ML19308A389
| ML19308A389 | |
| Person / Time | |
|---|---|
| Site: | South Texas, Comanche Peak  |
| Issue date: | 08/01/1979 |
| From: | Solomon J TEX-LA ELECTRIC COOPERATIVE OF TEXAS, INC. (FORMERLY |
| To: | |
| Shared Package | |
| ML19208C305 | List:
|
| References | |
| 1517, NUDOCS 7909260066 | |
| Download: ML19308A389 (23) | |
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s DOCKET NO. 1517-REMAND TEXAS POWER 6 LIGHT COMPANY TESTIMONY AND EXHIBITS OF J. BERTRAM SOLOMON ON BEHALF OF TEX-LA ELECTRIC COOPERATIVE, INC.
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1 Q
PLEASE ; TATE YOUR NAME AND ADDRESS.
2 A
My name is J. Bertram Solomon. My business address is 1000 Crescent 3
Avenue, S.E., Atlanta, Georgia 30309.
4 Q
PLEASE OUTLINE YOUR FORMAL EDUCATION.
5 A
I received the degree of Master of Business Administration from Georgia 6
State University in 1973. My area of concentration was Finance.
I also 7
received the degree of Bachelor of Science in Industrial Management from 8
the Georgia Institute of Technology in 1972.
9 Q
PLEASE STATE YOUR PROFESSIONAL EXPERIENCE.
10 A
As a Cooperative student at Georgia Tech, I gained approximately nao 11 years work experience as an assistant engineer in an industrial pro-12 duction setting. After my graduation from Georgia Tech in 1972, I 13 worked approximately one and one-half years as a program manager for p
a management consulting firm and for another one and one-half years as 14 15 a proj ect analyst for a resort development firm.
I was employed by 16 Southern Engineering Company of Georgia, my present employer, in January 17 1975.
Since that time, I have had assign =ents in both the retail 18 and uholesale rate departments of my Company, primarily in the area 19 of electric utility rates.
In the retail area I have participated in 20 the preparation of rate increase filings for both G & T and distribution 21 rural electric membership cooperatives as well as the determination of 22 revenue requirements and the proper rate design for unregulated rural 23 electric membership cooperatives. My primary activities, however, have 24 been in the wholesale area where I have conducted analyses of wholesale 25 rate filings of private utilities operating in eight different states.
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I have also participated in the preparation of testimony and exhibite 2
for several of these rate filings. Additionally, I have participated 3
in the preparation of retail and wholesale allocated cost of service 4
studies and power cost proj ecticas.
5 Q
HAVE YOU EVER TESTIFIED IN OTHER CO3DlISSION PROCEEDINCS?
6 A
Yes, I have testified before the Public Utility Commission of Texas 7
and the Public Service Commission of Kentucky.
I have also testified 8
before the Federal Energy Regulatory Commission in proceedings involving 9
the Public Service Company of Indiana, Georgia Power Company, Carolina 10 Power & Light Company, Louisiana Power & Light Company and Kansas Gas &
11 Electric Company.
12 Q
EY WHOM IS SOUTHERN ENGINEERING COMPANY OF GEORGIA RETAINED IN TRIS 13 pyy:ANDED PROCEEDING?
t 14 A
Southern Engineering is retained by Tex-La Electric Cooperative, Inc.
4 15 Q
IMAT WAS THE ASSIGNMENT OF SOUTHERN ENGINEERING COMPANY IN THIS PRO-16 CEEDING?
17 A
We were asked to review, in general and to the extent permitted by the 18 limited time provided by the schedule imposed on this matter, the inter-l 19 company relarionships between the Texas Utilities Company subsidiaries 20 and the pricing of transactions between the companies and specifically, 21 the issues enumerated by the Hearing Examiner in his orders of November 1 22 and 9 and December 6, 1978.
23 To the extent that issues listed by the Hearing Examiner are not 24 addressed by this filed testimony, it is because we were si= ply unable 25 in this limited period, to sufficiently analyze those issues with the _ _ _
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1 data provided. Failure to address any of these issues must not be inter-2 preted as an agreement with the treatment accorded these issues by the companies.
3 In analyzing the issues which will be presented in our testi-4 mony, we have applied the Co= mission's Rules and Regulations and sound 5
ratemaking procedures to the data provided by the companies in forming 6
our opinions regarding the proper ratemaking treatment of each transaction.
7 Q
ON WHAT ISSUES WILL YOU PROVIDE TESTIMONY?
8 A
I will provide testimony on the appropriateness of charging rate-9 payers straight-line depreciation rather than accelerated depreciation 10 on TUFC0 and TUGC0 fuel related facilities, the appropriate method 11 of allocating TUFCO's fixed costs and the gains on the sale of gas to 12 outside buyers, the appropriate ratemaking treatment of the operating 13 companies' advance payments to TUFC0 for exploration and development, l'
the impropriety of charging TUFC0 and TUGC0 interest relating to construction 15 work in progress currently to the customers of the operating companies, and 16 the appropriate treatment of the so-called " payout credit."
