ML19208C315
| ML19208C315 | |
| Person / Time | |
|---|---|
| Site: | South Texas, Comanche Peak  |
| Issue date: | 06/30/1979 |
| From: | Solomon J INDIANA MICHIGAN POWER CO. (FORMERLY INDIANA & MICHIG |
| To: | |
| Shared Package | |
| ML19208C305 | List:
|
| References | |
| ER78-379, ER78-380, ER78-381, ER78-382, ER78-383, NUDOCS 7909260048 | |
| Download: ML19208C315 (11) | |
Text
'""
INDIANA & MICHIGAN ELECTRIC CCMPANY A
FERC DOCKET N05. ER78-379, ER78-380, ER78-381, ER78-382, AND ER78-383 (M,.# '
DIRECT TESTIMONY OF J. BERTRAM SOLOPON g
f 1Q PLEASE STATE YOUR NAME AND ADDRESS.
2 3A My name is J. Bertram Solcmon. My business address is 1000 Crescent 4
Avenue N.E., Atlanta, Georgia, 30309.
5 6Q PLEASE OUTLINE YOUR FORMAL EDUCATION.
7 8A I received the degree of Master of Business Administration froat Georgia 9
State University in 1973. My area of concentration was Finance.
I also 10 received the degree of Bachelor of Science in Industrial Management frca 11 the Georgia Institute of Techno' logy in 1972.
12 13 Q PLEASE STATE YOUR PROFESSIONAL EXPERIENCE.
14 15 A As a Cooperative student at Georgia Tech, I gained approximately two years' 16 work experience as an assistant engineer in an industrial prcduction setting.
17 Af ter my graduation from Georgia Tech in 1972, I worked approximately one 18 and one-half years as a program manager for a management consulting firm 19 and for another one and one-half years as a project analyst for a resort 20 development firm.
I was employed by the Southern Engineering Company of 21 Georgia, my present employer, in January 1975.
Since that time, I have 22 had assignments in both the retai1 and wholesale rate departments of my 23 Company, primarily in the area of electric utility rates.
In the retail 24 area I have participated in the preparation of rate increase filings for 25 both git and distribution rural electric membership cocperatives as well 26 as the determination of revenue requirements and the proper rate design 27 for unregulated rural electric membership cooperatives.
My primary 28 activities, however, have been in the wholesale area where I have partic-29 ipated in the analysis of approxirately one and ane-half dozen Federal 30 Energy Regulatory Commission and Federal Pcwer Carmission filings of 31 private utilities operating in eight different states.
I also participated 32 in the preparation of testimony and exhibits for several of these rate 33 filings. Additionally, I have participated in the preparation of retail 34 and wholesale allccated cost of service studies and pcwer cost projecticns.
35 36 Q HA'M YOU EVER TESTIFIED IN OTHER CCMMISSION PROCEEDIhGS?
37 38 A I have testified before the Federal Energy 0.egulatory Commission (forTerly 39 Feceral Power Commission) in proceedings involving the Public Service 40 Comoany of Indiana, Docket No. ER75-ll9; Georgia Power Comcany, Cocket 41 Nos. E-9091, E-9521, ER76-587 and ER73-156; Carci;na ?cwer & Light Cercany, 42 Dockets Nos. ER76-495 and ER77-485; Kansas Gas s T:ectric Ccmcany, Docxet 43 No. ER77-578; and Louisiana Power & u gnt ^omtany, Oocxet No. ER77-533.
44 I have also testifiec before tne Public Service Ccamission of Kentucky, 45 the Texas Public Utility Commission and the Virginia State Corporation 46 Ccamission in both wholesale and retail ra e proceedings.
47 48 Q WFAT 'JAS YOUR ASSIGJMENT IN THIS PRCCEEDING?
49 50 A My assignment was to perfom an analysis of the actual cash working mn 7 9ggiU 'DN co 1
D T
'09260 JO n
O
~f-1 A
100 02
s f'
t 1
capital required by the Indiana & Michigan Electric Company in providing 2
service to its cooperative wholesale custcmers and to recorrend an appro-3 priate adjustment to the ccmpany's claimed 45-day cash working capital 4
allcwance if my analysis showed an adjustment to be necessary.
