ML20148B030
| ML20148B030 | |
| Person / Time | |
|---|---|
| Site: | Shoreham File:Long Island Lighting Company icon.png |
| Issue date: | 01/04/1980 |
| From: | Novarro J LONG ISLAND LIGHTING CO. |
| To: | Harold Denton Office of Nuclear Reactor Regulation |
| References | |
| SNRC-453, NUDOCS 8001160548 | |
| Download: ML20148B030 (400) | |
Text
_
7 LONG ISLAND LIGHTING COM PANY
. 7w#Ed"O
/
www SHOREHAM NUCLEAR POWER STATION P.O. BOX 618, NORTH COUNTRY ROAD e WADING RtVER, N.Y.1 792 January 4, 1980 SNRC-453 Mr. Harold R.
Denton, Director Office of Nuclear Reactor Regulation O.
S.
Nuclear Regulatory Commission Washington, D.
C.
20555 Shoreham Nuclear Power Station - Unit 1 Docket No. 50-322
Dear Mr. Denton:
Enclosed herein are six (6) copies of additional financial information.
This information updates and supplements our previous submittal forwarded to you via LILCO letter SNRC-378 dated April 19, 1979 in response to the NRC letter dated i
January 23, 1979 from Mr.
S. A.
Varga to Mr. A.
W.
Wofford.
Please note that certain bulky testimony and exhibits from the New York Public Service Commission cases 27374 (electric) and 27375 (gas) which were previously submitted, have not been reproduced herein and are incorporated by reference to SNRC-378.
If you have any questions please do not hesitate to contact us.
Very truly yours, J.
P.
- Novarro, Project Manager Shoreham Nuclear Power Station JPM/cc Enclosures cc:
J.
Higgins (NRC Inspector) 8001160Stf FC-8 93 5
l
\\
QUESTION 1.a.
Indicate the estimated annual cost by year to operate the subject facility for the first five full years of commercial operation.
The types of costs included in the estimates should be indicated and include (but not necessarily be limited to) operation and maintenance expense (with fuel costs shown separately), depre-ciation, taxes and a reasonable return on investment.
(Enclosed is a form which should be used for each year of the five year period).
Indicate the projected plant capacity of the unit for each of the above years.
RESPONSE
{i See the attached forms for the response to question 1.a.
for each of the five years beginning 1981.
{,
L o
l:
v I
'98027025
ol.e-i
l I
ATTACHMENT FOR ITEM NO.
1.a.
ESTIMATED ANNUAL COST OF OPERATING NUCLEAR GENERATING UNIT:
SHOREHAM NUCLEAR POWER STATION, UNIT NO. 1 FOR THE CALENDAR YEAR 1 9 _8 _1 (thousands of dollars)
,1 Operation and maintenance expenses Nuclear power generation Nuclear fuel expense (plant factor 66%).
$ 16182 5896 Other operating expenses 4231 Maintenance expenses Total nuclear power generation 2330F l
jl 100 Transmission expenses Administrative and general expenses 3100 Property and liability insurance 1620 Other A.&G. exoenses 4720 Total A.'&G.
expenses.
31129 TOTAL OEM EXPENSES 32300 Depreciation expense Taxes other than income taxes 15800 Property taxes 11053 Other 8
26853 Total taxes other than income taxes 2427 Income taxes - Federal Income taxes - other 19520 Deferred income taxes - net (2000)
Investment tax credit adjustments - net.
Return (rate of return: 10.20 g) 155978
$266207 TOTAL ANNUAL COST OF OPERATION 90027026 Ol.a-2
ATTACHMENT FOR ITEM NO.
1.a.
ESTIMATED ANNUAL COST OF OPERATING NUCLEAR GENERATING UNIT:
SHOREHAM NUCLEAR POWER STATION, UNIT NO. 1 l
FOR THE CALENDAR YEAR 19 82 l
1 (thousands of dollars) l Operation and maintenance expenses-i Nuclear power generation Nuclear fuel expense (plant factor 66 %).
$ 27600 l
16442 ll Other operating expenses 12782 Maintenance expenses 56824 Total nuclear power generation l'
107 Transmission expenses Administrative and general expenses 3250 Property and liability insurance 4676 Other A.&G. expenses 7926 Total A.&G. expenses 64857 TOTAL OEM EXPENSES l
l 55300
}
Depreciation expense 1
Taxes other than income taxes 28900 Property taxes l
14824 Other Total taxes other than income taxes 33724 f
Income taxes - Federal 2628 Income taxes - other 29534 Deferred income taxes - net.
Investment tax credit adjustments - net (2000)
)
10.20 %)
147329 Return (rate of return:
TOTAL ANNUAL COST OF OPERATION
$341372
?
9$027027 Ol.a-3 1
i ATTACHMENT FOR ITEM NO.
1.a.
ESTIMATED ANNUAL COST OF OPERATING NUCLEAR GENERATING UNIT:
SHOREHAM NUCLEAR POWER STATION, UNIT NO. 1 FOR THE CALENDAR YEAR 19_8_3 (thousands of dollars) i Operation and maintenance expenses Nuclear power generation Nuclear fuel expense (plant factor 71%)
$ 29106 15941 Other operating expenses 11814 Maintenance expenses Total nuclear power generation 56861 114 Transmission expenses 3
f Administrative and general expenses 3400 Property and liability insurance.
4441 Other A.&G. expenses 7841 i
Total A.&G. expenses 64816 TOTAL O&M EXPENSES 55300 Depreciation expense Taxes other than income taxes 30900 Property taxes 14667 j
Other 45567 Total taxes other than income taxes 3262 Income taxes - Federal Income taxes - other 33734 i
Deferred income taxes - net i
(2000)
Investment tax credit adjustments - net 138251 Return (rate of return: 10.20 %)
$338930 TOTAL ANNUAL COST OF OPERATION 900.2702'8 Ol.a-4
ATTACHMENT FOR ITEM NO.
1.a.
ESTIETED ANNUAL COST OF OPERATING NUCLEAR GENERATING UNIT:
SHOREHAM NUCLEAR POWER STATION, UNIT NO. 1 FOR THE CALENDAR YEAR 19_84_
(thousands of dollars) i Operatici and mainter expenses l
Nuc[E3i Dower cener Whci. ear fuel exp
- 1. ant factor 74%)
$ 32998 i
^
~
16948 Other operating c, 12560 Maintenance expenses Total nuclear power generation 62506 121 Transmission expenses Administrative and general expenses 3570 Property and liability insurance 4721 1
Other A.&G. expenses EYFT I
Total A.&G. expenses.
TOTAL O&M EXPENSES 70918 55300 Depreciation expense Taxes other than income taxes 33100 l
Property taxes 16082 i.
Other Total taxes other than income taxes 19187 40726 Income taxes - Federal Income taxes - other 28734 Deferred income taxes - net Investment tax credit adjustments - not (2000) 129683 Return (rate of return: 10.20 %)
l:
TOTAL ANNUAL COST OF OPERATION
$ 372543 l
Os
- 96027029' Ql.a-5
. _. ~._ _
t i
ATTACHMENT FOR ITEM NO.
1.a.
ESTIMATED ANNUAL COST OF OPERATING NUCLEAR GENERATING UNIT:
SHOREHAM NUCLEAR POWER STATION, UNIT NO. 1 FOR THE CALENDAR YEAR 19_8_5 (thousands of dollars)
Operation and maintenance expenses Nuclear power generation Nuclear fuel expense (plant factor 78%)
$ 37922 19399 Other operating expenses 14421 Maintenance expenses Total nuclear power generation 71737 136 Transmission expenses i
't Administrative and general expenses 3750 Property and liability insurance.
