ML19257B595

Corrected PA Public Util Commission Order Granting Increase in Electric Base Rates

ML19257B595
Person / Time
Site:	Crane
Issue date:	06/28/1978
From:	Mcelwee C PENNSYLVANIA, COMMONWEALTH OF
To:
References
TASK-TF, TASK-TMR NUDOCS 8001170696
Download: ML19257B595 (33)

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{{#Wiki_filter:n. N .V w w W, r e '. Qp r \\* ~m /h-b $4 PENNSYLVANIA ( PUBLIC UTILITY COMMISSION /V Public Meeting held February 24 and June 8,1978 Harrisburg, PA 17120 g ( d' Commissioners Present: k dd Louis J. Carter, Chairman Robert K. Bloom - Dissenting 1O (AkM Helen B. O' Bannon Michael Johnson 3 I - _ _W.ilson Goode, not voting [ _W / R.I.D. 392 - ennsylvania Public Utility Coasaission C.-22259 ~ Robc,i. 'fumphry, et al. C. 22262 - Donald Gordon Knarr and Elaine E. Knarr, et al. C. 22272 - Avtex Fibers, Inc. C. 22276 - City of Erie C. 22277 - Joseph and Mary Zurisko C. 22278 - City of Altoona r,. 22279 - Mark P. Widoff, Consumer Advocate C. 22280 - Lawrence Township Board of Supervisors C. 22281 - Herbert Kenneth Claque, et al. C. 22289 - S. K. Williams C. 22293 - Thomas G. McCracken C. 22294 - Eleanor Dunn C. 22296 - School District of the City of Erie C. 22297 - Rev. H. Dean Michaels, Sr. C. 22302 - Walter D. Hoffman C. 22303 - Robert Burchfield C. 22308 - Johanna M. Bittner C. 22315 - M & H Equipment, Inc. C. 22320 - Ma ry 11. Sa pko, e t a l. C. 22324 - Kenneth C. Springirth C. 22325 - Talon Division of Textron, Inc. C. 22326 - National Forge Company C. 22333 - Standard Steel Division of Titanium Metals Corporation of America C. 22334 - Appleton Papers, Division of NCR C. 22335 - Electra 11oy Corporation C. 22337 - Airco Speer Carbon, A. Division of Airco, Inc. C. 22344 - Welch Foods, Inc. C. 22345 - Universal-Cyclops Specialty Steel Division, Division of Cyclops Corporation C. 22349 - Eric Malleabic Iron Company C. 22350 - The Proctor & Gamble Paper Products Company C. 22353 - United Refining Company C. 22354 - PPG Industries, Inc. 1916 180 C. 22355 - Robert Snyder C. 22364 - John L. Dick, Jr. 8001170[9g G 1

J: C. 22365 - Shippensburg Park Lanes, Partnership C. 22373 - Alan K. Hart C. 22378 - Township of Harborcreek C. 22389 - Masonite Corporation C. 22391 - Virginia M. Springirth C. 22399 - F. J. Carter C. 22400 - Somerset County Area Vocation Technical School and Its Member School Districts , y, C. 22411 - Abex Corporation C. 22419 - Sunbeam Equipment Corporation C. 22453 - United States Steel Corporation 47, v. Pennsylvania Electric Company }'; CORRECTED 0RDER BY THE COMMISSION: On February 1, 1977, Pennsylvania Electric Company [ (Penelec) filed Supplettent No. 28 to its Tariff Electric-Pa. P.U.C. No. 69. This supplement would have increased base rate revenues from Pennsylvania retail customers by $67.8 million on an annual basis and would have increased total base rate revenues over actual revenues for the 12 months ended December 31, 1977, by $76.3 million. The company also hled Supplement No. 4 to its Tariff Electric-Pa. P.U.C. No. 70. This supplement would have cancelled ' riff No. 70 which continues the electric service tariff of the fomer Water-ford Electric Light Company, which merged into Penelec. The company's proposed supplements were suspended to January 2, 1978 and this investigation was instituted. In addition, 44 somplaints were received concerning Supple-ment No. 28, none vare filed regarding Supplement No. 4. Extensive public hearings of an evidentiary nature were held in Altoona, Erie, Tunkhannock and Harrisburg before Administrative Law Judge Morris Mindlin and Joseph P. Matuschak with the cucpany, the Commission's Staff, the Consumer Advocate and various Industrial complainants actively participating. On December 5, 1977 the initial decision of the Administrative Law Judges was issued for exceptions. Responses have been received from the company, the Staf f, the Consumer Advocate and the Industrial complainants.1/ On December 29, 1977 we 1] We have also received exceptions from Kenneth C. Springirth objecting to Judge Mindlin's decision in its entirety. T916 181 r 7

s ql adopted an Order making the then-present rates temporary rates until final Order of the Commission. On January 27, 1978 we permitted the company to file temporary rates designed to produce $30 million on an annual basis on condition that it waive any claims for recoupment that might be due for *F: period January 2,1978 to January 31, 1978. e company agreen and these rates became effective February 1, 1978.2 Oral argument was held for the Commission on February 8,1978. Future Test Year Penelec last was allowed to increase rates at R.I.D. 172 and 173 (Order issued June 2,1976) based on a test year ended March 31, a#r 1974, over two years earlier. This lag between the historic test year and the completion of a rate case was a principal reason for the recent amendment of Section 312 of the Public Utility Law by the Cenaral Assembly 'f so as to permit the use of future test years by utilities in rate proceedings. Here Penelec has employed a test year ended December 31, 1977. This then is the first proceeding before the Commission in which a utility has based its claim for relief on a partially projected j, test year. The Judges' decision contains an extenst"e discussion of the purposes of a test year and the reasons why a historict1 test year may no longer be appropriate. Briefly stated the purpose of a test year is to provide a basis for setting future rates. In the past when the rate of inflation was low, it was aneumed that the recent arperience of a company was an adequate indication of conditions in the near-future. The rapid inflation experienced in recent times have changed this. We know all too well that substantial increases in costs as well as expensive and massive additions to plant have made the historical test year not fully representative of the future. We have attempted to remedy the defects in the historical test year by making normalizing adjustments, grafting on to experienced test year data known or readily foreseeable changes. This has proved to be, at best, only a marginal improvement. Recognizing the need for improvement in the regulatory procedure, the Cencral Assembly amended Section 312 of the Public Utility Law (66 P.S. 1152) to allow utilities to use future test years. Penelec has availed itself of that opportunity. The company has presented data for two test years. One, a historical test year covering the 12-months ended October 31, 1976. In addition, it has submitted data for the 12 months ended December 31, 1977. This information with respect to expenses and revenues is primarily the company's 1977 budget figures, representing an averaging of beginning and end of year amounts. In addition the company presented an average 2/ By Order entered March 2, 1978 we directed Penelec to reduce the level of temporary rates to $28,385.000. We stated in that Order that as a result of our deliberations we determined that the fair value of Penelec's plant was $1,106,648,000 based on an original cost of $962,103,000. In recalculating these amounts for purposes of this Order we determined that certain minor mathematical errors were made at the time of our earlier deliberations. The correct original cost rate base, as shown in the text of this Order, should be $961,918,000 and the fair value should be $1,103,000,000. i916 I82

