ML20030B630
| ML20030B630 | |
| Person / Time | |
|---|---|
| Site: | Allens Creek File:Houston Lighting and Power Company icon.png |
| Issue date: | 06/30/1980 |
| From: | Letbetter R HOUSTON LIGHTING & POWER CO. |
| To: | |
| Shared Package | |
| ML20030B571 | List: |
| References | |
| NUDOCS 8108180371 | |
| Download: ML20030B630 (37) | |
Text
r 4
DIRECT TESTIMONY OF R. S. LETBETTER for nouSTOM LIGHTING 6 POWER COMPANY June 1980 0108190371 810812 PDR ADOCK 05000466 PDR
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4 PAGE 1
OF 35
}
TCSTIMONY OF STEVC T.CTBCTTER 2
3 Q.
PLEASC STATC YOUR NAMC, ADDRCSS, AND OCCUPATION.
4 A.
fly nano is Steve Letbetter and my business address is 5
611 Walker Avenue, Houston, Texas.
I an Comptroller of 6
Houston Lighting & Power Company.
7 Q.
UOULD YOU PLCASC GIVC YOUR CDUCATIONAL BACKGROUND, 8
PROFCSSIONAL QUALIFICATIONS, AND COMPANY CXPCRICUCC?
9 A.
I graduated fron Texas A&M University with a Bachelor 10 of Business Administration degree with a major in 11 Accounting.
At that time, I began employment with 12 Deloitte Haskins & Sells, an international public 13 accounting firm.
While with the firn I progressed to 14 Senior Accountant with responsibility for the field 15 u rk on nuncrous audit engagements including Houston 16 Lighting & Power Company.
In April of 1974, I joined
_gj HL&P as an Assistant Secretary & Assistant Treasurer.
Ubile in this capacity I was responsible, in part, for 18 l 19 the analysis of dif ferent nethods of financing the 20 Company's construction progran and compliance with 21 reporting requirements of the Securities and Exchange 22 Connission including preparation of registration 23 statements used in connection with public offerings of 24 securities.
In April of 1977 I was named Assistant 25 Comptroller with direct responsibility for the 26 T.ccounting Department.
In April of 1978 I was named 27 Comptroller.
I an a Certified Public Accountant and a nenber of the American-Institute of Certified Public 28 HOUSTON LIGHTING & POWER COMPANY
s PAGE
?
OF %
1 Accountants and the Texas Society of Certified Public Accountants.
l 3
O.
UOULD YOU PLCASC SUf1!!ARIZC YOUR TESTIf10NY IN TilIS 4
PROCCCDING?
5 A.
fly testinony will address the following areas:
6 1.
The financial and accounting data contained 7
in the Rate Filing Package, nanely, the rate 8
base as presented in Schedule B and the 9
overall cost of service and related 10 adjustments as sunnarized in Schedule A.
These sunnary schedules, and the nore detailed 33 accoanting schedules supporting then, were 33 13 prepared under ny supervision from data la derived from the books and reccrds of the j5 Company.
These books and records were audited 16 by the firn of Deloitte Haskins & Sells, Certified Public Accountants.
17 2.
The accounting changes made by the Company 18 since the last rate case.
g9 3.
The amount of investnent in construction 20 needed in rate base in order to achieve the 21 financial requirenents specified in the 33 testinony of Tir.
H.
R.
Dean during 1981, the 23 first year in whicit the new rates will be 34 ff etive.
25 26 4.
The effect of the Company's requested rate relief on future operations as presented in 27 28 Schedule P, and tlie adequacy of the results as HOUSTON LIGHTING & POWER COMPANY
1 s
PAGE 3 OF 3S 1
neasured against tho financial objectives 2
specified by the
.inission in the final order 3
of our last rate case and those specified in 4
the testinony of !!r. 11.
R.
Dean.
5 1.
Rate Base 6
'O.
11R. LETDCTTCR UOULD YOU PLCASE CXPLAlti PAGC 1 OF 7
SC;iCDULE B.
8 A.
This page is a sunnary of the components of the 9
original cost tate base of the Company as of tiarch 31, 10 1980.
This rate base represents dollars of investment 11 that HL&P has made to serve its customers and upon j2 which it should earn a reasonable return.
It consists 13 of plant and other assets, including facilities that 14 are currently in service as well as facilities that, 15 although are not currently in service, must be included 16 in rate base if the Company is to have an opportunity 17 to maintain its financial integrity, Cach of the 18 components of the 53.2 billion original cost rate base 19 is discussed in detail in this section of my testinony.
20 Q.
UCRC AITY ADJUSTt1Ct1TS T1ADC TO TilC ORIGIllAL COST OF 21 PLAllT?
22 A.
A nunber of adjustments have been nado to original 23 cost of plant.
The accounts adjusted and the amount of the adjustments are sunnarized on Schedule C-1.
24 25 O.
r1R. LETBCTTER, UOULD YOU PLEASC EXPLAlti TIIC ADJUSTt1Ct1T 26
?!ADC TO ACCOUt1T 106, CCt1PLETED CO!JSTRUCTIO!! IJOT 27 CLASSIFIED - 'CLCCTRIC?
28 IlOUSTON LIGitTING & POWER COMPANY
4 i
l
.PAGE h
op 3s a
i 1
A.
This adjustnant consists of three components, as shown 1
)L 2
on page 4 of Schedule C-1.
First, the balance in the 3
account por books at flarch 31, 1980 was adjustei to j
4 include projects that were in service at Ilarch 31, but, 2
l 5
due to a delay in paper work, were still recorded on l
6 the books
.s construction work in progress.
The second 1
4 i
7 adjustnent represents the inclusion of the tiarch 31, 8
1980 book balance of U.A.
Parish Unit No. 7 included in 9
construction work in progress (went into connercial 4
to operation on June 2, 1980).
The final adjustment i
reflects the reclassification fron construction work in 11 pr gross of delayed credits applicable-to depreciable 12 13 plant in service.
p 0
flR. LCTBCTTCR, UllY 11AVC YOU INCLUDCD CLCCTRIC PLANT llCLD POR FUTURE USC IM THC RATC BASC?
15 A.
Electric Plant lleld For Future Use, as adjusted on 16 17 Page 3 of Schedule C-1 for land and casenents j
reclassified to electric plant in servi;;c, consists 18 g9 primarily of land and land rights for which the Company has a definite plan, such as future generating 20 facilities, substations and transmission lines.
These 21 4
purchases were made in order to provide for the energy 22 needs of our customers, sinilar to purchases for a 23 natorials and supplies inventory.
Had these 24 acquisitions not been nade well in advance of 25 construction activity, the cost would have been much 26 higher or the property night not have been available, l
27 resulting in delays for the completion of needed i-28 HOUSTON LIGHTING & POWER COMPANY
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i PAGE 5
OF 35 4
t I
facilities.
Since the account represents capital 2
investnents necessary to continue providing reliable l
3 service to the benefit of our ciistomers uo are j
4 requesting recovery of the cost of capital relating to 5
these connitted funds.
i 6
Q.
