ML20030B598
| ML20030B598 | |
| Person / Time | |
|---|---|
| Site: | Allens Creek File:Houston Lighting and Power Company icon.png |
| Issue date: | 09/30/1980 |
| From: | Blumenthal E TEXAS, STATE OF |
| To: | |
| Shared Package | |
| ML20030B571 | List: |
| References | |
| 3320, NUDOCS 8108180340 | |
| Download: ML20030B598 (33) | |
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9 1
DOCKET NO. 3320 RE: APPLICATION Or HOUSTON
[
PUBLIC UTILITY COM*.ISSION LIGHTING & POWER COMPANY FOR i
AUTHORITY TO CHANGE RATES I
0F TEXAS i
I DIRECT TESTIMONY OF ELLEN BLUMENTHAL i
ACCOUNTING DIVISION PUBLIC UTILITY COMMISSION OF TEXAS 3
I I
(
SEPTEMBER 1980 1_
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Page 1 of 20 Docket Nc.
3320
)
Q.
Please state yoilr name and business address.
2 A.
My name is Ellen Blumenthal and my business address is 7800 Shoal Creek 2
4 C.
By whom are you employed and in what capacity?
5 A.
I am a Staff Accountant for the Public Utility Commission of Texas.
6 Q.
What are your principal areas of responsibility as a Staff Accountant of the 7
Commission?
8 A.
My responsibilities include testifying as an expert witness in accounting g
matters in rate cases filed with the Commission, reviewing rate increase 10 applications, and preparing testimony and exhibits for rate hearings related 11 to those applications.
12 Q.
Please state briefly your educational background, professional 13 qualifications, and business experience.
la A.
I received a Bachelors of Journalism from the University of Texas at Austin 15, in 1974.
While at the University, I tcM 36 hours4.166667e-4 days <br />0.01 hours <br />5.952381e-5 weeks <br />1.3698e-5 months <br /> of business courses lG including 30 hours3.472222e-4 days <br />0.00833 hours <br />4.960317e-5 weeks <br />1.1415e-5 months <br /> of accounting. When I completed my work at the University l
17 in August 1975, I went to work for a large local accounting firm in Houston.
1g In July of 1976, I returned to Austin to work with a local accounting firm.
19 My responsibilities with that firm included the audits of water control and 20 improvement districts and municipal utility districts.
I began working with l
21 the Public Utility Commission of Texas in May 1977. I have attended both the l
l 22 Annual Regulatory Studies Program and the Annual Seminar on Regulation of
?3, Water Utilities which are sponsored by the National Association of Regulatory l
l N;
Utility Commissioners.
i i
l 2s-I am a Certified Public Accountant and a member of both the Texas l
I
7 Docket No.
3320 Page 2 of 20 s
1 Society of Certified Public Accountants and the American Institute of f
2 Certified Public Accountants.
j 3
Q.
Have you previously testified before this Commission?
f i
4 A.
Yes, I have.
j 5
Q.
In connection with the present case before this Commission, Docket 3320, have 1
6 you performed an examination and review of the Rate Filin; Package anf 7
supporting workpapers filed by Houston Lighting & Powe* Company (HL&D or l 8
Company) in support of its request to increase and cnange base rates 9
amounting to $213,242,000 annually?
10 A.
Yes, I have.
In addition, I have reviewed tne audit workDaoers of tne 11 independent accountant for HL&P.
I have also performed an on-site '
12 examination of the Company's books and records.
13 Q.
In performing this examination and review, did you conside-the overall 14 financial condition and operating results of HL&D and its pa-ent, Houston 15 Industries, Inc. (HII)?
16 A.
Ye;, I did.
I i
17 Q.
What is the purpose of your testimony?
IS' A.
I will present the Staff's recomendations as to the test period cost of 19' service for the year ended March 31, 1980 and invested capital at Ma-ch 31, 20 1980 which I have computed based upon my review and examination of the 21 Company's rate increase application.
22 Q.
I have before me your Schedule I, pages 1 through 10 and your Schedule II, 23 pages 1 through 3.
Were these schedules prepared by you o under you" 24 supervision?
25 A.
Yes. they were.
I
b Docket No.
3320 Page of 20 3
I 1
Q.
Would you please describe what is presented on your Schedule I?
2 A.
Column (3) on page 1 of Schedule I presents the Company's test period cost of 3
service.
Column (4) reflects the Company's claimed additional revenue 4
requirement.
Column (5). represents HL&P's total claimed cost of service.
5 The amounts in Column (6) represent the Staff's proposed adjustments to the G
amounts requested by HL&P.
Column (7) shows the Staff's proposed total 7
revenue requirement.
8 Q.
Please explain why the amounts shown on your Sebedule I, page 1, for the g
Company's claimed base rate revenue requirement differ from those shown by 10 HL&P on page 1 of Schedule A in the Rate Filing Package.
11 A.
When deriving the base rate revenue requirement, HL&P did not reduce the 12 total cost of service by the other revenues shown on Schedule N-4 in the Rate 13 Filing Package. The. amounts shown in Columns (3) and (5) of my schedule for 14 the total cost of service and the base rate revenue requirement substantially 15 agree with Schedule N-2 in the Rate, Filing Package.
16 Q.
When you discuss revenue requirements, are you referring to tne test period 17 cost of service?
18:
A.
This Commission's Substantive Rules define the cost of service or revenue lg requirement as the amount of revenue required to cover all reasonable and 20 necessary expenses properly incurred by a utility in rendering service to the 21 public.
Included in the cost of service is a f air and reasonable return on 22 the adjusted value of invested capital used and useful in providing service.
23 Because the ratemaking process is a prospective one, the actual costs 24 iricurred in the test year must be adjusted to reflect conditions which can
?S reasonably be expected to occur in the future when the new rates are in L__. _
I 20 Docke2 No.
3320 Page of i
effect.
This adjusted test year is referred to as the test period.
2 Q.
What kinds of adjustments has Houston Lighting & Power Company made to actual 3
test year amounts?
