) the Company’s

“second” rate design proposal; (2) costs for its PBRM and Allocated Cost of Service consultants

that exceed the budgets submitted by lower cost bidders on those subjects; and (3) rate case

expense for its temporary employees.

a) Ratepayers Should Not Pay for Rate Design Twice

The Department should disallow all of the Company’s rate case expense associated with

its “second” rate design proposal. The Company may only recover for rate case expense that is

reasonable, appropriate, and prudently incurred. D.P.U. 15-155, p. 234, citing D.P.U. 10-114,

pp. 219-20; Bay State Gas Company, D.P.U. 09-30, p. 227 (2009).

It would be inappropriate for ratepayers to pay for the Company’s imprudence in making

one rate design proposal in its initial filing and then developing and supporting a completely new

rate design proposal in the middle of the case. In its initial filing, the Company submitted

testimony regarding an increase in base distribution rates as well as multiple other complex

issues to be determined, such as a PBRM, a merger and consolidation of WMECo and NSTAR,

and $400 million in future capital spending on grid modernization. See generally, Exhs. ES-

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CAH-1; ES-GMBC-1; ES-PBRM-1; ES-RDP-1. The Department and intervenors issued over a

hundred of sets of information requests combined, including dozens of questions regarding rate

design. The Company’s rate design panel filed testimony and rebuttal testimony. Exhs. ES-

RDP-1; ES-RDP-Rebuttal-1. However, on June 1, 2017, the Company chose to submit a

“refined rate design” proposal and supporting documents. Exhs. ES-RDP-2 (ALT1); ES-RDP-3

(ALT 1); ES-RDP-5 (ALT1); ES-RDP-6 (ALT1); ES-RDP-7 (ALT1); ES-RDP-8 (ALT1); ES-

ACOS 2-6 (ALT1). This new rate design was substantially different than the proposal in its

original filing and rebuttal testimony. As the Department correctly found, this new filing

required an entirely new discovery period and evidentiary hearing. Interlocutory Order on

Attorney General’s Motion to Protect Intervenors’ Due Process Rights, D.P.U. 17-05, pp. 12-14

(June 9, 2017). The Company did not appeal the Department’s order.

Due to the Company’s own imprudence, this case has now extended beyond the original

schedule, requiring further analysis by the Company’s rate design experts. Several more sets of

information requests have been issued on rate design and the Company will now have to prepare

for evidentiary hearings with their rate design panel, incurring additional rate case expense that

the Company seeks to recover as part of its rate case expense.

The excess rate case expense for this additional work should be born solely by the

Company because this additional work was due directly to the Company’s own imprudence. The

Company was solely responsible for the development of its rate design proposal in its initial

filing, which it later chose to replace with a new rate design on the eve of evidentiary hearings.

These expenses go well beyond the typical rate case expenses. Should the Company be allowed

to recover these extra expenses, it will benefit directly by strategically delaying a supplemental

filing and forcing an additional hearing. The Department has consistently held that it requires

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companies to contain rate case expenses. See, e.g., D.P.U. 15-155, p. 234, citing Fitchburg Gas

and Electric Light Company, D.P.U. 07-71, p. 99 (2008); D.T.E. 03-40, pp. 147-48; Fitchburg

Gas and Electric Light Company, D.T.E. 02-24/25, p. 192 (2002). Yet, the Company’s actions

here have accomplished the opposite. Accordingly, the Department should disallow the recovery

of these expenses.

b) The Company’s Rate Case Expense for its PBRM and Allocated

Cost of Service Experts Is Excessive

Moreover, the Department should disallow a portion of the Company’s rate case

expenses for its PBRM and Allocated Cost of Service experts because the Company’s expenses

are excessive. In seeking recovery of rate case expenses, companies must “provide an adequate

justification and showing, with contemporaneous documentation, [that] their choice of outside

services is both reasonable and cost-effective.” D.P.U. 10-70, p. 153; see also D.T.E. 02-24/25,

p. 192 citing D.T.E. 98-51, p. 61; D.P.U. 07-71, pp. 139-40. The Company bears the burden to

demonstrate that its choices of outside consultants and legal service provider are reasonable and

cost-effective. D.P.U. 15-155, citing Boston Gas Company, D.P.U. 10-55, p. 343 (2011); D.P.U.

09-30, pp. 230-31; D.T.E. 03-40, p. 153. The Department has explained that a company need not

go with the lowest bidder, provided however, that “[i]f a company engages an outside consultant

or legal counsel who is not the lowest bidder in the competitive bidding process, the company

must provide adequate justification of its decision to do so.” D.T.E. 03-40, p. 153.

Here, the Company failed to meet its burden to prove that there was adequate justification

for not selecting the lowest bidder for its PBRM and Allocated Cost of Service experts. The

Company’s PBRM expert, Christensen Associates, and allocated cost of services expert,

Concentric, were not the lowest bidders. Yet, there is nothing in the record that provides

adequate justification for selecting Christensen Associates and Concentric over lower cost

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bidders. Indeed, the lower cost bidders for the Company’s PBRM and allocated cost of service

work each had substantial utility regulatory experience and expert familiarity in their respective

subject matters. Atts. AG-4-5(l), (k) CONFIDENTIAL.

The Company has also failed to adequately control its costs for its PBRM and Allocated

Cost of Service experts. As of the beginning of April, Christensen Associates already submitted

invoices totaling nearly $300,000. Atts. AG-4-10(c) (Supplemental 1, 2 & 3). Concentric

submitted invoices totaling over $570,000. Atts. AG-4-10(d). These totals do not include

evidentiary hearings and any work on the Company’s briefs, and yet both Christensen Associates

and Concentric are each exceeding the budgets in their original bids. Atts. AG-4-5(n), (i)

CONFIDENTIAL.

Accordingly, the Department should disallow all rate case expense for its PBRM and

Allocated Cost of Service consultants that is in excess of the budget submitted by the lower cost

bidders for those subject areas. Atts. AG-4-5(l), (k) CONFIDENTIAL. This is the appropriate

result because the Company failed to adequately justify its selection of its PBRM and Cost of

Service consultants over lower cost bidders, and because the Company failed to control those

consultants’ costs after they were selected.

c) The Company Should Not Recover Rate Case Expense for Its

Temporary Employees

The Department should disallow the Company’s rate case expense associated with

temporary employees. It is not reasonable and prudent to recover these costs from ratepayers

because ratepayers already pay for this work by funding the Company’s Rates and Revenue

Department and because the timesheets submitted by the Company suggest that the Company

has included non-rate case work as part of its expense associated with temporary employees.

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First, the Department should disallow the Company’s temporary employee costs because

the Company already has a full Rates and Revenue Requirements Department. The Company

had between 11 and 13 full-time employees in its Rates and Revenue Requirements Department

during 2015 and 2016. Att. AG-47-6. This staffing level should have been sufficient for the

Company to prepare its rate case. Indeed, other investor owned utilities have required few or no

temporary employee assistance for their rate case expense. See, e.g., D.P.U. 15-155, pp. 228-29

(no request for temporary employee rate case expense); D.P.U. 14-150, pp. 219-20 (citing DPU

21-20); D.P.U. 10-55, p. 313 (citing RR-DPU-46(A) (Supp. 3)); Massachusetts Electric

Company, D.P.U. 09-39, p. 278-79 (2009). Here, Eversource requests that the Department allow

expenses for seven temporary employees over an eighteen-month period. Exhs. AG-4-10; Atts.

AG-4-10(i); AG-4-10(i) (Supplemental 2 & 3); AG-47-3; AG-47-5. It would not be appropriate

to charge ratepayers for these temporary employees when ratepayers are already fully funding

Eversource’s sizeable and capable Rates and Revenue Requirements Department. In addition,

over half of the temporary employees have retired from the Company. Exhs. DPU-21-20; AG-

47-4(c); AG-47-4(d); AG-47-4(f); AG-47-4(g). This means that ratepayers are essentially

paying for these temporary employees twice: once via a pension payment from their retirement

and again for the work they are currently performing. Accordingly, the Company has not met its

burden that these expenses are reasonable or cost-effective, and the Department should disallow

them.

Even if it was reasonable and prudent to charge ratepayers for these temporary

employees, the Department should still disallow these costs from rate case expense because

Company has not satisfied its burden to prove that they relate solely to the rate case. The

Company uses the same firm to provide temporary employees on a recurring basis, not just for

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the current proceeding. Exh. DPU 21-20. The Company identifies seven temporary employees

to provide assistance in preparing for the rate case. Exhs. DPU-21-20; AG-47-3; AG-47-4. Four

of these temporary employees were former employees of the Company who are now retired.

Exhs. DPU-21-20; AG-47-4(c); AG-47-4(d); AG-47-4(f); AG-47-4(g). A temporary employee

who the Company did not identify as working on the rate case appears on the Company’s

timesheets starting January 2017. Exhs. Atts. AG-4-10(i) (Supplemental 2 & 3)

CONFIDENTIAL; DPU-21-20; AG-47-3; AG-47-4. Coincidentally, her regular bill rate is also

the highest at nearly three times more than the next highest bill rate. Exhs. Atts. AG-4-10(i)

(Supplemental 2 & 3) CONFIDENTIAL. Because the Company uses temporary employees

from this firm on a recurring basis, this temporary employee’s timesheets suggest that other

temporary employee timesheets submitted as rate case expense include time worked on other

company matters and not just its rate case. Moreover, the hours worked by the temporary

employees that the Company did list as working on the rate case are also questionable because

there is no indication in these timesheets that their time was spent solely for rate case issues.

These temporary employees may have worked on projects for the Company outside of this

proceeding, yet their time was billed identically as hours worked per day, and the Company

includes all of their time as part of its rate case expense.

Accordingly, the Company has failed to meet its burden to prove that its temporary

employee expense was reasonable and prudent and the Department should disallow it from the

Company’s rate case expense.

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E. DEPRECIATION

The Company’s proposed depreciation accrual rates are excessive and the Department

should adjust them. The AGO’s Depreciation Witness, William W. Dunkel, identified several

issues with the Company’s proposed Depreciation rates related to net salvage.39 First, the

Company’s current depreciation rates have created a large and growing Percent Reserve, and the

Company’s proposed depreciation rates will continue to grow the reserve to the detriment of

ratepayers. Second, the “net salvage” values proposed by Company witness John J. Spanos are

several times what the Company actually incurs for net salvage and would produce significantly

higher depreciation accrual rates than the current net salvage values, everything else being equal.

Third, Mr. Spanos overstates the Company’s depreciation expense by including future inflation

in his net salvage calculations. Fourth, Mr. Spanos’s proposal to inappropriately collect future

inflation will harm ratepayers. As discussed in more detail below, the Department should reject

the Company’s proposed net salvage values and adopt Mr. Dunkel’s recommendations. In the

alternative, the Department should apply gradualism and limit any change in the net salvage

value accrual rates to no more than 20% of the existing net salvage accrual rate.

1. EVERSOURCE’S PERCENT RESERVE IS LARGE AND GROWING

It is undisputed that the Company’s current depreciation rates have been growing the

“Percent Reserve.” Book Percent Reserve is an important factor in depreciation calculations.

See Att. RR-DPU-26, p. 65 (Public Utilities Depreciation Practices published by NARUC). The

Percent Reserve measures the portion of depreciated plant that has already been recovered from

39 Mr. Dunkel’s testimony concerned only the Company’s proposed net salvage, and he did not provide any

testimony on the Company’s lives, depreciation formulas, or accounting practices related to depreciation. See Exh.

AG-WWD-1, p. 43. Mr. Spanos acknowledged that other than the net salvage estimates, Mr. Dunkel “has not

recommended changes to the service life estimates or to other aspects of the studies.” Exh. ES-JJS-Rebuttal, pp. 1–2.

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past ratepayers. Id., pp. 64–65.40 As Mr. Dunkel testified, “[w]hen the depreciation accruals are

significantly higher than the actual incurred net salvage and the actual retirements, the

depreciation reserve grows rapidly.” Exh. AG-WWD-1, p. 19. For NSTAR and WMECo

combined, the book Percent Reserve was 28.2 percent at the time of the prior depreciation

studies. Id., p. 20. However, the book Percent Reserve grew to 31.8percent in the June 30, 2016

depreciation studies—an increase of 3.6 percent. Id.41 During the time period between the

Company’s prior depreciation studies and the depreciation studies filed in this case, the

depreciation accruals have been $19.2 million per year higher than needed to maintain a constant

Percent Reserve. Id.; see Exh. AG-WWD-5 (calculating the changes in the Percent Reserve);

Exh. AG-WWD-13 (containing documents from both studies supporting the calculations of the

changes in the Percent Reserve). The Company does not dispute the size of the Percent Reserve

or the fact that it is growing. In addition, the amount actually in the overall book Depreciation

Reserve is now at least at the amount it theoretically should be at. Exh. AG-WWD-7; Exh. AG-

WWD-1, pp. 23–24.

Mr. Spanos’ proposed depreciation rates would continue to grow the Percent Reserve by

$11.2 million per year (down from $19.2 million in current rates). Exh. AG-WWD-1, p. 20;

Exh. AG-WWD-5; See Exh. ES-JJS-1, p.4 (showing $8.0 million difference between current and

proposed rates). The Company provides no reason why it should continue to collect millions of

dollars a year in depreciation expense to continue growing the Percent Reserve. The fact that the

Percent Reserve continues to grow confirms that the Company’s depreciation accruals are

40 The Percent Reserve is calculated by dividing the “book depreciation reserve” by the “book cost of the Gross

Plant.” Id., p. 65. 41 Moreover, the book Percent Reserve is actually slightly higher than the amount that is in the theoretical Percent

Reserve. Exh AG-WWD-7. The Company’s own theoretical reserve analysis confirms that the overall Book

Reserve is slightly higher than the theoretical reserve. Exh. AG-6-20; Exh. Att. AG-6-20(a); Exh. Att. AG-6-20(b).