17 Q
kVULD YOU BRIEFLY SUMMARIZE THE CONCLUSIONS WHICH YOU AND THE OTHER 18 UITNESSES FOR TEN-LA HAVE REACHED AS A RESULT OF YOUR ANALYSES.
19 A
Yes, these conclusicas are as follows:
'O l.
The non-volatile, fixed costs of TUFC0 and TUGC0 should be collected 91 from the customers of the operating companies through base rates, not 99 through any automatic flow-through fuel clause.
23 2.
The advance payments by the operating companies to TUFC0 for fuel exploration and development are investments in fuel to be used in the 25 future.
Accordingly, these advance payments should be capitalized and
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then charged to expenses as fuel is produced and consumed.
2 3.
The operating companies should not be allowed to charge their 3
customers currently for the interest expense incurred by the service l
4 companies on construction work in progress.
5 4.
Straight-line depreciation rather than accelerated depreciation f
6 should be used for ratemaking.
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5.
If the gains on the sale of gas by TUFC0 to outside entities are 8
to be split among the operating companies on an equal basis, the 9
full amount of TUFCO's fixed costs should also be allocated to each 10 of the operating companies equally; otherwise, these gains should i
l 11 be divided among the operating companies on the basis of consump-12 tion during the month of the sale.
13 6.
The fictitious amount which is included in TUFCO's " fuel gas purchases" 14 on its invoices to the operating coppanies should be excluded, or at 15 least not included in the operating companies' fuel cost adjustments J
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16 to their ratepayers.
This fictitious amount arises from TUFCO's i
17 accounting system's using a hypothetical cost for TUFCO's own pro-18 duction, rather'than its actual cost.
19 Q
PLEASE DESCRIBE THE RELATIONSHIPS BETWEEN THE T.U. COMPANIES FROM A 20 STRUCTURAL, OPERATIONAL, AND FINANCIAL STANDPOINT AS REVEALED BY DISCOVERY 21 AND DESCRIBED BY Tile COMPANIES' WITNESSES, THE RATIONALE FOR THE ESTABLISH-22 MENT OF TilESE RELATIONSHIPS-ESPOUSED BY' Tile COMPANIES' WITNESSES AND YOUR 23 OPINION OF IIOW TIIESE RELATIONSHIPS AND Tile TRANSACTIONS BETWEEN THESE 24 COMPANIES SHOULD EE VIEWED FROM A RATEMARING STANDPOINT.
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A I will fccus upon the three operating companies (Texas Power & Light, 2
Dallas Power & Light and Texas Electric Service Company) and the two maj or 3
(from a cost standpoint) service companies (Texas Utilities Fuel Company 4
and Texas Utilities Generating Company).
Each of these companies is, for 5
all practical purposes, a wholly-owned subsidiary of Texas Utilities Company.
r The rates of the operating companies are directly regulated by. the 6
7 Public Utility Co= mission of Texas. TUFC0 and TUGC0 file reports with the 8
Railroad Co= mission but, at this time, their rates are not set by regulatory 1
e authority.
Instead the operating companies themselves establish the pricing 10-methods employed by TUFC0 and TUGCO.
11 There is a relatively small amount of equity capital in each of the 12 service co=panies which is provided by Texas Utilities. However, as 13 stated by Mr. Campbell in his deposition, the ' issuance of long term debt l
14 by the service companies is supported by a portion of the equity in the
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15 three operating companies.
In addition, the long term debt of the service 16 companies is either directly guaranteed by Texas Utilities or backed by 17 the operating agreements between the service companies and the operating 18 companies.
19 The service companics are operated to recover from the operating 20 companies on a monthly basis accounting costs as defined by management.
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24 25 4,
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1 According to Mr. Campbell and Mr. Brittain, the service companies are 2
operated solely as the agents of the operating companies and were e
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established merely to avoid duplication of tasks and costs by the three 4
operating companies.
The functions of the service companies were gen-J 5
erally being undertaken by each of the three operating companies prior 6
to the establishment of the service companies.
7 Thus, from an operating and financial standpoint, the service companies 8
are simply extensions of the operating companies providing services to 9
them at their direction; these are services which otherwise would be 10 provided by the operating companies themselves.
In my opinion, in rate-11 making the service co=panies should be subject to the same ratemaking 12 criteria as the operating companies.
For purposes of establishing rates 13 which the consumers of the operating companies will pay, the rules and 14 regulations and the standcrd ratemaking criteria normally applied by this t
4 15 Commission should be applied to the pricing of the transactions among these 16 affiliated companies.
Ilowever, the companies in this proceeding, supposedly I
17 because of the organicational structure of the T.U. affiliates, are attempting 18 to establish rates to their ratepayers using methods which are in direct 19 conflict with the rules and regulations of this Commission and in conflict i
20 with standard.ratemaking principles.
