ML19308A398

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Testimony in Response to Tx Utils Generating Co & Houston Lighting & Power First Set of Interrogatories
ML19308A398
Person / Time
Site: South Texas, Comanche Peak  Luminant icon.png
Issue date: 12/31/1978
From: Solomon J
GEORGIA POWER CO.
To:
Shared Package
ML19208C305 List:
References
ER76-587, NUDOCS 7909260108
Download: ML19308A398 (8)
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.- GEORGIA P0rc.R CC}!?ANY LI

'( ) FFC DOCKET NO. ER76-587 PREPARED IESTIMONY OF J. 3ERTPJll SOLOMON IN BEHALF CF CGLETHCRPE ELECTRIC MEM3ERSHIP CORPORATION

,( l Q PLEASE STATE YOUR NAME A'!D ADDRESS.

2 3 A My na e is J. Bertram Solomon. My business address is 1000 Crescent 4 Avenue, N.E., Atlanta, Georgia 30309.

5 6 Q PLEASE OUILETE YOUR FORMAL EDUCATION.

7 8 A I received the degree of Master of Business Ad=inistration from Georgia 9 State University in 1973. My area of concentration was Finance. I also 10 received the degree of Sachelor of Science in Industrial Management from 11 the Georgia Institute of Technology in 1972.

12 13 Q PLEASE STATE YOL2 PROFESSIONAL EXPERIENCE.

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 pro-17 duction setting. After sy graduation from Georgia Tech in 1972, I worked 18 approximately one and one-half years as a progras =anager for a nanage=ent i 19 consulting firm and for another one and one-half years as .a project analyst 20 for a resort development firm. I was employed by the Southern Engineering 21 Company of Georgia, my present e=ployer, in January,1975. Since that time, 22 I have had assign =ents in both the retail and wholesale rate departments 23 of =y Company, primarily in the area of electric utility rates. In the 24 retail area I have participated in the preparation of rate increase filings 25 for both G & T and distribution rural electric =embership cooperatives as

g 26 well as the determination of revenue requirements and the proper rate

( 27 design for unregulated rural electric membership cooperatives. My 23 pri=ary activities, however, have been in the wholesale area where I have 29 participated in the analysis of approximately one dozen Federal ?ower

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30 Commission filings of private utilities operating in eight different 31 states. I have also participated in the preparation of testi=ony and 32 exhibits for several of these rate filings. Additionally, I have 33 participated in the preparatien of retail and wholesale allocated cost 34 of service studies and power cost projections.

35 36 Q HAVE YOU EVER TESTIFIED IN OTHER CO)CCSSION PROCIEDINGS?

37 38 A Yes, I have testified before the Public Service Co- ission of Kentucky.

l 39 I have also testified before the Federal Power Co= mission in proceedings 40 involving the Publi: Service Cocpany of Indiana, F?C Docket No. ER76-149; j 41 Georgia Power Ccecany, FPC Decket Nos. E-9091 and E-9521; and Carolina i 42 Power and Light Cotpany, ??C Docket No. ER76-495. l 43 )

44 Q WHAT WAS 'YOUR ASSIGNMENT IN T .E INSTA'iT ?ROCEEDING7 l 43 46 A My assignment was twofold - 23 se, I was to review'the direct testimony 47 and e::hibits and other available infor=ation of the Georgia Power Company 18 (GPC) concerning the cost to serve Oglethorpe Electric Membership Corp-49 oration (OEMC) . Specifically, I was to consider whether certain itecs of 50 operating expenses and working capital vere treated properly in CPC's filed State =ents "A" through "?" for ?eriod II. Secondly, I was to prepara l

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a study which categorizes (into base, inter ediate, peaking, and reserve) the Company's operating e::penses and net invest =ent, and uhich additionally 3 classifies production expenses into fuel, other variable, and fixed.

i 4 5 Q IN CARRYING OUT THE FIRST PART OF YOUR ASSIGNMENT WAT ADJUST >ENTS 6 DID YOU FIND NECESSARY?

7 8 A I found that the Ccepany has erred in the deter =ination of both rate 9 base investment and capacity related production and step-up substation 10 expenses. To correct this I have =ade the following adjust =ents:

11-12 1. Removed the 45-day cash working capital allowance included for 13 auclear fuel.

