Insurance and Commerce- Senate and House

Good afternoon. Let's go ahead and call this meeting to order. Good to see everyone here today to discuss this topic. Um, look forward to the conversation, um, Senator Hill, if you'd have anything you'd like to add. No, sir. Thank you. Um, first thing on the agenda is, has anyone had an opportunity to review the minutes they are attached as exhibit to be, um, we need to get those approved. Mo Motion from Senator Hill. Second from Representative Richardson, all in favor. Any opposed? Motion carries, thank you. First on the agenda is Allan McClain, commissioner, Arkansas Insurance Department. Mr. McClain, if you want to come up and have everyone introduce themselves and, um, just commence with your testimony. Thank you, Mr. Chair, Alan McLean, Arkansas Insurance commissioner and I'll have my colleagues introduce themselves. Uh, Jimmy Harris, uh, compliance director of the insurance department. Russ Galbraith, chief deputy. Thank you. Go ahead. All right, thank you, Mr. Chair, and, uh, uh, the, obviously the agenda item was an update on the homeowner on homeowners insurance, so that's pretty broad but so we thought we would, I would start with a fairly broad overview of what we're seeing in the homeowner's insurance regulatory space. I think most of you, if you've opened your homeowner's insurance bills, you, you have a pretty good, uh, feel for what uh insurance premiums are looking like now and and and homeowners, uh, we can also talk about auto insurance a little bit if you want to, uh, so those are. the primary topics we have here today and um but I will just uh touch, touch on the homeowners insurance market, as you know, uh, you know, what we refer to as a hard market. That means it's uh uh premiums are high and it's hard to, hard to get coverage sometimes for what you need at an affordable rate, uh, it's not as opposed to a soft market and so uh you, you, you, what you may be experiencing is an increase in in homeowners insurance premiums, perhaps some limitations in your. Coverages in terms of deductibles and percent deductibles, things such as that, and perhaps uh carriers choosing to uh underwrite a little bit more strictly sometimes as far as what they're willing to cover or not to cover. I was looking at the trees around my house yesterday thinking I, you know, I, I might need to cut down some trees, see if I'm gonna be able to uh continue some of the, the coverage that I have, uh, so, uh, I'd hate to do that, but that would, uh, minimize the, the likelihood of 11 hitting my house so it's different things. like that come into play. So that, uh, that's what a lot of uh us in this room are experiencing and certainly probably what you're your constituents are, are voicing to you and, and concerns and I, uh, yeah, I think you probably know by now, but it's not just an Arkansas issue. It, it is, uh, a countrywide for sure and each state uh handles things just a little bit differently in their regulatory structure. We're, uh, one regulatory structure is, is you've seen one, you've you've seen one. Uh, and, and in our country, but uh so we take a lot of pride in the state-based system of regulation that, uh, you give the insurance department, the insurance commissioner, a fair amount of latitude and, and, and regulating and so we, we do that, but, uh, we do collaborate and, and learn from our, um, uh, uh, colleagues and counterparts in other states as, as to as to what's going on in those markets, um, the, uh, because the risks are different in different parts of the state. We, we have a lot of convective. storms through here in, in Arkansas and they've caused a lot of the damage, uh, that, that you've seen and and and caused a lot of the cost that insurance companies have, have had to had to had to pay over the, the, uh, the last couple of years, other states have wildfires, other states have hurricanes and uh so, things look different in different states, so I think it's important that we do have a, a state-based, uh, uh, insurance regulatory scheme in, in our country, so. Uh, they, um, You know, there are different things that go into to these increased costs that you're seeing, uh, um, severity and frequency are the things that kind of come, come to mind is the severity of these losses that insurance companies are having to pay, meaning the, the cost of them uh and the frequency, and I think, uh, the, the data pretty well supports that uh that we've had a increased frequency of, of, of storms and some highly high more highly populated areas. Which means that the that the costs are gonna be more that the severity is gonna be higher and so you're gonna have uh more more homes and more property that's going to need to be to be covered, so that's none of that's probably any real surprise to you, but then then what increases those costs to the carriers or things that's things the economic factors, such as, uh, uh, inflation and uh supply chain and different market forces that are going to cause those insurance claim. to to cost more. So those cost, not surprisingly are passed along in the forms of uh increased uh rates to, to, uh, to all of us, so, uh, we, uh, then those, those rates are uh request or or submitted to to the insurance department and uh we, we review those, uh, and speaking only on homeowners rates we do not control the uh the, um, uh, commercial insurance rates we don't get to. those or the surplus line rates, so the, the, the main line insurance companies you'll. Yeah, that you might, might think of be the ones that come, come before us, um, so we're always trying to balance availability of coverage so you can have choices, uh, and, and affordability, and they often work against each other because it's, um, in order to have a wide availability of coverage for you and for all of us, um, for insurance companies to stay in our state to to to be available then uh there's considered to the rate increases has to, has to be given in order uh to justified rate increases for us to, to, uh, to, to, um. Keep them in the state so uh I think uh we have uh had about 8 insurance companies over the last two years, exit the state in terms of, of, um, uh, not wanting to write coverage, uh, then that's, uh, they, they will cite different reasons they don't have to give us a reason, but sometimes it's just the the their their their uh appetite for, uh, the, uh, the underwriting risks that they see in our state, uh, some may just we had one who only. s in South Dakota and Arkansas, and when they, uh, so had a kind of a high experience of of tornado risk they decided well we don't really have the appetite to be in Arkansas anymore, so they just, um, exited the state and just went back to South Dakota, so that's just an example. So there's, it may be somebody writing too, I mean 2 states it might be somebody who writes, uh, in, um, most of our states so there's, there's the, there's just a different dynamic of makeup so that so they will give us different reasons why they choose. 2 eggs at the state. So, um, that, um. We, we think it's important to strike that balance so so when we think about rate increases, we don't like to give approved rate increases that there, but uh we, we, when we look at their loss ratios and look and they justify to us, um, the amount of they show to us the amount of money they're spending on claims versus the amount they've collected in premiums. We, we take that into consideration when allowing them some amount of their rate increases. Very seldom do we give them the full rate increase that they asked for. Uh, we, but, uh, we, um, do have a lot of discussions about that. So, um, you know, we, we, um. So that's sort of the dynamic when you look at homeowners insurance rates and we try to, we, there's a great network of insurance agents in our state and probably every town and location you're in, you probably have several insurance agents where they're uh uh a a mutual insurance company such as uh Shelter or Farm Bureau, um, um, or, um, Uh, State Farm or then or you might have uh an independent insurance agent or two in your town representing numerous insurance companies, so we all encourage and we're in front of those agents a lot, uh, not only for us to give information to them, but because we do license them we approve their continuing education requirements, but we also need to hear from those agents is what they're hearing from from the consumers in the state, so that's, um, it's kind of a two-way street there. But we do Uh, rely on the agent force as we tend to call them to to to be a primary source of consumer information and so that's that gets information out to consumers, uh, as best as we can, uh, we have a consumer services division at the insurance department that takes calls from um from consumers daily whether that's for information or for whether that might be a complaint they might have with an insurance company that we can investigate and help them we. Uh, typically get about 150 complaints or calls a month and sometimes that's just we just get to educate a consumer and sometimes we can address a consumer complaint. So that's how we kind of the world we live in and homeowner's insurance, as most of you know we do a lot of other stuff department, but homeowners in this, this market crisis that we have consumes a lot of a lot of our time and particularly, um, uh, Deputy Harris's time as he. Uh, is, is deeper involved in in the rates and some of these um questions with some of the carriers. So I'll pause there and, and see if you, uh, have, have some questions and that me or any of my team can answer. Thank you, Mr. McLean. We certainly do have some questions. Senator Hill, you're recognized for a question. straight in front of you, um, of the, of the insurance companies that you said left the state. We're a major insurance companies of the age you mentioned. We've got the list here, uh, Jimmy, I'll let you go ahead and. So the biggest one, the biggest impact is gonna be Farmers Union Mutual Insurance Company. That was a small domestic, uh, I say small. It was about 18,000 policies, uh, and it's the one that he, he was referring to, uh, that's a multi-state but only one other state. That company is still servicing the policies, uh, but they began their non-renewals, um, January 1st of 24 and that will, that'll be, they'll be completely out of state. by January 1st of 25. Any claims that they have, they'll continue to work, uh, I, I, I'll say again, the company's not insolvent, but it, it's, it will be a shell, uh, domestic after, uh, all the climbs run out. Uh, outside of that, you've got American National PNC. Their non-renewal process is going to begin actually it just began, uh, uh, this week. After several delays there, uh, they're, uh, uh, kind of a unique company and that they, they gave some, some cash back rewards, uh, to their insured for being 3 years, uh, claims free. Uh, so we've been working with the company to make sure, uh, all of, uh, uh, Arkansas urs our our compensated, uh, for, for that little piece. Um I said Farmers Union was 18,000 policies that was less than 1% of the of the market. So to answer your question directly, no, no major, uh, insurers. Uh, I have, have ceased writing. Thank you, sir. Thank you, Representative Ladyman, great to ask for a question. Thank you, Mr. Chairman. I'm over here. Um, you know, I know we've had some severe tornadoes and uh maybe I don't know whether that's that unusual because up in northeast Arkansas we had tornadoes as long as I've been alive, and some of them have been pretty severe that hit the Jonesboro area up there, um, but my question is, you know, they're increasing these rates, uh, I don't know whether they have to ask for approval to do that or not, but If we have a year where we have no tornadoes, do they come and want to reduce the rates? We, we had several rate reductions because we had several good years uh after 2000, I'd say 2010 through maybe 2017, 2018. Uh, we started seeing a lot of property insurers take 1 or 2 point rate rate reductions or even more, or, or better, no right itself, which is basically a rate rate decrease, uh, because the cost of living and everything is going up year to year. So, so to answer your question. yes. Yes, I expect decreases following good years. Uh, I don't expect it to happen immediately, because a lot of insurers A lot of insurers had their reserves negatively impacted after all of these repetitive storms and once the once the reserves are gone, the insurer's gone. OK thanks we're we're watching that very close. Thanks Lyman Senator Hickey, you're writing for a question. Thank you, Mr. Chair. Uh, I appreciate you, Commissioner McCain, and of course, what you're saying, of course, that's what we're hearing, but I guess here's my thing that I'd like to ask, having multiple constituents, uh, they're asking what can we do? So, uh, we've heard the reason here, but I guess my thing is, Are there other options available other states. I've had people ask me about, you know, if my home is paid for. Can I possibly get some large 20,000 $30,000 deductible, that's on me if I'm willing to do it. Then, of course, I've talked to other people that have said that, well, that wouldn't reduce the premium by as much, but I didn't know if, uh, some other states had some things like that, and we had looked into those particular things. I do understand if a mortgage holder, uh, is involved, that, of course, the bank or whoever that mortgage holder is that they may, you know, they to be insured for at least what they're owed. My second question is going to be, As if that's the case. Can they just be insured for that as long as the mortgage holder allows it. I'm not saying that I would recommend that a constituent do that, but if it's their house and that's what they want to do, and they kind of want to self-insure, then I think that, you know, that's their business. So if those two and then I'll have 1 more, Mr. Chair, that I'm gonna ask for Senator Hammer right here because his mic won't turn on or he can use my mic, but. I'll address first that, yeah, in increasing deductibles as large as you can as long as you're, you know, each carrier will have different, uh, parameters on that. So that's, that's always the first option we say you'll self-insure as much as that who would sit because I've never really heard of anything such as a, a 200 or 30,000. Are those available in the market? If that's going to look a little different, that's gonna be pretty high and it gets into some co-insurance issues and some concerns that, that might surprise homeowners if you do that. I'm gonna let Jimmie explain. Co-insurance a little better than I can. OK, yes, there are carriers that offer large deductibles in the market right now. Generally those are gonna be homes half a million dollars or a million dollars, uh, uh, most other carriers are, are, are moving to a percentage deductible, 1, 2%, uh, uh, hopefully we won't see much higher than 2. Um To answer your question on on if you uh lower the coverage. I think what the commissioner was saying it's, it's, and some other people have asked, hey, why can I not say I'm gonna get $200,000 coverage on my half a million dollar home. OK? I only want to insure part of it. I'm gonna self-insure the rest. The problem with that is gonna come at claim time. Whenever your half a million dollar home. That you have You said I want to self-insure for 250,000, let's say half of it. Well, I claim time when your roof gets damaged, that ensure generally is going to expect the insurance company to pay for their new roof, right? But since you only paid for 50%. Of the full value of the coverage of your home. The insurance company is only going to pay for 50% of your roof. OK, this is more uh it's a co-insurance clause. It's generally found in commercial policies, not on personal lines because if someone wants to do something like, like you're describing, they might get a dwelling fire policy that that's an actual cash value policy. Then at claim time, your insurance company will pay ACV. The rest of it is, is gonna come out of your pocket. Um Regarding a mortgage holder, whether or not they'll they'll accept an ACV policy. I'm, I'm gonna guess not because they're gonna want their, their investment fully protected, uh, but that is absolutely gonna be up to, uh, the bank. But I guess on back to the mortgage holder on just the last part that you said. So let's just say that somebody owed. I don't care. 30,000 on their $200,000 home. If the bank signs off on, uh, if the bank signs off, said, I don't care. All I want is the 30,000. And the insured goes back to your other one. They just want to insure it for that. That's not, that's not available right now for them really to do. Is that correct? I, I can't answer that. I don't think so. I guess, and I guess from my standpoint, that's, you know, and I understand we kind of sit around here and we think, well, we've ran all mouse traps and everything to try to figure this out, but it's gotten to the point that so many constituents are, and I know they're for all the legislature. I can say me, but it's, uh, that's a reason we're probably here today, but, uh, I just didn't know if there's some other states that have some better ideas where we could do something better that we need to look into. Uh, they, I think, you know, again, I don't know that I'd recommend that to anybody, it's not my job to recommend, but it's also if, if they want to do something different than, you know, and they all sign off on the dotted line says, I understand this, then I mean, that's kind of what I want to do. OK, that, that's a great question. OK. Glad you asked. What, what we all know what we can't control or is the weather supply chain issues, building costs in the labor market. What we can control. I resiliency, mitigation, education, and the insurance policy itself. So What some other states have been doing and some representatives have asked are, uh, there's, there's several resiliency programs, strengthen Alabama homes is one, strengthen Oklahoma Homes is one. there's, there's Alabama, Kentucky, Mississippi, North Carolina, Minnesota. Texas, Louisiana, Florida, uh, there's several states that haven't, a couple that are, that are new, uh, new legislation specifically Oklahoma. What this grant does. I, uh, yeah, uh. Alabama specifically, they have $10,000 grants. That they give out every year, uh, uh, 2000. Now 1000 $10,000 grants, $10 million a year. That first come, first serve. Homeowners can apply for it. When, when, you know, the, the, the time drops, OK? Uh, and then homeowners are reimbursed for the total cost of mitigation up to a dollar cap, OK? What these standards are, they're fortified home standards by the IBHS and you might, it might require ring nails on your roof, or it might require your decking to be taped down might require reinforced garage door. Different things to make the home stronger. And, and, you know, stronger to withstand. Wind and hail damage. Obviously we wouldn't want to adopt any program, uh, the entire program, Alabama, because we're not a coastal state. They have a lot of coastal measures in there. But other things in, in the program, you know, there's contractor training programs where you get buy-in from the stakeholders in the state that say, hey, I want to learn how to do this. I wanna, I wanna help Arkansans strengthen their homes. Uh, other incentive programs that are that are tied in to some of these uh states there's mandated discounts for retrofitting homes. Uh, I believe, you know, there's 