ML19308B976
| ML19308B976 | |
| Person / Time | |
|---|---|
| Site: | Crane  |
| Issue date: | 01/11/1979 |
| From: | Mcelwee C PENNSYLVANIA, COMMONWEALTH OF |
| To: | PENNSYLVANIA ELECTRIC CO. |
| References | |
| TASK-TF, TASK-TMR NUDOCS 8001170718 | |
| Download: ML19308B976 (53) | |
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PUBLIC UTILITY COMMISSION
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Harrisburg, PA 17120 Public Meeting held January 11, 1979 Commissioners Present:
W. Wilson Goode, Chairman Robert K. Bloom, dissenting Louis J. Carter, concurring in the result Helen B. O' Bannon Michael Johnson, dissenting
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R-78040599 - Pennsylvania Public Utility Commission ((
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C-R0599001 - Kenneth C. Springirth C-RoS99002 - Mr. and Mrs. Dennis Thomas i
C-R0599003 - Mr. and Mrs. Donald Knarr
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l C-R0599004 - Mark P. Widoff, Consumer Advocate
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V C-R0599005 - Edward G. Balko C-R0599006 - Standard Steel Division of titanium Metals Corporation of America C-R0599007 - Electralloy Corporation C-R0599008 - Mark E. Leach C-R0599009 - National Forge Company C-R0599010 - Charles John Steffy C-R05990ll - Donald D. Harris C-R0599012 - Talon Division of Textron, Inc.
C-R0599013 - John Zello C-R0599014 - William P. Palmer C-R0599015 - Somerset County Area vocational Technical School and its Member School Districts C-R0599016 - Edward A. Brown C-R0599017 - Avtex Fibers, Inc.
c-R0599018 - Apartment Owners Association of Northwest Pennsylvania, Inc.
C-R0599019 - Joseph R. Graczyk C-R0599020 - Proctor and Gamble Paper Products Company C-R0599021 - Owens-Corning Fiberglass Corporation C-R0599022 - Cyclops Corporation C-R0599023 - Airco Speer Carbon-Graphite, A Division of Airco, Inc.
C-R0599024 - Mario S. Bagnoni, Councilman C-R0599025 - Edward R. Polaski C-R0599026 - City of Erie C-R0599027 - Paul L. Britton, III C-R0599028 - Sarah A. Reed Home - Retirement Center C-R0599029 - Erie Malleable Iron Company C-R0599030 - Abex Corporution C-R0599031 - Welch Foods, Incorporated C-R0599032 - Community United Church, Erie, et al.
C-R0599033 - W. Martin Peterhaensel C-R0599034 - Holy Trinity Lutheran Church and Community Center v.
Pennsylvania Electric Company 80011707/E+
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0RDER BY THE COMMISSION:
On April 28, 1978, Pennsylvania Electric Company (Penelec) filed Tariff Electric Pa. P.U.C. No. 71, providing for a general rate increase in its retail electric base rates and changes in its tariff rules.
Respondent propased that Tariff No. 71 be permitted to become effective June 27, 1978 or on such other date as prescribed by Commission order. This tariff was calculated to increase the Pennsylvcnia retail base rates by about $75.4 million, or an approximate 20.9 percent increase in base rates. Expected decreases in energy adjustment charges would offset this proposed increase.
The reason given by respondent for "the urgent necessity for prompt and substantial rate relief" was the anticipated deterioration in~its return on common stock equity to 6.71 percent during 1978 and 3.02 percent during 1979. This result is predicted despite the allowance of approximately 13.5 percent on common stock book equity granted in Pa. P.U.C. v. Pennsvivania Electric Company (Order entered February 24, 1978 at R.I.D. 392). The anticipated deterioration in earnings was attributed to the expected increase in capital, operating and maintenance costs of the placement in service of the Three Mile Island Unit No. 2 (TMI-2) nuclear unit, the Homer City Unit No. 3 (HC-3) coal-fired generation plant, and the Homer City coal-cleaning plant.
On May 23,1978 the Commission instituted th'is investigation and suspended the tariff for a period not to exceed seven months or until January 27, 1979. A total of thirty-four formal complaints were received. The Consumer Advocate filed a complaint, and the Commission prosecutory staff participated in the proceeding.
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- The proceeding was assigned to Administrative Law Judge Morris Mindlin for hearing and recommended decision. A pre-hearing conference was held on June 22, 1978. Non-evidentiary hearings were held in Erie on July 18 and in Altoona on August 9, 1978.
Between July 13, 1978 and November 16, 1978 thirty-four days of evidentiary hearings were held with the active participation of Staff, Consumer Advocate, industrial complainants, a home retirement center, several school districts, and respondent. All of these perties presented one or more witnesses. The record consisted of 3,398 pages of transcript and numerous statements and exhibits. Oral argument was held on November 16 and 17,1978. Main briefs were filed by respondent, Staff, Consumer Advocate, and Kenneth C. Springirth. Reply briefs were not filed due to the pressure of time.
During the proceeding the parties discussed possible areas of agreement for stipulation to eliminate issues and shorten the hearing process. An area of agreement was found in rate structure. The rate structure agreement, attached to this order is in the form of a written stipulation and is part of the record in these proceedings.
On December 7, 1978 the recommended decision of Administrative Law Judge Morris Mindlin was issued for exceptions.
Briefs on exceptions were filed by Kenneth C. Springirth on December 18, 1978, by the Staff on December 21, 1978, and by Consumer Advocate and respondent on December 22, 1978. A reply exception was filed by respondent on December 29, 1978.
At the public meeting held January 11, 1979 we considered the Administrative Law Judge's decision and the exceptions filed by the parties. We concluded on the basis of the record before us that the company had supported the need for overa,11 additional annual operating
9 8 revenues of $64,272,000. We now detail the reasons for those decisiens.
Future Test Year In its prior proceeding at R.I.D. 392 (Order issued June 28, 1978) respondent was the first to use a future test year. The use of a future test year drew impetus from the lag between the historical test year and the completion of a rate case. This lag was a principal reason for the recent amendment of Section 312 of the Public Utility Law by the General Assembly to permit the use of future test years by utilities in rate proceedings. The Judge discussed at length the company's use of a future test year and its impact on the claimed rate relief.
Respondent submitted data for two test years. Normalized historical data for 1977 was presented.
In addition, it presented a future test year ending ember 31, 1 ch consisted of 1978 budgeted data annualized and normalized to approximate the year-end level of operations. Actual data for the test year through September 1978 was compared with its budgeted data for the same period.
Consumer Advocate objected to this normalization of test year data to the year-end level of operations. This position questioned the viability of numbers which are budget projections onto which normalizations are tacked. The Judge found acceptable the methodology of respondent. Consumer Advocate takes exception.
Consumer Advocate viewed this finding as blind acceptance of respondent's data with monitoring by the Commission in the future.
It was argued this approach practically precludes a rate investigation.
The Consumer Advocate maintained the methodology of its witness as accepted in the Commission decision at R.I.D. 392 is proper.
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We find the reasoning and conclusion of Judge Mindlin to be proper and we adopt it as our own.
In our opinion, it meets the require-ments of the Public Utility Law and serves the public interest.
MEASURES OF VALUE Respondent submitted five measures of value including original cost depreciated, trended original cost depreciated at the spot, one-year average, three-year average and five-year average price levels as of December 31, 1978. The company's estimates are summarized below:
Table I Claimed Measures of Value
($000) 12/31/78 Trended original cost at Original Spot One-Year Three-Year Five-Year Cost 12/31/78 Average Average Average
$1,235,306
$2,012,856
$1.963,758 S1,865,833 S1,730,267 These estimates include Three Mile Island _ Unit No. 2.
The Consumer Advocate basically disagreed with respondent's test year approach to rate base. Respondent claimed a year end rate base at December 31, 1978 with adjustments whereas Consumer Advocate i
contended the proper application of the test year hinged on the use of an average rate base with a year end rate base treatment for Three Mile Island Unit #2 and the Homer City coal cleaning plant. Consumer Advocate maintained this position is consistent with the Commission's decision in the prior proceeding at Pa. P.U.C. v. Pennsylvania Electric Company (Order entered February 24, 1978 at R.I.D. 392). The Judge rejected Consumer Advocate's arguments on methodology and, on the record here, we agree.