5 6Q PLEASE BRIEFLY SUf'MARIZE THE RESULTS OF YOUR ANALYSIS.
7 8A Upon analyzing the actul papent practices of the company and the pay-9 ment practices of the cooperatire custcmers of the ccmpany, I found 10 that the company actually experiences a lag in payment for the expenses 11 incurred in providing service to the cocperative customers of 51 days 12 and that the cocperative custcmers render payent for service received 13 37 days after receiving such service. Thus, in f act, the corpany 14 experier.ces a net lead in the receipt of revenees to cover expenses in-15 curred in providing services to the ccoperative custcmers of 14 days 16 rather than a lag of 45 days as assumed in the 45-day allcwance proposed 17 by the company.
18 19 I am therefore reccarending that the rate base allecated to the cooperatives 20 be adjusted to reflect a credit of $465,576 to properly recognize the cost 21 free capital being contributed to the company by the cocperatives.
This 22
$465,576 is the re: ult of multiplying 3.84% (14 + 365) by the $12,124,376 23 in excenses included in my lead-lag study.
24 25 Q PLEASE EXPLAIN THE C0t' CEPT OF ALLCWING A CASH WCRXING CAPITAL CFPONENT 26 IN THE RATE BASE.
s 27 28 A The company is required to render service to its cus:ccers on a ccntinuous 29 basis and in so doing must amploy tne use of goods and services on a 30 continuous basis. Meters are read at the end of the billing period (t) 31 and it then requires time to prepare the bills for that period (t), send 32 them out and then receive cash payment for the me ered service. Thus, the 33 ccmpany dces not normally receive pagent for service rendered during one 34 period (t) until the middle or latter part of the nex period (t + 1).
35 To the extent that tne company must pay f or the gcccs and services con-36' sumea in providing service during that pericd (t) prior to receiving pay-37 ment frcm custcmers, there is a requirement for a short-term investment 38 to be mace in carrying these costs.
39 40 As an example, let us assume: (a) a 3C-cay period wherein service is 41 rendered, (b) that the company is required to make daily payments as gcods 42 anc services are consumed ir providing the electric service, and (c) that 43 it takes a total of 30 days after the end of the period to prepare and 44 mail the bills and then receive the mcney in hand to cover the cost of 45 providing that electric service. On average the cost of providing the 46 service was paid by the ccmcany at the midpcint of the service pcriod 47 (15 days), but the custcrer's paynent was not received until 30 days after 48 the end of the service period.
In this scenario, the company's net lag 49 in receipt of revenue to ccver its cash expenditures made in providing 50 service would be a total of 45 days.
This is the same net lag reflected
\\D\\b 035 a [ f,'
2
s <#
. o j<f # s#\\(s *v@$ **6 '
d o6@
5*
c 4
e t
.p.
pg
- gS*"
i*[ g* h c'e (S[ot o'
s1 -
s#":;,Wk.+ etsid::#i$1:#d:S"i"'v a
9" 6.pM e
- n
'v$.a@.w
- s# w' s1 v *@ ~6,to-5 ep C
63 O
6'633, t#un6
$6*" @ to t
s ed 0
gs 3s ge *ge
\\T st. O6 s
B 39 @ ad,@@ g'l*toCN@ (o 6 ctg 6@d 8 ga ' 3 i
CA gT 9 "ge gce oi.
gd et co s
<e "g
vb"
~
N@um!e!iM' l!:!!k[
hk8' iE e
m.Msasy.
e e a.
<t*'60 ad @d c
e g9* a. g@ *es g
g6 0"os.
e.
g, #*g @# q@A@. @.
