ML19308A390
| ML19308A390 | |
| Person / Time | |
|---|---|
| Site: | South Texas, Comanche Peak  |
| Issue date: | 09/30/1978 |
| From: | Solomon J GEORGIA POWER CO. |
| To: | |
| Shared Package | |
| ML19208C305 | List:
|
| References | |
| ER78-166, NUDOCS 7909260069 | |
| Download: ML19308A390 (12) | |
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A g GEORGIA POWER COMPANY FERC DOCKET NO. ER73-166 i PREPARED TESTIy0NY OF J. 3ERTRAM SOLOMON
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j 1Q PLEASE STATE YOUR NAME AND ADDRESS.
j 2 l 3A My name is J. Bertram Solomon. My business address is 1000 Crescent
! 4 Avenue, N. E., Atlanta, Georgia, 30309.
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! 6Q PLEASE OUTLINE YOUR FORMAL EDUCATION.
7 8A I received the degree of Master of Business Administration from Georgia
- 9 State University in 1973. My area of concentration was Finance. I also 10 received the degree of Bachelor of Science in Industrial Management from 11 the Georgia Institute of Technology in 1972.
- 12 13 Q PLEASE STATE YOUR PROFESSIONAL EXPERIENCE.
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- 15 A As a Cooperative student at Georgia Tech, I gained approximately two l
16 years' work experience as an assistant engineer in an industrial pro-
' 17 duction setting. After my graduation from Georgia Tech in 1972, I worked 18 approxicately one and one-half years as a program manager for a management 19 consulting firm and for another one and one-half years as a project analyst i 20 for a resort development firm. I was employed by the Southern Engineering 21 Company of Georgia, my present employer, in January 1975. Since that time, 22 I have had assignments in both the retail and wholesale rate departments
- 23 of my Company, primarily in the area of electric utility rates. In the 1 .
24 retail area I have participated in the preparation of rate increase filings
( 25 for both G & T and distribution rural electric membership cooperatives as i 26 well as the determination of revenue requirements and the proper rate design i 27 for unregulated rural electric membership cooperatives. My primary activi-3 28 ties, however, have been in the wholesale area where I have participated l 29 in the analysis of approxi=ately two dozen Federal Energy Regulatory 30 Commission and Federal Power Commission filings of private utilities j 31 operating in nine different states. I also participated in the preparation
! 32 of testimony and echibits for several of these rate filings. Additionally, j 33 I havejparticipated in the preparation of retail and wholesale allocated j 34 cost of service studies and power cost projections.
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35 j 36 Q HAVE YOU EVER TESTIFIED IN OTHER COMMISSION PROCEEDINGS?
l 37 j 38 A I have testified before the Co= mission in proceedings involving the Public j 39 Service Comoany of Indiana, Docket No. ER76-149; Georgia Power Co=cany, j 40 Docket Nos. E-9091. E-9521 and ER76-587; Carolina Power & Light Company, j i 4l Docket Nos. ER76-195 and ER77-135; Kansas cas & Electri: Comoany, ;
j 42 Docket No. ER77-578; and Louisiana Power & Light Cocoany, Docket No. ER77-1 43 533. I have also testified before the Public Service Commission of Kentucky 44 and the Texas Public Utility Commission in both wholesale and retail rate
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- 45 proceedings.
46 47 Q 3Y WHOM IS SOUTHERN INGINEERING COMPANT OF GEORGIA RETAINED IN THIS PRCCEEDING?
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- 49 A Southern Engineering is retained by Oglethorpe Electric Membership Corporation i 50 f
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1 (0EMC). Witnesses Gross, Springs, Hill, Ewert, Alexander and I will testify 2 for OEMC in this proceeding.
3 4Q WHAT WAS YOUR ASSIGNMENT IN THIS PROCEEDING?
5 6A I was to review the direc t testimony and exhibits and other available 7 information of Georgia Power Company (GPC or Co=pany) concerning the cost to 8 serve GPC's wholesale customers. Specifically, I was to consider whether the 9 methods employed by GPC for Per'.od 11 to develop the rate base, operating 10 expenses, taxes and cost of capital shown in the Company's filing were proper 11 and in accordance with Commission precedent and sound rate making procedures.
