ML19341C492
| ML19341C492 | |
| Person / Time | |
|---|---|
| Site: | Waterford  |
| Issue date: | 12/18/1979 |
| From: | Kennon E, Tamara Powell, Schwegmann T LOUISIANA, STATE OF |
| To: | LOUISIANA POWER & LIGHT CO. |
| Shared Package | |
| ML19341C490 | List: |
| References | |
| U-14078, NUDOCS 8103030639 | |
| Download: ML19341C492 (16) | |
Text
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BEFORE THE LOUISIANA PUBLIC SERVICE COMMISSION DOCKET NO. U-14078 LOUISIANA POWER AND LIGHT COMPANY, EX PARTE '
IN RE:
PROPOSED REVISION OF ITS ELECTRIC RATES AND CHARGES bl ORDER NO. U-14078
- .c e
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'81080306%
I.
INTRODUCTION This case involves the application of Louisiana Power & Light Company (hereinaf ter referred to as "LP&L")
for a general increase of its intrastate rates for electric service on the gross amount of $114,721,000.
The application for a rate increase was filed with the Commission on December 15, 1978.
Hearings were conducted by the Commission or before a hearing examiner on March 20, 1979, June 20, 1979, May 22 and 23, 1979, September 18, 1979, October 15 and 16, 1979 and November 15, 1979.
LP&L is an electric public utility organized and operating under the laws of the State of Louisiana with its principal place of business in the City of New Orleans.
LP&L sells electricity to approximately 478,000 consumers, including residential, commercial, industrial and governmental customers, in 43 of the 64 parishes in the state.
The company is a wholly owned subsidiary of Middle South Utilities, Inc.
("MSU").
Its sister companies in the MSU System include Arkansas Power & Light Company, Arkansas-Missouri Power Company, Mississippi Power & Light Company, and New Orleans Public Service, Inc.
This is the second occasion on which the Commission has considered a major rate request of LP&L in the past three years.
Prior to 1976, the company had never requested an increase of its base rates for electricity, but had reduced base rates on a number of occasions.
Under the strain of l
l
a large construction program, however, LP&L applied in 1976 for a rate increase of almost $54 million.
The Commission split on the resolution of the case, with one Commissioner endorsing a rate increase of $13,790,000, two Commissioners supporting an increase of $4,970,610, and two Commissioners dissenting.
Ex parte Louisiana Power & Licht Co., Order No. U-13220 (La. Pub. Ser. Comm'n, 1977).
A rate increase of $4,970,610 was awarded.
Thereafter, the Nineteenth Judicial District Court ordered the Commission to implement a rate increase of $13,790,000.
Louisiana Power & Licht Co.
v.
Louisiana Public Service Commission, No. 208,069 (La., 19th Jud. Dist. Ct., 1978).
The large construction prcgram has placed substantial strain on the company and this difficulty has been reflected in the accepted financial indicators for stocks and bonds.
The ratings of LP&L have slipped to the point where the attraction of capital on an ongoing basis will be virtually impossible without rate relief.
LP&L claims that, unless additional capital can be attracted for its construction
'1 program, the program will be shut down.
The largest part of the construction program requiring additional capital at present is the Waterford 3 nuclear generating unit, which is expected to cost more than $1.1 billion.
This generator l
l is essential to the ability of LP&L to serve its customers in the future.._.
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The seriousness of the rate request of LP&L is demonstrated by the relative positions of the parties.
LP&L strongly contends that a rate increase of more than $114 million is necessary to allow it to pay its expenses and attract capital to provide adequate service. 'The expert consultants retained by the Commission and presented by the Commission staff recommended a rate increase ranging from approximately $57 million to $60 million.
The Louisiana Energy Users Group, a group of industrial consumers of electricity, did not oppose the request for a rate increase.- The Louisiana Consumers League, an organization formed to represent the interests of small consumers, generally supported the recommendation of the Commission consultants and endorsed a rate increase of more than $56.5 million.
No party recommended a rate increase smaller than this amount.
II.*
ANALYSIS OF THE RATE CASE As in all rate cases, it is necessary to consider four matters in the analysis of the rate application of LP&L.
They are:
(1) the appropriate test year; (2) the rate base of the company; (31 the adjusted operating income; and (4) the.
fair rate of return.
This process is simplified in this case because the procedures of the Commission'on most of the important issues have been approved by the courts in recent cases.
- See, e.g., Gulf States Utilities Co. v.