'#foO dd <c t
.yA Y
Y d
S@ s e sg gc ct
, T
- 9'9*
'lo C
1 T' 5*
,di Q
'kt
[
T c#cy, e
t*6 s
's ** ', p#,le..$6*~
.e
\\
stc9s*
e d s # p. 6 g, t e t
st*
,6 " # ge+ s
@'gg, 5 '
u-c9 9
< e4,
~
s c# ssj#gg6 (.o @ S@ ge * * @* g8 '60
,@.e 6g6
\\
to at Cd no t
p (.g@S. g@k's s,
'9 A
' O 'f
,6*ks@o9cd,p@0 N
ci 66 oi '
3 qt d
- tq0 g@U.\\M s '.%cb e:
'v3s e6 ' s.' p '. c S
gs
\\
'Qb' o$
)s c*<s~ ' @ ' @*, s6 o Sh 3 **h $.!N TN"g @
c g
O so eh"*'k' cN <
9,#v,e w
w.std',#;# "' ep'is @;e,h' pac"e) $ '**
s 9
6 9
e #3 1*
Go t
g %p 0y @,et *o".# ~qo.#,,.p@,1 *tp o
9 9
t S
e s eC ', 02t p sd g 6"\\ s
- 5 r
e
- [f$k['#k,i'b b*)gg@ #*'9$
[c.e g
":s T
op $e $ h $e+R e; o$ c $
ts "i
t e
~ ~.
- s.,,s,- s,
@v
'h 6* 'iA*'i@{([@
o g
a, e.ps D@P cco D
h9 sw
@0
@ T Ju
_ XL L jda
\\0\\
,e s
4
'1 D
"~
... = -.
s
(
1 collected pricr to making payments for goods and services censumed in 2
providing this service.
3 4Q HAVE YCU OSSERVED ANY INDICATIONS THAT THE FERC AND ADMINISTRATIVE LAW 5
JUDGES HAVE RECCGNIZED THE NEED YOU HAVE POINTED OUT TO REVIEW THE 6
APPROPRIATENESS OF THE CURRENT APPLICATION OF THE 43-DAY FCPELA?
7 8A Yes, the Corrmissicn has made it clear that the current applicability of
(
9 the 45-day formula should be tested.
In its Opinien No, 19, issued 10 August 2,1978, Carolina Power and Light Corroany Docket No. ER76-495, 11 the Ccmission said it believed a re-examinaticn of the formula was 12 overdue and that it was instructing its staff to initiate such a 13 review. Additicnally, in Opir. ion No.19-A, issued February 21, 14 1979, in that sare case, the Commission required the company to
(
15 adjust the results of the standard 45-day formula based ucon a lead-16 lag study I presented on fuel and the lag on purchased pcwer expense 17 shown in the lead-lag study of a witness for the cities. The Com-18 mission also indicated in Opinion No.19-A that where a reliable 19 lead-lag study is available in the record it would utilize that 20 study to determine the working capital allcwance.
(
21 22 A number of other cases have also demonstrated the current irapplicably 23 of the traditicnal 45-day formula.
The Cormission fcund, in Opinicn No.
24 821, Southern California Edison Comcany, Docket No. E-8176, issued 25 September 22,10, /, that a 20./ day allowance should be used rather than
(
26 tne 45-day formula allcwance. The Corrmission also recuired a modification 27 of the 45-day formula as a result of a lead-lag study on fuel expenses 28 submitted by the Staff in its Opinion No. 788, Public Service Comcany 29 of Oklaheca, Cocket No. E-8242, issued February i7, 19T7~ a simi l a r 30
' adjustment was made to the 45-day allowance in reccgni:icn of the 31 actual icg en fuel expense in Opinion No. 279, South Carolina 32 Generating Cctrrar.y, decided October 24, 1956.
33 34 In his Initial Cecisicn in Pacific Gas and Electric Cemcany, Cocket '!o.
35 E-8928, issued November 4, T976, Presiding Law Jucge Thcmas L. Mcwe 36_
stated:
37 33 "The difference is so great, betweer, the resui:s 39 reached by the ac;ual study and that which the 40 rule-of-thumb methcd would yield, that it raises 41 the question a s to whether the rule-of-thumb 42 method needs drastic revision.