The Commission Staff and Consumer Advocate believed these estimates overstate the value of the company's plant, and they proposed
- a number'of downward adjustments. Consumer Advocate and Staff recom-mended adjustments to deferred income taxes, unamortized expenses, cash working capital, plant held for future use, and depreciation reserve.
In addition, Staff proposed.ac adjustment to rate base for test generation, and Consumer Advocate proposed :djustments for nuclear fuel, operating reserves, and Three Mile Island Unit No. 2.
We will discuss each of these issues in turn.
Accumulated Deferred Income Taxes Respondent has claimed an expense of S4,286,000 in its provision for deferred income taxes, attributable to TMI-2 during the test year. However, in crediting accumulated deferred income taxes respondent calculated $2,056,000 as the maximum permissible rate base deduction for liberalized depreciation under I.R.C. Reg. Section 1.167(1) -
1(h) (6). Both the Staff and Consumer Advocate opposed respondent on this issue. They dispute the company's failure to reduce the rate base with the full years amount in light of its claim for the full year's expense deduction. Judge Mindlin accepted respondent's interpretation of the I.R.C. regulation and rejected Staff and Consumer Advocate arguments to the contrary. Consumer Advocate takes exception.
The Consumer Advocate viewed the treatment of respondent as being neither consistent nor appropriate for racemaking purposes. Consumer Advocate would increase the accumulated deferred income tax (net) balance by $2,056,000 which would be consistent with the treatment of the provision for deferred income taxes on the income statement.
We agree with the Staff and Consumer Advocate that a full year's credit to the accumulated deferred income tax account is appropriate since respondent is taking a full year's income deduction.
= Although respondent interpreted the IRS Code as a limitation on its credit to accumulated deferred income taxes, we are of another opinion.
We feel the basic principles of regulation dictate the matching of a full year's credit with the full year's expense for deferred income taxes claimed by respondent. We, therefore, agree with the Staff calculation and increase the accumulated federal deferred income taxes deducted from rate base by $2,230,000 to $4,286,000.
Unamortized Expenses Respondent claimed the unamortized balances of several expense items as part of its rate base. These items include rate case expenses of $681,000, extraordinary flood expenses of $2,473,000 incurred at Johnstown, and a year end deferred energy cost balance of $19,774,000 remaining during the transition to the new retail energy clause. At the same time respondent proposed an upward adjustment to the accumulated deferred income taxes to reflect the income tax effect of these amortizations. These amortizations are accounted for in the operating income statement.
Commission Staff is opposed to these claims. They take the position that amortizable charges are expenses and should not be included in rate base to realize a return. This inclusion, Staff argued, can lead to double collection. Consumer Advocate obj ected to the amortization period on the deferred energy cost balance. Judge Mindlin denied the Staff and Consumer Advocate recommendations.
Staff excepts.
The Staff argues that the finding on this issue by Judge Mindlin is contrary to Commission practice and law.
It has not been the policy of this Commission, Staff maintained, to allow fixed utilities a return on operating expenses other than those funds necessary for normal
_7 day-to-day cash working capital.
Staff stated that these expenses claimed by respondent in rate base are abnormal and non-recurring, and therefore, they do not meet the requirements of cash working capital.
Accordingly, the Staff in order to maintain consistency with Commission practice and preclude double recovery recommended exclusion of $22,928,000 from rate base and a corresponding reduction to accumulated deferred income taxes (net) of $11,893,000.
We grant the exception of Staff.
Since respondent is amortizing these expenses, we feel inclusion of the unamortized balances in rate base to earn a return would overstate the rate base (and return) by the amounts amortized once the allowed rates become effective. Thus, we disallow the unamortized expenses in the amount of $22,928,000.
Cash Working Capital j
Respondent claimed $17,559,000 for its cash working capital needs. Staff recommended a disallowance of $12,585,000. This amount included $8,772,000 associated with long-term interest paid, S1,529,000 with dividends paid, and $2,284,000 in reduction of compensating bank balances. The Judge accepted the Staff recommendation for disallowing the
$8,772,000 associated with long-term interest but rejected the other Staff proposal =
The Consumer Advocate proposed the balance-sheet approach to cash working capital for respondent. This approach would result in a complete disallowan e of cash working capital. Judge Mindlin did not c
accept this position consistent with our findings in respondent's last proceeding. There were exceptions filed by respondent, Staff, and Consumer Advocate.
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. Staff excepts to the Judge's disallowance of $1,529,000 associated with preferred dividends paid and his ruling on the $2,284,000 related to compensating bank balances.
It is the opinion of Staff that the Judge erred in his conclusion that preferred dividends are declared, rather than accrued. The preferred stock holder, Staff stated, is entitled to a fixed payment at a fixed time.
Staff viewed the rationale used by the Judge in his rejection of their position on compensating bank balances as weak. Judge Mindlin found the financial sophistication of disbursement float ought not be recognized in regulation.
Respondent excepted to the $8,772,000 disallowance made in the recommended decision. The company in support of its argument cited earlier Commission decisions and argued the recommended decision requires it to use funds for public service without compensation, contrary to law. Consumer Advocate excepted to the findings on its balance sheet approach.
We reject both exceptions.
We agree with the exception of Staff. There is no discernable difference between funds used to pay interest to bondholders and funds used to pay preferred dividends.
In both cases there is an agreed upon or contractual arrangement for the payment of these sums; both items should be treated alike. The record showed a disbursement float of $2,284,000 which in our opinion can be used to offset compensating bank balance requirements. We disallow $3,813,000 of the cash working capital claim in addition to the amount disallowed by the Judge.
Test Generation Proper accounting treatment of test generation is prescribed by the Uniform System of Accounts. The cost of test generation is charged to construction work in progress, while the revenue value is l
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. credited to construction work in progress. Here, the Staff took the position respondent has not properly valued the benefits produced by its test generation from TMI-1, TMI-2, and HC-3.
In the case of TMI-2 and HC-3 it was contended respondent failed to credit the respective costs of plant with the value generated. Also, the company afforded inadequate credit from test generation to partially offset the costs of TMI-1.
Respondent disputed these Staff contentions. The company claimed the credit for TMI-l was proper at the time of the applicable fossil fuel adjustment clause and no value was derived from the test generation of HC-3 and TMI-2 in light of its present and precedent energy clauses.
At the request of Staff the company prepared a change to its energy clause in order to exclude test energy. This change read as follows:
"S = The Company's total kwh sales to customers, excluding firm sales to other utilities and energy produced from facilities undergoing operational tests. prior to being placed into commercial operation, in the current (c) and base (b) periods."
Application of this accounting revision by respondent to TMI-l test generation and the exclusion of test energy from TMI-2 was estimated to produce a saving of $1,300,000.
Such a changed energy clause was applied retroactively to the company's share of the test generation from TMI-2.
The savings could be credited to the reduction of the plant cost at Three Mile Island.
Judge Mindlin recommended the exclusion of test energy from the energy clause and a reduction of $1,300,000 to rate base.
In the changeover from the earlier clause to the present clause it was estimated l
$300,000 would be collected from customers leaving $1,000,000 to be l
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. added to the deferred energy costs balance. The Administrative Law Judge recommended an addition of $1,000,000 to deferred energy costs and an addition of $517,000 to accumulated deferred income taxes at the tax rate of 51.67%. Both respondent and Staff except to the Judge's calculations.
Respondent submitted that other items unconsidered by the Judge would produce a net reduction in rate base of $793,000. Additionally, the result of the Judge's recommendations would be a decrease in income available for return of $31,000.
The Commission Staff also disputed the Judge's computations.
This was a consequence, Staff argued, of the Judge's failure to recognize the basic issue that respondent is and has been mismatching revenues and expenses for large blocks of electric sales in violation of the Uniform System of Accounts.
In other words, Staff felt, respondent capitalized test generation expenses and treated as current revenues test generation revenues. Consequently, they feel the recommended reduction in rate base is understated and should be reduced by $5,408,757 for TMI-1, TMI-2 an'd HC-3.
We have reviewed the company's proposal for exclusion of test energy from its energy clause and find that it has' merit. We have elsewher.e in this order approved its prospective application. We disagree, however, with the Judge's decision to make this change retroactive to the test year.
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. Electric Plant Held For Future Use
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The company made the following claims for plant held for future use:
$674,813 for land; $1,601,560 for Reesdale coal reserves;
$5,367,871 for tripartite coal reserves; $2,920,258 for drilling, exploration and development of coal reserves; and $1,000,000 for the contemplated land acquisition of the Robindale tract. These claims I
were contestel by the Staff and Consumer Advocate.