Louisiana Public Service Commission, 364 So.2d 1266 (La.,
19781; South Central Bell Telephone Co. v. Louisiana Public Service Commission, 352 So.2d 964 (La., 1977).
As a preliminary i
matter, however, the Commission must consider the proper allocation factor to be used in assigning plant to the retail and wholesale jurisdictions.
A.
Aporooriate Allocation Factor.
The witness of LP&L, Mr. Jerry A. Rimes, used a coincident peak responsibility method employing an average of the one hour peak demands for the four peak days in the test year in developing the allocation factor.
Mr. Bruce M.
Louiselle, the consultant of the Commission, also recommended a coincident peak responsibility method, but contended that an 11 hour1.273148e-4 days <br />0.00306 hours <br />1.818783e-5 weeks <br />4.1855e-6 months <br /> per.iod should be used on each peak day in developing the allocation factor.
Mr. Louiselle demonstrated that the LP&L ' System load was near the peak during each of these hours on each day.
Given the small reserve margin of LP&L, the Commission believes that the customers taking power in all of these hours should bear a proportionate amount of demand cost.
Therefore, the allocation factor employed by Mr. Louise 11e will be used by the Commission.
B.
The Proper Test Year.
LP&L proposed a test year ending August 31, 1978.
The Commission, pursuant to its v
policy of using the most recent test period for which actual
}
data can be obtained and analyzed, requested data,for the l
test year ending December 31, 1978.
This information has been fully reviewed and analyzed by the staff.
The use of the 1978 test year has the ef fect of updating the application of LP&L by four months.
The Commission adopts the year 1978 as the appropriate test period.
1 C.
The Computation of Rate Base.
LP&L proposed the adoption of a year-end rate base, but this approach is inappro-priate because it leads to a mismatching of. revenues and expenses and the rate base.
No special factors supporting the use of a irear-end rate base exist in this case.
A year-end rate base would be particularly inappropriate because the Commission (1) has updated the test year, and (2) separately considered the issue of attrition.
Therefore, an average test year will be used.
The net plant in service of LP&L (plant in service less accu,mulated depreciation) amounts to $768,230.000.
The Commission will include in the rate base (1) plant held for future use ($4,081,000), construction work in progress
($438,391,000), materials and supplies ($5,994,000); the investment of LP&L in System Fuels, Inc. ($21,305,000) and the working capital allowance as developed by Mr. Louise 11e
($5,894,000).
Pursuant to its normal practice, the Commission will exclude capital from the rate base that is non-investor supplied.
The average rate base for the year 1978 is set forth below:
e AVERAGE RATE BASE FOR YEAR ENDING DECEMBER 31, 1977
($1,000)
Item Amount i
Plant in Service
$ 1,040,588 Less:
Accumulated Depreciation 272,358 l
Net Plant In Service 768,230
Item Amount Plant Held For Future Use 4,081 l
Construction Work In Progress 438,391 Materials and Supplies 5,994 Investment in System Fuels, Inc.
21,305 Working Capital Requirements 5,894 Less:
Non-Investor Suoplied Capital Customer Deposits S 11,054 Accumulated Deferred Taxes 79,349 Accumulated Investment Tax Credits (Pre-1971) 4,358 Operating Reserves 4,290 (99,051)
Rate Base
$1,144,844 D.
The Adiusted Operating Income.
The adjusted operating income of LP&L has be9n developed as proposed in the testimony of Mr. Rimes and adjusted by Mr. Louiselle.
In computing net operating income, Mr. Louiselle properly adjusted for the enactment of deferred fuel cost accounting, to reflect the fact that the amortization of a 1978 property loss will be completed prior to the effectiveness of new rates, and a
to flow through deferred state income taxes.
In addition, his proposed accounting treatment of "other revenues" as revenues rather than negative expenses is accepted.' The net operating income in the test year as developed by Mr. :'.ouiselle is $103,699,000.
This amount is subject to furthed" adjustments l
proposed by the company and by Mr. Louiselle.
[.
These include adjustments (1) for rate changes; (2) to aliminate abnormal income of LP&L received during the national coal strike; (3) to allow interest on customer deposits as an expense of the company; (4) to allow for the tax effect of wage expense adjustments proposed by the company and accepted by the Commission; and (5) to compute the allowance for funds used during construction at a rate of 5 percent, a level deemed appropriate to serve the interests of consumers while ensuring the financial integrity of the company.
See Ex parte Gulf States Utilities Co., Order No.'U-14078 (La. Pub. Serv. Comm'n, 1978) at 15-17.
