ML19308B989
| ML19308B989 | |
| Person / Time | |
|---|---|
| Site: | Crane  |
| Issue date: | 03/22/1979 |
| From: | Mcelwee C PENNSYLVANIA, COMMONWEALTH OF |
| To: | METROPOLITAN EDISON CO. |
| References | |
| TASK-TF, TASK-TMR NUDOCS 8001170731 | |
| Download: ML19308B989 (76) | |
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.F D6ds ion OF 3 -N71 wydudho rure a As n nT -44.
of: R.EPL4c4A)& ETden UgcV(-r PENNSYLVANIA-PUBLIC UTILITY COMMISSION J bT6 W dl>D//ld--
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Harrisburg, PA 17120 gjgg g
Public Meeting held March 22, T9 T Connaissioners Present:
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W. Wilson Goode, Chairman
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Louis J. Carter
$67(4% valva Te Ik Michael Jdhnson, concurring R.I.D. 626 PENNSYLVANIA PUBLIC UTILITY COMMISSION C-R0626001 JOHN F. ROMANN MARK WIDOFF, CONSUMER ADVOCATE Q
C-R0626002 C-R0626003 BETHLEHEM STEEL CORPORATION (c4ALg_ gf C,R0626004 JAMES A. SIMON & EDNA R. SIMON C-R0626005 ST. REGIS PAPER COMPANY C-R0626006 BIRDSBORO CORPORATION b
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C-R0626007 MRS. CHARLES R. WELLER, JR.
p tctu~2-. at h METROPOLITAN EDISON COMPANY Q
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APPEARANCES SAMUEL B. RU9 SELL, ESQUIRE W. EDWIN OGDEN, ESQUIRE ERIC L. B. STRAHER, ESQUIRE FREDERICK REIGLE, ESQUIRE RYAN, RUSSELL & McCONAGHY For: Metropolitan Edison Company MICHAEL P. KERRIGAN, ESQUIRE s
For: Pennsylvania Public Utility Conunission DAVID M. BARASCH, ESQ'JIRE g
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BARBARA L. SMITH, ESQUIRE
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MAURICE A. FRATER, ESQUIRE HENRY R. MacNICHOLAS, ESQUIRE ROBERT H. GRISWOLD, ESQUIRE
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McNEES, WALLACE & NURICK For:
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GEORGE MILLER, ESQUIRE BERNARD A.RYAN, JR., ESQUIRE DECHERT PRICE & RHOADS For: Bethlehem Steel Corpo*1 tion STEPHEN A. GEORGE, ESQUIRE BUCHANAN, INGERSOLL, RODEWALD, KYLE & BUERGER For: Birdsboro Corporation KEITH L. KILGORE, ESQUIRE SPITLER AND KILGORE For: James A. Simon & Edna R. Simon
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D 0RDER BY THE COMMISSION:
On June 30, 1978, Metropolitan Edison Company (Respondent, Met Ed or Company) filed Tariff Electric-Pa. P.U.C. No. 43, providing for increases in its base rates and changes in certain cariff rules and regulations, all to become effective August 29, 1978. Tte proposed tariff was designed to produce total operating revenues of $36!,609,000, based upon ture test year ending March 31, 19 e proposed rates as initially filed, would have produced an increase in total revenues of $87,229,000 and an increase in net utility operating income of
$42,836,000 above normalized revenues and net operating income at existing rates. Under proposed rates, Pennsylvania retail sales revenues are claimed to fs $346,100,000, while net utility operating income based on these revenues is claimed to be $98,600,000. On the basis of the original filing, therefore, Federal Energy Regulatory Commiseion, (FERC) sales for resale are claimed to produce operating revenues of
$19,509,000 and net utility operating income of $5,008,000.
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At the conclusion of the proceedings, Met Ed revised its claim for total operating revenues to $365,182,000 and its claim for net utility operating income therefrom to $105,372,000, for an increase in total utility operating income normalized for the test year ending March 31,1979, of $44,600,000 and a revenue increase of $86,802,000.
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Q f the total revenue increase of $86,802,000, $68,820,000 p
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}ce#'3 represents th revenue requirement]for Met Ed's fifty-percea; twnership of Three Mile Island Unit No. 2 (TM1-2), an 880 megawatt (W) nuclear unit that went into service cember 31, 1978.
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w By order adopted July 21, 1978, and entered August 8, 1978, the Commission, at R.l.D. No. 626, instituted a formal investigation to determine the fairness, reasonableness and lawfulness of Respondent's proposed rates, rules and regulations. The Commission order took note of the automatic suspension period of seven months set forth in 66 Pa.
C.S. $3108(d). The investigation proceeding was assigned to the Office of the Administrative Law Judge for hearings and recommended decision.
The proceeding was subsequently assigned to Administrative Law Judge Joseph L. Cohen.
In addition to the complaint filed by the Office of Consumer Advocate, six other complaints were filed against Respondent's proposed tariff, three by individual complainants and three by corporate com-plainants. The complaints were consolidated with the Commission ordered investigation for purposes of hearing and recommended desision.
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i Two prehearing conferences, twenty-eight days of evidentiary hearings and one day of oral argument combined with some additional oral testimony were held. Evidentiary hearings commenced on August 30, 1978, and ended on December 18, 1978. Oral argument was held on January 15, 1979.
The record in this proceeding consists of more than 3,150 pages of testimony, the prepared written direct testimony of 14 witnesses for Respondent, five for the Office of Consumer Advocate (OCA), and eight witnesses for Commission Prosecutory Staff (Staff). Numerous E
exhibits were admitted and various documents filed with the Commission were incorporated by reference into the record.
Initial briefs were filed by Respondent, OCA, Staff and Bethlehem Steel Corporation. The brief filed by Bethlehem Steel Cor-poration was in support of the stipulation of counsel, filed with the Commission on January 23, 1979, on behalf of the Respondent, the In-dustrial Conplainants, the Staff and the OCA, in regard to rate structure and allocation of the increase in base rate revenues among the classes of ratepayers.
On February 23, 1979 the Recommended Decision of Judge Cohen was issued for exceptions. Exceptions were filed by the Respondent, the Staff and the Consumer Advocate.
The Cospany Respondent, a Pennsylvania corporation, was incorporated in 1922 and is a subsidiary od General Public Utilities Corporatio (GPU), '
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x a holding company registered under the provisions of the Public Utility Holding Company Act of 1935. Respondent's prheipal office is at 2800 Pottsville Pike, Muhlenberg Township, Berks County, Pennsylvania 19605.
Its principal business is the production, purchase, transmission, distri-bution and sale of electricity.
Respondent provides retail electric service in :11 portions of four cities, 22 boroughs and 155 townships, located within 14 counties in eastern and central Pennsylvania, comprising a total area of approxi-mately 3,300 square miles and an estimated service area population of 826,500. It also sells electricity at wivilesale to five municipalities (estimated population 17,500), to an electric company serving substantially all of one township and to a rural electric cooperative. The company's only gub_sidiary, York Haven Power Company, is the owner and licensee of the York Haven Hydroelectric Project.
The generating and transmission facilities of Met Ed, Pennsyl-vania Electric Company (Penelec) and Jersey Central Power & Light Com- '
pany (Jersey Central), all of which are wholly owned subsidiaries of CPU, are interconnected and operated as an integrated and. coordinated system. Major facilities of this system are designed and installed on an overall system basis to achieve maximum operating economy consistent with service reliability. These electric transmission facilities are x
also physically interconnected with neighboring nonaffiliated utilities in Pennsylvania, New Jersey, Maryland, Ohio and New York. Respondent is l l
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r a member of t e Pennsylvania-New Jersey-Maryland interconnection (PJM) and Mid-Atlantic rea Cuuuuli, au v a sou16.i.1vu ym-dding-eeerdi=0;d review of the planning of utilities in the PJM area. The interconnection facilities are utilized.for substantial capacity and energy interchange and purchases power transactions as well as for emergency assistance.
Future Test Year Respondent in filing its Tariff Electric-Pa. P.U.C. No. 43 utilized a future test year ending March 31, 1979. The Public Utility N
N Code, 66'Fa. c.s. 5315(e) provides:
"In discharging its burden of proof the utility may utilize a future test year. The connaission shall promptly adopt rules and regulations regarding the information and data to be submitted when and if a future test period is to be utilized. Whenever a utility utilizes a future test year in any rate pro-ceeding and such future test year forms a substantive basis for the final rate determina-tion of the commission, the utility shall provide, as specified by the commission in its final order, appropriate data evidencing the accuracy of the estimates contained in the future test year, and the commission may after reasonable notice and hearing, in its discre-tion, adjust the utility's rates on.the basis of such data."
Pursuant to the Public Utility Code, the Commission on May 27, 1978, adopted ac a final regulation 52 Pa. Code Section 3.271(b),
which provides:
"Where a public utility submits and uses data for a future test year, it shall during the course of the proceeding, submit for the record the reaults of its actual experience in the future test year for each quarter start-ing with the day following the end of the
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A required experienced 12-month period. Such results shall be submitted within 30 days of the en /of the quarter or as soon thereafter as p 'sible."
OCA ontends that Respondant's rate base, revenues and ex-penses fo\\ its plant in-service exclusive of TMI-should be calcu-lated on the basis of a 13 month average test year. According to the OCA, the use of a year end rate base with a future test year is improper for the reason that the data is unreliable and the year end rate base method is " simplistic, distortive and unnecessary."
In his Recommended Decision Judge Cohen discussed this subject at some length, citing Re: Florida Power & Light Company,17 PUR 4th 478 (FPC, 1976) wherein a yerr-end test period was utilized. Addition-ally, we have reviewed numerous other decisions of the regulatory bodies in our sister states which discuss the merits of utilizing an average test period and a year-end test period. As a consequence of an extensive review of both views on the subject, we have concladed that a 13 month average test period is by far the more desirable choice and it will utilized in future cases, absent compelling circumstances to the contrary.
In the instant proceeding, while the OCA bas provided a number of adjust-ments which would recast t e Respondent's test period on a 13 month i
average basis, there are a L;sber of omissions which result in deficiencies in the record regarding a 13 month average test period. Reluctantly, we conclude that because of these deficiencies in the record, we have no choice but to utilize Respondent's year-end test period showing.
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Out-of-Period Adjustments The question of whether out-of-period adjustments should be permitted when a future test year is utilized is one of significant import at this juncture.
In the past, when a recorded test year was utilized, the reasons proferred for the adoption of out-of-period adjustments varied, but a similar thread of thought ran through them all of which focused upon the staleness of recorded data in relationship to the conditions which would obtain when the rates would be in effect and the need to make adjustments in order to more adequately reflect those future conditions.
Utilization of a future test year, under our Rule 53.271, advances the test year approximately one year closer to the period during which new rates will be in effect. Consequently, in our view, much of the validity of the proferred arguments in support of the necessity to allow out-of-period adjustments has disappeared. Recognizing that out-of-period adjustments will, in most instances, distort the relation-ship of revenues, expenses and rate base as they existed in the test year, we have in this proceeding and will in future proceedings, closely scrutinize and reext mine in light of the current situation, the alleged necessity for, and appropriateness of, proferred out-of-period adjustments, each on their own merit.