!!R. LETBCTTER, AS A RESULT OF TilC fit!AL ORDCR Ill 7
DOCKET 2676 CCRTAlti PROPCRTICS FOR UllICII A SPECIFIC 8
Ill-SCRVICC DATC !!AD 1107 BCCII."ETER!!IllCD UCRC UXCLUDED 9
FRO!! TilC cot! patly'S RATC BASE.
IIAVE YOU FOLLOUCD TIIIS i
j 10 PROCEDURE I!J TIIIS FILIllG?
i1 A.
tio, I have not.
Once again, the Company has a I
12 definite plan for such properties although a specific l
l 13 date for service has not been set.
Considering the 14 current economic environment with its doubic-digit i
15 inflation, we maintain it is in the customers best 16 interests for the Company to purchase these properties 17 well in advance of construction activity.
IIoucve r,
should the commission exclude these properties from gg 19 rate base once again, the Company is prepared to sell 20 then with any gain going to our shareholders in order 21 to compensate them for their investnent.
22 Q.
!!R. LETBETTCR, UllAT IS IIICLUDED It! TIIC LIIIC CllTITLCD 23 "ACCUt!ULATED DCPRECIATIO!!"?
24 A.
The accumulated provision for depreciation includes 25 only the adjusted book balance as of !! arch 31, 1980.
26 Q.
!!R. LETBCTTER, UllY IIAVC YOU tlOT I!!CRCASED TIIC 27 ACCUt!ULATED PROVISIOtl FOR DEPRCCIATIO?! FOR TiiE ItiCREASED DCPRCCIATIOll CXPCflSC ItiCLUDED Ill Tile COST OF 28 SCPNICC?
HOUSTON LIGHTING & POWER COMPANY
. - _ _ _ _.,. -.... -. _... _ _ _ _ ~ _. -. _. -... - _. _ _ _,. _ _
s PAGE 6
op n 1
A.
The Connission has yet to cone to a conclusion as to 2
the proper nethod of treating the depreciation reserve 3
as evidenced in their staffs' testinonies and by their 4
orders in various cases in the State.
For example, in 5
Docket 2001 the Company's depreciation reserve was 6
increased by ane half of the increased depreciation 7
expense allowed in the cost of service.
The case was 8
nade that a failu2e to reduce rate base for increased 9
depreciation woald result in an excess return based on 10 average invested capital in net plant.
I agree that jj thi.s is true when net plant decreasus during tne year in which rates are in effect.
Iloueve r, the facts do j3 13 not support this for ilL&P.
In Docket 2676 the reserve g4 was increased by the entirt additional amount of the 15 depreciation expenst allowed in the cost of service 16 even though the staf f reconnended the one half 17 adjustnant.
The fact is that !!L&P's net plant is continually increasing and any adjustnent to the 18 reserve will only conpound the effects of attrition.
- 9 20 Such an adjustnent defeats the purpose of the increased 7g depreciation adjustnent which was designed to reduce attrition.
In addition, an adjustment to the 33 23 depreciation reserve would be appropriate only if it i
34 was part of a forward-looking neasurc of investment, 25 capital, operating cost and revenues.
Iloweve r, it is inconsistent to single out this one iten and ignore the 26 27 fact that all other components of cost of service vill 28 also change in the future tine period.
HOUSTON LIG!! TING & POWER COMPANY
6 PAGE 7
OF T>
1 Q.
?!R. LETBETTER, PLEASE EXPLAIN THE LINC ENTITLED 2
"CXCLUDED PORTION OF INVESTl1ENT IN CONSTRUCTION".
3 A.
The $141 million represents the difference between 4
total original cost of plant and the required amount of 5
investnent in plant included in rate base in order to 6
enabic the Company to achieve the financial 7
requirements set forth by fir. Dean.
As shown on page 8
34 of my testimony, the financial results produced by 9
the requested increase are the min'inum required in 10 order for the Company to maintain its financial 11 integrity as specified by tir. Dean.
The $797 nillion 12 of investment in construction included in rate base is 13 the minimun amount necessary in order to achieve such 14 requirements.
Anything less will not allow the company 15 to achieve these requirements thus jeopardizing its 16 financial integrity, increasing the chances of our 17 securities being downgraded and virtually guarantecing 18 that common stock sales in the future will continue to 19 be below book value.
I would like to point out that 20 when I refer to the minimum level what I mean is that 21 even though a lesser anount of investment in 22 construction may allow the Company to achieve certain 23
. of the financial requirements, the amount which we have 24 included in rate base is the minimum necessary to 25 achieve all of the requirements in 1981 and thus 26 maintain our financial integrity.
27 Q.
MR. LETBETTER, 1100 DID YOU ARRIVE AT THE $797 r1ILLION 28 FOR INVEST!!ENT IN CONSIRUCTION?
HOUSTON LIGHTING & POWER COMPANY
n PAGE' 8
OF M i
A.
As stated in the Public Utility Regulatory Act, 2
Section 41(a), utility rates shall be based upon the ad usted value of property used by and useful to the 3
3 4
public utility in providing service including whero 5
necessary to the financial integrity of the utility 6
construction work in progress at cost as recorded on 7
the books of the utility.
This can only bc determined 8
by measuring the achieved financial indicators during 9
1981, the first year rates will be in effect.
Schea21e 10 P shows the results of including $797 million of 11 investment in construction.
In my opinion this is the 12 minimum amount necessary to achieve at least the 13 nir,.imum level of all of the financial requirenents 14 specified by Mr. Dean.
This was supported by the 15 results of additional studies which I had run using 16 levels of investment in construction in rate base 17 ranging from approximately $470 to $940 million.
18 Q.
MR. LETBETTER, UHAT IC INCLUDED IN Tile LINE ENTITLED 19 "UNRECOVERED INVESTMENTS"?
20 A.
Unrecovered invest _ments includes the unamortized 21 portion of the Allens Creek Unit No.2 cancellation 22 charges, the Freestone project, and, as discussed at 23 page 29 of my testimony, the unamortized portion of a 24 manpower study for coal-fired generating units, an 25 appliance saturation survey and a co-generation study.
26 Q.
MR. LETBETTER, WHY HAVE YOU AGAIN REQUESTED INCLUSION 27 OF THE ALLENS CREEK CANCELLATION CIIARGES IN RATE BASE?
28 HOUSTON LIGHTING & POWER COMPANY
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PAGE 9
OF "
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A.
The Commission agreed in Docket 2001 that the 2
investment in Allons Crock Unit No. 2 was prudent and 3
that the subsequent cancellation charges resulting from 4
the re-evaluation of the project were appropriato, i
5 This was reaffirmed in Docket 2676.
Ilowever, in both 6
cases the Commission denied the Company rate base 7
treatncnt of the unamortized portion because the
- I i
j 8
investment would never provido any direct benefit to i
i 9
the ratopayers.
