CERTIFICATE OF SERVICE Petition of Peoples Natural Gas Company LLC : for Approval of the Energy Efficiency and : Docket No. M-2017-2640306 Conservation Plan :

I hereby certify that I have this day served a true copy of the following document, the

Office of Consumer Advocate’s Reply Exceptions, upon parties of record in this processing in

accordance with the requirements of 52 Pa. Code § 1.54 (relating to service by a participant), in

the manner and upon the persons listed below:

Dated this 11th day of February 2019.

SERVICE BY E-MAIL & INTER-OFFICE MAIL The Honorable Dennis J. Buckley Administrative Law Judge Office of Administrative Law Judge Pennsylvania Public Utility Commission Office of Administrative Law Judge 400 North Street Harrisburg, PA 17120

SERVICE BY E-MAIL & FIRST CLASS MAIL, POSTAGE PREPAID

William H Roberts II, Esquire Peoples Natural Gas Company LLC 375 North Shore Drive Pittsburgh, PA 15212 Steven C. Gray Office Of Small Business Advocate 300 North Second Street Suite 202 Harrisburg, PA 17101 Theodore M. Love, Partner Green Energy Economics Group, Inc. 147 South Oxford Street Brooklyn, NY 11217 Robert D. Knecht Industrial Economics, Inc. 2067 Massachusetts Avenue Cambridge, MA 02140

Kevin J. Moody, Esquire Vice President and General Counsel Pennsylvania Independent Oil & Gas 212 Locust Street Ste. 300 Harrisburg, PA 17101-1510 Michael Zimmerman, Esquire Duquesne Light Company 411 Seventh Avenue, 15-7 Pittsburgh, PA 15219 David P. Zambito, Esquire Jonathan P. Nase, Esquire Cozen O'Connor 17 North Second Street, Suite 1410 Harrisburg, PA 17101 Anthony C. DeCusatis Morgan, Lewis, & Bockius LLP 1701 Market Street Philadelphia, PA 19103

2

Michael A. Gruin, Esquire Stevens & Lee 17 North 2nd Street, 16th Floor Harrisburg, PA 17101 Counsel for Duquesne Light Company

Linda R. Evers, Esquire Donald R. Wagner Stevens & Lee 111 N. Sixth Street Reading, PA 19601 Counsel for Duquesne Light Company

/s/Christy M. Appleby Christy M. Appleby Assistant Consumer Advocate PA Attorney I.D. # 85824 E-Mail: CAppleby@paoca.org Darryl A. Lawrence Senior Assistant Consumer Advocate PA Attorney I.D. # 93682 E-Mail: DLawrence@paoca.org Counsel for Office of Consumer Advocate 555 Walnut Street 5th Floor, Forum Place Harrisburg, PA 17101-1923 Phone: (717) 783-5048 Fax: (717) 783-7152 *266384

BEFORE THE PENNSYLVANIA PUBLIC UTILITY COMMISSION

Petition of Peoples Natural Gas Company LLC : For Approval Of Its Energy Efficiency : Docket No. M-2017-2640306 And Conservation Plan : __________________________________________

REPLY EXCEPTIONS OF THE OFFICE OF CONSUMER ADVOCATE

__________________________________________ Christy M. Appleby Assistant Consumer Advocate PA Attorney I.D. No. 85824 E-mail:CAppleby@paoca.org Darryl A. Lawrence Senior Assistant Consumer Advocate PA Attorney I.D. No. 93682 E-mail:DLawrence@paoca.org Counsel for: Tanya J. McCloskey Acting Consumer Advocate Office of Consumer Advocate 5th Floor, Forum Place 555 Walnut Street Harrisburg, Pa. 17101-1923 Phone: (717) 783-5048 Fax: (717) 783-7152 DATE: February 11, 2018

Table Contents I. INTRODUCTION ......................................................................................................... 1

II. REPLY EXCEPTIONS .............................................................................................. 1

OCA Reply to Peoples Exc. No. 1 .............................................................................................1

OCA Reply to Peoples Exc. No. 4 .............................................................................................3

OCA Reply to Peoples Exc. No. 5 .............................................................................................5

A. Introduction .....................................................................................................................5

B. Judge Buckley Correctly Characterizes Peoples’ CHP As A Load Growth Program. ...........................................................................................................................6

C. Judge Buckley’s Initial Decision Is Consistent With Recent Commission Precedent On This Issue. ................................................................................................9

D. Conclusion ...................................................................................................................... 14

OCA Reply to Peoples Exc. No. 7 ........................................................................................... 15

OCA Reply to Peoples Exc. No. 8 ........................................................................................... 17

A. Introduction ................................................................................................................... 17

B. Net-to-Gross Adjustments ............................................................................................ 18

C. Residential New Homes Program ................................................................................ 19

D. Conclusion ..................................................................................................................... 21

III. CONCLUSION ........................................................................................................ 23

TABLE OF AUTHORITIES

Page(s)

Cases

Eastwood Nursing v. Dep’t of Pub. Welfare, 910 A.2d 134, 141 (Pa. Cmwlth. 2006)………….13

NRDC v. Perry, 2018 U.S. App LEXIS 1088 (February 15, 2018) ...................................................................20

Final Policy Statement on Combined Heat and Power, Docket No. M-2016-2530484, Order (April 5, 2018) ....................................................................................11,12, 13

Petition of Philadelphia Gas Works for Approval of Demand-Side Management Plan for FY 2016-2020, and Philadelphia Gas Works Universal Service and Energy Conservation Plan for 2014-2016, 52 Pa. Code §62.4 – Request for

Waivers, Docket No. P-2014-2349362, Tentative Order (August 4, 2016) ............................................10, 11 Pa. PUC et al. v. UGI Penn Natural Gas, Inc.,

Docket No. R-2016-2580030, Order (February 9, 2017) ..................................................11, 16

Pa. PUC et al. v. UGI Utilities, Inc. –Gas Division, Docket No. R-2015-2518438, Order (October 14, 2016) ............................................11, 16, 17

Statutes

66 Pa. C.S. § 1329 ............................................................................................................................2

66 Pa. C.S. § 2201 et seq. ……………………………………………………… .........................13

66 Pa C.S.§ 2801 et seq……………………………. ....................................................................13

66 Pa. C.S. § 2806.1(a) ....................................................................................................................9

Regulations

52 Pa. Code § 58.2 ...........................................................................................................................9

52 Pa. Code § 69.3201 ...................................................................................................................11

52 Pa. Code § 69.3201(D)........................................................................................................12, 13

1

I. INTRODUCTION

On January 10, 2019, Administrative Law Judge Dennis J. Buckley (Judge Buckley) issued

his Initial Decision regarding Peoples Natural Gas Company’s Petition for Approval of its Energy

Efficiency and Conservation Plan (EE&CP or Plan). Judge Buckley identifies “significant” errors

in the Company’s calculations that impact the Total Resource Cost (TRC) test for the CHP, the

test results were “consequently unreliable.” I.D. at 49.