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significantly higher than the actual incurred net salvage and the actual retirements. The

Department should, therefore, find that there is no reason to charge ratepayers millions of extra

dollars per year to further increase the Percent Reserve and adjust the Company’s depreciation

rates accordingly.

2. THE COMPANY PROPOSES TO CHARGE RATEPAYERS ALMOST

THREE TIMES THE NET SALVAGE ACTUALLY INCURRED

The Company’s proposed net salvage factors in this proceeding are much higher than the

amounts the Company actually incurs for net salvage and also represent a significant increase

from the Company’s currently approved net salvage factors. The Company’s proposal to collect

far in excess of what the Company actually incurs for net salvage would exacerbate the

Company’s large and growing Percent Reserve.

When all of the NSTAR and WMECo distribution accounts are included, Company

records show that the amount the Company actually incurs for net salvage averages $14,755,633

per year. Exh. AG-WWD-1, p. 10. However, under the Company’s proposed depreciation rates,

the Company would charge ratepayers $42,726,188 per year for net salvage for these same

accounts. Id. This amounts to charging ratepayers 2.9 times more for net salvage than the

Company actually incurs. Id., p. 15.

When considering individual accounts, the amount that the Company proposes to

overcharge customers can be considerably higher. For example, for NSTAR Account 366-

Underground Conduit, the Company’s own documents show that the net salvage amount actually

incurred averages $467,417 per year over the three most recent years. Exh. AG-WWD-1; Exh.

AG-WWD-8; Exh. ES-JJS-2, p. 159. However, the Company proposes to charge ratepayers

$4,807,723 annually for net salvage for this account. Exh. AG-WWD-10; Exh. AG-WWD-1, pp.

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10–14. For this account, therefore, the Company proposes to charge over ten times as much for

net salvage in the annual depreciation expense as the annual net salvage it actually incurs.

Mr. Dunkel performed a similar comparison showing the Company’s proposed rates

versus current rates for each distribution plant account. Exh. AG-WWD-1, p. 15. When all of

the Company’s distribution accounts are included, the Company’s proposal amounts to charging

ratepayers 2.9 times as much for net salvage as the average net salvage the Company actually

incurred. Mr. Spanos did not deny these numbers, and agreed that “net salvage accruals

currently exceed net salvage costs.” Exh. ES-JJS-Rebuttal, p. 42.

Furthermore, the Company’s proposed net salvage factors are significantly higher than

the currently approved net salvage factors. Overall, the Company’s proposed changes to the

NSTAR and WMECo distribution net salvage factors would increase the annual depreciation

accruals by a total of $3.7 million over the current net salvage factors. Exh. AG-WWD-1, p. 17.

For example, while NSTAR Account 366-Underground Conduit has a currently approved net

salvage factor of negative 35 percent, Mr. Spanos proposes a negative 60 percent net salvage

factor. Id., p. 18. The Company’s proposed net salvage factor of negative 60 percent produces

an annual accrual that is $2,526,650 higher than produced by the currently approved negative 35

percent net salvage factor for this one account. Id.

Mr. Spanos’ proposal is also out of step with other similarly situated utility companies.

The survey data that Mr. Spanos provided in response to Exhibit AG-6-17 indicates that the

average net salvage percent for Account 366-Underground Conduit is negative 22 percent for the

utilities in the survey. Exh. AG-WWD-1, p. 25. This negative 22 percent is significantly less

negative (and thus would result in a lower depreciation expense attributable to net salvage) than

the negative 60 percent net salvage factor Mr. Spanos proposes in this proceeding. Ultimately,

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the Company’s proposal would result in excessive depreciation accrual rates and should be

rejected.

3. MR. SPANOS INAPPROPRIATELY CHARGES TODAY’S

RATEPAYERS FOR FUTURE INFLATION

The principal reason why the Company’s net salvage analysis produces excessive

depreciation accrual rates is the fact that Mr. Spanos includes future inflation in his net salvage

calculations. In conducting his net salvage calculations, Mr. Spanos gave more weight to net

salvage “as a percent of retirement,” which includes future inflation. Exh. AG-WWD-1, p. 36;

see Exh. ES-JJS-1, p. 13 (noting that the “statistical analyses consider the cost of removal and

gross salvage ratios to the associated retirements…” (emphasis added)).42 The problem with

giving significant weight to the “as a percent of retirement” analysis is that this percentage is

calculated using inconsistent dollar values due to inflation. Exh. AG-WWD-1, pp. 34–36.

Regarding the use of “percent of retirement” or “salvage ratio” Depreciation Systems, a standard

Depreciation textbook provides:

One inherent characteristic of the salvage ratio is that the numerator

and denominator are measured in different units; the numerator is

measured in dollars at the time of retirement, while the denominator

is measured in dollars at the time of installation.

Exhibit AG-WWD-Surrebuttal-1, p. 4, n. 10. To avoid the mixture of different dollar

values, Depreciation Systems states that “[a] first step in salvage analysis is to convert the

observed dollars to constant dollars.” Id., pp. 2–3; Exh. AG-WWD-Surrebuttal-2.

Mr. Spanos, however, failed to conduct the “first step” to “convert the observed dollars to

constant dollars.” See id. Rather, it is clear from the results of Mr. Spanos’ studies that he relied

42 The standard net salvage analysis for an account produces two types of results (expressed in two separate columns

in the depreciation studies): the results can be stated in terms of “dollars” and “as a percent of retirement.” Exh.

AG-WWD-1, pp. 33–34.

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heavily on the mixture of different dollar values inherent in the “as a percent of retirement”

analysis to produce his recommendations. Exh. AG-WWD-1, p. 36. Mr. Spanos’ analysis

produces misleading results because it includes the impact of inflation that occurs between the

time the investment goes into service and the time it retires. Exh. AG-WWD-1, p. 37, citing

Depreciation Systems, p. 53.

For example, in 2013, WMECo retired plant in Account 364 that had an original cost of

$27,766 when it was installed in the year 1955. Exh. AG-WWD-1, p. 38. This $27,766 original

cost is therefore in year-1955 dollars. Id. According to the Consumer Price Index-U, the year-

1955 dollars are worth 8.7 times the year-2013 dollars. Id. Obviously, it would have been

unreasonable to charge someone back in 1955 (in more valuable year-1955 dollars) for the net

cost of removal based on what the net cost of removal would be in lower-value year-2013 dollars

(fifty-eight years in the future). Exh. AG-WWD-1, p. 39.

However, Mr. Spanos proposes to do just that. If the Department adopts Mr. Spanos’

recommendation, the result would be to charge ratepayers in today’s dollars based upon what the

lower value of the dollar is expected to be 28 years in the future. Tr. Vol. IX, pp. 1772–73. Mr.

Spanos’ failure to convert to constant dollars results in net salvage recommendations that are far

more negative than they would be otherwise. For example, for WMECo Account 364, Mr.

Spanos recommends negative 60 percent net salvage for WMECo Account 364. As Mr. Dunkel

explained at evidentiary hearings, if Mr. Spanos had properly converted to constant dollars, he

would have calculated only negative 37 percent net salvage for this account. See Tr. Vol. IX, p.

1771–73.

Calculating net salvage based on a cost in dollars that are worth only a fraction of today’s

dollar, as Mr. Spanos does, does not result in a cost-based rate. NARUC’s Public Utility

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Depreciation Practices clearly states that future inflated costs should not be used. Att. RR-DPU-

26, pp. 21–22. Specifically, discussing the “Impact of Inflation and Deflation” NARUC states:

A cost depreciation base conforms to the accepted accounting

principle that operating expenses should be based on cost and not be

influenced by fair value estimates nor by what costs may be at some

future date.

Id. (Emphasis added). Accordingly, the Department should reject Mr. Spanos’ proposed net

salvage factors, which include future inflation, and adopt Mr. Dunkel’s proposed net salvage

factors, which do not.

4. RATEPAYERS WILL BE HARMED BY THE COMPANY’S PROPOSAL

The Company’s request to inappropriately charge for future inflation for its net salvage

expense will harm ratepayers. Mr. Spanos’ proposal creates a non-cost based subsidy, whereby

present ratepayers pay higher depreciation rates today, and ratepayers in the future may receive

benefits in terms of a smaller rate base and lower returns.43 Individual ratepayers who pay the

subsidy may move to another service territory before any benefits are realized. Tr. Vol. IX, p.

1793. Even ratepayers who stay in Eversource’s service territory will be harmed by Mr.

Spanos’s proposal. As Mr. Dunkel testified, the Federal Reserve Bulletin reported that “38.1

percent of families held credit card debit in 2013. Exh. AG-WWD-Surrebuttal-1, p. 35. The

average interest rate on credit card balances was 12.35 percent in 2016 according to the Federal

Reserve. Id., p. 36. These families would be better off financially by using any extra funds to

pay down their credit card balances rather than paying extra in their electricity rates in order to

43 Pursuant to current Department ratemaking policy, the Department will deduct any excess depreciation expense

from the Company’s rate base in the Company’s next base rate case, which will result in the Company receiving a

lower return.

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secure a possible “benefit” of a lower future rate base for Eversource. Id.; Tr. Vol. IX, pp. 1793–

94.

Mr. Spanos’ proposed subsidy has no apparent public policy purpose. The entire purpose

of the subsidy appears to be Eversource’s interest in receiving more money up front. Tr. Vol.

IX, pp. 1791–94.

5. THE DEPARTMENT SHOULD ADOPT MR. DUNKEL’S

RECOMMENDATIONS

Mr. Dunkel’s recommended depreciation rates would help stem the increase in the

Percent Reserve and would result in a lower depreciation expense to be recovered from

ratepayers. Mr. Dunkel performed an account by account analysis considering the current

approved rates, gradualism, the average annual net salvage actually incurred by account in the

most recent three years, and a different band showing the average annual net salvage actually

incurred by account in the most recent five years. Tr. Vol. IX, pp. 1758–60. Separately for each

distribution account Mr. Dunkel compared the accruals for net salvage that would result from his

proposed net salvage factors to the average annual net salvage actually incurred by account.44

Exh. AG-WWD-1, Table 2, p. 28.

The net salvage factors Mr. Dunkel recommends are shown on Table 3 of Mr. Dunkel’s

direct testimony and reproduced below. Exh. AG-WWD-1, Table 3, p. 31.

44 This method of comparing the accruals for net salvage that would result from the proposed net salvage factors to

the average annual net salvage actually incurred is the same net salvage analysis method adopted in the recent final

decision of the Public Utilities Regulatory Authority in Connecticut in Docket No. 16-06-04. Exh. AG-WWD-1, pp.

16–17.

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These “AGO Proposed” net salvage factors produce the accruals for net salvage shown on Table

2 in Mr. Dunkel’s testimony. Id., Table 2, p. 28. When all of the Company’s distribution

accounts are included, Mr. Dunkel includes in the annual depreciation accrual 2.2 times as much

for net salvage as the average net salvage actually incurred, as opposed to the Company’s

proposal of 2.9 times the amount actually incurred.45 Overall, Mr. Dunkel’s proposal would

produce a depreciation expense that is $9,511,174 less than the Company’s proposal.

45 It should be noted that the annual accrual amounts for net salvage shown on Table 2 are calculated using the

investments as of June 30, 2016. Exh. AG-WWD-3, p. 1. These accrual amounts would not remain fixed over

time. Because an accrual rate (not a fixed dollar amount) is recommended, if the Plant in Service grows in the future,

the accrual rates times the higher Plant in Service would produce higher dollar accrual amounts. Exh. AG-WWD-1,

p. 28, n. 39.

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The Department should approve Mr. Dunkel’s net salvage factors in order to “move in

the direction of a more reasonable relationship between the depreciation accrual for net salvage

that is charged to the ratepayers compared to what the Company actually incurs for net salvage.”

Exh. AG-WWD-1, p. 26. This would be a gradual improvement, taking into consideration the

interest of ratepayers as well as the Company’s shareholders.

6. IN THE ALTERNATIVE, THE DEPARTMENT SHOULD EMPLOY

GRADUALISM AND NOT ADOPT ALL OF THE COMPANY’S PROPOSED NET

SALVAGE FACTORS

In this proceeding, Eversource proposes net salvage factors that are significantly more

negative than the net salvage factors that are part of its current rates. Even if the Department

elects not to adopt Mr. Dunkel’s recommendations, it should nonetheless adopt net salvage

factors that are less negative than the factors that Mr. Spanos proposes under the principal of

gradualism. The Department considered gradualism when evaluating the reasonableness of a

company’s proposed net salvage factors. See Fitchburg Gas and Electric Light Company,

D.P.U. 15-80/15-81, pp. 217–18 (2016).

In this case, Mr. Spanos proposes making several of the net salvage factors for some of

the Company’s most significant accounts much more negative than the Company’s previously

approved factors. See Table 3, supra; Exh. AG-WWD-1, Table 3, p. 31. For example, Mr.

Spanos proposes to change the net salvage factors for WMECo Accounts 364 and 365 (Poles and

Overhead Conductors, respectively) from negative 40 percent to negative 60 percent and

WMECo Account 366 (Underground Conduit) from negative 15 percent to negative 50 percent.

Id. Mr. Spanos states that he based his net salvage recommendations on a “combination of

statistical analyses and informed judgment.” Exh. ES-JJS-1, p. 13. However, even assuming

that his methodology is correct (which, as discussed above, it is not) it is clear that that Mr.

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Spanos did not sufficiently incorporate the concept of gradualism in making some of his

recommendations. By contrast, in D.P.U. 15-80/15-81, Fitchburg Gas and Electric Light

Company (“Fitchburg”) provided evidence that one of its accounts had an actual net salvage of -

135 percent, and yet, employing gradualism, Fitchburg proposed changing its approved net

salvage factor by only negative 10 percent (from negative 70 percent to negative 80 percent).

See D.P.U. 15-80/15-81, pp. 217–18. Accordingly, if the Department declines to adopt Mr.