We still maintain that this is a very i
10 dangerous procedent and one which could eventually lead 11 to utilities cancelling plans for the construction of 12 critical projects where they do not have full knowledge f
13 that such projects will result in productive assets.
i 14 Considering the enormity of IIL&P's construction 1
15 program, this is a grave concern to the Company and 16 should be to the Commission and IIL&P's customers.
The
.I 1
l 17 fact remains that a prudent investment was nado and to i
4 18 deny full cost recovery confiscates the investors' 19 property.
20 Q.
PLEASE EXPLAIN IN !! ORE DETAIL TIIE UNRECOVERED COST 21 RELATED TO THE FREESTONE PROJECT.
I 22 A.
In May, 1978, IIL&P was notified by Dou Chemical
]
23 Conpany that r s was withdrawing as a member of the 24 Freestone Project, a planned joint venture for a i
25 lignite-fired generating station in Freestone County, 26 Texas.
Dow was to have provided the lignite and IIL&P 27 was to have built and operated the generating units.
28 As a result of the Dou' notification the company i
HOUSTON LIGHTING & POWER COMPANY
PAGE 10 OF 1
undertook an evaluation of its position and determined 2
that a rite in Limestone County was nore preferabic.
3 Consequently, the Limestone Electric Generating Station 4
was announced and the Freestone project was abandoned.
l l
5 Certain costs related to the project, primari:y l
}
6 engineering services and environmental studies, wore l
f 7
legitir-'c transferable costs and were transferred as I
8 such to construction work ir progress during the test 9
year.
The remaining costs of approximately $3 million 10 are included in unrecovered investments and we are 11 requesting rate base treatment and 5 year amortization 12 of such costs.
As with Allens Creek, a prudent 13 investment was made and, accordingly, we are requesting 1
14 full cost recovery.
15 Q.
UOULD YOU PLCASC EXPLAIN YOUR COMPUTATION OP UORKING 16 CAT ITAL SilOUN IN SCl!EDULC B?
17 A.
We have computed workin; capital in accordance with 18 Substantive Rule 052.02.03.031 (a)(3), and have 19 presented the details of the computation in Schedule 20 G.
The allowances for materials and supplies and 21 prepayments are thirteen-nonth averages.
The allowance 22 for fuel stock is the test year end balance, which we 23 feel is nore appropriate than an average since the cost 24 of oil has increased during the test year and the 25 Company anticipates purchasing ever one nillion 26 additional barrels of fuel oil trrough ut the remainder 27 of 1980 in order to support its expected '..erea sed 28 usage of oil as a boiler fuel in 1981.
The allowance 110USTON LIGilTING & POWER COMPANY
PAGE 11 OF 35 I
for cash working capital represents one-eighth or 2
adjusted operation and maintenance expenses less 3
recoverable fuel and the materials and supplies issues 4
and prepayments charged to expense during the test 5
year.
6 Q.
Mn. LETBETTER UOULD YOU PLEASE EXPLAIN WHAT IS 7
INCLUDED IN T!!E RATE BASE ITEM ENTITLED " ADVANCE FOR 8
LIGNITE LEASES"?
9 A.
In August, 1979, HL&P exercised an option for the 10 right to acquire certain lignite 1 cases in the Texas 11 counties of Limestone, Leon and Freestone.
As a result 12 of this agreenent the Company was required to make an 13 advance of $18 million to the owner of the leases.
It 14 is intended that these 1 cases supply a substantial i
15 portion of IIL&P's fuel requirements for its Limestone 16 Electric Generating Station expected to be ready for 17 commercial operation by 1985.
18 I Q.
PLEASE EXPLAIN Ti!E JUSTIFICATION FOR INCLUDING Tl!IS
- 9 ADVANCE IN RATE BASE.
20 A.
Long term fuel supply contracts are essential for the 21 operation of power plants such as the Limestone 22 Electric Generating Station.
In order to obtain such 23 contracts the Company must negotiate-well in advance of 24 the expected in-service date of the project.
This is 25 necessary in that the design and specifications of the 26 plant's boilers cannot be determined prior to knowing 27 the fuel characteristics.
These early negotiations 28 also strenghthen the Company's position at the l
HOUSTON LIGilTING & POWER COMPANY
PAGE 12 op 35 1
bargaining table and ensure a reliable fuel source for 2
the life of the plant.
This is especially true of I
3 lignite-fired power plants, such as Limestone, in that 4
the plant is built in the general vicinity of the mine 5
site because it is not econor.ical to transport lignite 6
long distances.
The lignite lease contract, a product 7
of suc'. negotiations, will enable the Company to 8
continue to provide reliable service to its customers 9
at the least possible cost.
Thus, the advance 10 represents a prudent capital investment and a 11 reasonable return should be allowed on these committed 12 funds.
13 Q.
t1R. LETBETTER, UllY HAVE YOU EXCLUDED Tile REMAINING 14 ITEMS SHOUN ON SCHEDULE B FROf1 THE RATE BASE?
15 A.
He have deducted these items from the rate base in 16 accordance with Substantive Rule 052.02.03.031(a)(4).
17 Q.
f1R. LETBETTER, UOULD YOU PLEASE EXPLAIN PAGE 2 OF i
18 SCilEDULE B?
i 19 A.
This page is a summary of the components of the 20 adjusted s alue rate base of the Company prepared 21 according to the guidelines specified in the Public 22 Utility Regulatory Act, Section 41 (a) and Substantive 23 Rule 052.02.03.031.
24 Q.
UllAT UEIGHTINGS UERE ASSIGNED TO CURRENT COST AND 25 ORIGINAL COST ?N CALCULATING THIS ADJUSTED VALUE RATE 26 BASE?
27 A.
Section 41 of the Public Utility Regulatory Act 28 provides that the adjusted value rate must reflect a j
l l
HOUSTON LIGHTING & POWER COMPANY l
PAGE 13 op 35 1
balance of between 60 and 75 percent original cost 1 css 2
depreciation and between 40 and 25 percent current cost 3
less an adjustment for age and condition.
In 4
determining the proper weighting of current and 5
original costs of property, we have considered the 6
effects of inflation on our construction program, the 7
growth cf our service Trea, the quality of ser' rice 8
currently being provided te our customers, and our need 9
to attract neu capital to finance our construction 10 costs.
Inflation will especially affect our 11 construction program due to the length of time required 12 for completion of major construction projects.
Because i
i 13 of these factors, we have determined that a mix of 40%
14 not current cost and 60% net original cost is necessary l
15 and appropriate to accurately reflect the adjusted 16 value of utility property used by and useful to our 17 customers.
18 Q.
11R. LCTBCTTER, ARC YOU RCSPONSIBLE FOR THE CURRENT 19 COST OF PLANT PRESENTCD IN SCHEDULE E AND THE 20 ADJUST!!CNT FOR AGE AND CONDITION SHOUN IN SCHEDULC F?
I 21 A.
The current cost of plant uas determined by Mr. Jack 22 Gillett and his testimony uill support these figures.