The Robindale tract is located in an area which was severely
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damaged in the 1977 Johnstown flood. The Indiana County Redevelopment t
Authority has acquired this land, and respondent has a conditional agreement with the Authority to acquire this tract at $2,000,000, with
$1,000,000 being its share.
It is contemplated the property will be acquired in the spring of 1979 and be used with other land for the development of the Seward No. 7 generating station, which is scheduled to be placed in service in 1985.
Respondent stated this purchase arrangement would offer a savings in price and is requesting Commission approval for the acquisition of the tract from the Authority. The Judge turned down the request.
In doing so, he expressed an aversion to any prior Commissic. Appiaval of managerial judgement.
The Reesdale coal reserves in the claimed amount of $1,601,560 are intended for use at Seward 7, scheduled to be placed in service in 1985.
Consumer Advocate has acknowledged evidence in the record to support this claim.
The Commission Staff is opposed because the reserves are not being actively mined.
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a i The Administrative Law Judge disapproved the Staff position.
His rationale was a scheduled in-service date of 1985 is not speculative, as defined by the Commission in the earlier case.
Staff takes exception.
The exception emphasized the proposed in-service date for Seward 7 is not reliable because construction has not yet begun. The Staff expects Seward 7 to be in-service no earlier than 1987 to 1988.
We concur with the finding of the Administrative Law Judge. Even the later in-service dates et*ed by Staff meet our requirements and are in concurrence with our decision at Pa. P.U.C. v. Pennsylvania Electric Company (Order issued June 28,1978 at R.I.D. 392).
Respondent claimed $5,367,871 as its share of costs incurred with its sister companies in a joint endeavor with two central Pennsylvania coal producers to confirm the presence of coal and to evaluate the economics of four coal fields. Respondent will pay the costs of drilling.
These coal reserves would be used at Seward 7.
The company has spent a total of $3,000,000 through July 1978 and planned no further expendi-tures in the test year. Consumer Advocate accepted the inclusion of these costs with adjustments to be made on its average-and-actual approach.
Staff opposed this cost inclusion with the same arguments it used for Reesdale.
The Judge found the $1,000,000 incurred in the tes? year to be proper, but he recommended disallowance of the remaining $4,367,871.
The Staff excepts. The Staff exception contained the same arguments used for Reesdale. We agree with Judge Mindlin as we did on the Reesdale issue.
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The balance of $2,920,258 in respondent's claim is respondent's joint share with its sister companies for current and budgeted amounts
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. to drill, develop, and explore for coal reserves. These amounts, except for $60,000 of supply and development costs, have not been related to specifically targeted use within the Commission's ten-year policy. Therefore, the Judge disallowed $2,860,258 from plant held for future use.
We concur.
Nuclear Fuel The company has claimed $19,441,000 for nuclear fuel used in its reactors of which $9,220,000 is for TMI-1.
The issue was essentially free of contention. Judge Mindlin recommended approval of the claim.
There were no exceptions, and we agree.
Operating Reserves Respondent, in its deductions from rate base, included
$1,394,000 for operating reserve-pensions. Consumer Advocate recommended an additional deduction from rate base in the amount of S730,000 which is contained in Account No. 215.1, Appropriated Retained Earnings-Amortization Reserve, Federal. The Federal Power Act requires respondent, who is the licensee of the Piney hydroelectric project, to accumulate in a separate account any excess of earnings over the allowed specified rate of return.
Consumer Advocate maintained these excess earnings are non-investor supplied sources of capital, and therefore, these funds are properly deductible from rate base. The Judge rejected these arguments on the grounds the fund represents retained, earnings and there is no way to ascertain the interest in these funds on the part of respondent's customers. Consumer Advocate excepts.
Its exception maintained the Judge erred in his statement thaft the public benefits either way from his treatment of the excess earnings.
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agree with Judge Mindlin.
TMI-2 Penelec claimed $175,841,000 in rate base for TMI-2.
Consumer Advocate proposed a reduction of this claim by $696,000. Th b ministrative Law Judge rejected the proposal by stating it was based upon an earlier estimate of cost and expenditure by test-year end. Exceptions were not filed, b e conc Depreciation Reserves
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Respondent proposed the use of 31-year and 34-year lives in its depreciation claim for TMI-2 and TMI-1, respectively. Staff proposed a 40-year life, being consistent with the service life used for fossil-3 fueled plants. The Consumer Advocate recommended an upward adjustment i
of S13,604,000 to the depreciation reserve in conformity with their average and actual approach.
The Judge found the claim by respondent of a 31-year life for TMI-2 to be proper. Staff excepts.
In the prior proceeding we accepted a 34-year life for TMI-1.
The exception of Staff is based on two arguments.
- First, the construction of a nuclear plant is superior to that of a fossil plant and thus its lifetime should be longer. Secondly, the high investment cost will make it economically prudent to maintain the plant at a high level of efficiency. Therefore Staff stated a life-span
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- of 40 years used for fossil-fueled plants is not an unreasonable expecca-tion.
While we will not grant the exception of Staff, we feel the Staff has valid reasons for longer life-spans than claimed.
We observed at Pa. P.U.C. v. Pennsylvania Electric Company (Order issued June 28, 1978 at R.I.D. 392) that "there is simply not sufficient experience with nuclear plants to establish a useful life with precision."
To tie these depreciation rates to the expiration of the particular unit's operating license, as implied in respondent's claim, would be arbitrary.
Therefore, for ratemaking purposes we set the depreciation life spans for TMI-l and TMI-2 at 35 years.
Accordingly, we reduce the depreciation reserve by $742,000.
This adjustment also reflects 1/2 year's accrued depreciation for THI-2.
An appropriate adjustment to annual depreciation expense has also been made.
Miscellaneous The Administrative Law Judge has made an upward adjustment of $474,000 to cash working capital and a downward adjustment of
$697,000 to accumulated deferred income taxes.
The net effect of these adjustments is an increase of rate base by $1,171,000.
The adjustments were made necessary by the Revenue Act of 1978 which reduced the Federal corporate income tax rate from 48 percent to 46 percent. We approve these findings.
Conclusion As a result of our resolution of the disputed issues, we determine respondent's net measure of value at priginal cost to be
$1,206,089,000.
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Judge Recommended 0.C. Rate Base 1,218,659 Adjustments to 0.C.:
Deferred Income Taxes (2,230)
Unamortized Expenses (22,928)
Cash Working Capital Test Generation (3,813) 1,300 Deferred Energy Costs Accumulated D.I.T.
(1,000)
Robindale Tract 14,359 1,000 Depreciation Reserve 742 Total
_f12,570)
Net Measure of Value at Original Cost 1,206,089 FAIR VALUE On the basis of our resolution of the various issues involving measures of value we find that the company's original cost rate base is $1,206,089,000 and the five-year average trended original rate base is $1,701,050,000 as shown below:
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-17 TABLE II Measures of Value
($000)
Original Five-Year Cost Electric Plant Average Electric Plant in Service
$1,508,704
$2,428,260 Nuclear Fuel in Reactor 10,060 10,060 Nuclear Fuel in Spare Assemblies 1,683 1,683 Plant Held for Future Use 4,336 4,336 Total Plant
$1,524,783
$2,444,339 Deoreciation Reserve 328,938 753,533
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Net Electric Plant
$1,195,845
$1,690,806 Additions To Rate Base Coal Inventories S
25,080 25,080 Oil Inventories 862 862 Operating M & S Inventories 8,427 8,427 Coal Mine Development Costs 9,235 9,235 Non-Recoverable Coal Costs 416 416 Extraordinary-Johnstown Flood Cash Working Capital 4,974 4,974 Deferred Energy Costs 5,700 5,700 Rate Case Expenses Miscellaneous 1,171 1,171 Total Additions 55,865 55,865 Deductions from Rate Base Customer Advances for Construction 1,502 S
1,502 Accumulated Deferred Investment Tax Credit 117 117 Accumulated Deferred Income Taxes.
