ML19308A402
| ML19308A402 | |
| Person / Time | |
|---|---|
| Site: | South Texas, Comanche Peak  |
| Issue date: | 08/31/1976 |
| From: | Solomon J GEORGIA POWER CO. |
| To: | |
| Shared Package | |
| ML19208C305 | List:
|
| References | |
| E-9091, NUDOCS 7909260149 | |
| Download: ML19308A402 (8) | |
Text
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[ )1 GEORGIA POWER COMPANY FPC DOCKET NO. E-9091 PREPARED TESTI1DNY OF J. BERTPAM SOLOMON
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3A My name is J. Bertram Solomon.
My business address is 1000' Crescent lQ PLEASE STATE YOUR NAME AND ADDRESS.
2 4
Avenue, N.
E., Atlanta, Georgia 30309.
5 6Q PLEASE OUILINE 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 Managemant from 11 the Georgia Institute of Technology in 1972.
12 13 Q PLEASE STATE YOUR 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 my graduation from Georgia Tech in 1972, I worked 18 appror.imately one and one-half years as a program manager for a management consulting firm and for another one and one-half years as c. project analyst 19 20 f r a resort development firm.
I was employed by the Southern Engineering Company of Georgia, my present employer, in January 1975.
Since that time, 21 I have had assignments in both the retail and wholesale rate departments
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{3 of my Company, primarily it che area of electric utility rates.
In the
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retail area I have participated in the preparation of rate increase filings 24 f r bod GE aM Mstdudon wral cicctric membership cooperatives as well
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25 as the determination of revenue requirements and the proper rate design for
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unregulated rural electric membership cooperatives. My primary activities, 2e however, have been in the wholesale area where I have participated in the 28 analysis of approximately one dozen Federal Power Commission filings of private utilities operating in eight different states.
I have also parti-30 cipated in the preparation of testimony and exhibits for several of these 31 rate filings. Additionally, I have participated in the preparation of 3,,
retail and wholesale allocated cost of service studies and power cost 33 projections.
34 35 Q HAVE YOU EVER TESTIFIED IN OTHER COMMISSION PROCEEDINGS?
36 37 A Yes, I have testified before the Public Service Commission of Kentucky.
38 I have also testified before the Federal Power Commission in proceedings 39 involving the Public Service Company of Indiana, FPC Docket No. ER76-149.
40 41 Q W11AT WAS YOUR ASSIGNMENT IN THE INSTANT PROCEEDING?
42 43 A My assignment was to review the materials filed by the, Georgia Power 44 Company in this proceeding along with other public information and that 45 Provided by the Company in response to data requests and to provide analyses 46 and testimony in three specific areas of responsibility as follows:
47 48 1.
Analyze the fuel expenses and fuel related revenues as. filed 49 by the Company to determine whether those expenses and revenues are proper, k
50 just, and reasonabic for purposes of establishing rates in this case.
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1 2.
With the exception of determining the proper demand and U
2 energy allocation factors and the proper treatment of transmission 3
facilitics, to review the Company's allocation of its total Company cost of service to its FPC jurisdictional wholesale customers and to 4
determine the propriety of the methodologies employed in such allo-5 cation.
6 7
8 3.
To prepare an allocated cost of service study Vnich includes 9
the adjustments to the Company's cost of service found to be necessary 10 by all of the Cooperative Intervenors' witnesses, and which accurately reficcts the rates of return which were actually earned by the Company 11 during the year 1975 under its present whoicsale electric tariff (WR-7R) 12 and which would have been earned under its proposed wholesale electric 13 14 tariff (WR-8R).
15 16 Q
WIIAT CONCLUSIONS HAVE YOU REACHED WITH REGARD TO THE COMPANY'S TREATMENT 17 0F FUEL EXPENSES AND FUEL REIATED REVENUES DURING THE TEST PERIOD (PERIOD 18 II)?
19 20 A
Georgia Power Company's treatment of fuel expense and related revenues 21 derived from the application of the proposed fuel adjustment clause does 22 not properly reflect the required matching of revenues and expenses 23 during the test period. There has been a mismatch.
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25 Q
PLEASE EXPIAIN THE OPERATION OF GEORGIA POWER' S PROPOSED FUEL ADJUSTMENT
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26 CLAUSE.