1 21 Q
IS TIIE CUSTGIARY MET!IOD OF CALCULATING DEPRECIATION ON UTILITY PROPERTY l
22 PRESCRIBED BY TIIE SUBSTANTIVE RULES OF TIIE TEXAS AND OrilER CGD11SSIONS'l 23 A
Yes, Section No. 3, paragraph 052.02.03.032 (a)(2) of this commission's 24 rules states that depreciation expense to be included in cost of service 25 will be computed on a straight-line basis. The request of the companies -
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I here is that they be allowed to ignore this long-standing ratemaking treatment 2
normally accorded this cost of service item and instead be left free to 3
select whatever. accounting method they prefer from the several which are 4
in accordance with " generally accepted accounting principles."
5 It has long been recog'Elzed by regulatory bodies, as it has by this
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6 Commiss ion, that allowing companies to choose from the many methods which i
7 are available for accounting purposes may result in charging current con-8 sumers for benefits to be received by future consumers, charging future 1
9 consumers for benefits received by current consumers, or overcharging 10 all consumers in general for services provided. To avoid these inequities, 11 these bodies have established the appropriate ratemaking treatment to be 12 accorded many cost of service items.
In general, it has been concluded 13 that if one is to follow the other, accounting treatment should follow 14 ratemaking treatment rather than vice versa.
15 Mr. Campbell, in his arguement on the matter of depreciation, cited the 16 decision of the Railroad Co=sission in its Docket No. 600 (the repeal" of 17 which is proposed), but he did not mention that the Special Rules of 18 Practices and Procedure for the Gas Utilities Division of the Railroad 4
i 19 Commission, at paragraph 051.04.03.019(a) also require that " book 20 depreciation and amortization for ratemaking purposes shall be computed on 21 a straight-line basis over the useful life expectancy of the item of pro-22 perty or facility in question." The Federal Energy Regulatory Commission 23 (formerly Federal Power Co=cission) also has required the use of straight-t 24 line depreciation on fuel facilities in ratemaking.
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t 1 Q Tile COMPANIES MAKE MAln' ARGUMENTS IN FAVOR OF USING ACCELERATED DEPPECIATION.
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2 I WOULD LIKE FIRST YOUR OPINION ON TFI ARGID1ENI TIIAT USING ACCELERATED 3
DEPPICIATION FOR RATDIAKING PURPOSES WOULD TEND TO LEVELIZE UNIT FUEL COSTS 4
OVER TliE EXPECTED LIVES OF PARTICULAR FACILITIES. DOES TIIIS PROVIDE i
5 JUSTIFICATION FOR ALLOWING ACCELERATED DEPPICIATION TO BE USED FOR RATE-6 MAKING PURPOSES?
7 A
No, it does not for a number of reasons. Depreciation is a fixed charge, 8
not a variable one. The capacity of any capital asset must be kept 9
available for potential use at any point during its useful life. The cost 10 of having an asset available is clearly a demand related-or fixed charge 11 rather than a co=todity related or variable charge.
12 Most of the arguments the companies make could be advanced equally 13 well for electric generating facilities, but they have not proposed that
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14 accelerated depreciation be used for ratemaking purposes on such equipment.
15 Through the years, regulators have rev'iewed the arguments presented by 16 the companies and many more and have come to the conclusion that stra'ight-17 line, not accelerated depreciation of utility property should be used for 18 ratemaking purposes.
19 Q
AS FOR TUFCO, ONE OF T!!E ARCIL1ENTS IS TilAT ACCELERATED DEPRECIATION BETTER 20 MATCllES Tite USE OF ITS FACILITIES. DO YOU AGREE?
21 A
No, Mr. Campbell ties his arguments in large part to the production of a
22 gas wells when in fact much of TUFCO's property is not associated with any i
23 one gas well, but rather, is pipeline used in transporting gas from many 24 wells and suppliers from one general area in west Texas to another area in 25 cast Texas. In addition, other facilities, such as storage facilities, 26 will likely be used more in the future than today..
1 In considering the TUFC0 gas pipeline, it must also be recognized, and 2
constantly borne in mind, that the major TUFC0 pipeline, that running 3
from the Dallas area to West Texas, does not belong exclusively to TUFCO.
4 This 36 inch diameter pipeline is owned in equal shares by TUFCO and 5
Lo-Vaca Gathering Company (with the exception of the compressor stations 6
on the pipeline which are 100* owned by Lo-Vaca Gathering Co=pany).
7 Lo-Vaca Gathering Company serves gas distribution loads in San Antonio, 8
Austin, Corpus Christi and many smaller Texas cities. As such, regardless 9
of any imposed termination of the use of natural gas in boilers, there is a 10 likelit. cod that Lo-Vaca will continue to need its pipelines for the inde-11 finite future.
12 Q
DO YOU, THEN, AGREE THAT TUFCO'S PIPELINE IS OF BUT LIMITED TERM USEFULNESS?
13 A
No, I do not believe that that is a correct assessment of the future prospects 14 for the use of this pipeline. This pipeline leads fro = one of the major 15 gas regions of the United States, the Permian Basin of west Texas, to one 16 of Texas' major population areas, the. Dallas-Fort Worth Metroplex.