23 The adjustment for age and condition was calculated, as 24 shoun on Schedule F, by determining the ratio of.
25 accumulated depreciation to total depreciable plant at 26 March 31, 1980, and applying this ratio to the total 27 current cost of depreciable plant in accordance with 28 our interpretation of Substantive Rule Os?_n?_n1_n11to).
_. _ _ HOUSTON LIGHTING & POWER COMPANY _ _ _. _,.. _ _ _.,, _. _ _
_ ~~ _
i a
PAGE D
O F__ "
1 2
II. COST OF SERVICE 3
Q.
UOULD YOU PLEASE EXP' AIN Tile CONTENT AND FORMAT OF 4
SCilEDULE A?
5 A.
Schedule A is the overall cost of service for Ilouston 6
Lighting & Power Company for the test year ended l' arch 7
31, 1980, prepared in accordance with Substantive Rule 8
052.02.03.032(a).
Schedulo A, page 1, is a summary 9
schedule showing test year data as recorded on the 10 books of the Company (column b), the effect of the 11 claimed adjustments under current rates (column d), and 12 the effect on the test year of the proposed new rates 13 (column g).
Each of the adjustments are referenced to 14 a supporting schedule in the Rate Filing Package which 15 provides underlying detail regarding the nature and 16 calculation of the adjustment.
As shown on page 1, wo 17 have deternined our overall cost of service to be 18 approximately S2.323 billion for the test year ended 19 flarch 31, 1980 with a resultant requested rate increase 20 of $214.397 million.
21 Q.
UIIY liAS THE TEST YEAR LOST OF SERVICE DEEN ADJUSTED?
22 A.
The Company has adjusted historical test year data in 23 order to arrive at more representative data from which 24 future revenue requirements can be determined.
25 Rates are set for the future, not the past.
If 26 the test period reflects the relative level of 27 revenues, operation and maintenance expenses, 28 depreciation, taxes, and capital costs that will exist 4
HOUSTON LIGHTING & POWER COMPANY
PAGE 15 OF_35 I
when the new rates are in effect, then the now rates 2'
can be set to recover these costs and both the Company 3
and our customers will be equitably treated.
Since the 4
function of the test period is to simulate future 1
5 conditions, I believe the nost desirable test year is a 6
future test year, with revenues, expenses, and capital 7
costs fully projected within the same time frame.
This 3
simulation has become very significant considering the 9
current ecoronic environment with its doubic-digit 10 inflation and interest rates.
As discussed c'ter, 4
I 11 Schedule P is an additional test of the validity of our 12 rate request since it shows the anticipated results 13 achieved during 1981, the first year of the ucw rates.
14 Q.
11R. LETBCTTER, WOULD YOU PLEASE EXPLAIN THE 15 ADJUSTf1EilTS 11ADE TO RECOVERABLE FUEL EXPENSE?
16 A.
In general, recoverabic fuel expense under current 17 rates has been adjusted to reflect both 1) the not 18 increase in test year kilowatt hour sales resulting 19 from adjustments for weather, year end customers and l
20 usage per customer that were provided by fir. John 21 Edwards, and 2) a change in fuel mix.
Kilowatt hour 22 sales were adjusted to generation level to recognize 23 losses and then converted to units of energy consumed 24 using appropriate heat rates and the availability of 25 fuel when the proposed rates beconc effective.
Gas 26 volumes arc either fixed contract amounts or amounts 27 anticipated to be under contract in~1981.
The quantity t
28 of coal is based upon an average capacity factor of 61%
i HOUSTON LIGHTING & POWER COMPANY
a PAGE 16 op 35 1
for U.
A.
Parish units 5 and 6 and 54% for U.
A.
Parish 2
Ne. 7 which requires more down-time, a nornal 3
occurrence, since it will be in its first full year of 4
operation.
As discussed in the testinony of 11r. Oprea, 5
the problems at the17.
A.
Parish coal units 5 and 6 6
have been corrected and we foresee no further problems 7
and these capacity fact ors are based on that premise.
8 The generation shown for oil represents No. 2 oil which 9
will be used in our U.A.
Parish Unit No. 7 'or 10 ignition.
The cost used for this oil was the market 11 price as of the test year end.
The costs used for gas 12 were either the prices as of the test year end or:
13 contractual prices effective January 1, 1981, and the 14 price of coal reflects the March 1980 invoice price.
15 The same approach was used to calculate the fuel 16 expense adjustment under proposed rates.
The on.y 17 difference is the level of kilowatt hour sales.
18 Q.
!!R. LETBETTER, DOES THIS ADJUSTt1ENT TO RECOVERABLE 19 FUEL EXPENSE REFLECT ANY CHANGES THE COMPANY IS 20 PROPOSING IN THE FUEL COST ADJUSTMENT?
21 A.
Yes, it does.
The Fuel Cost Adjustment as defined in 22 the approved tariff in our last rate case, Docket 2676, 23 does not reflect the limitations mandated by the 24 Commission on the pacc-through of certain coal charges 25 billed by Utility Fuels, Inc.
These limitations relate 26 to the inventory carrying charge and fixed charge 27 components of the coal billing.
-28 HOUSTON LIGHTING & POWER COMPANY
PAGE 17 OF 35 I
The coal expense included in recoverable fuel 2
expense as shown on Schedule A, has been computed in 3
accordance with the Company's proposed changes to the 4
Docket 2676 limitations, namely:
- 1) that no limitation 5
be placed on the fixed charge component of the billing; 6
and 2) that the 90-day inventory level limitation be 7
maintained but computed with a different capacity 8
factor on an annual basis rather than a monthly basis.
9 Q.
MR. LETBETTER, WOULD YOU PLEASE EXPLAIN THE COMPANY'S 10 PROPOSED LI!!ITATION ON THE INVENTORY CARRYING CIIARGE?
11 A.
The Conpany proposes that the 90-day inventory be 12 computed based on the amount of coal required to 13 operate its coal units at a 70% annual capacity 14 factor.
In this way, IIL&P can achieve a 60% annual 15 capacity factor with an appropriate amount of coal in 16 inventory for high consumption during peak periods.
If 17 our coal units can continue to obtain capacity factors 18 greater than 60%, the 90-day inventory based on 70%
19 will allow this performance to be realized.
20 The second part of the Company's proposal is to 21 request that this limitation be applied on an annual, 22 rather than a monthly basis in order to allow for 23 monthly variations in inventory levels resulting from 24 such operational considerations as plant load 25 schedules, summer peak requirements, maintenance 26 schedules, and so forth.
In other words, the Company 27 proposes that annually in February of each year the 28 average 90-day inventory for the preceding calendar HOUSTON LIGHTING & POWER COMPANY
PAGE
'18 OF 75 I
1 year'be determined, and compared with the 90-day level 2
based on operation of its coal units at a 70% annual 3
capacity factor.
If the actual 90 day level exceeds 4
4 this maximun, the inventory cari f ing charges associated i
5 i
with the excess, if any, will be credited to the 6
cu~stomer in riarch through a lower fuel adjustment i
I 7
factor.
