ML20030B613
| ML20030B613 | |
| Person / Time | |
|---|---|
| Site: | Allens Creek File:Houston Lighting and Power Company icon.png |
| Issue date: | 07/31/1981 |
| From: | Campbell R HOUSTON LIGHTING & POWER CO. |
| To: | |
| Shared Package | |
| ML20030B571 | List: |
| References | |
| NUDOCS 8108180354 | |
| Download: ML20030B613 (31) | |
Text
r 1
2 3
4 5
6 DIRECT TESTIMONY OF 7
8 R.
L. CAMPBELL 9
10 for 11 12 HOUSTON LIGHTING & POWER COMPANY 13 14 July 1981 15 16 17 18 19 i
20 21 22 23 l
24 25 I
26 27 9108180354 810812 '
28 PDR ADOCK 05000466 i
I PDR1-i i
HOUSTON LIGHTING & POWER COMPANY
/
PAGli 1
o}: 29 y
TESTIMONY OF RICK CAMPBELL 2
Q.
PLEASE STATE YOUR NAME, BUSINESS ADDRESS, AND POSITION WITH 3
HOUSTON LIGHTING & POWER COMPANY.
4 A.
My name is Rick L.
Campbell and my address is 611 Walker 5
Avenue, Houston, Texas.
I am Manager of the Accounting 6
Services Department.
7 8
0 WOULD YOU PLEASE DESCRIBE YOUR EDUCATIONAL BACKGROUND, 9
BUSINESS EXPERIENCE AND PROFESSIONAL QUALIFICATIONS?
A.
I received a B.B.A.
in Accounting from Texas Tech 10 University and joined HL&P as an internal auditor soon 33 thereafter.
I later served as senior auditor specializing 12 13 in EDP auditing before being promoted to a supervisor in the g4 Treasury Department over taxes and external reporting.
In 15 May cf 1977, I became a manager in the Accounting Department 16 and now report to the Vice President and Comptroller of the 17 Company.
I am responsible for HL&P's financial reporting to the Public Utility Commission of Texas, the Federal Energy 18 Regulatory Commission, the Securities and Exchange y9 i
l 20 Commission, and the various security holders.
My 21 responsibilities with the Company also encompass financial 22 f recasting, departmental budgeting and district accounting l
23 Perations.
I am a Certified Public Accountant and a member 24 of the American Institute of Certified Public Accountants 25 and the Texas Society of Certified Public Accountant 7.
26 l
27 s
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HOUSTON LIGHTING & POWER COMPANY
PAGE 2
op 29 Q.
HAVE YOU PREVIOUSLY TESTIFIED BEFORE THE PUBLIC UTILITY 3
COMMISSION?
A.
Yes, as a rebuttal witness for the Company in Docket 3
No. 2001.
4 5
Q.
HOULD YOU PLEASE SUMMARIZE YOUR TESTIMONY IN THIS PROCEEDING?
6 A.
My testimony will address the following areas:
7 8
1.
The financial and accounting data contained in the 9
Rate Filing Package, namely, the overall cost of service and related adjustments as summarized in 10 Schedule.. and the rate base as presented in 33 Schedule B.
y, 2.
The amount of construction work in progress in rate 13 base in order to achieve the return specified in the g4 testimony of Mr.
R. S.
Letbetter.
15 3.
The current cost of plant adjusted for age and 16 condition.
g7 Q.
HAS HL&P's RATE FILING PACKAGE BEEN PREPARED IN ACCORDANCE 18 WITH TUE REQUIREMENTS OF THE PUBLIC UTILITY COMMISSION?
gg A.
Yes.
On January 13, 1981 the Commission transmitted to all 20 i
Class A and B electric utilities new instructions for 21 j
electric rate filing packages.
All schedules have been l
Prepared pursuant to the Commission's new instructions.
23 Q.
WHO WITHIN THE COMPANY WAS RESPONSIBLE FOR PREPARING THE 24 1
l VARIOUS SCHEDULES?
73 l
l 20 2,
l l
'8 l
HOUSTON LIGHTING & POWER COMPANY
PAGE 3
OF 29 i
1 A.
All of the schedules setting forth the cost of providing electric service were prepared under my supervision.
Per 3
books entries on all schedules, including those used in cost 4
allocation and rate design, were supplied by various 5
accounting personnel of the Company under the supervision of R.
S.
Letbetter, Vice President and Comptroller.
The cost 6
7 allocation and rate design schedules were prepared under the 8
supervision of R.
E.
Doan, Vice President.
9 Q.
WHAT DOES THE DESIGNATION "PER BOOKS" INDICATE ON EACH SCHEDULE?
10 ij All "per books" information refers to entries taken from A.
jy the accounting records of the Company, which have been 13 reviewed by an outside accounting firm.
Included in the j4 rate filing package is a letter from Deloitte Haskins anc 15 Sells reflecting their review of the Company's books and 16 records and various rate filing schedules.
I.
COCT OF SERVICE 37 0
WHAT IS MEANT BY COST OF SERVICE?
18 A.
The Commission's Substantive Rule 052.02.03.032(a) defines 39 20 cost of service as that " amount of revenue required to (1) 21 cover all reasonable and necessary expenses properly 22 incurred by the utility in rendering service to the public 23 and (2) provide a fair and reasonable return on the adjusted 24 value of invested capital used and useful in rendering such service".
Schedule A reflects the overall cost of service 25 26 27 28 HOUSTON LIGHT!NG & POWER COMPANY
PAGE 4
OF_ Es i
for Houston Lighting & Power Company for the test year ended 2
March 31, 1981.