In addi-17 tion, this pipeline could be interconnected with interstate pipelines as it 18 presently is to intrastate pipelines.
19 Since these high pressure pipelines have to be kept in very good con-20 dition through extensive maintenance, and in view of the fact that natural 21 gas for some purposes will continue to be used for the foreseeable future, 22 I see no reason why this pipeline will not have a very long service life.
I 23 The rapid depreciation of these pipelines would appear to clearly 24 provide an opportunity for Texas Utilities, in the future, to transfer 25 its pipeline assets at their then-depreciated book value, to a profit-making i 8
l subsidiary for the benefit of Texas Utilities' shareholders.
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I 2 Q IS ACCELEPATED DEPRECIATION FOR BOOR PURPOSES EMPLOYED BY ALL OF THE FUEL 3
SUPPLYING SUBSIDIARIES?
4 A
No, in a similar financial and operating situation, the Oid Ocean Fuel 7
5 Company, the fuel subsidiary of TESCO used straight-line depreciation for 6
ratemaking purposes.
7 Q
JUST BECAUSE THE TUFC0 AND TUGC0 NOIES AND UNDERLYING OPERATING AGREEMENIS 8
PERMIT OR REQUIRE ACCELERATED DEPRECIATION TO BE USED IN FUEL TRANSFER 9
PRICES, SHOULD THIS COMMISSION ALLOW THESE CHARGES TO BE PASSED ON TO THE 10 PATEPAYERS?
11 A
No, Mr. Campbell insinuates that, by virtue of the notes for 12 the TUFC0 and TUGC0 long term debt, the operating companies are contractually 13 bound to charge the ratepayers for accelerated depreciation.
Clearly the 14 operating companies cannot contract away the regulatory authority of this 15 Commission.
In fact, it is absurd to claim that any agreement signed 16 between the service companies and the operating companies or between the 17 service companies and a third party could in any way restrict the regulatory 18 authority of this Com=ission.
19 Q HOW ARE THE GAINS ON THE SALE OF GAS BY TUFC0 TO THIRD PARTIES CURRENTLY 20 ALLOCATED AMONG THE THREE OPERATING COMPANIES?
21 A All gains on the sale of excess gas to non-affiliated buyers are reallocated 22 to each operating company equally. The companies contend that this method 23
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of allocation is appropriate because (a) TUFC0 was originally started with 24 equal advances from each operating company to finance on an equal basis the 25 construction of the 36 inch transmission pipeline, (b) the facilities of 26 TUFC0 are available for use by each of the three operating companies 27 on an equal basis, (c) the operating companies each have an equal call on 28 the gas purchased by TUFCO, and (d) TUFCO's fixed costs are paid equally by 29 cach of the.three operating companies. ~
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l Q
IN YOUR OPINION IS THIS A PROPER METHOD FOR ALLOCATING THE GAINS ON THE 2
SALE OF SUCH GAS?
3 A
It is if, and only if, each of the four f actors cited by the companies, equal 4
sharing of capital loans, equal sharing of pipeline availability, equal calls 5
on gas and equal sharing of fixed costs, are now and have been truly reflective 6
of the actual philosophy, operations and payments involved.
7 Q
ARE THE COMPANIES' CONTENTIONS, WHICH YOU ENUMERATED, TRULY PIFLECTIVE OF i
8 ACTUAL TLTCO OPERATIONS AND OPERATING C01DANY PAYMENTS TO TUFCO?
9 A
Tne allegations about the most crucial items are not truly reflective of the 10 actual operations and payments involved. Cor.trary to the companies' con-11 tention, TUFCO's fixed costs are not paid equally by each of the three 12 operating companies, and although TUFCO was originally started with equal 13 advances from each of the operating companies, the outstanding balarces of 14 advances have not remained equal, as is shown by data responses herai.'.
i 15 The data response material also shows that advance payments for exploration f
16 and development have not been made equally by the three operating companies, 17 Q
HAVE YOU PREPARED AN EXHIBIT TO DEMONSTRATE THE FACT THAT TUFCO'S FIXED 18 COSTS ARE NOT PAID EQUALLY BY THE OPERATING COMPANIES?
19 A
Yes, this is shown on Exhibit (JBS-1). As shown on this Exhibit the 20 fixed costs of TUFC0 for the year ending September 30,1977 (test year 21 in Dockct No. 1517), excluding advance payments for exploration and develop-22
" payout credits," costs of single purpose laterals and extensions, and
- ment, 23 the minimum payment (which last item is the only or.e paid on an equal basis) 24 j
actually paid by TPLL were $4,695,727.17.
If these fixed costs had been 25 divided equally among the three operating companies, TP&L wait 14 *.vre paid l -
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i only $2,680,209.57.
Thus, TP&L (and its customers) paid some $2,015,517.60 2
too much during the test period used in Docket No. 1517 if the joint facility 3
fixed costs of TUFC0 were intended to be allocated equally to the operating 4
companies.
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Q WHAT MUST BE DONE TO CORFICT THIS SITUATION?