This can only 43 be determined by a ccmparison of the results 44 in a nutter of cases."
45 46 In reducing the cash working capital allcwed Southern Califcrnia Edison, 47 Judge G'rdon, in tre Initial Decision in Cocket No. ER75-EC5, issued 48 June 1,1978, stated:
49 OO D
50 ob sj m~T 1013 035 mL,;!c.
1D _A1 i
2 4
a e
(
1
" Properly applied, the lead-lag method gives a nore 2
accurate picture of Edison's working cash require-3 ments than the rule-of-thumb formula."
5 Finally, in adcpting the results of my lead-lag study showing a net 6
lag of only 3 days presented in Louisiana Fower and Light Comcany, 7
Occket No. ER77-533, Judge Lande, in nis Initial Cecision issued 8
February 12,1979, said:
9 10 "After weighing the adequacy of the study perfomed 11 by Intervenors' witness against the criticism levied 12 against it, it is hereby found that the study best 13 represents the true condition of LP & l's cash working 14 capital needs.
It is accordingly adopted in this 15 proceeding."
16 17 Thus, these and other cases are showing the traditional 45-day allowance 18 to be an unreliable proxy for the actual cash ocrking capital required 19 by utilities today.
20 21 Q YOU HAVE MENTIONED A LEAD-LAG STUDY 5tytet TIHts, iS THAT THE BASIC 22 TOCL YOU USED IN ANALYZING I & M ELECTRIC'S ACTUAL CASM v!0RKING CAPITAL 23 REQUIREMENT?
24 25 A Yes, as I previcusly explained, the concept of allcwing a cash workir.g
(
6 capital allcwance in the rate base is based upon the presumption that the 27 ccmpany must make cash payment for the gceds and services consumed in 28 providing electric service prior to receiving the revenues for this 29 electric service.
A lead-lag study simply consists of a measurement of 30 the actual lag (or lead) experienced by the ccmpany in making cash pay-31 ment for each of its costs incurred in the renditicn of service and the 32 measurement of the actual lag it experiences in receiving resenues f rom 33 its custc'ers for the service.
34 3
Cne of the basic precepts of rate making in this ccuntry and, indeed, 3
cf this Comission is that rates must be based on a e:tching ci the 37 revenue and the costs incurred in the rendition of service.
In establishina rates these reverues and costs are normally measured on an annual, test
~
38 39 period basis. Thus, the leac-lag study must ccnicrm to this test period 40 measurement concett. The costs included by this Cornission in establishinc these rates are basically: cceration and maintenance expenses, depreciaticit,
'l 42 taxes and the cost of cacital. These items are all a part of the rates 43 paid by ;he custcmer '";r the current costs to the ccmpany of providing 44 service and, exceo tu the extent there are non-cash items incluced or 45 items the carrying ccsts of which have already been provided fcr through 46 rate base additiccs or deductions, since they are ccnverted to cash b) 4 the custcmer, they shculd all be included in a lead-lag study to determine 48 amal working cacital requirement of a ccmcany.
I have therefore 49 reflected all of these items in my study shewn in Exhibit (JBS.).
50 i
oPTR
- 31 1013 036 "kJ0 J]
L A s
_a
s
(
1 Q BRIEFLY EXPLAIN HCW YCU CONCUCTED YOUR LEAD-LAG STUDY AND THE RATIONALE 2
USED IN DEVELCPING THE LEADS AND LAGS IN YOUR STUDY.
3 4 A After time consuming discussicns with the company regarding collection 5
of data to be used in my analysis, it was agreed that the ccmpany 6
would make available the raw data necessary to conduct the study at 7
its offices in Fort Wayne, Indiana.
With the exception of federal 8
inccme taxes payable, Indiana supplemental net income tax, and 9
Michigan single business tax, I used 1978 actual paycent practices 10 obtained from this data to determine for each category of expense 11 th; number of days frcm the time the expense was incurred in providing 12 electric service until the payment for that expense was made.
