ML19262C206
| ML19262C206 | |
| Person / Time | |
|---|---|
| Site: | Shoreham File:Long Island Lighting Company icon.png |
| Issue date: | 01/14/1980 |
| From: | LONG ISLAND LIGHTING CO. |
| To: | |
| Shared Package | |
| ML19262C205 | List: |
| References | |
| NUDOCS 8002070260 | |
| Download: ML19262C206 (196) | |
Text
4 AMENDMENT 35 INSERTION INSTR _UCTIONS FOR REVISION TO THE LICENSE APPLICATION The following
- text, tables, and exhibits are to be inserted in the License Application-Operating License Stage.
These pages are either replacement pages or new pages as indicated below.
All replacement pages which differ from ex1. ting pages are identified with the amendment number and date in.he ' wer right hand corner.
Bars located in the margin of a parcicular page indicate material which is new in the admendment indicated at the bottom of the page.
Remove Old (Pages)
Insert New (Pages)
LILCO letter SNRC-459 in front of Tab LICENSE APPLICATION Title page August 28, 1975 Title page Amended January 14, 1980 Amended License Applica-Amended License Applica-tion (6 pages) tion (6 Pages)
Affidavit Andrew W. Wofford Affidavit Joseph P. Novarro 1972 Annual Report 1975 Annual Report 1973 Annual Report 1976 Annual heport 1974 Annual Report 1977 Annual Report 1978 Annual Report Exhibit B (3 pages)
Exhibit B (6 pages)
Tab EXHIBIT C C-1 through C-13 LILOO Prospectus dated October 30, 1979 with Supplement C-14 through C-20 Attachment A to Question 4.C - Testimony of Raymond J. Forrer pages and 12 through 20 Exhibit No. 13 (2 pages)
Exhibit No. 14 (Schedule 1 and Schedule 2)
Exhibit No. 15 (Schedule 1 and Schedule 2)
Exhibit No. 16 (Schedule 1 and Schedule 2)
Exhibit No. 17 and Exhibit
=
No. 18 r.s
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1945 052 1
Amendment 35 - January 1980 60 0 2 07 0 Clj${}
Remove Old (Pages)
Insert New (Paqqs)
Attachment B to Question 4.C - Te_'timony of Zvi Benderly (21 pages)
Exhibit No. 56 and Schedule 1 Schedule 2 and Technical Appendix page 1 of 4 Technical Appendix page 2 of 4 through page 4 of 4 Attachment C to Question 4.C - Opinion No. 79-14 (52 pages)
Appendix A Schedule 1 and Appendix A Schedule 2 page 1 Appendix A Schedule 2 page 2 through page 7 Appendix A Schedule 3 (6 pages)
Appendix B Schedule 1 and Appendix B Schedule 2 page 1 Appendix B Schedule 2 page 2 through page 5 Appendix B Schedule 3 page 1 and page 2 Appendix B Schedule 3 ll page 3 and Appendix C title page State of New York Public Service Commission Case 27374 (3 pages) through State of New York Public Service Commission Cases 27374 and 2737b (4 pages)
C-21 through C-23 THESE INSTRUCTIONS ARE TO BE FILED IN FRONT OF TAB - LICENSE APPLICATION.
066
- 2 Amendment 35 - January 1980
BEFORE THE UNITED STATES NUCLEAR REGULATORY COMMISSION DOCKET NO. 50-322 IN THE MATTER OF LONG ISLAND LIGHTING COMPANY AMENDED LICENSE APPLICATION UNDER THE ATOMIC ENERGY ACT OF 1954 AS AMENDED FOR SHOREHAM NUCLEAR POWER STATION UNIT 1 August 28, 1975 Amended: January 14, 1980 l
l945 054 Amcndment 35 - January 1980
BEFORE THE UNITED STATES NUCLEAR REGULATORY COMMISSION DOCKET NO. 50-322 IN THE MATTER OF LONG ISLAND LIGHTING COMPANY AMENDED LICENSE APPLICATION Pursuant to the Atomic Energy Act of 1954, as amended, and its implementing regulations, Long Island Lighting Company (Applicant or LILCO) submits this Amended Application for the class 103 facility operating license, as well as the byproduct, source, and special nuclear material licenses, necessary for LILCO to own and operate a nuclear electric generating unit located in the Town of Brookhaven, Suffolk County, New York, known as Shoreham Nuclear Power Station Unit 1 (the facility).
The facility will be an integral part of LILCO's total operating system.
A description of the facility and a discussion of the technical qualifications of LILCO and its principal contractors are contained in the Final Safety Analysis Report submitted herewith.
I.
INFORMATION INCLUDED This Amended Application consists of:
(1) the information required by 10 C.F.R.
g 50.33 which is set out below; (2) the technical information and safety analysis. report required by 10 C.F.R. 8 50.34(b) which is set out in a separate document entitled " Final Safety Analysis Report, Shoreham Nuclear Power Station Unit 1, Long Island Lighting Company," forwarded herewith and made a part hereof; (3) the environmental data required by 10 C.F.R. 8 50.30(f) which is set out in a separate document entitled " Environmental Report - Operating License Stage, Shoreham Nuclear Power Station Unit 1, Long Island Lighting Company,"
forwarded herewith and made a part hereof; and (4) the Physical Security Plan required by 10 C.F.R.
g 50.34 (c), forwarded here-with and made a part hereof.
Amendment 35 - January 1980 1945 055 O
II.
INFORMATION REQUIRED BY 10 C.F.R. 0 50.33 (a)
Name of Applicant Long Island I.ighting Company (b)
Address and Principal Office of Applicant 250 Old Country Road Mineola, New York 11501 (c)
Description of Business LILCO supplies electricity ana gas in Nassau and Suffolk Counties and the Fifth Ward of the Borough of Queens, New York City, all of which are on Iong Island in the State of New York, except that electric energy is not supplied in the Incorporated Villages of Freeport and Rockville Centre in Nassau County and in the Incorporated Village of Greenport in Suffolk County.
LILCO's service area consists of 1,230 square miles l
with an estimated population of 2,884,601 persons as of January 1, 1979.
The proposed nuclear generating facilit*f is a necessary part of LILCO's continuing construction of facilities to provide electric energy to meet increasing demand and to offset increasing difficulties in obtaining fossil fuel.
The business of LILCO is further described in the annual reports attached as Exhibit A below.
(d)
(1)
Not applicable.
(d)
(2)
Not applicable.
(d)
(3)
(i)
State of Incorporation LILCO is a public utility corporation organized under the Transportation Corporation Law of the State of New York.
(d)
(3)
(ii)
Directors and Principal Officers All principal officers and directors of LILCO are citizens of the United States of America.
Their names and resident addresses are stated in Exhibit B to this Application.
(d)
(3)
(iii)
Absence of Foreign Control LILCO is not owned, controlled, or dominated by an alien, a foreign corporation or a foreign government.
1945 056 Amendment 35 - January 1980 (d)
(4)
Absence of Agency LILCO is filing this Application solely for its own purpose and is not acting as an agent or representative of another person.
(e)
Licenses Sought LILCO is hereby applying for such licenses as may be necessary to the ownership, possession, use and operation of Shorehan Nuclear Power Station Unit 1 as decc.ibed in this Application, which facility is to be used as a part of LILCO's electric utility plant for the generation of electric energy, including the following licenses:
Class 103 Facility Operating License A construction permit (No. CPPR-95) for a class 103 facility was issued to LILCO for the Shoreham Nuclear Power Station Unit 1 on April 14, 1973, and was amended en May 14, l
1979.
This amended construction permit provides for a latest date of completion of the facility by December 31, 1980.
Pursuant to 10 C.F.R. EE 50.51 and 50.56, LILCO requests that upon substantial completion of construction of Shoreham Nuclear Power Station Unit 1, a class 103 facility operating license be issued for the facility.
This license is requested to be issued for a period of 40 years.
Byproduct, Source, and Special Nuclear Material Licenses Pursuant to 10 C.F.R. Parts 30, 40 and 70, LILCO will need such byproduct, source, and special nuclear material licenses as are necessary to authorize it to acquire, deliver, receive, possess, use and transfer such materials (and with respect to byproduct materials, also produce and own such material) in connection with the operation of Shoreham Nuclear Power Station Unit 1.
It is requested that these licenses be granted for a term consistent with the class 103 facility operating license requested above.
LILCO has combined its applications for these licenses in this single Application as permitted by 10 C.F.R. 8 50.31.
1945 057 v
Amendment 35 - January 1980 (f)
Financial Qualifications Facility Costs The estimated cost of the comple',ed facility is $1,581,000,000.
The associated cost for the transmission facilities is $23,571,000.
The estimated cost of plant operation for the first five years is as follows:
(7/Mos)
Year 1
2 3
4 5
6 (Thousands of Dollars)
Fuel 16,182 27,600 29,106 32,998 37,922 43,705 Operations &
10,127 29,224 27,755 29,508 33,820 33,820 Maintenance The estimated cost of shutting down the facility and main-taining it in a safe shutdown condition involves a $9,000,000 (1975 dollars) one-time cost and a $30,000 per year annual cost based on the entombment concept as described in Section 5.9 of the Shoreham Environmental Report-Operating License Stage.
The Applicant is financing these costs in the ordinary course of its business.
It is anticipated that the necessary funda will be provided from internal sources, principally I
depreciation accruals.
The Applicant is financially qualified to engage in the proposed activities as shown by its last four consecutive Annual Reports, submitted as Exhibit A to this Application.
Additional financial information is presented in Exhibit C.
Insurance Program LILCO is carrying the maximum property damage insurance presently available for the facility through the American Nuclear Insurors (ANI) and the Mutual Atomic Energy Reinsurance Pool (MAERP).
In addition to the coverage available through ANI and MAERP, it is LILCO's intent to seek from other available insurance markets any additional amounts of coverage necessary to protect its investment.
LILCO also will purchase nuclear liability insurance l
coverage from ANI, the Mutual Atomic Energy Liability Undensriters (MAELU), or any other acceptable insurer, in such form and in such amount as will meet the requirements of 10 C.F.R. Part 140.
This insurance will be i:. effect at least as of the date of shipment of the first fuel bundles from the seller's facilities to the Shoreham "i'*'
1945 058 Amendment 35 - January 1980 Pursuant to the terms of 10 C.F.R. E 140.20, LILCO will also execute with the Nuclear Regulatory Commission an indemnity agreement as required by S 170 of the Atomic Energy Act of 1954, as amended.
(h)
Scheduled Completion Dates The facility is scheduled to be operational by the Spring of 1981.
The latest date for completion of the facility is December 31, 1980, as stated in CPPR-95, as amended on May 14, 1979.
(i)
Regulatory Agencies and News Publications Regulatory agencies with jurisdiction over the rates and services incident to the proposed generation, sale and distribution of the facility's electric energy are:
New York Public Service Commission Empire State Plaza Albany, New York 12223 Federal Energy Regulatory Commission l
825 North Capitol Street, NE Washington, D. C.
20426 The following is a list of trade and news publications which circulate the area where Shoreham Nuclear Power Station l
Unit 1 will operate and which are considered appropriate to give reasonable notice of this Application to those municipalities, private utilities, public bodies and cooperatives, which might have a potential interest in the facility:
Newsday The New Haven Register 550 Stewart Avenue Register Publishing Company Garden City, N.
Y.
11530 367 Orange Street (516) 737-4444 New Haven, Conn.
06503 (203) 562-1121 The Daily News (L.I. Edition) 220 E.
42nd Street The Day New York, N.
Y.
10017 47 Eugene O'Neill Drive (212) 949-3602 New London, Conn.
06320 (203) 443-2882 Bridgeport Post & Telegram 410 State Street Bridgeport, Conn.
06602 (203) 333-0161 l
1945 059 Amendment 35 - January 1980 (j)
Restricted Data No Restricted Data or other classified defense information is involved in this Application, and it is not expected that any will become involved.
Nonetheless, pursuant to 10 C.F.R. @ 50.37, LILCO hereby agrees that it will not permit any individual to have access to Restricted Data until the Civil Service Commission shall have made an investigation and report to the Commission on the character, associations, and loyalty of such individual and the Commission shall have determined that permitting such person to have access to Restricted Data will not endanger the common defense and security.
III.
INFORMATION REQUIRED BY 10 C.F.R. @ 50.33a The pertinent antitrust information was filed April 14, 1971.
IV.
COMMUNICATIONS All communications to LILCO pertaining to this Application should be sent to:
Andrew W. Wofford, Vice President Long Island Lighting Company 175 East Old Country Road Hicksville, New York 11801 cc:
Edward M.
Barratt, Esq.
General Counsel Long Island Lighting Company 250 Old Country Road Mineola, New York 11501 Edward J. Walsh, Esq.
General Attorney Long Island Lighting Company 250 Old Country Road Mineola, New York 11501 1945 060 Original Dated:
August 28, 1975 Amended:
January 14, 1980 Respectfully submitted, LONG ISLAND LIGHTING COMPANY r1
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- /.'?, tat o JO PH P.
NOyARRO i/
Amendment 35 - January 1980
AFFIDAVIT STATE OF NEW YORK) ss: Shoreham COUNTY OF SUFFOLK)
JOSEPH P. NOVARRO, being duly sworn, states that he is Project Manager of the Shoreham Project within Long Island Lighting Company; that he is authorized on the part of said Company to sign and file with the Nuclear Regulatory Commission the foregoing Amendment No. 35 to the License Application, Shoreham Nuclear Power Station, Docket No. 50-322, consisting of an amended License Application and accompanying exhibits; that Amendment No. 35 was prepared under his supervision and direction; and that as of this date, the statements contained therein are true and correct to the best of his knowledge, information and belief.
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(Y?ALD 21f
/ / JOSEPH P.
NOVARRO V
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Sworn to before me this 14th day of January, 1980 a- }+4'"P" 1945 9g;
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DIRECTORS and OFFICERS O
DIRECTORS EDWARD C. DUFFY ROBERT G. OLMSTED Retired Vice Chairman of the Board President. Island Capital Corp.
Long Island Lighting Company Investments
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DOUGALL C. FRASER President President. Abingdon Investment Corp-Long Island Lighting Company Investments EBEN W. PYNE NATHANIEL M. GIFFEN Senior Vice President Chairman of the Board and First National City Bank Chief Executive Officer Suffolk County Federal Savings and E. CLINTON TOWL Loan Association Member of the Board of Directors Grumman Corp.
Manufacturing LIONEL M. GOLDBERG Vice President. Alexander & Alexander,Inc.
JOHN J. TUOHY Chairman of the Board Long Island Lighting Company JOHN D. 'MXWELL Vice-Cha',-ma. and Director, Kollmorgen Corp.;
PHYLLIS S. VINEYARD Vice President, Powers Chemco. Inc.
President, Suffolk Community Council Manufacturing Voluntary Non. profit Planning Agency OFFICERS JOHN J. TUOHY CHARLES R. PIERCE Chairman of the Board President and Chief Executive Officer J AMES W. DYE, JR.
JOHN J. RUSSELL Senior Vice President - Operations, Vice President - Customer Relations Transmission - Distribution and Purchasing ANDREW W. WOFFORD FRANK C. MACKAY Vice President - Project Management Senior Vice President - Commercial Operations EDWARD W. EACKER THOMAS H. O'BRIEN Senior Vice President - Finance MICHAEL CZUMAK Controller WILFRED O. UHL Senior Vice President RAYMOND J. FORRER Engineering and Project Management Assocaste Controller JOSEPH G. ACKER JOHN J. KEARNEY, JR.
Vice President -Transmission - Distribution and Secretary Service Operations KATHLEEN M. BROWN
- ' *"I 8* * '* **7 GRANT BROWN Vice President - Employee Relations CHARLES J. DAVIS Vice President - Engineering EDWARD M. BARRETT General Counsel IRA L. FREILICHER EDWARD J. WALSH, JR.
Vice President - Public Affairs General Attorney JOHN R. GUMMERSALL, JR.
FRANCIS M. WALSH Vice President - Operations and Construction General Claims Attorney 1945 063
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richer and more fulfillinglifeis a driving forcein allhuman existence. Walt Whitman, a native Long Islander, expressed in his poetry this wonder of humanity, and the glorious diversity and variety reflected in people e
everywhere.
Celebrated as the poet of democracy, Whitman told us that in the most common of human activities are found the essential elements of the meaning of life. We have tried to show in this year's Annual Report, through the people and places of Long Island, together with Whitman's words, how men and women, freed by energy from the drudgery of survival, better their lives in myriad ways: by a quiet walk on the seashore, through the confident satisfaction of a job I
I performed well, through the exhilaration of physical movement, 1945 0t'S or bv the c "te=v'atio" ^"d enjoyment of beauty.
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J I:nergy, the ntwt Essential Thia year, in additht to the discussion of LII.CO's opera:ians, our Annual Ra-h port lecles at examplas of leadership p'S ca Lcng Ishud, from the past aa tin 9
% psent.
g Ocr coverilkstrates the dangers of whalisj, a major Long W.and indnetry 9
d whJoh m:pplied gwwbg America with wh n13 cil forlighting t=til the hte Wh. L" CGntrt, tWO of the McSt p;oaliig ew;2 gy u,wces available r.cw c ad (ct the ktn:3 are shown d-no; nuclear power and solar
+ miri. A traspoon citu2n!u.m fuel, niMm cd here in McDowcake" form, een nMimately yield as rauch energy a J ) gc1kna cf oil or 356 pounda ef. &
"a ; narch for energy souces.
le In more than Irr'J,000 years ano, viu 2 ann dlwovered wood could be S >&i Water's force was harnessed ne> t foUowed by the capture of 1
ernTf in windmilla. Coal was the fuel y
th?I fued the ir.dustrial Revolution,
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b+eoslag the primari resource b-1^00. Pay years later, en and natural gu hd replaced coal as the snajor sources of the world's energy. Like the ence-Abundant whale, now a pro-tected species, fossil fuels were long regexdad es L:axhaustible.
A ann ~e new way to use these -
fueIs was c rm-S Siwith Edison's in.
verdien of the electriclight balbin W9. Our reliance en eles-tricity will increare fu the years ahead, as this form of energyis used to meet a wider rrnge cf needs. By the year 2000, elec- -
tricity may acccunt for as much as 50% of total United States energy use.
P.s production will rely to a great ex-1945 067 tent en new sources of fual, su,'ple-tienting diminishing ter4 plies of oil attd natural gas.
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EXHIBIT B LONG ISLAND LIGHTING COMPANY BOARD OF DIRECTORS William J.
Casey Business Address:
Glenwood Road Roslyn Harbor, N.
Y.
11576 516-621-9332 Wi lliam J. Catacosinos Business Address:
- Chairman and Chicf Executive Officer Applied Digital Data Systems, Inc.
100 Marcus Boulevard Hauppauge, N.
Y.
11787 516-231-5400 Secretary:
Ms. Marion Grant Residence:
Mill Neck, N. Y.
11765 516-922-4630 Edward C. Duffy Residence:
- 133 Marshall Avenue 6-52 050b l
Summer Residence:
Mason Drive, RD #1 Box SOA Cutchogue, N.
Y.
11935 516-734-6300 Winter Residence:
6140 Midnight Pass Road Sarasota, FL 33581 813-349-5180 l945 070
- Denotes mailing address l
Amendment 35 - January 1980 Winfield E.
Fromm Business Address:
- Group Vice President Instruments and Systems Group Cutler-Hammer, Inc.
One Huntington Quadrangle - Suite 3S12
- Melville, N.
Y.
11747 516-293-8901 Secretary:
Mrs. Edie Corl 516-293-8902 Resi.lence:
Laurel Court RFD #3 Lloyd Harbor, N.
Y.
11743 516-427-4821 Nathaniel M.
Giffen Business Address:
- Chairman of the Board and Chief Executive Officer Suffolk County Federal Savings and Loan Association 2100 Middle Country Road Centereach, N.
Y.
11720 516-585-6300 Secretary:
Mrs. Nancy Schechter Residence:
Levon Lane Miller Place, N.
Y.
11764 l
516-473-6019 Lionel M.
Goldberg Business Address:
- Vice President Alexander & Alexander, Inc.
One Huntington Quadrangle
- Melville, N.
Y.
11747 516-249-1500 Mrs. Loretta Roth Residence:
32 Pearsall Avenue
$ \\
Glen Cove, N.
Y.
11542 Sb l
516-676-1221
)
N l
- Denotes mailing address Amer' ent 35 - January 1980 John D. Maxwell Business Address:
Chairman Kollmorgen Corporation 31 Sea Cliff Avenue Glen Cove, N.
Y.
11542 516-448-1001 Secretary:
Mrs. Sandra Flynn Residence:
- High Farms Road Glen Head, N. Y.
11545 516-448-1002 Charles R.
Pierce Business Address:
- Chairman of the Board and Chief Executive Officer Long Island Lighting Company 250 Old Country Road Mineola, N.
Y.
11501 516-228-2026 Secretary:
Mrs. Hazel Morel Residence:
21 Wayside Lane Lloyd Harbor, N.
Y.
11743 516-423-2709 l
Eben W.
Pyne Business Address:
- Senior Vice President Citibank, N.A.
One Citicorp Center 153 East 53rd Street New York, N.
Y.
10022 212-559-9528 Secretary:
Miss Eileen Vandenberg Residence:
Willets Road Old Westbury, N.
Y.
11568 516-333-2084 Apartment:
200 East 66th Street New York, N.
Y.
212-688-1978 1945 072
- Den. tes mailing address o
Amendment 35 - January 1980 I
Wilfred O. Uhl Business Address:
- President Long Island Lighting Company 250 Old Country Road Mineola, N. Y.
11501 516-228-2100 Secretary:
Miss Ann Dunn Residence:
28 Elmwood Court Plainview, N. Y.
11803 516-681-0229 Phyllis S. Vineyard Residence:
- 10 South Brewster Lane Bellport, N. Y.
11713 l
516-AT6-0269 l
January 31, 1979 l
- Denotes mailing address
~
1945 073 O
Amendment 35 - January 1980
OFFICERS NAME TITLE ADDRESS Charles R.
Pierce Chairman of the Board 21 Wayside Lane of Directors and Chief Lloyd Harbor, N.Y.
11743 Executive Officer 423-2709 Wilfred O. Uhl President 28 Elmwood Court Plainview, N.Y.
11803 681-0229 Charles J.
Davis Senior Vice President-5 Brookside Drive Engineering & Project Oyster Bay, N.Y.
11771 Management 922-3210 728-6317 (summer)
James W.
Dye, Jr.
Senior Vice President-12 Summit Court Operations, Transmission / Oyster Bay, N.
Y.
11771 Distribution and 922-4742 Purchasing Frank C. Mackay Senior Vice President-923 Southern Drive Commercial Operations Franklin Square,N.Y. 11010 561-8084 Thomas H. O'Brien Senior Vice President-21 Hilton Avenue Finance Garden City, N.Y.
11530 741-2433 Joseph G.
Acker Vice President-15 Teal Crescent Transmission / Distribution Great River, N.Y.
11739 and Service Operations 277-5555 Hugh P.
Boylan Vice President -
22 Peterborough Drive Purchasing Northport, N.Y.
11768 261-2461 Matthew C.
Cordaro Vice President-10 Triangle Court Engineering Ft. Salonga, N.Y.
11768 757-9871 Ira L.
Freilicher Vice President-63 Old Farm Road Public Affairs East Hills Roslyn Heights, N.Y.
11577 484-2045 John R.
Gummersall, Vice President-141 Glenlawn Avenue Jr.
Operations and Sea Cliff, N.Y.
11579 Construction 759-9657 1945 074 Amendment 35 - Ja..uary 1980
h NAME TITLE ADDRESS Matthew S.
Procelli Vice President-8 Mountain View Court Employee Relations Northport, N.Y.
11768 757-3734 John J.
Russell Vice President-44 Mole Place Customer Relations Amityville, N.Y.
11701 691-4799 Andrew W.
Wofford Vice President-11 Chanticleer Court Project Management Huntington, N.Y.
11743 367-4374 Edward W.
Eacker Treasurer 22 Smith Street Glen Head, N.Y.
11545 759-0254 Michael Czumak Controller 246 Soundview Road Huntington, N.Y.
11743 423-5166 Raymond J.
Forrer Associate Controller 50 Relda Street Plainview, N.Y.
11803 l
935-1667 John J.
- Kearney, Secretary 35 Russell Road Jr.
Garden City, N.Y.
11530 l
746-7642 Kathleen M.
Brown Assistant Secretary 671 Clinton Avenue i
Uniondale, N.Y.
11553 I
489-7527 Edward M.
Barrett General Counsel 332 Southdown Road Lloyd Harbor, N.Y.
11743 l
421-3223 Edward J. Walsh, General Attorney 72 Brook Street Jr.
Garden City, N.Y.
11530 746-2682 Francis M. Walsh General Claims Attorney 124 Seaman Road
- Jericho, N.Y.
11753 l
931-4404 lll 1945 075 Amendment 35 - January 1980
J E
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1945 076
)
i
EXHIBIT C ADDITIONAL FINANCIAL INFORMATION Long Island Lighting Company forwarded to the NRC Staff via its letters SNRC-378, dated April 19, 1979 and SNRC-453 dated January 4, 1980, the additional financial information requested in the January 23, 1979 NRC letter from Mr.
S. A. Varga to Mr. A. W. Wofford.
That additional financial information has been reproduced herein as Exhibit C cxcept in the case of certain bulky testimony and exhibits from New York Public Service Commission Cases 27374 (electric) and 27375 (gas),
which is incorporated by reference to SNRC-378 and SNRC-453.
1945 077 s
C-1 Amendment 35 - January 1980
QUESTION 1.a.
Indicate the estimated annual cost by year to operate the subject facility for the first five full years of commercial operation.
The types of costs included in the estimates should be indicated and include (but not necessarily be limited to) operation and maintenance expense (with fuel costs shown separately), depre-ciation, taxes and a reasonable return on investment.
(Enclosed is a form which should be used for each year of the five year period).
Indicate the projected plant capacity of the unit for each of the above years.
RESPONSE
See the attached forms for the response to question 1.a. for each of the five years beginning 1981.
O 1945 078 O
C-2 Amendment 35 - January 1980
ATTACHMENT FOR ITEM NO.
1_a_
ESTIMATED ANNUAL COST OF OPERATING NUCLEAR GENERATING UNIT:
SHOREHAM NUCLEAR POWER STATION, UNIT NO. 1 FOR THE CALENDAR YEAR 19_8_1 (thousands of dollars)
Operation and maintenance expenses Nuclear power generation Nuclear fuel expense (plant factor 66%).
$ 16182 Other operating expenses 5896 Maintenance expenses
_4231 Total nuclear power generation 26309 Transmission expenses 100 Administra+ive and general expenses Property and liability insurance.
3100 1620 Other A.&G. expenses 4720 Total A.&G. expenses.
TOTAL O&M EXPENSES 31129 Depreciation expense 32300 Taxes other than income taxes 15800 Property taxes 11053 Other Total taxes other than income taxes 26853 Income taxes - Federal 2427 Income taxes - other Deferred income taxes - net 19520 Investment tax credit adjustments - net (2000)
Return (rate of return: 10.20 %)
155978 TOTAL ANNUAL COST OF OPERATION
$266207 1945 079 C-3 Amendment 35 - January 1980
ATTACHMENT FOR ITEM NO.
1.a.
ESTIMATED ANNUAL COST OF OPERATING NUCLEAR GEtiSRATING UNIT:
SHOREHAM NUCLEAR POWER STATION, UNIT NO. 1 FOR THE CALENDAR YEAR 19_8_2 (thousands of dollars)
Operation and maintenance expenses Nuclear power gencration Nuclear fuel expense (plant f actor 66 %).
... $ 27600 16442 Other operating expenses 12782 Maintenance expenses Total nuclear power generation 56824 107 Transmission expenses Administrative and general expenses 3250 Property ar.d liability insurance.
4676 Other A.&G. expenses 792T Total A.&G. expenses 64857 TOTAL O&M EXPENSES O
55300 Depreciation expense Taxes other than income taxes 28900 Property taxes 14824 Other Total taxes other than income taxes I372I Income taxes - Federal 2628 Income taxes - other Deferred income taxes - net 29534 Investment tax credit adjustments - net (2000)
Return (rate of return: 10.20 g) 147329 TOTAL ANNUAL COST OF OPERATION
$341372
~
u 1945 080 C-4 Amendment 35 - January 1980
ATTACHMENT FOR ITEM NO.
1.a.
ESTIMATED ANNUAL COST OF OPERATING NUCLEAR GENERATING UNIT:
SHOREHAM NUCLEAR POWER STATION, UNIT NO. 1 FOR THE CALENDAR YEAR 1983 (thousands of dollars)
Operation and maintenance expenses Nuclear pcwer generation Nuclear fuel expense (plant factor 71%)
$ 29106 Other operating expenses 15941 Maintenance expenses 11814 Total nuclear power generation 56861 Transmission expenses 114 Administrative and genera' expenses Property and liability insurance.
3400 4441 Other A.&G. expenses 7841 Total A.&G. expenses.
TOTAL O&M EXPENSES 64816 55300 Depreciation expense Taxes other than income taxes Property taxes 30900 14667 Other Total taxes other than income taxes 45567 3262 Income taxes - Federal Income taxes - other Deferred income taxes - net 33734 Investment tax credit adjustments - net (2000)
Return (rate of return: 10. 2' % )
138251 TOTAL ANNUAL COST OF OPERATION
$338930 1945 081 C-5 Amendment 35 - January 1980
ATTACHMENT FOR ITEM NO.
