ALJ/MLC/tcg - California



ALJ/KK2/lil Date of Issuance 6/20/2017

Decision 17-06-006 June 15, 2017

BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA

|Application of Southwest Gas Corporation (U905G) for Authority to Increase | |

|Rates and Charges for Gas Service in California, Effective January 1, 2014. |Application 12-12-024 |

| |(Filed December 20, 2012) |

| | |

DECISION GRANTING THE RELIEF SOUGHT IN THE PETITION

FOR MODIFICATION OF DECISION 14-06-028 AND

ORDERING MEMORANDUM ACCOUNTS

Summary

This decision grants Southwest Gas Corporation (Southwest Gas) the relief sought in its petition for modification of Decision (D.) 14-06-028 (Petition). The Petition is uncontested. This decision directs Southwest Gas to file its next general rate case filing by September 1, 2019, with a 2021 test year. Southwest Gas is authorized until 2020 to maintain its existing rate structure, as previously authorized in D.14-06-028, including its previously authorized 2.75 percent Post Test Year Mechanism adjustments. Southwest Gas must also establish memorandum accounts as directed in this decision. This decision closes the proceeding.

Background

Southwest Gas Corporation (Southwest Gas) is a multi-jurisdictional public utility, providing natural gas service to customers in California, Arizona and Nevada. In California, Southwest Gas serves approximately 185,000 customers in its three ratemaking jurisdictions: (1) Southern California; (2) Northern California; and (3) South Lake Tahoe.

Historically, Southwest Gas received approval for its rate structure on a five-year cycle (one test year followed by four attrition years). On December 20, 2012, Southwest Gas filed Application (A.) 12-12-024 for authority to increase rates and charges for gas service in its three California jurisdictions, effective January 1, 2014. Decision (D.) 14-06-028 authorized revenue requirement for test year 2014, with increases for attrition years 2015, 2016, 2017 and 2018,[1] and ordered Southwest Gas to file its next general rate case (GRC) by September 1, 2017, with test year 2019.[2]

On December 28, 2016, Southwest Gas filed its petition for modification of D.14-06-028 (Petition). In it, Southwest Gas requested:

1) Authorization to file its next GRC application by September 1, 2019, with a test year of 2021, instead of the previously ordered filing deadline of September 1, 2017, with a test year of 2019;

2) Authorization, until 2019, to maintain its existing rate structure ordered in D.14-06-028, including previously authorized 2.75 percent Post Test Year Mechanism (PTYM) adjustments; and

3) Expedited consideration of the Petition.

No party has filed a response or protest to the Petition. Southwest Gas contends in its Petition that it previously met and conferred with the Office of Ratepayer Advocates (ORA) and the Western Manufactured Housing Communities Association (WMA)[3] regarding the Petition and the remedies Southwest Gas seeks in it. Southwest Gas contends both ORA and the WMA expressed support for the Petition and the relief sought therein.

Rule 16.4 Requirements

Commission Rule 16.4[4] of its Rules of Practice and Procedures (Rules) governs petitions for modification. Rule 16.4(b) requires that a petition for modification concisely state the justification for the proposed relief and propose specific wording for all requested modifications. Petitions for modification must be filed within a year of the decision they seek to modify. If more than one year has passed since the underlying decision was issued, Rule 16.4(d) requires that the petition state why it could not have been presented within one year of the effective date of the underlying decision.

Discussion

1 Extension of GRC Filing Date and 2.75 Percent Post-Test Year Revenue Requirement Increase

Southwest Gas contends, and we agree, that modifying D.14-06-028, as Southwest Gas proposes, to allow it to file its next GRC in 2019, is in the public interest. This would allow customers two additional years of the current reasonable and stable rates approved in D.14-06-028 without the added expenditure of litigating a GRC proceeding or uncertain additional rate increases during that period. Southwest Gas also contends that its current revenue requirement and rate of return are not in need of adjustment, beyond those authorized by D.14-06-028 (with 2.75 percent PTYM annual increase). Southwest Gas contends that litigating a GRC is unnecessary and would be an inefficient use of Southwest Gas, ORA, and Commission resources which then will indirectly flow to the detriment of the ratepayers. We agree and see no public interest benefit of a GRC filing in 2017 under these circumstances. Thus, Southwest Gas is excused from filing its next GRC filing in 2017. Instead, Southwest Gas must file its next GRC filing by September 1, 2019, with a test year of 2021.