12 13 Q WOLTLD YOU PLEASE SCD!ARIZE TEE TESTIMONY THAT WILL BE GIVEN BY THE OTHER 14 OE"C UITNESSES IN THIS PRCCEEDING.
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16 A Mr. Gross is providing testimony regarding the proper treatment of GPC's in-17 vestment in Plant Hatch Unit No. II, the proper classification of production 13 O&M expense into den 2nd and energy cocponents, the impropriety of specifically 19 assigning a portion of the Pride Transloader investment directly to partial 20 requirements customers, and the design of partial requirement rates. Witness 21 Springs is testifying on the proper calculation of back-up energy costs and 22 the appropriate treatnent of the Southern Company pool transactions in this 23 proceeding. Mr. Hill, who is Division Manager of Power Supply and Engineering 24 for OEMC, is presenting the practical aspects of the partial requirements
( 25 billing procedure and OEMC's current load projections and its forecasted 26 future partial requirenents purchases. Dr. Ewert presents testicony on the fair 27 rate of return. Finally, witness Alexander is providing testimony regarding 28 the Account 281 credit to rate base and the incorporation of all OEMC recom-29 nended adjustments into the allocated cost of service study.
30 31 Q PLEASE SO2!ARIZE THE RESULTS OF YOUR ANALYSIS OF THE COMPANY'S FILING IN 32 THIS PROCEEDING.
33 34 A The company Fas unreasonably inflated its cost of providing service to its 35 wholesale custccers by improperly treating the following ite=s for rate 36 making purposes:
37 38 1. Contrary to established Comaission policy, GPC has functionaliced 39 its general plant on a basis other than wages and salaries.
40 41 2. Contributions to EPRI and EEI have been erroneously charged to 42 wholesale custocers.
43 44 3. In an attemp t to inflate its cost of capital, the Company has 45 requested an equity return on its unacortised inres:nen: :2::
46 credit which was actually contributed by its cust: ers.
47 43 4 The 43-day : ash working capital formula of 12.5% of :otal 49 0&M expense less purchased power relied upon by OPC si;nifi:antly 50 W-
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l overstates its actual cash working capital requirement as shown 2 by a lead-lag study.
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4 5. The Company unreasonably inflated its claimed test period income 5 taxes by: a) failing to properly synchronize its interest for tax 6 deduction purposes with the debe component of its requested return, 7 b) witholding the benefits of its consolidated income tax savings 8 from the wholesale customers, c) failing to properly reflect its 9 income taxes deferred in prior years - credit in its calculation 10 of normalized' income taxes, and d) adding to taxable income an 11 amount claimed to be reversing prior years' flow through of tax 12 benefits related to certain capitalized items related to construction.
13 14 Q E0'..' WAS GENERAL PLANI FUNCTIONALIZED BY GPC?
15 16 A As shown on page 26 of the Company's Statement "M", Period II, approximately 17 eighty-two percent of the total net general plant was functionalized on the 18 basis of wages and salaries. However, part of " Account 389, Land and Land 19 Rights, all of Account 392, Transportation Equipment and all of Account 399, 20 Other Tangible Equipment have been specifically assigned to functions and/or 21 the partial requirements customers. The transportation equipment was assigned 22 to the transmission and distribution functions. The remaining amounts 23 which were specifically assigned were related to the Company's Pride 24 Transloader operated by Company personnel in the coal handling process.
( 25 26 There was no discussion by Company witnesses of the process used in 27 functionalizing these general plant amounts except for a discussion of the 28 treatment of the Pride Transloader. There was evidently no analysis of each 29 individual account to determine what amounts within that account was 30 specifically used in the production function and that used in functions 31 other than production.
32 33 Q WHAT DO YOU FEEL IS THE MOST REASONA3LE METHOD OF FUNCTIONALIZING GENERAL 34 PL/.NT IN THIS CASE?
