ML19347E688
| ML19347E688 | |
| Person / Time | |
|---|---|
| Site: | Crane  |
| Issue date: | 02/17/1981 |
| From: | Mcclaren S PENNSYLVANIA, COMMONWEALTH OF |
| To: | PENNSYLVANIA, COMMONWEALTH OF |
| Shared Package | |
| ML19347E637 | List:
|
| References | |
| C-80072105, C-80072106, R-80051196, R-80051197, NUDOCS 8105130227 | |
| Download: ML19347E688 (100) | |
Text
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BEFORE THE
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PENNSYLVANIA PUBLIC UTILITY COMMISSION PENNSYLVANIA PUBLIC UTILITY COMMISSION Docket No.
v.
R-80051196 METROPOLITAN EDISON COMPANY PENNSYLVANIA PUBLIC UTILITY COMMISSION Docket No.
v.
R-80051197 PENNSYLVANIA ELECTRIC COMPANY :
METROPOLITAN EDISON COMPANY Docket No.
v.
C-80072105 PENNSYLVANIA PUBLIC UTILITY COMMISSION PENNSYLVAICA ELECTRIC COMPANY :
Docket No.
v.
C-80072106 PENNSYLVANIA PUBLIC UTILITY COMMISSION STAFF BRIEF ON GENERAL RATE INCREASE ISSUES Steven A. McClaren Deputy Chief Counsel Bohdan R.
Pankiw Julian S.
Suffian Assistant Counsel Attorneys for the Commission
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Prosecutory Staff February 17, 1981 8105130%IT
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TABLE OF CONTENTS Page I.
Introduction.
1 II.
Summary of Argument 3
III.
General Rate Increase Argument 8
A.
Rate Base 8
1.
The Fair Value Of Respondents' Rate Base Should Be Considered Equal To Original Cost 8
2.
Three Mile Island, Unit No. 1 Should Continue To Be Excluded From Rate Base As Plant Not Used And Useful In The Public Service.
8 3.
Accumulated And Annual Depreciation Should Be Determined Using Calculated
()
Depreciation Reserve And Whole Life Depreciation 15 4.
?uel Inventory Should Be Limited To Levels Which Respondents Intend To daintain.
19 5.
Tl:e Cash Working Capital Claims Fail To Account For All Sources Of Cash Working dapital 21 6.
The Inclusion 0! Unamorcized Expenses In Rate Base Should Be Disallowed 22 B.
Revenues and Expenses 26 1.
Met Ed Has Failed To Properly Impute A Portion Of The Proposed Base Rate Increase To Non-Jurisdictional Operations 26 2.
Annual Depreciation Accruals Should Be Based On Whole Life Depreciation i
Methodology 29 3.
The Status Of Three Mile Island, Unit Nos. 1 And 2 Requires The Cessation Of Depreciation On This Plant On Respon-dents' Regulated Books Of Account 29
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Paqa 4.
The Commission Should Disallow Penelec's
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Research And Development Expenses Associated With The Liquid Metal Fast Breeder Reactor Project 30 5.
The Expenses Associated With The Management Audit Should Be Amortized Over Five Years 31 6.
The Companies' Claims For Rate Case Expenses Are Overstated And Inconsis-tent With Current Commission Policy 32 C.
Taxes 34 1.
Introduction.
34 2.
Respondents' Claimed Pro Forma Income Tax Expense Should Reflect The Status Of The Three Mile Island Nuclear Power Station Units 34 3.
Recognition Of Actual Tax Liability During The Prospective Period Rates Will Be Effective Is Required Regulatory Practice 37 D.
Rate Of Return.
45 1.
Capital Structure 46 2.
Cost Of Long-Term Debt And Preferred Stock 47 3.
Cost Of Common Equity 47 E.
Rate Structure 49 1.
The Overall Revenue Requirement Allocations Proposed By Met Ed And Penelec Are Reasonable And Should Be Adopted.
49 2.
Met Ed And Penelec Should Retain The Residential Demand Provision For Loads In Excess Of 25 KW.
52 3.
The Demand Charge For Penelec's LP Customers Should Be Based On The Maximum 15-Minute Demand For The Month.
53
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4.
The Commission Should Adopt A
- ('T Residential Customer Charge Of
-'J
$5.00 Per Month For Both Met Ed And Penelec 55 5.
Neither Inverted Rates For Residential Customers Nor Flat Rates For General Service Customers Would Be Appropriate For Penelec 58 6.
PURPA Standards 60 IV.
Conclusion.
66 O
i I O i
i I
- lii -
I.
INTRODUCTION
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On July 29, 1980, Metropolitan Edison Company (Met Ed) and Pennsylvania Electric Company (Penelec) each filed tariffs proposing to increase retail base rates by
$7G.5 million and S67.4 million, respectively.
In con-junction with its rate filing, Met Ed also filed a petition for extraordinary rate relief under Section 1308 (e) of the Public Utility Code, requesting that S35 million of the total request be permitted to go into effect by September 1, 1980.
In. addition, Met Ed and Penelec each filed complaints under Section 1310(d) of the Public Utility Code against the.evel of temporary rates set by the Commission in its order of May 23, 1980.
Both Met Ed and Penelec are wholly-()
owned subsidaries of General Public Utilities Corporation (GPU).
By orders adopted August 28, 1980, the Commission j
adopted the recommendated decision of Administre.tive Law Judge Matuschak which denied Met Ed's petition for extra-ordinary rate relief and instituted investigations as to the justness and reasonableness of the proposed rate increases by Met Ed and Penelec.
Consolidated hearings were held before ALJ Matuschak concerning the proposed rate increases and the complaints against temporary rates between October 27, 1980 and January 23, 1981.
The records are now closed and the matters are now before Administrative Law Judge Matuschak for recommended decision.
{ }.
Finally, it should be noted that the Commission O
Prosecutory Staff (Staff) has separated its brief into two j
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volumes.
This volume deals with the issues raised by the proposed general rate increases; a separate volume deals with the issues raised by the temporary rates complaints, the financial viability of the Respondents, and the threat of insolvency.
i
'O O.
i II.
SUMMARY
OF ARGUMENT O
v Based upon the future test year date filed by Met Ed and Penelec, as adjusted pursuant to the direct testimony of the Commission Trial Staff's expert witnesses, Met Ed and Penelec-are entitled to no more than $8,882,000 and S11,758,000, respectively, in additional annual revenues pursuant to traditional ratemaking/ test year principles.
See Summary of Staff Position at Met Ed Table I and Penelec Table I.
The Commission Trial Staff's revenue requirement adjustments and position on rate structure issues may be summarized as follows:
Rate Base - The fair value of the Met Ed and Penelec rate bases should be considered equal to their original costs.
This was agreeable to all parties and is consistent with recent Commission decisions.
TMI-l should continue to be j
excluded from rate base together with associated operating costs.
The status of this property investment as not currently used and useful in the public service is expected to persist at least to the end of 1981.
Conditions precedent to its return to service are many and by no means certain of fulfillment this year.
The Commission should adhere to the policy of using calculated depreciation reserve and whole life de-preciation to measure the remaining service value and annual loss in service value of depreciable electric utility plant.
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n This approach satisfies the ratemaking objective of measuring n) the service value of plant supplying electric utility service.
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Fuel inventory should be limited to levels which Met Ed and Penelec intend to maintain.
The inclusion in rate base of amounts for " normal" inventory levels conflicts with i
published reports to the Commission as to the actual inventory level to be maintained and would provide a return on non-existent investment.
The cash working capital claims of Met Ed and Penelec fail to properly account for the cash available through accrued interest and preferred stock dividends to satisfy their cash working capital needs.
And, both Met Ed and Penelec have improperly included in rate base the unamortized g-portion of certain expenses.
(-
Revenues and Expenses - Met Ed has failed to properly impute a portion of the proposed base rate increase to non-jurisdictional operations, thereby asking Pennsylvania jurisdictional rate-payers to subsidize Met Ed's less profitable non-jurisdictional operations.
Consistent with our recommendation that rate base be calculated using theoretical depreciation reserve, annual depreciation accruals should employ the whole life approach.
In addition, as the TMI units are not currently contributing to revenues, or considered used and useful in the public service, the cessation of depreciation accruals on this plant is necessary on the regulated books.cf account O
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of Met Ed and Penelec.
Absent such action, the matching of
( w) v revenues and expenses will be out of phase, thereby distorting their financial statements.
Finally, the Commission should also disallow Penelec's research and development expenses associated with the controversial liquid metal fast breeder reactor, amortize the management audit expenses over five years, and allow a normalized level of rate case expenses consistent with current Commission policy.
Taxes - The income tax allowance for Met Ed and Penelec should reflect the tax losses generated by TMI-l and 2.
Recognition of such losses as a reduction to actual tax U'~N liability is required regulatory practice.
Both Pennsylvania and non-jurisdictional case law support the limitation on recoverable taxes to taxes actually paid.
Reflecting TMI losses in the income tax allowance is similar to the usual adjustment for consolidated tax savings.
In neither case is the allowance of underlying operations and cost of service relevant to reduction of the tax allowance to reflect only actual tax liability.
Rate of Return - Pursuant to traditional ratemaking standards and principles, the Commission Trial Staff's position regarding rate of return for Met Ed and Penelec is set forth at page 46 of this brief.
Our ovsrall recommendation is 10.53% for Met Ed
()
and 10.54% for Penalec.
The capital structure, cost of long-term debt, and cost of preferred stock are based on the - -
f latest and most accurate indicators as of March 31, 1981,
,(r the end of the future test year.
The 15.5% cost rate for common equity is identical to the common equity cost rate claimed by each company.
Rate Structure - Although we have certain criticisms of the cost of service data, the Commission Trial Staff believes that in general the overall revenue requirement allocations proposed by Met Ed and Penelec are reasonable and should be adopted.
With respect to particular aspects of the proposed rate structure, the Commission Trial Staff makes the following recommendations.
Met Ed and Penelec should rstain the residential demand provision for loads in excess of 25 KW to avoid the subsidization of the relatively few high demand O
residential customers by the balance of the residential customers.
The demand charge for Penelec's LP customars should be based on the maximum 15-minute demand for the month to eliminate the placement of the additional demand costs generated by low load factor customers on the balance of the LP customers.
The Commission Trial Staff also recommends a S5.00 per month customer charge for Met Ed and Penelee residential customers which is designed to recover the cost elements directly related to an individual customer's service regardless of demand or energy consumption.
The Commission Trial Staff opposes inverted rates for residential customers
()
and flat rates for general service customers for Penelec.
Finally, the Commission Trial Staff has reviewed
- each PURPA standard with respect to Met Ed and Penalec.
Our 1
recommendations are set forth concisely in the body of our J
brief.
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4 III.
GENERAL RATE INCREASE ARGUMENT
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A.
Rate Base l.,
The Fair Value Of Respondents' Rate Base Should Be Considered Equal To Original Cost.
e The Staff position is that the fair value of Re-spondents' individual rate bases should be at their respec-tive original costs, appropriately adjusted for test period purposes and as described herein.
The Staff's original cost position is supported by the testimony of Dr. Donald L. Birx and was accepted by both Penelec and Met Ed.
Staff St. DLB-1, pp. 1-2.
On behalf of Respondents, William D.
Garland testified:
(
[T]he Company would concur with the Com-mission were it to use original cost as the basis for its considerations and de-cision in this proceeding, either in l
lieu of or considered to be equal to a
" fair value" for the Company.
Penelec St. G, p. 15; Met Ed St.
G;,
- p. 15.
This approach should be accepted as it is uncontested and is consistent with recent decisions of the Commission.
See i
Pa.
P.U.C.
- v. National Fuel Gas Distribution Corp., R-79090956 and the decisions cited therein.
2.
Three Mile Island, Unit No. 1 4
Should Continue To Be txcluded From Rate Base As Plant Not Used And Useful In The Public Service.
O The responsibility of the Commission is to estab-lish rates that will give the utilities a reasonable opportunity 8-
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to earn a-fair return on their investment during the future v
period following this rate determination.
In arriving at the total revenues and, consequently, the rates for electric service required to yield a fair return on the utilities' investment, the focus must ha on the types of property to be included in rate base for the purpose'of fixing rates.
By its Order at Docket No. I-79040308, entered June 19, 1979, the Crmmission found Three Mile Island Power Station, Unit No. 2 ("TMI-2") not used and useful in the public service.
The temporary rates fixed on April 19, 1979 for Met Ed at R-78060626, and on April 25, 1979 for Penelec at R-78040599, were made permanent and all costs associated with TMI-2 were removed from base rates by Commission Order
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entered June 19, 1979 at Docket No. I-79040308.
In the current proceeding, the Respondents have not contested the Commission's June 19, 1979 determination regarding the status of TMI-2.
Parties are in agreement that TMI-2 continues to be not used and useful in the public service.
At issue before the Commission is whether Three Mile Island Power Station, Unit No. 1 ("TMI-1" ), in light of 1
its extended shut-down as ordered by the Nuclear Regulatory l
Commission ("NRC"), should be considered not used and useful in the public service and, therefore, continue to be removed from base rates.
The status of TMI-l was considered by the Commission over six months ago.
( ).
o r'i By its Order at Docket No. I-79040308, entered V
May 23, 1980, the Commission found that TMI-1 was not used and useful in the public service.
Temporary base rates were prescribed at an annual level of $26.9 million less than then existing rates for Met Ed and $11.7 million less than then existing rates for Penelec.
A full and current energy cost recovery was allowed.
The circumstances which J ed to the Commission's TMI-l determination in its Order of May 23, 1980 continue to exist.
If anything, the present record evinces even less likelihood of the resumption of generation by this unit in the near future and, indeed, substantial uncertainty as to whether the NRC will ever permit its return to service.
Conditions have not changed since the Commission's Order setting temporary rates to remove the costs associated with TMI-l from base rates.
Respcndents have claimed TMI-1 in rate base on the assumption that its return to service would take place shortly after March 31, 1981 - the end of the future test year.
However, the accuracy of this pre-diction is belied by the testimony of its Vice-President in charge of nuclear activities, Robert C.
Arnold.
On behalf of the Respondents, Arnold testified that the earliest anticipated return of TMI-l to full power service would be toward the end of the 4th quarter of 1981.
Tr. 360-361.
That this projection is itself overly optimistic
()
is evident when the conditions for its fulfillment are examined.
Witness Arnold testifying: _ _ _
i
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There are five major assumptions un-(_/
derlying the anticipated return to service schedule.
The first one is that the ASLB hear-ing time will not exceed six months.
The second is that the Nuclear Regu-latory Commission will proinptly decide whether the issue of psychological dis-tress is to be considered in the restart hearing, and, if so, that hearings on the issue can be accommodated within the six months hearing time.