In the proceeding below, the OCA supported the Company’s proposed energy efficiency

program, with certain modifications. The OCA, however, opposed the Company’s proposal to

incorporate a CHP into the Company’s proposed EE&C Plan because the CHP program is a load

growth program and not an energy efficiency program. The OCA’s Main Brief and Reply Brief

in this proceeding fully addresses the positions of the Company and the arguments now advanced

in the Company’s Exceptions. Peoples presents nine exceptions, and the OCA files these Reply

Exceptions below in response to the Company’s Exception Number 1 and Exception Numbers 4

through 9. The OCA supports the determination of Judge Buckley in this matter and submits that

it should be adopted by the Commission.

II. REPLY EXCEPTIONS

OCA Reply to Peoples Exc. No. 1: Judge Buckley Correctly Concludes That The CHP Plan Should Be Denied. (I.D. at 43-53; Peoples Exc. 5-7) In its Exceptions, Peoples argues that Judge Buckley erred by denying the Plan, without

prejudice, and that Judge Buckley “should have ordered a different resolution.” Peoples Exc. at

5-7. The Company requests that the Commission approve the EE&C Plan in its entirety, including

both the energy efficiency and conservation portion of the Plan and the CHP portion of the Plan.

2

Peoples Exc. at 5. In the alternative, the Company proposes that if the Commission determines

that additional notice is necessary, the Commission should tentatively approve the Plan, subject to

additional notice and opportunity to provide comments. Peoples Exc. at 6. Finally, the Company

requests that if the Commission disapproves any part of the EE&CP, the Commission should

disapprove the entire EE&CP, without prejudice, noting that Peoples has fulfilled its obligations

under Paragraphs 109-112 of the Merger Settlement. Peoples Exc. at 7.

In its Exceptions, Peoples argues that “the Commission should not force a natural gas utility

submitting a voluntary plan to implement a partial plan against its will. Peoples does not wish to

implement some parts of its voluntary EE&CP without the remaining parts.” Peoples Exc. at 7.

Under Section 1319 of the Public Utility Code, the Commission does have the authority to require

Peoples to implement a cost-effective natural gas energy efficiency program. Under such a

program, the Commission would allow the “public utility to recover all prudent and reasonable

costs.” 66 Pa. C.S. § 1329.

The OCA submits that there are two parts to the Company’s filing, the Energy Efficiency

and Conservation Plan (EE&CP or Plan) and the Combined Heat and Power (CHP) Plan. The

ALJ denies the Company’s proposed Energy Efficiency and Conservation Plan in its entirety due

to procedural concerns, and also denies the CHP program. I.D. at 45-51. ALJ Buckley’s Initial

Decision as to the EE&C Plan specifically concludes, “I agree, generally, with the OCA that the

public interest would be served by a workable EE&CP based on the four energy efficiency

programs, as modified, and but for the notice issue, I would approve the same.” I.D. at 45. ALJ

Buckley concludes:

Should the Commission still wish to approve the four energy efficiency programs (again, the notice/due process issue notwithstanding) that approval should be conditioned upon Peoples’ acceptance of the modifications proposed by the OCA, the OSBA, and PIOGA.

3

I.D. at 51. As the OCA states in its Main Brief, the OCA supports the four proposed energy

efficiency programs with the OSBA, PIOGA, and OCA recommended modifications. The OCA

does not support the implementation of the CHP program as a part of the Company’s EE&C Plan.

The OCA submits that a cost-effective voluntary natural gas energy efficiency program has merit

and should be approved. See, OCA M.B. at 10-15.

OCA Reply to Peoples Exc. No. 4: Judge Buckley Correctly Determines That The CHP Program Is Not Cost-Effective. (I.D. at 49-51; Peoples Exc. 18-24). Peoples argued that Judge Buckley errs in the decision to deny the CHP program based on

the program’s cost-effectiveness. Peoples Exc. 18-22. Peoples argues that even if the Commission

agrees with Judge Buckley, the Commission should use its discretion to approve the CHP program.

Peoples Exc. at 22-24. The OCA submits Judge Buckley correctly concludes that the TRC test

results for the CHP were unreliable, and the Commission should not use its discretion to support

a program that is based upon fundamentally flawed calculations. I.D. at 49-50. Judge Buckley

concludes:

The proposed CHP program is based on questionable data using a flawed methodology. In its present form, it would act as a load growth program for Peoples and would not reduce existing natural gas usage. It is unclear how the CHP program provides an efficiency benefit to Peoples’ natural gas customers consistent with an EE&CP.

I.D. at 50-51.

In its Exceptions, Peoples argues that the preponderance of the credible evidence

demonstrated that the Peoples’ CHP program was cost-effective and that the Plan as a whole was

cost-effective. Peoples Exc. at 17-24. The testimony of OCA witness Crandall and Duquesne

witness Defide demonstrates that the CHP program is not cost-effective. As the Company states

in its Exceptions, Peoples’ original EE&C Plan uses the 2015 Environmental Protection Agency

4

and Combined Heat and Power Partnership’s Catalog of CHP Technologies. Peoples Exc. at 18-

19. In response to the Direct Testimony of Duquesne Light Company witness David Defide, the

Company revises its Second Rebuttal Testimony of Theodore Love to use the U.S. Energy

Information Administration, Distributed Generation and Combined Heat & Power System

Characteristics and Cost in the Building Sector. Peoples Exc. at 18-19. As OCA witness Crandall

concluded, the revisions to the CHP program are more problematic than the original Company

proposal. OCA St. 1-SUPP-SR at 4.