The Commission rejects the suggestion of LP&L that construction work in progress should be included in the rate base without a concomitant allowance in operating income for funds used during construction and adheres to its traditional view that, to the extent possible consistent with the ability of the utility to attract capital, ratepayers should not pay the utility a rate of return on its plant until the plant is placed in service.
The AFUDC rate of five percent is enacted temporarily in view or the financial crisis facing the company.
The adjustment to implement the proper AFUDC rate is $7,150,000.
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Dr. Lurito, using the DCF formula accepted in the past by the Commission, concluded that a cost of equity of 13.0 to 13.25 percent is proper.
Dr. Lurito stated that this return on equity theoretically would produce a market to book ratio of the company's stock of 1.16 or more.
The approach of Dr. Lurito is preferable to the proposals of Dr. John K.
Langum, the rate of return witness of the company.
The analysis of Dr. Langum relies substantially on judgmental determinations, including adjustments for capital structure differences and asserted differences in risk.
The adjustments were not adequately supported.
Moreover, if the judgmental aspects of the analysis of Dr. Langum were removed, his determinations would not be markedly different from that of Dr. Lurito.
Because of the financial difficulties facing LPEL, the Commission deems it appropriate to allow the company to earn at the upper level of the fair rate of return, or at 13.25 percent of equity.
An overall rate of return of 10.5 percent is required as shown below:
6 CAPITAL STRUCTURE DECEMBER 31, 1980 Capital Cost Weighted Cost of Type of Capital Structure Rates Cost Rates Capital Debt 57.0%
9.10%
5.19%
Preferred Stock 9.0%
8.65%
.78%
Common Equity 34.0%
13.25%
4.51%
TOTAL 10.48%,
i
j F.
The Revenue Recuirement.
At the fair overall rate of return of 10.5 percent, LP&L failed to earn the revenue requirement in the test year.
The required net operating income is $120,209,000 as set forth below:
Rate Base Fair Rate of Return Revenue Recuirement
$120,209,000
$1,144,844,000 X
- 10. S t '
=
LP&L actually earned $97,331,000 in the test year.
Thus, the return deficiency is $22,878,000.
Applying the tax factor, the revenue requirement is $44,640,000 ($22,878 +.5175 = $44,640).
G.
Attrition.
Substantial evidence suggests that LP&L may suffer attrition 'in the future.
The only complete attrition study that was performed is the attrition analysis of Mr. Louiselle, which indicates that an attrition allowance of $14,967,000 should be granted at a rate of return of 10.5 percent.
The Commission will grant this attrition allowance to provide LP&L with a reasonable opportunity to earn the fair rate of return.
The total amount of the necessary rate increase is $59,607,000.
1 III.
ALLOCATION OF THE RATE INCREASE i
I Substantial attention was devoted in this proceeding l
to the appropriate method of allocating any rate increase.
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LP&L presented testimony supporting increased rates for l
each class of customers in about equal percentage amounts..
The Louisiana Energy Users Group, represencing large industrial
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customers, recommended a rate design based on a number of factors, the primary one being " cost of service principles."
See Memorandum on Behalf of the Louisiana Energy Users Group at 2.
The Louisiana Consumers League offered testimony tending to support a cost of service approach based on marginal cost pricing.
A possible result of the adoption of this approach would be inverted block rates.
In addition, there was disagreement among the witnesses as to the appropriate allocation procedure under a cost of service study using imbedded costs.
Mr. Rimes, a witness of LP&L, used the coincident peak responsibility method based on the average of the four one-hour system peaks in the test year to make jurisdictional allocations.
Maurice Brubaker, a witness of the industrial customers, generally accepted and relied on this approach.
Mr. Louiselle, however, stated that this approach is improper because of the flat load curve of LP&L and recommended the use of 11 hour1.273148e-4 days <br />0.00306 hours <br />1.818783e-5 weeks <br />4.1855e-6 months <br /> peaks for the four peak days.
This approach was accepted by the Commission in making the allocation between the intrastate c
and interstate jurisdictions.
l LP&L apparently relied on a number of factors in proposing an allocation of the rate increase on a percentage basis rather than according to a strict cost of service methodology.
It filed data showing that residential and commercial customers pay nearly twice as much per kilowatt hour as do industrial customers.
The company apparently does not want this disparity to increase.
In addition, it filed evidence showing that industrial rates under its proposal would still be generally lower than the industrial rates of other investor owned electric utilities in Louisiana.
Mr. Brubaker, the witness of the Louisiana Energy Users, generally endorsed a cost of service approach but did not propose this approach for use in this case.