As we authorize Southwest Gas to file its next GRC application two years later than originally ordered in D.14-06-028, it is also reasonable to authorize Southwest Gas to continue to maintain its existing rate structure, including the PTYM increases, during those additional two years. This would maintain rate stability and operational continuity during this period.

Southwest Gas is therefore authorized until 2019 to maintain its existing rate structure, as previously authorized in D.14-06-028, including the 2.75 percent PTYM annual adjustments.

2 Memorandum Accounts

In view of the two-year delay in Southwest Gas’ filing of its next GRC, as authorized in this decision, it is necessary and in the public interest to require that Southwest Gas establish two memorandum accounts now. These memorandum accounts would be required of Southwest Gas as part of the next GRC filing, and since that filing is being delayed by two years here, we will require these memorandum accounts now to go into effect during the extended GRC period authorized in this decision, as discussed below.

1 Tax Memorandum Account and

Related Reporting Requirement

In view of some recent tax related issues, which became significantly relevant to GRC proceedings since Southwest Gas’ last GRC, we find it prudent for Southwest Gas to establish a two-way Tax Memorandum Account. The first of those issues arose when the Internal Revenue Service issued its Revenue Procedure 2011-43, which provides utilities a safe harbor method of accounting for repair deduction. Then another issue arose when Congress enacted several federal statutes affecting the bonus depreciation tax benefits.

With these and other potential tax law or policy changes, we believe that a two-way Tax Memorandum Account is necessary to enable the Commission, going forward, to track and examine revenue and ratepayer impacts caused by the utilities’ response to them. We therefore required similar two-way Tax Memorandum Accounts in recent GRC decisions for other investor-owned utilities.[5]

By way of example, D.16-06-054 resolved the last GRC filings by San Diego Gas & Electric Company (SDG&E) and Southern California Gas Company (SoCalGas).[6] In those underlying consolidated GRC proceedings which resulted in D.16-06-054, the Commission learned that SDG&E and SoCalGas had previously changed their accounting methods concerning repair deductions which may have had detrimentally impacted the ratepayers, and there also were several recent tax law changes (concerning bonus depreciation and related accounting approaches) which affected the ratepayers.

To address potential ratepayer impacts flowing from both actual and potential changes in tax laws, policies and/or practices, in D.16-06-054, the Commission ordered two-way Tax Memorandum Account for SDG&E and SoCalGas to begin tracking the impacts of how the utilities take various tax elections and to increase the transparency of the utilities’ incurred and forecasted income tax expenses presented before the Commission in the consolidated GRC proceedings. As for Southwest Gas in this proceeding, there is no evidence that it has changed its accounting method concerning repair deductions or anything else since the issuance of D.14-06-028. We, nonetheless, believe public interest and prudent accounting practice require that Southwest Gas establish a two-way Tax Memorandum Account here for reasons analogous to those we applied in D.16-06-054 for SDG&E and SoCalGas. Southwest Gas shall file an advice letter within thirty days of this decision to establish this Tax Memorandum Account.

In the Southwest Gas’ Tax Memorandum Account, Southwest Gas shall track, going forward and during the extended GRC period, any revenue differences resulting from the differences in Southwest Gas’ income tax expenses authorized as a result of this decision and its actually incurred income tax expenses. Specifically, this Tax Memorandum Account shall track Southwest Gas’ income tax expenses, including repair deductions and bonus depreciation, and have separate line items detailing the differences between all authorized income tax expenses and all actually incurred income tax expenses, resulting from (1) net revenue changes, (2) mandatory tax law changes, tax accounting changes, tax procedural changes, or tax policy changes, and (3) elective tax law changes, tax accounting changes, tax procedural changes, or tax policy changes.