The OCA submits that the Company’s evaluation of the CHP and its benefits is flawed and

should not be approved. ALJ Buckley’s Initial Decision correctly discusses the flaws in the

Company’s TRC test. I.D. at 49. In support of his conclusion regarding the flaws in the TRC test,

Judge Buckley quotes OCA witness Crandall’s Supplemental Surrebuttal testimony:

[b]y changing the CHP data source, the avoided gas costs and the life of the CHP equipment, Peoples now concludes that CHP was even more cost effective than stated in its original EE&C Plan and CHP program filing. Even though Peoples asserted that it had updated and freshened up the data it relied upon to perform the economic analysis of a potential CHP program, the characteristics and cost data was not based on the most recent data from EPA as was described above. Had Peoples simply corrected the errors and used the most current CHP characteristics issued by the federal government, not have adjusted the natural gas avoided cost downward and extended the useful life values for CHP engines, Peoples would have concluded that CHP was less cost effective than its original analysis indicated.

I.D. at 49, citing OCA St. 1-SUPP-SR at 8.

In his Supplemental Surrebuttal Testimony, OCA witness Crandall identifies three areas of

concern with the revised data used in Mr. Love’s analysis. See discussion, OCA St. 1-SUPP-

SURR at 5-12; OCA M.B. at 24-29; OCA R.B. at 14-16. In particular, (1) Mr. Love’s revised

analysis does not use the most current data and information, and in fact, the Company uses older

data than otherwise available; (2) the Company artificially increases the lifetime for CHP units

from a 15-year lifetime to a 17-year lifetime contrary to the requirements for utilities in Act 129;

5

and (3) the Company lowers the avoided natural gas costs, without changing the avoided electric

costs from the original EE&C Plan. OCA St. 1-SUPP-SR at 8; OCA R.B. at 15-16. The OCA

submits that it is notable that Mr. Love’s Rejoinder Testimony did not respond to any of Mr.

Crandall’s critiques of the data used.

In its Exceptions, the Company attempts to downplay the importance of the TRC test.

Peoples Exc. at 22-23. Peoples argues in Exceptions that the projects would be evaluated based on

the analysis of the actual projects, and the Company would use an economic test for each project

as well as an independent evaluation on projects over $500,000. Peoples Exc. at 22-23. While the

OCA agrees with and supports the use of the economic test, a fundamental principle of the program

is that it must also meet a Total Resource Cost (TRC) test. OCA M.B. at 29-30; OCA R.B. at 16-

17. The TRC test standard has been set forth for the Act 129 programs and the same standard

should be applied here to Peoples’ proposed program. Moreover, the Company presents no

evidence to demonstrate that the actual project results would be able to overcome the fundamental

modeling errors identified by OCA witness Crandall and Duquesne Light witness Defide or would,

in fact, be any different from the flawed TRC test results proposed.

For the reasons set forth in the OCA’s Main Brief and Reply Brief and Judge Buckley’s

Initial Decision, the OCA submits that Peoples’ revisions to its TRC test are fundamentally flawed.

Peoples’ efforts to revise the Plan beyond the errors identifies in Duquesne Light witness Defide’s

testimony highlight the flaws in the Company’s plan to include CHP as a part of the EE&C Plan.

OCA Reply to Peoples Exc. No. 5: Judge Buckley Correctly Concludes In His Initial Decision That The CHP Program Should Not Be Permitted Because It Is A Load Growth Program. (I.D. at 51; Peoples Exc. at 24-27).

A. Introduction

6

In addition to the errors to the CHP TRC calculations discussed above, Judge Buckley also

denies the CHP program because it was a load growth program, and not an energy efficiency

program. I.D. at 49-50. In its Exceptions, Peoples argues Judge Buckley errs in disapproving the

CHP Program because it is a load growth program, not an energy efficiency or conservation

program. Peoples requests that the Commission should find that Peoples properly included a CHP

Program in its voluntary natural gas EE&CP. Peoples Exc. at 17-24.

While the OCA is not opposed to CHP programs, the OCA does not oppose the inclusion

of the CHP program as a part of the Company’s EE&C Plan with special ratemaking treatment

because the program would operate as a load growth program rather than EE&C program. OCA

M.B. at 16-23; OCA R.B. at 3-5. The CHP program does not reduce existing natural gas usage

and should not be treated the same as an energy efficiency and conservation program, particularly

as it concerns rate recovery through a surcharge mechanism. Contrary to Peoples’ arguments in

its Exceptions, the law does not support implementation of the CHP plan as a part of its Energy

Efficiency and Conservation Plan. Peoples Exc. at 24-26; OCA R.B. at 5-13. The purpose of the

energy efficiency plan is to reduce the utility’s overall energy demand and to support conservation

activities. In its filing, Peoples characterizes the CHP program as providing a decline in “net

energy usage,” or the “combination of the customers’ natural [gas] usage and electric usage.” Tr.

202. The energy efficiency benefits, however, would accrue to electric customers, not natural gas

customers, but the ratepayers supporting this program through the energy efficiency surcharge

mechanism are natural gas customers. As Judge Buckley’s Initial Decision correctly concludes,

the CHP is a load growth program and should not be approved as a part of Peoples’ EE&C Plan.

B. Judge Buckley Correctly Characterizes Peoples’ CHP As A Load Growth Program.

7

Peoples disputes Judge Buckley’s characterization of the CHP as a “load growth” program.

Peoples Exc. at 24-26. In the Initial Decision, the ALJ states that the “projected benefits are in

some instances speculative or will likely result in increased energy consumption.” I.D. at 50.

Judge Buckley concludes:

In its present form, it would act as a load growth program for Peoples and would not reduce existing natural gas usage. It is unclear how the CHP program provides an efficiency benefit to Peoples’ natural gas customers consistent with an EE&CP.

I.D. at 51. Judge Buckley’s determination is based, in part, on OCA witness Crandall’s undisputed

testimony regarding the impact of the CHP on natural gas sales for Peoples.