3 Q.
WOED YOU MEASE DESCRIBE SCHEDEE A?
A.
The items detailed in Schedule A present revenue and 4
5 expense amounts as recorded on the books of the Company 6
(column b), the effect of the adjustments to actual costs to 7
bring them to the levels experienced at the end of the test 8
year and the effect of adjustments for known and measurable 9
changes (column d), and the effect on the test year of the 10 Proposed new rates (column g).
Each of the adjustments is 3;
referenced to a supporting schedule in the Rate Filing g
Package which provides underlying detail regarding the 13 nature and calculation of the adjustment.
As shown on page 34 1, we have determined our overall cost of service to be 15 approximately $2.8 billion for the test year ended March 31, 1981 with a resultant requested rate increase of $248 16 million over the adjusted test year revenues.
g7 Q.
WHY HAS THE TEST YEAR COST OF SERVICE BEEN ADJUSTED?
18 A.
The Company has adjusted historical test year data in order g9 to arrive at more representative data from which future 20 33 revenue requirements can be determined.
Rates are set for the future, not the past.
If the 22 test period reflects the relative level of revenues, 23 24 Operation and maintenance expenses, depreciation, taxes, and capital costs that will exist when the new rates are in 25 26 27 28 HOUSTON LIGHTING & POWER COMPANY
PAGE 5
01: 29 y
effect, then the new rates can be set to recover these costs 2
and both the Company and our customers will be equitably treated.
In an effort to approximate these results, we have 3
4 used an historic test year as the basis for our test period 5
and have made adjustments for changes which will be applicable when the new rates become effective.
The 6
7 Principal shortcoming of this approach, of course, is that 8
it might not completely reflect the level of operations that 9
will exist when these new rates become effective in 1982.
0 WAT IS THE GENERAL NATURE OF THE SCHEDULE A ADJUSTMENTS 10 UNDER COLUMN C, LABELED " CURRENT RATES"?
yj A.
These adjustments annualize the book figures to more g
13 closely reflect the level of company operations at test year
- 4 end, normalize book amounts to compensate for unusual conditions, and make allowance for known and measurable 15 r reasonably probable changes, 16 0
WOULD YOU PLEASE EXPLAIN THE ADJUSTMENTS MADE TO 17 RECOVERABLE FUEL AND PURCHASED POWER EXPENSE?
18 A.
In general the amount per books has been adjusted to 39 reflect 1) changes in test year kilowatt hour sales 20 resulting from adjustments for weather, year end customers 21 and usage per customer that were provided by Mr. J.
M.
Edwards, 2) changes in fuel mix, and 3) the 23 24 recoverable portion of purchased power expenses.
Kilowatt hour sales were adjusted to generation levels to recognize 25 26 27 28 HOUSTON LIGHTING & POWER COMPANY
PAGE 6
op 29 line losses and then converted to units of energy consumed 3
using appropriate heat rates and the availability of fuel 3
when the proposed rates become effective.
Gas volumes are 4
either fixed contract amounts or amounts anticipated to be under contract in 1982.
The quantity of coal is based upon 5
6 an average capacity factor of 65.8% for W. A.
Parish units 7
5, 6 and 7.
The costs used for gas were either the prices 8
as of the test year end or contractual prices effective 9
January 1, 1982, and the price of coal reflects tha March 1981 invoice price less nonrecoverable amounts because of 10 the limitations imposed by Docket 3320.
The cost used for jy anticipated purchased power was the price as of the test g
13 year end for fuel costs and operation, maintenance and start-up cost portions of economy purchases.
34 Q.
DOES THIS ADJUSTMENT TO RECOVERABLE FUEL AND PURCHASED 15 OER EMNSE WM M CHMGES M COMN IS PROPOSMG 16 IN THE FUEL COST ADJUSTMENT?
17 A.
Yes.
The Fuel Cost Adjustment as defined in the approved 18 tariff in our last rate case, Docket 3320, will generally be 39 maintained; however, as discussed by Mr. Doan and Mr.
20 Letbetter there are minor modifications proposed.
21 Q.
PLEASE EXPLAIN THE LINE ENTITLED " RECOVERABLE CITY g
FRANCHISE REQUIREMENTS".
23 A.
Pursuant to Docket 2676, city franchise requirements are 3
- "9 ******
- "9
'9' *"'
25 26 27 28 l
HOUSTON LIGHTING & POWER COMPANY
PAGE 7
OF 29 j
adjustment for recoverable fuel.
The amount under current 2
rates represents 4% of the appropriate fuel and base 3
revenues collectible within municipalities.
As discussed 4
later in my testimony, the Company proposes to charge 4% of 4
5 revenues including the surcharge itself since a number of 6
municipalities are assessing HL&P on that basis.
7 0
PLEASE EXPLAIN THE ADJUSTMENTS MAD 3 TO OPERATION AND 8
MAINTENANCE.
9 A.
There were a number of adjustments made to the book amount and these are summarized on page 5 of Schedule A.
The first 10 adjustment is to purchased power and wheeling costs.
The
- y Per books amount for purchased power consists of a capacity 12 13 charge to the City of Austin and the operation, maintenance 14 and start-up cost of non-economy purchases that were scheduled from the City of Austin.
Economy energy 15 Purchases, power brokerage, fuel costs related to all 16 purchased power, and operation, maintenance and start-up 37 costs of economy purchases are included with recoverable 18 fuel expense as shown on Schedule A, page 2.