Dunkel’s proposed net salvage factors, the Department should similarly limit the Company’s

changes here under the principle of gradualism. A reasonable guideline to effectuate gradualism

would be to limit any change in the net salvage value accrual rates to 20 percent of the existing

net salvage accrual rate. For example, if the Department found it necessary to increase a net

salvage factor of negative 50 percent, the new accrual rate should be no more than negative 60

percent – a 20% increase (-50% x 1.20 = -60%). Employing gradualism will ensure that any

depreciation accrual rates approved in this proceeding are measured and incremental, and will

provide for continuity in rates.

F. VEGETATION MANAGEMENT

1. INTRODUCTION

Eversource makes two proposals relating to its vegetation management activities. First, the

Company proposes a two-staged Resiliency Tree Work (“RTW”) pilot program for: (1) 2017; and

(2) 2018 through 2022. Second, the Company seeks to annualize the vegetation management

expense incurred by NSTAR during the test year. That is, due to the split test-year ending June 30,

2016, coupled with, beginning in 2016, the Company’s changed accounting treatment of enhance

trimming costs, NSTAR’s base distribution rates include “approximately one-half of the actual

level of expense actually incurred.” Exh. ES-VLA-1, p. 17. In the first instance, the Company is

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advancing a solution in search of a problem. In the second instance, the AGO agrees that the

Company should be allowed an annualization adjustment, but the Company should not have been

capitalizing NSTAR’s enhanced trimming costs in the first place, which then necessitated an

accounting change in 2016, when the Company first began to expense NSTAR’s ETT vegetation

management costs.

a) Reliability Indices for Eversource

Vegetation management is an important factor contributing to an electric distribution

company’s system reliability. Eversource reported that both NSTAR and WMECo are currently

counted among the top-tier utilities for reliability performance. Exh. AG-20-29. That is, for both

the System Average Interruption Duration Index (“SAIDI”) and the System Average Interruption

Frequency Index (“SAIFI”), NSTAR and WMECo placed in the first-quartile, among major U.S.

electric distribution companies, which is indicative of a successful vegetation management

program. Indeed, since 2012, when NSTAR implemented ETT specifications on all primary

sections of circuits, NSTAR has placed in the first-quartile for both SAIDI and SAIFI. Exhs. ES-

VLA-1, p. 11 and AG-GLB-1, p. 24. Equally compelling, the Company’s improved vegetation

management practices for WMECo have resulted in better reliability performance. Whereas, prior

to 2015, WMECo did ETT predominantly on just poor-performing circuits, now WMECo deploys

ETT practices to the backbone of the system, resulting in first-quartile accolades for 2015. Tr. Vol.

V, p. 895; Exh. AG-GLB-1, p. 24.

The Company’s already fulsome vegetation management programs are having

demonstrated positive impacts on system reliability, and are in-line with industry practices.

Notably, however, National Grid in Rhode Island (“NGrid RI”), a peer utility with a similar

vegetation management program, is spending less money on vegetation management per circuit-

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mile pruned than both NSTAR and WMECo, yet NGrid RI has ranked in the first-quartile since

2012. Exh. AG-GLB-1, p. 26. Thus, the Department should be troubled by Eversource’s request

in this case to significantly increase its annual spending on vegetation management. Rather than

proposing to double its annual vegetation management spending, Eversource should be looking for

ways to economize and perform its vegetation management program activities more efficiently,

like NGrid RI.

b) Eversource Arborists

Currently, the Company employs a team of some twenty-five arborists, who identify hazard

or risk trees for removal along the Company’s circuits. Tr., Vol. V, pp. 897-899. The arborists are

assigned to a defined geographical location, which fosters relationships with Town officials and

tree wardens, and breeds familiarity with the trees and vegetation within their assigned location.

Tr., Vol. V, pp. 898-900. In addition, after the Company’s contractors have performed their

vegetation management responsibilities at their assigned job sites, “[a]rborists conduct field

reviews of all work areas and document any areas of non-compliance by location, correlating the

locations onto circuit maps for the East and West systems.” Exh. ES-VLA-1, p. 14. Arborists are

responsible for auditing the circuits in their designated areas to confirm that the circuits have been

trimmed to the Company’s specifications. Id.; Tr., Vol. V, p. 958. In addition, Company

supervisors and managers “do audits and ride-alongs with the arborists as well as they’re looking at

it.” Tr., Vol. V, p. 961.

The Company is performing quality control on 100 percent of all the vegetation

management work performed on its system. Tr., Vol. V, pp. 903-904. Furthermore, the Company

is in the process of implementing a geographic information system (“GIS”) based system to allow

its arborists to electronically upload their field work and observations into a database so that the

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Company will be able to track hazard trees and other information gathered by the arborists. Tr.,

Vol. V, pp. 905-906.

Today, all of the Company’s circuits are on a four-year trimming cycle, designed to prune

every circuit once every four years. Exh. ES-VLA-1, p. 11. The Company’s pruning

specifications provide for certain minimum distances between all vegetation and power lines.

Because the Company’s arborists are surveying all work areas along the Company’s distribution

system at least twice during the trimming cycle (i.e., before and after vegetation management work

is performed), it stands to reason that the vegetation surrounding all of the Company’s circuits

along its distribution system are thoroughly inspected by arborists every four years. Tr., Vol. V,

pp. 904-905. In fact, at the end of each four-year trimming cycle arborists will have inspected all

7,946 miles of overhead primary miles for NSTAR and all 3,270 miles of overhead primary miles

for WMECo. Tr., Vol. V, p. 927.

2. RTW PILOT PROGRAM

Currently, 7,445 miles of NSTAR’s primary distribution lines have been pruned to

Enhanced Tree Trimming (“ETT”) clearance zone dimensions of 10 feet x 10 feet x 15 feet. Exh.

ES-VLA-1, pp. 18-19. WMECo’s tree trimming standards, on the other hand, are a blend of ETT

and SMT clearance specifications.46 Exh. ES-VLA-1, p. 13. Notwithstanding the different

clearance zone dimensions, all distribution circuits across the Company’s entire Massachusetts

territory are trimmed on a four-year trimming cycle. Exh. ES-VLA-1, pp. 11, 19. Eversource’s

RTW pilot program aims to expand pruning clearance specifications and tree removal as a means

to improve reliability. Exhs. AG-11-14, p. 1 and AG-20-33(a).

46 Standard clearance specification for Schedule Maintenance Trim (“SMT”) is 8 feet x 8 feet x 12 feet. Exh. ES-

VLA-1, p. 11.

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If RTW clearance specifications are implemented, the Company will expand clearance

zone specifications to “15 feet to the side of the wire and 25 feet above the wire.” Exh, AG-11-14;

see Attachment AG-11-14 for diagrams of clearance zone dimensions. The Company wants to

apply the wider RTW specification to “at risk” circuits in the name of reliability, but the Company

admits that it does not know whether the wider clearance zone will result in improved reliability.

Exh. AG-11-14, p. 1. Furthermore, with reliability performance being in the first-quartile, it is

unlikely the Company will be able to demonstrate any reliability improvement. Indeed, wider

clearing zones are customarily relied upon by utilities for elongating their clearing cycles and not

for demonstrating any reliability enhancements.

a) 2017 RTW Pilot Program

Notwithstanding the Company’s first-quartile SAIDI and SAIFI rankings, and the

systematic review of the entire distribution system by its arborists, Eversource is proposing a $3.5

million RTW pilot program for 2017 (Exh. ES-VLA-1, p. 22) for which the Company has not

performed a cost-benefit analysis (Exh. AG-20-27). The 2017 RTW pilot program, which is

already underway, employs Light Imaging, Detection and Ranging (“LiDAR”) to inspect along

poor performing circuits as a means to identify where mid-cycle pruning is necessary. Tr., Vol. V,

pp. 932-933; Exh. ES-VLA-1, p. 20. The Company estimates that it will spend $0.65 million on

LiDAR related expenses, and $2.88 million on incremental mid-cycle pruning. Exh. ES-VLA-1, p.

22; Tr., Vol. V, pp. 935-936. By way of comparison, the Company spent just $516,300 on mid-

cycle pruning in 2016. Exh AG-20-31(b); Tr., Vol. V, p. 936. So, the 2017 RTW pilot program

represents incremental mid-cycle pruning expenses of more than 5½ times what the Company

spent in 2016 on mid-cycle pruning. Tr., Vol. V, p. 936.

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Despite the Company’s bold move to undertake the 2017 RTW pilot program absent

Department approval (Tr., Vol. V, p. 934), the Company’s implemented pilot program lacks any

meaningful measuring stick or a cost-benefit analysis. Exh. AG-20-27. How does the Company,

much less the Department, determine whether this $3.5 million “proof of concept” program

improved reliability, avoided outages, kept the Company in the first-quartile, or benefitted

ratepayers? The Company has made absolutely no attempt to quantify incremental reliability

benefits to justify the substantial pilot program costs.

Stripping out LiDAR expenses from the 2017 RTW pilot program highlights the absurdity

of authorizing the Company to spend an additional $2.88 million on mid-cycle pruning. The ends

do not justify the means. In 2016, Eversource spent more than $23.5 million on vegetation

management, which resulted in top-tier reliability results. Exh. AG-30-31(b). Assuming the 2017

vegetation management program activity spend is the same as 2016, then authorizing the Company

to increase its vegetation management costs by more than 12 percent to undertake $2.88 million of

additional mid-cycle prune, absent a showing of need, is unduly excessive and meritless.

Accordingly, the Department should deny the Company’s request to recover the costs of the

proposed 2017 RTW pilot program.

b) 2018 RTW Pilot Program

The 2018 RTW pilot program promises an initiative to “inspect, evaluate and target all

hazard and risk tree within the fall zone.” Exh. ES-VLA-1, p. 23. To accomplish this scheme, the

Company proposes to spend nearly $26 million per year of ratepayer money from 2018 through

2022. Id. Remarkably, the yearly cost of the 2018 RTW pilot program eclipses the Company’s

entire 2016 distribution vegetation management program by more than $2 million, catapulting the

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Company’s annual spend on vegetation management to almost $50 million dollars. Tr., Vol. V, p.

937.

Although the Company is proposing to use an aerial LiDAR survey as part of the 2018

RTW pilot program (Exh. ES-VLA-1, p. 24), LiDAR will not aid the Company in its quest to

inspect, evaluate, and target hazard and risk trees within the fall zone because LiDAR cannot

identify hazard or risk trees. Tr., Vol. V, p. 926. The Company defines a hazard tree as one that:

(1) is of sufficient mass that it could cause damage if it fell onto its distribution system; (2) would

hit the distribution system if it fell; and (3) has a condition that makes it likely to fall. Tr., Vol. V,

p. 952; Exh. AG-20-43, p. 1. LiDAR data, however, can determine only one of these criteria --

whether a tree might hit its distribution system if the tree were to fall. Tr., Vol. V, p. 968. In fact,

LiDAR will not inform the Company as to the mass, the health, or the condition of a tree. Tr., Vol.

V, p. 925; Exhs. AG-25-27 and AG-25-29. Consequently, LiDAR will not replace in-person,

visual inspection of potential hazard trees. Tr., Vol. V, p. 968. Ultimately, the Company will

need to rely on arborists, not LiDAR, to identify “the hazard trees that provide an imminent threat

to the distribution system.” Exh. AG-20-33(a), p. 4.

Between the aerial LiDAR survey and the commissioning of a third-party to study tree

species and conditions around the Company’s distribution system, arguably a task already

performed by the Company’s arborists, the Company estimates it will spend $5.9 million over the

course of the 2018 RTW pilot program. Exhs. ES-VLA-1, pp. 24-25 and Attachment AG-20-37,

p. 1; Tr., Vol. V, pp. 929, 931. Further, the costs associated with the aerial LiDAR survey are in

addition to the LiDAR costs associated with the $23.6 million Enhanced Mid-Cycle Prune

program.47 Exhs. ES-VLA-1, p. 23 and AG-20-33(a), p. 5.

47 The 2018 RTW pilot program is a five-year pilot program. The Company estimates that one year of Enhanced

Mid-Cycle Prune will cost $4,720,000. Exh. ES-VLA-1, p. 23.

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At a total cost of nearly $130 million,48 the 2018 RTW pilot program is more bloated and

unwarranted than the 2017 RTW pilot program. Like the 2017 RTW pilot program, this program

is much ado about nothing and devoid of a cost-benefit analysis. The Company does not need

LiDAR or a commissioned study to understand the vegetation vulnerabilities of its distribution

system. The Company does not need to double its annual vegetation management budget to

maintain system reliability. NSTAR’s first-quartile reliability performance results from 2012

through 2015 are ample evidence that the Company’s enhanced clearance zone efforts coupled

with enhanced tree removal (“ETR”), which targets “the removal of risk and hazard trees to

improve reliability,” are working effectively. Exh. ES-VLA-1, p. 12. Going forward, by

maintaining the ETT pruning clearance specification in the NSTAR territory, and by applying the

ETT pruning specifications to the remaining sections of the WMECo territory that have not yet

been cleared to that specification (Tr., Vol. V, p. 962), there is no credible reason to believe that the

Company’s reliability performance standards will not be sustained. Given that the Company does

not have a reliability problem, the 2017 and 2018 RTW pilot programs are, at best, an expensive

solution to a non-existing vegetation management program problem.

3. LIDAR

No Massachusetts electric utility is currently deploying LiDAR to inspect its distribution

systems. Tr., Vol. V, pp. 919-920. In fact, LiDAR does not determine tree health, tree condition,

tree species, tree diameter, or tree infestation. Exhs. AG-25-27, AG-25-28. AG-25-29, an AG-25-

30. Further, LiDAR cannot identify risk or hazard, nor does LiDAR replace the physical

inspection of trees. Tr., Vol. V, pp. 924-927; Exh. ES-VLA-Rebuttal, p. 5. LiDAR is, quite

48 The 2018 RTW pilot program is a five-year pilot program. The Company estimates that one year of the pilot

program will cost $25,950,000. Exh. ES-VLA-1, p. 23.