MEASURES OF VALUE Original Cost Respondent's original cost measure of value for its future test year, the twelve-month period ending March 31, 1979 as finally revised by respondent is set forth below in Table I: '
r TABLE I Original Cost Measure of Value Test Year Ending March 31, 1979 including TMI-2 As Revised Electric Plant Electric Plant. In Service
$1,262,679 Electric Plant Held For Future Use 1,799 Total Electric Plant
$1,264,478 Depreciation Reserve Electric Plant In Service
$ 216,992 Net Electric Plant
$1,047,486 Nuclear Fuel In Reactor - Net of Amortization 21,514 Nuclear Fuel - Spare Assemblies 4,614 Net Nuclear Fuel 26.128 Total Plant
$1,073,614 Additions coal Inventories 10,771 011 Inventories 1,574 Other M&S Inventories 10,746 Deferred Energy Costs (Cols. 2-7, Net of Tax) 1,063 Deferred Energy Costs - Unamortized 6,525 Unamortized Storm Damages 644 Unamortized Rate Case Expense 273 Cash Working Capital 14.297 Total Additions 45,893 Deductions Customer Deposits S
584 Customer Advances for Construction 672 Unamortized Gain on Reacquired Dabt 930 l
Acc.~ Deferred Investment Tax Credit (3%)
Acc. Deferred Income Taxes (Net) 47,339 l
Income Tax Refunds (Net) 829 Operating Reserves - Pensions 459 Total Deductions 50,813 Ner Original Cost Measure of Value
$1,068,694
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Both Staff and OCA propose adjustments to respondent's original cost measure of value claim.
1 nt In Service Respondent claims as its gross electric plant in-service the sum of $1,262,679,000. Staff proposes two adjustments to this in the amount of $19,332,000. The first adjustment represents a deduction for the value of test energy in the amount of $11,472,000; the second proposed adjustment is in the amount of $7,860,000 for the faulty steam valvesinTMI-(OCA}roposesreductionstoelectricplantin-service in the amount of $25,939,000. The adjustments proposed by OCA consist of the following:
(1) $3,929,000 to reflect the difference between the actual data and the budgeted data due, in largest part, to the delay in the in-service date of the Portland Industrial Waste System; (2) a proposed adjustment that would reduce respondent's rate base in the amount of $852,000 as an out-of-period expenditure related to TMI-2; (3) a proposed adjustment in the amount of $9,000,000 due to delays in_
the in-service date of TMI-2 alleged to be the result of managerial "mismanan_amant" in connection with claim _ed__ underfunding of an important Jhase of the construction of TMI-2; and (4) the amount of h$12,158,000 as a result of the necessity of replacing faulty steam safety valves.
Value of Test Enerav Staff proposed an adjustment that would reduce Respondent's claimed original cost measure of value by $11,472,000 for the value i
of test energy. Test energy is that energy produced by a generating unit while undergoir.g testing prior to being placed in commercial \\
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4 operation.
(Met Ed's statement N, page 1) Respondent claims that l
the proposed adjustment is improper.
The accounting treatment to be accorded test generation is set forth in electric plant instruction 3, paragraph 18 of the Uniform System of Accounts prescribed for electric utilities by FERC as follows:
"The earnings and expenses during construction 3
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te a component of construction ~
costs.
"(a) The earnings shall include revenues received or earned for power produced by generating plants during the construction period and sold or used by the utility. Where such power is sold to an independent purchaser before intermingling with power generated by other plants, the credit shall consist of the selling price of the energy.
Where the power generated by a plant under con-struction is delivered to the utility's electric system for distribution and sale, or is delivered to an associated company, or is delivered to and used by the utility for purpose other than distribution and sale (for manufacturing or industrial use, for example), the credit shall be the fair value of the energy so delivered.
The revenues shall also include rentals for lands, buildings, etc., and miscellat eous receipts not properly includibie in other accc.unts.
"(b) The expenses shall consist of the cost of operating the power plant, and othet costs incident to the production and delivery of the power for which construction is credited under paragraph (a), above, including the cost of repairs and other expenses of operating and maintaining lands, buildings, and other property, and other miscellaneous and like expenses not properly includible in other accounts."
Both Respondent and Staff agree that the value of test energy be capitalized, thereby reducing _ the construction cost of the facility involved by the value of the test energy. However, they
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disagree as to how test energy should be valued.
Respondent maintains that only energy related revenues should be considered in valuing test energy used in generating electricity for its customers. Staff maintains that both base and energy related rev-enues should be considered in determining the value of test generation.
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The position of Staff is that there is an increase in base ~ revenues associated with the testing of plant under construction and that, there-fore, such base revenues must be considered as part of the value of test f
generation.
p According to Respondent, it receives no benefit from test generation inasmuch as such generation is utilized to supply energy to 0[
its customers at a cost below the incremental cost of interghange g.
5 purchases and that this_ reduced cost is reflected in the energy clause,to thereby resulting in lower charges to its customers. Respondent also
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7 asserts that test generation has no impact upon base revenues for the p-reason that it does not result in increased sales, but rather it is used g,
to replace, not augment, other energy sources.
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To the extent that Respondent's energy clause might not fully tw take into consideration e value of test generation, we are of the opinion that the difference between the recognition of test generation in the energy clause and that part not so recognized should be capital-t ized, thereby reducing the cost of construction of the facilities in-volved. However, it appears that all test energy is recognized in the operation of the energy clause. Therefore, Staff's proposed reductio &
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,of rate base for test generation in the amount of $11,472,000 is denied.
Modification of Energy Clause Respondent, in response to the issue raised by Staff regarding the crediting of test energy revenues to construction costs, proposes a change to its energy clause to exclude test energy 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 current (c) and base (b) periods." (Amendment emphasized)
An identical change was recently approved in the Pennsylvania Electric Company case, R.I.D. 599 and we approve it herein.
TMI-2 Steam Valves Staff proposes an adjustment to Respondent's original cost measure of value in the amount of $7,860,000, representingtheaMd e_xpense in connection with the malfunctioning main steam safety valves
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on TMI-2.
Staff contends that this is neither an investment in used N
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,and useful property nor an expense that should be borne by ratepayers.
The OCA also recommends a downward ndiustment to Responden Q for plant in-service of not less than $12,158,000 in connection with the malfunctioning steam valves on TMI-2.
The OCA would also have Respondentorderedtoidenti)yandspecifythecostsassociatedwith the delay encountered by it in placing TMI-2 in service, which delay was occasioned by the malfunctioning valves.
Respondent contends that it should not be required to sustain any loss occasioned by the malfunctioning steam valves that is not re-covered in a pending suit again d nergan & Co.,
he manufacturers of the valves. Respondent further claims that direct costs associated with
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replacing the malfunctioning steam valves were approximately $1,700,000.
The adjustment proposed by Staff is based upon the testimony of its fair value witness, Donald L. Birx, wherein he states that the proposed adjustment is based upon the cost of the valve replacement, which entailed a major revision of the steam system and the costs in AFDC of delay 3 resulting therefrom.
The position of Staff is that ratepayers should not be required to pay depreciation upon and a return on those costs associated with the d,gl=y e=nmed by the malfunctioning valves supplied by Lonergan & Co.
e OCA,J oposing a reduction in respondent's original cost measure of value in excess of $4 million greater than that of Staff, predicates its adjustment upon two bases:
(1) that the malfunctioning of the main, steam safety valves could have been avoided by respondent through the exercise e prudent management prac es; ar (2) that the costs r
associated with the failure of these valves represent an abnormal cost incurred by respondent and therefore should not be included in its N
original cost measure of value.
The first contention of OCA with regard to the faulty steam safety valves is E_ h bereft of mer t rests on the assumption 1
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that prudent management would never have ordered the larger steam
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e safety valves for TMI-2, but, on the contrary, woul< have ordered the smaller steam safety valves which subsequently proved to be successful in the operation of TMI-1.
The second contention of the OCA that the faulty steam safety valves represent an extraordinary event unlikely to occur in the future and, thus, should not be recognized in rate base appears 5
to be an attempt to analogize it to extraordinary expenses occurring within a test year. This is a specious analogy.
We conclude that, although the malfunctioning of the TMI-2 steam safety valves is not attributable to a lack of prudent judgment on the part of management. and while Respondent asserts that it should not bear any costs that are not recovered in its pending suit against Lonergan & Co., we believe thatJ his situation-is-analo us-to that I
of the TMI--l girder ri, (R.I.D. 170-171, 50 P.U.C.-77, 102) and as there, we are of the opin' Ion'that-RespundEHEis ratepayers should not be made to bear the burden of the costs of von 1mefna the malfunctioning
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steam valves, for it was the Respondent not its ratepayer which selected h
_t e contractor to provide the valves and Respondent and its stock-N holders shouldJtar the risk of performance failure.
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We believe that the costs actually incurred in replacing the steam valves is most properly measured by Staff's figure of m
$7,860,000.
~~The original cost measure of value of Respondent's electric plant in service will be reduced $7,860,000. The accrued depreciation reserve will also be reduced by an appropriate i
amount.
Defay Due to Alleged Underfunding of TMI-2 The Office of the Public Advocate for the State of New Jersey commissioned Touche Ross and Company to conduct a review of the TMI-2 construction project for the purpose of determining whether the cost escalations resulting from slippages in the in-service dates of TMI-2 were occasioned by bad management practices. Judge Cohen determined that the report was relevant to the issue of whether the Respondent's total TMI-2 investment should be included in rate ba se.
The Touche Ross review, with the accompanying recowwendations and the testimony of Mr. Madden, suggests tha from the beginning f the TMI-2 construction project, the management of M eet le t
,something to be desired from the point of view of good management practices. However, the revies recognized that as time went on, centralized
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project direction was accomplished through the. medium of GPU Service J
Corporation (GPUSC), which directed the project '
2 1971 onward. As
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a matter of fact, GPUSC was incorporated as a wholly owned subsidiary of CPU in large part for the purpose of. managing construction projects for GPU subsidiaries.
The Touche Ross review was conducted with the cooperation of GPU and GPUSC personnel. Touche Ross had meetings with:the TMI-2 management and data was supplied to it by GPU.
From the data available to it, Touche Ross concluded in its review that i g thraa year period frc: 1971J;o_1978 the cost of delay in the in-service date of TMI-2 was conservatively estimated to be
$159,800,000.
Dividing this number by three, Touche Ross estimated the annual impact of the delay to be approximately $53,300,000. Utilizing the latter figure as a basis of computing monthly delays, Touche Ross estimated that the, project sustained a cost increase of 18 to 26 million dollars for a delay of from four to six months. Inasmuch as Respondent owned 50 percent of TMI-2, the cost tc it for such a delay would vary from $9 to $13 million.
The Touche Ross report suggests that a GPU management decision i
not to continue supplying funds at an accelerated rate for TMI-2 in the m._
latter half of 1976 was an imprudent management decision and resulted in a delay in the in-service date for TMI-2 of from four to six months.
There is no dispute between Respondent and OCA that such a decision was made in the latter half of 1976 with respect to TMI-2 construction, but there exists a major dispute as to the characterization of this GPU decision as imprudent. Moreover, there is a dispute as to whether the failure to accelerate funds did result in the delay alleged by OCA.
Respondent received a $17,180,000 rate increase on June 22, 1976 retroactive to July 3, 1975. Prior to that time, on September 24, 1974, it received a $12,740,000 rate increase by operation or law. OCA contends that GPU knew or should have known that Jersey Central would in all likelihood receive a substantial rate increase in the latter part of 1976. On this basis, OCA contends that the GPU system was in sufficiently good financial condition to continue spending funds for TMI-2 in the latter half of 1976 at the rate it was spending them in the first h4.lf of that year.
We are of.the opinion that the Touche Ross review does not contain sufficient information for us to determine whether, or at what cost, the GPU system could have raised an additional $10 to 20 million in mid 1976 in order to continue spending at a rate substantially in excess of its 1976 budget for the project.
For this reason, while the report does raise questions, it does not supply the answers with sufficient cogency that would perwit us to conclude that these addi-tional funds could have been raised at that time. For this reason, the adjustment proposed by OCA, predicated upon a delay allegedly due to underfunding in 1976, is denied. _
Plant Held for Future Use Respondent claims $1,799,000 as its original cost claim for I
plant held'for future use.
