ML19308A392
| ML19308A392 | |
| Person / Time | |
|---|---|
| Site: | South Texas, Comanche Peak  |
| Issue date: | 07/31/1978 |
| From: | Solomon J KANSAS GAS & ELECTRIC CO. |
| To: | |
| Shared Package | |
| ML19208C305 | List:
|
| References | |
| ER77-578, NUDOCS 7909260084 | |
| Download: ML19308A392 (11) | |
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- KA'?SAS GAS & ELECTRIC COMPA'iY FERC DCCKET NO. IR77-578 PREPRED TESTIMONY OF J. 3ERIRAM SOLOMON k-1Q PLEASE STATE YOUR NAME AND ADDRESS.
2 3 A My nane is J. Bertram Solomon. My business address is 1000 Crescent 4 Avenue, N.E., Atlanta, Georgia 30309.
5 6Q PLEASE CUTLINE YOUR FOR'ML EDUCATION.
7 8A I received the degree of :6 ster of Business Administration from Georgia 9 State University in 1973. My area of concentration was Finance. I 10 also received the degree of Bachelor of Science in Industrial Management 11 frca the Georgia Institute of Technology in 1972.
12 13 Q PLEASE STATE YCUR PROFESSIONAL EXPERII';CE.
14 15 A As a Cooperative student at Georgia Tech, I gained approximately two 16 years' work experience as an assistant engineer in an industrial 17 production setting. After my graduation from Georgia Tech in 1972, 18 I worked approxi=ately one and one-half years as a program canager for 19 a management consulting firm and for another one and one-half years 20 as a project analyst for a resort development firn. I was employed by 21 the Southern Engineering Company of Georgia, my present employer, in 22 January 1975. Since that tine, I have had assignaents in both the 23 retail and wholesale rate departments of my Company, primarily in 24 the area of electric utility rates. In the retail area I have participated 25 in the preparation of rate increase filings for both G & T and distribution 26 rural electric me=bership cooperatives as well as the determination of 27 revenue requirements and the proper rate design for unregulated rural 28 electric cembership cooperatives. My primary activities, however, have 29 been in the wholesale area where I have participated in the analysis of 30 approxinately one and one-half dozen Federal Energy Regulatory Cor:nission 31 and Federal Power Commission filings of private utilities operating in 32 eight different states. I also participated in the preparation of testimony 33 and exhibits for several of these rate filings. Additionally, I have par-34 ticipated in the preparation of retail and wholesale allocated cost of service 35 studies and power cost projections.
36 37 Q HNTE YOU EVER TESTIFIED IN OTHER COMMISSION PROCEEDINGS?
33 39 A I have testified before the Co::aission in proceedings involving the 40 Public Service Ceccany of Indiana, Docket No. ER76-149; Georeis Prwar 41 Ceccan1, Docket Nos. E-9091, E-9521 and ER76-537; end Carolina Power 42 & Li2ht Ccaranv, Docket Nos. ER76-495 and ER77-453. I have also tescified 43 before the Public Servica Co=ission of Kentucky and the Texas Public 44 Utility Cc=aission in both wholesale and retail rate proceedings.
45 46 Q 3Y WHOM :S SCUr/.E?_'; ENGINEERING COMPANY OF GEOROIA RETAINED IN IRIS 47 PROCEIDING?
43 49 A Southern Ingineering is retained by the Cooperativa Intervenors. Witnesses 30 Gross, Iwert and I will testify for the Cooperatives in this proceeding.
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1Q WHAT WAS YOUR ASSIGNMENT IN THIS PROCEEDING?
2 3 A My assignment was twofold: First, I was to review the direct testimony 4 and exhibits and other available information of Kansas Gas & Electric
- 5 Company (KG&E or Company) concerning the cost to serve KG&E's whole-
! 6 sale Cooperative customers. Specifically, I was to consider whether
, 7 the methods employed by KG&E for Period II to develop the rate base
! 8 and operating expenses shown in the Company's cost of service study
! 9 were proper and in accordance with Comnission precedent and sound I
10 ratemaking procedures. Secondly, I was to prepare an allocated cost 11 of service study which includes the adjustments to the Company's cost 12 of service study found to be necessary by witnesses Gross, Ewert, and me
- 13 and which accurately reficcts the rates of return which would be earned 14 under the Company's present whoicsale electric tariff during the Period l 15 II test period.
