ML19340E112
| ML19340E112 | |
| Person / Time | |
|---|---|
| Site: | Summer  |
| Issue date: | 06/30/1980 |
| From: | Still J, Yonce H SOUTH CAROLINA ELECTRIC & GAS CO. |
| To: | |
| Shared Package | |
| ML19340E107 | List: |
| References | |
| 80-375, NUDOCS 8101060438 | |
| Download: ML19340E112 (94) | |
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SOUT!! CAROLINA DOCKEf NOS. 79-100-E and 79-19'/-G - ORDER NO.80-375 June 30, 1980 IN RE: Applicatio.: of South Carolina Electric )
and Gas Company for adj ustments in )
electric rate schedules, tariffs, and ) ORDER contracts (SCPSC Docket No. 70-196-E) ) APPROVING
) ELECTRIC and ) RATES AND
) CHARGES Application of South Carolina Electric )
and Gas Company for adj ustments in gas )
rate schedules and contracts (SCpSC )
Docket No. 70-197-G) )
I.
This matter comes before the South Carolina Public Service Commission (hereinafter "the Commission") by way of a verified Application, duly filed on Junc 1, 1979, by South Carolina Electric
& Gas Company (hereinafter "the Compan "), whereby the Company notified the Commission of the Company's intent to adjust the
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! ) rates and charges heretofore approved by the Commission for the v
retail electric services provided by the Company, to be effective on bills rendered on and af ter July 1, 1980.1 According to the Company's Application, the proposed rates and charges, which were attached to the Application and incorporated therein as Exhibit VI, would have produced additional annual revenues of
$38,981,415, had they been in effect for the twelve months period ending March 31, 1979. The additional revenues represented an approximate increase of 10.77% in the Company's revenues attributable to its retail electric operations for the period.
1 The Company's presently authorized rates and charges for retail electric service were approved by Order No.77-831, issued on December 13, 1977, in Docket No. 76-645-E, IN RE:
Application of South Carolina Electric & Gas Company. The fuel component in the Company's base rates established in Order No.77-831 has been modified by subsequent decisions in Docket No.
18.362. See, e.g., Order No.80-259, issued on April 30, 1980, at p. 1 and the decisions cited therein.
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DOCKET NOS. 70-196-E and 79-197-G - Or. DER NO.80-375 June 30, 1980 page Two The Company's Application was filed pursuant to S. C. Code Ann.
$58-27-860 (1976), and R.103-830 et seq. of the Commission's Rules and Regulations.
On June 6, 1979, the Company filed a written Motion whereby the Company sought certain relief in the nat"re of an Order of the Commission authorizing a consolidation of the instant Dockets for the purposes of any public hearings to be scheduled in this matter.2 On June 18, 1979, the Comaission issued itt Order No.79-294 in the instant proceeding whereby the Commission, inter alia, determined that a formal proceeding should be commenced in this matter and that a public hearing should thereupon be conducted. Consequently, the Commission suspended the effective date of the rates and charges proposed in the Company's Application in Docket No. 79-196-E for a period of twelve (12) months unless a final decision sooner made dis-position of the issues raised by such Application.3 The Commission's action was authorized by S. C. Code Ann.. $58-27-810 (1976).4 Order
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No.79-294 furthermore consolidated the instant Dockets for the purposes of hearing.
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2 On June 1, 1979, purs ua nt to S. C. Code Ann., 558-5-240 (1976),
the Company likewise flied an Application whereby it notified the Commission of the Company's intent to adjust certain rates and charges for the natural gas services subject to the Commission's jurisdiction. That Application was assigned Docket No. 70-197-G.
The gas rates and charges were proposed to be made effective on servic ; rendered on and af ter November 1, 1979. The Company subsequently filed an amended Application in Docket No. 79-197-G.
j See, Order No.70-730 at p. 4.
3 The suspension of the effective date of the proposed rates and charges would consequently expire af ter July 1, 1980.
4 Order No.70-294 likewise suspended the effective date of
- the proposed rates and charges in the Company's Application in
! Docket No. 79-197-G for a period not to exceed sixty (60) days, l as provided by S. C. Code Ann., $58-5-250 (1976).
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DOCKET NOS. 79-196-E and 70-197-G - ORDER NO.80-375 June 30, 1980 page Three ___
On June 20, 1979, the Commission's Executive Director instructed the Company to cause to be published a prepared Notice of Filing once a week for three consecutive weeks in newspapers of general circulation in the Company's service area. The Notice of Filing indicated the nature of the Company's Applications and advised all interested parties desiring to participate in the proceeding of the manner acd time in which to file the appropriate pleadings. The Company was likewise required to notify directly all customers affected by the proposed rates and charges. On August 27, 1979, the Company furnished affidavits demonstrating that the Notice of Filing had been duly published in accordance with the instructions of the Executive Director.5 In addit.nn, the Company certified that a copy of the Notice of Filing had been mailed to each customer af fected by the rates and charges proposed in the Company's Applications.
() On June 27, 1979, the Company duly flied a petition and an Undertaking whereby the Company notified the Commission of its intention to place in effect under bond the rates and charges incorporated in Exhibit VI of the Application, the
- ef fective date of which had been suspended by Order No.79-294.
The Company's petition likewise sought approval of the Undertaking, l
! dated June 21, 1979, under the provisions of which the Company agreed ta make refunds, as directed by the Commission, of the amount, if any, by which the proposed rates and charges were finally determined to be unjust and unreasonable. The Company's j petition and Undertaking were filed pursuant to 3. C. Code Ann . ,
$58-27-880 (1976).
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The Notice of Filing was published in the State Register,
, Vol. 3, No. 14, dated June 29, 1979.
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DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 page Four__ __
On June 29, 1979, the Commission issued its Order No.79-326, in which the Commission, after a review of the Undertaking and of the Company's financial solvency and net worth, found the Undertaking to be sufficient to protect the interests of'the Company's customers and of the public at large and to secure such refunds with interest as might be ordered by the Commission upon the conclusion of this proceeding. The Commission thereupon approved the Undertaking and required the Company to publish notice of the implementation of the rates and charges in effect pursuant to the terms of the Undertaking.
The Commission Staff (hereinafter "the Staff"), purs ua nt to R.103-853 of the Commission's Rules and Regulations filed with the Commission and served upon the Company its Information Data Requust No. I, dated June 20, 1979, whereby the Staff sought the production of certain additional information relative to the Company's Applications and operations. The Staff thereafter served on the Company and flied Information Data Request No. II, dated July 12, 1979. The Company subsequently submitted to the Commission and the Staff its responses to the Information Data Requests.6 On September S, 1979, the Commission issued its Order No.79-469, whereby the Commission denied certain relief sought by a Motion, filed on August 23, 1979, by the South Carolina Utility Reform Coalition, an Intervenor herein. The Motion had requested the waiver of certain procedural requirements embodied in the Commission's rules of practice and procedure and the establishment of a monetary fund to compensate certain unnamed parties of record for the expenses incurred in O
The Company's responses to the Information Data Requests were introduced into evidenco during the hearing in this proceeding. See, Hearing Exhibi t No. 3.
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DOCKET NOS. 70-196-E and 70-197-G - OliDER NO.80-375 June 30, 1980 page Five __ _ _ _ _
their participation in the instant proceeding.
Likewise, on September 5, 1979, the Commission issued i ts Order No.70-471 herein, whereby the Commission denied the relief requested by certain persons seeking leave to intervene in the instant proceeding.7 The Commission found that such parties would not be so materially af fected by the ultimate decision as to justify their full partic.pation in this proceeding, and concluded that those parties should be allowed i
the limited participation af forded protestants, pursuant to R.103-804(N) of the Commission's Rules and Hegulations.O On September 14, 1079, the Commission's Executive Director instructed the Company to cause to be published a prepared Notice of llearing once a week for three consecutive weeks in newspapers of general circulation in the Company's service area. The Notice of Hearing indicated that the Commission had designated the date of October 22, 1979, for the commencement of the public hearing in this proceeding. On October 8, 1979, the Company furnished certain affidavits demc..trating that the Notice of l Hearing had been duly published in accordance with the instruc-tions of the Commission's Executive Director.0 On September 20, 197D, the Commission issued its Order No.79-515, whereby the Commission denied the relief sought by the Consumer Advocate for the State of South Carolina, a duly admitted I
See, Order No.79-471, p. I at in. I for an identification of the petitioners therein.
O The Commission subsequently denied reconsideration of its determination. See, Order No.79-514, issued on September 20, 1980.
See also, Russelln et al. v. South Carolina public Service Commission
[ Civil Action No. 79-Cp-40-3040, Fif th Judicial Circuit); and Russell et al. v. Yonce, e tc . , e t a l . (Civil Action No. 70! 2T60-0 United States District Court for South Carolina) .
0 The Notice of Hearing was published in the State Register, Vol. 3, No. 20, dated September 26, 197D.
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DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 page Six
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d Intervenor herein, in a Motion filed on September 12, 1980.
The Motion requested a separation of certain issues f rom considera.
tion in the instant proceeding. The issues so identified were related to specific standards incorporated in the Public' Utility Regulatory Policies Act of 197810 (hereinafter "PURPA"), which the
. Commission had originally intended to consider in the context of this proceeding.II The Commission later dbnied a nrittbn Petition
- for rehearing or reconsideration of the determinations made in Order No.79-515, although the Commission indicated that its final determination with regard to the consideration vel non of the PURpA standards would be made upon receipt of the probative evidence presented in this proceeding.12 Thereafter, upon evaluation of Motions of the Consumer Advocate for South Carolina and the South Carolina Textile Manufacturers Association made during the context of the hearing, the Commission determinrd s to defer the final consideration of the PURpA ratemaking standards and
(-') " lifeline" rates until a subsequent proceeding . (Tr., Vol. 43, at pp. 32-34)
On October 5, 1979, the Columission issued its Order No.79-567 whereby the Commission authorized counsel for the Consumer Advocate for the State of South Carolina to take certain deposi-tions,13 pursuant to the provisions of R.103-852 of the Commission's Rules and Regulations.
I 10 16 U.S.C. 552601 et seq. (1978).
II See, Order No.70-204, supra, at pp. 3-4, which expressed our intent to consider the adoption of the ratomaking standards identified in 16 U.S.C. 52621 (1978) and " lifeline" rates, as described in 16 U.S.C. $2624 (1978).
12 ee, Order No.79-570, issued on October 9, 1979.
13 ee, IIearing Exhibit No. 10.
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DOCKET NOS. 70-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 page Seven O On October 17, 1979, the Commission issued its Order No.79-587, whereby the Commission granted the relief sought in the Petition for leave to intervene out of time, filed on September 27, 1979, by the Secre,tary of the Army on behalf of the Uni.thd, States Department of Defense.14 On October 18, 1979, the Commission issued its Order No.
e 79-589 whereby the Commission denied certain relief sought by the Motion of the South Carolina Textile Manufacturers Association, served and filed on October 5, 1979, for the prefiling of tie prepared direct testimony and exhibits of expert witnesses proposed to have been offered in the hearing in the instant proceeding.
Likewise, on October 18, 1979, the Commission issued its Order No.79-592 whereby the Commission authorized counsel for i
the Intervenor, Palmetto Alliance, Inc., to take a deposition by way of certain electronic medium, conditioned upon the imposition of specific restrictions.15 5 7hereafter, pursuant to notice duly provided in accordance with applicable provisions of law and with the Commission's Rules and Regulations, a public hearing relative to the matters asserted in the Company's Applications, as consolidated by Order No.79-294, supra, was commenced on October 22, 1979, and conducted until recessed on December 18, 1979. At the opening of the hearing, Patricia T. Marcotsis, Esq., Harry M. Lightsey, Jr., Esq., and fiubert E. Long, Esq., represented the Company; Steven W. Hamm, Esq., and Raymon E. Lark, Jr., Esq., represented 14 The return date for the service and filing of Petitions to Intervene in the instant proceeding was August 17, 1979.
15 No formal indication was provided by Palmetto Alliance, Inc., whether the requested deposition was accomplished in accordance with the provisions of Order No.79-592.
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DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 -
June 30, 1980 Page Eight O the Intervenor, the Consumer Advocate for South Carolina (hereinaf ter "the Consumer Advocate"); G. Daniel Elizey, Esq., and Henry R. NacNicholas, Esq., representud the Intervenor, the South Carolina Textile Manufacturers Association; Robert Guild, Esq., represented the Intervenor, the South Carolina Welfare Rights Organization; Philip L. Fairbanks, Esq.,
represented the Intervenor, the Senior Citizens Comoittee of Dale, South Carolina; P. Lewis Pitts, Esq., and Robert W.
Warren, Esq., represented the Intervenors, the Grass Roots Organizing Workshop and the Palmetto Alliance of Charleston, South Carolina; Peter Q. Nyce, Jr., Esq., represented the Intervenor, the United States Departwent of Defense; and Robert T. Bockman, Esq., General Counsel, and Arthur G.
Fusco, Esq., Staff Counsel, represented the Commission and Commission Staff. The following parties of record were not represented by counsel at the commencement of the hearing
($ herein: Carolina Action; Midlands Housing Coalition; South
\.'I Carclina Utility Reform Coalition; Midlands Human Resources Development Commission; Palmetto Alliance, Inc.; and the South Carolina AFL-CIO. The following parties of record appeared pro se: John C. Ruoff, Charles Johnson, Ted Harris, B. J. Verdery, James E. Herring, Michael Lowe, Sr. Kathy Riley, Robert Guild, Sr. Susanne Beaton , Bruce L. Kaplan, Leon Pierce, Jr., B. W. Garrison and Mrs. H. R. Thompson.
Subsequent to the commencement of the hearing on October 22, 1979, the following parties of record participated in the conduct of the hearing: Peter Martin, pro se; Franklin Blechman, pro r so; and Tom Turnipsced, pro se.16 Several 16 ee, Order No.79-470 and Order No.79-513, supra, respectively, in this proceeding, gee, also. Order of the Honorable Matthew J. Perry, Judge, United States District Court for South Carolina, dated October 26, 1970, in Tom Turnipseed, etc. v. Henry G. Yonce, etc., et al. (Civil Action No. 79-2100-0).
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DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 page Nine v
duly admitted parties of record have not actively participated in the conduct of the hearing in this proceeding.17 On November 30, 1979, the Commission issued its Order No.79-665, wherein the Commission granted a Motion to quash a subpoena and subpoena duces tecum, filed on November 27, 1979, by the Honorable Richard W. Riley, Governor, State of South Carolina, pursuant to R.103-850 of the Commission's Rules and Regulations. The subpoena and subpoena duces tecum had been duly issued by the Commission's Executive Director upon request by several Intervenors in the instant proceeding.19 On December 12, 1979, upon Motion of the Commission Staf f, the Commission concluded the evidentiary portion of the proceeding in Docket No. 79-197-G in order to permit the Commission to deliberate f airly and f ully upon the issues and evidence presented in that Docket and to make disposition of such issues prior to the expiration of the suspension of the operation of
() the Company's proposed rates and charges for gas services.19 Oral arguments in regard to Docket (Tr. Vol. 110, pp. 151-2).
No. 79-197-G were heard by the Commission on December 17, 1979.
On December 31, 1979, the Commission issued its Order No.70-730 whereby the Commission, inter alla, approved certain rates and charges for the Company's natural gas services, effective 17 Those parties of record include the following: Owens-Corning Fiberglas Corp.; Kimberly-Clark Corporation; Utiroyal, Inc.; Owen Electric Steel Company of South Carolina; Westvaco Corp.; General Electric Company; Sunbeam Appliance Company; General Dynamics; Ms. Mamie Stansberry; Mr. and Mrs. George McLain; Ms. Louise Portee; Ms. Tracy L. Salisbury; the People Are Coming; Palmetto State Black Caucus; Lockhart Baptist Church; Mrs. Louis T. Murray; Southerners for Economic Justice; Ray P. McClain, Esq.; Ms. Janie Davis; Richland County (S. C.) Young Democrats; People United for Progress; Ms.
Gertie Hayes; Leon A. Smith; Ms. Frances Johnson; Batt Johnson; and Labor and Industry Committee, Burton-Dale NAACP.
18 See also. Order No. 80-44, issued on January 18, 1980, whereby the Commission denied a rehearing or reconsideration of its disposi-tion of the issues in Order No.79-665.
19 See, Order No.79-294, supra, and Order No.79-511, issued on September 19, 1979.
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DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 Page Ten O ~
for bills rendered on and after the Company's first billing cycle in January 1980. Thereaf ter, on January 7, 1980, the Commission approved certain tariffs and rate schedules for gas service filed by the Company in compliance with the terms of Order No.79-730.20
, On January 11, 1980, the Commission issued its Order No. 80-8 in which the Commission rescheduled the hearing, continued by the Commission's prior decision of December 12, 1979, to recommence on January 21, 1980. Thereafter, the hearing was resumed on January 21, 1980, and conducted until its conclusion on February 18, 1980.
The record in this proceeding includes one hundred and forty-five (145) volumes of testimony and one hundred thirteen (113) separate exhibits, which pertain to various aspects of the Company's retail electric operations and its gas oper3tions, the Company's need for capital and the cost of capital, the Company's present and requested rates of return, and various proposed accounting adjustments and rate design proposals. .
Subsequent to the close of the hearing, briefs were duly filed by the Company, the Consumer Advocate, and the South Carolina Textile Manufacturers Association (hereinafter "the SCTMA"). Palmetto Alliance of Charleston likewise filed a Memorandum.
In our Order No.79-730, which represented the full disposition of the issues in Docket No. 79-197-G, the Commission acknowledged that additional evidence might be submitted for our consideration of the Company's gas operations in the continued hearing herein.
l We indicated therein our determination to entertain the possibility i
I of further adjustments to the findings and conclusions, should I
t 20 See, Order No. 80-9, dated January 7, 1980.
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DCCKET NOS. 79-196-E and 79-197-G - ORDER No.80-375 June 30, 1980 Page Eleven
() such action be fair and reasonable upon analysis of the subsequent record.21 Our review of that record 22 however, reveals that no party of record either offered additional testimony or other evidence relative to the Company's gas operations, or so,ught rehearing or reconsideration of the disposition of those issues as provided by law. Consequently, the Commission finds no reason to cause us to disturb the findings of fact and conclusions of law reached in Order No.79-730.
In the consideration of the evidence in the record now before us, the Commission has remained mindful of our statutory responsibility, delineated by S. C. Code Ann., $$58-27-870, et seq.
(1976) to determine the lawf ulness and reasonableness of rate adjustments proposed by electrical utilities. In the due exercise of that responsibility and for the reasons more fully discussed herein, the Commission has determined that an overall rate of return on the Company's retail electric operations of 9.651 based on adjusted test year operations is fair and reasonable,
() and that in order to have the opportunity to achieve such return, the Company would have required additional annual revenue of $33,546,111. Founded upon the Company's test year operating and financial experience as adjusted, the Commission has concluded that the allocation of the additional revenue, as provided in Section X herein, meets the applicable statutory criteria and is consistent with other pertinent legal pronouncements.
Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591, 64 S.Ct. 281, 88 L.Ed.2d 333 (1944); Bluefield Water Works &
Improvement Co. v. Public Service Commission of West Virginia, 262 U.S. 679, 43 S.Ct. 675, 67 L.Ed. 1176 (1923); Southern Bell Telephone & Telegraph Co. v. Public Service Commission of South Carolina, 270 S.C. 590, 244 S.E.2d 278 (1978).
21 ee, Order No.79-730, supra, at p. 9.
22 ee, Tr., Vols. 111 through 145, passim.
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DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375
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June 30, 1980 page Twelve II.
THE COMPANY South Carolina Electric & Gas Company, organized an'd doing business in the State of South Carolina, is authorized by law to 23 engaged in the generation, operate as an electrical ut111ty transmission, distribution and sale of electricity and to operate 24 engaged in the purchase, transmission, as a public utility distribution and sale of natural gas. The Company provides its electric and natural gas services in the central, southern and southwestern areas of South Carolina, providing its electric services within twenty-four (24) counties and furnishing natural gas to more than seventy (70) communities. The Company's wholesale electric operations are subject to the jurisdiction of the Federal Energy Regulatory Commission (hereinafter "the FERC");
the Company's retail electric operations ar.d its natural gas operations are subject to the jurisdiction of this Commission,
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V pursuant to S. C. Code Ann., $$58-27-10, et seq., and 58-5-10 et seq. (1976), respectively.
The Company provides retail electric service to over 125 communities and wholesale electric service to three municipalities and service to six electric cooperatives in a service area con-sisting of some 12,000 square miles, with a population in excess of 1,200,000 persons. Within its territory, the Company provides electric service to approximately 285,000 residential customers, approximately 38,000 commercial customers, and approximately 800 industrial customers. As of March 31, 1979, the Company owned and operated seven (7) steam generating stations which utilize 23 See, S. C. Code Ann., $58-27-10 (1976) 24 See, S. C. Code Ann., $58-5-10 (3) (1976) a
DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 page Thirteen
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s fossil fuel, sixteen (16) internal combustion turhine generators, five (5) hydroelectric plants, and one pumped-storage hydroelectric plant, with a total generating capacity of 3,407 MW. In addition to its generating facilities, the Company owns and opera'tes an integrated transmission network and distribution system throughout its service area. The Company's system is interconnected with the facilities of adjacent electrical utilities to provide for the interchange of power. Approximately seventy-eight percent (78%)
of the Company's total revenues are produced by the Company's electric operations. (Tr., Vol. 2, S umme r , pp. 35-36)
The Company's currently approved rates and charges for its retail electric operations were authorized by the Commission's Order No.77-831, issued in Docket No. 76-645-h, on December 13, 1977, based upon the Company's operations during the twelve months ending December 31, 1976. The Company's Application herein asserts that its financial position "is no longer sound and in order to restore and maintain a proper financial position to enable it to k_ continue to meet the needs of its customers for increasing amounts of electricity, it must increase its rates and charges."25 The Company's president and Chief Executive Officer, Virgil C. Summer, summarized tre Company 's financial position :
The Company's earnings on its investment are no longer fair and reasonable. In its 1977 Order, the Commission granted the Company the opportunity to earn a 13 percent return on common equity. The return on common equity on March 31, 1979, was 10.7 percent, and had declined fur-l ther to 9.8 percent on May 31, and by the
! end of June, just before the new rates l were put into effect under bond, it was I down to 9.3 percent. For the twelve months ended March 31, 1979, earnings per share fell to $2.00, compared with
$2.38 for the twelve months ended March 31, t
and by the end of June the carnings per share were down to $1.78.
I 25 See, The Company's Application, dated May 30, 1979, f
t para. 5, p. 3.
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DOCKET NOS. 79-190-E and 79-197-G - ORDER NO.80-375 June 30, 1980 page Fourteen V
Coverage for fixed charges on bonded indebtedness fell to 2.35 times at the end of the test period, and preferred stock coverage fell to 1.55 times.
These coverages are dangerously low, threatening the Company's ability to finance and attract capital at a reason-able rate. The Company's stock has continued to sell at or below book value, which places the Company in the position of being unable to issue additional common stock without diluting the interests of its existing stockholders and confiscating part of their investment for the benefit of new stockholders. The Company, nevertheless, must issue additional stock and other forms of financing because it must continue its electric construction program to meet the expanding demands for services by its customers.
During 1979 the Company's financing from all forms of securities will be approxi-mately $150 million. Further, the Company contemplates additional financing of approxi-mately the same total in 1980. Higher construction costs and very high financing rates require that electric and gas rates and charges be increased in order to deal
/~% fairly with the Company's stockholders
(_ ) and other investors, and to enable it to attract the additional capital to adequately serve the needs of its customers.
(Tr., Vol. 2, S ummer , pp . 41-42)
The Company's Application asserted that the proposed rates and charges were "just and reasonable, providing the Company with only a minimally fair and reasonable return on common equity of approximately thirteen percent (13%), the level approved by the Commission in its last rate order for the Company."26 26 See, Order No.77-831, supra, at p . 41.
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DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 page Fifteen
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III.
CONSTRUCTION PROGRAM As an electrical utility, the Company has the statut,ory obligation to f urnish " adequate, efficient and reasonable service."
S. C. Code Ann., $58-27-1510 (1976). The Commission has a con-comitant responsibility to require the continuous provision of
" reasonable, safe, adequate and sufficient" service. S . C. Code Ann . ,
$58-27-1520 (1976). As we have consistently recognized in previous decisions, in an age of extensive planning and protracted construc-tion time for electrical generation, transmission and distribution facilities, the Commission must preserve an awareness of the interrelationship among projected demands for electrical energy, the proposed construction programs designed to meet those demands, and the maintenance of adequate reserve margins to address unforeseen contingencies.27 The record of the instant proceeding includes considerable
,,,/ testimony in regard to the Company's projected construction budget and the anticipated growth in sales and peak demand as independently forecasted by the Company,by the Commission Staff, and by the witness for the South Carolina Welfare Rights Organization.28 In the context of the full spectrum of issues herein, thorough consideration has been given to the significance of the projected construction expenditures which are designed to address the reasonable forecasted
( demands for electrical energy in the Company's service area while providing for the maintenance of a sufficient reserve of generating capacity.
27 See, e.g.,
Order No.79-830, issued on May 17, 1979, in Docket Nos. 78-189-E and 77-394-E, IN RE: Application of Duke Power Company, at pp. 9-10 and Order No.78-404, issued in Docket Nos. 77-354-E and 18,361 and 18,367, IN RE: Application of Carolina i power & Light Company, on July 13. 1978, at pp. 10-11; and Order l No.77-831, issued in Docket Nos. 76-645-E and 18,362 IN RE:
l Application of South Carolina Ef ectric & Gas Comrary on December 13, i
1977, at pp. 9-10.
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28 See, e.g., Tr., Vols. 49-56, and Vols. 64-74, Nichols; Tr.,
fg Vols. 88-89, Bouknigh t ; and Vols. 141-142, Riley. See, Hearf.g l (
\/ ) Ex. No. 3, item 24, for an explanation of the forecasting metuo-l dology employed by the Company; and Hearing Ex. No. 49 for a description of the forecasting methodology employed by the Commission Staff.
fx DOCKET NOS . 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980
( l Page Sixteen The Company'r witness Summer indicated that the Company's anticipated expenditures for electrical generation, transmission and distribution facilities for the five-year period through 1983 will approximate $519.000,000, excluding nuclear fuel. For the 1979-1980 period, the Company forecasts a construction budget in excess of $270,000,000, with the principal portion of the expendi-tures attributable to the construction of the V. C. Summer Nuclear Station and related transmission projects. ( Tr . , Vol . 2, S umme r ,
pp. 53-54) The projected annual construction expenditures for the 1979-1988 period appear in the following table:29 TA BLE A GROSS CONSTRUCTION DOLLAR EXPENDITURES ELECTRICAL OPERATIONS (ESTIMATED) 1979 $ 148,701,000 1980 103,594,000 1981 68,694,000 1982 67,860,000
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1983 1984 96,220,000 213,349,000 1985 341,028,000 1986 386,118,000 1987 338,438,000 1988 196,069,000 l
TOTAL $1,960,071,000 (Source: Hearing Exhibit No. 3, item 16)
The Company's projected construction budget clearly represents a significant expenditure of capital. The Company's short-term financial plan called for the generation of nearly seventy-five percent (75%) of the projected capital expenditures from external sources for the 1979-1980 period. (Tr., Vol. 10, Wooten, p. 53) 29 Compare, Table A. Order No.77-831, supra, at p. 10.
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DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 fg Page Seventeen U
The Company's ten-year construction budget provides for the completion of the Summer Station with its additional 600MW to the Company's system capacity, and the addition of 100MW and 200MW peaking capacity in 1985 and 1986, respectively and a T.70MW fossil-fired unit in 1987. (Tr . , Vol . 2, S ummer , pp . 52-53)30 The Company's proposed construction projects and the associated capital expenditures represent the Company's calculated response to the anticipated need for electrical energy imposed by the demands of its present and prospective customers. By necessity, that response incorporates a considerable degree of long-range planning.
The availability of a reasonable and reliable evaluation of the future demands for energy, upon which an electrical utility's construction program and expenditures are founded, is an integral element in the Commission's constant analysis of the service supplied by that utility. This Commission has frequently recog-nized the significance of rational forecasting of demand and the deleterious effects of inaccurate projections. The significance f~)h u
of sales and demand forecasts is predicated upon the obligation of electrical utilities to supply sufficient service to meet the present and reasonably anticipated demands for energy. That obligation is complemented by the Commission's oversight responsi-bility which must be exercised to provide that the availability of energy is accomplished at just and reasonable rates in order to balance the interests of the utility and its investors, the ratepayers and the general public. The establishment and 30 The current construction forecast incorporates the cancel-lation of a 500MW fossil-fired unit previously planned for operation
( in 1985. (Tr., Vol. 2, Summer, pp. 52-53)
I Cr V
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i 1
DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375
()
June 30, 1980 page Eighteen i
maintenance of adequate generation and delivery systems are complicated by the necessity to develop construction plans and
, energy forecasts as well as financing programs over extended periods of time. patently, over estimates of future demand, l will promote the construction of capacity which is neither used nor useful in providing electrical-service, the costs of which present and future ratepayers would be called upon to bear.
I On the other hand, a demand forecast which underestimates i
f uture growth may well produce critical energy shortages, loss i
e of electrical service, with the consequential injury to the physical and economic health of the State of South Carolina
{
and her citizens. Such adverse possible consequences require the Company and the Staff to exercise considerable caution in f the manner of forecasting demand, and likewise require the
- Commission to maintain close scrutiny over the projected and l actual results of such forecasting.31 l
! s The Company's plans for its construction program are founded I
j principally upon ten-year forecasts of peak demand which are derived primarily through the design and application of j
econometric models, which produce projections of energy sales for each major class of service. The econometric models utilize different major variables. For the residential class of-l service, population and real personal income are the principal I
( variables; for the commercial class of service, the most significant l . '
l i
variable is the number of residential customers on the Company's 31 8ee, Order No.79-230, supra, at pp. 11-12; Order No.
i 78-404, supra, at pp. 13-14; and Order No.77-831, supra, at' l pp. 12-13.
l I
.-,--,- ,-,..- -. - - - . - _ _ - . ,_-- --,-,- _...- .,_.- - -,-,~ m ... . _ , . - ,-~... _ ,,,,,,-r ,.._..-,-.-.,,--,:
DOCKET NOS. 79-196-E and 79,'97-G - ORDER NO.80-375 f,s June 30, 1980
(} page Nineteen system. A temperature variable is likewise incorporated in each model. For the industrial class of service, manufacturing employment constitutes the major variable. According to the Company's witness, Thomas C. Nichols, Vice President and Group Executive, power production and System Operations, the operation of the various econometric models produces a projected growth of approximately 4.8% annually for the Company's residential class of service through 1988.32 The anticipated annual growth in energy ss.les to the commercial and the industrial classes of service for the same period is 6.9% and 6.4%, respectively. (Tr.,
Vol. 49, Nichols, pp. 55-56.)33
".no application of a projected annual load factor 34 operates to convert the anticipated energy sales to a projected growth in peak demand. The Company's forecast produced a projected growth in peak demand through 1988 of 5.8%, which represents a
,s measurable reduction from the average annual rate of growth
(\--)' in peak demand experienced by the Company in the 1960-1974 pe riod and from the projections previously made by the Company. (Tr., Vol. 49, Nichols, pp. 54-55.)36 32
' Approximately three-fourths of the projected growth in sales to the residential class is attributable to an anticipated increase in the number of residential customers. (Tr., Vol. 49, Nichols, p. 56).
3 See, Hearing Exhibit No. 32 (TCN-1).
" Load factor" is the ratio of the energy consumed in a time period to the maximum energy which could have been consumed during tha t time period .
35" Peak demand" is defined as the highest sixty-minute integrated load recorded in a calendar year or other specified period of time. peak demand represents the highest usage of energy in any one hour.
G See also, Hearing Exhibit No. 32 (TCN-1), col. 7.
O U
O DOCKET NOS . 79 -196-E and 70-197-G - ORDER NO.80-375 June 30, 1980 page Twenty The Commission Staff's witness, Dr. James G. Sauknight, Chairman of the Department of Business and Economics at Columbia College, and a former research and statistics administrator in
} the Commission's Research Department, offered testimony relative to the Staff's independent forecasts of energy sales and peak demand for tt.e Company. According to Dr. Bouknight, the Commission Staff's study 3 was intended to provide an additional method whereby the Commission could evaluate effectively the forecasts of energy sales and peak demand utilized by the Company.
The study was designed, inter alia, to analyze the sensitivity of energy sales to changes in income, to estimate energy sales elasticities with respect to income, to price, and to the relative price of alternative fuels. In addition, the Staff's analysis addressed the system's sensitivity to weather, established the respective energy usage of each customer class, and
() reviewed the magnitude of potential uncertainties associated with a given forecast. (Tr., Vol. 88, Ibuknight, p. 10)
The Cocnission Staff's study involved an econometric analysis to develop its energy sales projections. This analytical approach incorporated the use of independent variables identified through the implementation of regression techniques. Those variables included the real average price of electricity, the average price of natural gas, real personal income, a production index, and certain weather variables. The Staff imposed certain sets of assumptions relative to the growth rates of the variables in the operation of the econ <xwt ric model .38 U
S_ce , llea ri ng Exhibit No. 49.
O nd., at pp. 3-4.
D.
J V
DOCKET NO. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 Page Twenty-One The Staff's review produced three distinct forecasts of peak demand, based upon the use of two separate projections of load factors and a combination of the assumptiere imposed upon the independent variables. The three forecast scenarios developed by the Staff produced growth rates of peak demand for the Company within a range of 5.17% to 6.0% for the period ending in 1990.39 (Tr., Voi, 88, Douknight, pp. 10-11)
Mr. Jesse L. Riley, witness for the SCWRO, criticized the results of the Company's forecast of load p owth. (Tr., Vols.
141 and 142, Riley, passim). For his own F ojection of peak demand, the witness principally relied upon the ase of a linear regression equation developed with the Company's historic load growth for the 1970-1979 period. (Tr., Vol. 142, Riley, p. 8)
Witness Riley's forecasting methodology did not address purposefully the effects of energy conservation, increases in the cost of energy or changes in real discretionary income.
f)
v (Tr., Vol. 141, Riley, p. 27)
The concept of the adequacy of the reserves of system generating capacity is integral to the process of load growth forecasting. The record of this proceeding contains extensive testimony relative to the Company's projected reserves and underscores the relationship between the projections of peak demand growth and the availability of reasonable reserves. The following table illustrates the Company's anticipated reserve margin available at peak demand incorporating the Staff's second forecast and the Compa* y's projected reserve margins which we consider to be significe".t for our review of the Company's 09 The Staff's forecasts did not include factors directly to reflect conservation measures, improved technologies or load control programs. The effects of such factors was incorporated in the elasticities of the variables in the model . (Tr. , Vol . 88, Bouknight, p. 11).
n v
- e. , -- , ,e a-y- - -, ,. s -- -- -g-, , -
DOCKET NOS. 79-196-E and 70-197-G - ORDER NO.80-375 June 30, 1980 page Twenty-rwo f-ss QI projected peak demand and system reserve margins.
TA BLE B Reserve Margins Commission South Carolina Electric Staff & Gas Company 1980 30.7% 32%
1981 44.8% 48%
1982 37.4% 39%
1983 30.3% 31%
1984 24.8% 25%
1985 20.4% 21%
1986 19.4% 20%
1987 25.8% 27%
1988 18.7% 20%
(Sources: IIearing Exhibit No. 49, at p. 12; and Hearing Exhibit No. 32 (TCN-4))
The Company's witness Nichols articulated the Company's policy with regard to system reserve margins:
The Company's reserve policy is to maintain a minimum level of reserve equal to its largest unit or of approximately 20% of the forecasted firm Total System Load whiche*/er is the greater.
Generating reserves will vary from year to year
() depending upon the year a unit becomes operational and variations in load projections.
(Tr., Vol. 49, Nichols, p. 59)
At present, the Company's largest operating base load unit generates approximately 580 MW.40 The Commission recognizes that the Company's forecasted available capacity for the period through 1988 indicates that the available reserves will exceed the minimum reserve margin considered reasonable by the Company.41 Tr., Vol. 49, Nichols, p. 11G) 40 See, Order No.77-831, supra , at pp. 15-16.
l 41 Hearing Exhibit No. 32 (TCN-4).
i 10 U
i
DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 fg June 30, 1980
() Page Twenty-Three We likewise acknowledge that a principal factor in the maintenance of the reserve margin above the minimum throughout the period is uttributable to the prospective operation of the V. C. Summer Station with its addition of 600 MW to the Company's base load generating capacity. Such result is an expected consequence of the addition of a substantial contribution to the overall system, as we recognized in the Company's most recent ratemaking proceeding.
The Commission acknowledges the fact that upon commercial operation of a new base load generating facility there is a temporary ef fect of a dramatic increase in reserve capacity. (Citations omitted)
However, the Commission feels that such temporary departure is justified in light of the demonstrated need for the proposed generating facilities.
Order No.77-831, supra, at pp. 16-17.
The Commission considers that the Company's anticipated system reserves in the 1980-1988 period constitute reasonable levels of available capacity which will enable the Company to meet the 7.s k-- expected load growth and to maintain a satisfactory margin which is sufficient to protect the Company's customers and the public interest at large. We are aware that a theoretic calculation of available reserve capacity may well prove ephemeral when operating conditions and circumstances combine to reduce " paper reserves" to narrow margins of safety. (Tr., Vol. 49, Nichols, pp. 60-61) However, we also repeat and reinforce our previous resolve that the Commission will carefully and thoroughly assess the future actual reserve levels and the Company's construction policies and budget.42 4
See, Order No.77-831, supra, at p. 17. See, Order of Honorable Dan F. Lancy, Jr . , presiding Judge,~date' September 21, 1978, in ifidlands Welfare Rights Organiz6 . ion, et al. v. The South Carolina public Service Commission, et al .
