STATE OF NEW JERSEY OFFICE OF ADMINISTRATIVE LAW

STATE OF NEW JERSEY

OFFICE OF ADMINISTRATIVE LAW

BEFORE HONORABLE GAIL M. COOKSON, ALJ

IN THE MATTER OF THE PETITION

OF PUBLIC SERVICE ELECTRIC

AND GAS COMPANY FOR

APPROVAL TO OFFER NEW

APPLIANCE SERVICE PRODUCTS

AND/OR SERVICES IN

ACCORDANCE WITH N.J.A.C. 14:4-

3.6(a) and (g)

)

OAL Docket No. PUC 08129-12

BPU Docket No. GO12030188

___________________________________________________________________________

INITIAL BRIEF ON BEHALF THE

DIVISION OF RATE COUNSEL

___________________________________________________________________________

STEFANIE A. BRAND, ESQ.

DIRECTOR, DIVISION OF RATE COUNSEL

DIVISION OF RATE COUNSEL

31 Clinton Street, 11

Floor

P. O. Box 46005

Newark, New Jersey 07101

Phone: 973-648-2690

Email: [email protected]s

ON BRIEF:

Christine M. Juarez, Esq.

Kurt S. Lewandowski, Esq.

TABLE OF CONTENTS

Page No.

I. SUMMARY OF POSITION .................................................................................. 1

II. PROCEDURAL HISTORY & STATEMENT OF FACTS ................................... 5

III. ARGUMENT........................................................................................................ 10

A. The New Services Proposed by PSE&G, With the Exception of WorryFree

Contracts for Pool Heaters & Gas Grills, Do Not Fit Within Any of the Categories Set

Forth in EDECA For Approval of New Competitive Services and Should Be Denied

By Your Honor. ............................................................................................................ 10

i. Categories (1), (3), and (5) of N.J.S.A. 48:3-58(b) Are Not Applicable to

PSE&G’s Petition. .................................................................................................... 11

ii. PSE&G’s Proposals Do Not Involve “Services Related to Safety and Reliability

of Utility Businesses” under EDECA. ...................................................................... 11

iii. With the Exception of WorryFree Contracts For Gas Grills and Pool Heaters,

PSE&G’s Proposals Are Not “Substantially Similar” to Competitive Services

Offered Pre-EDECA. ................................................................................................ 14

a. The Proposed Home System Protection Plans Are Not “Substantially Similar”

to the Grandfathered Services, and Should Be Denied......................................... 18

b. The Proposals to Install New Heat Pumps and New Mini-splits Are Not

“Substantially Similar” to the Grandfathered Services, and Should Be Denied... 20

c. Consistent With EDECA’s Intention to Limit Expansion of Competitive

Services, This Statutory Language Should Be Interpreted to Prohibit Expansion

Into New Appliances Such As Heat Pumps and Mini-splits. ............................... 23

iv. Your Honor Should Direct PSE&G To Copy Rate Counsel On All Future

Petitions and Notices Filed With the Board Regarding Any New Appliance Service

Offerings. .................................................................................................................. 24

B. As a Matter of Public Policy, PSE&G’s Appliance Service Business Should Not

Be Expanded Beyond Approval to Offer WorryFree Contracts for Pool Heaters and

Gas Grills, Because of The Competitive Advantage Enjoyed by PSE&G................... 25

C. PSE&G Should be Required to Return Margins Earned from New Appliance

Services to Ratepayers on a Concurrent Basis.............................................................. 28

D. PSE&G Should Monitor Its Hourly Charge Reports and Adjust its Hourly Rate if

Needed. ......................................................................................................................... 33

CONCLUSION................................................................................................................. 35

iii

TABLE OF AUTHORITIES

Page No.

Cases

DiProspero v. Penn, 183 N.J. 477 (2005) ......................................................................... 14

Ramapo River Reserve Homeowners Ass’n v. Borough of Oakland,

186 N.J. 439 (2006) .......................................................................................................... 14

State v. Hudson, 209 N.J. 513 (2012) ............................................................................... 12

State v. Lewis, 185 N.J. 363 (2005).................................................................................. 19

Statutes

N.J.S.A. 48:3-49.................................................................................................................. 1

N.J.S.A. 48:3-50(a)(1) ...................................................................................................... 27

N.J.S.A. 48:3-50(a)(2) .......................................................................................................27

N.J.S.A. 48:3-55(b)(l) ....................................................................................................... 32

N.J.S.A. 48:3-58................................................................................................................ 31

N.J.S.A. 48:3-58(b)....................................................................................................... 1, 10

N.J.S.A. 48:3-58(b)(2) ................................................................................................ 11, 34

N.J.S.A. 48:3-58(b)(4) .................................................................................................. 1, 14

Agency Orders

I/M/O Jersey Central Power & Light For Authorization to Implement a Conditioned Power

Service Program & For Approval & Acceptance of Tariff Revisions Related Thereto,

Docket No. ET92040380, Board Order, 10/19/93.................................................. 16, 17

I/M/O New Jersey Natural Gas Co. For Approval to Establish a Floor Price For Appliance

Service Contract & Non-Contract Services & To Implement Three New Electrical

Central Air Conditioning Services, BPU Docket No. GT99060394, Board Order, 3/27/00

....................................................................................................................................... 16

I/M/O NUI Elizabethtown Gas Co. For Approval to Establish a Floor Price Hourly Rate

For Appliance Service Contract & Non-Contract Services & To Implement New Electric

Central Air Conditioning Services, BPU Docket No. GR00060385, Board Order, 8/15/01

....................................................................................................................................... 16

I/M/O PSE&G, BPU Dkt. No. GR09050422, Decision and Order, 7/9/10...................... 29

In Re Public Service Electric & Gas Co., Docket Nos. GR91101574J & ER91111698J,

Board Order, 1/27/94 .................................................................................................... 12

Administrative Codes

N.J.A.C. 14:4-3.6(a)............................................................................................................ 5

N.J.A.C. 14:4-3.6(b)(3)............................................................................................... 11, 15

N.J.A.C. 14:4-3.6(j) ...................................................................................................... 2, 35

N.J.A.C. 14:4-3.6(n) ......................................................................................................... 34

N.J.A.C. 14:4-3.6(n)(8)..................................................................................................... 33

N.J.A.C. 14:4-3.6(n)(9).....................................................................................................33

N.J.A.C. 14:4-3.6(o) .........................................................................................................34

N.J.A.C. 14:4-3.6(p) .........................................................................................................34

N.J.A.C. 14:4-3.6(r)(1) ..................................................................................................... 32

N.J.A.C. 14:4-3.6(r)(2) ..................................................................................................... 32

N.J.A.C. 14:4-3.6(r)(3) .....................................................................................................32

N.J.A.C. 14:4-3.6(r)(4) ..................................................................................................... 33

N.J.A.C. 14:4-3.6(u) ............................................................................................... 8, 24, 25

I. SUMMARY OF POSITION

The Electric Discount & Energy Competition Act (“EDECA”), N.J.S.A. 48:3-49

et. seq., limits the ability of a public utility to expand its competitive service offerings.

Any proposed expansion requires the approval of the Board of Public Utilities (“BPU” or

“Board”). Under EDECA, a public gas or electric utility may expand its competitive

services only if the new service fits within one of five limited categories. N.J.S.A. 48:3-

58(b). If the proposed competitive service does not fit into one of these five categories,

the utility’s petition must be denied.

In the present case, Public Service Electric & Gas Company (“PSE&G” or

“Company”) filed a petition to expand its competitive service offerings. More

specifically, PSE&G proposes to add new service offerings to those services and products

provided by its gas utility’s Appliance Service Business (“Appliance Service Business“)

unit. As set forth below, only two of PSE&G’s proposed service offerings fit into one of

the permissible categories set forth in EDECA. These two proposals include a proposed

WorryFree Contract for gas grills and a proposed WorryFree Contract for pool heaters.