8 Q.
MR. LETBETTER, PLEASE EXPLAIN Tile LINE ENTITLED 9
" RECOVERABLE CITY FRANCllISE REQUIREMENTS".
10 A.
Pursuant to Docket 2676, city franchise requirements 1
are now recovered through a surcharge much like the 12 fuel cost adjustment for recoverable fuel.
The amounts 13 under both current and proposed rates represent 4% of 14 the appropriate fuel and base revenues collected within 15 uunicipalities.
1-6 Q.
f1R. LETBETTER, WOULD YOU PLEASE EXPLAIN YOUR 17 ADJUSTf!ENTS TO MISCELLANEOUS FUEL EXPENSE?
18 A.
t!iscellaneous fuel expense is the cost of operating 19 and maintaining our fuel oil pipeline.
This cost 20 fluctuates with the amount of oil burned.
As shown in 21 the recoverable fuel expense adjustment, the amount of 22 oil consumed decreases on an adjusted test year basis.
23 The adjustment is based upon miscellaneous fuel expense 24 of approximately S.10 a barrel.
-25 26 27 28 HOUSTON LIGHTING & POWER COMPANY
PAGE 19 OF 35 t
Q.
t1R. LCTBUTTER, Ul!Y IIAVC YOU f1ADC AN ADJUSTf1ENT TO 3
PURCHASUD POUCR AND UllCULING EXPUNSU?
A.
The test year amount for purchased power expense 3
4 consists of economy energy purchases, firm purchases 5
and a capacity charge to the City of Austin.
Uc have nt included econony energy in our adjusted cost of 6
7 service because of the uncertainty of the availability, 8
and the cost, of this economy power in 1981.
- However, we have included the cost of up to 500 riu of power to 9
10 be purchased from the City of Austin.
The agreement began in January 1980 and extends through the calender year 1985.
Thus, the test year amount includes only 37 13 three months of capacity charge accruals and has therefore been adjusted to reflect the fril twelve 34 i
j m nth charge.
The not effect of these two adjustments 15 is the resultant adjustment to purchased power 16 37 expense.
In conjunccion with the Austin agreement, IIL&P has also entered into an agreenent with the Lower 18 Colorado River Authority (LCRA) whereby LCRA has agreed 39 to transmit the power purchased from the City of Austin 20 through LCRA transmission lines to HL&P.
The 21 transmission services ar? being provided through t
December 31, 1985 and vill require an annual charge.
23 Thus, the test " ear amount for wheeling expense has 24 also been increased to reflect the annual charge.
25 26 Q.
MR. L D C T"iT R, UOULD YOU PLEASC EXPLAIN YOUR ADJUSTf!ENT TO UAGC EXPENSE?
27 28 4
i f
HOUSTON LIGHTING & POWER COMPANY
J e
PAGE 20 OF 35 1
A.
The wage expense adjustnent is based upon personnel 2
regairements to serve year-end level customers and has 3
five components:
4 1.
An adjustment to reflect the number of 5
employees and wage levels effective at March 6
31, 1980; 7
2.
An adjustment to reflect known salary changes 8
for union supervisory personnel; 9
3.
An adjustment to reflect the union wage 10 increase; 4.
An adjustment for approved increases for 12 other existing personnel; and 13 5.
An adjustment for additional personnel for 14 which there were outstanding personnel 15 requisitions at flarch 31, 1980.
This 16 adjustment is required to properly reflect the 17 annual cost of additional personnel to meet 18 the requirements of providing service to the 39 level of customers existing at !! arch 31, 1980.
20 Q.
MR. LETBCTTER, UOULD YOU PLEASE CXPLAIN YOUR 3g ADJUSTI!CNT TO Ct1PLOYCC BCNCFITS EXPENSC?
A.
Each of the major components of employee benefits 22 expense was adjusted separately.
Workmen's 73 24 compensation insurance was adjusted based on the test 25 year end adjusted number of employees.
Test year 26 retirement plan expense was increased to the minimun 27 contribution level provided by our actuary based on 28 plan benefits, participants, and payroll levels 4
HOUSTON LIGHTING & POWER COMPANY
PAGE 21 op 35 t
i effective January 1 1980.
Test year savings plan 2
costs were adjusted based on test year end adjusted i
3 number of employees.
Hospitalization insurance was 4
adjusted based on increased medical costs at test year l
5 nd as measured by the Houston Consumer Price Index for i
1 6
medical care.
Life insurance was restated to the 7
current expense level based on the prenium paid for the 8
m nth of riarch, 1980.
These test year adjustments to 9
cmployee benefits expense were then reduced to reflect 10 the percentage capital: zed as a result of the accounting changes discussed at page 29 of my testimony.
g 0
UHY HAVE YOU f!ADE AN ADJUSTf1ENT TO T!!E PROVISION FOR 13 PROPERTY INSURANCE?
g A.
In the Company's last rate case the Commissian denied 15 the Company any further accruals to the property g
insurance recerve on the basis that the balance in the g
reserv a
Mar 9
w s adequate.
18 39 Ue still maintain that this level is inadequate based on our increasing investment in transmission and distribution facilities; however, we have merely g
aajusted property insurance expense in order to yy
^
reinstate the reserve to the $8,525,000 level.
Q.
UGULD YOU PLEASE EXPLAIN YOUR OTHER ADJUSTMENTS TO 24 4
^
" ^"
"^
"^"
25 26 The next three adjustments were made in compliance A.
with Substantive Rule 052.02.03.032 (a)(6).
The 7
adjustments to legislative advocacy and social dues 28 s
HOUSTON LIGHTING & POWER COMPANY
PAGE 22 OF 35 1
remove from the cost of service all test year 3
expenditures for these items.
The adjustments to 3
ad. rtising, contributions, and donations reflect 4
application of the above rule and the reclassification 5
f contributions and donations charged to account 4 26 6
as an allowable cost of service item.
7 Uc are requesting recovery of the Company's 4
I 8
additional rate case expenses incurred in connection 9
with Dockets 2001 and 2676 and billed subsequent to our 10 last rate case and the estimated Company expenses for this application.
As discussed later, we anticipate j;
33 the need to apply for additional rate relief in 1981, 13 and therefore are requesting one-year amortization of 34 our rate case expenses.
15 Uncollectible accounts expense is a revenue-16 related expense and has therefore been adjusted for 17 revenue changes under current and proposed rates.
18 Q.
f1R. LETBETTER, WOULD YOU EXPLAIN THE ADJUSTMENT TO OTHER OPERATION AND MAINTENANCE EXPENSE?
g9 20 A.
The majority of total operation and mair,tenance 3g expense for the test year, excluding recoverable fuel, 22 has been adjusted to year end levels through the specific adjustnents I have Just described.
The 23 remainder, however, represents other operation and 24 25 naintenac.ce expenses which have not been individually 26 adjusted.