27 23 A
The Company's proposed fuel cost adjustment clause states thet the average 29 cost of fossil fuel during the second, third and fourth preceeding months 30 shall be applied in the current month. This means, for example, that the 31 amount of fuel adjustment billed for the month of January would be based 32 on the average cost of fuel during the months of November, October and 33 September.
34 35 Q
HOW HAS THE APPLICATION OF THIS FUEL CIAUSE RESULTED IN A MISMATCH OF FUEL EXPENSES AND REIATED REVENUES USED IN THE COMPANY'S PERIOD II TEST i
36 37 PERIOD?
i 38 39 A
While the Company has included in its expenses the cost of fuel for each 40 month during 1975, the application of the proposed fuel adjustment clause 41 has resulted in the recording of fuel adjustment revenues based upon the 42 cost of fuel roughly during the months of October,1974 through September, 43 1975.
I say roughly during.that period because one-third of the unit cost of fuel in September,1974, two-thirds of the unit cost of fuci in October, 44 1974, two-thirds of the unit cost of fuci in September,1975 and one-third 45 of the unit cost of fuci in October 1975 has been applied through the l
46 fuel adjustment clause during the twelve months of 1975.
47 48 49 Q
PLEASE EXPIAIN WHY THE DETERMINATION OF GEORGIA POWER COMPANY'S REVENUE
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50 REQUIREMENT SHOULD BE EASED UPON THE MATCHING OF FUEL REIATED REVENUES 51 AND FUEL EXPENSES.
7 8
Q IS IT NOT TRUE, liOWEVER, THAT THE OPERATION OF THE PROPOSED FUEL ADJUST >EST 9
CIAUSE RESULTS IN A lag IN COLLECTION OF FUEL EXPENSES ABOVE THE BASE COST 10 0F FUEL OF APPROXIMATELY THREE FULL MONTHS?
11 12 A Yes, it is, and as pointed out by Witness R. M. Gross there are 13 many other leading and lagging revenue / expense situations. To compen-14 sate the Company for the net amount of these leading / lagging situations, 15 I have included in my cost of service study (as did the Company in its) 16 a 45-day working capital allowance as traditionally allowed by the Federal 17 Power Commission. This allowance is made by the Company and the Intervenors 18 in lieu of a full lead / lag study which would be required to accurately 19' establish the total amount of working capital needed by the Company to
,o fund the not amount of any lags experienced in making payments for materials 21 and services and the receipt of electric revenues to cover those payments.
22 23 Q THE COOPERATIVE INTERVENORS WERE SUBJECT TO THE PROPOSED FUEL ADJUST-24 MENT CLAUSE FOR ONLY THREE MONfHS DURING 1975.
SURELY THE FUEL ADJUSTMENT C
25 REVENUES COLLECTED DURING THIS " LOCKED-IN" PERIOD WERE NOT EQUAL TO THE 26 REIATED FUEL EXPENSES?
27 28 A This is certainly true.
It is also true that the actual cost of serving 29 the Cooperative customers could be determined for those three months; 30 however, this undertaking would entail an extensive analysis of each of 31 the company's accounts to determine the actual level of investment, expenses, 32 and the required cash working capital.
It is not the intention of the 33 Cooperative Intervenors to undertake to do that nor has the company suggested 34 that it be done.
Rather, it has generally been recognized that proper rates 35 should be determined based upon accepted ratemaking principles 36 which mandate the use of an annual test period and a proper matching of 37 t st period revenues and test period expenses.
In addition to this fact, 38 it should be pointed out that the 45-day working capital allowance 39 has been utilized by the Company over the past several years in rate filings and thus has contributed a substantial amount of revenues to 40 g
offset all lags including that inherent in the Company's fuel clause.
42 43 Q HAVE YOU PREPARED AN EXHIBIT WHICH SHOWS THE PROPER MATCHIEC OF FUEL REIATED 44 REVENUES AND FUEL EXPENSES?
45 46 A Yes.
It is Cooperative Intervenors' Exhibit No.
(JBS-1).
47 48 Q PLEASE EXPIAIN THIS EXHIBIT.
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50 A This Exhibit is comprised of two pages. The adjustment required to obtair, y.. ll* s'
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the proper fuel revenue / expense catching for each of the dolesale custo=cr t
2 groups is shown on a separate page.