4 A.
The Company has made adjustments to acto 31 costs to bring tnem to the levels 5
experienced at the end of the test year.
These adjustments are ef ten 6
referred to as year-end adjustments.
In addition, the Comoany has made,
7 adjustments for known and measurable changes.
l 8
Q.
What is presented on the remaining pages of your Schedule I?
9 A.
The remaining pages show the details of the Staff's adjustments presented in ;
10 Column (6) of page 1.
11 Q.
Have you made an adjustment to the Company's claimed amour.t for Fuel Expense?
12 Yes, I have.
f 13 Q.
Please explain the differences between your amount and tne Comoany's amount.
14 A.
Schedule N-3.2 of the Rate Filing Pack 6ge shot:5 the Company's proposed i 15 adjustments to test year actual kilowatt hour sales. Tne Staff nas revieaed l 16 these adjustments and is recommending an adjust"1ent to the Company's amounts. !
17 I have used the adjusted kilowatt hour sales recommended by Barbara Alexander ;
i 18 of the Staff to compute Fuel Expense. Also, the Staff has again reviewed tne I
19 relationship between HL&P and Utility Fuels, Inc. (UFI) for reasonableness as i l
20 required by Section 41(c)(1) of the Public utility Regulatory Act.
21 Q.
What criteria are generally used to determine whether or not t-ansactions l
22 between affiliates are reasonable?
i 23 A.
Reasonableness of costs charged by an affiliate is generally determined by 24 comparing such costs to the market.
In addition, the rate of return the H;
affiliate is earning is considered.
i l
5 of 20
- 0ocket No.
3320 Page 1
Q.
Would you please explain exactly what functions UFI is performing and the 2
history behind UFl?
3 A.
UFI is presently supplying coal to the Company's W. A. Parish plant units 5, 6 4
and 7.
These are the only coal units which HL&P presently has in commercial 5
operation.
UFI transports the coal from the mine site in Wyoming via 6
railroad and delivers it to HL&P at the plant site near Houston. Some of the 7
coal is purchased by UFI froc. the Kerr-McGee Cc..
Ct,rporation under a long-8 term contract dated October 6, 1976. The original parties to this contra-t 9
were Kerr-McGee and HL&P. Additional coal is purcnased from the Spring Creek 10 Coal Company.
The coal handling f acilities at the Parish plant were also 11 originally owned by HL&P.
12 In February 1978, the Company's Board of Directors decided to transfer 13 all coal supply activities to UFI.
The Board also decided to assign to UFI 14 all of the Company's coal supply contracts as well as the Company's coal 15 handling f acilities and its contract for the purchase of coal cars (rail 16 cars).
The Kerr-McGee coal contract was assigned to UFI on March 28 1978.
17 The W. A. Parish units 5 and 6 coal handling f acilities were transferred to 18 UFI at net book value ($35,324,660) in May,1978. UFI and HL&P entered into a 19 Coal Supply Agreement on June 24, 1978.
This agreement was amended on 20; January 26, 1979, effective June 24, 1978.
21 Q.
Would you summarize the terms of the Coal Supply Agreement between UFI and 22 HL&P?
23 A.
The contract calls for UFI to sell coal to HL&P for use in the operation of 24 the Company's coal fired units, W. A. Parish units 5, 6, 7, and 8. The amounts 25 of coal to be delivered as well as the base price of the coal are set out.
i L_.._.-.
C 20 Docket No.
3320 Page of
.o F~
l Q.
Would you please elaborate on the price of coal which is included in the 2
contract?
3 A.
The contract sets out the base price of the coal which "is intended to cover 4
and include all costs incurred by Seller in purchasing, transporting,j 5
maintaining in inventory, and physically handling and delivering said coal to 6
the Point of Delivery, and any applicable taxes...".
7 There are four basis components of the price per ton for coal set forth E'
in the contract.
The Base Coal Charge includes the cost of tne coal fro 9
Kerr-McGee (or other company supplying coal to UFI) and the cost of 10 transportation from the mine site to the site of the coal handling '
11 facilities.
The $24.509 per ton Base Coal Charge is subject to adjustments 12 which are spelled out in the contract.
13 The Handling Charge is designed to recover U:!'s actual oce-ations and 14 maintenance expenses including depreciation on the coal handling equipment !
i 15 and rail cars. The base Handling Charge of $1.621 per ton is also subject to '
16 adjustment.
17 The Inventory Carrying Charge is designed to compensate UFI for the cost 18, of maintaining an inventory of coal at the Company's plant site.
Tnebase!
I i
19 Inventory Carrying Charge is $0.536 per ton and is also subject to 20I adjustment.
{
21l The last component of the coal price is the Fixed Charge wnich is :
22 designedtorecoverthecostoffinancingUFI'sinvestmentincoalhandlingl-23 equipment and rail cars.
The Fixed Charge stated in the original contract l
24 was $2.394 per ton. The amendment to the contract raised the fixed charge to Mj
$4.761 per ton.
This portion of the charge is to be recompJted at the '
i
r
)
Page 7 of 20 Docket No.
3320 f
6 i
I J
i caqinning of each calendar year beginning on January 1,1980, through the a
I 2
term of the agreement (June 30,2003).
3 The total base price of coal stated in the amended contract is $31.427 4
per ton or approximately $1.849 per MMbtu.
5 Q.
Why did the January 26, 1979 amendment to the Coal Supply Contract increase 6
the Fixed Charge per ton of coal?
7 A.
The contract amendment lowered the quantity of coal to be delivered in the 8
third and fourth quarters of 1978 by 622,000 tons.
In order for UFI to earn 9,
approximately the same dollar return, it was necessary to increase the price 10 per ton since fewer tons were delivered.
11 Q.
You have stated that these minimums which are stated in the contract are 12 subject to adjustment.
Exactly what adjustments can be made under the 3'
contract between HL&P and UFI?