These two proposals satisfy the EDECA requirement because prior to the passage of

EDECA, PSE&G performed repairs of gas grills and pool heaters. Therefore, these two

proposals can be said to be “substantially similar” to PSE&G’s pre-EDECA offerings.

N.J.S.A. 48:3-58(b)(4). None of PSE&G’s other proposed services fit into any of the

EDECA categories. With the exception of WorryFree Contracts for gas grills and pool

heaters, PSE&G’s petition should be denied as a matter of law.

In the alternative, even if Your Honor finds that some or all of PSE&G’s

proposals satisfy the EDECA requirements, there are valid public policy reasons to limit

the expansion of PSE&G’s competitive services. EDECA gives Your Honor broad

discretion in whether or not to approve new competitive services. Your Honor should

consider the competitive advantage PSE&G enjoys over its competitors in setting limits

on the expansion of PSE&G’s services. As New Jersey’s largest electric and gas utility,

PSE&G’s enjoys endless opportunities to market and sell its competitive services when

responding to calls from regulated utility customers. PSE&G’s competitors do not enjoy

this kind of access to customers and their homes. Rather than facilitating competition, as

EDECA was intended to do, an expansion of PSE&G’s competitive services will only

stymie competition. In light of these concerns, any expansion of PSE&G’s offerings

should be very limited.

The proposed expansion of PSE&G’s Appliance Service Business offerings also

presents ratemaking issues. Historically, the margins earned by the Appliance Service

Business are only accounted for in the course of a base rate proceeding. In between base

rate cases, the incremental margin revenues accrue to the benefit of PSE&G’s

shareholders. Given the growth of PSE&G’s Appliance Service Business since its last

base rate case, if the proposed services are approved, Rate Counsel respectfully submits

that the net margins from any new service offering added since PSE&G’s last base rate

case should be credited to ratepayers on a going forward basis through a clause-type

mechanism.

Finally, N.J.A.C. 14:4-3.6(j) places an affirmative duty on the Company to monitor

its competitive service business to prevent cross-subsidization by its gas utility

operations. In the recent past, auditors performing the EDECA-mandated audit of

PSE&G’s competitive service business found that PSE&G’s hourly fully-allocated labor

rate increased by a significant amount between PSE&G’s applications for changes in the

hourly labor rate used for its Appliance Service Business. Therefore, in order to prevent

cross-subsidization, Rate Counsel respectfully recommends that an affirmative duty be

explicitly placed on PSE&G to monitor its fully-allocated hourly rate and file an

application for a change in its hourly rate if the fully-allocated hourly rate exceeds the

hourly rate used by its Appliance Service Business.

In summary, Rate Counsel respectfully recommends that Your Honor make the

following findings in the Initial Decision:

1. With the exception of WorryFree Contracts for gas grills and pool heaters,

PSE&G’s petition to expand its service offerings should be denied as a matter

of law.

2. PSE&G is currently performing new installations of central air conditioners and

central heaters, in addition to replacement of these items. It appears that

PSE&G has Board approval to perform the replacements only. Accordingly,

the Board should investigate whether or not PSE&G should be allowed to

continue performing these new installations.

3. PSE&G should be directed to copy Rate Counsel on all future petitions and

notices filed with the Board regarding any new appliance service offerings.

This recommendation stems from PSE&G’s decision in 2011 to implement new

appliance service offerings without providing notification to Rate Counsel.

4. If PSE&G is permitted to expand its Appliance Service Business offerings,

going forward the incremental net margin revenues from new Appliance

Service Business offerings added since the Company’s current base rates were

established should be returned to ratepayers on a concurrent basis through a

clause-type mechanism.

5. In order to help ensure that its gas utility ratepayers are not subsidizing its

Appliance Service Business, an explicit affirmative duty should be placed on

PSE&G to monitor its fully-allocated labor rate and to file the necessary

application for an hourly rate change if its monitoring shows an increase in the

fully-allocated hourly rate.

II. PROCEDURAL HISTORY & STATEMENT OF FACTS

PSE&G is a regulated public utility engaged in the transmission, distribution, and sale

of natural gas and electricity. P-1 (Petition), p. 1. PSE&G currently provides, within the

regulated utility, certain competitive services including (a) Appliance Repair Service (b)

Appliance Maintenance Service (c) Appliance Replacement Parts Service Contracts

(a/k/a WorryFree) and (d) Water Heater, Central Heater, and Central Air Conditioning

Replacement. P-1, p. 2. On or about February 29, 2012, PSE&G petitioned the BPU for

approval to expand its appliance service offerings pursuant to N.J.A.C. 14:4-3.6(a) and

(g). In support of its Petition, PSE&G filed the Direct Testimony of Jorge L. Cardenas,

Vice President of Gas Delivery (P-2). PSE&G also filed the Direct Testimony of

Stephen Swetz, Director, Corporate Rates & Revenue Requirements (P-3). Specifically,

PSE&G seeks to offer the following new services:

A. Replacement Parts Service Contracts – these contracts are known to the public as

“WorryFree” contracts. P-2, p. 3. They cover the repair and replacement of

specified parts for the particular appliance for which the customer has purchased

the contract. Id. In its petition, PSE&G seeks to expand these contracts to

include the following new items: heat pumps, pool heaters, ductless

heating/cooling systems (a/k/a mini-splits), and natural gas grills. P-1, p. 4.

B. Replacement Services – this service replaces the customer’s entire appliance. P-

2, p. 4. PSE&G currently offers replacement of water heaters, central heaters, and

central air conditioners. RA-4, p. 2. PSE&G seeks to expand these offerings to

include the following new appliances: heat pumps, and ductless heating/cooling

systems (a/k/a mini-splits). P-1, p. 4.

C. Installation of New Mini-Split Systems – although this proposal was not included

in PSE&G’s petition, Mr. Cardenas’ direct testimony appears to propose that

PSE&G be allowed to install new mini-split systems in customers’ homes. P-2, p.

8. The installation of new mini-split systems is an unprecedented addition to

PSE&G’s appliance service business, which historically has been limited to

service, repair and replacement of existing home appliances.

D. Installation of New Heat Pumps – This proposal was not included in PSE&G’s

petition or pre-filed testimony. However, based on testimony at the evidentiary

hearing, it appears PSE&G envisions performing installation of new heat pumps,

not simply heat pump replacement. Mr. Cardenas testified that PSE&G envisions

providing new heat pump installations for customers who put expansions on their

homes and need a way to provide climate control without ductwork. T35:L5-17

(1/9/13).

E. Home System Protection Contracts – this proposal would be an entirely new

offering for PSE&G. This new offering is essentially an insurance contract, since

the work will be performed by outside contractors, not PSE&G employees.

PSE&G proposes four types of Home System Protection Contracts:

1. Home Sewer Line Protection – this contract will cover the cost for repair

or replacement of the main sewer line between the home and the sewer

main. P-2, p. 8.

2. Water Service Line Protection – this contract will cover the cost for

repair or replacement of the outside water line located between the curb

shut off and the water meter or exterior load bearing wall. Id.

3. Home Plumbing Systems Protection – this contract will cover the repair

and replacement of specified home plumbing components, such as toilet

components, leaky pipes, vent lines, shower and tub valves, etc. Id.

4. Home Electrical System Protection – this contract will cover the repair

or replacement of electric wiring system components inside the home,

including the fuse box, wall outlets, wall switches, interior wiring, etc. Id.