38,374 38,374 Internal Revenue Service Refunds 1,228 1,228
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Interest on IRS Tax Refunds 1,095 1,095 Customer Deposits 800 800 Net Unamortized Gain on Reacquired Debt 1,111 1,111 Operating Reserves - Pensions 1,394 1,394 Total Deductions S
45,621 S
45,621 Rate Base - Original Cost
$1,206,089 Rate Base - Five-Year Average
$1,701,050
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. Penelee arg ued for a fair value finding in the f ollowing manner, which is summarized below:
"In summary, therefore, Respondent urges a fair value finding which gives recognition in part to the spot measure of value and which, in conjunc-tion with the fair rate of return finding, authorizes allowable return in the amount of
$122,172,000, as established in this proceeding."
(Respondent's Main Brief, p. 74).
Fair value in this proceeding was viewed in relation to fair rate of return. The financial witness of respondent testified that the proposed fair rate of return is that "to be applied to a fair value rate base which reflects at least in part the current day value of Respondent's facilities."
(Respondent's Main Brief, p. 95).
Staff's final recommendation for fair value was $1,357,519,634.
The Staff derived this fair value by applying a trending factor of 1.1306 to the Commission's finding of original cost in the last rate case and adding the result to the difference between original cost finding in the last case and adjusted original cost at test-year end in this case.
The Judge disapproved this recommendation and viewed it as nothing more than a rationalized abstraction, especially since it was followed by an adjusted rate of return to be applied to its fair value.
Consumer Advocate recommended original cost as fair value.
Alternatively, they would accept the procedure of trending equity which the Commission used in the last case.
The Administrative Law Judge found an original cost fair value of $1,217,488,000. Hestated,"originalcost,beingasimple, direct, and ascertainable measure of actual legitimate capital investment, constitutes the only authentic and significant measure of fair value l
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- under our statutory scheme of utility rate re i
gulation."
it would be incongruous to Also, he found of fair value.
apply a cost of ecpital to a legal constr
--e uction
.,f Staff takes exception.
The Commission Staff argued the Judge ig nored the mandate of the law by finding the fair value to be ori i g nal cost. Then the Judge, Staff averred, made up for this by th j
e enployment of a higher rate of return. Staff is of the opinion its meth d of indexing is a o
proper procedure to be used in the determinati on of a fair value.
We agree in part with the Staff excepti on.
A great deal of 1
debate on this issue has occurred over th e years.
is a fair value state.
Pennsylvania cf the law rests in the General AssWe believe authority for embly and the courts.
will adopt in principle the fair value m Therefore, we This involves a weighting of original ethodology proposed by Staff.
by percentages to correspond to the p rcost and trended ori e cent of debt and percent of equity respectively in the capital structure.
In both decisions at Pa. P.U.C. v.
Pennsylvania Cas and Water Co.
214, 341A. 2d 239 (1975)
_, 19 Pa. Commonwealth Ct.
and Pennsylvani a Cas and Water Company v.
Pa. P.U.C., _
_ Pa. Commonwealth Ct.
381A. 2d 996 (1977) the Court has held a weighting or averaging of original cost and trended original cost sh ould be used. This method is also in conformity with our holding in th entered April 4, 1978 at R.I.D. 367.
e recent Bell Telephone order Only the component of the fair value r t a e base financed by common equity should be trended from origin l/
i a cost.
To trend the component of fair value financed through fixed obligations would, in
- our opinion, provide a return in excess of their actual costs. Because those actual costs are contractual and fixed, the excess return would accrue to the common equity holder. The effect would be to provide common stockholders with a return in excess of that allowed here. Use of this method would result in a fair value determination of $1,369,426,000, as shown below.
TABLE III Fair Value
($000)
Weighted Rate Base Weight Rate Base Original Cost
$1,206,089 67%
$ 808,080 Five-Year Average Trended
$1,701,050 33%
S 561,346 100%
$1,369,426 However, f air value is not determined with mathematical precision.
We believe this methodology provides a benchmark against which to measure our conclusion.
Based on the record here we find a fair value of $1,350,000,000 to be reasonable.
FAIR RETURN Administrative Law Judge Mindlin recommended the following fair return based on respondent's net original cost:
TABLE IV Recommended Fair Return Capital Cost Weighted Structure Rate Cost Debt 53%
7 48%
3.96%
p Preferred Stock 14 8.89 1.25 Common Equity 33 14.00 4.62 100%
9.83%
- Respondent, Consumer Advocate, and Commission Staff contested the issues of capital structure and common equity.
Staff litigated the issue of debt.
Financial evidence was presented by witnesses for each of the parties.
Capital Structure Recommendations for the capital structure by the various parties are shown below:
TABLE V Capital Structure Positions Kenneth C.
i Consumer Commission Springirth
_ Respondent Advocate Staff Debt 51%
52.1%
53%
54%
Preferred Stock 15 13.6 14 13 Common Equity 34 34.3 33 33 The Judge accepted the position of Consumer Advocate as representative without an explanation.
The Staff excepts.
Staff advocated the use of a GPU system consolidated capital l
structure in exception to the Judge's use of a company based capital structure.
It was felt by Staff that the system's capital structure experience and goals is a more accurate guide to a representative capital structure for ratemaking purposes.
For example, Staff pointed out its recommendation is identical to respondent's own estimated 1
capital structure at 12/31/79 (Recommended Decision, pg. 46).
We grant the exception of Staff.
Penelec is owned by General Public Utilities (GPU), and its equity is not publicly traded f
In our
- opinion, the Staff recommended capital structure is most representative and proper.
1
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i i
?
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, \\
Cost of Debt Respondent claimed 7.48 percent as the embedded cost of i j
ts long-term debt.
The Consumer Advocate was in agreement.
Commission Staff recommended a 7.52 percent cost rate.
To maintain consistency with the granting of the Staff exceptions on capital str ucture, we find a 7.52 percent cost rate of long-term debt.
Cost of Preferred Stock Respondent's claim of 8.89 percent as the embedded cost of preferred stock was unchallenged and it was accepted by th e Judge.
We concur.
Cost of Common Equity The claim of respondent and the recommendations of th e parties for the cost rate of common equity for ratemaking p urposes are as follows:
TABLE VI Equity Cost Rate to Rate Base v
Original Fair Cost Value Respondent 12.75 Commission Staff 13.25 - 13.75 10.25 - 10.75 Consumer Advocate 12.8 The financial witness of respondent, Mr. Joseph F
. Brennan, recommended a 12.75 percent cost rate of common equity appli cable to a fair value rate base.
His recommendation pas based primarily j
on earnings / price ratios.
Other methods such as earnings / net proceeds ratios, discounted cash flow, earnings / book ratio and the bare rent theory were used as checks.
I l
I i
1
4
. }
The Consumer Advocate offered Dr. Matityahu M i
rate of return witness.
arcus as a Dr. Marcus recommended a 12.8 percentequity cost rate on an original cost rate base.
~
His study included review of relevant non-regulated industries (S & P 400)
, relevant groups of regulated utilities, and historical data on GPU and other entities.
Dr. Marcus relied primarily on the discount d e
cash flow method.
Staff witness Steslow recommended an equity cost range of 10.25 percent to 10.75 percent applicable to a fair value rate base.
Earnings / price ratios (unadjusted) were emph asized by the Staff.
Staff used a ten-year (1968-1977) historical study of earnings / price ratios to support its conclusion.
The Administrative Law Judge found a 14 perc cost rate on original cost.
ent co= mon equity judgement factors to arrive at the same costThe J prior proceeding.
rate he found in respondent's The Consumer Advocate and Staff take excepti finding.
on to his Consumer Advocate maintained the Judge err d f e
or several reasons.
- First, it was argued he relied in large m facts not of record and not properly the subj easure on ect of " official notice."
Secondly, none of the competent reliable a 14 percent finding.
evidence on the record supports Consumer Advocate viewed the recommenda all three witnesses as being below the finding ns of Law Judge.
of the Administrative I
Staff in their exception interpreted the J d u ge's finding as being based almost completely on the market pe[form While the Staff favored GPU data as a st arting point, the use of data from other barometer g they also advocated roups.
Staff stated the performance l
s
- of Penelec over a five-year period (Exhibit L, schs. 9 and 13) is clearly superior to GPU.
Thus, the Staff contended the recommendation of Judge Mindlin is too high and their position of a 13.25 - 13.75 percent return (Staff Main Brief, p. 55) on common equity measured at original cost is more reasonable.