14 A.
In essence, the price adjustment provisions in the contract allow UFI to 15 adjust the price of coal for all increases in cost it may experience. At the 16 end of each calendar year, UFI is to invoice HL&P for all costs which were not 17 recovered during that year. Under the terms of this contract, UFI is assured 18 that it will recover its actual costs of doing business. More importantly, 19 UFI is cuaranteed to earn a 17% return on its average investment in plant and 20 equipment regardless of the number of tons of coal HL&P buys from UFI during 2I that year, j
22 Q.
In Docket 2676, the Commission imposed certain limitations on the cost of 1
l 23 coal from UFI which HL&P could recover from its ratepayers.
Is the Staff 26 recommending that those limitations be lifted?
l b.
A.
Yes.
The operating problems at the Parish units 5 and 6 which precipitated t
Page S of 20 Deckc8 No.
3320 l'
the Commission's actions in Docket No. 2676 have been corrected.
I 2
Q.
Please explain how you computed the $33.89 per ton of coal shown on page 3 of 3
your Schedule 1.
4 A.
The Base Coal Charge of $29.586 was the actual cost of coal in June 1980.
a 5
To calculate the handling charge of $1.986 per ton, I used the actual 1
6 operation and maintenance expenses of UFI for the twelve months ended July 7
31, 1980.
From this amount, I deducted the annual amortization of the
{,
8 accumulated deferred investment tax credits at July 31, 1983.
\\.
9 I calculated the Inventory Carrying Charge using tne average prime rate '
i 10 in effect in June 1980.
T?.is rate was applied to the estimated cost of a 11 90-day coal supply assuming a 70 percent annual capacity f actor for the three t
12 coal units.
This is the same methodology proposed t'y H;&P and, inmyj 3
opinion, is reasonable.
14 To calculate the Fixed Charge, I used the net book value cf the coal i
15 handling facilities and rail cars as of July 31, 1983. From this amount, I l
16 deducted the balance of deferred federal income taxes.
I then applied the i
l 17 pre-tax weighted average cost of capital of 10.97% which Dr. Sam Hadaway has i
18 recommended.
19 Q.
Is the Staff recommending that UFI calculate its charges to H.&P in the ;
!i 20 manner you have described above?
1 21 A.
No.
The Staff is recommending that HL&P not be allowed to recover from its i 22 ratepayers amounts in excess of the coal cost produced using the methodology 23 I have described.
24 Q.
Is there another approach which the Commission could use to limit the coal 1
P5 cost which the Company recovers from its ratepayers?
I
r e
9 of M age Occket No.
3320 j ;
1 A.
Yes.
Because the Company has transferred the coal supply function to an 2'
affiliate, it is able to recover through its fuel clause adjustment (FCA) not 3l only the actual cost of coal but also operation and maintenance expenses, l
1 4
depreciation, taxes and return.
If HL&P had not transferred the coal supply
?
5 function to UFI, the only cost which would be recoverable through the FCA i
I 6
would be the Base Coal Charge.
The Commission could include the Inventory 7,
Carrying Cost, the Handling Charge and the Fixed Charge in HL&P's base rates g
which would hold recovery of expenses constant as long as those rates were in t
g effect.
10 Q.
Why have you adjusted the Company's proposed amount for wage expense?
11 A.
The Company adjusted test year actual payroll for the following:
12
- 1) the year-end number of employees and wage levels,
- 2) an annual wage increase for bargaining unit supervisors, l
la
- 3) a new labor union contract which became effective in May 1983, 15
- 4) wage increases anticipated to become effective during the time new 16 rates will be in effect and 17
- 5) additional personnel to be hired to fill positions which were vacant at the end of the test year.
15; 19' I used the last payroll of July 1980 to compute an annual wage amount. By so 20 doing, I have included all parts of the Company's adjustment which are known 21f and measurable at this time, l
22j Q.
Are the adjustments which you made to employee benefits a result of your wage I
23 adjustment?
24 A.
- Yes, I have recomputed workman's compensation insurance and savings plan
/'
costs based upon the Staff's payroll amount.
N age of Docket No.
3320 r
l I
Q, The Company is requesting to accrue an additional $50,000 annually to the 2
property insurance reserve.
What is your recommendation concerning this q
3 reserve?
4 A.
In Docket 2676, the Commission adopted the Staff's recomendation that HL&P 5
discontinue the accrual to this reserve because there was a sufficient 6
balance in the reserve to cover substantial losses.
In 1979, the Company l
7 charged $125,003 against the reserve which was the cost to repair flood 8
damage sustained as a result of hurricanes Claudette and Elana.
9 As in the last docket, I again recommend that H1,&P not be allowed to '
10 accrue additional amounts to the property insurance reserve at the 11 ratepayers' expense.
A reserve such as this one should not, in my opinion, 12 be charged with relatively minor losses such as the one HL&P charged against it during the test year.
14 Q.
What is the purpose of a reserve such as this one?
15 A.
In general, the purpose of a property insurance reserve is to allow tne l Company to accrue for losses over an extended period of time tt2reby reducinc l; 16 I
17 the impact on the ratepayers or the stockholders.
15l HL&P established its property insurance reserve in the early 1950's to 19 absorb the cost of major uninsured property losses as a result of hurricane i i
20 damage to transmission and distribution lines.
In my opinion, the 5125,003l i
21 charged against the reserve during the test year does not represent a major i
22 loss.
23l Q.
You are recommending that an additional SS7,t?00 be removed from the cost of I
24' service for legislative advocacy o v 1 c.vunt removed by HL&D.
Please i
25 explain your reason for this adj, A
- iL.- _ _ _ _. _
Page 11 of 20 Docket No.
3320 i
i l'
A.
This amount represents legal fees paid to Baker & Botts which I consider to 2
be legisle.tive advocacy. Similar amounts paid to Baker & Botts were removed 3
from the cost of service in Docket 2676.
4 Q.
Why have you lowered the other operation and maintenance expense adjustment I
5 proposed by HL&P by $8,109,000?
[
6 A.
I have made this adjustment based on the recommendation of Staff witness Ms.
7 Barbara Alexander.
1 8
Q.
Why have you reduced the amount requested by HL&P for the Residential 9-Conservation Seuice Program (RCSP)?
