ML20038B217
| ML20038B217 | |
| Person / Time | |
|---|---|
| Site: | Comanche Peak  |
| Issue date: | 09/30/1980 |
| From: | Tanner M DALLAS POWER & LIGHT CO., TEXAS ELECTRIC SERVICE CO. |
| To: | |
| Shared Package | |
| ML20038B200 | List: |
| References | |
| NUDOCS 8111240890 | |
| Download: ML20038B217 (38) | |
Text
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- x 11 NOV 19 P4:12 1, SECRETARY
.. <.Ei hG & SERVICE BRAtlCH DIRECT TESTIMONY OF MAX H. TANNER, JR.
FOR DALLAS POWER & LIGHT COMPANY SEPTEMBER,1980 0111240890 81111'8 PDR.ADOCK 05000445 PDR I
TANNER PAGE 1 1 DIRECT TESTIMONY OF MAX H. TANNER, JR.
2 3 Q. PLEASE STATE YOUR NAME AND ADDRESS.
4 A. Max H. Tanner, Jr.,1506 Commerce Street, Dallas, Texas 75201.
5 Q. BY WHOM ARE YOU EMPLOYED AND IN WHAT CAPACITY?
6 A. I am a Vice President of Dallas Power & Light Company.
7 Q. HOW LONG HAVE YOU BEEN WITH THE COMPANY AND IN WHAT
. 8 CAPACITIES?
9 A. I have been a full-time employee of DP&L since 1953 and have served in various 10 technical and managerial capacities in the design, constrict'on, operation and 11 maintenance of the Company's distribution, transmission and production facilities, 12 including fuel requirements. I served as Manager of DP&L's Producticn Depart-13 ment from 1968 until 1974 and as Manager of System Operation until 1976, when I 14 ' was elected Vice President.
15 Q. WHAT IS THE NATURE OF YOUR RESPONSIBILITIES AS VICE PRESIDENT?
16 A. I am responsible for planning and engineering system facilities; managing the 17 Company's power production, transmission and distribution activities; and 18 securing fuel supplies for DP&L's plants. I am also responsible for coordinating 19 operations with other Texas Utilities (TU) companies and other interconnected l 20 systems.
I 21 Q. WHAT ARE YOUR EDUCATIONAL AND PROFESSIONAL QUALIFICATIONS?
22 A. I have a Bachelor of Science Degree in Electrical Engineering from Texas A&M j 23 University and am a Registered Professional Engineer in the State of Texas.
l 24 Q. ARE YOU A MEMBER OF ANY INDUSTRY OR PROFESSIONAL ORGANIZA-l 25 TIONS?
26 A. I am presently active in the Texas Interconnected System (Td), Electric Relisbility 27 Council of Texas (ERCOT) and the National Electric Reliability Council (NERC).
28 In addition, I am a member of the Power Engineering Society of the Institute of i
, . . - . - . - - - , . - - - . . - . . . . - - . - - . - ~ . - - - . - - - - - - - - - = - - - - - . ~ - - - - - - - - - - - - - - - - - - - - ~
TANNER PAGE 2 1 Electrical and Electronics Engineers (IEEE).
2 Q. MR. TANNER, PLEASE TELL US WHAT YOUR TESTIMONY WILL COVER.
3 A. I will review the Company's construction program, fuel utilization plans, opera-4 tions, depreciation and related matters.
5 Q. HAVE YOU PREVIOUSLY TESTIFIED ON ANY OF THESE MATTERS BEFORE 6 THE COMPANY'S REGULATORY AUTHORITIES?
7 A. Yes. I testified in the Company's last three rate applications before the City of 8 Dallas and in Dockets 1526,1903, 2572, and 3090 before the Public Utility 9 Commission.
10 Q. WOULD YOU PLEASE DESCRIBE THE FACTORS WHICH IMPACT THE PLAN-11 NING OF FACILITIES NECESSARY FOR SUPPLYING ELECTRIC SERVICE?
12 A. Yes. There are many factors which affect the planning of facilities to meet the i 13 needs of our customers. These factors include: (1) the availability, cost and 14 transportation of fuels; (2) the projected growth in both peak load and energy; 15 (3) availability and location of water rights and plant sites; (4) availability and cost 16 of capital; (5) the overall level of system reliability and (6) the time required to i
17 engineer, obtain regulatory approvals and construct new facilities. In view of the 18 uncertainties associated with each of these factors, it is imperative, and in the 19 best long term interests of our customers, to maintain viable options and flexibility 20 in planning for additional facilities.
21 To supply electric service to the Company's service area, extensive facilities, 22 resources and capital investments are necessary. In today's environment, the long 23 lead times required to place new facilities in service and the high rate of inflation 24 severely impact construction costs. Such parameters necessitate careful planning 25 and engineering to provide facilities to meet the needs of our customers during a 26 time when uncertainties prevailin every facet of the industry.
27 Q. MR. TANNER, WHY DOES IT TAKE SO LONG TO PLAN AND BUILD NEW l GENERATING FACILITIES?
28
l l
THE STATE OF TEXAS X COUNTY OF DALLAS X BEFORE the undersigned authority on this day personally appeared MAX H.
TANNER, JR., who, having been placed under oath by me, did depose as follows:
"My name is Max H. Tanner, Jr. I am of legal age and a resident of the State of Texas. The foregoing testimony, and exhibits, offered by me on behalf of Dallas Power
& Light Company, are true and correct, and the opinions stated therein are, to the best of my knowledge and belief, accurate, true, and correct."
DOAL MI MAX H. TANNER, JR.
V v.
SUBSCRIBED AND SWORN TO BEFORE ME by the said MAX H. TANNER, JR.
this 17th day of September, A.D.1980.
NK Z/J Notary Publickand for Dallas County, Texas My commission expires June 26,1981
f DIRECT TESTIMONY OF J0E D. KARNEY FOR DALLAS POWER & LIGHT COMPANY SEPTEMBER 1980
JDK PAGE 1 1 DIRECT TESTIMONY OF J0E D. XARNEY 2
3 Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
4 A. My name is Joe D. Karney. My business address is 1506 Commerce Street, 5 Dallas, Texas 75201.
6 Q. BY WHOM ARE YOU EMPLOYED AND IN W' HAT CAPACITY 7 7 A. I am employed by Dallas Power & Light Company, hold the position of 8 Treasurer & Assistant Secretary and have responsibility for the 9 financial, accounting, and internal audit activities of the Company.
10 Q. PLEASE DESCRIBE YOUR. EDUCATIONAL BACKGROUND AND PROFESSIONAL 11 QUALIFICATIONS.
12 A. I graduated from Southern Methodist University in 1961 with a Bachelor 13 of Business Administration degree in accounting. I have been employed by 14 Dallas Power & Light Company since July,1952 and have worked in various 15 areas of the Accounting Department prior to becoming Head of the General 16 Accounting Division in 1964. I was elected Assistant Treasurer of the 17 Company in 1971, Assistant Treasurer and Assistant Secretary in 1975, and 18 Treasurer and Assistant Secretary in 1977. In addition, I headed the 19 Company's Accounting Department from 1970 through 1978. I am a Certified 20 Public Accountant in the State of Texas and hold memberships in the 21 American Institute of Certified Public Accountants, the Texas Society of 22 Certified Public Accountants, the Financial Executives Institute, and the 23 Edison Electric Institute Financial Comittee. I have testified 24 previously in rate proceedings before the City of Dallas and the Public i
25 Utility Comission of Texas (PUC).
26 Q. TO WHAT DEGREE D0 YOU HAVE CONTACT WITH THE INVESTMENT AND FINANCIAL 27 COMMUNITY 7 28 g - , - - - , ,
JDK PAGE 2 1 A. I have extensive involvement in and responsioility for the financial 2 affairs of the Company. My contacts with the financial community include 3 regular meetings and discussions with representatives of comercial 4 banks, investment banking firms and rating agencies, as well as 5 consultation with individual and institutional investors and security 6 analysts.
7 Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS PROCEEDING?
8 A. My testimony will discuss: (a) the importance of the Company's ability 9 to attract capital; (b) the Company's current financial condition, 10 including fixed charge coverages, internal generation of cash, return on 11 common stock equity, and quality.of earnings; (c) the basis for the 12 Company's request to include construction work in progress (CWIP) in the 13 yate base; (d) the adjusted value rate base for the Company; (e) the 14 capital structure of the Company;.and (f) the Company's composite cost of 15 capital .
16 Q. PLEASE EXPLAIN THE SOURCES OF FUNDS AVAILABLE TO THE COMPANY AND THE 17 IMPORTANCE OF THE COMPANY'S ABILITY TO ATTRACT CAPITAL AT REASONABLE 18 COSTS.
19 A. In addition to funds generated internally, the Company traditionally has 20 obtained pemanent capital principally through the sale of long-tem 1
21 debt, preferred stock and common stock. In recent years, however, the 22 Company has had to resort to a higher level of short-tem debt and the 23 sale, through private placement, of intemediate-tem debt.
24 Electric utilities are generally conceded to be the most capital 25 intensive of all industries. Therefore, they must enter the capital 26 market on a regular basis. Since capital costs represent a significant 27 portion of total costs, and continue to increase in an inflationary .