Third, that TMI-l plant modifica-tions required prior,to restart will not differ significantly from the short-term items identified in the Commission's August 9, 1979 order and that TMI-l will not be required to meet longer term re-quirements prior to restart, which at the time of restart have not been re-quired for other operating nuclear power plants.
Fourth, that by the time of the ASLB recommended decision TMI-l will have completed all actions required by that decision to be completed prior to restart, that the Director of Nuclear Reactor Regulation will promptly certify such completion to the Commission, and that in accordance with Section 6 of the Commission's August 9, 1979 order the Commission will within 35 days lift the suspension of TMI-l's operating authority currently in effect.
Fifth is that the Commission will modify its August 9, 1979 order so as to permit prior to restart authorization the conduct of hot functional testing of plant systems with heat generated solely from the reactor coolant pumps and with the reactor remaining fully shut down and non-critical.
Tr. 362-363.
()
We should note that the NRC August 9, 1979 order estimated 2 months of hearings starting in February 1980.-
/~T before the Atomic Safety Licensing Board ( " AS LB " ).
Tr. 361.
V Hearings before the ASLB actually began in October 1980 and are now anticipated to extend at least 6 months.
Tr. 366, 419.
Also, no provision was made in the estimated TMI-l restart schedule for delays due to appeal.
Although Mr. Arnold claims that a stay of the NRC decision pending appeal is " highly speculative", he has not discuJsed the likelihood of a stay with other counsel in the NRC proceed-ing.
Tr. 423.
Moreover, he admits that at least one inter-venor, the Union of Concerned Scientists, has indicated their intention to appeal.
Tr. 364.
The decisional principle employed in determining that TMI-l was not used and useful in the public service was previously stated by the Commission:
The length of time which utility plant may be out of service and not be re-moved from rate base depends upon the nature of the plant, the degree to which the outage can be expected to occur during the normal operation of the plant, and the cerrainty with which resumption of service can be predicted..
Docket No. I-79040308, Order entered May 23, 1980, mimeo.
at 9; Docket No. I-79040308, Order entered June 19, 1979, mimeo. at 5-6.
In May 1979, the Commission found that this principle re-quired temporary rates be fixed reflecting removal of IMI-1 from base rates.
Today this principle is equally apt and
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compels that IMI-l be removed from rate base and that all costs associated therewith be excluded from cost of service.
I 1
l I
Considering that the earliest possible return of (q
TMI-1.to service is "the end of the 4th quarter of 1981"
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alone is sufficient reason to exclude it from rate base for a test year ending March 31, 1981.
When this earliest date depends upon the uncertain conditions specified by Mr. Arnold, we must conclude that there is practically no chance of TMI-l returning to service this year.
In fact, substantial uncertainty continues to exist with respect to whether TMI-l will ever return to service.
At the present time there is no assurance from the NRC that they will permit this unit to return to operation.
We cannot prejudge the outcome of the NRC proceeding.
As in the Commission's May 23, 1980 Order, the focus with regard to TMI-l's treatment relates to the length of the plant's p: esent and ongoing shut-down.
In its May 23 Order, the Commission observed that Respondents' testimony indicated an in-service date of approximately January 1, l981, during which the unit would have been out of service for nearly two (2) years.
The Respondents' current projec-tion for the return of TMI-1 to service looks to the end of 1981 -nearly three (3) years without generation.
When the accomplishment of even this late return to service must be qualified with the timetable before the ASLB and favorable decision by the NRC, it is clear that this plant will not be useful during the period rates will be in effect.
No one can seriously argue that an outage of three O
years for a nuclear power plant is not extraordinary; nor can it -
i be claimed that this ochage is routine in the normal opera-(~)
y tion of the plant.
By the Commission's standard for measuring a plant's.used and useful status, TMI-l's return to service cannot reasonably be characterized as " imminent and certain."
The Companys' prior representation of an in-service date of January 1,1981 (See Commission's May 23, 1981 Order at Docket No. I-79040308) has now been extended to the end of 1981.
If anything can be viewed as "certain", it is that TMI-l will not be in service this year.
Trial Staff urges that the investment and operating expenses associated with TMI-l be excluded from Respondents' cost of service.
In accordance with Dr. Birx's recommendation, this plant should "be required to demonstrate its ability to
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l perform at a capacity factor of at least 70% over three consc:utive months prior to its readmission to rate base."
Staff St. DLB-1, p.
4.
Met Ed's rate base should be reduced S162,660,000; net operating income associated with proposed revenues, expenses and taxes should be reduced S17,258,000.
Met Ed l
Ex. B-152, p.
2; Met Ed Ex. B-153, p.
2.
Penelec's rate base should be reduced 583,000,000; net operating income associated with proposed revenues, expenses and taxes should be reduced S8,707,000.
Penelec Ex. B-160, p. 2; Penelec Ex. B
- .61,
- p. 2.
See Appendix "A" Sch. 1 to brief for a summary of Trial Staff's adjustments to rate base, including
()
' oar adjustment to eliminate TMI-1. --
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p 1
-A 3.
Accumulated And Annual Deprecia-(_)
tion Should Be Determined Using Calculated Depreciation Reserve And Whole Life Depreciation.
Respondents' rate base and annual depreciation claims reflect the use of book reserves with remaining life based accruals.
Penelec St. G, pp. 1-2; Met Ed St. G, pp. 1-2.
The Staff submits that this approach has repeatedly I
been rejected by the Commission and is directly in conflict with Commission policy and with the past depreciation treat-ment accorded Respondents.
As in the past, we advocate the use of a calculated or theoretical depreciation reserve with whole life depreciation accruals. Staff St. MLG-1.
(
In Pa.
P.U.C. v. West Penn Power Company, R-80021082, Order entered February 3, 1981, the Commission rejected the l
Consumer Advocate's plea to average book and theoretical reserve in the following language:
This Commission has ruled many times in the past that a book reserve for depre-ciation is not a proper measure of accrued depreciation.
The public utilities in this Commonwealth have used many differ-ent methods of depreciation accounting at various times.
As a result of the irregularities found in the methods used, this Commission has, in most cases, re-fused to accept book reserves as the sole basis for the determination of actual de-preciation for the test year and adopted the practice of utilizing the study known as a " reserve requirement study" which is an analysis of a public utility's recent experience'in retiring units of property
()
for causes of depreciation.
As more com-plete data on plant retirements becomes
available3 with the passage of time, a 7s
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utility la able to make better estimates of future property service lives.
These estimates are of greater significance than the past estimates which were used for the accumulation of the book reserve which is merely a record of past debits and credits to a bookkeeping account.
West Penn, mimeo. at 18.
At this point we wish to express our concurrence with the Administrative Law Judge's recommendation (vigorously sup-ported by the Consumer Advocate) that a generic proceeding be initiated in order to investigate and establish uniform standards for arriving at a depreciation reserve, both for book and ratemaking pur-poses, for all Pennsylvania utilities.
West Penn, mimeo. at 18-19 (Emphasis supplied).
Similarly, Met Ed's claim in its last general rate proceeding for accrued depreciation based upon book reserve with remaining life depreciation methodology for annual accruals was unequivocally rejected by the Commission.
Pa.
P.U.C. v. Metropolitan Edison Corapany, R.I.D.
626, Order entered March 29, 1979.
Application of reserve requirement study methods and whole life depreciation was viewed as comporting with traditional regulatory practice in Pennsyl-vania which "does not permit an amortization of the defi-ciency between the book and calculated reserve.
as is the situation when the remaining life method is utilized."
Metropolitan, mimeo. at 19-20.
The Commonwealth Court has affirmed the Commission's discretionary authority to reject the remaining life theory.
I
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In Pennsylvania Power and Light Co. v.
Pa.
P.U.C.,
10 Com-onwealth Ct. 328, 337-41, 311 A.2d 151 (1973), the Court
~
summarized the established principles of law permitting the Commission to reject book reserve set forth on a utility's books and adopt a reserve requirement study.
These principles indicate that while the Commission may approve the remainder life theory it is under no obligation to do so.
Utilization of the reserve requirement study was lauded as the most accurata approach available:
A reserve requirement study is an analysis of the utility's recent experience in retiring from service its unit of property for various causes.
It is based on pres-ent day knowledge and judgment concerning lives of property.
It should disclose as accurately as possible the consumption of property to date.
[ Citation omitted]
Pa. Power & Light Co., 10 Commonwealth Ct. at 340.
Staff witness Michael J. Gruber testified to the advantages of theoretical depreciation reserve and associated whole life depreciation over the approach claimed by Re-spondents.
Staff St. MJG-1, pp. 2-6.
Although book deprecia-tion provides a measure of capital returned to the investor, it bears no relationship to the value of the utility plant in service.
Calculated on a fLictional plant basis, rather than using individual accounts or vintages, book reserve presents an accumulation of historical book entries and probable past inequities which render it inherently unre-liable as a reasure of actual accrued depreciation for the O
V L
s
-3 test period.
When partially depreciated plant is retired
)
under book reserve it is treated as though it were fully depreciated, thus permanently inflating rate base.
In contrast, calculated reserve reflects the best estimate, at the point in time when rates are being fixed, of accrued depreciation a,nd the depreciated value of the utility plant in service.
Based on recent experience in retiring units of property from service and the elimination of abnormal retirements from the reserve retirement study, the calculated reserve avoids the automatic recoupment of capital (regardless of justification) which is built into the remaining life approach.
With revised estimates of plant life, future customers are nc : overcharged in relation
()
to the benefits they receive.
Should there be under-recovery of investment, the Respondents may seek " Account 182.
Extraordinary Property Losses" trea tment under the applicable uniform system of accounts.
Staff urges the Commission to continue its policy of requiring that accrued and annual depreciation be de-termined using calculated reserve with whole life deprecia-tion.
As indicated in the recent order in West Penn, supra, a generic proceeding is the most appropriate vehicle for deciding whether modification of this policy is necessary.
Using the approach long accepted by the Commission, Mr. Gruber's adjustments reflect calculated reserve and
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accrual data supplied by the Respondents.
Met Ed's claimed
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depreciation reserve, excluding TMI-1, should be reduced x_-
by.S4,061,000 to $224,644,000 (Met Ed Ex. G-28, p.1) ; its annual depreciation accrual should be $21,332,000.
Met Ed Ex. G-28, p. 2.
Penelec's claimed depreciation reserve, excluding TMI-l and TMI-2, culd be reduced by $3,992,000 to S381,146,000 (Penelec Ex. G-28, p. 1); its annual depreciation accrual should be S38,304,000.
Penelec Ex. G-28, p. 2.
4.
Fuel Inventory Should Be Limited To Levels Which Respondents Intend To Maintain.
Met Ed's $16,919,000 claim for coal and oil inventories is inflated by quantities of fuel which it has no intention of actually maintaining.
g The Company's published intention is to maintain 28
~
day and 35 day supplies of coal, respectively, at its Titus and Portland Stations.
Fuel oil levels "are being held to a minimum (25% of usable tank capacity) due to continuing cash flow problems."
Staff Ex. TVP-1A, Sch. 2.
Notwithstanding Met Ed's reports to the Commissien, in October and November 1980, indicating the effectuation of these reduced coal inventory levels, it continues to claim coal inventory at Titus and Portland Stations based upon a 45 day burn at full rated capacity.
Met Ed St.
B, p.
7; Met Ed Ex. B-1, Part 2, p. 8.
Again, while actual plans are to maintain oil inventories at 25% of usuable tank capacity (See Met Ed's September 24, 1980 report to the Commission at
- 19
Staff Ex. TVP-1A, Sch.
2, p. 1), a higher claim is submitted
(-)
based upon " normal contingencies."
Met Ed St.
B, p.
7, Met Ed Ex.-B-1, Part 2, p. 9.
Recent conversion of six combustion turbines to dual fuel operation and plans to convert additional units to natural gas further support the Company's reduced oil inventory.
Staff Ex. TVP-1A, Sch.
2, p.
2.
Based upon the testimony of 'its witness Tolbert V.
Prowell, and the published intention of Met Ed, Staff advocates i
that ratepayers not be required to pay a return on fuel inventory which the utility does not plan to have.
Staff St. TVP-1.
Fuel inventory should be considered in cost of service through its inclusion in rate base only to the extent that it will actually be on hand.
Accordingly, we recommend that Met Ed's claims for coal inventory at Titus and Portland Stations be reduced from 45 days to 28 and 35 days, to comport with actual plans.
This will reduce the Ccmpany's coal inventory submission of $12,967,000 by S2,564,480 to the planned level of $10,402,520.
See Appendix "A", Sch.
2, p.
1 to brief.
Our recommended adjustment for oil inventory reduces the budgeted inventory level submitted by Met Ed (excluding TMI-1) to 25% of tank capacity for all stations except Conemaugh.
Tr. 1919.
This is consistent with published reports by Met Ed to the Commission and reduces the Company's oil inventory submission of S3,952,000 (excluding TMI-1) by $2,818,702 to S1,133,298.
See Appendix "A", Sch.
2, p.
2 to brief.
In summary, the Staff recommends that Met Ed's overall fuel inven-
L p.
tory be reduced by S5,383,182 for an appropriate inventory.
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allowance of S11,535,818.
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5.
The Cash Working Capital Claims Fail To Account For All Sources Of Cash Working Capital.
The purpose of a cash working capital allowance is to allow the common equity holder a fair return on investor-supplied funds required by the utility to cover any gap between cash expenditures required for the production and delivery of utility services and the collection of revenues associated with those services.
Mr. Markovci, a Commission Trial Staff accounting witness, testified that the rates paid by Met Ed and Penelec customers include a revenue requirement to service debt and
'()
preferred obligations; these rates are collected on a continuous basis throughout the year.
At the same time, the major portion of bond interest is paid semi-annually while preferred dividends are paid quarterly.
If the revenue collected from customers but not yet paid to bond holders and preferred stock holders are not recognized as a source of cash working capital and corres-pondingly offset against the cash working capital requirement, the utility will earn a return on capital not supplied by investors.
See Staff St. GFM-1, p. 2.
Moreover, the adjustments recommended by Mr. Markovci to the companies' cash working capital claims are fully consistent with Pennsylvania case law.
The Pennsylvania -
~
/
Commonwealth Court affirmed the Commission's recognition of
( })-
accruals for dividends on preferred stock and long-term debt interest as an offset to cash working capital requirements most recently in the following cases:
Pennsylvania Electric Company
- v. Pa.
P.U.C.,
Pa. Commonwealth Ct.
A.2d (430 C.D. 1979, filed July 23, 1980); UGI Company v. Pa.
P.U.C.,
Pa. Commenwealth Ct.
410 A.2d 923 (1980).
l In order to remain consistent with our position that i
no state or federal income taxes should be recognized for rate-making purposes since none will be actually paid during the period the rates will be in effect, the Commission Trial Staff has updated Mr. Markovci's cash working capital calculations to reflect the exclusion of accrued taxes from his prior calcu-
-)
lations for each company.