9 or 10 states that do that. If, if you. Spent 40 to $500 extra when you're putting the new roof on for, for, for the nails that are, that are, that are prescribed in the program, etc. etc. etc. Well then, your insurance company would have to give you a discount on your homeowner's insurance. Some states do that. Some states, they do deductible waivers for, for certain mitigation measures that that that they spell out in, in the guidelines of the program. Um, they'll do mandated policy endorsements to pay for a roof. If any of you. had to climb on your roof and, and you purchase this endorsement. Well, then your insurance company is gonna have to put your roof back like it was, but also upgraded. To be a fortified roof, OK? And you, you bought the endorsement to pay for that. You pay for it every year, and then once the claim time comes on, hey, you're, your roof is replaced with a fortified roof. Uh, there's sale tax credits on retrofitting labor and material costs in half a dozen states. There's 4 or 5 states with income tax credits and deductions for the cost of retrofitting their homes. Uh, there, there's also catastrophe savings accounts that are in, uh, I believe Alabama, Mississippi, and South Carolina, which would be a tax-free way for Arkansans to save money, pay the deductible. Pay for The rest of the, the, the cost of the new roof, you know, so they got a $10,000 grant and they also have had a savings account. Well, then they'd have enough money at that point to, to, uh, to, to retrofit their home. Um, There's a couple of states that it's not a straight grant, it's a grant, it's a matching grant. OK, I'm gonna put 10,000 in and you're gonna give me 10. And now I have buy-in and maybe I'm, I'm gonna maybe not so be so free with that contractor and, and, and the $10,000. Um, there's several things that, that, that other states are doing to try to lower the property claim cost for individual insureds. Insured have to also understand their insurance policy is in a maintenance policy. It, it is there for sudden and direct loss. If you've got a 20 year old roof or 25 year old roof. It might be time to, to, to get a new roof, uh, even if you don't have hail damage, uh. That, that's something that. I think consumers have to be better, uh, better at doing. Um There's been some discussion on, and I, and I suspect that that you'll see a bill. I, I, I can't remember who we spoke to. It was the legislator that, that they want to mandate that residential property deductibles. are all displayed in a conspicuous manner on the declarations page, not on the 3rd or 4th page in the endorsements because as you know, many carriers are putting a separate wind hail deductible on policies, and that's an endorsement, general endorsements are found on the last page of your declarations pages. Well, if they endorse the policy where, hey, we're going to pay a, a, a, a fixed percentage deductible, we're we're gonna, we're gonna pie fixed percentage deductible on when hail climbs. It's generally much, much higher than the all per deductible. Well, we're gonna mandate. Hopefully that all those are found in the same. Same, same Spot. Anything else. Well, I think I'm gonna just let some of the other members get in the queue. I appreciate it. My only thing is I, and Senator Hammer's got his own, so whenever he's his time, he can, he can ask his question. My only thing is just what I said. You know, I just wanna make sure that we personally are exhausting any and everything, and I heard what you said about the retrofit. I could see their issues. If that's new construction, fine, but if it's an existing home, we're trying to figure out what type of nails you put the roof on with might be tough. So, you know, I understand that there would be some complications with that, but what I'm saying if there's any, anything else, you know, that other states are, have done, I mean, even if we need to, uh, help with some of that research down here, you know, with, Uh, with our bureau or what I'm sure they're sitting over thinking we don't need some more work to do, but, but if we can help with that, I would just like to do it because I want to make sure that we've exhausted everything because we're getting, we are getting calls from constituents about this continuously, not just homeowners, of course, the, uh, uh, vehicle insurance too, which this is probably not the time and place on that, but, uh, getting both of those. So thank you. Thanks, Senator. Representative Allen, you are recognized for a question. what is the average rate increase on homeowners insurance in the state of Arkansas. So average, I would say. Over the last, uh, I would say last year, you, you're looking between 15 and 20%, so, uh, follow. So this up and coming year. Homeowners insurance is going to cost the homeowner about 15% more. I, you know, if, if I, if I had to guess, looking at 2023 loss ratios in the state of Arkansas because keep in mind, homeowners insurance rights are based on Arkansas experience only. So what happens in Arkansas affects the rights. In 2023, Uh, the, the, the Pure direct loss ratio for Homeowners alone. Was, uh, I'm sorry, I've got it right here. Somewhere around. 100 30%. So I, I would expect and and that's just, that's just a, a pure loss ratio that doesn't take into account their expenses. Any company expenses, underwriting expenses, yes, but. Production expenses, anything like that. They're, they're spending $1.30 for every $1 in premium that they that they bring in. So I want to make sure that the average increase is just going to be 15%. I, I can't answer that. I, I, for the last year, the average in 23, it was between 15 and 20%. So do you know what it's gonna be going to going to 24. I, I would expect similar right activity this year. Uh, next year. If we continue With relatively good weather results. Then hopefully they'll flatten out. OK, thank you. Thank you, Representative Wooton. Thank you, Mr. Chairman. Um, you said a while ago that it that the experience whether In Arkansas that we experience is bought the rights are based on and not based on the hurricanes in Florida or anywhere like that. Those would have the potential. To uh to impact an overall A a a larger company's reserves. But a, but a company just riding in Arkansas, which a lot of ours do. It's not gonna impact. Them at all. A company, a large company like State Farm, that writes in multiple states that's yeah, that's, that's they're gonna base their rights on Arkansas experience too. Um I, I don't, I don't expect, I, I expect a very minimal impact, um, Though the hurricanes may impact reinsurance rates, which, which will impact every insurer. Uh, January 1st, 2025 is a pretty important date for a lot of, a lot of mutual insurance companies, a lot of small companies, uh, because that's when they found out, hey, What's our reinsurance cost gonna look like next year, so. Some, some companies are going bankrupt because of North Carolina situation and in Florida. Did you anticipate that that will affect that probably will affect, will it not, the number of companies available to our constituents in Arkansas. I don't think that's gonna have a large impact on our insurers, uh, insurance companies take Very much take a state by state approach, um. What, what I've run into with my constituents is a situation like this. They've had a $2500 deductible for numerous years. All of a sudden this year, It's split what I call a split deductible, 5000 for routine and then 9000 if it's win hell or damage like that. Is that the usual um Uh, occurrence now with companies are they splitting the deductibles? I mean, you take. An average guy out here that owns a home. And he has to pay $9000. Well, what, why, why should he have the insurance. Yeah, there, there have been a lot of companies moved to a split wind hail, uh, and, and that's one of. The changes that that we implemented last year to allow companies to do that because we were an outlier of every other state around us that that we were the only state that did not allow companies to do that. Uh. There was a potential that that could have an impact uh on our availability of insurers, uh. And a and a very, very likely impact, uh, very, very likely that would have had. A, uh, a, uh, a much higher impact on our, on our rights if we had not. When, when, when the insurer insurance company tells you that that uh you have replacement cost. What, what they actually telling you, replacement cost of the value at that point in time or replacement costs based on what you paid for the home. That's a replacement cost is going to, is going to pay you, it's gonna be valued. on whatever it takes to replace that structure at that time. At that point in time. OK. Thank you, Mr. Chairman. Thank you, sir. Senator Hammer. Greg for a question. Thank you, Mr. Chair. And just give me a quick education. Is there a catastrophic fund that the insurance company or insurance agency division holds in the event insurance companies aren't able to make their claims. Yeah, we have a property and casualty guarantee fund when you have a life and health guarantee fund. It's not a state entity, it's a, it's a separate, uh, non-governmental entity that assesses the insurance companies in the in the state. They're doing business in the state and so they're that money is available to, um, uh, to, to. Pay the claims for an insolvent insurance company. And you know the condition of that as, as far as being healthy enough with the number of catastrophic claims that are being in, you know, with insurance companies looking at pulling out, can you just give us a comfort level where that is and how that is standing today. Yeah, I don't have the dollar figure in my mind, but, but it is, it is comfort, it there is you can be, be confident that it's OK. They did an assessment earlier in the year assessed all the insurance companies and they they paid up and so they've recently replenished the fund. Uh, we, we've really only had. We've got uh a uh domestic insurer called United Home. Many of you probably, uh, had constituents or even you yourself had policies with United Home and uh it was an Arkansas domestic and property and casualty insurance company that wrote in 8 states and, um, it, um, became insolvent last year, uh, about that, about this time and uh and it, um, those, those claims are all being paid by the Arkansas Property and Casualty Guarantee Fund. There was another major insurer domiciled in Missouri that had a lot of um Arkansas, uh, coverage called Cameron Mutual. Um, so even though it's a Missouri domiciled company, the, the claims that were. For Arkansas homeowners are being paid by our guarantee fund as well, uh, so, um, that's, um. That that's just an example and yes it's, it's healthy. I'd be glad to get you the numbers for that, but they did an assessment, uh, in the, back in June, uh, as, as these additional, uh, insolvencies were coming along and so it, it, it, um, but it's, it's in good shape now. OK, and then. So I've been told, and this is true, Hale is one of the biggest contributors to the rising cost of homeowners insurance that that is it true being at the top of the list or I would say wind and hell. Yeah, I would say yes, wind and hell in Arkansas would, would, it was a rough couple of years. OK, and I don't think you guys have any regulatory authority over roofing companies, correct? No And you don't want it either. I know, uh, but my, my question is, in a conversation having with a constituent is, um, You know, some of these roofing companies are coming along, and they're saying, hey, we'll take care of the deductible and your insurance will pick up the rest, and can you just speak to that for a minute because one of the things that was concerning to the constituent to the company was, um, that that that may not be 100% accurate, or how is it that they're using that in order to get people to make claims on their roughs or can you even speak to it? Thank you, Senator. Uh, we've definitely seen that as a, as a marketing tool. Uh, I can remember a few years ago when I had my roof replaced that, uh, the roofing company that I use, uh, uh, offered to pay, uh, my deductible, and I said no, um, it, it, it hurt, but, but I, I paid my deductible, um. You know, we, we've talked about this and uh. In terms of legality, um, you know, I, I don't think we really came to a consensus as to whether or not that's considered insurance fraud or not, uh, you know, the deductible is part of the, um, I guess self-insured aspect of, of a of a uh an insured paying for part of uh part of the claim, uh, what I will say though is if a roofing company inflates the cost of their, uh, estimate, uh, in terms of like, uh, adding whirlybirds or, or, uh, flashing or something like that in order to get to the point where the claim is inflated and they can absorb that deductible and pay that deductible, then that would be insurance fraud. OK, all right, thank you. Representative Longstrom, you're recognized. Thank you. Um, I'm over here. Couple of questions what happened with Cameron Mutual and United? Why did they go belly up? Well, just they, they, they had, they incurred more in losses than they they did uh in, in, you know, they paid out more in claims than they did in taking in premium. OK, um. You mentioned that for every $1 that's spent $1 30s goes out. What's being done by the industry to lower that because we could have more united and Cameron Mutuals. They're raising the rates, OK. Um Going back to the part where you said Arkansas rates are based on Arkansas experience. If you're in that same, if you're in this nationwide weather. Issue and you're insuring in a lot of different states. How is it possible to keep from going up if you're got an Arkansas and Louisiana and all these other states in the same pool, this, that just seems counterintuitive. Walk me through that, please. When we get a right request. We see how many policies that insurance company has. We see their premium collected, we see their losses that they paid out. We see their expenses. Um, They're all Arkansas numbers. And they're they're actuary. Only considers Arkansas numbers, uh, you know, what's the right need for this group of policies. And that same set of actions take place in every single state. That's why the premiums for homeowners in Florida are $15,000 a year. And premiums for homeowners and. I don't know. I think, uh, probably Arizona has what wildfire risk and, and, and, and not a lot of other risks, so they're, they're homeowners, I assume, is a little bit lower than us, but we Companies are required to use Arkansas experience only. And if the rates don't. If those numbers don't, don't, don't flush out or or our contracted actuary that we use pushes back then, then we don't allow the increase. But uh if a right is not unfairly discriminatory. Or not excessive, we, we have to allow it. OK. Thank you. Um, one last question, um, How and this fraud issue that I believe Senator Hanmer brought up, 2500 and they inflate the cost. What are the ins insurance companies doing to say educate the customer. This is, I wanna, I wanna be careful. Using fraud, um, because an insurance company is not going to pay. More in a climb than the roof is worth. So somewhere along the line the roofer has, has enough overhead built in. Maybe they're underpaying labor. That they can absorb the cost of the deductible or rebate the cost of deductible. But the insurance company. They base their claim amount on what's the labor cost in that area. What's material cost overhead expenses, that sort of thing. And if, and, and that's what they pay out. They take the deductible off and I said this is what we'll pay for the roof. If the roofer can do it for that amount of money. And absorbed the $1000 deductible. I, I would, I would hesitate to call that insurance fraud. OK. Thank you. And Representative Lundrum, I, I just want to add one thing real quick. You're talking about the loss ratios, so we looked at the top 10, uh, property carriers in Arkansas, uh, in 2022 and 2023. And the top 10 make up at 75% of the market, so it's a majority of the market, um, in 2022, uh, their direct written premium was roughly $1.3 billion but their losses were 1.6 billion. And then in 2023, their direct premiums were 1.6 billion, which is what their losses were the year before, but they they their losses were 2 billion. So that's where They're, they're chasing their tail, so to speak, with that loss ratio. The math stinks. I get it. Thank you. Representative Richardson, you are recognized for a question. Thank you, Mr. Cherry. So I got a couple of questions and they may sound a little off a bit, but you said that we've lost 8 companies in the past several years. Do you have any idea of what you anticipate to lose in the upcoming years based on that history, or is that? Can you see in the future like that, I guess. I don't anticipate losing many more, you know, several companies are indeed tightening underwriting, uh, underwriting restrictions. They're not riding as many properties as they used to. There, there may be, uh, uh, putting caps on the amount of properties that that they want to, to accept and in one area to reduce risk concentration. Uh, you know, I I expect more insurers will be coming back into the states and that actually leads to my second question. So with the amount that we've seen leave the state, uh, as they begin to understand rates and go for rate increases, is any of the supply and demand figured into their rate increase, like if, if you've lost 10 amount of insurance, now it's just a handful of us. Can we go up on a percentage of the rate based on the availability. No, no. OK. Thank you. Senator Dodson, you write for a question. Thank you, Mr. Chair. Um, My question goes to your, uh, insurance. Um Guarantee fund that you were talking about is, do we have an appropriate level of reinsurance on that fund. To ensure if we have a a really bad year and we have a lot of insurers and do you have any rules in place as far as individual companies having an appropriate amount of reinsurance other than using the guarantee. All of our all of our insured in, you know, our approved insurance companies have to have an acceptable amount of reinsurance. We have a whole solvency division within the department who spends every day examining insurance companies to make sure that they have the the right risk based capital in place to, to, uh, to stay solvent and meet their obligations, and it's only when you, they become insolvent, uh, and, and they default, uh, on their, well, they become insolvent, we might put them in um. rehabilitation, what goes to our liquidation division to our, our receivership division. I by statute and the state receiver. I appoint a deputy receiver to, to, to do that so it's um. And then you hope that through a rehabilitation process that they get back on their feet and, and, uh, maybe through some rate increases or some different things we call them early enough that, that they, um, uh, uh, and there's actually some levels of action we take at the at the before they even gets to, to, to that level, uh uh of monitoring them and, and asking them to, to infuse money into the company, so we're we're watching those and we have examiners and analysts that's, that's, that's their job. And we, uh, you know, we actually get. A plus ratings for our uh accreditation process because we, uh, uh, typically are, are, are gonna catch them before they, they go down the United home one, hit pretty, pretty quickly. They were, uh, uh, but, um, so if they have enough