I 28
JDK PAGE 3 1
environment such as we have experienced over the past several years, it 2 is extremely important to maintain a high credit rating in order that 3 capital may be obtained at the lowest possible cost. The Company's 4
ability to keep its capital costs low in the past has helped to maintain 5
reasonable electric rates for its customers.
6 As pointed out in Mr. Tanner's testimony, the Company is engaged in l 7 a continu'ing construction program to provide facilities that will bring
- 8 the cost benefits resulting from the use of lignite and uranium fuels to 9 its customers. The Company's regulatory authorities have acknowledged 10 the benefits the customer receives from the conversion to lower cost 11 alternate . fuels in the Company's .past two rate procee' dings. Based on 12 current estimates, the Company's construction expenditures will average 13 .approximately $130 million per year for the cext several years. It 14 should be noted that a construction program of this size represents i 15 annual expenditures equal to approximately 19 percent of the net cost of 16 all the plant currently in service. It is therefore important, and to 17 the direct benefit of the customer, that the substantial quantities of i 18 capital that will be required to provide these facilities be available at 19 the most reasonable cost.
20 Q. CONSIDERING THE COMPANY'S NEED TO ACQUIRE CAPITAL TO FINANCE THE 21 CONSTRUCTION PROGRAM, WHAT IS THE SIGNIFICANCE OF THE FIXED CHARGE 22 COVERAGE?
23 A. One of the most important indicators of the financial integrity of a 24 utility company is the extent to which earnings will cover its fixed 25 charges on debt. The fixed charge coverage that the Company maintains 26 over a period of years has a substantial impact on the ratings the 27 agencies assign the Company's bonds. It is generally recognized 28
JDK PAGE 4 1 1 throughout the financial community that for an electric utility, a fixed 2 charge coverage, including all applicable debt, of at least 4.0 times is 3 the minimum requirement to maintain a triple A bond rating.
4 WOULD YOU EXPLAIN THE TERM " SUPPLEMENTAL FIXED CHARGE COVERAGE"?
Q.
5 A. The computation of the supplemental ratio of earnings to fixed charges 6 is made pursuant to Securities and Exchange Commission (SEC) Accounting 7 Series Release No.122, the purpose of which is to include, for interest 8 coverage purposes, interest requirements on debt which is not on the 9 Company's balance sheet but which the Company has guaranteed or is in 10 some manner obligated to assume in case of default. In the case of 11 Dallas Power & Light Company, the supplemental coverage calculation 12 includes the Company's proportionate obligations for senior notes issued 13 by Texas Utilities Fuel Company (TUFCO) and Texas Utilities Generating 14 Company (TUGCO).
15 Q. MR. KARNEY, WHAT HAS BEEN THE RECOMt1ENDATION OF THE COMPANY'S REGULATORY 16 AUTHORITIES AS TO AN ADEQUATE FIXED CHARGE COVERAGE FOR DALLAS POWER &
17 LIGHT COMPANY?
18 A. The staffs of the regulatory authorities exercising jurisdiction over 19 the Company have recognized the need for a 4.0 times coverage to maintain 20 a triple A bond rating.
21 WHAT HAVE BEEN THE COMPANY'S FIXED CHARGE COVERAGES AND SUPPLEMENTAL Q.
22 FIXED CHARGE COVERAGES IN RECENT YEARS?
23 A. They have declined substantially. As showr. in JDK Exhibit No. 1, prior 24 to 1974 the Company's fixed charge coverage was generally in excess of 25 4.0 times. For the test year ended June 30, 1980, the fixed charge 26 coverage was 3.12 times and the supplemental fixed charge coverage was 27 2.76 times. These coverages are obviously below the minimum needed to 28 ,
JDK PAGE 5 I retain the triple A rating and have been for several years. Since 2 capital costs are ;uch a major portion of the Company's expenses, 1
3 retention of the triple A rating is vitally important to the Company and 4 its customers.
5 Q. HAS DALLAS POWER & LIGHT COMPANY BEEN ABLE TO ACHIEVE A 4.0 TIMES 6
SUPPLEMENTAL FIXED CHARGE COVERAGE AS A RESULT OF RECENT RATE ORDERS?
7 A. . As shown in JDK Exhibit No. 2, the Company's supplemental fixed charge 8 coverage is substantially below the minimum 4.0 times coverage needed.
9 Although recent rate orders of the Company's regulatory authorities' have 10 addressed the need to restore the Company's financial integrity, the 11 amount of. rate increase granted in each case has been inadequate to 12 accomplish this objective.
- 13 Q. MR. KARNEY, WILL DP&L'S CUSTOMERS BENEFIT IF THE COMPANY IS ABLE TO 14 MAINTAIN ITS TRIPLE A FIRST MORTGAGE BOND RATING?
15 A. Yes. The triple A rating allows the Company to borrow funds at the I
16 lowest possible cost. This is reflected in JDK Exhibit No. 3 which shows 17 Moody's average of yields on long-tenn public utility bonds for the years 18 1969 through 1979. For example, the spread between triple A and double A 19 was, on average, approximately 30 basis points from 1974 through 1979.
l - 20 During periods of greatest financial strains, the spreads are even 21 wider. With a difference in financing rates of 30 basis points, the 1 22 savings over the 30-year life of a $75 million bond issue would be over 23 $6.7 million. The spread to lower rated bonds is even greater. With a #
24 high credit rating there are additional savings in the cost of short-tenn 25 debt, pollution control bonds, and preferred and common stock.
26 Q. IN ADDITION TO THE SAVINGS OF INTEREST AND DIVIDENDS, ARE THERE OTHER 27 RE,AS.0NS FOR MAINTAINING THE TRIPLE A BOND RATING?
28 l
[
- JDK PAGE 6 1 A. Yes, other benefits of maintaining the triple A rating are the greater 2 availability and flexibility of capital financing. Strong credit 3 indicators lead to better financial health at a lower cost to the 4 ratepayer. Investors will generally accept a lower return on their 5 investment if the Company is financially strong, which results in a lower 6 cost of capital. The magnitude of the Company's construction program and 7 the required external financing necessitates that the Company have ready 8 access to the capital markets at reasonable cost.
9 IF DALLAS POWER & LIGHT COMPANY WERE TO LOSE ITS TRIPLE A RATING, WHAT Q.
10 WOULD BE NECESSARY TO REGAIN THAT BOND RATING?
! 11 A. It would take many years of sustained financial performance above the
- 12 established minimum requirements before the rating agencies would 13 consider upgrading the Company's bond rating. Therefore, retention of
. 14 the Company's favorable bond rating is extremely important at this time.
15 Q. -TO WHAT EXTENT ARE INTERNAL SOURCES OF FUNDS AVAILABLE TO MEET THE 16 COMPANY'S CAPITAL NEEDS?
17 A. A portion of the Company's net! earnings are reinvested in the Company in 18 support of the construction program. JCK Exhibit No. 4 shows retained 19 earnings, combined with other internally generated funds, as a percentage 20 of construction expenditures for the period January,1978 through June, 21 1980, as compared to the range of 40 to 60 percent recommended by the PUC 22 Staff in Docket 2572. As shown in the exhibit, the percentage for the 23 Company has fluctuated during the past several years, but has averaged 24 less than 40 percent during this period. For the test year, the level of 25 internally generated funds as a percentage of construction expenditures 26 was 32.1 percent. JDK Exhibit No. 4 further illustrates that the rate 27 increases granted in the Company's last two rate orders have been 28 l
JDK PAGE 7 1 insufficient to provide the level of internal cash generation recommended 2 by the PUC staff for the maintenance of financial integrity.
3 Also, from 1969 to the end of 1979, construction expenditures have 4 increased more than four times. This means that the Company must attract 5 additional capital. In order to obtain new capital in an inflationary 6 and recessionary environment, internally generated cash must be 7 . maintained at a level adequate to ensure investor. confidence.
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8 Q. WHAT PERCENTAGE OF DALLAS POWER & LIGHT COMPANY'S CAPITAL REQUIREMENTS 9 SHOULD BE MET THROUGH INTERNALLY GENERATED FUNDS ?
10 A. Dallas Power & Light Company should generate on a consistent basis 50 11 percent of its capital needs internally. In view of-the prevailing rate 12 of inflation and the size of our construction program, this level is the 13 minimum requirement.
14 Q. ANOTHER TEST OF FINANCIAL PERFORMANCE IS RETURN ON COMMON STOCK EQUITY.
15 -WHAT HAS BEEN DALLAS POWER & LIGHT COMPANY'S RETURN ON COMMON EQUITY 16 SINCE 1969?
17 A. The return on equity has declined dramatically since 1969, as shown by 18 JDK Exhibit No. 5. This exhibit shows return on common stock equity, 19 including and excluding Allowance for Funds Used During Construction 20 (AFDC), for the period 1969 through the test year ended June 30, 1980.
21 This decline has occurred in a period which has seen the cost of high 22 l quality debt issues increase from just above 6 percent to over 14 23 percent, approximately 3 percent above the Company's actual equity 24 earnings of 11.0 percent for 1978 and 1979 and 11.3% for the test year 25 ended June 30, 1980. The level of earnings for the Company has simply 26 been inadequate for several years. Reasonable investors will not 27 continue to accept the risk of an equity security at 11 percent when they 1
28 can earn 13 to 14 percent on a low: risk mortgage bond.