(78-Cp-40-0349).
i l eg
- s-l
DOCKET NOS. 79-196-E and 79-19 : ~G - ORDER NO.80-375 June 30, 1980
/"'N Page Twenty-Four U
This Commission has stated on several previous occasions that it is axiomatic that even the most sophisticated and rigorous analysis of projected load requirements cannot p'recisely predict the effect of future events.43 Th; Company likewise recognizes the imprecision inherent in such endeavors and consequently engages in systematic reviews of its projections and makes adjustments in its construction program in concert with the findings of such evaluations. This empirical review provides an element of flexibility to the construction program, given the extensive lead time required for the planning and construction of generation, transmission and distribution facilities, and thereby operates to balance the need for additional capacity with the projec+uG uemand .
The record in this proceedint and the Commissian's findings thereon do not wed the Commission inextricably to the methodology or results of the forecast of load growth presented by the
, Company, by the Staff, or by the SCWRO. However, the Commission is of the opinion that the projections made by the Company, and independently derived by the Staf f, represent reasonable expectations for the purposes of this proceeding. The Commission considers the Staff's projections in its second forecast scenario to reach a result which the Commission feels will be indicative of the rate of growth most likely to be experienced on the Company's system for the future period. The Commission I
( consequently finds likewise reasonable the Company's general construction program, as premised upon the currently forecasted load growth. The Commission will continue to expect the Company
( 43 See, e.g., Order No.79-230, supra , a t p. 15; and, l
Order No.77-831, supra, at p. 17.
l /~'N i \m-)
1 1
I
4 8 DOCKET NOS. 79-196-E ar.d 79-197-G - ORDER NO.80-375 gr June 30, 1980 t page Twenty-Five to exercise the utmost care in reviewing and revising its fore-casts of load growth and concomitant construction program.
The Company, the Intervenors, and the general public can be assured that the Commission and Staff will continue to maintain the scrutiny and review demanded by the Commission's statutory responsibilities.
IV.
TEST YEAR A fundamental principle of the ratemaking process is the establishment of a test year period. Ideally, such a period should be represented by the most recent twelve months preceding the date of filing a rate adjustment application for which data is available. While the rates and charges finally approved will have prospective effect only, this Commission has routinely ad-hered to the view that the immediate past experience, characterized a by identifiable operating results for a complete twelve months f
period, provides the most reliable guide for the immediate future.
The reliance upon the test year concept, however, is not designed to preclude the recognition and use of other historical data which may precede or postdate the selected twelve month period.
l Integral to the use of an average year, representing normal
- operating conditions to be anticipated in the future, is the l
necessity to make normalizing adjustments to the historic test year figures. Only those adjustments which have reasonable and definite characteristics, and which tend to influence reflected operating experience are made to give proper consideration to revenues, expenses and investments.44 Adjustments may be allowed for items occurring in the historic test year, but which will not recur in the future; or to give effect to items of an extraordinary nature 44 Southern Bell, supra. 244 S.E. 2d at 284.
(
t l
s_
k
. DOCKET NOS 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980
.'- page Twenty-Six by either normalizing or annualizing such items to reflect more accurately their annual impact; or to give effect to any other item which should have been included or excluded during the historic test year.
In the instant proceeding, the Company's Applications were based on actual operating experiences for the twelve months period ending March 31, 1979, and included financial and operating information for that period. The other parties of record herein likewise presented their evidence generally within the context of that same test year period. 1.1 consideration of the relative j
proximity of the commencement of this proceeding, the Commission finds the twelve months ending March 31, 1979, to be a reasonable period for which to make our ratemaking determinations herein.
V.
RATE BASE
() Pursuant to S. C. Code Ann., $58-27-180 (1976), the Comm1rsion has the authority after hearing to " ascertain and fix" the value of the property of an electrical utility. In the context of a ratemaking proceeding, such authority is exercised in the determination of the electrical utility's rate base.
For ratemaking purposes, the rate base is the total net value of the electrical utility's tangible and intangible capital or property value on which the utility is entitled to earn a fair and reasonable rate of return. The rate base, as allocated or assigned directly to the Company's retail electric operations, is composed of the value of the Company's property used and useful in providir.g retail electric service to the public, plus construction work in progress, materials and supplies, and an allowance for cash working capital. The rate base computation incorporates reductions for the reserve for depreciation and amortization, f"N
s
- DOCKET NOS . 79-196-E and 79-197-G - OHDER NO.80-375 p June 30, 1980 page Twenty-Seven
(_)
accumulated deferred income tax (liberalized depreciation) and customer deposits. In accordance with its standard practice, the Accounting Department of the Utilities Division of the Commission Staf f conducted an audit and examination of the Company's books, and verified all account balances f rom the Company's General Ledger, including rate base items, with plant additions and retirements. On the basis of this audit, the pertinent hearing exhibits, and the testimony contained in the record of the hearing, the Commission can determine and find prono balances for the components of the Company's rate base as well as the propriety of related accounting adjustments.
For ratemaking purposes, this Commission has traditionally determined the appropriate rate base of the affected utility as of the end of the test period.45 This Commission is among the majority of regulatory agencies which provides for the determi-g-'s nation of a utility's rate base on a " year end" basis, a result which most reasonably coincides with the prospective operation of any ratemaking decision. The use of a " year end" rate base likewise serves to enhance the timeliness of the effect of such action and preserves the reliance on historic and verifiable accounts without resort to speculative or projected figures. Conse-quently, the Commission finds it most reasonable to retain its consistent regulatory practice herein and evaluate the issues in this proceeding founded on a rate base for the Company's retail electric operations as of March 31, 1979.
i 45 See, o g , Order No.79-730, supra, at pp. 15-16; and Order No.80-113 isoaed on March 5, 1980, in Docket No. 79-305-C, In Re: Application of Southern Bell Telephone and Telegraph Company, at p. 14, and the decisions cited therein; and Order i
No.79-230, supra, at p. 18.
I m
~
O_-
s DOCKET NOS. 79-190-E and 79-197-G - ORDER NO.80-375 June 30, 1980 Page Twenty-Eight When the rate base has been established, the Company's total operating income for return is applied'to tbc mate base to determine what adjustments, if any, to the present rate structure are necessary to generate earnings sufficient to produce a fair rate of return. The rate base should reflect the actual investment made by investors in the Company's property and the value upon which stockholders will receive a return on their investment.
The Commission's determinations relative to the Company's rate base for its retail electric operations appear in the following subsections:
A. Plant in Service The Commission has traditionally used the regulatory accounting methodology recognized as " original cost less depreciation" in
[)\
the determination of the value of an electrical utility's plant in service. The record of the instant proceeding presents no justification for a departure from this methodology which was used by the Company and by the Staff in calculating the Company's gross plant in service "per books" of $1,014,300,765 for its retail electric operations.
The Company and the Commission Staff recommended that the "per books" figure for the gross plant in service related to the Company's retail electric operations be adjusted to reflect an increase of $8,770,412 to reflect construction work in progress O
V
DOCKET NOS. 79-196-E and 70-197-G - ORDER NO.80-375 h June 30, 1980
[/
N- Page Twenty-Nine that was completed and available for service prior to the end of the test period.40 The Commission considers the proposed adjustment to be proper and necessary to reflect accurately the Company's gross plant in service for retail electric operations as of March 31, 1970. Accordingly, the Commission finds $1,023,161,177 to be the appropriate figure for the Company's gross plant in service for ratemaking purposes in this proceeding.
B. Reserve for Depreciation and Amortization In determining the proper rate base for electrical utilities, the Commission uses the gross plant in service dedicated to providing public service as reduced by the reserve for deprecia-tion and amortization. The reserve represents that portion of the utility's depreciable prcperties which has been consumed by previous use and recorded as depreciable property. The "per books" reserve for the Company's retail electric operations was $247,621,762.
C\
\~ I The Company and the Commission Staf f recom.nended that the "per books" reserve be adjusted by the addition of $1,338,682, to reflect depreciation for the test year as if the plant in service at year end had been in service for the entire test period.47 The Commission finds such adjustment to be reasonable and proper, hereby adopting it for the purposes of this proceeding. The reserve for depreciation and amortization consequently becomes $248,960,444.
The gross plaat in service of $1,023,161,177, less the reserve for depreciation and amortization of $248,960,444, results in a net plant in service for the Company's electric operations of l
$774,200,733.
l 46 See , liearing Exhibit No. 9 (TMG-2. p. 1) and Hearing Exhibit No. 43, p. 25.
47
! _I_d .
l Iv)
I L
DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375
/~ s June 30, 1980 k ,'/
m Page Thirty C. Construction Work in progress Pursuant to the Commission's Directive of November 13, 1974, which, inter alia, identified the rate base items considered appropriate by the Commission for electrical and gas utilities, the reasonable and necessary costs of construction of utility plant not yet in service may be considered as a proper rate base item. Such costs are described as " construction work in progress" (hereinafter "CWIP"). This Commission has uniformly allowed CDIP to be included in a utility's rate base, with an offset adjustment to total income for return by that portion of the allowance for f unds used during construction (hereinaf ter "AFUDC") and income tax credit, which are attributable to the CWIP at the end of the test period. The evidence in the record in the instant proceeding has not caused the Commission to depart from, or modify, its previously adopted treatment for the inclusion of CWIP in the rate base herein for ratemaking
/'%
(,_) purposes 1or the Company's retail electric operations.
In the instant proceeding, the Commission Staff proposed that the "per books" CWIP of $391,523,793 for the Company's retail electric operations be reduced by $8,766,438 for the construction costs for projects completed and in service prior to the end of the test period .48 The recommendation reflected the adjustment to plant in service heretofore found reasonable.49 At the conclusion of the evidentiary portion of the hearing herein, the SCWRO moved for the disallowance of expenditures incurred in the construction of the Summer Station f rom the CWIP component of the Company's rate base. The Motion relied upon 48 See, Hearing Exhibit No. 43, p. 26.
4
, p. 28-29, supra.
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i DOCKET NOS. 70-196-E and 79-197-G - ORDER NO.80-375 Jur.e 30, 1980 page Thirty- Ono that party's assertions that the investment attributable to the Summer Station was " unreasonable and imprudent." (Tr.,
Vol. 145, p. 146) l We have previously addressed the prospective need for the Company's construction program in the context of the forecasted load growth.50 We have found that the Company's anticipated construction program, including the expenditures made for the Summer Station, is reasonable and proper at this time to meet i
i the requirements for energy demands within the Company's i service area and to maintain satisfactory system reserves. In a subsequent section of this Order, the Commission treats the f
issues relating to the reasonableness of the construction expenditures. Therein, we find that those expenditures, while ;
greater than originally anticipated, are neither unreasonable nor excessive through the present time.51 Consequently, the Commission herein finds it reasonable to include as CWIP for ratemaking purposes the funds expended by the Company for the construction of the Summer Station as of the end of the test period.
The Commission finds herein that CWIp is a proper element to
$ be included in the Company's rate base for retail electric operations, as adjusted in accordance with the recommendations I of the Commission Staf f, of fset by the appropriate adjustments
- j. to net operating income for return for AFUDC and the associated income tax credit.52 On the basis of the record before us, the proper figure for CWIp to be used for ratemaking purposes i for the Company's retail electric operations in this proceeding-I. is $382,757,360.
50 See,Section III, supra.
51 See,Section XII, infra. See also, Order No.77-831, i
- supra, at pp. 22-23, as upheld in the subsequent Circuit Court decision, supra,' p. 23, in.42.
j- 52 See,Section IX, infra, at pp. 62-G3.
0 .
i
.,- _. ,-.- ,..- ,---_ ,_ ,,-- - ,-_,,,.m -,,-,,-v~-- . - - , _ _ . . _ , . - , - . , . - . - . . - . . . . . . . . . - , . . - - .. ,,_ - . ..
DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375
()/
s,, June 30, 1980 page Thirty-Two D. Materials and Supplies The Commission has traditionally considered " materials and supplies" to be a proper itea to be included in an electric utility's rate base. One significant element of this generic item is the fuel supply inventory. In prior ratemaking proceedings, fuel stocks have been adjusted by increasing or decreasing this account by the dollar amount representing the Commission's determination of the reasonable capital outlay for an adequate supply inventory. That adjustment is based on the uncontroverted fact that the Company must expend considerable capital for fuel stocks to secure a reliable supply for the provision of adequate service. Since the costs of the inventory are not recovered until after the fuel is burned, the Company is permitted to earn a return on this inventory item, normalized to reflect test year costs.
b
( ,/ The Company's "per books" materials and supplies for its retail electric operations amounted to $59,095,248. The Company and the Commission Staf f proposed that such figure be adjusted to price the fuel inventory as of March 31, 1979, at the March 1979 purchase price of fuel received, a methodology which is consistent with previous decisions of the Commission.53 In addition, the Commission Staf f proposed to adjust the volume of the fuel inventory for ratemaking purposes to a level equivalent to ninety-seven (97) days burn, rather than the inventory on hand at the conclusion of the test year.
The Staff's adjustment was derivod by averaging the actual monthly inventory for each month of the test period. (Tr.,
53 See, e.g., Order No.79-730, supra, and Order No.77-831.
, ~.)
DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 page Thirty-Three N
Vol. 75, Hammond, pp. 139-140 and Vol. 107, Hammond, pp. 63-66)
The Company recommended that the materials and supplies component include the fuel inventory on hand at March 31, 1979, which included approximately 120 days supply of fuel. The Company's witness, T. M. Groetzinger, Vice president and Controller, acknowleuged that the fuel inventory proposed to be included for ratemaking purposes exceeded the amount of fuel normally maintained by the Company. (Tr., Vol. 17, Groetzinger, pp. 51-52)
The Consumer Advocate's witness, James A. Rothschild, recommended that the materials and supplies component of the Company's rate base incorporate a fuel supply inventory of ninety (90) days, asserting that the Company's own standards provide the maintenance of such supply during peak load periods. (Tr.,
Vol. 82, Rothschild, p. 33)
The Commission has carefully considered the respective i proposals of the Company, the Commission Staf f and the Consumer x_/
Advocate, in regard to the fuel supply inventory, and has concluded that the Staf f's recommended adj ustment is reasonable for the purposes of this proceeding and should be adopted herein.54 That conclusion reflects the determination that the fuel stock l
used in the computation of the adjustment to the materials and supplies component of the rate base should as nearly as possible incorporate the inventory on hand throughout the test period.55 54 See, Order No.78-404, supra, at p. 24, for similar treatment of this issue.
l 55 0ur conclusion herein should not be construed as a j determination that the average test year fuel inventory should be utilized in every proceeding without the exercise of l reasonable judgment. Unqualified reliance on this approach may l prove inappropriate in certain circumstances (e.g . , a coal mining
! strike may serve to produce average test year fuel stock levels
- below what would be considered reasonable for ratemaking purposes. )
l Generally, the Commission considers a fuel supply of approximately l ninety days burn to be reasonable, l
l V
fs DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375
()'-'
June 30,1980 Page Thirty-Four The Consumer Advocate's witness Rothschild proposed an additional adjustment to reduce the Compa ny's materials and supplies by an amount of $3,824,000 to reflect materials used for construction purposes (Tr., Vol. 82, Rothschild, pp. 35-6).56 The record of the proceeding indicates that no specific analysis of the nature of the materials and supplies was conducted to determine whether the af fected items were part of a planned and progressive construction project or were items used for emergency or maintenance purposes (Tr.,
Vol. 83, Rothschild, pp. 67-9). Upon review of the proposed adjustment herein, the Commission finds that the more appropriate regulatory accounting treatme.it for the purposes of this proceeding is to retain the amount at issue in the Company's materials and supplies.57 Based upon our separate determinations in regard to the
("% adjustments proposed by the respective parties, the Commission
( )
%/
considers that an amount of $54,166,223 should be included as materials and supplies in the Company's rate base for its electric operations for ratemaking purposes herein.
E. Working Capital Allowance The Commission has normally considered an allowance for working capital to be an appropriate item for inclusion in the rate base of an electric utility. By permitting a working capital allowance, the Commission acknowledges the requirement for capital outlay related to the routine operations of the utility.
56 The Consumer Advoca te's witness recommended that the Com-pany accrue AFUDC on the amount proposed to be excluded from materials and supplies, although no adjustment was proposed for CWIP. (Tr . , Vol . 82, Rothschild, p. 77) 57 The Commission's action herein is consistent with our determination in Docket No. 79-ID7-G. See, Order No.79-730, supra, at p. 21.
r~s I ')
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. - - . . . ._- - -. . - -. . . . _ w _- .
DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375
}' June 30, 1980 page Thirty-Five ,
I
!^
While both the Company and the Commission Staff utilized the i formula prescribed in the Commission's Directive of November 13, 1974, for the computation of the working capital allowance, the two parties reached dissimilar results. The Commission Staff proposed a computation of the working capital allowance of $21,428,311, derived i as follows: a cash allowance of $25,863,792 (one-eighth of operating and maintenance expenses less purchaseli power), plus minimum bank ,
4 balances of $4,478,074 plus prepayments of $2,422,434, less average tax accruals of $11,335,989. The Company's proposed working capital allowance differed by some $43,530 from that computed by the Staff
! because of various adjustments made by those parties to the Company's test year operating and maintenance expenses.58 The Company proposed to adjust the working capital allowance by an addition of $2,420,731 to reflect the revaluation of its fuel 4
inventory to the March 31, 1979 purchase price. The Staff opposed such 2 adjustment by contending that the fuel inventory revaluation in the materials and supplies component of the rate base removed the justifi-
, cation for an adjustment to the working capital. (Tr., Vol. 75, Hammond, p. 141). The Commission herein again adopts the position advanced by the Staff in this matter.59 i The Consumer Advocate's witness Rothschild recommended that the Commission adopt a revised formulation of the cash allowance portion of the working capital allowance based upon a proposed methodology which is the subject of a pending rulemaking pro- *
- ceeding before the FERC. 0 (Tr. , Vol . 82, Rothschild ,' pp. 37-39).
i The effect of the application of the proposed formula would be the 4 inclusion of $5,500,000 as a cash allowance in the working capital computation for the Company's retail electric operations.01 "The witness Rothschild also proposed the elimination of the reduction for average tax accruals in the amount of $11,33G,000 for the working 58 Compare, Hearing Exhibit No. D (TMG-2,.at p.
- 1) with Hearing Exhibit No. 43, at p. 31.
See, Order No.77-831, supra, at p. 28.
S_ee , FERC Docket No. RM 70-49: Calculation of Cash Working 4 Capital for Electric Utilities. Proposed FERC Reg. Sec. 35.24, 44 l Fed. Reg. 33410 (1979).
{ 61 e S_ee, Hearing Exhibit No. 45 (Schedule 2E, as revised).