16 17 Q WOULD YOU PLEASE SCS!ARIZE THE TESTIMONY THAT WILL BE, GIVEN BY THE i 18 OTHER COOPERATIVE INTERVENOR WITNESSES IN THIS PROCEEDING.
19 20 A Mr. Gross is providing testimony relating to " rolled-in" transmission, l 21 demand allocation factors, fuel stock, and rate design. Dr. Ewert will 22 testify concerning rate of return.
4 23 j 24 Q 25 WOULD YOU 3RIEFLY SDS!ARIZE THE CONCLUSIONS WHICH MR. GROSS, DR. EWERT AND YOU HAVE REACHED AS A RESULT OF STUDYING KG&E'S COST OF SERVING ITS i
26 WHOLESALE CUSTOMERS?
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{ 28 A The cost of service study presented by the Company in this proceeding 29 significantly overstates the cost of providing service to the Cooperative !
- 30 customers. The following major errors have been made by KG&E in its
- 31 filing, necessitating adjustments
32 33 Witness Cross 34 1. KGSE did not " roll-in" transmission in its cost of service i 35 study.
36 37 2. KG&E has improperly computed its Period II Demand Allocation 38 Factors.
! 39 40 3. The Company has erred in its estimation of required fuel stock 41 balances for Period II.
42 43 4. KCSE has improperly designed its proposed races.
44
, 45 Witness Evert 46 1. The Co=pany has requested an unfair rate of return on equity.
47 The Cempany should be allowed a common equity return in the 48 range of 11.53% to 12.137..
, 49 Witness solceca i 50 1. KG&E has inflated its test period plant in servita, accenulated
depreciation and depreciation expense by using the average
( 1 2 of beginning and end of year balances in its calculatiens 3 rather than the thirteen monthly balances.
4 5 2. The Company has included an unreasonable and unjust amount 6 of cash working capital in its test period rate base.
- 7 8 3. The other working capital items claimed by KCSE were either 9 erroneously charged (credited) to the wholesale customers
- 10 or overestimated.
11 12 4. KG&E erred in its functionalization and allocation of general 13 Plant and A&G expenses.
14 15 5. All production OEM expenses were erroneously classified as 16 energy related with the one exception of a portion of purchase power.
17 18 6. The Company made a mathematical error in its addition of the 19 distribution plant specifically assigned to Cooperatives.
20 21 7. KG&E has proposed the use of an unjust and unreasonable 22 automatic tax adjustment clause.
23 24 8. The interest expense for tax deduction purposes was not 25 properly synchronized by KGLE with the debt component of its 26 requested return.
t 27 28 Q HCW WERE THE ISSUES LISTED ABOVE TREATED IN YOUR COST OF SERVICE STUDY?
29 30 A The Pcwer Supply Production (PSP) and Power Supply Transmission (PST) 31 demand allocation factors as computed by the Staff and endorsed by 32 Mr. Gross were substituted for the Company's PS? and PST demand allocation 33 factors.
34 35 The other expense and rate base adjustments recommended by Fr. Gross and i 36 me were made at the appropriate places in my cost of service study and 37 were clearly marked as adjustments.
38 39 Dr. Ewert's reco= mended overall rate of return on rate base at 127 on 40 coccon equity was used in the determination of the allowable increase 41 shown an Exhibit No. (JBS-1) , page 2. The allowable increase under 42 the price rqueeze criteria was also shown using the lower end of Dr.
43 Ewert's recocaended zone of reasonableness of 11.35% on coc=on equity.
44 45 Q. I SECW YCU A DOCUMENT MARKED EXHI3IT NO. (JBS -l) . WAS TMIS EXHIBIT 46 PREPARED BY YOU?
i 47 48 A. Yes.
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50 Q. ? LEASE IXPMI'I THIS ETHI3IT.
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- ( l A. This exhibit reflects the adjustments to the Company's allocated cost of service study shown in its filed Statements M and N found necessary 2
3 by Cooperative witnesses Gross, Ewert and me. This exhibit contains 4 for Period II a summary of the allocated revenues and return on rate 5 base under present rates and the allocated revenues, return on rate 6 base, dollar increase and percent increase under proposed and allowable 7 rates as adjusted by Cooperative Intervenors; a rate of return report
, 8 showing the computation of income taxes and the rate of return on rate 9 base under present rates; an operating and maintenance expenses report; 10 a rate base report; a net cost of plant in service report; and the allo-11 cation factors used by the Cooperative Intervenors.