In OCA witness Crandall’s Direct Testimony, he testifies:

A deeper look at the gas usage shows Peoples’ proposed CHP program would increase Peoples’ gas sales by nearly three times as much as the rest of its proposed EE&C Plan would reduce gas sales over the life of the measures. Peoples forecasts that the lifetime effect of Peoples entire EE&C portfolio, not including CHP, is to save 10,462,205 MMBtu. In contrast, Peoples forecasts that the lifetime effect of CHP program is to increase gas consumption by Peoples’ customers participating in the CHP programs by 29,020,049 MMBtu.

OCA St. 1 at 10. Peoples’ revised CHP program would increase Peoples’ natural gas sales by over

3.3 times as much as the rest of its proposed EE&C plan would reduce natural gas sales over the

life of the measures. OCA St. 1-SUPP-SR at 4. OCA witness Crandall testified:

Peoples forecasts that the lifetime effect of Peoples entire revised EE&C portfolio, not including CHP, is to save 10,414458 MMBtu (See Peoples’ Exhibit “Savings-Incr” tab, cells N2 to N4). In contrast, Peoples forecasts that the lifetime effect of Peoples CHP program is to increase gas consumption by Peoples’ customers participating in the CHP programs by 34,610,567 MMBtu (See Peoples’ Exhibit 15, “Program Outputs” tab, row 102).

OCA St. 1-SUPP-SR at 4; OCA M.B. at 24; see also, Tr. 194-194 (Testimony of Company witness

Linda Petrichevich); Revised EE&C Plan Errata at 49.

In its Exceptions, Peoples quotes the OCA Main Brief statement that “[w]hile the OCA is

not opposed to CHP programs, the OCA has opposed the inclusion of the CHP program as a part

8

of the Company’s EE&C Plan because the program would operate as a load growth program rather

than an EE&C program.” Peoples Exc. at 24, citing OCA M.B. at 17. Peoples argues that “the

OCA’s position elevates form over substance.” Peoples Exc. at 24. The OCA’s argument is not

form over substance. The CHP program is inconsistent with the goals of a natural gas energy

efficiency program and has a different impact on the utility than energy efficiency. The special

cost recovery that has been offered for energy efficiency recognizes these key differences. A load

growth program, on the other hand, increases NGDC revenue, something not reflected in the

surcharge mechanism used to recover costs.

Peoples further argues that CHP is a fuel switching program, and it should be permitted to

include a fuel switching program in its EE&C Plan because the Technical Reference Manual for

EDCs allows the EDCs to include such programs in their EE&C Plans. Peoples Exc. at 26-27,

citing the PUC’s Technical Reference Manual, June 2016. The OCA submits that the fundamental

difference between the Company’s proposed CHP program and the EDC’s proposed CHP program

is that the EDC program is designed to decrease electric usage and must pass the TRC for the

electric usage reduction. The Company’s CHP does not propose savings in Peoples’ natural gas

demand, the energy efficiency benefits accrue to electric customers, not to natural gas customers;

however, natural gas customers solely will pay for the program incentives through the EE&C Plan.

Judge Buckley’s Initial Decision correctly concludes that Peoples’ proposed CHP program

is a load growth program and not an energy efficiency program. I.D. at 50-51. The Company

should not be permitted to recover the costs of a load growth program through its energy efficiency

surcharge. Conservation benefits to the program would accrue to electric customers and not to the

natural gas ratepayers that must pay for the program.

9

C. Judge Buckley’s Initial Decision Is Consistent With Recent Commission Precedent On This Issue. Judge Buckley’s Initial Decision is grounded in the law and in Commission precedent on

this issue. For electric utilities, the General Assembly has specifically defined the goals of energy

efficiency programs as set out in Act 129. Specifically, Section 2806.1(a) provides:

The commission shall, by January 15, 2009, adopt an energy efficiency conservation program to require electric distribution companies to adopt and implement cost-effective energy efficiency and conservation plans to reduce demand and consumption within the service territory.

66 Pa. C.S. § 2806.1(a) (emphasis added). Although Act 129 does not apply to NGDCs, the

General Assembly’s clear direction as to the goals of an energy efficiency and conservation plan

provides important guidance in this matter. Similarly, the Public Utility Code has defined

“program measures” in the electric utility context for the Low Income Usage Reduction Program

(LIURP) as “measures designed to reduce energy consumption.” 52 Pa. Code § 58.2. Peoples’

CHP proposal is inconsistent with the goals of an energy efficiency and conservation program for

a natural gas utility, as it is designed to increase natural gas demand.

As Peoples acknowledges in its Exceptions and Main Brief, a similar CHP program, the

“Efficient Fuel Switching” program, was proposed and denied as part of PGW’s Phase II Demand

Side Management program. Peoples Exc. at 25; Peoples M.B. at 18-19. In PGW, the Commission

rejected the proposed inclusion of CHP in PGW’s Demand Side Management program and stated:

Based upon the evidence of record, we are in agreement with the recommendation of the ALJs to adopt the position of the OCA that PGW’s proposed Efficiency Fuel-Switching program is in effect a load growth program that would result in increased natural gas usage in PGW’s service territory and, as such, is not properly included within this voluntary energy efficiency and conservation proposal of the Company. As pointed out by the OCA, on the electric side fuel switching has been considered an acceptable part of an energy efficiency program because in that instance, the fuel switching results in reducing electricity usage as that usage is replaced by other energy sources. However, under the scenario in this proceeding, PGW’s proposal would instead result in an increase in the demand for natural gas usage.

10

Considering that the overall purpose of a DSM energy conservation plan of a utility should be to reduce the utility’s existing energy demand requirements, we shall deny the implementation of PGW’s Efficient Fuel-Switching program in the context of this proceeding. It is important to note however that our rejection of PGW’s innovative pilot program proposal in the instant proceeding should not be interpreted that the Commission is categorically opposed to similar proposals in the future. We are in agreement with the expressed position of the OCA which stated that it is not opposed to such programs and that PGW is free to pursue such initiatives through other Commission filings. We conclude however that this demand-side management proceeding is not the appropriate mechanism to implement such endeavors as we would prefer to have such unique proposals examined within a separate regulatory submission where the issues inherent in such a proposal can be more fully developed.