2 i
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/ 's DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375
( ,) June 30, 1980 Page Thirty-Six capital allowance in the Company's electric operations. In support of the proposed adjustment, the w'.tness indicated that the pro-oosed FERC formula for the computation of the working capital allowance incorporates the working capital implications of tax accruals which climinates the necessity for the traditional approach. (Tr . , Vol . 82, Rothschild, p. 39)
In addition, the Consumer Advocate's witness proposed the elimination of certain prepayments in the amount of $2,254,000 f rom the working capital allowance. The affected prepayments were related to expenses for insurance and customer accounting forms and for municipal licenses and taxes, According to Mr.
Rothschild, the amount of the prepayments related to operating and maintenance expense are already incorporated in the cash allowance portion of the working capital allowance or in the average tax accruals and to include such items separately as pre-O payments would overstate the Company's rate base. (Tr., Vol. 82,
( /
Rothschild, pp. 40-41)
The Commission has carefully considered the recommendations advanced by Mr. Rothschild for the computation of the cash working capital allowance with its primary reliance upon the proposed FERC formula which the witness characterized as "a reasonable balance" between the facility in the application of a formula j and the accuracy obtained by the application of a time-consuming I
and expensive lead lag study. (Tr., Vol. 82, Rothschild, p. 38) l While the Commission has evaluated the approach incorporated in the methodology used by Mr. Rothschild , the approach represents at present only a proposal before the FERC which clearly embodies a marked departure from the accepted computation of the working l capital allowance used by this Commission and by utility regulatory l
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DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 page Thirty-Seven commissions in numerous jurisdictions.62 As we indicated in Nj I Order No,.79-730, we are not convinced based upon the evidence before us that the proposed methodology is more reasonable than the approach represented in our Directive and employed herein by the Commission Staff and by the Company.
The Consumer Advocate's witness f urther proposed the elimi-nation of $4,478,000 attributable to minimum bank balances from the computation of the working capital allowance.63 Mr. Rothschild stated that such compensating balances represented "a hidden cost" of short-term debt and should be considered for ratemaking purposes as an allowance in the determination of the cost of short-term debt rather than by treatment as a rate base item.
(Tr., Vol. 82, Rothschild, p. 42)64 in addition, the witness indicated that during the test period the Company had used only once the line of credit which the compensating bank balances support. Furthermore, Mr. Rothschild suggested that the Company could secure additional lines of credit from those financial institutions with which the Company maintains f unds on deposit.
(Tr., Vol. 82, Rothschild, pp. 42-43)
The Commission has traditionally allowed a utility's actual, required compensating bank ealarices to be included in the compu-tation of the working capital allowance.65 That regulatory treat.
ment recognizes the necessity to support lines of credit, bank borrowings and the issuance of short-term commercial paper.66 The Commission is not convinced that the record before us justifies a modification of the practice heretofore recognized in our Directive of November 13, 1974, and in our prior decisions, including our most recent review of this issue in Ordor No .79-730, supra .
02 Mr. Rothschild indicated that his proposed methodology for the computation of the working capital allowance hed been used with some modifications in a recent decision by the Rhode Island public Utilities Commission. (Tr., Vol. 83, Hothschild, pp. 70-74) 63 See, Hearing Exhibit No. 45 (Schedule 2E, as revised).
64 The wi.tness indicated that he had made no adjustment to the Company's cost of short-term debt. (Tr. Vol. 82, Rothschild,
- p. 83)
/ 65 See, e.g. Order No.79-730, supra, at pp. 24-25, ag Order
\~s No.77-831, supra, at p. 26.
66 See, Tr., Vol. 83, Rothschild, pp. 84-85.
DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980
, Page Thirty-Eight In conclusion, in light of our approval of the adjustments to the Company's test year operating and maintenance expenses in Section IX, infra, and as a consequence of our determinations herein, the Commission considers that the appropriate figure for the working capital allowance, pertaining to the Company's electric operations, is $21,428,311, as computed by the Commission Staff.
F. Accumulated Deferred Income Taxes The accumulated reserves for liberalized depreciation con-stitute a form of cost-free capital, and, consequently, an element upon which the Commission feels investors are not entitled to earn a rate of return. In the instant proceeding, the Staff and the Company proposed to reduce the rate base for the Company's electric operations by $65,494,468, consistent with our traditional treatment of this item.67 Therefore,t.se Commission finds it reasonable to reduce the Company's rate base by the total amount of
$65,494,468 for accumulated deferred income taxes.
G. Customer Deposits
(
The amount representing customer deposits is similarly considered by this Commission to be an element on which a utility's investors are not entitled to earn a return, and which should be excluded from the Company's rate base. The Commission finds that the rate base should be reduced by the amount of $4,621,644, as proposed by the Company and by the Staff. The Commission has treated the interest on customer deposits as an operating expense in computing the Company's rate of return.
H. Miscellaneous proposed Adjustments The Consumer Advocate's witness proposed an adjustment to reduce the Company's rate base for its electric operations by an amount of $439,000 to reflect operaulng reserves, which were characterized 07 See, Hearing Exhibit No. D (TMG-2, p. 1) and Hearing Exhibit No. 43, p. 25.
p i~_,)
i DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 O June 30, 1980 page Thirty-Nine generally as " expenses which have been included in the cost of service and charged to rate payers as an expense for ratemsking purposes, but which will not have to be paid until a future date."
(Tr., Vol. 82, Rothschild, p. 45) The specific adjustment was directed at the Company's injuries and damage reserve. Mr.
Rothschild maintained that the accounting practices employed by the Company enable it to use the associated funds which are accrued and charged as expenses until the actual cash disbursements are made.
Upon our second review of the proposed adjustment, the Commission continues to be of the opinion that such recommendation should not be approved for ratemaking purposes.60 The Commission considers the rate base treatment of the relatively minimal amount to constitute one regulatory device to address the potential problem of attrition of earnings as a substitute for the utili-zation of other regulatory devices such as a direct attrition O
(,) allowance or the use of a projected or forecasted test period.
The Consumer Advocate's witness likewise proposed to reduce the Company's rate base by $6,921,000, designed to represent funds provided by accrued interest expense and preferred stock dividends, !
which are charged monthly but paid c'A to bond holders semi-annually and to preferred stockholders on a quarterly basis.
I (Tr., Vol. 82, Rothschild, p. 47) This Commission does not con- !
sider the funds from the accrued interest expense and preferred stock dividends to constitute an available source of worxing capital w'n ich should be deducted f rom the Company's rate base.69 68 See, Order No.79-730, sup,ra, at pp. 25-2G.
69 See, Tr. Vol. 83, Rothschild, pp . 36-7. See, also FERC Docket No. Rp 79-49, supra,44 Fed. Reg. at 33414.
V
DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 page Forty
(
I. Original Cost Rate Base The Company's rate base for its retail electric operations, herein adjusted and determined by the Commission to be appropriate for the purposes of this proceeding, is set forth in the following table:
T A BLE C ORIGINAL COST RATE BASE
, Itetail Electric Operations March 31, 1979 Gross plant in Service $1,023,161,177
' Reserve for Depreciation (248,960,444) and Amortization Net plant $ 774,200,733 Construction Work in Progress 382,757,360 Materials and Supplies 54,160,223 Working Capital Allowance 21,428,311 Accumulated Deferred Income Tax (Lib. Deprec.) (65,494,468)
Customer Deposits (4,621,644)
TOTAL RATE BASE $1,162,436,515 VI.
cap!TAL STRUCTURE Considerable references to the Company's capital structure and to the appropriate capital structure for ratemaking purposes were made in the testimony and exhibits of witnesses for the Company and for the Commission Staff. The Company's Application included certain adjustments to the "per books" capital structure as of March 31, 1979, to reflect a bond issue at April 1, 1979, the short term debt transactions through the month of April 1979, and an issuance and sale of common equity on April 7, 1979.70 The Company's adjusted capital structure proposed for this proceeding appears in the following table:
70 See, Exhibits V of the Company's Application, dated May 30, 1979; and Tr., Vol. 10, Footen, p. 56.
I v
s DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 i
O page Forty-One TA BLE D CAPITALIZATION - PROPOSED BY COMPANY March 31, 1979 AMOUNT RATIO (Thousands)
Long Term Debt $6H6,626 53.79%
Short Term Debt 14,753 1.15%
preferred Stock 153,951 12.06%
Common Eq ui t y 421,223 33.00%
TOTAL }_1,276,553 100.00%
(Source: Application, dated May 30, 1979. Exhibit V)
The Commission Staff proposed the adoption of the Company's actual capital structure as of July 31, 1979, to incorporate more recent financial transactions involving the Company's securities.
As illustrated in Table E , inf ra , the Commission Staff proposed the exclusion of $20,079,000 from the capital structure.
That amount represents investment in, and advances to, Energy Subsidiary, Inc., the Company's wholly-owned land tf' subsidiary, of $13,305,031. In addition, there is excluded (s an amount of $6,773,905 which represents a note which was assumed by the Company from a subsidiary partnership of Energy Subsidiary, Inc. The capitalization was reduced by the
$20,079,000 proportionately, based on the ratios of each component to the total capital structure. The Staf f's adjustments effectively remove property not used and useful in providing utility service to the customers of the Company. As proposed by the Staff, the adjusted capital structure appears in the following table:
TA HLE E i
l CAPITAL 'ZATION - PROPOSED BY STAFF July 31, 1979 AMOUNT ADJUSTMENT AS ADJUSTED RATIO (Thousands) (Thousands) (Thousands)
Long Term Debt $696,673 ($10,606) $686,067 52.82%
Short Term Debt 29,811 ( 454) 29,357 2.26%
preferred Stock 153,036 ( 2,329) 150,707 11.60%
Common Equity 439,506 ( 6,600) 432,816 33.32%
TOTAL $1,319,026 1_$20,079) $1,298,947 100.00%
DOCKET NOS. 79-19ti-E and 79-197-G - ORDER NO.80-375 June 30, 1980 page Forty-Two The Commission finds it reasonable to adopt the Staff's proposal to employ a more recent actual capital structure than the capitalization existing at the end of the test period. Be tw eer.
March 31, 1979, and July 31, 1979, the Company engaged in numerous transactions involving its securities.71 The Commission considers that the use of the Company's capitalization as of July 31, 1979, which incorporates the effect of such transactions, will be more reflective of the Company's capi tal s t ratet ure during the period of time in which the rates approwd herein will be in effect.
By utilizing an actual capitalization adjusted to July 31, 1979, and thereby making allowances for the raore recent financial trans-actions, the Commission has given consideration to matters beyond the historic test period. The Commission finds such action to be reasonable in allowing the Company the opportunity to earn a fair rate of return and likewise provide the opportunity to main-tain that fair rate of return despite the effects of attrition.
The Commission has employed similar adjustments in previous decisions to compensate for inflationary pressures.72 Furthermore, the Commission considers that the adjustments as proposed by the Commission Staff for the exclusion of non-utility related investments from the Company's capital structure are consistent with our prior determina tions and are reasonable for the purposes of this proceeding.73 Consequently, the adjusted capitalization and associated ratios in Tablo E, supra, have been adopted and utilized by the Commission in determining a fair rate of return for the Company in this proceeding.
I See, e g , Order No.79-164, issued in Docket No. 79-102-E, on April 5, 1979; and Order No.70-165, issued in Docket No. 79-103-E, on April 6,1979; @ Oroer No.79-184, issued in Docket No. 16,464, on April 12, 1979; and Order No.79-246, issued in Docket No. 79-176-E, on May 30 1979; and Order No.79-280, issued in Docket No. 79-203-E, on June 12, 1979. -
See, Order No.79-730, supra, at p. 29; and Order No.79-230, supra, at pp. 29-30, and the decisions cited therein.
3 See, Order No.79-730, supra, at p. 29; ag Order No.77-831, supra, at p. 31; and Order No.79-230 supra, at pp. 31-32.
DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 Page Forty-Three VII.
COST OF CAPITAL A. Long Term Debt This Company, as well as all other regulated utilities, is directly affected by changes in interest rates. As described by the Company's Executive Vice President - Finance, Oscar S.
Wooten, the Company has experienced a constant increase in the embedded cost of long term debt in recent years, which is a function of the issuance and sale of new debt securities at higher prices than the overall average cost of existing debt.
(Tr . , Vol . 10, Wooten, pp. 62-3). The following table illustrates the recent figures for the embedded cost of the Company's senior capital:
TAHLE F Embedded Cost of Long Term Debt f 'i YEAR YEAR-END COST kl 1967 4.41%
1968 d.66%
1969 5.501 1970 6.06%
1971 6.33%
1972 6.47%
1973 6.60%
1974 6.95%
1975 7.38%
1976 7.70%
1977 7.63%
1978 7.76%
1979 (July 31) 7.93%
(Source: llearing Exh. #3, Item 4; Ifearing Exh. #43, p. 34)
The record of this proceeding illustrates the interrelation-ship among inves tor requi rements. the needs of cor.sumers for adequate utility service and the ability to raise significant amounts of capital at the lowest possible cost. This Commission has frequently observed the influence of a utility's rating of its first mortgage bonds on its ability to raise senior capital I /
.s
DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 page Forty-Four
[~/
l at competitive interest rates. Generally, lower bond ratings may result in messurably higher costs of capital to a utility, which ultimately increase costs to consumers for many years in the future.
In addition, higher interest rates on long term debt securities operate to reduce the earnings coverage of fixed charges. The fixed charge coverage is perceived by the investor as only one index of financial stability. The Company's debt coverage ratio of earnings to fixed charges, computed by use of the SEC methodology, for the period 1969 through the end of the test period, is demonstrated in th" following table:
TA0LE G Debt Coverage Ratio of Earnings to Fixed Charges YEAR RATIO 1969 3.60X 1970 2.62X 1971 2.39X 1972
[T x_,/ 1973 2.54X 2.36X 1974 2.22X 1975 2.79X 1976 2.58X 1977 2.78X 1978 2.67X 1979 (March 31) 2.46X (Source: !! caring Exhibit No. 3, Item 14)
B. Short Term Debt The Commission Staff proposed to assign the same cost rate to the Company's short term debt as the 7.93% embedded cost rate for long term debt as of July 31, 1979. The assignment of such I cost rate is consistent with previous decisions of this Commission.74 I
In the determination of the ovelall rate f return herein, the Commission has used a rate of 7.93% for the cost of short term debt.
74 See, e.g.,
Order No.77-831, supra,at p. 33.
J
. - , = - . . , _ . .
DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 page Forty-Five C. preferred Stock The Company's embedded cost of preferred stock has increased in the period from 1969 through July 31, 1979, as illustrated by the following table:
TAILE H Embedded Cost of preferred Stock YEAR YEAR-END COST 1969 5.12%
1970 6.56%
1971 7.08%
1972 7.22%
1973 7.22%
1974 7.18%
1975 7.78%
1976 7.89%
1977 7.91%
1978 8.04%
1979 (July 31) 8.17%
(Source: Ifearing Exh. r3 Item 7; IIcaring Exh. #43, p. 35)
For the purposes of this proceeding, the Commission has used 8.17% as the cost for the Company's preferred stock, as reflected
/ in Table H, supra, as of July 31, 1979.
U D. Common Equity One of the principal issues in any ratemaking determina-tion involves the proper earnings to be allowed on the common equity investment of the regulated utility. In this proceeding, the Commission was offered the expert testimony of several witnesses relating to the fair and reasonable rate of return on common equity for the Company. These financial experts presented detailed explanations of a number of methodological approaches to the determination of the cost of equity capital for the Company.
This Commission has frequently stated that it adheree to no particular theory or methodology for the determination of a fair rate of return on common equity. 5 Rather, the Commission has 75 Sen, e.g., Order No.79-730, supra, at pp. 32-33; Order No.79-230, supra, at p. 36, and the decisions cited therein.
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4 DOCKET NOS. 79-196-F: and 70-197-G - ORDER NO.80-375 June 30, 1980 t Page Forty-Six
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i perceived its function as that of engaging in a careful and reasoned 3
analysis of the abstract theories for application in a practical context. The record of the instant proceeding illustrates the use J
3 of several fundamental methods for the determination of the cost of equity capital by the expert witnesses for the Company and for I
the Commission Staff. Those methods include the discounted cash flow (hereinaf ter "DCF") method, the capital asset pricing model 4
(hereinafter "CApM"), the risk premium approach, and the comparable earnings method.
I While utilizing a combination of methodologies and deriving somewhat dissimilar results, each cost of capital witness acknowledged that informed judgment was significant in the analysis of the cost of equity and that a purely mechanistic application of any method was meaningless. In recognition of the role of judgment and the interdependence of complementary methodologies for cost of capital estimations, the Company's witness l
Dr. Stephen F. Sherwin explained:
{
The measurement of the cost of equity capital is essentially a process of sifting multiple facets of i
factual evidence, which serve as constraints on the exercise of judgment. Reliance on judgment l constrained by facts is to be distinguished from judgments based on predilections.
The different techniques for estimating the equity return requirement -- the comparable earnings test, j financial integrity approach and the capital attraction j (or discounted cash flow) techniques -- provide useful I
evidence but no single measure constitutes an exclusive basis for estimating reasonabic return requirements.
(Tr., Vol. 12, Sherwin, pp. 30-31) l Dr. Sherwin undertook to deter %4ne the fair return, as f distinguished from the cost of attracting equity capital, by
, reliance on three conceptual standards which establish economic guidelines for the " opportunity cost principle." (Tr., Vol. 12, Sherwin,
- p. 29) . The application of the three standards incorporated
{ certain assumptions regarding prospective general economic conditions.
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i i DOCKET NOS. 79-196- E and 79-197-G - ORDER NO.80-375 June 30, 1980 page Forty-Seven i
relative to the rate of growth in "real" gross national product for 1979-1980, the annual rate of inflation for the same period, i
the interest rates on A-rated long-term bonds for that period, and l the level of corporate profits through 1980. (Tr. , Vol .12, Sherwin,
- p. 32). In his extensive analysis to determine the fair return, I Dr. Sherwin examined general economic trends af fecting return i
j ' requirements, reviewed the risk-premium relationship between retur ns i
! on equity capital and debt capital, and performed an analysis of i
- business and financial risks. In measuring the return requirement l
for the Company, Dr. Sherwin employed a comparable earnings approach in conjunction with a financial integrity test. The comparable earnings approach incorporated the identification of three groups of industrials with riska similar to those of the Company and a comparison of their earnings, principally in the period 1977-1978.
The financial integrity test involved an analysis of market to 4
book ratios and a concomitant risk appraisal. The combination l{
of these standards led the witness to a conclusion that the fair i
- return for the Company was in the range of 14.5% to 15.0%. The i
application of a DCF approach produced a " bare bones" current i
i cost of attracting capital in the range of 13.50% to 13.75%, for which an adjustment for financing costs was made to produce a total current cost of capital attraction in the range of 13.85% to ,
i j 14.10%.