14 15 2. Applied an 8.277. offset to cash working capital to reflect the average 16 receipt of revenues to cover federal ince=e taxes prior to actual 17 payment of sace.

18 19 .3. Removed the Company's bank balances clai=ed as a cash working 20 capital require =ent in addition to the 45-day allowance.

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22 4. Functionalized administrative and general expense on the basis 23 of wages and salaries.

24 1 25 5. Eliminated sales expense and investment allocation to OEMC.

r 26 27 6. Reclassified production expenses into three catagories:

28 fuel cost, other variable costs, and fixed cost.

29 30 Q PLEASE EXPLAIN WHY YOU HAVE ELI}ENATED THE 45-DAY CASH WORKING CA?ITr.

31 ALLOWANCE ON NUCLEAR FUEL EXPENSES.

32 33 A The theory behind the 45-day allowance is that the ec=pany experiences 34 an average lag of 45 days between its pay =ents for certain goods and 35 services and its receipt of revenues to cover these pay =ents. It 36 is reasoned that the co=pany should receive compensation for naking 37 this investment in working capital, and.thus, it is included in the 38 rate base and the company earns a return on it. In the case of nuclear 39 fuel, however, the company makes an invest =ent upon its inital purchase 40 which it is allowed to include in rate base and upon whith it earns 41 a return. The company then a=ortises (depreciates) this invest =en in 42 monthly amounts over a peried of 4 to 5 years. Nuclear fuel invesc= enc 43 is thus analogous to other plant investnent which is purthased and then 44 depreciated over several years. To allow an additional cash verking 43 capital on this noncash a=ortization of nuclear fuel would be to allev 46 a double return on it.

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[ l Q PLEASE EXPLAIN tih~l YOU EAVE USED A FEDERAL INCOME TAX OFFSET IN VIEW 2 0F THE COMMISSION'S 0? INION NO. 730, SIERRA PACIFIC P0tGR COMPM.~Y, 3 FPC DOCKZT NO. E-3224.

4 5 A In that opinion and order, issued May 15, 1975, the Co==ission said, 6 "Even though at one ti=e the Co==ission credited working capital (cash) 7 with a percentage of inco=e tax accruals, subsequent federal inco=e tax 8 a=end=ents altered the Co==1ssion's approach: 'the accruals of current 9 incoce taxes, pending their quarterly pay =ent to the tax collector, are no 10 longer of such substance, proportion and continuity that they can be 11 relied upon as a source of working capital.' Since the traditional 12 45 day for=ula (1/8 of operating and =aintance expenses, less cost of 13 purchased power) operates to average shorter and longer pay =ent lag 14 periods, the relatively minor benefit to Sierra's working capital from 15 tax accruals does not warrant the ad hoc 10% credit to the rata base."

16 In a = ore recent decision, however, (Opinion No. 783 issued Nove=ber 17 10, 1976, Public Service Cc=cany of Indiana, FPC Docket Nn9. E-8536 and 18 E-8587) the Cor-4 ssion allowed a 5.5% federal inco=e tax offset since 19 a PSCI study of actual tax pay =ents showed the average cash availability 20 to be 5.5% of total federal inco=e taxes. The Co==1ssion in that opinion 21 says, "There is no Cc==ission policy which preordains the correct offset 22 to working capital allowance due to a particular utility's accu =ulation 23 of collactions before pay =ent of federal inco=e taxes. Necessarily, 24 such offset in any particular case depends on the circumstances under 25 which the applicant utilley operates."

26 27 In the instant dockat as well as in its last three filings, ??C Docket 28 Nos. E-9091, E-9521, and E176-536, the Georgia Power Co=pany used 2.43%

29 of its total federal incoce taxes payable as a credit to working capital.

I have prepared a schedule attached as OEMC Exhibit No. (J3S-2) using 30 31 infor=ation taken from the Co=pany's conthly operating reports for 1975 32 which shows that the FIT of f set percentage should be 8.27%. It is =y 33 understanding that the tax law is a little bit more lenient, but for 34 purposes of this calculation I have assu=ed full pay =ent of taxes accrued 35 on a quarterly basis. As far as I can tell the Co=pany has supplied no 36 justification fer its 2.a3% figure, so I have relied upon =y 3.27%

37 figure which is based upon actual 1975 experience.