12 13 Q. WHAT WAS THE EFFECT ON THE COOPERATIVE INTERVENORS REVENUE REQUIREMENT 14 0F MAKING YOUR CHANGES TO THE COMPANY'S COST OF SERVICE STUDY?
15 16 A. As can be saen on page 2 of Exhibit No,' (JBS-1), the adjusted rate of 1 17 return under the present rates during Period II would be 4.38%. Before 4
18 the corrections recommended by Mr. Gross and me, the ,Cocpany showed a 19 rate of return of 3.75%. Using the rate of return at the lower end of l 20 Dr. Ewert's recoc= ended zone of reasonableness, my adjusted cost of 1 23 service shows that revenues from the Cooperatives should be increased l 22 by only $1,861,082, (23.99%) as opposed to the Company's reauested in-23 crease of $2,423,499 or 31.27%.
24 Q WILL YOU PLEASE EXPLAIN WHY THE AVERAGE OF THE THIRTEEN PONTHLY BALANCES
, 25 SHOULD BE USED TO DETERMINE THE PERIOD II PLANT IN SERVICE RATHER THAN
( 26 THE AVERACE OF THE BEGINNING AND END OF YEAR BALANCES?
j 27 28 A In determining the rate base, KG&E has used the beginning and end of 29 year average for electric plant in service during the year. However,
! 30 it has been generally recognized by this Commission that the proper 31 synchronization of revenues, expenses and electric plant in service is 32 best accomplished through the use of the thirteen month average method.
33 Billing is done on a monthly basis, therefore, a monthly average is the j 34 most accurate method for the synchronization of expenses during the
' 35 month. The average of the thirteen electric plant in service end of 36 month balances accomplishes this monthly averaging, since the beginning 37 balance and the ending balance for each month during the test period 38 are weighted equally in the computation. The Company has estimated the 39 other important ingredients in its Period II cost of service on a montaly 1
40 basis since the major expenses are directly related to additions and 41 retirements of property as well as the scheduling of maintenance.
42
) 43 By using the average of the beginning and end of test period balances in 4
44 its calculation of average gross plant in service, KG&E has treated olant '
45 additions during the year as though they were in service for six months 1
46 of the year. The Company's own estimated in-service date for the Jeffrey
! 4/ Energy Center Unit No. 1 is during the very last month of the :est ceriod.
48 Thus, the Company has significantly overstated its Pericd II plan: i' n service.
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1Q DID KG&E PROVIDE ENOUGH INFORMATION TO COMPUTE ITS PLANT IN SERVICE 2 ON TIE BASIS OF TIE THIRTEEN MONTHLY BALINCES?
! 3 4A No, the Company's response to the Staff's data request (OEPR-2 and 5 OEPR-4 asking for the thirteen monthly balances) provided the gross 6 plant in service balances on a quarterly basis only. The balances 7 for accu =ulated depreciation were given only on a beginning and end 8 of year basis. In addition, the Company used the average of the 9 beginning and end of year depreciable plant balances with.an adjustment 10 for Jeffrey En'rgy Center Unit No. 1 in computing its test year 11 depreciation c. pense.
12 13 Q WHAT ADJUST'ENTS DJ TNi MKE TO PROPERLY SYNCHRONIZE THE TEST PERIOD 14 PIM'T IN SERVICE, ACCb. <, DEPRECL1 TION AND DEPRECIATION EXPENSE?
15 16 A Just as did the Staff, lacking the monthly balances, I averaged the 17 5 quarterly balances of gross plant in service with an additional 18 adjustment to ti=e-weight the investment in the Jeffrey Energy Center 19 Unit No. 1 for only one month since it was estimated by the Company to be 20 in service for only one month during the test year. This time-weighting 21 of the Jeffrey Unit was accomplished by including it in rate base at 22 one-thirteenth of its estimated origisal cost.