10 A.
The Company is requesting $588,000 for this program which was initiated as a 11 result of the National Energy Conservation Policy Act (NECPA) of 1978. The 12 general purpose of the program is to reduce the residential consumption of I
3i energy by providing conservation information to each residential customer le and conducting, at the request of the customer, an on-site inspection of the e'
15 customer's residence.
Based upon this inspection, the utility's l
16 representative will advise the customer of estimated energy savings which 17 could result if the customer implements certain conservation measu.es. HL&D 18 will be offering these ena gy audits to its residential customers in 19S1.
I 19 I have reviewed the detailed estimate of the annual cost of this program l-i 20 provided by the Company.
Included in the $58S,000 requested is $120,000 for 21 automobiles and $23,000 for computer terminals.
These items represent 22 capital expenditures and as such should be capitalized.
Therefore, I have j
23 deducted these amounts from the $688,000 requested.
2;l HL&? plans to charge a fee for performing the energy audits.
As shown M,
on Senedule N-4 of the Rate Filing Package HL&P estimates that this charge IL_ _
i L
Page 12 of 20 Docket No.
3320 I
will generate $300,000 annually:
12,000 audits at $25 each.
Because the 2
maximum amount a utility may charge for an audit by law is $15, I have 3
recomputed the estimated revenue to be $180,000. I have reduced the $545,000 4
estimated annual cost of the program by the $180,000 to arrive at my expected 5
annual cost of $365,000.
By netting the expenses and revenue, the Cc7any 6
will be given a cash working capital allowance on only the net cost of the 7
program.
8 Q.
Have you recomputed the amounts included in operation and maintenance expense 9
which vary with revenues?
10 A.
Yes,'I have. The only item in operation and maintenance expense which varie:.
11 with total revenues is uncollectibles. The computation of ~ 5is adjustment is 12 shown on page 5 of my Schedule I.
43 Q.
Why have you adjusted depreciation expense?
M A.
I have lowered the amount of depreciation HL&P requested by 110,387,000. Mr.
15 Kent Saatboff has proposed a composite depreciation rate of 3.607% rather 16 than the 3.961% HL&P proposed.
In addition, I have recalculated the amount 17 of depreciation which will not be charged to expense accounts.
16 Q.
Please explain your adjustments to taxes other than income.
19 A.
I have recomputed ad valorem taxes based upon the Staff amount for Plant in 20 Servite and Plant Hela for Future Use included in irivested capital.
v El I have also recomputed social security taxes and state and federal l
22 unemployment taxes based upon the Staff's recommended wages included in the' 23 cost of service.
24 Gross receipts taxes and the Public Utility Commission assessment have D
been recomputed based upon the Staff's recommended total cost of service.
IL_
l I
}
Docket No.
3320 Page 13 of 20 I
These amaunts vary directly with re enue.
2 0.
Your computation of Federal income taxes as shown on your Schedule I, page 9 3
starts witn return dollars as determined by the Staff.
Would you explain 4
your approach as presented on this Schedule?
5 A.
1-
.e computed test period income taxes as a derivation of test period 6
return.
The Test period return is the amount of dollars which will allow
'i 7
HL&P to recoup its debt and preferred stock capital costs and provide a f air j
8 return to its equity holders.
This return to equity holders is an after 9
income tax amount.
Therefore, it is necessary to start with the return 10 dollavs less amounts for debt interest plus any other items on which deferred I
11 taxes have not previously been provided or which are direct offsets to taxes 12 payable.
The resulting taxable income af ter income taxes must then be
'3 grossed up to net taxable income before taxes. Tnis number, when multiplied i
I4 by the Federal income tax rate of 46 percent and reduced by tax credits and 15 the consolidated tax savings, provides the actual test period income taxes.
i 16 Q.
How did you compute the amaunt of interest expense which you deducted from l
4 17 the revenue requirement?
18 '
A.
I multiplied the weighted average cost of long-term debt by the total 19' invested capital of HL&P.
20-Q.
When computing the interest deduction, why is it appropriate to use a 2l weighted average cost of debt taken from a capital structure which includes 22 accumulated deferred investment tax credits?
23 A.
The purpose of this calculation it to allocate to the original cost rate base 24 '
only that portion of the total interest costs that would reduce operating F
income before taxes and accordingly have an effect on the amount of Federal
7 Page M of 20 Docket No.
3320 I
incune taxes included in the cost of service. Investment tax credits provide 2
funds which the Company invests in rate base. Theoretically, if the Company 3
did not have investment tax credits, it would have to raise that capital by 6
either issuing additional debt or additional equity.
In my opinion, to 5
exclude the unamortized investment tax credits from the capital structure 6
when computing the weighted average cost of debt results in a distortion of 7
the weighted average cost of the components of the capital structure.
S Q.
Have you adjusted the current amortization of accumulated deferred 9
investment tax credits in your calculation of Federal income taxes?
10 A.
Yes, I have. Because the Staff is recommending a composite depreciation rate l
11 different from th3t requested by HL&P, it is necessary to adjust the current 12 amortization of accumulated deferred investment tax credits to be
.32 consistent.
14 Q.
Please explain your adjustments to other revenues shown on page 10 of your 15 Schedule I.
16 A.
I have increased other revenues by 5415,000 which represents oil and gas royalties, oil production income and rcatal income which HL&P received during 17 18 the test year.
Becausethesourcesofthisincomeareincludedininvestedl 19 capital, the ratepayers should receive the benefit of the income.
l 20, I have decreased other revenues by the $300,000 which HL&P anticipated i l
21 receiving for the energy audits under the RCSP program.
As I discussed i l
22 earlier in my testimony, I have reduced the expected cost of this prograr by '
t 23 the expected revenue.
24 !
The net amount of these adjustments is an increase to other revenue of l
?S
$115,000.
1 i
l
age D of M Decket No.
3320 i
l Q.
Would you please briefly explain page 1 of your Schedule II?
