In the Matter of the Petition of Public Service Electric and Gas Company for Approval of an Increase in Gas Rates and for Changes in

In the Matter of the Petition of Public Service Electric and Gas
Company for Approval of an Increase in Gas Rates and for
Changes in the Tariff for Gas Service.
BPU Docket No. GR01050328

In the Matter of the Petition of Public Service Electric and Gas
Company for Authority to Revise its Gas Depreciation Rates.
BPU Docket No. GR01050297

EXECUTIVE SUMMARY OF THE BRIEF FILED ON BEHALF OF
THE DIVISION OF THE RATEPAYER ADVOCATE

Division of the Ratepayer Advocate

The Division of the Ratepayer Advocate represents the interests of all utility customers, including residential, small business, commercial and industrial ratepayers. The Division is also a party in every case where New Jersey utilities seek changes in their rates or services. The Ratepayer Advocate gives customers a voice in setting long-range energy, water and telecommunications policy that will affect utility services for many years to come.

Public Service Electric and Gas Company

Public Service Electric and Gas Company ("PSE&G, "Public Service" or the "Company") is a combination gas and electric utility which provides natural gas utility services to more than 1.6 million customers located in Bergen, Hudson, Passaic, Essex, Morris, Somerset, Hunterdon, Mercer, Monmouth, Ocean, Burlington, Camden and Gloucester Counties.

PSE&G's Proposed Increase

On May 25, 2001 the Company filed a petition before the Board of Public Utilities ("BPU" or the "Board") requesting Board approval of an increase in its gas rates and for changes in its tariff for gas service. The overall rate increase proposed is approximately 7.06%, which the Company claims will yield an increase in revenues of approximately $170 million.

Impact on Ratepayers of the Increase Proposed By PSE&G

The percentage rate increase proposed by PSE&G will be greater than the overall increase for certain classes of customers. Furthermore, the proposed increase will only affect the non-gas commodity portions of a customer's bill, including charges assessed on a per-therm and monthly basis, such as the per-therm distribution charge and the monthly customer charge. For example, for residential customers the Company is proposing an rate increase of approximately 10.96%. A typical residential customer with monthly usage of 200 therms of natural gas per month during the Winter months, and an annual usage of 1,260 therms of natural gas, such as a gas heating customer, would face an annual increase of approximately $120.42, or 11.16% under the Company's proposal. The General Service class of customers, which includes most small businesses, will face an overall increase of approximately 6.07% under the Company's proposal.

Procedural Status of the Rate Increase Proceeding

The Company's rate increase proposal is now in litigation before the New Jersey Office of Administrative Law. The Ratepayer Advocate and other parties have summarized their positions in legal briefs submitted to the Office of Administrative Law Judge, who will issue a decision which will be, in turn, considered by the Board of Public Utilities. Initial Briefs were filed on Friday, November 2, 2001 and Reply Briefs are due on November 14, 2001. The ultimate decision regarding all rate modifications in New Jersey is made by the Board of Public Utilities.

The Ratepayer Advocate's Role

The Ratepayer Advocate intervened on behalf of ratepayers in the proceedings associated with the proposed increase now before the New Jersey Office of Administrative Law and the Board of Public Utilities. The Ratepayer Advocate has its own staff attorneys and several expert witnesses analyzing data from the Company to effectively address the critical issues raised by the Company's rate increase request. The Ratepayer Advocate directed numerous formal written inquiries to the Company, seeking detailed information regarding the need for investment, the financial structure of the Company, its expenses, its financial obligations, and other areas. The Ratepayer Advocate's expert witnesses prepared and filed testimony in opposition to various portions of the Company's proposal to increase your rates. Copies of the Ratepayer Advocate's testimony are available on its website, www.rpa.state.nj.us. In hearings before the Office of Administrative Law, Ratepayer Advocate attorneys cross-examined Company executives and witnesses. The Ratepayer Advocate filed its Initial Brief at the Office of Administrative Law on November 2, 2001.

The Ratepayer Advocate analyzed the Company's proposal and, based upon careful review, opposes the Company's rate increase request.