p'* t composed of beginning and year and estimates. Penelec also present.ed information regarding its two new generating stations - Homer City No. 3 and ~1hree Mile Island No. 2. This information is in the form of adjustments to the 1977 budget figures to cover capital and operating costa resulting from the commercial operation of these two projects. The magnitude of these adjustments can be seen from the fact that of the company's total rate request of $67.8 million, $39.1 million relates to these two plants. Only $28.7,million is related to increased operating costs of the system as a wholg. During the course of the proceeding, the company presented updated actual information, tquaallowingacomparisonbetweenbudgat and actual results. It is on.this basis, therefore, that we adopt the Administrative 1.aw Judges' use of a calendar 1977 test year and proceed to resolve the many issues pr sented to us. Me4sures of Value Electric Plant in Service Penelec's claimed average electric plant in service for 1977 is $1,114,687,000. '1his figure was computed by taking the beginning balance of $1,091,364,000 and adding the projected year-end balance of $1,148,085,000 dividing by two and backing out several minor items. The company arrived at its adjusted average balance of $1,114,687,000. The Administrative 1.aw Judges recommended adoption of this amount. The Consumer Advocate proposed a downward adjustment of some $14.430,000 to this estimate to reflect that which it terms Penelec's unacceptable method of averaging. We agree with the Consumer Advocate. As an averaging technique, the beginning and ending average balance method is highly simplistic and places.too much weight on the end point. We would have preferred use of a twelve-month or thirteen-month average such as is used in most other jurisdictions. In the future, utilities in this Commonwealth will be expected to use this procedure in arriving at averages. The record here unfortunately does not provide for such a detemination. In the absence of such data, we accept the Consumer Advocate's position that the mid-point of the year be used as representative of average plant in service. Both the Staf f and the Consumer Advocate urged that $1,575,000 be disallowed from rate base to reflect Penelec's share of expenditures for repairs at the Three Mile Island No. I generating station due to the faulty installation of a ring girder. Judge Hindlin recommended adoption of this adjustment and we agree. It may well be that there is a reasonable explanation for the faulty installation; this explanation, however, has not been placed in the record. The company has not met its burden of proof that this expenditure is reasonable and, therefore, it must be denied. 1916'183

q As a result of these adjustments, we find the yalue of electric plant in service to be $1,100,257,000. Nuclear.ael Penelec claims that its average balance per budget for 1977 for nuclear fuel in the reactor at Three Mile Island No. 1 is $8,510,000. It also seeks a normalizing adjustment in the amount of $143,000 to reflect nuclear fuel in the reactor at equilibrium. scheduled for the period March 1978 to May 1978. Equilibrium is anticipat >?? Judge Mindlin ~ f. agreed with the company's position. Ji 'd. The Consumer Advocate excepts to the inclusion of the $143,000 adjustment, arguing that an out-of-period adjustment is s not appropriate where a future test year is used. We agree with the Administrative Law Judges that a small adjustmant of this type should be made here, especially in light of the fact that it '/ f / is scheduled to occur presently. Plant Held for Future Use Penelec claimed $7.5 million as the value of plant held for future use. This represents coal reserves to be utilized with the Seward 7 and Coho generating units as well as land associated with plant anticipated to be placed in service within 15 years. Penelee recognizes that this claim is at variance with our announced policy of allowing in rate base land expected to be in use within a 10 year period. Penelec believes, however, that a 15 year period is more reasonable under present conditions. The Administrative Law Judges recommended disallowance of $398,000 of the company's claim. Advocate except. Staff and the Consumer Coal reserves make up a substantial part of the $7.5 million claimed for this item. As noted above the coal reserves in question are associated with units planned at Seward 7 and Coho. Neither generating unit is under construction and only some preliminary surveys have been made. Under these circum-stances we agree with Staff that coal reserves and land not associ".ted with plant to be in service within 10 years should be uisallowed. The company's investment in coal reserves may well prove to be beneficial to the ratepayers. The need for and the in-service date of these particular facilities, however, are speculative. See also Pennsylvania Power & Light Co., R.I.D. 221 (Order issued (Order issued ); West Penn Power Co., R.I.D. 369 ). For this reason we also reject the Consumer Advocate's argument that these reserves should be placed in construction work in progress. 91 6 84 - 9 ,-.,m_

4 We therefore reduce the Administrative Law Judges' recommendation by $6.4 million. Cash Working Capital Penelec claimed $18,841,000 for cash working capital. This claim is based upon a lag study of electric operating revenues and electric operation and maintenance expenses. It also includes prepayments and compensating bank balances and a reduction to reflect accrued taxes. The Consumer Advocate would completely disallow this claim while Staff would allow only $1,627,000. The Administrative Law Judges recommended an allowance of $8,427,000. Staff, the Consumer Advocate and tha Company except. The Consumer Advocate claims that, under the " balance sheet" approach to working capital, Penelec has no need for a cash working capital allowance. As explained by the Adminis- /' trative Law Judges, the balance sheet method compares current / assets and deferred debits with current liabilities. Under this methodology, currenty liabilities generally represent non-investor supplied funds. If current assets generally exceed cur, rent liabilities, the excess represents investor-supplied funds and is an indication of cash working capital needs. Here, according to the Consumer Advocate, the current liabilities on average exceeded current assets by $7.7 million. This, it is claimed, demonstrates that the company has no need for a cash working capital allowance. The company points out, however, that the Consumer Advocate's witness made the erroneous assumption that Penelec's balance sheet reflects in Accounts Receivable the accrual of revenues bmnediately upon the rendering of electric service to customers. Penelec does not accrue electric revenues unt41' customers' meters have been read and bills rendered. We are persuaded here that the Consumer Advocate's exception is not well taken. Staff, as noted above, recommended several adjustments to the company's claim. It reduced cash working capital by $5,464,000 to reflect the assumption that customers paid at the midpoint of the net billing period instead of th'e last day, as the company assumed. This is reasonable and we will adopt it. Staff also recommended a disallowance of $10 million on account of accrued interest and lag in interest payments. The Consumer Advocate computed this at $4,950,000. The Adminis-trative Law Judges adopted the Consumer Advocate's calculation. Both Staff and the Company except. Penelec claims that these funds should be included in its cash working capital requirement. We agree with the Administrative Law Judge that these funds, which are provided by ratepayers in advance of payment, should properly be considered in arriving at an estimate of respondent's cash needs. We agree with Staff that its estimate of the amount 1916 185,,....

involved, $10 million, which was arrived at on the basis of the midpoint of th six month period during which this interest accrues,1 is a more reasonable one and should be adopted. Staff also recommended a disallowance of $1.75 million to reflect the working capital lag in preferred dividend payment. The Administrative Law Judges rejected this adjustment. The Consumer Advocate and Staff except, jf arguing that there is no discernable difference between funds i t: used to pay interest to bondholders and funds used to pay 'Q}{' preferred dividends. We agree with this exception. In both cases there is an agreed upon or contractual arrangax2nt for F the payment of these sums; both items should be treated alike. This is entirely different from the position of a common equity holder who has no claim to the payment of dividands. The Consumer Advocate also objects to the inclusion of a cash working capital requirement for prepayments and com-pensating bank balances in the amount of $8.8 million. The Administrative Law Judges disapproved this recommendation and, on the basis of our resolution of the other issues presented, we agree. As a result of our decisions detailed above, we will reduce the company's cash working capital allowance to $1,627,000 as recommended by Staff. Homer City Generating Station No. 3 Homer City No. 3 is a 650 MW mine-mouth coal-fired generating station owned equally by Penelec and New York State Electric and Cao Corporation. The plant had an in-service date of October 31, 1977. Due to unforeseen developments, the station did not go into commercial operation before late December. Penelec estimates that the generating station will result in an addition to electric plant in service of $141.5 million. The Administrative Law Judge recommended an addition to rate base of $140,857,000. The Consumer Advocate excepts. The first exceptions regarding the in-service date of the unit has been rendered moot by the passage of time. The station is now in commercial operation. 1/ Penelec's debt instruments provide that interest shall be paid every six months and all interest is paid at the same time, regardless of the date of issue or date of maturity. 1916 186 _e_ .r, a

