ML19308A410

From kanterella
Jump to navigation Jump to search
Testimony in Response to Tx Utils Generating Co & Houston Lighting & Power First Set of Interrogatories
ML19308A410
Person / Time
Site: South Texas, Comanche Peak  Luminant icon.png
Issue date: 08/01/1979
From: Gross R
TEX-LA ELECTRIC COOPERATIVE OF TEXAS, INC. (FORMERLY
To:
Shared Package
ML19208C305 List:
References
1517, NUDOCS 7909260216
Download: ML19308A410 (9)
v • d • e


Text

bOCi'IT NO.15L7-RESCD y TEXAS PO'2R & LIGHI CO)1PANY - . -

TESTI!10NY AND EXHIBITS OF ROBERT M. GROSS. JR.

ON BEHALF OF TEX-LA ELECTRIC COOPERATIVE, INC.

1Q PLEASE STATE YOUR NME AND ADDREF;S.

2 A My name is Robert M. Gross, Jr. My business address is 1000 Crescent 3 Avenue, N.E., Atlanta, Georgia 30309.

4Q WHAT IS YOUR EDUCATIONAL BACRGROUND?

5 A I graduated from Georgia Institute of Technology in 1965 receiving 6 the degree of Bachelor of Industrial Engineering. I also attended 7 Georgia State University and in 1971 received the degree of Master 8 of Business Administration, majoring in finance.

9Q PLEASE STATE YOUR PROFESSIONAL EXPERIENCE.

10 A I have been employed by Southern Engineering Company of Georgia for 11 approximately ten years. During this time I have been involved in 12 the preparation of cost of service studies of Class A and B investor-13 owned utilities, rural electric cooperatives and municipal electric 14 systems and have participated in wholesale and retail electric rate 15 consulting assignments in 23 states. I am a registered professional 16 engineer in the State of Georgia.

17 Q HAVE YOU EVER TESTIFIED IN OTHER COFDIISSION PROCEEDINGS 7 18 A Yes, I have testified as a rate expert and cost of service witness 19 before the State Com=issions of Rentucky, Indiana, Michigan, Vermont, l

20 Virginia, and Arizona. I have also testified before the Federal Power 21 Commission (now Federal Energy Regulatory Connission) in proceedings 22 involving Mississippi Power Company, Appalachian Power Company, Duke 23 Power Company, Gulf States Utilities Company, Gulf Power Company, l

24 Virginia Electric & Power Company, Arizona Public Service Company, j 25 Public Service Company of Indiana, Inc., Carolina Power and Light, and i

s

( .l.

7 909260 2-/$

4

1 Southern California Edison Company.

2Q UQULD YOU PLEASE EXPLAIN YOUR ASSIG:35NT CONCER'i1NG TRE ISSUES SUBJECT 3 TO REMAND?

4A I have studied the costs included in Texas Power and Light Company's 5 (TP&L) nonthly fuel cost adjustment charges resulting from payments 6 to affiliated companies. Specifically, I examined the costs which are 7 included in the conthly billings from Texas Utilitics Generating Company 8 (TUGCO)and Texas Utilities Fuel Company (TUFCO) to Texas Power and Light 9 which in turn are passed on to the ultimate electric customer in the 10 form of automatic fuel adjustment charges, 11 Q MR. CROSS, BEFORE GOING INTO A DETAILED EXPIJJiATION OF THE MECHANICS 12 0F TP&L'S FUEL CLAUSE PROVISIONS k"dICli ALLOW AFFILIATED COSTS TO BE 13 PASSED ON TO THE ULTIMATE CONSUMER, WOULD YOU PLEASE PROVIDE A BRIEF 14

SUMMARY

OF HOW FUEL ADJUSTMENT PROVISIONS EVOLVED AS A RATEMARING 15 DEVICE IN THE ELECTRIC UTILITY INDUSTRY?.

