ML20003E999
| ML20003E999 | |
| Person / Time | |
|---|---|
| Site: | Comanche Peak  |
| Issue date: | 12/31/1979 |
| From: | Price G TEXAS POWER & LIGHT CO. |
| To: | |
| Shared Package | |
| ML19240B984 | List:
|
| References | |
| NUDOCS 8104170646 | |
| Download: ML20003E999 (26) | |
Text
p e
Do<kd Ale. Boot 1
2 3
4 5
6 7
8 DIRECT TESTIMONY OF 9
10 11 GARY L. FRICE 12 13 j
14 FOR 15 16 17 TEXAS POWER & LIGHT COMPANY 18 l
t 19 20 DECEMBER 1979 21 22 l
l 23 24 25 26 27
-810.4170 g 28 h TEXAS POWER & LIGHT COMPANY
Pric3 PAGE I of 18 1
DIRECT TESTIMONY OF GARY L. PRICE 2
Q.
WILL YOU STATE YOUR NAME AND BUSINESS ADDRESS PLEASE?
3 A.
Gary L. Price, Texas Power & Light Company, P. O. Box 226331, Dallas, Texas.
4 Q. WHAT ARE YOUR POSITION AND RESPONS;BILITIES FOR TEXAS POWER &
5 LIGHT COMPANY?
6 A.
I am Assistant Treasurer of the Company. My responsibilities include general 7
accounting, field accounting, budgets, construction and plant accounting and 8
payroll.
9 Q.
WOULD YOU BRIEFLY DESCRIBE YOUR EDUCATION, PROFESSIONAL QUAL-10 IFICATIONS AND COMPANY EXPERIENCE?
11 A.
I received a B.B.A. degree from Baylor University in 1966. I began my career 12 with Texas Power & Light as a trainee immediately following graduation. In 1969, 13 I became Supervisor of Budgets; in 1972, Manager of General Accounting; and I 14 was elected Assistant Treasurer in 1975. Included in my thirteen years with the 15 Company are appearances before numerous city councils and the Public Utility 16 Commission of Texas concerning rate applications of the Company.
17 I became a Certified Public Accountant in 1968, and I belong to the Texas 18 Society of Certified Public Accountants, the Dallas Chapter of Certified Public 19 Accountants and the American Institute of Certified Public Accountants.
20 Q. WAS LXHIBIT GLP-1 PREPARED BY YOU OR UNDER YOUR SUPERVISION?
21 A.
Yes.
22 Q.
WOULD YOU PLEASE DESCRIBE EXHIBIT GLP-1.
23 A.
This Exhibit was prepared in accordance with Substantive Rule 052.02.03.032(a).
24 It is the overall Cost of Service fer Texas Power & Light Company for the twelve 25 months ended September 30,1979, as adjusted. It is a summary of Operation and 26 Maintenance Expenses, Depreciation, Federal Income Taxes, Deferred Federal 27 Income Taxes, Federal Investment Credit Adjustments, Taxes Other Than Federal 28 Income Taxes, Interest on Customer Deposits, Gain on Reacquisition of Debt and TEXAS POWER & LIGIIT COMPANY
d Prica PAGE 2 cf 18 1
the Return on Invested Capital. The above items are further detailed to present j
2 the amounts as recorded on the books of the Company (column b), the effect of 3
the adjustments for known and measurable changes (columns c and d) and the 4
effect on the test year of the proposed rate increase (columns e and f).
5 Q. WHY HAS THE TEST YEAR BEEN ADJUSTED?
6 A.
The test year data reflects operating conditions of the past, conditions which 7
must te adjusted if rate.s are to be properly designed for use in the future.
8 Article VI, Sec. 39 of the Public Utility Regulatory Act states:
9 "In fixing the rates of a public utility the regulatory authority shall fix its overall revenues at a level which will permit such 10 utility to recover its operating expenses together with a reason-able return on its invested capital." (emphasis added) 11 12 It is quite obvious from the statutory language, as well as past Commission rate 13 orders, that rates are set for the future. Since rates are designed for the future, 14 it is equally obvious that they must be se't at a level that reflects costs which will 15 be incurred in providing service in the future.
16 If the historical test year is sufficiently adjusted so as to express the levels 17 of operation and maintenance expenses, depreciation, taxes, and capital costs 18 during the period when the new rates will be in effect, the new rates can be set to 19 cover these costs. If these conditions are met, the ratemaking objective will have 20 been accomplished.
21 The basic purpose of the test year is to provide a starting point in 22 developing appropriate cost data for setting rates. Therefore, the best way of 23 measuring the future cost of seryice for setting future rates would be to use a 24 forward looking test year, i.e. a budgeted or future test year. This approach 25 would reflect the level of revenues, expenses and cost of capital during the same 26 time frame.
27 The historical test year approach attempts to do the same thing (match 28 revenues, expenses and cost of capital) but in my opinion falls shott of the goal.
TEXAS POWER & LIGIIT COMPANY
Prica PAGE 3 rf 18 IN 1
By adjusting the actual test year data for known events, we have attempted to 2
bring operating expense closer to the level which will be incurred when the 3
requested rates are placed in eff ect.
4 Q.
DO THE ADJUSTED OPERATING EXPENSES REFL ECT THE LEVEL WHICH 5
WILL BE INCURRED WHEN THE RATES ARE PLACED IN EFFECT?
6 A.
No. Due to time constraints and the use of September 30, 1979 as the cut-off 7
date for most of the adjustments, the level of operating expenses is lower than 8
that which will be incurred when the rates go in effect.
9 Q.
DOES CUSTOMER GROWTH TAKE CARE OF THE PROBLEM?
10 A.
No, when a utility's rates are fixed and it experiences increasing costs, customer 11 growth accentuates the problem.
12 Q.
COULD YOU GIVE US AN ILLUSTRATION?