6 A
Either the $2,015,517.60 TP&L overpaycent on fixed costs should be dis-7 allowed as a cost of service item for purposes of establishing rates in 8
Docket No. 1517, or the revenue credit, from the gain on the sale of gas, 9
for ratemaking purposes should be adjusted upward by $1,990,137 from 10
$2,646,459 to $4,636,596 in order to reflect the proportion of TUFCO's gas 11 sales to the operating companies sold to TP&L during the Docket No. 1517 12 test period.
i 13 Q
EULD YOU PLEASE ENPIAIN THE COMPANIES' TREATMENT OF ADVANCE PAYMENTS FOR 14 ENPLORATION AND DEVELOPMENT?
15 A
TUFC0 currently receives advance payments from the operating companies 16 for all its intangible investments in oil and gas exploration and development.
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17 These advance payments are made by the three operating companies each l
18 month in proportion to the amount of gas taken from TUFC0 by each company 1-19 in that month. However, the companies treat-these advance payments as expenses i
l 20 rather than as investments.
i 21 Q
WHAT RATEMAKING CRITERIA SHOULD BE APPLIED FOR PURPOSES OF DETERMINING g2 THE APPROPRIATE TREATMENT OF THESE INVESTMENTS AND WHAT TREATMENT DO YOU 23 RECOMMEND?
24 A
An established ratemaking principle which applies to this situation is 25 that the expense charged the ratepayer should match the benefits received.
1 in the period for which the charge is made.
In the case of investments 2
in oil and gas exploration and development, the benefits of the expenditures 3
are received by the ratepayers ot ar a period of years as the oil and gas are 4
produced.
Thus, these investments in exploration and development should be 5
capitalized when they are initially incurred and expensed as the gas from 6
the wells is produced in order to properly match the cost with the benefit 7
received.
This procedure would also properly allocate explora; ion and 8
development cost to each of the operating companies and their customers S
as the gas is consumed.
10 Because in the past these investments have been expensed completely, 11 however, a dif ferent procedure needs to be applied to TUFCO's current 12 owned oil and gas reserves. At present, the low cost production 13 from these reserves is rolled in with the gas purchased from third 14 parties in determing an average TUFC0 gas cost. Instead, the pro-15 duction from TUFCO's presently owned reserves should be allocated to the 16 operating companies in proportion to how they paid for its development.
17 As a general principle, advance payments to other entities for fuel 18 development should be capitalized, and not recognized as charges to the 19 ratepayers unless and until the fuel is used by or for the ratepayers' 20 benefit.
This approach has been taken by both this Ccmmission and the 21 Federal Energy Regulatory Commission.
' SEQUENT 22 Q WHEN HAS THIS CO> MISSION DEFERRED FUEL ACQUISITION EXPENSES FOR '
23 RECOGNITION?
24 A In this very docket, Docket No.1517, this Commission determined that 25 TP&L's payments made through its af filiate for future uranium fuel enrich-
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26 ment and to United Nuclear Corporation for the acquisition of uranium to -.- -
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1 be processed and ultimately used by TP&L in the future should be capitalized 2
for amortization as the fuel is used.
This Commission applied the identical 3
treatment to TP&L's lignite held for future use.
4 Q
IN YOUR OPINION, IS Tl!E COMPANY'S PROPOSED TREATMENT OF INVESDIENTS IN 5
EXPLORATION & DEVELOPMENT FOR OIL & GAS INCONSISTENT WITH ITS AND THE 6
COMMISSION'S TREATMENT OF INVESDIENTS FOR LIGNITE AND NUCLEAR FUEL ACQUI-i 7
SITION?
8 A
Yes, in my opinion, these items are of the same class and yet TP&L has 9
treated them entirely dif ferently.
In all these cases, current dollars 10 are actually paid-out by the operating company to someone to secure a source 11 of fuel to be used at some time in the future. From a ratemaking standpoint, 12 it is immaterial whether these sums are paid by TP&L to an affiliate and by 13 the affiliate to United Nuclear Corporation for uranium yellow cake, or l
14 whether these sums are paid by TP&L to TUFC0 and then to a land owner for 15 lignite right acquisitions in the form of bonus payments or whether these 16 sums are paid by TP&L to TUFC0 and then to third parties to drill for gas f
17 and oil.
In each and every case, the item is an advance payment associated 18 with the acquisition of fuel to be used at some time in the future.
l 19 Q
HOW ARE ADVAh'CE PAYMENTS FOR OIL AND GAS ENPLORATION TREATED BY THE FERC?
20 A
The Federal Energy Regulatory Commission (formerly Federal Power Commission) 21 established, as a result of a rulemaking procedure a number of years ago, 22 its required treatment for these investments.
In its Order No. 440-A 23 clarifying and amending Order No. 440 and denying rehearing, issued January 24 5,1972, the Federal Power Commission said:
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1 "In reaching our decision to adopt full-cost accounting, 2
however, we compared the merits of the two concepts of 3
accounting, and concluded that full-cost accounting is 4
more consistent with the economics of exploration and 5
development over a period of time than current expensing 6
of costs.