38 39 Q IEY 00 TOU DISAG2IZ ~4ITH *EE COMPANY'S TREATMENT OF MINDDI 3AE 3ALANCES?

40 41 A There are several reasons why there is disagree =ent with the Co=pany's 42 inclusion of =inimum bank balances as a co=ponent of rate base. Dr.

43 Ewert and I both vill give reasons why =ini=us bank balances should not 44 be included in G?C's rate base.

45 46 The justification for the inclusion of =inimum bank balances as a 47 working capital requira=ent is given by Mr. A. W. Dahlberg on page 7 of 45 his direct testi=ony. Mr. Jahlberg contends that these bank balances 49 are necessary to support the dc7-to-day operations of the Georgia ?ower 50

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J Co=pany and that the 45-day working capital allowance "is not a substitute

( l 2 for required bank balances." The Cc==ission recently addressed such 3 arguments in its Opinion No. 783, issued November 10, 1976, Public Service i 4 Cocoany of Indiana, Docket Nos. E-8536 and E-8587. In its order the 5 Co==1ssion said, "The Cer-4ssion has adopted a formula allowing 45 days 6 of total operating expenses for the cash component of working capital 7 for electric utilities. See Union Electric company, 47 F.P.C. 144,175.

8 This allowance is intended to recover mini =en bank balances which have 9 been considered necessary to support the Company's disbursing bank 10 accounts and also to maintain balances sufficient to cover its lines of 11 credit with its =ajor banks." The conclusion reached by the Co= mission 12 in this decision was, " Absent such a lead-lag study, we are required 13 to find that our conventional formult represents a reasonable allowance 14 for the cash component for working capital in this case." In addition 15 to the Commission's argu=ents in opinion No. 783 against allowing the 16 inclusion of =ini=um bank balances in addition to a 45-day cash working l 17 capital allowance, it should be pointed out that one of the main 18 reasons given for the bank balance require =ent was that "A vast =ajority 19 of our custo=ers pay their electric bills by check. This means that

20 =any thousands of checks a month cust be cleared through these local 21 banks." OEMC is only one custocar and pays by one check each conth 22 and thus does not meaningfully contribute to the cost of processing 23 these vast nu=bers of checks.

24 25 In v!aw of the logic of the above arguments and the Commission's i

26 clear and long standing precedent on the minimum bank balance issue, l( 27 I have eliminated the Co=pany's mini =um bank balances from its clat=ed i 23 working capital.

! 29 30 0 WOULD YOU PLEASE COMMENT ON TEE COMPANY'S FUNCTIONALIZATION OF 31 ADMINISTRATIVE .GD GENERAL EXPENSES.

l 32 33 A In functionalizing its ad=inistrative and general expenses, Georgia 34 Power Company has singled out three items making up approxi=ately 15."

35 of total A&G expenses. Portions of these items have been specifically l

! 36 assigned to the functional categories and/or into specific customer l 37 groups, assigned to the functional categories on the basis of net plant, 38 assigned to the functional categories on the basis of an analyses of 39 materials and supplies and assigned to the functional categories based upon 40 wages and salaries with assigned A&G expenses. The remaining 85% of A5G 41 expenses have been assigned to the functional categories on the basis 42 of wages and salaries. Such a detailed treatment of a small portion a3 of A5G expenses certainly cannot be considered "just" and/or " reasonable".

44 There can be no justification for such treat =ent of only a s=all portion a5 of the items =aking up the Cocpany's A&G expenses. These items should 46 be handled on a consistant basis. If one or two are to be analy:ed in 47 great detail, each and every item co= posing A&G expenses should be 13 analyzed with the sa=e a= cunt of detail. Otherwise A4G expenses as a 49 whole should be functionali:ad in an equitable =anner. Rather than l 3e analyzing each individual AlG expense item, I have functionalized A&G exoenses on the traditional basis of wages and salaries.

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1 Q 2

WHY HAVE YOU DELETED GPC'S ASSIGNMENT OF SALES INVESTMENT 15D Sil.ES EXPENSE TO OEMC?