reinsurance, would they not? Hit our guarantee fund typically speaking. That's right, they have enough reinsurance, whether at uh at at the, you know, yes, and so, um, and unless they're so impaired that they can no longer afford the, the, the, the, the adequate level uh of of reinsurance. So, uh, that, that's part of what we, we do is make sure they have the right reinsurance that they have the right amount of not just reinsurance but capital in the company to be able to that. And, and correlation with their with their outstanding reserves. So as far as our that guarantee fund, um. I guess how much, what, what percentage of that is reinsured so that if there's a widespread catastrophic loss and we have multiple companies going out all at the same time, uh, similar to what we've seen how much capacity can that guarantee fund absorb before it's insolvent. And then as far as reinsurance, how much reinsurance do we have, uh, Is it a multiple of that guarantee fund? How, how does that work? You know, the, the guarantee fund itself does not, does not have a, have a reinsurance policy that sits on, on, on top of that we've got maybe a couple of companies that were paying out of that now that those companies, you know, we monitor the reserves of the, of the guarantee fund and all the all, all licensed insurance companies are required, uh, to, to pay into that guarantee fund on basically on a pro rata basis of their share of the market in our. Arkansas, so we put out the all call like in June to to assess everybody and they sent their checks in so it's, it's that, that's how the solvency of the guarantee fund is maintained. Um, and then as far as why why do we not have reinsurance on that guarantee fund. Beg your pardon. Why, why do we not have reinsurance on that guarantee fund. That seems like pretty important thing to me. I mean, each of the car yeah that. Yeah, that, that's, that's something I, I don't really have an answer to it, it the guarantee fund seldom actually kicks in to have to pay because the markets are, you know, the, the companies are pretty in pretty good shape, but the each of the carriers who do, who are assessed, they all have reassurance. They're, they're all, uh, expected to be, they're all solvent carriers, so, uh, through my assessment authority to mandate assessments they, they, they pay in and so that's basically the the reinsurance is is our authority to assess. All the uh licensed carriers in the state to fund that fund, so there really should be no, uh, instance where unless those particular carriers are insolvent that we wouldn't be able to um to pay that. OK, thank you. Thank you, Mr. Chair. Representative Allen, you recognize for a question. Uh, you mentioned a few minutes ago that some of the contractors would inflate their estimates, inflate their bills and commit fraud, and when the insurance company pay for it, they're paying more than they actually supposed to pay, but in most instances, in the true. That contractors work off of the insurance estimate and not off of their estimate. I think that's true part of the time, uh, what we've seen a lot of is the, the, the roofers, uh, getting estimates and sending them to the insurance companies. And, uh, uh, that, that does happen and I just want to clarify, I mean. When I talked about the fact that they might inflate, I, I'm giving a hypothetical, uh, in order to absorb that deductible amount where it's $1000 or $1500. So I'm not accusing anybody of fraud. I'm just saying that uh that that has happened, you can see that it could happen. But Uh, let me, let me clarify something. In most situations, The insurance company. Well send someone out. And they would write their own estimate. And it's up to the homeowner. To find a contractor. That is willing To work off of that estimate. That does occur, yes, sir. OK, thank you. Senator Hammer, you recognize for a question. Thank you, Mr. Chair. On the, uh, I was talking to one agent. He said that, uh, he thought it'd take about 3 years for this thing to level out for prices to get back. We need 3 years of calm spring and weather and, and, and get it. You, you feel that from everything you're looking at that that's realistic expectation. In order for the prices to start to turn down. Yeah, we wish we had a crystal ball, but that, that would be uh something along the lines of what I would expect as well. OK, so if that happens, What's the mechanisms? What are the mechanisms in place to make sure that the insurance companies would actually Return those rates back to what we're used to versus just keeping them at the level they are. Is that where you get involved and you approve the rates every year kind of thing. Just give me that quick education on that. And, and Jimmy can weigh in, but if, yeah, I, I would say that that's where the having so many carriers still in the state increases the, the competition, so they, they, I think the, the free market and the competition then lowering rates and trying to keep the business, uh, you actually have some, you know, right now you have companies. choosing not to write new homeowners insurance coverage because they just don't want the exposure right now, they want, they want it to wait till it levels out but at some point they will, they will want to compete more and they will start lowering their rates and, and making themselves more uh affordable. that sound right, Jimmy? OK, so do they have to come back to you for rate reviews, um, and it is, at what time of the year is that done? Just so I can have it on my radar screen. OK, yeah, and in Arkansas we allow property insurers to file rights once every 12 months. Uh, so I would, I would imagine the next time that that they file rates, you know, if they, if, if an insurer comes in and, and shows a 40% loss ratio, they're, they're not gonna ask for an increase. They're, they're probably, probably gonna file a decrease at that point. OK, that's 12 months on their calendar, not yours, right? I mean, I mean, we, we have insurers go 2 or 34 years without any right activity, and then they come to us with their hair on fire. And then we have to explain, you know, hey, what. Maybe don't have your B team handling your Arkansas business. Pay attention to the state and take rate when you need to take rate. Don't try to take 40 or 50% all at once. So, you know, that, that's one we have pushed back and try to keep, uh, insurers under 2, roughly, uh, anything over 20 does go into the newspaper for, for some reason, even though that we file. All of our right Activity on our website, uh, so, so, so that's something I would, but yes, yes, they're gonna file rights. No, we're not gonna approve. Or, or, or we're definitely gonna push back for, for companies not paying out claims, you know, they're, they're, they're just, they're, they're not gonna, they're not gonna file for right if they don't need it, like commissioner, uh, uh was saying that the market kind of controls that one insurer pushes right down. The rest, the rest follow. So is there any companies that you Denied Rate increases to All right, thank you. Thanks, Senator. Representative Johnson, recognize for a question. Thank you, Mr. Chairman. So on this process, it's how subjective is it with regard to allowance of rate increases. You mentioned if it's excessive, uh, do you have specific, or you statutorily complied to, uh, to do rate increases on certain loss ratios or what's the process there? No, I believe our, our statute says, uh something like we, we accept any right that's not unfairly discriminatory. not excessive, etc. etc. etc. how that is determined, uh, I might, I, I, I will send larger right requests, uh, on larger blocks of business to a contracted actuary. On several right requests that we get. Uh, because we do have a lot of smaller insurers operating in the state of Arkansas. I, I don't need to spend a bunch of money on an actuary to tell me that this insurer needs a right increase, so a lot of times we will go out, we'll just approve it, uh, you know, they're paying out like, for instance, Farmers Union Mutual that I mentioned earlier, they added 215% loss ratio pure direct loss ratio in 2020. 3 That's why they're not in the state anymore that that specific number that's there's a subjectivity to that is that your discretion. OK, uh, the assessment you keep mentioning for the guarantee fund. To help me understand that, how do you decide what is the assessment? Is that something that we statutorily define or is that something that is again subjective within the department to determine how much assessment is needed to provide that fund the money it needs. It's only happened once since I've been commissioner, but you know, we, we do look at the outstanding reserves of the the losses that we have in this case, you know, we had some like as mentioned, um, United Home, Cameron Mutual, and, uh, uh, then, then determine what, what we need to get in the fund and we send out the assessment notices to to shore up the fund and based on our estimates of the outstanding reserves, so that's something again left to the discretion of the department to determine when an assessment needs to be made. That's not something that's done annually. That's right, depending on the health of the fund based on your expertise in the area until this year with one had not been done in years. OK, and then one other question you mean you rattled off a list of things and answer to Senator Hickey's question. I came in late to that. That sounded like a lot of really good policy ideas, um, is that something you could assemble and maybe email out to the committee to have it to you this afternoon. Yeah, that's probably too soon but, but yeah, it would be helpful. I think that would be helpful. It sounded like. a lot of good things to look at and consider and if we could have those, you know, in writing to look at, that's something I, I certainly would be interested and I think other people would too. I have to thanks real soon. And I'll just add to the answer that that that a lot of states don't even ask permission to for rate increases, they just file and use as they stay so and so we, we get to look at them and, and weigh in on the criteria that Jimmy mentioned, but Oklahoma, for example, if you're an insurance company, you just file it and and use it without the commissioner really weighing in. Representative Warren, you are recognized for a question. Thank you, uh, Mr. Chairman. Uh, appreciate you guys. I'm getting some good information, learning here, but let me ask for clarification to make sure I understood something correctly. Earlier, did you say that you only deal with. Homeowners and not commercial. Correct. Correct, commercial property, they don't have to file rates, commercial, uh, liability. There's some professional liability that does have to file, uh, uh, for rate forms all have to be filed, uh, but you know, like Arkansas, like, like most other states, commercial property, uh, rights do not have to be filed for approval. monitor their solvency and analyze them just like any other company, but just not the rate approval. So you're still, you're still checking all the commercial. insurance companies. OK, thank you. As a matter of fact, many have, have, uh, one issue that that we've run into is commercial insurance companies, non-renewing after this last weather event. In the state of Arkansas, that's not allowed. So there's been some non-renewal reversals from, from commercial insurers, uh, uh, just. Several this year, we'll, we'll we'll probably end up putting a bulletin out, uh, addressing that kind of making sure insurers are aware, hey, in Arkansas, you can't non-renew somebody because they filed a wind claim. Thank you, Representative Flowers. You are recognized for a question. Thank you so much, um. I Probably this year got like 3 or 4. Maybe Going back to last year too, you got about 3 or 4 calls from people in my district who Had had claims, property claims, and um. Their insurance companies would not reimburse the entire cost. For different reasons. Um, And I really didn't know what to tell them to do because When you're paying your insurance company and you have a claim, they send their adjuster out. It just feels like that's it. Then more recently, I had a situation with my parents who are aging and they had a situation with their roof, and there had been a leak, which is how we knew that they found out that there was something going on with their roof. And the long story short, A claim that was going to be started out based on their adjust adjuster. was going to be 3000 ended up being almost 30,000 because there was asbestos, there were things that they had justice should have known, and the bottom line is the adjuster didn't even get on the roof. Like we had to insist and my brother had to work with them for a period of months. Every person, especially seniors don't have that. What are, are there any fines? Or penalties when people who pay their pay their premium and then need a claim paid in their own company is not acting in their best interest. How, how do we deal with that? I would encourage every one of those people to contact. OK. That, that's where I would start. And let us reach out to the company. Let us order the claim file that way we can review it and, and see if uh see if there's anything we can do. Thank you. Representative Wooton, you recognized him. Thank you, Mr. Chairman. I should ask this question when we had the opportunity, but I failed to do so. Did you, I want to be sure, clarification. Did you say that some states have statutorily said no to split. Uh, deductibles, I said, I said we were the last one that did not allow it. Everyone else allows it. I don't, I, I did a lot of research on the deductible dilemma. You know, and it, it's not an issue for a lot of states because they, they don't have the wind hail that, that we do, uh, for instance, that when he deductible, I asked the, the insurance department in California about they said what do you, you know, what are you talking about? We don't, no, we don't do that, but No No, I, I, I, I don't know that I could find any laws anywhere, man that deductible levels. For application of those deductibles. So they let me make sure you're you're what you're saying. You're saying that no other state. Require says they cannot do it. Correct. OK. Correct. Do you think that the Regulatory authorities will move in that direction. I'm not trying to put you on the spot, but that's kind of I don't, I don't because I, I don't think. Regulators want to. Want to, want to, to, to get in the business of telling them exactly what products they can sell and who they have to sell them to just, just. I think our main concern is how. You know how the the the contract is enforced and, and, and what the contract rates, OK? Um, I don't, I don't think any states are gonna have. An appetite to, to, to put any deductible mandate. So you basically rely more on buyer beware with the company saying that they're going to do this because um the constituent was able to find another company that did not do that. Uh, that, and I tend to agree with you, if you get into mandating. Then you're opening a whole new area. Yes, sir. OK. All right, thank you. Thank you, Mr. Chairman. Senator Hill, you recognized for a question. Thank you. I know you're insert yourself whenever they want to do a rate increase, but is there ever a time that you would insert yourself, understanding the free market argument where you would take a look at the rates and insurance companies are charging to see if they're keeping them inflated so as to be able to recoup, uh, maybe some of the loss or just until somebody calls attention to it, those rates are so high. I don't think they're gonna write any business if they have a higher rates, um, consumers are, are, are getting pretty used to shopping their homeowners and and their auto you know shopping their personal lines, coverages around. And uh uh I just uh. I don't see that scenario happening, but if, if, if an insurer wants to come to us. Inside the 12 month period and lower their rates, we will absolutely let them. Well, you would, you wouldn't have any reason to get involved in their business if they're lowering rates. It's just you get in business when they're raising the rates. I've, I've asked a company or two if they were sure that they're right request was enough. I'm sorry, the rate request what was adequate, um, for, yes, because it was not adequate and they did not change it and they're one of the ones that that left our market. Because they got in trouble because they, they shot too low and got buried up. OK. OK, thank you. Senator Hill, you're recognized for her question. You mentioned a while ago that uh insurance company can come to you usually once a year to ask for a rate increase. Can they do it if they have a substantial rating increase increase, they usually break it down into two because I've actually heard about an insurance, a major insurance company recently brought like a 20 something% increase and came right around and brought right at a 30% increase and split it up. Does that happen? Yes, uh. We always ask for a histogram of the right impact. Tell me, tell me how many policyholders are on this top end because they file for an average rate increase, of course, there's On the low end, and then, you know, that, that, that it may, it may not impact one consumer very much at all. It may impact another one at a much higher percentage, so we want to know what the individual impact is. Then we. Almost always ask them to cap. The individual impact at a certain amount, depending on where the histogram. Yes, OK? It might be, uh, you know, a 20% overall rate increase where some insureds are getting 75% increase and we'll ask the company to spread that out. 20 a year, cap it, cap it at 25%, um, and, you know, until it's fully realized is, does that answer that makes sense, but what it, it just kind of goes back to when you said a while ago, this year's rates were 15 to 20% increase. Sounds like you may have been closer to a 40 to 50% increase if you're allowing them to do that over a two year period, and some of the increases. If you get a 20% rate increase and then they come behind you, which many insurer insurers did this last couple of years and raised the, the, the total insured value of your home. The overall increase, the premium increase is gonna be much higher than 20%. Because you're paying the rate increase, then you're paying for more coverage because your home is worth more. Uh, and, and a lot of times, and, you know, a lot of times there's a deductible change. So yes, there's a lot more risk getting put on on the insured. Uh, uh, in, in, in this hard market, but I do expect it to turn around, um. Because the 15 to 20% you mentioned a while ago with the numbers I've seen from a different company and I have a lot of friends and I work at all those different companies, you're not touching it. Now there's there's been some big ones. Yes, thank you. Senator Clark, great to us for a question. Thank you Mr. Chair. The appreciate you gentlemen being here in the job that you do. Uh, I remember back, you know, Uh, when. We had, uh, homeowners insurance over years that shows I'm getting older, uh, get cheaper and cheaper and to the point that it was, uh, you'd be stupid not to be insuring your home. And when we had these weather events and uh. It's As I saw claims being paid, including mine wasn't my home, uh, my truck's been Uh Repaired from hail damage twice, never had hail damage to a vehicle in my