4922 Other A.&G. expenses 5577 Total A.&G. expenses 80550 TOTAL O&M EXPENSES 55300 i.
Depreciation expense l-Taxes other than income taxes 35400 Property taxes 16631 Other Total taxes other than income taxes.
52D71 59985 Income taxes - Federal Income taxes - other 16834
.l Deferred income taxes - net (2000)
Investment tax credit adjustments - net.
4 122329 Return (rate of return: 10.20 %)
$ 385029 TOTAL ANNUAL COST OF OPERATION 96027030' 01.a-6 l
1 i
'I i
!l' ATTACHMENT FOR ITEM NO.
1.a.
l
,n.
ESTIMATED ANNUAL COS"I OF OPERATING NUCLEAR GENERATING fI UNIT:
SHOREHAM NUCLEAR POWER STATION, UNIT NO. 1 i
FOR THE CALENDAR YEAR 19_8_6 (thousands of dollars)
Operation and maintenance expenses Nuclear power generation Nuclear fuel expense (plant factor 78%)
$ 43705 19399 Other operating expenses 14421 Maintenance expenses Total nuclear power generation 77525 l
i 136 Transmission expenses Administrative and general expenses j
3940 ll Property and liability insurance.
5411 Other A.&G. expenses F35I Total A.&G. expenses.
87012 TOTAL O&M EXPENSES 55300 Depreciation expense Taxes other than income taxes 37900 Property taxes 12079 Other 54979 Total taxes other than income taxes 66054 Income taxes - Federal Income taxes - other 16834 Deferred income taxes - net i
(2000) j Investment tax credit adjustments - net
,1 114974 Return (rate of return: 10.20 %)
El
$ 393153 i l TOTAL ANNUAL COST OF OPERATION Ql.a-7 1
r QUESTION 1.b.
Indicate the unit price per KWh experienced by each applicant on system-wide sales of electric power to all consumers for the most recent twelve month period.
RESPONSE
For the twelve (12) months ending January 31, 1979, the KWh unit price experienced by each applicant on the LILCO system was 5.8 cents.
I t
i I
98027032
Ol.b-1 l
1
QUESTION 2 Indicat? the estimated costs of permanently shutting down the facility, stating what is included in such costs, the assumptions made in estimating the costs, the type of shutdown contemplated and the expected source of funds to cover these costs.
RESPONSE
The Long Island Lighting Company has reviewed the various alternatives for decommissioning an 850 MWe boiling water reactor (BWR) plant at the end of its useful life.
They range from mothballing the plant nearly intact to complete dismantling of the plant and removal of all structures to one foot below grade level.
Selection of the best technique l
to use will naturally depend on many factors which can only be properly evaluated at the time of decommissioning.
Estimates of the costs of various alternatives can be made, however, based on the actual costs experienced in the decommissioning of several civilian reactors.
t Three different levels of decommissioning were considered and the estimated cost (1975 dollars) were obtained for each:
(1)
Mothballing I
Leaving the plant essentially intact after flushing f.
all systems and removing all loose radioactive items l
and wastes, providing a security fence around the l
Plant, and maintaining a perpetual around-the-clock guard and watchman service, with semi-annual inspec-tion of the plant performed.
Decommissioning Cost:
$ 3,500,000 Annual Charges After Decommissioning:
80,000/ year I
(2)
Entombment Leaving all buildings intact; flushing and dismantling j'
system piping; isolating, sealing, and entombing the i
reactor pressure vessel; providing closed shield housings j,
around major radioactive items such as the turbine generator, heat exchangers, moisture separators, etc.; removing all piping and other loose radioactive items and wastes; providing a security fence and performing semi-annual inspection of the plant.
Decommissioning Cost:
$ 9,000,000 Annual Charges After Decommissioning:
30,000/ year M'
- t 90027M3.
02-1
(3)
Complete Dismantling Removal of the plant down to one foot below grade level, leaving the subgrade foundations essentially intact, backfilling to grade level, and restoration of landscaping to the approximate original condition.
Decommissioning Cost:
$54,000,000 i
These numbers show the range of decommissioning costs for the j
Shoreham Unit.
A 1977 Atomic Industrial Forum report, AIF/NESP-009SR, "An Engineering Evaluation of Nuclear Power Reactor Decommissioning Alternatives" indicated that the cost of l
decommissioning could be reduced if the plant were first moth-l balled or entombed, and then left in that condition for a period of time before dismantling.
This approach to dismantling appears preferable to LILCO at this time.
The Applicant will continue to monitor industry developments and, at an appropriate time, a detailed decommissioning plan will be submitted to the NRC.
The source of funds will come from internal cash generation plus external financing as required.
90027034 02-2
l QUESTION 3 i
Provide an estimate of the annual cost to maintain the shutdown of the facility in a safe condition.
Indicate what is included in the estimate, assumptions made in estimating costs and the expected source of funds to cover these costs.
I
RESPONSE
Annual costs to maintain the shutdown of the facility in a safe condition, a description of what is included in the estimate, and assumptions made in estimating costs are in-cluded in response to question 2.
1I' The source of funds will come from internally generated cash i
I plus external financing as required.
l-l-
l-I t
ll
?
03-1 90027 0ba-i
OUESTION 4.a.
Provide copics of the prospectus for the most recent security issue and copies of the most recent SEC Form 10-K.
Provide copics of the preliminary prospectus for any pending security issue.
Submit copies of the Annual Report to Stockholders each year as required by 10 CFR 50.71(b).
RESPONSE
The below listed documents are herein provided:
1.
Prospectus dated October 30, 1979 and Supplement dated j
November 20, 1979.
2.
SEC Form 10-K for the fiscal year ended December 31, 1978 3.
LILCO Annual Report for 1975 l
4.
LILCO Annual Report for 1976 5.
LILCO Annual Report for 1977 6.
LILCO Annual Report for 1978 NOTE:
Item 1 is provided herein.
Items 2 through 6 have been submitted via the LILCO letter SNRC-378 dated April 19, 1979.
Q4.a-1 90027036
.. v 5 QUESTION 4.b.
Describe aspects of the applicant's regulatory environment including, but not necessarily limited to, the following:
prescribed treatment of allowance for funds used during construction and construction work in progress; form of rate base (original cost, fair value, other);
accounting for deferred income taxes and investment tax credits; fuel adjustment clauses in effect or proposed; historical; partially projected, or fully projected test year.
RESPONSE
i The following describes various aspects of LILCO's regulatory environment:
i 1.
The test year now utilized for rate making purposes in New York
,l State is the 12 month period at the end of a calendar quarter no earlier in time than 150 days before the date of filing.
This test year is to be fully adjusted to show the operating results for the first 12 months during which the proposed rates will be in effect.
i:
There have been no restrictions placed on the types of adjustment which may be made to the test year to make it represent the future period.
2.
There are certain items included in construction work in progress j
(CWIP) on which allowance for funds used during construction (AFC) il is not calculated, since they are either too small or are of too ll short a duration in time.
These items are often referred to as "non-interest bearing" CWIP.
Currently the average balance for these items is $45 million on the electric side of the business
- l and $4 million on the gas side of the business.
AFC generally would be calculated on the remainder of CWIP unless the Commission decides to permit some of it to be included in rate base.
(Such permission is normally only granted to enable a utility company to continue its financing program).
The Company is presently j
allowed to include $300 million of electric and $4 million of gas CWIP in its rate base.
- )
3.
In New York, the rate base is normally the average plant in service at original cost, less the accumulated depreciation reserve, less the deferred taxes on plant-related items, plus an allowance for working capital and any CWIP which the Commission has allowed to be included.
j l
4.
The Commission permits deferred tax treatment on some of the differences between book and tax depreciation which produces something which can be described as between flow-through accounting and normalized account-ing.
There is also deferred income tax treatment for the investment tax credit in excess of the first 4%.