In all other respects, treatment of G
accrued interest and preferred dividends, the methodology remains the same.
The net result of updating our position to reflect l
the exclusion of accrued taxes on the cash working capital requirement is as follows:
Met Ed's cash working capital claim is increased by S2,ll8,000 to S19,132,000; and Penelec's cash working capital claim is increased by $1,421,000 to $5,945,000.
The calculations to support these adjustments are detailed at Appendix A, Sch.
3, pp. 1 through 5 and Sch.
4, pp. 1 through 5.
6.
The Inclusion Of Unamortized Expenses In Rate Base Should Be Disallowed.
(v~3 The companies have improperly included the unamortized portion of certain operating expenses in their rate base claims. w. -
Met Ed has included the following:
(1) rate case expense of
(' ')
S283,000; (2) storm damage expen,se of $755,000; (3) licensing, environmental and engineering costs of $3,116,000 associated with the Berne Generating Station site and the Stoney Creek pump storage site; (4) energy costs of $2,664,000 associated with the old energy clause dating to June 1978; and (5) energy costs of S20,250,000 associated with the transition to the current retail energy clause.
Met Ed Ex. B-1, Part 2,
- p. 1 and B-152.
Penelec has included the following; (1) rate case expense of
$698,000; (2) flood and storm damage expense of S949,000; (3) energy costs of S1,198,000 associated with the old energy clause dating to June 1978; and (4) energy costs of $3,481,000 as:ociated with the transition to the current retail energy
()
clause.
Penelec Ex. B-1, Part 2, p. 1 and B-160.
The companies have also made claims to normalize future test year operating expenses to include the amortization of the above mentioned items, with the exception of the energy costs associated with the transition to the current retail energy clause.
These transition costs are being fully recovered currently as a surcharge to the current energy clause with full recovery of those costs and the costs associated with the June 1978 energy clause to be accomplished by December 31, 1981 (less than eight months from the effective date of the proposed rate increase).
Mr. Kleha, a Ccmmission Trial Staff accounting witness, r^
testified that the unamortized balance of the above operating b) expenses are not properly includable in the rate base for rate-making purposes.
See Staff St. JMK-1, p.
4.
Unamortized
(])
expenses are not capital investments, rather, they represent operating expenses which for ratemaking purposes are spread over several years so as to normalize the effect on current operations.
However, the utilities' actual financial records would show those expenses charged to operations in the period those expenses were incurred in order to allow the utility to reap the immediate tax benefits in that period without passing these benefits on to their customers.
Tr. 1872.
It has been the policy and practice of this Commission to allow fixed utilities to achieve a return on property used and useful in the public service, not on its. operating expenses.
The exclusion of operating expenses from the rate base is also fully consistent with Pennsylvania case O
law.
In affirming the Commission's exclusion of the unamortized portion of operating expenses from prior periods from the utility's rate base, the Pennsylvania Commonwealth Court held that a utility should not be permitted for ratemaking purposes to " capitalize an item in its rate base and at the same time recover the item as an expense from ratepayers."
UGI Corp. v. Pa.
P.U.C.,
Pa. Commonwealth Ct.
410 A.2d 923, 928 (1980).
In other words, the allowance of such unamortized expenses in the rate base would constitute a double treatment of the same items.
j The adjustments to exclude the above unamortized operating expenses from rate base are as follows:
reduce Met Ed's
, (~/)
measures of value by S27,068,000 and reduce Penelec's measures l -
of value by $6,326,000.
See Met Ed Ex. B-152 and Penelec O
ex. B-120.
O O
1 l
3~
B.
Revenues and Expenses
(~')i u.
1.
Met Ed Has Failed To Properly Impute A Portion Of The Proposed Base Rate Increase To Non-Jurisdictional Opera-tions.
In its rate filing, Met Ed has failed to properly impute a portion of the proposed base rate increase to non-juris-dictional operations in order to eliminate the subsidization of non-jurisdictional operations by Pennsylvania jurisdictional customers.
In order to eliminate this subsidy, Mr. Kleha.
testified that the most appropriate, ideal, and equitable approach would be to purge all revenues, expenses and rate base allocable to non-jurisdictional operations from Met Ed's claim.
However, when the Company is unable or unwilling k
to file its claim solely on a jurisdictional basis, then the rate of return for non-jurisdictional operation should be compared to the system average rate of return as proposed by Met Ed.
See Staff St. JMK-1 and Tr. 2482-84.
To the extent that the rate of return for non-jurisdictional operations (sales for resale) is less than the system average rate of return sought from jurisdictional customers (retail), the jurisdictional customers are forced to pay rates which subsidize the non-jurisdictional customers.
Therefore, to eliminate the subsidization, an amount of base operating revenues must be imputed or assigned to non-jurisdictional operations to equalize the rate of return A
'N_)
with the system average.
A similar imputation of revenues i _._
e to non-jurisdictional operations to equalize the rate of (m
(_)
return was approved by the Commission in Pa.
P.U.C. v. Phila-delphia Electric Company, R-79060865 (1980) and Pa.
P.U.C.
v.
Pennsylvania Power & Light Company, R-80031082 (1981).
As set forth in Appendix B, Sch. 1, Met Ed should have imputed $1,351,000 of the proposed S76.5 million base rate increase to non-jurisdictional operations, based upon Met Ed's final update of its test year data.
This imputation or assign-ment of S1,351,000, an increase of S1,324,000 over the $27,000 proposed by Met Ed, would produce equivalent rates of return between non-jurisdictional operations and the system average return requirement.
Schedule 4 also demonstrates that if TMI-1 were eliminated from rate base, Met Ed should have imputec S423,000 of the proposed base rate increase to non-jurisdictional operations.
In rebuttal testimony, Mr. Graham, a witness for the company, testified that Met Ed's service to the Borough 3
of Middletown under a contract in perpetuity at rates below 1
the curJent cost of service is the cause of Met Ed's substan-tial loss of revenues associated with the aggregate wholesale customer class, the non-jurisdictional operations.
He then suggests that in his opinion the Pennsylvania jurisdictional ratepayer should be forced to make up this revenue shortfall.
Trial Staff Exhibit J:1K-1, Sch. 1 shows that Met Ed's proposal would require that Pennsylvania jurisdictional customers provide a 10.7% rate of return even though Met Ed had requested
\\J-a system average rate of return of 10.61%.
)
The Commission Trial Staff submits that although Met Ed's contract with the Borough of Middletown may be the cause of the revenue shortfall, Pennsylvania jurisdictional ratepayers should not be required to subsidize Met Ed's non-jurisdictional operations by reimbursing Met Ed for the revenue shortfall.
The Commission Trial Staff, therefore, recommends that the Ccamission find such subsidization improper and direct that a portion of any rate increase allowed by the Commission be assigned or allocated to non-jurisdictional operations in an amount which s 1 maintain equivalent rates of return between the non-jurisdictional operations and the system average rate of return requirement.
/~)
k/
The calculations to determine the portion of the race increase which should be allocated to non-jurisdictional operations are set forth at Appendix B, Schedule 1 of this brief.
For example, if the Commission determines that the full requested $76.5 million rate increase should be granted (including TMI-1 in rate base), then $1,351,000 should be assigned or allocated to non-jurisdictional operations.
The net revenue increase to Pennsylvania jurisdictional customers would then be approximately $75.1 million.
On the other hand, if each Commission Trial Staff adjustment were fully adopted, no further allocation or assignment above Met Ed's proposed S27,000 amount would be required.
(
2.
Annual Depreciation Accruals Should
,s't )
Be Based On Whole Life Depreciation Methodology.
Consistent with the Staff position on the application of calculated depreciation reserve, as set forth in Section A.
Rate Base, Subsection 3. of the brief, the Staff advocates use of whole life depreciation accruals.
Staff St. MJG-1,
- p. 5.
Accordingly, as previously indicated, Met Ed's annual depreciation accrual should be S21,332,000 (Met Ed Ex.
G-28, p. 2); Penelec's annual depreciation accrual should be 538,304,000.
Penelec Ex. G-28, p. 2.
3.
The Status Of Three Milo Island, Unit i
Nos. 1 And 2 Requires The Cessation Of Depreciation On This Plant On Respon-dents' Regulated Books Of Account.
Respondents' continued accrual of depreciation for TMI-l and TMI-2 on its regulatory books of account violates the basic accounting principle which requires the matching of expenses incurred in the production of revenue with the revenue renlized in particular accounting periods.
Since no revenues are being realized from the TMI units, it is inappro-priate to accrue depreciation on this plant.
Staff witness Errol K. Wagner testified regarding the discontinuation of depreciation on these units.
Staff St. EKW-1.
Considering the inoperative status of the TMI units and their exclusion by the Ccmmission from base rates, it is clear th:.it this investment is not generating revenues.
(d When utility plant is not being used and its associated p(_)
costs are not being recovered through rates, it is improper to continue writing the asset off through depreciation.
If it is determined that TMI will not have future benefit for Respondents, then the investment should be written off as a loss.
Otherwise, the plant should be recorded in an invest-ment account.
However, since the " Property, Plant and Equipment" section of the balance sheet is limited to pro-perties currently used in the operation of the business, this asset should be reported separately under an appropriately descriptive caption on the financial statements.
Based upon Mr. Wagner's testimony, we urge the Commission to order Respondents to cease recording depreciation
(~ }
on the TMI units for all jurisdictional purposes.
We further recommend that past accruals be restored to provide that TMI-l and TMI-2 be recorded at their net book values at May 23, 1980 and April 25, 1979, respectively.
On these dates, Commission Orders were entered reducing rates to refluct the current status of TMI-l and TMI-2 as not used and useful in the public service.
Since the TMI plant was not in use, and from the dates of the Orders effectively did not contribute to revenues, these are the logical points at which depreciation accruals should cease.
4.
The Commission Should Disallow Penelec's Research And Develop-ment Expenses Associated With The f-Liquid Metal Fast Breeder Reactor
()
Project.
Penelec's claimed test year operating expenses include a budgeted expenditure of $182,000 for research concerning the
l
/'N
> (_)
liquid metal fast breeder reactor project.
Penelec Ex. B-51.
Mr. Horsfield, a Commission Trial Staff accounting witness, testified that the project is a controversial research program and to the best of his knowledge, the federal government has not yet decided to support the project.
Staff St. CAH-1 (corrected).
In addition, the Commicsion has not allowed this expense in prior rate proceedings.
For these reasons, the Commission Trial Staff recommends that the Commission deny Penelec's claimed test year expense of S182,000 associated with the liquid metal fast breeder reactor project.
5.
The Expenses Associated With The Manage-i ment Audit Should Be Amortized Over Five i
Years.
i I ')
s_-
l In their wrap-up exhibits, Met Ed and Penelec have, for the first time, included a claim to adjust future test year operating expenses to reflect a 2-year amortization of the Commission ordered management audit performed by Theodore Barry & Associates.
Met Ed has adjusted its test year operating expenses by $259,000 ($517,000 t 2), see Met Ed Ex. B-153, p.
1, col. 4 and p. 5; and Penelee has adjusted its test year operating expenses by S129,000 (S258,000 t 2), see Penelec Ex. B-161, 1
- p. 1, col. 9 and p.
4, line 23 H.
The Commission Trial Staff submits that this expenditure was of an unusual and non-recurring nature and that amortization of this unusual expenditure is therefore appropriate.
At the same time, we recommend that the period of amortization be no less than five (5) on the theory that the benefits of the manage-j s
o went audit will be realized for at least a similar number of
(~
\\ >;
years.
Therefore, the Commission Trial Staff recommends.
that Met ra's claim be reduced by $156,000 (S259,000 - (S517,000 t 5)] and that Penelec's claim be reduced by $77,000 ($129,000 -
(S258,000 t 5)] to reflect a more appropriate normalized level of test year expenses.
6.
The Companies' Claims For Rate Case Expenses Are Overstated And Inconsis-tent with Current Commission Policy.
Met Ed and Penelec have adjusted test year operating expenses to reflect a three (3) year amortization of rate case expenses associated with both the current and prior proceedings.
()
As updated by their wrap-up exhibits, Met Ed has claimed an annual allowance for rate case expenses of $216,000, see Met Ed Ex. B-153, p.
5, lines 17 and 18, and Penelec has claimed an annual allowance for rate case expenses of $163,c00, see Penelec Ex. B-161, p. 4, line 13.
The current Commission policy pertaining to the rate-making treatment of rate case expense has been clarified and again reiterated by Ccmmission orders at R-80041138, Pa. P.U.C. v.
Butler Township Water Company and at R-79090956, Pa.
P.U.C. v.
National Fuel Gas Distribution Corp.
There the Commission stated l
that it would allow a normalized amount, using a three (3) year expected life, for current rate case expense instead of an amortization of current rate case expense.
Furthermore the unamortized balance of prior rate case expenses would be amortized over a ten (10) year period.
- RR -
\\
Q Consistent with the Commission's established policy, j
the Commission Trial Staff recommends that Met Ed's claim for a rate case expense allowance be reduced by S87,000 and that Penelec's claim be reduced by S36,000.
The supporting calcula-tions for these adjustments are set forth in Appendix B, Sch. 2 of this brief.
l i
+
4 lO
[
a r;
Oij C.
Taxes s_
1.
Introduction.
Respondents' claim for income taxes overstates their tax expense, is inconsistent with the " actual taxes paid" principle and should be reduced.
Met Ed's claim for federal and state income taxes, including provisions for investment tax credits, should be denied in total.
Penelec's claim for income taxes should be reduced to reflect tax savings generated by losses from Three Mile Island.
The incident at Three Mile Island Power Station, Unit No. 2 ("TMI-2") on March 28, 1979, and the subsequent r-]
Orders of the Commission declaring TMI-2 and Three Mile Island Power Station, Unit No. 1 ("TMI-1") not used and useful has impacted upon every aspect of Respondents' operations.
Every aspect of Respondents' operations, including
.their claims for income taxes, must be viewed in light of the removal of the revenues associated with TMI-l and TMI-2 from base rates.
2.
Respondents' Claimed Pro Forma Income Tax Expense Should Reflect The Status Of The Three Mile Island Nuclear Power Station Units.
As explained in our treatment of rate base, TMI-l
({)
should not be considered in determining the fair value of utility property.
However, the unit will continue to generate
i losses which will be used to reduce actual tax liability.
o k-These tax losses reduce Respondents' overall cost of service.
Whether TMI-2 is eventually restored to service or is abandoned, its impact on taxes will also be substantial.
Although the operating costs associated with these units are not recoverable, since the units are not "used and useful",
the income tax savings flowing from their losses serve to reduce Respondents' tax liability and should therefore be reflected in cost of service.