1.a.
ESTIMATED ANNUAL COST OF OPERATING NUCLEAR GENERATING UNIT:
SHOREHAM NUCLEAR PONER STATION, UNIT NO. 1 FOR THE CALENDAR YEAR 1984 (thousands of dollars)
Operation and maintenance expenses Nuclear power generation Nuclear fuel expense (plant factor 74%)
$ 32998 Other operating expenses 16948 Maintenance expenses 12560 Total nuclear power generation 62506 Transmission expenses 121 Administrative and general expenses Property and liability insurance.
3570 Other A.&G. expenses 4721 Total A.&G. expenses.
577T TOTAL O&M EXPENSES 70918 Depreciation expense 55300 Taxes other than income taxes Property taxes 33100 Other 16082 Total taxes other than income taxes 47132 Income taxes - Federal 40'726 Income taxes - other Deferred income taxes - net 28734 Investment tax credit adjustments - net (2000)
Return (rate of return: 10.20 %)
129683 TOTAL ANNUAL COST OF OPERATION
$372543 1945 082 O
C-6 Amendment 35 - January 1980
ATTACHMENT FOR ITEM NO.
1.a.
ESTIMATED ANNUAL COST OF OPERATING NUCLEAR GENERATING UNIT:
SHOREHAM NUCLEAR POWER STATI'1N, C'!IT NO. 1 FOR THE CALENDAR YEAR 1985 (thousands of dollars)
Operation and maintenance expenses Nuclear power generation Nuclear fuel expense (plant factor 78%)
$ 37922 19399 Other operating expenses 14421 Maintenance expenses 71742 Total nuclear power generation 136 Transmission expenses Administrative and general expenses 3750 Property and liability insurance 4922 Other A.&G. expenses EI77 Total A.&G. expenses 80550 TOTAL O&M EXPENSES 55300 Depreciation expense Taxes other than income taxes 35400 Property taxes 16631 Other Total taxes other than income taxes 52031 59985 Income taxes - Federal Income taxes - other 16834 Deferred income taxes - net (2000)
Investment tax credit adjustments - net 122329 Return (rate of return: 10.20 %)
$385029 TOTAL ANNUAL COST OF OPERATION 1945 083 C-7~
Amendment 35 - January 1980
ATTACHMENT FOR ITEM NO.
1.a.
ESTIMATED ANNUAL COST OF OPERATING NUCLEAR GENERATING UNIT:
SI*C?.EHAM NUCLEAR PGt SU STATION, UNIT NO. 1 FCR THE CALENDAR YEAR 19_86_
(thousands of dollars)
Operation and maintenar.ce expenses Nuclear power generation Nuclear fuel expe..se (plant factor 78%)
$ 43705 19399 Other operating c:-:penses 14421 Maintenance expenses Total nuclear power generation 77373' 136 Transmission expenses Administrative and general expenses 3949 Property and liability insurance 5411 Other A.&G. expenses 9331 70tal'A.&G. e::penses 87012 TOTAL O&M EXPENSES O
55300 Depreciation expense Taxes other than income taxes 37900 Property taxes 12079 Other 5IY75 Total taxes other than income taxes 66054 Income taxes - Federal Income taxes - other 16834 Dcferred income taxes - net (2000)
Investment tax credit adjustments - net 114974 Return (rate of return: 10.20 %)
$393153 TOTAL ANNUAL COST OF OPERATION 1945 084 O
C-8 Amendment 35 - January 1980
QUESTION 1.b.
Indicate the unit price per KWh experienced by each applicant on system-wide sales of electric power to all consumers for the most recent twelve month period.
RESPONSE
For the twelve (12) months ending January 31, 1979, the KWh unit price experienced by each applicant on the LILCO system was 5.8 cents.
1945 085 C-9 Amendment 35 - January 1980
QUESTION 2 Indicate the estimated costs of permanently shutting down the facility, statino what is included in such costs, the acsumptions made in estimating the costs, the type of shutdown contemplated and the expected source of funds to cover these costs.
RESPONSE
The Long Island Lighting Company has reviewed the various alternatives for decommissioning an 850 MWe boiling water reactor (BWR) plant at the end of its useful life.
They range from mothballing the plant nearly intact to complete dismantling of the plant and removal of all structures to one foot below grade level.
Selection of the best technique to use will naturally depend on many factors which can only be properly evaluated at the time of decommissioning.
Estimates of the costs of various alternatives can be made, however, based on the actual costs experienced in the decommissioning of several civilian reactors.
Three different levels of decommissioning were considered and the estimated cost (1975 dollars) were obtained for each:
(1)
Mothballing Leaving the plant essentially intact after flushing all systems and removing all loose radioactive items and wastes, providing a security fence around the plant, and maintaining a perpetual around-the-clock guard and watchman service, with semi-annual inspec-tion of the plant performed.
Decommissioning Cost:
$ 3,500,000 Annual Charges After Decommissioning:
80,000/ year I
(2)
Entomoment Leaving all buildings intact; flushing and diamantling system piping; isolating, sealing, and entombing the reactor pressure vessel; providing closed shield housings around major radioactive items such as the turbine generator, heat exchangers, moisture separators, etc.; removing all piping and other loose radioactive items and wastes; providing a security fence and performing semi-annual inspection of the plant.
Decommissioning Cost:
$ 9,000,000 Annual Charges After Decommissioning:
30,000/ year g
1945 086 C-10 Amendment 35 - January 1980
(3)
Complete Dismantling Removal of the plant down to one foot below grade level, leaving the subgrade foundations essentially intact, backfilling to grade level, and restoration of landscaping to the approximate original condition.
Decommissioning Cost:
$54,000,000 These numbers snow the range of decommissioning costs for the Shoreham Unit.
A 1977 Atomic Industrial Forum report, AIF/NESP-009SR, "An Engineering Evaluation of Nuclear Power Reactor Decommissioning Alternatives" indicated that the cost of decommissioning could be reduced if the plant were first moth-balled or entombed, and then left in that condition for a period of time before dismantling.
This approach to dismantling appears preferable to LILCO at this time.
The Applicant will continue to monitor industry developments and, at an appropriate time, a detailed decommissioning plan will be submitted to the NRC.
The source of funds will come from internal cash generation plus external financing as required.
1945 087 C-11 Amendment 35 - January 1980
QUESTION 3 Provide an estimate of the annual cost to maintain the shutdown of the facility in a safe condition.
Indicate what is included in the estimate, assumptions made in estimating cost and the expected source of funds to cover these costs.
RESPONSE
Annual costs to maintain the shutdown of the facility in a safe condition, a description of what is included in the estimate, and assumptions made in estimating costs are included in response to Question 2.
The source of funds will come from internally generated cash plus external financing as required.
O I945 088 q C-12 Amendment 35 - January 1980
QUESTION 4.a.
Provide copies of the prospectus for the most recent security issue and copies of the most recent SEC Form 10-K.
Provide copies of the preliminary prospectus for any pending security issue.
Submit copies of the Annual Report to Stockholders each year as required by 10 CFR 50.71(b).
RESPONSE
The below listed documents are herein provided:
1.
Prospectus dated October 30, 1979 and Supplement dated November 20, 1979.
2.
SEC Form 10-K for the fiscal year ended December 31, 1978 3.
LILCO Annual Report for 1975 4.
LILCO Annual Report for 1976 5.
LILCO Annual Report for 1977 6.
LILCO Annual Report for 1978 NOTE:
Item 1 is provided herein.
Items 2 through 6 have been submitted via the LILCO letter SNRC-378 dated April 19, 1979.
1945 089 gy;.{-rAVIr@
Amendment 35 - January 1980
-3
QUESTION 4.b.
Describe aspects of the applicant's regulatory environment including, but not necessarily limited to, the following:
prescribed treatment of allowance for funds used during construction and construction work in progress; form of rate base (original cost, fair value, other) ; accounting for deferred income taxes and investment tax credits; fuel adjustment clauses in effect or proposed; historical; partially projected, or fully projected test year.
RESPONSE
The following describes various aspects of LILCO's regulatory environment:
1.
The test year now utilized for rate making purposes in New York State is the 12 month period at the end of a calendar quarter no earlier in time than 150 days before the date of filing.
This test year is to be fully adjusted to show the operating results for the first 12 months during which the proposed rates will be in effect.
There have been no restrictions placed on the types of adjustment which may be made to the test year to make it represent the future period.
2.
There are certain items included in construction work in progress (CWIP) on which allowance for funds used during construction (AFC) is not calculated, since they are either too small or are of too short a duration in time.
These items are often referred to as "non-interest bearing" CWIP.
Currently the average balance for these items is $45 million on the electric side of the business and $4 million on the gas side of the business.
AFC generally would be calculated on the remainder of CWIP unless the Commission decides to permit some of it to be included in rate base.
(Such permission is normally only granted to enable a utility company to continue its financing program).
The Company is presently allowed to include $300 million of electric and $4 million of gas CWIP in its rate base.
3.
In New York, the rate base is normally the average plant in service at original cost, less the accumulated depreciation reserve, less the deferred taxes on plant-related items, plus an allowance for. working capital and any CWIP which the Commission has'Illowed to be included.
1945 091 C-14 Amendment 35 - January 1980
O 4.
The Commission permits deferred tax treatment on some of the differences between book and tax depreciation which produces something which can be described as between flow-through accounting and normalized accounting.
There is also deferred income tax treatment for the investment tax credit in excess of the first 4%.
The Company also capitalizes a portion of its AFC net of income taxes.
5.
The Commission permits both electric and gas fuel adjustment clauses.
The electric fuel adjustment clause includes the cost of fuel, excluding the cost of fuel used to make sales for resale, plus the cost of economy purchases and the cost of fuel included in non-economy purchases.
The Commission also permits deferred fuel accounting so that fuel expenses and fuel revenues may be more closely in phase with each other.
O
@s b
N O
C-15 Amendment 35 - January 1980
QUESTION 4.c.
Describe the nature and amount of the applicant's mcqt recent rate relief action (s).
In addition, indicate the nature and amount of any pending rate relief action (s).
Use the attached form to provide this information.
Provide copies of the submitted financially-related testimony and exhibits of the staff and company in the most recent rate relief action or pending action.
Furnish copies of the hearing examiner's report and recommendation, and final opinion last issued with respect to each participant, including all financial exhibits referred therein.
RESPONSE
4.c.
Rate Developments Granted Electric Gas Test year utilized 12/31/77 (a) 12/31/77(a)
Annual amount of revenue increase requested-test year basis (000's) 147,100
$23,900 Date petition filed 5/31/78 5/31/78 Annual amount of revenue increase allowed-test year basis (000's) 26,000 16,580 Percent increase in revenues allowed 3.3%
9.1%
Date of final order 4/27/79 4/27/79 Effective Date 5/04/79 5/04/79 Rate base finding (000's)
$1,558,728 238,761 Construction work in progress included in rate base (000's)
S 300,000 4,120 Rate of return on rate base authorized 10.26%
10.26%
Rate of return on common equity authorized 13.7%
13.7%
Revenue Effect (000's)
Amount received in year granted 15,300 7,200 Amount received in subsequent year 25,700 16,900 Pending Requests Electric Gas Test Year 6/30/79(b)
Amount
$25.6 million None Percent 2.5%
Date filed 9/21/79 Date by which decision must jg4} 093 be issued 8/80 C-16 Amendment 35 - January 1980
O 4c.
Rate Developments Pending Requests (Cont.)
Electric Gas Rate of Return on Rate Base Requested 10.49%
Rate of Return on Common Equity Requested 13.7%
Amount of Rate Base Requested
$1,684,859 Amount of CWIP included in Rate Base
$300 million NOTES:
(a)
The Public Service Commission of the State of New York (PSC) in making its final determination recognized certain major adjustments to the 12/13/77 test year and concluded that such adjustments created a new test year, called the rate year, the 12 months ended 4/30/80.
(b)
The test year of 6/30/79 has been adjusted to a rate year of 4/30/81.
Sb b%)
N O
4 C-17 Amendment 35 - January 1980
The following financially-related testimony and exhibits of Staff and Company witnesses in rate cases 2737? (electric) and 27375 (gas) have been previously submitted via LILCO letter SNRC-378 dated April 19, 1979 except for items C.1 and D which are provided herein:
Financially-related testimony and exhibits of Staff and Company witnesses in rate case 27374 (electric) and 27375 (gas) will consist of:
A.
Prepared testimony and prepared exhibit #196 of Vincent A. Macri, Chief Utility Financial Analyst, Utility Finance Section, Office of Accounting and Utility Finance, N.Y.
State Public Service Commission, Empire State Plaza, Albany, N.Y.
12223, dated October 1978 for the Staff:
Exhibit #196 contains the following:
1.
LILCO - Cash Funds Requirements Excluding the Trusts for the years 1979 and 1980 2.
LILCO - Capital Structure - June 30, 1978 - Pro Forma 3.
LILCO - Average Capital Structure for the Rated Year 4.
LILCO - Moody's Utility Common Stocks - Average Long Term Debt Positions 5.
LILCO - Moody's Utility Common Stocks - Average Preferred Stock Positions 6.
LILCO - Moody's Utility Common Stocks - Average Common Equity Positions 7.
LILCO - Cost of Long Term Debt - June 30, 1978 - Pro Forma 8.
LILCO - Cost of Preferred Stock - June 30, 1978 9.
LILCO - Financial Statistics 10.
LILCO - 1978 Yields for Long Island Lighting 11.
LILCO - Moody's Utility Common Stocks - Financial Statistics 12.
LILCO - Moody's Utility Common Stocks - Financial Statistics - 1976 13.
LILCO - Moody's Utility Common Stocks - Financial Statistics - 1977 14.
LILCO - Moody's Utility Common Stocks - Financial Statistics - Current 15.
LILCO - Flowthrough Electric Utilities - Financial Statistics for 1976 16.
LILCO - Flowthrough Electric Utilities - Financial Statistics for 1977 17.
LILCO - Flowthrough Electric Utilities - Financial Statistics - Current 18.
LILCO - Standard & Poor's 400 Industrials - Financial Statistics 19.
LILCO - Moody's Utility Common Stocks - AFC as a Percentage of Earnings C-18 Amendment 35 - January 1980
O 20.
LILCO - Flowthrough Electric Utilities AFC as a Percentage of Earnings 21.
LILCO - Common St ock Issuances 1976 - $20,000,000 or more 22.
LILCO - Common Stock Issuances 1977 - $20,000,000 or more 23.
LILCO - Common Stock Issuance in 1078 - $20,000,000 or more 24.
LILCO - Derivation of Formula for Converting Investors Expected Return to Required Return on Equity 25.
LILCO - Divisors Necessary to Convert Total Return to Required Return on Equity at Given Market to Book Ratios *
(* Assume 66% payout ratio) 26.
LILCO - Average Capital Structure and '. c c t Rates for the Rate Year 27.
LILCO - Pre-Tax Rate of Return 28.
LILCO - Pro Forma Pre-Tax Coverage for the Rate Year 29.
LILCO - Pre-Tax Coverage Based on the 10% Limitation of Other Income 30.
LILCO - Moody's Utility Common Stocks Pre-Tax Coverage for the Twelve Months Ended December 31, 1977 31.
LILCO - Flowthrough Utilities Pre-Tax Coverage for the Twelve Months Ended December 31, 1977 32.
LILCO - Moody's Utility Common Stocks Pre-Tax Coverage lh for the Twelve Months Ended June 30, 1978 33.
LILCO - Flowthrough Utilities Pre-Tax Coverage for the Twelve Months Ended June 30, 1978 34.
LILCO - AFC as a Percentage of Earnings for the Rate Year B. Financially-related testimony and exhibits of company witnesses in rate cases 27374 (Electric) and 27375 (Gas) :
1.
Thomas H. O'Brien 2.
Raymond J. Forrer 3.
Roger F. Murray the 2nd 4.
Zvi Bendry (testimony and exhibit #64 which contains Schedules 1 and 2 and a Technical Appendix)
C.
The Hearing Examiner's report and recommendations, and final opinion last issued with respect to each participant, including all financial exhibits referred therein consists of the following:
1.
Recommended Decision by Administrative Law Judge David Schechte Issued 2/13/79 - Case 27374 and 27375 2.
Opinion and Order Determining Increased Revenue Requirements - Issued 4/27/79, Case 27374 (Electric Rates) and 27375 (Gas Rates).
(Attachment C to question 4C provided with this submittal) 1945 096 C-19 Amendment 35 - January 1980
D.
Financially-related testimony and exhibits of Company witnesses in support of the pending rate case:
1.
Raymond J. Forrer (pages 1 and 12 through 20 and Exhibits 13 through 18.
2.
Zvi Benderly (testimony and exhibit 56 which contains schedules 1 and 2 and a technical appendix).
1945 097 C-20 Amendment 35 - January 1980
ATTACHMENT A TO QUESTION 4.C TESTIMONY OF RAYMOND J. FORRER 1
Q.
Please state your name and business address.
2 A.
Raymond J. Forrer, 250 Old Country Road, Mineola, New York 3
4 Q.
What is your position with Long Island Lighting Company?
5 A.
I am Associate Controller, a position I have held since 1974.
6 7
Q.
Have you testified in other proceedings before this Commission?
8 A.
Yes.
I have testified in several of the Company's rate proceedings 9
including its last electric and gas rate Cases 27374 and 27375, 10 in Case 27136, in Case 80003 "Jamesport Siting Application", and 11 in case 26798 " Empire State Power Resources. Inc."
12-13 Q.
Hr. Forter, I show you a two page document entit. led "Long Island 14 Lighting Company - Balance Sheet." Was this document prepared 15 under your direction?
16 A.
Yes.
17 18 Q.
I that this document be marked for identification as it 19 No. 1.
Mr.
rer, would you please explai t Exhibit No.
20 1 shows?
21 A.
It shows the Balance She the ny as of December 31, in each 22 of the years
, 1976, 1977 and 1978 and as une 30, 1979 23 ex med from the book: of the Company by PSC prime accu..
24 1945 098 NOTE:
Pages 2 through 11 inclusive have been omitted intentionally. Amendment 35 - January 1980
RAYMOND J. FORRER O
1 cf which is entitled " Net Utility Plant - Electric - Bo'k Cos 2
o lant and Accumulated Depreciation - Monthly Balances !
3 1, 19 to April 30, 1981." The second page refers to Net 4
Utility nt - Common." The third page refers to eferred 5
Taxes - Elec c."
Was this document prepared der your 6
supervision?
7 A.
Yes.
8 9
Q.
I ask that this document be arke as Exhibit 12 for identifi-10 cation.
Mr. Forrer, what doe is Exhibit show?
11 A.
Page I shows monthly bala s after Rs for the period May 1, 1980 12 to April 30, 1981, in ' e various elec ic property accounts and O
13 accumulated depreci ion, including that p tion of common plant 14 from page 2 whi is allocated to electric ope ations. Page 2 15 shows the re ted common plant and accumulated de ciation balances.
16 The resu shown on es.ch page is net utility plant.
e 3 shows 17 mont'.
balances in the various deferred federal income t it=ms 18 f
electric oparations. Also shown on the bottom of each p 19 is the sverage annual balances for each of the items stated abov
~20 21 Q.
I show you a two-page document entitled, "Long Island Lighting Company 22
- Weighted Average Cost of Senior Securities at June 30, 1979."
23 Was this prepared under your directica?
24 A.
Yes.
1945 099 g
12 Amendment 35 - January 1980
RAYMOND J. FORRER 1
Q.
I ask that this document be marked as Exhibit 13 for identification.
2 Would you please explain this Exhibit?
3 A.
Exhibit 13 shows that at cf June 30, 1979, the weighted average 4
cost of long-term debt was 7.86% and the weighted average cost 5
of preferred stock was 8.02%.
6 7
Q.
I show you a two-page document entitled, "Long Island Lighting 8
Company - Estimated Cost of Senior Securities, Capital Structure, 9
and Rate of Return."
W' s this prepared under your direction?
a 10 A.
Yes.
11 12 Q.
I ask that this document be marked as Exhi'ait 14 for identification.
13 Would you please explain this Exhibit?
14 A.
Exhibit 14, Schedule 1 of 2 shows that the estimated changes in the 15 senior securities during the period of July 1,1979, and April 30, 16 1981, and the cost of those changes.
It reflects the pending sale 17 in October 1979 of $14.4 million of authority financing notes and a 18 proposed sale in May,1980 of $85 million of General and Refunding 19 Bonds at a cost of 10%. Also, an expected sale in December,1980 of 20
$70 million of General and Refunding Bonds at an estimated interest 21 rate of 10%. The schedule also indicates a refunding of the 22 Series A ist Mortgage Bonds of $20 million at a 3% rate in 23 September, 1980.
The resulting weighted aversge cost of debt at 24 April 30, 1981, is 8.16%.
The Exhibit further reflects (a) the 13 Amendment 35 - January 1980 1945 100
RAYMOND J. FORRER 1
recent issuance of Preferred Series S $75 million, with proceeds 2
to the Company of $73,715,000 at a cost of 9.97% and (b) an 3
adjustment for the Series Q Preferred Stock Amortization of 4
the redemption premium as per Case 27236. The Preferred Stock 5
has been reduced for the sinking fund requirements relating to 6
the Series L stock in July, 1979; Series Q in June, 1980; Series 7
L in July, 1980; and Series M in November, 1980. The weighted 8
average cost of Preferred Stock at April 30, 1981 is 8.56%.
9 10 Schedule 2 of 2 reflects the estimated capital structure, cost 11 rate, and the return components for long-term debt, Preferred 12-Stock, Common Equity and customer deposits as estimated for the 13 rate year ending April 30, 1981. In addition to the additional 14 bonds and preferred stock noted on Schedule 1, this schedule 15 reflects (a) a planned issue of $120 million offering of 16 common stock in November 1979, (b) a proposed $88.8 million
?7 offering of common stock in November, 1980, (c) proceeds of 18
$2 million from the sale of shares of common stock under the 19 Employee Stock Purchase Plan and (d) proceeds of $16 million 20 from the sale of shares of common stock under the Automatic 21 Dividend Reinvestment Plan during the rate year. Finally, 22 it reflects additional retained earnings of $58.7 million 23 and the estimated changes of $0.2 million to the capital stock 24 expense.
14 Amendment 35 - January 1980 1945 101
RAYMOND J. FORRER 1
Q.
What else does Exhibit 14 show?
2 A.
It shows the capitalization ratios of the capital structure and 3
the cost rates for each of the senior securities, 9% for customer 4
deposits and 13.7% for common equity. It also shows the resultant S
return components yielding a total required rate of rr. turn of 10.49%.
6 7
Q.
Mr. Forrer, would you comment or. the apparently high common 8
equity in the Company's capital structure?
9 A.
Although the common equity ratio in the Company's capital structure 10 seems high, two factors must be considered. First, in acccrdance 11 with past rate case treatment, the Resources and Construction Trust 12 have been excluded from the capital structure for rate purposes.
13 Second, theoretically, the Company could decrease the amount of 14 common equity by selling more long-term debt. But as shall be 15 demonstrated later on in my testimony, bond indenture coverage is 16 below acce. table levels, even with the full rate relief requested.
17 Therefore, the sale of additional bonds to reduce the common equity 18 might not be feasible. Other possibilities of reducing the common 19 equity ratio are to increase use of the Trusts as a financing vehicle 20 and to sell more Preferred Stock. With respect to the Trusts, 21 these were created to finance nuclear fuel and the construction 22 of the Company's share of Nine Mile Point 2 nuclear unit. It is 23 possible for the Company to borrow from the Trusts for "Other 24 Corporate Purposes" but this is merely another temporary expediency Amendment 35-da9dhykb 15
RAYMOND J. FORRER O
1 for financing and does not have a material effect on our 2
financing program. As far as Preferred Stock is concerned, the 3
preferred stock ratios are near maximum levels.
In addition, 4
without rate relief the amount of Preferred Stock that could 5
be issued may be limited by the Certificate of Incorporation 6
coverage test. For the recently issued Series S 9.8% preferred, 7
the coverage was 1.51 times. The minimum required is 1.50 times.
8 9
Q.
I show you a two-page document entitled, "Long Island Lighting 10 Company - Fund Requirements and Financing." Was this prepared 11 under your direction?
12 A.
Yes.
13 14 Q.
I ask that this document be marked as Exhibit 15 for identification.
15 Would you plear; explain this Exhibit?
16 A.
Schedule 1 of the Exhibit shows the fund requirements, internal 17 cash generation, and financing for the calendar years 1979, 1980 18 and for the twelve months ended April 30, 1981. The Exhibit 19 shows the funds required for our construction program and nuclear 20 fuct and Nine Mile Point #2 expenditures to be financed through 21 the resources and constraction trusts. Also, the funds required 22 for sinking funds and bond redemption.
Funds derived from internal 23 sources are shown without rate increases requested in this case.
24 The financing program including resources and construction trust O
16 Amendment 35 - January 1980 3-l945 103
RAYMOND J. FORRER 1
financing is shown in the section headed " Funds Provided."
2 Schedule 2 of the exhibit is similar to Schedule 1 except 3
that I have assumed the rate increase requested in this 4
filing to be effective May 1,1980.
5 G
Q.
I show you a two-page document entitled, "Long Island Lighting 7
Company - Bond Indenture Coverage and Ratio of Earnings to Fixed 8
Charges (SEC Coverage)." Was this prepared under your di-ection?
9 A.
Yes.
10 11 Q.
I ask that this document be marked as Exhibit 16 for identification.
12 Would you please explain this Exhibit?
13 A.
Schedule 1 of the Exhibit reflects the computation of the bond 14 indenture coverages and ratios of earnings to fixed charges at 15 December 31, 1979, December 31, 1980, and April 30, 1981. The 16 coverages are based on available income stated in the Schedule 17 and proposed bond financings. Schedule 1 is tabulated with-18 out rate increases while Schedule 2 reflects the requested 19 rate increase effective on May 1,1980.
20 21 Q.
Mr. Forrer, on Exhibit 16 you show the forecasted G&R bond 22 indenture coverage for the years 1979, 1980 and the rate year 23 respectively as 2.23 times, 2.02 times and 1.99 times without 24 rate relief and 2.23 times, 2.17 times and 2.22 times wi_th 17 Amendment 35 - January 1980
~.
1945 104
RAYMOND J. FORRER O
1 rate relief. Do any of these calculations include bond sales 2
that will take place subseque st to the particular 12 months 3
period?
4 A.
No.
All calculations include only the annualized interest on 5
all bonds outstanding at the conclusion of the particular 12 6
month period. For example, the coverages for the year 1979 7
do not reflect any interest on bonds to be issued in 1980. If 8
I were to include the interest on the first bond issue in the 9
spring of 1980 in the 1979 calculation, the resultant coverage 10 would be 2.05 times.
In Opinion 78-1, the Commission, in 11 establishing rate levels for the Company utilized as its criteria 12 a coverage of 2.3 times for the rate year including the first 13 issue of bonds to be sold after the rate year.
It is clear that 14 the Company will not meet this standard at any time. Further-15
- more, the bond indenture coverage throughout the entire period 16 is approximately at the levels which the Commission has con-17 sidered appropriate for granting interim rate relief. This 18 coverage situation will be exacerbated by the fact that egenses 19 in this presentation are based upon the levels found appropriate 20 by the Commission in the Company's most recent rate decision, 21 Opinion 79-14, issued April 29, 1979 in order to reduce the 22 controversial issues. As Associate Controller, I am familiar 23 with the Company's proposed 1980 budget and I can state that, 24 despite the strictest controls possible, it appears most likely 9
18 Amendment 35 - January 1980 1945 105
~.
RAYMOND J. M RRER.
I that actual expenditures for operation and maintenance for the 2
year 1980 and at least the first four months of 1961 will anceed 3
those reflected in the Company's filing.
Thus, all of the 4
financial criteria reflected in my exhibits are conservative 5
in that they present an optimistic view contrasted to what will 6
probably occur.
7 8
Q.
Mr. Forrer, I show you a one-page document entitled, "Long Island 9
Lighting Company - Internal Cash as a Percent of Capital Expend-10 itures and Dividends Paid as a Percent of Cash Income." Was 11 this document prepared under your supervision?
12 A.
Yes.
13 14 Q.
I ask that this document be marked as Exhibit 17 for identification.
15 Would you kindly describe this Exhibit?
16 A.
The Exhibit shows internal cash as a percent of capital expend-17 itures and dividends paid as a percent of cash income for the 18 year 1979,1980 and the twelve months ended April, 1981. The 19 data shown on this Exhibit were extracted from Exhibit 15.
The 20 top half of the Exhibit assumes no rate increase and the bottom 21 half of the Exhibit assumes the proposed rate increase effective 22 May 1, 1980.
23 24 Q.
Mr. Forrer in computing the percentage of dividends to the amount 19 Amendment 35 - January 1980 1945 106 e
RAYMOND J. FORRER O
1 of internal cash generation as reficceed on Exhibit 17, what common 2
stock dividend rates did you assume?
3 A.
Beginning in August, 1979, I used a quarterly rate of 44 1/2c per 4
share, the most recent quarterly payment.
I used this rate for 5
the November 1,1979 and February 1,1980 common stock dividend 6
payments. Beginning with the May 1, 1980 dividend, I assumed 7
quarterly payments would be 46 1/2c per share. As can be seen 8
from Exhibit 17, dividends paid would exceed cash income for the 9
rate year if no rate relief is granted and will amount to more I f, than 95% of cash income even if full rate relief is granted.
11 12 Q.