Prior to February 9, 1999, the effective date of EDECA, PSE&G offered appliance repair

and WorryFree contracts for both residential customers and small industrial customers.

RA-4, p. 2. Included in these grandfathered services are gas pool heater repair and

outdoor gas grill repair. Id. PSE&G also offered central heating and water heating tune-

up, and central air conditioning start-up. Id. PSE&G also received Board approval for its

water heater replacement program in 1998. Before the passage of EDECA, PSE&G did

not have any involvement with mini-split systems or heat pumps.

PSE&G intends to use its own unionized workforce for the proposed new WorryFree

repair contracts. P-2, p. 11. Replacements and new installations of heat pumps and mini-

splits would be done with a combination of internal labor, and licensed contractors when

required by law. T94:L8-L14 (1/9/13). PSE&G intends to use outside contractors for the

proposed home water, sewer, plumbing and electrical system protection contracts. P-1, p.

8. This is because these services may require the use of licensed plumbers and/or

licensed electricians, and PSE&G is not proposing to become a licensed plumbing

contractor or licensed electrical contractor. Id.

One year prior to filing this petition, PSE&G implemented several new appliance

service offerings in 2011 without formally petitioning the Board for approval, and

without providing notice to Rate Counsel. RA-1, p. 16. These new offerings include

WorryFree Contracts for: tankless water heaters, premier coverage gas boiler contracts,

and elite range, elite wall oven, elite cooktop, elite refrigerator, and elite dishwasher.

RA-4, p. 2. Rather than a formal petition, PSE&G filed a letter notice with the Board

pursuant to N.J.A.C. 14:4-3.6(u). At that time, Rate Counsel was unaware that PSE&G

was implementing these new offerings.

A pre-hearing conference in this matter was held before Judge Cookson on July

23, 2012. Judge Cookson issued a Case Management Order on July 24, 2012. Rate

Counsel filed a Motion for Partial Summary Decision on November 9, 2012, seeking

dismissal of PSE&G’s proposed Home Sewer, Water, Plumbing and Electrical Plans, and

PSE&G’s proposal to install new mini-splits.

In that motion, Rate Counsel argued that

these proposals did not meet the threshold statutory requirement for new competitive

services set forth in EDECA. PSE&G filed its reply to Rate Counsel’s motion on

November 30, 2012. Rate Counsel filed its response to this reply on December 14, 2012.

Judge Cookson issued an order denying Rate Counsel’s motion on December 18, 2012.

In this order, Judge Cookson stated that a factual record must be developed before

deciding “how the proposed services are related to the safety and reliability of utility

businesses or are substantially similar to competitive services previously approved for

PSE&G or other New Jersey gas or electric utilities….” (emphasis in original).

Rate Counsel filed its direct testimony of David Peterson (RA-1) on November

16, 2012. PSE&G filed rebuttal testimonies from Mr. Cardenas (P-4) and Mr. Swetz (P-

5) on December 10, 2012. An evidentiary hearing was held before Judge Cookson on

When Rate Counsel filed this motion, Rate Counsel was not aware that PSE&G also is seeking to install

new heat pumps. This information was not included in PSE&G’s petition or pre-filed testimony. This

proposal would have been part of Rate Counsel’s motion if we had been aware of it at the time.

January 9, 2013. Mr. Peterson presented live surrebuttal testimony on behalf of Rate

Counsel at the evidentiary hearing.

III. ARGUMENT

A. The New Services Proposed by PSE&G, With the Exception of

WorryFree Contracts for Pool Heaters & Gas Grills, Do Not Fit

Within Any of the Categories Set Forth in EDECA For Approval of

New Competitive Services and Should Be Denied By Your Honor.

EDECA limits the ability of a public utility to expand its competitive service

offerings. EDECA requires any proposed expansion of competitive services by a gas

utility to fit within one of five limited categories set forth in N.J.S.A. 48:3-58(b). This

statute provides as follows:

Subject to the approval of the board pursuant to subsection a. of this

section, a gas public utility or a related competitive business segment of

that gas public utility may provide the following competitive services:

(1) Metering, billing and related administrative services that are deemed

competitive by the board pursuant to section 8 of this act;

(2) Services related to safety and reliability of utility businesses;

(3) Competitive services that have been offered by any electric public

utility or gas public utility prior to January 1, 1993 or that have been

approved by the board prior to the effective date of this act to be offered

by any electric public utility or gas public utility. An gas public utility that

has offered a competitive service since prior to January 1, 1993 or a

competitive service that was approved by the board prior to the effective

date of this act is not required to obtain board approval pursuant to

subsection a. of this section for that service, but any gas public utility that

has not offered a competitive service since prior to January 1, 1993 or has

not received previous board approval for such a competitive service shall

apply for approval pursuant to subsection a. of this section. Except as

otherwise provided by this paragraph, a competitive service that is

permitted pursuant to this paragraph shall be subject to all requirements of

this act for competitive services and to any standards or other rules or

regulations adopted pursuant to this act;

(4) Services that the board determines to be substantially similar to

competitive services that are permitted under paragraph (3) of this

subsection; and

(5) Competitive services to non-residential customers using existing utility

employees and assets.

A public utility cannot expand its competitive services unless the proposed service fits

into one of these five categories. Only PSE&G’s proposed WorryFree contracts for gas

grills and pool heaters meet this criteria. Rate Counsel maintains that PSE&G’s proposed

home protection plans for water, sewer, plumbing and electrical services, its proposals to

replace existing mini-split systems and existing heat pumps, to install new mini-split

systems and new heat pumps, and the proposed WorryFree contracts for mini-split

systems and heat pumps, all fail to satisfy this threshold legal requirement.

i. Categories (1), (3), and (5) of N.J.S.A. 48:3-58(b) Are Not Applicable to

PSE&G’s Petition.

Categories (1), (3), and (5) are not applicable to the present proposals. Category

(1) involves metering and billing services. Category (5) addresses competitive services

to non-residential customers. Since none of PSE&G’s proposals involve metering and

billing, and they are proposed to be offered to residential customers, categories (1) and

(5) can be eliminated. Category (3) is a “grandfathering” provision that permits

competitive services offered by a regulated utility before January 1, 1993, or approved by

the Board prior to the effective date of EDECA. N.J.A.C. 14:4-3.6(b)(3) states that only

services offered by an electric and/or gas utility prior to January 1, 1993, or that the

Board approved prior to February 9, 1999, can be grandfathered under category (3).

Since all of PSE&G’s proposed services are new, they do not qualify for this category.

ii. PSE&G’s Proposals Do Not Involve “Services Related to Safety and

Reliability of Utility Businesses” under EDECA.

Category (2) allows “services related to safety and reliability of utility

businesses.” N.J.S.A. 48:3-58(b)(2). This language should be interpreted to encompass

only services related to the safety and reliability of the infrastructure owned by PSE&G.

Several principles of statutory construction support this interpretation.

First, our State Supreme Court has repeatedly stated that the best indication of

Legislative intent is the plain language chosen by the Legislature. See, e.g., State v.

Hudson, 209 N.J. 513, 529 (2012). These words should be given “their ordinary and

accustomed meaning.” Id. If the plain language of the statute leads to a clear

understanding, then the judicial inquiry ends without examining extrinsic sources. Id.

Applying these principles, a plain reading of the statute cannot be interpreted to mean the

safety and reliability of a customer’s home, or the appliances located within that home. If

the Legislature had intended this category to apply to PSE&G’s proposals, then they

would have chosen to use the language “safety and reliability of a customer’s home” or

something similar. The Legislature did not choose to use this language, and it would be

inappropriate to give this statute a broader interpretation than indicated by the plain

language of the statute.