35 36 A The Commission has recognized that general plant is most closely related 37 to labor and I reco==end using labor ratios to functionalize general 38 plant in this case. In Opinion No. 730, Sierra Pacific Pcwer Ccmoanv, 39 Docket No. E-8224, The Commission found:
40 41 "Ue find that both general and coc=cn plant should be 42 functionali:ed with factors derived from wages and 43 salaries of the =2jor functions, and therefore we accept 44 Staff's adjustment of Sierra's rate base. There is
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45 no substantial reason for functionalizing general and 46 common plant via different f actors, and furthermore, 47 the very nature of general and cocmon planc (administrative 48 facilities) is more conducive to functionalization with 49 factors derived from wages and salaries of the =ajor functions."
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1 More recently the Commission, in Order No. 13, Idaho Power comoany, issued 2 May 4, 1978, reaffir=ed the fact that the use of labor ratios is the most reasonable method of functionalizing general plant. In that same order, the 3
4 Commission also firmly reiterated the fact tha t the filing company 5 bears the burden of proving the methods used in its cost of service study 6 are not only just reasonable, but are more reasonable than the methods 7 supported by Staf f and/or Intervenors.
8 9 GPC has not only failed to meet the burden of showing its method to be 10 more reasonable than use of wages and salaries for functionalizing total 11 general plant, it has not shown its pick and choose method to even be 12 reasonable. For instance, the Company has neither shown nor claimed to 13 have made studies which would indicate whether or not there are amounts 14 included in the eleven accounts which make up general plant which serve no 15 production function at all. The largest account by dollar volume, Acccount 16 390, Structures and Improvements, may very well include huge sums of invest-17 nent for district transmission and distribution crew headquarters, pole yards 18 and equipment, transmission and distribution equipment warehouses and storage 19 yards, local collection offices and other facilities which provide no production 20 function whatsoever. While it is obvious that the Pride Transloader is used 21 by employees to perform a production function, it may be this piece of 22 equipment which makes the 52% shown on page 26 of Statement "M", Period II, 23 Column 13, line 16, which is the percentage of salaries and wages devoted f 24 to the production function, applicable for functionalizing net general 25 plant to the produc tion function. In any event, to single out such an ite:
26 for specific assignment to functions sans,a thorough review of the amounts 27 included in each of the eleven general plant accounts for similar treatment 23 is highly unreasonabic and should be rejected. This is especially true 29 in establishing partial requirements rates where the only distinction which 30 must be made is between those facilities serving a production function and 31 those serving all other functions.
32 33 Finally, the Commission in Opinion No. 20, Minnesota Power and Light Company, 34 recently indicated its fut tre policy regarding this issue when it said:
35 36 "On further consideration of this problem we are of the opinion that 37 General Plant, covered by Accounts 389-399 in the Commission's 38 uniform system of accounts for public utilities and licensees, 39 should properly be allocated on the basis of labor costs...and i 40 we require that labor ratios be used in allocating general plant 41 here and in succeeding cases."
42 l 43 For the reasons listed above it is my opinion that the most reasonable 44 method, and in fact the only method shown to be reasonable and this 45 proceeding, for functionalizing general plant is the use of tha labor 46 ratios. ; have shown the proper functionalization on my Exhibit No. (J35-1) .
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l Opinion No. 19, Carolina Power and Licht Company, issued August 2, 1973, 2 addressed this same arguement and f ound this interpretation be be in error 3 as follows:
4 5 "CP6L's witness based his interpretation of the statutory require-6 ment on an excerpt from a House committee report. '4e agree with 7 the argucment by Electricities that Congress did not intend in its 8 enactment of Section 46(.f)(2) to require the allowance of an 9 equity return on ADITC. Rather, it appears clear that a sharing of 10 the benefits was intended and that such sharing is most properly 11 accomplished. . . . .if the company is permitted an opportunity to earn 12 the overall rate of return on the accumulated balances."