39 Included in our adjusted cost of service for purchased 20 power is the cost of 800 MW of power under contract from the
., 3 City of Austin.
The original agreement between HL&P and the 2.,
City of Austin provided for the purchase of 500 MW of 23 24 Power.
An amended agreement became effective January 1, 1981 which, among other things, increased the available 25 26 27 HOUSTON LIGHTING & POWER COMPANY l
PAGl!
8 op 29 g
generating capacity to 800 MW for the years 1981 through 3
1987.
Also included in the adjusted cost of service for 3
Purchased power is the cost of 500 MW of power under contract from City Public Service of San Antonio.
This 4
5 agreement was entered into in June 1980 and is to begin in 6
January, 1982.
7 An adjustment is also being made for operation, 8
maintenance and start-up costs related to non-economy 9
purchases, since these costs are not currently recoverable 10 through the fuel clause.
A rate per KWH for operation, gi maintenance and start-up costs was developed 'vom the test 12 year end billings and was reduced by th; cmount relating to 13 recoverable economy purchas.es.
The resulting 14 non-recoverable rate was applied to the purchased power KWH's that are shown on Schedule A, page 2.
15 In conjunction with our purchase power agreements, HL&P 16 has entered into an agreement with the Lower Colorado River 17 Authority (LCRA) whereby LCRA has agreed to transmit the 18 power purchased from the City of Austin through LCRA 39 transmission lines to HL&P.
The test year amount for i
20 wheeling expense is adjusted to reflect their annual charge.
21 Q.
WOULD YOU PLEASE EXPLAIN YOUR ADJUSTMENT TO WAGE AND SALARY g
EXPENSE?
23 1
A.
The wage and salary expense adjustment is based on 24 '-
l Personnel requirements to serve year-end 1 el of customers 25,
i and has five components:
26 27 l
28 i
HOUSTON LIGHTING & POWER COMPANY
PAGE 9
OF 29 1.
An adjustment to reflect the ; mber of employees and j
2 wage levels effective at March 31, 1981; 3
An adjustment to reflect known salary changes for 2.
4 uni n supervisory personnel; 3.
An adjustment to reflect the known union wage 5
6 increase; 4.
An adjustment for wage and salary increases applicable 7
8 to existing non-union personnel; and 9
5.
An adjustment for additional personnel for which there 10 were outstanding personnel requisitions at March 31, 1981.
yj 12 Q.
WHY ARE ADJUSTMENTS TO WAGE EXPENSE NECESSARY?
13 A.
If the test period reflects the level of wage expense that 14 will exist when the new rates are in effect, then the new 15 rates can be set to recover these expenses and both the 16 Company and our customers will be equitably treated.
g7 Accordingly, adjustments to actual wage expense were made in 18 rder to bring these expenses to levels experienced at the 39 end of the test year and to adjust them for known and 20 measurable changes which will occur before the proposed rates are in effect.
33 G.
WOULD YOU PLEASE EXPLAIN YOUR ADJUSTMENT TO EMPLOYEE g
B3NEFITS EXPENSE?
23 24 Each of the major components of employee benefits expense A.
25 was adjusted separately.
Workmen's compensation insurance 26 27 28 HOUSTON LIGHTING & POWER COMPANY
PAGE 10 op 29 was adjusted based on the test year end adjusted number of 3
2 employees.
Retirement plan expense per books was increased to the minimum contribution level provided by our actuary 3
based on plan benefits, participants, and payroll levels 4
effective January 1, 1981.
Test year savings plan costs 5
were adjusted based on test year end adjusted number of 6
empl yees and the newly approved matching contribution 7
8 Percentage.
Hospitalization insurance was adjusted based on 9
increased medical costs at test year end as measured by the Houston Consumer Price Index for medical care.
Life 10 insurance was restated to the current expense level based on
- j 12 the premium paid for the month of March 1981.
All of these 13 test year adjustments for employee benefits expense were 34 then reduced by the percentage to be capitalized so that the 15 Company's cost of service reflects only current period 16
- expenses, g7 Q.
WHY HAVE YOU MADE AN ADJUSTMENT TO THE PROVISION FOR PROPERTY INSURANCE?
18 A.
In Docket 2676 the Commission denied the Company any gg further accruals to the property insurance reserve on the 20 basis that the balance in the reserve at March 31, 1979 of 21
$8,525,000 was adequate.
We still maintain that this level is inadequate basea on our increasing investment in 3
transmission and distribution facilities; however, we have 24 m rely adjusted property insurance expense in order to 25 reinstate the recarve to the $8,525,000 level.
26 27 28 HOUSTON LIGHTING & POWER COMPANY
PAGE 11 OF 29 g
Q.
WOULD YOU PLEASE EXPLAIN YOUR OTHER ADJUSTMENTS TO OPERATION AND MAINTENANCE EXPENSE?
7 A.
The next three adjustments were made in compliance with 3
Substantive Rule 052.02.03.032 (a)(6).
The adjustments to 4
legislative advocacy and social dues remove from the cost of 5
service all expenditures for these items.
The adjustments 6
to advertising, contributions, and donations reflect 7
8 application of limits stated in the above rule as well as 9
the reclassification of contributions and donations charged to Account 426 - Other Income Deductions as an allowable 10 cost of service item.
gg We are requesting recovery of the Company's additional 12 13 rate case expenses incurred in connection witt, Oocket Nos.
g4 2001 and 2676 and billed subsequent to our last rat.e case 15 and the estimated Company expenses for this application.
Rate case expenses associated with Docket No. 3320 have been 16 17 fully recovered to date.