The Company also capitalizes
'I a portion of its AFC net of income taxes.
V
'90027037 04.b-1
=
l
- F i
i 5.
The Commission permits both electric and gas fuel adjustment f,
clauses.
The electric fuel adjustment clause includes the cost i
of fuel, excluding the cost of fuel used to make sales for resale, plus the cost of economy purchases and the cost of fuel included in non-economy purchases.
The Commission also permits I
deferred fuel accounting so that fuel expenses and fuel revenues may be more closely in phase with each other.
l l
1 f
i f.
2 0027038
' h-2 9
OUESTION 4.c.
Describe the nature and amount of the applicant's most recent rate relief action (s).
In Use the sddition, indicate the nature and amount of any pending rate relief action (s).
Provide copies of the submitted financially-attached form to provide this information.
related testicony and exhibite of the staff and company in the cost recent rate relief Furrish copics of the hearing examiner's report and reco= mend-action or pending action.
including all ation, and final opinion last issued with respect to each participant, financial exhibits referred therein.
PESPONSE:
?
4c.
Pate Developments Granted Electric Gas IT/71TTTTa) 12/31/77 (a)
Test year utilized Annual amount of revenue increase requested-test year basis (000's)
$ 147,100
$23,900 Date petition filed 5/31/78 5/31/78 Annual amount of revenue increase allowed-test year basis (000's) 26 000 16,580 3
Percent increase in revenues allowed-
.. 3%
9.1%
4/21/79 4/27/79 Date of final order 5/0i/79 5/04/79-Effective date Rate base finding (000's)
$1,55f.,728 238,761 Construction work in progress included in rate base (000's) 300,000 4,120 Rate of return on rate base authorized 10.26%
10.26%
Rate of return on common equity 13.7%
13.7%
authorized Revenue Effect (000's)
Amount received in year granted 15,300 7,200 Amount received in subsequent year.
25,700 16,900 1-Elcetric Gas Pending Recuests_
0 6/30/79 (b)
,i Test Year Mnount
$25.6 million None i
2.5%
Percent Date filed 9/21/79 y
Date by which decision must 8/80 be issued u-
-T g
4c.
Rate Developments Pending Requests (Cont.)
Electric Gas Rate of Return on Rate Base Requested 10.49%
Rate of Return on Common Equity Requested 13.7%
Amount of Rate Base Requested
$1,684,859 Amount of CWIP included in l
Rate Base
$300 million j
i NOTES:
(a) The Public Service Commission of the State of New York (PSC) in making its final determination recognized certain major adjustments to the l
12/13/77 test year and concluded that such adjustments created a new test year, called the rate year, the 12 months ended 4/30/80.
(b) The test year of 6/30/79 has been adjusted to a rate year of 4/30/81.
l l.
ll s
i
)
4 Q4.C-2 90027040 I
I The following financially-related testimony and exhibits of Staff and Company witness in rate cases 27374 (electric) and 27375 (gas) have been previously cubmitted via LILCO letter SNRC-378 dated April 19, 1979 except for items C.1 and D which are provided herein:
' ~
Financially-related testimony and exhibits of Staff and Company witness in rate cases 27374 (electric) and 27375 (gas) will consist of:
A.
Prepared testimony and prepared exhibit #196 of Vincent A.
Macri, Chief Utility Financial Analyst, Utility Finance Section, Office of Accounting and Utility Finance, N.Y. State Public Service Commission, Empire State Plaza, Albany, N.Y.
12223, dated October 1978 for the Staff:
Exhibit #196 contains the following:
1.
LILCO - Cash Funds Requirements Excluding the Trusts for the years 1979 and 1980 2.
LILCO - Capital Structure - June 30, 1978 - Pro Forma 3.
LILCO - Average Capital Structure for the Rated Year 4.
LILCO - Moody's Utility Common Stocks - Average Long Term Debt Positions 5.
LILCO - Moody's Utility Common Stocks - Average Preferred Stock Positions 6.
LILCO - tbody's Utility Coctmon Stocks - Average Common Equity Positions 7.
LILCO - Cost of Long Term Debt - June 30, 1978 - Pro Forma 8.
LILCO - Cost of Preferred Stock - June 30, 1978 9.
LILCO - Financial Statistics 10.
LILC0 - 1978 Yields for Long Island Lighting 11.
LILC0 - Moody's Utility Common Stocks - Financial t
Statistics
- 12. LILCO - Moody's Utility Common Stocks - Financial Statistics - 1976 13.
LILCO - Moody's Utility Common Stocks - Financial
, i?
Statistics - 1977
- 14. LILCO - Moody's Utility Common Stocks - Financial Statistics - Current
- 15. LILCO - Flowthrough Electric Utilities - Financial Statistics for 1976
- 16. LILCO - Flowthrough Electric Utilities - Financial Statistics for 1977 17.
LILCO - Flowthrough Electric Utilities - Financial Statistics - Current 18.
LILCO - Standard & Poor's 400 Industrials - Financial Statistics
- 19. LILCO - Moody's Utility Common Stocks - AFC as a Percentage of Earnings 91)02704I Q4.C-3 4
o.-
- 20. LILCO - Flowthrough Electric Utilities AFC as a Percentage of Earnings
- 21. LILCO - Common Stock Issuances 1976 - $20,000,000 or more
- 22. LILCO - Common Stock Issuances 1977 - $20,000,000 or more
- 23. LILCO - Common Stock Issuance in 1978 - $20,000,000 l
or more l
24.
LILCO - Derivation of Formula for Converting Investors l
Expected Return to Required Return on Equity
- 25. LILCO - Divisors Necessary to Convert Total Return j
To Required Return on Equity at Given Market to Book Ratios * (* Assumes 66% payout ratio)
- 26. LILCO - Average capital Structure and Cost Rates for Ir i
the Rate Year
- 27. LILCO - Pre-Tax Rate of Return 28.
LILCO - Pro Forma Pre-Tax Coverage For the Rate Year
- 29. LILCO - Pre-Tax Coverage Based on the 10% Limitation of Other Income
- 30. LILCO - Moody's Utility Common Stocks Pre-Tax Coverage for the Twelve Months Ended December 31, 1977
- 31. LILC0 - Flowthrough Utilities Pre-Tax Coverage for the Twelve Months Ended December 31, 1977
- 32. LILCO - Moody's Utility Common Stocks Pre-Tax Coverage for the Twelve Months Ended June 30, 1978 33.
LILCO - Flowthrough Utilitics Pre-Tax Coverage for the Twelve Months Ended June 30, 1978
- 34. LILCO - AFC as a Percentage of Earnings For the Rate l'
Year B.
Financially-related testimony and exhibits of company witnesses in rate cases 27374 (Electric) and 27375 (Gas):
1.
Thomas H. O'Brien 2.
Raymond J. Forrer 3.
Roger F. Murray the 2nd 4.
Zvi Bendry (testimony and exhibit #64 which contains l
Schedules 162 and a Technical Appendix)
C.
The Hearing Examiner's renort and recommendations, and final opinion l
last issued with respect so each participant, including all financial exhibits referred therein consists of the following:
1.
Recommended Decision by Administrative Law Judge David i
Schechte Issued 2/13/79 - Case 27374 & 27375 2.
Opinion and Order Determining Increased Revenue Require-ments - Issued 4/27/79, Case 27374 (Elcetric Rates) and 27375 (Gas Rates). (Attachment C to question 4C provided with this submittal) 90027042 Q4.C-4
I D.
Financially-related testimony and exhibits of Company witnesses in i
support of the pending rate case:
1.
Raymond J. Forrer (pages 1 and 12 through 20 and exhibits 12 through 18) 2.
2vi Benderly (testimony and exhibi* 56 which contains schedules 1 and 2 and a technical appendix).