16 A Automatic adjustment provisions have been used in electric utility 17 ratemaking periodically for the last fifty years. During periods of 18 fuel price stability, fuel clauses have tended to disappear, whereas 19 during periods of fuel price volatility, fuel adjustment provisions 20 reappear in electric utility rates for a number of sound reasons.

21 Vnen the price of fuel becomes subject to volatile changes over short 22 time periods it becomes impractical, from a ratemaking standpoint, 23 to establish fixed electric charges because the charges either result 24 in a significant over recovery or a significant under recovery of 25 actual costs. In such cases, rates either would be too low or too high, 1 depending upon the level of fuel costs. When the price of fuel is a l 2 result of industry market pressures and thereby, beyond the direct 3 control of a utility and when the price is subject to short term 4 volatility, regulatory commissions have found it reasonable to incorpor-5 ate fuel adjustment provisions in electric utility tariffs.

6 Recently, however, the rote application of automatic fuel adjust-7 ment clauses by utilities has been challenged by state' regulators and t

8 consumer groups throughout the country. The primary reason for this 9 opposition has been, I believe, because of the grass root opposition 10 of electric ratepayers to spiralling electric utility bills caused by 11 higher fuel costs. The knee jerk reaction of many people is to simply 12 outlaw fuel adjustment provisions, as has been done in some states, 13 hoping that the problem will disappear. Of course, it does not.

14 From a more practical standpoint, some state regulators have 15 restricted the applicability of fuel ad.justment provisions. For 16 example, state co= missions in North Carolina, Virginia, and Arizona,"

17 adopted regulations whereby the automatic flow through of fuel costs 18 to the ultimate customer on a monthly basis was eliminated. The 19 automatic adjustment feature was replaced by procedures which require 20 a utility to forecast fuel costs from time to time (6 months to a 21 year) in formal hearings; the fuel recovery component is thus included 22 in the fixed rate, rathee than being allowed to fluctuate frcm month 23 to month. In these states, the co= missions gave more weight to l 24 providing an incentive to utilities for efficient fuel acquisition and 25 less weight to the ratemaking flexibility produced by automatic fuel

)

l escalatory provisions.

c 2Q DO YOU BELIEVE THAT SPECIAL CONSIDERATION SHOULD EE GIVEN TO TRANSACTIONS 3 EETWEEN EIECTRIC UTILITIES AND THEIR' FUEL SUBSIDIARIES AND AFFILIATES?

4 A Yes, because transactions between affiliated companies are not arms j 5 length transactions. In this case, for instance, managements of TP&L j 6 and its sister operating companies directly control the price structure i

7 of TUFCO's own oil and gas and of TUGO's lignite, and thus, the trans-i 8 actions which ultimately impact the fuel adjustment provision. Because of 4

9 this direct control, the price of owned fuel and fuel services from the 10 fuel subsidiaries will not be subject to the same market pressures that 11 would exist if TP&L were buying that fuel and those fuel services from

12 non-affiliated fuel suppliers.

13 Q WILL YOU DESCRIBE HOW TUFC0 AND TUGC0 BILL TP&L AND THE OTHER OPERATING 1 .

! . 14 COMPANIES FOR THE FUEL SERVICES RENDERED?

?( 15 A Texas Utilities Fuel Company (TUFCO) prorates its costs to the three 16 operating companies on three bases. Non-assigned lignite exploration 17 costs, credits for gains on off-syste= sales of excess gas and a j 18 minimum monthly fee of $480,000 are prorated to the operating companies 19 on an equal basis of 'l/3 to each. Oil acquisition costs and certain 20 other specifically identified items are billed in proportion to the service rendered each company. The remaining costs incurred by TUFC0

~

21 22 are prorated to the operating companies based upon their proportional ,

23 takes of gas.