23 24 Unlike the Staff, however, I further adjusted the depreciation expense 25 and accu =ulated depreciation to more closely match the adjusted plant
- ( 26 in service. Since KG&E did not provide the quarterly accu =ulated
. 27 depreciation or depreciable plant, it was necessary to begin with the 28 Company's beginning and end of year average depreciable plant and pro-29 rate it into quarterly balances based upon the quarterly gross plant 30 balances. It was then possible to compute the quarterly depreciation 31 expense and quarterly accumulated depreciation balances. I also adjusted 32 these itens to reficct Jeffrey No. I being in service for only one month.
33 34 Q I SHOW YOU A EOCUMENT MARKED EXHIBIT NO. (J3S-2). WAS Tt'IS EXHIBIT 35 PREPARED BY YOU?
36' 37 A Yes.
38 39 Q WILL YOU PLEASE EXFI).IN THIS EXHI3IT.
40 41 A The calculations to more properly time-weight KG&E's additions to plant 42 in service and to more properly match the test period depreciation expense 43 and accu =ulated depreciation with plant actually in service are shown on 44 this exhibit. These calculations result in reductions in gross plant, 45 accenulated depreciation and depreciation expense of s22,681,279, S467,192, 46 and S752,543 respectively.
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! 48 Q PLEASE EXPLAI'I THE CONCEPT OF ALLOWING A CASH WORKING CAPITAL COMPONENT 49 IN THE RATE 3ASE.
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( The Company is required to render service to its customers on a 1 A 2 continuous basis and in so doing must employ the use of goods and 3 services on a continuous basis. Meters are normally read at the 4 end of the month (t) and it then requires time to prepare the bills 5 for that month (t), send them out and then receive cash payment for 6 the metered service. Thus, the Company does not normally receive 7 Payment for service rendered during one month (t) until the middle 8 or latter part of the next month (t + 1). To the extent that the 9 Company cust pay for the goods and services consumed in providing 10 service during that month (t) prior to receiving payment from 11 customers there is a requirement for a short-term investment to 12 be made in carrying these costs. .
13 14 As an example, let us assume a 30-day month wherein service is 15 rendered, that the Company is required to make daily payments as 16 goods and services are consumed in providing the electric service 17 and that it takes a total of 30 days after the end of the month 18 to prepare and mail the bills and then receive the money in hand 19 to cover the cost of providing that electric service. On average 20 the cost of providing the service was paid by the Company at the 21 mid-point of the service period (15 days), but the customer's 22 pay =ent was not received for 30 days af ter the end of the service 23 period. In this scenario, the Company's net lag would be a total 24 of 45 days. This is the same net lag reflected in the standard 25 45-day formula relied upon by many companies as an approximation
( 26 of their cash working capital requirement. Obviously, all the costs 27 upon which rates are established and the customer's bill is computed 28 are not paid by se Company on the exact day the electric service 29 is rendered. Thu:, the 45-day formula must be viewed as an estimate of 30 the net of the leads and lags of all these cost items.
31 32 As pointed out by the Staff and as I discussed above, one of the 33 basic precepts of ratemaking in this country and, indeed, of this 34 Cocaission, is that rates must be based on a matching of the revenues 35 and the costs incurred in the rendition of service. The costs included 36 by this Commission in establishing these rates are basically: operation 37 and maintenance expenses, depreciation, taxes and the cost of capital.
38 These items are all a part of the rates paid by the customer for the 39 current costs to the Ccepany of providing service and, except to the 40 extent there are non-cash items included or items included the carrying 41 costs of which have aircady been provided for through rate base additicas 42 or deductions, since they are converted to cash by the customer, they 43 should all be included in a lead-lag study to determine the actual 44 working capital requirement of a Ccmpany.
45 46 Q WILL YCU ? LEASE EXPLAIN W! A LEAD-LAG STUDY SiiOULD 3E USED TO CALCULiTE 47 IliE CASli WORKING CAPITAL REQUIREFE}.*r INSTEAD OF TiiZ 45-DN! ?CRMULA USED 48 37 gcsg 49 ,
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'( 1 A In the past, the Co=nission has alicued conpanies to use 45 days 2 operation and maintenance expense less purebased power for cash 3 working capital allowance. As indicated by Staff, however, opinion 4 as to the current value of this formula is changing. In the initial 5 decision in Pacific Gas & Electric Cemoanv, Docket No. E-8928, Presiding 6 Law Jud3 e Thomas L. Howe states:
7 3 "The dif ference is so great, between the results reached by the 9 actual study and that which the rule-of-thumb method would yield, i 10 that it raises the question as to whether the rule-of-thumb method 11 needs drastic revision. This can only be determined by a comparison 12 of the results in a acaber of cases."