= f The Consumer Advocate would eliminate about $4.9 million of the company's claim for Homer City No. 3 electric plant in service. These' relate,to " cleanup costs" scheduled to occur sometime in 1978 after the plant goes into commercial operation. These costs cov'er'auch items as painting final insulation of a boiler builqing.and final payments to con-tractors. The Administrative Law Judge rejected the Consumar s J. Advocate's adjustment and 'an exception has been taken. We agree with the Consumer Advocate. These are not b expenses of a nonrevenue-producing nature such as those which ordinarily would be recognized in rate base as construction work in progress. Instead, these proposed costs are related to revenue-producing or expense-reducing property and differ little from other 1978 additions to electric plar.t in service. They should be omitted from Homer City No. 3 electric plant in service. As explained by the Administrative Law Judges, Penelec developed in connection with the construction of Homer City No. 3, a coal cleaning process so that less expensive, more readily available run-of-the mine coal could be used at this site. This Multi-Stream Coal Cleaning System consists of two parallel circuits designed to provide clean coal for the entire Homer City system. The cost involved is $23,025,000 of which $14.340,000 are related to Homer City No. 3. The Administrative Law Judge recommended that this sum be allowed in Homer City No. 3 electric plant in service. The Consumer Advocate excepts on the basis that the Homer City No. 3-related coal clean (ng facility will not be used and useful until approximately June 1978. The reason for this delay is that various environmental restrictions have been temporarily relaxed at Homer City No. 3 in order to permit the experimentation with various grades of higher sulfur content coal. We reject the Consumer Advocate's argument. We view this coal cleaning system as similar to the inclusion of pollution control devices on existing plant. We treat those items as non-revenue producing construction work-in progress and a similar treatment should be accorded this plant. The Consumer Advocate also claims that the cash working capital requirement of $684,000 ass.ciated with Homer City No. 3 should be eliminated for the same reasons that it recommends the elimination of any cash working capital. We rejected that contention earlier and we do so here also. Three Mile Island Generatf.g Station No. 2 As part of its overall rate increase request, Penalec included the increase in revenue requirement related to the new nuclear unit at Three Mile Island (THI-2). This unit is jointly , )916 187

owned by Penelec, Metropolitan Edison and Jersey Central Power & Light. Penelec sought to reduce its share of the plant from 25% to 10%.1/ This request, the subject of a separate proceeding (A. 100548) before this Coosaission, was not approved. Our decision here in no way should be inter-preted as prejudging the ultimate resolution of that pro-ceeding. During the hearings in the instant proceeding, Penelec claimed that there is a target system operation in-service date of May 31, 1978 for THI-2. When operational, it will provide 880 MW of capacity. The appropriate rate treatment of Dil_2,jwLbss( lbe_ subject ofimuch controverry'.- Ine Staff, for its part, t enelec'_s claims ~Yor this unit in ,ttG90stended rejec_rinn n their entirety. St2ff arstued that use of a future test year here would be rendered meaningless II the Coud Ugn_ygre .titjga ke the evren=1ve pgg f uture test year adjustments _ necessary +a eflace the fmnact of THI-z. dtaff also claimed f,' that these adjustments could not be estim3ted with the requi-site accuracy for those purposes of setting rates, that the in-service date of the plant is speculative and that an adjustment in revenues would be required to make the increases in rate base and expenses associated with TMI-2. ~ The Consumer Advocate argued along similar grounds for the elimination of THI-2 from this proceeding. In addi-l tion, the Consumer Advocate argued that any phasing in of the revenue requirement associated with THI-2 wculd be contrary htothePublicUtilityLaw. The pinistrative Law Judges rejecteri these arguments and took the nauition that allowiIig pa h test year adjustments is ennd e r ofth thg_ statute add ~h*gtrit uu oy togic. To do otherwise would, in their words7 condemn the Commission to the tyranny of continuous rate cases. In summary. rhoy found no regs_an r^ ~ Pzh '"= rate bas'e that property which is projected to be in service githin a short period at ter cne tolfdissava s vroei here--ie-entered. The Administrative Law Judges dismissed the concefhs o D ie other parties about a mismatching of rate base, revenues and expenses, finding no danger of any excessive recovery on the part of Penelec. they recomended a finding of p4,15M k f 1 In conclusion, as the measure of value of THI-2. As a result of expenses, depreciation and taxes related to THI-2 plus the allowable return on this measure of value, the Judges recommended that 1_/ For purposes of this proceeding, Penelec based its revenue requirements on its ownership of 10% of TMI-2. 1916 188

c the company be allowed to file, within thirty days af ter this station is placed in commercial service, tarif f revisions ldesigned to produce $17,340,000 in additional annual revenues. If the station does not go into commercial operation by June 30, 1978, the Administrative Law Judges recommended that no THI-2 associated rate relief be granted. Exceptions have been filed by Staff and the Consumer Advocate. r Staf f argues that the test year here basically reflects a level of operations which existed in mid-1977. The inclusion of THI-2, which would come on line approxi" mately 12 months later, would distort, in Staff's viev,- the relationship between plant, revenues and expenses. Staff. rejects the Judges' solution to any mismatching, i.e., on-going monitoring of the company's operating and financial condition, as insufficient to protect the ratepayer. The Consumer Advocate claims that any phasing in of rate increases as suggested here would be contrary to the Public Utility Law other than by means of a multi-tarif f filing or temporary _/ rates. As a practical matter, the Consumer Advocate notes, if Penelec is permitted to phase in its THI-2 increase in subsequent proceedings, it and other utilitics will file future test years with progressively more remote out-of-period revenue requirements to be phased in at various points in time. Complainants, on the other hand, would propose out-of-period revenue or expense adjustments and there would be continuous litigation. The Consumer Advocate also claims that, for the reasons stated earlier, any allowance for cash working capital associated wit'h THI-2 is improper. We are in general agreement with the Staff and the Consumer Advocate. We do not believe that, as an integral part of this rate proceed'ing, Penelee should be given authorization to inCIease rates at some inoettnite rucuic cime---Irrsan e we Delieve the occcer proceJUre to follow neim aanld-be-to-have the_ company make a separate filing to reficct its increased revenue requirement resulting from the commercial _ operation h. 11, as the company and the Administrative Law Judges sume, the plant in question will come on line in a matter of months, we would expect that any such filing would be treated on an expedited basis and limited solely to the impact of TM1-2 on the company's operations. In this way, the objections of Staff and the Consumer Advocate, which we believe have con-siderable merit, will be met while, due to what we anticipate will be the expedited nature of any new proceeding in light of this current proceeding, any capital attrition which the company may incur should be minor. DEPRECIATION Penelec's calculated depreciation reserve was $284,755,000. This reserve represents an adjusted average -9_ 1916 189 --.,4

balance and reflects the average theoretical reserve, resultf ; from the application of depreciation rates, based on a new service life study by the CPU Service Co poration. As noted by the Administrative Law Judges the Counniasion Staff has objected in general terms to the company's limitation of the expected life spans of THI No. 1 and No. 2 to the icngth of the operating licenses for these plants. The company has, therefore, set life spans of 34 years for THI-l and 30 years for THI-2. Staff contends that auch a restriction is arbitrary and argues that life spans of 40 years, similar to those of fossil-fueled plants, should be used. In the company's last rate case we used a 35 year life span for THI-1. The Administrative Law Judges found Staff's arguments unconvincing an'd we concur in this resolution. There is simply not sufficient experience with nuclear plants to establish a useful life with precision. However, we do not agree with the reasoning of the company, that the useful [- life is limited to the length of its operating license. To do so would be to tie useful life to licensing and regulatory delays - administrative procedures rather than actual plant operational experience. While we do not accept the company's reasoning, we concur with the Administrative Law Judges that a 34 year life span for TMI-1 is not unreasonable and accept it for this proceeding. The Consumer Advocate recommends increasing the depreciation reserve by $6,814,000. As explained by the pro-the company seeks a normalizing adjustment to its

ponent, depreciation reserve of $10.5 million.

