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IN RE: ORDER OF THE MISSISSIPPI PUBLIC SERVICE COMMISSION TO MISSISSIPPI POWER COMPANY TO FILE A PERFORMANCE EVALUATION PLAN OR SHOW CAUSE WHY IT CANNOT COMPLY

JANUARY 04, 1989

IN RE: ORDER OF THE MISSISSIPPI PUBLIC SERVICE COMMISSION TO MISSISSIPPI POWER COMPANY TO FILE A PERFORMANCE EVALUATION PLAN OR SHOW CAUSE WHY IT CANNOT COMPLY




IN RE: ORDER OF THE MISSISSIPPI PUBLIC SERVICE COMMISSION TO MISSISSIPPI POWER COMPANY TO FILE A PERFORMANCE EVALUATION PLAN OR SHOW CAUSE WHY IT CANNOT COMPLY

ORDER

This cause came on to be heard on Show Cause Order issued by the Mississippi Public Service Commission, hereinafter referred to as the" Commission ", to Mississippi Power Company, hereinafter referred to as the" Company "or as" MPC ", and the Commission after duly hearing and after considering all oral and documentary evidence in the proceeding, does find and Order as follows:.

This Commission has jurisdiction of this matter by virtue of its subject and the authority conferred upon this Commission by

 the laws of the State of Mississippi.

 On November 5, 1985, this Commission issued to the Company a Show Cause Order directing the Company to develop and file for consideration by this Commission a plan or procedure which, if adopted, would permit this Commission to evaluate the performance of the Company's utility responsibilities and obligations from time to time, and based upon those performance evaluations, to determine the reasonableness of the Company's utility rates subject to the jurisdiction of this Commission, or to show cause why the Company could not comply with that order. The Show Cause Order was issued because this Commission has for some time felt that the traditional method of utility rate making did not adequately consider the Company's performance in setting rates and did not recognize that a utility which performs its utility functions well and efficiently will be able to provide better service to its customers at lower rates while at the same time earning reasonable returns for its shareholders. Under traditional rate making, a utility was allowed to earn a higher rate of return than other utilities only when it was considered by investors to be more risky. Many times this perception by investors that a utility was more risky indicated and resulted from the fact that the utility was not performing its utility functions well.

 The Commission further ordered the development of this Plan because the traditional rate case means of setting rates is extremely costly, time consuming, technical and does not afford the public adequate input. A typical rate case will cost the state, the Company and the intervenors hundreds of thousands of dollars and can easily last three or more years. The result of that procedure has been often criticized by this Commission, the public, the legislature and just about everyone else involved. It appears that the old rate case system only benefits the expert consultants and lawyers which each party must hire.

 After issuance of the Show Cause Order, the Company worked on the development of such a plan with periodic direction supplied by the Commission and the Public Utility Staff. In MPC's response to the show cause order, it stated that MPC was unable to find any plan which is similar to the one proposed by the Commission. This is consistent with the findings of this Commission, the Public Utility Staff and several of the intervenors in this cause. In fact, no plan has been found which even seeks to examine the overall performance of a company as is proposed by this Commission. A number of plans adopted in other jurisdictions, namely New Mexico, Alabama, Michigan, and others, have incorporated measurements of single aspects of a company's financial performance to accomplish special purposes, but none has sought to measure the overall performance of the Company on

 the basis of a cross section of performance indicators. The performance indicators and the matrix arrangement in this Plan are unique and will allow this Commission for the first time to consider systematically how well the Company is serving its customers as a part of the process of setting rates.

 This is a new and innovative rate making approach which should insure the lowest possible rates for the ratepayers while assuring a reasonable rate of return for the stockholders. The Commission, however, assures all parties and the ratepayers it serves that the very innovative nature of the Plan may require adjustments from time to time and this Commission has the full power to and will adopt any necessary changes to insure the Plan's proper operation.

 On March 17, 1986, MPC responded to the Show Cause Order by filing its proposed plan. On April 4, 1986, this Commission requested that all interested parties intervene and file comments by May 6. Notice was given by registered mail to the Attorney General of the State of Mississippi, South Mississippi Legal Services, and all other parties participating in MPC's last major rate case. Notice was also published in a newspaper of general circulation in Mississippi. Following that notice, the Attorney General of the State of Mississippi, Southeast Mississippi Legal Services and Mississippi Legal Services Coalition (which, together will, be referred to as Legal Services), and General Motors Corporation all intervened. Prehearing comments were filed by Mississippi Power and Light and testimony were filed by the Attorney General and Legal Services. At the hearing, counsel for General Motors announced that he represented Dupont and Peavy Corporation, who were joining General Motors in the intervention.