We anticipate the need to apply f r additional rate relief in 1982, and therefore are 18 t
l requesting one-year amortization of our rate case expenses.
gg
(
20 Unco 11ectible accounts expense is a revenue-related expense and has therefore been adjusted for revenue changes 21 under current rates.
22 0
PLEASE EXPLAIN THE ADJUSTMENT FOR THE RESIDENTIAL 23 CONSERVATION SERVICE (RCS) PROGRAM.
24 25 26 27 28 HOUSTON LIGHTING & POWER COMPANY
PAGE 12 op 29 A.
The adjustment for the RCS program represents estimated g
2 expenses related to the Company's program for energy 3
conservation by customers and is designed to meet the requirements of the Public Utility Regulatory Policies Act 4
f 1978.
This program obligates the Company to notify each 5
ne of its residential customers of the availability of 6
7 energy audits that may be performed by the Company.
Based 8
upon this-audit, the Company's representative will advisc 9
the customer of estimated energy savings which could result if the customer implements certain conservation measures.
10 gy Q.
WOULD YOU PLEASE EXPLAIN THE ADJUSTMENT MADE FOR EPRI RESEARCH AND DEVELO'WENT SUPPORT?
g3 13 A.
This adjustment to the book amount reflects a known 14 increase of $1,084,000 in our EPRI research and development commitment.
The amount is based upon the actual revenue and 15 the kilowatt hour m:les which produced this revenue in the 16 17 year 1979 and the adjustment is necessary to reflect the 18 actual amount due in the coming year.
By committing to the g9 EPRI research and development program, the Company is able 20 to spread its research and development dollars over a much 21 broader base of activity; instead of the companies in the 22 industry duplicating each other's efforts, such a program 23 allows the companies to pool their knowledge and resources 24 to eliminate unnecessary expenditures.
By supporting this 25 pr gram, the company and its customers receive the benefits 26 27 28 HOUSTON LIGilTING & POWER COMPANY
PAGE 13 01:
29__
of informe. tion being gathered from scores of projects 2
including, among many others, solar and wind power research, equipment utilization testing and environmental studies.
3 Q.
WOULD YOU EXPLAIN THE ADJUSTMENT TO OTHER OPERATION AND 4
MAINTENANCE EXPENSE?
5 A.
The ma]ority of total operation and maintenance expense for 6
the test year, excluding recoverable fuel, has been adjusted 7
8 to year end levels through the specific adjustments I have 9
just described.
The remainder, however, represents other peration and maintenance expenses which have not been 10 individually adjusted.
Included in this category are jj expenditures for distribution expenses, customer account 12 13 expenses, customer services expenses, sales expensea and g4 administrative and general expenses.
Since the amounts in these accounts are proportional to our number of customers, 15 the cost for the test year end level of customers was 16 determined.
Reducing the test year end amount by the per 17 books amount results in an adjustment of $2,227,000.
No 18 adjustment is being made for amounts charged to generation gg and transmission accounts.
These accounts are indirectly 20 related to customers and more closely tied to the number and 21 type of plants in operation.
It can generally be expected, 22 23 however, that these costs will increase due to the Company's 24 reliance on more complicated coal-fired generating units.
O.
WOULD YOU EXPLAIN THE ADJUSTMENT TO DEPRECIATION EXPENSE?
25 26 27 28 HOUSTON LIGHTING & POWER COMPANY
PAGli 14 OF 29 A.
Depreciation and amortization have been adjusted to the 3
test year end level of adjusted depreciable plant.
Using the existing functional depreciation rates at March 31, y
1981, the calculated composite depreciation rate is 3.640%.
4 5
0 ARE YOU PROPOSING ANY CHANGES IN THE FUNCTIONAL DEPRECIATION RATES?
6 A.
No, not at this time.
7 8
Q.
WOULD YOU PLEASE EXPLAIN THE ADJUSTMENTS MADE TO FEDERAL INCOME TAXES AND FEDERAL INVESTMENT TAX CREDITS?
9 A.
An adjustment was made to these items to reflect the effect 10 of known changes under current rates.
y; The computation of the adjustment to federal income g3 13 taxes under current rates recognizes all applicable adjustments for revenues, operation and maintenance 14 expenses, taxes other than federal income taxes, interest 15 expense on long term debt, amortization amounts, and 16 17 interest on customer deposits as shown on Schedule A under current rates.
Depreciation and amortization for the 18 g9 purpose of computing federal income taxe.s was determined by 20 multiplying the tax basis property, including amounts on 21 which deferred taxes were previously provided, by the Proposed composite book depreciation rate.
The difference 22 23 between tax basis depreciation and the book basis 24 depreciation is principally a result of permanent basis differences and book basis costs which were previously 25 26 27 28 HOUSTON LIGHTING & POWER COMPANY i
PAGE
?5 01:
29 deductei for tax purposes and for which deferred taxes were 3
n t Provided.
2 The amortization of investment tax credits was 3
recomputed using the proposed composite depreciation rate of 4
3.64% at March 31, 1981.
5 Q.
SEVERAL ADJUSTMENTS HAVE BEEN MADE TO TAXES OTHER THAN 6
FEDERAL INCOME TAXES.
WOULD YOU DESCRIBE EACll OF THESE 7
ADJUSTMENTS?
8 A.
Social Security taxes have been adjusted for the increase 9
in wage and salary expense, using the 1982 tax rate.
10 Federal and state unemployment taxes have both been adjusted gy for the increase in test year end number of employees.