For Met Ed, the TMI losses will completely offset tax liability under the rate increase
-proposal recommended by Staff.
For Penelec, the effect of TMI losses is a reduction to allowable income taxes of
$18,516,000.
Staff St. RFW-1, p. 16 (Revised per Appendix "C"
()
to brief).
Trial Staff submits that the losses attributable to TMI will dramatically reduce, and for Met Ed eliminate, current and future income tax liability during the period the rates will be in effect.
This requires, more than ever, that actual tax liability be used in establishing the income tax allowance for ratemaking purposes.
On behalf of Staff, Robert F. Wilson, a Certified Public Accountant, testified regarding several factors which demonstrate that income tax liability would be minimal or nonexistent -(Met Ed) during the period rates would be in effect.
Staff St. RFW-1.
Regardless of whether TMI-2 is repaired and returned to service, Company witness Robert Arnold anticipates that clean-up costs for this unit will be in the neighborhood of $1 billion.
Tr. 413-414.
-R-
/
Staff witness Errol K. Wagner, also a Certified
'Public Accountant, testified that under statement of Financial Accounting Standard No.
5,
" Accounting for Contingencies",
these costs should be charged.to income as a loss.
Staff St. EKW-1, pp.
7-8.
Since the Commission, in its several Orders, has stated that no costs relating to the TMI incident, including clean-up, are recoverable from ratepayers, this expenditure must be borne by the Companies.
Order at Docket No. I-79040308 entered June 19, 1979 (mimeo, at pp. 12-13); Order at Docket No. I-79040308 entered May 23, 1980 (mimeo at 14); and Order at Docket No. R-80051196 entered September 19, 1980 (mimeo. at pp. 2-3).
Assuming that the cost is spread over five years, the average yearly
({}
expense for tax purposes would be $200 million.
Should TMI-2 be abandoned, Company witness David L.
Huff estimates that the investment loss will amount to $360 million.
Tr. 386.
This would be deducted on Respondents' tax returns until the carryover-carryback period expires.
In the alter-native, if TMI-2 is repaired, the refurbishment cost of S430 million (according to the proceedings pending before the Nuclear Regulatory Commission) will be capitalized.
Staff St. RFW-1, p. 5.
This would trigger additional tax depreciation, interest deductions upon completion and investment tax credits or progress payments while the unit is being rebuilt.
Staff St. RFW-1, p. 5.
Under either of these alternatives, the aggregate of the clean-up expenses and the,
(}
consequences of either repair or loss write-off will produce negative tax liabilities for the reasonably foreseeable future.
On cross-examination, Company witness Huff admiuted that the clean-up costs and the repair or abandonment of J
TMI-2 could offset Met Ed's taxable income for the entire seven year carryover.
Tr. 588.
He also agreed that the disallowance in rate base of TMI-l would itself bring about a taxable loss for Met Ed in 1980 and 1981.
Tr. 685.
Given the status of TMI and the Commission's position on recovery of costs associated with the accident at Unit No.
2, Met Ed cannot and will not have an income tax liability during the period which the rates now fixed O
will be in effect.
While it is likely that Penelec will have a positive tax liability during the effective period of the prospective rates, actual tax payments will be sub-stantially reduced by the effect of TMI.
In accordance with the settled reguatory principle that allowable rate-making expenses be limited to taxes actually incurred, Respondents' income tax allowance should be restricted to the actual taxes anticipated to be paid during the period of these prospective rates.
3.
Recognition Of Actual Tax Liability During The Prospective Period Rates Will Be Effective Is Required Regu-latory Practice.
)
v Whether the income tax allowance is based upon the test year data or upon a normalized liability over the
.37,-
carryforward-carryback period provided by the Internal n
(_)
nevenue Code, Met Ed will not incur an actual tax liability
.in the foreseeable future.
While some tax liability is projected by the Company for 1981, provided the entire S76.5 million rate increase request is granted, subsequent periods indicate taxable losses.
Met Ed Ex. B-151, p.
2.
Under Staff's proposed rate increase, Met Ed would have a negative tax liability for all periods including 1981.
Staff St. RFW-1, p. 3.
For the reasons articulated earlier, Penelec's tax liability will also be dramatically reduced over the next several years.
Staff St. RFW-1,
- p. 16.
If the losses from TMI are not considered in the income tax allowance, this component of rates will far exceed the
{
actual tax expense incurred and paid by Respondents.
(a)
Pennsylvania Case Law Limits The Allow-ance For Income Taxes To Taxes Actually Paid.
Providing for the recovery of taxes which admittedly will not be paid smacks of a proscribed hypothetical allowance.
Where the utility, as in the case of Respondents, has actual experience, the only relevant consideration is the actual tax paid by it.
Pittsburgh v.
Pa.
P.U.C.,
182 Pa.
Superior Ct. 551, 582-83, 182 A.2d 372 (1956).
In Chambersburg Gas Co. v.
Public Service Commission, 116 Ps. Superior Ct.
196, 223, 176 A.794, 805 (1935), the Superior Court said:
In fixing rates and setting up a tariff pre-I ')
scribing the rates which a company should receive, it is required that allowance be made for income tax paid (citations omitted].
e
=
In the Chambersburg case, the utility had claimed
)
an allowance for taxes for the year 1932 although no taxes were paid in that year.
The Court said:
The commission in 1932 very properly held that the utility was not entitled to an allowance on account of a tax which it had not been called upon to pay and which there
. was then no evidence that it would be re-quired to pay.
116 Pa. Superior Ct. at 224; 176 A. at 805.
The statement of the Superior Court is applicable to the present situation where the Respondents would sub-stitute for evidence of actual' expenditures an allowance based upon hypothetical considerations with a corresponding increase in rates.
To the extent that operating losses O
offset projected income levels, taxable income and tax liability will be reduced.
It is this reduced tax liability, or the expense associated therewith, which is paid to the taxing authority and recoverable through rates.
The limitation on recovery through rates to income taxes actually paid has long been established regu-latory law in Pennsylvania.
In Penn Sheraton Hotel v. Pa.
P.U.C.,
198 Pa. Superior Ct. 618, 631, 184 A.2d 234 (1962),
the Commission's refusal to reduce taxes actually paid by interest associated with a hypothetical debt ratio was affirmed, even though the actual capital structure consisted of 100 per cent stock.
When the Commission, in T.
W.
Phillips
()
Gas & Oil Co. v. Pa.
P.U.C.,
Pa. Commonwealth Ct.
412 A.2d 1118, 1122 (1980), sought to reduce a utility's
income tax allowance by assuming a hypothetical debt ratio, O)
(_
the Court reversed the Commission and ordered that taxes be calculated based on actual interest.
More recently, the Commonwealth Court has several times rejected a hypo-thetical disallowance of income taxes based upon the assumption that a portion of the uti) ;ty subsidiary's stock is supplied or supported by its parent company's debt.
Bell Telephone Co.
- v. Pa.
P.U.C.,
Pa. Commonwealth Ct.
408 A.2d 917, 921-22 (1979); Bell Telephone Co. v. Pa.
P.U.C.,
17 Pa. Commonwealth Ct. 333, 340, 331 A.2d 572, 575 (1975).
(b)
Nonjurisdictional Case L'w Supports a
The Limitation On Recoverable Taxes To Taxes Actually Paid.
(}
Federal and state regulatory commissions and courts have long considered the effect of net operating losses and tax carryforwards in determining utility cost of service.
In Consolidated Edison Co. v. New York State Public Service Commission, 53 A.D.
2nd 131, 385 N.Y.S.
2d 209, 210 (1976), the New York Supreme Court held it proper to reduce the allowance for federal income taxes by taking into account tax carryforwards available to reduce those taxes.
Since the carry-forwards were available to reduce tax liability on earnings under the new rates, failure to reduce cost of service thereby "would have resulted in an unrealistic and high tax allowance, and in turn, in a higher rate increase than would otherwise be required for Petitioner to obtain a fair and reasonable return en its -
investment."
384 N.Y.S.
2d at 210.
See also Iowa Metropolitan 7_
(m)
Water Co., Docket No. RPU-76-62 (February 24, 1978).
Similarly, on the federal level, the Interstate Commerce Commission
("I.C.C.")
completely disallowed the income tax claim where the utility had been " operating at substantial losses with no expectation of imminent change to a profitable operation, and hence incurring no income tax liability."
Charges at New York Harbor, Penn Central Transportation Co.,
344 I.C.C.
21, 33-34 (1972); Staff Ex. RFW-1A, Sch.
4.
See also American Colloid Co. v. Akron, C.
& Y.
R.
Co.,
321 I.C.C.
91, 105 (1963).
The Supreme Court of the United States has also addressed the " actual taxes paid" doctrine.
In Federal Power
()
Commission v.
United Gas Pipe Line Co.,
386 U.S.
237, 87 S.Ct. 1003 (1976), the Supreme Court held that the commission properly reduced cost of service to reflect tax savings from losses of unregulated members of an affiliated group which elected to file consolidated federal income tax returns.
The Court was speaking in the context of disallowing hypothetical tax expense where consolidated tax savings exist.
However, its statement applies equally to Respondents' situation--where an extraordinary incident at TMI will substantially reduce or eliminate tax liability:
[W] hen the out-of-pocket tax cost of the regulated affiliate is reduced, there is an immediate confrontation with the ratemaking principle that
/~)
limits cost of service to expenses
\\'
actually incurred.
386 U.S. at 244, 87 S.Ct. at 1007-1008.
(^)
In City of Chicago, Illinois v. Federal Power Commission, v
458 F.2d 731 (D.C. Cir.
1971), the United States Court of Appeals again articulated the rule' limiting recovery through cost of service to actual expenses incurred:
[F]or ratemaking purposes, taxes are considered nothing more and nothing less than a cost of doing business.
No hypothetical taxes can be included in cost of service just as no hypothetical expenses can be included.
Thus, the
" actual taxes paid" principle is in reality a particular application of what might be called the " actual costs in-curred" principle applicable to all ele-ments of costs on which the rate is based.
458 F.2d at 756.
See also El Paso Natural Gas Co. v. Federal Power Commission, 281
(~')
F.2d 567, 572-73 (5th Cir. 1960) cert. denied 366 U.S.
1912 V
(1961).
(c)
Adjusting The Tax Allowance To Reflect Losses Flowing From Three Mile Island Is Similar To The Usual Adjustment For Consolidated Tax Savings.
Under the " actual taxes paid" principle, hypothetical allowances and disallowances ara equally proscribed.
Application of this principle to Respondents is analogous to the ratemaking treatment accorded consolidated tax savings.
The Commission's requirement that the tax allowance reflect consolidated tax savings has an early genesi' in Pennsylvania and has long been affirmed on appeal.
See
()
Pittsburgh (1956), supra, 182 Pa. Superior Ct. at 580; City of Pittsburgh v.
Pa.
P.U.C.,
171 Pa. Superior Ct. _,
n
/~h-187, 207, 90 A.2d 607 (1956).
More recently, the Commonwealth V
Court affirmed the deduction of consolidated tax savings from recoverable taxes notwithstanding the utility's contention that "cound regulatory principles" require rates to be established on an individual utility basis.
Western Pennsyl-vania Water Co. v. Pa.
P.U.C.,
Pa. Commonwealth Ct.
(No. 8 3 C.D. 1979, at 7-9 of mimeo, filed October 1, 1980).
In Western, the Court recognized that the Commission's regulatory powers included balancing principles of regulation and economic theory to prevent inequities.
One such inequity noted by the Court is "the inclusion of income tax expenses which were never incurred in respondent's cos' of service."
The rationale for reducing the income tax allowance O
by the utilities' proportionate share of consolidated tax savings was articulated in Riverton Consolidated Water Co. v. Pa.
P.U.C.,
186 Pa. Superior Ct.
1, 20, 140 A.2d 114 (1958).
President Judge Rhoads, speaking for the Court:
Its (utility's] contention (for a tax allowance equal to the amount paid to its parent] is without merit.
The only proper tax expenses which Riverton (utility] may pass on to its customers is its proportionate share after the consoli-dated tax return is filed and the actual tax paid.
(citations omitted).
Judge Rhoads' Court concluded that the consolidated tax savings result not f2 cm underlying operations of tax loss members but l
from the holding company system.
Once this system is elected,
}
tax benefits from consclidated filing must be equitably shared.
l l
.The sharing of system consolidated tax savings does not
(~)
(_/
attribute the underlying operations of chronic loss affiliates to the utility.
Similarly, recovery through rates of Respondents' extraordinary TMI related expenses is not relevant to the limitation on-tax allowance to taxes actually paid.
Rejection-of the attribu-tion of expense argument for consolidated tax savings from a chronic loss affiliate should apply equally to the tax savings engendered by the extraordinary TMI losses.
In neither case does the sharing of tax savings require the sharing of underlying operations.
In each case the actual tax paid is the measure of proper tax expense.
O 4
O
e D.
Rate of Return Determining a fair rate of return on the utility pro-perty used and useful in the public service is always a difficult task requiring an analysis of financial and market data which is dependent upon numerous independent subjective judgments.
In the wake of the accident at TMI-2, that difficult task has been made infinitely more difficult.
Although the capital struc-ture, cost of debt and cost of preferred stock can be calculated from accounting data, reliable market data as to the cost of common equity for Met Ed and Penelec is non-existant.
For all practical purposes, GPU, which is used as the marketplace l
surrogate for. Met Ed and Penelec common equity, cannot 4
{}
access the equity capital markets at this time due to its depressed level of earnings.
Despite this lack of reliable marketplace data, this Commission must nevertheless determine for ratemaking purposes the costs of common equity for both Met Ed and Penelec, and fix an overall fair rate of return which is reasonable given the unique circumstances involved.
Pursuant to traditional ratemaking principles and standards, the Commission Trial Staff's recommendation in the rate of return area may be summarized as follows:
l i.
e 9
7-Metropolitan Edison Company
(>
Weighted Capital Components Cost Rates Cost Rates Long-Term Debt 51.7%
x 8.0%
4.12%
=
Preferred Stock 13.3 x
7.4
.98
=
Common Equity 35.0 x
15.5 5.43
=
100.0%
10.53%
Pennsylvania Electric Company Weighted Capital Components Cost Rates Cost Rates Long-Term Debt 54.1%
x 8.04%
4.35%
=
Preferred Stock 13.5 x
8.64 1.17
=
{}
Common Equity 32.4 x
15.5 5.02
=
100.0%
10.54%
These recommendations are based upon the direct testimony of Mr. Packard, a Commission Trial Staff rate of return witness.
Staff St. RLP-2, Sch.
1, p.
3 and Sch.
2, p.
3.
It should also be noted that the recommended 15.5% returns on common equity are identical to the returns claimed by both Met Ed and Penelec in their filings.