life, but, uh, happened with within 2 years. And when you know both those payments were over 10,000 bucks. I know, I knew my insurance was gonna be going up, uh, and, you know, and especially with inflation now people are upset with everything that's happening, but, uh, like I said, there's no doubt from hearing your testimony and from what we've heard before that insurance companies lost a lot of money and they have to, it's a zero-sum game, uh, you've got to Uh, you've got to be able to pay the claims and that has to come from the premiums. The Uh, and right now we've got to base it on what's happened in the last few years, uh, if it keeps happening, rates will stay up as you've said, if they, if it, if things go back to what we've normally seen in weather. Over time things will go down. Uh, but Before I was in the Senate. I used to tell people that the one branch of government that I knew that worked was the Arkansas Insurance Commission, uh, because people different legislators have mentioned fraud and the different things. We have lots of good insurance companies and lots of people who do a great job, but I have seen and personally, uh, been part of things that weren't right, and I have never seen a branch of government work as well as the Arkansas Insurance Commission when it comes to protecting consumers and I just want to applaud you on that and say, wouldn't you agree? Yes, uh, I concur. Thank you, sir. Represent Lunstrom, you are recognized for what appears to be the last question on this matter I will be very brief, um, what is the situation with umbrella policy insurance. I understand that people are being denied sometimes because they've hold elected office. So this is really going to hurt people with city council, school boards, or state legislature to be denied because you hold. OK, so yes, there are some carriers that exclude uh public officials. There are some that absolutely covered them. Uh, so I would encourage anybody that is having trouble finding uh personal umbrella policy, uh, to give me a call and I can help them. Find that. I'll put them in in touch with someone that can help them, but yes, there are some. That are that that are choosing to not cover that risk. Do you know why? I do not. OK, all right, I'll leave it there. The inquiring minds would like to know at some point. All right, thank you. Thank you, Representative Langstrom, thank you for that question. Gentlemen, thank you for your testimony. That was very helpful and we look forward to working with you in the future. Thank you, appreciate you. Thank you guys. Members of the, the next item on the agenda is item D. And this is the discussion of the Summit utilities rate settlement. So if you guys would like to make yourselves, uh, to Members, uh, a packet was handed out to each of you. You should have it on your desk in regards to this testimony. If you do not have one, let staff know and they will get you one immediately, um. If you guys would like to introduce yourselves, um, And then you can just proceed with an opening statement. Thank you, Mr. Chairman, members of the committee, I am Doyle Webb, I'm chairman of the state Public Service commission. Danny Hofer, chief of staff. Michael Marchand, the executive director of the um general, general staff of the Arkansas Public Service Commission. Happy to be here. Thanks. Mr. Chairman, I also have with us uh our other two commissioners, they're seated in the gallery, Commissioner Katie Anderson and Commissioner Justin Tate, you have the full public service commission before this committee today. Thank you very much. Your Honor, Your Honor, Mr. Chairman, uh, what we hope to do is to give you an overview of the public service commission. How a rate is set and then get into the specifics of the party settlement that is before the commission now as a commissioner, I have a difficulty in speaking concerning that settlement because we are under deliberation in that as the uh other two commissioners will have that, uh, issue as well, but I believe we bought brought two great staff members with us that can speak to any issue that the committee has. So I would call on first our chief of staff, uh, Danny Hofer, who's the chief of staff for the commissioners. OK. Thank you. If you'd like to give a statement. Good afternoon. Thank you so much. Um, so first, I want to thank you all for the opportunity to be here and the opportunity to give this statement, and then, um, to go ahead and interrupt my own statement, um. I I was wondering if it is OK if I pass around an org chart real quick, just because I think it'll help, um, while I'm talking about something here. OK. We'll have staff assist with that. Thank you so much. So I'll go ahead and uh let that circulate here for a moment. I will point to, um, I have with me 2 actual hard copies of our annual report. This is something that we submit to the governor's office every year. I've provided to BLR staff before this meeting, the online link to where we have it on our website, um, but I'll leave these two hard copies for the chairs, um, anybody who would like that link, BLR staff has it, or also I would be glad to get it to you. Um, we're not flush with paper copies, mostly because In this day and age, it's people just want to look at it online, um, But I'll be glad to get that to anybody who would like to see it. Uh, it tells a lot of good information about our history, what we do, what we're charged with. Um, it also has the org chart that I, is currently being passed out right now. So that's just something that I pulled out of this annual report. The Arkansas Public Service Commission first existed to regulate railroads in Arkansas, going all the way back to 1899. Even in those days, the commission was charged with ensuring that rates charged by companies were just unreasonable. In 1919, the commission was expanded to include regulation of utility companies. Today, the PSC has regulatory authority over re regulated utility companies, including electric, natural gas, water and sewer, and limited regulation over telecom companies. This regulatory authority is created by Title 23 of the Arkansas Code. And requires that all rates set by the commission shall be just and reasonable. The commissioners are responsible for ensuring that utility companies provide safe and reliable power at a reasonable cost. The commission acts as a quasi-judicial body. So in our cases, which we call dockets internally, and I just say that because we're going to do our best to say cases here today, um, but if, if I slip up and I'm referring to a docket, that's what I'm talking about. We're talking about a case. Um, our cases look kind of like a court case with that, the commissioners act as a panel of judges. Each docket has multiple parties who participate in the case by filing legal pleadings, testimony, and possibly appearing before the commission for hearings. We use a system of written testimony where witnesses actually submit their testimony in writing throughout the case. And this gives all the parties more time to review and analyze before filing their own written testimony and response. I'll talk a little bit more about how a rape case unfolds in a moment, but first, I want to tell you about how we are organized internally, and that's why I've handed out this org chart. So, the org chart, um, I hope it aids my explanation of our internal. Organization. We are divided internally into 3 divisions. Um, this is just How we have divided over the years, um, how we best think it, um. Operates, um, For the purpose of today's discussion, I'll only explain two of those divisions, and that's the commissioner's advisory staff and the general staff. So the commissioner's advisory staff advises commissioners on a daily basis and includes administrative law judges, accountants. Economists, um, research and policy, um, Other folks, these are the people who assist the commissioners, um, In reviewing testimony in motions, assist on research and drafting, uh, Advise the commissioners on legal and policy matters, etc. The general staff is also made up of experts, but these experts serve as expert witnesses, uh, throughout the cases that come before the commission. And so, um, the general staff also has experts, so they have accountants and financial analysts, engineers, attorneys, um, etc. who review a utilities application and file testimony with recommendations. The general staff acts as a party to all of our cases before the commission and acts as a neutral analyst of all these utility requests. Because the general staff is a party to all of our cases. This means that there is no exchange of substantive information between the commission staff and the general staff during an active case. So if a case is actively ongoing, there is no exchange of that case's information between the two staffs. Uh, this is kind of like the way an attorney can't discuss the specifics of his case with a judge or the jurors during a case, and this is because the commission ultimately acts as both the judge and jurors, uh, of all of our cases. So turning specifically to the summit rate case, um, well, Turning to rape cases in general. Uh, I'll get to Summit in a moment. Um, a rape case is one type of case that can come before the commission, and it begins when a utility files an application for a change in rates. When utility files that application at 10-month clock starts. This is set by statute, and a rape case cannot take longer than 10 months or else per statute, the companies requested rights automatically go into effect. If the commission deems that the rates should ultimately be different than what a company has requested. The commission must enter an order setting rights before that 10 month deadline. When the commission reviews a rape case, the commission must evaluate the evidence and testimony in the record. And make a finding that is just unreasonable. The commissioners are limited by evidence in the record when they make this decision. As many of you know, uh, In the ongoing Summit rate case, a settlement agreement was filed with the commission on October 7th, and the parties who signed on to that agreement include the PSE's general staff. Summit Utilities, the AG, Arkansas gas consumers, and hospitals in higher education group. I'm not sure whether any of those parties beyond the PSC general staff are in attendance today, but I know for sure that the PSE's general staff is present, um, Director Marshaw, who introduced himself a few moments ago is present here to my left. To your right. That would be more helpful to you. Um, a settlement agreement is not binding on the commissioners, and they may adopt, reject, or modify any settlement put before them. When the commission, uh, what the commission is bound to do, uh, is to set rates that are just and reasonable. And Per, uh, 23 44 10, um, Uh, the, uh, the Arkansas Public Service Commission. Uh Sorry, I'll just start at the top of the section. Um, if the investigation and hearing there on the Arkansas Public Service Commission finds the new right to be unjust, unreasonable, discriminatory, or otherwise in violation of the law or rules of the commission, it shall determine and fix the just and reasonable right to be applied to the utility. With regard, um, to the current summit rape case. Summit filed its application to change rates in January, on January 25th of this year. That is when their 10 month clock clock started. Since then, the witnesses in the case have filed nearly 6060 testimonies over 5 rounds of testimony. The commission held its evidentiary hearings in this uh case on October 15th and October 23rd. The deadline for the commission to enter an order ruling on summit's requested rights is is November 24th, however, because that falls on a Sunday in actuality, the deadline is the preceding Friday, November 22nd. As I've discussed with some of y'all leading up to this meeting, because the case is still under review and deliberation by the commission. The commissioners themselves are the commissioners themselves are somewhat limited in what they can answer. They are, of course, happy to take questions, answer to the best of their ability, um, they're just maybe be some situations if questions are really specific, where they might not be able to answer, but, um, Mr. Marchand, the director of our general staff is here today, um, as I mentioned earlier, the general staff is a party to all of our dockets. So he will be able to answer specific questions about the general staff's analysis of someone's requested rates, as well as general staffs, uh, participation in the settlement agreement. And I would be glad either to take comment or take questions or um pass it to Michael at this time, whichever the chair would prefer. Uh, if you'd like to give a statement, that'd be fine at this point. Thank you, Chairman. Um, I prepared a, um, I don't necessarily have a statement, but I thought it would be helpful to um understand, uh, generally how we set these rates and so I prepared a slide show. This is not, uh, this is just generally how all rates are set. So specifically for us it would be electric and gas rates and I'm happy to walk through that now if you're ready for that or. So, um, So if you go to the first page, um, there's a little outline, um, OK. Yeah, uh, so it's this page right here. Um This is how the presentation is organized, so first I'm gonna talk about what a revenue requirement is. Uh, second, I'll talk about rate base, which is But the company's assets and then 3, I'll talk about a little bit about the rate of return and cost of capital associated with those assets. So if you go to page 3. Up at the top it says revenue requirement definition. So, um, utility companies operate as regulated monopolies. I think we all know that. So what we do is we try to determine. What they need to operate when they come in to set rates. So Uh, the revenue requirement is simply, um, and I have it defined here is, uh, the sum of all the costs incurred by utility to provide safe and adequate service to its customers during a period of time, which is a test year. Um, so if you That's the definition. If you go to the next page, I actually just put out uh the formula that we used. So if you look at this, this gives you the actual revenue requirement formula. And um, So if anybody took business 101, you'll know that, um, for a company to operate and continue to be solvent, you have to recover your operating expenses, your taxes, which we call tax expense. Uh, depreciation expense, which is basically how they recover their assets, and then, um, a return on those assets. So the return is a little R and then rate base would be, you know, their pipes or their chairs in their offices or anything, any type of asset that they have. So this is the this is the formula and the rest of the presentation defines each of these or gives examples of each of these generally, so if you want to put that up in front of you. Um, the first thing we'll go to is operation and maintenance expense. So I put just some general examples of what would be classified as O&M, um, payroll, advertising, insurance, um, the bottom I'll, I'll note, uh, mandated program costs. So for a gas utility like Summit, this would be either mandated safety and reliability costs such as um the um uh pipeline and hazardous material safety association, FEMSA. Has guidelines and rules that they have to abide by. They have to keep their system at a specific, uh, level of, uh, and make safety investments, so that would fall into that, uh, Arkansas also has its own pipeline code, so they're required to keep, keep up with that. Our, uh, commission has a pipeline safety department and so, um, we have pipeline safety inspectors that go out and inspect all the pipelines for all the gas companies and all the master meters, and they do that. um Day in and day out. So, so that's uh that's what ONM, that's what the OE portion of the formula would be, so if you move on to, um, The next page. So, um, when we, when we're looking at these expenses, so keep in mind this formula we look at, uh, for a year. So what we're looking at is a test year, um, so. And what the company wants is they want to earn, they want this once we set these rates to be able to sustain them into the future. We don't know what the future costs are gonna be. So oftentimes that's what we argue about is how much are we're gonna have to pay people in payroll next year, 3 years from now. And so we look at historical levels of that and we'll annualize some expenses, uh, some expenses are normalized, and then we Make an estimate of what they might have to do, but all those are based in the test year. The test year is ground zero for us. So Um So that's where, that's where staff's analysis on operating expenses comes from. So Uh, if you go to the next page, um, I might be out of order. My next page is depreciation expense. Is that what you guys got? Return, OK, I'm sorry. I was just making sure you're still with me. So, um, so the return portion, uh, so cost related to the return of and the return on investment and utility plant. So When a company builds a pipeline or buys a pipeline or or for an electric company when they build a plant, they, they actually invest money into these assets, and they recover that through what we call depreciation expense. So if you're a You're a business person, you'll know that you start off with the uh book value of the asset and then we're gonna amortize that over a period of time and then Based on those units of time, they're going to recover that as a depreciation expense. So that changes every time they make an investment. So, So anyway, um, now I put in here the return of and the return on investments, because often there's a question that arises, what happens if there's no, if something that's not fully depreciated is still part of their assets, but they're not using it. It's not used and useful. We allow them a return of that component, but not a return on it. So they'll actually be able to get back the book value cost, but they don't get to earn anything on it. And so, That happens for different reasons. So if you go to the next one, depreciation expense. I just explained what that was, but that's basically the way that the company recovers their assets. Um Down here, I put, OK, so for, uh, for gas utilities, I put down here the bottom bullet utility assets, particularly pipes and wires have long useful lives, 30 to 50 years. So if you have a gas pipeline, it's got a 30 or 50 year useful life. But if you think about, for example, a utility like Summit, they're operating thousands and thousands of miles of gas pipeline, so some of that pipeline is a year old, some of that pipeline is 50 years old, so they're constantly replacing and upgrading their system. to make sure that it's safe and reliable. So that people just to maintain the integrity of their system. So, so anyway, those depreciation expenses in the, in the course of a rape case will get re-evaluated and so we'll look at what the useful life is for the remainder of their system unit by unit, and we, and then we have capital recovery analysts that'll go in and they'll determine what the appropriate rate would be and apply that and that gets calculated into the depreciation expense. So that goes into part of the revenue requirement. That's the D portion of the revenue requirement formula. So if you go to the next one, taxes. One that everybody loves. Um, so taxes. Uh, federal and state income taxes, payroll taxes, so again, As it, as it pertains to the revenue requirement. Anytime