Ad 12 valorem or property taxes were adjusted to reflect taxes 13 based on electric plant in service at March 31, 1981, and 14 the effective tax rate for 1980 based on actual taxes 15 assessed for that year.
The gross receipts tax and the 16 Public Utility Commission fee are revenue-related taxes and g7 have both been adjusted for revenue changes under current 18 rates.
The state franchise tax adjustment has been computed
- 9 using the taxable capital of the Company at the end of the 20 21 test year, including the Accumulated Deferred Investment Tax Credits.
23 0
PLEASE EXPLAIN THE ADJUSTMENT TO THE LINE ENTITLED
" AMORTIZATION OF ALLENS CREEK CANCELLATION CHARGES, 24 FREESTONE PROJECT AND OTHER DEFERRED DEBITS".
25 26 27 28 HOUSTON 11GHTING & POWER COMPANY
PAGE 16 op 29 A.
As a result of the final order in Docket 2676, the g
Commission authorized the amortization over 5 years of the Allens Creek Unit No. 2 cancellation charges, as well as amortization of fees paid to United Research Company for a 4
manpower study for coal-fired generating units, Telesurvey of Texas for an appliance saturation survey and expenses 6
associated with a et-generation study.
In Docket 3320, the 7
Commission also authorized the amortization over 5 years of 8
the Freestone Project.
Amortization of each of these 9
investments is then increased to allow for recovery of the 10 debt portion of the carrying cost of the remaining unrecovered investments.
The Company is not asking for rate 12 base treatment of the unamortized portions, only recovery of 13 the cost of capital associated with our debt obligations.
g Although the Company incurred these costs in the reasonable 15 and normal conduct of its business operations, it is not at 16 this time asking that the shareholders earn a return on 17 their portion of the unrecovered investments.
18 Q.
PLEASE EXPLAIN THE LINE ENTITLED " AMORTIZATION OF STATE 39 FRANCHISE TAX ASSESSMENT".
20 A.
As a result of the final order in Docket 3320, the 21 Commission auti:orized the amortization over one year of 22 additional state franchise taxes and interest assessed for 23 the years 1975 through 1978.
The adjustment to amortization 24 f state franchise tax assessment eliminates the amount 25 26 27 28 HOUSTON LICHTING & POWER CO'IPANY i
PAGE 17 OF 29 j
amortized from rates since the Company has already received recovery of the additional state franchise assessment.
0 WHY HAVE YOU INCLUDED INTEREST EXPENSE ON CUSTOMER DEPOSITS 3
IN THE COST OF SERVICE?
4 A.
It is appropriate to include interest expense on customer 5
deposits in the cost of service because customer deposits 6
have been removed from the rate base in Schedule B.
Our 7
8 adjustment reflects the annual interest on active customer 9
deposits outstanding at test year end.
0 ARE THERE OTHER ITEMS INCLUDED ON SCHEDULE A UNDER CUP. RENT 10 RATES?
jj A.
Yes.
One other item is an adjustment to revenue under 12 13 current rates of approximately $364 million, provided to me by Mr. Edwards.
This adjustment reflects the level of KWH 14 sales and revenues which would have occurred had the number 15 f customers at year end been served for the entire test 16 17 year.
It also takes into consideration adjustments for weather, income level, price of electricity and price of 18 competing fuels.
The result of these adjustments is to more gg accurately reflect test period revenues, as Mr. Edwards 20 l
describes in detail in his written testimony.
21 0
WOULD YOU PLEASE EXPLAIN THE ADJUSTMENTS UNDER PROPOSED g
RATES?
23 24 Except for the price of coal, which reflects no limitations A.
n the amount that can be recovered, the fuel expense l
25 26 27 l
l 28 1
HOUSTON LIGHTING & POWER COMPANY
PAGF 18 _op 29 adjustment at proposed rates was calculated using the samo 3
approach that was used in calculating the fuel expense 3
adjustment at current rates.
Also, the level of kilowatt 4
hour sales have decreased in response to the higher rates 5
charged to customers as discussed by Mr. Edwards.
6 The recoverable city franchise requirement adjustment under proposed rates represents 4.167% of the appropriate 7
8 fuel and base revenues collectible within municipalities, 9
and permits the Company to recover the amount claimed by certain cities under their franchises.
HL&P is contesting 10 municipal claims that the franchise fee must be paid on jj revenues arising from the franchise fee surcharge itself.
33 13 Chould it be successful in resisting these claims, any collections above the amount actually paid to the y
municipalities would be refunded with interest to the 15 ratePayers.
16 The adjustment to operation and maintenance is for 17 uncollectible accounts expense.
This revenue-related 18 expense has been adjusted for revenue changes under proposed 39 rates.
20 An adjustment was also made to federal income taxes to 33 take into account the effect of the proposed rate increase 22 as shown on Schedules I-7.6 and I-7.8.
23 Taxes other than federal income taxes has beea adjusted 24 f r the increased gross receipts tax and the increased 25 26 27 i
(
28 l
IlOUSTON LIGHTING & POWER COMPANY
PAGE 19 01:
29 Public Utility Commission fee thi.t. will be due under 2
proposed rates.
The adjustraent for the return on invested capital 3
4 represents the difference between the return as shown on Schedules B and H, and the return as shown on Schedule A at 5
current rates.
6 7
This adjustment generates the proposed return of 8
approximately $431 million included in the proposed cost of 9
service of approximately S2.8 billion.
Q.
HOW DID YOU DETERMINE THE AMOUNT OF THE PROPOSED RETURN?