Included in this. category are expenditures f r the many miscellaneous goods and services necessary i
27 to conduct business, namely, materials and supplies, 28 HOUSTON LIGHTING & POWER COMPANY
o t
PAGE 23 op 35 1
consultant fees, postage, janitorial and security 2
services, tree trimming, equipment rental, water, gas 3
and telephane utilities, transportation expense, and so 4
We know that costs are increasing in these areas, on.
and, as I shall explain later, we can identify some of 5
them; however, to develop a separate adjustment for 6
7 each of the items involved would be quite costly and difficult, if not impossible, to accomplish.
He have 8
9 considered these items in the composite, therefore, and 10 have calculated a single adjustment to bring these expenses to year end level.
gy 12 UHAT f1ETHOD DID YOU USE TO CALCULATE THIS YEAR END 0
LEVEL ADJUSTf!ENT?
13 A.
As in our last two rate cases, we have used the.
g a
statistical technique of regression analysis using the 15 relationship betwoon other operation and maintenance g
g expenses and average custoners as the means to making a justmenL Howe m, our approach this year varies 18 slightly from the last two rate cases in that we 39 Converted the base years used in the regression to 21 nstant dollars using the average Producer Price Index i
(formerly the Uholesale Price Index) during such y ars.
He then used the mean of the regression 3
3 analysis to project the appropriate expense level based on the number of customers at test year end and 3
26 converted the result back to ?! arch 31, 1983 dollars to arrive at the adjustment as shown on Schedule A.
?!r.
27 28 Edwards once again reviewed the statistical validity of HOUSTON LIGHTING & POWER COMPANY
~.. -
. - -, _ _ ~,.
l i
PAGF 24 op 35
]
1 the average customer variable and found that the high i
2 statistical correlation between it and other operation 3
and maintenance expense still existed but he determined
-4 that the use of constant dollars in the regression was 5
m re appropriate.
6 Q.
flR LETBETTER, PLEASE EXPLAIN THE ADJUSTt!CNT FOR THE 7
CNERGY CHECK PROGRAM.
8 A.
The adjustment for the energy check progra., represents l
estimated expenses related to the Company's progcsa for 9
10 energy conservation by customers and is designed to neet the requirements of the Public Utility Regulatory y;
Policies Act of 1978.
The adjustment does not include 12 13 any estimated expenditures for setup costs.
g4 Q.
MR. LETBETTUR, WOULD YOU UXPLAIt! Tile ADJ STt1ENT TO 15 DEPRECIATIOI; CXPCUSE.
16 A.
Depreciation and amortization have been adjusted to 17 the test year end level of adjusted depreciable plant, gg including the cost recorded at flarch 31, 1980 for U. A.
19 Parish No. 7, and have been increased as a result of 20 the proposed new rates discussed by !!r. Gillett in his 21 test imony.
22 Q.
UOULD YOU PLEASC EXPLAIN THE ADJUST!!ENTS t1ADC TO FEDERAL INCOME TAXCS AND FEDERAL INVESTMENT TAX 23 CREDITS?
24 25 A.
Yes. An adjustment was made to these items to reflect 26 the effect of known changes under current rates.
An 27 additional adjustment was then made to federal income taxes to take into account the effect of the proposed 28 rate increase.
HOllSTON LIGHTING & POWER COMPANY
s PAGE 25 op 35 1
The computation of the adjustment-to federal 2
income taxes under current rates recognizes all i
3 applicable adjustments for' revenues, operation and 4
maintenance expense.s, taxes other than federal income
.5 taxes, amortizatic.i amounts, and interest on customer 6
deposits as shown on Schedule A under current rates.
7 Depreciation and amortization for the purpose of 8
computing federal income taxes was determined by 9
multiplying the tax basis property, including amcunts 10 n which deferred taxes were previously provided, by the proposed composite book depreciation rate.
The difference between tax basis depreciation and the book 13 basis depreciation is principally a result of permanent basis differences and book basis costs which were g
15 Previously deducted for tax purposes and-for which deferred taxes were not provided.
16 The anortization of investment tax credits was 18 r computed using the proposed composite depreciation rate at March 31, 1980, as shown on page 18 of Schedule 39
^*
20 7,
The final adjustment nade to federal incone taxes was to adjust income taxes for the additional tax g
liability created by rate increase revenues under 3
3 proposed rates.
He determined this adjustment as a derivation of the return deficiency shown on Schedule A.
The return deficiency represents the additional 26 income the company would realize after all g
revenue-related expenses, fuel expenses, and federal 73 HOUSTON LIGHTING & POWER COMPANY
8 PAGE 26 OF 35 1
income tax expense are deducted.
To arrive at the 2
additional taxable income resulting from proposed 3
rates, we grossed up the return deficiency.
Applying 4
the statutory federal income tax rate of 46% to this additional taxable income results in the additional 5
federal income taxes under proposed rates.
6 7
Q.
SEVERAL ADJUSTt1ENTS HAVE BEEN t1ADE TO TAXES OTHER THAN 8
FEDERAL INCOt1C TAXES.
WOULD YOU DESCRIBE EACH OF THESE 9
ADJUSTt1ENTS.
A.
Social Security taxes have been adjusted for the 10 increase in wage expense, using the 1981 tax rate and 33 taxable base.
Federal and state unemployment taxes 12 13 have both been adjusted for the increase in test year g4 end number of employees.
Ad valorem or property taxes 15 were adjusted to reflect taxes based on electric plant in service at riarch 31, 1980, the effective tax rate 16 17 f r 1979 based on actual taxes for that year, and the 18 accounting change as discussed at page 29 of my 19 testimony.
The gross receipts tax and the Public 20 Utility Commission fee are revenue-related taxes and 21 have been adjusted both for revenue changes under 23 current and proposed rates.
The state franchise tax 23 adjastment has been computed using the taxable capital 24 of the Company at the end of the test year, including i
25 the Accumulated Deferred Investnent Tax Credits.
26 Q.
MR. LETBETTER, PLEASE EXPLAIN THE ADJUSTt1ENT TO THE LINE ENTITLED "At10RTIZATION OF ALLENS CREEK 27 4
CANCELLATION CHARGES, FREESTONE PROJECT AND OTHER 28 DEFERRED DEBITS".
i HOUSTON LIGHTING & POWER COMPANY
O E
PAGE 27 op 35 l
A.
As a result of the final order in Docket 2676, the j
2 Commission authorized the anortization over 5 years of the Allens Creek Unit No. 2 cancellation charges, as 3
well as charges related to a nanpower study for 4
coal-fired generating units, an appliance saturation f
5 survey and a co-generation study.
Since the Company 6
did not begin fully amortizing these costs until 7
January, 1980, this adjustment simply annualizes the 8
l test year total to the appropriato level.
As I 9
discussed previously, the amortization of the Freestone 10 Project represents a year's amortization of the 4
unamortized balance included in rate base.
1 13 Q.
MR. LETBETTER, PLEASE EXPLAIN THE LINE ENTITLED
" AMORTIZATION OF STATE FRANCHISE TAX ASSESSMENT".
A.
In pri r y ars the Company has computed the state 15 franchise tax using taxable capital which did not include Accunulated Deferred Investnent Tax Credits.
g i
Ue Calculated the tax in this manner because We did not believe our customers should bear the cost of an iten 39 subject to legal interpretation.