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simply, a means to measure distances, a kind of “HD radar.” Exh. ES-VLA-Rebuttal, p. 5; Tr. Vol.

I, p. 87.

In 2017, as part of the 2017 RTW pilot program, the Company began deploying vehicle

mounted LiDAR to collect data along 1,000 miles of its distribution circuits that are accessible

from public roads. Tr., Vol. V, p. 921. After the LiDAR data is analyzed, the Company

anticipates performing mid-cycle pruning on problem areas where vegetation has encroached the

Company’s distribution system. It seems, however, that deploying LiDAR is a needless

extravagance, as the Company’s engineers were able, without the benefit of LiDAR, to identify

“circuits whose performance in regards to trees, were of concern. And so that’s how [the

Company] identified the circuits that are included in the 2017 pilot for mid-cycle pruning.” Tr.,

Vol. V, p. 945.

As part of the 2018 RTW pilot program, the Company proposes to not only continue to

deploy the vehicle mounted LiDAR program from the 2017 RTW pilot program but also introduce

a second LiDAR program that will survey the Company’s entire distribution system. Tr., Vol. V,

p. 922. The Company indicates that “circuits will be scheduled automatically for a LiDAR survey,

regardless of current performance.” Exh. ES-VLA-1, p. 26. Moreover, the Company will be

deploying LiDAR on circuits that were pruned just two-years prior. Exh. ES-VLA-1, p. 25; Tr.,

Vol. V, p. 945. In other words, it is conceivable that circuits that were pruned to ETT or RTW

clearance zone specifications in year one will be reassessed in year three of the four-year trimming

cycle. That begs the question of why the Company would need to double back on these circuits

every two years. Are the Company’s distribution systems experiencing vegetation growth patterns

that are unique to its territory and not experienced in other northeastern states? Are the Company’s

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pruning methodologies ineffective? Is the Company conceding that its four-year trim cycle

program is ineffective?

LiDAR is an expensive, superfluous technology, which does little to aid the Company’s

engineers and arborists in identifying risk and hazard trees. The engineers currently identify the

poorest performing circuits on the Company’s distribution system. Tr., Vol. V, pp. 909, 945, 947;

Exh. AG-20-34. The arborists are the boots-on-the-ground experts who currently identify and

document field conditions, including assessing, and confirming for removal, risk and hazard trees.

Exhs. AG-20-41 and AG-20-34. LiDAR does not “tell you anything about the condition of . . .

trees. It’s not going to tell you which [tree] is going to be the next tree to fall. That’s where you

still need human intervention, to actually go look at [the trees].” Tr., Vol. V, p. 968. Moreover,

the Company is unsure whether LiDAR will save on operation and maintenance cost, much less

whether LiDAR’s static images have any intrinsic value to the Company’s other departments or

divisions. Tr., Vol. V, p. 969. Therefore, the Department should deny the Company’s request to

recover the costs associated with any of the proposed LiDAR programs.

4. ACCOUNTING FOR NSTAR’S FIRST-CYCLE ENHANCED

VEGETATION MANAGEMENT ACTIVITIES

Beginning in 2012, NSTAR instituted a four-year trimming cycle such that all of NSTAR’s

circuits within its distribution system are pruned once every four years. Exh. ES-VLA-1, p. 11. At

the same time, NSTAR’s pruning specifications were enlarged around the distribution primary

from SMT specifications to ETT specifications on all primary section of circuits. Id. At the

conclusion of the initial four-year enhance trimming cycle (i.e., starting in 2016 or beginning the

second four-year ETT trimming cycle), NSTAR chose to maintain the clearance corridor at the

ETT clearance specifications. Exh. ES-VLA-1, pp. 12-13.

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From 2012 through 2015, the Company capitalized the costs associated with the initial

four-year enhanced trimming cycle because the Company viewed the enlarged clearance zone “as

a capitalized improvement to the system rather than an operations and maintenance activity like the

SMT (which is expensed).” Exh. ES-VLA-1, p. 12. These first-cycle enhanced vegetation

management activities, the Company posits, “constitutes a system improvement, rather than

routine maintenance, and are therefore subject to capitalization for accounting purposes” (Exh.

AG-11-12), based on the assumption that “it extends the life of the asset.” Tr. Vol. XIII, pp. 2755-

2756. Then, in 2016, because the Company started maintaining the distribution primary at the

wider ETT clearance, the Company began treating the NSTAR ETT pruning work as an operations

and maintenance (“O&M”) expense. Exh. ES-VLA-1, pp. 12-13.

Also beginning in 2012, NSTAR implemented an ETR program to focus on the removal of

risk and hazard trees. Exh. ES-VLA-1, p. 12. And, like ETT, the Company capitalized ETR costs

because the removal of those trees “directly and materially extends the life of the underlying

assets.” Exh. RR-AG-14.

As discussed below, the Company’s capitalization of both ETT and ETR costs is

inappropriate, and it conflicts with the Department’s and the FERC’s accounting instructions, and,

therefore, should be rejected by the Department.

a) Capitalization of ETT and ETR Costs

The Company views NSTAR’s SMT program as “routine maintenance line clearance”, and

therefore, charges those expenses to O&M Account 593. Exhs. AG-19-31 and AG-37-6, p. 1.

Likewise, the Company treats the maintenance of NSTAR’s distribution primary at ETT

specifications (“METT”) as an O&M expenditure. Exhs. ES-VLA-1, pp. 12-13 and AG-11-11

(Attachment). Conversely, the Company capitalized costs associated with NSTAR’s first-cycle

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ETT program because, in the Company’s opinion, ETT goes beyond SMT by extending the life of

the related conductor, improving reliability, and adding “a minor unit of property that did not

previously exist.” Exh. AG-37-6, p. 1. Consequently, from 2012 through 2015, the Company

capitalized approximately $37.4 million in ETT costs in plant-in-service -- FERC Account 365,

Overhead Conductors and Devices. Exhs. ES-VLA-1, p. 12 and RR-AG-6(b), p. 1; Tr. Vol. XIII,

pp. 2754-2758. To that end, those ETT costs were depreciated each year through the end of the

test-year, resulting in a net plant or depreciable balance of enhanced tree trimming costs at the end

of the test year of $34.8 million for ETT. Exh. RR-AG-13.

In the same way, between 2012 and 2015, the Company capitalized approximately $14.8

million in ETR costs, which were depreciated each year through the end of the test-year, resulting

in a net plant or depreciable balance of enhanced tree trimming costs at the end of the test year of

$13.8 million for ETR. Exhs. RR-AG-6(b), p. 1 and RR-AG-13.

5. MAINTENANCE OF OVERHEAD LINES AND DEVICES

Contrary to the Company’s assertion that NSTAR’s initial four-year ETT trimming cycle

and ETR represents a system improvement rather than routine maintenance, it is clear from the

Department’s and the FERC’s accounting instructions that the ETT and ETR costs should have

been accounted for as expenses, and, therefore should have been booked to Account 593 rather

than to Account 365.

a) Account 593 – Maintenance of Overhead Lines

Pursuant to both the Department and the FERC rules regarding the accounting of annual

tree trimming costs, the instructions for Account 593 - Maintenance of overhead lines are clear.

The instructions state that this account shall include:

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[T]he cost of labor, materials used and expense incurred in the maintenance of overhead

distribution line facilities, the book cost of which is includible in . . . account 365, Overhead

Conductors and Devices . . ..” FERC 18 CFR part 101, Account 593 (revised as of April 1, 2016);

220 CMR 51.01.

The Department and the FERC specifically identify that the costs associated with the

trimming of trees and clearing of brush on overhead conductors and devices are to be included in

Account 593. FERC Uniform System of Accounts, Distribution Expenses, Maintenance Account:

593 Maintenance of overhead lines contained in FERC 18 CFR part 101, Account 593, Item 2.k

(revised as of April 1, 2016); 220 CMR 51.01.

Whether at the SMT clearance specification or the ETT clearance specification, the

Company is performing a routine maintenance function to its distribution system that extends the

life of the asset. Similarly, at what point does chopping down a hazard tree morph from an

expense into a capitalizable cutting? The removal of any hazard tree, like systematic pruning, is

designed to extend the life of the underlying assets. A hazard tree cut down in 2011 should not be

treated differently, for accounting purposes, from a hazard tree cut down in 2012. Exh. RR-AG-

14.

Although the Company asserts that NSTAR’s initial ETT cycle and ETR should be

capitalized because they extend the life of the asset, realistically any type of pruning or tree

removal along the Company’s distribution system, by its very nature, extends the life of the

conductors and improves reliability. The Company cannot hide behind the notion that first-cycle

vegetation trimming is capitalized “on the basis that it extends the life of the asset.” Tr. XIII, pp.

2755-2756. Nor can the Company impetuously capitalize tree removals simply because it decided

to “step up the level and extent of hazard tree removals on the system.” Exh. RR-AG-14.

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b) Account 365 – Overhead Conductors and Devices

Pursuant to the Department and the FERC Uniform System of Accounts Electric Plant

Account: 365 Overhead conductors and devices contained in FERC 18 CFR part 101, the account

includes “the cost installed of overhead conductors and devices used for distribution purposes,”

which includes “tree trimming, initial cost including the cost of permits thereof.” FERC 18 CFR

part 101, Account 365, Item 9; 220 CMR 51.01 (emphasis added). That is, the costs associated

with tree trimming connected with newly installed overhead conductors and devices can be

capitalized. Tr. Vol. XIII, p. 2760. In fact, these capitalized costs are then “depreciated over the

life of the conductor (account 365) benefitting from the specific tree trimming.” Exh. AG-37-6, p.

2. Other than the costs incurred by the Company to perform initial tree trimming when a

distribution line is first installed, there is no provision, in the Uniform System of Accounts for

Electric Companies, allowing electric companies to capitalize the costs of subsequent tree

trimming to that distribution line.

According to the Company, there are overhead conductors and devices on the Company’s

books dating back more than 100 years. Exh. ES-JJS-2. Furthermore, NSTAR, as constituted

today, is made up of over fifty difference electric and light companies through various mergers and

acquisitions. Tr. Vol. XIII, pp. 2762-2763, referring to Paul E. Osborne, Corporate History of Gas

and Electric Utilities in Commonwealth of Massachusetts, Massachusetts Department of Public

Utilities (March 2016). Given NSTAR’s history, the Company is unable to opine on the

distribution system pruning protocols of the predecessor companies that make up NSTAR. Tr.

Vol. XIII, pp. 2763-2764. Notwithstanding the Company’s learned dendrological history lesson of

Massachusetts (Tr. Vol. XV, pp. 3164-3166), the initial clearance occurs at the time the

distribution system is first built. Initial clearing does not occur years after a distribution line is

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“first initiated.” Tr. Vol. XV, pp. 3165-3166. The Company does not get a second opportunity to

capitalize trimming costs, simply because at the time the new distribution line was built NSTAR or

any of its legacy companies elected a narrower clearance zone compared to the Company’s

currently favored “10-by-10-by-15 standard.” Tr. Vol. XV, pp. 3165, 3175.

The Department should not allow the Company to capitalize either the ETT costs or the

ETR costs that were incurred during the 2012-2015 four-year trimming cycle. Accordingly, $48.6

million, the net plant or depreciable balance of enhanced tree trimming costs at the end of the test

year for ETT (i.e., $34.8 million) and ETR (i.e., $13.8 million), should be removed from rate base.

In addition, the Company should be precluded from capitalizing all ETR related costs on its

existing circuits going-forward. See Exh. RR-AG-13.

G. STORM FUND PROPOSAL

The Company proposes to consolidate storm-cost recovery into a single storm fund

mechanism (“Storm Fund”) for its NSTAR and WMECo service territories. Exh. ES-CAH-1, p.

24. The Company proposes: (1) a storm fund addition; (2) a storm cost recovery adjustment; and

(3) a request for recovery of unrecovered storm costs that have occurred since 2012. Exhs. ES-

DPH-1, pp. 104-33; ES-CAH-1, pp. 24-33. Under the Company’s proposal, storm costs would be

eligible for recovery through the Storm Fund where the incremental costs exceed $1.2 million.

Exh. ES-CAH-1, pp. 25-26. The Company also proposes: (1) to make annual contributions to the

fund of $10 million; (2) to accrue carrying costs to accrue at the Prime rate; and (3) to defer, until

the Company’s next rate proceeding, the cost associated with storm events which are greater than

$30 million in incremental costs. Id.

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1. THE DEPARTMENT SHOULD NOT ALLOW THE COMPANY TO

RECOVER DEFERRED COSTS THROUGH THE REPLENISHMENT FACTOR

The Company requests that, if the combination of any deferral balance and the balance in

the Storm Fund exceeds $75 million, the Company would collect an annual “replenishment factor”

to reduce the deferred balance, “pending a full investigation of the Company’s storm costs in a

separate (later) proceeding.” Exh. ES-CAH-1, p. 26.49 The Company proposes that

if the combination of single storm deferral balance (i.e., the sum total

of all single storms in excess of $30 million) and/or the balance of the

Storm Fund exceeds $75 million, the Company may request to file

for a “replenishment” factor, pending a full prudency review

investigation.

Exh. ES-DPH-1, pp. 122-23. In short, the Company requests to charge customers for Storm Fund

eligible costs and ineligible deferred costs for single storms in excess of $30 million through the

replenishment factor.

The Department has not previously allowed electric distribution companies to recover

deferred costs in a replenishment factor. Most recently, the Department authorized National Grid

to seek to recover Storm Fund eligible costs in a replenishment factor in D.P.U. 15-155. However,

the Department allowed National Grid to petition the Department for a replenishment factor for

storm costs eligible for Storm Fund recovery only. D.P.U. 15-155, p. 82. The Department did not

allow National Grid to include deferred costs for any single “outlier” storms in the approved

replenishment factor, as Eversource requests here.50 Denial of recovery of these deferred costs

49 The Department has allowed electric companies to recover storm fund deficit balances through replenishment

factors, e.g., “Storm Fund Replenishment Adjustment Factor,” or “Storm Fund Replenishment Adjustment.” D.P.U.