After reviewing the position of all parties we believe that a fair value equity return of slightly over 10 percent would be appropriate.1/ This allowance is somewhat higher than our fair value equity finding of 9.72 percent in Penelec's last race case. We feel this higher allowance incorporates a recognition of the rampant inflation which is affecting our economy as illustrated by a prime rate near 12 percent. The overall return on fair value rate base will be 8.53 perrant as shown below:
TABLE VII Fair Rate of Return Ratio Cost Weighted Cost Debt 54%
7.52%
4.06%
Preferred Stock 13 8.89 1.16 Common Equity 33 10.03 3.31, 100%
8.53%
1/
This equates to a 13.12% return on book equpty.
. OPERATING REVENUES Penelee claimed pro forma test year operating revenues at present rates of $392,451,000. The Administrative Law Judge approved the claim, and the Staff takes exception.
Staff argued the Judge erred in assuming a 1978 future test year level of sales contrary to the actual, experienced growth rate.
Respondent projected a growth rate of 2.8 percent for the future test year ended December 31, 1978, but Staff stated the actual growth rate for the first nine months of this period was 3.47 percent.
We approve the Judge's finding and will use h,is pro-forma level of revenues in our determination of revenue requirement.
In our opinion, the Staff comparison was not convincing.
OPERATING EXPENSES Respondent claimed pro forma test year operating expenses (including TMI-2 and depreciation but excluding taxes) at present rates of $281,656,000. The Consumer Advocate and Commission Staff contested a number of specific issues, and we will discuss each of these issues separately.
Homer City 3 - 0 & M Expense
)
The company normalized operation and maintenance expenses (fuel excluded) for Homer City Unit No. 3 and its coal cleaning plant to reflect the mature level of operations expected at,this station in 1983. The normalization produced an additional claim for expenses of
$2,183,000 over 1978 budgeted amounts. Respondent described the 1978 budgetasbeingabnormallylowintheabsenceokscheduledoutagesto perform maintenance. Staff took issue with the claim and recommended a reduction of $2,183,000 in normalized expenses. The Judge found
. the claim to be proper.
Both Consumer Advocate and Staff except.
Consumer Advocate argued the finding is flawed, because the expense level represents the station expenses at maturity.
It was further contended these pro forma changes occur outside the test year without any matching of annus11 zed revenues.
Staff viewed these normalized expenses as " anticipated and speculative" when one becomes involved with a 1983 maturity level.
Also, Staff dismissed the propriety of this adjustment in light of respondent's knowledge of these units and its ability to include all necessary expenses in the budget. Therefore, the Staff recommended a disallowance of $2,183,000.
We agree with the Staff. This normalization is much too speculative in nature and we will reduce expenses to the 1978 budgeted level. Our disallowance is $2,183,000.
TMI - 0 & M Expense Similar adjustments were made by respondent for both TMI units to reflect normal expenses for a mature unit. The operation and maintenance expense normalization increases over the 1978 budget were $321,000 for TMI-1 and $830,000 for TMI-2.
The budgeted amounts included no refueling costs. Respondent felt these additional claimed amounts were justified.
Staff proposed the elimination of the S321,000 claim for TMI-l and the $830,000 claim for TMI-2.
Consumer Advocate recommended the disallowance of $321,000 for TMI-l and the entire claim in the amount of $4,216,000 for TMI-2 since the claimed expense is a normalized t
expense to be incurred beyond the test year. The Judge rejected these recommendations and approved respondent's claim.
Consumer l
Advocate and Staff except.
i I
e
. The exception of Consumer Advocate was the same it submitted g
on Homer City 3.
The Staff felt the Administrative Law Judge exceeded the bounds of consistency and equitability by his approval of anticipated expenditures.
Staff advocated a disallowance of $1,151,000.
The exception of Staff is granted. We view the company's claim as too speculative.
A basic principle of accounting and racemaking demands the proper matching of revenues and expenses; clearly, the normalization of the TMI budget includes expenses beyond the future test year witi,eut matching associated revenues. We disallow $1,151,000.
Power Production and Other Expenses Commission Staff combined the budgeted expense of Penelee in a number of accounts, and the total amounted to $96,242,000.
These accounts were steam power generation and other power generation (less fuel expense accounts),
hydraulic power generation, transmission expenses, distribution expenses, customer accounts, and administrative and general.
The Staff position was that the expenses in these accounts are too high. They used a least squares statistical technique on the historical data for the years 1968 - 1977 to arrive at an estimated expense level for the test year.
By this technique the Staff determined the appropriate expense level to be S83,695,000.
I Consequently, they recommended a disallowance of $12,547,000 of respondent's budgeted expenses in these accounts.
The Administrative Law Judge dismissed
{
this approach and refused the recommendation.
Staff takes exception.
Staff contended its method is proper in that it has smoothed i
out ups and downs and established a reasonable level.
We agree with Judge Mindlin.
The historical data used in this method fails to sufficiently account for the higher rates of inflation experienced by respondent in recent years and the addition to these expenses associated 1
with the end of period addition of Homer City No. 3.
e
- Deco =missioning Excenses Respondent has claimed annual expense allowances of $330,000 and $308,000 for the decommissioning of TMI-1 and TMI-2, respectively.
The company has chosen the entombment method of decossissioning, and its claim for the Three Mile Island nuclear units duplicates the method employed in its last proceeding. The decision in that case granted respondent an annual allowance of $74,000 for TMI-1.
The Administrative Law Judge approved respondent's claim. Consumer Advocate excepts citing the Commission policy on decommissicning described in Pa.
P.U.C.
- v. Pennsylvania Electric Company (Order entered February 24, 1978 at R.I.D. 392).
We grant the exception of Consumer Advocate.
In our decision we reviewed the particulars of our deduction for the cost of dismantling
)
non-nuclear structures.
i The total estimated decommissioning costs in this proceeding are $39.6 million for TMI-1 and $38.2 million for TMI-2, in 1978 dollars.
Continuing with our policy set in the last Penelec case, we reduce the total estimated costs by the estimates of the cost of dismantling non-nuclear structures (Exh. E-3 and E-4, p. 2).
The reduced in-place entombment claim is $25.1 million for TMI-l and
$23.7 million for TMI-2.
An annuity was then developed. This annuity will provide for the investment in tax exempt state and/or municipal securities.
The total of this annuity and the interest accumulated thereupon (at a 6.5% interest rate) will amount to the reduced in-place entombment costs at the time of TMI's eventual decommissid'aing assuming a 35
\\
. year nuclear unit life. The annuity will amount to $111,000.1/
This $111,000 annuity should be treated in the following manner:
1 1.
The annuity and its accumulated interest shall be placed in an escrow fund, unavailable to Penelee until the dismantling of Three Mile Island.
One-twelfth of the annuity will be deposited in the fund at the end of each calendar month.
2.
Each fund investment by the escrow agent shall be in tax exempt state and/or municipal securities having the highest yield the time the investment occurs.
(The interest on such bonds is free at of both state and federal income taxes, and thus serves to reduce the amount of the burden on the ratepayers).
3.
A strict accounting shall be maintained for the fund, I
so that its balance can be determined at any moment in time.
Thus, if at any time there is a change in the estimated life of TMI-1, or TMI-2 in the decontamination and dismantling costs, in the proposed method of decommissioning, or in the average yield on the securities, the difference between the projected costs and the amount already accumulated in the fund can be readily ascertained, and the annual annuity requirement on the remainder can be readily computed.
1/
A = Pr x 2 (1+r)n -1 where P1 = 25% (25.1) = $6.275 million P2 = 25% (23.7) = $5.925 million
= 3.25% per half-year r
n1 = 62 half years n2 = 70 half years
/
therefore: A1 = $ 65.113 A9 = $ 45,946 A = $111,059
, 4.
It is expected that by following the procedure herein, the difference between the total amount of the fund which will h ave been accumulated and the actual costs incurred at decommission will b minimis.
However, if there is any excess whatever in the fund, Penelee shall return the excess to the ratepayers or use it for their direct benefit in any other manner that the Commission may order; and conver
- sely, if the costs exceed the amount of the fund, Penelee shall amortize th e
excess as a charge over a reasonable period as ordered by the Commission Using these provisions, not only will the interest on the escrowed fund be free of state and federal income taxes, but the annuity itself may be excluded from taxable income.