Included in this claim is $802,000 for portions of coal reserves that are not expected to be in production at the close of the test year. Staff, on the basis of Commission orders at R.I.D. 221, R.I.D. 392 and R.I.D. 369, proposes that this amount be excluded from Respondent's original cost measure of value.
We concur wit'n Staff in this regard and, therefore, the sum of $802,000, represanting that portion of Respondent's coal reserves not expected i
to be in production at the end of the test year, will be deducted from l
Respondent's original cost measure. of value for plant held in future use.
Portland Industrial Waste System The OCA proposed a downward adjustment to rate base to reflect the difference between budgeted and actual data in the amounc of
$3,929,000.
In largest part, this is a result of delay in the in-service date of the Portland Industrial Waste System. While OCA did not supply a precise figure in its exhibit, Respondent in its exceptions, asserts that its showing had included an snount for Portland of $2,997,000.
Portland is not due in service until at least mid 1979, and consequently, it is an out-of-period adjustment. Respondent proposes that it be included in rate base as non-revenue producing CWIP asserting that it meets the criteria set forth in Pa. P.U.C. v. Pennsylvania Gas & Water Co.,
R.I.D. 168 and other cases. We find that in this case it does not meet the established criteria as judged and evaluated in the context of a
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6 future test year and we disallow the Respondent's! claim of $2,997,000.
In this regard, consistent with our more critical examination of out-of-period adjustments, the previously adopted criteria should not be viewed as conferring automatic approval of those adjustments meeting the criteria. Rather the criteria are a threshold which must be met before out-of-period adjustments are eligible for possible approval.
Accrued Depreciation Respondent claims a depreciation reserve in the amount of
$216,992,000. Respondent's accrued depreciation is based upon its book reserve for the future test year ended March 31, 1979 and on a remaining life depreciation methodology.
Both Staff and OCA contend that Respond, ant should have used a calculated reserve in lien of a book reserve. Staff also contends that the use of a remaining life depreciation methodology is more subject to speculation than a total t
life theory, which Staff claims, is based upon historical experience.
Under the whole life depreciation accrual method, an annual accrual rate is determined. This method takes into account the salvage value and the service life of a unit or the average service life of a i
l group of units.
If based upon subsequent depreciation studies, it is determined that tLa past accrual rate resulted in a depreciation accrual j
more or less than the newly calculated reserve would justify, traditional regulatory practice in Pennsylvania does not permit an amortization of the deficiency between the book and calculated reserve based upon the whole' life methodology. Pennsylvania Power & Light Company v. Pa.
P.U.C.,
10 Pa. Commonwealth Ct. 328, 311 A2d 151 (1973).
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i Under the remaining life methodology,; accrual rates change when the estimated remaining life:of the unit or average service lives i
of a group of units change.
But no excess:or deficiency in accrued reserve is created as a consequence of utilizing the whole life de-i t
preciation methodology asj is the situation when the ra= mining life i
method is utilized.
l We will adhere to prior Commission policy and the decia. ions of l
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our appellate courts and follow the whole life method of depreciation i
accrual and increase the depreciation reserve! by $'4,414,000.
Consistent t
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with' this approach, we will not allow amortizatiori of Respondent's I
alleged reserve deficiency.
In terms of TMI-1 and THI-2, we are of the. opinion that the method that Respondent utilizes in calculating the annual; depreciation accruals for these plants has very little substance-to recommend it.
In essence, it bases the annual accrual on these plants on the forty year period set forth in the construction permit from Nuclear Regulatory Comission (NRC) less the period of time between construction of the plants and the placing of them into consnercial operation.
Inasmuch as it is admitted that the operating licenses for these facilities may be rm tewed at the expiration of the dates set forth in their construction permits, there is very little reason to utilize the date in the construc-tion permit for purposes of determining the annual rate for depreciation of these nuclear facilities.
We are of the opinion that a thirty-five year life estimate is n more reasonable estimation of the useful life of both TMI-l and 4
l TMI-2 than are the estimates of either the Responde'nt on'the one hand l
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r or the Staff and the OCA on the other. Accordingly, we reduce the depreciation reserve by $1,147,630.
OCA recommends that the depreciation reserve for TMI-2 be increased by $5,993,000 to reflect the fact that the Respondent claims a full year of depreciation expense in its income statement. We believe this proposed adjustment is required when utilizing a year-end test period, as contrasted with an average year test period, to ensure that revenues, expenses and rate base are stated on the same basis. The accumulated depreciation reserve will be increased by $5,993,000.
Materials and Supplies For the test year ending March 31, 1979, Respondent claims in its original cost measure of value a sum for materials and supplies in the amount of $10,746,000. OCA would adjust this claim downward by
$446,000 to reflect the difference between budgeted and actual inventory amount as of October 31, 1978. We find no merit in the recommended adjustment and it is denied.
Unamortized Expenses Respondent proposes to include in its original cost measure of value unamortized expenses associated with deferred energy costs, storm damages and rate case expense. Both Staff and OCA would deny these claims. In line;with past Commission policy, these items are excluded from Respondent's original cost measure'of value. Respondent's original cost measure of value is reduced by the following amounts:
$6,525,000 for unamortized deferred energy costs; $644,000 for unamortized i
storm damage; $273,000 for unamortized rate case expense, or a total i
adjustment of rate base of $7,442,000.
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I Cash Working Capital Respondent's cash working capital claim for the futura test 1
l year ending March 31, 1979 is $14,297,000. Staff recommends a cash l
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1 working capital allowance for Respondent in the amount of $2,469,000 or a downward adjustment to Respondent's claim in the amount of $11,828,000.
OCA, using a balance sheet approach, would adjust Respondent's cash working capital requirement claim such that Respondent's cash working capital claim would be reduced to zero.
Staff recommends disallowar.ca of $9,233,000 for long term interest accruals, $1,220,000 for accrued preferred dividends 3 and they would also include a disallowance of $1,375,000 for compensating bank balances. OSA also notes that if its balance sheet approach is not accepted, certain adjustments to Respondent's cash working capital claim need to be made with regard to accrued interest and accrued dividends on preferred stock.
Staff and OCA's contentions are that accrued debt interest and preferred stock dividends are cost free funds provided by the ratepayer.
Accrued debt interest and preferred stock dividends, if considered as a reduction 'o cash working capital prevents the ratepayer from being assessed with the same cost twice, in the sense of providing funds and then providing a rate of return on those funds.
OCA's method develops a daily interest expense which is multiplied by the net lag in payment of interest which results in a reduction in cash working capital ($75,000 daily interest expense x 62.1 days net lag in payment of interest which equals $4,658,000 reduction in cash working.
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capital). The $308,000 preferred stock dividend adjustment to cash working capital is developed in the same manner as the OCA's accrued
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debt interest adjustment.
Staff's method develops an interest rate at the mid-point of the Company's semi-annual interest payments:
debt portion net electric semi annual
$518,795,970 plant in-service at 3/31/78
$17,861,000 interest payment =
principal amount of LTD x
$501,790,000 outstanding at 3/31/78 2
a $9,233,160, debt interest adjustment to cash working capital requirement. The $1,220,045 prefer ed stock dividend adjustment to cash working capital requirement is developed in the same manner as Staff's accrued debt interest adjustment.
Met Ed contends that neither OCA nor Staff have supported their contentions that Met Ed has a payment lag. To support their claim that there should be no adjustment to cashing working capital for accrued debt interest and preferred stock dividends, Met Ed cites a prior rate proceeding of Pennsylvania Electric Company, a sister company of Met Ed, R.I.D. 172-173.
Since then we have accepted the principle that accrued debt interest and preferred stock dividends are paid in arrears and that during the period between collection and disbursement,'.the funds are at the Company's disposal. The cost of these funds are fully accounted for in the allowed rate of return. Therefore, accrued debt interest and preferred stock dividends are cost free capital and if recognition is not given to them as a source of cash working capital with zero cost, -
the common stockholders will earn a windfall return on capital not supplied by them. We adopt the Staff approach as we did in the Philadelphia Electric Company proceeding, R.I.D. 438.
We also agree with Staff that Respondent's compensating bank balance claim of $5,000,000 be reduced by the amount of $1,375,000 on account of the availability of " disbursement float", which has been used in the past to satisfy compensating bank balances when required.
Regarding the subject of compensating balances vis-a-vis banking charges, we would like to see in future cases, comparative data regarding the cost of compensating balances and concomitant reduction in banking charges.
Unamortized Gain on Reacquired Debt Respondent proposes to reduce its original cost measure of i
l value on account of an unamortized gain on reacquired debt in the i
ame,it of $930,000. Although Staff would make no adjustment to this figure, OCA would increase it by $175,000. In its brief, OCA recommends that "an amount be deducted from the average rate base to reflect the currant (October 31, 1978) discrepancy between budget and actual data."
Since this is an upward adjustment on an actual versus budgeted basis, it does not appear that the year-end balance could be less than the higher, essentially mid-year amount. For this reason it will be accepted as not being violative of the year-end test period concept, also i
recognizing that it almost assuredly understates the year-end balance.
Accumulated Deferred Income Taxes (net)
J Respondent claims a rate base deduction for accumulated deferred income taxes (net) in the amount of $47,339,000. Staff would increase this amount by $249,000, while OCA proposes an adjustment increasing Respondent's claim by $4,460,000. Respondent contends that...
7 its reduction is the maximum allowable consistent with liberalized depreciation allowance for Federal income tax purposes.
Staff recommends flowing through state liberalized depre-ciation instead of normalizing the same. This would, according to Staff, result in a not reduction to accumulated deferred income taxes in the amount of $789,000. This figure is obtained by subtracting from the deferred State income tax added by Respondent for 1979, an increase in deferred Federal income tax as a result of recomputing deferred Federal income tax and deleting deferred State income tax as a Federal income tax deduction.
Section 118 of the Internal Revenue Code which had required electric and gas utilities to include contributions in aid of construc-tion as taxable income, was repealed by the Revenue Act of 1978. The repeal was made retroactive to January 31, 1976, the effective date of Section 118. Because of this change in the Internal Revenue Code, Staff proposes an increase in accumulated deferred income taxes (net) of
$1,038,000. Subtracting from this amount the $789,000 previously mentioned.
Respondent's claim for accumulated deferred income taxes (net) would be increased by the amount of $249,000.
With regard to TMI-2, OCA proposes certain adjustments that have not been incorporated in Respondent's revised claim nor previously addressed. These proposed adjustments consist of the following:
(1) An increase of $4,494,000 to reflect a full year of deferred taxes inasmuch aa Respondent claims a full year of income taxes on its income statement;.-....
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(2) Increase the deduction by $6,590,000 to reflect tax savings realized by Respondent due to the allowance for accelerated de-preciation for the calendar year 1978.
We agree both with Staff and OCA that there is nothing in the Federal Internal Revenue Code nor regulations promulgated pursuant thereto to prevent the flow-through of tax benefits from accelerated depreciation allowances under state corporate tax law.
W'e agree with both OCA and Staff that the federal regulation does not preclude the flow-through of tax benefits under the state corporate net income tax.
We adopt the adjustment made by Staff. Thus, Respondent's claim for accumulated deferred income tax is adjusted by increasing it in the amount of $249,000 in accord with the Staff's proposed adjustment.
We are disposed to grant the adjustment proposed by the OCA to reflect a full year of accumulated daferred Federal income Tax-for TMI-2, consistant with our decision in the Pennsylvania Electric Company case, R.I.D. 599; regarding the same plant, and consistant with Respondent's full year's claim for deferred Fedaral Income Tax expense.