Met Ed Ex. B-1, Part I,
- p. 14 i
and Penelec Ex.
B-1, Part I, p.
5.
1.
Capital Structure.
Based upon the six months actual and six months esti-()
mated capitali:ations at March 31, 1981, the end of the future test year in these proceedings, Mr. Packard recommends a capital..
structure of 51.7% long-term debt, 13.3% preferred stock, and
-)
'J 35.0% common equity for Met Ed, and a capital structure of 54.1% long-term debt, 13.5% preferred stock, and 32.4% common equity for Penelec.
See Staff St. RLP-2, Sch. 1, p. 1, and Sch. 2, p.
1.
These data constitute the latest and most accurate indicators of Met Ed and Penelec capital structures for the near term future, the period when the rates will be in effect.
The Commission Trial Staff recommends the adoption of these capital structures.
2.
Cost Of Long-term Deb 2 And Preferred Stock.
Based upon the six months actual and six months esti-mated data regarding the actual interest expense of long-term
{}
debt and dividends on preferred stock for the twelve months ending March 31, 1981, the end of the future test year these l
proceedings, Mr. Packard recommends a long-term debt cost rate of 8.0% and a preferred stock cost rate of 7.4% for Met Ed, and a long-term debt cost rate of 8.04% and a preferred stock cost rate of 8.64% for Penelec.
See Staff St. RLP-2, Sch.
1, p.
2 and Sch.
2,
- p. 2.
These cost rates are calculated based upon the latest available data as to the actual long-term debt interest expense and preferred stock dividends that Met Ed and Penelec will experience during the future test year.
The Commission Trial Staff recommendt idoption of these cost rates.
()
3.
Cost of Common Equity.
1 Among rate of return issues, the cost of common equity l
l typically draws the most attention and generates the most controversy.
I n
o In the usual rate case, expert financial witnesses would draw
( })
upon market data for earnings / price ratios, discounted cash flow models, and the earnings of comparable risk firms in order to arrive at an opinion as to a given utility's cost of common equity.
The situation with respect to Met Ed, and to a somewhat lesser degree Penelec, however, is unprecedented.
Due to the accident at TMI-2 and the financial aftereffects on GPU and its subsidiaries, the available market data is of little or no value in determining the cost of common equity for Met Ed and Penelec.
Given current financial conditions characterized by lack of comparable risk firms, lack of dividends and earnings on common equity, and lack of access to financial markets, the cost of common equity for Met Ed O
and Penelec is simply " indeterminate" at this time.
As testified to by Mr. Packard:
Traditional analysis is simply not applicable without the requisite market data.
Conse-quently the frequently employed methods of earnings / price, discounted cash flow, compara-ble earnings, and capital asset pricing must be discarded in favor of indirect evidence.
In my opinion, the general increase in the cost of capital for all electric utilities is perhaps the best indirect support for rates of return higher than those claimed by Met Ed and Penelec.
Staff St. RLP-2, p.
9.
Therefore, in view of the general increase in costs of common equity experienced by all electric utilities and the unprecedented situation faced by Met Ed and Penelec,
(_l the Commission Trial Staff believes that the evidence of s-record supports the 15.5% common equity cost rates claimed by Met Ed and Penelec.
e 1
- (-}
E.
Rate Structure
.\\ s The primary objec'tives of rate structure and design are reasonable rates which are reflective ~of the costs to serve, and which will foster the wise, efficient, and conservative use of utility services.
With these parameters in mind, the Commission Trial Staff has examined the rate structures proposed by Met Ed and Penelec, as well as the load and cost of service data provided in support of their rate structure proposals.
Additionally, we have reviewed the rate structure proposals in terms of the PURPA i
ratemaking standards, and have analyzed items II and III of Commissioner Johnson's motion with respect to Penelec.
O 1.
The overall revenue requirement al-locations proposed by Met Ed and Penelec are reasonable and should be adopted.
The rates proposed by both Met Ed and Penelec are essentially cost-based rates that continue to apply the general principles found acceptable by the Commission in prior rate proceedings as well as the " regulatory signals" contained in recent electric utility rate orders and the generic rate structure report at 76-PRMD-7.
See Met Ed St. C,
- p. 7 and Penelec St. C, p.G.
In particular, a review of the cost of service studies at proposed rates for each company demonstrates that the overall revenue require-()
ment responsibility has been fairly allocated to each class l J
r3 of service such that the rate of return obtained from each G
class of service is reasonably close to the overall rate of return for the system.
See Met Ed. Ex. C-3, pp. 3-5 and Penelec Ex. C-3, pp. 3-5.
The same can be said for the revenue requirement allocation among customer classes at present rates.
See Met Ed Ex. C-3, pp. 20-22 and Penelec Ex. C-3, pp. 20-22.
In other words, the cost data of record demonstrate that at both the present and proposed rates each class o' service will cover its respective cost of service and, in addition, will provide a rate of return on the electric utility plant necessary to serve that class which is reasonable close to the average rate of return for the system.
()
The Commission Trial Staff, however, does have two concerns with respect to the Company's cost of service data:
the inclusion of TMI-l in the cost data and the age of the underlying load data.
The cost of se. : ice studies for both Met Ed and Penelec include the operating expenses and property investment associated with TMI-1.
TMI-l is currently out of service and is not expected to again provide service to the public until at least January of 1982.
The Commission Trial Staff has accordingly recommended the exclusion of TMI-l from the rate base.
In addition, it could be argued that the operating expenses and property investment associated with TMI-l should also be excluded from the cost of service
. ()
studies to determine an appropriate revenue allocation.
1 i
(
Such exclusion of TMI-l related costs would significantly shift the indicated revenue requirement responsibility from each customer class, given the general service customer's heavy responsibility for the coincident demand peak of the i~
system.
Staff St. WJ-1, pp. 1-2.
On the other hand, once TMI-l returns to service in 1982, the indicated revenue requirement responsibility would shift back again.
Under these circumstances, the Commission Trial Staff recommends that the cost of service study as presented by Met Ed and Penelec be used as a basis for allocating the revenue re-quirement responsiblity a.aong customer classes.
Another concern relates to the age of the under-lying load data for the cost of service studies.
Although the demand allocation factorr used in the cost of service study for industrial customers are based on current billing data, the residential and commercial demand allocation factors are extrapolated from 1972 load studies.
Mr. Japak, 1
a Commission Trial Staff rate structure witness, testified that "lcad characteristics from 1972 cannot accurately be used to predict the characteristics of 1980."
Staff St. WJ-1, p.
3.
The combination of rate structure changes, level of i
appliance saturation, the pervasive effects of 1973 oil embargo and subsequent oil price increases, and many of the other factors have probably changed load characteristics as measured in 1972.
The pattern of electricity consumption by
()
residential and commercial customers has very likely undergone
.51. -
significant changes between 1972 and 1980.
The Commission Trial Staff, therefore, recommends that the Commission order Met Ed and Penclec to begin limited load research on resi-dential and commercial customers in order to obtain more current load data regarding these customers.
Such current load data for residential and commercial customers will serve to significantly improve the accuracy of cost of service studies presented in subsequent rate cases, and thereby provide a better basis upon which to fairly and reasonably allocate the overall revenue requirement respon-sibility among customer classes.
2.
Met Ed and Penelec should retain the residential demand provision
{}
for loads in excess of 25 KW.
The cost of providing electric utility service to any class of customers can be broken down to three basic cost elements:
demand costs, energy costs, and customer costs.
In general, the rates for residential customers are based upon a monthly customer charge and a flat energy charge per unit of KWH which is designed to recover both energy and 62 mand costs.
The rates are also based on the energy and demand characteristics of the average residential customer.
Certain residential class customers, however, deviate substantially from the average.
Mr. Japak testified
(')
that:
I
N "An analysis of the Met Ed 100 largest customers without waterheating or space heating shows ann?.al KWH consumption ranging from 48,800 to 122,840.
These by far are not average residential cus-temers.
Ninety percent of these 100 customers are actually farms (Schedule 9),
customers that are more accurately com-mercial in nature."
Staff St. WJ-1, p.
4.
These customers generate demands substantially greater than the other residential customers.
Consequently, the inclusion of these high consumption resi-dential customers in the average will in effect shift a portion of the demand costs generated by the high consump-tion residential customers to all other residential customers.
A rate with a separate demand charge for these high consumption residential class customers will more
'~#
accurately recover the costs of serving these customers, and will avoid imposing their costs on all other customers.
In addition, the separate demand charge would encourage such customers to make use of a higher load factor.
For these reasons, the Commission Trial Staff recommends that Met Ed and Penelec retain the residential demand provision for loads in excess of 25 KW.
3.
The demand charge for Penelec's LP customers should be based on the maximum 15-minute demand for the month.
Penelec's present and proposed tariffs provide that the demand charge for LP customers shall be based on r-)
\\_/
e.
I the greater of (1) the average of the four weekly maximum f )w
\\
15-minute demands recorded during the month, or (2) fifty percent of the maximum 15-minute demand during any time of the month.
This provision for the averaging of demand for.
LP customers is unusual among Pennsylvania electric util-ities and is inconsistent with the manner in which demand costs are allocated to service classes in the cost of ser-vice study.
Mr. Japak testified that Penelec uses the peak responsibility method of allocating demand costs in its cost of service study.
That method allocates the demand costs of the system based upon the coincidence of a rate group's demand with the system peak, thereby benefitting (G
_)
customers whose peak is not coincident with the system peak.
Staff St. NJ-1, p. 6.
The demand averaging for LP customers, however, allows those customers to offset an unusually high demand for a given week with the lower demands of the other three weeks of the month.
Therefore, to the extent that the high demand of the month coincides with the system peak, the enrire rate class will be allocated more demand costs.
- But, due to the demand averaging provision, the additional demand costs are spread among all customers of the rate group.
The demand averaging provision for LP customers penalizes high load factor customers who have to pay the additional demand costs generated by low load factor cus-()
temers.
The practice is unfair and should be eliminated. -
"4 Moreover, the elimination of demand averaging will promote b3 conservation by creating an additional incentive to maintain the highest possible load factor at all times.
Mr. Japak also testified that the demand averaging technique is unusual among Pennsylvania utilities, and that even Met Ed, Penelec's sister company, does not employ this technique.
Staff St. WJ-1, p. 7.
Finally, the elimination of demand averaging was one of the recommendations of the generic electric utility rate structure report at 76-PRMD-7.
The Commission Trial Staff recommends that the Commission should order Penelec to (a) restrict the demand averaging provision: to customers currently served on rate LP, (b) be-gin the orderly phase-out of this provision, and (c) insti-()
tute a provision determining billing demand on the maximum 15-minute integrated demand.
4.
The Commission should adopt a residential customer charge of
$5.00 per month for both Met Ed and Penelec.
As indicated earlier, the costs of providing electric utility service can be broken down into three elements:
demand cost, energy cost, and customer cost.
In describing the parameters of an appropriate rate to cover customer costs, Mr. Rosenthal, a Commission Trial Staff rate structure witness, testified as follows:
O l
(~)
"At a minimum a monthly customer charge i
should recover carrying charges on the
'/
meter and service drop, their associated operation and maintenance enpenses, meter reading and billing.
These ele-ments constitute a ' basic customer cost' of items which a company is required each month to have in place for each customer."
Staff Stat. RAR-1, p. 2.
Mr. Rosenthal rej ects, however, the inclusion of transformer, line, and generator costs as elements to be considered in developing an appropriate customer charge.
The relative customer responsiblity for these cost elements varies considerably among different residential customers; consequently, allocating the average of transformer, line, and generator costs to all customers would lead to cross-subsidies among residential customers.
For example, while a large farm, classified within the residential class, would require a separate transformer, an apartment dweller would share a transformer with several other apartment dwellers.
Based upon the cost of service study presented by Met Ed and Penelec, Mr. Rosenthal isolated those cost elements which are directly related to an individual cus-tomer's service regardless of demand cr energy consumption:
the net investment and carrying charges on the meter and service drop, the asseciated operation and maintenance expenses, meter reading, and billing.
The indicated monthly basic customer cost is $3.59 for Met Ed and $3.23 for Penelec.
()
Staff Ex. RAR-1A and 13.
In an alternative analysis, using I
1 l
l l
(-)
the Company's cost of service data, Mr. Rosenthal realized v
similar results of $4.33 for Met Ed'and S3.62 for Penelec.
Staff Stat. RAR-1, p. 3.
Given these cost data, Mr. Rosenthal recommended that the customer charge for Met Ed be raised to $5.00, with the remainder of any revenue increase for residential customers being used to produce a uniform rate for all KWH 4
used.
For Penelec, Mr. losenthal recommended that the customer charge be maintained at the current S5.00 level, with the remainder of any increase for residential customers being used to eliminate the special heating provision and to produce a unifcrm rate for all KWH used.
On the other hand, the S8.00 customer charges proposed by Met Ed and Penelec would constitute a substantial increase over the current customer charges and would create unreasonably high percentages increases in customer bills at low usage levels.
For example, for Met Ed residential customers the proposed $8.00 custcmer charge would consti-tute a 113% increase over the current $3.75 customer charge and, at the proposed rates, would result in percent base rate increases from 27% to over 100% for energy consumption at 500 KWH and below.
Met Ed Ex. C-5, p. 2, Cel. 9.
In con-trast, Mr. Rosenthal's proposal would substantially lessen the percentage increases to between 24% and 33% for energy consumption at 500 KWH and below.
Staff Ex. RAR-lC.
For O
l l
these reasons, the Commission Trial Staff recommends that O
(_/
the Commission adopt a 55.00 customer charge in lieu of the S8.00 customer charge proposed by Met Ed and Penelec.
5.
Neither inverted rates for resi-dential customers nor flat rates for general service customers would be appropriate for Penelec.
After analyzing the effects on residential cus-tomer bills of an inverted rate schedule, Mr. Rosenthal concluded that it would " necessitate extremely burdensome increases being placed on heating customers".
Staff St. RAR-1, pp.
6-7.
Mr. Rosenthal went on to explain that the elimina-tion of the present special heating provision already serves to increase the rates for residential heating customers and
()
that to further increase those rates with an inverted rate i
schedule at this time would be unreasonable.
See Tr. 2376.
A flat rate for general service customers can be interpreted as (1) a single uniform rate for each KWH of consumption or (2) a CDE rate with a uniform customer charge, a uniform demand charge per KWH, and a uniform energy charge per KWH.
Upon review, Mr. Rosenthal testified that a flat rate for general service customers under either interpreta-tion would not be appropriate.
Staff St. RAR-1, p. 7.
Mr. Rosenthal testified that a single uniform rate for eacn KWH of consumption would cause large users to bear a disproportionate share of the rate increase, and
()
would eliminate the current incentive to control demand..
l i
And, by eliminating the relatively constant flow of revenues
\\_3
(
/
from customer and demand charges, a flat rate schedule would also decrease the stability of revenue.