The Company's witness, Francis E. Jeffries, undertook an ,
' analysis of the fair rate of return for the Company based upon the
!. j principles that a utility should be allowed to earn a return l
' sufficient to assure confidence in its financial soundness, to maintain end support its credit standing, and to enable it to retain l and attract the necessary capital to comply with its obligation to i serve the public. Mr. Jeffries' approach combined an analysis of l
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i DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 ;
O Page Forty-Eight investors' return requirements under present and prospective economic conditions, an evaluation of the investment risks of the Company, a determination of the cost of common equity based i upon the returns earned on alternate investments and the' Company's need to attract capital. The results of this analysis were tested by the investigation of a debt-equity risk premium analysis.
1 (Tr., Vol. 15, Jeffries, pp. 7-8). Mr. Jeffries' study concluded that the appropriate rate of return on common equity was within ;
the range of 14.5% to 15.0%.76 The Company's witness Wooten, whose corporate responsibilities i
include planning and executing the Company's financing programs, ;
}
overseeing the issuances and sales of securities, and the }
maintenance of the Company's investor relations program offered {
testimony relative to the Company's financial condition, the f impact of inflation on the Company's earnings, and the effect of :
l a combination of risks upon the return expectations of investors. j While Mr. Wooten did not undertake the compilation and analysis
(
of an independent cost of capital study for this proceeding, i
he contended that the return on common equity of 13.00% requested by the Company's Application herein was the " bare minimum" necessary "to restore our indicators of a sound financial condition, among them earnings and coverage ratios, to reasonable levels."
(Tr., Vol. 10 Wooten, p. 66)
The Staff's expert witness, Dr. R. Glenn Rhyne, Director of the Commission's Department of Research, also presented testimony
[ and exhibits relative to the cost of equity capital. Dr. Rhyne employed two independent methods in the derivation of the conclusions expressed in his testimony in regard to his' estimate of the rate of return which the Company should be allowed the opportunity 6 According to Mr. Jeffries, recent economic conditions have caused the fair return for the Company to be in excess of the range determined to be reasonable when his study was compiled. (Tr., Vol. 15, Jeffries, p. 41).
O
DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 O Page Forty-Nine to earn. Based upon the CAPM and the DCF methods, Dr. Rhyne's analysis led to the conclusion that a return on equity in the range of 12.54% to 13.20%, based upon the independent cost of equity estimates,was fair and teasOnable.77 The testimony and exh'otts of the financial witnesses for the Company and the Staff demonstrated an approach to their respective investigations within the parameters of.the language of the United States Supreme Court in its decision in Federal power Commission v. Hope Natural Gas Co., 320 U.S. 591 (1944), at 603:
[T]he return to the equity owner should be commensurate with the return on investments in otner enterprises having corresponding risks.
That return, moreover, should be sufficient to assure confidence in the financial integrity of the enterprise, as to maintain its credit and to attract capital.
While the independent studies of each witness. either implicitly or explicitly, commenced with those standards, the respective methods employed produced quite dif ferent results, thereby presenting
() the Commission with a range of between 11.1%. the lowest estimate produced in Dr. Rhyne's studies, and 15.00%, the highest estimato made by the studies of Dr. Sherwin and Mr. Jef fries.
In the final analysis, the Commission must appraise the opinions of the expert financial witnesses as to the expectations of investors or the opportunity costs of equity capital in conjunction with the tangible facts of the entire record of the proceeding, I including the observable financial condition of the Company.
Southern Bell, supra, 244 S.E.2d, at p. 282.
! Furthermore, the Commission cannot determine the fair and reasonable return on common eq"' s for the Company in isolation.
Rather, the Commission must caref ully consider a variety of
(
relevant factors, including identifiable trends-in the market relating to th'e' costs of labor, materials and capital; comparisons Y7 j The application of the CApM produced estimates ranging from
( 11.1% to 13.72% with a "best estimate" of 12.30% (Hearing Exhibit No.
i 42, RGR-19); the DCP analysis produced return estimates ranging j from 12.52% to 13.40%, with a "best estimate" of 12.96%.
-..._---.,_,;.-~_--..~..,_-,-----..- . - . - - - , . . . . - - . . . - . . . ~ _ . _ , , . _ - . _ . - , _ . , . . . _ . . . . - - _ .
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DOCKET NOS. 79-190-E and 79-197-G - ORDER NO.80-375 June 30, 1980 O page Fifty of past earnings with present earnings and prospective earnings; j the prices for which the Company's service must be rendered; the returns of other enterprises and the reasonable opportunities for investment therein; the financial policy and capital structure of the Company and its ability to attract capital; the competency and efficiency of the Company's management; the inherent protection against destructive competition afforded the Company through the operation of the regulatory process; and the public demand for growth and expansion which is required to evaluate the construction program for the foreseeable future. The Commission must strike the balance among these complex and interrelated factors in the context of the record berein.
The Commission recognizes the legal principle and the ,
practical necessity that the Company be allowed the opportunity to earn a fair rate of return to enable it to continue to meet its service obligatioas and to maintain its financial strength to f provide for the attraction of capital to finance its construction program. The present and perceivably perspective financial condition of the Company and the investor appraisal of that condition demonstrate to the Commission that the Company's cost of equity capital for its retail electric operations should be evaluated as somewhat lower than that postulated by the Company's witneases herein, and at the same level found fair and reasonable in the most recent ratemaking proceeding involving the Company's retail electric operations.78 The record of this proceeding demonstrates that the Company's general financial condition has remained relatively stable since i
!- 78 See, Order No.77-831, supra, at p. 41, where it was determined that a fair and proper rate of return for the Company fell within 5
the range of 10.5% to 13.0%, and that just and reasonable rates for its retail electric operations would allow the Company the opportunity to earn a rate of return of 13.0%.
O e
- . --v- e3- re gr,gv.,-y- ..-w w- ,-,----w,- - - - , - - y.-r-r3 y---,-w wy-- yww--w,,. =wp-.n%- w+-,- --,---,.mw---n--, -.%- - --yw-- v- --y,yy- --
DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.90-375 June 30, 1980 O Page Fifty-One ,
its most recent general ratemaking proceeding in Docks' No.
76-645-E. While the Company's two most recent sales of common equity have been slightly below book value, there have been no demonstrable difficulties in marketing the Company's securities or an identifiable lack of confidence in the Company on the part of investors. (Tr., Vol. 11, Wooten, pp. 16-17). The Company has maintained its "A" bond rating and has made recent progress toward strengthening its capital structure (Tr., Vol. 11 Wooten pp. 10-11). While some individual indicators tend to show that the Company's financial condition is " weakening" (Tr . , Vol . 10, Wooten, p. 52), the Company's overall financial situation resembles the prevailing contemporary conditions at the time of the last general ratemaking proceeding.
While the Commission must recognize the manifestations of inflation and their ef fects upon the Company. (Tr., Vol. 10, Wooten, pp. 47-49) the Commission considers the present financial
() condition of the Company to have maintained the level of risk of the Company's common equity to potential investors at that ,
approximate level of the period two years ago. Consequently, the Commission is of the opinion that the Company's cost of equity capital will reflect that phenomenon, which should be incorporated in the range of the fair rate of return which the Company should be allowed the opportunity to earn.
In its determination of a f air and reasonable rate of return, the Commission maintains the ultimate responsibility of setting the rates.to be charged for the utility services provided by the i
i Company. The exercise of that responsibility involves the balancing of the interests of the consumer and the investor. During this proceeding, the Commission heard the testimony of many consumers of the Company's services, articulating a concern about 1
the increasing costs of all forms of energy, including electricity, which create a heavy burden for many residential customers with limited or fixed incomes. The Commission must gravely balance the int erests of
_s
() DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30,1980 Page Fifty-Two the consumer in regard to the price of utility service with the i
interests of the same consumer in regard to the reliability and adequacy of the supply of energy. The Commission has maintained these interests paramount througbout this proceeding. The
- Commission's determinations of the Company's revenue requirements and of the proper allocation of those revenues within the approved rate att ucture embodied in this Order reflect fairly and equitably the interests of those consumers so graphically expressed in the record before us.79 Upon a thorough review of the conclusions reached by each financial and economic witness in this proceeding, as well as upon our consideration of the full evidence in the record before uJ, the Commission has determined that the additional revenues of $38,981,415 produced by the proposed rate schedules for the Company's retail electric operations, which would generate a
() rate of return on common equity of 13.72%, based on adjusted test year figures,80 are excessive and unreasonable. That return on common equity and the associated revenues cannot be supported by the evidence in this proceeding.
It, therefore, becomes the Commission's responsibility to set a fair and reasonable rate of return on common equity from which can be derived the lawf ul rates for the Company for its retail electric operations. This responsibility must be discharged in accordance with statutory and judicial standards, and based upon the numerous factors identified herein, and applied in accord with the informed judgment of the Commission.
79 See Tr., Vol. 59-60, passim.
80 See,Section IV, supra, and Section VIII, infra.
DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 Page Fifty-Three In light of all relevant issues in the record of this i proceeding, the Commission is of the opinion, and so finds, that a fair and proper return on common equity falls within the range of 13.00% to 13.20%, and that a rate of return of 13.00%
1 on common equity produced by additional annual. revenues of
$33,546,111 for the Company's retail electric operations, as approved infra,81 is fair and reasonable. ,
i The rate of return on common equity herein found fair ,
and reasonable falls slightly above mid-point of the range estimated by the Staff's witness Dr. Rhyne. The Commission considers the results reached by the Staff's witness to have incorporated effectively the expectations of the potential equity investor through the estimate of relevant risk of investment in the Company's equity relative to the market as a whole. The Commission considers that the Company'r, electric operations
! currently incorporate slightly higher risks than the gas operations.
As a consequenco, we consider the proper cost of equity capital should be slightly higher for the electric operations than the cost
' of equity capital adopted in Order No.79-730 for the Company's gas operations.82 The 13.00% - 13.20% range reflects the Company's financial condition since the 1976-77 period and,the commensurately stabilized risk for the equity investor. The Commission considers that range to represent the reasonable expectation for the equity owner, and, therefore, consistent with the standards of the Hope decision. A return within the range found fair and reasonable is sufficient to protect the financial integrity of the Company, to preserve the property of the investor, and to permit the Company to continue to ;
provide reliable service to present and future customers at reasonable rates.
81 See,Section X, infra.
82 See, Order No.79-730, supra, at p. 40, in which we found fair and reasonable a cost of equity capital in the range of 12.75%
[\ to 13.00% and approved rates and charges sufficient to allow the
'-- Company the opportunity to earn a rate of return of 12.75%,. based on adjusted test year figures.
4 . .
l DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 O- June 30, 1980 Page Fifty-Four VIII.
RATE OF RETURN An important f unction of ratemaking is the determination of a
the overall rate of return which the utility should be granted.
' This Commission has utilized the following definition of " rate of return" in previous decisions, and continues to do so in this proceeding:
For regulatory purposes, the rate of return is the amount of money earned by a regulated company, over and above operating costa, expressed as a percentage of the rate base. In other words, the rate of return includes interest on long-term debt, dividends on
- preferred stock, and earnings on common stock and l surplus. As Garfield and Lovejoy have put it "the return is that money earned f rom operations which l
is available for distribution among the various classes of contributors of money capital. In the case of common stockholders, part of their share may be retained as surplus."
Phillips, The Economics of Regulation, pp. 260-261
) (1969).
l The amount of revenue permitted to be earned by the Company through its rate structure depends upon the rate base and the allowed rate of return on the rate base. As discust.d in the preceding section of this Order, the primary issue between the regulated utility and regulatory body most frequently i
involves the determination of a reasonable return on common equity, since the other components of the overall rate of return, i.e., dividends on preferred stock and cost of debt, are fixed, f
Although the determination of the return on common equity provides
[ the necessary component from which the rate of return on rate base i l can be derived, the overall rate of return, as set by this Commission, must be fair and reasonable.
f The United States Supreme Court's landmark decision in Bluefield Water Works & Improvement Co. v. public Service Commission of West Virginia, 262 U.S. 670 (1923), delineated general guidelines for determining the fair rate of return in utility O
__ _ _ = . _ _ . _ _ _ _ . _ _ _ __ . . _ . __ _ . _ _ _ _ . _ _ _ _. _.
'T l
i DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30,1980 Page Fif ty-Five i
regulation. In the Bluefield decision, the Court stated:
1 What annual rate, will constitute just compensation -
j depends upon many circumstances and must be deter-mined by the exercise of a fair and enlightened judgment, having regard to all relevant facts. A public utility is entitled to such rates as will permit it i to earn a return on the value of the property which it employs for the convenience of the public equal I to that generally being made at the same time and in the same general part of the country on invest-ments in other business undertakings which are i attended by corresponding risk and uncertainties; i
but it has no constitutional rights to profits such as are realized or anticipated in highly F.ofit-able enterprises or speculative sentures. The return should be reasonably sufficient to assure
. confidence in the financial soundness of the utility and should be adequate under efficient and economical management, to maintain and support its credit and enable it to raise the money necessary for the proper discharge of its public duties. A rate of return 4 may be reasonablo at one time, and become too high or too low by changes affecting opportunities for investment, the money market, and business generally.
q 262 U.S. at 692-693.
During the subsequent years, the Supreme Court refined its I
appraisal of regulatery precepts. In its frequently cited Hope decision, supra, the Court restated its view:
We held in Federal power Commission v. Natural
! Pipeline Co. . . .that the Commission was not bound to the use of any single formula or combination of formulae j n determining its rates. Its ratemaking functier., moreover involves the making of ' pragmatic ad.P;4 tmen ts ' (cite omitted) .... Under the statutory Piandard of 'ju-i and reasonable' it is the result reached, not 4 e method employed which is controlling (Citations >%1tted). . . .
The ratemaking process under the Act, i.e., the i , fixing of 'Just and reasonable' rates involves a l
balancing of the investor and the consumer interests.
- Thus we stated in the Natural Gas Pipeline Co. caso, that regulation does not insure that the business I shall produce net revenues. (Citation omitted).
i But such considerations aside, the investor interest has a legitimate concern with the financial integrity i
of the company whose rates are being regulated.
1 4
L
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I DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30,1980 O page Fifty-Six From the investor or company point of view it is important that there be enough revenue not only for operating expenses but also for the capital costs of the business. These include service on the debt and dividend on the stock. (Citation omitted). By that standard the return to the equity owner should be commensurate with ret urns on investments in other enterprises having corresponding risks. .That return, moreover, should be suf ficient to assure confidence in the financini integrity of the enterprise, so as I to maintain its credit and to attract capital.
! 320 U. S. at 602-603.
The vitality of these decisions has not been eroded, se indicated by the language of the more recent decision of the Supreme Court in In Re permian Basin Area Rate Casen, 300 U.S. 747 (1968).
This Commission has consistently operated within the guidelines ,
set forth in the Hope decision.83 The range of the rate of return which the Commincion has herein found to be fair and reasonable enould enable the Company to maintain and enhance its position in the capital markets. Patently, however, the Company must insure that its operating and
() maintenance expenses remain at the lowest level consistent with reliable service and exercise appropriate managerial efficiency i in all phases of its operations. The Commission has consistently manifested its abiding concern for the establishment and continua-tion of efficiency programs on the part of its jurisdictional entities. By our Directive of August 27, 1974, the Commission urged the derivation of cost control studies, the adoption of cost reduction programs, and the elimination and reduction of costs "in all possible ways". The continued awareness of the
(
potential efficacy of such programs and their implementation are consistent with the conscious national and State policies to limit the deleterious effects of inflation.
i 83 Eco, also, Southern Bell, supra, 244 S.E.2d at 280-3.
O
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, e DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 i June 30, 1980 '
- () Page Fifty-Seven f The record of this proceeding indicates that the Company has l generally undertaken its cost reduction ef forts in the spirit of the Commission's Directive and consistent with our previous Orders.84 Nonetheless, the Commission cannot ignore the effect of the Company's increasing operating expenses. The Company g may take notice of the fact that the Commission is not inclined to I be completely satisfied with the cost reduction and efficiency I
programs of any jurisdictional entity. The Commission will expect the Company to continue to design and implement such programs in the future as an index of good management practice in the f
interests of its customers and of the Company itself. With the full array of its resources at its disposal, the Company should be able to assure us that such programs produce identifiable and I
measurable results consistent wi.a the provision of economical and adequate service to the Company's ratepayers. In this Order, 4
the Commission has found a range for the fair and reasonable return I
() on common equity which the Company should be allowed the opportunity to earn, and has herein set rates to produce revenues to reach the lower bound of that range. The Commission considers i
that effective programs of cost reductions can operate to enable the Company to improve its financial posture and earn a return
- within the range above that lower limit. The Commission has, j therefore, provided to the Company the incentive to continue efficient practices in its operations and construction.
I 7
The record of the instant proceeding reflects considerable i
j testimony in regard to the organization and management of the Company.
1 The Commission Staff's witness, Robert M. Bryson, Chief of the Electric Department of the Utilities Division, repeated the Staff's recommendation that the Commission direct the conduct of an t independent management audit to review the Company's organization 00 See, e.g.,
Order No.77-831, supra, at pp. 46-7.
l lO
- s DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 page Fifty-Eight and operations.85 (Tr., Vol. 99, Bryson , pp. 11-12) The Commis-sion recognizes that the Company has only recently undertaken the initfation and implementation of a management audit of its overall operations. (Tr., Vol. 2, Summer, pp. 59-60) Consequently, the Commission considers that the direction of a second such management audit at this time souid be superfluous and uneconomical until the completion and review of the study previously made.
We find, therefore, that the action here requested by the Staf f should be deferred until a review of the completed management audit can be made by the Staff and a repert provided to the Commission. As we stated in our Order No.77-831, we continue to feel that the most prominent measure of the managerial efficiency of an electrical utility remains its ability to provide adequate and reliable service to its customers at reasonable rates. O In this Order, we have previously found that the Company's adjusted capitalization ratios, as of July 31, 1979, are appropriate
~s and should be used for ratemaking purposes herein. The Commission
\_/ has likewise found that the respective embedded cost rates for long term debt and for short term debt of 7.93%, and that an embedded cost rate for preferred stock of 8.17% should be utilized in the determination of a fair overall rate of return. For the purposes of this proceeding, the Commission has herein found the proper cost rate for the Company's common equity capital to be 13.00%.
Using these findings, the overall rate of return on rate
< base for the Company's retail electric operations may be derived 5
as computed in the following table:
TABLE I Overall Rate of Return Ratio Cost Weighted Cost Long Term Debt 52.82% 7.93% 4.19%
Short Term Debt 2.26% 7.93% .18%
Preferred Stock 11.60% 8.17% .95%
Common Equity 33.32% 13.00% 4.33%
TOTAL 100.00% 9765%
fT d
85 S e, Order No.77-831, supra, at p. 47.
f 86
_I_d .
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1 j , .
DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980
, O Page Fif ty-Nine IX. l ACCOUNTING AND PRO PORMA ADJUSTMENTS Certain adjustments af fecting revenues and expenses ,were included in the exhibits and testimony offered by witnesses for r
i the Company, the Commission Staff and the Consumer Advocate. This ,
! Order will discuss in detail only those accounting and pro forma adjustments which represented differences in regulatory treatment i of the respective items, and only as they pertain to the Company's retail electric operations.