This means that if Southwest Gas were to receive repair deductions, Southwest Gas must track the revenue impacts resulting from the election of the repairs deduction in its Tax Memorandum Account; and if Southwest Gas elects to use bonus depreciation, it must also track the revenue impacts resulting from that election in its Tax Memorandum Account.

We provide specific guidance to Southwest Gas for the manner in which it shall establish and utilize its Tax Memorandum Account. First, by authorized income tax expenses as applied to the extended GRC period, we mean the income tax expenses authorized for 2019 and 2020 as a result of this decision. The authorized income tax expenses in 2019 and 2020 shall be calculated by first escalating the 2014 tax expenses authorized in D.14-06-028 by the PTYM annual adjustments authorized from 2015 through 2018 and then annually escalating the 2.75 percent annual PTYM adjustments through to 2019 and 2020. While the 2.75 percent is generally applied to the revenue requirement and not individual expenses, Southwest Gas shall demonstrate, in its advice letter establishing this Tax Memorandum Account, how the authorized tax expenses were calculated by escalating the amount from 2015 through 2020 and how the authorized revenue requirement relating to income tax expenses were calculated for 2019 and 2020.

One of our rationales in requiring the Tax Memorandum Account involves bonus depreciation which deserves a contextual elaboration here. A bonus depreciation is a form of accelerated depreciation, which impacts rates. An election to use bonus depreciation refers to a situation where a taxpayer is allowed to claim an additional amount of deductible depreciation above what is normally available. Three recent federal tax statutes (the American Taxpayer Relief Act of 2012 (ATRA),[7] the Tax Increase Prevention Act of 2014 (TIPA)[8] and the Protecting Americans From Tax Hikes Act of 2015 (PATH))[9] address or otherwise affect bonus depreciation tax benefits. If the bonus depreciations authorized therein are not appropriately accounted for, going forward, Southwest Gas’ revenue requirements will not reflect the decrease in tax expenses due to bonus depreciation. In turn, its ratepayers will pay higher rates than reasonable, all else equal.

The establishment of the Tax Memorandum Account under these circumstances is consistent with Resolution L-411A in which the Commission stated: “we believe that an even handed approach to regulation requires us to consider, when there has been a large and unexpected decrease in expenses between rate cases, whether it is appropriate to establish a memorandum account to allow for a future decrease in rates.”

Based on the foregoing, the Tax Memorandum Account must be established, as discussed in this decision, to enable the Commission’s review of the ratepayer impacts in Southwest Gas’ next GRC proceeding. The Commission at that time will also consider any arguments about possible adjustments relating to the Tax Memorandum Account. The account shall remain open and the balances in the account shall be reviewed in every subsequent GRC proceeding until a Commission decision closes the account.

As we have done in other recent GRCs, we will require Southwest Gas to notify the Commission of any other tax-related changes, any tax-related accounting changes, or any tax-related procedural changes that materially affect, or may materially affect, revenues, and any revenue differences if applicable. Our reference to “materially affect” means a potential increase or decrease of $3 million or more. The failure to disclose such changes in a timely fashion undermines the integrity of the regulatory process, and may amount to a violation of Rule 1 of the Commission’s Rules.

2 Section 706 Executive Compensation

Memorandum Account

Southwest Gas must establish an Executive Compensation Memorandum Account pursuant to Public Utilities Code[10] Section 706, which became effective on January 1, 2016. It defines a “triggering event” as an event occurring after January 1, 2013, wherein “an electrical corporation or gas corporation violates a federal or state safety regulation with respect to the plant and facility of the utility and, as a proximate cause of that violation, ratepayers incur a financial responsibility in excess of five million dollars ($5,000,000).”[11] Subsection (b) of that Code section provides that:

(b) For a five-year period following a triggering event, no electrical corporation or gas corporation shall recover expenses for excess compensation from ratepayers unless the utility complies with the requirements of this section and obtains the approval of the commission pursuant to this section.