13 14 A number of cases have indeed shown the current inapplicability of the 15 traditional 45-day fornula. In Southern California Edison, Docket No.
16 ER76-205, the ALJ approved lead-lag study resulted in a substantial 17 reduction below the 45-day allowance. Judge Gordon stated:
18 19 " Properly applied, the lead-lag method gives a more accurate picture 20 of Edison's working cash requirements than the rule-of-thumb 21 formula."
22 23 In addition, your Honor, in Carolina Power & Light, Docket No. ER76-495, 24 found that use of the 45-day allowance would cause an unjust result.
, 25 Only 2 days cash working capital was found to be just and reasonable 26 on the basis of the lead-lag study results included in the initial 27 decision in that Docket.
28 29 These and other cases ate shouing the traditional 45-day allowance to 30 be an unreliable proxy for the actual cash working capital required by 31 utilities today.
32 33 My own experience also indicates the current inapplicability of the 34 45-day allowance for cash working capital. My recently filed lead-lag 35 study in Docket No. ER77-485, Carolina Power & Light Comoany (CP&L),
36 where Period II was the calendar year 1977, showed CP&L to actually 37 experience a net lead in receipt of revenues prior to its cwn payment 38 for goods and services consumed in providing electric service rather 39 than a net lag.
40 l 41 Q DO YOU AGREE WITH STAFF WITNESS LEFl!AN THAT, SINCE THE CCM?ANY WAS 42 UNRES?CNSI*/E TO STAF7'S REQUEST FOR DATA NECESSARY TO PERFCPl! A 43 CCli?REHENSI'IE LEAD-L\G STUDY, NO CASH WORKING CAPITAL SECULD 3E ALLOWED 44 IN THE COST OF SERVICE USED IN THIS ?RCCEEDING?
45 46 A Yes, the Cecnission has traditionally considered the 45-day allowance to 47 be a reasonable approximation of the cash working capital requirements of 48 electric utilities. Thus, the Commission, on several occasions, (notably 49 in Opini:n No. 733, Public Service Ceccanv of Indiana (?CSI) has stated 30 that to challenge the results of the 45-day allowance a lead-lag study is i
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required. Obviously the Company has decided that ;by relying on these
( l 2 former statements of the Cornission and denying access to the informa-3 tion necessary to conduct a lead-lag study for KGLE, which only it has, 4 it can avoid having any adjustment made to its claimed cash working 5 capital. In my opinion, to allow this strategy to rule would be highly 6 unjust, unreasonable and contrary to the public interest. My opinion 7 is borne out by the Co= mission in Opinion No. 13, Idaho Power Comoany, 8 and especially by Commissioner Holden when, in his concurring statement
! 9 regarding the ALJ's treatment of a procedural point n the basis of his 10 interpretation of the Commission's intentions in Opinion No. 783, PSCI, 11 as follows: "It is only required that a method used by the company be 12 reasonable; that a 'more reasonable' method =ay exist is irrelevant."
13 Regarding this quote from the ALJ's initial decision Co=missioner Holden says:
14 "The Commission in the Order above, has adopted the view --
15 advanced by Staff -- that this ' flies in the f ace of the 16 Federal Power Act and cannot be a correct reading of the 17 Public Service Comoany of Indiana. decision.'" - .-
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t 18 19 ".....I entirely agree. If the recited view of Public Service 20 comoany of Indiana were to hold, we would have established 21 regulatory criteria antagonistic to the regulatory mission, 22 as defined in the statutes, and hostile to its purposes. The 23 view in PSC1, if taken literally, would not merely fail to 24 give affir=ative protection. It would oblige the Coc=ission 25 the agent of the public interest, to impose upon itself 26 restrictions such as to foredoom that public interest to 7
27 defeat."
28 29 For the reasons discussed above, I also recommend that no cash working 30 capital be allowed in the Company's Period 11 cost of service study.