Mr. Forrer, I show you 6 one-page document entitled, "Long Island 13 Lighting Company - Allowance for Funds Used During Construction 14 as a Percent of Income for Common Stock." Was this document 15 prepared under your supervision?
16 A.
Yes.
17 18 Q.
I ask that this document be marked as Exhibit 18 for identification.
19 Would you kindly describe this Exhibit?
20 A.
This Exhibit shows the Allowance for Funds Used During Construction 21 (AFC) as a percent of income for common stock for the years 1979, 22 1980 and the twelve months ended April, 19d1. The top half of the 23 Exhibit assumes no rate relief. The bottom half of the Exhibit 24 assumes the proposed rate increase effective May 1, 1980.
O 20 Amendment 35 - January 1980
, '. [..
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Exhibit 14 Schedule 1 of 2 P.S.C. Case No.
Witness: Forrer LONG ISLAND LIGHTING COMPANY ESTIMATED COST OF SENIOR SECURITIES, CAPITAL STRUCTURE AND RATE OF RETURN
$(000)
Estimated Cost of Senior Securities as of April 30, 1981 Amount Rate Cost Long-Term Debt As of June 30,1979 - (As Per Exhibit 13 Page 1 of 2)
$1,264.230 7.86%
$ 99.375 Authority Financing Note Issue - October 1979 14,400 7.38%
1,066 Scod Issue May 1980 85,000 10.00%
8,5 00 Refund Series A September 1980 (20,204) 2.95%
(596)
Bond Issue December 1980 70,000 10.00%
7, 000
$1,413,426 8.15%
$1,15,345 Preferred Stock As of June 30,1979-(As per Exhibit 13 Page 2 of 2)
$ 380,510 8.02%
$ 30,516 Adjustment for Series Q - As per Case 27236 2,158 1,178 Refunding of Series L - July 1979 (1, 04 9) 7.41%
(78)
New Series S Preferred - September 1979 73,715 9.97%
7,350 Refunding of Series Q - June 1980 (4,280) 8.41%
(360)
Refunding of Series L - July 1980 (1,049) 7.41%
(78)
Refunding of Series M - November 1980 (1,998) 8.41%
(168)
$ 448,007 8.56%
l_,3_8,360 3945 1
0 Amendment 35 - January 1980 9
LoNo ISIAND LIoHTINo COMPAPY
_FSTH*ATED COST OF SENIOR TECUSITIES, CA PITAL STTG*P'JPS A N D fu\\ TE O F t'ET L n.';
4(005)
Ca pital Total Iong Tern Pm fe rre d Capi al 2tock Hetained Custome r Opital.
De bt St: ;4. _
Stock Ex pe nse Eculty Ntal Depo sit s 1:ation As of June 30, 1979
$ 1,275,375 $ 383,m3 $
710,e55 $ (27,919) $ 331,602 $ 1,014,538 $ 8,175 $ 2,637,036 Esticated char.ces thru April 30, 1980 14,400 75,950 I n,025 (1,270) 58,269 141,024 279,374 Inlance As of April 30, 1983 e
1,< o4.rl3
,8., n ys i ce,e,o 29,1.w i -
3,4, c z i : 1. 2 v5, > o z_
30,13 e 2, w,410 my 1990 g 1,37,,775 3 4c2,eg3 3 343,375 ;,29,126)
- 398.89 $ 1,216,583 $ 8,175 $ 3,c64,431 June 1980 1,37_,,775 453,093 S48,875 (27.013) 363,774 1,2]3,621 8.175 3,0 %,669 July 1990 1.374,775 457,048 848,875 (2d,930) 400,396 1,220,341 S.175 3,060,339 August 1990 1,374,775 457,048 853,890
'23,671) 417,599 1,242,613 8,175 3,0S2,616 eptemter 1980 1,354,775 457,043 553 S90
.23.773) 411,093 1,236,215 8,175 3,036,213 octc oer 1930 1,354.775 457,043 d5 3, E 90 23,676) 421,332 1,246,546 S 175 3,c66,544 Navecter 1930 1,354,775 455,04S 946,685 (29,814) 430,993 1,347,c64 8,175 3,165 S62 De cembe r 1930 1,424,775 455,0W 946,6?5
( 2),715 )
411.391 1,323,351 6,175 3,216,359 January s 91 1,424,775 455,04S 9',6,635 f29,616) 430.S75 1,%7,944 8, l't5 442 3,235,jS4 Fe br'm ry 1,31 1,424,775 455,048 951.700 (29,558) 447,6 4 1,j69,766 6,175 3,257, 4 H. 794 1, !r.6, c 3 3 6,175 3,244,031 Tp' N, M 1 )
mrch 1981 1,424,775 455,cgg 451,720
~%,,j., DJ
,ra, g, )
,, - 3 /, 'i ' 0 1-+,117, 912 c, #,.a Eleven Months Total in,,^ c a, ) N 5,o;s,r 3 g,j, 3,0 j
April 19y1 1,,,2.,, 7 75
,g, g,3 g,1, fg
- .j,;u2)
.,q3,c13 1, j 73,73 c,175
), gS g, yg Aprii 19bo 1.2 @,775 462,803
?44, u ']
(21,193) 94,?71 1,2:5.562 8,17s 2,966,410 Total April 1930 and 1931 2,71~,'50 91 t, ff 1, 7 p,5 g 4 s 3, o i,
c g, a 2, g g,.,13 1g, g g u ;,, $ g,,
April 1980 and 1931 AveraEe 1,w 7,275 Asa,o7x m,290
<s,270) 419,2gs 1,p.S,~,9 8,175 t.112,682 Tuolve F.onths Total
$16, o 13, ~-
5,,d5.b01 f.' o,75 0, o ho E5 0, % 41
$5,000,475 (15,406.171 $95,100 $ [T,607,4 72 Annual AvveraEc 1/12
$ 1,384,933 $ 456,950 $
695,837 $ (29,237) $ 417,248 $ 1,293,848 $ 8,175 $ 3,133,956 In ti o s.
44.195 14.56%
40.97%
0.26%
100.00%
cor.t mctors 8.167 8.56%
13.7 f 9.0 5 neturn components 3,61%
1.25T 5.61%
0.025 10.495 5.m."' W U
- g. n. -a
. P R E.
9.- c2 Amendment 35 - January 1980 31; n.
'd ~,o t_
so r
's
- 5%
n O'1 M
M M
O O
O
Exhibit No. 15 Schedule 1 of 2 P.S.C. Case No.
Witness:
Forrer LONG ISLAND LIGHTING CCMPANY FUND REQUIREMENTS AND FINANCING
$(000)
Without Rate Increase 12 Mos. Ended 1979 1980 April 30, 1981 Funds Required Construction Expenditures
$370,170
$350,793
$318,358 Nine Mile Point #2 30,568 30,700 32,400 Nuclear Fuel 17,988 20,004 20,560 Bokum Advances 21,000 0
0 Allowance for Funds (79,931)
(101,356)
(106,750)
Preferred Sinking Fund 1,070 7,850 7,850 let Mortgage Bond Redemption 0
20,000 20,000 Total Funds Required S360,865 S327,991
$292,41a Internal Cash Net Income
$171,525
$198.794
$196,697 Preferred Dividend Payment (32,433)
(37,739)
(37,512)
Common - Dividend Payment (89,155)
(109,906)
(118,458)
Depreciation 54,106 57,175 58,333 Deferred Taxes (73)
(5,852)
(5,901)
Other - Working Capital (67,268) 2,129 2,726 Allevance for Funds (79,931)
(101,356)
(106,750)
Total Internal Cash
$ (43. 229)
$ 3,245
$(10,865)
Funds Provided - Financing Bonds
$100,000
$155,000
$155,000 Notes 10,569 2,700 2 '/00 Trust Proceeds 69,556 50,704 52,960 Preferred 75,000 0
0 Common - Stock 120,000 88,800 88,800
- Employee & ADRP 17,888 18,020 18,020 Short Term 11,081 9,522 (14,197)
Total Funds Provided - Financing
$404,094
$324,746
$303,28 :
Total Funds Provided
$360,865
$327,991
$292,418 1945 \\\\2 Amendment 35 - January 1980
Exhibit No. 15 Schedule 2 of 2 P.S.C. Case No.
Witness:
Forrer LONG ISLAND LIGHTIFG COMPANY FUND REQUIREMENTS AND FINANCING
$(000)
Assuming Rate Increase (5/1/801 12 Mos. Ended 1980 April 30, 1981 Funds Reanired Construction Expenditures
$350,793
$318,358 Nine Mile Point #2 30,700 32,400 Nuc1 car Fuel 20,004 20,560 Bokum Advances 0
0 Allowance for Funds (101,356)
(106,750)
Preferred Sinking Fund
?,850 7,850 let Mortgage Bond Redemption 20,000 20,000 Total Funds Required
$327,991 j,292,418 Internal Cash Net Income
$207,339
$214,627 Preferred Dividend Payment (37,739)
(37,512)
Common Dividend Payment (109,906)
(118,458)
Depreciation 57,175 58,333 Deferred Taxes (1,009)
(2,724)
Other - Working Capital 2,275 1,956 Allowance for Funds (101,356)
(106,750)
Total Internal Cash
$ 16,779
$ 9,472 Funds Provided - Financing Bonds
$155,000
$155,000 Notes 2,700 2,700 Trust Proceeds 50,704 52,960 Preferred 0
0 Common - Stock 88,800 88,800
- Employee & ADRP 18,020 18,020 Short Term (4,012)
(34,534)
Total Funds Provided Financing
$311,212
$282,946 Total Funds Provided
$327,991
$292,418 O
i945 l13 Amendment 35 - January 1980
Exhibit No. 16 Schedule 1 of 2 P.S.C. Case No.
Witness: Forrer LONG ISLAND LIGHTING COMPANY BOND INDENTURE COVERAGE AND RATIO OF EARNINGS TO FIXED CHARGES (SEC COVERACE)
$(000)
Bond Indenture Coverage Without Rate Increase 12 Mos. Ended 1979 1980 Apr. 1981 Income Available For Coverage Electric Operaciag Income Before Income Tax
$166,852
$166,794
$164,358 Cas Operating Income Before Income Tax 29,192 38,194 37,756 Other Income Allowed 19,604 20,499 20,211 Total Income Available
$215,648
$225,487
$222,325 Mortgage & C&R Bond Interest Bonds Existing @ June 30, 1979
$ 96,680
$ 96,680
$ 96,680 New $85 Million 010% Hay 1980 8,500 8,500
$70 Fullion 010% Dec 1980 7,000 7,000 Refund - $20 Millica Series A 3%
(600)
(600)
Total Bond Interest
$ 96,680
$111,580
$111,580 Identure Coverage - Times Earned 2.23 2.02 1.99 Ratio Of Earnings To Fixed Charges Income Available for Coverage Electric Operating Income Before Income Tax
$166,852
$166,794
$164,358 Cas Operating Income Before Income Tax 29,192 38,194 37,756 Allowance for Funt's Used During Constr.
79,931 101,356 106,750 Other Income and Deductions 4,086 4,476 4,436 Capitalized Trust Interest 24.125 33,38_3_
36,849_
Total Income Available
$304,186
$344,203 S350,149 Fixed Charges Interest on Bonds
$ 94,772
$102,734 4107,701 Interest on Notes 6,697 8,752 8.752 Amortization DD&E - Premium Net 931 1,022 1,060 Interest on Losas 4,908 4,047 3,964 Other Interest 843 953 1,026 Capitalized Trust Interest 24,125 33,383 36,849 Total Fixed Charges
$132,276
$150,891
$159,352 Coverage - Times Charges Earned 2.30 2.28 2.20 1945 114 Amendment 35 - January 1980
Exhibit No. 16 Schedule 2 of 2 P.S.C. Case No.
Witness:
Forrer LONG ISLAND LIGHTING COMPANY BOND IDENTURE COVERAGE AND RATIO OF EARNINGS TO FIXED CHARGES (SEC COVERAGE)
S(000)
Assuming Rate Increase (5/1/80)
Bond Indenture Coverage 12 Mos. Ended 1980 April 30, 1981 Income Available for Coverage Electric Operating Income Before Income Tax
$182,030
$187,438 Gas Operating Income Before Income Tax 38,194 37,756 Other Income Allowed 22,022 22,519 Total Income Available
$242,246 S247,713 Mortgage & G&R Bond Interest Bonds Existing @ June 30, 1979
$ 96,680
$ 96,680 New $85 Million @ 10% May 1980 8,500 8,500
$70 Million 010% Dec 1980 7,000 7,000 Refund - $20 Million Series A 3%
_$111,HO,
$111,580 (600)
(600)
Total Bond Interest Indenture Coverage - Times Earned 2.17 2.22 O
Ratio of Earnings to Fixed Charges Income Available for Coverage Electric Operating Income Before Income Tax
$182,030
$187,438 Gas Operating Income Before Income Tax 38,194 37,756 Allowance for Funds Used During Construction 101,356 106,750 Other Income and Deductions 4,476 4,567 Capitalized Trust Interest 34,458
_ 37,908__
Total Income Available
$360,514
$ 374,419
~
Fixed Charges Interest on Bonds
$102,734
$107,701 Interest on Notes 8,752 8,753 Amartization DD&E - Prem Nat.
1,022 1,060 Intercat on Loans 3,750 3,248 Other Interest 953 1,026 Capitalized Trust Intere3t 34,458 37,908 Total Fixed Charges
$151,669
$159,695 Coverage - Times Chargt:s Earned 2.38 2.34 1945 115 Amendment 35 - January 1980
Exhibit No. 17 P.S.C. Case No.
Witness: Forrer LONG ISLAND LIGHTING COMPANY INTERNAL CASH AS A PERCENT OF CAPITAL EXPENDInfRES AND DIVIDENDS PAID AS A PERCENT OF CASH INCONE
$(000)
Without Rate Increase 1979 1980 12 Mos. Ended Internal Cash as a Percent of Capital Expenditures April 30, 1981 Funds Required
$360,865
$327,991
$292,418 Sinking Fund a-d Redemption (1,070)
(27,850)
(27,850)
Total Capital Expenditures
$359,795
$300,141
$264,568 Internal cash
$(43,229)
$ 3,245
$ (10,865)
Percent (12.0) 1.1 (4.1)
Dividends Paid as a Percent of Cash Income Net Income
$171,525
$198,794
$196,697 Depreciation 54,106 57,175 58,333 Deferred Taxes (73)
(5,852)
(5,901)
Allowance for Funds (79,931)
(101,356)
(106,750)
Total Cash Income
$145,627 S148,761
$142,379 Dividends Paid
$121,588
$147,645
$155,970 Percent 83.5 99.2 109.5 Internal Cash as a Percent of Capital Expenditures Assuming Rate Increase (5/1/80)
Funds Required
$327,991
$292,418 Sinking Fund and Redemption (27,850)
(27,850)
Total Capital Expenditures
$ 300,141
$264,568 Internal Cash
$ 16,779
$ 9,472 Percent 5.6 3.6 Dividends Paid as a Percent gf Cash Income Net Income
$207,339
$214,627 Deprecia tion 57,175 58,333 Deferred Taxes (1,009)
(2,724)
Allowance for Funds (101,356)
(106,750)
Total Cash Income
$162,149
$163,486 Dividends Paid
$147,645
$155,970 Percent 91.1 95.4 Note: All Data On This Exhibit Extracted From Exhibit 15.
1945 116 Amendment 35 - January 1980
Exhibit No. 18 P.S.C. Case No.
Witness:
Forrer O
LONG ISLAND LIGHTING COMPAN_Y ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION AS A PERCENT OF INCOME FOR COMMON SIDCK
$(000)
Without Rate Increase 12 Mos. Ended 1979 1980 April 30, 1981 Income for Common income (Exhibit 16 Schedule 1 of 2)
$304,186
$344,203
$350,149 Fixed Charges (Exhibit 16 Schedule 1 of 2)
(132,276)
(150,891)
(159,352)
Federal Income Tax (386) 5,483 5,900 Preferred Dividends (33,021)
(37,663)
(37,452)
Income For Common
$138,503
$161,132
$159,245 Allowance for Funds Used During Construction
$ 79,932
$101,356
$106,750 Percent 57.7 62.9 67.0 Assuming Rate Increase (5/1/80) 12 Mos. Ended 1980 April 30, 1981 Income for Common Income (Ey.hibit 16 Schedule 2 of 2
$360,514
$374,419 Fixed Charges (Exhibit 16 Schedule 2 of 2)
(151,669)
(159,695)
Federal Income Tax (1,505)
(97)
Preferred Dividends (37,663)
(37,452)
Income For Con: mon 3169,677 S177.175 Allowance for Funds Used During Construction
$101,356
$106,750 Percent 59.7 60.3 1945 117 O
Amendment 35 - January 1980
ATTACHMENT B to QUESTION 4.C 1
TESTIMONY 2
OF 3
ZVI BENDERLY jg 4
5 Q.
Will you give your name and address, please?
6 A.
My name is Zvi Benderly.
My business address 7
is 80 Broad Street, New York City.
8 Q.
What is your occupation?
9 A.
I am an economist and Vice President employed 10 by National Economic Research Associates, Inc.
11 Q.
Please describe your education and employment 12 background.
13 A.
I received a Bachelor of Science degree in Civil 14 Engineering in 1957 from the Technion, Israel Institute 15 of Technology.
In 1958, I entered New York University 16 Graduate School of Engineering where I received, in 1959, 17 a Master of Science degree in Civil Engineering.
I have 18 held a professional engineering license in New York State 19 since 1963 and in New Jersey since 1968.
Since 1966, 20 I have been enrolled in New York University Graduate 21 School of n sines: Administration and I received a Macter 22 of Business Administration degree from that institution 23 in 1967.
My major areas of concentration were Corporate 24 Finance and Quantitative Analysis.
In addition, I have 25 completed all courses and examination requirements for 26 a Ph.D. degree in Finance and Operations Research and Amendment 35 - January 1980 n 'O.1';D 1
am currently working on my dissertation.
2 From 1960 to 1968, I was employed by Alexander 3
Potter Associates, a consulting engineering firm in New 4
York City.
In my capacity as a project engineer, I 5
directed engineering and economic studies of civil engi-6 neering projects related to public works improvements 7
in the United States and abroad.
These studies involved 8
the areas of water pollution control, water resources, 9
land development and urban planning.
10 During the period 1968-1969, I served as an engi-11 neering economist with Public Service Electric and Gas 12 Company in New Jersey.
In this capacity, I prepared 13 financial and economic analyses relating to utility 14 revenue require.ments and studies dealing with profit-15 ability and economic choice as applied to public utilities.
16 During my employment at Public Service, I conducted cost-17 benefit analyses and empirical studies pertaining to 18 t he measurement of the cost of capital.
19 Since joining National Economic Research Associates, 20 Inc., in 1969, I have concentrated on the financial anal-21 ysis of regulated industries.
I have prepared empirical 22 studies concerned with estimating the cost of capital 23 and the fair rate of retu:n for regulated enterprises.
24 These studies included collection, statistical analysis 25 and interpretation of financial data and the construction 26 of econometric models.
I have participated in preparing Amendment 35 - January 1980 D'S DW 1
direct and rebuttal testimonies pertaining to the fair 2
rate of return to be allowed to regulated companies.
3 I am a member of the American Finance Association, 4
the Western Finance Association and the Operations Re-5 search Society of America.
6 Q.
Have you ever testified before a regulatory agency 7
in the past?
8 A.
Yes.
I have presented testimony before the Federal 9
Energy Regulatory Commission, the Federal Maritime Com-10 mission, and the regulatory agencies in the following 11 states:
Arkansas, Connecticut, Massachusetts, Michigan, 12 Minnesota, Nevada, New Hampshire, New Mexico, New York, 13 Rhode Island, Vermont, and Virginia.
This testimony 14 was presented on behalf of the following companies:
15 Boston Edison Company, Central Vermont Public Service 16 Company, Consolidated Edison Company, Consumers Power 17 Company, Long Island Lighting Company, subsidiaries of 18 Middle South Utilities, Minnesota Power & Light Company, 19 subsidiaries of New England Electric System, Niagara 20 Mohawk Power Corporation, subsidiaries of Northeast 21 Utilities, Northern States Power-Minn., Pacific Gas and 22 Electric Company, Public Service Company of New Hampshire, 23 Public Service Company of New Mexico, Sierra Pacific 24 Fower Company, and Virginia Electric and Power Compariy.
25
- 0. _ What is the purpose of your testimony in the pre-26 sent proceeding?
I945 120 Amendment 35 - January 1980 nie: Tin' 1
A.
The purpose of my testimony in th!s proceeding is h
2 to examine the cost of common equity capital for Long 3
Island Lighting Company (hereinafter referred to as 4
LILCO).
5 Q.
Have you prepared an exhibit in conjunction with 6
your testimony?
7 A.
Yes.
In support of my testimony, I have prepared 8
Exhibit 56, consisting of 2 Schedules and a Technical 9
Appendix.
10 Q.
Was this exhibit prepared by you or under your 11 supervision?
12 Q.
Yes, it was.
13 Q.
Please define the term "the cost of equity capital."
14 A.
The cost of equity capital, in my view, is a market-15 oriented concept and, therefore, should be determined 16 within the context of the marketplace.
It is the minimum 17 c u r r e r.t rate of return required by investors on their 18 investment in a firm's common shares for them to be will-19 ing to buy or continue to hold those shares.
Based on 20 this minimum rate, investors determine the price they 21 are willing to pay for the firm's common shares and there-22 by they establish the terms at which a firm can acquire 23 new equity capital from the public.
This minimum rate 24 is, generally, referred to be economists as the firm's 25 "barebones" cost of equity capital, raarket capita iog } j 26 rate, or investor's discount rate.
Amendiaont 35 - January 1980 n O r a' 1
Since investors are the sole suppliers of equity 2
capital funds to the firm, the firm must pay the going 3
rate for these funds in the marketplace in order to induce 4
investors to buy or to continue to hold the firm's shares.
5 Thus, the firm must hold out to investors the prospect 6
of carning at least the minimum return which they (the 7
investors) require.
This minimal return is the barebones 8
cost to the firm of obtaining equity capital.
9 The price which investors are willing to pay for 10 a firm's common stock depends upon the present value 11 of expected future earnings from an investment in the 12 stock.
The present value is determined by applying the 13 appropriate discount rate to investors' expected future 14 returns--returns which are comprised of dividends and 15 proceeds from the sale price of the common stock.
As 16 is indicated in a subsequent part of the testimony, the 17 discounted cash flow (DCF) method for estimating the 18 "barebones" cost of equity is predicted on this theoret-19 ical proposition.
The appropriate discount rate is the 20 same as the rate of return investors require on the price 21 they pay for the common stock.
Therefore, the terms 22 investors' discount rate, market-capitalization rate 23 of return, and "barebones" cost of equity capital are 24 all synonymous.
25 It is important to note here that the investors' 26 discount rate--the market-required rate of return--or, Amendment 35 - January 1980 1945 122 nera' 1
alternatively, the barebones cost of egrity, is deter-2 mined in the market by the relative riskiness of the 3
firm's common stock as perceived by investors.
The rate 4
of return investors require on their investment in a 5
particular common stock takes into account the return 6
available from investments in other common stocks, bonds 7
and other investment media, weighing these returns against a
the relative risks involved.
In other words, a market-9 required rate of return for a particular firm is the same 10 as the returns investors require on their investment in 11 the common stock of other firms or enterprises of similar 12 perceived risks.
13 The barebones cost of equity capital is alterna-14 tively defined as the minimum rate of return on equity 15 capital investment required by a firm to bring its market 16 price into equality with its book value.
If investors 17 expect that a firm will fail to earn a return on its 18 equity capital at least equal to its barebones cost of 19 equity, the market price of the firm's common stock will 20 decline to a level below its book value, thus effecting 21 the process of dilution whenever the firm has to issue 22 new common stock.
A mathematical demonstration of this 23 point is shown on the Technical Appendix in my exhibit.
24 The cost of equity ccpital (as distinguished from 25 the barebones cost of equity) is that minimum rate of 25 return which the firm must earn on its equity investment Apendment 35 - January 1980 n/Gr.6 1
if it is to attract equity capital withcut diluting the 2
equity of existing shareholders.
It is equal to the 3
investors' discount rate or the barebones cost of equity 4
capital adjusted for the costs of issuance and market 5
pressure effects which are incurred when new common stock 6
is issued.
7 The cost of equity capital reflects the capital 8
attraction rate.
If the capital attraction rate is 9
actually earned, the financial integrity of an enterprise 10 is preserved.
An allowed rate of return on common equity 11 which is, at least, equal to the cost of equity capital 12 affords the f.irm an opportunity to be able to issue new 13 equity capital without diluting the equity investment 14 of existing stockholders.
15 In summary, since it is my view that the cost 16 of equity capital is a market-oriented concept, my ap-17 proach to determining the cost of equity is based on 18 an assessment of current investors' requirer.ents as re-19 flected in their behavior in the marketplace.
Such deter-20 mination embodies the evaluation of investors' expected 21 return and their perception of the risks attendant with 22 their investment.
23 Q.
Are you aware that, in this proceeding, the Company 24 is filing for rates based on a return on common equity 25 capital of 13.7 parcent?
1945 124 26 A.
Yes, I am.
It is my understanding that the Company, Amendment 35 - January 1980 n/Gr.a' 1
in its effort to mitigate controversy surrounding this 2
proceeding, is asking for'the same rate of return on com-3 mon equity capital which it was allowed by this Commission 4
in its last rate case.
In that last case, the Commission 5
concluded that 13.7 percent is a fair return on LILCO's 6
common equity (see Opinion 79-14, page 44).
According 7
to the studies delineated in my present testimony, a return 8
on common equity capital of 13.7 percent is below the cur-9 rent barebones cost of equity for LILCO.
Moreover, it is 10 significantly below the rate of return required by LILCO 11 to attract equity capital without diluting the equity of 12 existing shareholders.
13 0
What approach are you using in your present testi-14 mony as to the cost of equity for LILCO?
15 A.
My approach as to LILCO's cost of equity capital 16 is based on the discounted cash flow (DCF) analysis.
.I 17 should point out that in rate-of-return testimonies which 18 I present in other jurisdictions, I rely principally on 19 the price-book approach.
I have testified before this 20 Commission, in a number of cases, as to the cost of equity 21 capital, relying on the price-book approach.
The price-22 book approach attempts to identify the risk and other 23 factors besides expected rates of return on equity which 24 affect the price-book ratios of electric utilities.
The 25 C$mmission, however, has found that this particular ap-26 Proach requires "further refinement" before it can be 8J25 Amendment 35 - Janu y
n!sr a' 1
reliably used for estimating the cost of equity capital.
2 It is for this reason, therefore, that my testimony in 3
this proceeding does not rely on the price-book approach.
4 However, it is important to note here that the DCF method 5
for estimating the cost of equity capital and the price-6 book approach are based on the same theoretical principles.
7 Q.
Before proceeding with the presentation of your DCF 8
analysis of the cost of equity for LILCO, please describe 9
in general terms the DCF method.
10 A.
According to the DCF theory, and as demonstrated 11 on the Technical Appendix in my exhibit, the value which-12 an investor will put on a share of stock is given by 13 the following simplified formula:
14 D
~9 15 16 In this formula, P is the price of the stock.
It depends 17 on D, which is the expected dividend per share over the 18 coming year.
It also depends on k, a discount rate ap-19 plied by the investor to all future dividends; this dis-20 count rate is the rate of return the investor requires 21 on this stock in light of the cost of money and the rela-22 tive riskiness of the stock, and this discount rate k 23 is known as the barebones cost of equity capital.
P 24 also depends on g, which is the average long-term growth 25 rate in dividends which the investor expects.
26 What this formula tells us is that if the investor 1945 126 Amendment 35 - January 1980 nie rra 1
expects dividends of D per share in the first year, and 2
if he expects that dividends will grow at an annual rate 3
of g over the indefinite future, then the discounted 4
present worth (using k as the discount rate) of the entire 5
expec ted future flow of dividends will be P, the price 6
the investor is willing to pay for the stock.
7 We can solve the above formula for k, the 8
barebones cost of equity, and we get:
9 D
k=p+g 10 11 Thus, in order to know k at any given point in time, 12 we need information about D, P and g at the same point 13 in time.
Information about P, the price of the stock, 14 is readily available for listed securities.
Information 15 about D, the dividend expected by investors over the 16 coming year, can usually be estimated with a fair degree 17 of accuracy.
However, there is a problem in estimating 19 g,
for g is the long-term growth rate in future dividends 19 which investors expect, on the basis of which they were 20 willing to pay the price P for the stock.
It should 21 be noted that in estimating g, we are not forecasting 22 the future.
Rather, we are attempting to ascertain what 23 investors are forecasting.
This objective is fairly 24 difficult to obtain even in relatively normal times.
25 In past periods, prior to che emergence of the energy 26 crisis, it was possible to argue that investers were 1945 127 Amendment 35 - January 1980 n/G r:D.'
1 probably forecasting a continuation of past trends.
2 Even so, there was often considerable disagreement among 3
analysts as to precisely what growth rate investors were 4
actually expecting; these differences often meant spreads 5
of several percentage points among alternative estimates 6
of the cost of equity.
7 In present circumstances, the difficulties in 8
objectively estimating the growth rate which investors 9
are now forecasting are even greater due to the unsettled 10 state of money markets and utility finances over the 11 past several. years.
It is possible, however, to make 12 certain reasonable assumptions about investor expecta-13 tions and, thus, arrive at an estimate of the growth 14 factor to be included in the DCF method for estimating 15 the investors' discount rate.