In the event of a triggering event and to be able to review any proposed excess compensations under this requirement, the Commission must:

… require all authorized executive compensation to be placed in a balancing account, memorandum account, or other appropriate mechanism so that this section can be implemented without violating any prohibition on retroactive ratemaking.[12]

Accordingly, Southwest Gas must establish an Executive Compensation Memorandum Account and track the compensation of its officers. It must track the compensation paid or owed to its officers, and it must follow the requirements of this code section if it seeks to have ratepayers pay for the “excess compensation” that may have been paid to or is owed to an officer in connection with a “triggering event,” as defined in that section.

The Executive Compensation Memorandum Account will allow the Commission to review what was paid and awarded to an officer in the years after a triggering event, and to determine in a company’s application if any monies paid should be refunded (or allowed to be recovered in rates). Such an account enables the Commission’s review of any related ratepayer impacts in Southwest Gas’ subsequent GRC proceeding. The Commission at that time will also consider any arguments about possible adjustments relating to the Executive Compensation Memorandum Account. The account shall remain open and the balance in the account shall be reviewed in every subsequent GRC proceeding until a Commission decision closes the account.

3 Procedural Considerations

Southwest Gas contends that its realization that a petition for modification should be filed only came to light recently during its preparation for the anticipated September 1, 2017 GRC filing. Southwest Gas explains that its representatives met with ORA staff in November 2016 to discuss the anticipated 2017 GRC filing as ordered in D.14-06-028. During that meeting, Southwest Gas realized the potential public interest benefits of extending the current rate case cycle for two years. Thereafter, Southwest Gas decided to seek modification of D.14-06-028.

Based on the foregoing statement of justification, we find Southwest Gas has demonstrated reasonable and good cause as to why the Petition was filed more than a year after D.14-06-028 was issued. This complies with the Rule 16.4(d) of the Commission’s Rules.

Southwest Gas has also requested expedited consideration of the Petition so that it would know, by or before April 2017, whether to allocate resources toward analysis and preparation for a September 2017 GRC filing. Expedited consideration is warranted, and we therefore grant it.

Comments on Proposed Decision

The proposed decision of the Administrative Law Judge (ALJ) Kimberly Kim was mailed to the parties in accordance with Section 311 of the Public Utilities Code and comments were allowed under Rule 14.3 of the Commission’s Rules. There are no Comments were filed.

Assignment of Proceeding

Clifford Rechtschaffen is the assigned Commissioner and Kimberly H. Kim is the assigned ALJ in this proceeding.

Findings of Fact

1. Southwest Gas is a multi-jurisdictional public utility, providing natural gas service to customers in California, Arizona and Nevada. In California, it serves approximately 185,000 customers.

2. On December 28, 2016, Southwest Gas filed the Petition to modify D.14-06-028, which previously authorized the revenue requirement for test year 2014, with increases for attrition years 2015, 2016, 2017 and 2018, and ordered Southwest Gas to file its next GRC by September 1, 2017, with test year 2019.

3. The Petition is uncontested and seeks to modify D.14-06-028 by (a) extending previously ordered GRC filing deadline from September 1, 2017 to September 1, 2019, and (b) authorizing Southwest Gas, until 2019, to maintain its existing rate structure as ordered in D.14-06-028, including its previously authorized 2.75 percent PTYM adjustments.

4. Having Southwest Gas file its next GRC in 2019 would allow ratepayers two additional years of the current reasonable and stable rates approved in D.14-06-028 without the added expenditure of litigating a GRC proceeding or uncertain rate increases during that time.

5. Southwest Gas contends that its current revenue requirement and rate of return are not in need of adjustment, beyond those authorized by D.14-06-028.

6. Litigating Southwest Gas’ GRC in 2017 is unnecessary and would be an inefficient use of the utilities’, ORA, and Commission resources which then will indirectly flow to the detriment of the ratepayers.

7. Authorizing Southwest Gas to continue to maintain its existing rate structure during the additional two years, including the previously authorized PTYM increases set forth in D.14-06-028, would maintain rate stability and operational continuity during this period.

8. In D.16-06-054, the Commission ordered a two-way tax memorandum accounts to track and examine revenue and ratepayer impacts caused by the utilities’ implementation of various tax laws, tax policies, tax accounting changes, or tax procedure changes.