I 13 then determined the number of days from the time service was rendered 14 to the cooperative custcmers until payment for that service was 15 received by the company. The development of these leads and 16 lags is shcwn on Exhibit (JBS-1), Schedules 2 through 10. As shown 17 on Schedule 1 ef that ExhTETt, I then applied each of these lag 18 periods to the Period II dollar amounts in each expense category 19 allocated to the cooperative class of service by witness Daniel in 20 his Cost of Service Study to obtain an overall weighted average lag 21 in payment for expenses asscciated with the cost of providing service 22 to the ccmpany's cocperative custcmers.
This figure was then sub-23 stracted from the revenue lag experienced by the ccmpany to obtain 24 the overall net lead or lag experienced by the compt 23
(
26 I divided my study into three areas: 0 & M expenses, taxes, and cost of 27 capital. A subtotal for 0 & M expenses and taxes ar.d a subtotal for cost 28 of capital items were developed to show the weighted average days lag of 29 each of those expense areas and then these two subtotals were averaged to 30 provide an overall weighted nunber of days lag figure for the total of 31 these expenses incurred in providing service to the cooperative customers 3-cn a Pericd II test year basis.
Since rates are developed on a supposedly 33 normal test year basis, in deveicping the leads and lags in my study, 34 I assumed that the expense or liability is incurred continucusly during 35 the entire service period or accrual period in ouesHcn er on the averace
~
36 at the midpoint of the period; i.e., at the midpoint of the month if 37 the period is a mont' or the midpoint of the quarter if the period is 33 a quarter.
39 40 For example, let us consider the icg for federal inccme tax. The ccmpany 41 is required to pay federal inccme tax en a quarterly basis. The first 42 quarterly payment is due on April 15 which allows for a lag of 60 days -
43 45 days frca the average date on which the tax was incurred plus the 44 15 days remaining after the end of the quarter before payment is due.
45 The three other quarterly payme ts are due June 15, September 15, anc 46 Cecember 15, respectively.
Eac. of these dates produce a lag cf 30 days-47 45 days frca mid-quarter to the end of the quarter less 15 days for payment 48 prior to the end of the quarter. The weighted average lag that results is 49 37.5 days making the conservative assumption that 1/4 of the annual tax 50 liability will be paid each quarter.
DTTP bb$
- ' S
'D. T T n 1013 037 s
ellik
f 1Q PLEASE TXPLAIN YCU" OETERM1 NATION OF THE LAGS SHOWN FOR THE THREE FUEL 2
EXPEE E ITEMS ON EX 7 (J3S-1), SCHECULE 1.
3 4 A Since the fuel procurement and papent practices of the company were 5
significantly affected by tae Ut".! strike during the first four months of 6
1978, those fcur months we"e excluded from consideration in my study.
In 7
order to get a representative sample of the fuel payment practices f or 8
the remaining eight months cf the year, the payment experience for 9
the purchase of coal, freight, and oil and lease payents for nuclear 10 fuel for the months of Pay, July, August, September, NovemMr, and 11 December were analyzed. These transactions and the associatd payment 12 statistics are shcwn on Schedule 2 of Exhibit (JBS-1),
hing 13 the records of the company, the date the fuel was received or the 14 midpoint of the receiving dates in the case where a single payment 15 covered fuel received on more than ona ky, was determined along with 16 the date and amount of payment for that fuel.
As shown on Schedule 17 2, Page 1, the number of days lag between the receipt of fuel and 18 the payment for that fuel was determined and applied to the percent 19 the associated dollar accunt was of the total amount of the fuel -
20 purchased during the six months covered by my study to obtain a 21 weighted average number of days lag for each of these fuel items.
22 Since the lag for both ccal and freight came out to be 36 days and 23 since all the freight was :sscciated with coal expenses, the 36 days 24 was applied to the total expenses estimated by the company for
(
25 coal during Period II. The weighted average days lag for oil and 26 nuclear fuel were both determined in the same manner as shcwn on 27 Schedule 2 except that the full 12 months' actual data was used for 28 nuclear fuel.