He relied primarily on cost of service, but considered other factors.
Mr. Brubaker testified that a proper rate design could reasonably be based on the following considerations:
cost of service, simplicity, understandability, continuity, stability, gradualism, and recovery of the revenue requirement.
In addition, he stated that some Commissions have implemented lifeline rate concepts, value of service principles, marginal unit pricing proposals and rate structures designed to promote conservation.
He also testified that within the concept of gradualism, it is appropriate to consider historical allocation patterns and the effect of rate design on public acceptance of any rate increase.
c Mr. Brubaker testified that the industrial rates per i
kilowatt hour are about one-half of the commercial and residential rates.
If the fuel components of rates are not considered, the industrial rates per kilowatt hour are about one-third
" the residential and commercial rates.
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If the Commission wanted to allocate rates based solely on cost causation, it could not do so.
The data is inadequate for a determination of the load factors of residential and commercial customers under the coincident peak method.
Moreover,. if the ll-hour coincident peak method recommended by Mr. Louiselle and accepted by the Commission to make the jurisdictional allocation were adopted to allocate costs among the customer classes, there would not be adequate data for any class.
Furthermore, no data was offered by the Louisiana Consumers L2 ague to permit or support marginal cost pricing.
Thus, a cost of service allocation supported by adequate data cannot be implemented.
An analysis of data not discussed by the experts suggests that the relatively small industrial rates result at least in part from subsidization by residential customers on the cost of fuel.
Between 1973, when the energy crisis began, and 1978, the sales to industrial customers by LP&L increased 67.2 percent and the sales to commercial customers grew by 64.4 percent, while the sales to residential customers increased only 48.4 percent.
Industrial and commercial customers caused the utility to incur proportionately larger 1
fuel acquisition costs than did residential customers.
LP&L generally maintained its favorable fuel prices in this period for a large portion of the fuel it acquired, but
- incremental purchases required substantially larger expenditures.
Indeed, the incremental price of fuel to LP&L in 1978 was i
l,
about 2 cents per kilowatt hour, while the average price was only about.86 cents'per kilowatt hour.
Yet under the-fuel flow-through procedure of the Commission, all classes of customers pay the average cost of fuel regardless of the amount of electricity taken.
An adjustment to' reflect i
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cost-causation of fuel expense would favor residential ratepayers.
In addition, other cost-causation factors exist.
The Commission noted in the recent Gulf States case that the industrial load may be extremely volatile.
Ex Darte Gulf States Utilities Co., Order No. U-14078-A (La. Pub. Ser.
Comm'n, 1978).
If it exists, this volatility may increase the difficulties of the company in projecting its construction needs and may increase the risk of its capital investment by leading to earnings fluctuations, resulting in a higher cost of service.
The Commission considers it worth noting that commercial and industrial customers are best able to bear any increase because of their ability to pass along the expense through price increases and because of the tax deductability of the expense.
Moreover, insofar as electric utility rates are
,m concerned, industrial customers apparently enjoy a favorable position vis-a-vis competitors in other states.
In addition,
'c it is appropriate to consider the favorable treatment accorded i
industrial and commercial customers in the flow-through of fuel costs.
However, these factors would not support an allocation of rates solely to industrial customers. l
7 e
Cost of service, of course, is a primary factor in rate design, but the value of service is also important.
In light of the energy crisis, the principle of conservation must be accorded special weight.
All of the factors mentioned by Mr. Brubaker are important.
On the basis of all the considerations presented in this case, it is appropriate to allocate the rate increase on a flat kilowatt hour basis.
All customers bear a fair share of the rate increase, but the disparity in the prices charged industrial versus other customers will not increase.
This was the approach approved in Ex parte Gulf States Utilities Co., Order No. U-14078-A (La. Pub. Se rv..Comm ' n,
1978).
IV.
CONCLUSION IT IS HEREBY ORDERED that Louisiana Power & Light Company be permitted to increase its electric rates in the amount of $59,607,000.
The rate increase is to be allocated on a flat kilowatt hour basis.
BY ORDER OF THE COMMISSION:
BATON ROUGE, LOUISIANA December jjL, 1979 Louis J. Lambert dissents CHAIRMAN n/ Thnma=
E.
Powell-VICE-CHAIRMAN n/ Fa Kennnn COMMISSIONER s/ John Schwegmann, Jr.
COMMISSIONER s/ Louis S. Quinn n/ ceerge 3.
Ackel abstains SECRETARY COMMISSIONER I