13 A.
Certainly. Assuming a customer bill form costs us 5 cents and rates were set to 14 reflect this cost, then the Company's rates would be proper. If the Company adds 15 a customer, the expense would increase because of an additional customer but so 16 would revenue and the Company would still cover its costs. But, if the cost of the 17 bill form were increased to 6 cents by the supplier, the Company's rates would not 18 reflect this increase. The " deficit" in the Company's rates would apply to each of 19 the more than 678,000 customers, and growth would only compound the " deficit."
20 Inflation (and that is what the I cent increase in the cost of the bill form 21 represents) is a very real fact of life, but no adjustment to operating expense for 22 inflation has been made for the period dter September 30,1979, even though it 23 has certainly occurred and will continue to occur.
24 Q. WHO PAYS FOR THIS "UNDERRECOVERY OF COSTS?"
25 A.
Since the Company must pay its bills, the common shareholder is the one who 26 absorbs the "underrecovery" through lower earnings than granted in the rate case.
27 Mr. Swiger discunes this problem in his testimony.
28 TEXAS POWER & LIGilT COMPANY
Prica PAGE 4 rf 18 1
Q.
REFERING TO EXHIBIT GLP-1, WOULD YOU PLEASE EXPLAIN THE AD3UST-2 MENTS APPLICABLE TO OPERATION AND MAINTENANCE EXPENSES?
3 A.
Yes.
Fuel and purchased power were adjusted: (1) to reflect the changes in 4
kilowatt hour sales for weather normalization and customer annualization as 5
provided by Mr. Don Simpson; (2) to recognize more current cost levels; and 6
(3) to recognize a full year's generation from Martin Lake Unit #3. The effect of 7
these adjustments to fuel and purchased power is an increase of $19,022,513.
8 The next adjustment is 1or aMitional production expense. This adjustraent 9
of $7,463,822 is necessary for two reasons: (1) Martin Lake Unit #3 was not in 10 service for a full year during the test year and (2) the Company's portion of labor 11 costs at the jointly-owned lignite plants (Big Brown, Monticello and Martin Lake) 12 did not reflect current conditions. By annualizing the expenses, including required 13 overhauls, for Martin Lake and adjusting the labor costs at the jointly-owned 14 plants in the same v'ay as TP&L's other labor costs were adjusted, the test year 15 more closely reflects the level of these costs when the new rates are placed in 16 effect.
17 The next adjustment to operation and maintenance expenses is to adjust 18 other labor costs to reflect the level of employees and their wages at the end of j
19 the test year and to adjust the result for known salary changes. In November, l
20 1979, scheduled employees received an annual salary increase. Although non-21 scheduled employees did not receive this increase at that time, the same level 22 will be the general guideline when their salaries are reviewed. Since these salary 23 increases will occur th:oughout the year, an adjustment for one-half the increase 24 was made to nonscheduled employees' salaries. The total of this adjustment is 25
$5,142,618.
26 Employee benefits were adjusted by $359,340 to reflect the increase in 27 wages and to recognize known changes in the cost to the Company for employee 28 insurance and pension costs.
TEXAS POWER & l.lGIIT CO.iiPANY
Pric2 PAGE 5 cf 18 The next two adjustments were made to comply with Substantive Rule 1
2 052.02.03.032(aX6)(B). They eliminate from the test year the expenses incurred 3
for legislative advocacy and social membership dues. I might add at this point that the total of contributions, donations and advertising does not exceed the 4
5 three-tenths of one percent limit as provided in Substantive Rule 6
052.02.03.032(aX6XA).
7 The next adjustment amounts to $53,768 and is based upon our application 8
ior a rate increase. The Company is estimating $500,000 wil! be spent on this 9
rate filing and the adjustment is necessary to recognize the difference between 10 the $500,000 and the amount expensed during the test year applicable to prior 11 rate cases.
The uncollectible accounts provision to expense and the Utility Commission 12 13 fee have been adjusted by $130,514 and $34,227, respectively, to reflect the 14 adjustment made to revenues.
15 The next adjustment of $539,082 is necessary due to a change in the company's relocation policy. The Company was finding it extremely difficult to 16 get employees to transfer from one location to another due to increased housing 17 costs, high interest rates and the inability to sell homes within a reasonable time.
18 19 in order to be able to fill vacant jobs with the best qualified people, the Company 20 instituted a home purchase plan for transferred employees effective May,1979.
21 The adjustment is to annualize test year expense.
22 The next adjustment, Provision for Insurance and Casualties, is the result of problems the Company has faced for several years and will continue to face in the 23 24 future. These problems are: (!) insurance premiums are escalating rapidly; 25 (2) deductibles are being increased by the insurance companies, thus putting the Company in a position of being a self-insurer whether it wants to or not; and 26 27 (3) with the growth of the Company, the exposure to losses continues to increase.
28 in order to operate as efficiently as possible, while at the same time not TEXAS LOWER & LIGIIT COMPANY
Prico PAGE 6 cf 18 1
taking undue risks, a Reserve for Insurance and Casualties was established in 1971 2
to provide the Company some protection in the event of a large loss and to 3
produce a savings to the customer through lower insurance premiums.
4 Q. HAS THE COMPANY EXPERIENCED ANY LOSSES?
5 A.
Yes. TP&L has experienced losses in previous years, such as the generator winding 6
failure at the Big Brown Generating Station and, during the test year, the 7
Company experienced a loss of $1,677,000 due to the ice storm in January,1979.
8 Q. WAS THE $1,677,000 CHARGED TO EXPENSE DURING THE TEST YEAR AND, 9
AS A RESULT, REFLECTED IN THE COST OF SERVICE OF THE COMPANY?
10 A.
No, the loss was charged to the Reserve for Insurance and Casualties.