Decommissioning expenses must be considered in this proceeding, and current ratepayers who are benefitting from the generation of the TMI units should be the ones who contribute toward the costof the eventual decommissioning of that facility. An annuity of $111,000 is sufficient to provide $48.8 million, the current estimate for the proper containment (by the in-place entombment method) of the nuclear l
components of the TMI units.
The accumulation of this decommissioning fund shall be used only for the purposes of the eventual decommissioning of that plant, and as such should not be deducted from rate base.
The original claim was for an annual decommissioning expense of $638,000.
An annual provision of $111,000 represents a disallowance of $527,000.
Amortization of Book Reserve Deficiency Penelee possessed a book depreciation reserve deficiency of f
So,016,000 on the basis of its calculated reserve as of December 31 1978.
1 i
e The company claimed an annual charge of $453,000 to the income statement to amortize this deficiency. The Judge accepted the objection of the Commission Staff and Consumer Advocate, and he disallowed the annual amortization claim. There were no exceptions. We concur.
Other Operation and Maintenance Expenses In its claim respondent had included an item of $171,000 for payment to the Liquid Metal Fast Breeder Reactor Program in 1978.
The Administrative Law Judge found a lack of evidentiary support in the record for this item. There was a question as to whether this payment would be incurred. The Judge disallowed the claim, and there were no exceptions. We agree.
Amortization of Deferred Energy Costs There were other energy costs incurred by respondent, which were deferred under the currently effective retail energy clause. A total of $19,380,000 were projected to be unrecovered as of the end of the transition period. Respondent proposed to amortize these costs over a five-year period at an annual amount of $3,876,000.
Consumer Adv : ate proposed a ten-year amortization period.
This proposal would result in a recommended annual disallowance of
$1,938,000. Judge Mindlin turned down this recommendation. The Consumer i
Advocate takes exception.
It is the position of Consumer Advocate that the deferred i
energy balance included in measure of value should be reduced by the amount of amortized expense shown on the income statement for the test year. We agree with Judge Mindlin on the five-fear rmortization period.
l Our treatment of the unamortized balances in rate base renders this exception moot.
i
- Annual Depreciation Expense Under the depreciation reserve section of this Order we discussed our determination of a 35-year life span for the Three Mile Island nuclear units. A related adjustment to annual depreciation i
expense must be made to reflect this determination. Therefore, we reduce depreciation expense by $774,000. Our estimate of total ennual depreciation expense for TMI-l was $3,198,000 and for THI-2 was
$5,266,000.
Conclusion As a result of our resolution of the disputed issues, we determine test year operating expenses (including depreciation but excluding taxes) to be $276,397,000.
(000)
Judge Recommended Operating Expenses 281,032 Commission Adjustments to Operating Expenses:
Homer City 3 - 0 & M (2,183)
TMI - 0 & M (1,151)
Decommissioning (527)
Annual Depreciation (774)
Total (4,635)
Operating Expenses 276,397 l
f
- INCOME TAXES Consolidated Tax Savings General Public Utilities (GPU) and its subsidiaries, including Penelec, file a consolidated Federal income tax return under the Internal Revenue Code.
For book purposes the tax savings resulting from consolidated filings are allocated to the subsidiaries by the parent.
In this proceeding GPU only allocated the portion of the tax savings related to interest payments. Commission Staff contended all the tax savings, attributable to all parent losses including operational losses, should be allocated to the subsidiaries.
In this instance Staff recom-mended a downward adjustment of $447,000 to the company's Federal income tax claim in order to reflect all the tax savings.
This adjustment was calculated based upon the latest data provided in the 1977 tax return filed at September 15, 1978.
The Administrative Law Judge approved this recommendation in his decision.
Exceptions were not filed by the parties. We agree.
GPU Double Leverage Savin 3s l
Consumer Advocate argued that fund: derived through the issuance of GPU long-term debt is used to buy equity in Penelec.
Therefore, net income, derived from the difference between its recommended cost of equity to Penelec and the actual long-term debt cost for GPU, was imputed to respondent by the Consumer Advocate This, hypothetical income was calculated to be $513,000.
net The Judge rejected this position. The Consumer Advocate excepts with a repeat of its basic arguments. Irhe reasoning and conclusion of Judge Mindlin is adopted.
- Deferred State Income Taxes Commission Staff has reco= mended the disallowance of respondent's claim for deferred state income taxes on accelerated depreciation in the amount of $1,949,000.
In other words, Staff argued the benefits of accelerated depreciation should be flowed through to the present rate-payers.
The Administrative Law Judge disapproved the Staff recommenda-tion. He cited past Commission policy which in respect to state income taxes followed the lead inherent in the Federal law. Also, the Judge expressed his concern for the increasing demand on energy resources and the effect of inflation on construction costs.
In his opinion, the present policy on all deferred income taxes recognizes these problems. The Staff takes exception.
i The Staff exception contained a number of contentions.
- First, normalization violates a basic principle of ratemaking because it causes current ratepayers to pay a higher expense than has actually been incurred or is about to be incurred.
Secondly, the Staff maintained the Federal law specifically excludes state deferred income taxes from the requirement of normalization, when accelerated depreciation is used.
Also, Staff viewed the normalization of income tax benefits as a forced investment of the general public capital into utility plant.
Additionally, this investmeci :ould cause the creation of excess capacity and induced higher rates.
We find merit in the exception of Commission Staff. Proper ratemaking must endeavor to match actual costs Incurred by respondent with the utility rates customers are charged.
In this instance, the state income tax benefits due to the use of accelerated depreciation
~
),
-)
, are normalized or retained by respondent.
Straight-line tax depreciation charges are claimed in the rate proceeding yet the company pays actual income tax charges using an accelerated depr eciation method. The income tax difference is deferred into a reserve account for amortization in i
later years.
Ratepayers pay this deferred income tax, charge in races We disallow $1,949,000 of deferred state income taxe s claimed in respondent's pro forma income taxes.
At the same time we will allow
$896,000 of additional Federal income taxes to reflect the tax e ect of this disallowance.
_ Income Tax Effect of Interest Expense Under the recommended decision of the Administrativ Judge debt interest was calculated at $48,312,000.
Our decision found a capital structure of 54 percent debt at a cost rate of 7 52 percent.
Along with the determined original cost rate base of $1,206,089,000, we find $48,977,000 of interest expense.
Co.nsequently, income taxes (at a 46% Federal rate) are adjusted downward by $360 000 f rom the Judge's recommendation of $760,000.
Provision for Deferred Income Tax At page 80 of the recommended decision an adjustment of
$130,000, was made to Provision for Da erred Income Tax.
This adjustment is unexplained and, to our knowleoge, unneccesary We, therefore, reduce the recommended tax figure by $130,000.
Federal Income Tax Rate The Revenue Act of 1978 reduces the corporate income ta x
ratesforthetaxyearsafterDecember31,197pfrom48perc ent to 46 percent.
This rate filing, with the approved rates to become effective in 1979, has been considered within the context of the 46 percent rate.
o
! RATE STRUCTURE As a result of negotiations among all parties, an agreement on rate structure issues has been reached and is attached heret as Appendix C.
The Consumer Advocate, the Commission Prosecutory Staff, and the industrial complainants have join d 1
e with Penelec in the stipulation.
The stipulation was approved by the Administrative Law Judge. We believe that the principles behind this agreement are correct, and we will direct the company to file its approved rates in accordance with principles set forth in this sti pulation.
_ CONCLUSION As a result of our resolution of the many issues presented here, we determine that Penelee has shown the need for total i
additional annual operating revenues of $64,272,000 and total allowable annual operating revenues of $456,723,000, as shown in the attached Appendix B.
{
1 Of this amount, $56,238,000 should come from Pennsylvania retail customers (Appendix A).
The amount of relief granted is approximately 74 percent of the amount requested.
I The rate of return allowed is, in our opinion, the minimum that is needed to attract capital at reaso i
nable rates. The company is directed to file tariffs reflecting this level of rate reli f e
and our comments on structure; THEREFORE, IT IS ORDERED:
1.
That the complaints listed in the caption of this proceeding are sustained to the extent indicated.
2.
That the respondent forthwith file tariff supplements cancelling its proposed Tariff Electric-Pa. P.U/C. No. 71.
>.f
. 3.
That the respondent is authorized to file withi i
after the date of entry of this Order, as it may n 30 days elect, tariff revisions consistent with our above-Order, designed to provid e total annual operating revenues of $456,723,000 (exclusive of revenues from the k
State Tax Adjustment Surcharge and the Energy Adj i
ustment Clause) as computed and allowed herein at the level of operati ons at December 31, 1978.