Petition of Philadelphia Gas Works for Approval of Demand-Side Management Plan for FY 2016-

2020, and Philadelphia Gas Works Universal Service and Energy Conservation Plan for 2014-

2016, 52 Pa. Code § 62.4 – Request for Waivers, Docket No. P-2014-2349362, Tentative Order at

80-81 (August 4, 2016) (PGW DSM Phase II Order).1

Peoples does not try to differentiate PGW in its Exceptions other than to argue that the

Commission has not established an “ ‘across-the-board’ policy disapproving all CHP programs in

natural gas EE&CPs.” Peoples Exc. at 25. The OCA submits that the Commission does identify

in PGW that a demand-side management proceeding is not the appropriate mechanism for a load

growth program. See, PGW Phase II Order at 81. The OCA’s position here is the same as it was

in the PGW DSM Phase II Order proceeding that a load growth program should not be included

as a part of an Energy Efficiency and Conservation Plan. As the Commission states in the PGW

DSM Phase II Order, “we are in agreement with the expressed position of the OCA which stated

1 The OCA notes that the Commission’s Order was labeled was Tentative because the Commission requested Comments regarding an unrelated issue about the budget for PGW’s Low Income Usage Reduction Program (LIURP). See, PGW DSM Phase II Order at 145.

11

that it is not opposed to such programs and PGW is free to pursue such initiatives through other

Commission filings.” PGW DSM Phase II Order at 81.

Peoples then cites to the UGI Gas Order in support of its position. The only two natural

gas utilities with CHP programs are UGI Gas and UGI PNG. See, Pa. PUC et al. v. UGI Penn

Natural Gas, Inc., Docket No. R-2016-2580030, Settlement at ¶ 34 (Order approving Settlement

entered February 9, 2017) (UGI PNG Gas Order); Pa. PUC et al. v. UGI Utilities, Inc. –Gas

Division, Docket No. R-2015-2518438, Order (October 14, 2016) (UGI Gas Order). In the UGI

proceeding, the Joint Statement of Chairman Gladys M. Brown and Commissioner David W.

Sweet specifically identified that one of the conditions for their approval of the CHP program was

because the program was being proposed as a part of the base rate proceeding. The Joint Statement

provided:

The EE&C Plan also includes a separate program providing incentives to commercial and industrial customers for the installation of combined heat and power (CHP) systems. The Commission has been a strong proponent of CHP, as evidenced in our Act 129 Implementation Order and our Proposed CHP Policy Statement. While this program will not decrease the volume of gas consumed by UGI’s customers, the program will result in a net-total energy decrease for participating customers. Since this program is proposed within a rate case, the parties have had the opportunity to evaluate any projected increased throughput and correspondingly negotiate settlement terms with this in mind.

UGI Gas Order, Joint Statement at 1 (September 1, 2016) (emphasis added) (footnotes omitted).

In support of its Plan and in its Exceptions, the Company also argues that the Commission’s

Final Policy Statement on Combined Heat and Power definitively supports including the CHP as

a part of the CHP. Peoples cites to the Commission’s statement that EDCs and NGDCs should

include CHP as part of their “energy efficiency and resiliency plans, as well as their marketing and

outreach efforts.” See, Peoples Exc. at 23-24, 26; 52 Pa. Code § 69.3201; Final Policy Statement

on Combined Heat and Power, Docket No. M-2016-2530484, Order at 2 (Order entered April 5,

12

2018).2 The actual language of the Policy Statement, though, does not include a reference to the

energy efficiency plans. The Commission’s Policy Statement at Section 69.3201(D) states:

EDCs and NGDCs are encouraged to support the development of CHP by evaluating and implementing new strategies, programs and other initiatives to promote the deployment of CHP and to reduce barriers to such deployment within their service territories.

52 Pa. Code § 69.3201(D).

The OCA agrees that NGDCs, like Peoples, should be encouraged to develop CHP

projects, but the OCA does not agree that the Final Policy Statement Order means that the program

should be included as part of an NGDC’s Energy Efficiency Plan with special ratemaking

treatment. OCA witness Crandall testified regarding the Final Policy Statement Order as follows:

The Commission in its Docket No. M-2016-2530484 Policy Statement issued on April 5, 2018 (see page 2) stated that the Policy Statement is intended to make CHP as a part of their energy efficiency and resiliency plans as well as their MARKETING (emphasis added) and outreach efforts: and…”A common definition of an energy conservation is an effort made to reduce the consumption of energy by using less of an energy service. This can be achieved either by using energy more efficiently (using less energy for a constant service) or by reducing the amount of services used (for example, by driving less). Energy conservation reduces the need for energy services, and can result in increased environmental quality, national security, personal financial security and higher savings. Conservation of resources by a gas utility or others are activities and programs designed to do more (or the same) by using less natural gas to heat and fuel appliances and processes in homes/businesses/schools/etc. It is inappropriate, in this forum, to include a marketing and load building initiative, which would result in approximately three times the natural gas being consumed, rather than saved in the proposed EE&C Plan. A CHP marketing program is encouraged by the Commission in its April 5, 2018 Policy Statement (Docket No. M-2016-2530484). This marketing initiative could be reviewed and assessed in a more appropriate forum, such as a base rate case or separate CHP Rider proceeding. The economic viability of the proposed CHP program is entirely contingent on the savings of

2 In fact, PGW’s arguments in the DSM Phase II proceeding were very similar to Peoples’ arguments here. See, PGW DSM Phase II Order at 78-79. The Commission’s Tentative Order regarding the Combined Heat and Power Policy Statement was issued on March 9, 2016 (prior to the PGW DSM Phase II Order), and the Tentative Order contained the same language that Peoples relies upon in its Briefs and Exceptions. Proposed Policy Statement, Docket No. M-2016-2530484, Tentative Order (March 9, 2016) (Tentative Order), (“encourage EDCs and NGDCs to make CHP an integral part of their energy efficiency and resiliency plans, as well as their marketing and outreach efforts”). Tentative Order at 2; Final Policy Statement Order at 2. The Commission subsequently rejected the proposed inclusion of the program in PGW’s DSM Phase II Order. PGW DSM Phase II Order at 80-81.