JDK PAGE 8 1 Of even greater concern is the trend in return on equity excluding 2 AFDC. The sophisticated analyst, particularly rating agencies and 3 institutional investors, considers calculations of return on equity both 4 including and excluding AFDC. Earnings are discounted when a significant L -
portion is attributable to AFDC. In the case of Dallas Power & Light 6 Company, over one-third of its test year earnings were non-cash. With 7 such a large portion of non-cash earnings, the Company's earnings are 8 subject to substantial discounting.by investors. At the end of the test 9 year the cash return on equity, that is, the return excluding AFDC, was 10 7.2 percent. If allowed to continue, this condition will not pennit 11 capital to be attracted at reasonable costs.
12 Q. WHAT D0 YOU CONSIDER NECESSARY TO IMPROVE THE COMPANY'S FINANCIAL 13 . INTEGRITY?
14 A. In addition to obtaining an adequate return on common equity, the 15 inclusion of all Construction Work in Progress (CWIP) in rate base is 16 necessary.
17 Q. IS THE COMPANY REQUESTING CONSTRUCTION WORK IN PROGRESS IN RATE BASE?
18 A. Yes, the Company proposes to include $308,313,988 of CWIP in rate base.
19 This represents all CWIP at June 30, 1980 with the exception of a 20 noncurrent payable related to Martin Lake SES Unit 4.
21 Further, it should be understood that the amount of CWIP requested 22 to be allowed in the rate base is substantially less than will be 23 invested in CWIP before the proposed rates are in effect. At an average 24 monthly investment of $10 million, an additional $70 to $80 million will 25 be added to CWIP after the end of the test period and before these rates 26 are in effect.
27 28
JDK PAGE 9 l Even with 100 percent of test year CWIP in rate base the Company's 2 actual investment in CWIP will be substantially more during the period 3 when the rates are in effect. In Docket 1526, $87.7 million of CWIP, 4 approximately 48 percent of a requested $182.3 million, was allowed in 5 rate base. By the time new rates were in effect, the amount in rate base 6 represented only 36 percent of the Company's actual investment in 7 construction and the average during the period covered by those rates was 8 only 28 percent. In Docket 2572, the Company was allowed $194.6 million 9 of CWIP in rate base, which was approximate 1y 80 percent of a requested 10 $243.2 million. However, after the new rates were in effect only nine 11 months, CWIP in rate base as a percent of the total CWIP for the period 12 was only 62 percent. This is estimated to decrease to 51 percent by 13 December, 1980. The Company is presently requesting that 100 percent of 14 adjusted CWIP at June 30, 1980 ($308,313,988) be included in rate base.
15 As shown on JDK Exhibit No. 6, the percent of CWIP in rate base will have 16 been reduced to approximately 77 percent by the time the rates could 17 reasonably be expected to be placed in effect and further reduced to 58 18 percent by the end of the first year the new rates are in effect. This 1
19 exhibit graphically reflects the capital attrition problem which exists 20 when rates are set on a historical test year basis and substantiates the 21 need for all CWIP at the end of the test year to be included in rate 22 base.
l 23 DP&L's ongoing construction program assures that the Company will in 24 the future, as it has in the past, incur substantial additional 25 investments in CWIP after the end of the test year. Since a cash return 26 has not been allowed on this portion of the Company's investment in CWIP, 27 the Company is virtually assured that its earnings will be inadequate to 28 recover on a current basis the full carrying costs associated with the
JDK I PAGE 10 1 construction program, a program which the Company undertakes for the 2 benefit of its customers. Thus, it is extremely important from the 3 standpoint of the Company's financial integrity that the full requested 4 amount of CWIP be allowed in rate base. Any lesser amount illl only 5 result in additional non-cash earnings, further eroding the Company's 6 financial integrity.
7 Q. ARE THERE OTHER REASONS FOR REQUESTING THAT CWIP BE INCLUDED IN RATE 8 BASE?
9 A. In addition to enhancing the financial integrity of the Company, it is 10 the best alternative for the customer. When the construction of a 11 facility covers an extended period of time, interest costs for the funds 12 necessary for the construction program are incurred. These costs must be 13 borne by the customer whether they are capitalized and recovered over the 14 life of the project or recovered currently. When CWIP is included in 15 rate base, the costs of construction are paid as they are incurred. When 16 these costs are capitalized, they add to the cost of the facility being 17 constructed and earn a return over the life of the plant. It is better 18 to pay the costs currently rather than to pay interest on interest.
19 Q. IS THE COMPANY'S ABILITY TO ATTRACT CAPITAL ENHANCED BY THE INCLUSION OF 20 CONSTRUCTION WORK IN PROGRESS IN THE RATE BASE?
21 A. Yes. The engineering and construction periods for major projects such 22 as power plants range from eight to twelve years. During these extended l
23 periods the Company is required to obtain large amounts of capital to 1
24 finance the projects and, therefore, must pay for the use of these funds 25 in-cash. Including CWIP in rate base results in a recovery of these 26 costs currently, providing higher quality earnings, which helps the 27 Company maintain its financial integrity. Conversely, capitalizing these 28 l
l JDK L
PAGE 11 t
I costs defers their recovery by the Company, leaves the quality of 2 earnings at an inadequate level, and increases the overall cost of 3 providing service to the customer.
4 Q. HOW CAN COMPLETION OF A CONSTRUCTION PROJECT AFFECT THE COMPANY'S 5 ELECTRIC SERVICE RATES IF CWIP IS NOT ALLOWED IN RATE BASE?
6 A. To the extent that CWIP is excluded from rate base, completion of a 7 . major project will cause revenue requirements to increase dramatically at 8 the time the project is included in rate base. This is the result of 9 accruing AFDC which is capitalized and becomes part of the cost of a 10 project. Upon completion of a project, AFDC is discontinued, the project 11 is placed ,in service, and revenue requirements must subsequently be 12 increased sufficiently to cover the return on the full amount of the 13 project, including the capitalized AFDC. By allowing CWIP in rate base, 14 rate increases tend to be more gradual which again is in the best 15 interest of customers, 16 Q. IF CWIP IS NOT INCLUDED IN RATE BASE, WHAT EFFECT DO AFDC EARNINGS HAVE 17 ON THE COMPANY'S FINANCIAL INTEGRITY?
18 A. When non-cash AFDC makes up a large part of earnings, the amount of cash 19 earnings available to pay common dividends can be inadequate to pay those 20 dividends. At the end of the test year, the dividend payout ratio, 21 excluding AFDC from earnings, was 123.3 percent. This ratio is 22 unacceptably high and must be reduced. The inclusion of CWIP in rate 23 base will have a positive effect in reducing this ratio to more 24 acceptable levels.
25 Q. HOW IS THE QUALITY OF THE COMPANY'S EARNINGS AFFECTED BY INCLUDING CWIP 26 IN RATE BASE?
27 28 1
JDK PAGE 12 1
A. As shown in JDK Exhibit No. 7 the construction program to convert to 2
alternative fuels has caused CWIP to _ increase rapidly in relation to 3 electric plant. CWIP has increased from approximately 9 percent of i 4
electric plant in 19C9 to aimost 24 percent at the end of the test year.
5 As a result, the portion of the Company's earnings attributable to AFDC 6
has increased significantly. JDK Exhibit No. 8 shows that AFDC has 7
increased from less than ten percent of earnings in 1969 to a high of 8
43.2 percent in 1978 and 36.7 percent for the test year ended June 30, 9
1980. The reduction from the Mgher level in 1978 results principally 10 from the sale of portions of the Comanche Peak Steam Electric Station.
11 AFDC earnings have a negative influence on the Company's financial 12 : integrity and its credit rating. The income statement reflects AFUC as 13
, income, when in fact it is a non-cash item which cannot be used in 14 meeting the Company's capital requirements. Actually, AFDC represents a 15 cost which cannot be fully recovered until the plant with which it is 16 associated is fully depreciated. The Company's regulatory authorities 17 have recognized the impact of AFOC on the quality of earnings and the PVC 18 staff, in the Company's most recent rate case, has recommended that rates 19 be set such that AFDC not exceed 20 pc art of earnings. JDK Exhibit No.
20 9 shows that the Staff's recommendation for AFDC as a cercent of earnings 21 has never been attained during the periods of time following the 22 implementation of rates resulting from the Company's last two rate 23 l
proceedings. The amounts of CWIP allowed in rate base in those procead-l 24 ings have been inadequate. As a result, the Company's AFDC as a percent 25 of earnings has not dropped below 34 per '.nt. Even with the requested 26
$308 million of CWIP in rate base, additions to CWIP subsequent to the 27 test year will result in additional AFDC earnings. For all of the above 28
JDK PAGE 13 I reasons the Company is requesting that the amount of CWIP shown in 2 Schedule B, page 3, be included in rate base.
3 DOES THE INCLUSION OF CWIP IN RATE BASE AFFECT THE FIXED CHARGE Q.
4 COVERAGE?
5 Again, to the extent that AFDC is included in earnings, the quality of A.
6 those earnings is reduced. In evaluating a company's financial condition 7 .most financial analysts, the rating agencies and the sophisticated 8 investor will consider the fixed charge coverage ratio excluding earnings 9 As shown in Schedule H-7, the Company's attributable to AFDC.
10 supplemental fixed charge coverage, excluding AFDC, has dropped to 2.42 Il times for .the test year ended June 30, 1980. This coverage is inadequate 12 and underscores the importance and necessity of including the requested 13 amount of CWIP in the rate base.