These factors counsel against a flat rate schedule.
In the alternative, a CDE rate "would maintain some of the incentives for control associated with demand charges.
However, the information on CDE rates, based upon Respondent's exhibits, is confusing at best."
Staff St. RAR-1, p. 7.
The cost to serve LP customers is gener-ally.less than the cost to serve GP customers, since LP customers do not require the step-down transformers neces-sary to serve GP customers.
This fact can be illustrated with reference to Penelec's cost of service study at Penelec
(}
Ex. C-3.
At page 12, Col. 9, the demand cost for GP cus-tomers is $107.3 per KWH, while the demand cost for LP customers is $104.6 per KWH.
And at page 15, Col.
9, the total cost (demand, energy, and customer related costs) of serving GP customers is S3.38 per KWH, while the total cost of serving LP customers is $3.15 per KWH.
On the other hand, the cost data in Penelec Ex. C-21 show the demand related cost for serving large GP customers (S6.46 per KW per month) to be less than the cost of serving LP customers (57.37 per KW per month).
Penelec Ex. C-21, p. 5 and p.
8.
The evidence of record provides no reliable basis upon which to conclude that a CDE rate would be more appro-j i
I priate than the present or proposed rate structure for fg
('"1 general service customers.
The Commission Trial Staff recommends that a flat rate structure for general service f
customers not be adopted at this time.
6.
PURPA Standards.
The Public Utility Regulatory Policies Act of 1978 (PURPA) sets forth six electric utility ratemaking standards as well as five generic rate structura standards.
PURPA requires that the Commission consider each of these and then determine, based upon the testimony and evidence of record, whether adoption of each standard would be appro-priate for the electric utility in question.
The majority of these standards have already been considered in past rate cases for both Met Ed and Penelec, and thus satisfy the Commission s obligation under PURPA.
i Nevertheless, the testimony of Mr. Carter, the rate structure witness for Met Ed and Penelec, covers every PURPA standard anC. provides a convenient summary of the evidence available to enable the Commission to reevaluate each PURPA standard with respect to Met Ed and Penelec.
See Met Ed Stat. C-1 and Penelec Stat. C-1.
Cost of Service - As in past rate cases, the proposed rates
)
are based on a corprehensive cost of service study which determines the cost of service for each rate group.
Met Ed Ex. C-3 and Penelec Ex. C-3.
The cost of service study also determines the levelized customer, demand, and energy com-
' ()
ponents of cost incurred to serve each major rate group.
Met Ed St. C-1, p. 3.
Although we have certain criticisms il.
J
o with respect to the cost of service study submitted by Met
-( )
Ed and Penelec, the Commission Trial Staff believes that on the whole these cost of service studies provide a reasonable basis upon which to allocate the revenue requirement respon-sibility among customer classes.
To the extent that the cost of service studies presented by Met Ed and Penelec differ from the federal cost of service standard, the fedcral standard should be considered rejected.
Declining Block Rates - This standard provides that the rates for energy consumption should decline only if the associated energy costs decline as well.
The proposed rate structures for both Met Ed and Penelec reflect this stan-
/~3
(_/
dard.
The companies have proposed a flat energy charge for residential customers.
On the other hand, the rates for general service customers are blocked for demand and energy to reflect the costs of service at low and high usage levels.
The rates for large primary and other large customers are basically time of day rates without blocks.
The Commission should adopt the declining block rates standards for all customer classes, and find that both Met Ed and Penelec have implemented the standard.
Time of Day Rates - The standard provides that time of day rates should be implemented if the long-run benefits are likely to exceed the metering costs and other costs associated with such rates.
Met Ed and Penelec have proposed mandatory time of day rates for all general service customers served p
(J at primary and transmission voltages.
Met Ed and Penelec believe that the long-run benefits will exceed the costa associated with such rates.
Met Ed St. C-1.
Met Ed and l
Penelee have also made time of day rates available to resi-dential customers on an optional basis.
The Commission should adopt the time of day rates standard, and find that Met Ed and Penelec have implemented the standard.
+
Seasonal Rates - No seasonal rates have been proposed by
~
either Met Ed or Penelec.
The record contains no evidence 1
that the cost of service varies significantly on a secsonal basis for either Met Ed or Penelec.
The Commission should not adopt the seasonal rate standard.
(
Interruptible Rates - All customers served ur. der the general service rate schedules have curtailable sertice provisions which flow-through to such customers the cost savings ex-perienced by Met Ed and Penelec pursuant to the service curtailments.
Met Ed St. C-1, p. 9 and Penelec St. C-1,
- p. 9.
The Commission should adopt the interruptible rates standard for general service customers, and find that both Met Ed and Penelec have implemented the standard, i
Load Management Techniques - Met Ed and Penelec have em-ployed many load management techniques over the last ten years such as. curtailment provisions for general service customers, wime of day rates for all primary end trans-
[
)
mission voltage customers, and the formation of energy j
l management committees.
Met Ed St. C-1, p. 10.
The Commis-
)
1
,_Aa_c 1
e y
sion should adopt the load management standard, and find g
(_)
that both Met Ed and Penelec have implemented the standard.
Master Metering - Met Ed and Penelec have not yet elected to eliminate master metering applications for service.
The companies' cite the additional costs associated with wiring each dwelling unit.
However, the federal standard would restrict master metering only if the long-run benefits to electric consumers would' exceed the cost of separate metering.
The Commission should adopt master metering stan-dard and order that Met Ed and Penelec restrict all master metering to customers contracted for service prior to July 1, 1901.
However, the Commission Trial Staff also recommends that Met Ed and Penelec include an exemption,
\\
similar to that approved for Pennsylvania Power & Light Company at R-78040578, to cover new heating sources which result in long-term energy conservation, as well as the exemption in the master metering standard itself to cover situations in which the long-run benefits to electric con-sumers do not exceed the cost of individual metering.
Automatic Adjustment Clauses - At I.D. No. 214, the Commis-sion conducted an extensive investigation as to the appro-i priate regulatory mechanism to deal with the dramatic changes l
l in fuel and energy casus experienced by electric utilities.
l Based upon that extensive investigation, the-Commission
(-)
concluded that the current automatic adjustment clause was
\\g t
appropriate regulatory mechanism to deal with the problem and that the inclusion of efficiency factors would only _ _ _
D needlessly complicate the operation of the current automatic I( )
adjustment clauses. 'In addition, Sections 1307(d) and (e) of the Public Utility Code, provide for a reconciliation of fuel and energy-related costs with automatic adjustment clause revenues every year.
See Met Ed St. C-1, p. 13-14.
Thus, to the extent that the federal automatic adjustment clause standard differs from the procedures adopted by Commission, the federal standard should be considered rejected.
i Informatiott To Consumers - Under the information to con-sumers standard, each electric utility shall transmit to each of its electric consumers annually a clear and concise explanation of the existing rate schedule and any other rate schedule applicable to such consumer.
This information must-()
also be provided to new customers within 30 days of their
~
f joining the system.
Additionally each consumer must be informed of any change within 30 days of application for such change.
As a result of the adoption of this standard, the only change which will affect the current procedures of Met Ed and Penelec is the annual information on the applicable rate schedules.
The Commission should adopt the information i
l to consumer standard, and order Met Ed and Penelec to provide each electric consumer information regarding the applicable rate structures on an annual basis.
Procedures For Termination Of Service - As a result of the LO generic investigation at 76-PRMD-10, Consumer Standards and I
l
{
o
{}
Billing Practices for Residential Customers, the Commission has established extensive regulations applicable to all electric utilities covering the termination of service to residential customers.
The Commission should find that its obligations under PURPA have therefore been satisfied.
Advertising - The federal standard provides for the dis-allowance for ratemaking purposes of promotional or political advertising.
Such expenses are rarely claimed by electric utilities, and are routinely disallowed if they are claimed.
The Commission should adopt the standard.
Neither Met Ed nor Penelec have claimed any promotional or political adver-tising in these proceedings.
)
i O.
i i
p IV.
CONCLUSION Pursuant to traditional ratemaking standards and principles, the Commission should find that Met Ed and Penelec are entitled to no more than S8,882,000 and $11,758,000, res-pectively, in additional annual revenues.
The Commission should j
also adopt the rate structure changes and PURPA recommendations set forth herein.
Respectfully submitted, N
95tev'eh A.
McClaren Deputy Chief Counsel Bohdan R.
Pankiw O
Julian S.
Suffian Assistant Counsel For the Commission Trial Staff Dated:
February 17, 1981 0._
e
,()
TABLE I MET ED Summary of Trial Staff Position
($1,000)
Staff Position Rate Base (A) 522,453 Rate of Return (B) 10.53%
Recommended Income Available (C) 55,014 Income Available per Return As Adjusted---Present Rates (D) 46,310 Deficient Income Available
('c) 8,704 Recommended Rate Increase (F) 8,882 (A) Table II (3) Table III (C)
(A) x (3)
(D) Table IV, Column (6)
O.
(E) (C) - (D)
(F) (E) +.98 Gross Receipts Tax Factor 1
i
'l 4
N lo l
a v
(%
\\
"d TABLE II Met Ed Race Base as of March 31, 1981 (S1,000)
Original Cost As Claimed by Res.ondent
$719,507(a)
Staff Adjustments:
TMI-1 Removal S(162,660)(b)
Book to Calculated Reserve (4,061) (c)
L*namortized Stoney Creek & 3 erne (3,116) (d)
Unamorti:ed Rate Case Expense (283)(d)
Unamortized Storm Damage (755)(d)
Deferred Energy Cost--Old Clause (2,664)(d)
Deferred Energy Cost--Pre 5/31/80 Clause (20,250)(d)
Cash Work Capital 2,118(e)
Fuel Reserves
(,-s)
(3,383)(f)
(197,054)
Rate Base--Per Staff
$522,453 (a) Met-Ed Exhibit 3-152.
(b) Trial Staff Statement No. DLB-1--Witness Donald L. Sirx, (Revised per Brief).
(c) Trial Staff Statement No. MJG-1--Witness Michael J. Gruber (Revised per Brief).
(d) Trial Staf f Statement No. JMK-1--Witness Joseph M. Kleha (Revised Rate Case Expense / Storm Damage per Brief).
(e) Trial Staf f Statement No. GFM-1--Witness George F. Markovci (Revised per Brief).
(f) Trial Staff Statement No. TV?-1--Witness T. V. Prove 11 (Revised per 3rief).
t I
%-)
l l
l I
i I
e.
-9 i
i TABLE III Met Ed Capital Structure, Cost Rates & Race of Return i
I Long-Term Debt 51.7%
8.0%
4.12*
l Preferred Stock 13.3%
7.4%
.98%
l Common Equity 35.0%
15.5%
5.43%
100.0" 10.53" o
n k
l 2
i I
L i
?
1 i
f a
l l
1 I
(O l-'-
m..
m l
O e
w I A8 E.IV pes t t'.4 9
2.0 4t e1mseces e,f egges et tow 3 leon ense l
Twl we ebwell.s taelat l/ll/HB 8""* **'* ! I?! ***$ A*D"*'!."*b.IT 58d8I s$s.ono i
te se e
..e.6.et -
vo..el e th ee en.el 4 rw.4 shee ss.e l t real Te 648 Teet B t e mem ene p seemesmb=1 t me: B ee.inews e ac le*I 6ws
- G aelemitwl Esati as.es em em A.0 ).ese.*6 g ese s eamos Stalf (B)
(2)
(Il (45
(%l
- F S'd8 8..
8*1 6'*8' 3"I'2
.... 3. 3 * }..
.3N.I - 3 3.2 dj**'"?M.*
( il 4Al 86)
lad at l **J 8
8e. w es4 tem
$242.448
$242,441
$242.440 See.lus2
$258.523 Tas Suae4e.es pe
- 6. nase.Iy CI.see a.
4.e. e r.or eet sai sis s79 ot loo.. es.: 4e.9 se weseem
.. e, isen u,7w
_ u,7s Tat ea
$nt. !,nj
$2sle tny
$2st, s m Se,ans Si60,6s2 t'ln*t !") *'*n"~'
i eseI l t e l wpe 6 roe tte.wd Is.we i
$ e.4.2ee:
$ 64.2e2
$ s.4.2n2
$.4.isk i=re.see.a ao.seSy co.:
I c e e.,.e c eu st y
- s. s se.
$ 30.986 1a.652 lu.652 la.652 l uw t
- Aa.&e 88.nemit te.a 2,261 2.258 2.211 2.239 C.n o se s..ance.t g*ay o nel l t empt 4es. 8 4 4 14.8169 it..eedet le..funct H..thest ott.ee osos 59.051 (17.371) 48.654
$(241)(al 48.458 48.418 Am..e t t r.at teme e.f leelea s e l I. pus esy 5.#77 S.77#
%.777
%.772 soir i sosime6ees 194 48448
~~
= g.e ec 644 lose 2 7.fM8 I (6. 5%ll 28.2s2 (Inn t it.)
21.es 54
- 20. set
T.amus enslast if,247 12:248 82.247
_ 3 78
_l2.42%
Ti.t al Utes.es 6eca 4:ag=-aw n
$ 2 8jf.B B #
(IF,}42)
$2 82 4Q
$leill
$ 2n_2, u_4 4
_ 378 2en2 222 1
3 e ii.,e.at..es I s.em, te., vos.
f ew. anne T.naes
$ 31.9%3
$ 57,342
$ 4al.29%
$ 4 91
$ 49.726
$d. M4
$ Se,4 M Bowiemme T.eams Cus terset -- I'e-.bes al
$ 4 3.902
$ B5.S to S 29.472(1)
$(29.472)(s)
-- (el (e)
--state (1.837) 2.5 38 8.408 (1.40ll (c) un d es s ed--0 e*le-e s t 9.545 (4.4428 3.% B9 3.S34
- 3. 5 59
--Essem (89)
(l99 (89)
(890 Investe.e.t tem re e.666 (22.9eMll (22.9eeul.
22.shto (1,9 Ammes t 6 sat 6u.e est 3 e.wes.t sotat T4s s*sedit
. {l4.75
_,,,6, 3
,,,,[104)
_ glo,4)
(804)
T*.t a l luomane Tamus
$_,{ 2,2en t
$ II,%4 5, l l,gh ae
$,( P.es9 53
$_l 4lse 3,4 B E, i
.t ut 6 t ei y oi.es t es, lea.
$ 14.21s 5.,i,ist
$ l a,9af.e
$ _ es, s24
$ 44., i.lo e, M4 ss,ol4
_ - ~. -
(,el Am l=ee eseoef -- Fate Catas G.agae eemi- $ l%.eppt-- ft een.wtaneme Aes lit $8 F.asinB.