! A. Weather Normalization Adjustments i The Consumer Advocato's witness proposed the adoption of I
! companion adjustments to the Company's test year revenues and expenses to reflect the effect of weather on the Company's sales i
of electricity. According to Mr. Rothschild, the 1978-79 winter period was seven percent (7%) warmer than normal based upon an analysis of historic weather data, which resulted in abnormally low sales of energy. (Tr., Vol. 82, Rothschild, pp. 57-8). Yo I compensate for the weather, Mr. Rothschild proposed that the Company's test year revenues for electric operations should be i
decreased by $218,000, and that the Company's test year operating and maintenance expenses be decreased by $101,000.
This Commission has tended to regard proposed adjustments for l weather normalization with increasing disfavor. As we recently j observed in rejecting proposed revenue and expense adjustments 4
l for weather normaliz1 tion:
/-
! I Furthermore, in setting rates for prospective appli-
! cation, the Commission must be assured that adjustments to test year information incorporato as much precision as possible to promote maximum fairness to the Company and to its ratepayers. The character and impact of futuro weather conditions do not lend themselves to sufficiently accurate measurement to lead the Commission to conclude that the Company's proposed
- adjustments should be allowed.
(Order No.79-230, supra, at p. 56).87 I
87 See, also, Order No.78-404, supra, at pp. 50-52.
/*
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DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 O June 30, 1980 Page Sixty We likewise rejected associated weather adjustments proposed by this witness for the Company's gas operations.00 Based upon the record in the instant proceeding, the Commission in not*
convinced that the data upon which the adjustments herein are
, predicated is sufficiently abnormal to cause us to depart from
, our demonstrated rejection of such adjustments and incorporate the effect of weather in setting rates in this proceeding.
B. Adjustments for Additional Industrial Customers The Consumer Advocate's witness suggested that the Commission approve adjustments to the Company's test period revenue and expenses to reflect the addition of eleven (11) "larga electric customers" which were added to the Company's system after the conclusion of the test period. (Tr., Vol. 82, Rothschild, p. 55)
In order to incorporate the effect of the additional usage, the witness proposed to increase the Company's test period revenue
() by $1,004,000 and increase the Company's operating and maintenance expense by $600,000.
The Commission has fully reviewed the rationale articulated by the Consumer Advocate's witness in support of the proposed adjustments. We do not agree that the Company was, or is, "in an extreme excess capacity situation." (Tr., Vol. 82,, Rothschild,
- p. 54)00 Furthermore, while the Commission may adopt adjustments to test period operating conditions to reflect events outside the test period,90 such adjustments must be cautiously and judiciounly applied. For the matter at issue, we are of the opinion that the identifiention and use of only a portion of one i clnso of servico upon which to base such an adjustment is too I 00 fe2, Order No.70-730, supra, at pp. 47-48.
00 Fog, sunra, at pp. 17-25.
00 sm , suora, pp. 25-26.
i O
i l
l l
t
[
DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 O pnne Cixty-One selectico and too speculative herein for adoption. Furthermore ,
thin p?oposal tends to encourage an unreasonable departure from the re).ir.bility and continuity of the une of an historic, test period. To find nothing in the record before us to justify such result.
C. Miecellaneous General Expense (Account 930.2)
The Commission Fraf f proposed en adjustment to the Company's expenses based upon its sample of the Company's expense vouchers for the test period. An amount of $9,030 as allocated to retail electric operations, was reclassified from Account 930.2, Miscellaneous General Expense, to Account 429, Miscellaneous Income Deductions, an account which includen various membership dues, fees and charitable contributions. The amount so reclassified principally represented certain dues for Chember of Commerce memberships of Company employees. (Tr., Vol. 75, Hammond, pp. 138-13D) The Staff's adjustment would have the ef fect of
(/ excluding such expenditures from operating expenses, and removing them from consideration in setting fair and reasonable rates.
The Company had proposed to chnrgo such expenditures as an operating expense in Account p30.2.
The Commission has previously and consistently treated such i expense as a "below the line" item which should not be charged f
to a utility's ratepayers.01 There is nothing in the record of
! this proceeding to cause us to reevaluate our traditional
, determination that such expenses are more properly charged to a l utility's shareholders than to its ratepayers. The Commission consequently finds the adjustment made by the Staff to be
, i reasonable in this proceeding.
I 91 Fee, e.g., Order No.79-230, supra, at pp. 63-64; and l Order No.78-404, supra, at p. 53; and Order No.77-831, supra,
}
at p. 50.
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I l
[
DOCKET NOS. 79-198-E and 79-197-G - ORDER NO.80-375 June 30,1980 Page Sixty-Two In addition, the record of this proceeding indicates that the Company charged certain industry association dues to Account 930.2, which were paid as membership dues to the Edison Electric Institute (hereinafter "EEI") during the test period,
- in the amount of $263,160.92 While the Commission continues to consider such expenses to be allowable for ratemaking purposes, in the instant proceeding the Company paid the dues for two calendar years in the test period. (Tr., Vol. 30, Groetzinger, pp. 5-6)
In order to determine the Company's appropriate revenue require-ments herein, the Commission will disallow the amount of $105,039, paid to the EEI in June 1978 for services provided in 1977 and for which an invoice was rendered in January 1978, prior to the test period in this proceeding. The Commission finds the remaining expenses included in Account 930.2 to be fairly incurred by the Company for reasonable services and consequently of benefit to the ratepayers.
D. Computation of Allowance for Funds Used During Construction The Consumer Advocate's witness proposed that the Commission adopt a revised rate for the computation of the income for return associated with AFUDC. (Tr., Vol. 82, Rothschild, p. 50). Mr.
Rothschild specifically recommended that the overall rate of return produced by the proposed rates and charges be used for the derivation of the amount of income attributable to AFUDC.93 The effect of the proposed adjustment amounted to an increase in the Company's income for return for its electric operations of $10,241,000.
In addition, Mr. Rothschild proposed that an associated addition 1
of $2,210,000 should be made to the income tax credit for the Company's electric operations. (Tr., Vol. 82, Rothschild, p. 50).
The Company and the Commission Staff computed the income I for return associated with AFUDC at a lower rate than the requested overall rate of return, after tax. The use of the lower rate is consistent with the Chart of Accounts approved by the FERC l
92 See, Hearing Exhibit No. 3, item 39, p. 2.
03 The Consumer Advocate's witness used an af ter-tax rate of
' ON return of 7.38% in the computation of the income attributable to AFUDC. See, ' Hearing Exhibit No. 45, Schedule 11E.
I _
I DOCKET NOS. 79-196-E and 70-197-G - ORDER NO.80-375 June 30, 1980 page Sixty-Three and in accordance vich prior decisions of this Commission.04 The Commission continues to consider that its previously approved treatment represents a fair balance among the interests of current ratepayers and of future ratepayers and of the Company. 'The
, incremen+al difference between the rates utilized herein will have a compounding effect and the use of a higher rate of return for the computation of AFUDC related income for return will operate to increase future revenue requirements.95 Consequently, the Commission herein finds reasonable the computation of the AFUDC and associated income tax credit for the Company's electric operations as proposed by the Company and by the Staff.96 E. Adjustment for Estimated Metered, but Unbilled. Revenues The Consumer Advocate proposed to adjust the Company's test year revenues for its electric operations by an amount of $401,000 to reflect estimated metered, but unbilled, revenues,97 According to Mr. Rothschild, the adjustment is designed to include revenues recorded in the month of April 1979 attributable to service ren-dered in the last half of the month of March 1979, which was the final month of the test period herein. (Tr., Vol. 82. Rothschild, pp. 61-62).
The Commission has considered the concept of the proposed
, adjustment in light of the accounting treatment of the fuel costs in j the unbilled revenues upon which the adjustment was based. A signifi-cant portion of the subject revenues is attributable to the cost i
i 04 The rate employed by the Company and the Staff was 6.5%.
See Hearing Exhibit No. 3 Item 84, p. 428. ~ See
, also Order
! NF~,79-730, supra, at pp. 49-50.
95 g ., Tr., Vol. 82, Rothschild, pp.96-106.
96 See, also. Order No.80-113, supra, in which a similar determination was made for this issue in a general ratemaking proceeding for a telephone utility.
07 See, Hearing Exhibit No. 45, Schedule 16E.
O I l V
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c DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 (u)
June 30, 1980 page Sixty-Four of fuel. Under the accounting practices employed by the Company, the cost of fuel for the service rendered in March 1979 would have been booked during the t same month and, consequently, already incorporated in the revenue figures for the test period. (Tr., Vol. 84, Rothschild, pp. 14-15).
Therefore, the Commission is of the opinion, and so finds, that the proposed adjustment would operate to everstate the Company's test period revenues and that the adjustment should not be adopted herein, consistent with our treatment of this issue in Order No.70-730.
P. Adjustment for Tax Savings from Interest Expense The Consumer Advocate proposed to recompute the Company's test year income tax expense to annualize tax savings associated with interest expense. The proposed adjustment would reduce the Company's test year expense for its electric operations fs G I
\/ by a net figure of $1,196,000,98 Mr. Rothschild nmintained that the adjustment was consistent with 'the regulatory treatment accorded other expenses, e.g., property taxes and depreciation. (Tr., Vol. 82, Rothschild, p. 69).
Upon f ull review of the instant proposal, the Commission finds the concept of the adjustment for tax savings from interest expense to be sound in principle, although the Commission herein will adopt a different methodology which is more consistent with our regulatory practice.
The revenue necessary to produce the overall rate of return of 0.65% approved herein includes, inter alia, an amount of the 98 See, Hearing Exhibit no. 45, Schedule 19E, revised .
p)
DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 Page Sixty-Five total income for return required to service the Company's debt capital. For the purposes of the ratemaking proceeding, however, the Company's state and federal taxes are computed in the cost of service study on the basis of an interest figure which is somewhat lower.100 Since the Commission's action herein will allow the expense for the interest, it is appropriate that the associated taxes for the annualized interest be adjusted, and that the overall revenue requirement be reduced by the net
~
amount of the difference.101 g ,.s the instant matter, the inc'Ye~ase~
l in the income for return amounts to $2,099,052, a figure somewhat higher than the adjustment proposed by the witness for the Consumer Advocate.
G. Customer Growth The Consumer Advocate proposed that the Company's test year income for return for its electric operations should be increased by
$196,000 to adjust for customer growth during the test year.102 The proposed adjustment was founded on the contention that the Company's computation of the customer growth adjustment included depreciation expense related to growth which has been already annualized for ratemaking purposes. (Tr., Vol. 82, Rothschild, p. 59).
The Commission Staf f computed the adjustment to the ampany's test year income for return for customer growth in accoroptce with traditionally accepted regulatory principles and standard practices.103 The Commission is of the opinion, and so finds, that the application of the standard formula for the computation should be approved for ratemaking purposes in this proceeding.104 99pee, Hearing Exhibit No. 43, p. 32, as adjusted. Table C. , p. 40.
100 ee, Hearing Exhibit No. 3, item 58.
101 The gross amount at issue .z St.262,899, which is the dif ference between $50,773,414
- sd 43,c10,515.
102 ee, Hearing Exhit :. ! Tw 0 Schedule 15E.
103 ee, Hearing Exhib,. No. e. p. 30.
104 See also, Order No.79-730, surta., at p. 51; and Order No. 79-2307, supra , at pp. 56-7, and Order' no. 79-90, supra, at O, pp. 44-45.
I
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9 e .
r DOCKET NOS. 70-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980
() page Sixty-Six H. Adjustment for Expenses of Governmental Affairs Department The Commission Staff proposed an adjustment for certain 1
operating and maintenance expenses related to the operations of the Company's Governmental Affairs Department. The Staff proposed to reclassify to non-operating accounts some $77,266, which represented an allocatoi portion of the test period salary and expenses of the head of that Department who was the Company's registered lobbyist. The amount proposed to be reclassified and disallowed for ratemaking purposes likewise included expenses of the Department incurred for the purchase 1 of alcoholic beverages, as allocated to the Company's electric operations.105 The Staf f's proposed adjustment was founded on an inability to distinguish with certainty the expenses related exclusively to lobbying activities and those related to other functions of the affected Department. (Tr., Vol. 75,
() Hammond, pp. 137-138)
The Commission has reviewed thoroughly the proposed adjustment, and is of the opinion, and so finds, that the adjustment is reasonable and should be approved for ratemaking purposes herein.
l The Commission concurs with the rationale advanced by the Staff to the effect that the Company's ratepayers have little effect on the positions and issues advocated by the Company's lobbyist, and that consequently, expenses for lobbying activities should be charged to non-operating accounts, in order that such expenses may be borne by the Company's shareholders rather than by the ratepayers.
Where the Company's books and recorys fail to differentiate o
adequately the lobbying expenses f rom other expenses incurred by 1
the person with the formal responsibility for lobbying activities, the Commission considers that the most appropriate response is to reclassify all expenses charged to that individual.106 105 See, Hearing Exhibit No. 43, at pp. 13-14 pee, also, Order No.77-831, supra, at p.'51.
"O. -106 ee, also, Order No.79-730, supra, at p. 52.
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j DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30,1980
! page Sixty-Seven b The record of this proceeding includes considerable testimony relating to the general operations of the Company's Governmental Affairs Department and the duties and responsibilities of its personnel. (Tr., Vols. 115-126, passim) Such expenses.were not incurred by the Company's registered lobbyist. Furthermore, we do not consider that the test period expenses at issue were incurred for the purposes of lobbying in the same fashion s9 the activities for which expenses were disallowed both in Order No.79-730 and herein. Consequently, the Commission finds no further adjustment is necessary or proper in regard to such 2 expenses.
I. Advertising Expense The Commission Staff proposed the reclassification of certain institutional advertising expenses in the amount of $137,955, as allocated to the Company's electric operations, which the Company had charged to operating accounts.107 The amount reclassified repre-sented general advertising expenses for purposes other than conserva-I tion or information dissimination, and the Staf f's adjustment has I
l the ef fect of eliminating such expenses for ratemaking consideration.
This Commission has traditionally adhered to a treatment of advertising expenses which allows for ratemaking purposes only the advertising expenses which were incurred during the relevant test year and which were related to energy conservation or information dissemination.108 The Commission does not consider advertising expenses for institutional purposes to be proper expenses to be borne by the ratepayers of a utility. The Commission consequently finds the Staff's adjustment to be appropriate for ratemaking i
- purposes herein.
4 107 See, Ilearing Exhibit No. 43, at p. 40.
10B See, Order No.79-730,. supra, at p. 53; and Order No.79-230, supra, at p. 02, and the decisions cited therein.
O
r T DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 Page Sixty-Eight J. Miscellaneous Adjustments The Consumer Advocate recommended that the Company's "most cost inefficient base load units" be " mothballed" in order to reduce the Company's operating and maintenance expense,s in the future. The proposal was predicated upon the conclusion that the facilities were not presently needed to provide service to the Company's customers. (Tr., Vol. 82, Eothschild, pp. 54-55).
In order to avoid the creation of a disincentive for the Company, Mr. Rothschild proposed that the plant investment for the units be retained in the Company's rate base. The witness suggested that the Commission direct the initiation of a study to identify the
" cost inefficient" generating units.
Upon review of the instant proposal, the Commission considers that the recommendation should not be adopted in the context of this proceeding. We have previously determined the Company's construction and generating capacity to be reasonable for the purposes of this proceeding.109 The consideration of any such study would be deferred until the commercial operation of the Summer Station in 1981. Accordingly, the Commission considers that the recommended study and treatment would be inappropriate at the present time.
The record of this proceeding reveals considerable discussion of the expenses incurred by the Company during the test period in the form of fees for legal services. The Commission has reviewed thoroughly the record in this proceeding and finds therein no evidence sufficient to justify the reclassification for ratemaking purposes the expenses paid for legal services, including retainer j fees, during the test year. The testimony indicates that such l
l fees were reasonably incurred, and the Commission herein finds t
that they should be allowed for ratemaking purposes. Our determination includes the legal fees incurred for the expenses
(
i 109 See, Supra, pp. 15-25.
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i i
DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 page Sixty-Nine for the litigation of the dispute involving performance of the Company's nuclear fuel supply contract.110 The Commission finds the expenses to have been incurred during the test period for a purpose which legitimately operates to protect the interests of the Company and its ratepayers.III The Consumer Advocate's witness proposed to adjust the Corrany's test period expense for purchased power by a credit of $863,000, to reflect an average level of sales and purchases of interchange energy for the past three years rather than use the Company's actual test year experience. Upon full consideration of this proposal, the Commission is of tne opinion, and so finds, that the adjustment should not be adopted for ratemaking purposes herein. The Commission does not find the selection of a three-year period to be sufficiently representative of the Company's ,
experience even if we were inclined to incorporate such adjustment as a ratemaking device.112 The Staff proposed to adjust State and federal income taxes to reflect the effect of the Staff's revenue and expense adjustments.
The Commission has considered and adopted the Staff's tax adjustments for the purposes of this proceeding, as well as'the effect of the other adjustments adopted herein. All other adjustments to, or treatment of, revenues, expenses, or rate base items proposed by the Staff in its presentation, not specifically addressed herein, j have been reviewed by the Commission and found reasonable. Any
?
i Other adjustments proposed by any other party inconsistent therewith are herein found unreasonable or inappropriate for ratemaking purposes and are hereby denied.
- 110 Cf., Docket No' . 80-142-E, In Re
- petition of South Carolina Electric and Gas Company.
111 Exhibit No!,4s,See Hearing Schedule Exhibit 18E. No, 3 Item 84, pp. 354ff; and Hearing ~~~
112
-See, Order No.77-831, supra, at pp. 69-72. See also, South Carolina ETectric & Gas Company v. The public Service Commission of
. South Carolina, et al. (Case No.80-270, Supreme Court of South Carolina).
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4 t DOCKET NOS. 79-196-E and 79-197-G - ORDER NO,80-375 l '
June 30, 1980 Page Seventy X.
REVENUE REQUIREMENTS 1
The Company's total income for return on its retail electric operations after accounting and pro forma adjustments *is $94,968,258, which, if divided by the original cost rate base of $1,162,436,515, t
as computed in Table C, supra, results in a return on rate base of 8.17%, as of March 31, 1979.
In order to achieve an overall rate of return on jurisdictional e
operations of 9.65%, which we have found to be fair and reasonable for the test period, in accort r e with the reasons expressed herein, the Company would have required an amount of $112,142,157 total income for return on its retail electric operations.
I Total income for return, both before and after the approved
} increase in the Company's revenues, as found by the Commission, is i
illustrated in the following table:
J TABLE J
() TOTAL INCOME FOR RETURN BEFORE RATE INCREASE ELECTRIC OPERATIONS Net Operating Income for Return $ 69,795,202 Customer Growth 887,795 4
Allowance for Funds Used During Construction 18,006,068 Income Tax-Credit 6,279,193 j
TOTAL INCOME FOR RETURN $ 94,968,258 l
AFTER RATE INCREASE Total Before Increase $ 94,968,258 i
Approved Increase (Net of Taxes) 16,958,191 Customer Growth on Approved Increase 215,708-TOTAL INCOME FOR RETURN $112,142,157 i
The revenue requirements found herein are those found reasonable
! -for the Company's retail electric operations and which the
' Commission thereby finds appropriate for'the test period, in .,
recognition of the prospectivo application of the rates so approved, i The Commission's approval of rates designed to' meet the Company's revenue requirements.is predicated upon a full review of the entire i O
_ _ _ _ _ _. _ . = . _ . __ . . _ _ . . _ .