I I
i 4
l l
i Q4.c-5 90027043
1 l
l ATTACHMENT A TO QUESTION 4.C TESTIMONY OF RAYMOND J. FORRER
(
1 Q.
Please state your name and business address.
(
2 A.
Raymond J. Forrer, 250 Old Country Road, Mineola, New York l
3 4
Q.
What is your position with Long Island Lighting Company?
5 A.
I am Associate Controller, a position I have held since 1974.
6 7
Q.
Have you testified in other proceedings before this Commission?
8 A.
Yes.
I have testified in several of the Company's rate proceedings 9
including its last electric and gas rate Cases 27374 and 27375, 10 in Case 27136, in Case 80003 "Jamesport Siting Application", and 11 in Case 26798 " Empire State Power Resources, Inc."
12 p.. -
[.
\\' _ i 13 Q.
lir. Forrer, I show you a two page document entitled "Long Island 14 Lighting Company - Balance Sheet." Was this document prepared 15 under your direction?
16 A.
Yes.
17 18 Q.
I.
' that this document be marked for identification an ".abit 19 No. 1.
Mr.
rrer, would you please explai t Exhibit No.
20 1 shows?
21 A.
It shows the Balance Shee t the u ny as of December 31, in each 22 of the years
,1976,1977 and 1978 and as v.
' me 30, 1979 23 ex - _ sed from the books of the Company by PSC prime accum.
24 NOTE:
Pages 2 through 11 inclusive have been omitted intentionally.
90027044
_1_
c
RAYMOND J. FORRER C...
s 1
of which is entitled " Net Utility Plant - Electric - Book Cos 2
o "lant and Accumulated Depreciation - Monthly Balances t 3
1, 19 to April 30, 1981." The second page refers to Net
{
l 4
Utility k 'nt - Common." The third page refers to eferred 5
Taxes - Elect c."
Was this document prepared der your 6
supervision?
7 A.
- Yes, i
i 8
i f
9 Q.
I ask that this document be arke< as Exhibit 12 for identifi-10 cation.
Mr. Forrer, what doe
- is Exhibit show?
11 A.
Page 1 shows monthly balar s afte VRs for the period May 1, 1980 12 to April 30, 1981, in e various elec ic property accounts and
~-
13 accumulated depreci ion, including that p' tion of common plant 14 from page 2 whi is allocated to electric ope tions.
Page 2 15 shows the re ted common plant and accumulated de
-ciation balances.
16 The resu shown on each page is net utility plant.
ge 3 shows 17 month balances in the various deferred federal income t items 18 f
electric operations. Also shown on the bottom of each p-19 is the average annual balances for each of the items stated abovt
-20 21 Q.
I show you a two-page document entitled, "Long Island Lighting Company j
22
- Weighted Average Cost of Senior Securities at June 30, 1979."
23 Was this prepared under your direction?
24 A.
Yes.
90027045' 12 1
l l
RAYMOND J. FORRER l'
'~
V 1
Q.
I ask that this document be marked as Exhibit 13 fer identification.
2 Would you please explain this Exhibit?
t 3
A.
Exhibit 13 shows that as of June 30, 1979, the weighted average 4
cost of long-term debt was 7.86% and the weighted average cost 5
of preferred stock was 8.02%.
6 7
Q.
I show you a two-page document entitled, "Long Island Lighting 8
Company - Estimated Cost of Senior Securities, Capital Structure, 9
and Rate of Return." Was this prepared under your direction?
10 A.
Yes.
11 12 Q.
I ask that this document be marked as Exhibit 14 for identification.
I 13 Would you please explain this Exhibit?
14 A.
Exhibit 14, Schedule 1 of 2 shows that the estimated changes in the 15 senior securities during the period of July 1,1979, and April 30, 16 1981, and the cost of those changes.
It reflects the pending sale
)?
1n October 1979 of $14.4 million of authority financing notes and a 18 proposed sale in May,1980 of $85 million of General and Refunding 19 Bonds at a cost of 10%. Also, an expected sale in December, 1980 of 20
$70 million of General and Refunding Bonds at an estimated interest 21 rate of 10%. The schedule also indicates a refunding of the l
22 Series A ist Mortgage Bonds of $20 million at a 3% rate in 23 September, 1980. The resulting weighted average cost of debt at l
24 April 30, 1981, is 8.16%.
The Exhibit further reflects (N) the 90027046 13
i I -
RAYMOND J. FORRER l
1 recent issuance of Preferred Series S $75 million, with proceeds 2
to the Company of $73,715,000 at a cost of 9.97% and (b) an 3
adjustment for the Series Q Preferred Stock Amortization of 4
the redemption premium as per Case 27236.
The Preferred Stock 5
has been reduced for the sinking fund requirements relating to 6
the Series L stock in July,1979; Series Q in June,1980; Series 7
L in July,1980; and Series M in November,1980. The weighted 8
average cost of Preferred Stock at April 30, 1981 is 8.56%.
9 10 Schedule 2 of 2 reflects the estimated capital structure, cost 11 rate, and the return components for long-term debt, Preferred 12 Stock, Common Equity and customer deposits as estimated for the 13 rate year ending April 30, 1981.
In addition to the additional 14 bonds and preferred stock noted on Schedule 1, this schedule IS reflects (a) a planned issue of $120 million of fering of 16 common stock in November 1979, (b) a proposed $88.8 million 17 offering of common stock in November, 1980, (c) proceeds of 18
$2 million from the sale of shares of common stock under the 19 Employee Stock Purchase Plan and (d) proceeds of $16 million 20 from the sale of shares of common stock under the Automatic 21 Dividend Reinvestment Plan during the rate year.
- Finally, 22 it reflects additional retained earnings of $58.7 million 1
23 and the estimated changes of $0.2 million to the capital stock 24 expense.
1 i
14 90027047
RAYMOND J. FDRRER jl
'ill
~
1 Q.
What else does Exhibit 14 show?
2 A.
It shows the capitalization ratios of the capital structure and 3
the cost rates for each of the senior securities, 9% for customer 4
deposits and 13.7% for common equity.
It also shows the resultant
\\l 5
return components yielding a total required rate of return of 10.49%.
6 7
Q.
Mr. Forrer, would you comment on the apparently high common 8
equity in the Company's capital structure?
9 A.
Although the common equity ratio in the Company's capital structure i
10 seems high, two factors must be considered. First, in accordance 11 with past rate case treatment, the Resources and Construction Trust 12 have been excluded from the capital structure for rate purposes.
13 Second, theoretically, the Company could decrease the amount of 14 common equity by selling more long-term debt.
But as shall be IS demonstrated later on in my testimony, bond indenture coverage is 16 below acceptable icvels, even with the full rate relief requested.
17 Therefore, the sale of additional bonds to reduce the common equity 18 might not be feasible. Other possibilities of reducing the common 19 equity ratio are to increase use of the Trusts as a financing vehicle 20 and to sell more Preferred Stock. With respect to the Trusts, 21 these were created to finance nuclear fuel and the construction 22 of the Company's share of Nine Mile Point 2 nuclear unit.
It is 23 possible for the Company to borrow from the Trusts for "Other 24 Corporate Purposes" but this is merely another temporary expediency
?
90027048 13 l-l-
a
l I
RAYMOND J. FORRER l
1 for financing and does cut have a material effect on our 2
financing program. As far as Preferred Stock is concerned, the 3
preferred stock ratios are near maximum levels.
In addition, 4
without rate relief the amount of Preferred Stock that could S
be issued may be limited by the Certificate of Incorporation 6
coverage test. For the recently issued Series S 9.8% preferred, 7
the coverage was 1.51 times. The minimum required is 1.50 times.
8 9
Q.
I show you a two-page document entitled, "Long Island Lighting 10 Company - Fune bequirements and Financing." Was this prepared 11 under your direction?