14 WHAT WEIGHTINGS WERE GIVEN TO CURRENT COST AND ORIGINAL COST IN Q.
15 CALCULATING THE COMPANY'S ADJUSTED VALUE RATE BASE?
16 A. Sixty' percent original cost and forty percent current cost.
17 WHAT FACTORS WERE CONSIDERED IN DETERMINING THESE WEI6MTINGS?
Q.
t 18 The need to attract capital, quality of service, the growth in the A.
19 Company's service area, and inflation, as it has affected and will 20 continue to affect the Company's construction program were considered.
l 21 A3 discussed in Mr. Tanner's testimony, the Company is engaged in a 22 substantial construction program to convert from the use of scarce and l 23 costly fuels such as natural gas and oil to cheaper, more abundant fuels 24 such as lignite and uranium. As can be seen in MHT Exhibit No. 2, 25 construction expenditures have increased dramatically in the past ten 26 years. Our construction expenditures over the next three years are 27 estimated to be almost $400 million, which is approximately 58 percent of 28
JDK PAGE __1_4_
1 the net cost of all the plant currently in service. The Company must be 2 in a position to attract large sums of money from the investment
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3 community if it is to carry out its required construction program.
4 As to quality of service, the Company has met and is meeting the 5 needs of its customers by providing dependable electric service within 6 its service area. In order to continue to provide quality service, the 7 construction of facilities to utilize alternate fuels must be 8 maintained. Thus, the maximum current cost weighting of 40 percent is 9 appropriate in view of the need to support this construction program and 10 to continue the record of high quality service.
11 Inflation cortinues to have .a serious impact on the Company's 12 operations, as well as its construction program, since inflation 13 increases the costs of all goods and services purchased. Also, interest 14 rates continue to be high compared to our present enbedded rates.
15 Current interest rates for higher quality long-tenn debt are in the 13 16 percent range compared to our present embedded interest rate of 6.96 17 percent, as shown on Schedule H-6. Each new dollar of long-term debt or 18 preferred stock increases our embedded cost of money, whether it is j
19 issued to finance our construction program or to refund maturing bonds 20 and debentures originally issued 25 or 30 years ago.
21 In view of these factors, a 60 percent weighting for original cost 22 and a 40 percent weighting for current cost is reasonable and should be 23 allowed.
j 24 WOULD YOU BRIEFLY DESCRIBE THE CAPITAL STRUCTURE OF DALLAS POWER & LIGHT Q.
25 COMPANY Al THE END OF THE TEST YEAR?
26 A. At the end of the test year the capitalization was composed of 41.6 27 percent long-tenn debt,12.7 percent preferred stock and 45.7 percent 28 common stock equity.
I
JDK PAGE 15 1
Q. PLEASE DESCRIBE THE COMPANY'S LONG-TERM DEBT.
2 A. At June 30, 1980, the %pany had three basic types of long-tenn debt 3 outstanding. The majority of t. sis debt is first mortgage bonds. As 4 reflected in Schedule H-6, the Company had thirteen series of first 5 mortgage bonds outstanding in the principal amount of $305 million.
- 6 These series range in principal amounts from $9.0 million to $50.0 7 million and have maturity dates from 1983 through 2005. Interest rates
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8 . range from a low of 31/8 percent to a high of 9 3/8 percent.
9 At June 30, 1980, the Company had approximately $23.3 million of 10 sinking fund debentures outstanding. This debt is not secured by any i 11 lien on the Company's property, but is issued on the basis of the ,
12 Company's general credit. As reflected in Schedule H-6, there are two l
13 . separate issues of 25-year debentures outstanding with maturity dates of 14 1989 and 1993. The interest rates are 41/2 percent and 6 3/4 percent,
- 15 respectively.
16 Also reflected in Schedule H-6, is other unsecured debt consisting 17 of three series of 30-year pollution control revenue bonds of 18 approximately $16.7 million, net of funds on deposit with the trustee.
19 These three series were sold by the Sabine River Authority, a 20 governmental agency of the State of Texas, for the purpose of 21 constructing pollution control equipment to be installed at certain 22 jointly-owned generating stations of the Company, Texas Electric Service 23 Company and Texas Power & Light Company. Interest on the bonds is exempt 24 from federal income taxes to the holder. By agreement with the 25 Authority, the Companies contract for the repayment of the bonds sold for 26 the purchase of the equipment installed at the generating stations. The 27 Company is obligated for $8,590,000 of the 61/4 percent series, 28
JDK PAGE 16 1 $7,125,000 of +6-4.70 percer.t series and $2,025,000 of the 6.60 percent 2 series. Tl t-a due in 2006, 2007 and 2008, respectively. This 3 type of secui t similar to the sinking fund debentures in that they 4 are based on the company's general credit and are not secu ed by property 5 of the Company.
6 The Company's embedded interest cost on long-tenn debt has steadily 7 . increased to 6.96 percent. This represents a 63 percent increase from
- 8 the embedded cost of 4.26 in 1969.
9 Q. WHAT RATINGS HAVE BEEN ASSIGNED TO THE COMPANY'S FIRST MORTGAGE BONDS, 10 SINKING FUND DEBENTURES AND POLLUTION CONTROL REVENUE BONDS?
, 11 A. The Company's first mortgage bonds have been designated triple A by both 12 Moody's Investors Service, Inc. and Standard & Poor's Corporation. The 13 sinking fund debentures and pollution control revenue bonds have been 14 assigned a double A rating by both agencies since they are not secured by 15 property but are based on the general credit of the Company.
. 16 Q. PLEASE DESCRIBE THE NOTES PAYABLE INCLUDED IN THE COMPANY'S CAPITAL l
17 STRUCTURE.
l 18 A. The notes payable, amounting to an adjusted $202,821 as shown in i
i 19 Schedule H-5, page 2, were issued as partial payment for land acquired i 20 for plant sites, lignite reserves and water rights.
21 Q. WOULD YOU DESCRIBE THE COMPANY'S PREFERRED STOCX?
22 A ., At June 30, 1980, the Company had seven preferred stock issues 23 outstanding as detailed in Schedule H-4. The amount outstanding was 24 approximately $104.7 million with annual dividend rates ranging from 25 $4.00 per share to $7.48 per share. The preferred stock is cumulative, i 26 without par value, and entitled to $100.00 per share upon liquidation.
27 The embedded annual dividend rate for all of the series is currently 6.27 28 .
t
JDK PAGE 17 1 percent, as shown in Schedule H-4. The Company's preferred stock, like 2 the sinking fund debentures and pollution control revenue bonds, is rated 3 double A by both Moody's Investors Service, Inc. and Standard & Poor's 4 Corporation.
5 Q. PLEASE DESCRIBE THE COMPANY'S COMMON STOCK.
6 A. At June 30, 1980, there were 14 million shares of common stock 7 . outstanding, 99.9 percent of which were owned by Texas Utilities 8 Company. The common stock equity on the books of the Company at this 9 date amounted to $377.9 million.
10 Q. ARE THERE ANY OTHER ADJUSTMENTS NECESSARY TO DETERMINING THE PROPER 11 CAPITAL STRUCTURE OF THE COMPANY FOR THIS PROCEEDING 7 12 A. Yes. A pollution control revenue bond issue is scheduled to take place 13 in October of 1980 in which the Company will be obligated for $6,334,000 14 of the issue. This adjustment more accurately reflects the Company's 15 capital structure and is shown in Schedule H-6, page 1, of the rate 16 filing package.
17 Q. HAVE YOU CALCULATED THE COMPANY'S WEIGHTED COST OF CAPITAL AT JUNE 30, 18 1980 AS ADJUSTED?
1
! 19 A. Yes. Schedule H, page 2, shows the outstanding capital, as adjusted, at 20 the end of the test year. The weighted cost of capital is the composite 21 cost of the various classes of capital used by the Company. The cost of 22 long-term debt is the embedded cost of debt taken from Schedule H-6.
23 Notes payable are detailed in Schedule H-5, page 2. The cost of 24 preferred stock capital is its annual dividend requirement as shown in 25 Schedule H-4. The cost of common stock equity capital is the amount 26 necessary to yield a fair return as described by Dr. Charles E. Olson and 27 is reflected in Schedule H, page 2. The cost of equity was determined 28
JDK PAGE 18 1
from Dr. 01 son's recommended range of return on common equity of 17.0 to 2 18.0 percent,. In view of current circumstances, I believe a 17.0 percent 3 return is appropriate. Although the 17 percent return is the minimum of 4
the range recommended by Dr. Olson, such return together with the 5 inclusion of 100 percent of the test year balance of CWIP which the 6
Company is also requesting should be adequate to allow the Company a 7
. reasonable opportunity to improve its financial integrity. However, it 8 is apparent that with the inclusion of less than 100 percent of CWIP in 9
rate base, a higher return on common equity would be necessary and 10 appropriate.
11
-Q. WHAT IS THE COMPANY'S WEIGHTED COST OF CAPITAL?
12 A. The weighted cost of capital is derived by taking each cost element 13 expressed as a percentage rate as shown on Schedule H, page 2. This 14 results in an 11.44 percent weighted cost of capital on a total adjusted 15 capitalization of $886,029,596.