29 30 Q HCW WAS THE LAG FOR PURCHASED POWER DETERMINED?
31 32 A The company estimated approximately 995 of its net purchase pcwer for 33 Feriod II to ccme from sources covered by its monthly Interchange Power 34 Statement.
This is an AEP document which is used to charge and credit 35 to each member of the system amounts related to interchange among the 36~
member ccmpanies and sales and purchases to non associated utilities 37 by each of the member companies which c re shared by the companies on 38 a load ratio basis. As shown on Schedule 3 of Exhibit (J8S-1),each 39 of the twelve monthly Interchange Pcwer Statements were analyzed to 40 determine the actual lag in pagent for power purchased or sold. A 41 vieighted average number of days lag for the entire year was then 42 deveicped as shcwn.
43 44 Q PLEASE EXPLAIN YCL'R CALCULATION OF THE LAG FOR L ASCR. COSTS.
45 46 A Schedule 4 shows the calculatica of the weighted average lag in payment for 47 payroll costs using actual 1973 figures. As shcwn, the calculaticn was 48 mace for I & M Elactric alcne and in consclidation with I & M Power with 49 the same results in bcth cases.
The lag for payroll papents to exempt 50 emples ees is 7.5 days since these emcicyees are paid twice monthly on D
P D
do
~*~T
~
. 2.1 a
1013 038 o
_2 7
(
1 the 15th and the last day of the month. Thus, frca the midpoint of the 2
pay period until the end of the oay period is 7.5 days. The non-exempt 3
employees are paid every Friday for the preceeding week.
Therefore, ihe 4
lag asscciated with payroll paymects to these employees is 3.5 days 6 cm 5
the middle of the week for which the employees are paid plus 6 days until 6
they are paid or a total of 9.5 days. The annual payroll amcunts were 7
ta'mn directly from the payroll records of the company.
8 9Q HCW WAS THE LAG FOR THE OTHER 0 & M EXPENSE ITEMS DETERMINE 0?
10 11 A Since the items comprising this expense category are generally numercus 12 and in small amounts, it was necessary to sample the company's payment 13 experience for these items.
For this purpose, I went through the payr:ents 14 made for these items fcr the months of November and Cecember 1978, and 15 analyzed the lag associated with amounts in excess of $10,000.
In cases 16 where repetitive expenditures apceared such a:, tree trimning servicest 17 I used amounts smaller than $10,000 which seemed to be representative of 18 the experience with vendors suppling such services. The results of my 19 analysis are shown en Scnedule 5 of Exhibit (JBS-1).
On the two pages 20 of this Schedule I have shown the acccunt numcers to which the amounts 21 relate. T;1e 500 series acccunt numbers are consistant with the FERC 22 Uniform System of Accounts; hcwever, the 600 series account numbers used 23 by the company correspond to the 900 series numbers in the Uniforn System 24 of Accounts.
25
(-
26 Q PLEASE BRIEFLY DESCRIBE YCLR CCMPUTATICNS OF THE LAGS ASSCCIATED WITH THE 27 VARICUS TAX EXPENSES.
28 29 A I previously discussed the ccmcutaticn cf the 1ao on federal inccme tax 30 payments which is shown cn Exhibit (J3S-1), Schedule 6, page 1.
The 31 remainder of the tax items can be segrega:ed acccrding to the way the 32 payrent lag was calculated into three groups.
The first group, Indiana 33 Sucplemental Met Income Tax and Michigan Single Business Tax shcwn 34 respectively en Schedule 7, page 2 and Schedule 8, page 2, was treated in 35 much the same manner as the federal inccme tax payable. The lag days were 36 calculated frcm the quarterly payment dates recuired by the taxing 37 authorities.
38 39 The calculation of the lag for the seccnc group, Indiana Prc;erty Tax and 40 Michigan Property Tax, is also shown on Schedule 7, p age 2 and Schedule 8, 41 page 2.