This was to be added to the 1977 beginning and ending average reserve balance and represents the deficiency determined to exist as of the beginning of the test year to the company's average book balance of depreciation reserve. The Consumer Advocate agrees with the adjustment but maintains that the balance in the budget is too low. The actual Iigures for the test year, he argues, show that booked reserve far exceeded budgeted reserve.1/ Since the budgeted reserve is clearly unrepresentative, the Consumer Advocate recocreendea using the June balance, which is $6,814,000 greater, as statistically representative of the average book balance for the year. We agree that, on the record here, use of the budgeted balances would be inappropriate and that the Consumer Advocate's adjustment is a reasonable substitute. l_/ Eight months into the test year, the booked reserve was $286,000,000 or $12,000,000 over the budgeted average. 1,.9, 6 90 w.. ~ mt..

Staff objected to Penelec's application of component 'ighting depreciation to post-1976 property additions. As ained by the Administrative Law Judge, component weighting se to achieve a weighted annual rate related to retirement expt ence. The direct weighting or average service life method assig fixed, annual rate determined by the average service life o1 units of the class. The Administrative Law Judge adopted f's adjustment and Penelec excepts. We ee with the Administrative Law Judges that, on the record he the shift from average service life to com-ponent weightin-preciation has not been adequately supported. A similar shif t w respect to telephone equipment has been the subject of an FCC y since 1974; the impact of the proposal is obviously great a we believe, merits more extensive consideration that was ven in this proceeding. FAIR VALUE On the basis of ou esolution of the various disputes involving measures of value we find that the company's original rate base (including Homer City No. 3 associated items) cost is $961,918,000 as shown below: e. --.g

Table I Measures of Value ($000 Omitted) Electric Plant Electric Plant In Service $1,100,257 Nuclear Fuel in Reactor 8,653 Plant Held for Future Use 705 Homer City No. 3 136,607 Total Plant $1,246,222 [- Depreciation Reserve Electric Plant In Service $ 291,569 Nuclear Fuel 4,276 Post 1976 Component Weightings ( 82) Homer City No. 3 1,932 f Total $ 297,695 Net Electric Plant 948,527 Additions to Rate Base Coal Inventories 17,911 011 Inventories 681 Operating Materials and Supplies 5,652 Coal Mine Development Costs 9,867 Non-recoverable Coal 449 Deferred Energy Costs 27.700 Accumulated Deferred Income Taxes ( 14,665) Cash Working Capital 1,627 Items Associated with Homer City No. 3 2,960 Total Additions 52,182 Deductions From Rate Base Customer Advances for Construction 1,724 Accumulated Deferred Investment Tax Credit 953 Accumulated Deferred Income Taxes 26,947 IRS Refunds 1,492 Interest on IRS Refunds 1,329 Customer Deposits 741 Net Unamortized Cain on Debt Reacquisition 1,227 Operating Reserves 2.821 Items Associated with Homer City No. 3 1,557 Total Deductions S 38,791 g Rate Base - Original Cost $ 961,918 1916 I92,v > w, .._y,_.-

Table 11 Homer City No. 3 ($000 Omitted) Electric Plant in Service $ 136,607 Depreciation Reserve Additions 1,932 coal Inventories 4,204 Coal Mine Development Costs ( 328) Deferred Energy Costs (Net of Associated Accumulated Deferred Income Taxes) ( 1.600) Cash Working Capital 684 + Total Additions 2,960 Deductions Accumulated Deferred Income Taxes ($ 1,557) Penelec claims that the most appropriate finding of fair value should be at or near the spot price measure as of October 31, 1976. This amount is roughly $1,766,000,000. Staff recommended a fair value finding of $1,110,000,000. The Consumer Advocate recommended roughly $1,096,000,000. This estimate was arrived at by trending only that portion of the rate base supported by common equity capital and using five year average price figures. This estimate also included Homer City No. 3. The Administrative Law Judges recommended a fair value finding of $1,236,000,000 reflecting both Homer City No. 3 and TMI-2. Exceptions have been filed by the company and the Consumer Advocate. The company maintains that the fair value of its rate base should be at or near the spot price measure ($1,765,898,000). In view of the closeness of this measure in time to present values, the company in effect is seeking the reproduction cost of its facilities. This position has been considered and rej ected by the Commission and the Courts. In both Pa. P.U.C. v. Pennsylvania Gas and Water Co., 19 Pa. Commonwealth Ct. 214 (1975) and the recent Pennsylvania Cas and Water Co. v. Pa. P.U.C., Pa. Commonwealth Ct. (No. 1523 C.P. 1976, Order issued December 21, 1977), the Courts have held that there is no one formula or one set of statistics'to be used in determining fair value. Rather, a weighting of original cost and trended original cost should be used. Penelec's exception, which was based on use of a spot price measure, is therefore rejected. We find that, on the record before us, the best estimate of fair value can be derived from the Consumer Advocate's methodology. Specifically, the Consumer Advocate recommends not only that we rely on a five year average trended 1916 193 m =

original cost, but that the only portion of the rate base that should be trended is that portion associated with the common equity percentages in the company's capital structura. In determining the present value of a utility's plant, we are required to give weight to the reproduction cost of the property based upon the fair average of prices for materials, labor and property. Equitable Cas Co. v. Pa. P.U.C.,160 Pa. Superior Ct. 458 (1947). We believe that a five-year average is more appropriate here than the mest recent single year's spot ~ prices in determining the fair value of plant used and useful. ~ To rely solely on the most recent year's price index would overemphasize the events and economic circumstances in that one o' O period. We are concerned that a single year's indexes could produce substantial distortion in valuation because of some unusual occurrence or event. Furthermore, in an industry that is marked by rapid technological change and its corollary, equipment obsolescence, it is more appropriate to use an index which s# j smooths the effects of those changes, their embodied cost savings, and the ef fects on productivity. We also fear that the use of a single year's prices would centribute to the general inflationary spiral in the economy, since the current 1,evel of inflation become embodied in the fair value finding and would serve as a basis for the rates set here. These rates then become componenta of future price levels and are reflected in the subsequent indexes used to measure inflation. On the basis of these considerations we believe use of a five-year average is prudent, conservative and preferable. The five-year trended original cost of Penelec's rate base is $1,389,491,000 as shown below: W G 1916 '94 _.__,_,=

Table III i Five Year Trended Original Cost ($000) Company claim $1,521,165 Minus Adjustment to reduce budget to 6/30/77 balance 10,772 Accrued Depreciation on Budget Adjustment ( 219) Three Mile Island Unit No. 2 64,918 Accrued Depreciation - TMI No. 2 ( 1,230) Nuclear Fuel - TMI No. 2 4,152 Nuclear Fuel Reserve - TMI No. 2 ( 2,041) Electric Plant Held for Future Use 6,800 Cash Working Capital 17,420 Eliminate Component Weighting Method of Depreciating Post 1976 Plant ( 69) TMI No. 1 - Ring Girder 1,541 TMI No. 1 - Ring Cirder Calculated Depreciation ( 131) THI No. 2 Materials and Supplies 157 THI No. 2 Deferred Energy Costs (~ 2,500) Less: Associated Deferred Income Taxes 1,324 THI No. 2 Accumulated Deferred Income Taxes ( 824) Homer City No. 3 Rate Base Deduction 4,439 Accumulated Deferred Income Taxes Adjustment ( 51) Trending Correction Homer City No. 3 22,747 Homer City No. 3 Calculated Reserve ( 320) Customer Deposits 741 Net Unamortized Gain on Reacquisition of Debt 1,227 Operating Reserves 2,821 Total Deductions 131,674 Total 5-Year Trended Original Cost $1,389,491 It is appropriate at this point to comment also on use of trended original cost estimates in general. Trended original cost estimates, such as those we have before us, are derived by using standard index numbers. These indexes are simply estimates of average increases in costs. The use of these indexes to trend historical costs of embedded plant facilities cannot reflect technological changes and improvements that have occurred since the plant went into service; neither can they reflect changes in the application of labor to installed plant. Finally, no ' I916 195