12 A.
Yes.
13 14 Q.
I ask that this document be marked as Exhibit 15 for identification.
15 Would you please explain this Exhibit?
16 A.
Schedule 1 of the Exhibit shows the fund requirements, internal 17 cash generation, and financing for the calendar years 1979, 1980 18 and for the twelve months ended April 30, 1981.
The Exhibit
]
19 shows the funds required for our construction program and nuclear 20 fuel and Nine Mile Point #2 expenditures to be financed through j
21 the resources and construction trusts. Also, the funds required 22 for sinking funds and bond redemption. Funds derived from internal 23 sources are shown without rate increases requested in this case.
24 The financing program including resources and construction trust 90027049 16
)
h
RAYMOND J. FORRER Q..
I financing is showa in the section headed " Funds Provided."
2 Schedule 2 of the exhibit is similar to Schedule 1 except 3
that I have assumed the rate increase requested in this 4
fi11ng to be effective May 1,1980.
5 6
Q.
I show you a two-page document entitled, "Long Island Lighting 7
Company - Bond Indenture Coverage and Ratio of Earnings to Fixed 8
Charges (SEC Coverage)." Was this prepared under your direction?
9 A.
Yes.
10 11 Q.
I ask that this document be marked as Exhibit 16 for identification.
12 Would you please explain this Exhibit?
~'
13 A.
Schedule 1 of the Exhibit reflects the computation of the bond 14 indenture coverages and ratios of earnings to fixed charges at 15 December 31, 1979, December 31, 1980, and April 30, 1981.
The 16 coverages are based on available income stated in the Schedule i
17 and proposed bond financings. Schedule 1 is tabulated with-18 out rate increases while Schedule 2 reflects the requested 19 rate increase effective on May 1, 1980.
20 21 Q.
Mr. Forrer, on Exhibit 16 you show the forecasted G&R bond 22 indenture coverage for the years 1979, 1980 and the rate year 23 respectively as 2.23 times, 2.02 times and 1.99 times without 24 rate relief and 2.23 times, 2.17 times and 2.22. times with l:
'!)
90027050 17
RAYMOND J. FORRER d
1 rate relief. Do any of these calculations include bond sales I
2 that will take place subsequent to the particular 12 months i
3 period?
4 A.
No.
All calculations include only ::he annualized interest on 5
all bonds outstanding at the conclusion of the particular 12 6
month period. For example, the coverages for the year 1979 7
do not reflect any interest on bonds to be issued in 1980. If 8
I were to include the interest on the first bond issue in the 9
spring of 1980 in the 1979 calculation, the resultant coverar,e 10 would be 2.05 times.
In Opinion 78-1, the Commission, in 11 establishing rate levels for the Company utilized as its criteria 12 a coverage of 2.3 times for the rate year including the first J
13 issue of bonds to be sold after the rate year.
It is clear that 14 the Company will not meet this standard at any time. Further-15
- more, the bond indenture coverage throughout the entire period 16 is approximately at the levels which the Commission has con-17 sidered appropriate for granting interim rate relief. This 18 coverage situation will be exacerbated by the f act that expenses 19 in this presentation are based upon the icvels found appropriate 20 by the Commission in the Company's most recent rate decision, 21 Opinion 79-14, issued April 29, 1979 in order to reduce the
)
22 controversial issues. As Associate Controller, I am familiar 23 with the Company's proposed 1980 budget and I can state that, 24 despite the strictest controls possible, it appears most likely m
90027051 18
RAYMOND J. FORRER r
w I
that actual expenditures for operation and maintenance for the 2
year 1980 and at least the first four months of 1981 will exceed 3
those reflected in the Company's filing.
Thus, all of the 1
l 4
financial criteria reflected in my exhibits are conservative l
l 5
in that they present an optimistic view contrasted to what will 6
probably occur.
7 8
Q.
Mr. Forrer, I show you a one-page document entitled, "Long Island 9
Idghting Company - Internal Cash as a Percent of Cspital Expend-10 itures and Dividends Paid as a Percent of Cash Incom." Was 11 this document prepared under your supervision?
12 A.
Yes.
13 14 Q.
I ask that this document be marked as Exhibit 17 for identification.
15 Would you kindly describe this Exhibit?
16 A.
The Exhibit shows internal cash as a percent of capital expend-l' 17 itures and dividends paid as a percent of cash income for the IS year 1979, 1980 and the twelve months ended April,1981.
The 19 data shown on this Exhibit were extracted from Exhibit 15.
The i
20 top half of the Exhibit assumes no rate increase and the bottom
,j l
21 half of the Exhibit assumes the proposed rate increase effective l
22 May 1, 1980.
23 24 Q.
Mr. Forrer in computing the percentage of dividends to the amount
)
19 90027052
RAYMOND J. FORRER s
1 of internal cash generation as reflected on Exhibit 17, what common 2
stock dividend rates did you assume?
3 A.
Beginning in August, 1979, I used a quarterly rate of 44 1/2c per 4
share, the most recent quarterly payment.
I used this rate for 5
the November 1,1979 and February 1,1980 common stock dividend 6
payments. Beginning with the May 1, 1980 dividend, I assumed 7
quarterly payments would be 46 1/2c per share. As can be seen 8
from Exhibit 17, dividends paid would exceed cash income for the 9
rate year if no rate relief is granted and will amount to more 10 than 95% of cash income even if full rate relief is granted.
11 CN 12 Q.
Mr. Forrer, I show you a one-page document entitled, "Long Island 13 Lighting Company - Allowance for funds Used During Construction 14 as a Percent of Income for Common Stock." Was this document 15 prepared under your supervision?
16 A.
Yes.
17 18 Q.
I ask that this document be marked as Exhibit 18 for identification.
19 Would you kindly describe this Exhibit?
20 A.
This Exhibit shows the Allowance for Funds Used During Construction 21 (AFC) as a percent of income for common stock for the years 1979, 22 1980 and the twelve months ended April, 1981.
The top half of the 23 Exhibit assumes no rate relief. The bottom half of the Exhibit 24 assumes the proposed rate increase effective May 1, 1980.
20 I'
90027053
C C_
g e
90027054 l
enC t
u!
pE gp U y$gQm m,".O.
g; u?
g$
" y$k t) 666268704617542980731 8244542 8
5 cB 977804256549278941789 2841596 8
7 d
2 3, u
56845982,7,1,1,0,9,8,2,8,7,8,80,6 5, 9, 7, 3, 3,8, 7, d
e dX o
11112122233464 7864769 2
9 i
g r
9 a
d 1
rA p
e P(
l t
x p
i 9
a b
7 t
n i
/
)
o h
1 B
e x
3
(
5 g
x E
/
t sy 592679594100839260783 9384773 96 a
a 7
5176848 76 g
t r
on 93513619466,2430246125 t
e Ca p 233334444445589777809 9098899 77 r
g p
1 1
o n
t m m
i y
eo d
n NC f
r a
o o
p o
c m
t n
e o
o r
C i
t e.
f
)
r gs o sA d(
479987979518590862663 6647320 4
0 o
ad e
049520241711290433972 9652201 73 p
gr s to e 2,9,8,2,02,9,07,0,8,3,1,4,11,2,1,6,1,2, 4,6, 9, 9, 9,8, 3, 3,2, g
rB s 9
ey 7
cn n,
n.