As shcwn, the lags on these items were calculated f rcm the terms 42 included on 1978 tax invoices frcm the taxing authority which were paid 43 by the ccapany on the dates specified by those terms.
44 45 The last group of items includes FICA taxes, Federal Unemployment, Mdiana 46 Unemployment and Michigan Unempicyment.
7he calculation of the lags for 47 these items are shcwn on Schedule 6, pages 2 thrcugh 1; Schedule 6, page 5; 48 Schedule 7, page l; and Schedule 3, p age 1 respectively. The lag periods 49 calculated for these items were based upcn the actual payment experience 50 of the ccccany during 1973.
Since rates are cesigned by divicing the D
ooA 1013 039 g c e g] 7 b
. d
]L 8
_a o
(
l total ccst of service by the annual billing quantities to obtain unit 2
costs which will te applied to sales in each month, it was assumed that 3
the recovery of the total wount would be even throughcut the d8 required 4
payment periods during the year or $297,482 per payment period.
It was 5
then necessary to match these accurals with the actual payments made to 6
the government. These calculaticns are shown on Exhibit (JBS-1),
7 Schedule 6, pages 2 through a with the calculation of the weighted average 8
days lag associated with FICA taxes. The other items in this group were 9
handled in similar f ashion.
10 11 Q WERE THE LAG DAYS FOR IriTEREST ON LONG TERM DEST AND PREFERRED STOCK 12 DIVIDENDS CALCULATED IN A MANNER SIMILAR TO THE CALCULATIONS FOR THE 13 ITEMS YOU HAVE JUST DISCUSSED?
14 15 A Yes, these calculations are shown on Schedule 9 of Exhibit (J3S-1).
16 17 Q WHY DID YOU INCLUDE THE COST OF LONG TERM DEST AND PREFERRED STOCK IN 18 YOUR LEAD-LAG STUDY?
19 20 A As I explained above, both of these items represent a cost that the 21 ccmpany must pay and that is therefore included in the revenues collected 22 from the custcmers just as any other cost to the ccmpany.
The collection 23 of the dollars asscciated with these items represents, therefore, cash 24 which the ccmpany has on hand having been contributed by its customers
(
25 to meet its cash needs. These funds must be used in this manner 26 since they are nct capital contributions for which there would have 27 to be a rate base reduction, nor investments in short term interest-28 bearing instruments for which there would have to be an interest 29 inccme credit to the ccst of service.
30 31 Finally, I want to reiterate that these items recresent costs which have 32 been used in matching the revenues to be paid on'an annual basis with the 33 ccs:s incurred in rendering service during the same period and, as such, 34 none of then are contributions of capital but rather are payments for the 3a cost of capital.
In the past these items have been reviewed by the 36 Cocmissicn in the context of making offsets or adcitions to the allowance 37 under the d5-cay formula rather than in the centex: of a full, detailed 38 study of the actual cash working capital requiremen:s of the ccmcany.
39 As sncwn abcve, when reviewed in the context of a ccmorenensive lead-lag 40 stuuy, it is necessary to include the payrents anc receipt of revenues 4l for each of these cost items.
The cost of these items are fixed obligations 42 for wnich payments are required either semianrually or cuarterly. The 43 ourchaser5 cf the company's icng term debt and preferred stock recognize 44 this fact anc adjust the amount they are willing to cay for these fixed
'+ 5 inccme o'cligatiens in orcer to adjust the rate of return accordingly.
46 Thus, the cash amounts which are collected f rom cus:crers to pay these 47 fixec cbligations must be prcoerly reflected in an analysis of the 48 ccmoany's cash workirig capital requirements.
49 50
""o
~
1013 040 OO c
m 4
o J0.iL i a
e
(
1Q PLEASE DISCUSS THE ITEMS YOU HAVE OMITTED FROM YOUR STUDY AND EXPLAIN 2
WHY THEY WERE CMITTED.
3 4 A I have omitted f rca my lead-lag study depreciation expense deferred 5
inccme taxes, investment tax credits, and the cost of ccmmon equity.