13

electricity (a fuel provided by a competitor to Peoples) and would not be expected to conserve or use less natural gas on Peoples’ customers’ premises.

OCA St. 1-R at 6-7 (emphasis in original).

Peoples argues that the proposed CHP program advanced the goals of the Final Policy

Statement and represents “a public announcement of a policy that the agency intends to follow in

future adjudications.” Peoples Exc. at 23, citing Eastwood Nursing v. Dep’t of Pub. Welfare, 910

A.2d 134, 141 (Pa. Cmwlth. 2006). The OCA submits that Section 69.3201(d) of the

Commission’s Final Policy Statement does not require Peoples to include CHP in its energy

efficiency plan. 52 Pa. Code § 69.3201(D). The Commission’s Final Policy Statement does

encourage Companies to develop CHP, but not as a part of the Company’s Energy Efficiency and

Conservation Plan.

Peoples also argues that the conclusion the program is a “load growth” program is

inconsistent with the Natural Gas Choice and Competition Act and the Electricity Generation

Customer Choice and Competition Act. Peoples Exc. at 26, citing 66 Pa. C.S. §§ 2201 et seq.,

2801 et seq. The Company states “[t]hose statutes use market forces to further the public interest

in promoting cheaper, more abundant and reliable energy for consumers – with appropriate

safeguards.” Peoples Exc. at 26. The OCA submits that the Company’s arguments are without

merit because they do not address the fundamental problem that CHP is a load growth program

included as a part of an energy efficiency plan. Moreover, the Company’s arguments do not

address the flaws in the Company’s calculations of the TRC for the proposed CHP program. There

is nothing in Judge Buckley’s decision that inhibits the use of market forces or prevents the

Company from correcting the errors and requesting to implement a CHP program in another more

appropriate forum, such as base rate proceeding.

14

D. Conclusion

For the reasons discussed above, the OCA submits that Judge Buckley correctly applies

the law and determines that the Company’s proposed CHP program should be denied. The

proposed CHP program is not an energy efficiency program, but instead is a load growth program.

The OCA submits that the Judge Buckley’s Initial Decision should be adopted.

OCA Reply to Peoples Exc. No. 6 Judge Buckley Does Not Deny The CHP Program Because Of Its Size. (I.D. at 49-51; Peoples Exc. at 28-30) In Exceptions, Peoples argues that Judge Buckley errs in disapproving the CHP Program

based on the size of the program. Peoples Exc. at 28-30. The Company misstates the ALJ’s

conclusion in this case. ALJ Buckley states that “the proposed CHP program is based on

questionable data using a flawed methodology. In its present form, it would act as a load growth

program for Peoples and would not reduce existing natural gas usage.” I.D. at 51. While Duquesne

opposes the size of the program, Judge Buckley denies the program because it was a load growth

program and not cost-effective. I.D. at 49-51. Judge Buckley’s conclusion is that “[i]t is unclear

how the CHP program provides an efficiency benefit to Peoples’ natural gas customers consistent

with an EE&CP.” I.D. at 51.

Peoples proposes to spend $24,994,480 on its four proposed energy efficiency programs,

and proposes a separate budget for the CHP program. The CHP Program “will be subject to a

$17.5 million cap, although expenditures are projected to be $12.3 million over five years” I.D. at

25; Revised EE&C Plan Errata at 12. The budget for the CHP program would produce energy

savings for electric customers, not natural gas customers. The OCA submits that the Company

should instead be encouraged to develop an EE&C program for its MGS and LGS customers such

as custom and prescriptive rebate/financial incentives program with a broad array of energy

efficiency measures that would be accessible to most, if not all, of Peoples’ MGS and LGS class

15

customers. OCA St. 1 at 22. Rather than utilize the large amount of funding for a CHP program

that would only be available to a select few, the budget should be directed more appropriately to

energy efficiency programs.

OCA Reply to Peoples Exc. No. 7 The Commission Has Only Approved A CHP Program For A Natural Gas Distribution Utility As A Part Of A Base Rate Proceeding. (I.D. at 49-51; Peoples Exc. at 30-32) In Exceptions, Peoples argues that Judge Buckley errs in failing to address Duquesne’s

argument that a voluntary natural gas EE&C Plan must be proposed as part of a base rate case.

Peoples Exc. at 30-32. The OCA submits that Peoples fails to make a critical distinction in its

Exceptions. Peoples states that Duquesne’s (and also OCA’s) argument is that an EE&C Plan

cannot be approved outside of a base rate proceeding. Peoples Exc. at 31, citing Duquesne R.B.

at 10-17. That portion of Duquesne’s Reply Brief, however, discusses whether the CHP program

could be approved outside of the context of a base rate proceeding. No party argues that a

voluntary energy efficiency program must be approved in a base rate proceeding. The CHP

component, however, should be considered in a base rate proceeding. See, Duquesne M.B. at 12-

13; Duquesne R.B. at 10-17; OCA R.B. at 10-13.

In its Main Brief, Duquesne succinctly set forth the reason that CHP programs should be

considered in a base rate case. Duquesne states:

Where a proposed CHP program will augment a gas utility’s revenues and net income, there must be a solid evidentiary basis for finding that Section 1307’s fundamental requirement – the new rates will produce not more than a just and reasonable return on the utility’s rate base – has been satisfied. As the Commission has previously held, that kind of finding can properly be made only in a base rate proceeding where all elements of an NGDC’s revenues (and revenue enhancements) and revenue requirement can be thoroughly examined.

Duquesne M.B. at 22.