10 A.
Mr. Letbetter indicated in his testimony that the Company's weighted average cost of capital at March 31, 1981, is 12 13 12.32% as sho.in on Schedule H, page 1.
This rate was g4 applied to the original cost rate base at March 31, 1981 which, as will be explained in detail in my testimony that 15 f 11 ws, centains $990 million of construction work in 16 progress and nuclear fuel in process.
The $431 million 37 resulting return is equivalent to a 10. 43% return on the 18 adjusted value rate base as shown on Schedule H, page 3.
- 9 II. RATS BASE 20 21 0
WHAT IS THE PURPOSE OF SCHEDULE B?
A.
Schedule B enumerates the Company's rate base.
This rate 22 23 base represents dollars of investment that HL&P has made to n
24 serve its customers and upon which it should earn a reasonable return.
As stated in the Public Utility 25 76 27 28 HOUSTON LIGHTING & POWER COMPANY l
PAGl:
20 01:
29 i
3 Regulatory Act, Article VI, Section 41, utility rates shall 3
be " based upon the adjusted value of property used by and useful to the public utility in providing service including, 3
where necessary to tLa financial integrity of the utility 4
construction work in progress at cost as recorded on the 3
books of the utility".
6 7
Q.
WOULD YOU PLEASE EXPLAIN PAGE 1 OF SCHEDULE B?
8 A.
This page is a summary of the components of the original cost rate base of the Company as of March 31, 1981.
It 9
consists of plant and other assets, including facilities 10 that are currently in service as well as facilities that,
- y although are not currently in service, must be included in 12 rate base if the Company is to have an opportunity to meet 13 certain financial goals.
Each of the components of the $3.5 34 billion original cost rate base is discussed below.
15 0
HERE ANY ADJUSTMENTS MADE TO THE ORIGINAL COST OF EANT?
16 A.
A number of adjustments have been made to original cost of g7 P ant.
The accounts adjusted and the amount of the l
18 adjustments are summarized on Schedule C-1.
39 0
WOED YOU EEASE EXEAIN THE ADJUSTMENT MADE TO ACCOUNT 20 106, COMPLETED CONSTRUCTION NOT CLASSIFIED - ELECTRIC?
21 A.
This adjustment consists of two components, as shown on g
Page 2 of Schedule C-1.
First, the balance in the account 23 per books at March 31, 1981 was adjusted to include projects 24 that were in service at March 31, but, due to a delay in 25 26 27 28 HOUSTON LIGHTING & POWER COMPANY f
PAGli 21 01:
29 paper work, were still recorded on the books as construction 2
work in progress.
The second adjustment reflects the 3
reclassification from construction work in progress of 4
delayed credits applicable to depreciable plant in service.
5 Q.
WHY liAVE YOU INCLUDED ELECTRIC PLANT liELD FOR FUTURE USE IN tHS RATE BASE?
6 A.
Electric Plant Held For Future Use consists primarily of 7
8 land and land rights for which the Company has a definite 9
plan, such as future generating facilities, substations and transmission lines.
These purchases were made in order to 10 provide for the energy needs of our customers, similar to ji purchases for a materials and supplies inventory.
IIad these g
13 acquisitions not been made well in advance of construction activity, the cost would have been much higher or the i4 property might not have been available, resulting in delays 15 f r the completion of needed facilities.
Sir.ce the account 16 represents capital investments necessary to continue 17 providing reliabic service to the benefit of our customers 18 we are requesting recovery of the cost of capital relating 39 to these committed funds.
20 Q.
IN THE PAST, THE COMMISSION HAS EXCLUDED FROM THE COMPANY'S 3;
RATE BASE CERTAIN PROPERTIES FOR inIICH A SPECIFIC IN-SERVICE 22 DATE HAD NOT BEEN DETERMINED.
HAVE YOU FOLLOWED THIS 23 PROCEDURE IN THIS FILING?
24 25 26 27 28 HOUSTON 1.lGHTING & POWER COMPANY
....J
PAGE 22 OF 29 1
A.
No, I have not.
Once again, the Company has a definite P an for such properties although a specific date for l
2 3
service has not been set.
Considering the uncertain 4
economAc environment and double-digit inflation, we maintain 5
it is it, the customers best interests for the Company to 6
purchase these properties in advance of construction 7
activity.
8 Q.
WHAT IS INCLUDED IN THE LINE ENTITLED " ACCUMULATED 9
DEPRECIATION"?
10 A.
The accumulated provision for depreciation consists of the 11 adjusted book balance as of March 31, 1981.
12 Q.
WHY HAVE YOU NOT INCREASED THE ACCUMULATED PROVISION FOR 13 DEPRECIATION FOR THE INCREASED DEPRECIATION EXPENSE INCLUDED 14 IN THE COST OF SERVICE?
15 A.
Consistent with prior rate filings, the Company is not 16 increasing the Accumulated Provision for Depreciation for 17 the increased depreciation expense included in the cost of 18 service.
This is also in accordance with Docket 3320 in gg that no adjustments were rcrommended by the PUC staff.
20 Q.
PLEASE EXPLAIN THE LINE ENTITLED " EXCLUDED PORTION OF gg CONSTRUCTION WORK IN PROGRESS".
22 A.
The $367 million is the difference between the adjusted 23 construction work in progress less land included in CWIP and 24 the amount of CWIP in r/te base.
The book cost of land is excluded since it is not used in the calculation of 25 76 27 28 HOUSTON LIGHTING & POWER COMPANY I
PAGE 23 o[:
29 g
allowance for funds used during construction and accordingly 7
is treated as if it was included ir. Account 105 - Electric Plant Held for Future Use.