15-155-A, p. 18; Massachusetts Electric Company and Nantucket Electric Company, D.P.U. 13-59, pp. 1-2, 4 & n.2

(2013). 50 The Department made no mention of recovering deferred costs through a replenishment factor.

In order to prevent the storm fund from falling into a significant deficit as the

result of a single major storm event, we find that it is necessary to exclude from

storm fund eligibility any single storm event that exceeds $30 million in

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through the replenishment factor would not result in unlawful confiscation because the Company

has the opportunity to seek recovery of individual storm events with incremental O&M costs that

exceed $30 million in its next base rate case. See Boston Edison Company v. Department of Public

Utilities, 375 Mass. 1, 10 (1978); Massachusetts Electric Company and Nantucket Electric

Company d/b/a National Grid, D.P.U. 15-155-A, p. 15; D.P.U. 15-155, p. 82.

2. CARRYING CHARGES FOR DEFERRED AMOUNTS NOT ELIGIBLE

FOR STORM FUND RECOVERY MUST NOT BE COLLECTED IN THE

REPLENISHMENT FACTOR

The Company proposes to collect through its proposed replenishment factor carrying

charges on the balance of the Storm Fund and on the balance of any storm costs in excess of $30

million excluded from the Storm Fund. Exh. ES-DPH-1, pp. 121-22.

The Department should reject the Company’s request to recover interest on amounts not

eligible to be included in the Storm Fund through a replenishment factor. The Department allows

collection of carrying charges through a replenishment factor for Storm Fund eligible events

only—and not for deferral amount for those “outlier” storms that exceed $30 million in

incremental costs. D.P.U. 15-155-A, pp. 15-16; D.P.U. 15-155, pp. 82-84. Indeed, the Company

recognizes that the Department excludes from Storm Fund eligibility very large “outlier” storm

events that exceed $30 million in incremental costs. Exh. ES-DPH-1, p. 122, citing, D.P.U. 15-

155, p. 82. Yet, the Company provided no new evidence or arguments that should cause the

Department to change its well-founded precedent. Id.

incremental costs (exclusive of Verizon costs). The Company may seek to defer

these costs for recovery in its next base rate case.

D.P.U. 15-155, p. 82.

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The Company will not be harmed by not collecting carrying charges for “outlier” storms

charges through a proposed replenishment factor. Pursuant to Department precedent, carrying

charges accrue when they are incurred. D.P.U. 15-155-A, p. 15–16. The Department allows the

Company to seek, in between rate cases, a prudence review of storm costs associated with any

storm event where incremental operations and maintenance costs exceed $30 million (exclusive of

Verizon costs). D.P.U. 15-155-A, p. 15; D.P.U. 15-155, p. 82. Accordingly, the Company can

seek any carrying costs in a prudence review of any “outlier storms,” and there is no need to allow

the Company to collect carrying charges through the replenishment factor. Therefore, the

Department should not allow the Company to recover carrying charges for any storm event that is

not eligible for recovery under the Storm Fund.

3. THE DEPARTMENT SHOULD REJECT THE COMPANY’S REQUEST

TO RECOVER CERTAIN LEAN-IN COSTS THROUGH ITS STORM FUND

The Company requests a cost recovery mechanism through the proposed Storm Fund for

“lean in” costs. “Lean in” costs are costs the Company incurs to retain and pre-stage outside crews

in anticipation of a Level III or higher qualifying storm event. In this case, the Company requests

that the Department include lean in costs for Level III events that do not occur or ultimately qualify

for Storm Fund treatment in its base rates. 51 Exh. ES-CAH-1, pp. 27, 30; Exh. DPU 2-11; Tr. Vol.

V, pp. 995-999.

The Company has provided no evidence supporting its request to include these lean in costs

through the storm fund. First, the Company could not identify when it last incurred these costs, nor

could it identify the dollar magnitude of any lean in costs associated with such events. Tr. Vol. V,

pp. 997-999. Indeed, the Company does not track these lean in costs separately from overall storm

51 For example, a Level III event may occur but is ultimately less severe than anticipated, causing the total event

costs to fall below the $1.2 million threshold.

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costs in events that ultimately qualify for Storm Fund treatment. Exh. DPU 2-8. As such, these

costs are not extraordinary by any means and do not need special recovery through the storm fund.

Second, if the Department allows the Company to recover such lean in costs in the storm fund, the

Department will create an incentive for the Company to incur these lean in costs needlessly and to

inflate those lean in costs.

For all of the above reasons, the Department should not adopt the Company’s proposal to

recover in its Storm Fund lean in costs for predicted Level III or above storms that do not qualify

for storm recovery expenses.

4. RECOVERY OF OUTSTANDING STORM COST BALANCE

The Department should reject the Company’s proposal to recover a claimed Storm Fund

under-recovery in NSTAR’s base rates because the Company has not provided any supporting

evidence of its claimed dollar balance under-recovery. The Company claims that NSTAR incurred

$124,766,641 of incremental operations and maintenance costs for ten storms. Exh. ES-DPH-1,

pp. 127 (Table DPH-1). Although NSTAR admits that it has already collected some of that

amount from ratepayers, it claims a total Storm Fund under-recovery of approximately $100

million. Exh. ES-DPH-1, pp. 126-27, 129. The Company proposes to recover the under-recovery

from NSTAR customers over five years, starting January 1, 2018, with interest at the Prime rate.

Exh. ES-DPH-1, p. 129. The Company estimates the total annual revenue recovery will be

$30,805,377. Exhs. ES-DPH-1, p. 130; ES-DPH-5 (East).52

52 With respect to WMECo, the Company proposes to continue to recover its storm costs at the level it is currently

recovering, until it fully recovers the outstanding balance of fund costs. Exh. ES-DPH-1, p. 131. The Company

states that, if there are no new storms by December 2017, WMECo will fully recover its costs by the end of 2019.

Exhs. ES-DPH-1, p. 131, ES-DPH-5 (West).

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The Company has provided no supporting evidence that it incurred $124,766,641 of

incremental operations and maintenance costs for ten storms. Costs must be “verifiable” to be

reasonable and prudent. See Massachusetts Institute of Technology v. Department of Public

Utilities, 425 Mass 856, 871-72 (1997). Moreover, the Company presented certain storm costs in

D.P.U. 16-74 and D.P.U 17-51, which are currently pending prudence review.53 The Company

admits that the Department’s review in D.P.U. 16-74 and D.P.U. 17-51 could affect the amount

that the Company seeks from ratepayers for the purported under-recovery. Exhs. DPU 16-6; ES-

DPH-5 (East); ES-DPH 1, p. 127 (Table DPH-1). Accordingly, the Department should deny cost

recovery for NSTAR’s claimed Storm Fund under-recovery and “any additional storms that may

occur prior to new rates on January 1, 2018.” See Exh. ES-DPH-1, p. 128.

5. BILLINGS TO VERIZON FOR JOINTLY OPERATED POLES

The Department should deny Eversource’s proposed adjustment for recovery of the

difference between the amount that it billed Verizon and the amount that Eversource accepted from

Verizon in lieu of full payment for the shared costs of Jointly Owned Poles.

The Company and Verizon were signatories to Joint Operating Agreements (“JOAs”). Exh.

ES-VLA-1, pp. 27-28; Exh. AG 25-15. The JOAs include intercompany operating procedures

(“IOP”) that explicitly state that heavy storm-related vegetation management work will be handled

“immediately without prior review,” and that the parties agree to a “50/50” division of costs for

this work. Exh. Att. AG 25-15(a), p. 1. Eversource billed Verizon $8.1 million for its cost

responsibility for vegetation management work under their JOAs (NSTAR $7.1 million and

WMECo $1.05 million). Exhs. Atts. AG 25-22(a) and (b); ES-VLA-1, pp. 27-28.

53 In its D.P.U. 17-51 investigation, the Department only recently conducted a public hearing on July 12, 2017.

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The Department has held that electric companies, such as Boston Edison Company and

Western Massachusetts Electric Company, must pursue Verizon for costs that Verizon is

“contractually obligated to pay under the terms of the Joint Operating Agreements.” Western

Massachusetts Electric Company, D.P.U. 13-135-A p. 46 (2016). The Department has consistently

and repeatedly found that the Company is “obligated to demonstrate that it is not seeking to

recover any costs from its customers that Verizon is contractually obligated to pay under the terms

of the JOA.” D.P.U. 13-135-A, p. 41 (2016). The Department disallowed 50 percent of NSTAR’s

storm-related vegetation management costs. D.P.U. 13-52, pp. 47–49; see also D.P.U. 13-135-A,

p. 45 (disallowing 50 percent of the storm-related management costs to the portion of poles that

WMECo jointly owns with Verizon).

Despite direction to seek “legal process,” Eversource never filed suit against Verizon

arising out of a breach of any of the JOAs between the Company and Verizon. Exhs. AG 25-26;

AG 25-25; see Exh. AG 1-82. Rather, outside of the legal process, on April 6, 2017, NSTAR and

WMECo entered into a settlement agreement and release with Verizon. Exh. Att. AG-25-26

(Supplemental 1). In the settlement agreement, Eversource agreed to accept considerably less

money than the $8.1 million dollars Eversource billed Verizon—only $1.5 million—to resolve the

outstanding amounts related to Major Storm Events occurring in the years 2008 through the

effective date of the agreement. Exh. Att. AG-25-26 (Supplemental 1), p. 1. Moreover, the

settlement agreement also provides that Verizon will only be responsible for 7 percent of the total

cost of storm-related vegetation management in the parties’ overlapping service area going

forward. Id., p. 5.

Having failed to secure a court determination on the rights and obligations of Eversource

and Verizon under the JOAs, Eversource is ineligible to seek recovery of those costs. The

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Department was explicit in its requirement that that NSTAR and WMECo may only recover these

costs from ratepayers after they “pursue[] Verizon pursuant to legal process for collection of these

vegetation management costs, and if it is determined that Verizon is not responsible for all or any

portion of the costs. . ..” D.P.U. 13-135-A, p. 45; D.P.U. 13-52, p. 49. As the Department noted,

the appropriate forum for interpreting the JOAs is the courts. D.P.U. 13-52, pp. 45–46, n.27;

D.P.U. 13-135-A, p. 43. However, conducting a prudence review of Eversource’s request to

recover the costs at issue here would require the Department to interpret the JOAs, because any

prudence review would necessarily require the Department to weigh the relative merit of

Eversource’s and Verizon’s claims under the JOAs.

Moreover, the settlement agreement clearly seeks a result that is good for Eversource and

Verizon, but bad for ratepayers. In the settlement agreement, Verizon agreed to pay Eversource

only seven percent of the total cost—rather than the 50 percent division of costs for severe storm

restoration efforts in the previous IOP, Exh. Att. AG 25-26 (Supplemental 1), p. 6; Exh. Att. AG

25-15(a), p. 1. Eversource, on the other hand, having “resolved” the issue of the amount that

Verizon will pay for jointly operated poles from Verizon, can seek to avoid the Department

similarly disallowing 50 percent of its storm-related vegetation management costs from its cost of

service in this case without the delay and inconvenience that would result from a lawsuit against

Verizon. See D.P.U. 13-52, pp. 47–49; D.P.U. 13-135-A, p. 45. Ratepayers, however, are left

holding the bag. Pursuant to the original JOAs with Verizon, ratepayers were only required to pay

for 50percent of the costs attributable to jointly operated poles. Under the settlement agreement,

Eversource asks ratepayers to pay 93 percent of those costs going forward. This result is neither

just nor reasonable.

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The Department should not allow Eversource shareholders to benefit from the Company’s

imprudence, to the detriment of ratepayers, from ignoring the Department’s directive to obtain a

legal determination by the courts as to the extent of Verizon’s responsibility under the JOAs.

Accordingly, the AGO recommends that the Department deny Eversource recovery of the

difference between what the Company billed Verizon and the amount Verizon paid Eversource

pursuant to the agreement both companies entered into on April 6, 2017. Exh. Att. AG 25-26

(Supplemental 1).

H. TAXES

1. INCOME TAXES

a) There is No Evidentiary Support for WMECo’s Increase to

Taxable Income for “Property Tax Expense”

WMECo proposes to increase its taxable income by $2,226,850 for “property tax expense.”

WMECo did not present any testimony whatsoever either describing this item or explaining why it

is appropriate to adjust the cost of service for this item. Exh. ES-DPH-2 (West), Schedule DPH-

33, p. 8. However, in response to Exh. AG-19-55, WMECo explained that the Company is

proposing to normalize property tax deductions that the Company claims were previously flow-

through, over a five-year period. Based on an annual amount of $2,226,850, the cumulative

flow-through deduction is $11,134,250.

On cross examination, Mr. Horton acknowledged that WMECo did not put forth this

proposal in his direct testimony, stating that “[o]n Page 174 of my testimony it references to the

referenced schedule, but I didn't go into great length about any of those adjustments, no.” Tr.

XIII. p. 2787. In fact, reference to the referenced testimony shows that while Mr. Horton did

discuss certain of the items included in the calculation of taxable income, there is absolutely no

187

mention of WMECo’s increase to taxable income by $2,226,850 for property tax expense, let

alone going “into great length” about that adjustment.

In the response to Exh. AG-34-17, WMECo elaborated on its statement that it is proposing

to normalize property tax deductions that were previously flow-through, stating that “[t]he

property tax deduction was flowed through incrementally on an annual basis as the difference,

either increase or decrease, in the property tax deduction from one year to the next.” The

available evidence not only fails to support this statement but, rather, indicates the exact

opposite.

WMECo’s last general rate case was D.P.U. 10-70. Tr. Vol. XIII, p. 2790. There was no

flow-through of any tax reconciling item for property taxes in that case. Id. Thus, the record

evidence shows that the property tax deductions that were supposedly previously flow-through,

were not actually flowed through in the calculation of taxable income.