13 14 Q UIL\T IS THE EFFECT OF NOT DEDUCTING TRESE AMOUNTS FROM RATE BASE NOR 13 INCLUDING THEM IN THE CAPITAL STRUCTURE AS ZERO COST FUNDS?
16 17 A The effect is to allow the Company to earn its overall' cost of capital 18 on this amount. This overall cost of capital or rate of return is, 19 of course, made up of the cost of long-term debt, preferred stock and 20 a return on common equity and, in my opinion, is certainly. sufficient to 21 meet the requirements of the IRS.
22 23 Q PLEASE EXPLAIN YOUR ADJUSTMENT RELATING TO INTEREST EXPENSE DEDUCTI3LE 24 FOR INCCME TAX PURPOSES.
25 26 A There should be conformity betueen the , interest expensd deducted for 27 tax purposes on the one hand, and, on the other hand, the long tern 28 interest component used in developing the rate of return. In order 29 to accomplish this conformity, an adjustment is needed to the amounts 30 proposed as tax deductible interest expense by the Company in its 31 Period II cost of service study. These Company-proposed a cunts are:
32 33 Interest on Long Term Debt S160,232,000 34 A=ortization of Debt Discount, 35 Expenses & Premium (Net) 907,000 36 Other Interest 1,151,000 37 AFUDC - Debt (35,435,000),_
38 Total Interest Charges $126,835,000 39 40 As shown on Exhibit No. (
_JBS-2), I have computed the properly 41 synchronized interest expense by applying the weighted debt component 42 of 4.6", as testified to by witness Evert, to the total rate base.
43 44 This Cocaission has consistantly recognized the necessity to match 45 the interest expense deduction for inceme tax purposes with the 46 interest axpenses collected in the return portion of test year revenue 47 requirement.
43 49 Q '4HY 'O YCU DISAGREE *ETH THE COMPANY'S TREAIMENT OF THE INCCSE TAX SAVINGS 30 RESULTING ?RCM THE ?! LING OF A CONSCLIDATED INCCME TAX RE*CR:i?
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1 A The Company has removed the consolidated tax savings allocated to it by 2 its parent company and assigned these benefits directly to stockholders.
3 This treatment results in charging the customers for taxes which are not 4 paid by the Company and is clearly in error when measured by the standards 5 provided by the Commission in opinion No. 821, Southern California Edison 6 Company, issued September 22, 1977. In that Opinion, the Cocaission estab-7 lished the criteria to be used in determining whether or not the utility 8 customers were to receive the benefit of the consolidated tax savings. It 9 said the determining factor should be whether or not the savings resulted from 10 " business activities which are totally unrelated to the providing of electric 11 utility service." In as much as the Company does not even claim that its 12 consolidated tax savings result from business activities which are totally 13 unrelated to the providing of electric utility service, there can be no 14 question but that the customers should receive these tax savings.
15 16 The Southern Company subsidiary systems are all interconnected and 17 operated as an integrated whole and the parent company is engaged only 18 in providing services to the member companies as opposed to conducting 19 operations of its own. All taxes are paid on a consolidated basis 20 making it necessary to allocate the taxes paid to each operating utility company.
21 The total tax paid by the group is thus the total incurred in relation to 22 utility operations. In other words, the sum of the parts must equal the 23 whole. Therefore, GPC cannot be considered on its own merits apart from its 24 associated companies as far as the tax losses (gains) of the parent company
( 25 26 and/or Southern Company Services, Inc. are concerned, because these tax losses (gains) arise directly from administrative interrelationships in-27 volved rather than as a result of indep'endent utility operations of the 23 respective companies. For example, dividends on common stock paid by GPC 29 create income (not of a taxable nature) for its parent ccmpany, and fees 30 paid by GPC to Southern Services create income for the latter associated .
31 company. While both the payment and receipt of common stock dividends and 32 fees for services are determined on a system basis, they do affect the 33 individual tax expense of each operating company. This linkage is insep- ,
34 arable. Therefore, the tax expense of GpC cannot be considered in isolation 33 from the tax losses of the parent company and/or Southern Services.