2 A.
This Schedule presents the major components of the Staff's proposed adjusted l
3 value of invested capital at March 31, 1980. I have used the mix percentages
)
4 presented by Mr. Child and the current cost of plart in service net of i
5 adjustment for age and condition proposed by Mr. Saathoff. Original cost of
.I 6
net plant and the other elements of invested capital are shown on page '. of 7
my Schedule II.
8 Q.
You have increased Plant in Service by $786,000.
Please explain the reason 9
for this adjustment.
10 A.
This amount represents land on which the Company has built a fuel oil 11 pipeline.
The pipeline is complete and in service.
The Company 12 inadvertently failed to reclassify the land to account 101 from plant held 1
for future use.
This reclassification has no effect on either the tctal I
14 original cost of invested capital or the total revenue requiremeat. However, 15 it does have an impact on the adjusted value of invested capital.
16 Q.
The Staff has excluded from invested capital $259,903,000 of the construction 17 work in progress (CWIP) at March 31, 1980.
Please explain what this amount 18-represents.
19 A.
Of the total amount excluded, $67,947,000 represents 16 percent of the 20 construction costs to date on the South Texas Nuclear Project (STNP). Based 5
21 on Mr. Sweatman's recommendction, the Staff has removed 16 percent of the 22 costs incurred t;irough the end of the test year.
23 In his testimony, Mr. Sweatman expressed serious doubts that the 24 Company will ultimately build the Allen's Creek Nuclear Project. Therefore, J
25 the Staff has decided to exclude these costs from invested capital until a i
i L_ _.__ _
f
16 of 20 i
Page Docket No.
3320 j
I l
i' construction permit for the project has been issued by the Neclear Reg late.ry i!
Commission and the uncertainty of the project has been removed.
Q.
Why are you proposing to exclude $22,115,000 from Plant Held for Future Use?
4 A.
There are many f actors to be considered in analyzing plant neld for future 5
use.
Most of these are difficult to quantify and represent reasons other 6!
Commissions have decidci to disallow plant held for future usa ent i re.ly. In i
7 certain instances, a company might not even be able to find a substation site 8
in a rapidly growing area if the site had not been purchased in prior years.
9 This f actor may cause some utilities to gamble on the growtt. in certair, areas 10 by purchasing sites ahead of time.
If the projected growth does not take 11 place as anticipated, ratepayers have paid the carrying cost of property that 12 may be delayed in use for many years or cancelled altogether. This is a risk 13' that should be borna by the ratepayers only when it can be shown that the 14 Company has a definite plan for the property's use within a reasonable time 15 period.
This Commission has determined in past cases that property which 16 will not be placed in service within the next ten years should not be 17 included in invested capital.
The amount which I have excluded represents 18 about seventeen items for which the Company has no scheduled use before 1990.
19 Q.
On page 2 of your Schedule II, you have excluded from invested capital 20
$14,895,000 of unrecovered investments requested by the Company. Why did you 21 rnake this adjustment?
22 A.
The Company requested the inclusion of unrecovered investments in invested 23 capital in its last rate case before this Commission. Because the Comission,
24l I
has consistently excluded such items from rate base, I have removed the W
$14,895,000 from my invested capital.
1 I
I 17 of 20
' Dock et No.
3320 Page l
1 Q.
Is there any theoratical justification for in:luding these amounts in the 2
rate base?
3 A.
The amounts HL&P is requesting to include in invested capital represent the i
4 Allen's Creek cancellation charges, t'ie Freestone Project cancellation l
5 charges as all as amounts paid for a manpower study, an appliance saturation 6
survey and a co-generation study.
These costs are being amortized over a 7
five-year period. Because the Company will recover these costs ratably over 8
five years, the only way that HL&P will be made whole is to include these 9
amounts in invested capital.
Exclusion of these amounts from invested 10 capital results in a sharing of these costs between the shareholders and the 11 ratepayers.
12 Q.
Why have you excluded the $18,000,000 HL&P has invested in lignite 13 leases?
14 A.
This $18,000,000 represents advance royalties HL&P paid in order to 15 acquire certain lignite lenes from Dow Chemical Company.
This 16 lignite is to supply a substantial portion of HL&P's fuel 17 requirements for the Limestone Electric Generating Station (LEGS).
lE In Au,ust of 1979, UFI signed a contract with Northwestern 19 Resources Company (NWR) which states that NWR will both provide a 20 portion of the lignite reserves and mine the lignite for LEGS. The 21 contract further states:
l 22 "UFI is currently negotiating for the accuisition of 23, leases in the Reserve Area... and upon the start of I
24 l production, will sublease said reserves to NWR 25 pursuant to Section 2.8" i
l.
i Page 18 of 20 Docket No.
3320 i
1 Also, in a sworn statement, Mr. George 0prez stated that HL&P plans to 2
transfer to UFI the lignite leases acquired from Dow.
3 Because HL&P fully intends to transfer these leases to UFI, it would be 4
inappropriate for the ratepayer to pay a return on the $18,000,000.
The 5
agreement between Dow and HL&P pertaining to these leases does not prohibit 6
the Company from assign lng these rights to UFI.
7 Q.
Please explain your computation of the cash allowance portion of working 8
capital.
9 A.
I have included a cash working capital allowance equal to one-eighth of the 10 Staff's recommended operation and maintenance expense after deducting the 11 amounts charged to expense during the test year from materials and supplies, 12 prepaid taxes and prepaid insurance.
In my opinion, this me.aod best 13 estimates the investment the Company must have to meet its day-to-day 14 ot, ligations. It is a method that has been tested in the courts and while any 15 method is, at best, an estimate, I feel that this is the most satisfactory 16 method of calculating the working cash investment the Company must maintain.
17 Q.
Why did you reduce the cash allowance for items in prepayments and inventory i
18 charged to operation and maintenance expense?
l 19 A.
I reduced the cash allowance to avoid a possible overiecovery of items in i 20 naterials and supplies inventory and prepayments.
For example, if a $130 21 item in prepayments is included in the prepayments balance for the first,
l 22 eleven months of the test year before being charged to expense, the Company' 23 would get the benefit of:
(1) 12/13ths of the value in prepayments or 5120 i 24,
plus (2) one-eighth of the value in the cash allowance or $16.25. Thiswouldf t
Mi mean a total working capital of 5136.25 on an item costing 5130. Therefore, il ~_
l I
Page 19 of 20 Docket No.