As an offset to this increase, the OCA adjustment to deferred Federal Income Tax to adjust deferred taxes for TMI-2 to reflect the new 46% rate will be made in the amount of $532,000.
OCA proposes to reduce Respondent's non-TMI-2 accumulated deferred income tax claim by $1,570,000. This reduction in the accu-mulated deferred income tax (net) account is based on the reduction of the federal corporate net income tax rate from 48% to 46% and is asso-ciated with another OCA proposal by which such amount would be amortized over a ten year period, thereby increasing Respondent's income available for return. While we are not necessarily convinced by Respondent's %
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argument that the proposal of OCA would jeopardize its liberalized depreciation allowance under federal law, we choose not to make this adjustment in this case.
OCA's proposed adjustment to reflect tax savings realized by Respondent due to the allowance of accelerated depreciation for 1978 is also denied.
Operating Reserves OCA recommends that operating reserves be increased in the amount of $191,000 to reflect another source of operating reservas entitled " amortization reserve-federal." Previously, this account was part of the operating reserves of Respondent. In R.I.D. 434, the Com-mission accepted OCA's position and deducted this item from rate base.
Since that time, FERC reclassified the account, by Order Number 5, issued April 5, 1978, to an appropriated retain =d earnings account,.au removing the item from the operating reserves of Respondent. This re-classift~1 tion, OCA contends, does not change the fact that t'aese funds were not provided by investors and,.hence, should not be allowed to earn a return. The Respondent's brief on this matter has been closely analyzed as well as the definition of " net investment" as it appears in Section 3(13) of the Federal Power Act, 16 USCA Section 796 (13) and conclude that the deduction of this amount from net investment is not warranted.
For the foregoing reasons, the OCA's proposed adjustment to
" amortization reserve-f ederal" is denied, i
l Fair Value Rate Base Table II sets forth the 60mpany's claim and our adjustments and findings with regard to the Respondent's original cost measure of 1
l value and the five-year trended original cost measure of value. I
TABLE II Measures of Value - March 31, 1979 Adjustments (000)
Original 5-Yr. Avg.
Cost Trended Cost Claimed by Respondenc
$1,068,694
$1,445,879 Adjustments:
IMI-2 Steam Valves (7,860)
(6,670)
Portland Ind. Waste System (2,997)
(2,997)
Plant Held for Future Use (802)
(802)
Depreciation Reserve *
(9,009)
(9,009)
Deferred Energy, Unamortized (6,525)
(6,525)
Unamortized Gain on Reacquired Debt (175)
(175)
Unamortized Storm Damage (644)
(644) 46% FIT - TMI-II 532 532 Unamortized Rate Case Expense (273)
(273)
Cash Working Capital (11,828)
(11,828)
Accumulated Net Deferred Income Taxes *
(4,743)
(4,743)
Adjusted Measures of Value
$1,024,370
$1,402,745 Weighting of these measures by :he debt / preferred stock and common equity ratios produces the following results:
$1,024,370,000 x 65%
$ 665,840,500
=
$1,402,745,000 x 35%
490,960,750
=
$1,156,801,250 We adopt as a fair value rate base in this proceeding the amount of $1,160,000,000. __--
RATE OF RETURN Capital Structure A summary of the capital structure positions of Metropolitan Edison Company (Met Ed), OCA, and Staff are set forth in the following table:
Claimed Capital Structure Ratios Type of Capital Met Ed Consumer Advocate Staff Debt 50.4 52 53 Preferred Stock 12.8 13 13 Common Equity 36.8 35 34 100.0 100 100 Joseph F. Brennan, Met Ed's rate of return witness, claims an estimated March 31, 1979, capital structure. He included accumulated deferred Job Development Tax credits (JDC) in his common equity capital.
structure ratio claim. Met Ed asserts that the inclusion of JDC in the common equity capital structure ratio is in accord with provisions of Section 46(f)(2) of the Internal Revenue Code which provides for ratable flow-through over the life of the assets which generate the credit. The Company attempts to support its inclusion of JDC in the connon equity ratio by means of Internal Revenue information letters.
Dr. Matityahu Marcus, OCA's rate of return witness, recommends a capita?. structure estimated as of March 31, 1979, excluding accumulated deferred Job Development Tax credits from the common equity component.
Mr. Marcus claims that his capital structure recommendation is similar to Met Ed's projected near term capital structure ratios. OCA contends that there is no statutory support for the inclusion of JDC in common equity j
and notes that in previous proceedings before this Commission at Pa.
P.U.C. v. The Bell Telephone Company of Pennsylvania R.I.D. 438 and Pa. P.U.C. v. The Bell Telephone Company of Pennsylvania R.I.D. 367 the Commission has found that JDC should not be included in the common i
equity portion of the capital structure.
Staff rate of taturn witness John J. Steslow claims that con-solidated capital structure is appropriate for Het Ed.
The Staff's consolidated capital structure claim (a based upon the General Public Utilities (GPU) consolidated capital structure. The Staff contends that a consolidated capital structure should be employed for the follow-ing reasons:
1.
The common stock investor's ownership is in GPU and not Het Ed.
2.
Investor common stock evaluations in the market are based on GPU.
3.
Met Ed's business characteristics are similar to CPU.
e-4.
PU has issued debt in the past and currently has debt outstanding which is utilized by all system companies.
The Commission Staff also cites Pa. P.U.C. v. The Bell Tele-phone Company of Pennsylvania, R.I.D. 367, contending that that decision is a precedent for the use of a consolidated capital structure in develop-ing a fair rate of return. The Staff also excludes JDC from the common equity capital structure, stressing recent Commission decisions which allow JDC; but not in the common equity component of the capital structure..
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V We reaf firm our prior position that while JDC should not be deducted from rate base it should not be included in the common equity portion of the capital structure. The IRS information letters submitted by Met Ed in support of their JDC claim have been previously' considered, and rejected as a basis for treating JDC as if it were common equity.
Having carfully considered the subject, we do not believe that a capital structure finding for Het Ed in this proceeding should be based upon the consolidated capital structure of CPU. We have found in previous cc:.'s concerning Het Ed and her sister company, Pennsylvania Electric Company, that the.absidiary's capital structure ratios should be used in developing a fair rate of return and not the consolidated capital structure and we do so again in the proceeding. See Pa. P.U.C. v. Pennsylvania Electric Company R.I.D. 392; Pa. P.U.C. v. Metropolitan Edison Company R.I.D. 434.
We adopt the,papital structure proposed by OCA of 52 percent debt,13 percent preferred stock, and 35 percent common equity.
Debt Cost Witness Brennan claims Met Ed's projected debt cost rate will be 7.73 percent as of March 31, 1979. The debt cost claim reflects Met Ed's September 1978 bond issue which reduces witness Brennan's original debt cost claim from 7.77 percent to 7.73 percent.
OCA recommends a debt cost rate of 7.71 percent for Met Ed.
Witness Marcus' debt cost clain is based on estimated year end 1978, but reflects the actual issuance cost rate for the September, 1978, bond issuance. In addition, Marcus contends that since Met Ed does not intend.. --
to issue additional debt during 1979 that their debt cost claim is rep-resentative of the near-term future.
Staff recommends a debt cost of 7.75 percent. Staff'a rec-ommendation is an aggregate cost rate which, although giving primary weight to Met Ed's experienced debt cost rate, considers the cost of GPU long-term debt. Met Ed's separate debt cost is, according to the Staff, 7.72 percent. We find an estimated debt cost rate of 7.73 percent as of March 31, 1979, to be fair and reasonable.
Preferred Stock Cost The Company claims a preferred stock cost rate of 7.4 percent projected as of March 31, 1979. The preferred stock cost rate recom-mendations of OCA and Staff coincide with Met Ed's preferred stock cost rate claim. We find an estimated preferred stock cost rate of 7.4 per-cent as of March 31, 1979, to be fair and reasonable.
Common Equity Generally, the most contested portion of a rate of return determination is the required earnings on common equity. This proceeding has followed the historical pattern. Hours of hearing time and pages of transcripts have been devoted to the subject of the appropriate level of earnings to be authorized. To facilitate an understanding of the three cost of equity positions, a brief summary of each postition is given.
Mr. Brennan advocates a 12.5 percent common equity earnings level applicable to a f air value rate base based upon a 36.8 percent common equity capital structure component. Mr. Brennan indicated that his cost of equity claim is pre.mised upon market ratios and judgment..
Since Met Ed's common stock is held only by GPU and not publicly traded, he looked to GPU common stock data. However, he did not solely rely on GPU data, but also reviewed the financial data for Moody's 24 Public Utilities and a six company barometer group which he believes is similar in many important respects, to Met Ed.
In arriving at his recommendation Mr. Brennan relied to varing degrees upon money market related methods and guidelines. The methods and guidelines which he reviewed included earnings / price ratios, earnings /
net proceeds ratios, the Discounted Cash Flow Method (DCF), earnings / book ratios and a bare rent, plus the inflation and reward for risk theory.
Primary weight was given to GPU earning 3/ price ratios during the period 1973-1977 and at mid-June, 1978.
The witness contends that Met Ed, if it was a publicly traded common stock, should sell at a market price / book value in excess of 1 to 1.
It is the witness' opinion that a marketprice/ book value ratio in excess of 1 to 1 is necessary for a company to market common stock with-out dilution of book value.
A summary of Mr. Brennan's analyses is shown below:
Indicated Minimum Method Required Achieved Return Adjusted earnings / price ratios 13.6 Earnings / net proceeds ratios 15.5 Discounted Cash Flow Method 14.75 Earnings / book ratio 13.3 Bare rent theory 14.75.
OCA witness, Mr. Marcus, recommends a 12.1 to 12.9 percent cost of equity range applicable to an original cost rate base end a 35 percent common equity capital structure.,
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Marcus relies on GPU market related data and various money rarket relatea guidelines in developing his cost of equity determination.
The Hu also stresses the Discounted Cash Flow Method in his analysis.
Discounted Cash Flow, which he employs, consists of two components, a dividend yield based on the average of the experienced five year average dividend yield of 10.27 percent and the average dividend yield for the last twelve months of 8.93 percent was employed by the witness in his Mr. Marcus concludes that Met Ed should experience a determination.
He concedes that growth rate estimates growth rate of 2.5 percent.
are the most difficult part of applying the Discounted Cash Flow Method since judgment plays such a major part in the choice of data and the l
interpretation of the market related data.
Mr. Marcus also observed earnings / price ratios, which he believes do not give recognition to investor growth rate expectations, and a spread method, which estimates the relationship between bond yields and the cost of equity.
Indicated Required l
Achieved Return Method E
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12.1 j
Discounted Cash Flow Method 12.63 Earnings / price ratios 11.51 to 12.19 Spread Method OCA contends that Met Ed's common equity cost rate should not Without fla-be adjusted to consider an allowance for flotation costs.
If the Commission tation costs OCA fir.ds a cost of equity of 12.1 percent.
were to decide that an allowance for flotation costs should be considered, Mr. Marcus has done a study for the period January 1,1975, through December 31, 1976, which indicates that the average flotation costs are -
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approximately 7.5 percent. The inclusion of this adjustment would inct se the common equity cost from 12.1 to 12.88 percent (9.6 percent dividend yield +.925 to reflect the flotation costs adjustment = 10.38 percent dividend).
Staff recommends a 10.0 to 10.5 percent cost of equity range applicable to a fair value rate base and a 34 percent common equity capital structure ratio. Staff also recommends a range of 13.25 to 13.75 percent return on book value common equity.