11 Q. WHAT IS THE EFFECT OF THE AD3USTMENT TO THE COST OF SERVICE?
12 A.
In July 1979, we increased the accruals to the Reserve for Insurance and 13 Casualties to restore the Reserve to the dollar level accumulated before the 14 charges for the ice storm. The increased accruals would achieve this over a three 15 year period assuming no further losses. Also, the normal accrual to the Reserve 16 has been increased approximately 10 percent. The adjustment, $460,309, is the 17 amount necessary to produce an annualized level in the adjusted test year.
18 Q.
WILL THE COMPANY BE IN THE SAME RELATIVE POSITION IN REGARD TO 19 THE RESERVE FOR INSURANCE AND CASUALTIES WITH THESE ADDITIONAL 20 ACCRUALS AS BEFORE THE ICE STORM LOSS?
i 21 A.
No. As I stated before, it will be three years before this loss is restored to the 22 Reserve. In addition, to increase the normal accrual which was approved in our 23 previous rate case (Docket #1517) by only 10 percent per year will not keep the 24 Reserve in the same relative position to Electric Plant in Service as before.
25 Inflation alone reduces the relative coverage provided by the Reserve for 26 Insurance and Casualties.
27 Q.
DOES SELF-INSURING SAVE THE CUSTOMER MONEY?
l 28 A.
Yes, the customer benefits from our policy in two ways. If Texas Power & Light i
TEXAS POWER & LIGIIT COMPANY
Prica PAGE 7 Cf 18 1
purchased insurance coverage with the lowest deductibles possible, the additional 2
annual insurance premiums would be between $2,500,000 and $3,000,000. These 3
additional premiums would be paid every year and rates would reflect this higher 4
level of premiums. The customer would pay more but would recche no benefit 5
until a loss occurred. Additionally, through the use of a Reserve for Insurance and 6
Casualties, whatever amount the customer pays to create the Reserve is deducted 7
from the Rate Base, thus saving the customer the allowed return on the amount 8
deducted. The customer certainly benefits from our policy.
9 Q. IS THE RESERVE FOR INSURANCE AND CASUALTIES REALLY NECESSARY?
10 A.
Yes, it is. One must keep in mind that management has a fiduciary responsibility 11 to maintain adequate insurance coverage on the Company's assets. Management 12 is also striving to provide dependable service at the lowest reasonable cvst 13 possible to its customers.
14 Management could provide adequate insurance coverage on the Company's 15 assets by purchasing insurance with the lowest deductibles possible but this would 16 be very expensive. Through the use of a Reserve, lower insurance premiums are 17 realized (which benefits our customers) while adequate coverage is maintained.
18 Q.
PLEASE EXPLAIN THE NEXT ADJUSTMENT ON EXHIBIT GLP-l.
19 A.
We have adjusted the test year to reflect a known increase in our EEI research 20 and development. commitment of $677,792. The amount is based upon the actual 21 sales of electricity for the year 1978 and is necessary to reflect the actual 22 amount due in the coming year.
23 Q. WHY WAS AN ADJUSTMENT MADE FOR "OTHER OPERATION AND MAIN-24' TENANCE EXPENSES"?
25 A.
In order for the test year to accurately reflect conditions as of September 30, 26 1979, it was necessary to adjust the "other operation and maintenance expenses" 27 which have not been individually adjusted to reflect changes in costs during the 28 test year.
TEXAS LOWER & LIGIIT COMi%NY
Price PAGE 8 ef 18 1
"Other operation and maintenance expenses" include such items as repairs, 2
maintenance on transportation equipment, parking expense, mstal charges.
3 customer bill forms, subscriptions to professional and business publications, 4
repairs on affice equipment and facilities, janitorial supplies, legal services, 5
technical consultant fees, rent, etc. Due to the number of items included in 6
"other operation and maintenance expenses", to adjust each item would be very 7
expensive and time consuming. As an alternative to making literally hundreds of 8
adjustments, these expenses have been adjusted to the September 30,1979 level 9
based on past experience and the number of customers served.
10 Q.
HAS THIS APPROACH BEEN ACCEPTED BY THE COMMISSION IN RECENT 11 CASES?
12 A.
Yes.
13 Q. D O E '. THE ADJUSTMENT REQUESTED IN THIS CASE REFLECT ANY 14 INCREASED COSTS AFTER SEPTEMBER 30,1979?
15 A.
No, and under present conditions, I believe the adjustment is very conservative.
16 Q.
HOW WAS THE ADJUSTMENT TO "OTHER OPERATION AND MAINTENANCE 17 EXPENSES" CALCUL ATED?
18 A.
A study was made to determine the relationship between customers served and 19 "other operation and maintenance expenses". Our study produced a coefficient of 20 determination between customers served and "other O & M expenses" of.9643 21 which means that 96.43 percent of the change in "other O & M expenses" is 22 mathematically explained by customtr growth.
Exhibit GLP-2 shows the 23 historical trend since October,1977. This trend has been used to establish the 24 expense level based upon test year-end customers, The adjustment is $3,273,498.
25 Q. W AS A CONFIDENCE INTERVAL CALCULATED TO MEASURE THE REASON-26 ABLENESS OF THE EXPENSE LEVEL UPON WHICH YOUR ADJUSTMENT IS 27 MADE?
28 A.
Yes, we calculated a 95 percent confidence interval for this estimate.
TEXAS POWER & LIGIIT COMPANY
Pric]
PAGE 9 CI 18 I
Q.
IS YOUR ADJUSTMENT BASED ON THE LOWER LIMIT OF THIS INTERVAL?
2 A.
No, it is the midpoint.
3 Q. WHY DIDN'T YOU CHOOSE THE LOWER LIMIT?
4 A.
The purpose of the study was to determine a reasonable estimate for this 5
adjustment. We believe the mid-point to be a reasonable basis for this adjustment 6
althuagh as I previously pointed out,it is conservative in that it is below the level 7
that we anticipate will be actually experienced.
8 The lower limit would certainly not be reasonable since there would be a 9
971/2 percent probability that actual expense would exceed the estimate.