they're and then property taxes. So anytime they're adding assets, the taxes that they pay are gonna go up because the life of the asset is gonna get extended longer, so it'll be worth more. So, and then. With payroll, if you're adding more people, you have higher payroll taxes, so that all gets reevaluated. In the, in the, um, in in a rape case, and then that goes, that's part of this calculation up here. That's the T portion. Um, and then rate base, uh, is the next slide. There's actually 2 slides. Looks like that, and I apologize for not getting this here soon enough to have it on the television. Um So a rape, what is rate base? So rate base is utility plant. So, um, What we, what we determined, so we start at the useful life of the book value, and then we determine what portions are used and useful, and then, um, apply. The, the remainder of these to come up with what their actual rate base is. Working capital assets is often something that we argue about because those changed throughout the year at different points in time, so, but for in the, in the terms of a rape case, what we'll do is we'll look at what they're utility plant was at the beginning of the year and at the end of the year, and we take an average, so instead of trying to fight with them over what happened every month of the 12 months we'll look at the what was in service at the beginning of the year and then at the end. end of the year and then we take an average, so it, it balances what they're What they have in service with, um, what should be reasonably expected to be recovered. And then I put this next slide in just really for um, Uh, illustrative purposes, um. But this is, this is kind of a, this is a basic calculation, a general calculation to come up with race rate base, so we'll take the original cost of the plant. Well back out or deduct accumulated depreciation of the amount of depreciation on that plant that is accumulated over the life of the, of the individual plant balances and then we'll add in deferred debits and subtract, divert credits. Um, we'll take out, um, kayak, which is customer advances for construction. That's money that customers have to contribute in order for them to build. Build things for specific customers. So let's say somebody wants their own gas line or something like that and utility says, well, that's going to cost $10,000. You got to give us, you know, $5000 so we can start constructing it and then, so that's what, that's what contribution and aid of construction is, um, and then we add back in working capital. And then, uh, take out this bottom adjustment, the capitalization, um, used and useful. The next slide. This just gives a little, uh, explanation of, of what we consider use and useful if it's something that we're gonna include into rate base. We say that it's in service, that's, it's just what we use to say, hey, that's uh it's built and they can use it and run and ratepayers are benefiting from it, so we're gonna include that in. Um, plant, which is far in excess of customer needs or as non-utility plant in nature is usually not a part of rate base. So, um, we make adjustments or recommendations for adjustments when we're putting forth our rate-based numbers, um, so we'll pull out things like. Country club dues or or whatever, I mean, just anything that's not that ratepayers aren't gonna get a benefit from, we'll, um, pull that out. Um, so these last slides go to the, uh, how we determine the rate of return, um, so. This is often the most subjective part of what we do, uh, or of a rape case. Um, so essentially we've talked a lot about the assets for companies. They have to be financed in some way, so companies are financed different ways, um, either debt or equity really, but then there's other ways that they can be financed, but we take a look at How they're financed, if it's reasonable, if somebody comes in and they're 100% equity, we're not, that's not gonna work, so we'll make adjustments to, and there's ways that we go through and do that, but, um, But typically that's the return portion. We want to make sure that they can actually pay the debt that is financing the assets and then provide investors a reasonable return for what they put up to to finance those assets as well. So, and that's what these last slides are for. Um, so yeah, I'll just, um, And so, uh, the one thing that I'll say that hasn't really been, I guess, um, talked about or fleshed out about the summit thing is if you go back to the slide that I have of the revenue requirement formula. I think it's a helpful tool to look at because Where is it? So if you look at the individual components, and you think about how rates are set. Those Components Um In Summit's case, those components were set at the beginning of 2022. So it was set as um as the uh As a part of the settlement from when Center Point became Summit. And so those were those were set as part of interim rates, and the reason we set those is interim rates is because in order to get an accurate picture of what a company, how they're operating, which this was a new company, you, we needed a full test year to look at. And so we needed them to operate for a year. And so throughout the course of that settlement, we negotiated that they could not come in for a year. they had to wait, but they had to come in before 2 years. And so if you look at those individual components, um, on that sheet operating expenses, taxes, depreciation, plant, all of those were last re-evaluated in 2022. So when you think about it, these rates will go into effect in 2025. That's three years. So over the last 3 years, you can look at, have, have payrolls gone up, have nuts and bolts become more expensive, have, you know, has, have they added more plan? So they've added approximately 30 to $400 million worth of plant in the last three years. So that has its associated taxes and depreciation that go along with it. So, so anyway, um, That's just some information, um, in the context of, of the formula that I presented. So happy to answer any questions. Thank you, thank you for that. That was very helpful. I think we're ready to Have questions now, Reps in the viewbanks, you are recognized. Thank you, Mr. Chair. I actually have a couple of questions. Uh, you mentioned the groups that signed on to the settlement, consumer group, and then I believe it was the schools and hospitals or something like that. Uh, within the consumer group, did anybody represent poultry growers. Are you aware? Not that I'm aware off the top of my head. All right, well, As a former poultry grower for 38 years. I know the impact of the, the gas is on, on net income. And so I, I, uh, talked with a friend of mine that's still a poultry grower and got a copy of his bill. And so it's a 24.3% increase. I'm trying to figure out which part of the bill that applies to, uh, there's two sections. There's delivery and service charges, which I believe is the part. In my mind that I think that this rate increase would cover the other part is the supply charges it says gas supply rate, I assume that's the cost of the gas. I don't know it. Either way, uh, the, a 24. 0.3% increase, uh, even if it was just on the delivery and service charges on his one month bill would be an increase of almost $250. Now, this was for A relatively mild month. This past winter and I know gas bills can be exorbitant, you know, if you, if, if, for two reasons. One, if there's a severe cold spell or there's spikes in the natural gas price, which also gets passed along if my understanding now. Like I said, I don't know if anybody was representing poultry growers, which is a large, I have a large number of those in, in my district, and there's quite a few in the state of Arkansas. Uh, the other thing is I, I, I met with Summit last week. And in the course of that conversation, they said they had to invest $500 million in Arkansas because of the disrepair of the infrastructure that they had acquired from CenterPoint. And I Made the statement that I think they paid too much. And now you're wanting the ratepayers to Pay for this so that you have a guaranteed rate of return. So, uh, if you could address a couple of those issues because like I said, number one, I don't think poultry growers were represented at the table, and the other one is, if they did in fact pay too much for it because of the disrepair of the assets, and I believe you mentioned you have inspectors that go out to main to guarantee that, you know, the infrastructure is safe and everything. Why wasn't that done and these repairs done in a timely fashion when they were center points, so. Thank you, Mr. Chair. So I'll go ahead and start, um, with your question about, um, Poultry farmers and, um, whether or not they were represented. I am not sure. Um, I can go ahead and take a look at who, um, who makes up the membership of, um, That Arkansas gas consumers group, and I can find out for you though. And then I will actually pass, um, to Director Marshaw on the question specifically, uh, about, um, the, the the FEMSA costs and, and the, the settlement, uh, the previous settlement. On the purchase. Uh, OK, thank you. Uh, I believe Tyson is a member of the Arkansas Gas Consumers, uh, but I, I don't know that, but I'm pretty sure that they are so. But, sir, they're the integrator, they, they, their costs are, are different than, and they don't necessarily represent the growers. Fair enough. I, I, I just, I, I, I'm throwing that out there because I know that they're poultry related. I don't know that, um. But, um, so to your, uh, I, I apologize, can you ask your question about the And, and when I met with Summit, they say that they had spent $500 million in Arkansas and needed to because of the Condition, the disrepair of the assets, you know, the, the lines and such. And, um, I told them I thought they paid too much for it, and now they're asking for the ratepayers to assure them a certain rate of return on their investments and, uh, You had said that you have inspectors that go out to inspect these, these, this infrastructure to make sure that it's safe. And if that's the case, why wasn't CenterPoint making those, uh, repairs or replacing lines in a timely fashion. Um, I, I would need to know more specifically what the company was talking about, but I, I can speak to you generally about, if that's OK. I mean, um, so our pipeline inspectors are on schedules and they go out and they inspect all of the pipelines and master meters. So, um, so, uh, they are inspecting though to make sure that the, the pipelines meet the code. I don't know if they're specifically looking at the condition. I would assume that I, I don't know what the difference is between summit's definition of ill repair and whether or not it meets the code or not. So to answer that question, I will tell you that as part of the settlement agreement, um, staff. Included that none of the goodwill that was a part of the, a part of the uh transaction for Centerpoint buying the assets, uh, I mean, Summit buying the assets of Center Point were to be included in rates. So as a portion, as a part of this rape case, we removed approximately 850 million of goodwill when calculating their weighted average cost of capital. So that was not included in this. And just for full disclosure, I am a customer of Summit, but it's just my resident, so this is not. Going to affect me. But, uh, I do have a lot of neighbors that it will affect. Their ability to provide for their families. My, my mother-in-law is a summit Custer. I'm a summit customer and I understand it's either a 24 or 36 inch high pressure line that goes across my farm, so I'm very familiar with them. Believe me, I, yes, yes. Reps Allen, you're recognized for a question. Thank, thank you, Mr. Chairman. Uh, my question is, um, There's, there's a reason why we are here today. So, my question is when summit. Purchase Centerpoint. Did they ask for a rate increase at the time of the purchase? No. No, there was no rate increase. The, we, what we did is reset to interim rates at the time, and I can provide you that docket number if you'd like to read it. But, but it's my understanding that they asked for a rate increase in uh Mr. Webb, you were not there at this time when when this took place and the uh the ex- chairman did not want them to have a rate increase. So is that true? I don't You're talking about at the time the asset purchase occurred. The last time the summits. Rates They're, uh, base rates were changed was in 2015, 15098U. So when did the purchase take place? That was in 2021. It was closer, I believe it was closed 20 in January of 2022. And at that time there were interim rates that were set. OK. Why, why, why we're in rates set, because Center Point was no longer a company, so Summit was the new gas provider or gas company, so they had the summit had to have a way to charge people. So we had to set interim rates. Couple more questions and then I'll get back in the queue. It's also my understanding at the time when Centerpoint was being sold. That the company of choice. Well it's not summit. And so as a result of that, A lot of politics came into play. Are you familiar with that? No, sir. That was before my time. As as executive director. I'll just, I'm, I'm not familiar with that as well, are you familiar with a company called Black Hill? With what? Black Hill, I believe it is, I'm familiar with that, yeah, one of the companies that was being considered. Black Hills operates in Northwest Arkansas, I believe to be considered as the buyer of of uh of Center. I don't know. To my knowledge, um, no, but that doesn't mean that that wasn't a consideration that was discussed before, um, it came to the public Service commission, um, when it came to the Public Service commission, it was as a request for summit. Purchase center point. So the decision of who was going to Sell Or purchase the Centerpoint assets had already been decided by the time it came before the Public Service commission. 11 quick question and then I'll get back in the queue. It's, it's my understanding, and I might be be incorrect, but I was told. That the previous chairman Did not want. Summit to have the company and as a result of that, all the politics started. And since the politics started, now the consumer. It's having to pay for the games that were being played with the sale of this company. I didn't, I, I do not know, um, the answer to that with regard to the previous chairman. I, I'll get back to the cube because I have more questions. Thank you, Representative Senator Chesterfield, you're ready for a question. I remember the Everybody's talked about, talked all the way around everything. And I appreciate this stuff here, um, but at the end of the day, are you going to vote to raise the rate. It's what people I know want to know. I don't need to know how you arrive at M&O. I don't even know how you arrive at anything else, but at the end of the day, are you going to vote to raise the rate? So right now, that is, and I know you just said that everybody has talked around this, and so I apologize in advance. That is genuinely still under consideration. The commissioners have not made a decision, and it's, it's very genuinely under deliberation, and I say this because not only they're talking about the 23, they're talking about another $4.97 another this, another that. The people I represent, and I think the vast majority of people across the state can't afford it. And so Maintenance and operation or operation and maintenance, whichever way you want to put it, you were visiting with us about here, these 15 pages are part of that. What is troubling to me is, as the rep representative Eubanks talked about was, what are you doing going forward because I realized there are new people on this commission and the chairman, but what are you going to do going forward to make sure that we don't have public utilities where the maintenance and operation is uh is not being kept up. So that we don't talk about somebody coming in here and claiming that they spent all of this money over half a million dollars just in M&O is at a half billion dollars. I'm, I'm not really sure when we get into the 500s. Are we talking about millions or billions, which is it? Hello, is anybody with me? I'm listening. No, I was, I was just confirming that it's, it's millions. It's millions. OK. We, the taxpayers. Cannot afford this. We've had an increase in our water bills. We've had an increase in our energy bills. The hospitals that are saying they're OK with it are going to go up on their prices. And all of that's going to be passed on to us. So I just need to know at the end of the day, Mr. Chairman, that's it. Are you going to vote to raise the rate. I hope that you are not. Thank you very much. Thank you, Mr. Chair. Senator, I highly respect you and I want to respond, OK? I can't give you an answer, a yes or no, but I asked that very question at a hearing to the chief executive officer of Summit. And he said that much of the increase in upkeep and has come as a mandate. I call it a mandate. He called it an obligation that the federal government put on them. I called it an unfunded mandate that shifting responsibility of the federal government to the, uh, ratepayers of Arkansas and that's not right Yes, ma'am. I understand. Or is unnecessary. We need to know as taxpayers and you are in essence our representatives. are going to understand that the people of this state simply cannot afford this kind of huge increase in our rates. You understand that, uh, I'm gonna call you do, we've called each other by first night we were in the house together. You understand that and I understand it, and at the end of the day I think that's why you're here. To answer that for those of us who care, and I think the majority of the people in this room care, including you. But let's not do the federal, federal I want you to know that that question had been asked of them and that was their response, OK. I don't wanna hear bird walk today. I just need to know that answer, and if you aren't able to give it to me today, give it to me tomorrow. Or when you vote, say we're not gonna allow this decision you will be one of the first to know, OK, I'm not a member of this committee. I appreciate your time allowing me to say what I had to say. Center Chesterfield, we've never been able to keep you from saying what you want to say. I, I want noted a record that I love Senator Chesterfield, OK? And I have loved her a long time, OK? But we all do. Senator Hammer. Thank you, sure. Let me pick up on that discussion because that's one of the operation and maintenance expense is the mandated program cost. Can you, those mandated program cost in state, federal. You probably, you just answered that question, I want to hear it. Because that's one of the things that is listed on your sheet is, uh, part of the Consideration is the mandated program called. Say it again Yes, I'm sorry, I, I didn't catch the question, my question is the operation maintenance expense, which is factored into their justification to come to you and ask for the rate increase. OK. The, the mandated program costs that are listed on here are how many of them are state mandated and how many of them are federal or. Or is it a mixture of one or the other? I don't have that information here, but I can get that for you because I'd like to see that because if there's something within the state that we can do to eliminate some of those mandates in order to take away some of the justification for the cost increase. We'd like to know what those are. And if