Y stility would actually undertake to replace all of its present assets, nor would the actual replacement take place in the exact form and manner assumed by the trended original cost estimates. If Penelec were starting from scratch today, the resulting system would not be identical to the existing one. We find, therefore, trended original costs estimates to be imprecise and not truly indicative of the current value of i' the original plant, future capital requirements.nor are they indicative of the utility's If we gave a disproportionate weight to these estimates in determining the fair value of the utility's plant for rate making purposes, we would be over- .' 3 emphasizing past inflation and,1gnoring the increased efficiency .'3-and reduced operating costs that would occur if existing plant lJ were replaced with facilities that developments. incorporate new technological y1 l The Consumer Advocate also urges us to weight the trended original cost rate base to correspond to the percent P of equity in the capital structure. / In this way, the effects of inflation, the reason for the use of a fair value rate base, will be reflected only to the extent the plant is financed by common equity. Inflation has no direct effect on debt holders because they are compensated in the form of interest. The fixed contractual returns to these investors are properly measured in terms of the original cost of such investment. The same is true with holders of preferred stock. These security holders have a contractual relationship and receive a specific dollar return for their investment. If the portion of rate base financed by debt and preferred equity investors is also restated to trended cost levels, as proposed by the company, the effect would be to provide common stockholders with a return in excess of that allowed here. Penelec's fair value would be $1,103,000,000,Under the Consumer Advoc as shown below. Rate Base Weighted Weight Rate Base Original Cost S 962,000,000 67 Percent S 645,000,000 Five Year Average Trended $1,389,000,000 33 Percent $ 458,000,000 Total 100 Percent $1,103.000.000 We accept this fair value as reasonable. Fair Return j l h,} h h Capital Structure As shown below, the recommended capital structure proposed by the various parties are substantially the same:. n<< w M' .n._ -,.m. - > g,

Table IV Proposed Capital Structures Consumer Type Penalec Staff Advocate Long Term Debt 52% 51% 52% Preferred Stock 15 15 15 Consnon Equity 33 34 33 100% 100%- 100% The Administrative Law Judge recommended use of the company's and Consumer Advocate's proposal and we agree. This is the capital structure which existed during most of 1977 the test year here. [. Cost of Debt All parties agree that the appropriate cost of debt is 1 the embedded cost of long-term debt during the test year. This was 7.3%. Cost of Preferred Stock All parties agree that the cost of preferred stock here should be the embedded cost during the test year. The company has no plans for issuing additional preferred stock at this time. The embedded cost of 8.9% will be used. Cost of Common Equity Penelec's financial witness Mr. Joseph P. Brennan recommended an allowed equity return of 12.5% applied to a fair value rate base. This is necessary, in his opinion, to maintain a market-to-book ratio of 125%. Since Penelee is owned by General Public Utilities (GPU) and its equity is not publicly traded, Mr. Brennan used a GPU common equity money market related cost rate tested against the indicated common equity cost rate of similar risk enterprises. Mr. Brennan relied principally on a study of earnings / price ratios for CPU, other public utilities and various industrials. The Staff recommended a 10.75 to 11.25 porcent cost rate applied to a fair value rate base. Staff selected from the exhibits introduced by both Mr. Brennan and Dr. Hatityahu Harcus, the Consumer Advocate's financial witness, a different sample of representative electric utilities. The date thus derived indi-cated a range of average adjusted earnings / price ratios,from T916 197 - gy-y --.;.g-

~

12. 2% to 13.4%.

Staff then adjusted these downward to reflect the trend toward lower common equity cost rates and arrive at its recommendation. The Consumer Advocate's witness, Dr. Marcus, recom-mended a 12.5% return on an original cost rate base. In arriving at this amount, he applied the Discounted Cash Flow (DCF) method to CPU. In estimating dividend yield, Dr. Marcus took the average yield experienced by GPU since January 1973.s This was 9.74%. Dr. Marcus developed his estimate of investors' growth expectations by looking at th2 past book value, earnings and dividend growth of the company. i He concluded that, on this long-term basis, ir,vestors expected growth of around 2%. M He admitted, however, that recent growth in earnings could support a higher growth estimate. Dr. Marcus adjust 5d the resultant bare-bones cost of capital of 11.74% upwards to reflect pressure and selling cost of 7.5%. f The Administrative Law Judges, relying heavily on y non-quantifiable judgment factors, concluded that a return of 14% applied to an original cost rate base, roughly what we allowed in Penelec's last rate case, would be reasonable. The Consumer Advocate excepts. It is the position of the Consumer Advocate that the appropriate return on equity should be more in line with the recommendations of Dr. Marcus than those of either Mr. Brennan or the Administrative Law Judges. The Consumer Advocate points to several factors which in his view demonstrate that a lower equity return than that allowed in the last case would be warranted. Specifically, he points to the decline in construction expend tures which will reduce its need to raise outside capital;l the increase in retained earnings which will permit capital, and the increase in sales. internal generation of We agree that recent trends have demonstrated a decline in the cost of equity cepital. We also agree with the Consumer Advocate that Mr. Brennan's reliance of 1971 through 1975 data seriously overstates the present cost of equity capital. The record shows that the current earnings-price ratio for GPU results in a market return of 12.07%. We further agree with the Consumer Advocate that Mr. Brennan's adjustment to reflect a market-to-book ratio of 1.25 is overstated and arbitrary. In view of the recent decline in the cost of common equity capital, as demonstrated by the testimony and exhibits of Dr. Marcus, we believe that a return of 9.72% on fair value 1/ Penelee had construction expenditures of $120 million in 1975 and $131 million in 1976. The company fore-casts construction expenditures of $87 million in 1978. 1916~198 g,.. ..-,-. g

equity capital would be appropriate. This equates to 13.5% on book value common equity, slightly lower than we allowed in Penelec's last case, but well within the range of reason-ableness here in view of the company's improved financial conditions and reduced construction program as well as the generally lower cost of equity referred to above. The overall return on fair value rate base will be 8.34% as shown below: Tg Ratio Cost Weighted Cost Long Term Debt 52% 7.30% 3.796% Preferred 15 8.90 1.335 Common Equity 33 9.72 3.209 100% 8.340% OPERATING REVENUES No party excepts to the Administrative Law Judges' calculation of test year og rating revenues from its Pennsylvania customers of $275,609,000._ We will therefore use this enount in our determination of revenue requirement. OPERATING EXPENSES Penelec calculated operating expenses for 1977 (excluding income taxes) at $178,997,000. Both the staff and the Consumer Advocate have contested specific expenses and we will discuss each disputed item separately. Coal Cleaning Expenses The company adjusted 19'/7 budgeted coal cleaning costs for the Homer City generating station ($1,208,000) by removing the cost of power consumed at the coal cleaning plant ($182,000) by annualizing Homer City.I and 2 coal cleaning costs ($285,000) and by removing Homer City 3 coal cleaning costs,for part of the year ($172,000). As adjusted, coal cleaning costs for Homer City were claimed to be $1,139,000. We believe that the appropriate treatment for these expenses is to allow ?he com-pany's original budget estimate less the cost of power consumed at the plant. The removal of Homer City No. 3 costs 14 con-sistent with our treatment of this plant. Allowing i separate annua 112ation of the coal cleaning costs for Homer City 1 and 2 would be inconsistent with use of an average test year and the treatment of other expense and rate base claims related to sections 1 and 2 of the coal cleaning plant. I9l6k99 1/ Excluding the effect of Homer City No. 3..-7.gf gye ,,,,,....y.