16 Q. MR. KARNEY, WHY D0 YOU CONSIDER 17.0 PERCENT RETURN ON COMMON EQUITY TO 17 BE REASONABLE?
18 A. Since the equity component is the foundation of the capital structure 19 and the comon shareholder bears the most risk, the return to the common l
20 shareholder must be higher than the return to either the bondholders or 21 the preferred shareholders. Currently the return on high quality 22 corporate bonds with little or no risk is approximately 13 percent. The 23 return to the risk bearing equity investor must be substantially higher.
24 With the Company's present depressed level of earnings and interest 25 coverage, the recommended return on equity is justified and necessary to 26 assure its financial integrity.
27 28 l
l
JDK PAGE 19 1
Q. WILL YOUR PROPOSAL GUARANTEE THE COMMON EQUITY INVESTOR THAT EIS RETURN 2 WILL BE 17.0 PERCENT 7 3 A. No. Recent history shows that the allowed return on common equity has 4 not been earned. This results from the use of a historical test year to 5 detennine the Company's rate base and cost of service. In our last 6 proceeding it was nine months af+.r the end of the test year before the 7 -Company was able to begin billing a portion of the requested rate 8 increase under bond, and it was eleven months before current rates were 9 billed under an interim rate order. During this period, the Company's 10 costs continued to increase and the investment continued to grow, making 11 the test year out of date well before the rates went into ef fect. This 12 assured that the Company would be unlikely to earn the rate of return 13 ,g ranted based on a historical test year. Although some adjustments have 14 been made for post-test year events, these adjustments do not fully 15 offset the effects of attrition on the Company. Unless the Company's 16 regulatory authorities recognize the reality of attrition, the Company 17 will be denied the opportunity to earn the return granted.
18 Q. MR. KARNEY, WILL THE REVENUE INCREASE REQUESTED IN THIS CASE ALLOW THE 19 COMPANY A REASONABLE OPPORTUNITY TO RESTORE ITS FINANCIAL INTEGRITY?
20 A. An analysis of the Company's projected results of operations based upon l 21 rate increases resulting from various levels of return on equity and CWIP 22 in rate base clearly indicates that the Company has virtually no chance 23 of earning the 17 percent return on equity requested, unless all of the 24 CWIP requested is included in rate base. If such amount of CWIP is 25 included in rate base, there is a reasonable opportunity to earn the 26 requested return on equity by the end of the first year the new rates 27 will be in effect; however, the return declines significantly 28
JDK PAGE 20 1 thereafter. Although return on equity on a twelve month basis reaches 17 2 percent at one point in time (the twelve months ended December 31,1981),
3 the return for any other twelve month period is below this level. It 4 should be noted that such results are based upon receipt of the full 5 amount of rate increase requested by the Company; anything less cannot be 6 expected to produce these results.
7 Q.
, WHAT HAS BEEN DALLAS POWER & LIGHT COMPANY'S RETURN ON EQUITY SINCE 8 JANUARY 1, 1978?
9 A. JDK Exhibit No.10 clearly illustrates that the Company has not earned 10 the rate of return allowed. The Company's authorized return was 11 increased from 13.75 percent in Docket 1526 to 14.5 percent in Docket 12 2572, represented by the horizontal lines near the top of the exhibit, 13 yet the return actually earned has continued to fall below the amount
! 14 authorfied. Fur.ther, the deficiency between the earned and authorized 15 return is increasing. This indicates that previous rate orders have been 16 inadequate and that in determ,ining the amount of revenue deficiency, the 17 Company's regulatory authorities must more carefully appraise the impact 18 of economic and other factors that will exist during the period the rates 19 will be in effect.
20 Q. DOES THIS CONCLUDE YOUR TESTIMONY?
21 A. Yes.
22 23
~
24 25 26 27 28
DALLAS POWER & LIGHT COMPANY 6-5.84 SUPPLEMENTAL RATIO.OF EARNINGS TO FIXED CHARGES i
1969 - 1980 i
! 5 -
I o i 4 _____________________ ,
i 3.97 l
Fixed Charge Coverage
! 3 -
3.12
! 3.00 -
2.76 Supplemental Fixed Charge Coverage 1
4 i
j 2 -
t 2 I5 O
I
'69 I
'70 I
'71 '72 I I
'73 I
'74 I
'75 I
'76 I
'77 I
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'79 I
'80'
.h 9E a v.
, YEARS E l
- TEST YEAR ENDED JUNE 30,1980 9
)
i t
i
! DALLAS POWER & LIGHT COMPANY RATIO OF EARNINGS TO FIXED CHARGES AND i
SUPPLEMENTAL RATIO OF EARNINGS TO FIXED CHARGES j 4- JANUARY 1978-JUNE 1980 i
j 3.09
{
i 1 3.31
/
j Fixed Charge Coverage 3.36
.22
- O 3.12 3- -
1 2.76 Supplemental Fixed Charge Coverage 2 -
2 k5 ex W
0 ' ' ' ' ' '
bh Jc i MA M J J A S O N D J F M A M J J A S ON D J F M A M J E 1978 rj: 1979 z': 1980 %
MONTHS
MOODY'S AVERAGE PUBLIC UTILITIES .
BOND YlELD BY RATING GROUP 1969 - 1979 10.96 %
11 -
/ .,
Aaa RATING / *
. . 10.49%
--- - Aa RATING
-...- A RATING * *'*
f 10.09 %
10.06*/.
,/- \.' . ,
- 10 ......... Bas RATING . y '
,' /
i ; , ., , j 9.86%
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- b
- ElGHT MONTHS ENDED AUGUST,1979 YEARS
1
! s0 -
DALLAS POWER Tx LIGHT COMPANY PERCENT OF CONSTRUCTION EXPENDITURES 4saw GENERATED INTERNALLY 45 JANUARY 1978-JUNE 1980 l
I Staff Criteria 40-60%
40 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
~
1i 35 -
32.1%
30 -
25 -
24.8 %
20 -
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': 1978 r' : 1979 z': 1980 :' 25 MONTHS h
DALLAS POWER & LIGHT COMPANY
- 20. -
RETURN ON COMMON STOCK EQUITY 1969 - 1980 RETURN ON EQUITY INCLUDING AFDC 16.2%
~~ ' ^
15 -
14.6 % s
's 13.4 %
's's 12.1 %
[
'~-%'% 11 0 %
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j 11.3 %
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o c-I I I ' ' ' ' I I ' ' '
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YEARS- 25
- TEST YEAR ENDED JUNE 30,1980 h
DALLAS POWER & LIGHT COMPANY CWIP IN RATE BASE ACTUAL VS. AMOUNT REQUESTED
$530 t
Total CWIP*
CYllP IN EXCESS RATES EFFECTIVE .m (EST.) k OF AMOUNT l g REQUESTED 6 400 -
- g;
- : i TEST YEAR 6-30-80 to E $308 3 300 -
_ _ _. _ _ _ _ _ _ _ _ _ m:w c4uccumu==Eh==:Gu==u:wstawc .
g Amount Requested O
u.
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e 200 -
2 7 .
IE5 0' ' '
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' 1980 :':'
MONTHS 1981 :: 1982 "hg E
- ACTUAL AT JUNE 30,1980 AND ESTIMATED THEREAFTER 9 m
\
l DALLAS POWER & LIGHT COMPANY -
!, CWIP AS A PERCENT OFTOTAL ELECTRIC PLANT 1969 - 1980 i
l l 30.1 %
i 30 ~
\
\
\
\
23.7 %
20 "
e
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0 ' ' ' ' ' ' ' ' ' ' I 8 20
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- TEST YL-AR ENDED JUNE 30,1980
"}@o N
0
I I
~
i DALLAS POWER & LIGHT COMPANY i
AFDC AS A PERCENT OF EARNINGS I
1969 - 1980 i
1 .
45 -
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l 40 -
i I 35 -
36.7 %
4 l 30 -
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j 10 - 9.8%
i 5 -
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i
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' TEST YEAR ENDED JUNE 30,1980 YEA 9S h co
DALLAS POWER & LIGHT COMPANY -
AFDC AS A PERCENT OF EARNINGS DECEMBER 1978-JUNE 1980 30 . _
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/
! : 42.2%
40 -
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.LN3OU3d
THE STATE OF TEXAS )
COUNTY OF DALLAS )
BEFORE the undersigned authority on this day personally appeared J. D. KARNEY, who, having been placed under oath by me, did depose as follows:
"My name is J. D. Karney. I am of legal age and a resident of the State of Texas. The foregoing testimony, and exhibits, offered by ce on behalf of Dallas Power & Light Company, are true and correct, and the opinions stated therein are, to the best of my knowledge and belief, accurate, true, and correct."
O)
' D. KAfNEY F}
l SUBSCRIBED AND SWORN TO BEFORE ME by the said J. D. Karney this 23rd day of September, A. D. 1980.
Yb Carla F. Stroud 0
Notary Public in and for Dallas County, Texas My commission expires 3-31-84
.:. '":2 '
!~f , , 2, cocMETED Public Utility Commission 9 S; F tnac ..-
of Texas 81 is/19 pa:12 George u. co..c. ,
_. - w
--- - u. v. a cu;ns c -- .a me, G arret' Mctris Os tn'",3 hC 9
- f I, Martha M. Bartow, certify that this is a true and correct cocy of a portion of the transcript dated December 8,1980, including ;; ages 34 through 44, pages 68 through 72, and pages 129 through 132 cf the Cross Examination of Max H. Tanner, Jr. , from Public Utility Cer n s-sion Docket No. 3460.