Using Page 1 (which is for the Cooper-3 ative cust mers) as an example, the last Colu=n (G) shows for each conth 4
and the total for Period II, the additional revenues d ich should be in-cluded in the cost of service to properly catch fuel related revenues 5
and fuci expenses. This adjustment is calculated by subtracting fuel 6
revenues actually used in the Cocpany's Period II cost of service study (Column 7
D) fr = the fuel revenues which properly match fuel expenses (Colu=n F).
8 The monthly fuci revenues shown in Colu=n D are based upon the, average 9
cost of fuci in the preceeding second, third, and fourth conths. The 10 monthly fuel revenues shown in column F are based upon the unit cost of 11 fuel in the current month and thus properly match the monthly fuel 12 13 expenses. The kilowatt hour '>urchases and unit fuel costs used in this Exhibit were taken from the unterial filed by the Company in this docket 14 plus material submitted to the FPC Staff and to the Intervenors in this 15 Proceeding. The second page of this Exhibit displays similar calculations 16 for the Municipal custo=crs.
g 18 yg Q WAT REVENUE ADJUSTMENIS RESULT FROM THESE CALCULATIONS?
{'OA The Period II test year revenues for the wholesale customers should be increased as follows:
22 23 24 Cooperatives
$395,898 25 l
Municipals
$153,715 26 27 2S Q IN FULFILLING THE SECOND PART OF YOUR ASSIGNMENT, WHAT DID YOU FIND?
'9 A I f und'that the Company had assigned part of its plant inves==ent and 0
jt operating expenses to the sales function and that it had then erroneously allocated a portion of this invest =ent and expense to its solesale
{y customers.
I niso found that while the Company had recogni=ed the " general" nature of administrative and general (A6G) expenses and functionalized the large majority of those expenses based upon wages and salaries, a 35 couple of items within the A&G category have been singled out and specifically 36 assigned to the various customer groups. The only other cajor error I 37 found (other than the incorrect treat =ent of transmission investment and 38 expense pointed.out by Mr. Springs) in the Company's allocation of total 39 Company cost of service was that its income tax allocation for=ula allocates 40 all income tax deductions based upon allocated rate base rather than properly 41 allocating each individual income tax deduction based upon its own character-42 istics.
43 44 Q WHY EWE VOU DELETED GEORGIA POWER'S ALLOCATION OF SALES INVESTMENT AND 45 EXPENSE TO THE WHOLESALE CUSTOMERS IN YOUR COST OF SERVICE STUDY?
46 47 A 48 The Uniform Syst of Accounts specifies that sales expenses cover only 49 activities (such as demonstrating, selling, or advertising) the object f which is t pr te r retain the use f utility service by present
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50 and prospective customers.
C1carly, these types of activities are related
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'to the retail class of service. Any sales c=penditures for programs initiated 1
2 by Georgia Power are solely for the benefit of its retail jurisdictional loads.
3 not requested by its wholesale customers and not desired by then. It is no 4
m re proper for the Company to assign a component of sales expense to its 2 lesale cust ers than for it to ask an interconnected co=pany, such as 5
Alabama Power Company or Gulf Power, to share in Georgia Power Company's 6
sales expenses. It is plainly the responsibility of the distributing h
utility to bear its burden of stimulating its own retail loads through sales activities, if that is s at it desires to do.
The solesale custo=er 9
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""7-have an entirely different goal than Georgia Power Company in regard to sticulating retail loads. To ask the d olcsale customer to subsidize it the Company's sales activities would therefore be improper and unreason-12 able. Accordingly, I have allocated sales related expense and investment 3,
{4 exclusively to the retail class of service.
15 16 Q HOW EAVE YOU ALLOCATED THE COMPANY'S ADMINISTRATIVE AND GENERAL EXPENSES?
17 33 A I first functionalized the entire amount based upon the functionalized y[c vages and salaries shown in the Company's Period II Statement "M", and then allocated. each function to the various customer groups according to the related direct expenses.
22 23 Q WHY DID YOU USE THIS METHOD INSTFAD OF THAT DIPLOYED BY GEORGIA POWER?
24 25 A The Co=pany allocates approximately 817. of its ad=inistrative and general 25 expense on the basis of the payroll allocation method. The re=aining 197.