16 0
Please indicate the approach you have taken in this 17 proceeding in implemanting the DCF approach as to the 18 barebones cost of equity capital for LILCO.
19 A.
As indicated earlier, to examine the barebones cost 20 of equity according to the DCF method, it is necessary, 21 first, to measure the recent level of prices; second, to 22 estimate the reasonably expected dividends per share in 23 the next 12 months; and, third, to add an estimate of the 24 growth which investors are currently expecting.
25 Q.
How did you determine the apprcpricte dividend-26 price ratio for LILCO to be used in the DCF model?
Amendment 35 - January 1980 1gf{
}29 nieTR 1
A.
It is generally agreed that in deriving the 2
dividend-price ratio component of the DCF formulation, 3
one should not analyze spot market data only, but rather 4
the yield component should be calculated based on recent 5
data, over a representative period of time.
6 During the first half of 1979, the price of LILCO 7
common stock fluctuated between S18.25 and $15.13.
The 8
average of the monthly high-low prices of LILCO common 9
stock in the first half of 1979 was about $17.
This aver-10 age price of LILCO's common stock during the first half 11 cf 1979 reflects the level of pricts at which LILCO's com-12 mon stock traded before the Three Mile Island incident, 13 as well as the utility stock market reaction to the acci-14 dont and its recovery which has since taken place.
I 15 should also note that most recently the price of LILCO's 16 cor.mion stock has been about $17. 5.
According to the DCF 17 theory as shown on the Technical Appendix in my exhibit, 18 the dividend-yield component of the DCF model is derived 19 on the basis of the indicated dividend rate over the coming 20 year, rather than on the past 12 months actual dividend 21 rate.
The indicated dividend rate for LILCO over the com-22 ing 12 months is $1.76.
The coming 12 months period is 23 taken starting at the second quarter of 1979.
Thus, the 24 dividend-price ratio for LILCO, based on the indicated 25 dividend for the 12 months period indicated above, is a 26 little over 10 percent even on the basis of a price of Amendment 35 - January 1980 1945 129 1
$17.5.
In my view, therefore, the proper level or the 2
dividend yield to be used in the DCF model in determining 3
the barebones cost of equity for LILCO is at least 10 4
percent.
5 O.
Please address yourself to your estimation of in-6 vestors' expectations of future growth for LILCO.
7 A.
The growth component of the DCF model reflects 8
investors' expectations as to future long-term growth 9
in dividends per share.
For electric utilities having 10 a relatively st<.ble payout ratio, growth in dividends 11 per share will, on average, be the same as the growth 12 in earnings per share.
Since earningn of electric utili-13 ties are regulated, future growth in earnings per share 14 will be derived fro.n future growth in book value per 15 share.
An implicit assumption here is that investors 16 do not expect the rate of return earned by the regulated 17 company to increase continually into the indefinite future.
18 Growth in the book value per share and, consequently, 19 in dividends per share can arise from two basic sources:
20 the retention of earnings and the sale of neu common 21 stock at not proczeds above book equity per share.
22 As I have indicated earlier, it is very difficult 23 to objectively estimate the future growth rate investors 24 expect the company to experience.
A plausible assumption, 25 in today's circumstances with respect to LILCO, as to 2C the estimate of inventors' expectations of future growth jgjg} Amendment 35 - January 1980 n!OT.a 1 is that investors anticipate that growth will occur 2 through retained earnings. 3 It is a mistake to make a DCF calculation in LILCO's 4 case on the basis of a projection into the future of past 5 net increases in book value for several reasons. The first 6 of these is that growth from retained earnings in a partic-7 ular year can be distorted if the company engages in mas-8 sive sales of new common stock at not proceeds either above 9 or below book value per share. Iloweve r, focusing for the 10 moment on past sales of stock at less than book value, 11 it is implausible to assume that investors expect LILCO 12 to incur significant dilution into the indefinite future lh 13 when issuing new common equity capital. In order to assume 14 that investors expect LILCO to incur dilution in the future 15 on a continuous basis when issuing new equity capital, 16 one must also assume that investors expect regulation to 17 be unable or unwilling to take measures to prevent repeated 18 economic confiscation of LILCO's stockholders' equity, 19 when the Company seeks to raise equity capital in order 20 to meet its public utility obligations. Former Chairman 21 Kahn has pointed out how foolhardy and counter-productive 22 it would be for a Commission to persist too long in forcing 23 a utility to sell additional shares at a discount, below 24 bech value, and we must assume that a rational investor 25 will have confidence that a rational Cemmission will not 26 do it. 1945 131
- Amendment 35 - January 1980 I1 O r,a' 1
The same point is applicable when past sales of com-2 mon stock have been made at a substantial premium. Since 3 the Commission avowedly now seeks to arrive at substantial 4 Parity between price and book, it would be irrational for 5 the investor to project continual sales at a premium over 6 the indefinite future and, thus, to estimate growth by 7 Projecting past increases in book value derived from both 8 reinvested earnings and sales of stock at a premium. 9 It seems clear that predicating a future growth esti-10 mate on a projection into the indefinite future of sales 11 of stock at either a discount or a premium is to ignore 12 the pronounced goal of the New York Commission and build 13 in a distortion, whether on the upside or the downside. 14 It would be irrational. I will assume, therefcre, that 15 investors, in formulating their expectations of future 16 growth for LILCO, will anticipate that growth will occur 17 through retained earnings. 18 Q. Have recent past sales of LILCO stock resulted in 19 dilution? 20 A. Yes. Sincc 1974, LILCO experienced massive sales 21 of new common stock below book value. These sales of LILCO's 22 common stcck have resulted in substantial dilution. With 23 the exception of 1977, LILCO has issued each year new equity 24 at net proceeds per share substantially below book value 25 since 1974. For example, when LILCO issued 6.4 million 26 shares on October 18, 1978, its book value per share was Amendment 35 - January 1980 r1 O l' a' 1 $19.58, while its net proceeds from the sale were about 2 $16.81. Considerably larger dilution was incurred by LILCO 3 as a result of the sales of new common equity in 1974 and 4 in 1975. 5 The substantial dilution suffered by LILCO in 1974 6 and in 1975 more than wiped out the growth from retained 7' earnings, thus, giving rise to a decline in total ocok 8 value per share. Even in 1977, when LILCO was able to 9 sell new common equity capital without incurring dilution, 10 net proceeds per share were only slightly above book value 11 per share. (Net proceeds per share were $18.47, while 12 book value per share was S18.34.) Each of the sales of 13 new common equity yielding net proceeds below book value 14 constituted economic confiscation of LILCO's existing 15 stockholders' equity--a phenomenon which investors will 16 not expect to repeat itself, on a continuous basis, into 17 the indefinito future. 18 Q. You said that there are several reasons why rational 19 investors would not calculate LILCO's long-term future 20 growth rate in dividends per share based on historic net 21 increases in book value per share. The first reason you 22 gave is that a reasonable investor would not assume that 23 the Commission would, into the distant future, require 24 LILCO to market its shares on a confiscatory basis. What 25 are the other reascns? h 26 A. The second reason is that LILCO's basic method of , Amendment 35 - January 1980 n /e l' n 1945 133 1 marketing its common shares--rights offerings--involves 2 a distribution of value to its stockholders which is con-3 cealed by such an application of the DCF method. The 4 easiest way to see this is to put ycurself in the position 5 of a stockholder who, at intervals of about one year, is 6 given rights to buy additional shares at a discount below 7 market. Those rights, under the rules of the NYSE, are 8 listed and immediately saleable and, indeed, a very large 9 volume of them are sold. The investors pockets the pro-10 ceeds. Of course, in the odd case, the market for the 11 stock can go down so far that the rights can become worth-12 less, but this very rarely happens. 13 It is easy to see, in the case of the stockholder 14 who sells the rights that there is that extra value of 15 rights which is being distributed; in the case of those 16 stockhelders who exercise the rights there is exactly the 17 same value distributed to them but they realize it in the 18 form of additional shares of stock. 19 There are still other respects in which LILCO's 20 method of marketing shares involves distribution of value 21 which does not show up in the traditional DCF calculations. 22 One such distribution occurs under LILCO's dividend rein-23 vestment plan, under which a shareholder is able to pur-24 chase additional shares at market with no brokerage com-25 mission. This is no small matter--in recent years, 500,000 26 and more shares have been distributed in that way annually, gmendment35-January 1980 nie. r.T t 1 even though not all investors take advantage of it. 2 Another distribution takes place under the Employee 3 Stock Purchase Plan, where shares are sold at a discount 4 of at least 10 percent below market to employees. The 5 amounts per employee are limited, but the Company has'been 6 selling between 80,000-100,000 shares per annum for several 7 years. The value of the discount goes to the employees 8 in the first instance as a kind of fringe benefit. In 9 other words, this dilution of the book value of the utock 10 is reflected in any calculation of net growth in book value, 11 but is really an employee benefit and should not be con-12 sidered a negative eleraent with respect to expected growth. 13 Q. Please continue with your estimation of investors' O 14 expectations of future growth for LILCO. 15 A. For the reasons I have given, a rational investor 16 would expect that future growth will be due to growth from 17 retained earnings. The growth from retained earnings will 18 depend on the rate of return which investors expect the 19 company to earn on its equity capital. It is, of course, 20 very difficult to ascertain directly what rate of return 21 on equity itvestors expect the company will be earning 22 over time. 23 LILCO carned over 13.2 percent return on average 24 book equity in 1975, and over 14 percent return in both 25 1976 and in 1977. In 1978, earnings per share declined 26 to a level of $2.44 indicating a return on average book Amendment 35 - January 1980 n/B ra' 1945 135 1 value per share of about 12.9 percent. The decline in 2 earnings per share has continued during 1979 to a level 3 of $2.36 for the 12 months ended June. This level of 4 earnings reflects a return on average book value of about 5 12.2 percent. 6 However, from the point of view of projected future 7 level of earnings, a reasonable investor in LILCO would 8 pay great attention to the 13.7 percent return on common 9 equity allowed by this Commission in its most recent deci-10 sion (April 27, 1979). In recent months, value Line and 11 other financial analysts have been projecting 1979 earn-12 ings per share at the S2.60 to 52.65 level--a return on 13 common equity of about 13.3 percent. 14 It would appear, therefore, that an acsumption that 15 investors expect LILCO to earn, on average, a return of 16 13 percent on its book equity is ultraconservative and 17 underestimates investors' expectations. With an indicated 18 dividend per share of $1.76 and earnings of $2.51 (which 19 is 13 percent of the average book value of $19.34 in the 20 12 months ended June 1979), the retained earnings would 21 be S0.75, representing an expected growth rate from 22 retained earnings of about 3.9 percent. 23 As shown on Schedule 1 of my exhibit, such an esti-24 mate of expected fature growth ic quite conservative in 25 light of the actual growth in book value due to retained 26 earnings experienced by the Company. In the period Amendment 35 - n ry 0 nie:1' EL' 1 1965-1972, growth from retained earninge had been at the 2 rate of about 4.5 percent, except in the recession of 1970, 3 when LILCO's earnings per share experienced a decline. 4 In 1973 and 1974, when another decline in earnings had 5 been experienced, the growth from retained earnings was 6 no more than about 3.2 percent. However, it is unreason-7 able to assume that investors are forming their expecta-8 tions as to future growth by confining themselves to the 9 dismal earnings picture experienced by LILCO and the elec-10 tric utility industry as a whole during the 1973-1974 11 period. In 1975, the growth in LILCO's book value per 12 share due to retained earnings was about 4.7 percent, 13 rising to a rate of growth of about 5.6 percent in 1976 14 and 5.4 percent in 1977. In 1978, due to the depressed 15 level of earnings, growth from retained earnings declined 16 to about 4 percent. A 3.9 percent estimate of investors' 17 expected future growth in dividends per share for LILCO 18 is, likewise, on the conservative side when compared with 19 the 5 percent growth in dividends per share currently pro-20 jected by Value Line over the 1982-1984 period. 21 0 Are there any other factors which should be considered 22 in analyzing LILCO's cost of equity capital? 23 A. It is generally agreed that it is desirable to have 24 the market price of the utility's stock at least moderately 25 above the book value so as to make it possible for the 25 utility to sell new shares without diluting the equity 1945 137 ~ Amendment 35 - January 1980 IlGir.n 1 of its existing stockholders. The issuance of new stock 2 involves certain expenses, and often results in a temporary 3 downward market pressure on the price of the stock. As 4 shown on Schedula 2 of my exhibit, costs of issuance and 5 market pressure for the last four issues of new comcon 6 stock by LILCO were, on average, about 7 percent. 7 There is a lot of dispute with respect to market 8 pressure and there is an especial controversy whether :on-9 clusions drawn from companies with direct offerings are 10 applicable in cases of rights offerings. But, in this 11 instance, it is not necessary to enter into that contro-12 versy because it is so clear from the data which I already 13 have introduced that 13.7 percent return is significantly 14 below the Company's cost of equity capital. That conclu-15 sion is evident when we consider that the proper dividend 16 yield for LILCO in a DCF formulation is at least 10 per-17 cent and that an ultraconservative estimate of future long-18 term growth is, at least, 3.9 percent. 19 Q. Does this complete your testimony? 20 A. Yes, it does. 21 22 23 24 25 1945 I38 26 Amendment 35 - January 1980 n tC r. a'
Exhibit No. 56 P.S.C. Case No. Witness: Benderly LONG ISLAND LIGHTING COMPAN'l SCHEDULE 3 1 AtID 2 AND A TECHNICAL APPENDIX 1945 139 Amendment 35 - January 1980 niell'.n*
Schedule 1 IDNG ISLAND LIGHTING COMPANY 1965 - 1978 Growth from Dividends Average Retained Retained Earnings Paid Book Value Earnings Earnings Year per Share per Share oer Share per Share cer Share
( Do ll a r s ) ------------------
(Percent) (1)-(2) (4) + (3) (1) (2) (3) (4) (5) 1965 $1.56 $0.98 $12.62 $0.58 4.601 1966 1.67 1.06 13.18 0.61 4.63 1967 1.80 1.14 13.80 0.66 4.70 1958 1.86 1.22 14.42 0.64 4.44 1969 1.04 1.28 15.07 0.66 4.33 1970 1.91 1.33 15.74 0.58 3.68 1971 2.03 1.37 16.42 0.71 4.32 1972 2.18 1.41 17.24 0.77 4.47 1973 2.02 1.45 17.99 0.57 3.17. 1974 2.03 1.46 18.04 0.57 3.16 1975 2.31 1.49 17.50 0.82 4.69 1976 2.52 1.54 17.56 0.92 5.58 1977 2.59 1.51 18.32 0.96 5.35 1978 2.44 1.68 18.91 0.76 4.02 Source: Lcng Island Lighting Company, annual reporta, various issues. Amendment 35 - January 1980 n.e. n1
Schedule 2 LONG ISLAND LIGHTING COMPANY Subscription offerings . Total Flotation Costs Date of Number Flotation Market and Prospectus of Shares Costs Pressure Market Pressure (3) + (4) (1) (2) (3) (4) (5) 8/27/75 3,988,040 4.33% 3.03% 7.36% 7/28/76 4,633,104 2.26 6.95 9.21 7/20/77 5,443,723 1.55 4.31 5.86 10/18/78 6,402,515 2.00 2.03 4.03 2 1945 141 Amendment 35 - January 1980 n!Ott'.Ei
Technical Accendix Page 1 of 4 Mathematical Derivation of the Traditional Discounted Cash Flow (DCF) Model and a Demonstration That When the Expected Rate of Return on Common Equity is Equal to the Investors' Discount Rate the Market F;2 c Will Equal Book Value Per Share Definitions: P = Current price of stock, or present value of expected future dividends. Bo. = Current book value per share. k = Investors' discount rate or barebones cost of equity capital. De = Most recent cash dividend. g = Investors' expected future constant grcwth rate in dividends. r = Expected rate of return on common equity h capital. E = Earnings per share. ) = Retention ratio. RE = Retained earnings, t = Time index. (c = If 2, J,...=) .The following formulation assumes that investors expect dividends to increase at a constant rate ; into the indefinite future. The current stock price is the present worth.of all expected future dividends: D D D 2 3 (1) P* = + + +.... (1+k) (1+k)* (1 +k) ' l9k5 jf} O Amendment 35 - January 1980 nie!r'n
Technical Accendix Page 2 of 4 Assuming a constant expected growt h rate in divi-dends, we can write: (2) D, = D, (1+g) D, = D,,(1+g )
- D, = D,(1+g)3, etc.
Equation (1) becomes: 0,(1+g) D (1+g)* D, (1+g) ' (3) P' = . _ _ + + +.... (1+k) (1+k)* (1+k)' or .. O,(1+g)# (4) P,= E t=1 (1+k)* It can be shown that Equation (4) can be simplified as follows: U 2 (5) P,= k-g or D (6) k = -- + g 1945 143 Equation (6) is, of course, the well-known and most:often used DCF formulation for estimating the barebones cost of equity capital. Let un now assume that investcra expect the firm to earn a constant rate of return en equity capital r and Amendment 35 - January 1980 nietTin
Technical Appendix Page 3 of 4 that they expect the firm to retain a constant fraction b of itt; :arnings as well. The expected earnings per share in time t are equal to the product of the expecte~d rate of return on equity capital r and the beginning-of-the-period book value per share: (7) E = rB,,y The dividends per share in time t are expected to be: (1-b)r3 (8) D = (1-b)E = g The retained earnings during time c are, thus, equal to: '9) reg =Eg g = rB _3 (1-b)rB _3 -D g g RE = brB t t-1 Assuming that inves tors expect growth to occur through retained earnings, we conclude that the investors' expected future growth rate g can be expressed as: RS, (10) g= = br 1945 144 3 2-2 O Amendment 35 - January 1980 t t..
Technical Acce-dix Page 4 of 4 Substituting Equations (8) and (10) into Equation (5), and letting t=1, we get: (1-b)rB o (11) P,= k - br or P (12) _1 = (1-big, B, k - br s If investers expect the firm to earn a' rate of return on its common equity cepital which is equal to their required rate of return or discount rate, then: r=k Equation (12) becomes: (13) bl = (1-5)r, (7-b)r, y B, r - br (1-b)r Equation (13) indicates that, according to the traditional DCF theory and method for estir.ating the bare-bones ccst of equity capital, if investers expect a company to earn on its equity capital the same rate of return as they require in the marketplace, then market price and bcok value will tend to be in equality. 1945 145 Amendment 35 - January 1980 nie/r'a
ATTACIIMENT C to QUESTION 4.C STATE Or I;EW YCnK FUBLIC SER'/ ICE CO:*.MlSSION OPINION NO. 79-14 CASE 27374 - LO :G ISLMD LIGHTING CO2TANY - Electric Rates CASE 27375 - LONG ISIJdiD LIGHTING C01.TAUY - Gas Ratos OPINION AND OR702 DEiERMIli1NG REVENUE PIQUI!SMENT 1945 146 Issued: April 27, 1979 Amendment 35 - January 1980
CASES 27374 and 27375 TADLE OF COSTENTS Pagg q APPEARANCES BACKGP.OUUD OF THE CASE 2 CONSTRUCTION EXPE;iDITURES 5 LILCO's Exceptions 6 Updated Forecast Issue 6 Eevised CVR Issue 7 Neu llaven/Stuyvesant 9 OPERATING REVESUES 10 Sales Forecasts 10 Meter Tarapering 10 Uncollectibles 11 OPERATING EXPENSES 12 Overhaul Expense 14 Major Maintenance Project Expense 15 Tree Trimning Expense 16 Administrative and General Expense 17 Customer Accounts Expense 18 Personnel 18 Equipment 19 Advertising and Public Affairs E:: pense 20 Research and Development Expense 21 1945 147 Storm Damage Reserve and Accrual 22 Injuries and Damages Reserve and Accrual 23 Amortization of Unfunded Pension Liability 24 Wage and Inflation Index 25 Labor Productivity 27 Amendment 35 - January 1980
CASES'27374 and 27375 Page DEPRECIATIOt; 28 7 28 Gac Depreciation _n Production Structures 28 Steel Transmission Mains 29 Cathodic Protection Devices 29 Electric Street and Parkway Lighting 30 Electric Production Structures 31 Environmental Control Equipment 32 PROPERTY TAXES 33 FEDERAL INCOME TAX 35 Trust Interest Deductions 35 TRASOP Tax Credits 36 Gas Department Ta:t Credits 37 Earned Vacation Deduction 38 Amortization of Deferred Taxes 39 Revised Computations 39 RATE BASE 39 Deferred Tax Credits 39 Shoreham Switchyard 41 Rate Base Capitalitation Adjustments 42 ALLOWED RETURN 43 CONCLUSION 45 ORDER 47 1945 148 APPENDICES DISSENTS -ii-Amendment 35 - January 1980
CASES 27374 r.nJ. 27375 g s STATE OP df.*4 YORK 9 PUBLIC SET.VICE COMMISSION 9 S APPEAPANCES 9 Joel Blau, Jeri Eisenberg and Sam Laniado, Staff Counsel, Ucwced Read, Assistant General Counsel, Nelson A. F.cckefel:er r;mpire State Plaza, Agency Building No. 3, Albany, New York 12223, for the Public Service Commission. Edward M. Barrett, General Ccunsel (by Calv - E. Rafuse, Jr., J c.v.e s J. Stoker,I1!, Edward J. Walsh, Jr.., and David K. Nadano, of Counscl) 250 Old Country Road, Nincola, New York llS01,for the Long Island Lighting Cc:apany. Reilly, Like & Schneider, Esgs. (by Irving Like, Werner G. Zumbrunn, and nichard Hand, of Counsel) 200 West Main Street, Babylon, New York, for the Counties of Nassau and Suffolk. Rosemary Pooler, Executive Director (by Jamcs F. Warden, Jr., David Sch2iccel, and John Rosenberg, of Counsci) 99 Washington Avenue, Albany, New York, for the New York State Consumer Protection Board. h Bruce D. A2 pert, Deputy Town Attorney, Town Hall, Main Strect, Ecmpstead, New York ll550,for the Town of Ecmpstead. William J. Schickler, Sunrise Highway at Pond Road, Oakdale, New York ll768,for Suffolk County Water Authority. Howard L. Blau, Esq., 380 North Brcadway, Jericho, New York 11753, for the Oil Heat Institute of Long Island, Inc. Marcia Slatkin and Van Howell, P.O. Fox CO, Shoreham, New York, ll706,fer r.fo GrSound Community Energy Projects. Kenneth J. Uces, Associate General Onynsel, 245 Park Avenue, New York, N.Y. 10017,for Dooz-Allen & Eamilton, Inc. Neil Noland, Co-Chairman and Ewa Reid, Co-Chairperson, box 3977, Sag Harbor, N.Y., 11963,for Long Island Ratepayers Association. 1945 149 Amendment 35 - January 1980
c., S 2 '!: / / an. 2 '/ Ti 5 C LILCO, staf f, ':cascu and Suf folk counties, Long [ Island concuncr Action und the Town of Hempstead have sub-mitted briefs objecting to a variety of the Judge's recom-monded dispositions of revenue issues.1! U BACKGROUND OF THE CASE In previous LILCO electric rate cases, we found it necessary to depart from our usual rate caso standards to determine the revenues required by this company to provida relichie service in light of its nassive construction program, dominated by the ShorehcIn nuclear generating station.2/ In those cases, we found that the company was plagued by extrema cash flew problems that threatened its ability to borrcw the funds necessary to finance its con-struction pregram. In those circumstances, we found it necessary to adopt such special measures to improve cash flow as tcmporary rates, inclusion of construction work in progress (CNIP) in rate base, and interperiod tax allocations. As a result of thcsc actions, LILCO no longer faces such severe financing problems. Its indenture coverage ratio is no longer close to the limit of 2.0 times. In fact, because ~T/ Soma parties sunaleting briefs violated Section 2.7 of our Rules of Procedure by excessive incorporations by reference to carlier briefs, serving us with an inadequate number of copies of their briefs, and exceeding authorized page limits. Rule 2.7 (c) (3) clearly states that briefs to the Concission should be self contained. Given the ciret= stances of this case, some waiver of the 50-page limit would have been granted. In the future, morcover, we will expect parties burdened by the requirements of Section 2.7 to seek waivers of the page limits as provided by Section 2.7 (f) of our Rules and not attempt to ciret= vent the rules by incorporation by reference. Briefs not conforming to our rules are subject to rejection. -2/See Case 27136, Lena Island Lightinc Company - Electric Rates, 18 NY PSC (Opinicn he. 76-1, issuca January 9,
- 1978, mimeo p. 2-5); Case 26887, Lgn_g Island Lichting Ccapany -
Electric Rates, 16 MY PSC 497 (1976); anc Case 26552, Long Bland Lichtine Ceruany - Electric Rates, 15 SY PSC 15 -(T9 7Ti-- Lx L:o ' s lEs t gaa rate increase came in Case 27087, Lona Island Lichtinc Ccmeany - Gas Rates (Order issued August 5, 1977). 1945 151 ~2-Amendment 35 - January 1980
STATE OF NEW YOnK PUDLIC SERVICZ CC:IIISSION COMMISSIONERS: Charles A. Zielinski, Chairman O Edward P. Larkin, dissenting Carmel Carrington Marr Q Harold A. Jerry, Jr. 9 Anne P. Mead, discenting Kcren S. Burstein, discenting 9 Richard S. Bower CASE 27374 - LOiG ISLAND LIGHTING CO:1P7J:Y - Electric Rates CASE 27375 - LONG ISIJdiD LIGHTING COMPIliY - Gas Rates OPINION NO, 79-14 OPINION AND ORDER DETERMINING REVENUE REQUIRDIENT (Issued April 27, 1979) BY THE COMMISSION: On May 31, 1978 Long Island Lighting Company filed tariff revisions designed to increase its annual electric revenues by $147.1 million (18.51) and its annual gas revenues by $23.9 million (13.1%). By various orders, we suspended the effective date of the proposed revisions to April 28, 1979 in orde: to examine their propriety in public hearings. Upon consideration of an extensive record compiled during 42 days of evidentiary hearings, Administrative Law Judge David Schechter issued a recommended decision on February 13, 1979. The Judge found that the company had shown a need for rate increases designed to produce $52.3 million (6.6%) additional annual electric revenues, and $15.7 million (8.6%) additional annual gas revenues, in order to earn a 10.13% overall return on its investment. 1945 150 t 4 Amendment 35 - January 1980
b CASI:S 27374 and 27375 f D g interest on trust financed construction is not considcred for indenture coverage purposes, but is considered for SEC coverage purposes, LILCO's indenture coverage ratio has been higher than its SEC (or book) coverage ratio.
- Moreover, LILCO has, in recent years, earned returns on equity that have appro::imated those we have allowed in deciding its rate cases.
Ilonetheless, the company chose to present and argue its case here in a manner similar to that crployed in previcus cases. A major portion of its proposed electric increases would result from inclusion of an additional $400 millicn of construction work in progress in rate bare which the company seeks to justify on the basis of alleged nccessity to improve its interest coverace, and the ratios of the allcuance for funds used during construction (AFC) to not income, the market price to book value of its stock and internal funds to construction c::penditures. Staff has argued that the company's target ration are overly conservative; that existing ratios can be improved by alternative strategies; and that the rate increases sought by the company are greater than what is needed to achieve even LILCO's target ratios. A key part of staff's argument relics on the relation-ship it found between the AFC to net income ratio (which can be reduced by increasing the amount of CWIP in rate base) and the cost of equity capital to the company. Staff believes that if we included an additional $200 million of CNIP in rate base, we could reduce significantly the return on equity that we would otherwise have to allow in this case. Finally, various intervenors tock the position that LILCO's . financial position was now strong enough to allow us to measure LILCO's revenue requirement by application of our usual rate case standards, and without cash flow allowances. The principal cause of LILCO's financing problems in recent years has been its construction cf the 820. megawatt Shoreham nuclear generating station at a cost of something Amendment 35 - January 1980 1945 152
C.
- " '. *i.