Extraordinary Flood Damage As explained by the Administrative Law Judges a severe storm and flooding occurred in the company's service territory, especially the Johnstown area, in July 1977. Penelec claimed, af ter allowance for insurance, a not loss of $2.8 million and proposed to amortize this amount over a ten-year period at $280,000 per year. The Commission's Staff argued that while Penelec has suffered an extraordinary loss, the record here indicatas that its estimates may be overstated and suggests that $1,500,000 might be a more accurate estimate of the company's net loss. The flooding occurred at a time when these hearings were drawing to an end; the report of the company was submitted only two days before the ecord closed. In the absence of 1 we believe that Staff's estimate additional investigation should be adopted, amortized over 10 years. This allowance of $150,000 can be revised in future proceedings when the loss has been more accurately determined. Deferred Maintenance Expense Penelee included $1,749,000 in its 1977 budget for maintenance. It seeks, however, an additional $3,762,270 over this budgeted level for other, additional maintenance. The company claims that this additional amount is necessary for adequate mairtenance of f acilities and has attributed the deferral of maintenance to lack of funds. The Consumer Advocate, Staf f and the Administrative Law Judge recommend denial of this request and we agree. Penelec is under a statutory duty to provide safe and adequate service. This responsibility is not dependent or conditional upon a specific allowance in a rate case. It was for this reason that we rejected a similar claim in Penelec's last rate case and we do so here also. The company must establish priorities and undertake all necessary maintenance at the time it is required. To request an additional allowance over a.:4 above budgeted amounts for deferred maintenance indicates poor budgetary practices. 1/ Staff claims that even with the limited time available to examine these items, it has demonstrated overstate-ments of some claims, specifically the expense associated with new leases on new vehicles. 1916 200 ~ mmu

Rate Case Expenses Penelec claimed rate case expenses of $651,000. This amount is made up of $369,000 attributable to the pre-sent case, $166,000 representing the unamortised balance of its 1974 rate case and $116,000 representing the unamortised balance of its 1972 rate case. The company proposed to amortize 3 these expenses over a two-year period at $326,000 per year. Since its 1977 budget already includes $145,000 for rate case expenses, the company seeks, in effect, an additional $181,000, < r.g Staf f proposed to disallow $174,000 from this total. .y Staff would limit the expenses for legal fees, CPU services and rate of return expense to $68,000 (the level of Penelec's last proceeding) instead of the $213,000 sought by the company. In addition, it recommended a deduction of $106,000 in the annual amortization of prior rate case expenses. Staff would allow, therefore, only $477,000 for this item and would amortise it over 5 years instead of two. The Administrative Law Judges adopted Staff's proposals and Penelec does not except. We will therefore reduce the company's adjusted expenses by $230,600. Amortization of Book Depreciation Reserve Deficiency As noted earlier, a recent depreciation study was undertaken by GPU Service Corporation. This study computed a book depreciation reserve deficiency of some $10.5 million. Penelec proposed an annual allowance of $422,000 to amortize the reserve deficiency upon the basis of various average remaining lives for seven functional plant groups. Under this proposal the company would be able to make up for past low rates of accrual on property and thus permit the company to recover its entire capital investment in an item by the time that property is retired. The Administrative Law Judge recommended that Penelec's adjustment be denied as contrary to established Commission policy. We agree with that result. It clearly seems inequitable to shif t onto present and future ratepayers a burden which should have been borne by past rat'epayers. Assuming the company's new depreciation accrual rates are as accurate as possible, these ratepayers will be paying their fair share of Penelec's depreciation costs and should not be burdened with making up the obligations of past customers. The company has not excepted to the Administrative Law Judge's recommendation. Proposed Billing Practices Expense j g j h }l} { The company claimed some $3,250,000 in expenses related to the additional costs which it says it will incur as a result of implementation of our proposed rules at. ,y s.

76-PRMD-10 (Consumer Standards and Billing Practices for Residential Service). The Consumer Advocate, the Comunission's staff and the Administrative Law Judges recommend denial of these adjustments since the proposals are still under consideration by the Commission. The company does not except to this recar-madation. Load Reserve Program Penelec claimed $250,000 in increased expenses relating [- to its comprehensive load research program. This represents ,J-one-third of the program's total estimated cost of $750,000 to

• 4.

be spent over three years. It is apparent from the record that progress on this program has been considerably delayed, caused M in part by the flooding of last July. As a result the company ..l estimated that it would spend only about $51,000 on this pro-g gram during 1977. While the Administrative Law Judges recomunended ,} that the company's total request he allowed, be believe that only the actual test year expenditures should be passed on to 'y. ratepayers. m Decomrnissioning Expenses Penelec has requested._an annual expense allowance of $300,000 with respect to 'lHI-l to provide for the decommissioning of this nuclear station..This represents Penelec's share of the expense of "in place entombment" of 'INI-l estimated at $37.2 million, spread over 31 years. THI-l's estimated remaining service life. The Administrative Law Judges considered this expense reasonable and prudent. Staff and the Consumer Advocate except. We believe that the Administrative Law Judge's position is basically correct. In reaching this conclusion we are moti-vated by our concern for the future health and safety of the citizerm of the Commonwealth. This concern requires that the company make adequate annual financial provision for a known event in the future; an event that has a substantial cost. We must take the initial step now to protect future ratepayers from bearing a significant revenue burden associnted with the decommissioning of a plant from which they will receive no 1916

202, service.

The Consumer Advocate and Commission Staff argue that Penn Sheraton Hotel, et. al. v. Pa. P.U.C., 198 Pa. Super. 618 (1962) precludes establishment of a provision for decommiss(oning. The Penn Sheraton case dealt with the prospective negative salvage value of the removal of steam distribution mains from beneath Pittsburgh streets upon retirement. The Superior Court defined this prospective negative salvage as "the estimated negative salvage to be incurred 1,f,and when the distribution f mains are removed some time in the future." (Emphasis added).,, ~~;i y - n em" mm

s The key word in this Court decision is "if". The Consumer Advocate questioned the necessity of a decommissioning claim, quoting Penelec's witness as admitting that, " depending upon the world-wide energy situation in 2008, the regulatory agencies and the public may be willing to take greater risks than they might be at present." The question, however, is 4 whether this Commission is willing to begin upon this path of greater risk now. By providing a mechanism for carrying out the fiscal aspects of control of these hazardous nuclear ( components, we insure that this will be done. Those who now .;.?.: enjoy the benefits of this technology can do no less than to ((q,.: assure that it will not impose an unreasonable financial s 'r burden on future ratepayers. Y.l - It is true that the total costs of decommissioning 1 a nuclear power plant cannot now be determined with precision and may be termed speculative by some. Although the total amount determined to be needed may not be accurate, the rejection of the claim would ignore the vital issues of health and safety which are reasonably foreseeable. Changes in the estimates of decommissioning costs may be dealt with through periodic review and adjust-ment of the total estimate (and its annuai provision) within each rate case, or at any time upon the initiative of the Commission when it feels that such review is necessary. Penelec's claim in this proceeding for the in-place entombment of the Three Mile Island Unit No. I was an annual provision designed to accumulate $37.2 million in a separate fund by the year 2008, this fund being respondent's estimate in 1977 dollars for the future decommissioning of this unit. The dompany proposed to invest the funds collected in tax-exempt securities, the earnings upon which to be "available to offset in pert the esentation in the cost that is expected to occur" by the year 2008. An analysis of the estimated claim shows that of the $37.2 million, approximately $13.6 million is for the dismantling of non-nuclear structures of TMI-l and include the turbine buildings, cooling towers, river water pump house, and miscellaneous structures which by their nature, pose no 1014 9A7 special concern in regard to health and safety. Thus we should I 7IU LUJ consider such expense as the " prospective negative salvage" referred to in the Penn Sheraton case. Penelec's expense in this matter will be limited to an allowance of fundo sufficient to accumulate the $23.6 million now viewed as necessary for the proper containment of the nuclear components upon decom-missioning. Provision for a greater amount is without adequate justification. -.y.~.. .w w