Moreover, if Your Honor wishes to look to extrinsic evidence, PSE&G’s

proposals do not fit in this category because the Board has already determined which

services are related to the safety of customers’ homes. In Re Public Service Electric &

Gas Co., Docket Nos. GR91101574J & ER91111698J, Board Order dated January 27,

1994 (“Safety Services Order”, provided in exhibit RA-4, p. 121). In the Safety Services

Order, the Board made a finding that sixteen services offered by PSE&G are “safety-

related” and must be offered free of charge to customers. The Safety Services Order

specifically states:

Additionally, the Board FINDS under its responsibility to insure that

utilities provide safe and adequate service that it is important that the

Company be obliged to insure that safe service is available to its

customers, and the customer not be deterred from seeking safety-related

services. Accordingly, the Board HEREBY ORDERS that on all service

calls, diagnostic time of fifteen (15) minutes plus associated travel time

shall be free of charge. Furthermore, there shall be no charge for

additional diagnostic or repair time if, after the diagnosis, it is determined

that the work that is required is related to safety. After the first 15

minutes, a charge shall be imposed for diagnostic and repair services that

are deemed to be non-safety related, at which time, the Company shall

inform the customer that those types of chargeable services are also

available from other entities.

Id. at p. 5 (RA-4, p. 125).

The Board spoke very clearly in the Safety Services Order. The Board determined that

customers cannot be charged for services that are necessary to ensure the safety of

customers and their homes. The Board made a specific finding of sixteen safety-related

services. The language “services related to safety and reliability of utility businesses”

cannot be interpreted to include any service related to safety inside a customer’s home

because the Board has already determined what those safety-related services are, and that

they must be offered free of charge. Your Honor should follow the Safety Services Order

because it stands as current Board policy. If the Board wishes to change its policy, it is

for the Board to make that determination.

A more reasonable interpretation of this statutory language is that the Legislature

intended it to apply only to services involving the safety and reliability of PSE&G’s

utility infrastructure. Instead, PSE&G seeks to interpret this category (2) extremely

broadly, to include any competitive service that has even the most tenuous connection to

the provision of any utility service, including water and sewer. The problem with this

interpretation is that it renders the remainder of the statute meaningless. If category (2) is

interpreted to allow PSE&G to essentially do anything, then the four other statutory

categories become superfluous and meaningless.

Such an interpretation runs contrary to

the Legislature’s choice to include the other four categories in the EDECA statute.

Statutory language should be interpreted to give meaning to the legislation as a whole.

Ramapo River Reserve Homeowners Ass’n v. Borough of Oakland, 186 N.J. 439, 450

(2006) (“We ascribe to the statutory words their ordinary meaning and significance, and

read them in context with related provisions so as to give sense to the legislation as a

whole.”) (quoting DiProspero v. Penn, 183 N.J. 477, 492 (2005) (internal citation

omitted)).

Finally, this language should not be interpreted to include any infrastructure

pertaining to water or sewer service. EDECA as a whole only applies to gas and electric

utilities. EDECA does not govern water and sewer utilities. If the Legislature had

intended this section of EDECA to apply to water and sewer utilities, the Legislature

would have specifically included that language.

If these proposals involved safety, PSE&G would have addressed them long ago.

They don’t. They involve maintenance of customers’ homes and convenience to the

customer, not safety and reliability of utility businesses. Accordingly, PSE&G’s

proposals do not fit into Category (2), and should not be approved.

iii. With the Exception of WorryFree Contracts For Gas Grills and Pool

Heaters, PSE&G’s Proposals Are Not “Substantially Similar” to Competitive

Services Offered Pre-EDECA.

The final category for new competitive services in EDECA is category (4),

“services that the Board determines to be substantially similar to competitive services that

are permitted under paragraph (3) of this subsection.” N.J.S.A. 48:3-58(b)(4). This

Similarly, PSE&G appears to argue that these services are related to the reliability of their utility

businesses. Clearly they are not.

category permits new competitive services that are “substantially similar” to services that

were offered by any gas or electric utility or approved by the Board prior to the effective

date of EDECA, which was February 9, 1999. N.J.A.C. 14:4-3.6(b)(3). Only two of

PSE&G’s proposals fit in this category – the proposals to offer WorryFree contracts for

gas grills and pool heaters. These two proposed offerings satisfy the “substantially

similar” requirement because prior to EDECA, PSE&G was already performing repairs

of gas grills and pool heaters.

The first part of the inquiry requires an examination of which competitive services

were offered by gas and electric utilities, or approved by the Board, prior to the passage

of EDECA. Although PSE&G contended at the hearings that New Jersey Natural Gas

Company and South Jersey Gas Company provided competitive services prior to the

passage of EDECA, PSE&G never presented any evidence at the hearings as to what

those offerings were. T65:L6-9. PSE&G did provide a response to a transcript request,

TR-1, listing some appliance services offered through regulated utilities that were

subsequently move to non-regulated entities. The description of programs offered by

South Jersey Gas Company, New Jersey Natural Gas Company, and Elizabethtown Gas

Company is inadequate because it does not indicate which services were offered prior to

February 9, 1999. For example, TR-1 states that South Jersey Gas offered repair and

parts replacement “prior to 2004.” PSE&G, who bears the burden of proof in this matter,

failed to specifically provide evidence of these gas utilities’ specific offerings pre-

EDECA. In any event, offerings listed in the response appear similar to what PSE&G

was offering pre-EDECA: appliance repair (ovens, cooktops, etc.), and parts replacement.

Although PSE&G’s response hints that New Jersey and Elizabethtown Gas may have

offered electric air conditioning replacement, Rate Counsel reviewed the relevant Board

Orders and this is not the case. See, e.g., I/M/O New Jersey Natural Gas Co. For

Approval to Establish a Floor Price For Appliance Service Contract & Non-Contract

Services & To Implement Three New Electrical Central Air Conditioning Services, BPU

Docket No. GT99060394, Board Order dated March 27, 2000; I/M/O NUI Elizabethtown

Gas Co. For Approval to Establish a Floor Price Hourly Rate For Appliance Service

Contract & Non-Contract Services & To Implement New Electric Central Air

Conditioning Services, BPU Docket No. GR00060385, Board Order dated August 15,

2001 (Orders attached as Exhibit A). These two Companies only offered repair and parts

replacement on central air conditioners, not full replacement services. Even then, these

services were not approved until after the effective date of EDECA. To summarize, prior

to EDECA the gas utilities were offering appliance repair or parts replacement, similar to

PSE&G’s offerings at that time. They were not providing the services that are the subject

of this petition.

PSE&G’s response does provide detail about a “Conditioned Power Service

Program” (“CPSP”) offered by Jersey Central Power & Light beginning in 1993. A

review of that Board Order indicates that the CPSP is totally different from PSE&G’s

proposals. I/M/O Jersey Central Power & Light For Authorization to Implement a

Conditioned Power Service Program & For Approval & Acceptance of Tariff Revisions

Related Thereto, Docket No. ET92040380, Board Order dated October 19, 1993

(attached as Exhibit B). None of the offerings in the CPSP can be found to be

“substantially similar” to PSE&G’s proposals. The CPSP offered “various services and

equipment to assist customers in protecting sensitive electronic equipment from power

disturbances” arising from “fluctuations or spikes in voltage levels.” Id. at 1. For

residential customers, these offerings included installation of a meter socket device in

tandem with individual surge suppressors which plugged into wall outlets. Id. at 2.