The Ratepayer Advocate's Position

Under the laws of New Jersey, regulated utilities, such as Public Service, are permitted to charge rates that are "just and reasonable." The law also allows a utility company a fair opportunity to earn a profit on its investment. The critical focus of the Ratepayer Advocate's investigation is the level of revenue needed by the Company to to provide utility service and provide a reasonable return on the investment in its physical plant. The rates ultimately implemented should be the lowest possible, consistent with the requirement that the Company provide safe, adequate and proper utility service.

The Ratepayer Advocate focused on certain critical issues affecting rates and service, and the results of that investigation were set forth at length in its Initial Brief. Significantly, the Ratepayer Advocate's experts have found that instead of an increase, a rate decrease of approximately $14.5 million is due ratepayers. The Ratepayer Advocate's review of the Company's filing encompassed many areas, including the following key issues, as set forth in its Initial Brief:

Rate of Return: The law allows public utilities to earn a fair return on their investment. In this case, PSE&G predicated its proposed increase on a return on equity figure of 12.0%. The rate of return proposed by PSE&G, however, is the same rate of return used when its rate were last set, in 1992. Since then, there has been a pronounced downward trend in interest rates. The Ratepayer Advocate recommends the use of a lower return on equity figure, 9.85%. Overall, the Ratepayer Advocate's recommended return on equity figure would yield an overall rate of return of 8.22%, versus the 9.04% proposed by the Company.

Rate Base: Rate Base represents the dollar value of utility assets utilized to provide utility service, upon which the rate of return figure is applied. Rate base assets include gas distribution mains and service connections to customers, as well as a certain level of cash working capital. The Ratepayer Advocate found that the Company overstated its rate base amount. The Ratepayer Advocate recommends that the Board adopt a downward adjustment amounting to $145 million be applied to the Company's proposed rate base figure. This adjustment would reduce the Company's rate base to $1.82 billion.

Projected (Pro-Forma) Company Expenses and Revenue: The appropriate level of expenses and revenues associated with the provision of utility service is a factor in ratemaking. Projections of Company expenses and revenues were examined. The Ratepayer Advocate's witness challenged many components of the Company's claimed operating expenses, including the Company's accounting for consolidated income taxes, its labor cost estimate, and its marketing expense deferral and found that adjustments to the Company's figures were necessary. Among the more significant recommended adjustments were the reduction in the Company's claimed depreciation expense, from $129 million to $82 million, and the elimination of $6.35 million of executive incentive compensation expenses. The Ratepayer Advocate also recommended an adjustment of $22.9 million to reverse the Company's inclusion of the impact its proposed transfer of its gas supply, storage, and capacity contracts to an unregulated affiliate, since the Board has not yet ruled on that matter. The Ratepayer Advocate strongly opposed PSE&G's gas contract transfer proposal. The recommended adjustment is based on the presumption that the gas contracts will not be transferred to an affiliate. In sum, the Ratepayer Advocate recommended that the Board adopt adjustments in revenues and expenses that added $101 million to the Company's projections of operating income. The resulting increase in the projected operating income refutes the Company's claim that a rate increase is needed at this time.

Rate Design: The allocation of the proposed increase (decrease) to the various customer classes (i.e., residential, commercial, etc.) is an issue. The Ratepayer Advocate recommended an allocation formula which mitigates the bill impact of the proposed rate changes, so that no individual class of customers would be unduly burdened by a rate increase or unduly enriched by a rate decrease.

Tariff Changes: Furthermore, the Ratepayer Advocate recommends that certain tariff changes proposed by the Company should be rejected, so as not to deter competition or unduly burden ratepayers. The Ratepayer Advocate opposed as impediments to competition: (1) the Company's proposed one-year term for residential customers returning from competitive suppliers; (2) a proposed doubling of security charges for competitive suppliers; and (3) a proposal to offer new optional meter services before competitive suppliers are permitted to enter the market. The Ratepayer Advocate also opposed as excessive, unduly burdensome to low-income customers, and counterproductive the Company's proposal for a 275% increase in its reconnection charge for customers whose service is terminated for non-payment, from $20 to $75.

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