4 r i DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 4 Page Seventy-One spectrum of issues presented in this proceeding and is thereby 4
predicated upon the evidence in the record within the applicable legal parameters.113 Pursuant to the Commission's Directive of March 13, 1979, the Company's Application herein included a certification that the proposed adjustments in rates and charges were in compliance with the applicable price guidelines promulgated by the Council on Wage and price Stability.II4
- The Commission is of the opinion that the increase in the Company's income for return for its retail electric operations found fair and reasonable herein is consistent with the language and intent of the pertinent anti-inflationary pay and price standards.115 XI.
ALLOCATION OF REVENUES The revenue requirements of the Company having been dete rmined,116 the Commission is also concerned with the determin-ation of the specific rates and the development of the rate structure that will yield the required revenues. It is generally accepted that proper utility regulation requires the exercise a
of control over the rate structure to ensure that equitable -
treatment is afforded each class of customer.
1 l
113 See, e.g Federal Power Commission v. Ilope Natural Gas Company,~EEpra; Southern Bell, supra, and S. C. Code Ann.,'Sec.
58-27-10. et seq. (197G) 114 3 - Exhibit VII. Application of South Carolina Electric and Gas Company, dated May 30, 1979, 115 See, G C.F.R. Part 705, et seq.
I See,Section X, supra.
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E e F DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-373
, June 30, 1980 page Seventy-Two The three principal criteria of a sound rate structure have been delineated as follows:
...(a) the revenue-requirement or financial-need objective, which takes the form of a fair-return standard with respect to private i utility companies; (b) the fair-cost-apportion-l ment objective, which invokes the principle that the burden of meeting total revenue '
requirements must be distributed fairly among the beneficiaries of the service; and (c) the optimum-use or consumer-rationing objective, under which the rates are designeil to discourage
.I the wasteful use of public utility services while promoting all use that is economically justified in view of the relationships between cost incurred and benefits received, i
Bonbright, principles of public Utility Rates (1961), p. 292.
The criteria have been observed by this Commission in recent j proceedings and again are utilized in this matter, j The cost of supplying electricity to different customers is a function of many factors and variables. The allocation of these costs among the different classes of customers represents
- a complex task, since many of the total costs of producing energy f
-() are common to all customers. A procedure frequently used by this Commission in analyzing utility costs in the context of the i review of rate design provides for the assignment of the 4
{ distribution of total costs among three major categories based on (1) costs that are a function of the total number of customers,
- (2) costs that are a function of the volumes of the service supplied or energy costs, and (3) costs that are a function of the service capacity of plant and equipment in terms of capability of carrying hourly or daily peak loads or demand costs.
The Company's Application in this proceeding proposed to increase the Company's approved base rates-as of the date of filing, June 1, 1979, by approximately 10.77%, which would have generated-additional annual revenues of $38,981,415. The. rate schedules proposed by the Company would result in: slight variations in the
, percentage increase in revenue among the customer classifications:
the revenues from the residential class would have increased by
- O g
, 1 DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 Page Seventy-Three 12.08%; the revenues from the general service class would have increased by 9.79%; and the revenues from the outdoor lighting class would have increased by 10.07%, and the proposed increase for the other public authorities class amounted to 10.74%.11 The Company's witness Harry G. Boylston, Jr., " ice president, Marketing and Area Development, described the Company's fundamental rate design objectives which were intended to reflect established ratemaking principles and to consider the effects of rate proposals upon individual customer accounts. The Company's express intent is to design rates which provide that each class of service pays its proportionate share of the costs of service, based essentially on a fully allocated, embedded cost of service study.118 The Company seeks to design rates which enable the rate of return of each class of service to approximate as closely as practicable the overall rate of return for the entire retail electric operations.
In addition, the Company seeks to design rates which are easily comprehended by the customers and administered by the Company
() and which promote conservation and efficient use of electrical energy. (Tr., Vol. 38, Boylston, p. 41).
The Company's specific proposals for its rates and charges for electric services II9 included an increase in the minimum charge for miscellaneous municipal light and power service (Rate 3) from $4.50 for single-phase service and $9.00 for three-phase service, to $6,00 and $12.00, respectively. The Company likewise proposed an increase in the single energy block of Rate 3 service.
For its residential service (Rate 8) customers and the farm service (Rate 14) customers, the Company proposed increases in the two i
11 The proposed increases varied among the sub-groups within each general customer class. For example, within the residential class, the revenue increases were 13.81% for Space Heating customers and 11.35% for regular residential service; within the General Service class, the increases varied from 8.27% to 12.34%. ~~~, See Hearing Exhibit No. 53, p. 16.
See, Exhibit No. 3, item 58.
IIO See, Exhibit VI of the Company's Application, dated May'30, 1979. See also, Tr., Vol. 38 Boylston...pp. 42-44.
. s.-
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1 l -s/ DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375
< June 30, 1980 ,
J Page Seventy-Four
]
energy blocks of each rate schedule and in the basic facilities 1 i
charge from the currently approved $4.50 for single-phase service and $9.00 for three-phase service, to $6.00 and $12.00, respectively.
In addition, the Company modified the space heating provisions of those rates by increasing the rate end reducing the applicability 1
4 from the existing nine-month period (October-June), to a six-month J
j period (November-April).
The Company proposed to modify, slightly, +he small general i service (Rate 9) rate design to reduce the currently approved four energy blocks to three and to invert the final block. The space heating applicability remained unchanged, although an increase in the space heating rate was proposed. A minimum charge for Rate 9
, was likewise included in the Company's Application.
The Company proposed an adjustment in its high load factor l
service (Rate 20) to reduce the currently approved energy portion
- of the rate from two blocks to a single energy charge. The Company's proposals for large general service (Rate 23) reflected only an increase in the rates without the incorporation of changes in rate design. The Company proposed increases in the energy charges for church and school service (Rate 12) and inverted the final block of the rate. In addition, the Company proposed to adjust its rates i
t for street and security lighting service. Special contracts were increased by approximately the same percentage as the class of i
service to which the pertinent service is assigned.
I The Company's fully allocated cost of service study for the test period provided the most current foundation for an analysis of the relative rates of return among the various classes of service. In addition to illustrating the actual costs of service, this cost study reflects the varying deviations in the rates of i i return from each class of service from the overall Company rate of return.120 l
l 120 See, Hearing Exhibit No. 22 (GCH-2),
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, e DOCKET NOS. 79-196-E and 79-197-G - ORDER NO,80-375 June 30, 1980 page Seventy-Five The Commission has traditionally found such cost studies to be essential in the evaluation ot the fairness and reasonableness of revenue allocations among the classes of customers of electrical utilities.1 I The record of the instant proceeding has served to reinforce our previous observations with regard to the advantages of cost of service studies developed in a manner consistent with the use Jf fully allocated embedded costs. (Tr., Vols. 36-38, How; Vol. 99, Bryson pp. 5-7; Vols. 93-96, Brubaker; and Vols. 97-98, phillips).
The Commission has endeavored to derive equitable, lawful and reasonable rates of return for each customer class in comparison with the rate of return earned for each other customer class, and with the total company rate of return. The rate and charges herein approved incorporate features designed to achieve the objectives deemed appropriate and proper.
The Commission has repeatedly stated its recognition that increases in utility rates may be felt most dramatically by the very low usage customer. However, in our determination that rate structures of jurisdictional utilities follow, to the fullest extent possible, their respective costs of service, by which each' customer class sustains an equitable portion of those costs associated with providing proper service to that class, it becomes impossible to provide special relief to a single class of customers through the rate design without creating serious inequities elsewhere.
! The Commission's concern is in the establishment of a rate structure which provides that all customers bear fairly.their proportionate share of th* costs of service.
The Com)any has requested an increase in revenues of $38,981,415, and has submitted proposed rato schedules which would produce that 121
, See, Order No.79-230, supra, at p. 82, and the decisions cited therein.
4
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e r DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 Page Seventy-Six b(,,f amount of additional revenue. The Commission has determined that the Company should be allowed additional revenues of $33,546,111, rather than the amount requested, a reduction of some $5,435,304.
The Commission must assume, therefore, the responsibility for the identification of the manner in which the Company's rate schedules should be redesigned to incorporate our findings herein and reflect the increased revenues approved. The Commission acknowledges the complexity of the task. The relevant principles characterized in this discussion and the testimony and exhibits in the record of this proceeding have been fully considered in reaching our findings. The Commission has analyzed the Company's proposed rates and has incorporated our determination of the proper increase in revenues in the derivation of equitable, lawful and reasonable rates of return for each customer class, generally in comparison with the rate of return earned for each other customer class, and with the total Company rate of return.
The Commission has considered a spectrum of factors in its
_( f deliberations as to the appropriate allocation of rates in accordance with our finding of a 1: ful rate of return for the Company. Clearly, cost factors play a prominent role in the identification of the constituent elements of a fair and reasonable rate design, but cost cannot be used as the sole determinant.
In approving the increases in the Company's various classes of service, as illustrated in Table K, infra the Commission has undertaken to recognize and re'sncile the Commission's consistent ratemaking objectives to meet the revenue requirements found fair and reasonable and to promote fairly the intent to meet the appropriate ar.J proven costs of service. The revenue increases appearing in Table K will be applied to each class of customer, as more fully delineated herein, and the Company will be required to file appropriate rate schedules for the approval of the Commission within fifteen (15) days of the date of this Order.
O
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i DOCKET NOS. 70-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 Page Seventy-Seven TABLE K APPROVED INCREASE BY CLASS I
CLASS OF SERVICE APPROVED INCREASE Residential Service:
Regular $ 8,217,709 Space IIeating 4,623,524
- Total Residential $ 12,841,233 i
General Service:
, Small General Service I $ 4,324,828 Small General Service II 1,971,764 Small General Service III 2,629,462 Medium General Service 1,730,131 Large General Service I 8,557,016
- Total General Service $ 19,213,201 Street Lighting
. Street Lighting $ 583.920 1
Other Public Authority:
i Other Public Authority I $ 384,415 Other Public Authority II (State Line) 523,342
() Total Other Public Authority $ 907,757 Total Jurisdictional (Retail Electric) $ 33,546,111
( The record herein demonstrates that the parties devoted considerable attention to the design and effect of the rates and
- charges for the Company's residential class of service. A principal issue concerned the proposed adjustment to the basic facilities charge for the residential class. The Company's proposed charge of
$6.00 was designed "to more nearly recover the average customer cost of $7.44." (Tr., Vol. 38, Boylston, pp. 41-42).I Based upon the record of this proceeding, the Commission is of the opinion, and so finds that the Company's proposed adjustment
- 1 to the basic facilities charge, although not designed to recover 2
122 See also, Tr., Vol.'99, Bryson, pp. 8-9.
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, e DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 Page Seventy-Eight fully the customer component of cost, represents an abrupt adjustment in the existing charge which occasions a disproportionate effect upes tne low usage residential customers. Consequently, the Commission considers that the proposed adjustment cannot herein be approved. The approval of a $5,00 basic facilities charge for single-phase service represents the Commission's recog'ition of the principle that significant changes in rate design arculd be
! incorporated in such a manner as to reduce as reasonably as possible the immediate impact on the affected customers.123 The increase in the basic f acilities chet te will enable the Company to recover more of the customer related costs through the basic facilities charge than the previously approved charge.
After full consideration of the evidence in the record before.
us and based upon our evaluation of the applicability of the principles of ratemaking, the Commission is of the opinion, and so finds, that fair and reasonable rates and charges for the Company's Rate 8 and Rate 14 services, and which are herein approved,
'( f are the following:
RATE 8 Rate Per Month Bacic Facilitics Charge -- $5.00 Plus Energy Charge:
First 1000 Kwhrs at---- $ .04409 per Kwhr.
Excess over 1000 Kwbra at $ .04793 per Kwbr.
ELECTRIC SPACE HEATING PROVISION It is further provided that where the Company-has determined that electricity is the sole means of space heating in the premises, all kwh, in excess of 1000 kwh, will be billed at 4
$ .03465 each during the billing months of November through April.
123
-Sae, e.g., Order No.79-730, sup a, at pp. 62-63; and Order No 79-230, supra, at p. 86; ag 023er No.78-404,' siiiira ,
at pp. 67-68.
a O
DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 page Seventy-Nine l) RATE 14 Rate Per Month Basic Facilities Charge ---- $5.00 plus Energy Charge:
First 1000 Kwhrs at--- $ .04400 per Kwhr.
Excess over 1000 Kwhrs at--- S .0479,3 per Kwhr.
The Commission will herein likewise approve a basic facilities charge of $10.00 for three-phase service under Rate 8 and Rate 14.
The Commission considers the modification of the period for the applicability of the space heating provisions in Rate 8 to be fair and reasonable, and that such extension should be approved.
In addition, the Commission is of the opinion, and so finds, that the minimum charge of $5.00 for single-phase service and
$10.00 for three-phase service should be approved for the Company's miscellaneous municipal light and power service (Rate 3).
Based upon the record before us, the Commission further finds that the Company's rate design proposals and adjustments for rates and charges for Rate 9, Rate 12, Rate 20 and Rate 23, are fair and reasonable and should herein be approved. The remaining proposed O adjustments to the Company's contract service and to its street and security lighting services a e likewise approved herein.
The Company will herein be required to file for approval on or before July 15, 1980, revised rate schedules for Rate 3, Rate 8 and Rate 14 as specified herein. At the same time, the Company will i
! be required to file for approval rate schedules for all other classes of customers to reflect the increase in revenues as illustrated in Table K, supra, using the rate designs incorporated in the Company's Application herein. Those rate schedules will be effective
- on and af ter the August 1980 billing cycles in order to i
reflect the ef fective date of the. fuel component as previously I
approved by Order.No.80-325.
The rates and charges approved herein with the currently effective fuel component, will be ef fective only for the July 1980 billing cycles. The. rates in effect pursuant to'the Company's i
Undertaking dated June 21, 1979, will therefore remain in effect.for billing cycles prior to the July 1980 billing cycles.
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DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 page Eighty The rates in effect pursuant to the Company's Undertaking i
are to be cancelled upon the effective date of the rates approved herein. The Commission finds that the rate design of those rates so placed in effect pursuant to the Undertaking, on July 1 1979, was reasonable and fair for the period of time during which the rates were collected. The Commission, however, has found herein that the revenues produced by the bonded Rate 8 and Rate 14 were unreasonable and excessive. Pursuant, therefore, to the terms of
{
S. C. Code Ann., Sec. 58-27-880 (1976), the Commission must prescribe the manner in which the refund of the excess revenues, as herein determined should be made.
The Company is hereby directed to refund to its affected residential customers the difference between the revenues approved in this proceeding and the revenues collected pursuant to the Company's Undertaking approved by the Commission in Order No.79-326, as adjusted for the approved fuel component.124 The Company will j [) be directed to refund by credit to each affected existing customer,
%J or by direct payment to affected former customers, the appropriate j refund with interest at nine percent (9%) per annum in accordance with the terms of the Undertaking. Furthermore, the Company is hereby directed to accomplish the refund operation, to certify the completion of the refunds, and to file with the Commission the appropriate calculations illustrating such action, with the refund and interest shown separately.
1 124 The approved fuel component in the Company's base rates for the period July 1, 1979, through October 31, 1979, was 16.25 mills per KWH. See, Order No. 79-21, dated January 15, 1979, and Order No.79-398, dated July 27, 1979, issued in Docket No. 18,362, j supra. For the period November 1, 1979, through July 31, 1980, the approved fuel component is 17.50 mills per KWH. See, Order No.79-398, supra, and Order No.80-259, dated April 30, 1980, issued in Docket No. 18,362, supra.
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DOCKET NOS. 79-196-E and 79-ID7-G - ORDER NO.80-375 June 30, 1980 page Eighty-One p
\ XII.
MISCELLANEOUS ISSUES The record of this proceeding reveals a number of matters which are more properly addressed separately than in the context of any preceding sections of this Order.
There is considerable testimony in the record in regard to the memberships of Company employees in various country clubs and in certain clubs in Columbia. The testimony concerned principally the ratemaking treatment of the fees and dues for memberships in such establishments and the treatment of the expenses incurred in the use of the clubs' facilities.
In Order No.70-730, the Commission recognized that initiation fees and dues for country clubs have been traditionally classified as non-operating, or "below-the-line", expenses for ratemaking purposes.125 The Commission therein determined that similar treatment should thereafter be adopted for the initiation fees and dues associated with the Company's employees' memberships at
\_- the palmetto Club and the Summit Club in Columbia. The Commission directed the Company to reclassify those expenses to appropriate non-operating accounts, effective on and after January 1, 1980.126 In effect, such action operated to treat the particular private clubs for ratemaking purposes as if they were public restaurants.
In addition, we directed the Comp ~ y to take the appropriate actions to assure the Commission t'at the expenses incurred at all clubs and restaurants which are charged to operating accounts be strictly related to business purposes. The Commission stated it would expect the Company to maintain a system of complete documentation to enable the Commission and its Staff to insure compliance with our Directive in this matter. Our Directive and our expectations continue unmodified.
1S See, e.g. ,11 earing Exhibit No. 3, at p. 304, which illustrates that such Tees and dues are recorded in Account 426.5 for electric operations.
See, Order No.79-730, supra, at p. 67.
w_-
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DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 l June 30, 1980 Page Eighty-Two O
N, / The record of this proceeding contains considerable testimony in regard to the Good Government Fund (hereina f ter "the Fund").
an independent organization composed of employees of the Company who voluntarily elect to make political contributions through the operation of the Fund.I While the Fund does not operate under the aegis of the Company, the Company makes available a procedure for those employees who so elect to make their contribution to the Fund through a payroll deduction process. Consequently, some minimal operating expense is incurred by the Company in the adminis-tration of the payroll deduction procedure.
In Order No.79-730, the Commission determined that, whi'le the administrative expense was patently minimal, the Company and tha Fund should maintain "an independence of operation which would be enhanced by the maintenance of provisions which preclude the use of Company facilities for the functions of the Fund." The Commission thereupon directed the Company to discontinue the availability of the payroal deduction process for employee
( ) contributions to the Fund on and after January 31, 1980.
Upon review of the evidence before us, and of the Directive in Order No.79-730, the Commission now finds that the mandatory provision of that Order prohibiting the use of employee contributions to the Fund by the payroll deduction mechanisim should be slightly modified. The Commission considers that the respective interests will be adequately protected and that the desired " independence of operation" can be su f ficiently mair.tained by the establishment of a system whereby the employees may contribute to the Fund by payroll deductions, with the minimal administrative expense incutred by the Company assigned to a non-operating account or reimbursed by the Fund. In that fashion, the Company's ratepayers will not contribute to any cost of administration of non-Company operations.