they're federal, then they're federal. But whatever state would like to, like to know what that is, um, so can, can I say one, so, uh, to be clear too that it may not be new mandated cost either. it may be um upgrade, you know, if, uh, a pipe needs to be upgraded to comply with existing. That could be in there too, so. If we could just take a look at that and, and see if there's any wiggle room there to, to try to knock it down a little bit. And then that uh Senator Hammer the whole committee does not need that y'all just get directly with him. OK. Um, and then, The, the cost of actual purchase has been discussed in here. But But at the same time, If they, they had to be aware of the condition. Of the equipment. That they are now using as a justification or they're just a company that is either bad in doing their business, or they just took it for granted that they'd be able to ram this thing through. So, do you know anything about what they did in the way of inspecting before they negotiated their price. I, I don't know what due diligence was done on the part of summit before the acquisition, um, there is a, um, A docket that um. Where the commission approved the acquisition where that information may be, and I'd be happy to research that. And then if they don't get the rate increase, The Exit strategy. I mean, are they just, they're just on the hook holding the bag. If they don't get the rate increase, and how would that play out if they don't? If they, so, so to be clear, the current, the rate increase is so that they can recover their costs. So if, so if the rate increase is not passed, they're not recovering their full cost, right? And that and that goes back to the argument I would make is if they don't recover their cost, how much of that is because they didn't do due diligence, that it's like they're buying a car that they didn't take it to the mechanic to have it checked out before they bought it. And now, they, they are identifying that, oh, we got. We got ca, we got to fix. Why, why should we have to eat it and the rate increase versus they and their stockholders because somebody somewhere within the organization didn't factor that in. Well, um, I. I don't, I don't really wanna answer that, but I will. So, so it would be a really big car and a lot of moving parts. I mean, you're talking about thousands and thousands of miles of pipe. I mean, so, right, exactly. So, uh, so, uh, but, um, I'd be happy to look into what due diligence was done and and get that to you. Well, I just think it would be good to know because if you have to turn them down, I think you'd want just cause because the responsibility rests with them, and I, I get it. and everything else, but, and I'm just curious, just the young lady on the end, what stab at that. And so to be clear, I don't want it to be understated that we did remove the goodwill portion of their financing that was related to the acquisition. So when we go to determine their weighted average cost of capital or the return that the investors get, we took that out, so that was approximately $800 million that was removed when determining that. I just unloaded something on somebody else and. And, and now we're expecting the ratepayers to pay the cost of it. Yes sir, I understand. Thank you, Senator, to answer your question, um, or try to answer your question. If we do not, uh, reach a settlement that they like. They can appeal to the court of appeals. And the court of appeals will decide whether it is an unauthorized taking of their property, uh, without just compensation, so that's the simple answer they can appeal from the pub uh, public service commission to the Arkansas Court of Appeals. For taking taking what did you say what's called an unauthorized taking. It's a taking, uh, OK. I would This may not be appropriate, but if somebody's gonna get taken, let it not be the citizens that get taken. Like thank you, thank you. like. Thanks, Senator. Senator Hickey, you're recognized for a question. Thank you, Mr. Chair. My, my questions are gonna be along the same line, of course I'm gonna get a little, a little deep here. So I'm gonna start off with this, so because I'm gonna ask, ask something of you all because whenever we did transformation. We found that we did a lot of research. That you all are basically the way I would describe this as an executive or a legislative agency. You are that quas ideal. I heard you kind of go around that, that wasn't exactly what you say, but I'm gonna, I'm gonna ask this from my standpoint with what we're hearing it started with uh Representative Eubanks and has continued on. It's almost to me that we need to do some type of investigation in this because and get a report delivered to the legislature and of course if the governor wants to see it, that's up, up to her. But it seems like to me that, that this, so, If what we've heard here is true that we went in and we had, had to do all of this, uh, these repairs and everything like that, that was from deferred maintenance. So if there was deferred maintenance, On this stuff. Previously, as somebody else has already said, should that work have been being done beforehand or why was it not? Was it our inspectors? That we don't have legislation in place or we don't have anything in statute whenever it reaches a certain point that they weren't doing their job. It looks like to me that we need to look back there because, you know, we're, we're looking at this and from my standpoint, it's like, well, if, if we had have been doing our job correctly. From way back And before things got, because I've seen business after business after business in my past profession that the worst thing they could ever do was deferred maintenance, because that only multiplies and gets larger and larger. So I think that we need to find out exactly what's being discussed here, as far as these large cost. That now the ratepayer is gonna have to pick up. To see what where that came from because I'd like if, if, if we were to find out, and we've got to be honest with that. That that was something that we should have done. And we need a statute on it. We're coming into session. I want to make sure that we've learned with what we're doing right here and make sure that we don't have these all over the state or in the future with any and all utilities. So I think that this is a little bit deeper that, you know, we need to look into it that way. Now, my question is this. With The current operator. Summit Is, is, would there be, would there be any reason? That They would go ahead and do these extra costs. To increase The cost on the front end, would that in any way benefit them from a managerial type deal or do we have any percentages set up as a certain As a certain percentage of your size or some nature of that. You know that that would equate back to because if there is any mechanism. Like that in place, I would want to make sure that those were justified. That those were justified that we were doing all those calls and making sure that we weren't doing more than we needed to right now also. So I don't know if you can answer that last one or not. I know my other one was a comment, but I would like to see that we get a report on this. To see exactly where this went, because like I say, if there's some things that we need to do from a legislative standpoint, To make sure that, you know, we don't get into this situation again, I'd like to do that. Thank you. I'll go ahead and start and just ask for a little clarification just to make sure that as we go forward, that we're getting you what you want. Um, on On that report, are you wanting that on, um, specifically concerns about deferred maintenance or larger, a larger picture of the sale itself or just deferred maintenance within the sale. It sounds like to me, uh, It sounds like to me that that it's all inclusive just to be just to be quite frank because it actually sounds like to me that we, we had this other company that was under our regulation, CenterPoint. Uh And it sounds like to me if what if a lot of ifs here, but if what we've heard is that there really was this deferred maintenances I'm going to refer to it because that's what it is, was the, was the deferred maintenance within? What the state was allowing. Was the deferred maintenance more than what the state should have allowed. Because somebody wasn't doing their job or I've heard some political accusations here. I want to make sure that there wasn't anything else going on right there. Uh, I think we need to just kind of look at, look at this whole thing thing with some of the stuff we've heard in here. So, I'm gonna say all-inclusive as far as this particular sale. OK. And again, my other part is, is, and maybe he was going to do that is I want to make sure that Is there any, is there any type of Management fees or anything of that nature that are, are, that are allowed to be paid out if somebody's of a has A larger capital outlay or something like that that I wouldn't know about. No, sir. OK. Thank you for that. Representative Wootton, you are recognized for a question. Thank you, Mr. Chairman. Um, I'm really, I don't know where to start, but I say two big issues here, and I agree with Senator Hickey and I agree with Representative Eubanks. If they bought that company knowing that they were gonna have to spend $500 million and they didn't get an adjustment in their price. They, they made the mistake. And now they're coming back in here to you and tell you it's a federal mandate. So which is it? Is it the 500 million, or is it a mandate that they're asking for a 24.3% increase on poultry. People. Can you tell me what the average bill for a regular consumer. What is the average bill? And, and, and under the settlement that y'all are looking at, I saw 15.4% increase in the, in the paper, in the media, is that correct? There's there's a lot of finger pointing up here, and I, and I just, all I want is an answer because I've got constituents that are having a hard time making it from day to day when they've got a 23% increase in the grocery store, a 25% increase at the pump and a 12% increase on clothing and a 14% in and now a utility company that's controlled by the state of Arkansas and, and, and guarantee, I wish I had been guaranteed a 10% return on my investment when I was in business because that would have thrilled my heart. But that that's not what happened. And their guaranteed. Now they made a mistake. So which one is it? Is it a mandate of 500 million or That's causing the right to increase or is it a federal mandate by that bunch in Washington that don't know which ends up, and like I shared with the joint Budget Committee the other day. We're broke. Reckoning day is coming, and if we don't realize that at the state level. And we do because we're one of the few states that can't spend more than we take in. The, these politicians and the governor's office and other places, talk about a balanced budget. They got no choice. So now, which one is the 2? Is it the 500 million or the Federal mandate is causing this rate increase and, and I still go back to my question. What's the average rate pay payer paying a month now and what will they pay? So, with regard to the, which one is it? We will, we'll, we'll endeavor, um, to To investigate this issue, um, and, and get a report, um, to get you an answer for that. Um, as for the finger pointing, I do not want that to look disrespectful, um, if, if we're kind of OK, I, I didn't want that to in any way as we kind of um discuss quickly amongst ourselves who might be uh better to answer that. And then, um, The reason why I was pointing my finger was because, um, since general staff is the one of the parties to that settlement agreement. I was going to ask Michael to address, um, The average bill question, um, because that's something that comes up in the settlement agreement, Mr. Chairman, before you, let me ask a question if I may. Go ahead. Another question. And I, and I don't mean this as an insult to y'all, to your staff, or But in dealing with the energy and dealing with summit and others. Are we adequately staffed up here. Do our are our people able to come up against lawyers that are making 200 and $300,000 a year. Mr. Wooton, I'll answer that. I think we have some of the best staffed and best educated and most dedicated staff in the industry, the state of Arkansas could increase the pay for our staff. We are competing with that kind of expertise, OK? Having being quasi-legislative, we have the ability to raise the funds but we're limited. By what the legislature sets on salaries, but we have the best staff and the most dedicated staff that you could imagine, OK? I think that we outstaff them, to be honest, and I, I, I mean to be intentional about that. I, I am, I've only been there nearly 2 years. I'm very impressed with the staff that we have. So, but that's a good question and it's a, it's, it's a need that we have had and that our utilities are willing to. Support us, they know that when you go to hire an engineer, you can't pay $60,000 a year, OK? So we, we do need help and I think your questions are well taken. I'm gonna let him answer them. If he doesn't, I'll answer them, OK. Um So, uh, the $500 million dollar question, um, I, I don't, I don't know what that. Mm The substance of that was so, but uh it sounds like we're gonna look into that. The average bill was $65 before and it'll be $80 after the increase that's consumer. That's a homeowner that's based on average consumption for the residential rate, what is the increase that y'all have recommended or have you recommended the the commission has not recommended. It is the staff that's recommended that, that's a result of what I, the numbers that I just told you are the result of The negotiations between The company, general staff, the attorney general, and the, uh, intervenor groups. The hospitals and University of Arkansas and then uh Arkansas gas consumers. OK, Mr. Woo, I want to expand on that when we say $15 or $20 average. It's not, it, it, it's an average if you averaged it out over 12 months, but the usage comes in the winter and so those monthly bills will be higher than 15 to $18 because that the average is gonna skew at. That point, OK so the, the, the real one of the negative factors here is that this rate increase hits right when gas usage goes up. OK? And people will not have time to prepare for it. Let me give you one example, and I'm through, Mr. Chairman. I got a bill. From Summit For $600 several months ago. And I called him. Said something about it. I said, well, why? I never got an answer, but my bill. For the next 6 months was 0. Now what that says to me is this they either made a accounting mistake, a bad mistake in there. Get out their bills because this happened at the same time when the average person on the street was a constituent of mine and others were having to pay exorbitant rates. OK I think they had a catastro shortage and they raised and and the increased these bills to increase their cash flow in order to pay for these, uh, Maintenance. That had been deferred apparently by the other company that took them over and see, that's not being fair to our ratepayers today for us to have to pay out that money and then it's to increase their cash flow if that's possible, but I, I'll rest with that. Let me answer one more question for you. I'm probably answering too much, but, uh, I asked the CEO of Summit was that. maintenance or was that a mandate he said it was a federal obligation, OK? Now, he made that statement to this commission under oath if he lied to us, we will pursue perjury charges against him. We need to get to the bottom about the determination of who wound up with Center Point. Understood, uh, uh, you know, because, and if they did not do their job, then we need to look at our, our, uh, end of the regulation that, that y'all have to see if we need to be beef it up because ultimately we're gonna pay for it. Representative I'm so sorry. I didn't mean to cut you off, Mr. Chair. Go right ahead. I was, I was just going to offer, um, with regard to, um, Something you said about reaching out about your bill and not getting an answer. I was just going to offer this to you and anybody else, um. If, and, and this is not specific to summit. This is specific to all utilities. That is something that, um, we have an entire division within or an entire section within the PSC that is dedicated to helping any kind of concern, so you can always reach out to us any further because I called y'all's office and one I got was the 800 number where I got when I called before so I I understand what you're saying, but it didn't work because I. about you and uh please call me if you ever need something more, OK? Thank you, Mr. Chairman, for your forbearance and thank you. Thank you, Represent Wooton. Represent flowers, you recognize for a question. Thank you, uh, Mr. Chair. Um, So I, I appreciate a lot of the back and forth and the questioning. Well, I just wanna, before I start my questions, be clear with this question. Is it that the staff, and I guess this is a question to you, Chairman uh Webb. Is it that the staff based upon their um assessment and um. Research has has recommended to the commission to vote for the settlement. The general. Excuse me, the general staff, along with every other participant in the rape case. Has recommended settlement at that rate. No one, no one challenged ma'am would be summit and then those entities that signed onto the settlement was all the hospitals and higher education. It was the gas users, it was the Attorney general and the and the general staff, not the, not the commissioner yes ma'am and the staff have recommended the three commissioners, please vote for this. That's correct. OK. Just want to be clear now. We're here in this meeting and as legislators asking questions about what happened before this, um what was it? What happened before this purchase back in January 22 of $2.15 billion in terms of um the pipeline inspection and delayed maintenance, we're still trying to figure out You know, of that $500 million subsequent investment in operations and maintenance, how much of that is a federal mandate, which kind of doesn't matter because if there's a federal mandate, we have to assume that it has to do with safety. So that people are safe when we're talking about moving and dealing with gas, but It's and it's mandated, like it's always been mandated, so I'm just wondering. If you've been given this some information from the staff and told you should vote for it and all these entities at the exclusion of other entities. Have said you should settle. On behalf of all the rest of us ratepayers who weren't at the table. How is it that we are here And we, we don't know, we're not told this information. Like, is it that that information is not included in the research and the considerations made to make a recommendation for the, the, um, commissioners to vote for it or those things were not a part of the consideration before you were told you should vote for. The settlement. I think I understand the question and maybe it would be, um, Helpful if I provided some context around how we, how the parties operate. So, the company puts together a rape case, which is a very intense process. It's a 10 month process and. We have minimum filing requirement schedules. There's a lot of them. I mean, it's like you've seen thousands of pages of stuff that they put together and they come in and file it and it basically details. Everything about their company for the test year. So they filed