9. Under Code Section 706, which became effective on January 1, 2016, Southwest Gas must establish a memorandum account to track the compensation of its officers authorized in this proceeding, going forward, and the compensation paid or owed to its officers, and to follow the requirements of Code Section 706.

10. Southwest Gas has demonstrated reasonable and good cause as to why the petition to modify D.14-06-028 has been filed more than a year after that decision was issued.

11. Southwest Gas requests expedited consideration of the Petition.

Conclusions of Law

1. Southwest Gas has complied with Rule 16.4(d) of the Commission’s Rules.

2. Expedited consideration of Southwest Gas’ Petition is warranted.

3. Modifying D.14-06-028 and directing Southwest Gas to file its next GRC in 2019, with 2021 test year, is reasonable under the circumstances and in the public interest.

4. It is reasonable to authorize Southwest Gas to continue to maintain its existing rate structure previously authorized in D.14-06-028 during that additional two years, which includes the PTYM increases set forth in D.14-06-028.

5. It is reasonable to modify D.14-06-028 as proposed, and the relief sought in the Petition should be granted.

6. Southwest Gas should establish a two-way Tax Memorandum Account.

7. Southwest Gas should notify the Commission of any tax-related changes, any tax-related accounting changes, or any tax-related procedural changes that materially affect, or may materially affect, revenues. “Materially affect” means a potential increase or decrease of $3 million or more.

8. Pursuant to Code Section 706, Southwest Gas must establish an Executive Compensation Memorandum Account.

9. This proceeding should be closed.

ORDER

IT IS ORDERED that:

1. The relief sought in the petition for modification of Decision 14-06-028 by Southwest Gas Company is granted. Southwest Gas Company:

a) Shall file its next general rate case by September 1, 2019, with 2021 test year; and

b) Is authorized until 2020 to maintain its existing rate structure, as previously authorized in Decision 14-06-028, including its previously authorized 2.75 percent Post Test Year Mechanism adjustments.

2. Decision (D.) 14-06-028 is modified, with modifications reflected in underlined format, as follows:

a) Modified Finding of Fact 37 of D.14-06-028:

The Company operates on a five-year general rate case cycle (test year plus 4 attrition years) meaning that, absent modification of this decision, its next general rate case will be filed in 2017 with a 2019 test year.

b) Modified Conclusion of Law 17 of D.14-06-028:

It is reasonable to authorize a PTYM adjustment for attrition years 2015-2020 in each of the Company’s rate jurisdictions at 2.75 percent per year.

c) Modified Conclusion of Law 30 of D.14-06-028:

The Company’s next general rate case should be filed in 2019, with a 2021 test year.

d) Modified Ordering Paragraph 3 of D.14-06-028:

Southwest Gas Corporation is authorized to implement the post-test year changes to rates and charges for years 2015 through 2020, to become effective on January 1 of each year, in each of its three California rate jurisdictions.

e) Modified Ordering Paragraph 12 of D.14-06-028:

Southwest Gas Corporation’s post-test year mechanism (PTYM) adjustment for attrition years 2015-2020 in each of its rate jurisdictions shall be based on the 2.75 percent per year PTYM adjustment that is currently in place.

f) Modified Ordering Paragraph 18 of D.14-06-028:

Southwest Gas Corporation shall file its next general rate case by September 1, 2019, with a 2021 test year.

g) Modified Ordering Paragraph 37 of D.14-06-028:

Southwest Gas Corporation is authorized to submit advice letters requesting attrition year adjustments to rates for 2015 through 2020 consistent with this decision. Supporting work papers shall be included with the advice letters.