31 32 Q. ARE YOU FAMILL\R WITH THE ADJUSTMENTS MADE 3Y STAFF WITNESS LEHMAN TO 33 THE OTHER WORKING CAPITAL ITEMS CLADIED BY KC4E7 34 35 A. Yes, Mr. Lehman has correctly adjusted the allocation of the Ccepany's 36' claimed prepayments of regulatory expenses and fuel expenses to elimi-37 nate the allocation to wholesale customers. Both of these items are 38 normally expensed as incurred and even though the Company has employed 39 the use of deferred fuel accounting for fuel adjustment related expenses, 40 it has failed to show, as it must, that its claimed 13-day cash working 41 capital allowance is insufficient to meet working capital needs for these 42 two items.' In fact, as cited above and by S:aff, IG&E refused to provide 43 sufficient data necessary to make such a determination. Thus I have also 44 adjusted my cost of service in the same manner.
45 46 Federal income tax accruals, as well, should be included in a lead-lag 47 study and since I have eltninated the Company's claimed cash working 48 captial allowance entirely, it would be improper :o farther reduce the 49 rate base by these accruals. Therefore, I have treated this ites as 50 Mr. Lehman.
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( 1 Mr. Lehman did not, however question the Company's exorbitant fuel 2 stock estimates. As shown by Mr. Gross these claimed fuel stocks 3 should be reduced to a more normal amount. I have adjusted my cost 4 of service according to the recommendation of Mr. Gross on this issue 5 and have allocated his recommended fuel stock allowance as Staf f did 4
6 using the demand allocation factor for the production level.
! 7 8 Q. HAVE YOU REVIEWED STAFF'S FUNCTIONALIZATION AND ALIDCATION OF GENERAL 9 PLANT?
10 11 A. Yes, I have and I agree with their method of allocating general plant 12 by wages and salaries. In the past, the Commission has recognized 13 that general plant is most closely related to labor. In Opinion No.
14 730. Sierra Pacific Power Cocoany, Docket No. E-8224, The Cocmission j 15 found:
16 17 "We find that both general and common plant should be 18 functionalized with factors derived from wages and 19 salaries of the major functions, and therefore we 20 accept Staff's adjustment of Sierra's rate base. There 21 is no substantive reason for functionalizing general 22 and common plant via different factors, and further= ore, 23 the very nature of general and common plant (administra-
- 24 tive facilities) is more conducive to functionalization
- 25 with factors derived from wages and salaries of the major r 26 functions."
l 27 28 Furthermore, the Company has failed to show why general plant should 29 more reasonably be allocated on another basis.
J 30 31 Q. DO Y3U FEEL THAT THE STAFF'S METHOD OF FUNCTIONALIZING AND ALIDCATING 32 ADMINISTRATIVE AND GENERAL UPENSES IS MORE REASONABLE THAN THAT USED 33 BY KG&E?
34 4 35 A. Yes. On pages 6 and. 7 of his testimony, Mr. Lehman discusses the l
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infirmities of the Company's treatment.of A&G expenses as well as the 37 corrective measures necessary. The problem with KLG's allocation of- ;
3S the A&G expenses is that it erroneously allocated a portion of the 39 advertising expenses recorded.in Account 930.1 to the wholesale i 40 customers and erroneously treated as property related the the expenses 4 41 included in Accounts 925, 931 and 932. The wholesale customars of 42 KG&E who themselves distribute at the retail' level should not be l 43 burdened with a portion of the Co=pany's advertisieg expense since they !
44 must be free to make their own decisions concerning all aspects of this i
43 expenditure. The expenses included in Accounts 925, 931 and 932 are all i labor related and should be allocated accordingly.
46 47 1 48 Thus, I functionalized property insurance on the basis of total plant.
49 No advertising expenses or researth and development expenses have been 1 50 assi;ned to the wholesale customers. Regulatory f ees have _Seen allocated i
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2 remainder of A&G expense, 827. of total A&G, which I have allocated on 3 the basis of wages and salaries.
4 5 Q. WHAT ADJUSTMENTS HAVE YOU MADE TO THE COMPANY'S CLASSIFICATION OF 6 PRODUCTION OPERATING AND MAINTENANCE EXPENSES INTO DD!AND AND ENERGY 7 COMPONENTS?
