On December 12, 1994, Craven Crowell, chairman of the board of the Tennessee Valley Authority (TVA), issued two well-publicized announcements. First, TVA would not finish three of the nuclear...
Mergers and the Public Interest: Saving the Savings for the Poorest Customers
the prevalence of fixed-income older customers in a community. Local communities can have needs that go into the calculus of how a utility best interacts with the community, and it is precisely these needs that are less well-served by a merged company.
In sum, CEAF/CC identified adverse impacts of the proposed PSCO merger that would more than offset any benefits passed on to low-income consumers via a proposed rate freeze. CEAF/CC argued that specific merger conditions were needed to remedy these adverse impacts, thus assuring that net benefits were passed on to the low-income consumers.
Fixing Ratemaking Bias. In addition to the adverse impacts created by the merger, CEAF/CC assessed the extent to which merger savings would inure to low-income PSCO consumers. CEAF/CC argued to the Colorado PUC that, due to their unique attributes, low-income consumers would receive a disproportionately small share of the savings unless actions were taken to capture and distribute the benefits.
In Colorado, PSCO proposed to share the savings generated by the merger with customers through a rate freeze. This mechanism, in effect, allocates merger savings back to individual customers on a per-unit-of-energy basis (kilowatt-hour or therm). In this way, the more energy a customer uses, the higher the proportion of merger savings will be returned to him in the form of a bill that is lower than it would have been without the merger.
CEAF/CC objected to this plan. According to PSCO's merger application and pre-filed testimony, $96.6 million in merger savings could be attributed to the customer service function. Nearly $29 million in PSCO labor savings came in the area of "customer service." PSCO would realize an additional $67.6 million in savings in customer-service-related capital and expenditures for operations and maintenance.
CEAF/CC argued that a distribution of this $96.6 million in savings on a per-unit-of-energy basis would provide a disproportionately small benefit to low-income consumers. PSCO acknowledged that customer service costs are incurred as a function of numbers of customers. Indeed, the allocation of customer service costs on the basis of both usage (in units of energy) and sales (in dollars of revenue) were found to be inappropriate as cost allocators for customer service costs. In addition, PSCO conceded, the proper cost allocation for savings on information systems (IS) retail projects and customer information systems involves the number of customer bills. Finally, PSCO said, the proper allocation of IS savings involving distribution and delivery is the number of electric/gas customers.
If benefits are produced based on numbers of customers or customer bills, CEAF/CC said, but distributed according to energy usage, then customers (or classes of customers) with higher consumption will receive a disproportionately high share of the benefits and customers with lower consumption will receive a disproportionately low share.
In making these calculations, it does not matter whether one is addressing inter- or intra-class distribution of benefits. According to CEAF/CC, if you have a certain sum of benefits that are causally related to numbers of customers and you distribute those benefits between customer classes (e.g., industrial, commercial) on the basis of units of energy, then some