';Y lihu S1. 3 bi ?.lica. Staff and tbc Cot.ntics of r escu and Suffolk raire several iscucs concerning the Ecor, Allcn S Her.ilton (D22:) rcpert on the Shoreham project. Ly order issued July 11, 1970, we directed that the BAII report be evaluated in this proceeding to deterr.cno what rate impact, if any, would result from the consultant's findings. The BAH project manager testified z..id was cross-examined on the report and tuo LILCO witnesses testified and were cross-c::amined on several aspects of the Shorcham project. The subject is not discasced in the recermended dacicion. es (q Staff and the Counties call for a Cor.nission x, proceeding to address the issue of whether Shorchau costs have boon incurred prudently and to dotcrnine to what extent \\ Q LILCO's ratepayers should be asked to support Shorcham expenditures. For reasons that will be set forth in more D3 detail in a subsequent order, uc have decided that an UD investigation of the Shorchen project, along the lines g suggested by staff and the Countics is necessary. We shall, Q therefore, institute a proceeding shortly for that pulpose. The scope of the investigation and the iscucs to be con-sidered will be delineated in the order establishing the case. LILCO believes it will complete construction of the Shoreham pli.nt and that it will be ready for service as early as Septc2ber, 1980. In view of Shorehan's imminent completion, and our review of LILCO's financing opportunities, we have decided not to adopt the recemmendations of the company, our staff, and the Judge that vc include additional CWIP in rate base.1/ We did add CNIP to rate base in LILCO's last electric rate case, but only after uc found that there was a " compelling necd" to do so because the integrity of electric service on Long Island was at stake.2/ That need no longer exists. ~1/The proximity or uho Shcreham completion date leads us to conclude that staff has also overestimated the extent to which investers discount Arc earnings and thus the extent to which the ecuity :.cturn allevanca can be reduced when cash flou allcuances are provided. Our allowed return does not assucc any additional cash flow allowances. gg 2/ Case 27136, Long Island Lichtino, supra, mimeo p. 4. 1945 153 Amendment 35 - January 1980
y.....m.. ., ; 3 *. ..,g.t., =i,., , e ..s Evcn.though we do nc,t prmCc addi ional cnu. flo i allowances here, we : ill fi:c rates u.at vill allcw LIL"O to generate earnings zufficient to attract the capital needed to finance p.tv ined construcf ion, meet its nernal operating expenses, and provide its investors with a reacenchle opportunity to earn a fair return in the period during which the neuly authorized rates will be in effect as we arc obligated to do.l' With this / background in mind, we turn to the parties' specific exceptions to the Administrative Law Judge's reccamended decision. CONSTRU: TIC:: E%P: HON URE9 The amount of LILCO's constructicn expenditures in 1972, 1979 and 1980 will increase the company's revenuo requiremont directly, to the extent the expenditurcs relate to plant that will go into service by the end of the rate year, and indirectly, to the extent they affect its tax liability and the cost of capital. There are three issues /223d on exceptions: es 1. Will LILCO's actual construction o expenditures throegh the middic of ^hh 1990 vary from its rate case estimates by the same percentage as its actual Ob expanditures varied from its budget forecasts in the period 1973 to 1977? 2. Should a revised construction expendi-tures forecast, excluded frcm the record by the Judge, be relicd on for ratemaking purposes? 3. Should enpenditures for pursuing the licensing of the proposed New Haven /Stuyvesant generating facilities be considcred for ratcnaking purposes? ~1/Tnis standard J.s embocied in our Statenent of Policy on Test Periods in Major Rate Prococ3Ehes, issuec I;ovamber 23, 197T (minco p. 3) Accorc: Case 21037, Central Hudsen Gas & Electric Coro. - Electric Entes, 17 NY FSI! 401 TBf77); ~ Cases 2/094-s, Oranac & Eockland Utilities, Inc. - Flectric and Gas Pates. ~17 21Y PSC (Opinion No. 77-14, issued Octocer 7, 1977, mimeo. p'. 3-4); Cases.27108-9, Ecchester Gas & E l e c t r i c _C o_r. o. - E.' e c t r ic._n_r d G c s _R_a te s, l~/ NY 55C~ 3 (Opinion no. 77-18, inst:ct ;;o;ct1cr 1, 19,/ /, mimeo. p. 5); Cases 27 215--7, Mincarn I:: hawk I car Corn. - Electric, Street Lichti".c, and Ce s hat.es",~~E NY 15! (Opinion I;o. 78-14, .issucc June 43, 1573, nimeo. p. 3). Amendment 35 - Janur.ry 1980 1 OAR 1RA
Ct. SIT 27374 c.nd 27375 LI LC O ' ': Teoc. ticr.s The first two issues are raised in LILCO's exception to Judge Schechter's adcption of staff adjustments to LILCO's construction expenditure forecast. Staff argued that LILCO's actual construction expenditures through mid-1980 can be expected to vary from its foreuast by the sane ratio that LILCO's budget forecasts varied from the actual expenditures in 1973-77.1/ Per this reason, staff witness Edwards testified that the company's forecast of its construction expenditures should be reduced by about $110 million. This testimony resulted in rate base and ocpreciation accrual adjustments by staff that ucre accepted by the Judge.2/ LILCO encepts on two grounds. First, it argues that staff's reliance upon the c:mpany's own original con-struction foreccst is in error because that forecast has been updated. Second, it argues that the staff's CVR's are too large because conditions in 1978-80 are unlikely to result in the same construction delays the company experienced in 1973-77. Uedated Feracast Issre. Judge Schechter refused to admit LILCO's updated construction forecast when the q company declined to extend the suspension period for the 45 CEE$ P' additional days deemed necessary to give staff and interested f members of the public an opportunity to review and rebut the f EU evidence presented. On exceptions, the company urges us to RSER consider the excluded evidence. While LILCO's arguments in 6~~3 support of its updated estimates may have some merit, we g3pg cannot ignore the fact that staff and other interested 6 9 parties have not had an opportunity to review and rebut the 6 0
- 63L, 1/The measure or tne dif crence is the ratio of the actual expenditures to the forecast expenditures and, in this case, was called the " construction variance ratio," or CVR.
-2/In addition, staff'a rate of return witness based his testimony on this revised forecact cf construction requirements. 1945 155 Ame,ndment 35 - January 1980
Cl.( "E 27:74 and 272.75 basi.; for the ne'> figurec. W. can 9 Da lictle cisht to the raw, entcsted escircctes whleb are Leiere us as an offer of proof. The Judge's decision precluding adniscion of the new estimates was proper and concistent with recent decisions we have made on the use of revisof. forecasts for ratemaking purposes.1/ Revised CVR Issue. LILCO's second argtr. ant is bar. d on evidence in the record. Its witness p.:ncented a revised electric conciruction c::panditure forecast, accepting substantial portions of staff witness Edwards' forecast, Q\\ n but making adjustments bsued largely on revised ' long-terp{4 b \\
- Q3 (more than one year) CVR's, as shown below:
\\ , (g <9 lons -Ter;_ CVR Ccrearison f .StaffandALJ.9M LILCO New Production (mostly Shorcham) 103S 122.0L Otner Production 30% 64.9% Transmissicn 65a 84.9% Distribution BOL 106.4's LILCO contended that the 1973-77 CVR's will produce a more accurate forecast only if the 1978-80 pericd is com-parable to 1973-77. It urged that the 122% ratio for new production properly reficcts Shorehan cost overruns and that its other long-term CVR's are more accurate because they are adjusted to eliminate the effect of 1973-77 construction delays attributable to unforeseen declines in load growth and problems l_/See Cases 2 /215-7, Nicacra Mohavk, sucra, (mimeo p. 4-6), where a sales forecast re elsion was e::ciuded frca the record and not othersisc considered for ratemaking purooses, and Case 27296, National Fuel Gas - Pates, 18 NY PSC (Opinion 78-h, issued Decermer M, 1978, nimeo p T5') where construction expenditure forecast revisions ucre not used to estimate rate base. See also Case 27136, Long Island Lightinc, supra (mimeo p. 10-12) where un t=testeu sales forecent reFision was not used tc estimate operating revenue. 1945 156 Amendment 35 - January 1980
00 D W mpy \\ D ,n CAba 2737/. and 27375 oh b in octaining regulatory permits. The corpany's witness testificd that these factors are not likely to delay con-struction scheduled for 1975-80. We think it would be foolish to project that Shoreham expenditures will be less than 10C3 of LILCO's original forecast, as arsumed by staff and the Judge. LIL'.O's cost overruns at Shoreham; its past tendency to uncV.rectim.te Shorcht.a c-xpenditures; and its inability to keep project expenses v.ithin fcrecasr_s are well docunented in the record in this case, in previces cases, and in the Boor, Allen, & Hanilton study we ordercd. Tha record suggests that past CVR's on production plant have rarely been less than 100.07., and have often substantinlly excccded 100.0t. In light of the record, it seems sensible to us to adopt LILCO's 122.0L CV:t. We observe, however, that this issue concerns almost exclusively a project that vill nct be in rate bene in the period for uhich we are setting r:tes. lh Therefore, LILCO's noi production CVR will be relevent for ratemaking purposes only to our forecasts of rate year financial position and tax liability and not otherwise.1/ For the other categories, we are persuaded that the staff construction expenditure estinates, as mcdified by the Judge, are more accurate than LILCO's. LILCO makes a plausible case for a scmewhat higher transmission CVR on thc ground that its Article VII cases were subject to delays during the 1973-77 period. But staff correctly points out that the Judge had already allowed 100% of the Shorcham related transmission far:j lities expenditures, so the remaining amounts for transmission subject to a louer CVR ere de minimis in any event. With respect to distribution expendi-tures, LILCO's argument is, at best, tenuous. It contends g7 1/As ecmputed in Appenc1x A, Schedule 3, page 4, the increase ~ in Shoreham investment, which accrues AFC not of tan, increases tax e:: pense by 0765,000. This interparied tax allocation for Shoreham was authcrised in Case 268G7, Long Island Lighting, supra, 16 NY PSC bl7{, Amendment 35 - January 1980
M N CASES 27 374 and 27 37 5 o B B{f( f0 Df u u that distribution expenditures will be higher than staff rather expects because they vary with growth in customers, than load, as utcff assunes. Even if LILCO were correct, we observa that the ccupany has been rcvicing dounward the expected numhcr of customers en its systen. Since load on its system is also declining, we enn find no substance in LILCO's position hr.re. New Haven /Stu/vesa g A major portion of staff's brief on exceptions is devoted to an argunent that LILCO's planned licensing cxpenditures on the New 1:aven/Stuyvesant generating project (including approximately $28 million already spent) should not be reccgnised for ratemaking purposes because there is "no necd" for the New Haven /Stuyvcsant plants. Various intervenors, and the Counties, which propose a similar adjustment for Janesport, h2ve endorsed the staff proposal. The Ui.cdom of the New Haven /Stuyvesant Article VIII applicntion ir certainly cpen to question. LILCO's decision to spend $23 million on a second Article VIII application before a decision on its first one is even rendered is causa for justifiable concern. Yet, this rate case clearly is not the propar procedural vehicle to test the wisdom of those expenditurcs. Our revenue requirement deterninntion here does not reflect the New Haven /Stuyvesant expenditures as operating expenses or as part cf rate base. And they have not affected our decisions en the cash flow issues in this case. While it could be argued that these expenditures have caused a marginal increase in LILCO's cost of capital, that amount would be difficult to quantify precisely and, in any event, likely to be so small as to be relatively insignificant. 1945 158 Amendment 35 - January 1980 _g_ v.
aa a rg 3 : b d 2 7 ' 'i o and 27075 CJ. SJ.7 ,S.k a .a oo o The ultimate determination regcrding the need for new electric generating facilities is, under Article VIII of the Public Service La:, largely a natter for the Boa d on Electric Generation Siting and the En'.ironment, rather than the Public Servic: Cc:: mission. he record necessary to determinc. Uhether the ::cu Haven /Stuyvesant geaerating plants should be built is in Siting Doard Cacc 80000, and that procce: ling has barely bc;un. Our rejectica of the staff adjustment in this case should not be construed as a tacit approval of the expenditures for the 'ew Haven /Stuyvesant application. If the application is denied, the recovery of these er.penditures in future rates would depend on a finding, in seme future rate case, of the prudenca of seeking a certificate in the first instance. OPERATING REVF' lies Sn]en For_eccats Starf, the Counties and the Judge have accepted the cccpany's final electric and gas sales revenue forecasts. On enceptions, LILCO proposed two adjustments, one increasing gas revenues by $549,000 to reflect the changed temperature setting for S.C. 5 temperature control customers, and a seccnd reducing electric revenues by $2.2 mi.llion because of a recently discovered S.C. 2 MRP billing error. We have reviewed these adjustments, which were not opposed by any party, and have found them to be proper. They will be recognised in cur revenue determination. Meter Tampering In order to reduce losses from meter tampering and theft of service, LILCO has instituted a regular meter tampering program with an estimated annual cost of $736,000, consisting largely of payroll expense. The program is 9 1945 159 - Amendment 35 - January 1980
D*R} D 'S d b C;.5.f_ 27274 nd 273T .d.R!Ium Ju o expectc6 to convert the cost of come amour.t of hii:vatt-hours of electricity and cubic feet of gas that would othe:. cise be " lost and unaccounted for" into revenue. LILCO conceded that the progran therefore required some revenue offset to the costs it estimated. The precise amount of revcnuas that the progra:a ni ght produce is somewhat speculative, because the c xtent of rcater tarpering and the amount that will be recovered as a. result of the progren oro ur.known. LILCO said it was wil.1.ing to esse:rn that the progrc:a vcaid produce revenue equal to its cost. However, staff, using company surplied revenue and c:: pense estimates frcn its pilot meter tampering program in offect in 1977 and 1973, constructed a " cost benefit index" indicating that LILCC has recovered 2.1 revenue dollars for every dollar previoucly spent on mater tampering investigations. Staff argued that a fully develcped program could be expected to bc even more productive and therefore proposed an adjuctment contempinting recovery of 2.5 dollars in revenue for every dn11ar spent on the program. The Judge adopted the staff adjustrent and the company has excepted. Staff's adjustment is correct in principle. But its estimate of probable revenues is based on tenuous estimatos of past expenditures. LILCO developed a revised projection, reflecting its actual 1978 cxperience with the tampering program, that suggests a $1.1 million revenue recovery. This ir approximately $350,000 more than its original estimate, and about $900,000 less than the staff estinate. In light of the weaknces in the data staff relied upon here, uc adept the company's revised estimate. Uncollectibics Judge Schechter estimated that.576% of the company's additional revenues would be uncollectible. LILCO objects, 1955 1: D Amendment 35 - January 1980
G.. : 27/71, 0 Y '75 D 9' ~ . S~}a clsining thnt the Judge h(.s given no explanc
- .n for s!s use of this ratio.
The cczpany proposed a ':igure of.59'2. In 1970, its 1cuest ratio.as.5711, and recent ratios have been in cxcess of.6005. It appears that the company has bcon experiencing an increasing uncollectible ratio. In Case 27136, we uscd the.5360 ratio e:cperienceu for the 12 r.onths cMed June 30, 1976, and notcd that the previouc ratio had beca.5114. Trcreasing uncc11ectibleg are a mtter of particular concern to us bccause they incrchse the cost of service for all customers. The probleu can and should be ameliorated through improved collection and customer relarions efforts by the company. Eccaure ve are providing an additional onpanse allo.n.nce for therc-functions, we believe that LILCO should be able to hold its future uncollectibles ratic to the.594% figure assurnd in the original filing. O P E R ;.T I n G E X_P D;:S C S Large parts of the racord in this prccacding were devoted to analysis of the principles underlying the assertions by various vitnesses that differing proposed operating expense allowances were reasonable. Staff and the intervenors 2cund that there was inadequate record support for expense allcwance increases in the amounts sought by the ccmpany. LILCO objected to many of the adjustments they proposed on the ground that establishing proper expense levels is, absent a showing of imprudence, a ratter of management discretion and contrary proposals constitute an unwarranted intrusion upon managen.ent prerogatives. Management prerogatives have their place--but it is not in the determination of what expense allewances are reasonable for ratemaking purposes. That is our obligation. Management has the opportunity to prove to us that its 1945 161 . Amendment 35 - January 1980
CAO:S 27374 cnd 27375 D 0 0 k m . A kW gu o proposed expense clicwances are reasonable and not excessive. Staff and intervenors have an cpportunity to challenge those explanationc and suggest alternative allowances. The ultinate decision as to what is reasonable is ours. And the Public Service Law provides that a reasonable amount is that which will enable the company to provide safe and adequate service at just and reasonable rates. The allowances we provide in these cases will be based on our analysis of the evidence presentcd by all of the parties and sufficient to enable LILCO to provide normal service. He shall not provide expense allowances for claimed abnormal, so-called " backlog, activities which may occur in the rate year. This decision is based on an important regulatory principle that is applicable to all companies under our jurisdiction: when circumstnnces have allegcely required a utility to adopt an austerity progran, we expect to see evidence that those circumstances hnvc diminished stockholders' returns before nanagement cuts back on expon-diturcs necessary to maintain safe and reliable service. That evidence has not been presented here. We expect LILCO, and all other companics, to follow this princip3e in their operations. In our view moreover, it is not within management's prerogatives to avoid the st. itory obligation to provide safe and adequate service in order to provide investors what management deems to be an adequate return. In this OpAnion we will discuss only the expense items contested in the briefs on exceptions.1[ We adopt the allowances recommended by our staff for the other expense items becaus.o we believe staff approached the overall question of expense allowances by seeking conscientiously to balance the consumer's interest in good service with their interest in reasonable rates. While the expense allowances recommended 1/Our specific ad]ustments are set out in the Appendices. 945 162 Amendment 35 - January 1980
c;. O ? *i 2 7 ' cn -1 2 '! L7 5 i D{ by various intervenors, nctrbly the Countics, vare cc:c sion-ally below thout reconmended by staff or the C dge, the basis for their argue.cnts was, in large pa 1, the inadcquacy of LILCO's proof. The defect in this approach, and in the " budget overestination factor" adjustmants proposed by the Countics as well, is that both igno;e the relationship of operating expense ellowances and Go quality of constrer service. The " budget overectiration factor" approach is furthur flawed by its sponscr's failure to establish the comparnbility of tha historic period 1.e used to develop the factor c.nd the poJiod for which we are setting rates. The record as a v; hole, including service cenplaints at the public statement hearings, the testitony of our staff, our public files of consumer ccmplaints (of whieb ue take officiz.1 noticc), and even the testimony of the Counties' own rate of return uitness, provide a:c.ple prcof that LILCO must improve its servi.cc performance. It is the consumer who suffers f rota tervica cuthrcks, and it is the consur.or we nust protect by assuri:.g that the cerpany's rates are sufficient to produce the revenue necessary to ucet nounl operating expenses. Overhr.ul Ezcence Judge Schechter adopted the major overhaul expense allowance LILCO proposed on the ground that it was necessary to provide for the normal level of three generator overhaula per year. But he rejected the company's request for an allowance sufficient to cover a second periodic overhaul for two specific units. LILCO contended that the two units involved will receive an extra periodic overhaul in the rate year because the first Shorchan overhaul will disrupt the ordinary maintenance schedule for the following year. The Judge accepted LILCO's argument but concluded that it proved only that this was an abnormal expense. He therefore adopted 1945 163 (II '" Amendment 35 - January 1980
D}} C1. ids 27374 cad 27375 staff's proposal to cr.ortize it, as an unn.'ual expense, over five years. LILCO, staff, and the intervenors each except to aspects of the recommendation. Uc will affirm the Judge's resolution of those issues. LILCO's c::ception is unpersuasive because, in the end, it fails to show how a decision to allcw full recovery of all norir.nl periodic overhculs, and a:rortice the two unusual periedic overhauls in unfair. The mere fact that the two unusual overhauls will occur in the rate year does not require their cost to be built permanently into LILCO's rates. Staff cad the Countics obscrve en c::coptions that one of the three major overhauls schedulco for the rate year is cn Far Rockauay Unit 1;o. 4, a job that wac deferred from a previcus year. They contend, therefore, that this it a " backlog" adjustment that should be disregarded for purposes of establishing a normal rate year expense level. Their argument ignores the undisputed fact, relied on by the Judge, that the normal cativity level for LILCO is three major overhauls per year. As the company notes, if it were not overhauling Far Rockcway Unit 1:o. 4 in the rate year, it would be overhauling none other unit. Ma-jor Maintenance Project Exocnse Judge Schechter rejceted the company's request for a $500,000 allowancc for major maintenance projects. He termed the projection " speculative" and a " contingency requcst uitnout reasonable basis or foundation." In its brief on exceptions, the company arguas that its exhibit listing a dozen planned major maintene.nce projects between 1978 and 1982, ranging in cost from $250,000 to $1,050,000, provides a reasonc.ble basis for its request. We agrca that the company has provided a reasonable basis for some contingency arcunt to cover the kinds of projects listed in 1945 164 ' Amendment 35 - January 1980
Cl.:: 5 2 / 3 7 a and 27375 FD 9'b l S D@hb ,$ A J o the enhibit. What the company has failed co prove, however, in that these projects will increasa its operating cxpenses by the $500,000 it claius. If, for example, the work involved were to be performed by LILCO's owr, crews, without overtime, there v;ould be no increase in total operating cxpenses. In these circirr. stances, ve :.ust rely on uhat guidance the record gives as to the company's past experience. The only exarple of actual rajor :.~.aintenance experditures LILCO has provided is the replacsment of the turbine shaft at Port Jeffeison No. 1 in 197S, which added about $200,000 to its annon1 operating enpenses. We will linit our allowance to that amount. Trce Tri:.ninc Dmense Judge Schechter rejected LILCO's request for increases in its trae trimming expense allowance. The company introduced evidence to prove that $2.3 million should be spent on tree trimming in order to keep service interruptions caused by untrimmed trees during the next twelve months at the norme.lized 1977 level, i.e., 11.6 interrup-tions por 100 circuit miles per year. The Judge found LILCO's evidence on the service interruption trend unpersuasive and concluded that there vould be 11.5 iaterruptions per 100 circuit railas in the next twelve months without additional expenditures for tree trimming. Since this interruption rate was below the one the cercpany had chcracterized as " nor.nal, " the Judge rejected LILCO's proposal. On exceptions, LILCO denics that it characterized 11.6 interruptions as a " normal" level. While its evidence showed that 11.6 vias the 1977 normalized level of interruptions the company argues that the evidence used by the Judge to forecast the level of interruptions in the next twelve months implies a normalized 1977 level of 10.8 interruptiens per year. The company's point here is persuasive. There is a 1945 165 . Amendment 35 - January 1980
<9 y mar o D 0 D . dl. \\j ; C.;SES 27374 and 27375 _n oc o somewhat vorsening trend which tends to shou that LILCO's As a past tree trinming ef forts have been inadequete. result, consttacrs have received leas reliabic service. We will allow the cenpany enough to reverse the deteriorating trend. The evidence relicd on by the Judge shows a normalized 1977 cutage rate (10.3) that should be our target here if servic2 in to be in prove _6. Using the assumptions in LILCC's origi.'.nl presentation, we esti=nte that an additional $000,000 will be sit 7ii cient to reach this target. I:e will make no specific separate allowc.nce, however, for emergercy tree trimming, or to fill fequests for tree trimming by customerc. The increased preventive tree trimming centemplated by cur allouance should reduce the need for cmcrgency and request trce trimming activities, which tend to increasc when preventive trinming is deferred. Admin."..trati.e cn3 Ceneral Enocnse Judga Schcchter adopted staff's estimate of LILCO's rate year administ):e.tive and general expense, which was daveloped by multiplying LILCO's actual 1977 payrol? by a 1.118 vage increase factor and other cxpenses by a 1.15 inflation factor. LILCO objects to the reconmenced allowance because some 1978 actual figures are greater than the company's estimates for the rate year. It suggests that this proves that its original forecast is reascnable. LILCO made this same argument to the Judge. He rejected it because the specific expense increases cited by the company tended to be offset by other spccific staff allowances that exceeded those sought by the company. LILCO's exception ignores the Judge's reasoning, which we find to be basically sound, particularly in the absence of a showing that the specific expense increases are necessary. LILCO's exception is therefore denied. 945 166 Amendment 35 - January 1980 A
Cn3Ed 27374 and 27375 D y)O ' 1 ) Cv
- Ju"3~~
b' Customer ?.ccounts E:.: cense Personnal. Judge Schechter refected most of the company's request for a $2.0 uillion increase in its expenses for custcmcr accounts personnel. LILCO claimed thtt additional personnel were needef to improve its,bil]ing, collection and consea.cr relations functions. The Ju(;e adopt;d staff adjur., mants climintting the requestcd allc..ancas (c.:ccpt for the meter t npering proga.a) on the ground t'aat the ccmpany did not noot ita burden of proving the "fansibility" of these hirings and that the beneficial results of the hirings were "clusive." LILCO has e::cepted. Our reading of the record indicates that staff and LILCO failed to Join this issue properly. The compar.y introduced substantial evidence to shou that its past billing collection, mater reading, and complaint-handling efforts have been in:Gequetc. Evidence from cur ccmplaint files and lh the public statenent hearings confirms LILCO's claims. 2ct tha company failed to show hcw the additional money it recuested would be spent to improva its shortcomings. Staff, on the other hand, focused on the reasonab3eness of past expenditures as a measure of what should be allowed here and ignored LILCO's poor service performance under previous budgets. It is obvious to us that the company must take action to reduce the number of unread meters, unattended past due bills, and unanswered consuc.cr complaints. 1.nd it seems clear that such measures will not be costless, Evt the company's presentation gives us no assurance that thcse problems will be attacked properly. Providing an allowance so that more money can be spent for additional pceple does not assure that available personnel will be properly trained and managed so they can be used productively. Indeed, staff has argued that if the dollars spent in'the past for overtine and part-time help were used instead to finance a properly Amendment 35 - January 1980 1945 167
CASES 27374 and 27375 trained and managed workforce, service could to improved without additional cost. We ere left, therofera, with an important issue to resolve and insufficient guidance from the litigants on the costs and benefits of their respectivo propocals. If uc rdept the full c::pcnse allc cnce LILCO has rcqucsted, it may involve more costa to consun.ers in rates than benefits in improved service. Converscly, the allouances recerecended by cteff provide the bene. fit of screwhac lowe2. ratea with the potential cost that thocc ratec vill bc. insufficient to improve service and end consuner dissatisfaction. In thoce circums.tances, our recolution of the difference between staff and LILCO muct be a compromise. LILCO requented an increase of about $2.8 million, including $736,000 for the meter tampering program. P.ccegnizing that the scre personnel con be uced fer various cuctemer accounts functions, we will approve a total allowance equal to half the requested aucunt. LILCO is free to appropriato this num for hiring, training or management in the meter reading, billing, collections, customer relations, and tampering investigations functions within this category as it sees fit. Eut the corapany will be required to report to our consumer service staff regularly on its efforts to improve service and the program of expenditures it is undertaking to do so. Equipment. Judge Schechter fcund an $S2,000 staff adjustment to clininnte the increase in die annual cost of payment processing equipment " inappropriate." che $82,000 was originally described as the additional rent for new equipment, but the ccmpany witness provided no basis for his estimate of the rcntal cost of a new machine. Mot until its initial brief did LILCO indicate that it had purchased the equipment instead. On exceptions, staff complains mostly about the manner in which LILCO's evidence in support of 1945 168 Amendment 35 - January 1980
CASES 27374 and 27275 D**D D 'l~ h A o f . 2 dY b we thin allowance was presented. According to staff, LILCO failed to recognine the trade-in value of the old machine or other ravings the new purchase might producc. In response, LILCO claims that the $82,000 reflects the trada-in value of the old machine, that its original rent expense cutimate is apprenimately equal to the a:.nua] carrying chsrgac cn the purchr.ced equipment, and that no suving.e. are anticipated as a result of the purchare becauce the ncw machine will do essentially the umc t.ork as the mcchine it has reple.ced. In light of the erguments, we find that the Judge's conclusion in correct. Advarticing and Public Affr. irs Ex.)es..se Judge Schechter detc mined that LILCO'c advertising and public affairs ellowance should be lim 2.ted to.075% of its revenuen, the name ratio we adopted in Case 27136, t.hc last LILCO clectric rate cacc. nc also rccc..= ended (.ddiLicnal allowances of $156,000 for arca 6c.velopment, $90,000 for internal communications and $18,000 for library matcrials. LILCO, Staff, and the intervenors have all excepted to varicus aspects of the Judge's recorcendation. The company arguco that the.075% allowance will not be enough to cover the cost of conveying all the information it would like to convey, and that it intends to spend more than the allowed amount in the rate year. We considered and rejected this same argument in Cace 27136 and do so again here. Staff objects to the separate, add 3tional allowance for area devolcpment advertising on the ground that this activity was intended to be covered by the percentage allowance limits specified in our P_olicy Statement. ! Staff is correct. It also objects to the incroaced allowance for internal communications because of the company's alleged failure to demonstrate that improvement is needec and can be achieved 1945 169 1/17 IFliP.SC 1-R. Amendment 35 - January 1980
CASES 27374 ano 27375 only through additic..,.1 cxpenditures.' It claims the base year level of intern,1 c^* inications expense adequately provides for the cost of reasonable empicyee bulletins anu meetings as veil cs union news letters. We agree.