. we believe that for a proper matching of 7
revenues and expenses, all exploration and development 8
costs incurred by a company should be accounted for by 9
the full-cost accounting method. "
10 Tne Federal Energy Regulatory Commission also recently found that the I
11 full-cost accounting method should also be used by electric utilities 12 who engaged in exploration and development for natural gas as well as 13 gas and oil utilities. The Commission in its decision in Southwestern r
14 Electric Power Company, Opinion No. 28, dated September 20, 1978, 15 j
described its prescribed method as follows:
16 "Under full-cost accounting, the costs of both successful 17 and unsuccessful projects are capitalized and then divided 18 by the amount of proven reserves to get a unit cost."
19 In my opinion, the same rationale used by the Federal Power Commission 20 in its rulemaking should be applied in this proceeding for determining l
21 proper expenses to be included in charges from TUFC0 to the operating 22 companies and from the operating companies to their customers. To do 23 otherwise would be to charge current ratepayers for benefits to be reaped 24 by future ratepayers. The companies should be required to recalculate the 4
1 25 exploration and development expenses which would have been charged under the
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l full-cost accounting method for their respective test years and replace 2
those expenses actually charged in those test years with the amount so 3
C0mPut*d-4 Q
WHAT CRITERIA DO THE COMPANIES RECOMMEND FOR DETERMINING THE PROPER RATE-5 MAKING TREATMENT OF ADVANCE PAYMENTS FOR OIL AND GAS ENFLOPATION AND 6
DEVELOPMENT?
7 A
Mr. Campbell does not address the proper ratemaking treatment of these 8
advance payments other than to suggest that this Connission procrastinate 9
and delay making any decision on the appropriate retemaking treatment 10 until the FASB and SEC make a decision on an appropriate accounting 11 treatment (if a single accounting treatment ever will be mandated). He 12 simply discusses the currently acceptable oil and gas company accounting 13 methods for treating these costs, which amount to an oil and gas company's 14 being allowed to do practically anything it pleases, i.e., capitalize some 15 or all costs or expense so=e or all costs. Meanwhile, under his recom-16 mendation, the utility companies would be allowed to handle these costs 17 any way they chose for ratemaking purposes.
18 Q
IS THE INTEREST RELATED TO CONSTRUCTION WORK IN PROGRESS ON FACILITIES 19 OWNED BY TUFC0 AND TUCCO CHARGED CURPINTLY TO THE OPERATING COMPANIES 20 AS PART OF THE COST OF CURRENT OPERATIONS?
21 A
As testified by Mr. Williamson in his deposition, all interest costs 22 of TUFC0 and TUGCO, including that related to construction work in pro-23 gress, is billed to the operating companies on a monthly basis. These 24 interests costs are passed on directly to the ratepayers either through 25 the fuel clause or through base rates.
Mr. Williamson also testified i i L
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1 that the service companies do not capitalize any allowance for funds 2
used during construction. This amounts to the same thing as including 3
construction work in progress in the rate base since a current return 4
is earned on the capital invested in construction work in progress.
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5 Q
ARE THESE INTEREST COSTS ASSOCIATED WITH CONSTRUCTION WORK IN PROGRESS 6
0F THE SERVICE COMPANIES APPROPRIATE CHARGES TO BE INCLUDED IN THE RATES 7
0F THE OPERATING COMPANIES?
8 A
Both the Public Utility Regulatory Act and the substantive rules of the 9
Public Utility Commission state that construction work in progress is 10 to be allowed in the rate base only where necessary to the financial 11 integrity of the utility.
Thus, this question must be addressed in each 12 proceeding before this Commission.
However, as far as this proceeding, 13 Docket No.1517, is concerned, it has not been shown that the inclusion 14 of the interest related to construction work in progress in the rates of 15 TPit is necessary to the financial integrity of either TP&L or the service 16 companies. This burden or proof has not been met since no testimony or 17 exhibits have been offered for this purpose.
18 The balance of TUFCO's CWIP as of the end of December 1976, December 19 1977, and October 1978, taken from the monthly financial reports of TUFC0 20 received in response to data requests in this proceeding are as follows:
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$13,615,052, $13,272,899 and $13,167,842.
This is an average of $13,351,93,1 22 which, at a rate of 9%, is $1,201,674 in interest on this construction work 23 in progress annually.
The TUGC0 balances for the same months are:
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$61,150,390, S73,967,071 and $92,073,109. The average of these is 25
$75,730,190 for an annual interest amount of $6,815,717 at 9%.
These are k
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substantial amounts which have not been justified as properly includable 2
expenses to be flowed through currently to the ratepayers and should be 3
disallowed.
4 Q
MR. BRITTAIN, AT PAGE 11, AND MR. CAMPBELL, AT PAGE 4, OF THEIR PREPARED 5
TESTIMONY FILED JANUARY 12 ALLEGED THAT TUFC0 SELLS GAS TO THE OPERATING 6
COMPANIES "AT COST."
MR. CAMPBELL EVEN CALLS IT " ACTUAL COST."