Currently, this program is no longer offered to new customers, presumably because the

demand has decreased as customers purchase individual power surge strips. The CPSP is

very different from PSE&G’s proposed offerings. The most significant difference is that

the CPSP was a device to protect from voltage surges caused by JCP&L’s own

distribution infrastructure. The CPSP was intended to mitigate problems caused by

JCP&L’s regulated utility business. PSE&G’s proposals, in contrast, involve customer’s

maintenance of their own homes. None of PSE&G’s proposals address problems arising

from PSE&G’s distribution of gas or electricity to customer’s homes. PSE&G’s

proposals are totally different from the CPSP. The response to the transcript request TR-

1 is the most detailed evidence PSE&G presented regarding services offered by other

utilities pre-EDECA. With the exception of the CPSP, these services parallel PSE&G’s

pre-EDECA offerings.

The inquiry also requires examination of PSE&G’s pre-EDECA services. The

following services were offered by PSE&G, or approved by the Board for PSE&G, prior

to EDECA (collectively, the “grandfathered services”):

1. WorryFree contracts for repair (or parts replacement) of the following appliances:

residential contracts for central house heaters, water heaters, clothes dryers, ranges, wall

ovens, cooktops, Central air conditioners, refrigerators, dishwashers, washing machines;

small commercial contracts for heaters, central A/C, and water heaters.

See RA-4.

2. Maintenance Services: Central A/C start-up program, central heating and water heating

tune-up.

3. Appliance Repair: Gas House heaters, gas water heaters, gas and electric ranges, gas

and electric wall ovens, gas and electric cooktops, gas and electric space heaters and

piping, gas clothes dryer, gas fireplace, gas pool heaters, outdoor gas grills, outdoor

lighting, Electric central A/C, refrigerators, dishwashers, washing machines.

4. Replacement Services: Water Heater replacement.

Based on this list, PSE&G’s proposals to offer WorryFree contracts for repair of gas

grills and gas pool heaters appear to satisfy the “substantially similar” requirement

because prior to EDECA, PSE&G already offered repair of gas grills and pool heaters.

a. The Proposed Home System Protection Plans Are Not

“Substantially Similar” to the Grandfathered Services, and Should Be

Denied.

The home system protection plans in the current filing are totally unrelated to the

grandfathered services. The water line, sewer line, and plumbing protection plans don’t

even involve gas or electric service. These proposals involve water and sewer service

only. Indeed, they are totally unrelated to PSE&G’s core business, which is the

transmission and distribution of gas and electric service. All of the grandfathered

services involve either gas-powered or electric-powered appliances, connecting these

offerings to PSE&G’s core utility business. These three proposals do not have this

connection. Furthermore, the statute requires new competitive services to be

“substantially similar” to grandfathered services of gas or electric utilities, not

grandfathered services offered by water or sewer utilities. The Legislature could have

chosen to specifically include competitive services offered by water or sewer utilities, but

did not.

PSE&G’s claim that water lines and sewer lines are “substantially similar” to gas

or electric appliances is unreasonable. Following the logic of PSE&G’s argument, if

PSE&G is allowed to offer water and sewer line repairs, then New Jersey American

Water Company should be allowed to repair telephones. While this example may seem

absurd, it is no different than what PSE&G is proposing to do with water and sewer line

repairs. Courts should avoid statutory interpretations which “‘lead to absurd or

unreasonable results.’” State v. Lewis, 185 N.J. 363, 369 (2005) (quoting State v. Gill,

47 N.J. 441, 444 (1966)).

As a practical matter, PSE&G has no expertise in the areas of water and sewer

service. PSE&G does not provide regulated water or sewer service, and Mr. Cardenas

testified that he has never been employed by a regulated water or sewer utility. T17:L11

– T18:L1 (1/9/13). Your Honor and the Board should not allow PSE&G to venture into

new areas outside of its expertise, exposing ratepayers to increased financial risk in the

process.

Furthermore, with the exception of water heater replacement, PSE&G used its

own unionized workforce to handle the grandfathered services. In contrast, PSE&G does

not have the internal resources to perform any of the home protection plans, not even the

proposed electrical system protection plan. These offerings may require the use of

licensed plumbing and/or electrical contractors. PSE&G is not and has never been a

licensed plumbing or electrical contractor, and does not intend to become one. Instead,

PSE&G intends to contract out this work to licensed sub-contractors. Ratepayers will

never benefit from these offerings during major storms, because the work is not being

performed by PSE&G’s unionized workforce. PSE&G’s only role will be that of an

insurance salesman. PSE&G never had such a limited role in its grandfathered services.

These proposals are not “substantially similar” to the grandfathered services and should

be denied by Your Honor.

b. The Proposals to Install New Heat Pumps and New Mini-splits

Are Not “Substantially Similar” to the Grandfathered Services, and

Should Be Denied.

PSE&G’s proposal to offer new installations of mini-split and heat pump

heating/cooling systems is not “substantially similar” to any of the work it was

performing prior to February 9, 1999. PSE&G’s appliance service business has always

involved servicing, repairing or replacing existing home appliances. New installations

are of a very different nature. For example, the installation of a new mini-split in a home

provides PSE&G with additional incremental revenues for its electric distribution utility;

a repair or replacement of an existing appliance does not provide these incremental

revenues.

PSE&G argues that these proposals are “substantially similar” because PSE&G

presently offers new installations of central air conditioners and heaters. P-4, p. 4. This

argument is flawed for several reasons. First, PSE&G’s argument uses the wrong legal

standard. PSE&G received Board approval to offer central air conditioner and heater

replacement in 2002, well after the passage of EDECA. EDECA requires a proposed

competitive service to be “substantially similar” to services offered or approved prior to

February 9, 1999. Since PSE&G’s central air conditioner and heater replacement

program was not approved by the Board until 2002, it cannot be used in an evaluation of

the “substantially similar” standard set forth in EDECA.

Secondly, PSE&G revealed at the evidentiary hearing that even though it

currently offers new installations of central air conditioners and heaters, PSE&G never

petitioned the Board for approval of this service. The 2002 Board Order approving

PSE&G’s central air conditioner replacement program shows the Board only

contemplated central air conditioner replacement and heater replacement. For example,

in the 2002 Board Order the Board stated:

PSE&G is proposing to offer both a turn-key Central Heater Replacement

Program and a Central Air Conditioning Replacement Program by selling

and installing a range of central heaters and central air conditioners in a

variety of sizes and energy efficiencies within its service territory and

statewide. The Company intends to utilize its gas distribution employee

workforce for the installation of central heating and central air

conditioning units, plus removal and disposal of the replaced units. [In Re

Public Service Electric & Gas Co., BPU Docket No. EO98030146, Board

Order dated March 22, 2002 (provided in RA-4, p. 5 of 130).]

The 2002 Board approval was limited to replacement of existing central air

conditioners and central heating units. PSE&G apparently did not petition the Board for

approval to offer new installations of these units. At the evidentiary hearing on January

9, 2013, Mr. Cardenas testified as follows:

Q. According to this chart, in what year did PSE&G begin offering

central air conditioning and central heating replacement?

A. 2002.

Q. Okay. Thank you. And can you tell us what year PSE&G started

doing new installations or, to use your language, upgrades to central air

conditioning?

A. I don't have that information.

Q. So you don't know.

A. I don't know.

Q. Let me refer you to a Board order. Your Honor, the Board order starts

on page 4 of 130 in response to this discovery response, RCR-19? [sic]

THE COURT: Okay. 2002. March 22nd?

MS. JUAREZ: Yes, March 22nd, 2002.

Q. Now, Mr. Cardenas, this is the Board order approving the company's

proposed central air conditioning replacement, and I would like to refer

you to the highlighted portion of the Board order on page 5 of 130, and I

would like to ask you to read the highlighted portion out loud once you're

done reading it to yourself.