The $367 million represen6s the 3
4 difference between total original cost of plant anti the 5
required amount of investment in plant included in rate base 6
in order to enable the Company to acaleve the return set 7
forth by Mr. Letbetter.
I would point out that the 8
inclusion of CWIP in rate base does not cause our customers 9
to pay for facilities for which they receive no current benefit.
The Company's rates wili not be set to recover the 10 jj actual cost of a new generating unit or transmission line j;
until these facilities are actually in service to the 13 customer.
CWIP in rate base simply offsets some of the cost 34 of financing the construction.
By asking the ratepayers to 15 join with the Company in bearing some of the burdens of the financing costs of new construction, we will have an 16 17 PPortunity to place into service, on a timely basis, generating facilities needed by our customers, 18 Q.
HOW LID YOU ARRIVE AT THE $990 MILLION FOR CONSTRUCTION g9 WORK IN PROGRESS AND NUCLEAR FUEL IN PROCESS IN RATE BASE?
20 A.
On Mr. Letbetter's request, several cases were run with the 3;
level of CWIP and NFIP in rate base ranging from 50% to 100%
22 and it was determined that 73% of CWIP and NFIP was the 23
,,4 appropriate level to achieve the return needed to produle the required base revenues in the year the new rates wou'.d 25 be in effect.
26 27 28 HOUSTON LIGHTING & POWER COMPANY J
PAGI-24 01:___ 2 9 l
j Q.
WOULD YOU PLEASE EXPLAIN YOUR COMPUTATION OF WORKING 3
CAPITAL SHOWN IN SCHEDULE B?
3 We have computed working capital in accordance with A.
Substantive Rule 052.02.03.031 (a)(3), and have presented 4
5 the details of the computation in Schedule G.
The 6
allowances for materials and sapplies and prepayments are thirteen-month averanes.
The allowance for fuel stock is 7
g the test year end balance, which is more appropriate than an 9
average since the cost of oil has increased during the test 10 year.
The Company also anticipates purchasing additional 11 barrels.of fuel oil throughout the remainder of 1981 in 12 rder to support its expected usage of oil as a boiler fuel 13 in 1982 during peak periods and whenever any of th2 coal g4 units are temporarily out of service.
The allowance for 15 cash working capital represents one-eighth of adjusted peration and maintenance expenses less recocerable fuel, 16 and the materials and supplies issues, and prepayments 17 charged to expense during the test year.
18 Q.
UOULD YOU PLEASE EXPLAIN WHAT IS INCI JDED IN THE RATE BASE
- 9 ITEM ENTITLED " ADVANCE FOR LIGNITE LEASES"?
20 21 In August 1979, HL&P exercised an option for ths right to A.
acquire certain lignite lasses in the Texas counties of g
Liaestone, Leon and Freestone.
As a rer.ilt of this 23 agreement the Company was required to make an advance of $18 24 million to the owner of the leases.
It is intended that 25 26 27 28 HOUSTON LIGHTING & POWER COMPANY J
l'AGli 25 op 29 these leases supply a substantial portion of HL&P's fuel i
3 requirements for its Limestone Electric Generating Station expected to be ready for commercial operation by 1987.
3 4
Q.
PLEASE EXPLAIN THE JUSTIFICATION FOR INCLUDING THIS ADVANCE IN RATE BASE.
5 6
A.
HL&P is not currently contemplating the transfer of the 7
lignite leases to Utility Fuels, Inc. (UFI).
A transfer at g
this point in time will not be made since it is not 9
Practical for a company the size of UFI to carry an 10 investmenc of this magnitude without the co responding j;
ability to earn a return on the investment.
In addition, financing this investment will limit UFI's financing 12 13 flexibility in the future.
'JFI will not be able to recover g4 any cost until ligr.ite is actually sold to HL&P in the future.
HL&P will carry the investment until mining of the 15 lignite leases starts at which time the leases will probably 16 be transferred to UFI.
17 A 1 ng term fuel supply contract is essential for the 18 39 operation of a power plant such as the Limestone Electric Generating Station and has to be negotiated well in advance 20 f the expected in-service date of the project.
Since the 21 lignite leases ensure a reliable fuel source for the life of g
the plant and er".ble the Company to continue to provide 23 reliable service to its customers, HL&P should be allowed a 74 reasonable return on its prudent capital investment.
25 26 27 28 i
HOUSTON LIGtITING & POWER COMPANY A
PAGE 26 op 29 g
Q.
WHY HAVE YOU EXCLUDED THE REMAINING ITEMS SHOWN ON SCHEDULE 3
B FROM THE FATE BASE?
A.
We have deducted these items from the rate base in 3
accordance with substantive Rule 052.02.03.031(a)(4).
4 O.
WOULD YOU PLEASE EXPLAIN PAGE 2 OF SCHEDULE B7 5
A.
This page is a summary of the components of the adjusted 6
value rate base of the Company prepared according to the 7
8 guidelincs specified in the Public Utility Regulatory Act, 9
Section 41 (a) and Substantive Rule 052.02.03.031.
10 0
WHAT WEIGHTINGS WERE ASSIGNED TO CURRENT COST AND ORIGINAL COST IN CALCULATING THIS ADJUSTED VALUE RATE BASE?
j; A.
Section 41 of the Public Utility Regulatory Act provides gy 13 that the adjusted value rate must reflect a balance of 34 between 60 and 75 percent original cost less depreciation 15 and between 40 and 25 percent current cost less an adjtstment for age and condition.