27 is either specifically allocated or functionally distributed and then allo-23 cated by Joltage icvel.
Georgia Power has arbitrarily assigned to the nole-29 sale class $311,551 of federal regulatory expenses.
In addition it has 30 assigned $172,664 of state regulatory expenses specifically to the retail 31 class.
Such arbitrary assignments of a limited number of administrative 32 and general expense items is certainly not proper unless all administrative 33 and general items are handled in such a manner. Here the Company takes a 34 selected few A&G expense items and allocates them specifically sile treat-35 ing the vast majority on an accepted allocation basis.
Rather than arbi-36 trarily assi;;ning a selected few items, I believe it would be more appro-37 priate to treat all administrative and general expense items equally by applying the wage and salary allocation method to the total acount of 38
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39 40 My revision to Georgia Power's treatment of administrative and general expense 41' is shown on Schedule III, Sheet 2 of Cooperative Intervenors' Exhibit No.
42 (JBS-3) and is based on the wage and salary functionalization shown in 43 Statement "M", Period II, Page 20 of 24.
44 45 46 Q WHY DO YOU DISAGREE WITH THE COMPANY'S METHOD OF ALLOCATING INCOME TAX 47 DEDUCTIONS?
48 49 A The Company allocates all income tax deductions using its allocated rate 50 base. While it is true that most of the deductions are related to-investment, I
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1 the major deduction, interest expense, arises out of both plant-in-2 service and the Company's construction work in progress and thus should 3
be allocated based upon both plant-in-service and construction work in 4
Progress combined.
5 6Q IIOW DID YOU DEVELOP TIE CONSTRUCTION WORK IN PROGRESS PORTION OF THIS 7
IVTAL IhTESTMENT ALIDCATOR?
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8 9A In its original filing and the July 11, 1976 update in this proceeding, 10 the Company included construction work in progress in the rate base, and 11 I used this icveli::cd CNIP as a basis for prorating the Company's CWIP 12 shown on Statement D, Page 2 of 2 of its third update. After assigning 13 the actuni CWIP to the various icvels and other functional categories
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14 utili:cd by the Company, I applied the Company's five-day average peak 15 demand allocation method to the demand related portion and prorated 16 the specifically assigned categories according to the related specific 17 assignmee s included in the Company's July 11, 1976 filing. The results 18 of this process are shown on Cooperative Intervenors' Exhibit No.
19 (JBS-2).
20 21 Q HAVE YOU PREPARED A COST OF SERVICE STUDY UdICH EMBODIES THE ADJUSTMENTS 22 YOU DESCRIBED AB0VE AND THE OTHER ADJUST >ENTS RECO> BENDED BY COOPERATIVE 23 INTERVENORS' WITNESSES GROSS, SPRINGS, LIVINGSTONE AND EWEP,T AS LISTED 24 IN TIE TESTIMONY OF MR. GROSS?
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26 A Yes.
It is Cooperative Intervenors' Exhibit No.
(JES-3).
27 28 Q PLEASE BRIEFLY DESCRIBE THIS EXHIBIT AND TELL HOW YOU INCORPORATED THE 29 ADJUSTMENTS RECOEENDED BY THE ABOVE NAMED WITNESSES.
30 31 A This Exhibit is made up of a stra=ary page followed by five schedules.
32 The sumary shows the results of my cost of service study under present 33 rates, the Company's proposed rates, and the rates found to be just and 34 reasonabic by the Cooperative Intervenors' witnesses.
Beginning with the 35 last schedule, Page 18 of 18, the demand allocation factors for each icyc1 36 and the energy allocation factor used in this cost of service study ate i
37 shown.
Schedule IV shows the allocation of original cost of plant-in-38 service and the accumulated provision for depreciation.
Schedule III 39 contains the allocated operating expenses. The remaining rate base items are shown on Schedule II.
Schclule I, rate of return, utilices the com-i 40 41 Putations made in the other schedules, computes the allocated income taxes, t
and su marizes the f r g ing showing the adjusted rate of return under the 42 Company's present rate (WR-7R) at the bottom of the Page on line 25.
43 44 45 Q HOW DID YOU APPLY THE ROLLED-IN TRANSMISSION CONCEPT SUGGESTED BY MR.
46 SPRINGS?
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48 A I applied the power supply transmission allocator (level B-2) to the 49 demand related investment and expenses at levels B-2, C and D.