Staff's cost of equity recommendation is premised on market related ratios for GPU, Moody's 24 Public Utilities, and the six company barometer group chosen by Mr. Brennan. Primary weight was given to the experienced market related ratios of Moody's 24 Public Utilities and the six company barometer group, tempered with judgment.
Staff presented an array of market related analytical techniques including earnings / price ratios, earniags/ net proceeds ratios, the Dis-counted Cash Flow Method, and a comparable earnings approach.
The earnings / price ratio presentation of the Staff covers a ten year span and includes, in addition to the heretofore mentioned barometer groups, Allegheny Power System and Texas Utilities.
Staff concludes that the 10.5 percent mid-point of the experienced earnings / price ratios for Moody's 24 Public Utilities and the six company barometer group deserves greater consideration in determining an equity cost rate applicable to Met Ed than GPU's experienced mid-point of 11.5 percent for the same period.
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Earnings / net proceeds ratios for GPU, although reviewed by the Staff, were not given much weight in their determination. Staff contends that the 12.3 percent ear..../ net proceeds ratio experienced by GPU in 1973 is the wvet representatf'a recent common stock issuance.
Staff's Discounted cr Flow technique considers the current GPU dividend yield of 9.5 percent and a 3.5 percent growth rate estimate based on the long run estimated Gross National Product growth rate. Staff used their DCF finding of 13.0 percent as a test of their return on book conunon equity recommendation.
Concerning the comparable earnings approach, Staff does not make a specific determination, but concludes that general market conditions t
cause most of the change in a stock's price and not an individual company's experienced financial performance.
Met Ed's common equity capital is totally srpplied by GPU, Met Ed's parent, which issues common stock publicly. Therefore, independent common stock market related ratios are not available for Het Ed.
Con-sequently, GPU's market related ratios were used as an indicator of Met Ed's equity costs. The problem encountered in this approach is that, if one were to conclude the CPU's earnings have been inadequate, there is an absence of information as to where the deficiency may exist j
among the subsidiary operating companies.
We sgree with Mr. Brennan that the Pennsylvania operations of GPU may be viewed as less risky than the total operations of GPU con-solidated. Therefore, the. earnings requirement on equity indicated by GPU's market related ratios may overstate Met Ed's common equity earning J
requirement and should be judgmentally adjusted downward to reflect Met Ed's lower risk. We further agree that all market related data must be supplemented with informed judgment.
Before beginning our discussion it is well to review and restate the ultimate objective of a rate of return determination, which is to derive a weighted number, which, when multiplied by a rate base, will pro-
'I duce a fair return. That product should be sufficient to:
(1) assure confidence in the financial soundness of the utility; (2) maintain and support its credit; and, (3) raise the money necessary for the proper discharge of its public duties.
It should also be:
(4) equal to that being made at the same time in the same general part of the country on investments in other business undertakings attended by corresponding risks and uncertainties.
The first three standards are essentially judgmental while the fourth requires a comparison with the earnings of other business enterprises of comparable risk. The fourth standard is certainly the easiest to approach, since for all business enterprises there are firancial sta-tistics regarding earnings which can be gathered, compiled, and compared.
The frequent approach is to select other comparison utility companies based upon comparable size, location, financial rating and other char-acteristics which assertedly make them companies with corresponding risks. Thus the risk standard is met without having to make ad,s.:ments to financial statistics for any perceived variation in risk.,
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Statistics are then compared and from these statistics, together with the infusion of judgment, a witness narmally proffers a conclusion regarding the level of earnings required on a common equity, which then becowes a weighted component of the rate of return to be applied to a previously selected rate base, which then becomes the total allowed return, which, if earned, is sufficient to pay interest on debt, pay dividends on preferred stock, and provide a fair return on common equity.
The first step is t,look at the statistics in order to determine what they reveal with regards to the experienced earnings of the subject company, (here GPU) and the comparison groups.
The following table shows experienced earnings / price ratios for GPU, Moody's 24 Public Utilities and a six company barometer group.
Earnings / Price Ratios
- 1973 1974 1975 1976 1977 June 1978 GPU 12.4 16.3 15.6 13.5 13.6 14.3 Six Barometer Group 11.5 14.3 16.6 13.3 13.3 14.1 Moody's 24 11.1 14.6 15.9 13.6 12.8 13.3
- Earnings / price ratios adjusted by 7.5 percent to reflect flotation costs.
While many witnesses apparently view earnings / price ratios as a measure of required earnings, the earnings base, i.e. the equity component of rate base, bears no relationship to market price. In a vacuum, earnings /
price data could be identical while earnings in relationahip to a base of book value could vary widely.
If in one case it were 10% on book value and in the other 20% on book value, then all other things being equal, it would be expected that the market to book value would be twice as much in the latter case. The actual value of earnings / price ratios would i
seem to be as an indicator of relative risk. Although all witnesses have
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indicated that market price / book value ratios should be considered, obviously such a ratio does not exist for Met Ed.
As to GPU, even were we to accept the principal that it is desirable for common stock to sell at approximately book value, during periods of normal market conditions, we have some question whether it is a proper function of regulation to attempt to influence market price, or that an attempt to do so would necessarily succeed.
The following table shows experienced market price / book value and earnings / book value ratios for CPU, Moody's 24 Public Utilities and a six company barometer group.
Market Price / Book Value Ratio Earnings / Book Value Ratio l
1973 1974 1975 1976 1977 1978 HP/BV - E/BV MP/BV - E/BV MP/BV - E/BV MP/BV - E/BV MP/BV - E/BV MP/rv - E/BV GPU 89.3 10.3 67.6 10.2 65.4 9.3 83.5 10.5 91.8 11.5 83.5 11.1 Six Barometer Group 107.4 11.5 74.9 9.7 75.0 11.7 94.3 11.7 99.8 12.2 91.5 11.9 Moody's 24 112.5 11.5 79.9 10.4 77.0 10.8 91.9 11.3 97.9 11.4 90.2 10.9 An examination of earnings on book value and market to book prices seems to indicate what one would expect which is that lower earn-ings as measured by book value results in a lower market, to book value, rates.
To the extent that the relationship is not direct the most obvious extraneo,us factor is a difference in investor perceived risk, be it busi-ness risk, financial risk, regulatory climate or a combination of these and other factors. The 1977 and 1978 data reveals that while the GPU,
0 earnings level was fractionally above the level of Moody's 24, the market to book ratio was depressed. Were this ascribed to investors assessment of greater risk associated with an investment in GPU, as con 6 tasted with the comparison groups, Mr. Brennan has indicated that Met Ed is less risky than GPU overall and consequently the observation is not an indication that Met Ed requires a level of earnings above the level r~
.ced by the other comparable groups.
Most financial witnesses will concede, when questioned on the subject, that market value capital costs test be adjusted when applied to a rate base other than original cost.
The application of market value capital costs to a rate base in exceas of original cost would automatically provide an excessive return then compared with other utilities whose earnings are based upon original cost.
Met Ed concedes this obvious interrelationship in its Brief wherein it stated:
Page 69 "It is apparent that a fair value f.Lnding is not made in the abstract. It has to be viewed in the light of the finding as to fair rate of return to be applied to that fair value rate base, so tlat an appropriate level of return is authorized.
Page 70 "Among other things, that finding anaunts to approxi-mately 94% of the spot value (1,711.985,000). If that finding were made, the rate of return urged by Mr. Brennan would have to be scaled down to allowable return within the level established by respondent.
Page 71 "In summary, therefore, respondent urges a fair value finding which gives recognition in p.trt to the spot measure of value and which, in conjunction with the fair rate of return finding, authorizes allowable return in the amount of $105,372,000, as established in this proceeding.
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Pago 84 "As was pointed out previously under the return on fair value, neither a fair value finding, nor a fair rate of return finding can resonably be made in the abstract, without considering the other.
Respondent submits that the foregoing proposed fair rate of return (or such adjustment thereof as the Commission may find to be supported by the record) are applied to a finding of fair value which produces the allowable return of i
105,372,000 established by respondent in this
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proceeding."
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I The only data presented which indicates a comparable level ofearnlIngs,uponsomebase,isearningsonbookvalue. The number sought bere is a number, stated in percentage form, that af ter weighting could bd applied to a base and result, all other things being equal, in earningalon common equity which would be equal. The only common base which is presept is book value, because that is the only common basis, which is susceptil le of development from financial statements, because they do not report rate base. Data reported in financial statements is either in or develojable into data regarding earnings on book value.
In order to develop a number, representing an earnings level requirement, which could be weighted and then applied to the fair value rate base.ts developed herein, on a basis which would produce a relevant comparison, it would be necessary to develop numbers which would set forth
- 5. hat comparable companies earn on the common equity component of a fair value rate base. This data if developed would then be stated on a comparable basis as are the data set forth on a book value basis.
In light of the fact that in this proceeding, as in most, days of testimony, exhibits and cross-examination was necessary to develop evidence upon which'to find a fair value of the Company's property, clearly the development os' a fair value rate base for 30 comparison companies.
for a multi-year period in order to determine earnings on a fair value basis is clearly an impossible task.
While it is true that the cost of capital is not synony-mous with a fair return, since the cost of capital may be less or. ore than a fair return, practical considerations frequently prompt the acceptance of the cost of capital as a surrogate for a fair return.
To express the objective, in another way, it is to find a rate of return on equity, or factor x, which when applied to a factor y will produce a fair overall return, or earnings available for return, on equity.
The only y factor which is available in common for the subject company and comparison groups is book value. As a consequence the comparable earnings approach is to utilize book value as the common factor.
If the common factor of book value is not used then there is no method to derive from financial statistics a comparable x factor stated as a percentage. A rate of earnings does not exist in a vacum, it exists as a percentage of another factor.
Once a rate of earnings on book value is selected for the future, after having examined the paat, how is it applied? If after weighting, it ie applied to a rate base which deviates in some way from total capital, then to the extent that rate base, be it original cost or fair value, deviates from total capital, if authorized earnings are achieved, dollars of earnings for common equity will exceed or fall short of the numbers of dollars implicitly found necessary for common equity. To state it another way if a comparable rate of return is 10%
on book equity of $100 million, implicitly the numbers of dollars necessary are $10 million. However, if that rate of return is blindly lifted and m
made applicable to an equity component of a fair value rate base of
$115 million, the result would be equity earnings of $11.5 million, or
$1.5 million more than that expected to be achieved by the comparison comps 7.ies. Of courne this flies in the face of the fact that after comparing earnings it has been found that both need only $10 million.
There are at least two methods by which a $10 million level of earnings for common equity could be achieved. First, derive the numbers of dollars necessary for interest, preferred stock dividends, e'd earn-ings for common equity, the totality of which are earnings available for return, from which gross revenues may be derived. A rate of return as such need not be derived but may be if desired for some reason. Second, if a rate of return on book value is derived, it could be deflated by a factor derived from the excess of a fair value rate base over an original cost rate base. But since even an original cost rate base deviates from total capital a more precise method would be to use a factor derived from fair value over the total capital relevant to rate base.
The results in both of these cases would be identical, all other things being equal.
In both cases the stated rate of return under fair value regulation would be less, but produce an equal return for equity. The question immediately rises which is, is there any objective justification of a rate of return and return on common equity to be lower in a fair value jurisdiction? The answer is yes' Met Ed recognized this fact in its Brief as quoted above.
In this case we find no evidence which would indicate that a fair return for common equity is either more or less than the cost of capital and consequently we adopt the cost of capital as a surrogate - -.
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for a fair return. We believe that a fair rate of return on fair value of 10.15% is adequate,,which results in an overall weighted cost of capital or rate of return on fairvalue of 8.53% as follows:
Ratio Cost Rate Weighted Cost Long Term Debt 52%
7.73%
4.02%
Preferred Stock 13%
7.4%
.96%
Common Equity 35%
10.15%
3.55%
8.53%
For the purpose of comparison and as a means of validating our conclusion we note that this equates to a rate of 13.38% on original cost.