In determining the proper 16 weighting of current and original costs of property, we have 17 considered the effects of inflation on our construction 18 39 program, the growth of our service area, the quality of service currently being provided to our castomers, and our 20 l
need to attract new capital to finance our construction 21 costs.
Inflation will especially affect our construction 22 pr gram due to the length of time required for completion of 23 major construction projects.
Because of these factors, we 24 have determined that a mix of 40% net current cost and 60%
25 l
26 27 28 l
HOUSTON LIGHTING & POhER COMPANY l
PAGl:
27 og 29 net original cost is necessary and appropriate to accurately g
2 reflect the adjusted value of utility property used by and JSeful to our Customers.
3 Q.
PLEASE EXPLAIN HOW THE CURRENT COST OF THE COMPANY'S 4
FACILITIES WAS DETERMINED?
5 A.
The current cost of the Company's facilities was determined 6
with the assistance of Whitman, Requardt and Associates.
7 8
Estimating the current cost of the property in any plant 9
account requires a suitable index and the vintaged surviving fnvestment.
Handy-Whitman construction cost indexes and 10 other published indexes were used.
11 UtL11ty plant can be divided into two classes of 33 13 property:
located property and mass property.
Located 14 Pr Perty is property which is classified by location and installation date.
In the case of generating plants, 15 interim additions and retirements are debited or credited to 16 the specific units and when a unit is retired, its cost is 17 deducted from the original vintage at the original cost.
gg Vintaged entviving ba?ances are maintained by account and 39 the application of trend factors is a straight-forward 20 21 Process.
Mass property accounts are composed sf hundreds of 22 identical retirement units.
Additions are recorded in terms 23 f total units and total dollars.
Retirements are normally 24 re rded as subtractions from the whole.
Since the original 25 26 27 28 HOUSTON LIGHTING & POWER COMPANY
PAGli 28 o g.-
29 i
cost and age of a retired unit cannot be deterrr.ined, the 2
Company app' Lies the rolling average cost.
0 WHAT IS A ROLLING AVERAGE COST?
3 4
The rolling average unit cost of a particular retirement A.
5 unit is the total investment in that unit divided by the total number of units.
Theoretically, the cost changes each 6
7 time a unit is capitalized.
As a practical matter, the 8
rolling average unit cost for retirements is computed 9
annually.
10 The property records do not show any disparsion of survivors.
This situation is not true to real life because
- j 37 units are retired at all ages for a variety of reasons.
13 Therefore, the surviving investment in the maJs accounts y
must be distributed by vintage.
15 Q.
HOW WAS THAT DONE?
16 A.
Using the depreciation study developed in Docket 3320, 17 suvivor curves typical of each of the mass accounts was 18 developed.
The dollars were then distributed by vintage in accordance with these curves as shown on Schedule E-1, y9 20 These vintaged dollars werc then trended with the 21 appropriate index for each account.
The supporting 22 computations are shown as part of the development of the 23 trended future accruals in Schedule F-1.
24 C,
IIOW WAS THE ADJUSTMENT FOR AGE AND CONDITION SHOWN IN SCHEDULE F CALCULATED?
25 26 27 28 HOUSTON LIGHTING & POWER COMPANY i
d
i%Gli 29 og:
29 A.
The adjustment for age and condition was determined by g
using a trending method.
The surviving investment by year 2
P aced in service was first determined for each primary l
3 account, that is, the original cost of the plant placed in 4
service during that year less the cost of any such plant 5
that has since been retired.
This is also commonly known as 6
" vintage survivors".
Future accruals are then computed for 7
each vintage based on the remaining life for each vintage.
8 The balance and the future ac-:ruals were then trended to 9
current cost.
The theoretical reserve was calculated by 10 subt'erting the trended future accruals from the trended balance in each vintage and summing results for all vintages 12 in each account.
13 34 Q.
HOW DOES NET CURRENT COST RELATE TO THE COMPANY'S HISTORICAL COST?
15 A.
Since utility plant was purchased, two things have 16 occurred.
First, plant has depreciated in value, and 17 second, inflation has eroded the /alue of a dollar.
Net 18 current cost reflects both depreciation and the impact of g9 inflation on the construction of the Company's facilities 20 33 over the years.
A return of 10.43% on our current cost investment would provide the return that we're requesting in 37 this application.
23 0
DOES THIS CONCLUDE YOUR TESTIMONY?
24 A.
Yes it does.
25 26 27 28 HOUSTON LIGHTING & POWER COMPANY t
1
'IEE STATE OF TEXAS 3
COU?r1Y OF HARRIS 8
Before me, the undersigned authority, on thir-day personally ap-peared Rick L. Campbell, havirg been duly swrn, upon oath says:
"My name is Rick L. Campbell, I am of legal aJe and a resident of the State of 'Ibxas. 'Ihe foregoirg testimony, and exhibits, offered by me on behalf of Ibuston Lightirg & Power Company, are true and correct, and the opinions stated therein are, in my judgment and based upon my professional experience, true and correct."
ll Rick L. Campbell Subscribed and sworn to before me by the said Rick L. Campbell this 16TM day of JUNE, 1981.
atw P sranen gu1llttillt 4,f.
Notary Public in and for S Qf
.C $
Harris (bunty, 'Ibxas I
E i N/
kd'
\\
.* 'O h
'A h *.......#'.=*
T JOHN P. STERNER l
Notary Public, State o'}eg g C
My Commission Expires 0F
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