However, in a recent 0
case before the Supreme Court of the State of Texas, the court ruled that the Deferred Investment Tax
~~
Credits should be included in the taxable base.
We 3
have been assessed additional taxes and interest 24 thereon for the years 1975 through 1978.
Accordingly, 25 we have deferred the total assessment and are 26 requesting amortization over one year.
As I've stated 27 above, our method of calculating this tax was to the
,3 A
HOUSTON LIGHTING & POWER COMPANY
i PAGE 28 op 35 1
benefit of the customer, but now, as a result of the 2
Supreme Court ruling, an assessment has been levied 3
which represents a legitimate cost of service and 4
should be borne by our customers.
5 Q.
WHY HAVE YOU INCLUDED INTEREST EXPENSE ON CUSTOMER 6
DEPOSITS IN THE COST OF SERVICE?
7 A.
It is appropriate to include interest expense on 8
customer deposits in the cost of service because 9
customer deposits have been renoved from the rate base in Schedule B.
Our adjustment reflects the annual 10 interest on active customer deposits outstanding at 3g 12 test year end.
13 0
t1R. LETBETTER, UllAT OTHER ITEMS ARE INCLUDED ON SCHEDULE A?
- 4 15 A.
There are two other items:
- 1) an adjustment to 16 revenue under current rates of approximately $387 milli n, pr vided to me by Mr. Edwards, and 2) the 17 18 proposed return of approximately $363 million under the propoced rates which results in a total cost of service 39 20 under proposed rates of approximately $2.323 billion.
21 0
MR. LETBETTER, HOU DID YOU DETERt1INE TliC Af10UNT OF Ti!E PROPOSED RETURN?
33 A.
The Company's weighted average cost of capital at 23 24
!! arch 31, 1980, of 11.36% as shown on Schedule H, page 25 1, was applied to the original cost rate base at !! arch 26 31, 1980 which, as previously explained, contained $797 million of investment in construction.
The $363 27 million resulting return is equivalent to a 9.05%
28 HOUSTON LIGHTING & POWER COMPANY
PAGE 29 op 35 i
return on the adjusted value rate base as shown on 2
Schedule H, page
- 2. The calculated return and cost of 3
service were then tested, as shall be explained later, and shown to be the minimum level required to generate 4
5 sufficient revenues in 1981 to naintain the company's financial integrity.
6
?
III. ACCOUNTING CHAf!GES 8
9 Q.
f1R. LETBETTER, HAVC YOU If1PLEf1ENTED ANY CHANCCS IN ACCOUNTING PRINCIPLES DURING THE YE AR?
10 A.
Yes.
As a result of the Commission's final order in Docket 2676, several accounting changes wcre g
recommended.
The Company implemented these changes 13 beginning in January, 1980.
Such changes included (1) g the capitalization of ad valoren taxes related to j$
a construction work in progress, (2) the capitalization of employee benefits and depreciation of transportation g
equipment related to construction and f3) the yg 39 discontinuance of accruals to the reserves for property suran an n
es aM damages.
20 Q.
?!R. LETBCTTER UCRC THERC AfiY OTHER ACCOUNTING CHANGES g
If1PLCf1CNTED DURING THC YEAR?
A.
Yes.
Beginning in January, 1980, the Company 3
increased its rate for allowance for funds used during
.,4 Construction (AFUDC) from 7 % net of tax to 8h% net of 26 tax and nou includes a provision for compounding on the an unt of AFUDC included in the CUIP balance at Ilarch 27 31, 1979 excluded from rate base in our last case.
The 28 HOUSTON LIGHTING & POWER COMPANY
a a
PAGE 30 OF 35 1
new rate is less than both the cost of capital approved 2
in Docket 2676, the cost of capital at March 31, 1980 3
as shown on Schedulo 11 and that computed using the 4
Federal Energy Regulatory Commission (FERC) formula as 5
pr scribed in FERC Order No. 561.
6 7
IV. TEST OF ADEQUACY OF REQUESTED RATE RELIEF 8
Q.
IN SUMt1ARY DO YOU BELIEVE T!!AT ALL OF THESC 9
ADJUSTtlENTS ARE ADEQUATE TO GIVE IIL&P THE OPPORTUNITY 10 TO RECOVER ITS COSTS OF SERVING THE CUSTOMER AS WELL AS gg PROVIDE A REASONABLE RETURN ON THE COf1PANY'S INVESTED CAPITAL?
g3 13 A.
Based on the measurable changes in our costs of 34 operation and the financial requirements determined by 21r. Dean, I believe they will.
I would like to point i
15 16 ut, however, that the rate relief requested to cover ur cost of service, as supported by Schedule P, is 27 18 adequate for approximately one year and is the minimun g9 level required to achieve the Tinancial requirer.ents 20 necessary to maintain our financial integrity.
21 Q.
IIAVE YOU DONE ANY STUDIFS YOU CAN DESCRIBE IU flORE j
77 DETAIL THAT SHOW THE CFFECT OF THE REQUESTED RATE RELIEF ON IIL&P'S FUTURE OPERATIONS?
23 1
24 A.
Yes.
Schodule P in our rate filing package summarizes 25 the effect of our request and is based on a detailed 26 financial forecast which takes into consideratior:
increased revenues from KUH sales, increased costs of 27 Providing service and the financing of new 28 J
HOUSTON LIGHTING & POWER COMPANY
O 4
PAGE 30 OF 35 1
new rate is less than both the cost of capital approved 3
in Docket 2676, the cost of capital at March 31, 1980 3
as shown on Schedulo II and that computed using the 4
Federal Energy Regulatory Commission (FERC) formula as 5
prescribed in FERC Order No. 561.
6 7
IV. TEST OF ADUQUACY.0F REQUESTED RATE RELIEF 8
Q.
IN SUtif1ARY DO YOU BELIEVE TIIAT ALL OF THESC 9
ADJUSTt1ENTS ARE ADEQUATE TO GIVE !!L&P THE OPPORTUNITY 10 TO RECOVER ITS COSTS OF SERVING THE CUSTO!!ER AS WELL AS PROVIDE A REASONABLE RETURN ON THE COfiPANY'S INVESTED gy CAPITAL?
12 j3 A.
Based on the measurable changes in our costs of 34 operation and the financial requirements determined by 11r. Dean, I believe they will.
I would like to point 15 16 ut, however, that the rate relief requested to cover our cost of service, as supported by Schedule P, is 37 18 adequate for approximately one year and is the minimum g9 level required to achieve the financial requirenents necessary to maintain our financial integrity.
20 21 Q.
IIAVE YOU DONE ANY STUDIES YOU CAN DESCRIBE IN flORE 33 DETAIL TilAT SHOW THE EFFECT OF THE REQUESTED RATE RELIEF ON IIL&P'S FUTURE OPERATIONS?
23 24 A.
Yes.