- Finally, staff argues that the increase in expense, frcu $2,000 to
$20,000, for materials and supplies given to libraries is uns ti:morted. He vicr this final itcu as something close to a choritable contribution. The amount invelved is so small thct uo sea little point to requiring utilitics to provide " support" foritsolonhasthetotalamountforcontributions of this nature is reasonable. Staff has not attacked the allowance on this ground. This staff exception is therefore denied. F.ercarch and Developrcnt E::conce Judge $chechter adopted two staff adjustments, one to eliminate estin.ded payment.s to the Erceder heactor Corporati.on (for 'che Clinch River project) and the other to reduce tha esti:..ated LILCO centribution to ESEERCO to reflect delays in vcrious ESECRCO projects. On exceptions, LILCO argues that it is _i_f the Breeder Reactor Corporation demands payment, contractually obligated to make the papnent. While this may be true, it offers no evidsnce that the BRC is likely tc demand payment this year. The Clinch River project remains in suspension. LILCO's exception is therefore denied. Staff's ESECRCO adjustment was correct when it was made. But in its brief opposing exceptions, staff concedes that recent changes in ESEERCO funding require a r'..h: tion of its $220,000 original adjustment to $50,000. '2P o chis modifica-1/ .at '# sue.- tien, we adopt the Judce's resolution ci ~ 1945 170 1/In accorcance with the principles of nulti-year planning and financing of research and development programs we announced in Case 27154, 1977 Lono Rance Electric Plans, 18 NY PSC (Cpinion 7 8-3, issuea 2. arch 6, 1976) the company wi1T ultimately bc reinbursed for these amounts if they are propcr spent. Amendment 35 - January 1980
,,.,.,,. t 7 a, n. c n u s.,1 >, 1 0 o D**D " QTW We sJuU 2 Storm Dc: w e Eccerve and Actrual The enormoua expenditures LILCO incurred to effect restoration of service after the devastating 1978 ice stc.c.s are duly noted in the record. LILCO cequested that it be allowed to amortize over a thrca-year period the entra-ordinary $2.8 mi.llion net cost of the ice stcras. It alsc souglW an increase in its reser~a far storm decago bccause its eny.osure ecs inct e:.s' d whcn th. cei.ctibie amount on its insurance was raised fron $3 tillion to P5 millica last year. Judoc.3chachter approvcd the arc.ortization rec uest bi.t rejected the plea to increase storn dar. age rocerve by $500,000 on t ha ground that his special amortization allowance would servc the same purpose. Both staff and the cc:cpany except to the Jadge's rcjection of the accounting change and the increana jn the accrual. Staff, joined by other parties, also encepts to the reco nmended special amorti zation. Staft's posit. ion is that the si.ur:a 6c$ age reserve exista specificn11y to cover the cost of there extraordinary s tonas ; therefore, no special ac'.ditional Ic.ortization allo.ance is necessary. It alsc points out that with the increase in the reserve accrual i+. is suppcrting in this case, the extraordinary loss of the 197C storms will be absorbed by April, 1980--before the end cf the rate year-- without a cpecial amortication. The company responds that its territory is uniquely subject to potentially devast& ting weather. The result of the staff position is that itt. reserve will not reach the maxinta level for at least five years. In the intervening period iF will have to face the potential of storm damage with less than adequata protection. Where it is difficult fcr us to anticipate expenses
- attributalile to extraordinary storm losses, our usual procedure is to defer and amortine such losses fiven the Amendment 35 - January 1980 1945 171
C;JES 2737/ anf 27375 n pg' u frcquency of LILCO rate ecsos in recent years, we cuestion whether this company needs to employ reserve accounting for storm damage expenses any longer. The possible advantages of deferral accounting are north investigating. For now, we must agree with the company's position that the 1978 storms were beyond anything we contemplated when we modified its reserve and accrual in Case 27136. Come amortizaticn allowance beyond the proposed incrcace in the reserve, which we vill approve, is therefore in order. The extraordlaary costs of the storml/ should be chargcd, in the first instance, to the ncw linit of the reserve, and the rcrasinder shoalc he amortined over three years. This proccdure vill reduce the amount of the amortination by $166,667 (0500,000 3 years). In;iuries and Derages Reserve and I.ccrual LILCO estimated its rate year injuries and dcmages accrual on the basis of a three-year moving average ar.d sought a $2.5 nillion al3cwance. The Judge found that s ta f f 's estinato, based on a four-yenr average, was reecenable and adopted its $763,000 adjustment. Ee noted that staff's method was ccuperab]e to the one we adopted in Case 27078, Lcny Island Lichtine Comany - Gas Rates. On exception.3, the company complains that staff's method will produca " deficiencies," i.e., its injuries and damages expenses will be recovered over nine years instead of three. It also recomputes its estimate using staff s method to shcw that the adjustment should only have been $129,000, rinally, it observes that the estimate should he n.ade on the basis of the most recent th'ree years' experience, as we did in Case 27078. It complains that staff artificially reduced its estimate by using a four-year average. In response, staff argues that its decision to use a four-year average was 1945 172 1/We accept tne start's computation of this amount in Attachment C to staff's reply brief to the Judge. 4 \\ Amendment 35 - January 1980
Cr.ns.27374 and 27375 ! D D b O proper because the annual fluctuations in this account make an average over a greater nurber of years a more reliable estimate for ratemaking purposes. Staff also relies on the record in Case 27078 which shows that the 1975 accrual uns inflated by an accounting change in that year, and that our allo nnce in that care used a normalized 1975 secrual. Both utaff and the company departed from the method we used in Case 27078--stc.ff by using a four-year average and the company by using a moving average and failing to normalize the 1975 accrual. Heither method gives any weight to actual claims, which during the 1975-77 period were $3.5 million, or $4.4 million less than the accruals. Cor. paring the latesu three years, including 1978, the averace accruals decline Lo $1.9 millior. while average claims increase to $1.6 million. This latest experience indicates a con-vergence of the average accruals and clairca which would l justi fy an expense allowance midway between the two averages. This :r.cthed results in an es:penso allowance which is essentially the same as the staff's. LILCO's exception is denied. Amortization of Unf"nded Pension Liability Judge Schechter rejected LILCO's proposal to eliminate its unfunded pension liability over a ten-year (rather than thirty-year) ' period on the ground that the company has not demonstrated either a need to reduce the amortization period or that the reduction proposed is " realistic." LILCO excepts on the ground that the unfunded pension reserve is. increasing, implying that future customers will have to pay pension costs related to service provided by LILCO employees in the past. It criticizes the recommended decision for its failure to consider this alleged inter-generat,ional inequity. LILCO's characterization of this Amendment 35 - January 1980 1945 173
CASES 27374 and 27375 D**]D *D ~ T lIl A e o f6 OL.AjYTua issue is somewhat misleading. This is not an issue of whether future ratcpzyers vill be required to pay for the prenent cost of service. It is an issue of whether present or future ratepayers should pcy the ecst of past service. Uc can find no logical reason for requiring present rate-payers to pay all of this cost. Absent a showing that the thirty-year amortization period, which is also used by other utilities of this state, is improper in some way, we will not approve a change. Ucce and Inflation Index LlLCO cpplied wage and inflation factors to base year expenses to estimate expensas for the year ended June 30, 1930. Staff observed that the rate yenr in this case will cnd on April 30, 1980. It therefore argued that the company has, in effect, clabned an allowance for two extra months of inflation and proposed an adjustment to eliminate it. The Judge adopted the staff adjustnant and LILCO has excepted. On exceptions, LILCO mninly points out various reasons why its use of a rate year equal to four calendar quartcrs was reasonable. More information was available and it made historic comparisons and analysis easier. The company's reasons for adopting the year ended June 30, 1980 as a test period, while logical, are irrelevant, since neither staff nor the Judge objected to it as such. Their adjustment is based on a strict application of the future rate year concept--rate case allowances should be designed to make the company whole for the first twelve months that rates will be in effect, not the test period the company happens to select. LILCO makes two additional points that are more compelling. First, the probable lhg in our approval Amendment 35 - January 1980 1945 174 4-
CASES 27374 and 27375 h }D D D l of its compliancc filings, and the practice of the industry to base revenue recognition for accounting purpost; on mcLer readings during the accounting period, Inther than on service estimated to have been rendered during the accounting period, means that the comoany will not recognine somc of its additional rato case revenue until July, 1979. Second, the cc:many's uage and inflation index assu c.e5 a ti-1/23 increase through 1978 while the ratual rate, r.s T.Teasured by the GNP deflator, was 7.45. According to LILCO, this would require additional allowances of $457,000 for its Electric Departrent and $102,000 for its Gas Department. The staff adjustments ref1cet our usual practice and they were properly adopted by the Judge. While we see merit in the two xclevant points nada by the company, we will r.ot provide any additional allowances on account of them. The a:.tount of the revenue increase not acccunted for in the rate ycar because of regulatcr/ delaya, and delay in their recognition for accounting purposes is not quantifiable from this record. LILCO's argument that it offsets, and is thus equal to, the staff adjustment is speculative. We would have been willing to provide LILCO with additional allcwances to the extent it demonstrated its actual 1970 unit cost increuses exceeded the 6.5% assur.ed in its presentation. But it has not done so. It did not use the GMP deflator to develop its original estimate, so the GNP deflator cannot be used properly and reliably to revise that estimate. LILCO's exception is, therefore, denied. O Amendment 35 - January 1980 + I 1945 175
I CASES 27274 and 27375 b 0((5 'OD Labor Productivity LILCO'; original case included a productivity adjust =cnt that assured it would achieve it annual force reductions thrc_th the rnte year. The cc:.9pany offered no evj dence that t:.;se gains could be achic"ed, nor did it suggest where th : force reductions might take place. In fact, LILCO's cvidcnca sho',cd probculo negative productivity thrcuch the rate year. nonethcless, Judge Schachter adopted the LILCO productivity adjustment. The Counties have called the 10 profuctivity adjusucent "artinrery" and have excepted to the Judge's failure to adep. their productivity adjustment, based on LILCO's historic 2.3t rate. In opposing the Counties' exception, L7LCO paints to studies which show that its productivity,ill prchably decline in the rate year and that nuch of its past productivity has been capital-related. The Counties' cochanical application of historical productivity rates, to adjust forecasted enpenses in a forward-looking rate year is not a reliable measure of expectcc productivity. At best it could be used only for some guidance, in the abscnce of more specific analysis. Specific adjustments to various operating expenses are a more accurate way to reflect future productivity. The reduction in labor expense inherent in the adjustnents to LILCO's estimates we have adopted is about 10%. He consider the productivity reflected in those adjustments reasonable, and therefore make no further productivity adjustment. Amendment 35 - January 1980 1945 176
CASES'27374 and 27375 l' D** D
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.N h g c, es DEPRECIATIO;i Gas Depreciation Productiop Structures. The rccent retirement cf LILCO's Bay Shore gz.s plant has led the company to seek a change in the deprcciation rate on all its gas production struerures. The relative position of LILCO, staf f ar.d the Judge on this issuc are shown balou: Current LILCO .L_L.J anf Staff Averare Service Life 35 years 20 years 30 ysirs Salvage Valuc (100) (5%) (101:) Judge Schachter, relying on testimony from staff, concluded that the recent Bay Shorc plant retirement dis-torted ave;sge service life calculations; that the " full band" indicated average service life ves about 30 years; and that a more modcat average servica life reduction to 30 years and retention of a 100 negative salvage rate would produce a reasonable depreciation accrual. On exceptions, the company argues that the accrual rate for gas productica structures should be the same as the rate for other gas production accounts because (1) gas plants vill henceforth be rctired in their entirety and (2) the trend in the gas production plant account is towm"d a shorter average servica life. The company's first point is irrelevant becausa no LILCO gas plants will be retired in the forcseeable future. Its second argument fails because it has not demonstrated that the modest reduction in the average service life recommended by the Judge is unsatisfactory, particularly in light of his provision for negative salvage, which is greater than the company's. LILCO's exception is denied. Amendment 35 - January 1980 1945 177
CASES 27374 and 27375 0 } D1 p M udk 1 Steel Transoission Mains. At various times, gas transmission and distribution mains have been studied as similar and different property classes for depreciation purposes. When distributica and transmission mains were studied as a single class, the assumed negative salvage was 15%. Distribution mains are now studied separately, and the accrual provides for 20; negative salvage. Although the 1:eighted average ncgative salvage for the two plant accounts has been 21.40, the Judge concluded that 15% negative salvage was fair for the transmission acccunt because the salvage study in the record indicated tht.t actual negative salvage has been only 1.';. On exceptions, the company ccmplains that because tram nission and distribution mains were in a single account until 1968, the deta on which the 120 negative salvage factor was dctcrmined ia cuite limited. It therefore argues that the two accounts should be treated on the same basis and, since the weighted cumulative average negative salvage of the tuo accounts is negative 21.4%, a negative 20% allowance for each is fair. The actual studies, although based on somewhat limited current data, are the best evidence available. They show that transmission negative salvage is 120, less than the 150 now allowed, and far less than the 20% sought by the company. We therefore conclude that the Judge's allowance is reasonable. Cathodic Protection Devices. LILCO has been depreciating cathodic protection devices at the sane rate it uses for all distribution plant, a rate reflecting a 75-year average service life and 15% negative salvage. In this case, LILCO requested that a special subaccount for cathodic protection devices be established to reflect a 15-year average service life and zero net salvage. The Judge rejected the company's request end found that cathodic protection Amendment 35 - January 1980 o' 1945 178
CMF-27374 e d 4737S D *
- lD D
9'l 3 moMo XX= devices 1.'ay increana the average service life of the associa ed mains, as evidenced by LILCO's actual cnperience between 1971 and 1977. Although it 12 true, as LILCO points out on exceptions, that theco devices probably vill not last 75 years and that thcy are attached to many mains with chort life enoectancies, they do not necessarily reduce the average service 2ife of the accouat as a whole. Fcr this rcason, we rejected a similar requent to estab]ich a special ceparate account far cathodic prntection devices in Case 27296, National Fuel Gan - Rate 7:, 18 !;? PSC (Opinion No. 78-29, issucd Decenber 29, 1978, mimeo p. 30). We will adopt the Judgc's esolution of this issue. Electric Street ar/i Parb av Lichtina As Ln.C3's stnet lighting plant is gradually turned over to nunicipal and state agencies, premature retirc ents are prcducing unforeseen losses ubich the company now sacks to recover in rates. The cc:apany proposed to depreciate the value of the remaining street lighting plant on the assvaption that it would retire approxilaately 30,000 units per year for tuo years and a lesser amount in each of the next eight yearc with zero net salvage. The company also proposed remaining life treatnent of its parkway lighting plant, with a five year remaining life and 62% net sal age for 1-1/2 years and zero thereafter. Judge Schechter found that the street lighting retirements were taking place much nore slowly than assumed by the company and that an amortization assuming 10% salvage and a fifteen year remaining life was more reaconable. Since the recommended decicion, however, LILCO has effected several transfers of its street lighting plant. On exceptions, the company points to its sale of 33,777 units to the Town of Oyster Bay resulting in thout $10 million of unrecovered net plant. In light of this experience, it believes its Amendment 35 - January 1980 I945 179
CA";S 27374 and 2'1375 a q. fw A o 11 %G original remaining service life assumption pas reasonable. Staff responds that the actual salvage value of the street lighting plant involved in the sales to five other nunicipalitics we approved on March 6, 1979, as well as the Oyster Bay sale, was about 400, and that this dc.Tonstrates that its amortination rate is r.cre reasonable than the ccmpany's. It appears that municipalities are no longer interested in obtaining street lighting service from LILCO, so we accept the proposition that the company sl.ould recover its investment over a relatively short period. Decause it seems likely that the systems with higher salvage values will be sold first, the 40% salvage realized frcn the recant transfers is probably too high to expect in the future. Our allowance will therefore assume a ten-ysar amortization period an a 250 suivage value to reflect both the evidence of quichening sales anc recent salvage values. We leave the issue of how and iron rhen LILCO should recover thcce costs for resolution in the ro_c design phase of this proceeding. In view of the uncertainties regarding projected parkway lighting retirements and the absence of retirement experience, the Judge adopted staff's recommendation that the accrual reflect a ten-year remaining life and a lot salvage value. The difference between this accrual and the one recommended by the company is about $200,000; it would be greater, but the company assumed that its current suit against the State would be successful and has reduced its plant in service estimate to reflect the anticipated award. Such speculation about the outcome of the suit could result in an under accrual. He thcrefore adopt the Judge's recommendation. Electric Production Structures Judge Schechter rejected LILCO's proposal to increase its depreciation allowance to reflect a decline in -.o 1945 180 Amendment 35 - January 1980
C,.,..,., s.: 4/e t' u.,u .IaI a h . LM m1* D 'A )h D Y lD the averare service li~fe cf its electric, productior. structures from the current 45 years to 35 years. Instccd, he ado,r*cd the 40-year average service lifc reco.Taended by staff. Cn exceptions, the corpany argues that a reduction of the average service life from 45 to 25 ycers will (1) help cicse the $7.2 million gap between book and theoretical depreciation and (2) give all production plant tha scne average service life. The Ju6ge focused on the second -lustification and found it insuflu:1 cat hertur.e, in one case, LILCO was ab.e to tarn a production structure into a training facility af ter the gcne.:ating unit was retired, uILCO claims that such recycling is unlikely...in the future bccause many of irc remaining structures are the semi-outdoor type and useful only as c2ectric predtction structures. In reply, staff argued thet a change in theoretical reserve resulting frcr. a change in life table does nct warrant the large reduc'icn _n the average service life esticate sought. The results of rhe mortality study for this accoir,t are of limited value hecr.use of the large discoatinuitics in the observed life table. agree with sta2f and accept the more gradual reduction to 40 years rather than to 35 year.<:. rnvironmental Contr.c..l_. _"quicuent Judge Schechter adopted LILCO's pro; osal to ano.-tize the envircrmental control cquipment at I:orthport Units 1 a.d 2 over the remaining lives of those units. On exceptions, staff argues that use of remaining service life depreciatien should be discoura;;ed because it results in a proliferaticn of subaccounts, each with its cun rate, and cakes review of property accounts virtually impossible. In reply, LILCO argues that late additions to existing plant are usually replacement parts that extend the plant's useful life, but these pollution control facilities vill not have the same effect. It therefore supports the Judge's resolution of this issue. 1945 181 Amendment 35 - January 1980
GJu}D " D 9 h> CME 5 27374 and 27375 D Y u L1 I 0 FEDEPJ.L IUCOME TAX Trust Interest. Deductions A substantial part of LILCO's investment in Nine Mile Point No. 2'and its future.an"~ car ucl requirements c are being financed by the debt of LILCO's construction and resources t):usts. Af ter detr'rnining t hnt i.ILCO vould be deducting the interest c:' the acbt of the trusts on its own currt:nt tax returns, Judge Sch'.chter c?ec:ided that these deductions should be reccgnised for raterachJ ng purposes. The Judge uns convinced that the deduci.icnu cou.16 pro;erly be used to reCuce the ccmpany's taxes by a nemo froni LILCO's own t&n counscl. IIis rocc5mendation that these deductions be used to reduce the income tax expense borne by current con:nvrers is consistent with our gancral policy in favor of flowing through tcx benefits to customers. On exceptions, LILCO attacks the Judge's action on the ground that its right to take the deduction 3 fcr the trust interest on its tax return is too uncertain withcut a cor.clusive IRS ruling on thia natter. k's believe that t.".e Judge properly relied on the menorandum of LILCO's tax counsel, as we diu when we approved the trust financing ~ arrangements, as persuasive evidence that the interest is deductible for income tcx purposes. Flouing through the deductions arising from construction of future plant to reduce today's rates gives today's ratepayers the benefit of tax deductions that could be reserved for tomorrow's rate-paycru. Tomorrow's ratepayers vill have to pay the cash returns on the investment in the plants involted, but we continuu to believa this policy is reasonable, as we did in the last LILCO electric rate case. In that case, when the corapany sought extension of this interperiod tax allocation to the deductions related to the Nine Mile Point 2 and Jamesport generating facilitics, we said: ', Amendment 35 - January 1980 1945 182
CASES 27374 and 27375 -D D
- 3. \\
u c3 c3 a a oo o .a On exceptions, L:LCO and the Counties cc: plain h that it is " inconsistent" to treat property taxes differently from other enpense itcms. LILCO further claims that since its forecast was the "only" forecast of rato year property ta::es in the record it must be adopted. Property tance are annual pay.sents set by government decision and are certainly distinguishable from most other rate year expenses. Uc have regula"ly alloaed the second-stage filings to permit utilities. to recover prcperty tan increases.1/ LILCO's forecast of property ta:es was not the only one in the record--staff and the Counties both submitted forecascc--and infnrration in staff's brief opposing exceptions indicates that even the most current enticates may turn out to be inaccurate. Accordingly, ve will authorize a second-stage tarif f revisica in January, 1900 to reflect actual property tax changes through that :c.onth. We do so with two caveats: first, as in the other cases cited in the nargin, we will permit LILCO to recover only 903 of the increases related to higher estimated assessments, and second, if LILCO should file another major rate case in the next year, we will make such offsets as may be necessary to provent an overrecovery of these expenses resulting from overlapping rate periods. -1/See Case 27029, Consolidr.ted Edison Comcany - Electric Rates, 17 N'I PSC 241, 263 (197 N, Caces 27094-5, Orance & "ocklana Utilities, Inc., suora, nimeo. p. 26; Cases 27103-9, Rochester Gas ;cd Olectric Cerroret.icn, supra, mimco. p. 15; Case 27100, New Ycrk Telecnone cc mnv, 17 tiY PSC (Opinion No. 77-22, issucd Decenner 1, 1978, mimeo. p. 7); Case 27209, Jamaica Water,Sunciv Ceccanv, 18 NY PSC _ ); 1978, mimeo p. 11 (Opinion No. 70-24, issuec Octoccr 6, cases 27215-7, Niacara Mol.cwk Power Corcoration, suora, nimeo p. 28; Case 27275, arooktyn Union Gas company, 18 NY PSC (Opinion No. 78-28, issuca.iovember 28, 1978, mimeo p. 19; Case 27296, N.nticnal Fuel Gas Corcoration, 18.iY PSC (Opinion No. 73-29, issued December 29, 1978, mimeo 26 g3 -3/.- Amendment 35 - January 1980
Y b CASES 27174 an.1 27375 99@ 0 D 3d e AA o We have ext:nined tut. question of the impact of pollution control equipment on depreciation allouances in 1/ three successive Niagara Mohawk electric rate cases.1 There we decided not to depreciate the equipment over the remaining life cf the relate.d generating plant, in part because we had previously recognized that the expected average service life of Eiccarc Mohawk's generating plant was reduced because of the added equipment. Ar' pting a similar cpproach here, we reach the same result as the Judge without assuming that the usefulness of the Northpert units will suddenly come to an end in 2007. A good average servicc life estimate, properly reflecting pact and anticipated events, will, if reviewed and updated periodically, avoid the deficiencies LILCO clains it will expcrience if the remaining life technique is not uced for this property. We therefore accept the Judge's allouance, and authorize LILCO to modify its depreciation accounting to reficct the implicit reduction in the average service lives of its facilities. We will also expect the compnay to analyze the effect of anvironr.mntally iaposed plant additions en average service life in its next rate procceding and reflect its analysis in the determination for the affected account s. PROPERTY TAXES Judge Schechter rejected LILCO's estimate of its rate year property taxes and adopted instead a considerably lower figure that reflected historic expense IcVels, plus allowances for known assessment and rate changes. His adjustments reduced electric axpenne by $5 million and gas expense by $1.3 million. He suggested that these allowances be revised to reflect known changes up to the time of final decision and that the company be permitted a second-stage filing to recover further increases during the rate year. 1945 184 1/ Case 26088, 11 NY PSC 1475, 1486-8 (1971); Case 26594, 15 11Y PSC 268, 275-6 (1975); and Case 27943, 16 NY PSC 908, 918 (1976). Amendment 35 - January 1980
CASES ??374 and 273*/5 mm c3 D D 3-4 Lq-g J QW G It has long been our policy that current tax deductions should be reflected in current rates. We have nade exceptions only in cases wherc~ utilities denonstrated that deferral was necessary to protect their ability to raise necersary capital on reasonable tcrns. LILCO has failed to demonstrate that the cash flow allovrances authorized in opinion No. 78-1 are inadequate, so va continue to draw the line on interperiod tax allocations at the Shoreha a related it.terest deductions.3/ In this decision ue have not redeced the cash flow allowances ve. approve.d i s, oinion 1;o. 78-1. LILCO has again fai]ed to show that those allowances are inadequate. Its exception is therefore denied. TRASOP Tax Credi ts Judge Schechter, in his tax calculation, used all avai)able tax credits to reduce tames to the 10% ntatutory limit, without recognining any of the 1% "TFASOd" tax credits.- LILCO is generating core tax credits than it can use on its current tax returns, so the unused credits are carried forward or inventoried for use in futurc years on a first-in, first-out basis. Thus, 1% TRASOP credits generated in 1977 will be used before 4% or 6% credits generated in 1978. On c::ceptions, LILCO argued that Judge Schechter's failure to recognize the it credits gives the benefit of those credits to consumers, rather than employees as Congress intended.. LILCO reasons that if it is to continue to be 1/ Case 27136, suura, vraer issued April 17, 1978, mimeo p. 5. Incofar as the relative burdens between today's and tonorrew's ratepayers are concerned, we observe that plant being financed today for the use of future ratepayers tends to cause current ratepayers to have to pay for higher returns on investment. " /TRASOP.is the acronyn for Tax Reduction Act Stock Ownership 2 ' Plan,'a tax progra designed te encourage corporate cmployers to buy stock for the benefit of their enployees with funds the employer would otherwise pay in taxes. I945 185 Amendment 35 - January 1980
CAS3S 27374 and 27375 D"D P D W ~ sI S }h a 3 S& cligible for the investment tax credit, it must invest the entire tax savings produced for the benefit of employees; and if all savings are instead used to reduce consumer rates, there will be nothing lef t for its employces unless LILCO spends its own money, something it says it is unwilling to do. It concludes that the Judge's approach will force it to terminate the program. We approvcd LILCO's TRASOP program on the assumption that it would benefit employees at no cost to consumers. It now appears that there is a cost to consumers since the existence of the TRASOP carry-forward credits bars our recognition of other credits we could otherwise use to hold down rates. In these circumstances, we are compelled to adcpt staff's approach. At the same time, we must forbid further TBASOP investments by the company until it reaches a tax position that will enable it to use the TRASOP credits without imposing costs on consumers. We therefore expect that there will be no unused TRASOP tax credits available in the rate year. Gas Department Tax Credits On exceptions, LILCO complains that the Judge, without discussion, accepted staff's proposal to reduce its Gas Department's revenue requirement by subtracting tax credits equal to the sum of all the 19'/8 and 1979, and one-half of the 1980 credits. The company argues that no more than 12 months' worth of tax credits can be used in determining the revenue requirement. It is our policy to minimise Federal income tax.cxpense to be funded by consumers by accounting for use of all available tax credits and deductions.1/ These credits, adopted by the Judge, although 1945 186 1/Sce Case 26538, Consolidated Edison Comoany - Electric Rates, 14 NY PSC 1503 1534 (1974) Aff'd on appeal, Consolicatad Edison Company of Mew Ycrk, Inc. v. Public Service Cornission, 385 HYS2d 209 (1976). Amendment 35 - January 1980
CAS2:S 27374 and 27375 D"m D 0 'B S m M ej EK generated in prior periods, can and should be properly used to reduca the part of LILCO's tax liability attributable to h its Gas Department in the rate year. Its exccption is therefore denied. Earned Vacation Deduction The Judge resolved a dispute between LILCO and staff regarding the amount of earned, but unpaid, vacation pay that would ava11chle in the rate ycar as a dcduction to LILCO's tax lichility by adopting a ctaff adjustment that reduced the proposcd electric expense allowance by $266,000 and gas expense by S75,000. The company entinate of the deduction was $C00,000, equal to the 1974-1978 average, plus $72,000. The stcff esti= ate adopted by the Judge was equal to the 1977 actual figure ($328,000) tinen itn 1.118 wage increase factor. The actual vacation deductions taken in recent years, shown belcu, exhibit the kind of volatility that.usually justifies norn:.lization: h 1978 $593,003 1977 828,212 1976 583,742 1975 390,39G 1974 459,590 On the basis of these figures, LILCO's estimate, which includes the very low 1974 and 1975 figures, cecms low, while staff's estimate, based on the very high 1977 figure, seems high. He judge that a total deduction of $760,000, equal to the most recent three-years experience, times the staff's wage increase factor, is a reasonable estimate. 1945 187 Amendment 35 - January 1980
CASES 27374 and 27375 12ortization of Deferred Ta::es, The Countics, in their brief on exceptions, urgo us to require a three-year amortization of the excess" deferred taxes on LILCO's books that result from the reduction of the corporate tax rate frca 48% to 46%. Staff and LILCO agree that whatever the ra2rit of the Counties' position, the ratecaking problens created by the tax reduction are generic and should be resolved in the context of our investigation of this matter. We agrec. The Countics' exception will therefore be denied. Revised Computations Our substantial revisions to the operating revenue, expense, rate base and return allowancco recommended by the Judge have required substantial revisions to the income tax conputationc he made. Our computations arc set out in the appendices. RATE EA_SE Deferred Tan _Cgdits Judge Schechter adopted a staff proposal to reduce the rate year rate base by: (1) the shareholder half of the 4% flow-through tax credits generatef by the Shorehan con-struction; and (2) the difference betwecn the rate year ~ actual flow-through crodits and the three-year average we used to determine the " normal" level in the last LILCO electric rate case. LILCO excepts. The company nakes a number of arguments with respect to the first item. First, it notes that we did not make this rate base adjustment for the reallocated flou-through credits in Case 27136 and that, allegedly in accordance with the accounting procedure it negotiated with staff, the reallocated credits are " deferred credits" rather than " deferred ta:: credits" that can be deducted frca rate base. 1945 188 Amendment 35 - January 1980
CASES 27374 ano 27375 u D syg ei Second, it argues that capturing the stockholder share of g the 40 credits to reduce revenue requirement is unfair because it would not have adopted flow through accounting if we had not adopted a sharing policy. Finally, it argues that using these credits both to reduco rate base nou and to reduce income later would be unfair. It even suggests that this approach may be against Internal P.evenue Service regulations. The company says the second adjustment is also unfair because in Case 27136 ue used an averaging approach, including credits estimated to be available in the rate year, to increase the nominal amount of flow-through credits when the actual amount of test period flow-through credits available was below average. Now staff wants to use the actual amount available when it is above average. We believe the staff adjustments are fair and consistent with our decision in Case 27136, where we said: The cost of financing the Shorcham CWIP is imposing a severe burden on current ratepayers while, at the same time, abnormally high ITC benefits generated by Shoreham progress payments are providing stockholders with an abnormally high return on equity. But LILCO's cash flow requirements prevent us from reducing the above-the-line tax expense by allocating all of the flow through credits to the ratepayer at th.i.s time. Instead, we hold that the portion of all future Shoreham flou through credits that would be allocated to the stockholders under our general policy should be allocated to the ratepayers. This should be done by deferring them now, for accounting purposes, and amortising them later, as an offset to the attrition produced when Shoreham is fully included in rate base. (Opinion Ho. 78-1, nimeo p. 23) We have made an equitable determination that the 4% credits from Shoreham construction should be allocated entirely to the ratepayers. There is no reason why they 1945 189 Amendment 35 - January 1980
D ^0 d )[.f W D CASES 27374 and 27375 D* )D A Ao o Ju 6 should not be considered custoner-contributed capital and an offs 7t to rate base, regardless of the manner in which they are accounted for on the books of the company. Otherwise, the ccapany would have free use of the customer's money. It should be understood that we are not reducing rate base by any part of the stockholders' credits which are not related to Shorcham. Indeed, the staff estimate of the accumulated rate year Shoreham credits is conservative. Also, we see no violation of IRS regulations since the tax credits in question are Option 3 (flow-through) credits to which ratemaking restricticas do not apply. The second staff adjustment is similar; like the rate base deduction for the Shereham tax credits described above, they represent funds available for use by the company because of credits which normally would reduco revenue requirement. In Case 27136, the three-year average was expected to be the actual amount of flow-through tan credits utilized over the period. The sarue average used in this case is 3ess than the expected utilitation. As a result, a rate base deduction is required to reflect the expected excess credits available to the company. Since our revenue requirement is considerably less than that recommended by staff and the Judge, the impact of this treatment is relatively small--a rate base reduction of less than $2 million. LILCO's excsptions are, therefore, denied. Shorchen Switchvard Judge Schechter adopted staff's $4 million rate base deduction to exclude the Shoreham switchyard from plant in service and to include it in construction work in progress, where it would accrue AFC. He concluded that there was "no specificity" to the company claims that the facility will be in service in April, 1979, a year before the related Shoreham generating facility is in service. The company excepts. 1945 190 E' Amendment 35 - January 1980
CASE 3 2i374 ano 27375 DTP}D fif D W"d 3 Y 9 Ma u u )]u The Judgc incorrectly franed this isene. Staff did not dispute the company's claim that the Shercham switchyard would bc in service before the Shoreham generating facility. It argued, however, that since the suitchyard was constructed primarily to connect the Shorcham generating unit and the Shoreham transmission line, it should not '; r placcd in service until the Shoreha:a generating ctation is in service. Uhilc there is merit to staff's position, cnd its reconnendation may be consistent with past LILCO practice, it is not consistent with Part 168.3 of our Uniform S stsm f of Accour.ts, which requires that the coupleted portions cf larger projects be included in plant in servire. While we would, for adequara cause, diverge from the policy of Part 168.3 for ratemaking purposes, we would be willing to do so only in cases where a major distortion in rates would occur if ve failed to act. This is not such a case. LILCO's exception is granted. Rate Base Capitalization Adjustments The company, staff, and the Judge computed LILCO's working capital requirements using the standard FPC formula. The Counties' witness decided, en the basis of his " balance sheet" analysis, that the FPC formula resulted in an excessive working capital allowance. For this reason, the Counties except both to Judge Schechter's failure to adopt their S39 million adjustment to working capital, and a similar rate base adjustment to recognize the $6.3 million injuries and damages resorte. Staff and the company agree that the Counties have essentially proposed a rate base / capitalization adjustment without adequate support. Staff's analysis indicated that there is a $1 million difference between the two, an amount too small to justify an adjustment.