3320 I
any items in materials and supplies or prepapents that are charged to 2
operation and maintenance should be subtracted out of operation and 3
maintenance expense before the one-eighth allowance is calcuhted.
4 Q.
Have you made any other adjustments to the working capital allowance 5
requested by the Company?
6 A.
Yes.
HL&P has requested inclusion of the thirteen-month average of 7
prepayments.
I have excluded from this amount the thirteen-month average of 8-miscellaneous prepayments whicn includes workman's compensation insurance 9
and amounts paid to the Texas Atomic Energy Research Foundation.
In my
{
10 opinion, these do not represent normal prepaid items and should therefore be 11 excluded from this computation.
i 12, Q.
Would you please explain your adjustment for Other Cost-Free Capital?
l 13 !
A.
This represents the amount that HL&P has accrued as of March 31, 1930 for its i
14 contribution to the Clinch River Breeder Reactor Project.
Although the 15 Company is committed to contribute this amount, the Breeder Reactor 16 Corporation has informed participating utilities that it would not call for i
17 contributions "until sometime after January 1, 1981".
Because the l
18'
$1,826,000 has been provided by the Company's ratepayers and there is no f
I 19; corresponding current outflow of cash, this amount represents non-investor i
20' supplied funds and therefore should be deducted in arriving at the invested 21 capital of HL&P.
22 Q.
Would you sumarize the Staff's recommendation in this case?
?3!
A.
The Staff is recommending a total cost of service of $2,280,632.
After t
24; deducting the portion of f :1 expense recoverable through the fuel adjustment l
25 clause, city franchise requirements and other operating revenues, the Staff I
a f
I__
l l
Page 20 of 20 Dxket No.
3320 1
is proposing a base rate revenue requirement of $955,390.
2 Q.. Does this conclude your testimony?
3 A.
Yes, it does.
4 i
'5 6
i-7 8
l 9
I 10 11
~
12 3
14 15 16 17 lE _g 19' 20 21 22 23 I
i t
24 '
1
?$,
l l____
4 Schedule 1 (Blumenthal)
. age 1 of 10 PUBLIC llTILITY COMMISSION OF TEXA5 HOUSTON LIGHTING AND POWER COMPANY
~ TOSI 'If SLTiVICL TWELVE MONTHS ENDID MARCH 31, 1980 (T110li5WNT6 TriolTARK)'-~ -
CompanJ_(a.)
Staff Exhibit Test Period Claimed income No_.__
Des _c_ri t_ie n Refere _nce
._A.m..oun.t
_ Deficiency
_T_otal Adjustments A_s__Adju_s te_d_
Line a
I ('iltr.enthal) p.2
$1,290,776
$(49,036)
$1,241,740
$ 21,713
$1,263.453 1
ruel I
2 Recoverable city franchise requirements I (Blumenthal) p.4 44,522 3,694 48,216 (873) 47,343 I (81urenthal) p.5 258,444 571 259,015 (11,377) 247,638 3
Operation and maintenance 4
9epreciation and amortiration I (Blumenthal) p.7 116,2,0 116,260 (10,387) 105,R73 I (Blumenthal) p.8 88,119 1,945 90,064 (1,796) 88,?68 5
Taxes other than income 4,813 4,813 4,813 6
Amorti7ation of deferred debits I (Plumenthal) r.9 101,683 97,465 199,153 (18.037) 181,116 7
Federal income taxes 574 574 574 8
Interest en customers' deposits 11 (Blumenthal) P.1 248,420 114,416 362,836 121,282) 34,1,554 9
Return
$7.153,616(h)
$169,055(t,)
$2,322,671(b) $(42,039) $2,230,632 10 Total cost of service I (Blurenthal) p.10 (1,348,473) 44,187 11,304,2R6)
(20 95,6) [1,325,2j2) t 11 Fuel and other revenues
$,001.113
$211,2_42
$LQ10J03
$D2.J25) $J55.J20 12 Base rate revenue requirement (a) Schedule A, page 1 (Rate Filing Package).
(b) Schmiule N-2 (Rate filing Package).
F' Schedule I (R1umenthal)
Pace 2 of 10 PUBLIC UTILITY COMMISSION OF TEXAS HOUSTON LIGHTING AND POWEP. COMPANY
.i FUEL EXPENSE il STAFF ADJUSTMENT
!.j i!
t TWELVE MONTHS ENDED MARCH 31, 1980 (THOUSANDS OF DOLLARS) l Line Ma'H Heat Cost Fer Fuel f!c.
Description Generation Rate (a)
Meet Ib) fiEtu Exper,:e 1
Gas supplier el s,152,291(a) 10.237 134,6t0
$1.042(a) 5140,295 2
Gas supplier #2 31,818,445(a',
10.237 325,725 2.669(a) 869,361 i
3 CoPI 9,690,379(a) 10.726 103,939 1.97 (d) 204,759 1
e Oil 2,557,877 10.442 26,709 1.E36(c) 49,035 i
Totals 57.219.992 51.263,453 4
I (a) Schedule A, page 3 (Rate Filing Package).
'(b)
MBtu= 10 (c) Weighted average ccst of *2 oil in inventory per Schedule G-1 (Rate Filing Package).
(d) Schedule I (Blumenthal) p.3.
4
. ~ -,
I I i
i i
l Schedule I (Blumenthal)
Page 3 of 10 l
I 1
PUBLIC UTILITY COMMISSION OF TEXAS HOUSTON LIGHTING At!D POWER COMPANY COMPONENTS OF C0AL COST TWELVE MONTHS ENDED MARCH 31, 1980 Line Staff No.
Description Amount 1
Base coal charge per ton
$29.586 2
Handling charge per ton 1.986 3
Inventory carrying charge per ton 1.131 4
Fixed charge per ton 1.187 5
Total cost per ton
$33.89 6
MB:u per ton
+17.2 (a) 7 Cost per tiBtu 5 1.970 (a) Test year average heat rate.