/$
ISSUED UNDER MY HAND AND SEAL on this the /M ~
u day of November,1981.
l l
l
.1 <.
l SEAL // LLG ). .% E J "
i Martha M. Bartra Director of Records Services l
l
' An Equal Opportunity /\ffirmative Action Eme.:f e L 7800 Shoal Creek Boulevard a Suite 400N
- Austin, Texas 73757 e :, L -C. ?c,
. . Tanner - Crosa 34 Q And a reduced load growth reduces your need 2 for additional capacity.
3 A That's correct.
4 Q Can you briefly describe to us some of the 5 rescheduling of these units and the reduction of your 6 interest in some of these joint projects?
7 A Well, we have, of course, sold a portion of our s interest in Comanche Peak. In fact, we have sold 9 45 percent of our interest in Comanche Peak since our 10 last rate case.
11 Q What was your original interest in Comanche 12 Peak?
13 A Thirty-three and a third percent.
14 Q What's your present interest?
15 A Eighteen and a third percent.
16 Q And what has transpired with regard to the 17
- Company's interest in the joint lignite plants?
18 A We have reduced our interest in Martin Lake 4 19 from 25 percent to 20 percent.
20 Q And have you rescheduled some other units?
21 A Forest Grove has been rescheduled.
- Let's discuss this briefly, then, with respect Q
23 to the subject of fuel mix.
a Would you agree with me, Mr. Tanner, that a large 25 part of the justification for the construction program HICKMAN KENNEDY REPORTING SERVICEINC.
7800 SHOAL CPEEK BCULEVARD. SulTE 346-WEST AUSTIN. TEXAS 78757 m ?) it a.rq7
Tanner - Cross
._3_5_
has been reduced for dependence upon gas and oil?
3 Is that correct?
3 A That is correct.
4 Q And was it intendec that uranium would be 5 significant in the 1980s in reducing the dependence 6 on gas and oil?
7 A That, along with our lignite, yes.
g O And then, as a result of lower growth 9 projections, the Company has reduced and rescheduled 10 these units as you have testified. What effect is that 11 going to have with regard to your fuel mix, or into the 12 mix --remainder of the decade of '80s?
13 A That plus a delay of the units and the fact 14 that gas has become more available, at least out through ,
15 the '80s, and we were able to burn it. We are going to 16 be depending on gas a little more, but as our load has 17 changed, and particularly the base load amounts of it, IS we would not have been able to atilize--fully utilize 19 the full output from the Comanche Peak or nuclear units 20 or the lignite units had we retained the full ownership 21 we started with. And by the way, we made the Comanche 22 Peak decision to the ten percent to the Brazos T&PA 23 way back in 1976. It was a few years before we actually
.y got that contract finalized and all.
o0 0 Mr. Tanner,would you agree with me that the h HICKM AN-KENNEDY REPORTING SERVICE INC.
7800 SHCAL CREEK BCULEVARD. SulTE 346 WEST AUSTIN. TEXAS 78757
3be' -
Tanner - Cross 3_6 _
City of Dallas has been supportive of the construction 2
program, generally, and this movement away from gas 3 as a primary fuel?
.; A Yes, very definitely.
5 Q And the City of Dallas also has been supportive 6 of the inclusion of at least some CWIP in the rate base 7 to assist the Company in that regard.
3 A Yes.
9 Q ,
And all of this was done, was it not, on the to understanding that we would reduce dependence on gas 11 substantially, and continue to do so.
12 A I guess I couldn't really say on what basis 13 y'all made those decisions. We were putting forth in 14 those situations. We were changing our fuel mix, which 15 is still our goal to change our fuel mix.
16 Q Is that what the Company represented to the II City of Dallas, and later on to the PUC?
IS A Yes.
19 Q All right.
20 Okay, sir. As we did in Dallas, let's look 21 at your Exhibit 4 here for just a second.
v, And does your Exhibit 4 represent a graphic 3
display of your fuel mix from the years 1971 through 2I 1989?
.m A Yes. It's actual--what we experienced through b HlCKMAN-KENNEDY REPORTING SERVICE INC.
7S00 SF'OAL CREEK SOULEVAPD SuliE 346 WEST AUSTIN. TEXAS 78757
4bc. Tanner -
Cross 37 1979. It's projected from '80 through '89.
2 Q All right, sir. And in Dockets 2572 and 1526, 3 did you submit similar exhibits?
4 A Yes.
5 Q I will try to get them in good order this 6 time, Mr. 2anner.
7 (The document, "DP&L Fuel Consumption, 1977-1985 3 Estimated," was marked as
" DALLAS-1" for identification.)
U Q Mr. Tanner, have you had an opportunity to 10 take a look at what I have handed you that is ked as 11 MHT Exhibit Number 3--and I've marked on there 12 Docket 1526.
13 A Yes.
14 Q And I will ask you now if that is a true and 15 correct copy of the exhibit that you sponsored in IG Docket 1526 that shows or purports to show the same type 17 of thing as your Exhibit--it is Number 3 in this case.
18 A Number 4.
19 Q Number 4 in this case.
20 A Yes.
21 Q Is that correct?
22 A That's correct.
23 (The document, "DP&L Fuel 23 Consumption, 1979-1986 Estimated," was marked as 2' " DALLAS-2" for identification.)
h HICXM AN-KENNEDY REPORTING SERVICE INC.
7800 SH0AL CREEK BOULEVARD. SUITE 346-WEST AUSTIN. TEXAS 78757
.c,~ .-, ,--,
> oc - -
Tanner - Cross 38 y i Q Mr. Tanner, have you had an opportunity ;
3 there to take a look at what I have handed you, _ marked j 3 Dallas Exhibit Number 2?
.; A Yes.
..l 5 ,
O And is that a true and correct copy of your G Exhibit Number 3 in Docket 2572 which purports to show
- the same information as your--or the same type of 3 information as your Exhibit Number 4 in this case?
9 A . Yes. !
i 10 MR. HOLMAN: Do you have an additional ;
4 11 copy of that one? !
l 12 (Mr. Sparks hands copy of exhibit to the :
13 Hearings Examiner.) '
11 MR. SPARKS: Mr. Examiner, we will i
13 move the introduction of City of Dallas Exhibits 1 and 2 16 at this time.
17 MR. HOLMAN: Is there objections,
- 18 Mr. Engelland?
i i
5
- 19 MR. ENGELLAND
- No object. tons.
20 MR. HOLMAN: Being none, Dallas 1 and 2 I
J 21 are admitted.
22 l (The documents marked for ,
i identification as " DALLAS-l"
[ 23 and " DALLAS-2" were received i 9; into evidence.)
25
,i 3
b HICKMAN-KENNEDY REPORTING SERVICE INC.
4 7800 SHOAL CREEK BOULEVARD. SulTE 346 WEST l AUSTIN, TEXAS 78757 -
/6b'c -
Tanner - Cross
_ . . . 39 O Mr. Tanner, I'm not going to spend a lot of '
2! time on these, but I'll ask you: Looking at the City ,
3 of Dallas Exhibit 1, which is your Exhibit Number 3 in 4 Docket 1526, could you describe, generally, what you 5 , represented to the regulatory authority in that case 6 ,with regard to the decrease in dependence upon gas and 7 oil through the decade of the '80s, up through 1985.
8 A At that time, gas was in very short supply 9 and resepves were very short, and we had not anticipated to that we would be able to get much gas. So, we 11 represented much~less gas u'se and we had more units 12 to be scheduled to be built in the '80s to replace that '
13 gas.
14 Q Well, would it be correct, then, to say that i
15 in those proceedings, you indicated that you were 16 working towards a reduction of your fuel mix to the 17 point where your gas and oil usage would be down below 18 20 percent figures towards the latter part of the '80s?
19 A Yes, but it would have still been about 29 40 billion cubit feet.
21 Q Looking now at Docket--Dallas Exhibit 2, 22 which was your exhibit that you submitted to the 23 authority in Docket 2572, explain to us how your usage--
91 your projected use of gas and oil changed then.
25 A Well, because we had seen that gas might become a
b HICKM AN-KENNEDY REPORTING SERVICE INC.
7800 SHOAL CREEK BOULEVARD. SUITE 346 WEST AUSTIN. TEXAS 78757 __ _ _.
' 7 be Tannur - Cross 60 more available, our loads had not grown as much,
., we delayed some units back at that time, and we had 3 pr jected a slight bit more use of gas although the
- absolute quantity of 40 billion out there is about the 5 same at the end of the period.
6 0 Speaking in terms, now though, of percentages 7 of gas and oil in your fuel mix.
3 A Well, the percentage has changed because 9 you are changing the other energy, and you're changing to your overall load estimate, so the percentages have 11 to change as regards to that.
12 0 And they have also changed with regard to 13 your Exhibit 4 in this case.
14 A That is correct.
15 Q And, I guess to get the point, isn't it correct, 16 Mr. Tanner, that the Company's conversion program, 17 would you agree with me, has been effective, but 18 perhaps not as effective as was originally represented 19 to us in terms of reducing dependence on gas an,d oil?
l 20 A We have not moved as fast as we first thought.