8 9 A. I have made the same relative classification of the individual pro-10 duction expense accounts as the Staff. However, for fuel and deferred 11 fuel expense my figures are slightly dif ferent since I used those 12 figures reported by the Company in its response to Staf f Data Request 13 Item OEPR-19. KG&E's implied assumption that all production 0501 ex-14 penses, other than purchase power, are directly variable with kWh out-15 put is highly erroneous and results in an unreasonabic allocation of 16 expenses to the wholesale customers. In my review of filings before 17 the Commission, I have never seen such an assumption supported. The 18 Staff's classification of production expense accounts shown in its 19 Exhibit (S -7) is well reasoned and more closely reflects the break-20 down into fixed and variable or demand and energy related ccaponents 21 cocmonly used in the industry. This is clearly more reasonable than 22 making an unsupported assumption that all production expenses vary in 23 direct proportion to kWh output. Thus, I have used the same classifi-24 cation as Staff.
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('- 27 Q. WHAT WAS THE NATURE OF THE COMPANY'S ERROR IN ITS ASSIGNMENT OF 28 DISTRIBUTION PIANT?
29 30 A. The Company erred in its specific allocation of Distribution Plant to 31 Cooperatives. In its response to Staff Data Request Item OEPR-9, the 32 Company provides information showiag the components of the a=ount 33 allocated to Cooperatives. The Company must have erred in adding these 34 components. My cost of service study reflects the correct amount of 35 $ 191,313 instead of the $192,240 used by KG&E.
36 37 Q. WHY DO YOU RECOMMEND THE DISALLOWANCE OF KG&E'S PROPOSED TAX ADJUSTMENT 38 CLAUS E? !
39 40 A. Such a clause, in addition to being an abdication of the Commission's -
41 regulatory responsibility, is a highly unjust and unreasonable sequester 42 of the rights of the wholesale customers of the abil' ty to participate
- 43 in the constructive review of the cost basis for the charges imposed 44 upon them. Furthermore, the Commission has previously ruled against 45 such automatic adjustment clauses as this one proposed by KO&E. For 46 instance, in its approval of a settlement agreement in Arizona Public 47 Servico 00=oanv, Docket Nos. E-8621, et al; E-9280, 1E 31; and E-9031, 48 Issued September 16, 1975, wherein the Company had precosed a similar
, 49 tax adjust =ent clause, among others, the Commission said:
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"Our review of the settlement indicates that, for l purpose of clarification, we should condition our 3 acceptance of the settlement to provide that, not
- 4 withstanding any provisions contained therein, no 1 5 change in rates, other than changes pursucnt to
- 6 Cocaission approved fuel cost adjustment clauses i 7 or Commission approved research and development 8 cost adjustment clauses, shall be made by APS with-9 out compliance with Sections 35.1 and 35.13 of the 10 Regulations and Section 205 of the Federal Power 11 Act."
12 13 For these reasons I reco==end that the Company's proposed tax adjust-14 ment clause be disallowed.
15 16 Q . PLEASE EXPIAIN YOUR ADJUSTMENT RELATING TO INTEREST EXPENSE DEDUCTIBLE 17 FOR INCOME TAX PURPOSES.
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- 19 A. There should be conformity between the interest expense deducted for 20 tax purposes on the one hand, and, on the other hand, the long term 21 interest component used in developing the rate of return. In order 22 to accomplish this conformity, an adjustment is needed to the amounts 23 proposed as tax deductible interest expense by the Company in its 24 Period II cost of service study. These Co=pany-proposed a=ounts are
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'6 Interest on Long Term Debt 23,133,000
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- Other Interest 2,288,000 2S l Amortization of Premium Discount & Expenses - net 136,000 l 3 (6,132.000)
! AFUDC Borrowed 31 i 32 1 Total Interest Charges 19,475,000 33 34
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- 35 adjustment by Staff witness Lehman in which he used the weighted debt j-36 component of 3.747, from Staff witness Reed's 9.187, rate of return, i 3[ However, I have revised this interest expense by applying the weighted 3 debt component of 3.797, as testified to by witness Ewert and as shown l
39 on Exhibit No. (DCE-1), page 15 to my revised rate base of j $496,170,463 to yield a revised interest expense of S'8,304,861.
42 This Co:cission has consistantly recogni::ed the necessity to =atch 43 the interest exoense deduction for income tax ourposes with the 44 interest exoens'es collected in the return portion of test year 45 revenue requirement.
4o 47 Q. DOES THAT CONCLtvE YOUP, PREPARED TESTSIONY AT THIS T31E7
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