o 9
oa 094550959540545000999 8889229 94 me 1
rp 212112123224332455554 7864879 2 6 e
i dt g p1 Pm 2,
us ya x9 o
1 le nE e4 0
tC ct a 7
3 e
no d2 No Ir s e
E t
p e te
)
N l
d as U
5, ar u ma
))))))
J ue l5 iC 4,4,4,4,4,4,4, td cr t o)
)))))
T t2 33333 3333333 cn x sn i
A
(
(((((
(((((((
AuE Ei T
s A
S ey 153023561464150343044 4637380 8
3 P
E sn 015991138325494399476 0433839 4
6 2,
M I
na 111 1111111111222333 8543476 3
)
)
)
3 4
5 O
T ep 6
(
(
(
C I
pm R T xo O
U B EC M
C E I
E D) sn e
T S
H M0 G
R h0 ro g
/
I O E0 ei L
I T(
tt 80830680639660037003 083143 36 nm N
ia 38893500665506671751 081142 -
51 au h
D E G rs 11 21211 2332333444 776475 6
4, hi t
cm u
N S
N wn 9
xe A
A O
ro er L
F L ep p
r S
O dm n
o I
no is f
T UC e
O S
sd t
N O
O C
502730010501200132600 0005030 51 ru p
L t
003315090703200404000 0007560 71 el e
dc c
E ag 3,2,2,42,5,2,3,0,3,0,7,6,0,5,7,9,7,5,0,0, 0,0,0,6,1,0,0, 3,9, ln x
G ne A
tic 005550050550555000000 0000440 0
1 oi e
R nri 222112224224332455665 8975870 36 h
(
A 2,
1 E
uer l
x V
ofP 1
as a
A mf ne T
Ao oi D
i r g
ET 000000000000000000000 0000000 55 te n
H l
000000000000000000000 0000000 77 uS i
t(
d 0,0,0,0,0,00,0,0,0,0,0,0,0,0,0,0,0,0,0,0, 0,0,0,0,0,0,0, 3,3, r
G at i
I pn E
iu 005550050550555000000 0000550 0
5 ty o
W co 222112224224332455665 8975870 37 st.
c 2,
ni) e nm 1
irH R
iA 1
u r
ot s e P
tae g
mi a 1
r g
n 5
5 5
50 5
55 5555 5de t
oe 070575200255002502205 5722205 0
9nS r
1a a
pt 035237104652521256102 2866627 5
d M
ua oR 333334454445589777809 9998899 7
,nl 1
9oo n
C 2p o
ue roh n ect o
b i
mem t
emo c.
s var u) 023456813456790112312 d
osf ds 888888899999990000088 n3466789 s6 N
ee
/////////////////////
o8800009 e0 fd Rt 111111111111111111111 B/////// t/
noe o
/////////////////////
1111111 o1 i r xN 909212584663499429261 g/////// N/
sr a s
1 111 1
1 1
n6 96 2 54 3 2
dde Tg d
i 1
g1 enf n
n d
n uos ei oe neeeeeee ie sbn mc Bu uuuuuuuu cu s
a on D
fDDDDDDD nD Irr ca t
e e
a et nn b
g)
R4888854 n2 Am Ii e a1
/////// i/
r5 F
D g(
d1755513 F1 so0 f
t n
ef3 oy n rAEFoHIJLMN0PQRSUvWxYz a 99988 99 y7 i
t r o t
rr ti e Ms ls i
eof er T
e ae r
Sfo No 1
ri o
3D) ) a :? ' T_
- ti ss J
er h
g sr I C :( r CL(
ne t
)
)
n re
'C eS u
1 2
o iS LF G
A
(
(
E.xhibit No. 13 Eage 2 of 2 pes.C. Case No.
g l
O CO ChCD d O O O O O N O O'e-4 to o Wit nec o Forrer u-om O Chw H m m Ch Cnd 3 O O O O
~ ~
c.
in s
in N Cn N O. o.s. tn. m. os d.No.
.O.
vy
,-q N N N N # rorG OO O
O.C ro l
to b
W Nw M
h l
eC tp o
I to (0 W,
OC rG\\0 # @\\0 3 H ed e4 Os o Lt%d N H
W v
I r0 H. fo. d. to. H. N. PG. d. 3. N. N. @. LO.O.
Ch.o.
'O OC0 4O LA# # # LACO CO MCD O CNCO CD :O C:0 O
H P
Ch d' O N
M H
.n M
\\
te b-94 in N COCD LOCD f4 ChO PS LACO N fo4
\\0 O
') h
+4 T
3 N 5 O lad AD AO AO COCO N r-4 O O
r-4 p
@ M M.CD. L.O. O.NCQ \\0. Ch. 04 Ch. GN Ch. AO. 6 D.
h.Lh.
4 w
00 Os\\0 Ch er Chd ON3 3 6AD H C5ei CD O O
u D.
}e O M
r.t N N to en d pq :t ON O
y to FA w
WO M
Ch M
M t-pO to 0%
Ge O
ed M
M h
Q m
O M
A O
G (d
to d H Ch N O N 3 ON O N tNO \\0 3 S C0 t-O b
0 b.
o ca into# N d 4\\04fo m:rPGt'- O CD 0 O
to G HHN.
m.
O.
O CC
\\D O
t-6 OO tr>
p
=C O. O M
M H,-
e
.C v
N n
Os F-n
-la C H
5 O
p:
w O
J M 40 k.
0 v4 C
Id ii ou N PG O to O FOCO O N N tor ^
d H
O g b
M (4 H
+4 c1 O PGCO tY O M N i i CO N t M @
to.t O
N.
e4 H
Q s 01 N H 'O H rq fo CO F4. H N O.
e C
F4 (t:
HH O
to N
O QO V)
O f" '
O H
.d o U%
H O
O tE O.
H M,0 w Q
V1 CO 3
ra de 20 fu.$
N Co'
=C O
to p
ce tp OOOOOOAOOOOOOO
<O CO g' Q
An e
O d
e4 H
f4 C0 OOOOOONOOOOOOO 4 v4,,O O. O. O. O. O. O. rG. O. O. O. uS. O. O.'. O.
Cd.ir.
c O
g 4
C g$ 0 L O 6 0 O O tn o LA LA O O3 0) O ro CO N c3 e
o M
O Ld O % th H
N N N to to to O to d \\0
'O rh to to s
C
.fi %
p O
CO e
O 4
I e4 (h'
G Md O
H IQ e
td m-OOOOOOOOOOOOO O
CO :n E4 O.
C0000000000OO O
3
.1 O.C N
v4 D 0000000000000 O.
Ch.b.
Ci O
o c' H
dP O N o in O t& O totN O LACO O O CD o O
(d
- 4 O e4 N
N Ntot4fotafortQ O lO
-M
- T to Os 4(
e N =d M
L G
P v4 e
e
=C i
V, in O
w O LAtn LA N N O O O CD N O O to O
O N. to. to. H. e-I PG. d. it.CO. b. th. e.
N.
c a
in# 3 a inCO CO t-CO ch Ch t-CO tn
- a v
CC 4
0%
0 O
rd O
.O O
e4 P
O k
CD G
H M
SQ A (d N :::l % W Q N O N O'CC CO G
SH O
- ~
Q fn 5
M v4
$.i O to c4 ev H
(G o
(O sr4 C/)
b M
O
/.. - ',{
%G G
p X
X
@ En w4 f
U U
1, b
H i
O O
i
/
% tD G
to OC M
N p
M M
e4
% vi OV V
to t
C 43 v4 NA 4
k 4
54 v
O k
Q)
G e-e H G
tG Ld uw e
4 4
0 4
H N
N Ee N
w
Exhibit 14 Schedule 1 of 2
[
P.S.C. Case No.