3 4 A The Georgia Power Ccapany has specifically assigned $13,609 of sales 3 invest:ent and S24,860 of sales expense to OEMC. The Uniforn System 6 of Accounts specifies that sales expenses cover only activities such 7 as deconstrating, selling, or advertising, the' object of whicl3 is to 8 promote or retain the use of a utility service by present and prospec-9 tive customers. Clearly, these types of activities are related to the 10 retail class of service. Any sales expenditures for prograss initiated 11 by the Georgia Power Company are solely for the benefit of its retail 12 jurisdictional loads, are not requested by OEMC, and are not desired 13 by it. It is no more proper for the company to assign a couponent of 14 sales expense to OEMC than for it to ask an interconnected company to 15 share in GPC's sales expenses. It is plainly the responsibility of 16 the distributing utility to bear its burden of stimulating its own 17 retail loads through sales activities, if that is what it desires to 18 do. OEMC may have an entirely different'goa1 than the Georgia Power 19 Company in regard to stirulating retail loads. To.ask the wholesale 20 customer to subsidize the Co pany's sales activity would be tnproper 21 and unreasonable. Therefore, sales related expense and investment 22 have been excluded froa the costs to be born by CEMC.

23 24 In the past, GPC has arr _d that the specific assignment of sales 25 expense was cade to it, wholesale cooperative customers because of

,- 26 the costs of adainistering the contracts with the 39 customers and

( 27 360 delivery points as well as the other costs arising from these 28 numerous custocers and delivery points. Under the partial require-29 ments rate, these costs have been astronomically reduced since 30 contractually there is only one custoner (OEMC) and one delivery 31 point (at the B-1 level) .

32 33 As shown in OEMC Exhibit No. (JBS-5), sales expense and investment 3c and regulatory expense (ALG) specific assignnents are the only specific 35 assi;nnents I have changed from that shown in G?C'.s Statenant "M".

36 37 Q WHY WAS IT NECESSARY TO RECLASSIFY THE COXPANY'S PRODUCTION EX?ENSES 38 INTO FCEL, OTHER VAR M3LE, AND FIXED COSTS?

39 40 A There are two reasons for this. First, the company erred in its 41 classification of thesa costs into " energy", and " demand". Second, 42 as testified by Mr. Gross, in order for the Conpany to properly 43 recover its costs, variable cost shocid he recovered on the basis 45 of kWh sales and fixed costs should be recovered on the basis of 45 kW demands.

46 47 Q IN WHAT WAY DID THE C09A2.~~ ERR IN ITS CLASSIFICATION OF PRCDCC'70N 48 EX?ENSES?

49 50 A The Conp2ny's errer besic2117 lies in its inconsistant treat:ent of internal generatian expenses on the one hand and purchased power ::sts m -

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( generation expenses whereas not only fuel, but also other variable

. 2 3 costs and, as testified to by OEMC Witnesa Springs, some fixed costs.

4 As explained by Mr. Springs, the error of classifying fixed charges -

5 as energy related was in the Cocpany's surplus power and energy sales 6 to the Southern Cocpany Pool. The other =ajor classification errors 7 were in other Southern Company Pool transactions (purchases and sales) 8 where variable costs other than fuel were classified as " energy" and 9 thus ellainated from consideration in determining the monthly charges 10 to OEMC under the Company's proposed billing procedure.

11 12 Q ILWE YOU PREPARED AN EXHIBIT WHICH SHOWS YOUR CLASSIFICATION OF 13 PRODUCTION EXPENSES INTO FUEL, OTHER VARIABLE, AND FIXED COSTS?

14 15 A Yes, OEMC Exhibit No. ____ (JBS-3).

16 17 Q PLEASE EXPLAIN HOW YOU MADE THIS CLASSIFICATION.

18 19 A As shown en page 3 of OEMC Exhibit No. (JES-3), I began with inter-20 nal generation expenses by first listing the total expense for each 1

21 plant as given by GPC in its filing. By subtracting the O&}t expenses 22 other than fuel given by the Company in a data response, I obtained the l 23 fuel expenses shown in column 4. In order to separate the remaining 24 expenses, I used a combination of the projected GWh generation for each 25 plant shown in the Company's Interchange Contract Analysis for 1976 with 26 its corresponding variable supplies and maintenance rate and the per-27 centages of each FPC account considered to be variable by the Ccapany.

28 This calculation of the "other variable" expenses is shown on page 4 of 29 OEMC Exhibit No. (JES-3). The remaining expenses represent the 30 fixed portion.