10 Q.
DOES THIS SAME LOGIC EXPLAIN WHY YOU CHOSE NOT TO ASK FOR THE 11 UPPER LIMIT?
12 A.
Yes. I am seeking the best available estimate which is, statistically, the most 13 probable. Although I believe that some upward bias is justified, I have utilized the 14 results of the study without any bias. As I have stated before, the adjustment is 15 conservative due to the fact that I have not considered any increase in costs 16 beyond September 30,1979, even though they have occurred.
17 Q.
WOULD YOU DESCRIBE THE ADJUSTMENT TO DEPRECIATION EXPENSE?
18 A.
The Depreciation Expense recorded on the books of the Company has been 19 adjusted for two items. One, we are seeking approval of a change in c7r+mn 20 depreciation rates as discussed by Mr. Dwight Cole and two, we have annealized 21 our depreciation expense for depreciable plant in service at September 30, 1979.
22 The total adjustment is $5,376,476 which results in an adjusted test year 23 Depreciation Expense of $68,036,076.
24 Q.
PLEASE EXPLAIN THE CHANGE IN FEDERAL INCOME TAXES, DEFERRED 25 FEDERAL INCOME TAX ES, AND FEDERAL INVESTMENT CREDIT 26 ADJUSTMENTS.
27 A.
Federal Income Taxes, Deferred Federal Income Taxes, and Federal Investment 28 Credit Adjustments have been adjusted to recognize the tax effect of the h TEXAS POWER & l.lGIIT COMPANY
Price PAGE 10 cf 18 1
adjustments made to the Cost of Service and Rate Base.
2 Q.
WOULD YOU PLEASE DESCRIBE THE ADJUSTMENTS TO TAXES OTHER THAN 3
FEDERAL INCOME TAXES?
4 A.
The taxes which are revenue related (gross receipts and city franchise) have been 5
adjusted to reflect the changes in revenues. Social Security taxes have been 6
adjusted to reflect the known increase in wages and the known increase in the 7
taxable wage base from $22,900 to $25,900. Ad valorem taxes have been adjusted 8
by multiplying plant in service at the end of the test year by the current effective 9
tax rates. The state franchise tax has been computed using the adjusted capital 10 of the Company at September 30,1979. The total adjustments to taxes other than 4 S23,4L4 11 Federal income taxes is $V,521,920 and the adjusted test year amount is YSW3,02-12
$45,051,888.
13 Q.
WHAT IS THE TOTAL AMOUNT OF OPERATING EXPENSES, AS AD]USTED?
ft(0IS b N Total operating expenses, as adjusted, on present rates amount to $661,,684,,305 14 A.
7M,93% 7U 15 for the test year.
The total of $721,259,681 represents the total adjusted 16 operating expenses for the test year including the adjustments due to the proposed 17 rate increase.
18 Q.
WHAT ARE THE OTHER ITEMS ON EXHIBIT GLP-l?
19 A.
The next item is Interest on Customer Deposits which has been annualized based 20 upon the level of active customer deposits at Ceptember 30,1979. This amount of 21
$371,550 is appropriate since customer deposits have been included as a reduction 22 to the Rate Base.
23 The amount of $170,771 shown as Gain on Reacquisition of Debt is the 24 discount we received when we repurchased some of our debt issues.
25 The final item is Return on invested Capital, which I will discuss later.
26 Q.
WAS EXHIBIT GLP-3 PREPARED BY YOU OR UNDER YOUR SUPERVISION?
2 27 A.
Yes. I relied on Mr. Cole for certain items, but the Exhibit was prepared under i
28 my supervision.
TEXAS LOWER & LIGIIT CO fi'ANY
Pric]
PAGE II of 18 1
Q.
WOULD YOU PLEASE EXPLAIN EXHIBIT GLP-3?
2 A.
This Exhibit shows the details of the Original Cost and Adjusted Value Rate Bases 3
for the Company. Some of the items have been adjusted to more appropriately 4
reflect the Company's Rate Base which should be considered in this proceeding.
5 Q.
WOULD YOU EXPLAIN EACH ADJUSTMENT?
6 A.
The first adjustment is to Accumulated Depreciation.
The adjustment is to 7
reflect one-half of the adjustment made to depreciation expense in the Cost of 8
Service.
This gives an adjusted Accumulated Provision for Depreciation of 9
$421,621,343.
10 Q.
MR. PRICE, WHY HAVE YOU ONLY CONSIDERED ONE-HALF THE INCREASE 11 IN DEPRECIATION EXPENSE AS AN ADJUSTMENT TO THE RESERVE?
12 A.
To analyze this adjustment, an understanding of the definition of depreciation 13 expense is imperative. Depreciation expense, as defined in rate filings, is the 14 invested capital recovered from rate payers through base rates. To deduct the 15 full amount of the additional depreciation expense from the Rate Ibse before it is 16 received from the rate payer would cause an understatement of the invested 17 capital necessary to serve the customers as demonstrated below:
18 19 Case A. Reserve Adiasted for Full Amount of Depreciation (assuming 20 year life):
20
$1,000,000 - invested capital 21 (50,000) - depreciation reserve adjustment 22
$ 950,000 - adjusted invested capital
- '3 8% - allowed rate of return 24 76,000 - required operating income 26 27 28 TEXAS LOWER & LIGitT COMPANY
Pric2 PAGE 12 cf 18 1
Results:
2
$1,000,000 - beginning invested capital 3
(50,000) - depreciation expense recovered in base rates 4
$ 950,000 - ending invested capital 5
$ 975,000 - average invested capital necessary to serve customers 6
76,000 - allowed operating income 7
7.79% - actual return earned 8
Case B. Reserve Adjusted for 1/2 of Depreciation (assuming 20 year life):
9
$1,000,000 - invested capital 10 (25,000) - 1/2 of depreciation reserve adjustment 11 i
$ 975,000 - adjusted invested capital 12 8% - allowed rate of return 13 78,000 - required operating income 14 15 Results:
16
$1,000,000 - beginning invested capital 17 (50,000)'- depreciation expense recovered in base rates 18
$ 950,000 - ending invested capital i
l 19
$ 975,000 - average invested capital necessary to serve customers 20 78,000 - allowed operating inceme 21 8% - actual return earned l
22 l
23 As is apparent in Case B, the customer is paying a return on the average 1
24 dollars of invested capital necessary to provide service, whereas in Case A the l
j 25 customer gets the benefit of the additional depreciation expense before he pays 26 it. This penalizes the investor through realization of a lower return than was 27 allowed.