V Witness: Forrer l
LONG ISLAND LIGHTING COMPANY ESTIMATED COST OF SENIOR SECURITIES, CAPITAL STRUCTURE l
AND RATE OF RETURN
$(000) l Estimated Cost of Senior Securitjes as of April 30, 1981 Amount Rate Cost Long-Term Debt As of June 30,1979 - (As Per Exhibit 13 Page 1 of 2)
$1,264,230 7.86%
$ 99,375 Authority Financing Note Issue - October 1979 14,400 7.38%
1,066 Bond Issue Fby 1980 85,000 10.00%
8,500 Refund Series A September 1980 (20,204) 2.95%
(596) j Bond Issue December 1980 70,000 10.00%
7,000
$1,413,426 8.16%
$115,345 Preferred Stock As of June 30, 1979-(As per Exhibit 13 Page 2 of 2)
$ 380,510 8.02%
$ 30,516 Adjustment for Series Q - As per Case 27236 2,158 1,178
-m' Refunding of Series L - July 1979 (1,049) 7.41%
(78)
New Series S Preferred - September 1979 73,715 9.97%
7,350 Refunding of Series Q - June 1980 (4,280) 8.41%
(360)
Refunding of Series L - July 1980 (1,049) 7.41%
(78) i Refunding of Series M - November 1980 (1,998) 8.41%
(168)
{
$ 448,007 8.56%
S 38,360 i
i 90027057 e
s-IDNG ISLAND LIGHTING COMPANY
_FSTIMATED COST OF SENIOR SECURITIES, CAPITAL STRUCTURE AND RATE OF RETURN
$(000)
Capital Total Long Term Pre fe rred Ca pital Stock Futained Customer Capital-De bt Stock Stock Expense Equity Total Deposit s ization As of June 30, 1979
$ 1,275,375 $ 388,948 $
710,855 $ (27,919) $ 331,602 $ 1,014,538 $ 8,175 $ 2,687,036 Estimated Changes thru April 30, 1980 14,400 73,950 134,025 (1,270) 58,269 191,024 279,374 Balance As of April 30, 1980
$ 1,209.775 _1 462,69d $
644,000
$ (29,109) s 309,e71 s 1,205,562
$ d,175 e 2,90674T6 May 1980
$ 1,374,775 $ 462,898 $
848,875 $ (29,126) $ 398,834 $ 1,218,583 $ 8,175 $ 3,064,431 June 1980 1,374,775 458,098 848,875 (22 028) 383,774 1,203,621 8,175 3,044,669 July 1980 1,374,775 457,048 848,875 (20,930) 400,396 1,220,341 8,175 3,060,339 August 1980 1,374,775 457,048 853,890 (28,871) 417,599 1,242,618 8, 175 3,082,616 Septentar 1980 1,354,775 457,048 853,890 (28,773) 411,098 1,236,215 8, 175 3,056,213 october 1980 1,354,775 457,048 853,890 (28,676) 421,332 1,246,546 8, 175 3,066,544 November 1980 1,354,775 455,048 946,685 (29,814) 430,993 1,347,864 8,175 3,165,862 December 1980 1,424,775 455,048 946,685 (29 715) 411,391 1,328,361 8, 175 3,216,359 January 1981 1,424,775 455,o48 946,685 (29,616) 430,875 1,347,944 8, 175 3.235,942 Fe brua ry 1981 1,424,775 455,048 951,700 (29,558) 447,644 1,369,786 8, 175 3,257,784 March 1981 1,424,775 455,048 951,700 (29,461) 433,794 1,356,033 8,175 3,244,031 Eleven Months Total 15,262,525 5,024,426 9, d51,750 (321,560) 4,5o7,730 14,117,912 69,925 34,494,790 April 1981 1,424,775 455,048 951,700 (29,362) 446,618 1,370,956 8,175 3.258,o54 April 1980 1.289,775 462,898 844,880 (29,189) 389.871 1,205,562 8,175 2,966,410 Total April 1980 and 1981 2,714.550 917,111 1,796,500 (50,551) 630,469 2,570,510 16,350 6,225,364 April 1980 and 1981 Average 1,357,275 458,973 898,290 (29,276) 419,245 1,288,259 8,175 3,112,682 Twelve Months Total
$1o,619,000 $5,483,401 $30,750,ouo g(350,644) $5,006,975 $15,406,171 $98,100 $37,60',472 Annual Avverage 1/12
$ 1,384,983 $ 456,950 $
895,837 $ (29,237) $ 417,248 $ 1,283,848 $ 8,175 $ 3,133,956 Patios 44.19%
1h.58%
40 97%
0.2C%
100.00%
Cost Factors 8.16%
8.565 13.7 %
90%
Return Components 3.61%
- 1. 25 %
5.61%
0.02%
10.49%
O momm O
Ob Er 5 B h 8. 0 N
~ S; N
9*,
o
'8 8 ro.
Un 55R5 N
.~
,8 4
Exhibit No. 15 l
Schedule 1 of 2 1
P.S.C. Case No.
Witness:
Forrer
~
LONG ISLAND LIGHTING COMPANY FUND REQUIREMENTS AND FINANCING
$(000)
Without Rate Increase 12 Mos. Ended 1979 1980 April 30, 1981 Funds Required Construction Expenditures
$370,170
$350,793-
$318,358 Nine Mile' Point #2 30,568 30,700 32,400 Nuclear Fuel 17,988 20,004 20,560 Bokum Advances 21,000 0
0 Allowance for Funds (79,931)
(101,356)
(106,750)
Preferred Sinking Fund 1,070 7,850 7,850 1
1st Mortgage Bond Redemption 0
20,000 20,000 Total Funds Required
$360,865
$327,991
$292,418 Internal Cash Net Income
$171,525
$198,794
$196,697 Preferred Dividend Payment (32,433)
(37,739)
(37,512)
Common - Dividend Payment (89,155)
(109,906)
(118,458) h Depreciation 54,106 57,175 58,333 Deferred Taxes (73)
(5,852)
(5,901)
Other - Working Capital (67,268) 2,129 2,726 Allowance for Funds (79,931)
(101,356)
(106,750)
Total Internal Cash
$ (43,229)
$ 3,245
$(10,865)
Funds Provided - Financing Bonds
$100,000
$155,000
$155,000 Notes 10,569 2,700 2,700 Trust Proceeds 69,556 50,704 52,960 Preferred 75,000 0
0 Common - Stock 120,000 88,800 88,800
- Employee & ADRP 17,888 18,020 18,020 Short Term 11,081 9,522 (14,197)
Total Funds Provided - Financing
$404,094
$324,746
$303,283 Total Funds Provided
$360,865
$327,991
$292,418
~
90027059 s
I
--,e m
9y,,. -. -
Exhibit No. 15 Schedule 2 of 2 P.S.C. Case No, f,
Witness:
Forrer LONG ISLAND LIGHTING COMPANY FUND REQUIREMENTS AND FINANCING
$(000)
Assuming Rate Increase (5/1/80) 12 Mos. Ended 1980 April 30, 1981 i
Funds Reaufred.
Construction < Expenditures
$350,793
$318,358 Nine Mile Point #2 30,700 32,400 Nuclear Fuel 20,004 20,560 Bokum Advances 0
0 Allowance for Funds (101,356)
(106,750)
Preferred Sinking Fund 7,850 7,850 1st Mortgage Bond Redemption 20,000 20,000 Total Funds Required
$ 327,991
$_292,418 Internal Cash Net Income
$207,339
$214,627 Preferred Dividend Payment (37,739)
(37,512)
[_'
Common Dividend Payment (109,906)
(118,458) 1
\\,,
Depreciation 57,175 58,333 Deferred Taxes (1,009)
(2,724)
Other - Working Capital 2,275 1,956 Allowance for Funds (101,356)
(106,750)
Total Internal Cash
$ 16,779
$ 9,472 Funds Provided - Financing Bonds
$155,000.
$155,000 No tes 2,700 2,700 Trust Proceeds 50,704 52,960 Preferred 0
0 Common - Stock 88,800 88,800
- Employee & ADRP 18,020 18,020 Short Term (4,012)
(34,534)
Total Funds Provided Financing
$311,212
$282,946 Total Funds Provided
$327,991
$292,418 i
90027060
Exhibit No. 16 Schedule 1 of 2 P.S.C. Case No.