L 36 37 Support for this reasoning was given on page 29 of the Initial' Decision of' -
l 38 the presiding Administrative Law Judge in Alabama Power Company, Docket t
! 39 No. E-8831, issued October 22, 1976, where he found that the customers of 40 one of Georgia's sister subsidiaries should receive the benefit of the con -
! 01 solidated tax savings as follows:
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43 "As understood, certain administrative services which are a
'44 function of Alabama's utility operation are in f act carried l
43 on for Alabama by its parent, the Southern Company. Custe-is marily, the deductibility of these expenses is transferred by ',
17 the parent company to Alabama. By means of consolidating the id return, Alabama, in effect, claims and receives the benefit of 19 the tax deduction. '
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1 There is no reason to require Alabama to receive a windfall 2 by depriving their own customers of the credit resulting fron ;
j 3 the expenses they pay; Florida and the later decisions following
- 4 it concern af filiates' and parents' tax losses arising out of 5 their separate and unrelated business enterprises. The Coanis-i 6 sion wants to ' avoid regulating one company on the basis of the It is likened i l 7 activities of others in the affiliated group.'
l 8 to the decisions which, in determining rate of return, eliminated L i 9 common equity investment in wholly non-utility business. See 47 10 FPC 341, 363. Here it is very cuch utility business, and Alabama's,
! 11 not the Southern Company's. Accordingly, the adjustment is not j 12 required."
l 13 l 14 Additionally, the Company included no showing of the calculation of
- 15 its estimated $2,100,000 alloction of the consolidated income tax savings.
j 16 Thus the unsupported statement of GPC's witness Scott that the costs and l
17 expenses giving rise to the consolidated savings are n6t charged to the l
18 ratepayer should not be relied upon in deciding this issue. Also, this 19 same contention was addressed by the Ad=inistrative Law Judge in New
_ England Power Company, Docket Nos. ER76-304, ER76-317 and ER76-498, Initial
{ 20 l 21 Decision, issued June 30, 1977, wherein he found on pages 36 and 37 as follows:
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! 23 "NEP argues that it would be unf air to give consideration to
! 24 consolidated tax savings without giving consideration to the ex-i 25 pc.uses of the parent company that made these tax savings possible.
l 26 27 However, as outlined by NEP's' witness (. Transcript p.1337),
28 subsidiaries of NEES pay dividends to the parent. The income 29 availabic to NEES from such dividends covers expenses and supports 30 the securities issued by NEES.
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} 32 Based on this source of inco=e, NEES files a consolidated 33 tax return and nilocates to each subsidiary its proportionate l share of the tax savings resulting from this consolidated return.
- 34 l 35 Thus, NEP's arguements that NEP cannot take into account these 36 tax benefits without sharing NEES expenses, is not persuasive.
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! 37 38 NEP is proposing that its customers pay higher rates to l 39 cover a tax expense that it has not incurred. This would result i
40 in an unjustified windfall for NEP and would require ratepayers
- 41 to support a non-existent expense.....
42 43 In light of the foregoing, NEP's clain'ed cost of service will be reduced by $794,000, (footnote ositted) to eliminate
! 44 l 43 any claim for unpaid taxes resulting frca the consolidated tax 46 return filed by its parent NEES."
1 47 l 43 Therefore, in computing a tax allowance to be borne by the wholesale 49 customers, GPC's tax savings of $2,100,000 due to filing a :onsolidated l
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l Federal Inccce Tax Return should be taken into account ao a credit to 2 Federal Income Taxas.
3 4 Q WILL YOU PLEASE EXPLAIN WHY A LEAD-LAG ST*JY SHOULD 3E USED TO 5 CALCULATE THE CASH WORKING CAPITAL REQUIREYENT INSTEAD OF THE 6 45-DAY FORMULA USED 3Y GPC.