Respondent shall, in connection with its tariff fil
.i, ing hereunder, file, with the Commission, a cost of service st d u y, fairly allocating revenues and unifomly allocating the level of ret between its Pennsylvania jurisdictional and iturn, permitted hereby, customers.
s non-jurisdictional 4
That the stipulation, entered by respondent Prosecutory Staff, the Consumer Advocate
, the Commission
, and the various industrial complainants, in respect of respondent's propo sed rate design and revenue allocation, and submitted to the Commission fo r its approval, is hereby approved.
In its tariff filing in compliance herewith, respondent shall incorporate the tariff provisions, contained i i
n the stipulation.
respondent shall reduce each of its proposed rate i The its tariff revisions in confomity with the sti ncreases in developing pulation by the overall percentage of the total proposed revenues and non-jurisdictional sales.
, allocated between jurisdictional 5.
That the respondent shall file detailed calcul its tariff revisions, ations with by which it shall cemonstrate that the rates do comply with the requirements, set forth in the C ommission's Order.
6.
That t
the surcharge shall be computed in accord the State Tax Adjustment Procedure Ord ance with er of March 10, 1970, i
as revised.
l l
- 1.]
l z 7
{
That Respondent may incorporate the followi in its Energy Clause:
ng provision S = The Company's total kwh sales to cust
- omers, excluding firm sales to other utilities and energy produced from facilities undergoing i
operational tests prior to being placed into commercial operation, in the current s;
(c) and base (b) periods.
8.
The value of energy produced from faciliti es undergoing operational tests prior to being placed into cocmercial operation shall be determined at the difference in average energy costs per kwh of sales, determined with and without adjustme t f n
or such energy. The value of such energy shall be credited to th facilities, producing such energy prior t e construction costs of the into commercial operation.
o such facilities' being placed 9.
Since the Commission is making its rate d t e ermination herein upon the substantive basis of future-test-yea
=
subject to further order of the Commission forr data, the respo such filing, file appropriate data within thirty days after the end of each calendar quarter and for a 12-months' period next precedi ng the end of such calendar quarter, to afford comparison between th e estimated data, submitted in this proceeding and the actual co t s of s'ervice.
Such data shall be submitted in addition to the heretofore required to be submitted monthly and annual reports, i
Such data shall include rate of return on rate base and capital and sepa f
rate accounting for unusual and non-recurring expense and expen se, heretofore disallowed under racemaking policy of the Commission Where it will be significant e
j i for measuring its return, the respondent shall mak e accounting note of variances between usual regulatory and financial-accounting practice.
10.
Upon the filing and approval by the Commission of s
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acceptable tariff revisions, as prescribed by the Cocmi and investigation at R-78040599 ssion's Order, the inquiry i
and the consolidated complaint proceedings shall thereupon be terminated and the record marked clo sed.
BY THE COMMISSION fu 5
C. J. McElwee h,
Secretary (SEAL)
ORDER ADOPTED: January 11, 1979 ORDER ENTERED:
January 26, 1979 1
1 f
i i
x 4
A
APPENDIX A 1.
Fair Value
$1,350,000,000 2.
Rate of Return 0.0853 3.
Total Allowable Return (Line 1 x Line 2) 3 115,184,000 4.
Commission Determined Income Available at Proposed Rates S 126,404,000 5.
Income Excess (Line 3 - Line 4)
S 11,220,000 6.
Revenue Excess (Line 5 x Revenue Factor of 2.0316) 22,792,000 7.
Total Revenue Request S
87,064,000 8.
Total Additional Revenues Allowed (Line 7 - Line 6) 64,272,000 9.
Percent of Request Allowed (Line 8 ; Line 7) 73.822 10.
Total Pennsylvania Retail Revenue Request S
76,181,000 11.
Total Pennsylvania Retail Revenue Allowance (Line 10 x Line 9)
S 36,238,000 i
I l
APPENDIX S PENNSTLVANIA ELECT 1LIC COMPANY R-78040599 Summary of Revenues Expenses and Taxas
($000)
Pro Forza Test Year Proposed Commission Adjustments 12 Months Proposed Rates Operating Ended Rate Proposed ALJ Per Expenses and Income Commission 12/31/78 Increase Allowance Adjustments ALJ Taxes Available Allowance OPERATING REVENUES:
8tce Rsvenues 380,384 Forfsited Discounts 2,167 oth;r 9.900 Total 392,451 87,064 479,515 479,515 (22.792) 456,723 OPERATING EXPENSES:
Optrstica and Maintenance Hossr City 3 (2,183)
Three Mile Island (1,151)
Oth r (171)
Powsr Production and Othsr Dscommissioning (527)
Amortization of D:ficiency (453)
Total 236,044 1,394 237,438 (624) 236,814 (3,861) 232,953 D pr:cistion and Amortization 38,081 6.137 44,218 44,218 (774) 43,444 TAXES Taxts. Other than Income 13,372 1,742 15,114 15.114 (456) 14,658 itets Income 2,154 4,378 6.532 44 6,576 269 (1,558) 5,287 Fedirst Income 5,720 18,219 23,939 278 24,217 2,548 (9.558) 17,207 2cnsolidated Tax Savings (447)
(447)
(447)
D:ferred Income Taxes 12.220 4,131 16,351 16.351 (1,949) 14,402 Prevision for Deferred Incoes Tax 130 130 (130)
Investcent Tax Credit -
Nst 5,280 8,412 13,692 13,692 13,692 Incoms Tax Effect of Inter st Expense 760 760 (360) 400 Miscs11aneous (57)
(57)
(57)
(57)
Total 38,689 36,882 75,571
- 765, 76,336 378 (11,577:
65,142 NET INCOME AVAILABLE FOR RETL'RN 79,637 42.651
+122,288 (141) 122,147 4.257 (11,220) 115,184
APPEliDIX C BEFORE THE RECEIVED PENNSYLVANIA PUBLIC UTILITY COMMISSION
[;;V 91978 DOCKET NO. R-78040599 SECRETARY'S L.
E WOtiRp W"i'm PENNSYLVANIA PUBLIC UTILITY COMMISSION v.
PENNSYLVANIA ELECTRIC COMPANY MOTION On behalf of respondant, Pennsylvania Electric Company, and with the consent of all active participants in the above captioned proceeding, it is lx:reby moved that the Stipulation attached hereto be made a part of the record in said proceeding.
f r*,
't..! l i..,(/h (' [b,jh !<
c.
Ryan, Russell & McCo ghy Counsel for Pennsylvania Electric Company
/
BEFORE Tile PENNSYLVANIA PUBLIC UTILITY COMMISSION DOCKET NO. R-78040599 PENNSYLVANIA PUBLIC UIILITY COMMISSION v.
PENNSYLVANIA ELECTRIC COMPANY STIPULATION The undersigned, counsel for Pennsylvania Electric Company
(" Company"), the Pennsylvania Office of Consumer Advocate (" Consumer Advocate"), the Pennsylvania Public Utility Commission Prosecutory Staff
("PUC Staff"), and various industrial complainants in the above captioned proceeding, herewith submit for the Commission's consideration a Stipula-tion for thc proposed settlement of specific rate structure and allocation of the base rate revenue increase amount issues of said proceeding.
l INTRODUCTION I
i on April 28, 1978, the Company filed its Tariff Electric PA i
PUC No. 71 proposed to become effective June 27, 1978, together with sub-stantial supporting data.
By Order entered on June 6, 1978, the Commis-sion instituted a formal investigation to determine the fairness, reasonableness, and lawfulness of the proposed rates, rules and regulations as well as to consider the lawfulness and propriety of existing rates, rules and regulations. TheCommission'sOrderalfotooknoteofthe automatic suspension of the proposed tariff increases and changes until January 27, 1979, unless the Commission would permit the new tariff to
4 C.
INTRODUCTION (Continusd) become effective on an earlier date.
l The proceeding was assigned to the Office of Administrative Law Judges for hearings.
As of the date of this Stipulation, there have been thousands of pages of direct testimony, 33 days of hearings involving more than 3300 pages of written transcripts, hundreds of exhibits, and respons es to various interrogatories and data requests made of the Comp any by the other parties in the proceedings, and several days of informal meetings and discussions between the Company and various active parties.