24 As shown on Exhibit 1, costs prorated on a proportional basis include 25 fuel gas purchases, operation and maintenance expense, depreciation and l

I

1 depletion expense, taxes, and interest expense (net of the $480,000 minimum) 2 incurred by TUFC0 and advance payments to TUFC0 for exploration and 3 development. All of these costs, once billed to the operating companies, 4 are in turn recovered from the ultimate customer through the operating S companies' fuel adjustment clauses. I find this aspect of the treatment 6 of TUFCO's charges to be improper and inconsistent with the rationale 7 for fuel adjustment provisions because these costs are relatively 8 non-volatile. TUFCO's monthly costs incurred in operating and maintaining 9 its facilities, depreciating its facilities, and owning such facilities, 10 1.c., taxes and interest expense, are the typa of expenses that should 11 not be flowed through an automatic fuel adjustment provision. These 12 costs are known and meu urable and are not subject to significant short 13 run unknown changes. To the extent that these costs are the result of 14 management prero;;ative and are closely controlled, they are no different 15 from fixed costs incurred by TP&L itself.

16 Q IF TIIESE TUFC0 CHARCES TO Tile OPERATING COMPANIES API NOT PICOVERED 17 TIIROUGli Tl!E OPERATING COMPANIES' FUEL ADJUSTMENT PROVISION,IIOW WOULD 18 TilEY BE RECOVEPID?

19 A These charges should be recovered in the same manner that TF6L's own 20 fixed costs are recovered: through the base rates, and as a result of 21 a properly justified cost of service study.

22 Q Do YOU BELIEVE Tl!AT RECOVERY OF TIIESE COSTS TIIROUCII BASE RATES WOULD 23 IMPOSE A IIARDSIIIP ON TP&L WilICII COULD ULTIMATELY RESULT IN LE'h TIIAN ,

1 24 COMPENSATORY RATES?

25 A No. Any cost changes should be known by TP&L in advance and thus be 1

l lI L. l l

4 O 1 includable in its filed cost of service study supporting base rate

(,

j 2 charges on the same basis that TP&L now reflects other known and measure-l 3 abic changes of its operations in its filed cost of service study.

4 I would suggest that cost recovery through base rates be applied

, 5 to TUFCO's operation and maintenance expense, depreciation expense, l 6 tax expense and interest expense. The-only item of TUFCO's expenses 7 that should continue to be reflected in the fuel adjustment provision i

! 8 of the operating companies is TUFCO's fuel gas purchases from non-1 9 affiliated producers. This item apparently is subject to market pressures 10 and some volatility and, tlerefore, is not fixed or subject to the 11 exclusive control of TP&L management as are the other TUFC0 expenses 12 and it alone varies with fuel consumption.

13 Q WILL YOU DISCUSS TUGCO'S BILLING PRACTICES?

14 A Texas Utilities Generating Company (TUGCO) in engaged in a multi-9( '

faceted operation which includes fuel related operations and transactions.

l 15 16 TUGC0 is responsible for the mining and transportation of lignite fuel 17 required for tb operation of the jointly owned lignite units at 18 Big Brown, Ibaticello and Martin Lake.

19 Exhibit 2 shows a typical TUCCO monthly bill. This particular bill 20 is for TP&L's share of TUGCO's costs at the Martin Lake Steam Electric 21 Station during October, 1977. It can be seen from this bill that TUGC0 1

22 uses the FERC Uniform System of Accounts to itemize its costs for billing 23 purposes, including the cost of fuel charged to Account 501. These TUGC0 24 Account 501 costs are in turn passed on by TP&L through its fuel adjustment 25 provision to the, ultimate customer.

, (._ ,

2

e l

WOULD YOU PLEASE D. CRIBE THE " COSTS" UdICH ARE INCLUDED IN TUGCO'S

( Q 2 ACCOUNT 501?