16

As Peoples acknowledges in its Exceptions, the only two natural gas utilities with CHP

programs are UGI Gas and UGI PNG. See, Pa. PUC et al. v. UGI Penn Natural Gas, Inc., Docket

No. R-2016-2580030, Settlement at ¶ 34 (Order approving Settlement entered February 9, 2017)

(UGI PNG Gas Order); Pa. PUC et al. v. UGI Utilities, Inc. –Gas Division, Docket No. R-2015-

2518438, Order (October 14, 2016) (UGI Gas Order). Unlike Peoples’ proposed CHP program,

both of those programs came about as settlements of the Company’s respective base rate

proceedings and were substantially smaller programs. See, OCA M.B. at 21; OCA R.B. at 11;

Duquesne M.B. at 11-12; Duquesne R.B. at 10-17. As Duquesne states in its Main Brief regarding

the UGI Gas Order:

The contemporaneous joint statement of two commissioners affirmed that UGI Utilities’ CHP was being approved only because, unlike PGW’s, it was presented in a base rate case and, therefore, the additional revenues it would produce could be assessed in conjunction with all of the elements of the company’s filing to determine just and reasonable rates.

Duquesne M.B. at 12.

In its Exceptions, Peoples argues that the Joint Statements are not precedential and that the

Order does not require that the CHP be approved as a part of a base rate proceeding. Peoples Exc.

at 31. The UGI Gas Order does address this issue, and specifically acknowledged that the

Commission has previously rejected the inclusion of CHP programs in natural gas energy

efficiency programs outside of a base rate proceeding. UGI Gas Order at 28. The Commission

states in the UGI Gas Order:

Previously, the Commission has rejected the inclusion of CHP programs in natural gas EE&C programs. In general, natural gas EE&C programs are designed to reduce the usage of natural gas. CHP programs, to the contrary, usually result in higher natural gas usage, but produce an overall reduction in total energy usage. As such, CHP programs are more akin to market development projects, in addition to being energy efficiency. Thus, the Commission had rejected CHP programs in natural gas EE&C plans.

17

UGI Gas Order at 28 (emphasis added). The Commission approves the UGI Gas CHP Plan as a

part of a settlement in a base rate proceeding. The Commission also adopts an economic test as a

condition of approval of the program and specifically identifies that the reason the program is

approved is due to the “unique conditions” presented. UGI Gas Order at 28-29; DLC St. 1 at 13.

OCA Reply to Peoples Exc. No. 8: Judge Buckley correctly approved the Office of Consumer Advocate’s Proposed Modifications to the EE&C Plan. (I.D. at 50-51; Peoples Exc. at 33-37)

A. Introduction

In Exceptions, Peoples correctly identifies that the Company did not agree to all of the

modifications to the Company’s energy efficiency programs as recommended by OCA witness

Crandall. Peoples Exc. at 34. Peoples claims that Judge Buckley erred in stating that the natural

gas energy efficiency programs should be modified as recommended by the OCA. People Exc. at

34-35. Judge Buckley states:

Should the Commission still wish to approve the four energy efficiency programs (again, the notice/due process issue notwithstanding) that approval should be conditioned upon Peoples’ acceptance of the modifications proposed by the OCA, the OSBA, and PIOGA.

I.D. at 51.

Overall, with the exception of Peoples’ proposed CHP Plan, the OCA supports the

Company’s proposed energy efficiency plan. The OCA proposes the following four modifications

to the Company’s Energy Efficiency and Conservation Plans: (1) use of a third party evaluation,

measurement and verification in natural gas and electricity areas to perform the Company’s

evaluation; (2) net-to-gross adjustments to savings; (3) adoption of federal energy efficiency

standards; and (4) changes to the Residential New Homes Program. OCA M.B. at 10-16; OCA

R.B. at 2-3. As Peoples correctly identifies, the Company agrees to modify its Plan to use a third

party evaluation and monitoring firm. Peoples Exc. at 33-34; see also, OCA R.B. at 2. Peoples

18

also agrees to adopt the OCA’s recommendation regarding federal efficiency standards. Peoples

Exc. 34; Peoples R.B. at 10.

In Exceptions, Peoples addresses the two remaining OCA proposed recommendations that

the Company did not adopt: (1) net-to-gross adjustments and (2) changes to the Residential New

Homes Program. Peoples Exc. at 34. If an energy efficiency plan is approved by the Commission,

the OCA submits that both of these proposed modifications should be included in Peoples’ energy

efficiency plan as recommended by Judge Buckley.

B. Net-to-Gross Adjustments

If the Commission approves the proposed energy efficiency programs, Judge Buckley

recommends approval of the OCA’s proposed modification to incorporate net-to-gross

adjustments. I.D. at 50-51. In Exceptions, Peoples states that “the OCA’s proposal seems to be

aimed at the process Peoples will use to plan future iterations of its EE&CP, rather than at the

Commission’s evaluation of Peoples’ EE&CP, as modified during the present proceeding.”

Peoples Exc. at 35. Peoples argues that to the extent the OCA’s proposed modification for net-to-

gross adjustments is adopted, the net-to-gross adjustments should only be required to be used on a

going-forward basis. Peoples Exc. at 35, citing Peoples St. 2-R at 3-4 (Rebuttal Testimony of

Company witness Love).

OCA witness Crandall proposes the use of the net-to-gross ratios for planning purposes.

As Mr. Crandall explained in his Surrebuttal testimony, Mr. Crandall recommends that the

Company should utilize “net-to-gross values in designing the programs, establishing and adjusting

customer incentive levels and quantifying and reporting program savings attributable to the EE&C

Plan.” OCA St. 1-S at 3; see complete discussion at OCA M.B. at 11-13. The primary purpose of

the net-to-gross factors is to ensure that the Company is using its incentives in the most productive

19

manner possible. The Company acknowledges that it has modeled many other aspects of the TRC

calculation from Act 129. Peoples St. 2-R at 23. Act 129 programs have utilized a net-to-gross

factor as the Company acknowledges, and therefore, the OCA submits that Judge Buckley’s

recommendation to incorporate the net-to-gross factors in Peoples’ energy efficiency programs

should be adopted.