A I
classes of service.
1 substantial portion of the proceeding was devoted to rate structure cost of service, and the allocation of revenues among the various The parties hereto have worked together to resolve areas of controversy in order to reach this Stipulation.
It is hereby agreed that the position taken by any party hereto with respect to any issue covered hereby is completely without prejudice, is taken solely for the purpose of reaching this Stipulation, and shall not be construed, either subsequently in this proceeding or in any other proceeding
, as representing the view of that party as to the appropriate manner in which that issue should otherwise have been determined.
This Stipulation has been divided into two sections; (1) Speci-fic Rate Structure Issues, and (2) Allocation of Revenues Section 1 contains four parts: Part I nddresses Residential Rates RS, RT, and a proposed experimental demand meter rate; Part II deals with General Service Rates GS, GL, LP, and H; PartIII treats the Lighting Service Rates SL, OL, MV, and TS; and Part IV pertains to th e
elimination of certain rate schedules and provisions.
f Section 2 contains a description of how the base rate increase is to be allocated among the jurisdictional rate groups. __
i
SECTION 1 - SPECIFIC RATE STRUCTURE ISSUES The parties hsrsto h:va agrend, se aforesaid, to certain changes to specific rate schedules of the Company as follows:
I.
Residential Rate Structures:
1.a.
Rate RS - Residential Service This rate will consist of a customer charge (which does not include any kilowatthours) and one or two energy blocks.
The second energy block will commence after the first 900 kWh in the winter billing months of October through April and will be avail-able only to (i) existing Rate RS electric space heating cus-tomers (including existing customers under Rate AE which is being eliminated) and (ii) to locations for which Rate RS elec-t tric space heating commitments were made prior to the effective date of these new rates. The increase to the electric space heating customers shall be such as to eliminate a substantial Portion of the existing rate differential between standard resi-dential customers and the residential electric space heating customers. Customers served under the restricted Rate RS elec-tric space heating provision shall be notified of the Company's i
intent to eliminate such provision in the next general rate filing by the Company.
1.b.
Rate RT - Residential Time-of-Day Service This optional rate will remain as proposed with the excep-tion that the customer charge shall be $3 per month greater than the RS customer charge in recognition of the additional incremental costs to serve customers on a time-of-day basis, f
The energy charges will be adjusted to reflect higher off-peak charges than presently stated with downward adjustments to the proposed on-peak charge, as warranted.
_3_
i f
j 1.c.
Residential Demand Meter Rate Experiment A Residential Load Factor Rate shall be introduced, 4
subject to the following restrictions:
1.
Due to the experimental nature of this rate, the Company restricts the number of customers it will
~
serve hereunder to five hundred (500) until further notice.
2.
A one-year contract minimum shall be required.
3.
Availability will be limited to customers con-suming 900 or more kWh per month for three con-secutive months.
In addition, the customer charge will be greater than the Rate RS customer charge in recognition of the additional incremental costs to serve customers on a load factor rate.
1.d. The Company, Consumer Advocate, and Commission Prosecutory Staff have agreed to jointly develop a program to be used 1
I to promote, monitor, and evaluate the success of the time-of-day and load factor rates.
In any event, the Company will undertake to promote more specifically the existence and applicability of these rates through direct contact with customers as well as through available print and broadcast media.
Significant findings will be furnished to interested parties.
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II.
Central Service-Rate Structures:
1 1
II.a.
Race CS - General Service - Small i
Special Provisions (e), Space heating Service, and
.s (f), Service to Churches, will be proposed to be eliminat d r.
e in the next general rate filing.
1 Customers presently l
served under these provisions shall be notified of this
,1 intent by the Company.
Special Provision (h), Off-Peak Service, shall be expanded and made available to all cus temers.
A separate monthly fixed charge and a one year contract minimum shall be required for a; I
customers un-der 50 kW to compensate the Company for the additional incre mental costs for providing this service.
The single Rate CS for customers under 100 kW will be an initial step in the direction towards having only three general service r t ae schedules (secondary service, primary service, and sub-transmission service).
II.b.
Rate CL - Cencral Service - Large The demand blocking will consist of two blocks with a cost differential of 40c per kW.
This step is also taken in light of the effort to move further in the direc-tion of three general service rates.
The bulk of the in-crease will be placed in the demand charges of the rate to the extent that small customers (under 200 kW) do not re-ceive disproportionate increases.
Special Provision (c),
Untransformed Service, credit will be increased to 35c per t
kW.
Special P ovision (f), Space Heating Service, will be treated consistett with Rate CS, Special Provision (e)
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I
II.c.
Rate LP - Large Powtr The bulk of the increase allocated to this rate schedule will be placed in the demand charge.
ll.d.
Rate H - All-Electric School, Church and Hospital Service This rate is to be proposed to be eliminated in a subsequent general rate filing made by the Company follow-ing a study to be made by the Company to determine the customer impact of such a move.
Customers shall be noti-fied of this intent by the Company.
III. Lighting Service Rate Structures:
III.a.
Street Lighting Rate SL - Incandescent Lighting Service, Rate OL - Private Outdoor Lighting Service and Rate MV -
Municipal Street Lighting Service The allocated increase will be distributed as follows: Rate OL - no increase, Rate MV - Standard High Pressure Sodium Vapor units - no increase.
Rate MV -
Standard Mercury Vapor and Restricted Rate SL - Incandes-cent Street Lighting, will absorb any increase allocated to lighting service rates.
III.b.
Rate TS - Traffic Signals A study is to be made by the Company to determine the feasibility of opening this restricted rate to all traffic signals, thus eliminating the mete,r investment.
As part of this study a similar investigation will be made as to the feasibility of providing unmetered service to telephoac booths and other small us/ age applications such as school and railroad crossing signals.
Results of the study will be furnished to interested parties. -
J 1..
IV.
_ Rate Schedules and Provisions - Eliminated:
IV.a.
_Present Rate RS, Special Provision (a) - Water Heating Service e
This provision shall be eliminated as proposed by the Company in its filed Tariff Pa. P.U.C. No. 71 Customers will receive service under standard Rate RS l
or such other rate as they may elect (Rate RT).
IV.b.
Present Restricted Rate AE - All-Electric Service and I
_ Restricted Rate GH - All-Electric General Service These rates shall be eliminated as proposed by the Company in its filed Tariff Pa. P.U.C. No. 71.
Customers will be transferred to the appropriate rate schedules IV.c.
Rate OP, This rate will be withdrawn inasmuch as no custom are served thereunder.
Service of this nature will be available under the expanded off peak provision of Rate GS 1
l l
e
o SECTION 2 - ALLOCATION OF REVENUES The parties hereto have agreed, as aforesaid, to certain allo-cations of the jurisdictional retail rate increase granted the Company as follows:
Step 1 The overall base rate percent increase as related to the normalized base revenues as contained in Penelec Exhibit C-52 is 21.6832%. Initially, each retail rate schedule shall be allocated an increase amount determined by multiplying the normalized revenues set forth in Penelec Exhibit C-52, column 4 by the increase percentage.
Step 2 Presently, certain rate schedules are producing higher than average rates of return. Therefore, present rate classifica-tions CS, CM, and OL shall receive fifty percent of the allo-cated increase amount determined in Step 1.
The remaining fifty percent of the rate GS, CM, and OL increase amount shall be reallocated proportionally to the remaining rate schedules.
On the assumption that the Company is granted the entire amount of its rate increase, Schedule A has been prepared to demonstrate the results of Steps 1 and 2 set forth above. The methodology contained in Schedule A would still be appropriate in the event the Company is granted less than the entire requested amount.
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The foregoing Stipulation by the parties is subject to the acceptance and approval of the Pennsylvania Publi c Utility Commission.
In the absence of any such approval by the C ommission, and without express agreement of each of the signatori the deemed to be null and void.
es, this Stipulation shall be i
,t Ryan, Russell & McConaghy Attorneys for Pennsylvania Electric Company 1
g By:_ L..o 30L;I e
Samuel B. Russell,*Esq.
Mark P. Widoff Consumer Advocate By:-
mAsso Y
vs-(~
t a
Prosecutory Staff of the Pennsylvania Public tility Commissi n By:_ \\)
e s ((
O. pw43gh v
Indu i
Com nts By.
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B
(
By:_
e 4
c By:
Dated November 9, 1978 l
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