that the company does, and then the parties to the docket, so the attorney general, general staff, hospitals and higher education group which includes a lot of people, um, and then the Arkansas gas consumers, which they have a website, I don't know what it is, but it'll tell you all the people that they represent. All have experts that come in and independently verify what the company has filed. Now when I say that, so back in the old days, staff would we'd load up 5 or 6 auditors and send it to Summit's office, and they would go through all their books and records, check invoices, everything we do that electronically now, uh, because of thanks to You know, computers, but, um, so we go in and we verify all that all all their books and records. We look at invoices for everything, and that's why it takes so long. It's a 10 month process, like I said, and so we basically come up with those schedules on our own, as do the other parties, and then we say this is actually reasonable. And so, you know, sometimes it matches with what the company is saying. I mean, it's kind of hard to argue about taxes. you know, What the tax rate would be, but you know what that tax rate is applied to, we do argue about that. So, Those individual parties, that's how we get to the settlement. So but so what I'm hearing though is that a company that made a purchase, knowing that there would be additional maintenance costs and operations costs, and I'm saying that because we had a meeting with them the other day and they told us that they were aware, they were aware that there were these issues. They purchased the company with the knowledge that there would need to be some investment made. Into this infrastructure. OK. So I don't know that, I don't think that that was an issue, and they did this. Under the construct of being a regulated monopoly. Which means that there are mandated program costs. There are things that have to be done to make sure that the system stays safe in exchange for them being the only ones out there providing the service. So I don't take issue with Summit for that. What I take issue with is we have no idea. as to whether or not these maintenance costs had been deferred to the detriment of the system, which is to me, You know, and abhorrent, um, circumstance that will ultimately affect the people. The ratepayers because again, they're regulated, um, monopoly and I don't think they would have paid $2.15 billion for a company and its assets and taking on the role of this regulated monopoly. Understanding they're gonna have to spend more money if they weren't clear that they were going to get their money back. OK. And we are here now after they've made their case, they're making their case to the regulators, saying we spent this much money. And this is why we spent it and we would like for you to raise the rates of our customers. Based upon that, and y'all are the regulators, not People who were supposed to make sure they make a profit. So the my concern, the first question is, Were these decisions, was the decision made to make a recommendation to the commission. With or without the information regarding What the problems were before and whether or not those things should have been fixed under the regulatory oversight of Center Point. And whether or not when you look at the justification as to whether or not this increase should be made. It seems to me we should already know whether or not the the costs were mandated, how much of it was taxes, how much of it was state or federal. Seems like all of those are things that as the regulatory body making the decision would know as a part of the considerations, so I have, I have 3 questions and that's my first question. I'm trying to get an understanding about. The short answer would be, we're in that period of time when we would be discovering that. We, we just completed the hearing last Wednesday. And we had 2 public hearings last week on Tuesday and Thursday, so we've just gotten into the deliberation and the, and the reading of, of the written testimony and looking at the issues that you're talking about its due diligence to look at these issues, but staff did not include those considerations when they said commission, you should vote for this settlement. considered it, but we may not know it because they are a party. Does that make sense? OK. So my second question is Again, it is the role of the commission to take all of this into consideration and do what is best for ratepayers for citizens who were not at that table. What happens just like a judge would hear all of the evidence and make a decision. Yes, so what happens A little different, but OK. What happens if there was a circumstance where The oversight of center point was lacking and some of that maintenance was deferred and now they got their payday and they're gone and now we got to come back and pay the $500,000 in deferred maintenance. Like what happens if we the state really didn't do our due diligence in oversight previously and now we're trying to make up for it now at the cost of the taxpayers. So I think I think there's a lot of Potential variables in there, um, like that I want to be careful on speculating. Well, for instance, um, you said if If Centerpoint, didn't do its due diligence, um, no, no, no. If the state if the state didn't do it is due diligence in saying, you gotta pay to fix this. Today Not tomorrow and then tomorrow you sell before you have to fix it. So, one, I think that would Ah take into consideration whether or not they were Centerpoint was actually in violation in some way, um, if they weren't in violation, but they had infrastructure that was just naturally aging. Um, that's That's not necessarily a violation that's something that, um, Would be, I guess. part of doing business, but wouldn't be a violation. Um, that's not I I can't speak to whether at this moment, whether or not there was a violation or not, but I guess the point I'm trying to make is, um, that to me seems like a big, I mean, presumably we should know, yes. So that means that would then mean that the mandated program costs might not necessarily have been mandated because what was mandated for Summit than should have been. mandated for Centerpoint. I'm not Trump following you, in terms of in terms of mandated. costs there are things that had to be fixed, it had, this has to be fixed. Then shouldn't it have had to have been fixed. For Center. OK, I get what you're saying. Do you want to go ahead or I was just gonna say I don't, I don't think, and it's been a while since I've read all that stuff. The record has anything about deferred maintenance in there. I, I don't think that that's an issue in the docket. So, Whether or not that was considered, if it was not an issue and if it was not brought up in the docket, it would not have been considered. I don't even know if thats what I'm at cause I don't think it exists. I, I'm not what I'm suggesting, because if there were no violations, and we're really talking about an aging system and not necessarily any Government hands saying you have to spend this $500 million right now in order for the system to work safely and properly, then we're really talking about You know, this is new and we're gonna make this right. We're gonna upgrade the system right now since we're making the purchase so that we can go ahead and make the rape case. Now And so that's what it appears to me and I know you all are gonna. Return some information to the committee about these issues. But I guess then that would beg my question, my final question, even though you couldn't really answer my second question. Um, because you're still gathering information. Is it, is it a possibility if in fact These Changes that were made or an upgrades or or maintenance that we paid for that summit paid for and the amount of half a billion dollars. If they weren't absolutely necessary if it all wasn't federally and or state mandated. Then wouldn't it be a part of the decision of the commission to say, you know, you didn't have to spend all that money and therefore, we are not going to approve this settlement and what we are going to suggest, recommend, or mandate is that this increase. Will be um the increase will be made over a period of 10 years versus 1 year. So one of the things, um, That the commission considers when they review any rape case, but they'll be doing it when they review this right case just like any rape case. Um, and when they look at these costs is they look at the prudence. So that goes to your, your question, um, in terms of Were they Absolutely needed now, um, and And if not, to what extent, you know, should, should they be able to recover for that. That's a question of prudence, um, so that is a consideration of the commission when they do review, um, With regard to, um, you asked a question about, um, Tim timing, um, and so, Because there would have to be some kind of outcome. The money's been spent, they purchased the purchase has been made, and they are now the regulated monopoly. So, sorry, yeah, I mean, so to me it would be a matter of timing and how much of the $500 million must be um. reimbursed through a rape case by the people based upon how much of that really was mandated, how much, you know, what, what did we do or not do during the center point years and should we put that all on the ratepayers at all and if so, over what period of time is to me kind of the questions at hand. So while I'm not, um, I'm not specifically saying that this is something that the commission is or is not considering at this time, um, Previous, in previous instances, the commission or previous iterations of the commission, um, have employed, um, options such as deferred implementation, um, so that is, I, I, I think that's what you were getting to in your third question. That is something that's available kind of, um, In the Tool bag to be considered, um, I will, I, I only point to statute here, um, I mentioned it earlier, but I, I just point to it again that, um, In order The, the commission in order to, um, Set rates. So if, if they are rejecting the settlement agreement, which would then put us into a fully litigated hearing. We'd have to go back to hearing with all the parties, um, or, or, um, To modify it, um. that they are finding, they would have to find the rates, that the proposed rates are unjust, unreasonable, discriminatory, or otherwise in violation of the law or rules of the commission. So I say that only, um, To say that there is a little bit of a left-right guard rail of how For the commission can look at numbers and say, um, We have concerns about these numbers. What can we do with them? Um, there, there are some limitations on the commission. One of the limitations on the commission is They have to make a decision based on evidence in the record. So It has to have been flushed out or somebody has to have presented something up to this point in the record. The record is very voluminous, but nonetheless, it needs to be evidence in the record that they used to go ahead and, and make their decision. Um, I can tell you that as of Um, Friday, the record was reopened, um, for the purpose of positing additional questions back to the parties, uh, those questions have not been put to the parties yet. I think they probably will be within about the next day or so. Um, Just with what you just said, and I'm sorry, my just last one, last one, last one. Just you, something you just said though about the parameters around the decision making. Can there can there be a consideration made by the commissioners on the impact to the ratepayers in terms of the implementation, the timeline, the prudence, like what is this gonna do to ratepayers' ability to even access these services and I'm and I'm asking you this coming from a place. Where you're not only regulating our gas, but you're regulating our electricity and you're regulating our water. And we've been through this in Pine Bluff, where United Water left infrastructure. That was harmful to us and then had a company come purchase and they made some investments. Still need to make more investments and they have a rape case too. So this to me, I'm looking at this like there's a pattern here. Thank you. Um, Yes, that is something that the commissioners can take into consideration. It's, but it, it has to be balanced against or along with, um, probably against, um, The utilities constitutional right to be able to, um, earn a reasonable Return Sorry, what? Well, I mean, but, but it's, it's, it's more about recovery because what it gets into is it gets into, um, uh, a And a legal argument in terms of they've spent Costs, and so they are constitutionally entitled to be able to recover prudent costs, um, otherwise, as the chairman mentioned earlier, then it becomes a question of if it was an unlawful taking or not, but, um, the short answer to your question was, It's, it's a holistic approach as much as it's a, um, Uh, formulaic approach. Thank, thank you for your answer. Representative Eaves, you're recognized. Thank you, Mr. Chairman. Um, you guys are kind of in a tough spot, it seems to me, but I have a question for you, um, and I forget your name on the end, sir, but the, is the CEO compensation included in the data that you look at to determine whether this is warranted. this rate increase, the payroll, it would be in payroll. Well, the reason I'm asking that question is I was looking at an article from S&P Global. And it talks about, uh, I guess the previous CEO David Lazar or Lesser, however his name is pronounced from Center Point was the 2nd highest paid utility CEO in 2021. He saw his compensation package increased 200%. To 37.8 million, up from 12.6 million. Does the current CEO make that kind of money? Of Summit I, I, I think that's maybe center point, the, the holding company. Yeah, how much does this CEO make? I don't know what his exact salary is, but I think what you're referring to is center point, the, the publicly traded holding company. This is, this is an operating company. This is Summit Utilities, Arkansas do you know what the current CEO of that particular company makes. I mean, the reason I'm asking is I have no way of knowing what this is. Representative, uh, we, we found that they had not included that in their last annual report and at the hearing, I requested that it be completed so that we would. the executive compensation. Also ask if any of this rate increase would be used for executive bonuses or additional compensation and under oath they said no, but we're following up trust but verify. OK, I appreciate that. Like I said, you, and I'm not trying to put everybody on the spot, but it's gonna be awkward for us to go home and and try to explain a $15 rate increase if you have a CEO and I'm not saying you do now, but the previous one apparently, uh, of the holding company was. a 200% increase. So thank you for asking those questions. Thank you. Thank you, Representative Representative Beatty, you're recognized for a question. Thank you, Mr. Chair. Um, over here. I I'm kind of gonna follow up on several of the questions that were have already kind of previously been asked but kind of hone in on, on a couple. One, you mentioned that the $850 million worth of goodwill, you, you remove that from this rate of the fair rate of return calculation. Yes, sir. So, that 850 million in goodwill. Just for those, I, I think everyone in this room understands that that's the excess. That summit utilities paid over the fair market value. Of Center point Well, that's, that would be a certain extent that's for the equity portion, yes. OK. So, paid more than what it was worth, and now we're coming back in so I'm, I didn't mean to cut you off. I'm sorry. When you say more than what it was worth, it may be, I mean, that's what they thought it was worth, that their calculation it's not that they paid more than what it was worth. It was, that's what they thought it was worth, was an excess of what the book value of the company was, right? And and so that's what's on, on the financial statement under goodwill, the 50, OK. Representative one interesting thing you'd find is that we discovered that and under our law, they have to pay property tax on that and we collected the property tax on that for the state of Arkansas as well. Well, that's, that's good. Um, so, so my, my question is now a year later, they're, they're coming in with a rate increase. I'd heard that these rate increases at the time that this, this, um, transaction was consummated that those rate increases were. Known that we, we knew they were coming and they would be asking the, the PSC for those rate increases, is that correct? As part of the settlement, um, there was a provision that they had to stay out for 12 months, but they had to come back in for a rate increase or they had to come back in for a rape case. So basically a reevaluation, uh, within 2 years. Well, I, again, I guess my mind works a different way. Business, there are so many different risks that you, you, you have to take in account when, when you, when you're a business and, and looking at the numbers that are provided, they, if you discount this 9.58, I think was the, um, 9.85, excuse me, the, the return on equity percentage after the settlement agreement. How does that compare with The average return on equity for other natural gas companies in the country. The average approved ROE, uh, from January to July was 9.83, 9.83, that was the, the approved on a, so we recommended 9.85, the average for the whole country for gas utilities was 9.83%. And so that's actually the equity proportion, um, the actual return, the rate of return on their assets is 6.17 I believe because it's a weighted average, so it's kind of my point again. They're making a profit now. They're making a, a rate of return now, uh, from the 400,000 Arkansans that use their service. This model that you factored in has all the moving pieces of what I consider manageable things they control, such as the payroll, they're advertising insurance, all the, all the areas that you identified. Did staff, uh, you said they provide information the staff do a thorough analysis of all of those controllables to make certain that their rate of return and their operation costs were reasonable and that there weren't large, you know, like the investment, the half, half a billion or whatever they said they invested in infrastructure that could skew that rate of return, um, And, and the calculations there from depreciation expense and and other tax consequences based on business decisions they make that could adversely affect a rate of return for one, for year one, that may not be the case in subsequent years with the projections and pro forma. Did you do a thorough analysis of that, that information. Uh, in your review, uh, of the rate increase request. Yes, sir. So I understand staff's job is to, to look at the information that was provided, uh, and then make a recommendation based on the fair rate of return for the entity, if I'm correct. Is that the staff looks at it from the rate of return for the entity, and then, then the responsibility for approval or denial, and, and that's gonna have the direct impact on the ratepayers in Arkansas rests with the commissioners. Yes, sir, so we take the information that's provided and then we independently verify all of it. We also audit their books and records to make look for anomalies, to make sure that everything is reasonable, everything's on point. And then when it comes to the rate of return, we conduct um an independent evaluation based on what, what