28 TEXAS LOWER & LIGHT COMPANY
Price PAGE13 of 18 1
Q. WOULD YOU PLEASE CONTINUE YOUR EXPLANATION OF THE EXHIBIT?
2 A.
The Current Cost of Plant in Service, the respective weighting of RCN and Net 3
Original Cost, and the methodology e. determining the allowance fo age and 4
condition were supplied by Mr. Dwight Cole. By applying a 60 percent weighting 5
to Net Original Cost and 40 percent to Net Current Cost, the total adjusted value 6
of Net Plant in Service is $2,127,007,940.
7 Electric Plant Held for Future Use has been reduced by $1,008,725 to 8
reflect only the dollars representing land, lignite and water rights that 9
' are not dedicated to a specific power plant, but which will be dedicated in the future.
~
10 I might add that this is the original cost of these items and not an adjusted value.
11 Q.
WHY SHOULD PLANT HELD FOR FUTURE USE BE INCLUDED IN THE RATE 12 BASE?
13 A.
The only way a utility can earn a return on these dollars is by inclusion in the 14 Rate Base. Under the Uniform System of Accounts, we are not allowed to 15 capitalize an Allowance for Funds Used During Construction on Plant Held for 16 Future Use. Therefore, if these items are not included in the Rate Base, the 17 Company will forever lose the carrying costs on these investments made in the 18 customers' best interest and for their benefit, effectively removing any incentive 19 for the Company to continue with its time proven program. When one weighs the 20 cost of including land, lignite and water rights in the Rate Base versus the 21 potential cost of waiting to purchase these items, the least costly approach would be to 22 encourage these timely purchases by including same in the Rate Base. In my 23 opinion, to exclude entirely or to establish an arbitrary time fra:ne for inclusion in 24 Rate Base items which are vital in the production of electricity cripples the 25 Company's ability to save its customers money through long-term planning.
26 Q. WHY WAS AN ADJUSTMENT MADE TO CONSTRUCTION WORK IN PROGRESS?
27 A.
The amouat of C.W.I.P. on the books of the Company at September 30,1979, is 28
$593,752,658. la accordance with Mr. Campbell's testimony, I have reduced this TEXAS IUWER '; LIGHT COMPANY
Prica PAGE l4 0f 18 1
amount by the total expenditures applicable to the Forest Grove Unit; to 2
eliminate 82.569 percent of the expenditures for Sandow Unit #4; and to eliminate 3
25 percent of the remaining C.W.I.P. balance.
4 I would like to point out that this in no way represents the level of 5
Construction Work in Progress that the Company will have on its books when the 6
proposed rate increase goes into effect.
Exhibit CLP-4 shows the present 7
estimate of the levels of Construction Work in Progress (excluding Forest Grove 8
and 82.569 percent of Sandow Unit #4) which the Company will experience during 9
the first year the proposed rates are in effect.
As shown by this Exhibit, 10 Construction Work in Progress will substantially exceed the $338,117,435 which 11 has been included in the Rate Base in Exhibit GLP-3.
12 Q.
WHAT ARE THE BENEFITS OF INCLUDING C.W.I.P. IN THE RATE BASE?
13 A.
There are many benefits derived from including C.W.I.P. in the Rate Base. The 14 ones I believe are the most important are: (1) Improves cash flow; (2) Improves 15 quality of earnings; (3) Improves interest coverage; and (4) Helps keep future 16 rates lower.
17 Q.
HOW IS CASH FLOW IMPROVED?
18 A.
If C.W.I.P. is not included in the Rate Base, the financing costs of construction 19 are added to the cost of the plant. This procedure is accomplished by recording 20 an Allowance for Funds Used During Construction on the books of the utility. The 21 result is to defer costs (which the utility must pay currently) for future recovery.
22 Therefore, by including C.W.I.P. in the Rate Base, the utility collects the 23 financing costs currently which improves its cash flow.
24 Q.
DOES THE CUSTOMER PAY FOR CONSTRUCTION IF C.W.I.P. IS INCLUDED IN 25 THE RATE BASE?
26 A.
No. The investor is still paying for the construction. The customer is only paying 27 the " interest" or carrying costs on the money used to pay for the constructim 28 TEXAS IOWER & LIGilT COMPANY
. Pric2 PAGE 15 of 18 1
Q. HOW IS THE QUALITY OF EARNINGS IMPROVED?
I 2
A.
Simply stated, cash income is being substituted for non-cash income. When a 3
utility capitalizes the financing costs of construction by the recording of 4
A.F.U.D.C., the income of that utility is increased by the amount of the 5
A.F.U.D.C. Since this increase in income is simply the result of a journal entry 6
rather than actual cash, the cuality of the utility's earnings decline. In other 7
words, as A.F.U.D.C. becomes a larger percentage of earnings of a utility, the 8
poorer the quality of earnings. Financial analysts discount A.F.U.D.C. and look at 9
a utility's financial record exclusive of A.F.U.D.C. When C.W.I.P. is included in 10 the Rate Base, the utility recoups the financing costs on a current basis as they 11 are incurred, thus improving the quality of earnings.
12 Q.
WOULD YOU EXPLAIN HOW INTEREST COVERAGE IS IMPROVED?