7 8 A In the past, the Ceanission has allowed the companies to use 45 days 9 operations and caintenance expense less purchased power for cash working 10 capital allowance. However, opinion as to the current value of this 11 formula is changing. In the initial decision in Pacific Gas & Electric 12 Comoanv, Docket No. E-8928, issued November 4, 1976, Presiding Law Judge 13 Thomas L. Howe states:
14 15 "The difference is so great, between the results reached by the 16 actual study and that which the rule-of-thunb method would 17 yield, tha t it raises the question as to whether the rule-18 of-thumb nethod neede drastic revision. This can only be detecnined 19 by a comparison of the results in a number of cases."
20 21 A number of cases have indeed shcun the current inapplicability of the traditional 45-day formula. In Southerr California Edison, Docket No.
22 23 ER76-205, the ALJ approved lead-lag study resulted in a substantial 24 reduction below the 45-day allowance. Judge Gordon stated:
( 25 26 "Prcperly applied, the lead-lag methcd gives a more accurate 27 picture of Edison's working cash ' requirements than the 28 rule-of-thumb farcula."
29 30 In addition, the Consission found, in Cpinica No. S21, Southern California 31 Edison Cocoany, Docket No. E-8176 issued Septenber 22, 1976, that a 20.7 day 32 allowance should be used based on an analysis less rigorous than a lead-lag 33 study.
34 35 These and other cases are shewing the traditional 45-day allowance to 36 be an unreliable prcxy for the actual cash working capital required by 37 utilities today.
38 39 My own experience also indicated the currant inapplicability of the 40 45-day allowance for cash working capital. My recently filed lead-lag 41 study in Jocket No. ER77 435, Carolina ?:ver i Light Coegany(C?LL),
42 where Peried II was the calendar year 1977, showed CP&L to actuall,,
43 experienca a net lead in receipt of revenues prior to its own payment 44 for goods and services consuned in providing electric service rather 45 than a net lag.
46 47 Q PLEASE E*C) LAIN IHE CONCE?! 0F ALLOUING A CASH WORKING CA? ITAL CD}0'CNENT 43 IN THE RATE 3ASE.
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1 A The Company is required to render service to its customers on a 2 continuing basis and in so doing must employ the use of goods and 3 services on a continuing basis. Meters are read at the end of the 4 month (t) and it then requires time to prepare the bills for that 5 month (t), send them out and then receive cash payment for the 6 metered service. Thus, the Company does not norcally receive payment 7 for service rendered during one month (t) until the middle or latter 8 part of the next month (t + 1) . To the extent that the Company must 9 pay for the goods and services consumed in prov,iding service during 10 that month (t) prior to receiving payment from customers, there is a 11 requirement for an investment to be made in carrying these costs.
12 13 As an example, let us assume a 30-day period wherein service is 14 rendered, that the Company is required to make daily payments as goods 15 and services are consumed in providing the electric service and that 16 it takes a total of 30 days af ter the end of the period to prepare 17 and mail the bills and then receive the money in hand to cover the cost 18 of providing that electric service. On average the cost of providing 19 the service was paid by the Company at the mid-point of the service 20 period (15 days), but the custemer's payment was not received for 30 days 21 af ter the end of the service period. In this scenario, the Company's 22 net lag would be a total of 45 days. This is the same net lag reflected i 23 in the standard 45-day formula relied upon by many companies as an ap-24 proximation of their cash working capital requirement. Obviously, all the 25 costs upon which rates are established and the customers' bill is computed, 26 are not paid on the exact day the elec. ;i: service is rendered. Thus the 27 45- day formula must be viewed as only an estimate of the net of the leads 28 and lags of all these cost items.
29 30 One of the basic precepts of ratemaking in this country and, indeed, of 31 this Commission is that rates must be based on a matching of the revenue 32 and the costs incurred in the rendition of service. 'fhe costs included 33 by this Commission in establishing these rates are basically: operation 34 and maintenance expenses, depreciation, taxes and the cost of capital.
35 These items are all a part of the rates paid by the customer for the 36 current costs to the Company of providing service and, except to the 37 extent there are non-cash items includad or items the carrying costs of 33 which have already been provided for through rate base additions or de-39 ducticus, since they are converted to cash by the customer, they should 40 all be included in a lead-lag study to determine the actual working 41 capital requiremenc of a Company. I have therefore reflected all of these 42 items in my study shown in Exhibit No. (J3S-3) .
a3 44 Q ML\T ARE DIE RESL1TS OF YOUR LEAD-LAG ST"Df ?