Schedule P in our rate filing package sumnarizes 25 the effect of our request and is based on a detailed financial forecast which takes into consideration 26 increased revenues from KUlf sales, increased costs of 27 Providing service and the financing _of new 28 HOUSTON LIGHTING & POWER COMPANY
O S
PAGE 31 op 35 1
construction, which will clearly have a tremendous 2
impact on IIL&P's financi.a1 integrity in the months and 3
years ahead.
4 Construction expenditures in 1981 will be far 5
greater than the current 1cvel, but, with S797 million f investment in construction in rate base, IIL&P will 6
7 have an opportunity to weather the serious financial 8
burdens placed on the Company by the customers' need for such a program.
9 Setting rates using only historical info rma tion O
without regard to, or consideration of, the financial and business operations of the Company during the 13 Period when those rates are in effect doesn't make sense nor does it benefit the customer in the long run.
g Q.
f1R. LETBETTER, CAN YOU DEf10NSTRATE T!!E PROBLEtt OF 15 USING STRICTLY HISTORICAL INFORf1ATION?
A.
The problem can be demonstrated by con'sidering one of g
the financial parameters considered very important in 18 measuring financial integrity, namely, " times interest 39 earned" on the Company's debt obligations.
The Public 0
Utility Commission Staff testified in Docket 2001 that g
a range of 3.50 to 4.00 times interest earned, excluding AFUDC, was adequate to maintain HL&P's AA credit rating and the final order issued in the case supported the Staff's recommendation.
Iloweve r, the 5
v rall st of capital of 10.02% granted in Docket 26 2001 was determined using a component cost for debt of g
7.34% which reflected approximately $91 million of HOUSTON LIGHTING & POWER COMPANY
PAGE 32 op 35 1
interest expense.
In December of 1978 HL&P issued $100 2
million of 9k% First Mortgage Bonds.
Thus, the 3
Company's actual interest expense on long-term debt in 4
4 1979, the first year in which the now rates were in 5
effect, was approximately S102 million producing a 6
coverage of 3.12, as shown in Schedule H-7.
Thus, in 7
times of rampant inflation and spiraling interest rates 8
historical information obviously loses meaning.
The 9
allowance of additional investment in construction in 10 rate base is one method of counteracting this attritional offect.
12 Q.
MR. LETBETTER, DO YOU HAVE A COf!PARISON OF THE 13 COf!P ANY ' S 1980 PROJECTED fit!ANCIAL REQUIREMENTS AND g4 OBJECTIVES UITil TIIOSE AS SPECIFIED IN THE PUC'S FINAL 15 ORDER IN DOCKET 2676?
A.
Yes, I do.
The prospects for 1980 as shown on 16 Schedule P are compared below to the financial 37 18 requirem nts as specified in Docket 2676.
19 20 i
21 22 23 24 25 26 e
27 28 HOUSTON LIGHTING & POWER COMPANY
o o
PAGE 33 op 35 1
1980 Per PUC Per Final Order 2
Financial Requirements Schedule P In Docket 2676 3
Interest coverage 3.39 4.12 4
Internally generated funds
~
as a % of capital 5
expenditures 27.30%
29.80%
6 Rate of return on average common equity 12.69%gg 15.00%
7 (1)
Includes approximately 1.3% of return on the Job 8
Development Credits 9
You should note that it is unlikely the Company will 10 achieve the targeted rate of return on common equity 11 during 1980, and we will never come close to reaching 12 the interest coverage specified by the PUC's order.
In 13 addition, one other objective of the Commission was to I4 allow the Company to sell common stock above book 15 value.
As !!:. Dean discussed in his testimony, IIII's 16 stock sale in April, 1980 was at 76% of book value, and I7 five out of the last six issues prior to that sale were 18 also below book value.
19 Q.
BA::. % ON TiiE cot 4PANY'S REQUESTED RATE RELIEF, UIIAT ARE 20 YOUR PROSPECTS FOR 1981?
21 A.
The prospects for 1981 based on this rate application and reflected on Schedule P are shown below and
~~
23 compared to the financial requirements specified by f1r.
24 Dean.
25 26 27 28 HOUSTON LIGHTING & POWER COMPANY
4 PAGE 34 OF 35 1
1981 Per Per 2
Financial Requirements Schedule P
H.R.
Dean 3
Interest coverage 4.06 3.5 or greater 4
Internally generated funds as a % of capital ex-39.4%
40% or greater penditures 5
I 6
Rate of return on average 15.97%(1) 16%
common equity 7
(1)
Includes approximately 1.5% of return on the Job 8
Development Credits 9
Uith the requested rates in effect, HL&P should have a 10 reasonable opportunity of achieving the financial gg requirements deemed appropriate by Mr. Dean in order to 13 maintain our financial integrity.
13 Q.
MR. LETBETTER, UHAT UOULD BE THE EFFECT.OF APPLYING 14 THESE REQUIREMENTS TO THE TEST YEAR END LEVEL OF 15 OPERATIONS, SIMILAR TO THE APPROACH USED BY THE PUC STAFF?
16 37 The effect would be a resulting rate increase A.
18 inadequate to meet the financial requirements in 1981.
As discussed, historical information loses meaning 39 20 uuring periods of high inflation and high interest 21 rates coupled with the size of the construction program 22 with which the Company is confronted.
Thus, to apply Mr. Dean's-fin'ancial requirements to the test year end 23 level f
Perations is inappropriate because it does 24 25 n t reflect the conditions that will prevail during the 26 Period in which rates will be in effect.
If a test year end concept is used to measure financial 27 i
integrity, the problem can only be solved by 28 HOUSTON LIGHTING & POWER COMPANY
]
PAGE 35 op 35 g
arbitrarily setting financial requirements.
I have in luded below a chart which demonstrates the problem 2
of using test year end level of operations including our proposed revenue requirements t.o measure financial 4
integrity.
6 Financial Indicators 7
Schedule P Test Year End 8
Interest coverage 4.06 4.95 9
10 Internally generated funds as a % of 11 capital expenditures 39.4%
48%
12 Return on Common Equity 15.97%
18.6%(1) 13 (1) Includes approximately 1.7% of return sn the Job Development Credits Q.
DOES THIS CONCLUDE YOUR TESTIMONY?
A.
Yes it does.
16 17 18 I
19 20 21 22 23 24 25 26 27 l
28 HOUSTON LIGHTING & POWER COMPANY
A o
e
>w i
THE STATE OF TEXAS 5
COUNTY OF HARRIS Before me, the uridersigned authority, on this day personall y appeared R. S. Letbetter, who, having been duly sworn, upon oath says:
"My name is R. S. Letbetter, I am of legal age and a resident of the State of Texas. The foregoing testimony, and exhibits, offered by me on behal f of Houston Li ghting & Power Company. are true and correct, and the opinions stated therein are, in my judgment and based upon my professional experience, true and correct."
R. S. Letbetter Subscribed and sworn to before me to by the said R. S. Letbetter this 13 day of June,1980.
i Aka L
tG G
My comission expires:
Notary Public in and for March 14,1984 Harris County, Texas a
.