13 A.
Earnings that a utility receives in lieu of A.F.U.D.C. would also have to cover the 14 tax liability. Since interest coverages are computed on a pre-tax basis, the 15 coverage would be improved. Also, because the utility would not have to borrow 16 as much (since its cash flow would be improved), there would be less interest to 17 cover.
18 Q. HOW WOULD FUTURE RATES BE LOWER?
19 A.
Two ways, by paying the financing costs currently, future rates will not include 20 such costs and, since the utility's financial position will be improved, the lower 21 financing costs will result in Inwer rates for the consumer.
i 22 Q. DO YOU FEEL INCLUSION OF THE REQUESTED LEVEL OF C.W.I.P. IS I
23 NECESSARY TO THE COMPANY'S FINANCIAL INTEGRITY?
24 A.
Yes. Considering the level of C.W.I.P. when the proposed rates go into effect and 25 the factors mentioned above, I feel that the amount requested is the minimum 26 that should be allowed.
27 Q.
PLEASE EXPLAIN THE REMAINING ITEMS ON EXHIBIT GLP-3.
28 A.
The next item, Nuclear Fuel in Process, is per the books as of September 30,1979.
TEXAS LOWER & LIGHT COMPANY
Prica PAGE 16 of 18 1
This item is similar to Construction Work in Progress. It is money that has 2
already been spent by Texas Power & Light to provide for our customers' future 3
electric power needs. Due to this, I feel that inclusion in the Rate Base is 4
appropriate, especially since commitments have to be made for such fuel we!! in 5
advance of actual use.
6 Working Capital represents one-eighth of adjusted operation & maintenance 7
expenses less fuel, purchased power, and the portion of prepayrtents and material 8
and supplies charged to operation and maintenance expenses, plus the amount of 9
materials and supplies and fuel stock on the Company's books at September 30, 10 1979, and a 13 month average of prepayments. This computation was made in 11 accordance with Substantive Rule.052.02.03.031(a)(3).
12 Q. WHY HAVE YOU USED THE "l/8 OF O & M" FORMULA INSTEAD OF THE 13 AVERAGE DAILY CASH BALANCES FOR THE COMPUTATION OF CASH 14 WORKING CAPITAL?
15 A.
There are several reasons. The "l/8 of Operation and Maintenance Expenses" has 16 been used for many years, is representative of the amount of cash working capital 17 necessary for a utility and is a part of the Substantive Rules of this Commission.
18 I have not asked for the maximum allowed under this Commission's Rules since !
I 19 have deducted fuel expenses from the total Operation and Maintenance Expenses.
20 I have not used the average daily cash balances for the computation of cash 21 working capital due to the fact that the daily cash balances have no relationship 22 to the amount of cash working capital that is required.
I 23 Cash working capital is the amount of investor supplied capital which is 24 necessary to fund operations until the customer pays his bill. Since the investor 25 supplies the capital, a return is necessary for this capital, the same as on capital 1'
26 used to fund power plants.
27 Daily cash balances do not represent the amount paid for operation and 28 maintenance expenses but, instead, merely represent what is lef t af ter those l
TEXAS LOWER & 1.lGIIT COMPANY
Pric PAGE l7 0f l8 1
items are paid. Two companies with identical accounting practices could have the 2
same daily cash balances although one company is twice as large as, and has twice 3
the cash working capital needs of, the other company. These cash balances 4
depend on the cash management practices of a company and do not represent the 5
amount of cash working capital necessary for that company.
6 Q.
PLEASE CONTINUE YOUR EXPLANATION OF EXHIBIT GLP-3.
7 A.
The next three items, Accumulated Deferred Federal Income Taxes, the Reserve 8
for Insurance and Casualties, and Customer Deposits and Advances have been 9
deducted from the Rate Base because they represent customer-supplied sources 10 of capital invested in utility plant. The reason I have adjusted the amount for 11 Accumulated Deferred Federal Income Taxes is to eliminate the accumulated 12 deferred taxes applicable to those items which have been eliminated from the 13 Rate Base.
I,H),953,Sn 14 An Original Cost Rate Base of $1,893,953,491 and an Adjusted Value Rate 2/l34 f9.S *199 i
15 Base of $2,434,695,467 were calculated by simply adding the dollars in columns (d) 16 and (e), respectively!
These figures were supplied to Mr. Steve Swiger to 17 determine the return on invested capital.
Mr. Swiger determined the return
'2 lo,Lo7J J2 18 dollars to be $210,607,628, which I included in the Cost of Service on Exhibit 19 GLP-1.
20 Q. WHAT IS THE OVERALL COST OF SERVICE THAT YOU CALCULATED ON 21 EXHIBIT GLP-1 AND WHAT DID YOU DO WITH THAT FIGURE?
130 743/ 7</
22 A.
The overall Cost of Service (including fuel) is $932',068l088. I gave this figure to 23 Mr. Gene Lewis for his use in designing the appropriate rate schedules.
24 Q.
DOES THIS CONCLUDE YOUR TESTIMONY?
25 A.
I would like to add one thing. A utility is no different than any other business 26 when it comes to purchasing materials, hiring employees, paying bills, etc. The 27 utility has to pay the " market price" for these items and pay in cash. However, a 28 utility does not have the same flexibility that other businesses have in making TEXAS POWER & l.IGHT COMPANY
Prico PAGE L3_oL18 1
necessary changes in the pricing of its product. Since we cannot adjust the price 2
of electricity except through langthy rate hearings, the price that is set should 3
reflect as closely as possible the cost of producing that electricity. To do 4
otherwise is to subsidize one group (customers) at the expense of another group 5
(shareholders). If this is done for any extended period of time, the Company will 6
not be able to attract the capital necessary to provide adequate and dependable 7
electric service to its customers or will have to pay an unnecessarily high 8
premium for that capital -- either result being to the customers' substantial 9
detriment.