21 And if we had had to move, we would have building units 22 which would not have been economical. The ones we 23 have built have been economical as my testimony shows.
23 If we had had to continue building this, we would have 25 been building units that would not necessarily have been h HIC MAN-XENNEDY REPORTING SERVICEINC.
, 7800 SH0AL CREEK BOULEVARD, SUITE 346-WEST AUSTIN. TEXAS 78757
$be Tanner - Cross 41 h
economic, but we felt we had to because gas would not a2 . be available. That situation has not changed, at least, 3 through '89. There is some questions beginning in the 4 year 1990 about the availability of gas.
5 Q Mell, what kind of shape are you going to a be in, in that regard to year 1990? Are you still going 7 to be over 20 percent dependent upon gas?
a A It depends on whether the Fuel Use Act is 9 amended or the off-gas provisions are changed some.
,9 If they remain as it is, we will have to schedule some 11 uhits as you are seeing on my Exhibit 4 in this case.
12 We are showing some co-units to come in there and 13 we may have to s chedule some additional ones if that 11 cff-gas provision is not changed or moderated.
15 Q Well, isn't it correct, Mr. Tanner, we have been lH going through a period here of very high construction 17 co s t?
18 A That is correct.
19 Q And a great deal of construction work in 20 progress.
21 A That's correct. Ne are trying to slow that 22 down same.
23 Q That's rig ht . And would you agree with me I
that it appears from your latest Rate Filing Package 20 here that we hopefully sort of crested over the peak h HICKMAN-XENNEDY REPORTING SERVICE INC.
7800 SHOAL CREEK BOULEVARD. SUITE 346-WEST AUSTIN. TEXAS 78757
be. Tanner - Cross
_4
_2_
a,d have begun to reduce? Would that be right?
2 A That is correct, but if we don't get some 3 relief on the Fuel Use Act, we are going to have to 4 push this t h i. n g back up in the later '80s.
5 Q That was going to be my next question. If it be-6 comes impractical for you to continue--to have your
- reliance on gas and oil, would it be correct to assume s that your construction program and your construction 9 work in progress would be back up?
10 A It would have to be accelerated again. That's 11 correct. .
12 Q Well, I guess you can understand, perhaps, our la concern '-
't maybe we are not making as much progress 14 as we thought we would originally during this decade 15 away from gas. Is that right?
16 A Well, I think what we have been able to do 17 and the flexibilities that we have had and have been 18 able to maintain, that we have been able to hold the 19 cost to our customer at the lowest possible level, 20 and that's what we plan to do throughout the '80s.
21 I don't have to build those to provide the intermediate 22 peaking use which gas will do very well on our existing y~
~
low embedded cost gas use to the absolute time that 24 we have to either fr.om the lack of that gas or the 0
obsolescence of those units.
h HICXMAN-KENNEDY REPORTING SERVICE INC.
7800 SHOAL CREEK BOULEVARD. SUITE 346-WEST AUSTIN, TEXAS 78757 ci- . . , - . ,
.0bc Tanner - Cross 42A 7
Q Well, we have had rate increases, have we 3
not, in '76, '78, and '79?
3 A That is correct.
.; Q All right. And there has been a substantial 5 amount of CNIP in the rate base that Dallas customers 6 have been responsible for picking up. Is that correct?
7 A Been some, yes.
8 9
10 11 12 13 Il 15 lii 17 is 19 L'O
.' l 22 23 21 1
25 HICKM AN-KENNEDY REPORTING SERVICE INC.
7600 SHOAL CREEK SOULEVA?D. SUITE 345 WEST AUSTIN. TEXAS 78757
1 bc- Tanner- Cross 43 MR. HOLMAN: Are you leaving this topic, o.
or--
3 MR. SPARKS: No.
4 MR. HOLMAN: I just wanted to know if 5 I could--you gave me two of one and none of two.
6 MR. SPARKS: I haven't done this right.
7 You now have one that is marked "2572"?
6 MR. H O L;1 A N : Right.
9 MR. SPARKS: Right. That is our lo Exhibit 2 there.
11 MR. HOLMAN: Thank you.
12 MR. SPARKS: Maybe if we do this the 13 third time, I will eventually get it right.
14 BY MR. SPARKS 15 O Well, when DP&L sells part of its interest 16 in the joint lignite project or in the nuclear project II to TP&L or TESCO, or even to a nonaffiliated party, 18 is that done at net book cost?
19 A It is to TP&L and TESCO. It would not 20 necessarily be done to a th.ird party.
', l Q All right. But it is with TP&L and TESCO.
22 A That is correct.
23 Q What happens with regard to the construction M
cost--and by that I mean the CWIP that the ratepayers o' '
have been bearing the burden of when.part of that plant h HICKMAN-KENNEDY REPORTING SERVICE INC.
7800 SHOAL CREEK BOULEVARD. SUITE 346-WEST AUSTIN. TEXAS 78757
ac - Tanner- Cross 44 is sold to a sister company? i g A We have never sold a sufficient amount that 3 was included--that amount we sold, it was not included 4
in CWIP, which has been allowed in rate base.
5 Q In other words, it's your testimony--and
(; correct me if I 'm wrong --but the plant you have sold
~
7 has not been plant that has been included in CWIP in a s rate base?
9 A That is correct.
10 Q Okay.
11 A We specifically excluded that in the last cases.
12 Q All right, sir.
13 I'm trying to cross out and skip over some of 14 the things that I think have been already covered in 15 Dallas here, Mr. Tanner.
lii Let me ask you now about your testimony at 17 the bottom of page 9 and the top of page 10 regarding I' the lignite resources of Grimes of Walker County.
19 Do I understand your testimony to be that this 2" lignite has been pulled out of the plant and held for 21 future use in rate base?
22 A That is correct; as it was in the last case.
U Q All right. And I believe I asked you in 2I Dallas if there were any water rights connected with f' Is that these properties, and you said there was not.
.~. - - - . . - -. ._
h HICXMAN. KENNEDY REPORTING SERVICE INC.
7800 SHOAL CREEK BOULEVARD. SU!TE 346 WEST AUSTIN. TEXAS 78757
7 Tanner - Cross 68 1 A The Company's current schedule, current plans, 2
is to load fuel in late 1981. There are a lot of 3,
uncertainties in nuclear power plant construction.
4 That is our current plan.
5 I further understand that this nuclear body 6
visited the plant and indicated that they thought it
~
might be different. They also said it might be 8
possible for us to make this and they encouraged us to 9
continue.on our schedule, a r.d that's what we are doing.
10 Q Right. But based on their findings, they 11 thought it would be December 1982 rather than December 12 1981. Is that correct?
13 A I did not read what they specifically found.
14 I talked to our folks there. They have one opinion; we 15 have another. They encouraged us to continue on ours 16 and that's what we're going to do.
Q All right. In regard to the capacity factor 18 listed here for Unit 1 of Comanche Peak, it's listed as I9 29 percent for 1982 and for 1984 it's listed as 53 20 percent. Could you give me an estimation of what the 21 future capacity factors would be following the operations?
22 Are you talking about, for instance--let me back-track 2A a little. Are you talking about on the first one, one
- 9 unit having come on line?
A That's correct.
h HICKMAN KENNEDY REPORTING SERVICEINC.
7800 SHOAL CREEK E0ULEVAPO. SUITE 346 WEST AUSTIN. TEXAS 78757
, c m ,c1 ,nr
3 Tanner - Cross
_ _ 69 1 Q All right. And in the second instance, you're 2
talking about 53 percent capacity factor for that first 3
unit.
4 A No. For both units.
5 Q For both units.
6 A That's correct.
7 Q All right. If you're talking about having the S
second unit come on line in 1984, why would the 9
capacity factor for the first unit be 29 percent in its 10 first year and the capacity factor for the second unit 11 be 53 percent in its first year?
I2 A Let me see if I can explain that.
13
, Unit 1 will load fuel, as is our present plan , in late 1981. We would anticipate it will be commercial by 15 mid-year. It would be producing some power during that N
first six months during the test phase, small amounts of 17 power. It would produce power in the latter half of 1
M 1982.
M Now, we know from experience of others that you 20 don't get these things up to full capacity and run them.
21 So we have made a very conservative estimate on the 22 output of Unit 1 during 1982, a 29 percent capacity 23 factor. In 1984, Unit 1 will be in its third year of ol operation. Unit 2 will be startup, just like Unit 1 20 was in '82. So that 53 percent is a composite of Unit 1, h HICKM AN-KENNEDY REPORTING SERVICE INC.
7800 SH0AL CREEK BOULEVARD. SUITE 346 WEST AUSTIN. TEXAS 78757 re.~ ,e: e,
e
> Tanner - Cross 70 1
i which will have been in service for a period of time, 2
and Unit 2, which is just coming in service. We are 3
striving and our goal is to operate these at around 4
a 70 percent capacity factor.
5 Q I see. Okay. So would you say, then, that 6
for Unit 2 you're still saying that the first year of 7
operation it would be around 29 p e rc en t?
8 A That's correct.
9 Q And then the difference would be--let's see--
for Unit 1, it would be the difference between those 11 and then that's an average of the two.
I2 A I don't think you can just take the difference, U the arithmetic difference there and come up with actual capacity factor of the two units, or one versus the If' other.