- Further, LILCO and staff criticise the computation since the adjustment was based on a comparisen of the average balance sheet working Amendment 35 - January 1980 7,
g 1945 191
CASES 27374 and 27375 ] D D capital for the twelve months ended Tagust, 1978 with the rate year working capital derived using the FPC formula. When the balance sheet working capital calculation for the 1977 bare year is cc:apared to FPC formula working capital for the same pcried, the difference is eliminated. The Counties' picccceal working capital adjustments arc incon-sistent with the rationale of the FPC formula. We helieve the LILCO and staff capitalization com,rarisons provide an accurate measure of LILCO's rate base and working capital requirements. The Countiesenception in denied. ALLOU.CD. PJ7.'UP_.':. Judge Schechter reco:::.nenned that LILCO be alloued a 10.13% cverall return; a figure that recognizes his use of a pro forma rate year capital structure, staff's estimates of the cost of long-term debt and preferred stock; and a return on equity of 13.4t. LILCO, which sought a 10.4% to 10.5% overall return allowance, and the Counties, whose witness recommended a 9.6% overall return, have excepted to his recommendation. At this point in the proceeding, the differences among the parties have largely narro.cd to the issue of what a fair return en LILCO's common equity would be. The 12.250 allowance supported by the Counties' witness was the lowest recommended and the 14.3% allowance sought by LILCO was the highest. Staff recommended 13.40. Because staff and the Judge predicated their recommendations on the incorrect assumption that we would add $200 million CUIP to rate base, and since there have been substantial changes in the financial markets and in LILCO's earnings since the rate of return testimony was developed, it would serve no useful purpose to review in detail the positions of each of the parties. They are fully described in the reconmended decision and based on somcuhat stale data. Amendment 35 - January 1980 1945 192
m av m eW~ 1 CASES 27374 and 27375 D D D a
- sh_d, Aa eg Our own rate of return analysis, using the sar.2 discounted cash flow approach used by witnesses in the case, leada us to conclude that 13.7t is a fair all wed return on equity for LILCO.
Over the past several months the yield on LILCO's common stock has averaged 9.50-9.75%. This is substantially higher than the yields assuried by any witness in the case. But it does reflect the change in interest rates that has occurred since the rcceipt of tectimony in the case. This yield would be consistent with a growth estimate based on LILCO's recent experience, for it is lihc3y that there have been changes in investor growth expectations as well.1/ Witnesses in the care provided growth estiuates that ranged from 3.5t to 5.0%. LILCO's 1978 return cnd retention ratea make current growth e::pectations in excess of 4% seem too high. The staff's figures on historic growth in book value per share, a proper indicator of growth and onc which reflects the impact of new issues as well as the effect of return and ratantions, demonstrate that 3.5% is a better lh estimate. Investor growth expectations nre thus in the 3.5% to 4.01 range. Combining these figures for yield and growth produces a " bare bones cost of equity in the 13.0% to 13.75% range. From this, we conclude that 13.71, which includes an allowance for issuance costs, is a fair return on LILCO's common equity. An allowed return of 13.7% compares with the 13.3% allowed in LILCO's last electric rate case, and the 13.5% wa allowed in its last gas rate case. A higher return is now justified by the general increase in interest rates since then, and our decision not to add more electric CWIP to rate base. While it is true, as Suffolk County observed, that 1/We believe rEe very recent increase in yield above this range relates to a downward revision in growth expectations attributable to circumstances other 'than the change in market interont rates. Thus, any further increase in yield assumptions would be matched by an offcetting reduction in growth expectations. 1945 193 ' Amend $ent 35 - January 1980
CASES 27374 and 27375 D** D ~ #D N@\\ s, oo o ed. tru _a 13.7% is a higher return than those earned by most energy utilities in past years, it recognizes the concerns of the 1979 investor, and sone of the unusual circumstances that make the risk of investing in LILCO stock different from the risk inherent in other securities. Our overall return allowance, reflecting a 13.7% return on equity and minor changes in LILCO's cost of debt and financing plans since the close of the record, is 10.26t as derived from the following table: Amount t _ Cost Rcturn Long-Term Debt $1,275,375 4G.0t 7.88% 3.62% Preferred Stock 337,710 14.0 3.35 1.17 Customer Deposits 8,300 .3 9.00 .03 Common Equity 1,103,450 39.7 13.70 5.44 Total $2,774,C35 100.0% 10.26% CONCLUSICM Our estimates of LILCO's probable revenues, expenses, rate base and cost of capital for the next tuelve months indicate a need to increase its electric rates by 3.3% to produce about $36.0 million in additional revenue and its gas rates by 9.1% to produce about $16.6 million. Our computation of these rever.ne requirements is detailed in Appendices A and B. The clectric rate increases are substantially less than those sought by the company, or even those recommended by our staff and the Judge, primarily because we have concluded the company does not need cash flow allowances to finance its construction program. Where our expense allowances er:ceed those recommended by staff and the Judge, we found they were necessary to enable LILCO to provide the service to which its customers are entitled under the Public Service Law. We have also recognized that LILCO's cost _of Amendment 35 - January 1980 1945 194
CASES 27374 cnd 27375 D'D D' TV4 iMa oJ . )] 1/ capital vill be somewhat nore than either the Judge or staff expected, because general inflation--a phenomenon cver which neither we nor LILCO's management has much control--in the past six months has driven interest rates much higher than they assumed. LILCO has, in acce; dance with our November 3, 1978 Statement of Policy cn Federal Anti-Inflation Guidelines, demonstrated that an electric rate increase of less than 7.0% ($87.7 million) would comply with the primary Federal " price deceleration" standard. It also claimed thst a gas rate increase as high as 13.1% ($23.9 million) would comply with the Federal " profit margin standard. The authorised electric rato increase is far.less than the increase allowed under the Federal price deceleration guideline. By our own computation, the authorised gas increare will exceed the allowable increase under both the Federal " price deccleration'~ and " profit margin" anti-inflation standards. We believe, however, that the indicated gas rate increase is not in violation of the Federal Anti-Inflation program because the g company's gas operations qualify for an exception under the W guidelines. Here, as in the recently decided nochecter Gas and Electric Coroorntion gas rate case,1/ gas rates held within the limits set by the Federal standards would result in a gas department return on equity that would be substantially less than the current yield on LILCO's long-term bonds. Also, LILCO'a common stock is selling at less than 90% of book value, just as RG&E's was. This fact is attributable in part to the depressed earnings of its gas department in the past. These considerations lead us to conclude that the company's gas department should be granted an exception to the Federal guidelines in this case for extreme hardship and gross inequity. We are satisfied that these increases will not hamper the nation's effort to control inflation. -1/ Case 27372, Rocnester Gas and Electric Corcoration, 19 NY PSC (Opinion No. 79-12, issued April 13, 1979, mimeo
- p. 50). Amendment 35 - January 1980 1945 i95
CASIS 27374 and 27375 07 1 u Finally, we are investigating the propriety of LILCO's electric and gas rate design in a seccnd phase of this procacding to determine how and from whom the ccmpany should receive the revenue it requires. During the pendency of that investigation, across-the-toard increases to obtain the additional required revenue, as proposed by staff and reccamonded by the Judge, vill be acceptable. The Commission orders: 1. Long Island Lighting Company is directed to cancel immediately the suspended tariff leaves and supplements enumerated in Appendix C. 2. The company is authorized to file amendments to its electric cnd gac tariff schedules designed to produce an increase in revenues in an alaount and manner consistent with the iindings and conclusions contained in the foregoing decision. The company shall serve copies of its compliance filing on all parties listing appearances in this proceeding. Comments of interested parties may be filed with the Secretary to the Com:aission within-three (3) days of service of the company's prcposed revisions, if personally served, and within five (5) days if served by mail. The revisions shall not take effect until approved by the Ccamission. 3. The company is directed to report all changes in its property tax expenses through January, 1978 to the Secretary on or before January 31, 1980 and is authorized to file tariff revisions for second-stage rate increases at that time if necessary to recover property tax expense increases. The company shall serve copies of the report, and notice of any proposed tariff revisions on all parties listing appearances in this proceeding. Comrents of interested parties may be filed with the Secretary to the Commission-within three (3) days of service of the company's proposed b Amendment 35 - January 1980 1945 196
CASES 27Ti4 and 27373 D**]D *D TI'Ns _ c o j\\1
- S_b e
o revisions, if personally served, and within fivo (5) days if served by mail. The revisions shall not tako effect until approved by the Corraission 4. The company is directed to file with the staff of the Consumer Service Secticas of the Power and Gas Divisions a quarterly report containing the inforr.ation doucrined in Appandix D in a form and nanner approved by stoff. 5. Except as grantcd herein, all exceptions to the Administrative Lt.u Judge's recoramended decision arc denicd. 6. Except as modified herein, the findings and conclusions of the reco.T.raended decision are adopted as part of this Opinion and Order. 7. This proceeding is continued. By the Commission, O (SE7.L) (SIGNED) SAMUEL R. MADISON Secretary 9 1945 197 ' Amendment 35 - January 1980
C. 27374 Appendix A Schedule 1 IE;G ISU.;ID LICH7I"G CO"OANY Commission Eevenue Requirenent Electric Departr. ant (000) Revenue Requirement por Schedule 2, Page 1 25,000 Less: novenue Taxes 4.02% $1,005 Advertising 0.075% 19 Uncollectibics 0.594% 195 (1,219) Operating Incone 24,781 Less: rederal Incomo Taxes 8,155 Dalance Available for Return 16,626 Adjusted Balance Available at Present nates 143,340 Total Available for Return S 159,966 Adjusted note Base per Schedule 2, Page 1 $ _1_, 55 8, 7 2 3 Rate of Returil 10.261 D**D
- D'TV'
, ))_j\\ _a va o 1945 198 Amendment 35 - January 1980
- c. 2 / 314
,8f::F: IstJLt'n !.tC:t7tt:C C0*.5s NY Ap;.unJ1m A Statim 2:.t of C. c.atl ] Incuia, u tc 1: un, fute of Dutura Sctbedule 2 t 1%ar t.Pe 12 M utha n il.c.bne 30, 1930 Parje 1 Ele.cttic Ag.arta.cr.t (nA) As ris. ally A0ju. tea 1y AI.3 As Adjust.d Commission As Adjustud Comalsaton Af ter It. ate c.w..iny
- gi se r.e..t g np AT.1**
g.ist=*nt. By cou.1: i. t an pat. s incre:. u (1) (2) D8 (4) (3) (b) (7)
- e.,.an.e i y[novxu r$: a.7U~r~4 city 6 % 4,471 1,212
$ 715,C21 (1) $ (3,0%) $ 742,591 $ 20,MO 001,L'el .s.s. s't ho r 01,u s et t a.9 Huvunusa 4,W 4 '![*1 4d s ~ Tu.tal 7ss,172 1,212 79M.i t (3,092) 107,#92 MM O L1.122 ' p r.it i n.: ( q,g..so s ti.+s.attaa a M.stntsnanco Espunsen 40s,221 (17,tti.) 451,275 (2) 3,104 454,459 17 4 4 54,L 3 Ca..ritalle Co..ta1Lutlana 27J 270 273 270 h ;.ra:1.Liua 50.925 (1.C72) 45.25. (3) 377 43,631 49,411 122 f0 ) (4) 1,0C9 124,510 1 015 12 h%1, b r. a (t hst %.an incca.a Tasas 137 'n? _ W',t? 7) 6/i,R3 b 2*.0 62 p, e;Ps 1,219 E %,q g t (?4, *. 5) dt.a1 to.t :34
- 3. e.it l e..; 7... m..,
141,143 25,007 li.6,9 % (d,342) 15C,C13 24,701 l as t. J'J 4 F...*s al la.cas T. nasa.- As Allocated 70,791 (2flM) 16,7 #=1 (3) (I,4Cl) 15.,273 0,1% 23,42's %h - _ k2is 3 j aM /SI $ 141,110 $ 16.s2 & $ 1 5.*e.6 et,t o.e ro a ti.., I r.ermo $ ! ?1, 3 % 27,. c.o 1. nt $1,190,, *J 70 $ (17,061) $1,179,t.3) (C) $ 3,2G9 $1,133,19J $1,10J,13u (C) .. 4 :. a w; C(,8 t =1 132,401 ( 8,1a t) 121.217 (7) 47-J 128,696 123,0% gj a6..wtan. titae ' oak in 5aagcous 7.n. 032, (2C3,000) L43,i C 's (f.) (200 C03) 3G.;,620 1C0,000
- h. ma l'arcrred reder 1 Itt.o.m Taxes (2.J,7 / 3) 2,11J (194,643)
(9) (3GS) (19,512) (19,$12) a'>*) (10) 1,469 ( 2% 1(.C) $(1,414) (p t.*d) { la t. t rvJ 1..veut. Tax CruJiti, J:'s 'J. ;-) ( q) i10 Total _01. : j7p,716 $ ( 2 m. t.t:2,) g,f,:,S v ;. $ fl*5 ;tf t) [1,g,3 g. 5(4.498) gysJ.s g Y' L. 9 ;. on e.1 L.it e of Pctiern
- a. 60s 0.41%
9.17s 13.20s
- .cr Lale! Lit 243 Stimd414 1. Column 3.
Q'
- c r A1.7, ed), Appendix C, Page 2.
[4 3 = b e A Amendment 35 - January 1980 LD O O O
C. 27374 7.pp e.. ! '.x .t. Schedule 2 LO!!G ISLA!!D LIG*lTI!!O CO.PANY Page 2 Explanation or Cor.mitaicn Adjustnents To Electric Operating Iacena For the 12 Months Ending June 30, 1980 (000) Etisct C:. Operating Adjustment, Explanation Inc e Operating Pcvenues, 1(a) Dec:cc.so revenue to reflect reduction of rcter tempering recoveries to company revised icvel. Increase Per ALJ $1,212 Increase Per Commission 339 Com.nission Adjustment (873) (b) To adjust operating revenues to correct S.C. 2 MRP billing error. (2,219) $13,093) Effcet On Operating Excento Operntion and Maintenance Egpenses 2 ( a ', Prcducti:n Exocarec (1) L31owance for Maintenance Project contingencias. Per AIJ $ Por Commission 200 Commission Adjustment 200 (20M (?! Roversal of.iLJ reduction of Boiler Maintenanco Projects. Per ALJ $ Per Commission 283 Commission Adjustment 283 (223) (b) Trancmission and Distribution Expenses (1) Commission allcwance for tree trimming expenses. Per ALJ $ Per Commission 880 Commission Adjustment 880 (CEO) (2) Reversal of ALJ reduction of Public Works expenses. Por ALJ $ Per Commission 173 Commission Adjustncnt 173 (173' 1945 200 m h6 ~\\Q Amendment 35 - January 1980 9
C. 27374 Appendix A Schedula 2 LO??G ISL.Y D LIG!!TI::G COMP.'. W Page 3 Explanation of Commis:;ien Ad3ustnents To Electric Operating Incomo For the 12 Months Ending June 30, 1980 (000) (Cont'd) Effect On Effect G.. Operating Operatint-a.d j u s tr,en t gelanation Expense Income Mation and Mainte::anen r :censos 2(c) Customer Accounts Expenses Commission allowance for increase in Customer Relations expcnses. Per AIJ ( $2,19 3 - $1,13 7) $1,056 Per Commin'; ion (50% of $2,193)
- 1,09G Co:amissien Adj ustment S
40 (40) (d) Administrative and General Excenses Commission reversal of ALJ adjustment to ESEERCO costs tesulting from DASI,Y withdrawal. Per ALJ 220 Per Cor.c-ission 50 Commission 1,djustment 170 (170) (e) Advertisina and Public 7.ffairs Expense Adjustment to ALJ disallowance. Arca Development 156 Emplovee Cc=monication 90 Chang'c in nevenue 2 Commission Adjtstment z.aV Electric Portion @ 90% (223) 223 (f) Storm Damarre Reserve and Accrual Adjustment to increase reserve limit and reflect resultant lower amortization. Per AIJ 601 Por Commission 434 Commission Adjustment (167) 167 (g) Labor Productivity Reversal of company's productivity adjustment. 1,730 (1,730)
- Company Adjustment - Exhibit 38A
$2,811 Electric 9 78% 2,193 Gas 0 22% 618 DQke g e Amendment 35 - January 1980 1945 201
C. 273'4 Appe.9 'i:: A Schedule 2 LCt:G TSUS D 1.IGi':'I??G CO *nAt3Y Page 4 ExplEEstic n or corrusraan t.c j uctr.cnt: to Electric Operating Inccme For the 12 Months Ending June 30, 1980 (000) (Cont'd) Effect On Effect On Operating Operating Adiuntment Exclanation Expence Income Coeration and Maintenance Excenscc 2 (h) Wage _Increare Indering Adjusba.cnt to reflect restoration of indexing due to revisions cauned by Commission adjustr.cnts to labor base. Adjustmant.1 to labor base (Si,57G X G8.361) $1,077 Wage increase factor 13.37s Commission Adjustment 145 (145) (i) Inflation Indexing Adjustment to reflect restoratjen of indexing duc to revisionc causnd by Con.ission adjustnents to inflation base. Adjustments to inflation base ($1,576 X 31.64%) 499 Inflation factor 17.5% Commission Adjustment 86 (86) (j) Wage Increase - " Proper Period" Recalculation of elimination of two extra months Wage Increase cc..ipounding resulting from Commiscion adjustrc.ents. Per ALJ 234 Per Co:rnission 313 Commincion Adjustment (79) 79 (k) Inflation increasa " Proper Period" Recalculation of clinination of two extra conths Inflation Increase compounding resulting from Cor;r.ission adjustmente. Per ALJ 265 Per Commission 319 Commission Adjustment (54) 54 Total Operation and Maintenance Adjustments $ 3,184 3,184 9 Amendment 35 - January 1980 -w 1945 202
C. 27374 APTuriix A Scisi in 2 LOMG.T';L7J;D LIGM'.'1NG CO:OMY Pac: L Explanatio:4 o f co..n.ist,lo.4 Ja.J us tments To Electric Operating Income For the 12 Months Ending Juna 30, 1980 (000) (Cont'd) Effect On Effect C. Operating
- -ecrati:
Adjurtment Explanation Expence Incone _ Depreciatien Er.nonae 3(a) Conmission revision of ALJ'n change in Ocpreciation ratea en Street Light.ing Plant to ten-year life and 25% salvage. Comraiss3cn Adjustn ent 245 S (2 /. : (b) Allowanco for Depreciation Expenso related to placing Sharcham Switchyard in nato Base (per Exhibit 212).
- 132, D--
Total Depreciation Adjustments 3 377 5 (- Taxec Other Than Incm Trees . 4 (a) Adjuut: ant to uplato Property Taxes to later.t 1:nown tax bills. Per ALJ $4,977 Per Co. letter 3/29/79 3,199 ~ Commission Adjustment 1,778 (1,77: (b) Adjustment to reduce P.cVenue Taxos related to Adjuntuent 1(b) above. (S2,219 X 4.02%) (89) .. r. i Total Taxes Cther Than Incomo Tax Adjuttments 1,609 (1,6SJ Federal Incono Taxes 5 Per Appendix A, Schedule 3, Page 1. $ (3,467) E 3,.iG-eoD Amendment 35 - January 1980 1945 203
C. 27374 Appcndix A Schedule 2 LONG _IS.L.JD_LIGHTI !G CO"_PAtiY Page 6 Explanation or Cc=mir.3:cn Adjustments To Electric Rate Base For the 12 Months Ending Junc 30, 1980 (000) (Cont'd) Effect On Adjustment Explanation Rate B2se Not Plant 6(a) Roverse ALJ adjustment related to Shortham Switchyard in Rate Case (per Exh. 112). 4,113 (b) Modification of Rate Base allowance for deferred Storm Damago expenses. Chango in reserve 500 Loss one-half of first year's change in acortization 84 Cormission Adjustment (416) (c) Adjustment to Depreciation Reserve to reflect changes in Depreciation expense (Adjustment 3). Commission Adjustment ($377 X 1/2) (188) Total Adjustment to Not Plant 3,5M tforkino Capital 7 Adjustment to reflect changes resulting from Commission adjustments. Compinbion Adjustment ($3,134 +.$167 X 1/7) 479 Construction Work in Proaress 8 Disallevance of Shoreham CNIP from Rate Base. $(200,fCi D' h B k3 U Sl o B)B o Amendment 35 - January 1980 1945j?ci4
Ap;cndir ; C. 27374 S che.' el : ; LO?:G ISLt.':D LiqFT.TNG CCMP;.'"/ Page 7 Explanation ni Cen*.ilss:.cn Adjuctments To Electric Rete Base Fcr the 12 Months Ending June 30, 1980 (000) (Cont'd) Effect C7 Adjustncnt Explanation Rate Ensp_ Deferred Federal Incc..e Taxon 9 Change in Average Accuraulated Doferred Taxes due to Corxnicsjon adju.Stnents to current Def erred ' faxes (befare rate increasc). Current Daferred por ALJ $ 16,709 Current Deferred per Com:nission 18,446* Additional Def6rred Taxes S 1,737 Rato Bass offect (1/2) (3 f M Deferred Invcsrrent Tax Credits 10 Chi 7e in Averaso Accenulnted Deferred Invectr. ant Tax Crcdits duc to Commicsion adjucta.cnts (before rate increase). Current Deferred end Stockholder IfC por ALJ 2,817 Current Coferred and Stockholder ITC par Commission Reduction (2,817) Rato Baco offect (1/2) 1,409 h 9 D h S e sh 5
- Por Appendix A, Schedule 3, Page 4.
1945 205 O Amendment 35 - January 1980 \\ ed
C. 27374 Inic FSrxio v.teTTlen (wnur Ccevutation et.%Jetal Ie cs.mo WM - I cr Cusumieniori A.geeredia A 3 1.1. ct ri c In g e t te*-e.t SCI *Jale 3 for the 12.%,nt's ?.ndtn1 June 10,1933 g.,9, g (nw'} As AJjusteJ As I.JJ.istoJ Ccec 1sr tos As A4]vstcJ Cornission For Commt ston AA t.f g it wnts tiy twem!*:sfort stato increase R.e t e Increase (1) (2) (J) (4) (' ) s Total Operating Incoone }Fda 5 I_{3,312) $l'Jt.613 y24dO1 S i ts I,}94, Other Income - A M 64.8M3 0) 29.204 'J J, fst'C 9 2.tt' 4 J Trust Intervet Charges ('2,100) (2) ( 10.)). (23,000) (2),600) Other Interest Charges 19734) (3) J1,Q) (9 3 dG I) _{9.),5(.8) 3 Euistot.n! _{s M N1) 2 8.( tas t 2 3,0 72) _ 23,d79) ( Incos,4 Isuforo income Taxes 11*>,201 t r., 's il 1 1 "., *ys 24,7b1 1 *=', l l 'a N.!uct tbn-T.o ra'.1 e it ems Allcatance for runda used Du. ring Construction Jt, t.no ?<:. 2r54 '31,004
- 91. f434 AJJ-Dack of S tes e int Tax-Dediectible Accrual for Ittj ttries ani.8 DJ%3ges lle*Scrve Accroal for Dail tasLts huscrvo As.caual for Storm Darage bcserve 1,601 (4)
(167) 1,434 1,434 sortlev.cntal Provision 1,468 1,4CS 1,46te Amoatization of thirtga<;o PccordinJ Taxes 275 275 271 l'AC Casats - 84 furred (2,271) (2,274) (?,27() r,ut,t o t a l I,070 flgt e33 9sa) 7 DeJ xt Alditional Tau Deductions I T4x tet'reciation an Excsse of Dook Depreciation 15,506 (5) 1,0C6 16,672 16,672 - 7 Eu,miss Cesarr).ed to Reserves j Injuries aset tsmagce Stow. am,nes = = ' 'C 31 ! t,.l.ti. = = Co it of Aseving Hstired Property 1,005 1.995 1,0J5 C Conta (t.aaged to Constructions C .syro11 Tames 1,161 1,151 1,161 - Q I s"alon;s 2,013 2.013 2,013 !