somewhat what publicly traded companies are earning in the market. See, the operating companies, they don't have to compete for capital. publicly traded entities. So we look at those and we apply those, uh, what we find based on current evaluations of what investors are requiring from similar companies, but public companies. And so that's how we factor into the return, but yes sir that all that all goes in that uh that happens during staff's evaluation. So, and, and then just. 11 other area here may expand on it depending on the response. So projections that they provided you. For their pro forma going forward without the rate increase, what, what did they, what did they calculate their return on equity, uh, a rate of return would be without the rate increase. The So Those are kind of two different things, so I'll answer it in two different ways, I guess, but they're requested return on equity was 11%. And so, like I said, the national average was 9.83. Our recommendation was 9.85. And the settlement that's proposed to the commission is at 9.85%. So that's the return on equity portion, um, the total request was for, uh, it was 100-ish million dollars increase in the settlement. Um The settlement provided for $85 million in increase that does not include rolled in rider revenue, which they're already receiving. So after that, it would be about 74 million. OK. So, I, I guess I was just looking at if there's no rate increase approved. Watch the impact as far as their rate of return at that point if, if, if the rate increase is not approved by the PSC. So, uh, if you look and I, I apologize, I can go back to the filing and look, but they actually, that's part of what they file is what they're actually earning at this time, and it's substantially below what they request is and the reason is because all these, when you have a rate increase or a rate impact, I mean, uh, uh, a rape case, you're looking at a, it's like taking a snapshot of the company's books. I mean, it's a point. time. And so I mean, just, so this last snapshot was in 2022. Just think about anything if prices or anything for anything that you can think of have gone up or down over the last 3 years and then now we're looking at a current snapshot, and we didn't look at any snapshots in between, so that's, that's the easiest way I can, you know, but I'm happy to, I mean, I, if you have specific questions, I'm happy to walk you through staff's analysis or however you want to look at it. Well, I guess my final statement right now. Arkansas, um, taxpayers and folks, uh, ratepayers in Arkansas right now. With inflation and other, other concerns and this at this time of year where, where you're gonna utilize more of, of the resource, uh, for heating and cooling, they're already under a strain, so my, my concern again is all those ratepayers wish they could reach out there and get a little extra income that it's going to take to cover this, but they don't have the ability to do that. They're, they're operating within the, what they receive from their are working some overtime or a second job to take care of the needs of life in their households. So all I would say is I would implore the commission to take those ratepayers and, and the timing of this rate increase into consideration when they make this decision, uh, when you meet and, and to fulfill their duty to take care of the ratepayers of Arkansas that, that haven't been at the table. They're at the table through the commission. So, uh, with that, I, I, I thank y'all. Thank you, Representative Beatty. Represent Allen, you recognized. Thank you, Mr. Chairman. Um My question is that inside of that settlement agreement. Was there anything in there that addressed rate increase. The original settlement agreement. For the asset purchase? Yes. That addressed a future rate increase or. I, I don't believe there was so was so there was nothing in there that talked about a rate increase at all. That just the rate increase at all. So the asset, so the The asset purchase. Contemplated a future rate increase in that it said that. They could not come in and request a rate increase for 12 months, but they had to come in within 24 months to do it. OK, thank you. OK, thank you. Senator Clark, you recognize her a question. Thank you Mr. Chair. The You know, there's Lots of what y'all do is just it is what it is, the inflation is what it is. The gas prices are what they are, uh. The, but the, the one thing that we've honed in on that bothers me. is That center Lo and I, uh, when he was representative, uh, pioneered legislation on, uh, water that requires all of our systems, I think, except one, but we may have left out 2 or 3, the one in Pine Bluff because they're regulated by y'all. Uh, and maybe a couple others for other reasons, but almost all. Uh, have to have an audit over 5 years now, uh, and nobody's going out and inspecting water lines we know what the average life is. We know what, when it has to be replaced, uh, and so on with other equipment because we were doing nothing about deferred maintenance. Now I'm sure that's not true where, uh, with what y'all are dealing with, it can't be. Uh But that's. We've talked about it that way and so the seller. Who I understand to be center point. Either had to have hidden. Deferred maintenance. Uh, that had not been done, which I find not to be likely or the buyer. Uh, summit Correct? Was scammed and did not do their due diligence and didn't know. About deferred maintenance, I can't imagine a company of that size, uh. Doing that or in their followings to buy this company. It would state that there's, it's discounted because of deferred maintenance and that there's. Uh, this is gonna have to be taken care of. Uh I don't know I, I don't think that exists. That being the case, that seems to be the one thing in the rate increase, like I said that that we've honed in on. That, uh, and I know because my dealings with water again. A popline that has a 30 year life. I use 30 instead of 50 because we said 30 to 50, but I'm gonna that has a 30 year life that's 25 years old is not deferred maintenance. But it's not worth what a pipeline that's 5 years old is worth. Because Uh, because it's closer to having to be replaced, but that's not news. That's and that's what confuses me and I think a lot of us in this request, that part of the request for an increase is how did they not know? and I don't think that's even possible and it could come back if it's roofs, if it's trucks, those things I deal with every day, and those are all knowable, and all, and, and all have an average life span also. So that part of the increase is bothersome. To me Uh, because the ability in my study of economics, I found monopolies and public utilities to be both the most interesting, uh, and the least. favorite of mine at the same time, the so. Surely it's not possible to buy the previous company. And then come back and say, and oh by the way. We missed this. And so the ratepayers have to pay for it that, that, that seems to be the one thing in there where there is something that can be done if, if I understand it, uh, tell me where I'm wrong. Um Well, I'll, I'll say I share your view on the most interesting in the in the uh anyway, um, uh. I think you're correct. I, I don't know. So to be clear, I've heard, uh, the 500 million tossed around. I, I don't know where that came from. The actual, the actual increase in plant net plant for this increase was $300 million. That's net of accumulated debris depreciation. So, um, Uh So, I think there's also um The role of the commission in approving the um purchase. I, I don't, I'm, I'm not a lawyer, I'll say that right off the bat. So, uh, I, I don't know, uh, I know that Summit was granted a CCN to operate in Arkansas as part of the purchase, but I don't know the role, the, the commission had in evaluating. All the requirements or all the um. portions of the uh the agreement, so. Um If that's helpful. Yes, and I'm not even suggesting that you missed anything. I'm suggesting that it's most likely not there, but it would need to be. If we're gonna come back later. And say There were things here that needed to be done that somehow we didn't know. I, I, I think that's a, a very fair statement. And I, I think it, it would, uh, um. I think that's a very fair statement. Well, I appreciate the job that y'all do. You're, I don't think you ever deal with rate decreases. Uh, so I appreciate the job. It's not a job I would want, but I appreciate the fact that we've got good people doing it. Thank you. Thank you, Mr. Chair. Thank you, Senator Representative Richardson. Do you recognize for a question. Thank you, Mr. Chair. So I just want to make sure I'm, I'm understanding you. So at the completion of this deal, this 2.15 billion. There was never indication that Summit would seek to raise rates at the completion of the. deal. When that deal closed, you guys had no idea they had wanted, they want to raise rates as part of that. So The nature of regulated utilities is that Eventually, you're never gonna recover all your costs at the same rate. So there's an understanding that rates are gonna have to go up. At some point At the conclusion or at the consummation of that deal. There were provisions in the settlement where Center Point, or I'm sorry, Summit had to stay out for 12 months, um. And I could get you details on why I understand that and I, I understand that being a provision that they would have to stay out, but what I'm saying is, prior to them staying out, did they make it known that they were going to go up on rates to recoup some of the. Damage or some of the, the debt that they had incurred. Was that known in the beginning? They, they were, they had to come in within 24 months for a rape case. And I think the general assumption for regulated utilities is in when you come in for a rape case, your rates are gonna go up. So did you know did you know that they were going to increase rates it, when the deal closed, did you know that they wanted to increase the rates at the time that deal closed. I think it's specifically said, we're going to come in and raise rates. If that answers your question. Thank you, Representative Burson. Senator Hickey, you're recognized. My mine's motion, of course, I had asked you all, you know, when you said that you would, and we, and I truly believe you would, but I've been asked to by some members, you know, that we go ahead and put that in the form of the motion. So I'm gonna attempt this members. So, My motions is that we have an investigative report that you all develop. And if there's any problem with the word investigative, then I can just say report, but I'm gonna call it an investigative report with some of the stuff we've heard. So an investigative report developed and presented. To this committee. Regarding comments included. In this committee is how we arrived at this point, that should be inclusive of the statements that have been made about in this committee about the maintenance, the possibility of deferred maintenance, whose responsibility it was. To not allow that to happen. Uh, there were some questions here about uh whethered federal mandates, uh, that have been passed on. Are truly at issue. So if we would research that, uh, I know. Chairman Webb, you said that you were gonna look into that anyway, probably, but if we would go ahead and put that in the report. And we would expect it to be a very comprehensive report, which should include any recommendations for legislative changes to guard against any negative findings that you may, that you all may have found out about. And again, Personally, I trust that you all do this again, as Chairman Webb said, trust but verify. So, but, so anyway, we also, I've had some, uh, other members think that, well, we should just have legislative audit to look at this. I truthfully believe that you all are going to be, uh, probably at least the first line of defense to get us that report, but we are going to retain the right that possibly refer your findings to legislative audit in the future to verify any accuracy. So with that, I'll make that motion. Thank you, Senator. See Seeing no objection to the motion, we'll go ahead and approve that motion. Senator Hill, you're recognized. I'd like just kind of back up just a little bit and have some discussion on that for just a second. Tommy and then I guess that's to be more toward. Uh, Mr. Webb over here, whenever y'all put this report together. Danny, keep it simple. OK. But not too simple. OK. Yeah, we don't want it to be extra long, extra elaborate, something no one's gonna read. Let's keep it in. Readable form that everyone will take their time and, and read it and not have it in lawyers' language of 60 pages, OK? Because you've lost my attention span after the first two pages, if I make it that far. So let's keep, let's keep it simple on on what we're trying to do and go straight to the substance and not a bunch of fluff. So if y'all, y'all would do that and I'd like to add one more thing in on your, I'd like to know. In zapine, if Summit did the proper due diligence when they bought this facility. Now this sounds to me like they didn't do their due diligence. Cause I know we never banks and other businesses are doing their due diligence. You find everything wrong that you want to find, because you're gonna use that for bargaining tools. And it sounds to me like they didn't do the due diligence on. On the other side of that, so if y'all would put, put that in findings as well. I'd appreciate that. Mr. Chairman, as I understand, uh, Senator Hickeys, uh, motion. Uh, it's something that we would want to find out if, if, if we're doing something that's or not doing something that we should be doing that's deficient we need to propose a way to correct that or give us the ability to correct it in the future and we will do that. We're happy to do that and we'll do our best. We'll fight every lawyer gene in ourselves to keep it short, OK? Thank you. There's only one lawyer up here and he's sitting beside me. I understand, Senator. Senator Hickey, you're right. And I think that would be correct because as I've been sitting up here people have text me that says, you know, some states have changed the way that they've done it. Uh, I'm sure you all are aware of that. I don't know if that's a good thing or a bad thing. What's the negative? What's the positive, you know, guaranteed return on equity to performance-based, again, don't know a thing about it, but if there is some type of legislation, You know, that we need before the session starts in January. I'd like for to, and I guess I was negligent that within that, I would assume that we should probably at least work. With you all, I don't know how long something like this might take. But again, I would like, I would like for us to have it. You know, prior to the session. So I don't know if we should put a date on that, on that motion or not. So I would say that, uh, we're probably in pretty good shape here, San Hickey on this. We're not in a hurry for it, so I'd say anytime before noon Wednesday. Right That was on Tuesday no. I actually, sorry. I was going to say, may I actually, um, This is a little longer than Wednesday, um I was just teasing with that. Um, because the commission's order will be issued, um, sometime between now and the 22nd of November. I was going to ask, um, if we could be able to wait until that time, um, to at least, um, I, I don't know if the chairman would prefer to wait until that time to open the investigation or if he would just wait to present the findings at that time since OK. Yeah It's, I understand the situation we're putting you all in because you're, you've got to make a decision on something. But I also don't want you all to make it to, to, to make a decision. And then you find something. Because at that point, again, we're going to have to trust that you all are gonna come forward and say, well, We may be approved something that a little quick because we were required to do it. Uh, that we found out after the fact. So, I think we all just need to be prepared for that, that, uh, how, how we're going to deal with that, we'll, we'll thoroughly investigate the question I think before we make a decision, uh, you know, the concern I have about this process just in all honesty, and I'll use Senator Clark is a good example. Senator Clark has a daughter. And she goes out and buys a new Corvette. And comes home and says, Daddy, it was reasonable and prudent that I bought that Corvette. Now you ought to pay for it. That's the situation that we find ourselves in, is it reasonable and prudent and we may need to beef those terms up, you know, we don't, we don't wanna run a utility and tell them what they what they can do and what they can't do or direct them. I mean, we, we, we, we can tell them whether we're gonna pay for it or not, and that should impact whether they spend the money or not, uh, but, but they're kind of like senator, uh, the senator's daughter. who went out and bought the Corvette and now expects daddy to pay for it and that's how I equate that I wish I could buy a business that way and uh anyway I probably have spoken too much, but uh that's. I think your, your point is well taken. Sure, I just, we've heard, we've heard some numbers right here. We hear these big rate increases somehow some way. You know, I think that we can look back at this and say, well, you know, this maintenance really was deferred. It should have been done. Our inspectors were not picking it up, make sure that again that all that was on the up and up, uh, And if it wasn't, then, then we need to address it. And like I say, we'll beef up our legislation just uh for the future so that we're not sitting here 2 and 3 and 4 and 10 years from now, you know, wishing that we, whenever we had learned these lessons that we didn't do something about it. Well, the, the thing that we've been concerned about is the fact that uh the public is of the belief that they're gonna get a $15 and some odd average increase and it will be more than that, and that doesn't include the cost of gas, which uh utility can pass on without a profit, so the increase is more than what people are expecting and uh they need to be aware of that and we need to be aware of that so we know. what the impact is. Sure, so they need to be prepared. Thank you, sir. Thanks, Senator Hickey. So to confirm, I, I don't want to put you on the spot because I think it's a difficult issue for you, I can tell, but do we have a, do we have a consensus on the timeline to get this information to, to the members. We'll, we'll bring it back as soon as possible. We'll bring it back, uh. I, I think we can bring it back before we make a decision or about the same time that we make a decision. Can we do that? Yeah. We'll bring it back. I think we're gonna have to have that information to make a decision. OK. So we'll bring it back before the end of November. How about that? OK. That's it. That may be right after we make a decision, but it will be in the time frame, OK, I think end of November is appropriate based on your schedule. I think that's 2024, correct? Oh, that's correct. OK. 2024. That's right. And uh thank you. And I, I want to thank you for your testimony and some of our members have left, but I want to thank the members for the diligent questions today and the seriousness of this matter and, and, um, this is, as we know, the Arkansas citizens are having a difficult time right now. So I appreciate the members. Um, for all of this, and this meeting is adjourned. Thank you