{
i Schedule I (Blumenthal)
{
Pace 4 of 10 l
l
.I l
PL'BLIC UTILITY COMHISSION OF TEXAS HOUSTON LIGHTING AND POWER C0t',PANY REC 0VERABLE CITY FRANCHISE STAFF ADJUST".ENT TWELVF $40NTHS ENDED P. ARC 8; 11, 1980-(THOUSANDS OF 00LDiRS)
Line Staff No.
Description Adjustment 1
Total.. st of service
$2,-280,632
( 3,)
j t
2 Rate 2.0759' (b) l I
47'343 3
Staff amount 4
Company amount (48,216)
(c) g)
(as Schedule I (Blumenthal) pace 1.
(b) Conpany amount as adjusted divided by Company recuested total cost of service.
(c)
Schedule A, pace 4 (Rate Filing Package).
I 4
Schedule I (Blumenthal)
Page 5 of 10 PUBLIC UTILITY C0ftMISSION OF TEXAS I
HOUSTON LIGHTING AND POWER COMPANY i
OPERATION AND MAINTENANCE EXPENSES STAFF ADJUSTMENT TWELVE MONTHS ENDED MARCH 31, 1930 (THOUSANDS OF 00LLAPS)
Staff Line No.
Descrir 'on Adjus* ment 1
Payroll expense 2
Staff amount 5 17,765 (20,323) (a)
$(2,555) 3 Company amount 4
Employee benefits S (1,634) 5 Staff amount 1,525 (b)
(109) 6 Company amount 7
Provision for property insurance 8
Staff amount 5 '50) (c)
(50) 9 Company amount 20 legislative advocacy al Disallowance of amounts related to (87) legislative advocacy 12 Other operation and maintenance 23 Staff amount 5 1,630 (9,739)(d)
(8,109) 14 Company amount l
15 Energy check procram 16 Staff amount S
365 (688) (c)
(323) 17 Company amount 18 Unco 11 ecd bles t
19 Cost of service
$2,280,632 l
20 Rate X
.338% (f)
I 21 Staff amount S
7 70c 7,*85d (f)
(141)
I 22 Company amount Sf11.377) 23 Total Staff adjustments 1
Schedule I (Blumenthal)
Page 6 of 10 PUBLIC UTILITY C0!t'41SSION OF TEXAS HOUSTON LIGHTING AND POWER COMPANY FOOTNOTES (a) Schedule A, page 7 (Rate Filing Pickage).
(b) Schedule A, page 8 (Rate Filing Package).
(c) Schedule A, page 9 (Rate Filing Package).
(d) Schedule A, page 14 (Rate Filing Package).
(e) Schedule A, page 15 (Rate Filing Package).
(f) Schedule A, page 13 (Rate Filing Package).
Schedule I (Blumenthal)
Page 7 of 10 PUBLIC UTILITY COMMISSION OF TEXAS HOUSTON LIGHTING AND POWER C0!1PANY DEPRECIATION AND Att0RTIZAT10h STAFF ADJUSTt1ENT THELVE MONTHS ENDED ttARCH 31, 1980 (THOUSANDS OF DOLLARS)
Line Staff No.
Description Ad.iustment 1
Depreciable base
$3,038,273 (a) 2 Composite rate X
3.607%(b) 3 Total depreciation
$ 109,590 4
Less depreciation charged to other accounts (3,736)(c) 5 Add amortization of limited term easements 19 (d) 6.
Staff anount 5 105,873 7
Company amount (116,260)(d)
S(10.387)
(a)
Schedule I-5, page 4 (Rate Filing Package).
(b)
Kent'Saathoff, Commission Staff Engineer.
(c) Computed as ratio of amounts shown on Schedule I-5, page 2 (Rate Filing Package), column e.
(d) Schedule I-5, page 2 (Rate Filing Package).
j.i t
$chedule I (Blumenthal)
Page 8 of 10 I
I i
PUBLIC UTILITY COMMISSION OF TEXAS H0'JSTON LIGHTING AND POWEP COMPANY TAXES OTHER THAN INCOM:
5'AFF ADJUSTMENTS T
i TWELVE MONTHS ENDED MARCH 31, 1980 (THOUSANDS OF DOLLARS)
Line Staff No.
Description Adjustment 1
Ad valorem taxes 2
Plant in service and plant held for future use @ 3-31-80
$3,108,617 (a) 47,HT(b)
.0152 3
Rate x
4 Staff amount 5
5 Company amount (47,576)(c) 5 (325) 6 Social security taxes 7
Staff amount S
7,080 8
Company amount (8,076)(c)
(996) 9 State unemoleyment 10 Staff amount S
35 11 Company amount (39)(c)
(4) 12 Federal unemplovment 13 Staff amount S
242
_222) 20
(
14 Company amount 15 Gross receipts.Public Utility Commission Assessment l
16 Cost of service
$2,280,632 17 Rate X
.011499 lE Staff arount 5
26,225 19 Company amount (26,716)(c)
(491) 20 Total Staff adjustments 5(1,796)
I (3) Scnedule II (Blumenthal) page 2 (b) Company Schedule I-E workpapers I
(c) Schedule I-E, page 1 (Rate Filing Package)
7-Schedule I (Blumenthal)
Page 9 of 10 PUBLIC UTILITY COMMISSION OF TEXAS HOUSTON LIGHTING AND POWER COMPANY FEDERAL INCOME TAXES TWELVE MONTHS END2D MARCH 31, 1980 (THOUSANDS OF DOLLARS)
Line No.
Description Amount 1
Return S 341,554(a) 2 Interest on long-term debt (ll7,070)(b) i 3
Non-normalized timing differences and other credits:
4 Surtax exemption (19) 5 Depreciation 562 6
Amortization of investment tax credit (5,800)(c) 7 Other 218 (5,039) 8 Income after income taxes S 219,445 t
9 Factor for Federal income taxes before amortization of tax credits and other X.851851852 10 Federal income taxes before amortization of tax credits and other
$ 186,935 11 Amortization of investment tax credits and surtax exemption (5,81 9) 12 Staff Federal income taxes
$ 181,116 13 Company Federal income taxes (199,153) (d) 5 (18,037) 14 Staff adjustment (a) Schedale II (Blumenthal) page 1.