 Opportunity was afforded to all parties to file data requests. In total, 151 such requests were made to the Respondent MPC and response given.

 On May 5, 1986, this matter was set for hearing before this Commission on June 17 and 18, 1986. At that hearing, all parties were given an opportunity to be heard. The Company, the Attorney General. Legal Services and the Public Utility Staff were all allowed to file testimony through the time of the hearing. Additionally, General Motors, who elected not to prefile any testimony, offered testimony live at the hearing. All witnesses were offered for cross examination.

 This Commission has considered the proposal submitted by the Company and the comments and suggestions of all parties concerning this matter. This Commission wishes to express its appreciation to all for the cooperative manner in which their assistance has been offered. This Commission recognizes that as

 we approach a new and innovative method of rate making, the assistance and cooperation of parties will be needed to insure that the new method is fair and reasonable to all parties. The response of the Company to the Show Cause Order in this matter provides a good starting point for the development of such a new and innovative, comprehensive Performance Evaluation Plan, but as pointed out by the Staff and the valuable comments and testimony of the intervenors, the Company's proposal is entirely too favorable to the Company and must be modified in order to be fair and reasonable to all parties. This Commission is always aware that Bluefield Water Works v. Public Service Commission of the State of West Virginia, 262 U.S. 679, 43 S. Ct. 675, 67 L.Ed. 1176 (1923) and Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 64 S. Ct. 281, 88 L.Ed. 333 (1944), as well as the decisions of the Mississippi Supreme Court require that rates yield a fair return on the reasonable value of utility property and that they be at the lowest reasonable rate to the customer. We find that the Plan, which we hereby adopt, yields such a result, and further allows this Commission to carefully monitor the performance of the Company and to use this to provide penalty or reward based upon how well the Company is operated.

 Whenever a commission undertakes something that is new and innovative, it must do so with caution. Several of the intervenors request we proceed with caution and others suggest that the Commission not undertake such a process at all. All of the intervenors, however, expressed support in concept for a plan which based the Company's returns on performance. While this Commission recognizes the need to proceed with caution, we also recognize that someone must take the first step toward innovative improvement. We believe that this is such a first step. We also believe that the Plan as substantially modified by us in this Order will accomplish the objectives sought to be attained and will yield a fair result to all parties. At the very outset, however this Commission cautions that it will diligently review the operation of the Plan and will not hesitate at any time to modify any portion or discard the Plan in its entirety if it is found that the Plan does not function as it should and yield a fair result.

 Prior to the Company's filing its response to our Show Cause Order, the Public Utility Staff undertook an investigation of performance plans. After the Company's filing, the Staff proceeded to study the details of that proposal and, in response to the request of this Commission, has submitted comments and filed testimony which have been very helpful to this Commission in evaluating MPC's proposal. Likewise, the comments of some of the intervenors have been helpful in pointing out aspects of the Plan which need to be changed before it is finally adopted. The Commission has considered and weighed heavily all of the comments

 and testimony. As the Plan operates, this Commission will continue to consider all the comments and may again call upon interested parties to submit their observations and to offer recommendations for improvements.

 For purposes of the rest of this Order, the Company's filing in response to our Show Cause Order should be used as a point of beginning and will be used to as such. Hereafter, whenever this Order mentions the" Plan ", that will be reference to the rate which this Commission intends to adopt and requires the Company to file incorporating all of the changes required by this Order. We, therefore, find that the following changes must be made to the Company's response before the Plan is adopted:

 GENERAL PROVISIONS

 QUARTERLY ADJUSTMENTS

 General Motors agreed with this Commission that performance evaluations should be a part of rate making but suggested that the evaluations be done only at the times when the utility requested traditional rate relief. While we think some performance evaluation may be appropriate when a utility makes a traditional rate request, we do not believe that the method proposed by General Motors affords the Commission an adequate opportunity to judge the Company's performance and to require adequate performance on a continuing basis. We believe that the quarterly evaluation and adjustment will allow this Commission proper oversight and make the utility more responsive to its customers while, at the same time, yielding a fair return to the Company at the lowest possible rates.