In arriving at our conclusion in this case we are mindful of and have considered the current high levels of interest rates, the continued high level of inflation, and the fact that rates filed pursuant to this order will not go into effect until the end theteIsA~
period.
We conclude herein, based upon all the evidence of record, which is relevant to the cost of capital, that a rate of return of 8.53%
on the fair value rate base adopted herein will produce a lair return, which will:
(a) be adequate to attract new capital on reason-able terms; (b) maintain the financial integrity of currently invested capital; and (c) be comparable to returns expected to be earned by other enterprises of similar risk.
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Fair Rate of Return Based on available evidence, we find for Met Ed a fair rate of return of 8.53 percent applicable to a f air value finding of
$1,160,000,000 or an income available for return of $98,948,000.
OPERATING REVENUES Respondent's base revenue clata under its proposed rates for the future test year ending March 31, 1979 is $365,182,000. This claim includes the effect of the Commission rate order at R.I.D. 434.
Staff recommends an adjustment which would have the effect of increasing respondent's future test year revenues in the amount of
$5,362,000.
Staff's adjustment is based upon a higher rate of sales growth than that of respondent. Respondent predicates its revenue growth associated with additional sales on the basis of.a 3.8 percent growth in sales.
Staff predicates its proposed revenue adjustment to respondent's claim upon a sales growth of 6.3 percent. On the basis of the record before us, the proposed adjustment of Staff is warranted.
Respondent's projected growth figure is considerably lower than the average growth rate it experienced during the 1975-1977 period.
In addition, respondent's actual sales for the nine-month period from January 1, 1978 to September 30, 1978 (which includes six months of respondent's future test year) indicates its actual sales growth over this period to be 6.67 percent. Although respondent offered rebuttal testimony on the issue of salee growth, we are persuaded that the evidence presented by Staff in this regard reflects a more accurate prediction of sales growth than that employed by respondent. Consequently, I
we increase respondent's base revenue claim by $5,362,000, as proposed by Staff...
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EXPENSES AND ADJUSTMENTS TO OPERATING INCOME Fuel Expenses _
Consistent with our revenue adjustment predicated,n additional sales of 185,498 MWH, respondent's claimed fuel expenses are increased by
$1,484,000.
Nuclear Generction Expenses Respondent budgeted an expense level for units TMI-l and TMI-2 of $13,042,000.
Its claimed normalized expenses for these units, however, is $16,435,000. The normalized adjustments reflect the operation of TMI-l and TMI-2 at " mature" levels of operation. A nuclear facility usually achieves a mature level of operation after its third refueling.
TMI-2 is expected to operate as a mature level approximately four years from its in-service date.
It is also expected to incur refueling expenditures for a refueling that will not occur 'until approximately eighteen months after the unit comes on line. For these reasons, Staff would, for claimed reasons of equity and consistency, hold respondent to its budgeted expense level as opposed to its normalized expense level, thereby reducing its claim by $3,393,000.
We consider the prop;,ed normalization adjustment of respondent to be an out of period adjustment.
It reflects a level of expense that will not occur until relatively far into the future and therefore, we adopt Staff's adjustment.
Nonnuclear Operation and Maintenance Expenses Staff proposes a downward adjustment in the amount of $5,427,000.
The basis of Staff's proposed adjustment is the utilization of the least squares technique of regression analysis upon respondent's actual s
expenses for the period January 1, 1968 to March 31, 1978. !
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co Respondent criticizes Staff's methodology, alleging:
(1)
It did not consider anything other than raw FPC reported totals for various operating accounts during the period under consideration; (2) It ignores recent additional expenses associated with operating and maintaining devices to comply with environmental regulations; (3).It
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implicitly assumes that the inflation rate for 1979 will be identical to the average for the years 1968 to 1977; (4)
It fails to recognize increases expenses caused by such factors as the aging and need for costly maintenance at Titus and Portland stations and for respondent's combustion turbines; (5) Respondent's actual operation and maintenance expenses for the eight month period ending November 1978, totaled
$49,588,000 as compared to the budgeted amount of $49,639,000 (exclusive of TMI-2) for the same period of time.
Actual expenditures for the period, therefore, were 99.9 percent of the amount budgeted therefor (Respondent Exhibit B-16-6,
- p. 2).
The fact that respondent's actual experience operation and maintenance expenses, exclusive of TMI-2, for the eight month period ending November 1978, deviates less than one tenth of one percent of its budget for that same time period is substantial evidence of the accuracy of its budgeting process.
In saying this, we do not wish to imply that the least squares method of regression analysis is inapplicable to predicting a level of expense or revenues, but merely wish to indicate that the results of any particular statistical methodology, otherwise recognized as a standard statistical procedure, are only as valid as the data base and the assumptions utilized in the application of that particular methodology..j
m For the foregoing reasons the operation and maintenance adjustment proposed by Staff is denied.
OCA proposes the following adjustments to respondent's operation and maintenance expense clain:
(1) Deny respondent's claim for additional pay-roll expense in the amount of $2,572,000 for a wage increase that will first become effective in May of 1979; (2) Deny respondent's claim of $448,000 that reflects the increased employee benefits associated with (a) annualizing the number of respondent's employees as of the end of the future test year, March 31, 1979, (b) payroll adjustments associated with a mature level of THI-1 operations and (c) respondent's clain regarding a wage increase to take effect May 1, 1979; i
(3) Reduce respondent's claim for research and developement expense by $418,000; (4) Adjust respondent's claim for other opera-tion and maintenance expense for increasing the same in the anount of $20,000 for personnel cost attributable to TMI-2 operations; (5) Reduce TMI-2 operation and maintenance expense by at least $6,094,000 to reflect only the level of those expenses that will be incurred during the test year.
Consistent with our prier actions with regard to out-of-period adjustments in this proceeding, we reduce operation and maintenance expenses by $2,572,000.
With regard to the proposed reduction in local research and development we conclude that respondent has not met its burden of proof and we reduce it by the amount of $266,000.
As to respondent's claim of_$152,000 for its past operation in the Liquid Metal Fast Breeder Reactor, we conclude that respondent's >
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4 future contribution for this project is too speculative at this time.
Consequently, respondent's research and development expense is reduced by a total of $418,000.
The remaining adjustments proposed by the OCA are rejected.
Uranium Exploration Costs Inasmuch as a Mbtion to Strike the testimony of Mr. Zodiaco regarding uranium exploration costs of respondant was granted by the Administrative Law Judge, respondant's claim for these costs in the amount of $243,000 is denied.
Annual Depreciation Based upon our decision regarding depreciation lives for THI-1 and IMI-2, respondent's annual depreciation expense clata is reduced by
$1,411,000.
Decommissioning Expenses Consistent with the decision in the Penclec case R.I.D. 599 and our prior decision regarding respondent at R.I.D. 434, the respondent's claim is reduced by $1,162,000 to an authorized amount of $137,000. These mor.ies will be treated as trust funds in accordance with our prior direction in R.I.D. 434.
Rate Case Expenses Respondent claims rate case expenses in the amount of $586,000, which it proposes to amortize over a five year period. This amortization results in a charge to its pro forma income statement fn the amount of $117,000. Of this claim, $314,000 represents unamortized expenses from two previous rate cases and $272,000 in estimated expenses for the instant proceeding. -
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Staff proposes an adjustment that would reduce responden,t's rate case expenses applicable to this proceeding by $215,000. This would have the effect of reducing the current rate case expenses to
$57,000 and decrease the total amortization of rate case expenses by $43,000.
The justification for the proposed adjustment is based upon the rationale of Carolina Water Company, 32 PUR 3d 462 (North Carolina, 1960),
in which the North Carolina Public Service Commission found that, although rate case expenses should be amortized when a proposed rate increase is approved, the stockholders, not the ratepayers, should bear the cost of the proceedings when an increase is not justified. Relying on this authority, Staff would limit rate case expenses for this proceeding to those booked by respondent as of August 31, 1978, when respondent refused to accept a " responsible settlement offer."
There is no evidence of record that would enable us to determine whether (1) the proposed settlement was " responsible" or (2) whether respondent's refusal to accept the settlement offer was unjustified. The only bases for making any determination with regard to this matter are the contradictory characterizations of the settlement offer by Staff and respondent, set forth in their respective briefs.
Therefore, the proposed adjustment of Staff is denied.
Amortization of Net Gain on Reacquired Debt Respondent has recognized as nonutility income an amortized gain on reacquired debt of approximately $67,000 during the test year.
OCA proposes that this amount be recorded as a reduction in operating expenses of respondent, consistent with the treatment of this item at R.I.D. 434 and the similar treatment accorded the amortization of gain
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3 on reacquired debt of Pennsylvania Electric Company at R.I.D. 392. We will continue to treat amortization of net gain on reacquired debt as a reduction to operating expenses.
Thus, we have reduced respondent's test year operating expenses by $67,000.
1 Taxes Other Than Income l
Respondent's claimed capital stock tax liability for the test year ending March 31, 1979, ia $5,623,000.
OCA proposes to reduce this j
claim to a recovery rate of $3.500,000 annually by means of an expense l
reduction of the tax recovered through base rate.
A comparison of respondent's balance sheets at March 31, 1978, and March 31, 1977, reveals that the value of its total proprietary capital, upon which the capital stock tax is based, increased by two tenths of one percent between the period covered by the balence sheets.
There is no expectation of a significant growth in the value of respondent's proprietary capital during the test year that would justify respondent's claim.
In October, 1978, respondent filed a 1977 capital stock tax return in which it estimated its liability at $3,500,000.
Respondent's claim is approximately 61 percent greater than its estimated liability on its most recently filed capital stock tax return. Respondent has not met its burden of proof for a test year expense in excess of its estimated 1977 liability of $3,500,000.
We will reduce respondent's capital stock tax to a base rate recovery rate of $3,500,000, by means of a $1,273,000 adjustment to tax expense.
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p Consoliated Income Taxes Pursuant to Section 1552(a)(1) of the Internal Revenue Code of 1954, as amended, CPU files a consolidated Federal Ircome Tax return a2d allocates the tax liability of the group among the members in accordance with the ratio the taxable income attributable to each member of the group having taxable income bears to the consolidated taxable income. Thus, it follows that only respondent, Pennsylvania Electric Company, York Haven and Jersey Central Power & Light Company have any tax liability for the payment of Federal Income Taxes of the consolidated group, for the reason that GPU and GPUSC generally sustain losses for income tax purposes.
Because the interest deduction of GPU debt is taken into consideration in their allocation, the taxable income producing affiliates pay less tax than they would if they filed separately.
Staff proposes that respondent's Federal Income Tax claim be reduced by $1.500,000, contending that respondent's consolidated Federal Corporate Income Tax liability is actually less than that claimed by respondent. Originally, Staff proposed a reduction of $1,481,000.
However, because of the newly enacted Federal Corporate Income Tax rates, Staff increased its proposed adjustment to $1,500,000.
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The adjustment proposed by Staff is based upon the fact that when corporate affiliates file a single consolidated tax return any tax loss of an affiliate reduces the taxable income of the consolidated gre27 The use of consolidated income tax returns should benefit ratepayers as well as the utility and its parent. Pittsburgh v. Pa.