A. "PSE&G is proposing to offer both a turn-key Central Heater

Replacement Program and a Central Air Conditioning Replacement

Program by selling and installing a range of central heaters and central air

conditioners in a variety of sizes and energy efficiencies within its service

territory and statewide. The company intends to utilize its gas distribution

employees [sic] workforce for the installation of central heating and

central air conditioning units, plus removal and disposal of the replaced

units."

Q. Thank you very much. So my question is: Did PSE&G file a

subsequent petition with the BPU seeking Board approval to offer new

installations, rather than replacements?

A. I do not know if [sic] an order other than this where we have requested

that.

[T40:L17 – T42:L5 (1/9/13).]

It appears that PSE&G does not have Board approval to install new central air

conditioners or new heating units. Therefore, PSE&G cannot argue that new mini-split

and heat pump installations should be allowed because PSE&G is already installing new

central air conditioners. New installations of these units have never been sanctioned by

the Board. Rate Counsel recommends that PSE&G’s request to perform new installations

of mini-splits and heat pumps should be denied. In fact, Your Honor should recommend

that the Board determine whether PSE&G can continue performing new installations of

central air conditioners and heaters, since it is currently doing so without Board authority.

PSE&G receives incremental revenues from additional gas and/or electrical distribution

sales when new air conditioners and new heating units are installed, in addition to the

appliance service revenues received by performing the installation. The Board has never

determined (1) whether PSE&G should even be in the business of performing new

installations like a general HVAC contractor, and (2) if so, whether ratepayers should

receive some sharing of this double benefit of additional revenues. Your Honor should

recommend that the Board investigate these questions.

c. Consistent With EDECA’s Intention to Limit Expansion of Competitive

Services, This Statutory Language Should Be Interpreted to Prohibit

Expansion Into New Appliances Such As Heat Pumps and Mini-splits.

Finally, PSE&G proposes to replace existing heat pumps and existing mini-splits,

and to offer WorryFree contracts on heat pumps and mini-splits. Your Honor should

deny all four of these requests because they are not “substantially similar” to PSE&G’s

offerings prior to EDECA. Before the passage of EDECA, PSE&G’s appliance service

business never involved any type of work on heat pumps and/or mini-splits. In fact,

PSE&G did not offer any type of HVAC replacement prior to EDECA. EDECA requires

a new competitive service to be “substantially similar” to a grandfathered service, not

simply “similar.” This onerous requirement demonstrates the Legislature’s intention to

limit the ability of a regulated gas or electric utility to expand its competitive offerings.

Rate Counsel believes the “substantially similar” language should be interpreted

narrowly, consistent with the Legislature’s intention. PSE&G should not be allowed to

expand its offerings to new appliances, such as heat pumps and mini-splits, that were

never part of PSE&G’s appliance business prior to EDECA. If the Legislature had

intended to give PSE&G broad discretion to expand its appliance service offerings, the

Legislature would have chosen more permissive language. The Legislature chose not to

do so, and its intent should be followed by denying PSE&G’s proposals to replace mini-

splits and heat pumps, and to offer WorryFree contracts for those items. Rate Counsel

recommends that approval be limited to PSE&G’s proposals to offer WorryFree contracts

for gas grills and gas pool heaters, since prior to EDECA PSE&G already offered repair

of these items.

iv. Your Honor Should Direct PSE&G To Copy Rate Counsel On All

Future Petitions and Notices Filed With the Board Regarding Any

New Appliance Service Offerings.

As Mr. Peterson testified, PSE&G implemented new appliance service offerings

in 2011 without formally petitioning the Board for approval, and without providing

notice to Rate Counsel. RA-1, p. 16. These new offerings included WorryFree Contracts

for: tankless water heaters, premier coverage gas boiler contracts, and elite range, elite

wall oven, elite cooktop, elite refrigerator, and elite dishwasher. RA-4, p. 2. Rather than

a formal petition, PSE&G filed a letter notice with the Board pursuant to N.J.A.C. 14:4-

3.6(u). This regulation allows a public utility to “make modifications to the pricing terms

or other terms and conditions of a competitive product” by letter notice “subsequent to

the initial approval by the Board.” N.J.A.C. 14:4-3.6(u). Rate Counsel believes that

PSE&G’s decision to implement the 2011 offerings by letter notice was legally

questionable, particularly the tankless water heater WorryFree contract. While PSE&G is

permitted to modify pricing terms by letter notice, the regulations only allow this once a

utility receives Board approval for a new offering. Tankless water heaters differ from

traditional water heaters in price and technical requirements. Rate Counsel believes that

the tankless water heater WorryFree Contract was a new offering, not a price

modification, and PSE&G should have filed a formal petition with the Board. However,

Rate Counsel never had the opportunity to raise this issue, because PSE&G never copied

Rate Counsel on its letter notice to the Board. Rate Counsel was totally unaware that

PSE&G implemented these new programs. Rate Counsel should be given the

opportunity to evaluate whether a proposed offering is really a term modification,

appropriately implemented by letter notice under N.J.A.C. 14:4-3.6(u), or a new

competitive service that requires Board approval. Rate Counsel requests that Your Honor

direct PSE&G to copy Rate Counsel on any and all future petitions and letter notices

pertaining to appliance services that PSE&G files with the Board.

B. As a Matter of Public Policy, PSE&G’s Appliance Service Business

Should Not Be Expanded Beyond Approval to Offer WorryFree

Contracts for Pool Heaters and Gas Grills, Because of The

Competitive Advantage Enjoyed by PSE&G.

Even if a proposed appliance service fits into one of the statutory categories set

forth in EDECA, Your Honor and the Board are not required to approve the proposal.

EDECA gives Your Honor and the Board discretion in whether or not to approval new

competitive services. As part of this discretion, Your Honor may consider various public

policy reasons to limit the expansion of PSE&G’s appliance service business.

PSE&G’s appliance service competitors include small appliance repair

businesses, big box stores like Sears, and private plumbers and electricians. Given its

position as a regulated gas and electric utility, PSE&G enjoys an unparalleled advantage

over these competitors. As New Jersey’s largest electric and gas utility, PSE&G benefits

from almost unlimited opportunities to market and sell its competitive services when

responding to service calls received by the regulated utility. Many customers call

PSE&G when they smell gas or are experiencing a lack of heat, for example. A

technician from PSE&G responds and, as previously mentioned, diagnoses the problem

as either safety-related or non safety-related. If the problem is a non-safety related

competitive service, the PSE&G technician then has the opportunity to offer and market

PSE&G’s competitive services. In most cases the technician who responds to the service

call is also the same individual who would complete the competitive services work.

Therefore, the customer’s quickest option is usually to have the PSE&G technician

perform the repair. Mr. Cardenas acknowledged this competitive advantage at the

evidentiary hearing:

Q. Do a lot of your competitive service jobs come from -- come from

customers calling, for example, no heat?

A. When there's a no heat call, we respond. And we look at the unit and

see if there's an adjustment that is safety-related or a repair. We check

whether the customer has a contract. If they have a contract, the activity

would be covered under the contract. Let's say that it requires

replacement. It's a cracked boiler which cannot be operated safely. We

would at that point in time tell the customer there needs to be a

replacement of the unit. You have the option to have any plumber do the

work or we can do that work. That's the typical interaction between the

technician and the customer.

THE COURT: So the answer to her question was yes, most of your

competitive service work comes from a call that originates -- originally

might have been safety-related or part of a regulated utility customer's

concern.

MR. STERN: I didn't understand that as the question. Was that the

question?

MS. JUAREZ: I was sort of curious how much comes from, yes, like calls

for safety-related issues.

MR. STERN: Then you should clarify your answer.