- . les Tawn g
2.546 2,546 J,545 -y rest Presir.aty Taxes J.6,731 16,731 16,7J1 Q7 C, t n.. ma t h at.J 84rvelotment comte $17 517 5 '. 7 C Pe ert y Tus s - Lien Date 3,272 3,272 3,272 N 2413 r Milo 52 - Cne.mtruction Charges 1,267 1,261 1,2b7 ~ Q l'est ") Vacations AJjustaent
- 714, (6)
(141) ','s )
- .y t, b
Su'.t.,ta f J 1g>l2 96 4%,U57 4 '.. m. J Taz.shte Is cuno (tesse) p_1.MQ [it i,'M1) S '3.311) y23 /u'. $34Q ro teral fucore Tax et 4% $ 4.912 $ (G,132) $ (1,520)
- 11,399
$ e,st7 P teas s : Investw.et Yan Credit JM4j) 4.045 (12.232) (IJ,2tJ) reAral Tesma T.sm - Current 14 7 (2 J31) ( 1, '.M) (u2J) ( 2,353n D.iferred re bral Is.coew Tax - Current 1 G,,'GS (7) 1,737 I fl.4 ' 6 lb,4 % fa.forrsJ ted.rr.1 Inc m o Taz - t.svrtization (1,653) (k,651) (1,fe )) a isteated Invustment T.ix credit 1.5CS (0) (1.5C0) 5,744 5,714
- ,tuimal.kr Iown.at wesit Tax Credit
_l, ? !!s (')) jl y2) 3,214 1,2;11, 2 PNt l'wica al Ir:c<.ru T.auss (Albactiwnt 5) L19,7f1 }, ( 3. 467)
- 15,271 (10) En l'A S ??,423 g
Amendment 35 - January 1980
C. 27374 0 D 0 b Appendi:: A ~{ u Schedulo 3 LO!!G ISLAND LIGHTI !C CO:'PAMY Page.2 Explanation of Cor.:aission Acjustments To Electric Department Federal Income Taxes For the 12 Months Ending Junc 30, 1980 (000) Effect On Taxable Adjustment Explanation Incone Other Incom> - AFC 1(a) Reversal of ALJ reduction of AFC rel'ated to additional Shoreham in Rate Base. ($200,000 X 7.63t). $ 15,260 (b) Additional AFC cn revised Shoreham construction expenditures allowed by Commission. ($4 3,000 X 7. 63%). 3,281 (c) Revision of AFC to allow use of the FERC method to compute Arc rate. 10,663 Adjustracnt to Other Incone - AFC S 29,204 S _ 0_ Trent Interort Chargos 2 Recalculat30n of Trunt Interest to update interest rate to 10.5% estimate of prime. rate. Commission Adjustment (.5% over ALJ rate) (900) Other Interont Charoes 3 Revision of interest deduction to change Long-Term Debt cost rate. Cost Amount Rate Interest Long Tern Debt $1,275,375 7.81% S100,372 Customer 747 Deposits 8,300 9.00 _$101,119 Electric portion at 92.33% $ 93,363 Interest Per ALJ 89,734 Commission Adjustment S(3,629) O Amendment 35 - January 1980 1945 207 ,p
C. 27374 Appendi:: A Schedule 3 LONG 1SI.AND LICHTI:iG COMPA!!Y Page 3 Explanatian of Com.nission /.d3uctnents To Electric Department Federal Incomo Ta::es For the 12 Months Ending June 30, 1980 (000) (Cont'd) Effect on Taxable Ad3ustaent Explan~ation Income Accrual for Storm Denage P.eserve 4 Adjuctment to revice add-back of Storm L mage accrual to level allowed by Com:r.ission. Accrual per ALJ 1,601 Accrual per Commission 1,434 Commission Adjustment S (167) tax Depreciction in Execes of Book Deureciation 5 Additional ta:: depraciation related to change in book deprcciation rates (per Adj. 3). $(1,096) Earncd Vacttion Ar}justr.ent 6 Revirion of. Earned vacation deduction to three year averago inflated for Wage Increase. Per ALJ 941 Per Commincion 760 Commission Adjust =cnc 181 Electric portion at 78% 141 B %9 \\:) o D Sh b 1945 208 Amendment 35 - January 1980
C. 27374 Appendix ; Schedule 3 LONG I_S,IAN'] LTC ~?T7NG CO.'iP AM_'{ Page 4 Explanation of Cortiss,len Aa;ustuents To Electric Ceparcr.ent Federal Incer.e Taxes For the 12 Months Ending June 30, 1980 (000) (Cont'd) Effect On Inco:.c Adjustment _ Exclanstien Taxes 7 Pocalculation of Leferred Taxes - Current under the APB ill t:cched. 48% Deferral 46% Dcferral 1979-00 Avera;c 7.c N-e,;ut ad Assen Ocpreciation Pange $ 6,223 $ 5,969 Cost of Eccorel 527 505 Mortgage Taxes 310 297 Puol ccst Adjtstrent (922) (884) Gac Cost Adju::t=3ut 269 257 Dofezred Tu::cs S 6,411 $ 6,144 i 46% kx Cr1gLnnting Tizing Differences $13,356 g Tax at 4Gt S 6,144 Additional I"C at 70% linit $(4,301) 9u Resulting Deferred Tax $ 1,0_4 3 Deferred Ta:: Co.eutation Total Electric At Gas At Deferrals E6.87% 13.13% APS #11 Itcr.s $ 1,8(3 $ 1,601 $242 Shorcha:a AFC Net of Tax 16,845* 16,945 18,098 513,4*6 $242
- AFC Met of Tax Revision
~ Deferred Per ALJ $13,122 Co sission reversal of Ch*IP in Rate Base 3,771 Ceferral at 1.87% 16,393 Percentage Eeduction to 1.78% FERC Fate (.0481) % Reduction (813) Net 16,080 Plus: Deferral related to additional Shorehan c:qcnditures 535,000 X 1/2 = j}f} } i $J3,000 X 1.73% 765 Revised Deferral S16,545_ Doferred Taxes Per ALJ (Electric Portion) S16,709 Deferred Taxes Per Co. mission (Electric Portion)lE,446 Co:nraission Adjustncnt $1,737 Amendment 35 - January 1980
C. 27374 Appendix 1. Schedule 3 IONC ISLTND LIGH"_iNO CO:*2A:iY Page 5 Explanatio., of Commission Acjustments To Electric Dopartment Federal Incono Taxes For the 12 Months Ending June 30, 1980 (000) (Cont'd) Effect On Income Adjustment Explanation Taxes Deferred Investment Tax Credit,s 8 Elintination of Dcferred ITC because of negative current income tax before rate increase. $ (1,539) Stockholder Investmant Tax Credits 9 Elimination of Stockholder ITC because of negative current incomo ta.s: before rate increase. $ (1, 2],S ) 0 g 1945 210 Amendment 35 - January
Cs. 27374 Accer. dix A Sc'odule 3 lh h 27375 Page 6 LC!iG ISLA! D LIG!!TI:2G CO"PI.21Y Explanttion of Cor=nssion Adjustncnto E-10 and G-5 to Electric and Gas Incomc Taxes After Rate Increase For the 12 Months Ending June 30, 1980 (000) Total Electric Ga r, (1) Federal Incomo Ta:: @ 46% $ 20,601 9,879 $ 10,722 (2) ITO utilization @ 70% 14,421 12,232 2,139e (3) Federal Income Tax - Current 6,180_ (2,353) 8,3_33 (4) Flo:-through 7,364 6,488 876 (5) Lces: Stockholder portion - 50% 3,682 3,244 438 (6) Deferred ITC 7,057 S 5,7/,4** 1,313 O D**D *D'TK* .b. oo a
- Maximum allocable based on generated credits.
- Maximum flow-through allcwable
$10,300 Actual flow-through - linc 4 7,364 Difference - Option 3 - Electric - deferred ~ 1,936 Total Electric deferred - line 6 5,744 Electric deferred - Option 1 5 2,808 Sumdary of ITC Total Electric Gas Option.3 - flow-through 7,364 S' 6,488 876 Option 3 - deferred 2,936 2,936 Option 1 - deferred 4,121 2,308 1,313 $ 14,421 $ 12,232 S 2,119 O ~~ Amendment 35 - January 1980 1945 211
C. 27375 Appendix 3 Schedule 1 LONC ISLAND LIGHTI!!G CO"P7sNY Commission Revenue Ecquirement Gas Department (000) Revenue Requircrr.unt per Schedulo 2, Page 1 $ 15,SEO Less: Revenue Taxes 4.02% $ G66 Advertising 0.075% 12 Uncollectibloc 0.594% 98 (7761 Oporating Incomo 15,"804 ~ Less: Federal Income Taxes 7,271, Balance Availabic for Return 0,532 Adjusted Balanco Available at Present Rates 15,974 Total Available for Return $ 24,507 Adjusted Rate Base per Schedule 2, Page 1 S238,7 { Rate of Return 10.26% h 0 g 1945 212 .iaendment 35.- January 1980
e )) 0 00970M 49 7 4904 1 1 t e 46 0 4 8 32 91
- 7 0
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- s. 9
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- 364 8
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- , r n
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- l t ht l
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- +
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C. 2/375 Appa u: a Schadule 2 LONG ISLAND LIGHTI!!G CO!'PANY Page 2 Explanation of Conmission Ac]ustrents To Gas Operating Income For the 12 Months Ending June 30, 1980 (000) Effect On Operating Adjustment Explanation Incore Operatino Revenues 1(a) Adjustment to increase revenues to reflect change in S.C. S temperature setting. 549 (b) Decrease in revenues to reflect reduction of meter tampering revenues to company revised level. Increase Per ALJ 5 Increase Per Commission 2 Commission Adjustment (3 ) 546 Effect On Operating Excense Ooeratien and Maintenance Expenses 2 (a) Transmission and Distribution Expenses (1) Elimination of nor:aalizing adjustment to servicing customer equipment expense. 277 (277) (2) Elimination of adjustment to normalize routine operations expense. 120 (120) (b) Customer Accounts Expense Commission allowance for increase in Customar Relations expenses. Per ALJ 297 Per Commission (1/2 X S518)
- 309 Commission Adjustment 12 (12)
(c) Advertising and Public Affairs Expense Adjustment to ALJ disallowance. Per Commission ($248 X 10%) (25) 25
- See Appendix A, Schedule 2, Page 3.
{D _3.$h D*' D .S I 7 gm u Amendment 35 - January 1980 19aS 714
A 0 N 0 " ]D s sen 6; .S. 3 C. 27375 Appendix B Schedule 2 LONG ISL?ND LIC'!T7'!G CO:'?tl!Y Page 3 Explanc. tion o r C=nssion Ady.:staants To Gas Operating Inccme For the 12 Months Ending June 30, 1980 (000) (Cont'd) Effect On Effect Cn Operating Operatinj Adjustment Explanation Expense Incore Operation and M?.intenanco E::pensos 2(d) Labor Productivity Reversal of company's productivity adjustment. 577 (577) (e) Wace Increase Indexing Adjustment to reflect restoration of indexing due to revisions caused by ComT.ission adjustments to labor base. Changa in labor base (S409 X 76.77%) $ 314 Wage increase factor 13.31 Commission adjustn.cnt 42 (42) (f) Inflation Inde::ina Adjustment to reflect restoration of indexing due to revisiona caused by Commission adjustments to infla' ion base. Chr.nge in ir.flation base ($409 X 23.23%) 95 Inflat' ion factor 17.5% Ccamission adjustment 16 (1G) (g) Wage Increase - " Proper Period" Recalculation of climination of two extra months wage increase compounding resulting from Commission adjustments. Per ALJ 147 Per Commission 171 Conmission Adjustment (24) 24 (h) Inflation Increase "Procer Period" Recniculation of climination of two extra months inflation increase compounding 1945 215 resulting from Commission adjustments. Per ALJ S 127 Per Commission 140 Commission Adjustment (13) 13 Total Operation and Maintenance Adjustment 982 (982) Amendment 35 - January 1980
- . 27375 Appcndix a Schedule 2 IR:G TSLAND LIG:4TJf!G CO !PA!!Y Pt.cc 4 Explanac. ton of Co=6: ssion Ad]ustnents To Gas Operating Income For the 12 Months Ending June 30, 1980 (000)
(Cont'd) Effect On Effect On Operating Cperating idjustment Explanation Expense Incone taxes Other Then Incon.e Taxes, 3(a) Adjustment to update Property Taxes to latest known tax bills. Per AIJ $ 1,306 Per Co. ltr.3/29/79 1,080 Commission Adjustment 226 (226) (b) Adjustment to reflect Revenue Taxes related to Adjustment 1(a) ($549 X 4.02%) 22 (22) Total Taxec Other Than Income Tax Adjustnent 248 (248) ?cderal Income Taxes 4 Per Appendix D, Schedule 3, Page 1. (542) 542 D""D "D T Ti f B-l\\ ..s h b _2 194S 216 Amendment 35 - January 1980
- , 27'J75 Appendi:: B Schedule 2 LONG ISI.?!!D LIG'ITI !G CO:tPA!IY Page 5 Explanation ci Cornission Ad3ustments To Gas Rate Dane for the 12 F.onths Ending June 30, 1900 (000)
(Cont'd) Effect On Adjustment Explanation Rate Barr prhing Capital 5 Adjustr.cnt to reflect changes resulting from Cornissicn adjustnonts. Commission Adjustment ($982 X 1/8) 122 Ceferred Investrnnt Tax Credits 6 !!oduction in hvorage Accuraulated Deferred Investment Tax Credits due to Commission adjustments. Change in Deferred ITC per Cornission S 838 Rato Base offcet (1/2) S 419 O b D O\\S 'b @ 9 9%S O Ar.ndment 35 - January 1980 1945 217
C. 27375 tmc rstrio f.Tra Ttwo c<n nrif Ccomputation of Icdotal trvonic Tanen - Per Coresission AI.:vndta a SeheJule 3 Ces Dutartru.*t Fnt the 12 mnths I'n. ling Junes ?0,1900 pa,e i {0N) As Adjusted AJ AJ)usted reelcston As Adjusted Coeusisalon For Ccenission g A_f.1 $.e.tme s g g stssion State incr.*ase k.ste incie..se (1) 32) (J) (4) (h) Total Operating Inco** Other Incune - AFC 5 19,464 (Cfl4 8 $ 171,7U2 $35,C05 $ 34,53', 'Ntal Interest Chargos Subtotal . (7,764,) (1) 8 J 7,75(-) (7.75M Incasmo Cofone Incman Teses _E,M) 0 ySr.) Jt,p4 11,301 (67C) 11,026 _ 15.8504 J g ]A, 6 Delut t. N..,e-Ta nable It eseg A11ouance for tuneds (f;ed During Construction Aehl Dee-k of item s r:ot Tan-th-Jiectil>1n Accrual for Injeerles awl C se.agos !<aserve Accrual for I:4d lulits Reserve u Su;1,1=.=crtal Provision 332 Amurtization of rar,g=rty tose 332 514 312 Amortizatioes of Mortgage Res;ording Taxes 514 31 514 CAC Costs Defegr d 31 u 7% 31 Subtutal 7'.6 1.6 33 ?'.6 1, te l) 1 t,15 Doduct A l. lit tesnal Tau thst actione T.ex r 4.semistion in Excess of Book Depreciation 3,261 (2) 541 3,002 tom a s Charged to Reserves 3,602 jusli;u an! Desages ? aJ bel,t s of Ime=2vir.g ket tred Property h 280 s. C4 st a Changed to Constructions en 2t'd 283 P.sysola Temos l' 175 4 Pensions 175 (g 300 175 Salce Tames 300 100 300 Prog.usty Tamus - Lien Date 100 243 1CO Itsrt.ed Vacation Adjusteent 243 243 207 (3) (40)
- 367, 167, N
subtot.=1 4,'A4 tot Tausblu Income (Imas) 5 IJ1 5.3"5 s c
- 0. t.H L Q
g _$ (1,177) W,5 04, $ 15,00 4 $ 23,P ]3 Federal Jr. cosmo Tar at 46% $ J,933 (541) $ 3,452 $ 7,270 $ 10,722 Imams love.ta.unt.T.as CreJit reJoral incusau Tau - Current J 2_,,109) 037 (3,352) ( a!33 gly 1,004 Jy6 2,10J to,4 3 3 u,533 Deferred ta Jural Inconnu Tas - Current 242 Lanf.orrcJ *ederal Incomo Tas - pmortization 242 242 Duferred investsrnt Tau Caedit 4349) (419) (440) 1,314 (4) (633) 476 030 1,314 St.octbolder Investine:nt Credit 41fl 4 IG 4?S wt l'eJort! Incomo Taxes (AJjustment 4) L 3,150 g_ t1421 2,n od (5) {7 27j gg g Amendment 35 - January 1980
C. 27373 Appendix B Schedule 3 LONG ISIJ.: D LIGHOI':0 00"?A !Y Page 2 Explanation of Co m.issio....s3vstments To Gas D3partment Federa'. Income Tc::cs For the 12 Months Ending Jcno 30, 1980 (000) Effect On Taxable Adjustment Explanation Income Total _Interent Characa 1 Rcvision of interest deduction to reflect change in Long-Term Debt cost rate. Interest per ALJ 7,764 Commission Interest 7.67% of total shown on Appendix A, Schedule 3, Page 2 7,756 Comirssion Adjustment S 8 Tax Depreciaticn in Excess of Book Depreciatica 2 Additional ta:< depreciation related to change in book depreciation rates. S ( 541_) Earned vecetion Adiustr.enu_ 3 Revinion of Earned Vacation deduction to three year average inflated for Wage Increase. Per hLJ S 941 Per Comnission 760 ~ Commission Adjustment S 181 Gas portion at 22% 40 0 9 1945 219 O Amendment 35 - January 1980
C. 27375 Appendix B Schedulo 3 LO! G ISLI.t:D LIG!!TI?!G [O"JA!!Y Page 3 Explanation of Coticission Ac.]ustments To Gas Department Federal Inc me Taxes For the 12 Months Ending Jure 30, 1930 (000) (Cont'd) Effect On Incona Adjuntnent Explanation _ Taxes Doferred Investment Tax credits 4 necalculation of Investment Tax credit utilization using the APB #11 r.:ethod (before rate increase). Reduction of Deferred ITO to lcVel indicated from Conmission adjustments. S (S32) I3 3 nD D (\\ DQh 1945 220 Amendment 35 - January 1980
C1.SES 27374 and 27375 APPL DIX C LO!!G ISLAND LIGHTIt!C CO.'!PA:lY Amendments to Schednic P.S.C. tio. 7 - Electricity First Revised Leaf tio. 31C Sixtn Revised Leaves llos. 331 and 47 Tenth Revised. Leaf tio. 42A Fourteen'.h Revised Leaf :;o. 38 Sixteenth Revisco Lear.l;o. 42 Seventeenth Revised Leaves !!os. 31A cnd 33H Eighteenth Revisco Lear :Jo. 43 Twenty rirst Revised Leaf tio. 45 Twenty-seventh Revised Lcar !!c. 33F Twenty-eighth Reviced Leaf I;o. 33G Thirty-second Revised Lcer :;o. 34 Thirty-third Revised Leaf !!o. 30 Thirty-fourth Revised Leaf flo. 28 Suppplen:ent !!o. 42 Supplement lio. 47 q 'g, Amendments to Schedule P.S.C. !!o. 4 - Gns gp Fourteenth Revised Leaf !!o. 34 Sixtecntn Revised Leaf i;c. 30 Seventeenth Revised Lear !c. 32 111netecnth Revi. sed Laaf :lo. 27 9-Twentieth Revised Leaf !!o. 25 Supplement !!o. 25 Supplcment flo. 28 I945 22i O Amendment 35 - January 1980
D 0 0 3 b STATE OF NLM YCRK I PUBLIC SERVICE COMMISSION I j\\
- a s
e, U eu I CASE 27 374 - LONG ISLMD LIGliTING CO:iPAliY - Electric Rates EDWARD P. LARKIN, Commissioner, dissenting: I dissent from the majority's electric revenue requirement detcrmination on the basis of a fundamental regulatory precept. The electric rate incrcase authorized by the majority does not, in my opinion, provide the corpany with enough internally generated cash to guarantee its ability to meet its financial and service commitments. I cannot sanction a rate award that will require a public service corporation to rely heavily on short-term horrowings, or elaborate trust financing schemes and sales of stock at substantially less than book value to meet its service and finanaial obligations. The interest coverage, dividend coverage, and AFC ratios inplicit in the majority's revenuo requirement will make it difficult for LILCo's management to attract the capital the majority concedes the company will need to complete the Shorcham project. There is no margin for error in the majority's revenue requirement calculation: its sales revenue estimate is optimistic, its expense allouances are minimal, its tax estimates reflect a flow-through of almost every conceivable credit and deduction, and its return allowance is at the extreme low end of the range of reasonableness. I have no objection to tough-minded regulation, but I believe we have an obligation to look beyond the immediate result to see who will be hurt if our determinations are vrong. It is naive to think LILCO's stockholders will be P.ne primary, or even the major, victims if the. majority's 1945 222 Amendment 35 - January 1980
c3 c3 n. D D TD IQ CASE 27374 tfud$ u~uta oa rate award proves insufficient. Experience shows it is consumers who ultimately pay when rates are kept at artifi-cially low levels. Consumcrs can be exploited just as cffcetively by poor service as by high ratcc.1/ In this case, I see a real possibility that financing delays could result in slippage of the Shorehan in-service date, an event that would be most unfortunate for LILCO consumers, for they will continue to pay the high cost of electricity generated mostly with oil purchased at OPEC-dictated prices, until Shoreham comes on line. Thud, consumers face the dochle jeopardy of high fuel adjustment charges and poorcr service. The tragic part of the majority's decision is that it is so unnecessary. In LILCO's last electric rate case, this Commission had the will to approve the cash flcu allowances the company nceded to provide s^*vice and finance cons truc tion. It could have done so again here by adopting h the cash flow and return rccommendations of the Ctaff and the Judge. In its rush tc heep this electric rate increase to the minimum, the majority has found it eressary to allow LILCO'r, stockholders a higher return than either the Staff or the Judge recommended. It would havr: been better to follow Staff and the Judge and provide LILCO with more cash while reducing its paper profits. For what does the majority risk service degradations, delay in Shoreham's completion, impairment of capital, and excess profits? As far as I can see, the only reason is to give consumers a few more months of relatively low base rates before the addition of $1 billion of Shoreham investment to rate base requires an extraordinarily large increasc in base electric rates. When Long Island consumers find their household budgets stretched by that increase, there will be no thanks or remembrance for the majority's decision to 1945 223 (l) 1/ Cases 26522 and 26523, Rochester Gas and Electric Corcoration - Rates, 14 NY PSC 1064, 1068 (Chairman dahn, concurrang). Amendment 35 - January 1980
CAEn 27374 reduce the modest electric rate increase reccmacnded by the Judge here, because the necessary result is that what promises to be a large increase in the next LILCO electric rato case will be even larger. I thereforc dissent from the electric rate increase authorized by t.he majority. I would have accepted their dete minations, if r.ach flow allowances from inclusion of CWIP in rate base or interperiod tax allocations had been recognized to produce additional revenues in the $60-$75 million range. u %\\U 1 \\D 00 o 1945 224 Amendment 35 - January 1980
Nh Y SThT", CF : D: YCiB ( PL*2LIC SEEVICE CO.t!ISSIC:1 9 CASE 27374 - IC G ISUJ:D LIGifTI!;O COP.PMN - Electric Rates CASE 2732 5 - LONG ISUd:D LIGHT 1::G COMP AtN - Gas Pates A!CIC F. PIAD, KARE:t S. BUROTEIli,' Commissioners, dissenting:
- 5 dissent fro a various portions of the opinion of the majority.
Before teaching the issues on which we dissent, we believe it is neccccary to put into perspective the conditions which obtain in the frar. chide area sierved by the Company and the it.eact that increased rates will have on business and industry es voll as residential ratepayers. The decision of the majority decs not, nor did the Adlainistrative Law Judge's Recom:r. ended Decision, discuss the public outcry that occurred at the outset of this case. There were four public statement her. rings held in Nassau and Suf folk Counties at its inccption. Some 115 persons spoke at these hearings during July 1978. In addition no less than 10,000 protests and petitions were received by the Public Service Cornission from ratepayers cbjecting to the proposed rate increase. With few exceptions, 1945 2?S peopic at the hearings voiced opposition to the rate increase. f They pointed out the difficulty that the ciderly and the poor, who already face severe financial hardships, will have if rates are increased. In addition middle class families plagued by high taxes, Amendment 35 - January 1980 sever cs.sessments, inflation and unemploymnt argued that hardship will result frca higher utility prices. In addition to those who wrote to the Corsission or appeared at public statenent hearings, several witnesses presented by the Counties of Nacsau and Suffolk testified to the irpact increased rates would have on rcsidential ratepayers as well as upon industry and business, thus exacerbating the serious econo:.ic prcblems which beset Long. Island at this tine. It is important to note that this rate incretse application is the fourth rade by the Company,ince 1974. In 1975 in case 26552 this Corzission granted an increase of SG4.3 million. On 1:ay 22,1976 in Case 2f937 this Cornission granted an increase of $33.2 millien and on January 9, 1978 thin Cornission gran*ed an inercare of S53.7 million--a total increase in three years of $157.2 million. In additien, in two of thcse cases, temporary rates were allcwed prior to the decisien in the permanent rato case and second stage rate increases totalling :.ver $11 millien were authorized by this Corsission. Although the Company was granted an increase on January 9, 1978, barely five conths later the Company was once again at our doorstep with a request for S171,000,000! A review of the Company's presentation clearly indicates that this request is based on an overstated budget designed to inflate its rate request. While it is true that the rate of return earned by the Company,in 1978 fell below its allowed rate of return of 13.3%, nevertheless the Company has achieved an average retur a for the years 1975-78. U D L 4 1945 226 Amendment 35 - January 1980 While there is some continued cash flow problem, this is the result of a large construction program and AFC accruals. This problem should be reduccd considerably by the ccmpletion and inclusion in rate base of the Shoreham plant in 1930. He conclude, as we did in Case 27370/1/2, Rochester Gas and Electric Corporation, and in Casos 27361/2, New York State Electric and Gas Corporation, that the ccenomic conditions in a utility franchise area should be censidered in arriving at an appropriate ccst of equity capital and establishing rates so that the impact on censumers is \\ minimized to the greatest extent possible, while at the same time bg allowing the corpany sufficient funds to provide safe and relichle service and raise r.ecessary capital in the firuncial market. N t.'e turn now to those areas in the majority opinien frem which we dissent. 1. Rate of return. The analysis used by the majority in determining the rate of return on common equity indicates that a " bare bones" cost of equity in the 13.25 - 13.75% range is proper. Because of the impact of these rates on consumers of service as discussed above this Commission should adopt the lower end of the range of reasonableness. This would equate to a return of 13.5% including issuance costs--a fair return on commen equity under the circu:1 stances that prevail. 2. Meter Tt.rpering Recoveries. We disagree with the majority in the ravenue estimate adopted with respect to re. venue protection activitics preposed by the Company. Initially the 1945 227 Amendment 35 - January 1980 t \\' Company request was based upon the pre:nise that LILCO was willing to asstoc that the program would prcduce revenue equal to its cost. Statf used a test year benefit / cost ratio to project revenues attributable to the progran and detern.ined that revenues of $1,112,700 over and above the cost of tne program would be a reasonable, even conservative, estimate. The Company then recomputed its figures and agreed tnat additicnal revenues of $350,000.00 cculd be imputed on the basis of 1978 data. Since the 1978 data are derived fron a six month period shen the progra= was being developed, they do not properly reflect all the revenues to be cy.pected in the test year. The Cor.:nicsion.chould instead adopt the revenue figuro as reco =cnded by the Administrative LU: Judy. In all other respects we concur with the opinion c,f the majority. b D((D }D 1945 228 Admendment 35 - January 1980
QUESTION 4.d. Complete the enclosed form entitled, " Financial Statistics," for the most recently available period and the calendar years 1977, 1976, and 1975.
RESPONSE
See the attached form enti^' ed " Financial Statistics," for the calendar years 1975 through JLi8. 1945 229 C-21 Admendment 35 - January 1980
D FI MNCIAL STATISTICS D LONG ISLAND LIGHTING COMPANY Dk 1978 1977 19-6 19 75 (S0001 Earnings available to cer.on equity $111,305- $104,593 $ 26,737 $ 66,95h Average co=on equity 88h,918 754,6h2 615,192 512,S5; Rate of return on average co=on equity 12 585 13.865 14.115 13.c65 Times total interest earned before FIT: Gross incone (bo h including and excludins (1) 2.62 2.62 2.62 2.53 AFC) + current and deferred FIT + total interest charges + acortication of debt (2) 1 91 1.85 . 92 1 95 discount and expense Times long-term interest earned before FIT: Gross income (both including and excluding (1) 2 74 2 76 2.80 2.87 AFC) + current and deferred FIT + lcng-term interest charces + a ortization of (2) 2.01 1 95 2.05 2.20 debt discount and expense Bond ratings (end of period) (3) Standard and Poor's A-/A A-/A A-/A A-/A-Moody's A/AA A/AA A/AA A/AA Times interest and preferred dividends earned after FIT: Gross income (both includin6 and excluding (1) 1.86 1,92 1.89 1.82 AFC) total interest chsrges + amo.tization of debt discount and expense (2) 1.32 1.3h 1.37 1.37 + preferred dividends AFC.(all) (h) $ 69,739 $ 65,801 $ 50,661 $ 36,3h5 Net income after preferred dividends 111,305 10h,593 86,757 66,954 5 62 75 62.95 58.45 Sh.35 Market price of coccon $ 17-1/h $ 18-5/8 $ 18-1/h $ 15-7/5 Book ue of co=on $ 19 12 $ 18.70 $ 17 93 $ 17 19 !sarket-book rr2tio (end of period)* 90.25 99.6G 101.60 92.-5 Earnings avail. for,coron less AFC + depreciat' ion end amortization, deferred taxes, and invest, tax cr. adjust.-deferred $107,h70 $ 87.h97 $ 27,750 $ 76,606 co=non dividends 74,759 63,473 51,336 kl,936 Ratio of Earnings to Dividends 143.85 137 8% 169 35 152.75 Short-term debt (5) Bank loans Co..?.creial paper O
- If subsidiary company, use parent's data.
1945 230 C-22 Admendment 35 - January 1980
(Continued) 1978 1977 1976 1975 Capitalization (Arount & Percent): Long-term debt (6) $1,175,751 $1,102,003 $1,017,977 $892,L75 Preferred stock 390.449 394,436 331,431 304,9D Common equity 982,942 823.h83 67h,828 551,3h1 Long-term debt h6.1% 47 5% 50 3% 51.c5 Preferred stock 15 3% 17 0% 16.h% 17 55 Cornon equity 38.6% 35 5% 33.3% 31 55 Notes: (1) Gross income includes all AFC (2) Gross income excludes all 4: (3) The ratings are listed for the Company's two mortgages as follows: General and Refunding Bonds /First Mortgage Bonds. (4) Includes AFC applicable to Trust financings in 1978 of $3.6 million. (5) No short-term debt was outstanding at any one of the four years ended December 31, 1975, 1976, 1977, or 1978. (6) Includes lo ng-term debt (and current =eturities of $25 million at 12/31/75) and unamortized pre ium er.d discount on debt, but excluding $30.0 million of Trust Obligations-the Company's pro issory note, due 1982, to Tri-Counties Resources Trust (at 12/31/77 and at 3/31/78). 1945 231 C-23 Admendment 35 - January 1980}}