3A Exhibit 3 shows a detailed breakdown of the lignite component of 4 Account 501 for the Big Brown station which is typical. This exhibit f 5 shows that included in Account 501 are amounts for fuel production, 6 operation, maintenance, depreciation, federal income tax credits, taxes, 7 interest expense, plus additional amounts for fuel handling, ash disposal, 6 fuel treatment, and rail transportation, if applicabic. While some of 9 these expenses such as rail transportation may vary directly with the 10 quantity of lignite fuel that is consumed at the station, it is certain 11 that some of these costs do not vary at all with consumption and are, 12 therefore, fixed. Others, such as labor, may vary either directly with 13 production or be fixed. Examples of more-or-less fixed costs are 14 maintenance expense, depreciation expense, federal income tax credits,

[

15 property taxes, and interest expense. All are unrelated to the month 16 to conth consumption of fuel at the plant. Since these costs are 17 unrelated to the level of commodity usage and monthly consumption, 18 they at 1 cast should be separated from Account 501 and recovered through 19 TP&L's base rates rather than through the fuel adjustment provision. '

20 Do YOU FORESEE /dW DIFFICULTY IF PORTIONS OF TUGCO'S ACCOUIX 501 WERE Q

21 RECOVERED THROUGH TP&L'S BASE RATES RATHER THAN.THROUGH THE MONIHLY 22 FUEL CMUSE PROVISION?

23 A No. TUCCO's costs associated with operation and maintenance of the lignite 24 units do not flow through the fuel adjustment provision but are included 25 in the operating companies base rate. For exactly the same reasons, b

lk

N b i j .

\

l 1 TUGCO's fi::ed cost incurred in its lignite operations should also be l 1 2 included in the base rates rather than added into the amounts to be 1

3 recovered through the automatic fuel adjustment provision. t I

i 4Q MR. GROSS, ARE TilERE OTIIER PIASONS WliY T11ESE AFFILIATED COMPA'iY FIXED i

5 COSTS S110ULD NOT BE FLOWED TIIROUGli TP&L'S FUEL CLAUSE?

?

6A Yes. Since TUFCO and TUCCO are closely controlled by TP&L's canagement, i

7 it is totally inconsistent to allow their fixed costs to flow through

8 unregulated to the ultimate customer through an automatic escalatory t

9 clause uhile TP&L's own fixed costs are allowed to be recovered only i

I 10 through regulated base rates. The customer should not be subjected to i

! 11 rate increases caused by increases in TUFCO's and TUGCO's fixed costs I 12 when such costs are not scrutinized by the Commission through the normal i

13 cost of service filing raquirements. It is obvious that the existence 14 of the fuel affiliates presently provides TP&L with an opportunity to 15 avoid regulation with respect to portions of its operations because i 16 affiliated fixed costs are now being recovered through an automatic l

i 17 fuel adjustment provision. TP&L has an open ended ability to pass on 18 TUFCO and TUGC0 fixed fuct costs.

] 19 Q MR. GROSS, WilAT IS YOUR OPINION OF TP&L'S C0 DIET;T TIIAT AS ID5G AS Tile 1 -

] 20 PRICE OF FUEL FROM Tile AFFILIATES IS LESS TIIAN Tile MARKET PRICE, TilEN 21 TIIE COMMISSION S110ULD IIAVE A "IIANDS OFF" ATTITUDE TOWARD AFFILIATED j 22 COMPANIES?

i j 23 A The affiliated costs that we have. been discussing are items within the 24 control of TP&L and as such certainly there should be some incentive for

] 25 TP&L to closely manage them. The rather nebulous market measure espoused t k -S-s

- . , - , , - , -- , - -,nw m-.-- -

.-m-- en--- - - - . r - e.,, , v , .. e= w~ e-

4 1 in the company's rationale does not provide this incentive . From a rate-2 payers standpoint, there should be as much incentive as possible given 3 to TP&L to keep these fixed costs to a minimum. In my opinion, this 4 incentive can be best ceployed through the elimination of the feel 5 clause that allows TP&L automatic rate increases for cost items that 6 should be the subject of commission hearings.

7Q DOES THAT CO::CLUDE YOUR TESTIMONY?

8 A Yes.

9 10 11 12 13

(,

15 .

16 17 18 19 20 ,

21 22 23 24 25 l

[

Retrieved from "https://kanterella.com/w/index.php?title=ML19308A410&oldid=2498502"