Finally, the calculation by Penalec for allowance of decommissioning expenses is improper. We reject the assumption that inflation will continue at its present rate through the year 2008 and that the interest earned upon respondent's annual investment in tax-axempt securities ?. would offset that inflation. At this time we will maks no provision for inflation, but rather adjust the annual allowance. /.jp from time to time to account for any axperienced inflation. l; If we would permit Penelee to collect $74,000 annually and j l9-0 to invest in Commonwealth of Pennsylvania General Obligstion ' 'c Bonds with an annual yield to maturity of 5.5%, by 2008 it 33 would have accumulated the establiebed $23.6 million to be used for the decommissioning of the nuclear componsats of I'40 THI-1. i This $74,000 annuity should be treated in the hg following manner: 74 ,s 1. The annuity and its accumulated interest shall )Y be placed in an escrow fund, unavailable to Penelec until the dismantling of Three Mile Island No.1 occurs. One-twelfth of the annuity will be deposited in the fund at the end of each calendar month. 2. Each fund invegtment by the escrow agent shall be in those bonds issued by $he Commonwealth of Pennsylvania having the higheat yield at the time the investment. occurs. (The interest on such bonds is free of both state and federal income taxes, and thus serves to reduce the amount of the burden on the ratepayers.) 3. A strict accounting shall be maintained for the fund, so that its balance can be determined at any moment in time. Thus, if at any time there is a change in the esti-mated life of THI-1, in the decontamination and dismantling costs, in the proposed method of decommissioning, or in the average yield on the Commonwealth's bonds, the difference between the projected costs and the amount already accumulated in the fund can be readily ascertained..and the annual annuity requirement on the remainder can be readily computed. 4. It is expected that by following the procedure herein, the difference between the total amount of the fund jQj4 9nA which will have been accumulated and the actual costs incurred /IU cV7 at decommission will be dji minimis. However, if there is any excess whatever in the fund,, Penelec shall return the excess to the ratepayers or use it for their direct benefit in any other manner that the Commission may order; and conversely, if the costs exceed the amount of the fund Penelee shall amortize the excess as a charge over a reasonable period as ordered by the Commission... w,~.. . m ~ c.g

Using these provisions, not only will the interest on the escrowed fund be free of state and federal income taxes, but the annuity itself may be excluded from taxable income. .; Ur Decommissioning expenses must be considered in this .7-proceeding, and current ratepayers who are benefitting from the generation of THI-1 should be the ones who contribute toward the cost of the eventual decommissioning of that facility. An annuity of $74,000 is sufficient to provide $23.6 million, the current estimate for the proper containment (by the in-place i entombment method) of the nuclear components of THI-1. The (2, accumulation of this decoanaissioning fund shall be used only for the purposes of the eventual decommissioning of that plant. af-{, rfM1 ' and as such should not be deducted from rate base. j'E The original claim was for an annual decommissioning sc-expense of $300,000. An annual provialon of $74,000 represents "\\ ' a disallowance of $226,000. '^ / /' / Miscellaneous Adjustments The Consumer Advocate proposed two adjustment 9 which were unopposed by Penelec. The Administrative Law Judges, did not include them in their initial decision. Both adjustments should be made. One would increase operating revenues by $45,000 to reflect the interest on customer deposits paid by the company in the test year. The other would reduce operatiqg i expenses by $80,000 to reflect the net gain on reacquired debt which the company is amortizing during the test year. Conclusion As a result of our resolution of the disputed issues we determine test year operating expenses (excluding Homer City No. 3) to be $198,609,600. 11T16 205 -,- g , pp ~ ~ -

Tabic 'l Operating Expenses All Figures Excluding Homer City #3 1. Expenses for 1977 as adjusted by Pennsylvania Electric excluding income taxes $178,997,000 g,. 2. Income taxes for 1977 as adjusted 23,781,000 s' 3. Total Operating Expenses $202,778,000 Adjustments to claimed experses 4. A) Homer City Coal Cleaning Cost ($ 113,000) F 5. B) Extraordinary Flood Damage 150,000 6. C) Deferred Maintenance Expense 7 - payroll ( 3,002,000) - other operation and maintenance ( 760,000) - taxes other than income taxes ( 175,000) D) Rate Caso Expense Amortization ( 230,600) E) Amortization of Book Depreciation Reserve Deficiency ( 422,000) F) PRMD-10 Practices - payroll ( 2,272,000) - other operation and maintenance (- 979,000) - taxes other than income taxes ( 134,000) G) Load Research Program - payroll ( 131,000) - other operatJon and maintenance ( 68,000) - taxes other than income taxes ( 7,700) H) Depreciation - Ring Cirder ( 47,000) - Component Weighting ( 165,000) I) Decommissioning Expense ( 226,000) J) Amortization of Net Gain on Reacquisition of Debt ( 80,000) K) Interest on Customer Deposits 45,000 Total Adjustments ($ 8,617,300) Associated Income Taxes $ 4,448,900 Net Total Operating Expensea $198,609,600 1 19T6' 206-i. i e

y RATE STRUCTURE Several parties have excepted to the recommended charges in rate structure. We will discuss separately each objection raised before us. '.over Factor and Reactive Demand Penelec proposed the elimination of the reactive demand charge on rate schedulep CL and LP with the imposition .3 of an increased power factor requirement. Under its proposal 'A1 customers would be required to maintain the power factor at

1. > 'a '

not less than 90% lagging instead of 85%. Staff recommended that instead of c1Lainating the existing reactive demand charge, the company simply replace the present charge with an earlier charge for all kilovars at reactive registered maximum demand. The company excepts stating that this would require j/r Rate CL and LP customers to correct power factor to unity (1) or pay a penalty charge. The company maintains that no other class of customers maintains or is required to maintain unity power factor. In addition, the company argues that many of these customers' peak demands are imposed during system off-peak periods. If these customers correct their power factor at the time of their peak, they will have overcorrected for all times when their load is less than their maximum. We agree with the Administrative Law Judges' recommendation. In view of the fact that its proposa for monitoring and enforcing power factor is inadequate,1 we do not believe that the reactive charge should be eliminated. Instead, staff's proposal,' which would adjust the reactive charge to reflect the true cost of service under rates CL and LP for reactive demand, should be approved. This pro-cedure was in effect in the tariffs preceeding Supplement No. 44 of Pa. P.U.C. No. 58. Merger of Rates CS and GM Rate GM is totally demand-metered; CS includes both demand and non-demand metered customers. Penelec proposed merging these rates and Staff recommended that the company merge GM and the demand-metered CS customers and use rate CS for general service non-demand metered customers. While Penelec poses some hypothetical problems in administration, we believe that the Staff's proposal is desirable and should be adopted. 19116. 207 1/ There is no method now proposed for monitoring power factor, nor any penalties proposed other than discontinuance of service. - - n4

y..