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! 16 A as shown en page 1 of Exhibit No. (J3S-3), using data f rom "r. Alexander's 47 allocated cost of service study, GPC actually experiences a net lag in a3 receipt of revenues to cover current cash expenditures of only 21 days 49 rather than the claimed 43 days. This results in a cash working capital 50 s
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1 requirement of Sil 194,000 for PR customers. Any allowance of a cash 2 working capital amount greater than this would be unjust and unreasonable.
3 4Q BRI2 FLY EX? LAIN THE RATIONALE USED IN DEVELOPING THE LEADS AND LAGS IN 5 YOUR STUDY.
6 7 A Based on data supplied by the Company, I determined for each category 8 of expense the number of days f rom the time the expense was incurred in 9 providing the elect _ric service until the payment for that expense was made.
10 I then determined the numb er of days from the time service was rendered 11 until payment f or that was received. The difference between these two 12 numbers produced the overall net lead or lag experienced by the Company.
13 14 I have divided my study into three areas - 0 & M expenses, taxes, and cost 15 of capital. I have also shown a subtotal for 0 & M expenses and taxes 16 and then a total including the cost of capital items. For each area I 17 assumed that the expense or liability is incurred continously during the 18 entire period in question or on the average at the midpoint of the period; 19 1.e. on the 180th day of the year if the period is a year.
20 21 For example, let us consider the lag for federal income tax. GPC pays federal 22 income tax on a quarterly basis. The first quarter payment is due on 23 April 15 which allows for a lag of 60 days, 45 days from the average date 24 on which the tax was incurred plus the 15 days remaining after the end of
( 25 the quarter before payment is due. The three other quarterly payments are 26 due June 15, September 15, and December 15, respectively. Each of these 27 dates produce a lag of 30 days, 45 days' frca mid-quarter to the end of 28 the quarter less 15 days for payment prior to the end of the quarter. The 29 weighted average lag that results is 37.5 days making the conservative 30 assumption that one-fourth of the Period II tax liability will be paid 31 each quarter.
32 33 In determining the lag for fuel expense I first grouped the fuel expense 34 dollars acc6rding to ths terms of payment as provided by the Company in its 35 data response number 3-27. I then computed the number of days lag from 36 receipt of fuel until pay =ent was made for each grouping. A weighted average 37 days lag was then computed for total fuel expenses.
38 39 I have followed this basic methodology for determining the lag for each cost 40 ,
item shown in my study.
41 42 I have also fetermined that the Company experiences a 44.17 day lag in 43 receiving payment from its wholesale customers. This revenue lag is based 44 on the actual experience for each month of the twelve month period ended 45 December, 1977 as provided by the Company in response to intervenor data 46 requests.
47 43 Q IN YOUR EXHI3IT NO. (JBS-3) YOU HAVE INCLUDED FIDERAL TAXIS, XID THE 49 COST OF LONG TEIM 3E3T, PREFERRED STOCK MiD COMMON STCCK. ?LIA32 EX? LAIN 50 WHY YOU INCLUDED THESE ITEMS.
(s 1 A As I explained above, each of these itens represents a cost that the 2 Company must pay and that is theref ore included in the revenues collected 3 f rom the customers just as any other cost to the Company. The collection 4 of the dollars associated with these items represents, therefore, cash 5 which the Company has on hand, contributed by the customers to meet its cash 6 needs. These funds cust be used in this =anner since they are not capital 7 contributions for which there would have to be a rate base reduction nor 8 investments in short-term interest-bearing instruments for which there would 9 have to be an interest income credit to the cost of service.