3. Within 30 days of the effective date of this decision, Southwest Gas Company (Southwest Gas) shall file a Tier 2 advice letter to establish a Tax Memorandum Account and track Southwest Gas’ income tax expenses, including repair deductions and bonus depreciation, and comply with the below directives:

a) In the Tax Memorandum Account, Southwest Gas shall maintain separate line items detailing the differences between all authorized income tax expenses and all actually incurred income tax expenses, resulting from (i) net revenue changes, (ii) mandatory tax law changes, tax accounting changes, tax procedural changes, or tax policy changes, and (iii) elective tax law changes, tax accounting changes, tax procedural changes, or tax policy changes;

b) Southwest Gas shall apply the following definition and formula in its Tax Memorandum Account ordered in this decision: (i) Authorized income tax expenses, as applied to the extended general rate case (GRC) period, means the income tax expenses authorized for 2019 and 2020 as a result of this decision; (ii) The authorized income tax expenses for 2019 and 2020 shall be calculated by first escalating the 2014 tax expenses authorized in Decision 14-06-028 by the Post Test Year Mechanism (PTYM) annual adjustments authorized from 2015 through 2018 and then annually escalating the 2.75 percent annual PTYM adjustments through to 2019 and 2020; and (iii) Southwest Gas shall demonstrate, in its advice letter establishing this Tax Memorandum Account, how the authorized tax expenses were calculated by escalating the amount from 2015 through 2020 and how the authorized revenue requirement relating to income tax expenses were calculated for 2019 and 2020; and

c) Southwest Gas shall actively maintain and keep open the Tax Memorandum Account and its balances to be reviewed in every subsequent GRC proceeding until a Commission decision closes the account.

4. Southwest Gas Company shall notify the Commission of any tax-related changes, any tax-related accounting changes, or any tax-related procedural changes that materially affect, or may materially affect, revenues. “Materially affect” means a potential increase or decrease of $3 million or more.

5. Within 45 days of the effective date of this decision, Southwest Gas Company (Southwest Gas) shall file a Tier 2 advice letter to establish an Executive Compensation Memorandum Account, and comply with the below directives:

a) In the Executive Compensation Memorandum Account, Southwest Gas shall track (i) the date and (ii) amount (or cash value) of all monies and other compensations, including but not limited to, annual salaries, bonuses, benefits, and all other consideration of any value, paid or owed to its officers;

b) Southwest Gas shall follow all requirements of Public Utilities Code Section 706 if it seeks to have ratepayers pay for the “excess compensation” that may have been paid to or owed to an officer in connection with a “triggering event”; and

c) Southwest Gas shall actively maintain and keep open the Executive Compensation Memorandum Account and its balances to be reviewed in every subsequent general rate case proceeding until a Commission decision closes the account.

6. Application 12-12-024 is closed.

This order is effective today.

Dated June 15, 2017, at Sacramento, California.

MICHAEL PICKER

President

CARLA J. PETERMAN

LIANE M. RANDOLPH

MARTHA GUZMAN ACEVES

CLIFFORD RECHTSCHAFFEN

Commissioners

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[1] D.14-06-028, at Ordering Paragraph (OP) 12.

[2] Id. at OP 18.

[3] WMA intervened and participated in Southwest Gas’ last GRC proceeding.

[4] Hereinafter all references to “Rule” or “Rules” are to the California Public Utilities Commission Rules of Practice and Procedure – California Code of Regulations Title 20, Division 1, Chapter 1.

[5] See e.g., D.16-06-054.

[6] A.14-11-003 and A.14-11-004.

[7] The ATRA was enacted into law on January 2, 2013. The ATRA included a one year extension of the 50 percent bonus depreciation for eligible property placed into service before January 1, 2014, and for costs incurred before January 1, 2014 attributable to eligible long production period property placed into service before January 1, 2015.

[8] The TIPA was enacted into law on December 19, 2014. The TIPA included a provision to extend the 50 percent bonus depreciation for one year retroactive to January 1, 2014. This 50 percent bonus depreciation applies to eligible property placed into service before January 1, 2015, and for costs incurred before January 1, 2015 attributable to eligible long production period property placed into service before January 1, 2016.

[9] The PATH was enacted into law of December 18, 2015. The PATH includes a provision which extends bonus depreciation under the following phase-down schedule through 2019: at 50 percent for 2015-2017; at 40 percent in 2018; and at 30 percent in 2019.

[10] All references to the Code in this decision refers to the California Public Utilities Code, unless otherwise specified.

[11] Code Section 706, subsection (a).

[12] Id., subsection (f).

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