P.U.C., 182 Pa. Super 551, 128 A2d 372 (1956). See also Federal Power Commission v. United Gas Pipe Line Company, 386 U.S. 237 (1967);
Riverton Consolidated Water Company v. Pa. P.U.C.,186 Pa. Super 1,140 A2d 114 (1958). The proper tax expense passed on to ratepayers is the proportionate share of the consolidated income tax liability that the utility incurs and actually pays. For this reason, Staff's proposed adjustment to Respondent's test year tax liability of a reduction of
$1,500,000 is approved.
Sales to CPU Affiliates Staff proposes an adjustment that would redu.e Respondent's revenue requirement or to account for sales to Respondent's sister affiliates as a result of the increased capacity of having THI-2 on line. The availability of TMI-2 will result in substantially greater i
sales to Jersey Central Power & Light Company, Respondent's sister af filiate.
Staff proposes a reduction in Respondent's pro forma expenses in the amount of $13,662,497 to account for a reduced revenue require-ment associated with sales to Jersey Central. l l
3 The adjustment of $13,662,497, as proposed by the Staff, is denied.
ADJUSTMENTS TO OPERATING INCOME Income Effect of GPU Long Term Debt OCA would adjust Respondent's pro forma income statement to reflect an increase in Respondent's net income, after taxes, "due to GPU double leverage."
Although such an adjustment has been previously made, in another proceeding, we choose not to do so in this case.
Tax Savings Associated With Interest Deduction For CWIP Currently Respondent normalizes its tax savings associated with interest on construction work in progress and reduces the amount of AFDC earned by the amount of the deferred taxes. OCA proposes to flow-through this tax benefit to present ratepayers. Construction work in progress does not enter into the cost of rendering service to ratepayers until the facilities are put in service. Similarly, we do not believe that the tax benefits of AFDC should accrue to current ratepayers, but rather should accrue to future ratepayers who will be on the financial burden of AFDC. The adjustment proposed by the OCA is denied.
State Tax Flow-Through Adjustment As we have indicated above, there is no inhibition against the flow-through of State Corporate Income Tax benefits associated with liberalized depreciation. Therefore, we adopt an adjustment to net operating income to reflect Respondent's savings, in the amount of
$2,110,000, l
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OPERATING INCOME The following table sets forth the Respondent's revenue and expense claims for the test year ending March 31, 1979, our adjust-ments, pro forma net operating income, as adjusted, and the total allowed net operating income.
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TABLE III Summary of Adjustments Under Proposed Rates (000)
Proposed Proposed Rates per Rates-As Respondent (a)
Adjustments M usted S
S S
Total Operating Revenues 365,182 5,362(b) 370,544 Operating Revenue Deductions:
Expenses 157,069 (5,209)(c) 151,860 Depreciation 38.076 (1,663)(d)
(36,443)
Decommissioning 1,299 (1,162) 137 Taxes, Other 13,215 (1,166) (e) 12,049 Income Taxes 50,151 4.118 (f) 54,269 Total Deductions 259,810 (5,050) 254,758 Income Available for Return 105,372 10,414 115,786 (a)
See Met-Ed Exhibit B-144 (e) Taxes - otM--
Revenue Adjustment
$ 5,362 (b) Revenue Adjustments:
GRT Rate x 2 Customer Load Growth
$ 5,362 Capital Stock Tax (1,273)
(c) Expense Adjustments:
S(1,166J Fuel Expenses
$ 1,484 Local Research and Development Costs (418)
(f) Income Taxes:
Uranium Exploration Costs (243)
Amortization of Gain on Revenue Adjustments S 5,362 Expense Adjustments 5,209 Reacquired Debt (67)
Nuclear Generation (3,393)
Taxes-O*her Adjustments 1,166 Decon _asioning Expense 1,162 Non Nuclear 0 & M (2,572)
Interest Expense:
Company Claim 42,533
$(5,209)
Adopted 41,853 680 (d) Depreciation:
13,579 Change to 35-year life on Consolidated Taxes 6,757 TMI-l & 2 S(1, 663)
Flowthrough of State Incomu due to Accelerated
/
_ 2,110)
Depreciation Deferred Fed. Inc. Tax 971
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Consolidated Fed. Inc. Tax (1,500)
Total Income Taxes S 4,118 -.
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PERCENTAGE OF SALES ATTRIBUTABLE TO JURISDICTIONAL CUSTOMERS Both the OCA and Staff requested that the Administrative Law Judge recommend to us a percentage of allowable revenues attributable to Respondent's jurisdictional customers. Respondent, on the contrary, stated that when it files a tariff conforming to the order in this matter it will set forth those revenues applicable to its jurisdictional customers.
The Administrative Law Judge concluded that there was sub-stantial evidence in the record to support a jurisdictional sales per-centage of 93.5 percent. The Respondent did not except thereto and in the absence of an exception we adopt the recommendation of a jurisdic-tional sales percentage of 93.5%.
Future Applications - Jurisdictional Basis It is obvious to anyone with even the barest minimum of rate-making experience that where a public utility engages in sales subject to a state jurisdiction as well as that of the Federal Energy Regulatory Commission that the ratio of revenues, expenses, rate base and realized rate of return on sales in two or more jurisdictions are not necessarily equal. As a consequence, a showing on a total company basis tends to distort jurisdictional revenues, expense, and return relctionships when a blanket jurisdictional allocation factor is used. Consequently, we shall order herein that Respondent shall, in future general rate appli-cations, file on a Pennsylvania jurisdictional basis, allocating revenues, expenses, rate base and return to jurisdictional operations and fully explaining and documenting the method (s) of allocation. Respondent shall _
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continue to file on a jurisdictional basis until such time in the future that Respondent may apply for and obtain our permission to make appli-cation upon some other basis. Failure to file any future application on a jurisdictional basis shall of course, in light of this order, be grounds for rejection of that application.
RATE STRUCTURE On January 23, 1979, counsel for respondent, OCA, Staff and the Industrial Complainants in this proceeding submitted a rate structure stipulation (which is attached to this section as Appendix A) proposing a certain rate structure for Respondent and a recommended allocation of revenues among the various customer classes. That stipulation as modified by Appendix B has been approved herein. However, a stipulation of rate structure issues effectively isolates us from the views of the parties on extremely important issues.
Consequently, we expect in the future, regardless of the exis-tence of a stipulation, that rate structure issues will be fully developed upon the record and fully summarized in the Recommended Decision in order that we may be fully informed of the various views of the parties in deciding rate design issues.
CONCLU3 ION Based upon the allowances and disallowances in this Order regarding Respondent's revenues, expenses, and rate base under proposed rates, we have determined that its rate increase request of $86,802,000.4
zy-o would yield operating revenues of $370,544,000 and income available for return of $115,786,000.
In accordance with our finding of $1,160,000,000 as fair value of property devoted to public service and an 8.53 percent as a fair rate of return, we have determined that Respondent's income available for return should be $98,948,000.
We therefore disallow $34,205,000 of Respondent's proposed revenue increase of $86,802,000 and find that it is entitled to increased revenues of $52,597,000 overall and an increase of $49,178,000 on Pennsyl-vania jurisdictional operations.
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THEREFORE, IT IS ORDERED:
1.
That the several complaints are dismissed except as otherwise indicated herein.
2.
That the exceptions of the parties to the Recommended Decision of the Administrative Law Judge are denied, except as otherwise indicated herein.
3.
That the Respondent is authorized to file within 30 days after the date of entry of this Order, tariff revisions consistant with our above order, to provide total annual Pennsylvania jurisdictional operating revenues of $314,477,000 (exclusive of revenues from the State Tax Adjustment Surcharge and the Fuel Adjustment Clause), as computed and allowed herein at the level of Pennsylvania jurisdictional operations ending March 31, 1979, as contained in the Respondent's showing in this proceeding and as adjusted upward for increased Pennsylvania jurisdictional sales of 173,441 MWH (185,498 MWH x 93.5%) as proposed by the Staff and approved herein together with the concomitant increase in base rate fuel Costs.
4.
That the additional jurisdictional revenues allowed herein in the amount of $49,178,000 w'ill be allocated to customer classes in accordance with Appendix A as modified by Appendix B, attached hereto.
5.
That Respondent file detailed calculations at the time of filing revised tariffs pursuant to this order that clearly demonstrate that the rates filed comply with all of the provisions and requirements l
of this order, to include but not limited to, data as to revenue increase percentages by customer class, rate blocks within each customer class, and on an overall company basis. Additionally, for.
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each tariff schedule, kilowatthour sales by rate block will be shown based upon Respondent's showing regarding estimated annualized sales as of March 31, 1979 and Staff's adopted increased Pennsylvania jurisdictional sales of 173,441 MWH will be separately shown by rate schedule and rate block within each tariff schedule.
6.
That pursuant to 8315(e) of the Public Utility Code, Respondent file recorded data regarding the test period, contrasting its showing herein with recorded data as soon as such data becomes available, but in no event later than June 29, 1979.
7.
That in future general rate increase applications Respondent will file its application on a 13-month average test period basis.
8.
That in future general rate increase applications Respondent will file on.a Pennsylvania jurisdictional basis only, excluding revenues, expenses and rate base applicable to operations subject to regulation by the Federal Energy Regulatory Commission.
9.
That in future general rate increase applications Respondent will provide data regarding bank charges avoided as a result of the maintenance of compensating balances.
10.
That Respondent may file an amendment to its Fuel Adjustment Clause as set forth in the body of this order.
- 11. That the tax surcharge will be recomputed in accordance i
with Section B, paragraph 2, of the State Tax Adjustment Surcharge Order of March 10, 1970.
12.
That upon the filing and approval of acceptable tariff revisions as prescribed herein,.the inquiry and investigation at i
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l R.I.D. 626 and the consolidated complaint proceeding thereunder shall be terminated and the record marked closed.
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. M ! L, ION ISS c.
C. J. McElwee Secretary (SEAL) j ORDER ADOPTED: March 22, 1979 ORDER ENTERED: Mardt 29,1979 l
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s'4, narDaz Tax 4g,h PENNSTLVANIA PUBLIC UTILITY CCHMISSION
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DOCKET NO. R-78060626 4
p, a.
PENNSYLVANIA PUBLIC ITIILITY CG0(ISSION T'f v.
MIT10POLITAN EDISON Cm(PANY STIPULATION The undersigned, counsel for Metropolitan Edison Company (" Company"),
the Pennsylvania Office of Consmer Advocate (" Consumer Advocate"), the Pennsylvania Public Utility Commission Prosecutory Staff ("PUC Staff"), and various industrial complainants in the above captioned proceeding, herewith j
submit for the Commission's consideration a Stipulation for the proposed settle-(
asnt of specific rate structure and allocation of the bsse rate revenue increase amount issues of said proceeding.
i INTRODUCTION On June 30, 1978, the Company filed its Tariff Electric PA PUC No.
43 proposed to become effective August 29, 1978, together with substantial supporting data. By order entered on August 8, 1978, the Commission instituted a formal investigation to determine the fairness, reasonableness, and lawfulness of the proposed rates, rules and regulations as well as to consider the lawful-ness and propriety of existing rates, rules and regulations. The Commission's Order also took note of the automatic suspension of the proposed tariff increases and changes until March 29, 1979, unless the Commission would permit the new fbo& W M4%f M.,s-s6 os 2 6 l
Wp. /-AP-? ? -
l P-APPENDIX A i%w w
D. mem e m m.-.
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INTRODUCTION (Cont 1 Sued) tariff to become effective on an earlier date. The proceeding was assigned to the Of fice.of Administrative Law Judges for hearings.
As of the date of this Stipulation, there have been thousands of pages of direct testimony, 28 days of hearings involving more than 3000 pages of written transcripts, hundreds of exhibits, and responses to various interroga-tories and data requests made of the Company by the other parties in the proceed-ings, and several days of informal meetings and discussions between the Company and various active parties. A substantial portion of the proceeding was devoted to rate structure, cost of service, and the allocation of revenues among the various classes of service. 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 issus 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 menner in which that issue should otherwise have been determined.