(l.) As lose St at e emaeet Ha a. mfg-l
- W es ee me M 6a 4 mal.B. 8.e ed** e (Mat w a hspi laus toesei).
(e; ) Ae6 gate S t.et esr. ice.t th e. DU W I Wi t e.% 064 4e0 t'. te 6 5 mp.ee (tenwis.ent gets is( le f) Agg.neseilla 4.'.
Setedeele 85 P.ws.e 4.
- pe. e + 1:w.i s st at asa s ea s.e. esclimlised sus tliar 9es, tl.o clianin..tt.n of TMI I 4ent 2 es si g.e3cseal St a f f.n=lju t am est a (lies etas
($000) kespui.les.t*s claim (a)_
Pe ers.eset H.et e s Pe ersent it.a t e s_
Pa oluw l P s op ese,1 t:melwi s ee9 Emclwlin9 t'ac l epile>3 Staft l'a u-ros a6s St af f Stectans.,rembwl i
1MI-2 TMI-I 1NI-l 6 2 A.ljssst uairut St.e f f Isovenew Is cucase (1)
(2)
(3)
(4)
(5)
(6) i Rew, e.uc s 417,052 417,O_52 417,u57 I I, 75es 42es,etin I;ml.ensus 265,20h (5,430) 259,856 (295) (la) 259.568 259,561 tit l*s ecl.it ion 44,104 (3,2 76) 48,023 (1,00t9) (c) 40,020 40,020 Taze s--ot t.us 17,7th 17,786 17,7th 215 17,951 Tasu u-Isecomma 13 5H6 1 13 20,714 (I 7 tleI) (s!)
2,a5 3 5,735 as, son 3
3 Total 340 09)
(1,550) 359,114
( h l84) 120.150 5,9 70 32s.,120 inwomas Aval tal,le los Ret us es 3 160 1,55tt 77,718 1 9,1154 96, *m 82 5,708 I H 2. 6'ha lee?4vn.htsit 's o.C. Me.e sus e s 08 Va lise, exclu liseg 1MS-1 & 2 (Ros4unshisit Enlaiteit 0-100, p. I asa.1 2 of 7) 969),181 96 3,lu t asete ol Hutuen 1.90s
- 9. age,g St.nl f 's u.c. He.asures of V.s tue exclu liws
'INI-I & 2 A11.cealia "A",
Solmslule I, l' age I of 2 9 74,2tl6 974.2Hb 974,2H6 laate of laet us sa 0.tMet 9.95%
30.54s (4) pesann.bn.t 's Enl ileit Is-loo (ts) As lies ins iet --H&D e.nl enberb ( $ lil2.t hMI), M. nee.s9eme set Aielit ($ 7 7,00:1) asel Hat e Case Est.eeenues ($ 36,00s)).
(c) As lies St at eemettet No. ftIG-1-- Wit ewss Mitis.wl J. Ca ulats (14evi scal les Ita ief).
(61) Parnelec Talste all meal A31.esella e, S.: lie hale I, P ple I ol I
{
1
/^%
TABLE III U
PENELEC Summary of Trial Staff Net Reduction to Income Tax Expense of $17.881.000
($000)
Statement No. RJW-1--Witness Robert E. Wilson (Revised per Brief)
(18,516)
Reduction to Operation and Maintenance Expenses 147(a)
Interest Expense 488(b)
Income Tax Expense (17,881)
(a) R&D Expense--LMFBR Project $182,000 Management Audit 77,000 Rate Case Expense 36,000 S295,000 x 49.7674 (Tax Factor)
(b) Computation of Respondent's interest charges O
Measures of Value, excluding TMI 1 and 2 983,183 (Respondent's Exhibit B-160)
Interest Component of rate of return
- 4. 4 Li (Respondent's Exhibit B-1, Part 8, Page 22, Item A) 43,358 Computation of Staf f's interest Charges Long-Term Debt Calculation 42,378(c)
Decrease in interest expense 980
$980 x 49.7674 (tax factor) = S488 (c) Long-Term Debt 54.1 974,286 527,089 8.04 42,378 Preferred Stock 13.5 974,286 131,529 8.64 11,364 Common Equity 32.4 974,286 315.669 15.50 48,929 100.0 974,287 10.54 102,671
()x x
e i
i 1
I j-i l
i I
TABLE IV,
.i PENELEC i
.i Capital Strue:ure, Cost-Rates & Rate of Return l
Long-Term Debt 54.1*
8.04%
4.35%
Preferred Stock 13.5%
8.64%
1.17%
i Common Equity 32.4%
13.12" - 15.5%
4.25" - 5.02" 1
100.0%
9.77" - 10.54%
t I
e
)
4 i
i l
6 I
t i
2 1
l 1
4 I
l
- - -.. -... ~........ _,.
,,.. - -, ~
e Appendix "A" Schsdulo 1 Page 1 of 2 rx N-]
Pennsylvania Electric Company Measures of Value March 31, 1981 Original Cost (S000)
As Claimed by Respondent 1,066,183(A)
Staff Adjustments:
TMI-l Removal (83,000)(B)
Book to Calculated Reserves (3,992)(C)
Unamortized Rate Case Expense (698) (D)
Unamortized Flood Expense (949)(D)
Deferred Energy Costs--Old Clause (1,198)(D)
Deferred Energy Costs--Pre 5/31/80 Clause (3,481)(D)
Cash Working Capital 1,421(E) 974.286 (A) Respondent Ex. B-160, Page 1 of 7.
(B) Respondent Ex. B-160, Page 2 of 7.
(C) Trial Staff Statement No. MJG-1--Witness Michael J. Gruber (Revised per Brief).
(D) Trial Staff Statement No. JMK-1--Witness Joseph M. Kleha (Revised per Brief).
(E) Trial Staff Statement No. GFM-1--Witness George F. Markovci (Revised per Brief).
O t
i
--c
Appendix "A" Schedule 1 Page 2 of 2
,sU Metropolitan Edison Company Measures of Value March 31, 1981
($1,000)
Original Cost As Claimed by Respondent
$719,507(a)
Staff Adjustments:
TMI-l Removal S(162,660)(b)
Book to Calculated Reserve (4,061) (c)
Unamortized Stoney Creek & Berne
'3,116) (d)
Una=ortized Kate Case Expense (283)(d)
Unamortized Storm Damage (755)(d)
Deferred Energy Cost--Old Clause (2,664)(d)
Deferred Energy Cost--Pre 5/31/80 Clause (20,250)(d)
Cash Work Capital 2,118(e)
(~'
Fuel Reserves (5,383)(f)
V)
(197,054)
Rate Base--Per Staff
$522,453 (a) Met-Ed Exhibit B-152.
(b) Trial Staff Statement No. DL3-1--Witness Donald L. Birx, (Revised per Brief).
(c) Trial Staff Statement No. MJG-1--Witness Michael J. Gruber (Revised per Brief).
(d) Trial Staff Statement No. JMK-1--Witness Joseph M. Kleha (Revised Rate Case Expense / Storm Damage per Brief).
(e) Trial Staff Statement No. GFM-1--Witness George F. Markovci (Revised per Brief).
(f) Trial Staff Statement No. TVP-1--Witness T. V. Prowell (Revised per Brief).
nerauu. ' n
'~j Sch:dulo 2
)
Paga lof 2 Trial Staff Exhibit TVP-1A (Revised Schedule 1
-)
Page 1 of 2 O
Adjustment,to Company Claim for Coal Inventory (1)
(2)
(3)
March 1981 Inventory Cost Station Staff Allowance of coal / ton Amount Conemaugh 93,000 tons
$40.99
$3,812,000 Titus 55,800 38.21 2,132,118 Portland 113,100 39.42 4,458,402 Staff Recommendation:
261,900 tons
$10,402,520 Company Claim:
328,000 tons
$12,967,000 Staff Adjustment: (66,100 tons)
($2,564,480)
(1)
Based on 45 day inventory level at Conemaugh, 28 days at Titus,
()
and 35 days at Portland.
(Trial Staff Exhibit TVP-1A, Schedule 2, Page 2),
(2) Company Exhibit 3-1, Part 2, Page 8.
(3) Column 1 x Column 2.
h l
l
Appindix "A'
~
Sch dulo 2 Pcgo 2 of 2 Trial Staff Exhibit TVP-1A (Revised) f Schedule 1
/~')
Page 2 of 2
\\/
Adiustment to Company Claim for Oil Inventory (1)
(2)
(3) 25% of tank March 1981 Tank Capacity Capacity Inventory Cost (4) i Station Gallons Gallons of oil / gal.
Amount Conemaugh 65,800 56,230(5)
S0.91
$51,169(5)
Hamilton 210,969 52,742 0.72 37,974 Hunterstown 395,000 98,750 0.74 73,075 Mountain 300,800 75,200 0.76 57,152 Orreanna 210,969 52,742 0.72 37,974 Portland 4,210,000 1,052,500 0.69 726,225 Shawnee 300,000 75,000 0.66 49,500 Titus 243,307 60,827 0.77 46,837
)
Tolna 300,800 75,200 0.71 53,392 Staff Recommendation 1,599,191 gal.
$1,133,293 Company claim (Less TMI-1) 5,604,564 gal.
3,952,000 Staf f Adj ustment (4,005,373 gal.)
(S2,818,702)
(1) Company Exhibit B-7, page 3.
(2) Trial Staff Exhibit TVP-1, Schedule 2, Page 1.
(3) Company Exhibit B-1, Part 2, page 9.
(4) Column 2 x Column '.
(5)
Reflects Staff aJ1owance of Company claim for oil inventory at Conemaugh.
See TR. 1919.
O
Appendix "A", Sch:dulo 3 Pago 1 of 5 O
L l
Trial Staff Position Metropolitan Edison Company i
Cash Working Capital Requirement (Excluding TMI) i
SUMMARY
$1,000's Staff Position af ter Adjustment for Interest and Preferred Dividends of S3,500.
$19,132 Respondent's Clais 17,014 I
Staff Recommended Increase in Cash Working Capital Requirement S 2,118 O
4 i
J O
Pega 2 of 5
.f)
Trial Staff Final Position
\\_/
Metropolitan Edison Company Cash Working Capital Requirements (excluding TMI)
Trial Staff' Adjustments Respondent Current Exhibit B-135 Statement GFM-1 Adjustment Final S
S S
S Operation and Mainten-ance Expenses 18,867 18,867 Average Prepayments 432 432 Accrued Taxes (2,285) 5,618 3,333 Semi-Annual Interest Payments (3,304)
(3,304)
Preferred Dividend Payments (196)
(196)
Total 17,014 (3,500) 5,618 19,132 Metropolitan Edison Company Cash Working Capital--Taxes (excluding TMI)
Respondent Pa. P.U.C.
Pa. PUC Erhibit B-135 Staff Final Page 6B of 6 Adjustment Position S
S S
Federal Income Tax (46% Race)
(6,300) 6,300(a)
Pa. Income Tax (10.5% Race) 521 (521)(a)
Pa. Gross Receipts Tax 2,416 (161) (b) 2,255 Pa. Capital Stock Tax 636 636 Pa. Public Utility Realty Tax 442 442 Total (2,285) jgggg
};3gg 1
(a) To eliminate income taxes from cash working capital reflecting Staff's position of not allowing income taxes in rates.
i (b) To reduce gross receipts tax to reflect reduced revenue requirements:
cal-culated as follows:
l
Pega 3 of 5
([])
Taxes, Other Met Ed Exhibit.B-1, Part 8, Page 2, Line 22
$13,128 Trial Staff Exhibit CAS-1A (Before Revenue Requirement)
$12,247 Gross Receipts Tax included in Revenue Requirement ($9.665 x 2%)
193 Total 12,440 Difference 688 Gross up Factor to 4 %-( 'O ~)
2'25 Decrease in Gross Receipts tax for Working Capital 1,548 Lead Factor (Met Ed Exhibit 3-135, Page 63) 10.39%
Cash Working Caital Effect S 161
- O e
11 i
Pego 4 of 5
.c METROPOLITAN EDISON COMPANY Commission Staff Adjustment to Cash Working Capital Requirement for Semi-Annual Interest Payments for Year Ended March 31, 1981 Source:
S(1,000)
Staff Brief Measures of Value (Without TMI-1 and TMI-2)- - -
3/31/81 before CWC Adjustment
$520,335 Trial Staff Statement Capitalization Ratios Long Term Debt 3/31/81 51.7%
RLP-1 Amount of Measures of Value Allocated to Long-Term Debt ($520,335 x 51.7%)
$269,013 Trial Staff Statement Pro-Forma Long-Term Interest Charges Allocable RLP-1 to Electric Plant (Embedded Debt Cost of 8.0% x
$269,013)
$ 21,521
()
Daily Interst Expense (365 days + $21,521 Pro-Forma Long-Term Interest Charges)
S 59 Rats of Return
- Daily Interest Expense--Semi-Annual Interest Intstrogatory No's.
95% x $59 56 1&2 Days to Mid-Point of Semi-Annual Interest Met-Ed Exh. 3-1 90 days Part 4, Page 2-3 Less:
Revenue Lag Days 31 days 39 days Adjustment for Semi-Annual Interest Daily Interest of $56 x 59 days S
3,304
- Response to Staff Rate of Return Interro-gatories 1 and 2 indicate that 95% of total interest projected for future test year ended March 31, 1981 is paid semi-annually and 5% is paid monthly.
No adjustment was made for monthly interest payments.
O
Pcga 5 cf 5
,V I
METROPOLITAN EDISON COMPANY Commission Staff Adjustment to Cash Working Capital Requirement for Preferred Dividend Payments for Year Ended March 31, 1981 Source:
$(1,000)
Staff 3rief Measures of Value (Without TMI-l and TMI-2)- - -
$520,335 3/31/81 before CWC Adjustment Trial Staff Statement Capitalization Ratio Preferred Stock RLP-1 3/31/81 13.3%
Amount of Measures of Value Financed by Preferred Stock (13.3% x $520,333)
$ 69,205 Trial Staff Statement Embedded Cost of Preferred Stock Dividends O}LP-1 f-Allocated to Electric Plant (7.4* x $69,205)
$ 5,121 4
Daily Preferred Charges (365 days t S5,121 Pro-Forma Preferred Dividends) 14 Days to Mid-Point of Quarterly Preferred Dividends 45 days Me t-Ed Exh. 3-1 Less:
Revenue Lag Days 31 days Part 4, Page 2-3 14 days Staff Adjustment for Quarterly Preferred Dividends Daily Preferred Dividends $14 x 14 days S
196*
O
e s
App:ndix "A", Sch:dulo 4 Page 1 of 5 O
Trial Staff Fcsition Pennsylvania Electric Company Cash Working Capital Requirement (Excluding TMI)
SUMMARY
$1,000's Staff Position af ter Adjustment for Interest and Preferred Dividends of $6,904 S5,945 Respondent's Claim 4,524 Staff Recommended Increase in Cash Working I
Capital Requirement
$1,421 O
t 1
O O
O j
... ~ _
~
e Trial itaff Final Position Pennsylvania Electric C4upany CastilJorking Capital Requirements (excluding THI)
Trial Staff Adjustments Respondent's Respondent's Trial Staff Current.