HAVE YOU 7
INVESTIGATED THESE ALLEGATIONS?
8 A
Yes, I have.
9 Q
k"dAT HAVE YOU FOUND?
10 A
I have found that " cost" and " actual cost," as they must be defining 11 those terms, do not comport with ny understanding of the words at all.
12 I also do not believe that their definitions comport with any generally 13 accepted definition.
14 Even if one3 for the sake of argument, were to concede that the t
15 excess of accelerated depreciation c er, straight-line depreciation could 16 be a ratemaking cost as opposed to accounting cost, TUFC0 is still 17 found to have charged the operating companies approximately $3,000,000 18 nore than cost on natural gas sales during the Docket No. 1517 test year 19 (ended Leptember 30, 1977).
20 Q
BY WHAT MECHANISM DID TUFC0 DO THIS?
21 A
When TUFCO, under the control and direction of the operating companies, 22 calculated the amoent which it would show on its invoices as " fuel gas l
23 purchases," it added together:
24 1.
All amounts paid to third parties for gas purchased from third parties, 25 2.
All amounts paid to third parties in connection with TUFCO's production !
%s 1
from its owned gas reserves (such as royalties and production 2
taxes), and 3
3.
Additional amounts sufficient to boost the price of TUFCO's own gas 4
so that, all in all, during the first periods of production it would j
5 be no less expensive than if it had been purchased rather than pro-6 duced from owned properties.
7 Q
IS THE' EXTRA CHARGE TO INCREASE THE " COST" 0F PURCHASED GAS TO AN ARTI-8 FICIALLY HIGE LEVEL BROEN OUT OF FUEL GAS PURCHASES ON THESE INVOICES?
9 A
No, it is not.
There is nothing on the f ace of the invoices to show that 10
" fuel gas purchases" actually includes costs plus profits. This had to 11 be found from discussions with the service company accounting personnel.
12 Q
TUFCO'S ANNU/J. REPORTS TO THE RAILROAD COMMISSION SHOW THAT TUFC0 EAPSS 13 NO INCOME.
HOW CAN TUFC0 SELL AT A PROFIT THE GAS DEVELOPED WITH OPERATING 14 COMPANY INVESTMENT AND NOT EAlus INCOME?
4 15 A
So that TUFC0 vill not show up as earning a profit, it returns to the 16 operating companies, by credits to other eccounts, the profits earned by 17 selling gas to the operating companies and the profits earned by selling ~
i 18 gas to third parties.
i 19 Every month, TUFC0 sends each of the operating companies two invoices.
20 The first covers all gas sold to the operating companies, those fixed costs 21 associated with certain portions of the TUFC0 system which are not of 22 benefit to all of the operating companies, and carrying charges on fuel 23 oil inventory. In the aggregate, during the test year the amounts shown 24 on these invoices were overstated by the approximately $3,000,000, 25 TUFC0 also sends each of the operating companies a second invoice each.
8 9
1 month for miscellaneous charges, such as the cost of its participating in the 2
Ranchers Exploration uranium program (now transferred to CHACO), the cost of 3
fuel oil delivered to the various plants, and the acquisition costs of new lignite.
It is on this invoice, the sacond one, that TUFC0 credits to the 4
5 operating companies all profits earned on the sale of gas to the operating 6
companics. These amounts have been termed " payout credits" by the companies, 7
Q HOW DID YOU DETERMINE THE AMOUNT OF THESE TUFC0 PROFITS ON CAS SALES DURING 8
THE TEST YEAR?
9 A
From all of the invoices for gas sent to TP&L by TUFC0 for the test year, I I
10 extracted and then summed the total, unallocated amount shown for " payout 11 credits."
12 Q
THESE " PAYOUT CREDITS" ARE SHOWN SEPARATELY ON THE TUFC0 FUEL INVOICES AND J
13 YET YOU SAID THE PROFIT WAS IN THE LINE ITDI " FUEL CAS PURCHASES." IS THIS 14 ITDI IN THE INVOICE TWICE?
15 A
No, it is in there three times.
It is added to the top line, " fuel gas 16 purchases," it is subtracted from the second lint "other operaticn," and f
17 it is added in again further down the page in the line " payout credit."
18 Thus the " Allocable Fuel Gas Cost" includes this amount of profit which is 19 charged directly to the ratepayers of the operating companies through their 20 fuel adjustment provisions.
21 HOW DOES TP&L TREAT, FOR RATDIAKING PURPOSES, THE TUFC0 PROFITS RETURNED Q
2 TO IT TRROUGH A CREDIT ON THE SECOND INVOICE %\\CH MONTH?
23 For ratemaking, the aggregate amount of these credits received by TP&L during A
24 the test year was treated as a credit to the cost of service.
25 tatAT IS YOUR OPINION OF TIIIS TREATMENT FOR RATDIAKING PURPOSES?
Q t'
20-c
l l
A This will be a perfect example of the fox being left in charge of the hen house
(
2 if the operating companies are allowed to perpetuate this practice.