6 As shcwn by my earlier quotation frcm the Commission's decisicn in the 7
Interstate Power Company and Albany Lighting e mpany case, the Comission c
8 has long recognized that ncncash items such as depreciaticn shculd not 9
be included in a cash working capital analysis.
The Commissicn, since 10 that time, has properly and consistently recognized that depreciation 11 specifically and noncash items in general should not be included in a 12 lead-lag study since no cash payment for these amortization items is requi re d.
14 15 I did not include deferred taxes in my study because the balance in the 16 accumulated deferred inccme tax accounts is deducted from rate base 17 thus recognizing the cost free capital supplied by the custcmers.
18 Althcugh customers are actually required to pay rates based upon the 19 hypothetical payment of investment tax credits amounts which t'he company 20 never pays, the ITC was not deducted f rcm rate base nor ccnsidered in my 21 lead-lag study because the Congrass, in its Revenue Act of 1971, mandated 22 that when the investment tax credit is amortized to ratepayers ratably 23 over the life of the associated property, the rate base should not be 24 reduced by virtue of the credit.
(
25 26 There has been much contention, over whether or not the ccst of ccmmon 27 stock equity should be included in a comprehensive lead-lag study.
- Thus, 28 without addressing the arguments invo'1ved, in order to be ccnservative 29 in my anaisis, I have not included these costs in my study.
30 31 Q WHAT WAS ThE RESULT OF APPLYING THE LAG EXFERILNCED BY THE CCPPANY IN 32 PAYMENT FCR ITS EXPENSES TO THE AMOUNTS OF THOSE JXPENSES ALLCCATED TO 33 THE CCOPERATIVE CUSTCMERS FOR PERIOD II?
34 35 Exhibit (JBS-1), Schedule 1 shcws that the weighted average da.-
- 36. A lag experienced on 0 & M expenses and taxes alone was 40 days.
Whei.
37 combined with the lag enjoyed on the payment of interest expense and 38 preferred stcck dividends, the overall weighted average lag is shown to 39 be 51 days.
Thus, on the average the ccmpany enjoys a 51 cay lag period 40 frca the time its expenses are incurred until it makes cash payment for 41 those expenses.
42 43 C HCW DID YOU CALCULATE THE LAG IN THE RECEIPT OF REVENUES :RCM THE 44 CCCPEPATIVE CUSTCMERS AND WHAT WAS THE RESULT OF THAT CALCULATICN?
45 4o A The calcuation cf the rever.ue lag experienced on the ccmpany's cccperative 47 business is shown on Schedule 10 of Exhibit (JBS-1).
As shown, I 48 obtained a weighted average days lag using the actual 1973 payments for 49 each of the ccmpany's cooperative custcmers. This lag was determir.ed to 5
be 3ya:%
g uh
.M 1
10 ggqqn}
e JdM 1013 041
(
1Q HOW DO YOU INTERPRET THE RESULTS OF YOUR ANALYSIS?
2 3A The company receives revenues for service to its cooperative custcmers 4
on the average 37 days after the rendition of such service; hcwever, it 5
does rot make cash payment to its vendors and other suppliers for the 6
goods and services it consumes in providing this service until 51 days 7
af ter the service is rendered. Thus, the company has the cash frca its 8
cooperative custcmers in hand a net of 14 days prior to having to make 9
payment for expenses incurred in serving those custcmers.
Therefore, 10 rather than imposing a burden upon the company to obtain additional 11 capital, the cocperative custcmers are actually supplying cost free 12 capital to the coupany.
13 14 As a result of this analysis, I have instructed Mr. Daniel to include in 15 his cost o' service study a cash working capital credit to the rate base 16 allocated to the cocperative customers of $465,576 to reflect this cost 17 free capital centribution made by the cooperatives.
18 19 20 21 22 23 24
/
29 DR9 0
2o 27 66 29 f
a JU A 1
30 a
31 32 33 34 35 36' 37 38 39 40 41 42 43 44 45 46 47 48 49 50 1013 042 13