In effect, what WMECo is seeking to do is to retroactively address a problem that never

existed and does not exist now. WMECo has presented no evidentiary support for its increase to

taxable income by $2,226,850 for “property tax expense,” and it has provided no Department

precedent that would accommodate this item. In short, WMECo has presented no reason to

include this item in its calculation of pro forma income tax expense.

The property tax expense item of $2,226,850 on Exhibit ES-DPH-2 (West), Schedule

DPH-33, Page 8 should be eliminated from the calculation of WMECo’s pro forma income tax

expense. The effect of eliminating this item is to reduce WMECo’s pro forma income tax expense

by $895,194.

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2. PROPERTY TAXES

a) The Company’s Projected Property Tax Calculations Are

Inconsistent with Department Precedent

In the test year the Company booked $87,288,884 in distribution-related property tax

expense for NSTAR and $14,965,006 for WMECo. Exh. ES-DPH-2 (East), Sch. DPH-25, p. 1;

Exh. ES-DPH-2 (West), Sch. DPH-25, p.1. However, in its initial filing the Company seeks to

recover $89,083,373 in distribution related property taxes for NSTAR and $16,493,608 for

WMECo based on a proposed methodology that would estimate the expected level of property

taxes in the rate year. Id.; Exh. ES-DPH-1, pp. 159-167. For those municipalities that utilize net

book value in determining personal property taxes, the Company proposes to calculate the

estimated rate year level of property tax expense by applying current municipal tax rates to the

latest Form of List (“FOL”) personal property valuations provided by the Company. Id., pp.

166-167. Using the Company’s proposed methodology inflated the Company’s initial revenue

requirement for property taxes by a total of $3,323,091. In its updated filing of May 25, 2017,

the Company now seeks to recover distribution property tax expense of $90,038,843 for NSTAR

and $ 17,446,410 for WMECo. Exh. ES-DPH-2 (East) (May 25 update), Sch. 25, p.1; Exh. ES-

DPH-2 (West) (May 25 update), Sch. 25, p.1. Again, these amounts include projections of

personal property value derived from 2017 FOL valuations provided by the Company to various

municipalities, although from the way these expenses were presented in the May 25 updated

filing it is difficult to determine how much of the increase is based on projected property tax

liabilities versus actual tax bills received. Exhs. ES-DPH-7 (East and West), Schs. 10-13 (May

25 update).

The Company’s proposal to use its own estimates of its personal property value in the

calculation of a representative level of property tax expense should be rejected as speculative,

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unduly complicated and at odds with Department precedent. The Company’s proposed

methodology will also result in over collection of property tax expense while the Company pays

lower actual property taxes calculated on the allegedly lagged valuations.

The Department’s long-standing policy is to base property taxes on the most recent

property tax bills a utility receives from the communities in which it has property. New England

Gas Company, D.P.U. 08-35, p.150 (2009); Boston Gas Company, D.P.U. 96-50 (Phase I), p.

109 (1996); Western Massachusetts Electric Company, D.P.U. 86-280-A, p.17 (1987). The

Department holds the record in a proceeding open to receive the most current tax bills from cities

and towns to the utility. Boston Gas Company, D.P.U. 88-67, Phase I, p.165-166 (1988);

Colonial Gas Company, D.P.U. 84-94, p.19 (1984). The Department allows this update because

post-test year property tax expenses are verifiable, non-controversial, routine, and outside the

control of the Company. Bay State Gas Company, D.P.U. 12-25, pp. 329-30 (2015) (citations

omitted).

The approach suggested by the Company is very much like the one rejected by the

Department in Massachusetts Electric Company and Nantucket Electric Company d/b/a National

Grid, D.P.U. 15-155, pp. 213-214 (2016). In that case, National Grid proposed to calculate the

estimated rate year level of property tax expense by applying current municipal tax rates to the

latest property valuations provided by each municipality. Id., p. 211. The Department

concluded:

The Department generally has rejected the use of projected data to

determine a company’s property tax expenses. (Citations omitted).

Rather, the test year level of property tax expense, adjusted for

known and measurable changes (i.e., the most recent property tax

bills provided at the close of the record), provides the most

reasonable representation of a company’s property tax expense and

fairly represents this component of its cost to provide service.

National Grid’s projection of future increases of property tax

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expense, though derived from current tax assessments, is speculative

and does not constitute a known and measurable change based on

Department precedent. The Company has offered no persuasive

reason to depart from our precedent here. Therefore, we decline to

adopt the Company’s proposed property tax calculation.

Id., pp. 213-214.

The methodology proposed in this case is much the same as National Grid’s proposal and

is an equally speculative departure from Department precedent. Accordingly, the Company’s

property tax revenue requirement should be reduced to amounts booked in the test year plus

known and measurable updates to those amounts by submission of actual 2017 property tax bills

through the close of this proceeding.

b) The Department Should Ensure There Are Appropriate Property

Tax Allocations to Other Businesses

The Department allows distribution companies to update their cost of service for the

latest municipal property tax bills available before the Department issues its order. Tr. Vol. XV,

p. 3190. Here, the property tax bills will be for fiscal year ended June 30, 2018 based on

property valuations as of January 1, 2017. The invoices from each municipality will include all

of Company property within the municipality.

The Department should make certain that the property taxes included in the cost of

service will include only the amounts associated with distribution plant in service as of January

1, 2017, the valuation date for the bills. In order to attribute property taxes to the non-

distribution business, the Company makes an allocation based on plant in service. See Exh. ES-

DPH-1, p. 160. Currently, Eversource is making large investments in transmission and solar

plant that will cause these property tax bills to increase. Therefore, when the Department

determines the Company’s pro forma cost of service including these late filed property tax bills,

it should make sure that appropriate allocations are made to the other businesses based on plant

191

balances of the same January 1, 2017 valuation date as is used by the municipalities. See RR-

AG-17.

c) WMECo’s Deferred Property Tax Claims

The Company also seeks recovery for certain WMECo property taxes from 2012-2016.

Exh. ES-DPH-1, pp189-193; Exh. AG-44-1 (Att.). Mr. Horton testified that the Company is

seeking recovery of exogenous property tax costs for FY 2012-2016 in the amount of

$10,306,354. Exh. DPH-1, p. 190. The Company has requested a 5-year amortization of this

amount, at $2,061,271 per year, to be recovered via a “Municipal Property Tax Adjustment”

tariff. Exh. AG-44-1 (Att.); RR-DPU-33. For the reasons set forth below, the Department

should reject WMECO’s adjustments to the claims for 2012-2015 and the amount of $1,991,983

for 2016.

(1) WMECo’s Deferred Property Tax Claims for 2012-2015

Should Be Adjusted to Net Out State and Federal Income Tax

Benefits

Pursuant to the terms of the AG-DOER settlement approved by the Department in

NSTAR and Northeast Utilities, D.P.U. 10-170 (2012), the Company was authorized to seek

recovery of certain deferred incremental property taxes incurred by WMECo for the years 2012-

2015 provided the claims met a dollar threshold and satisfied Department precedent concerning

the recovery of exogenous costs. D.P.U. 10-170, AG-DOER Settlement, Article II (5) p. 5.

From examination of the detail of the Company’s claims for recovery of the 2012-2015 taxes it is

apparent that no adjustments have been made for the tax benefits that the Company will realize

from deducting these amounts from its income taxes. Exh. AG-44-1 (Att.). If the Department

finds that the Company is entitled to exogenous recovery of the deferred amounts for 2012-2015,

the claimed amount of $8,314,371 should be reduced to reflect income tax deductions.

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(2) The Company Is Not Entitled to Deferral of WMECo ’S

2016 Property Taxes

In Western Massachusetts, Electric Company, D.P.U. 16-107, the Company filed for

deferral of an increment of WMECo’s 2016 distribution-related property taxes in the amount of

$1,991,983 related to the City of Springfield’s use of the RCNLD method of valuation. The

Department has not yet issued an order in that docket but the matter awaits decision after

discovery took place and the issues were fully briefed by both the Company and the AGO. The

same 2016 deferral claim has been included in this proceeding. Exh. ES-DPH-1, pp.192-193;

Exh. AG- 44-1. However, the evidence pertaining to this claim is in the record of D.P.U. 16-107

and should be decided in that docket.

The 2016 deferral request must be considered separately from the Company’s requested

recovery of exogenous property tax costs for the years 2012-2015. As noted above, those four

years are addressed by the AG-DOER settlement agreement approved by the Department while

the 2016 tax year was not included in that agreement. Mr. Horton conceded in his testimony that

eligibility for recovery of exogenous property tax expense under the settlement ends as of

December 31, 2015. Exh. ES-DPH-1, p. 190. Nonetheless, the Company in this case improperly

bundled the disputed 2016 amount in for recovery along with the amounts for 2012-2015. Exh.

ES-DPH-1, p. 190; Exh. AG-44-1.

The AGO reiterates its argument from D.P.U. 16-107 that the Company failed to make a

prima facie showing that it is entitled to seek deferral of WMECo’s 2016 distribution property

taxes. The Department has a clearly established three-part standard for reviewing petitions for

deferral accounting treatment. North Attleboro Gas Company, D.P.U. 93-229, p. 7 (1994). The

Company fails all three prongs of the standard and is not eligible for deferral of the $1,991,983

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of WMECo 2016 property taxes. Further, as established in D.P.U. 16-107, the amount at issue

for 2016 must be adjusted to reflect income tax benefits. D.P.U. 16-107, AG Br., p.4.

In North Attleboro Gas Company the Department held that a utility seeking deferral

treatment must demonstrate prima facie in its petition that: 1) based on Department precedent,

the annual expense may be recoverable as an extraordinary expense if it were incurred during a

test year; 2) a Department denial of the request for deferral would significantly harm the overall

financial condition of the Company; and 3) the Department’s denial of the request for deferral is

likely to cause the filing of a rate case that would include in its test year the expense for which

deferral is sought (“North Attleboro standard”). D.P.U. 93-229, p. 7. The Department explained

that the policy behind granting deferrals is based in administrative efficiency and is intended to

avoid unnecessary rate cases that would be triggered by certain extraordinary pre-test-year

expenses. Id.

(a) WMECo’s 2016 Distribution-Related Property Tax

Increment Does Not Represent an Extraordinary Expense

Under the first prong of the North Attleboro standard, the Department determines

whether the expense at issue may be recoverable as an extraordinary expense if it were incurred

during the test year. According to Department precedent, non-recurring expenses incurred in the

test year are ineligible for inclusion in the cost of service unless the Company demonstrates that

the expenses are extraordinary both in nature and amount. Fitchburg Gas and Electric Light

Company, D.P.U. 11-128, p. 10 (2012), citing Fitchburg Gas and Electric Light Company,

D.P.U. 99-115, p. 5 (2001); Fitchburg Gas and Electric Light Company, D.P.U. 1270/1414, p.

33 (1983).

The 2016 tax expense at issue is recurring rather than non-recurring and is also neither

extraordinary in nature or amount according to Department precedent. In past deferral cases,

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expenses that the Department determined to be extraordinary in nature typically arose out of

sudden, unforeseen force majeure- type events. Fitchburg Gas and Electric Light Company,

D.P.U. 09-61, pp. 10–11 (2009) (expenses incurred during winter storm in 2008 during which

Governor declared state of emergency); Fitchburg Gas and Electric Light Company, D.P.U. 11-

128, pp. 11, 14 (2012) (significant storm cleanup expenses from Tropical Storm Irene and the

October Snowstorm after state of emergency declared); Aquarion Water Company of Mass.,

D.T.E. 03-127, p. 8 (2004) (expenses directly related to a water company’s compliance with the

Public Health Security and Bioterrorism Response Act of 2001 after September 11).

In contrast to the above authorities, the Company’s 2016 property tax bill from the City

of Springfield is a recurring annual event. WMECo stated in D.P.U. 16-107 that it had been

receiving property tax bills from the City of Springfield based on the RCNLD property valuation

method since 2011. D.P.U. 16-107, Co. Petition, p. 3. It is reasonable to expect that the

Company will continue to receive similar bills year after year in the future. Accordingly, the

Company cannot meet the “extraordinary in nature” hurdle.

In D.P.U. 16-107 the Company also failed to establish that the 2016 property tax

increment is extraordinary in amount. The after-tax cost of the amount for which the Company

requested deferred treatment is something less than the claimed amount of $1,991,983, which

AGO calculations demonstrated was significantly less than one percent of the Company’s 2015

revenues. D.P.U. 16-107, AG Br., p. 6.

(b) The Company Has Failed to Demonstrate That the

Denial of the Request for Deferral Would Significantly

Harm the Overall Financial Condition of the Company

The second element of the North Attleboro standard requires that the Company prove that

a Department denial of the request for deferral would significantly harm the overall financial

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condition of the Company. D.P.U. 93-229, p. 7. Department precedent on this issue involves

situations where an expense is unforeseen and potentially catastrophic to a utility’s financial

stability. See, e.g., D.P.U. 09-61, p. 12. As noted above, the gross amount in question is

$1,991,983, which is less than one percent of the Company’s revenues. There can be no serious

argument that this amount of property tax expense posed a grave risk to WMECo’s financial

condition. Under the facts the Company simply cannot make a showing of financial harm of the

type and the degree that Department precedent has found to be significant. D.P.U. 16-107, AG

Br. pp. 5-7.

(c) WMECo’s 2016 Incremental Tax Obligation Was

Not Likely to and Did Not Prompt the Filing of a Rate Case

In D.P.U. 16-107, the Company implicitly admitted that it could not meet the third part of

the North Attleboro standard, which requires that the “Department’s denial of the request for

deferral is likely to cause the filing of a rate case….” D.P.U. 93-229, p. 7. In its Initial Brief, the

Company admitted that it planned to file a distribution rate case in January, 2017. D.P.U. 16-

107, Co. Br. p. 3. The Company cannot meet the third prong of the North Attleboro standard

because of its stated intention to file a rate case in 2017 no matter what the outcome of the

deferral request in 2016.