The Commission will herein adopt this revision, effectiv.' cn and I
See IIearing Exhibit No. 3, Item 46; see also, Ilearing Exhibit NoT,19.
128 e S,ee, Hearing Exhibit No. 27
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DOCKET NOS. 79-196-0 and 79-197-G - ORDER NO.80-375 !
June 30, 1980 1 page Eighty-Three
() af ter July 1, 1980. We will likewise require the Company to maintain a complete documentation to insure compliance with our determination in regard to this matter.
In our most recent general ratemaking decision for the Company's retail electric operations, the Commission addressed the continuing relationship between the Company and its wholly-owned real estate development subsidiary, Energy Subsidiary, Inc. (hereinafter "the Subsidiary"). In Order No.77-831, supra, we stated:
While the Commission does not take the.
position that the Company should require its wholly-owned subsidiary to liquidate its property unprofitably, the Commission does strongly urge the Company to take e' itive steps to dispose of the real estate held oy Energy Subsidiary and dissolve the corporation in accordance with the expressed intentions of the Company and the spirit of the Commission's Memorandum of August 24, 1974.
In the instant proceeding, the Company's witness Summer indicated that the Gubsidiary has made " considerable progress" in the effort to dispose of its assets, although "the real estate market has not jg permitted an easy disposition of those assets without suffering (s /) significant losses." (Tr., Vol. 2, Summer, p. 38). Mr. Summer asserted that the Subsidiary would undertake a more concentrated effort in the disposition and dissolution process. (Tr. Vol. 2, Summer, pp. 38, 82-84).
The Commission finds nothing in the record of this proceeding to cause us to modify our previously stated evaluation of this matter or to dilute our strong encouragement that the Company take the positive steps toward disposition of the assets of the Subsidiary indicated since 1974.129 We likewise will continue to require the submission of semi-annual reports on the progress of the divestment of the property and subsequent corporate dissolution of the subsi-diary.
See, Ordcc No.77-831, supra, at pp. 78-79.
v
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DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 page Eighty-Four O
The Commission's Order No.77-831 also found that the upper reservoir associated with the Fairfield pumped Storage project will be utilized in the operation of the Summer Station. We further concluded that the costs of the reservoir should be appropriately allocated between the two projects, with a proper amount of the allocable expenses charged to the South Carolina Public Service Authority. We herein reiterate our prior decision without modification that we shall require the Company to make the appropriate determination of the allocation at the proper time. (Tr., Vol. 75, Hammond, p. 144).130 During the context of the hearing, Mr. Arthur Dodds, a witness sponsored by the Intervenor, Tom Turnipseed, offered certain photographic exhibits 131 for the purpose of demonstrating that certain projects for purportedly private purposes were undertaken in December 1979 and January 1980 by Company personnel on the private property of a member of the Company's Board of Directors. (Tr., Vol.
144, Dodds, pp. 38-41).
7-s i
%>'! The Commission finds the record bcfore us to be insufficient to enable us to reach any meaningful conclusion in regard to this matter. Although we do not find that any ratemaking adjustment could be made as a consequence of a review of tnis matter, we will direct the Commission Staff to undertake an investigation of the issue and make a full report to the Commission at a subsequent time.132 The Company and the parties of record are reminded of the language of Order No.77-831 in this regard:
We, therefore, order the Company to take affirma-tive steps to insure that all labor performed by Company employees during regularly scheduled work-ing hours be undertaken for Company business only.
This Commission will not condone or tolerate any practice which permits Company employees to be used for private labor during regular working hours even though reimbursement is made to the Company.
130 Id., at p.80 I I See, Hearing Exhibit No. 113.
IU
,s See, Order No.77-831, supra, at pp. 72-74.
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LJ
DOCKET NOS. 79-196-E and 79-197-G - ORDER No.80-375 June 30, 1980 Page Eighty-Five
(~ The Intervenor SCWRO proposed that the Commission require the Company to modify its service practices and procedures to institute a moratorium on involuntary terminations of electric service for residential customers until the adoption of regulatory provisions in accordance with PURPA. (Tr., Vol. 145, pp. 147-148).
The record of this proceeding contains extensive testimony in regard to the Company's service policies and procedures, which indicates that the procedures for discontinuance of service have been applied in accordance with the Commission's Rules and Regula-tions.1 3 In aflition, the Company has initiated a Custoner Assistance Program, effective on and after November 1, 1979, which is designed, inter alia, to provide specific assistance to elderly, handicapped and low income users of the Company's services in a demonstration of a "more lenient attitude on the part of the Company towards the deposits and credit terms and cut-offs.. ."
(Tr., Vol. 2, Summer, p. 79).
The Commission shares the manifest concerns of the Intervenors
/
(m,/ and of the Company that persons in situations of legitimate hard-ship who experience dif ficulty in meeting payments for energy services be provided meaningful assistance. The Commission considers that an unrestricted moratorium on involuntary discontinuance of service would operate eventually both to the disadvantage of those customers it would be designed to assist and to the remaining ratepayers in general. Rather the Commission will clearly expect the implementation of the Company's assistance program to be undertaken with the determination and concern articulated by the Company's President herein.
133 See, R.103-342, and Hearing Exhibit Nos. 4 and 5. See, also, Section 115 of the public Utility Regulatory Policies Act of 1978, 16 U.S.C. Section 2625(g), which requires State regulatory authorities to undertake considerations in regard to termination procedures before November 9, 1980.
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DOCKET NOS. 79-19G-E and 79-197-G - ORDER NO.80-375 June 30, 1980 page Eighty-Six 0 The Commission notes that the pending proceeding in Docket Nos. 18,605 and 18,606, initiated by the Commission Staff
- has provided the Commission and the parties of record therein, including the SCWRO, the full opportunity to address the issue of
! discontinuance of electric and gas service.134 The Commission t
considers that proceeding to be the most appropriate manner in which to review the F.atters raised in the motion of the SCWRO.
4 Our resolution of such issues will be made in that proceeding.
The record of this proceeding contains extensive testimony relative to the policies and practices of the Company with regard to l
i the planning, construction and prospective operation of the I
V. C. Summer Nuclear Station, including the ultimate costs of !
i trans! rtation and storage of spent nuclear fuel and the costs of decommissioning the facility.
We have previously concluded herein that the Company's construction program is reasonably designed to meet the foreseeable needs of the Company's customers for the future period.136 While
.O the record in this proceeding clearly indicates that the costs
- associated with the construction of the Summer Station are considerably greater than originally anticipated and subsequently.
j estimated.137 we cannot conclude in this proceeding that the expenditures made by the Company are " unreasonable and imprudent" as urged by several intervenors.138 As we have previously acknowledged,-_
escalating construction costs have been attributable to labor.
cost increases, to price increases for materials, and to unanticipated design and engineering costs required by regulatory agencies.' We find no basis in the evidence before us upon which to conclude that i
i 134 public hearings in Docket Nos. 18,605 and 18,606 have been completed and the matters theroin are pending before the Commission for disposition.
135 See, especially, Tr. Vols., 128-131, 133-134 Crews;
'f . Vols., 1572133, Johnsrud; Vols. 136-140, 142-143, Babb; and Vol. - 145, i' Crider.
136 '
See,Section III, supra, pp. 15-25.
137 g
- k. . _S e e , Order No.,77-831, supra, at pp. 74-78.
I h 138
- - See , e. g. , Tr.,.Vol. 75, pp. 16-22; Vol. 145, p. 147.
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I DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980 page Eighty-Seven 3 any ratemaking response should be made for alleged inefficient
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management practices or construction activities. Nor do we ff?M any probative evidence in this record to justify any reevaluation of the decision made over ten years ago by the Company's management to design and construct the nuclear generating unit.
Although construction delays and regulatory requirements have caused deferrals of the date for commercial operation of the f acility, the Commission finds no reason to attribute such results to the Company's management.
While this Commission has not been granted authority commensurate with the jurisdiction of the Nuclesr Regulatory Commission for the evaluation of the safety of the construction and operation of a nuclear generating unit, this Commission does have the responsibility to determine if adjustments to the overall costs of the project are necessary and appropriate for ratemaking purposes. In that respect, the Commission will expect the Company to implement the attitude espoused by Mr. Esca II. Crews, Jr., the Company's Vice president and
() Group Executive for Engineering Services and Construction, that reimbursement would be sought from the appropriate contractor or supplier for construction or materials which produce non-conformance notices and non-compliance notices, where the construction or material deficiency was reasonably avoidable. (Tr., Vol. 131, Crews,
- p. 64). The Commission considers that neither the Company nor its ratepayers should absorb the costs of correcting such deficiencies.
A considerable portion of the testimony in the record before us relates principally to the prospective operation of the Summer Station or the future costs of the storage and disposal of nuclear waste and the ultimate costs of decommissioning the Summer Station.
For the most part, the matters addressed are either outside the scope of the Commission's jurisdiction or too speculative for determination in this ratemaking proceeding. The Commission does find herein that the Company has demonstrated that its training programs and prospective engineering of the Summer Station will be
. satisfactory to provide competent and efficient operation of that
_m facility.
1 l
a e I DOCKET NOS 79-196-E and 70-197-G ~ ORDI:R NO.80-375 June 30, 1980 page Eighty-Eight In the ultimate analysis, for those mat ters within the Commission's jurisdiction, the Company, the parties of record, and the public can be assured that we have not relaxed our previous statement of our assessment of the construction of the Summer Station:
The Commission fully expects the Company and the contractor to employ all reasonable measures to insure that the costs incurred in the construction of the Summer Unit are the lowent possible, con-sistent with the accepted standards of engineering practice and the required health and safety provisions.
XIII.
FINDINGS AND CONCLUSIONS Based upon the foregoing considerations and after a full review of the testimony and exhibits presented in this proceeding by the Company, the Intervenors and the Staff, the Commissiin has made the following findings and reached the following conclusions concerning the operations, the rate of return and the reasonable requirements for earnings to be allowed the Company for its retail electric operations:
() 1. That South Carolina Electric & Gas Company is an electrical utility, providing electric service in a service area r'. thin South Carolina, and its retail electric operations are subject to the jurisdiction of this Commission, pursuant to S. C. Code Ann.,
Sec. 58-27-10 et seg. (1976).
- 2. That the Company's present construction budget for the next ten years projects expenditures of $1,960,071,000; that the construction of generating capability should be planned and designed at the minimum to meet annual peak loads; that based on the peak load forecasts entered in the record of this proceeding, the Company's present plans for construction of generating facilities are sufficient to meet the projected needs of its customers, which the Commission i
herein finds reasonable;
- 3. That the appropriate test period for the purposes of this proceeding is the twe t ve-m<m th period ending March 31, 1979; 4.
That the Company is seeking an increase in its rates and charges to its retail elect ric customers, . in Docket No. 79-196-E, m
a
e o DOCKET NOS. 79- 19G-I: and 79-197-G - ORol:R NO.80-375 June 30, 1980 page Eighty-Nine 79 6 i 1 ,/ that would produce additional revenues for the test period of
$38,981,415.
- 5. That a year-end, original cost rate base of $1,162,436,515, consisting of the components set forth in Section V of .this Order, as adjusted, in Table C, should be adopted for ratemaking purposes herein.
G. That the capital structure, as adjusted, set forth in Table E of Section VI . should be approved;
- 7. That the embedded cost of long term debt, as of July 31, 1979, is set forth in Table F; that the Company's debt coverage ratio of earnings to fixed charges is set forth in Table G; that the Company's embedded aest of preferred stock, as of July 31, 1979, is set forth in Table II.
- 8. That the evidence provided a range for rate of return on common equity between 11.10% and 15.00%; that a fair and proper return on common equity for the Company falls within the range of 13.00% to 13.20%, within the range proposed by the witness for the
/'\
( ,/ Staff, and that the rate of return of 13.00% on common equity, produced by the additional revenues of $33,546,111, as approved, is fair and reasonable;
- 9. That the Company's embedded cost rates for long term debt and for short term debt of 7.93% and the Company's embedded cost rate for preferred stock of 8.17% and a cost rate of 13.00% on common equity should be used in the determination of a fair overall rate of return;
- 10. That the accounting and pro forma adjustments set forth in Section IX are reasonable and proper and should be adopted;
- 11. That the rate of return on the Company's South Carolina retail electric operations, during the test period, after accounting and pro forma adjustments, and prior to any rate adjustment was 8.17%;
- 12. That the total income for return allocated to the Company's retail electric operations, af ter accounting and pro forma adjustments r.
U
. e DOCKET NOS. 79-196-1: and 79-197-G - ORDER NO.80-375 June 30, 1980 Page Ninety
) and prior to rate adjustments, was $94,968,258 for the test period; and that such amount of income is insufficient based on the reasonable rate of return found in this proceeding; 13 That approval should be given for rates which will provide additional gross revenues to the Company of $33,546,111, on its retail electric operations, which will produce an additional net income after taxes for return of $16,958,191;
- 14. That the additional revenues allowed would produce a rate of return on approved rate base of 0.65% on the Company's retail electric operations, which is found to be fair and reasonable;
- 15. That such additional revenues and the return which these revenues produce are well within the range of reasonableness and fairness, and must be provided if the Company is to meet its statutory requirements to provide adequate. efficient and reasonable service; and that further, such additional revenues are consistent with the applicable anti-inf ation guidelines promulgated by the Council on Wage and Price Statility;
() 16. That the additional revenues would provide the Company the opportunity to earn a rate of return on common equity allocated to South Carolina retail electric operatmens of 10 00%;
- 17. That the rate schedules filed :'or approval by the Company on June 1, 1979, which produce additional revenues of $38,981,415 are unlawful and unreasonable, and should be denied;
- 18. That the Company shall file for approval on or before July 15, 1980, revised rate schedules to reflect the Commission's determinations herein as fully described in Section XI of this Order; and that such rate schedules shall be effective on and after the August 1980 billing.
cycles.
- 19. That the rates approved herein shall be effective for the July 1980 billing cycles only, nnd that the rates in effect pursuant to the Company's Undertaking of June 21, 1979, shall remain in effect until the July 1980 billing cycles.
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J i
e e DOCKET NOS. 70-196-H and 79-197-G - ORDER NO.80-375
- June 30, 1980 i page Ninety-Ono
- 20. That the Company make the appropriate refunds to the j
affected residential customers of the revenues found to be unreasonable
] and excessive; that, further, the Company make such refunds as more fully described in Section XI herein; and that, further, the Company file with the Commission the calculations upon which the refunds are
, cccomplished; I
- 21. That the Company should modify its existing administrative practice of providing payroll deductions for its employees for their i
- contributions to the Good Government Fund, effective on and after
.1 July 1, 1980, to provide for the accounting or reimbursement procedures more fully described hereinabove.
4
- 22. That the Company should hereafter reclassify the expenses for initiat)on fees and dues paid for memberships of its employees in the private clubs identified in Section XII of this Order to 4
appropriate non-operating accounts; and that, further, the expenses at such clubs, country clubs, and public restaurants charged to j . [" operating accounts should be incurred only for business purposes; L
and that, further, the Company should maintain its books and records j
in a manner sufficient to demonstrate compliance with such directive.
-23.
That a moratorium on involuntary discontinuance of electric j
service prior to the determinations in Docket No. 18,605, as proposed by certain Intervenors herein, is not reasonable and should
, be denied; that further, the Company should undertake the implemen-
!, tation of its Customer Assistance Program to address the legitimete concerns of those customers in need of the assistance which the program is intended to provide.
- 24. That the Commission Staff should be directed to investi-gate the assertions of the work allegedly performed on private property by Company employees as more . fully described herein.
- 25. That the costs incurred by the Comnany, and the expenditures i
made, for the construction of the V. C. Summer Nuclear Station are reasonable and should be. allowed for ratemaking purposes in this I
proceeding.
c3 I
I
rN DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375
\ - '
) June 30, 1980 Page Ninety-Two
- 26. That the Company continue to file with the Commission, as previously ordered, quarterly reports of the disposition of the property of Energy Subsidiary, Inc.
- 27. That the Company should file with this Commission quarterly reports for its gas, reta.1 electric, and total jurisdictional operations including the following information:
(a) Rate of return on approved rate base; (b) Return on common equity (allocated to each operation);
(c) Earnings per share of common stock; (d) Debt coverage ratio of earnings to fixed charges; and that, further, such reports should be filed within thirty (30) days of the end of the calendar quarter which is the subject of the report.
-~
- 28. That no further action should be taken in j
(j Docket No. 79- 19 7-G , based on the evidence herein.
ACCORDINGLY, IT IS ORDERED, ADJUDGED AND DECREED:
- 1. That the proposed rate schedules filed by the Company on June 1, 1979, are unreasonable and improper and are hereby denied.
- 2. That the Company file with the Commission for approval, on or before July 15, 1980, rate schedules in accordance with the findings contained herein.
- 3. That the Company make the refunds to the affected residential customers as provided herein.
- 4. That the Undertaking, dated June 21, 1979, he cancelled upon approval by the C' mission of the rate schedules ordered to be filed herein and ,on certification of the accomplishment of the refunds.
)
4 w r3 DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980
\'-') Page Ninety-Thron
- 5. That the Company file the reports herein identified in accordance with our findings.
G. That this Order remain in full force and effect until
-- further Order of the Commission.
P BY ORDER OF Tile COMMISSION:
s/ Ifenry G. Yonce Chai rma n ATTEST:
s/ James II. Still 7s Executive Director
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(SEAL) e k,
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u w DOCKET NOS. 79-196-E and 79-197-G - ORDER NO.80-375 June 30, 1980
[( 'I
_, Page Ninety-Four OPINION OF FRED A. FULLER, JR.
CONCURRING IN PART AND DISSENTING IN PART I respectfully disagree with the majority's conclusion ra that a fair and reasonable rate of return falls within the range of 13.01 to 13.2%.
Since the early 1970's, which saw a dramatic increase in the number of rate increase proceedings, electrical utilities have stated to the Commission that the proposed additional revenues were necessary to attract capital to enable the utilities to build additional generating facilities. n he n t h e V . C . S umme r Un i t becomes operational in 1981, the Company's reserve margin will be approximately 50%. While electrical utilities should maintain a reasonable reserve. I consider this level to be too high. The Company has deferred construction projects for generating units
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i based upon forecasts of reduced demand. I consider that the red uced demand and the high reserve margin make it unnecessary for the Company to continue to borrow capital for construction as in the past. In addition, utilities have f requently referred to rising interest rates as a justification for rate relief, and interest rates are currently decreasing.
I am of the opinion that the ef fects of inflation justify some rate increaFe in this proceedilig . I made the motion that the Commission find a rate of return on equity of 12.54% to be reasonable, which would have allowed 72.88% of the additional revenues requested .
The result is $10,000,000 less than requested and $5,000,000 less than the result of the majority's decision.
s/ Fred A. Fuller. Jr.
Fred A. Fulle r , J r . , Commissioner Fourth District p_
_