THE WITNESS: Put it this way, we sent out mailers to all customers in

our territory that say we provide this service. Not all the replacement or

work that we do is associated with a safety call that came in that then

generated work. There is a whole campaign, there's a whole mechanism

for marketing the services.

Q. Thank you.

A. I don't know the percent of how much is generated one way versus the

other.

Q. Let's go back to the boiler example. If a repair is needed, does the

technician keep those parts in the truck?

A. The technician's truck has an inventory of parts for repairs. And in

some cases the part has to be ordered.

Q. What if the customer chooses not to get their repair from you, do you

turn off the gas or -- and leave? Turn off the gas to the boiler?

A. If there is a safety-related incident, we would advise the customer that

there's a problem with your boiler, you should not operate it under the

present condition. And this is very very important in flooding conditions

because we have had, as a matter of fact, a very bad explosion during the

floods last year in Manville where a customer after having water in a

boiler that did not function right decided to light it up himself and,

unfortunately, the boiler blew up. If there's a safety-related incident, we

would shut off the device, red-tag it, so that there would be an indication

there's a safety problem with this device.

Q. And if the technician has the part available in his inventory in the truck, then

the customer's quickest option is to get the repair from you. Correct?

A. Yes. We would be there at that time.

[T55:L22 – T58:L7 (1/9/13).]

Mr. Cardenas’ testimony illustrates PSE&G’s advantageous position in the appliance

service marketplace. PSE&G’s role as the largest gas and electric utility in New Jersey

drives the success its appliance service business. A significant amount of PSE&G’s

competitive services work stems from calls from regulated customers. These service

calls provide PSE&G with innumerable opportunities to market their appliance service

business. As Mr. Cardenas acknowledged, once the PSE&G technician is inside the

customer’s home, the customer’s quickest option for repair is usually for PSE&G to

perform the work. As a gas and electric utility, PSE&G enjoys a tremendous advantage

over any and all of its competitors.

Your Honor and the Board have the discretion to consider the effect that an

expansion of PSE&G’s appliance service business would have on PSE&G’s competitors.

This effect should be considered in conjunction with the purpose of EDECA. The

intention of EDECA was to de-regulate the State’s electric and natural gas utilities in

order to “[l]ower the current high cost of energy” and “[p]lace greater reliance on

competitive markets.” N.J.S.A. 48:3-50(a)(1) and (a)(2). EDECA was intended to

encourage competitive markets. Ironically, PSE&G’s competitive service work does not

encourage competition in the realm of appliance services. If anything, because of its

advantageous position in the marketplace, PSE&G’s appliance service business may

stymie competition. If PSE&G expands, becoming more and more dominant in the

appliance service business, this may discourage new competitors from entering the

marketplace and attempting to compete with PSE&G. As Your Honor noted during the

evidentiary hearings, there are only a finite number of repairs, etc. needed in any given

year. T78:L1 (1/9/13). Any appliance service work captured by PSE&G is taken away

from PSE&G’s competitors. Rate Counsel urges Your Honor to consider the intention of

EDECA in acting on PSE&G’s petition. The benefits to PSE&G’s shareholders and

ratepayers from its appliance service business should not be at the expense of forcing

independent plumbers and electricians out of business, or discourage any potential

competitors from entering the arena. Any expansion of PSE&G’s appliance service

business should be very limited.

C. PSE&G Should be Required to Return Margins Earned from New

Appliance Services to Ratepayers on a Concurrent Basis.

Historically, margins earned from PSE&G’s Appliance Service Business are

considered only when base rates are set in the course of a base rate case proceeding under

traditional cost-based rate of return regulation, where such margins are accounted for as a

contribution to “above-the-line” utility income in the determination of the Company’s

revenue requirement. See T141:L11-T143:L25 (1/9/13); RA-1, pp. 13-16. However,

while base rate cases are infrequent, PSE&G’s Appliance Service Business continues to

grow. In between base rate cases, incremental margin revenues accrue to the benefit of

PSE&G’s shareholders. At present, there is no rate mechanism to return such

incremental margin revenue to ratepayers between base rate cases. As such, PSE&G’s

ratepayers do not benefit from the incremental margin revenues earned by PSE&G

between rate cases.

The amounts at issue are not insignificant in absolute or relative terms. For its

proposed new services, PSE&G projects first year margin revenues totaling $627,000,

increasing to $1.857 million in year three. TR-2. Meanwhile, PSE&G attributes $28

million of its base rate revenues to its Appliance Service Business.

T142:L12-

16(1/9/13). In year three, PSE&G’s projected margin revenue of $1.827 million for its

new services amounts to an increase of over 6 percent over its base rate Appliance

Service Business margin revenue of $28 million. Unless ordered to do so by the Board,

the timing of PSE&G’s next base rate case is ultimately up to the Company. PSE&G

argues that the incremental margins from its Appliance Service Business operate to

mitigate the need for a base rate case. P-5, 5:15-19. Following PSE&G’s reasoning, all

else equal, incremental margins would operate to even further extend the time between

base rate cases, thereby forestalling the receipt of benefits by ratepayers of incremental

margin revenues. Yet, on the other hand, PSE&G undercuts its argument by minimizing

the significance of the margin amounts, expressed as a portion of PSE&G’s very large

overall revenues. P-5, 3:23-4:5. Either way, unless there is some mechanism for

returning incremental margins to ratepayers between rate cases, ratepayers lose.

Meanwhile, PSE&G’s Appliance Service Business has grown since its last base

rate case. Three new Appliance Service Business service contract products were added:

(1) Premier Coverage Gas Boiler Contracts; (2) Tankless Water Heater Contracts; and (3)

Elite Range, Wall Oven, Cooktop, Refrigeration and Dishwasher Contracts. RA-4, p. 2.

The revenue requirement for PSE&G’s current gas base rates was resolved by a Stipulation which was

approved by the Board, as memorialized in an Order dated July 9, 2010. See I/M/O PSE&G, BPU Dkt. No.

GR09050422 (Decision and Order, July 9, 2010).

The proposed new services are also incremental to the services offered at the time of the

last base rate case. T144:L4-8 (1/9/13). If approved, the proposed new services would

add to the Company’s Appliance Service Business margin revenues, as confirmed by the

Company’s projection of revenues. P-5, 3:21-23; TR-2. Yet, under the current rate

treatment for Appliance Service Business margin revenue, between base rate cases, these

increases in margin revenues would serve to benefit only PSE&G’s shareholders.

The incremental margins at issue are distinct from the margin revenues

considered in setting base rates and are distinct from other base rate-type revenues and

expenses, such as base rates for gas distribution service. Mr. Peterson noted these

distinctions and the need for special treatment of such incremental revenues in his sur-

rebuttal testimony at hearing:

It's the company's position apparently that in between rate cases

they're entitled to whatever savings or costs that result. Typically, that's

the case. But also typically the normal model is that when you're in a test

period, you have defined services that are provided. If the company sells

more of those services in between rate cases, that's the incentive in cost

based regulation, rate of return regulation. Sell more product. In between

rate cases you keep the benefits.

But the difference here is these are not the product lines that were

established in the last rate case. These are new products. So, therefore, if

we had known of these products in the last rate case, we could have

considered them in the ratemaking formula. We didn't know those

products -- it calls for special treatment.

I'm a hundred percent behind the company on this one for services

offered during the test period. These were services that were not offered

during the test period so there's a good reason for specialized rate

treatment in between rate cases on something like that. [T181:L19-

T182:L10 (1/9/13)]

As Mr. Peterson noted, the incremental margin revenues at issue are not the result of

base-rate cost savings or increased gas distribution service sales. For these reasons and

those set forth below, Rate Counsel respectfully recommends that the incremental

margins attributable to new service offerings merit a rate mechanism which reflects these

distinctions.