(b) Weighted average cost of debt applied to Staff invested capital.
(c) Unamortized investment tax credit multiplied by Staff composite depreciation rate.
(d) Schedule A, Page 17 (Rate Filing Package).
_, _. -, - - ~.
~ ~ ~ '
h Schedule I (Blumenthal)
Pane 10 of 10 Pl!BLIC UTILITY COMMISSION OF TEXA5 HOUSTON LIGitTING AND POWfR COMPANY T~UTL7.90 01llL_R RlVliluf S, TWELVE MONTil5 ENDFD MARCII 31, 1980 (IllT)iiXKhisIITIlifRS)
Staff Company _
As Test Period Amount Adjustmge Total Adjustments Ad usted Line L
') esc ription
[])
[2)
(3)
(4)
(5)
(6 1
Recoverable fuel
$1,290.776 (a)
$(49,036) (a)
$1,241,740 (a) 121,713
$1,263,453 (c) 2 Recoverable city franchise requirements 44,522 (a) 3,694 (a) 4R,216 (a)
(872) 47,344 (d) j 13,17_5_ (b) 1,155_ (b) 14,330 (b)
Q 14,445 (e) 3 Other revenues 4
Total 1124E dD
$(44.18Z) 11,30LZB6
$20_J56 11.325J42 1
4 Schedule A (Rate Filing Package).
(a)
(b) Schedule N-4 (Rate Filing Packar;c) and Schedule N-2 (Rite Filing Packaae)
(c) Schedule I (Blurrenthal) pane 1.
Schedule I (Blumenthni) page 4 (d)
(e) Calculated from Company responses to Staff requests for infonnation anri Schedule 0 (Rate rtilng rackage).
4 t
li
+
9 n_ s at% m e.6 em me=-s~==
Schedule II (Blumenthal)
Page 1 of 3 PUBLIC UTLITY COMMISSION OF TEXAS HOUSTON LIGHTING AND POWER COMPANY AD,1USTED VALUE OF INVESTED CAPITAL AND RfTURN TWELVE MONTHS ENDED MARCH 31, 1980 (THOUSANDS OF DOLLARS)
Mix NL Description Exhibit Reference Computation Amount line 1
Net Plant - original cost II (Blumenthal)p.1 $2,494,503 Child X
63.75%
$1,590,246 2
Percentage mix 3
Net plant - current cost Saathoff
$4,036,880 Child X
36.25%
1,463,369 4
Percentage mix 589,4S7 5
Construction work in progress 3,262 6
Plant held for future use 87,966 7
Nuclear fuel in process 109,915 8
Workin9 capital (219,920) 9 Deferred federal income taxes 10 Pre-1971 unamortized investment (9,318) tax credit (9,816) 11 Customers' deposits (18,173) 12 Customer advances (8,475) 13 Reserve for property insurance (344) 14 Reserve for injuries and damages (1,826) 15 Other cost-free capital f
53.576.373 16 Adjusted value of invested capital i
$ 3c1.554 17 Return 99.551 s
- - + - -
Schedule ?* (Blumenthil)
Page 2 i,i ;
PUBLIC UTILITY C0r9115510N OF TEXM HOUSTON LIGHTINt; AND POWER COMPANY INyt51th CAPITNt TNii #TTilHN TWEtVE MONTHS INDFD MARCH 31, 1980~
(lh00$Xhil N hWLiTRS)
Lino i
Descript_lon Exhibit Reference Company (a)
Adjustments As Adj_usted 1
Plant in Service
$1.104,569 786
$3.105.355 4
2 Accumulated Depreciation (610 R52) j6_10,8E) 2 3
Not Plant in Service
$2,493,717 786
$2.444,503 4
Construction Work in Progress II (Blumenthal) p.3 708,787 (119.300) 589,487 5
Plant Held for Future Use 25.377 (22.115) 3.262 6
Nuclear Fuel in Process 87.966 87,966 7
Unrecnvered Investments 14,895 (14,895) 8 Advance for Lignite Leases 18,000 (18,000) l 9
Farking (,apital II (Blumenthal) p.3 111.280 (1,365) 109.915 10 Deferred rederal Income Taxes (219,920)
(219,920) 11 Pre-1971 linamortired Investment Tax Credits (9,318)
(9.318) 12 Customers' Ocposits (9.816)
(9,816) 13 Customer Advances (13.173)
(18,173) 2 14 Reserve for Property insurance (8,475)
(8,475) 15 Reserve for Injuries and Dama9es (344)
(344) 16 Other Cost - Free Capital (1,826)
(1,R26) 17 Total Invested Capital 13.193.975 K11_6g)
$3OJ7J11 1R Daturn 911.37% Staff; U.l_445S 911.36% Company
$_ 3_62.836 (a) Schedule B (r. te Filing Parkage).
e 9 he - - w a w _
r Schedule II (Blumenthal)
Page 3 of 3 PUBLIC UTILITY C0ffilSSION OF TEXAS HOUSTON LIGHTING AND POWER COMPANY INVESTED CAPITAL STAFF ADJUSTt1ENTS TWELVE MONTHS ENDED PARCH 31, 1980 (THOUSANDS OF DOLLARS)
Line Staff No.
Description Adjustments 1
Construction work in progress i
2 Staff amount S 589,487 3
Company amount (708,787)(a)$(119.310) 4 Working Cacital 5
Working cash allowarte
$ 26,800 6
Materials and supplies 27,719 7
Prepayments 4,516 8
Fuel inventory 50,880 t
9 Staff amount 5 109,915 10 Company amount (111,280)(b)5 (1.365)
{
( a,' Deternined from Schedules B and C-1 (Rate Filine Package).
(b)
Schedule G (Rate Filing Package).
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