There are no legal grounds for the allowance of deferred recovery of WMECo’s 2016

property tax expense, which should therefore be excluded from the Company’s cost recovery in

this case.

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I. OTHER REVENUES

1. THE PRO FORMA ADJUSTMENT TO ELIMINATE BELMONT

WHOLESALE DISTRIBUTION CONTRACT REVENUES FROM TEST YEAR

NSTAR MISCELLANEOUS REVENUES IS SELECTIVE AND SPECULATIVE

NSTAR proposes to make a pro forma adjustment to reduce Other Electric Revenues by

$449,077 related to the “Belmont Service Contract.” Exh. ES-DPH-3 (East), WP DPH-5, p. 1.

There is no further description of what this adjustment represents on this schedule, and Mr.

Horton offered no explanation whatsoever of this adjustment in his testimony.

In response to Exh. AG-19-11, NSTAR explained that this adjustment

was made to remove revenues related to the Belmont Wholesale

Distribution Contract as it is expected to be terminated in 2017. A

new substation is under construction that will remove the need for

the contract.

In response to Exh. AG-37-2, NSTAR noted that the termination was anticipated to be

“completed later in 2017,” which is well after the end of the test year. The expected adjustment

cannot be recognized as a known and measurable change because it has not occurred and the

record does not support a finding that the termination will occur. Fitchburg Gas and Electric

Light Company, D.P.U. 98-51, p. 62 (1998) (“A ‘known’ change means that the adjustment must

have actually taken place, or that the change will occur based on the record evidence. A

‘measurable’ change means that the amount of the required adjustment must be quantifiable on

the record evidence”).

Overall, the termination of the Belmont Service Contract is purely speculative. First,

there is no commitment to terminate the contract and the Company submitted no documentation

supporting the termination of this contract. Further, Belmont must accomplish a number of

engineering and construction steps before the contract can be terminated and the timing of these

efforts is not specified. Exhs. AG-37-2; AG-50-4. In addition, the underlying reasons the

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contract would be terminated are not explained on the record and there is nothing to indicate

whether, even if the existing contract is terminated, a new contract with Belmont reflecting the

new electrical configuration would be required. Exhs. AG-19-11; AG-37-2; ES-EPH-3 (East),

WP DPH-5, May 25, 2017 Update; Tr. Vol. XIII, pp. 2784−2785.

Importantly, the termination of the contract seems to rest entirely with Belmont and there

is nothing on the record from Belmont to indicate when it might take all the steps to effectuate

that result. Apparently, the Company believes that when the new substation is completed, which

is said to be under construction, that will allow for the termination of the Belmont Service

Contract. Exhs. AG-19-11; AG-37-2. But the Company admits there is even more that Belmont

has to do before the Belmont Service Contract can be terminated. Belmont apparently has to

take further steps to transfer its load onto the new substation. Exh. AG-37-2. Distribution

service is said to need to be transitioned from Eversource’s distribution circuits to the

substation’s distribution circuits, and there is no schedule for this final step. Exh. AG-50-4.

The Company “anticipates” that this Belmont work will occur in 2017. Exh. AG-37-2.

The Company does not seem to know when the contract would be terminated and there is no

commitment that it will happen or when that might be. Nor is there anything in the record to

indicate if this anticipation at all comports with the reality of the scheduled work in Belmont.

Likewise, it is facile to claim that, after all the required construction is completed, the Belmont

Service Contract is “expected to be terminated.” Exh. AG-19-11. Again, there is nothing to

detail why the work in Belmont would lead to a contract termination or whether the work would

lead to the need for a new special contract.

The Company states that after the Belmont load transfer is complete, the parties “expect

to file with FERC to terminate this existing agreement.” Id. However, the Company has not

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provided any evidence that Belmont has agreed to transfer its existing load onto the new

substation or to file with FERC to terminate the existing agreement, or that FERC has committed

to approve termination of the contract.

In addition, NSTAR has not established that termination of the Belmont Service Contract,

assuming that it takes place as anticipated, is outside the normal ebb and flow of revenue

changes resulting from the addition and departure of larger customers. Dedham Water

Company, D.P.U. 1217, pp. 7−9 (1983) (Department will not recognize annualization of

revenues attributed to customers added or lost during the test year, unless the change is

significant in magnitude). On cross-examination, Mr. Horton acknowledged that there have been

and will be other changes to NSTAR distribution revenues after the end of the test year, for

example, large additions of industrial load. Tr. Vol. XIII, p. 2785. Thus, it is entirely possible

that by the time the Belmont Service Contract is terminated (assuming that it is, in fact,

terminated), there will be other customer additions that offset, or more than offset, this $449,077

loss in revenues.

For these reasons, the Company’s proposed pro forma adjustment to eliminate test year

revenues pertaining to the Belmont Service Contract should be rejected as contrary to the

Department’s established precedent that such adjustments are known and measureable. On the

contrary, the proposed adjustment is entirely speculative. Based on the record in this proceeding

there is no way to guess at, let alone ascertain, when the special contract between the Company

and Belmont would be terminated. Accordingly, the Department should reject the pro forma

reduction to Other Electric Revenues by $449,077 related to termination of the Belmont Service

Contract.

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2. THE DEPARTMENT SHOULD ADJUST THE COMPANY’S POLE

ATTACHMENT REVENUES TO REFLECT THE NUMBER OF POLE

ATTACHMENTS AT TEST-YEAR END

The Company charges monthly fees to third parties for attaching their equipment to the

Company’s distribution plant. One of the largest groups of pole attachers is the cable television

business. Exh. ES-DPH-3 (East), Workpaper DPH-5, p. 2. As the number of pole attachments

on the distribution system grows, especially from cable television companies, so will the revenue

that the Company receives from those attachments.

The Company’s revenues should be adjusted to reflect the test-year end number of pole

attachments. The Department requires electric utilities to adjust their revenues for the year-end

pole attachments. Massachusetts Electric Company and Nantucket Electric Company, D.P.U.

09-39, p. 121 (2009); Massachusetts Electric Company, D.P.U. 95-40, p. 79 (1995); Boston

Edison Company, D.P.U. 85-266-A/85-271-A, p. 117; Boston Edison Company, D.P.U. 1720, p.

85 (1984). The Company has not provided any evidence or any new argument that should cause

the Department to change this long-established precedent.

The Company provided the number of pole attachments and its monthly pole attachment

rates at test-year end. See Exh. AG-51-17 and Exh. RR-AG-26. This information is provided in

the following table:

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Therefore, the Department should include these pole attachment revenues in the pro forma cost

of service to reflect the additional revenues provided by the test-year end pole attachments.

J. CONSOLDATION OF THE COMPANY’S TERMS AND

CONDITIONS TARIFF

1. INTRODUCTION

The Company is proposing to consolidate into a single tariff the Terms and Conditions

for Distribution Service tariffs of its four legacy companies: Boston Edison Company,

Commonwealth Electric Company, Cambridge Electric Light Company, and Western

Massachusetts Electric Company (together, “Terms and Conditions”).54 Exh. ES-RDP-9, p. 17.

There has been no pressing problem identified with continuing separate Terms and Conditions

for Distribution Service for the four Eversource legacy companies. Indeed, the Company freely

54 The Boston Edison Company, Cambridge Electric Light Company and the Commonwealth Electric Company

merged to become part of what is now Eversource in 1999 and each have since maintained separate Terms and

Conditions for Distribution Service. Western Massachusetts Electric Company became part of what is now

Eversource in 2012 and has since maintained its separate Terms and Conditions for Distribution Service.

Test-Year End

Number of Annual Annual

Attachments Fees Revenue

East

Jointly Owned 407,652 $10.00 $4,076,520

Solely Owned 95,622 5.00 478,110

TOTAL $4,554,630

West

Jointly Owned 87,480 9.00 787,320

Solely Owned 5,107 4.50 22,982

TOTAL $810,302

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acknowledges that there are reasons to maintain separate policies in each legacy company’s

Terms and Conditions and has proposed to maintain certain separate policies. See e.g., Exh. ES-

RDP-9, pp. 23-24.

Nonetheless, in this proceeding the Company is proposing to consolidate into a single

tariff the Terms and Conditions for Distribution Service tariffs of the above four Eversource

legacy companies. The Company claims that there is a significant amount of overlap between

the current tariffs and that the tariffs are virtually identical. Exh. ES-RDP-9, p. 11; Tr. Vol. XI,

p. 2242.

The Company’s witness in his testimony indeed suggested that there was basically

nothing to the changes needed to make the Terms and Conditions tariff for Distribution Service

the same. Tr. Vol. XI, p. 2244. However, the red-lined exhibits submitted by the Company

purporting to show the changes to each legacy company’s Terms and Conditions tariffs

demonstrates the complexity of the requested changes. For tariffs that are deemed to be almost

identical there are a mass of red-lined changes. See e.g., Exh. ES-RPD-14, Pt. 1, p. 154 et seq.;

Exh. ES-RPD-14, Pt. 2, p. 76 et seq. As part of these changes, the Company is proposing

wholesale, rapid increases to a number of fees included in the Terms and Conditions for

Distribution Service.

There may be a rationale for making certain tariff language consistent across the four

legacy companies, but, if so, the Company has failed to present it. Pressed on this issue, the

Company’s witness at several point seemed to indicate that the rationale, as weak as it might be,

was to take the language currently applicable to the largest number of customers and impose it

on the legacy company or companies with a lesser number of customers. Tr. Vol. XI, p. 2252,

lines 18-22: p. 2254, lines 22-24. However, this explanation is contradicted by the Company’s

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proposed change to the line extension policy. The Company proposes to adopt Western

Massachusetts’ line extension policy and discontinue the line extension policy for Boston Edison

Company, Cambridge Electric Light Company, and Commonwealth Electric Company even

though Western Massachusetts has far fewer customers than those other legacy companies. Exh.

AG 49-3; Tr. Vol XI, p. 2245. Actually, in angling to move toward a unified tariff, the evidence

shows that where there were differences between the tariffs, and the Company has chosen to

adopt the tariff language that favors the Company and disadvantages customers without

sufficient justification.

As discussed below, the AGO objects to certain new provisions in the consolidated

Terms and Conditions. The AGO recommends that the Department (1) eliminate the Company’s

Force Majeure provision; (2) limit the Company obligation for meter and communication device

installation to 30 Days; (3) eliminate the Limitation of Liability provision for curtailment of

service; and (4) exempt low-income customers from the Company proposal to increase certain

fees.

2. ELIMINATE THE COMPANY’S PROPOSED FORCE MAJEURE

PROVISION

The Company is proposing to include in its Terms and Conditions a force majeure

provision that exempts the Company from liability from conditions over which it has no control.

Exh. ES-RDP-14, pt. 1, p. 181 (Force Majeure); Tr. Vol. XI, pp. 2254-2255. The AGO opposes

this language because it could pre-empt Department authority, and is not necessary because of

the “limitation of liability” provision in the Terms and Conditions. Exh. ES-RDP-14, pt. 1, p.

181

Massachusetts utilities “have an obligation to restore service in a safe and timely

manner.” Massachusetts Electric Company v. Department of Public Utilities, 469 Mass 553, 554

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(2014), citing Fitchburg Gas & Electric Light Company, D.P.U. 09–01–A (2009); Eastern

Edison Company, D.P.U. 85–232 (1986); Western Massachusetts Electric Company, D.P.U. 95–

86 (1995) (severe wind storm). As part of its general supervisory authority, the Department

resolves customer complaints regarding the quality and cost of electric service. G.L. c. 164, §

76; 220 C.M.R. § 25.00 et seq. The Department also evaluates electric company performance in

restoring electric service; has authority to set service quality and restoration of service standards;

and penalizes companies for violating these standards. G.L. c. 164, §§ 94; 85B; 1I; 1J; 1K and

220 C.M.R. § 19.00 et seq.

There may be circumstances where the Company might intend to apply this force

majeure provision to its customers without required review or approval by the Department, or a

court of competent jurisdiction. Only the Department, or a court of competent jurisdiction – not

the Company – determines whether the Company “shall be excused from performing under the

Schedule of Rates and . . . not be liable in damages” due to a force majeure. Exh. ES-RDP-14,

pt. 1, p. 181.

The Company’s “Limitation of Liability” provision in the Terms and Conditions exempts

the Company from liability for damages “unless there is negligence on the part of the

[C]ompany.” Exh. ES-RDP-14, pt. 1, p. 181 (Limitation of Liability). A force majeure event,

being outside of the control of the Company, could not be caused by any actions or omissions of

the Company that would support a Department (or court) finding of negligence. Therefore, the

Limitation of Liability provision of the Terms and Conditions precludes the necessity of a force

majeure provision.

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3. LIMIT THE COMPANY OBLIGATION FOR METER AND

COMMUNICATION DEVICE INSTALLATION TO 30 DAYS

The Company is proposing to change its obligation for meter and communication device

installation upon customer request from “within 30 days,” to “if reasonably possible, within 30

days”. Exhs. ES-RDP-14, pt. 1, pp. 166-167. By including the language “if reasonably

possible” the Company is providing itself with more flexibility than it would have if the

language were not included.

In its response to discovery, the Company justifies including the “if reasonably possible”

language because “it is not aware of any meter changes that were not completed within 30 days

so long as they were within the capabilities of the Company to execute them.” Exh. AG-49-6.

However, assuming that this is the case, the Company’s explanation would support the exclusion

of the language “if reasonably possible.”

Moreover, any delay in installing a meter and/or a communication device beyond 30 days

could adversely affect the customer’s quality and cost of service, and possibly delay restoration

or initiation of electric service. See G.L. c. 164, §§ 122 (Use of Incorrect Meter); 124 a - 124i

(Shutting off or Failing to Restore Service). Therefore, the AGO recommends that the

Department exclude the language, “if reasonably possible.”