10 11 Finally, I want to reiterate that these items represent costs which 12 have been used in matching the revenues to be paid on an annual basis 13 with the costs incurred in rendering service during the same period 14 and, as such, none of them are contributions of capital, but rather are 15 payments for the cost of capital. In the past these items have many times 16 been reviewed in the context of making offsets or additions to the 17 allowance under the 45-day for nla rather than in the context of a full, 13 detailed study of the actual cash working capital require =ents of a Company.
19 As shown above, when reviewed in the context of a comprehensive lead-lag 20 study, it is necessary to include the payments and receipt of revenues 21 for each of these cost items.
22 23 Q WIL\T OTHER ERRORS DID YCU FIND IN TPI COMPANY'S PERIOD II INCOME TAN 24 CALCULATIONS?
( 25 26 A There are two other cajor errors in the, Company's tax calculations shown 27 in Statement "J". First, the Company failed to properly reduce its 23 normaliced income taxes by the Income Taxes Def erred in ?rior Years - Credit.
29 While the deferred in prior years - credits for state and federal taxes are 30 shown on page 2, lines 40 and 36 respectively, they are used for " explanatory" 31 purposes only and are not reflected in the taxes charged in the Company's 32 Statement M cost of service study. The taxes actually used for ratenaking 33 purposes in this proceeding are those shown on lines 33 and 54 on page 2 of 34 S ta temen t J . These are the taxes used by Mr. Newton in his allocated cost 35 of service study in Statement M nodified only to reflect the a,nortication 36 of investment tax credit as a reduction in expenses rather than a 37 reduction in taxes. These aaounts shown on lines 38 and 34 have not been 38 properly reduced by the deferred in prior years - credits.
39 40 Exhibit No. (J3S-4) is a copy of GPC's Period II Statement J, pages 1 4l and 2, columns 1-3 adjusted only to shou the proper treat:ent of the Income s 42 Taxes Deferred In Prior Years - Credit. As shown by this Exhibit, this error 4' alone results in an overstatement of taxes of S9,762,000 on a total coepany 45 basis. This Exhibit also shows that, as a result of this error, the Income
~4s Tax Charged to Operations portions of the tax " Break Jown" for state and 46 f ederal taxas shown on lines al and 39 are wrong.
47 43 The other aajor error is shown on the Company's Period I! Statement J, 69 page 1, lina 13. Here the Ocepany reflects an addition to tax 2ble inco=e l 30 for the one so-called "ttning" difference between book incere and taxable 1
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1 income which it chose to flow through to customers. The taxes associated 2
with all other such claimed " timing" dif ferences were normalized. Even 3
this one item which reflects the difference between straight line tax de-4 Preciation and straight line book depreciation was adjusted by the Company 5
to eliminate that portion of the dif ference which would have benefited 6
the custcmers. Thus GPC has narrowed this " flow through" to those timing 7
differences which have the effect of adding to the taxes charged to the 8 customers. This is patently unjust and unreasonable especially in light of 9
the fact that this Company fought so diligently for "comprehcnsive inter-10 period income tax allocation" (normalization), which was approved by the 11 Commission in its 530 series of Orders, only to now pick and choose to 12 normalize just those items which allow it to increase the taxes charged 13 to its customers. If the concept of normalization is to be employed, it 14 should be employed uniformly not just to those items which benefit the 15 Company.
16 17 in support of its selective approach, the Company claims that this la item, which now accrues to the detriment of the customers, is the 19 result of benefits received by the customers in past periods. This claim, 20 however, is only that and is not substantiated by record evidence which 21 links the year-by-year accumulation of these benefits by component part to the transfer of same to the customers through specific rates charged 22 these customers. Even assuming, for the sake of arguement, this could be 23 24 done, it could in no way justify the proposed chicken-plucking approach 25 which ef fectively stacks the deck against the customers. Thus, this 26 selective " flow through" of just those itcas which would lower the cost 27 f service if normalized should not be hilowed.
28 29 Q DOES T!!IS CONCLUDE YOUR PREPARED TESTI)!ONY AT TIIIS TI31E?
30 31 A Yes.
32 33 34 35 36 37 38 39 40 41 42 ,
43 44 45 46
- 47 43
( 19 30 l
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