31 32 Moving then to the classification of the purchased power expenses, I 33 also used the fuel and other variable rates and scheduled generation, 34 purchases, and sales given in the 1976 Southern Cocpany System Inter-35 change Centract Analysis f rcs which the Conpany's Period II Southern 36 Pool "ransactions were obtained. In conjunction with Mr. Springs, I 37 classified the Surplus energy sales as shown on page 9 of OEMC Exhibit 3S No. (J3S- 3) . The Economy energy purchases and sales were shown 39 .

In the Interchange Contract Analysis in two periods, January - thy, 40 and June - December, 1976. I found that fuel was AA". of the total 41 cost for the first period and 84% for the second period and that the 42 other variabic expenscs vare 14% and 16% for the respective periods.

43 Thus, I applied these percentages to the pay =ents and revenues for 44 each period te derive the fuel and other variable classificaticas for 45 the year. Furchases of Economy energy were made at an average of 12.16 46 mills /kWh, so I classified these purchases as intermediate. Econeny 47 energy sales were nada at an average rate of 17.16 aills/kWh and thus 48 classified as raserve. The purchases and sales terred "Poci Capacity 49 Energy" came entirely frca cocbustion turbines. Page 14 of OEMC 50 Exhibit No. (J3S-3) shows the Cc:pany's esticated fuel cost and l

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( l other variable cost applicable to its conbustion turbines during 1976.

2 I used this breakdown to classify the ?ool Capacity energy sales and 3 purchases. These items accounted for the majority of the Company's 4 estinated Period II purchased power. Most of the other items were 5 given in sufficient detail to classify directly as fuel, other variable, 6 or fixed costs as shown on pages 1 and 2 of OEMC Exhibit No. (J3S-3).

7 8 Systen control and load dispatching expenses and "other expense" were 9 assigned as did the Company with that portion assigned by the Company 10 to " energy" being assigned to other variable.

11 12 Page 8 of OEMC Exhibit No. (JBS-3) shows how the various pool trans-13 actions we,rc assigned into generating categories.

14 15 Q IN COMPLETING THE SECOND PART OF YOUR ASSIGNMENT, HOW HAVE YOU 16 INCORPORATED TdESE ADJUSD!ENTS IN YOUR COST STUDY?

17 13 A I have prepared CEMC Exhibit No. (JBS-1) in which these adjustments 19 have been made. This exhibit is composed of four schedules. Schedule 20 No. 1 contains total cocpany operating and maintenance expenses with 21 assignnent to the base, intermediate, peaking, and reserve generating 22 categories. Schedule Nos. 2 and 3 show the electric plant-in-service 23 and other rate base itens respectively also assigned to the generating 24 categories. Schedule No. 4 contains the allocation factors used in this 25 exhibit.

, 26 27 My adjustment to renove the 45 day cash working capital allowance  ;

28 included for nucicar fuel is shown en Schedule 3, Sheet 1, Line 20.

29 30 The 8.27% FIT offset to cash working capital is shown on Schedule 31 3, Sheet 1, Line 21.

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l 33 The Co:pany's minimum bank balances have not been included in the 34 working capital shown on Schedule 3, Sheet 1.

35 36 The production and step-up substation administrative and general expense 37 as functionalized on the basis of wages and salaries is shown on Schedule 33 1, Sheet 1, Lines 27 - 29.

39 j 10 My eli=ination of sales expense and investment allocated to OEMC is 41 shown on Exhibit No. (J3S-5) .

42 1 43 The results of my reclassification of pr.oduction expenses to fuel, 40 other variable, and fixed costs are shown on OEMC Exhibit No. (J3S-1) , (

45 Schedule 1, Sheet 1, Lines 4-13. I 46 l 47 The results of this assignment of total company expenses and rate base l 45 to the various generating categories are used by OEMC Witness Gross 49 in his determination of revenue requirement, rate design, and allocation 50 to OEMC.

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l Q liAS GPC NOR>iALIZED CERTAIN DEFERP2D INCO3!E TAX ITE!!S?

( 2 3 A Yes, the Company has normalized certain items in accordance with Order 4 No. 5 30-B .

5 6Q DOES TIIIS CONCLUDE YOUR TESTI1!ONY?

7 8 A Yes, it does.

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