4. ELIMINATE THE LIMITATION OF LIABILITY PROVISION FOR

CURTAILMENT OF SERVICE

The Company is proposing to limit Company liability regarding curtailment or

interruption of service. Exhs. ES-RDP-14, pt. 1, p. 181; Tr. Vol. XI, pp. 2254-2255. The AGO

recognizes - and supports - the need for the Company to protect the integrity of its system.

However, the AGO objects to the Terms and Conditions language that automatically excludes

liability.

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the Company may, in its sole judgment, curtail or interrupt electric service

or reduce voltage and such action shall not be construed to constitute a

default nor shall the Company be liable therefor in any respect.

Exh. ES-RDP-14, pt. 1, p. 181

Company application of this provision could preclude a customer an opportunity to

exercise his or her statutory rights to resolve bona fide disputes. See G.L. c. 164, §§ 1a (Electric

Restructuring); 1f (Consumer Protection); 1i (Service Quality); 139, 139a, 140, (Net Metering

Facilities); 142 (Distributed Generation); 220 C.M.R. § 8.00 (Qualified Facilities and On-Site

Generation); 10.00 (Electric Restructuring); 18.00 (Net Metering); 19.00 (Emergency Response

Plans); and 25.00 (Billing and Termination Procedures).

The Company justifies adopting this language because it is in the Commonwealth

Electric tariff, implying that the Company is using the Commonwealth Electric tariff as the

baseline, and that the provision is not new. Exh. AG-49-16. However, explaining that the

Company is adopting tariff language which is less favorable to customers simply because it

decided to adopt Commonwealth Electric’s tariff as the baseline tariff, does not justify using the

more stringent language. Further, the fact that the provision is preexisting also does not explain

why it is necessary to include in the consolidated Terms and Conditions. The Company witness,

Mr. Chin testified that that this provision is needed for customer safety and system integrity.

Exh. Tr. Vol. XI, p. 2255. However, since this provision did not appear in all tariffs it is clearly

not considered necessary for these reasons.

The AGO requests that the Department exclude the language that automatically limits

liability in the Company’s Terms and Conditions with respect to curtailment or interruption of

service.

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5. FEE INCREASES

The Company is simultaneously proposing to increase the fees in Appendix A of each

legacy company’s Terms and Conditions for Distribution Service, including the returned check

fee, account restoration charges, and a warrant fee. Exhs. ES-RDP-9, p. 17; ES-RDP-14, pt.1, p.

184; DPU-6-4, Atts. DPU-6-4(a)-(g); Tr. Vol. XI, p. 2266. The WMECo legacy company’s last

rate case was D.P.U. 10-70 and WMECo presumably appropriately reset its fees at that time.

The record does not indicate when the NSTAR legacy companies last reset its rates. In its initial

filing, the Company proposed certain fees. See e.g., Exh. ES-RDP-14, Pt. 1, p. 184. On cross

examination, the Company stated that “we had some formula errors” and changed the proposed

fees, in some cases quite significantly. Tr. Vol. XI, p. 2260; DPU-6-4, Atts. DPU-6-4(a)-(g). In

addition, the changed fees levels were subsequently proposed to be adjusted to round the fee to

the nearest dollar. Tr. Vol. XI, pp. 2260, 2266.

The Company’s current proposal for the account restoration fee, $71, is an increase of

approximately 700 percent for Commonwealth Electric and Cambridge Electric Light, about 450

percent for Boston Edison, and about half Boston Edison’s percentage for WMECo. Tr. Vol. XI,

p. 2260. Other fees have also increased significantly, for example the ‘can’t get in’ or warrant

fee, increased to $214. Tr. Vol XI, p. 2266. (However, it is sometimes difficult to discern from

the Company’s presentation exactly what is being changed and from what levels.) See e.g. Exh.

ES-RDP-14, Pt. 1, p. 184; Exh. ES-RDP-14, Pt. 2, p. 201.) The Company’s witness testified that

the Company wanted to move to blended cost based fees for all legacy companies (Tr. Vol. XI,

p. 2268), although at the same time the Company testified that some additional factors were not

considered and so the fees were not truly cost based. Id., pp. 2268-2269. The Company did not

consider a series of increases over time to avoid the abrupt increases proposed. Id.

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Given that the fee increases proposed by the Company are very large and potentially

disproportionately impacts a disadvantaged (i.e., low-income) segment of the Company’s

customer base, the Department should implement any increases over time consistent with its

long-standing principle of rate continuity. One way to set new fees would be to take the fee

levels established in 2010 for WMECo and adjust them upward to reflect cost increases in the

intervening seven years.

Moreover, regardless of the fee level established, it would be appropriate to exempt those

Company customers on the low-income rate from at least the Account Restoration fee.55 There

is abundant precedent for this. National Grid not only has a much lower Account Restoration fee

as part of its Terms and Conditions ($38) but it exempts its low-income customers from this fee.

The pertinent language of the National Grid tariff (M.D.P.U. 1192, Appendix A) is as follows:

Account Restoration Charge

Pursuant to the Company’s Terms and Conditions, the Company

may assess an Account Restoration charge for the restoration of

service after discontinuance…. The Account Restoration Charge of

thirty eight dollars ($38) will be charged and collected from all

customers except the Company’s low income (Rate R-2) customers.

The Department should adopt the same language in this proceeding for Eversource.

6. THE DEPARTMENT SHOULD REQUIRE ADDITIONAL CUSTOMER

EDUCATION, OUTREACH, AND COMPANY OWNERSHIP OF PRIVATE

POLES

Eversource proposes to adopt WMECo’s line extension policy for all of Eversource’s

customers. Although the current and proposed line extension policies require Company

55 The Department has the authority to mandate reduced fees on the basis of income criteria. American Hoechest

Corporation, 379 Mass 408 (1980); Boston Edison Company v. Department of Public Utilities, 375 Mass 443, 489

(1971).

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ownership of any installed poles and wires, more than 11,600 customer accounts continue to

receive electric service over lines attached to privately-owned poles and wires.56 Tr., Vol. XI,

pp. 2277-78; RR-AGO-11, Att. (c). Private ownership of poles and wires is a result of practices

in real estate development and utility regulation that occurred decades ago, and thus, many

customers who receive service through privately-owned poles and wires today are surprised

when they learn of their ownership and maintenance responsibilities. Moreover, only a small

percentage of affected customers have engaged with the Company to transfer ownership. The

Company should take additional steps to inform customers, particularly those new property

owners taking over existing service, and to accelerate the transfer of ownership of this privately-

held equipment to the Company.

Eversource estimates that some 20,000 poles and 2,800 pole lines continue to be privately

owned by 11,638 customer accounts. Tr., Vol. XI, p. 2276; RR-AG-11, Att. (c). Although most

of the affected equipment, 18,146 poles, are in the former Commonwealth Electric Company’s

service territory, privately-owned poles are present throughout the Company’s territory.57 RR-

DPU-35, Att. Although the Company does not own or maintain privately-owned equipment, it

attempts to track it via its Graphical Information System (“GIS”). Tr., Vol. IV, p. 752; Tr., Vol.

XI, p. 2277.58

In 2014, at the Department’s direction, the Company renewed efforts, originally begun in

1991, to inform customers of their responsibilities with respect to the privately-owned equipment

and options for ownership transfer. Tr., Vol. XI, pp. 2282-83, Exh, RR-AG-11, Att. (d). As part

56 Beginning with a 1998 tariff update for Commonwealth Electric Company customers, the Company ended the

practice of privately-owned poles and wires by requiring pole ownership transfer in its line extension policy. 57 The Company identified the following quantities of privately-owned poles in each of its five regions: Metrowest:

1,316; MetroBoston: 706; Cambridge: 2,072; South: 18,146; and West: 28. Exh. RR-DPU-35, Attachment. 58 The Company first took stock of the prevalence of privately-owned poles and wires in the aftermath of Hurricane

Bob, which hit the Company’s service territory in the south coast of Massachusetts and Cape Cod particularly hard

in 1991. Tr., Vol. XI, pp. 2280, 2282-83.

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of this effort, the Company sent at least one form letter to each of the 11,638 affected customer

accounts, with approximately one-third receiving two reminder letters and another approximately

one-third receiving only the original letter. RR-AG-11, Att. (c), p. 2. Distribution of the letters

began in May 2014 and concluded in September 2015. Id. The form letter advised the customer:

(1) they are served, in part, by privately-owned electrical equipment; (2) they are responsible for

maintenance and restoration after a storm; and (3) they may retain ownership or can work with

the Company to take ownership after “certain requirements are met.” Exh, RR-AG-11,

Attachment (a). The Company does not appear to have made any efforts to communicate with

customers since September of 2015. See RR-AG-11; RR-AG-11 Att. (c).

In order for the Company to assume ownership, the equipment must be in good condition

or replaced to company standards, and there must be an easement for the private real property to

allow for maintenance and restoration efforts and trimmed trees. Tr. Vol. XI, pp. 2281, 2288-89.

The customer form letter does not provide customers with these details, nor does the Company

provide an estimate of the customer’s cost to bring the equipment and property up to the proper

standards. RR-AG-11, Att. (a). The Company does not have a current estimate of the cost to

assume legal responsibility of the privately-owned poles and pole lines. Tr., Vol. XI, pp. 2289-

90. In 1991, the Company estimated that doing so would cost at least $25 million. Tr., Vol. XI,

pp. 2290-91. Considering the age of the infrastructure and the impact of inflation on that 1991

estimate, the cost to assume legal ownership of all privately owned poles and wires is likely

much higher. Id.

The Company indicates that, as a result of the renewed communications efforts in 2014,

877 customers are willing to work towards ownership transfer, a mere 7.6 percent [ 877 / 11,600

] of the affected customer population. Tr., Vol. XI, p. 2282. As the condition of this equipment

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continues to deteriorate over time, the customer’s and Company’s service is further placed at

risk. Furthermore, new homeowners are likely to be even more oblivious to the true nature of

their electric service than existing homeowners. To minimize customer confusion, the

Department should require the Company to actively engage with customers to facilitate

ownership transfer and apprise new customer account holders of any private ownership

responsibilities when they open a new account.

K. MERGER REVIEW - SECTION 96

1. BACKGROUND

On July 16, 2016, the Company filed with the Department a request for advisory ruling

that a proposed consolidation of NSTAR and WMECo did not require Department pre-approval

under Section 96. On August 10, 2016, the Attorney General filed comments with the

Department arguing that Eversource was required to file for and obtain Section 96 approval

before Eversource could consolidate its operating companies.

On January 13, 2017, the Department agreed with the AGO and required Eversource to

file for Department review and approval under Section 96 before consolidating NSTAR and

WMECo. NSTAR Electric Company and Western Massachusetts Electric Company each d/b/a

Eversource Energy, D.P.U. 16-108 (July 13, 2017). In its Order, the Department required the

Company’s Section 96 petition to include, in addition to the showings provided by Section 96

and Department precedent, a description of the consolidated entity, the functionality of the

consolidated entity, the integration process, the timing of the integration process and the

organizational, accounting, and legal steps to be taken to accomplish the consolidation. D.P.U.

16-108, p. 21. In addition, given the review of the NSTAR/NU merger in prior proceedings, the

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Department anticipated to focus its review in this docket on “matters associated with service

quality and rate impacts for customers.” Id.

2. THE DEPARTMENT SHOULD CONSIDER RATE IMPACTS BEFORE

APPROVING THE COMPANY’S SECTION 96 PETITION

In its Interlocutory Order on Attorney General’s Motion to Protect Intervenors’ Due

Process Rights, D.P.U. 17-05, (June 9, 2017) the Department determined that “it is critical that

the issue of rate design receive adequate attention within this docket.” D.P.U. 17-05, p. 13.

“[U]nlike the rate design set forth in the Companies’ initial filing, here the Companies propose to

consolidate rate classes and rates for NSTAR’s and WMECo’s residential customers effective

January 1, 2019.” Id., p. 6.

The revised proposal does, however, shift revenues between

NSTAR Electric and WMECo as compared to the original proposal

(Exh. ES-RDP-3 (ALT1), Sch. RDP-4 (East/West)). If the various

rate design changes are approved as proposed, bill impacts for

certain WMECo and NSTAR Electric customers would decrease in

relation to the original proposal while bill impacts for other WMECo

and NSTAR Electric customers would increase in relation to the

original proposal (Exhs. ES-RDP-2 (ALT1), D.P.U. 17-05 Page 7

Sch. RDP-9 (East/West); ES-RDP-3 (ALT1), Sch. RDP-3

(East/West); ES-RDP-4 (ALT1), Schs. RDP-3 (East/West) through

RDP-7 (East/West), and RDP-15; DPU 56-9 (Supp.) at 7).

Id., pp. 6-7.

The Department has established a separate schedule to investigate new rate design

proposals. While the Department has some evidence in the record regarding service quality, it

has yet to consider matters associated with rate impacts for customers. Before deciding on

whether the proposed consolidation is in the public interest, the Department should be informed,

based on the evidence, about how that consolidation will impact customers’ bills. In order for

the Department to determine whether the proposed merger is in public interest, the Department

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must determine if it can set just and reasonable rates after the merger according to its five goals

for utility rate structure: Efficiency; Simplicity; Continuity, Fairness; and Earnings Stability.

Thus, the Department should not rule on the Section 96 request until after it hears all the

evidence on the current rate design proposals and rate impacts on customers.

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VI. CONCLUSION

The Department should reject the Company’s proposed rate increase and should accept

the AGO’s recommendations as set forth in this brief as they are in the interest of the Company’s

customers.

Respectfully submitted,

MAURA HEALEY

ATTORNEY GENERAL

By:

Joseph W. Rogers

Nathan Forster

John J. Geary

Matthew Saunders

Donald Boecke

William Stevens

Elizabeth Anderson

Lynda Freshman

Alexander Early

Joseph Dorfler

Elizabeth Mahony

Sarah Bresolin

Shannon Beale

Christina Belew

Assistant Attorneys General

Office for Ratepayer Advocacy

One Ashburton Place

Boston, MA 02108

(617) 727-2200

July 21, 2017