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 TEXAS LOWER & LIGIIT COMPANY
TEXAS POWER & LIGHT COMPANY Overall Cost of Service Test Year Ended September 30,1979, As Adjusted At Present Rates At Proposed Rates j
Line Amount Known As Rate increase As i
No.
Descriptic,n per Books Adjustments Adjusted Adjustments
_ Adjusted (a)
(b)
(c)
(d)
(c)
(f) i Operating expenses:
1 Operation and Maintenance Expenses
$446,114,099
$ 37,068,067
$483,182,166 644,095
$483,826,261 2
Fuel and purchased power 19,022,513 3
Additional production expense 7,463,822 4
Wages 5,142,618 5
Benefits 359,340 6
Legislative advocacy (16,721) 7 Social dues (72,947) 8 Rate case expenses 53,768 9
Uncollectible accounts 130,689 447,245 10 Public Utility Commission fee 34,304 196,850 11 Relocation expense 539,082 12 Provision for insurance and casualties 460,309 13 EEI research and development support 677,792 j
14 Other operation and maintenance 3,273,'498 i
15 Depreciation 62,659,600 5,376,476 68,036,076 68,036,076 l
16 Federal income taxes 8,009,784 4,547,539 12,557,323 54,317,673 66,874,996 4
17 Deferred Federal income taxes 25,984,666 (3,991,630) 21,993,036 21,993,036 j
18
- Federal investment credit adjustments 37,784,221 (7,587,570) 30,196,651 30,196,651 19 Taxes other than Federal income taxes 40',529,968 4,523,464 45,053,432 3,954,311 49,007,743 20 Gross receipts
'259,629 1,495,318 21 City franchise 426,952 2,458,993 22 Social security 377,016 3
23 Ad valorem 2,864,699 rn 24 State franchise 595,168 y
}
25 Total operating expenses 621,082,338 661,018,684 719,934,763 26 Interest on customer deposits 331,871 39,679 371,550 371,550 27 Gain on reacquisition of debt (170,771)
(170,771)
(170,771) 28 Return on invested capital 167,738,273 146,843,407
_710,607,632 5
29 Total Cost of Service (Operating h
Revenues)
$788,981,711
$808,062,870
$930,743,174 u
TEXAS POWER & LIGHT COMPANY Overall Cost of Service Test Year Ended September 30,1979, As Adjusted At Present Rates At Proposed Rates Line Amount Known As Rate increase As No.
Description per Books Adjustments Adjusted Adjustments Adjusted (a)
(b)
(c)
(d)
(e)
(f)
Operating expenses:
1 Operation and Maintenance Expenses
$446,114,099
$ 37,067,815
$483,181,914 651,321
$483,833,235 2
Fuel and purchased power 19,022,513 3
Additional production expense 7,463,822 4
Wages 5,142,618 5
Benefits 359,340 6
Legislative advocacy (16,721) 7 Social dues (72,947) 8 Rate case expenses 53,768 9
Uncollectible accounts 130,514 452,263 10 Public Utility Commission fee 34,227 199,058 11 Relocation expense 339,082 12 Provision for insurance and casualties 460,309 13 EEI research and development support 677,792 14 Other operation and maintenance 3,273,498 15 Depreciation 62,659,600 5,376,476 68,036,076 68,036,076 16 Federal income taxes 8,009,784 4,526,386 12,536,170 54,925,383 67,461,553 17 Deferred Federal income taxes 25,984,666 (3,991,630) 21,993,036 21,993,036 18 Federal investment <.redit adjustments 37,784,221 (6,899,000) 30,885,221 30,885,221 19 Taxes other than Federal income taxes 40,529,968 4,521,920 45,051,888 3,998,672 49,0$0,560 20 Gross receipts 259,045 1,512,093 21 City franchise 425,992 2,486,579 22 Social security 377,016 23 Ad valorem 2,864,699 24 State franchise 595,168 25 Total operating expenses 621,082,338 661,684,305 721,?"9,681 26 Interest on customer deposits 331,871 39 679 371,550 371,550 t
27 Gain on reacquisition of debt (170,771)
(170,771)
(170,771) {
28 Return on invested capital 167,738,273 146,130,004 210,607,628 E
29 Total Cost of Service (Operating Revenues)
$788,981,711
$808,015,088
$932,068,088 g
L
e l
Trend of Other Operation and Maintenance Expenses 4
Based On Average Number of Customers October 1977-September 1979 1
60 -
I September 1979%.
J 55 -
<i K
./
~
5 50 -
/
4 8a
.g 8 45 -
Eg
?s m
o
. Twelve months ending expenses in cE
$5 reference to average number of i
40 -
o October 1977 Annualized expenses for actual number of customers at September 30, 1979.
o 7
35 -
m 5'
O 30 j m
O' 610,000 620,000 C30,000 640,000 650,000 660,000 670,000 680,000 h
i Average Number of Customers
TEXAS POWER & LIGHT COMPANY Original Cost and Adjusted Value Rate Bases Test Year Ended September 30,1979, As Adjusted Original Cost Rate Base Line Actual September 30,1979 Adjusted Value No.
Description September 30,1979 Adjustments As Adjusted Rate Base (c)
(b)
(c)
(d)
(e) 1 Plant in Service
$2,007,887,307
$2,007,887,307 i
2 Less: Accumulated Depreciation 418,933,105 2,688,238 421,621,343 3
Net Plant in Service 1,588,954,202 1,586,265,964 1,586,265,964 4
Adjusted Value Weighting 60 %
5 Net Original Cost in Adjusted Value j
Rate Base 951,759,578 6
Net Current Cost of Plant in Servie 2,938,120,906 i
7 Adjusted Value Weighting 40 %
i 8
Net Current Cost in Adjusted Value Rate Base 1,175,248,362 9
Adjusted Value Plant in Service 2,127,007,940 I
10 Electric Plant Held for Future Use 4,,499,042 (1,008,725) 3,490,317 3,490,317 j
11 Construction Work in Progress 598,752,658 (260,635,223) 338,117,435 338,117,435 12 Nuclear Fuel in Procss 23,896,607 23,896,607 23,896,607 13 Working Capital 14 Accumulated Deferred Federal
_ 50,369,561 2,255,694 52,625,255 52,625,255 4
Income Taxes (101,332,653)
(77,145)
(101,409,798)
(101,409,798) 15 Reserve for Insurance & Casualties (1,486,398)
(1,486,398)
(1,486,398) 16 Customer Deposits & Advances (7,545,860)
(7,545,860)