Ratepayers will not see any benefit from this incremental margin revenue until “if

and when” PSE&G files its next base rate case. Therefore, Rate Counsel recommends

that the Board implement a margin sharing mechanism if the Company is permitted to

expand its Appliance Service Business offerings. More specifically, as set forth below,

on a going forward basis margins from new Appliance Service Business services added

since the Company’s current base rates were established should be returned to ratepayers

on a concurrent basis, as recommend by Mr. Peterson. RA-1, pp. 15-16.

PSE&G operates its Appliance Service Business as part of its gas utility

operations. As stated above, historically, margin revenues from its Appliance Service

Business are treated as “above the line” revenue in a gas base rate case. However, other

than precedent, there are no statutory or regulatory impediments to considering an

alternative to such treatment.

While EDECA provides specific guidance as to how margin revenues from

competitive services provided by electric public utilities or their related competitive

service business units should be returned to ratepayers, EDECA is less specific about

how such revenues should be returned to ratepayers in the case of gas utilities. See

N.J.S.A. 48:3-55, N.J.S.A. 48:3-58. The relevant EDECA statute addressing gas

competitive services is silent with respect to a mechanism to return margins to ratepayers,

and focuses on defining permissible competitive services, protecting utility service

quality, preventing cross-subsidization, and protecting a competitive market. See

N.J.S.A. 48:3-58.

EDECA specifies that a portion of net margin revenues from competitive services

provided by electric public utilities or their related competitive service business unit are

required to be returned to ratepayers through an offset to distribution rates or through the

Market Transition Charge. Rate Counsel notes that the electric Market Transition Charge

is a clause-type mechanism, subject to periodic true-ups, in contrast to the traditional base

rate case mechanism for returning margins to gas ratepayers. See RA-1, pp. 15-16. The

portion of margin revenues to be returned to ratepayers is set at 50 percent of net

revenues when competitive services are provided by utilizing electric public utility assets,

with a limited exception for certain contractual arrangements, and 25 percent of net

revenues from competitive services provided by a separate business unit without using

electric public utility employees and assets. See N.J.S.A. 48:3-55(b)(l). The pertinent

regulations governing the treatment of electric competitive service revenues are similarly

specific. See N.J.A.C. 14:4-3.6(r)(2), (3).

In contrast to the regulations governing such revenues for electric utilities, the

regulations governing the treatment of such revenues for gas utilities are less specific.

The regulations provide general guidance for the accounting treatment of gross revenues

from the provision of a competitive product or service by all public utilities:

The level of gross revenues representing the fully allocated cost of

providing the service shall be recorded in the respective competitive

service revenue account and treated above-the-line for ratemaking

purposes and credited to ratepayers…. [N.J.A.C. 14:4-3.6(r)(1)]

The regulations governing the rate treatment of margins from competitive services

provided by gas public utilities such as PSE&G’s Appliance Service Business are less

specific than those for electric utilities:

For gas public utilities, the total margins shall be treated above-the-line for

ratemaking purposes and credited to ratepayers. [N.J.A.C. 14:4-3.6(r)(4)]

In sum, the pertinent statute and regulations do not prohibit the concurrent return of

margins to gas ratepayers. Given the growth of PSE&G’s Appliance Service Business

since its last base rate case, Rate Counsel respectfully submits that the net margins from

new service offerings initiated subsequent to PSE&G’s last base rate case should be

credited to ratepayers on a going forward basis through a clause-type mechanism.

such, the margins would be treated above the line for clause accounting,

D. PSE&G Should Monitor Its Hourly Charge Reports and Adjust its

Hourly Rate if Needed.

Of particular concern to Rate Counsel is the prevention of cross-subsidization of

the Appliance Service Business by PSE&G’s gas utility ratepayers. One item which

could materially affect whether ratepayers are subsidizing the Appliance Service

Business is the hourly labor rate attributable to gas utility employees working on

Appliance Service Business calls. EDECA requires PSE&G to price its Appliance

Service Business services at not less than its fully-allocated cost:

The price that a gas public utility charges for a competitive service shall

not be less than the fully allocated cost of providing such service, as

The regulations define “total margins” as the difference between the total revenues received and the total

expenses, in contrast to “net revenues” which are defined by the regulations as the difference between total

revenues and dedicated expenses. See N.J.A.C. 14:4-3.6(n)(8),(9).

For purposes of Rate Counsel’s recommended treatment of net margin revenues, net margins should be

considered net revenues, defined as the difference between total revenue and dedicated expenses, and

applied in a manner that does not double-count relevant expenses.

determined by the board, which cost shall include an allocation of the cost

of all equipment, vehicles, labor, related fringe benefits and overheads,

and administration utilized, and all other assets utilized and costs incurred,

directly or indirectly, in providing such competitive service. [N.J.S.A.

48:3-58(d)(2)].

Presently, in accordance with Board regulations, PSE&G updates its hourly rate

on a semi-annual basis.

However, a recent competitive services audit report noted that

the increase in the March 1, 2010 hourly labor rate to $230 represented a 21 percent

increase in the previously established rate.

Prior to then, a $190 per hour labor rate was

in effect since March 6, 2008. In its audit report, Overland Consulting (“Overland”)

recommended that PSE&G “monitor” its fully allocated cost per hour on a more frequent

basis (e.g. monthly or quarterly) to ensure that the floor price included in the Company’s

tariff for appliance services covers the fully allocated cost of providing appliance

services, thereby ensuring continual compliance with the EDECA standards.

As noted

by Mr. Peterson, “the fact that PSE&G’s labor costs rose significantly in a relatively short

period of time (21 percent in two years) and not addressed in PSE&G’s semi-annual

filings supports the reasonableness of Overland’s recommendation.” RA-1, 17:16-18.

Furthermore, the Board imposed an affirmative duty on public utilities to ensure that its

prices equal or exceed its fully-allocated cost of providing such competitive services:

Each electric and/or gas public utility is responsible for and has an

ongoing obligation to track, monitor and update, as necessary, its fully

allocated cost of providing each competitive product and/or service

offering by itself or its related competitive business segment, and to ensure

that the price it or its related competitive business segment charges for

each such competitive product and/or service at all times equals or

exceeds the fully allocated cost of providing such competitive products

P-5, 6:23-7:3; See N.J.A.C. 14:4-3.6 (n), (o), and (p).

See RA-1, pp. 16-18.

See RA-9, excerpt from the Overland Consulting Audit Report (January 2012), BPU Dkt. No.

EA09040305, Chapter 4 Recommendation 1, p. 4-2. The audit proceeding is pending before the Board.

and/or services and to file the notification required by (t) and (u) below.

[N.J.A.C. 14:4-3.6(j)]

In accordance with this affirmative duty, PSE&G should be required to file the necessary

application for an hourly rate change if its monitoring shows an increase in the fully-

allocated hourly rate. This would help ensure that ratepayers are not subsidizing the

Company’s Appliance Service Business.

CONCLUSION

For all of the above reasons, Rate Counsel respectfully submits that Your Honor

find:

1. With the exception of WorryFree Contracts for gas grills and pool heaters,

PSE&G’s petition should be denied as a matter of law.

2. The Board should investigate whether or not PSE&G should be allowed to

continue performing these new installations of central air conditioners and central

heaters.

3. PSE&G should be explicitly directed to copy Rate Counsel on all future petitions

and notices filed with the Board regarding any new appliance service offerings

4. If PSE&G is permitted to expand its Appliance Service Business offerings, the

incremental net margin revenues from new Appliance Service Business offerings

added since the Company’s current base rates were established should be returned

to ratepayers going forward on a concurrent basis through a clause-type

mechanism.