N Q Do you know about what the capacity factor for--
A No, I do not. I just know that that's a
- 9. b composite of the twc. ,
i U
in 10. Q And you're shooting for a goal of 70 percent i
capacity factor?
->i A That's correct.
Q How does that compare with other operating nuclear plants?
l A It's slightly atove the experience, although some of them operate above the 70. The average is b HICKMAN-KENNEDY REPORTING SERVICE INC.
7800 SHOAL CREEK BOULEVARD. SulTE 346 '/.EST AUSTIN. TEXAS 78757 Fim os.nq7
31 ._. _.
Tanner - Cross 71 1
probably--well, it was running up in the 60s. There have 2
been some retrofit cetivities which have limited their 3
operation, and it's down in the nigh 50s right now.
I Q What makes you think that the Comanche Peak 0
plant will be able to operate a 70 percent capacity 6
factor when other plants are operating at the high 50s I
or the 60s?
6 A Because there will be several plants of this 9
size in ' operation. We will gain experience from the 10 other operation of the plant. Some plants already in 11 operation have achieved those kinds of capacity factors, 12 and we feel like that we can. All our efforts and our 13 construction and our training for operating the plant, 11 our fuel procurement is on that basis and we will make U every effort to maintain that because it's to the I6 benefit of our customers to provide cheaper kilowatt
" hours to do so.
I*
Q Has it consistently been the experience with plants that are now in operation that this has been the case, that they have been able to increase their t
capacities?
A Our lignite plants are running right at 70
-)'j
~'
percent. The national average on large coal plants is
.q
~
about 10 to 12 percent lower. So we already have a very 2'
good track record on our capacity factors of the units b HICK'AAN-KENNEDY REPOR TING SERVICE INC.
7600 SHCAL CREEK ECULEVARD. SUITE 3.:6 WEST AUSTIN. TEXAS 78757
,c m ,.e n n,
.p2 ,. _ _ _ _ Tanner - Cross 72 l1 I ' we operate. Yes.
Q But you're talking about lignite plants. You 3 'I have no experience with the nuclear plants.
4 ^
A I don't have any experience with nuclear. All 5
,I can go is what the others--but I don'.t see why we 6
can't achieve the same thing in nuclear that we achieved in our lignite operation. ,
S Q I probably didn't make my question clear.
9
' Has it been the experience of other nuclear 10 plant operators, as they have learned from past
. i experience with some of these others, that their 12 capacity factors have increased?
13 A They are definitely on the increase and they 14 have gone from the mid-50s on up to about the mid-60s until the Three Mile Island situation caused a lot of 16 retrofits, which the units have been down a lot for that, 17 and it has fallen back off. The last numbers I looked 18 at, it was in the high 50s with an average capacity factor of 60-some-odd units that are in commercial 20 operation.
9[
~ !
Q All right. Thank you.
e~~ j
- We've talked quite a bit about the reserve j capacity which you have. Another exhibit here--
21 ,'
MS. ELLIS: We ask that this be marked as i
O}
~
CASE Exhibit T-3. :
L__.._ _ i h HICKM AN-KENNEDY REPORTING SERVICE INC.
7800 SHOAL CREEK EOULEVARD. SUITE 346 WEST AUSTlN, TEXAS 78757 '
l%171.142.1707 ~~ ' - - - ~
bc2 Tanner - Cross
,, _..z. _. 129
'li
'jcontract. So, we'would make some projections.
i 2 !; We also have to make projections on some of 1 i,
3 the fuels we have under contract on what it's going to be; 4 ; , in the future, because they-have-escalation clauses in 5 ! . them.
't 6 Q All right. Is the economic life for i
7, Comanche Peak still considered to be 30' years?
8 A Yes, ma'am. -
i-i i 9 i Q , All right. When is it expected that the'first -
i 10 unit of Comanche Peak will be decommissioned?
11 A Thirty years from June 1981--June 1982. I i
i 12 beg your pardon. I'm one year off.
13 Q All right. -When do you expect the second unit 14 to be decommissioned? Will it be-just two years after 15 that? ,1 16 A Two years after that.
t II Q All right. When are the costs for that .
18 decommissioning going to be passed along to the i
l 19 ratepayers?
20 A When the plant goes in service, there will be
(
- 21 a provision for depreciation of that plant which will
--> . > cover the removal of these commissioning costs that 23 will be collected over the life of those plants in our og i rates.
23 What about--is the same true in regard to the 0
b HlCXM AN-KENNEDY REPORTING SERVICE INC.
7800 SH0AL CREEK BOULEVARD. SUITE 346-WEST AUSTIN. TEXAS 78757 (W2) 4S8-3297
bc3 Tanner - Cross 13p waste disposal of the plant ?
2 A That will be a cost of removing the plant, yes.
3 Q So that will be included as well. All right.
3 So when that plant comes on line, these costs 5 will immediately start showing up?
e; A They will show up as a depreciation expense,
- yes.
6 Q Do you know what--whether or not it is true 9 that the, aspects of advance planning in financing for lo decommissioning are not comprehensively addressed by 11 the U.S. Nuclear Regulatory Commission regulations?
'2 Do you know whether or not that is true?
13 A I sure do.
14 Q If that were true--I would like to ask you l 'i a hy po t h e t i cz.1 question about it here. I don't know lii if you will know the answer, but perhaps you can help.
l~ If it were true that during the demolition 18 stage of decommissionina, the taking down of the 19 buildings, structares, and so forth, the Nuclear 20 Regulatory Commission doesn't have responsibility of 21 the station because all the radioactive materials will 2 have been removed at that time, if that's true, and they don't have control over tnat at that point--
23 A Once there is not radioactive material on site, 2'
they could care less. That's their only responsibility, h HICKM AN-KENNEDY REPORTING SE1VICE INC.
7800 SHOAL CREEK 80ULEVAPO. SUITE 346-WEST AUSTIN. TEXAS 78757 (512)458-3297
, ac4
- Tanner - Cross -
13_1
.i I! as I understand it. {
1ij 2! Q All right. At that point, during the i 3l demolition stage of decommission, do you anticipate that
.; the Texas Public Utility Commission will have any 5 responsibilities-during that stage?
6 A We will have collected the costs to 7 decommission it, tear it down. Once we have-collected 8 those costs, I don't think the N9C or this Commission 9- would c a.r e .
10 Q So, no one will be looking at how :.t's done 11 or anything like that other than the Company? Is that i
12 correct?
13 , A NRC will be looking at it after all 14 radioactive material is removed from the site.
15 Q Right. But after that.
16 A After that, as scon as we have collected--
17 which I'm sure we will--through our rates the cost to 18 decommission the plant, the Commission, here and the 19 city, I don't know that they would have any concern 20 over that.
21 Now, if we used it for something else, 22 which I would anticipate we would, because it's a good 23 site. It has water resource there. He are going to o;
have something to replace it. I would assume that we 25 would utilize that source for that. And if we did, I'm
, _ . ~ . . _ _ _ . . .
b HICKMAN KENNEDY REPORTING SERVICEINC.
7800 SH0AL CREEK BOULEVARD. SUITE 346 WEST AUSTIN. TEXAS 78757
, (5121458-3297 -
sc 5 Tanner - Cross
_13
._ _ ]
sure we would reflect that back into our rates and 3
ask for it to be considered, and I'm certain it woald be.
3 Q All right. So at that point, the full
.; responsibility would rest with the Company or the 5 affiliated companies, or whatever--of Texas Utilities
(; companies or the owners of the plant.
7 A T*'s our responsibility anyway, s Q Regarding these decommissioning costs which 9 will be . coming into the rates very soon from what you 10 said, hasn't the Company changed its method of 11 decommissioning from later dismantling to immediate 12 dismantling. And if so, what effect will that have?
13 Hasn't that increased the cost from about, oh, 18 or 11 so million dollars to about $100 million?
15 MR. ENGELLAND: Mr. Examiner, I'm going lii to object to the rest of this line of questioning.
17 It has absolutely no relevance to this rate case.
lH These are costs that will not be collected until at 19 least two years on out into the future. And what 20 she is now discussing is something that's going to 21 happen 32 years from now. They have absolutely 22 no relevance in set rates in this particular proceeding.
,~ , .;
I object.
~;
0 MR. HOLMAN: Do you care to respond, b
Ms. Ellis?
h HlCKMAN KENNEDY REPORTING SERVICE INC.
7800 SH0AL CP&x BOULEVAPD SUITE 346 7.'EST AUSTW TEXAS 78757 s tm aca.ioo7
- x 00CMETED Public Utility Commission d M,,
esmc ; ~.:..v of Texas El 19 P 3. :i2 Ge:rge M. Cc'rcc -
c., air- 2n F. M. Roi!irm c GN.* f SS C."&
Grrett Merris c >nm.issa.-
I, tiartha it. Bartow, certify that this is a true and correc cc::y of the Direct Testimony and Exhibits 1 through 8 and Affidavit of Gary L. Price For Texas Power and Light Company, March 1981, from Puolic Utility Commission Docket No. 3780.
ISSUED UNDER fly HAND AND SEAL on this the /3 day of November,1981.
A-SEAL
)
lh f/
b .
'l Martha ti. Bartow Director of Records Services I
An Equal Opportunity / Affirmative Action Employer
__hibydtJ@auAswmd a hita NMIM o Auntin_ Texsua 727M7 o A191A*F.."
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