Using
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50 the Company's Witness R. A. Newton'_s workpapers, I also identified the 1
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specific assignments made at the B-2, C and D levels and applied the 2
power supply transmission allocator to these amounts.
3'4'Q HOW DID YOU M!d2 TIIE ADJUSTMENTS RECOMMENDED BY DR. LIVINGSTONE?
5-6 A As suggested by Dr. Livingstone, in order to remove the taxes on the January sale of assets from the cost of service, I deducted $1,091,639 7
from state taxes (Schedule I, Sheet 5, Line 3) and I deducted $9,692,554 3
from federal taxes as shown on Schedule I, Sheet 6, Line 2.
9 10 Dr. Livingstone's AFUDC adjustments entail reducing the original cost yt f plant, reducing accumulated provision for depreciation, -increasing 12 the pr visi n f r deferred income taxes, and reducing current year's 13 depreciati n expense. The first three of these are rate base adjustments 14 and ar ref1 cted as such n Schedule I, Sheet 4, Lines 1 through 13.
15 The current year's depreciation expense is adjusted as shown on Schedule 16 III, Sheet 2, Lines 23 through 26.
Of course, as a result of the reduced 17 current year's depreciation, there is an increase in current year's inco=e 18 This increase is automatically cecomplished in the calcu-ta:: expense.
19 lation of income taxes.
20 21 22 Q HOW WERE THE ADJUSTMENTS DESCRIBED BY MR. GROSS RECOGNIZED?
23 24 A Mr. Gross calculated several rate base itens using the 13 month average 25 plant-in-service.
In order to reflect these revised investment amounts, 26 I simply replaced the company's figures with Mr. Gross' comparabic amounts.
27 Intangibic plant remains the same, the change in distribution plant is 28 assigned to the retail class because most of the additions to distribution 29 plant are to service the Company's new retail customers.
Transmission plant 30 was prorated among the various service levels and other categories based 31 upon the Company's assignment among those levels and categories. Production 32 plant and nucicar fuel were allocated using the level A allocation factor.
Plant held for future use was prorated in the same manner as transmission 33 34 plant.
35-36 Q PLl%SE EXPIAIN HOW YOU INCORPORATED THE ADJUSTMENTS RECOMMENDED BY DR.
37 EWERT.
38 39 A At Dr. Ewert's suggestion I removed all bank balances from the Company's 40 working capital and I utiliced his suggested 8.93% rate of return in 4.
determining the Company's allowable revenues as shown in the summary of 42 Cooperative Intervenors' Exhibit No.
(JBS-3).
43 44 Q W11AT WAS T11E EFFECT ON THE COOPERATIVE INTERVENORS OF 1% KING THESE CHANGES TO THE COMPANY'S COST OF SERVICE STUDY?
45 46 47 A As can be seen on Page 1 of 18 of Cooperative Intervenors' Exhibit No.
48 (JBS-3), the actual return earned by Georgia Power during 1975 was 49 6.04%.
Before the corrections recommended by the Cooperative Intervenors
50 witnesses, the company showed an earned rate of return of 4.43%.
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l Using the rate of return recountended by Dr. Evert, my adjusted cost 2
of service shows an allowable increase in revenues of $11,983,625 3
(13.6%) for the Cooperative Intervenors as opposed to the Company's 4
requested increase of $21,076,363 or 23.9%.
5 6
Q HAVE YOU REVIEWED THE REVENUES UNDER PRESEhT RATES USED IN THE FPC 7
STAFF'S COST OF SERVICE STUDY?
i' 8
9 A
Yes.
10 11 Q
WERE THE REVENUES CALCULATED IN A MANNER CONSISTENT WITH THE ALLOCATION 12 OF COST RESPONSIBILITY FOR THE COOPERATIVE CUSTOMERS?
13 14 A
No, the FPC Staff used the revenues as calculated by the Georgia Power 15 Company which cy.cludes 107. of the Hatch power and energy received by l
16 the Cooperative customers, while the 12 month average allocation factors 17 used were calculated based upon demands which include this same 107. of 18 Power from Plant Hatch Unit No.1.
19 20 Q
DOES THIS CONCLUDE YOUR TESTIMONY?
21 22 A
Yes, it does.
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