 AUDITS

 Mr. Thomas H. Weiss testified on behalf of the Attorney General about the need for an initial audit of the Company's historic records as well as the need for a continuing audit during the operation of the Plan. The type of audits which will be made under the Plan will be that of the historical performance and financial records of the Company similar to the audits which are regularly conducted of the Company by the Federal Energy Regulation Commission (FERC), Arthur Andersen and Company and the Internal Revenue Services. Unlike in traditional ratemaking, there will be no adjustments based upon what the Company projected its future financial condition will be. By using historical data, the task of the auditor is somewhat easier. The auditors must ensure that expenditures are properly allocated to accounts, that those expenditures are reasonable and not imprudent, and that the books and records properly indicate the financial condition and true performance of the Company. This

 Commission recognizes that any audit function is not a simple task but the Commission, through its own resources, can perform all the audits as they are required. It must be remembered that the Commission has just recently audited the Company's book in connection with the Company's filing in U-4774 and in connection with its regular review of the Company fuel adjustment clause. Thus the Commission is very familiar with the Company's books and finances. If, at any time, however, this Commission determines that further auditing needs to be done, this Commission will not hesitate to order such an audit regardless of whether the Plan is in effect or not.

 PUBLIC PARTICIPATION

 Certain intervenors expressed their desire to have hearings each quarter during the operation of the Plan. They contend that the law requires quarterly hearings. Such a requirement would impose on the utility and the Commission many more hearings than have been had in all prior rate cases filed by this Company and all those hearings would take place in a span of three years. While it is true that hearings have been a part of the traditional ratemaking procedure, hearings have not been the panacea which some intervenors would suggest. Rate hearings in the past have been costly for the people of the state of Mississippi, who ultimately bear the cost of not only this Commission, but also that of the Attorney General and Legal Services. The traditional process is also expensive to the utility. In fact, this Company estimates it has spent approximately $4,000,000.00 since 1980 on various rate matters before this Commission. The traditional rate process with its hearing has also taken valuable time which this Commission can now use to insure the Company is performing well. The Plan which this Commission adopts establishes formulas by which any revenue changes will be calculated during the term of the Plan. Those formulas incorporate all aspects of utility ratemaking which are just and reasonable. Unless this Commission later determines otherwise, those formulas will not be changed during the term of this Plan and will constitute the" rate. "The only function remaining, then, will be the mechanical application of this formulary rate to the performance and financial situation of the Company. That sort of mechanical application does not require regular hearing.

 Instead of limiting ratepayer involvement, we find that this Plan will give the public more opportunity for input than they have ever had in the past, since the ratepaying public will have direct input to the performance evaluations. This Commission, as a representative of those ratepayers, will also have a much greater opportunity than ever before to evaluate the day to day activities, performance and accounting practices of

 the Company. This Commission will use this opportunity to protect the ratepayers to a greater extent than could be possible under traditional ratemaking.

 Each quarter the Company will file necessary data with this Commission. That data and the Company's calculations will be audited to ensure it is in accord with the rate. The Mississippi public records laws make all information available to the public for inspection and copying, and interested parties need only ask to get all necessary information needed. Under the Plan, this Commission will more closely monitor this Company than it ever has in the past and will not hesitate to alter or modify it if it is found to be necessary.

 FILING PROCEDURES

 The Company has proposed that, should a dispute arise between the Commission and the Company about a quarterly filing, the revenue change proposed by the Company will go into effect subject to later reconciliation. This procedure is unacceptable. This Commission cannot allow the utility to put into effect any revenue change to which it disagrees. The Plan which is to be adopted shall provide that any revenue change be strictly in accord with the Plan. Any dispute as to any adjustment which may arise between the Company and the Staff shall promptly be brought to the attention of the Commission prior to the effective date of the adjustment. The Company and the Commission will attempt to resolve the dispute prior to the time the claimed adjustment is to go into effect. Should the Commission and the Company be unable to resolve that dispute within that time, only the undisputed portion of the adjustment will be put into effect and the disputed portion shall be resolved by the Commission during the next subsequent ...


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