C. Residential New Homes Program

Peoples argues that the Commission should reject Judge Buckley’s recommendation to

adopt the OCA’s proposed modification to Peoples’ Residential New Homes Program. Peoples

Exc. at 35-37. The Company argues that, as revised, the program appropriately reflects the impact

of changes in the building codes. Id. Peoples revised its EE&C Plan in its Second Rebuttal

Testimony and updated its Residential New Homes Program (RNHP). The RNHP is designed to

encourage builders, developers, architects, and homeowners to build more energy efficient

structures than is required by the current residential energy code. OCA St. 1-SUPP-S at 14; see

also, OCA M.B. at 14-16. In its original Plan, Peoples proposed financial incentives in the range

between $40 and $50 per annual MMBtu saved for energy measures and energy improvements,

assuming the property is at least 25% more efficient than if it were built to the applicable minimum

residential energy code. Id. In its revised EE&C Plan, the Company proposes to be able to lower

the percentage to 5% above the applicable minimum residential energy code. OCA St. 1-SUPP-S

at 14; Peoples St. 2-REJ at 32-33.

The OCA proposes that Peoples use the standard set forth in its original EE&C Plan that

to qualify for a credit the property is at least 25% more efficient than if it were built to the

applicable minimum residential energy code. Peoples argues that the OCA’s recommendation

regarding the Residential New Homes Program standards is inconsistent with the OCA’s proposal

20

that the Company monitor on-going federal litigation for changes that could impact the EE&C

Plan. Peoples Exc. at 36. Peoples claims that it should have a similar “flexibility to reduce that

threshold” for the Residential New Homes Program if new building codes are established and has

done this by lowering the standard to 5%. Peoples Exc. at 36. The OCA submits that Peoples’

proposal is not akin to the OCA’s recommendation regarding the implementation of pending

federal regulations.3 The federal regulations related to limited incentives under the Commercial

Equipment Program for specific types of equipment with specified thermal efficiency standards

well above the current or new federal energy efficiency standards. The RNHP involves a whole

home with multiple savings opportunities above minimum code standards.

OCA witness Crandall explains in his Supplemental Surrebuttal Testimony:

On page 43 of Peoples Natural Gas Exhibit 13, Special Notes, a message is included indicating that the new construction market is cyclical and that the program could be impacted by general economic trends which would not be within the control of Peoples. Also, the message includes a comment that there is uncertainty regarding the implementation timeline for the 2015 International Energy Conservation Code (IECC 2015). “This shift will have a significant impact on claimed savings and costs…” It will be important that the EMV team be involved early on to provide an interpretation and guidance regarding the baseline methodology and legitimate savings would be attributable to this program. EMV teams will be familiar with both the International Performance Verification and Measurement Protocol and the U.S. Department of Energy Efficiency and Renewable Energy Uniform Methods Project. Peoples will be allowed to take credit for only the savings attributable to the incremental energy efficiency measures and practices that exceed the applicable building codes by at least 25%. Peoples is not eligible to take credit for energy saved which will emanate from Pennsylvania’s residential energy code but only those measures and improvements that would occur at least 25% above the applicable residential code.

3 On February 15, 2018, the U.S. District Court of Northern District of California (Case No. 17-CV-03404-VC) issued an opinion that requires the U.S. Department of Energy to promulgate rules and complete the implementation of the energy efficiency standards impacting numerous appliance and gas consuming devices. See, NRDC v. Perry, 2018 U.S. App LEXIS 1088 (Case No. 17-CV-03404-VC) (February 15, 2018). The court ruling will have a direct impact on Peoples’ program and the derived savings. See, OCA M.B. at 13-14; OCA St. 1 at 6. The OCA recommended that the Company continue to monitor the federal proceeding, and if approved, implement new energy efficiency standards as they are adopted. OCA M.B. at 14. In its Reply Brief, Peoples adopted the OCA’s recommendation. Peoples Exc. 34; Peoples R.B. at 10.

21

OCA St. 1-SUPP-SR at 15.

In Rejoinder Testimony, Company witness Love responds that the program is “designed to

get as much cost-effective savings as possible when a new home is constructed.” Peoples St. 2-

REJ at 32-33. Mr. Love testifies:

While it is still possible to achieve more than 25% savings against current code levels and maintain cost-effectiveness, new building code levels will leave much less cost-effective savings opportunities than the current code. Peoples will seek to acquire as much savings as possible that can be demonstrated to be cost effective from the TRC perspective, but will need the flexibility to lower the 25% threshold in order to do so.

Peoples St. 2-REJ at 32-33.

The OCA agrees that the Company should seek to acquire as much savings as possible;

however, the OCA submits that Peoples should not be permitted to receive energy efficiency credit

for any savings less than 25% of the applicable residential code. The purpose of the program is to

incentivize the builders and developers to go above the standards that are otherwise required by

the residential building codes. The level should be established to achieve the maximum, cost-

effective energy efficiency measures. As such, the OCA submits that the Company should be

permitted to provide incentives only if the home will exceed the applicable minimum residential

code by 25%.

D. Conclusion

Judge Buckley recommends that if the Commission approves the Company’s proposed

energy efficiency programs, the OCA’s modifications, OSBA and PIOGA modifications should

be adopted. I.D. at 50. The OCA submits that the OCA’s proposed modifications will better

ensure maximum benefits from the EE&C Program.

OCA Reply to Peoples Exc. No. 9: Judge Buckley Correctly Determines That The CHP Program Could Be Severed From the Company’s Plan. (I.D. at 50; People Exc. at 36-37)

22

Judge Buckley concludes that “[i]f the Commission sees fit to ultimately approve Peoples’

proposed EE&CP, the due process/notice issue nothwithstanding, then the CHP is severable from

those four programs. The door is open for Peoples to separately propose a CHP pilot in another

proceeding.” I.D. at 50. In Exceptions, Peoples argues that Judge Buckley erred by holding that

the CHP program can be severed from the natural gas energy efficiency programs. Peoples Exc.

at 37. Peoples states that if the Commission disapproved the CHP program, the Commission

should disapprove the entire EE&CP, without prejudice. The OCA submits that there is no reason

that the CHP program cannot be severed from the energy efficiency programs. In the case below,

the OCA recommended that the proposed CHP be denied, and that the CHP program be removed

from the EE&C Plan Rider. OCA St. 1 at 19. OCA witness Crandall recommends that the

Company replace the CHP program with prescriptive and custom programs to provide flexibility

for the LGS class customers. See, OCA St. 1 at 19. The OCA submits that severing the CHP does

not necessarily mean that the Plan cannot otherwise offer a benefit to customers, with the inclusion

of the OCA’s proposed modifications.