(7,545,860) x 4
17 Total
$2,156,107,159
$1,893,953,522
$2,434,695,498 Q
Di j
18 Weighted Cost of Capital 11.12 %
.g 19 Percent Return 8.65 %
i rn 20 Total Return
$ 210,607,632
$ 210,607,632 g
5 C) h.
j
TEXAS POWER & LIGHT COMPANY Original Cost and Adjusted Value Rate Bases Test Year Ended September 30,1979, As Adjusted Original Cost Rate Base Line Actual September 30,1979 Adjusted Value No.
Description September 30,1979 Adjustments As Adjusted Rate Base (a)
(b)
(c)
(d)
(e) 1 Plant in Service
$2,007,887,307
$2,007,887,307
^
2 Less: Accumulated Depreciation 418,933,105 2,688,238 421,621,343 3
Net Plant in Service 1,588,954,202 1,586,265,964 1,586,265,964 4
Adjusted Value Weighting 60 %
5 Net Original Cost in Adjusted Value Rate Base 951,759,578 6
Net Current Cost of Plant in Service 2,938,120,905 l
7 Adjusted Value Weighting 40 %
8 Net Current Cost in Adjusted Value Rate Base 1,175,248,362 9
Adjusted Value Plant in Service 2,127,007,940 10 Electric Plant Held for Future Use 4,499,042 (1,008,725) 3,490,317 3,490,317 11 Construction Work in Progress 598,752,658 (260,635,223) 338,117,435 338,117,435 12 Nuclear Fuel in Process 23,896,607 23,896,607 23,896,607 13 Working Capital 50,369,561 2,255,663 52,625,224 52,625,224 14 Accumulated Deferred Federal Income Taxes (l01,332,653)
(77,145)
(l01,409,798)
(l01,409,798) 15 Reserve for Insurance & Casualties (1,486,398)
(1,486,398)
(1,486,398) 4 16 Customer Deposits & Advances (7,545,860)
(7,545,860)
(7,545,860) 17 Total
$2,156,107,159
$1,893,953,491
$2,434,695,467 18 Weighted Cost of Capital 11.12 %
19 Percent Return 8.65 %
rn 20 Tctal Return
$ 2'0,607,628
$ 210,607,628
[:r 5
O w
e 9
TEXA5 POWER & LIGHT COMPANY Estimated Construction Work in Progress Balances Estimated Amount in included in Line Service Requested Estimated blance Description Date Rate Nse 7-31-8 8-31-80 9-30-80 10-31-80 1130-80 12-31-80 1-31-81 2-28-88 3-31-81 6-30-81
% 31-81 6-30-81 No.
(a)
(b)
(c)
(d)
(e)
.. (f )
(g).
(h)
(i)
(J)
(k) 0)
(m)
(n)
(o)
Major Projects i Sandow 4*
1981
$ 28,885
$ 38,212 $ 38,624 $ 38,948 $ 39,225 $ 39,459 $ 39,728 $ $ $ $ $ $ (1981 2 Comanche Peak i & 2 (1983 347,326 440,451 446,865 453,466 462,988 470,143 478.454 483,%I 488,513 493,412 498,307.503,163 507,667 3 Oak Knoll !
1990 1,897 3,329 3,34 2 3,355 3,438 3,45I 3,464 3,712 3,726 3,740 3,754 3,780 3,864 4
Martir. Lake s 1985 8,443 10,050 10,139 10,216 10,293 10,371 10,481 10, % 2 10,643 10.725 10,996 11,270 14,196 (1987 5 Mdl Creek I & 2 (1988 1,259 2.238 2,263 2,436 2,461 2,485 2,825 2,851 2.879 3,008 3.205 3,370
- 3,8 34 (1985 6 Twin oak I&2 (1986 31,619 45,958 47,106 48,315 49,701 51,7ll 53,729 56,222 58,214 60,f40 62,047 64,696 67,316 10 Sub-Total 419,429 340,238 548,339 556,736 568,106 577,620 588,681 556,908
% 3,975 571,025 578,309 586,279 596,877 Il Transmission, Distribution, etc.
31,394 20,582 21,575 19,333 21.134 17.466 9,012 8,138 8,191 8,243 8,297 8,367 8,451 12 Reduction for 25% of Net Remaining Construction Work in Progress 112,706 13 Total
$338,117
$%0,820 $%9,914 $576,069 $589,240 j595,086 $597,693 $565,046 $572,166 $179.268 $586,606 $594,646 $605,328
' Excludes 82.%9% of Cost (portion dedicated to large industrial customer) ra E
9 1*
i
o THE STATE OF TEXAS I
COUNTY OF DALIAS I
BEFORE the undersigned authority on this day personally appeared GARY L. PRICE, who, having been placed under oath by me, did depose as follows:
"My name is Gary L. Price.
I am of legal age and a resi-dent of the State of Texas. The foregoing testimony, and exhib-its, offered by me on. behalf of Texas Power & Light Company, are true and correct, and the opinions stated therein are, to the best of my knowledge and belief, accurate, true, and correct."
l GARY / PRICE SUBSCRIBED AND SWORN TO BEFORE ME by the said Gary L. Price Febrwerv day of Occm ber, A. D.1976'.
this 19th Robert D. Daniels Notary Public in and for Dallas County, Texas 5,(* 'My Conunission expires 8-31-80 s'
e S
s,. - -,
s
,_