Exlillai t tio.
Claim Brief CFM-1 Adjustment Final S
S S
S Operation 6 i
Maintenance Expenses B-149, p. 2 5,600 5,600 Avers,ge Prepayments B-1, Part 4, p.
1 936 936 i
Accrued Taxes11-149, p. 1 (2,012) 8,405 6,393 i
Semi-Annual Interest Payments (6,612)
(6,612)
Preferred Dividend Payments (372)
(372)
Total Exli. B-160 page 2 of 7 line 19 All Otlier 4,524 (6,984) 3,405 5,945 4
M f
O He i-tJe 4
l l
O O
O Pennsylvania Electric Company Cash Working Capital--Taxes (excluding THI)
Tax Expense Twelve Month Tax Position Difference Respondent Staff Average Factor (A) Respondent Staff Staff Position S
S S
S S
Federal Income Tax (26% rate) (B) 28,110 (10,884)
(21.32)
(5,993) 2,320 8,313 Pennsylvania Income Tax (10.5% rate) (B) 9,497 (48)
(3.49)
(332) 3 335 Pennsylvania Cross Receipt Tax (4.5% rate (3) 20,498 18,819 14.51 2,974 2,731 (243)
Pa. Capital Stock Tax (C)
_6,355 6,355 14.51 922 922 Pa. Public Utility Realty Tax (C) 3,475 3,475 14.51 417 417 Total 67,935 17,717 p,012) 6,393 8,405 (A) Penelec Exhibit H-38.
(B) Penelec Exhibit B-150.
(C) Penelec Exhibit B-161.
5 u
w
LPCg:215 o O i
't u)
PENNSYLVANIA ELECTRIC COMPANY Commission Staff Adjustment to Cash Working Capital Requirement for Semi-Annual Interest Payments for Year Ended March 31, 1981 Source:
S(1,000)
Measures of value (Without TMI-1 and TMI-2)---
3/31/81 before CWC Adjustment
$972,865 Trial Staff Stat. RLP-1 Capitalization Ratios Long Term Debt 3/31/81 54.1%
Amount of Measures of Value Allocated to Long-Term Debt ($972,865 x 54.1%)
3526,320 Trial Staff Stat. RLP-1 Pro-Forma Long-Term Interest Charges Allocable S 42,316 to Electric Plant (Embedded Debt Cost of 8.04%
x $526,320)
~
Daily Interest Expense (365 days @ $42,316 Pro-Forma Long-Term Interest Charges) 116 Days to Mid-Point of Semi-Annual Interest Penelec Exh.
90 days 3-1 Part 4, Less:
Revenue Lag Days 33 days P. 2-b of 5 57 days Adjustment for Semi-Annual Int.erest Daily Interest of $116 x 57 days S 6,612 O
N
)
i 4
4
)
<~
s LJ PDMSYLVANIA ELECTRIC CCMPANY Commission Sta'f Adjus*>ent to Cash Working Capital Requireme". f for Preferred Dividend Payments for Year Ended March 31, 1981 Source
$ (1,000)
Measures of Value (Without T'(I-l and TMI-2)---
3/31/81 before CWC Adjustment
$972,865 Trial Stoff Capitalriation Ratio Preferred Stock 3/31/81 13.5%
Stmt. RLI>-1 Amcunt of Measures of value Financed by Preferred Stock (13.5% x $972,865) 3131,337 Trial Staff Embedded Cost of Preferred Stock Dividends Stat. RLP-1 Allocated to Electric Plant (8.64% x $131,337)
$ 11,348 Daily Preterred Charges (365 days * $11,348 Pro-Forma Preferred Dividends) 31 Days to Mid-Point of Quarterly Preferred Dividends 45 days 33 days Less:
Revenue Lag Days 12 days Part 4, Page 2-3 of 5 Staff Adjustment for Quarterly Preferred Dividends Daily Preferred Dividends $31 x 12 days 372 4
O 1
i
i
{
App:ndix "B", Sch dulo 1
~()
U
_M,et Ed Proposed Return
- Total Total Retail Total Resale Electric Dept. (Jurisdictional)
(Non-Jurisdictional)
Income Available
$76,339,0001/
S75,586,060
$752,940.3l Rate Base
$719,507,0001/
$706,423,235 S13,083,7651/
Return 10.610% 1/
10.700 5.755%
Required Income Available
$1,388,187 Met Ed Proposed Income Available 752,940 Increase to Income Available S 635,247_or $1,324,201 Revenue Requirement ***
Met Ed Proposed Return **
Total Total Retail Total Resale Electric Dept. (Jurisdictional)
(Non-Jurisdictional)
Income Available
$59,081,000_/
$58,338,293
$742,7071/
2 O
Rate Base S556,847,000 /
S548,054,386 sa,792,6141/
2 k
Return 10.610% 2/
10.645%
8,447%
Required Income Available
$932,896 Met Ed Proposed Income Available 742,707 Increase to Income Available
$190,189 or $396,458 Revenue ***
Requirement i
- Met Ed Proposed Return predicated on inclusion of TMI-l in rate base.
- Met Ed Proposed Return excluding TMI-l from rate base.
- Revenue Requirement 2.08455 times Income Available.
1/ Met Ed Exhibit C-3, Page 5 of 22.
2/ Met Ed Exhibit C-46, Page 3 of 4 and Met Ed Exhibit B-153, Page 2.
3/ Non-Jurisdictional segment equal to.9863% of total Company as per Cost of Service Study, Mac Ed Exhbiit C-3.
4/ Non-Jurisdictional segment equal to 1.8184% of total Company as per Cost of Service Study, Met Ed Exhibit C-3.
5/ Non-Jurisdictional segment equal to 1.2571% of total Company as per Cost of Service Study, Met Ed Exhibit C-46.
6_/ Non-Jurisdictional segment equal to 1.579% of total Company as per Cost of Service Study, Met Ed Exhibit C-46.
i-t Appendix B, Schedule 2 o
Rate Case Expense Metropolitan Edison Prior Proceedings Unamortized Balance
$301,000/10 yrs.
$30,100
=
Current Proceeding 296,000/3 yrs.
98,667
=
Normalized Allowance
$128,767 Respondent Claim 216,000 Reduction S 87,~233 Pennsylvania Electric Prior Proceedings Unamortized Balance
$313,000/10 yrs.
S31,300
=
Current Proceeding 286,000/3 yrs.
95,333
=
Normalized Allowarce
$126,633 Respondent Clain 163,000 Reduction S 36,367 t
Sources:
Met Ed Ex. E-153, p. 5.
Penelec Ex. B-161, p. 4, Adjustment C.
i i
V
w,~
/
\\vf'
.h uP Mk. Tag el't el 4 TA84 12el'd ad ti ets+ANY
($eMat) n=g= t.t son eet re4 e al 6 se. nee s e.a
, T.enn, gs ne swagwp peg Lg g At St.ati peue seanceab I fedt eu.
G lue As t eal es. 340 t o. Inom.
Tam reemit sense eef skt. ret Tam tec4m-t tune 8ll two-t t.se los laws rees tim s pee hm.t 6.mo Ine est TH 3 - l sect Me t -2 s e w.es e ss.*t Tau Co or.Ilt s (sous en el s r*~t)
St af f #wi untet.t et p,.
gg q,.,e.g, g.
,e,3 ghe 6haus eal Cle.en-le 9:ste-no.sts l
n,,,,,..,y e,
C'le.*t da e.1 Ygans paja.@le 8. I. 14 je, 2 twffue aos ice of te of Test-2 M
- h"I8dt""
i (l)
(2)
(3)
(48 N
(h)
- 1. 4 eat 78 e.
$ 29 4, s.22 sinds. des 2 1
Tot al eatwe at lees een.=ews 2
s A*.t e Te*t el leb$$ eaggawe Sleds e dhe 34.88. 56 8 e
I i= l.s <>e. lat 6un est.vas=*
23.252 28es*64 170 I A) 4 Aweem pe n.t t s.e l v rpa T4mes set t.ee t ie.en ince.new taaen
.B3,804
_%2,24!
206,312 Jua,u44 6
Total 4t.hm-t ien.m 58,i.dal 7
14.et eges mL 6ws news = t=-tose l ee*4 m==
t e am s s 91,29u at leise s Int es e nt tiede asu s (A)
(1,940
_ 2 4,94e]
$ 69, @
s M,hM i
9 et t lenses.it 8.eloce 6honnee s.ames l
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,,b ea2y e.st em d u s.e=3.et a mt. 54444 te.es emel y re.luew.0 t he s eas s e.ht t em e l.eem tee re e se.
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.8
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App:ndix C 3
Schadulo II p
Ptg3 2 of 3 O
Met-Ed Exh,1 bit Elimination of Tax Reduction B-153 Elimina-TMI-l with Revenue Effects of tion of TMI-2 Excluded TMI-l & TMI-2 (S)
(S)
(S)
Taxes Current - federal 13,858 15,5 70* (a)
(29,428)
- state 2,260 2,538*(a)
(4,798)
Deferred - federal (6,295) 4,602 Os)
- state Investment Tax Credit ITC Amortiration 165 (63) Os) f-~g U
Total Taxes 9,988 22,647 Total Tax Effects of TMI-l & TMI-2 (34,226)
- Total Tax Reduction due to TMI-l Current - Federal (15,570)
- S tate (2,538)
Adjustment - See Page 3 of 3 of Appendix C, Schedule II (18,108)
(a) From Appendix C, Schedule II, Page 3 of 3 (b) From Met-Ed Exhibit 3-153, Page 2 of 12 OV l
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i.
1 App;ndix C i
4 w
Sch:dulo *:I PIga 3 of 3 y
Tax Reduction Due Tax Claim Tax Adjustment
. 'x,)
to Removal of TMI-l Associated with of R. F. Wilson Revenues TMI-l per B-153, P.2 Associated with TMI-l (S)
(S)
(S)
Revenues 42,722 Gross Receipts Tax.
Rate 2%
Gross Receipts Tax 854 Revenues 42,722 Less:
GR Tax 854 Revenues less GR Tax 41,868 Pennsylvania Tax Rate 6.9767%
Pa. Tax 2,921 383 (2,538)
Revenues 42,722 Less GR Tax (854)
Pa. Tax (2,921)
Net Revenues 38,947 Federal Tax Rate 46%
/"'s Federal Tax 17,916 2,346 (15,570)
U Total TMI-l Tax Effect (18,108)
Column one calevlates the state and federal income taxes associated with only the revenues of TMI-1.
Column two is the company's claim for state' and federal income taxes based upon revenues and expenses associated with TMI-1.
Column three is arrived at by subtracting column one frcm column two and represents the tax reduction associated with only the expenses of TMI-1.
O
App,ndix C i
i Schsdulo I S
Pr.g3 1 of 3
(,)
PENELEC Summary of Trial Staff Net Reduction to Income Tax Expense of $17,881.000
($000)
Statement No. RJW-1--Witness Robert E. Wilson (Revised per Brief)
(18,516) (d)
Reduction to Operation and Maintenance Expenses 147(a)
Interest Expense 488(b)
Income Tax Expense (17,881)
(a) R&D Expense--LMFBR Project $182,000 Management Audie 77,000 Rate Case Expense 36,000
$295,000 x 49.7674 (Tax Factor)
(b) Comoutation of Respondent's interest charges p
Measures of Value, excluding TMI 1 and 2 V
(Respondent's Exhibit B-160) 983,183 Interest Component of rate of return 4.41%
(Respondent's Exhibit B-1, Part 8, Page 22, Item A) 43,358 Computation of Staff's interest Charges Long-Term Debt Calculation 42.378(c)
Decrease in interest expense 980
$980 x 49.7674 (tax factor) = $488 (c) Long-Term Debt 54.1 974,286 527,089 8.04 42,378 Preferred Stock 13.5 974,286 131,529 8.64 11,364 Common Equity 32.4 974,286 315,669 15.50 48,929 100.0 974,287 10.54 102,671 (d) See Page 2 of 3 of this schedule.
l l
l
[
\\
t
J App;ndix C t
Schedulo I Ptga 2 of 3 AV Penelec Exhibit B-161 Page 1 of 12 Elimination of Total Tax Elimination TMI-l with Adjustment Due of TMI 2 Revenue Excluded to TMI 1 & 2 (1) (s000)
(2) (S000)
(3) (S000)
Taxe s Current - Federal 7,488 8,312 * (a)
(15,800)
()DeferredFederql
- State 1,209 1,316* (a)
(2,525)
(3,150)
(2,383) 03)
ITC (72)
(242) * (b) 314 Amorti:e ITC 360 145 * (b)
(505)
Total Taxes 5,835 7,148 (18,516)
- Total Tax Reduction due to TMI-l Current - Federal (8,312)
- State (1,316)
ITC 242 ITC - Amortication (145)
Total TMI-l (9,531)
Tax Adjustment (See Page 3 of 3 of this Schedule)
(a) ' rom Appendix C, Schedule I, Page 3 of 3 f-] Co) from Penelec Exhibit 161, Page 2 of 12 l (_/
I l
5-App 3ndix C i
a v
Sch:dulo I Piga 3 of 3 Tax Claim Tax Adjustment
[")
Tax Reduction Associated of R. F. Wilson
\\s' Due to Removal of with TMI-1 Associated Revenues of TMI-l Per 3-161, P.
2 with TMI-l (1)
(S000)
(2) (.S000)
C3) (S000)
TMI-l Revenues 20,840 Gross Receipts Tax Rate 2%
Gross Receipts Tax 417 Revenues 20,840 Less:
GR Tax (417)
Revenues less. GR Tax 20,423 Pennsylvania Tax Rate 6.9767%
Pa. Tax 1,425 110 (1,316)
Revenues 20,840 Less:
GR Tax 3 2%
(417)
Pa. Tax 9 6.9767%
(1,425)
Revenues less GR Tax and Pa. Tax 18,998 Federal Tax Rate 46%
Federal Tax 8,744 432 (8,312)
O Investment Tax Credit (2 2) 242 ITC Amortization 145 (145)
Total TMI-l tax adjustment resulting from testimony of R. F. Wilson (9,534 Column one calculates the state and federal income taxes associated with only the revenues of TMI-1.
Column two is the company's claim for state and federal income taxes based upon revenues and expenses associated with TMI-1.
Column three is arrived at by subtracting column one from column two and represents the tax reduction associated with only the expenses of TMI-1.
i l
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