Cost of Service Study Both the Consumer Advocate and the Industrial Com-plainants find fault with the company's cost of service study. This study calculated costs using a kilowatt peak demand allocation method which gave equal weight to winter and summer peak in allocating bulk power supply, investment and expenses, The Consumer Advocate proposed instead an allocation of bulk power costs using the summer peaking Pennsylvania-New Jersey-Maryland (PJM) Power Pool. The Administrative Law Judges were not persuaded 'l ?E that Penelec and the rest of the CPU systen should allocape e 1 its bulk power costs on the basis of the PJM system. We ,U disagree. The bulk power purchase costa should be allocated -a, primarily on the summer peak demand, the peak for the PJH and i CPU pools. This is most relevant for allocating the bulk ,/ power generation and transmission capacity costs. The effect of this cost reallocation is to reduce the revenue requirement s/".- c f rom the residential class of customers and to shif t this responsibility largely to the CS and GL classes. The Industrial Complainants object to Penelec's allocations of transmission maintenance expenses and distri-bution maintenance expenses on an energy basis rather than a demand basis. The complainants point out that, according to the NARUC Manual, all transmission expense accounts should be allocated as demand related and that distribution main-tenance expenses should be allocated on the basis of the underlying plant. It is clear that Penelec here has departed from recognized, accepted cost allocation methods. There might well be a valid reason for thia departure. If so, it has not been set forth on the record here. In view of this, the complainants' exception will'be adopted and the company will be directed to revise its cost of service study's allocation of maintenance expenses to reflect their demand-related nature. The rates filed in compliance with our. order here should 1916 205 reflect this reallocation. The Industrial Complainants also object to the cost of service study's application of the average annual cost per Kwh equally to each customer class on the basis of total energy used. The complainants contend that in allocating fuel and purchased power energy costs, Penelec should have made a distinction between on-peak and off-peak energy costs. As the complainants themselves recognize, there is little useful data available in the record on the difference between the cost per Kwh of on-peak supply. Any reallocation here would be too speculative and we will, therefore, deny this exception. 3 ....v m,

,e t. Residential Time-of-Day Service The pace of Penelec's residential time of day rete program (RT) has been criticized by the Consumer Advocate. In addition, it was propcsed that the rating periods should be reset to include peak, shoulder, and of f-peak periods and that the rates themselves be reset. The Administrative Law Judges believed that it would be premature to adopt these recommendations and we agree. The Consumer Advocate ha's raised important issues, however, which we expect will be considered in any future-

l 5

rate proceedings. l3 In all other respec;ts we adopt the recommendations of the Administrative Law Judges with respect to rate design. CONCLUSION i As a result of our resolution of the many issues presented here, we determine that Penelee has shown the need for total additional revenue relief of $27,808,730 for total company operations, including Pennsylvania customer saIes, sales for resale under FERC tariffs, and other operating revenuca. Of this amount, $24.7 million is allocated for Pennsylvania retail customers (Appendix A); the remainder allocated for FEHC resale customers. The company is directed to file tariffs reflecting this level of rate relief and our changes in rate structure; TilEREFORE, IT IS ORDERED: 1. That the complaints listed in the caption of this proceeding are sustained to the extent indicated. 2. That the respondent forthwith file tariff supple-ments cancelling its proposed revisions to its Tariff Electric-Pa. P.U.C. No. 69. 3. That the respondent's Supplement No. 4 to its Tariff Electric-Pa. P.U.C. No. 70 is hereby permitted to become effective. 4. That respondent is authorized to file within 30 days af ter the date of entry of this Order, as it may elect, tarif f revisions consistent with our above Ordet, designed to provide total annual operating revenues of $303,417,730 (exclusive of revenues from the State Tax Adjustment Surcharge and the Fuel Adjustment Clause), as computed and allowed herein at the level of operations at December 31, 1977. 1916 209.g wm

7 e r e 5. That respondent fije with the Coussission within 8 30 daya after entry of this Order a plan for refunding any excess revenues collected since February 1, 1978. 6. That detailed calculations be filed with these tariffa or tariff supplements, demonstrating that the rates do comply with the requirements set forth in this Order. 7. That the surcharge authorized by our State Tax Adjustment Surcharge Order of March 10, 1970, be recomputed and revised in accordance with Section B, paragraph 2, of that Order. 8. That, to the extent consistent with the above order, the initial decision of Administrative Law Judges Morris Mindiin and Joseph P. Matuschak is adopted as the Order of this Commission. 9. That, except as granted in the above Order, all exceptions to the initfal decision of the Administrative Law Judges in this proceeding are denied. C. J. McElwee Secretary (SEAI) ORDER ADOPTED: February 24 and June 8, 1978 ORDER ENTERED: June 28, 1978 ~ ' ~ 1916'210 I

• s 'R e

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- ~. /e R.I.D. 392 7 Appendix A 1. Fair Value $1,103,017,000 2. Rate of Return 0.0834 3. Total Allowable Return (Line 1 x Line 2) S 91,991,617 4. Income Available S 78,809,000 (A) 5. Income Deficiency (Line 3 .Line 4) 13,182,617 6. Revenue Deficiency (Line 5 x Revenue Factor of'2.1095) 27,808,730 cc. 7. Total Revenue Request S 76,299,524 '~ 8. Percent of Requent Allowed (Line 6 i Line 7) 36.44% 9. Total Pennsylvania Retail Revenue Request S 67,800,000 Y ..y 10. Total Pennsylvania Retail Ravenue Allowance (Line 9 x Line 8) 24,700,000 (A) Income Available for Return without Homer City No. 3 76,999,000 Income Available for Return attriF " ole to Homer City No. 3 1,810,000 78,809,000 119I6 211 y. ..,..,,c.,

A t*{ g. i 4 PE:iNSYI.VANIA El.ECTRIC COMPANY b* R.I.D. No. 392 ~.. Scary of Revenues. Expenses and Taxes (000 Onitted) Test Year Adjusted Comission Coer21s sion 12 11onths Adj us tnen t s Test Year Revenue Comission Adj us ted Additional Ended llorer City 12/31/77 f3 Other Totals Allowed Allowance Operating Revenues Total 275.609 275,609 27.808.7 303,417.7 Operating, Expenses !!orer City Coal Cleaning Cost (113) Extraordinary Flood Damage 150 Deferred :1aintenance Expense - Pavroll - Otacr Operation and (3,002)

faintenance Rate Case Expense t.nortization (760)

(230) kortization of Book Deprecia-tion Ccserve Deficiency PFciD-10 Practices (422) - P2yroll (2,272) - Other Operation and Ita in t en ance 1oad Reccarch Program (979) - Payroll (131) - ocner operation and itaintenance (68) uepreci. Liv.. - Ring Cirder (47) - Conoonent Weichting (165) Decor:missioning Expense Amount of Net Cain on (226) Reacquired Debt (80) Interest on Custoner Deposits 45 Coal and Ash if andling 250 Coal Cleaning Costs 1,031 keserve Capacity (6,207) Op: ration and Maintenance 2,950 ~ Depreciation 4 3,863 --+ Total 168.437 1,887 (8,300) 162,024 .m. 162,024 ~ Taxes N Tanes - Other than income 10,560 526 (317) 10,769 556.2 11,325.2 state Ir. cone 2,575 (944) 601 2,232 1,901.3 4,133.3 N Federal Incotne 9,433 (16,823) 3,848 (3,54 2) 12.168.6 8,626.6 Provision for Deferred Income Taxes (Net) 6,989 3,035

t Investment Tax Credit (Net) 4,784 10,509 10,024 10,024 15,293 15,293

{ Total 34,341 (3,697) 4,132 34,776._:-14,626.1 49,402.1 } Net Incoce Availa* le for Return 72,831 _1,810' 4,168 i j i,'iO9 ~ Y U3,162.6 91,991.6 ~ w. a .c x. o n .}}