3 The operating. companies tell TUFCO how it is to compute its " fuel cost" 4
in billing them. The operating companies, in turn, pass on directly to their 5
ratepayers, through their fuel cost facter adjustments, these amounts invoiced 6
by and paid to TUFCO. Through this mechanism, implemented by themselves, the 7
operating companies have been collecting an amount for a fictitious " cost" 8
which is not paid by TUFC0 to anyone. This amount is collected monthly through 9
their respective fuel clauses Valle only crediting to ratepayers an amount
~
10 which was fixed as part of their base rates in a rate proceeding on the basis 11 of historic test years.
12 From a regulatory standpoint, it makes no sense to allow a utility to 13 freely pass through to the ratepayers the sums paid to third (allbeit affili-14 ated and controlled) parties without having to credit to the cost of fuel 15 all payback credits from the fuel suppliers.
j 16 Q
EUT IF THE A'10UNT OF 'IHESE PAYBACKS SHOWS UP AS A CREDIT TO THE COST OF 17 SERVICE lATER, HOW IS THE RATEPAYER PREJUDICED?
18 A
The ratepayers are prejudiced in at least two ways. First, they. lose the 19 protection from monopolistic overcharges Vnich is provided by regulation.
20 As a result of this loss, they are reduced to only being able to later argue 21 that the utility should h, ave to account for these credits rather than being 22 able to show that they should never be allowed in the first place.
4 23 Secondly, they can be prejudiced by the potential for further mismatches 24 becueen the amount of the paybacks and the historical levels which are being 25 shown as a credit to the cost of service. For example, if the operating.-. -
9 1
companies are able to cause TUFC0 to earn whatever profit they wish and 2
then receive that profit through a credit, they are in effect given the 1
3 power'to unilaterally raise their rates whenever they wish.
The thing 4
which makes this practice so alarming is the simple f act that these amounts 5
which currently flow through the fuel clauses, are purely figments of an 6
accountants imagination and are not at all represented by true costs, hard 7
dollars paid to anyone by TUFC0 for either owned or purchased gas.
8 Q
ARE THESE PROFITS AND CREDITS SOMEHOW RELATED TO THE OPERATING COMPANIES' 9
HISTORICAL ADVANCES TO TUFCO FOR OIL AND GAS EXPLORATION AND DEVELOPMENT?
10 A
only in a roundabout fashion, TUFC0 has, in the past, expensed currently 11 all of its investment in oil and gas development.
These amounts have been 12 collected from ratepayers through the base rates of the operating companies.
13 To the extent that the investment in exploration and development would enable 14 TUFC0 to supply gas from its owned reserves to the operating companies at 15 a price which is lower than that recei ed for gas being sold by TUFCO's 16 partner out of the same well, the imposition of " payout credits" is the mechanism 17 used to keep score on the extent to which the investcent has paid off. It 18 must be kept in mind, however, that it is only a scorekeeping mechanism and 19 is unrelated to any actual outlay of cash on a monthly basis and should not 20 be. allowed to impact the ratamaking process.
21 In fact it is inaccurate even as a scorekeeping mechanism as is clearly 22 demonstrated by the mismatch between the investment by each of the operating 23 companies and the proportion of the profits that is credited back to it.
24 If there is any relationship between the E&D contribution of each operating 25 company and the future credit it receives, it is purely coincidental.
k
, 4 S
-s 4
.m
_~s
i A
D i
1 The original investment is assessed to the operating companies in pro-l 2
portion to their respective takes of gas from TUFC0 during the month in 3
which TUFC0 incurred the particular intangible exploration and development 4
cost. The paybacks on the other hand, are allocated each month in pro-5 portion to the amount of TUFCO gas taken by each of the operating companies 6
in that month. There is absolutely no attempt made to insure that the i
7 paybacks go to the operating companies in poroportion to their original 8
advances which were invested by TUFCO.
}
l 9
Q MR. SOLOMON, MUCH OF YOUR TESIDIONY HAS DISTINGUISHED GENERALLY ACCEPTED 10 ACCOUNTING PRINCIPLES FROM TIE PROPER RATEMARING TPIATMENI 0F VARIOUS ITEMS 11 AT ISSUE IN THIS PROCEEDING. HAVE THE AUTHORITATIVE ACCOUNTING RULEMAKING 12 BODIES PICOGNIZED THE FACT THF. TFIPI MAY BE SUCH DIFFEP2NCES AS FAR AS 13 FIGUMTED COMP!d;IES API CONCERNED?
14 A
Yes, the Accounting Principles Board was the predecessor of the present 15 FASE. Its opinions remain in effect until supplanted by FASB rulings.
16 In the addendum to AFB Opinion No. 2 (which has been in effect since 1962),
the Accounting Principles Board recognized that there may be instances 17
]
18 where the ratemaking treatment for any given item (generally those 19 involving timing of expensing costs) =ay vary from accounting method-20 ology allowed by the Board.
I 21 Q
DOES THIS CONCLUDE YOUR TESTDIONY AT THIS THE?
22 A
Yes, it does.
23 i
24 25
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