I This Stipulation has been divided into two sections; (1) Specific Rate Structure Issues, and (2) Allocation of Ravenues.
Sectf.on 1 contains four parts: Part I addresses Residential Rate',
RS and RST; Par II deals with General Service Rates GS, GP, TP, H, GC'.i and MS; Part III treats the Lighting Service Rates MV-1, MV-2, SL, OSL, OL, TS and FL; and Part IV pertains to the elimination of certain rate schedules and provisions.
Section 2 contains a description of how the base rate increase is to be
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allocated among the jurisdictional rate groups. _ _.
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, SECTION 1 - SPECIFIC RATE STRUCTURE ISSUES The parties hereto have agreed, as aforesaid, to certain changes to specific rate schedules of the Company as follows:
I.a.
Rate RS - Residential Service This rate will consist of a customer charge (which does not inclu!e any kilowatthours) and one or two energy blocks. The I
second energy block will commence af ter the first 1,000 kWh in the winter billing months of October through April and will be availab1's only to (i) existing Rate RS electric space heating customers (including existing customers under Rate AE which is being eliminated) and (ii) to locations for which Rate RS electric 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 residential customers and the residential electric space heating customers.
Customers served under the restricted Rate RS electric space
heating provision shall be notified of the Company's intent to eliminate such provision in the next general rate filing by the Company.
I.b. Rate RST - Residential Time-of-Day Service This optional rate will recain as proposed with the exception 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. The energy charges v13 3 be adjusted to reflect higher of f-peak chargos than
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pres:Itly ctated trich downw:rd cdjustansta to the prspored on-peak charge, as warranted.
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We Company. Consumer Advocate, and Commission Prosecutory Staff have sgreed to jointly develop a program to be used to promote, i
monitor, and evaluate the success of the time-of-day and the r
off-peak provision of residential rates. In any event, the Company will undertake to promote more specifically the existance and applicability of these rates through direct contact with customers as well as through available print and broadcast media.
gianificant findings will be furnished to interested parties.
II. General Service Rate Structures:
II.a.
Rate CS - Censral Secondary Service General Provision (b), Off-Peak Service, shall be expanded and made available to all customers. A separs.te monthly fixed k
charge and a one year contract minimum shall be required for all customers under 50 kW to compensate the Company for the additional incremental costs for providing this service. Regarding General Provision (a). Qiurches and Parochial Schools, a study will be made to determine the hyact of elbinating the provision in the j
next general rate filing. A study will also be made with respect to the "Detarmination of Use-ofDpacity" provision for measuring pcwer factor as to the appropriate demand icvel for measurement and application of the power. fact.or provision (presently 300 kW).
With respect to the so-called " sliding window method" of demand measurement for billing purposes, as described on the C
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recced ct N.T. 1148-49, th3 Company agrees that it will not implement such biJ11ag practice until each affected customer has been provided one year's written notice of such implementation.
During the notice period customers v133 be parallel bi3 3ed using the " sliding window concept" for information purposes only.
Actual implementation wi13 occur on a rate schedule by rate schedule basis.
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The allocation of any increase in base rate revenues within the rate schedule will be proportional to the distribution of the proposed rate increase contained in Met-Ed Exhibit C-4.
II.b.
Rate GP - General Primary Service The bulk of the increase will be p3 aced in the demand charges of the rate similar to the methodology discussed in II.a. above.
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A General Provision (e), Untransformed Service, will be incorporatedforchstomersgreaterthan3MWtransferredfrom a
present Rate CPL-2.
The level of the voltage discount shall be such as to limit the impact of the base rate increase to an amount not gr/.ater than 150% of the total Company retail base rate irteresse. Such provision shall expire two years af ter j
the ef te-etive date of the new rates or upon the fi31ng of a new general rate ecsc by the Cocpany, whichever cccurs first.
A General Provision (f), Power Factor Correction, will be incorporated for all customers transferred from present Rate i
CPL-2 which wi)) waive application of the 90% power factor i - -.
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rcquirement coatsinsd in tha "Dataruinntirt. of Billing Demand" t
. and in 31eu thereof vi13 require an 85% povar factor. Such I
provision shall expire one year af ter the ef fective date of the new rates or upon the filing of a new geteral rate case by the Company, whichever occurs first.
The " sliding window method" for demand measurement described in II.a. above shall be applicable to this rate.
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II.c.
Rate TP - Transmission Power Service The bulk of the increase allocated to this reta schedule will be 3, laced in the demand charge as discussed narlier in II.a.
The " sliding window method" for demand measurement described in II.a. above shall be applicable to this rate.
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II.d.
Restricted Rates H - Space Heating and Air Conditioning Service and CCH - General Cooking or Heating Service These rates are to be proposed to be alinf anted in a subse-i quant general rate filing made by the Company following a study to be made by the company to determine the customer impact of such a move.
Customers shall be notified of this intent by the Company.
II.e.
Rate MS - Munici::a1 Service This rate will consist of a customer charge and energy charges.
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i-III. M ahtine S*rvica Rate Structuren:
III.a.
Rates MV-1-Overhead Street Liahtina Service: MV-2-Restricted Ornamental Street Liahtina Service, Mercury Vapor: Restricted I
SL-Overhead Street Liahtina Service: Restricted OSL-Ornamenta)
Street Li:theina Service; and OL-Gutdoor Area Lightina Service he allocated increase wi31 be distributed as follove:
Rate OL - to increase; Rates MV-1, MV-2 SL, and OSL - the l
allocated 12 crease will be distributed as proposed in Met-Ed Exhibit C-4 between the various lamps.
III.b.
Rates TS - TV,afUc Sinnel and Telephone Booth Limhtina Service and Restrictei 71 - Fire Alarm Box Lightina The allocated increase will be distributed as proposed in Met-Ed Exhibit C-4.
t IV. Rate Schedules and Provirions - Eliminated:
i IV.a.
Present Rate RS. General Provision (c) - Water Heatina Restricted This provision shall be eliminated as proposed by the Company in its fil ed Tarif f Pa. P.U.C. No. 43.
02stomers will receive service un ter standard Rate RS or such cther applicable rate as they may elect (Rete RST).
IV.b.
Present Restricted late AE - All E3ectric Home Service and Restricted Rate !!CS - All Electric Ceneral Service.
i These rates shall be eliminated as proposed by the Company in its filed Tariff Pa. P.U.C. No. 43.
Customers wi33 he trans-forced to the appropriate r.ite schedules.
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"* SECTION 2 - ALLOCATION OF REVENUES The parties hereto have agreed, as aforesaid, to certain allocations of the jurisdictional retail rate increase granted the Company as follows:
! Sten 1 The overall base rate percent increase as related to the normalized base revenues as contained in Met-Ed Exhibit C-1 is 31.8641%. Initially, each class of customers shall be allocated an increase amount determined by multiplying the normalized revenues set forth in Met-Ed Exhibit C-1, page 2, colum 2 by the increase percentage finally granted by the Commission.
Step 2 The parties agree that an amount of $4.3 million should be shifted from the Residential class of customers to the General Service rate classifica-tions including "Other".
Shoeld the Company be granted less than its entire request, the $4 3 million shif t shall be reduced in the event the total retail rate relief granted is less than $40 million.
For each million dollars below $40 million, the reduction shall be 2.5%
of the $4.3 million.
The distribution of the $4 3 million and the results are shown in Schedule A, columns 7 and 8.
Step 3 The various lighting schedules shall receive percentage increases as set forth in Met-Ed Exhibit C-1.
The unrecovered difference in j
tbcse amounts and the Step 1 percentage enount shall be sproac hsch uniformly across the " General Service" and "Other" retail rate schedules, excluding the residential schedules. The results of this redistribution are contained in Schedule A, columns 9 and 10.
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and 3 set forth above. The methodology contained in Schedule A wouJd still be t
appropriate in the event the Company is granted an amount less than its total requested increase so long as the retail increase granted is greater than $40 h
million. If the amount granted retail customers is less than $40 million, the necessarymodificationtoScheduleAissetforthinStep2above.[
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i The, foregoing Stipulation by the parties is subject to the acceptance and I
approval of the Per.nsylvania Public Utility Commission. In the absence of any such approval by the Co:maission, and without the express agreement of each of I
the signatories, this Stipulation shall be deemed to be null and void.
I Ryan, Russell & McConaghy Attorneys-for Metropolitan Edison Co any
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t Mark P. Widoff Consumer Advocate By:
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hj Prosecutory Staff of the Pennsylvania Public Utility Commi sion By: wf I1*29~ W Industrial Complainants.
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APPENDIX B SECTION 1 - SPECIFIC RATE STRUCTURE ISSUES The parties hereto have agreed, as aforesaid, to certain changes to specific rate schedules of the Company as follows:
I.a.
Rate RS - Residential Service This rate will consist of a customer charge (which does not include any kilowatthours) and [cce er two-ener;;y 51 :ks]
Ma energy blocks I.n Oe. months of October through Aprit and one eneAgy block for the. remaining months. The second energy block will commence after the first 1,000 kWh in the winter. billing months of October through April and will be available only to (1) existing Rate RS electric space heating (including existing customers under Rate AE which is being eliminated) and (ii) to locations for which Rate RS electric space heating commitments were made prior to the effective date of these new rates. [The.
increase-t+-the-e-1::::i: pe : he et4ng-eustomers-ehell-he-euch as-to-e Lim ina t e-a-subs ta n tria l-po r tri on-o f-t h e -e x is t i n g-s a te 440fevent444-be tween-s tand a rd-re sident ia l-customer s-and-t h e r-es iden t4al-ele c tr i c-s pace-hea t,in g-ou s tomers. Cue t xc ee-eer-ved under-the-rest,sieted-Rase-RS-eleecric epece-heatring-provision be act1Elad-of-tha Companyls-intent-te climinate-oueh ah=11 provision-in-tha-next-general-sace-s-14-ing-hy the Company. ]
The. rate differe.ntial between the so energy blocks shaft be maintained at the approzinate. diffeAence as proposed by the company's original filing (4.74 per kWh for first 1000 kWh, 3.34 per kWh for all over 1000 kWh).
The company shaft maintain a differential until such time as substantial evidence is submitted showing the effects and reasons for eliminating such differential.
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W I.b.
Reto RST - Recidentiel Ties-of-Dry S*rvica This optional rate will remain as proposed with the exception that the customer charge shall be $3 per month greater than the RS customer charge in reccgnition of the additional [iner: rent 21]
costs to serve customers on a time-of-day basis. The energy charges will be adjusted to reflect higher off-peak charges than presently stated with downward adjustments to the proposed on-peak charge, ac uarranted. The company shall submit tubstarttial evi.dence shoscing the economic justification fon. such adjeshnents.
I.c.
The Company, Consumer Advocate, and Commission Prosecutory Staf f have agreed to jointly develop a program to be used to promote, monitor, and evaluate the success of the time-of-day and the off-peak provision of residential 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.
II.
General Service Rate Structures:
II.a.
Rate CS - General Secondary Service General Provision (b), Off-Peak Service, shall be expanded and made available to all customers. A separate monthly fixed charge and a one year contract minimum shall be required for all customers under 50 kW to compensate the company for the additional incremental costs for providing this service. Regarding General Provision (e).
Churches and Parochial Schools, a study will be made to determine the impact of eliminating the provision in the next general rate t
filing. A study will also be made with respect to the " Determination of Use-of-Capacity" provision for measuring power factor as to the app'ropriate demand level f,r measurement and application of the power
' actor provision (present.y 300 kW).
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