Witness: Forrer LONG ISLAND LIGHTING COMPANY BOND INDENTURE COVERAGE AND RATIO OF EARNINGS TO FIXED CHARGES (SEC COVERAGE)
$(000)
Bond Indenture Coverage Without Rate Increase 12 Mcs. Ended 1979 1980 Apr. 1981 Income Available For Coverage Electric Operating Income Before Income Tax
$166,852
$166,794
$164,358 Gas Operating Income Before Income Tax 29,192 38,194 37,756 Other Income Allowed 19,604 20,499 20,211 Total Income Available
$215,648
$225,487_
S222,325 Mortgage & C&R Bond Interest Bonds Existing @ June 30, 1979
$ 96,680
$ 96,680
$ 96,680 New $85 Million 010% May 1980 8,500 8,500
$70 Million @ 10% Dec 1980 7,000 7,000 (600)
(600)
Refund - $20 Million Series A 3%
Total Bond Interest S 96,690
$111,580
$111,580 Identure Coverage - Times Earned 2.23 2.02 1.99 I
l1 Ratio Of Earnings To Fixed Charges Income Available for Coverage Electric Operating Income Before Income Tax
$166,852
$166,794
$164,358 Cas Operating Income Before Income Tax 29,192 38,194 37,756 Allowance for Funds Used During Constr.
79,931 101,356 106,750 Other Income and Deductions 4,086 4,476 4,436 Capitalized Trust Interest 24,125 33,383 36,849 Total Income Available
$304,186
$344,263
$350,149 Fixed Charges Interest on Bonds
$ 94,772
$102,734
$107,701 Interest on Notes 6,697 8,752 8,752 Amortization DD&E - Premium Net 931 1,022 1,060 Interest on Loans 4,908 4,047 3,964 Other Interest 843 953 1,026 Capitalized Trust Interest 24,125 33,383 36,849 Total Fixed Charges
_$132,2 76 S150,891
$159,352 Coverage - Times Charges Earned 2.30 2.28 2.20 90027061 J
l
. =..
.-~
Exhibit No. 16 Schedule 2 of 2 P.S.C. Case No.
Witness:
Forrer LONG ISLAND LIGHTING COMPANY i
BOND IDENTURE COVERAGE AND RATIO Or' EARNINGS TO FIXED CHARGES (SEC COVERAGE)
S(000)
I f
i Assuming Rate Increase (5/1/80) 12 Mos. Ended Bond Indenture Coverage 1980 April 30, 1981 Income Available for Coverage Electric Operating Income Before Income Tax
$182,030
$187,438 l
Gas Operating Income Before Income Tax 38,194 37,756 j
Other Income Allowed 22,022 22,519 Total Income Available
$242,246
$247,713 Mortgage & G6R Bond Interest Bonds Existing @ June 30, 1979
$ 96,680
$ 96,680 New $85 Million 0 10% May 1980 8,500 8,500
$70 Million @ 10% Dec 1980 7,000 7,000 j'
Refund - $20 Million Series A 3%
(600)
(600)
Total Bond Interest
$111,580
$111,580 Indenture Coverage - Times Earned 2.17 2.22 O
Ratio of Earnings to Fixed Charges Income Available for Coverage Electric Operating Income Before Income Tax
$183,030
$187,438 Gas Operating Income Before Income Tax 38,194 37,756 Allowance for Funds Used During Construction 101,356 106,750 Other Income and Deductions 4,476 4,567 Capitalized Trust Interest 34,458 37,908 Total Income Available
$360,514
$374,419 Fixed Charges Interest on Bonds
$102,734
$107,701 Interest on Notes 8,752 8,752 Amortization DD&E - Prem Net.
1,022 1,060 Interest on Loans 3,750 3,248 Other Interest 953 1,026 Capitalized Trust Interest 34,458 37,908 Total Fixed Charges
$151,669
$159,695
- 4 --
Coverage - Times Charges Earned 2.38 2.34 90027062 a
Exhibit No. 17 P.S.C. Case No.
Witness:
Forrer LONG ISLAND LIGHTING COMPANf INTERNAL CASH AS A PERCENT OF CAPITAL EXPENDITURES AND DIVIDENDS PAID AS A PERCENT OF CASH INCOME
$(000)
Without Rate Increase 1979 1980 12 Mos. Ended l
Internal Cash as a Percent of Capital Expenditures April 30, 1981 Funds Required
$360,865
$327,991
$292,418 Sinking Fund and Redemption (1,070)
(27,850)
(27,850)
Total Capital Expenditures
$359,795
$300,141
$264,568 Internal Cash
$ (43,229)
$ 3,245
$(10,865)
Percent (12.0) 1.1 (4.1)
Dividends Paid as a Percent of Cash Income Net Income
$171,525
$198,794
$196,697 Depreciation 54,106 57,175 58,333 l
Deferred Taxes (73)
(5,852)
(5,901) j Allowance for Funds (79,931)
(101,356)
(106,750)
Total Cash Income
$145,627
_S148,761
$142,379 Dividends Paid
$121,588
$147,645
$155,970 Percent 83.5 99.2 109.5 Internal Cash as a Percent of Capital Expenditures Assuming Rate Increase (5/1/80)
Funds Required
$327,991
$292,418 Sinking Fund and Redemption (27,850)
(27,850)
Total Capital Expenditures
$ 300,141
$264,568 Internal Cash
$ 16,779
$ 9,472 Percent 5.6 3.6 Dividends Paid as a Percent of Cash Income Net Income
$207,339
$214,627 Deprecia tion 57,175 58,333 Deferred Taxes (1,009)
(2,724)
Allowance for Funds (101,356)
(106.750)
Total Cash Income
$162,149 S163,486 l
Dividends Paid
$147,645
$155,970 Percent 91.1 95.4 900270()?>
Note: All Data On This Exhibit Extracted From Exhibit 15.
)
. :l
.. ~. ~
Exhibit No. 18
[
P.S.C. Case No.
l Witness: Forrer LONG ISLAND LIGHTING COMPANY ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION AS A PERCENT OF INCOME FOR COMMON STOCK
$(000)
Without Rate Increase 12 Mos. Ended 1979 1980 April 30, 1981 Income for Common Income (Exhibit 16 Schedule 1 of 2)
$304,186
$ 344,203
$350,149 Fixed Charges (Exhibit 16 Schedule 1 of 2)
(132,276)
(150,891)
(159,352)
(386) 5,483 5,900 Federal Income Tax (33,021)
(37,663)
(37,452)
Preferred Dividends
$138,503
$161,132 S159,245 Income For Common Allowance for Funds Used During Construction
$ 79,932
$101,356
$106,750 57.7 62.9 67.0 Percent J
Assuming Rate Increase (5/1/80) 12 Mos. Ended 1980 April 30, 1981 Income for Common Income (Exhibit 16 Schedule 2 of 2
$360,514
$ 374,419 Fixed Charges (Exhibit 16 Schedule 2 of 2)
(151,669)
(159,695)
(1,505)
(97)
Federal Income Tax (37,663)
(37,452)
Preferred Dividends
$169,677
$177,175 Income For Common 1
Allowance for Funds Used During Construction
$101,356
$106,750 59.7 60.3 Percent
')
90027064
ATTACHMENT B to QUESTION 4.C j.
1 TESTIMONY 2
OF 3
ZVI BENDERLY 4
5 Q.
Will you give your name and address, please?
6 A.
My name is Zvi Benderly.
My business adcress 7
is 80 Broad Street, New York City.
i.
8 Q.
What is your occupation?
9 A.
I am an economist and Vice President employed 10 by National Economic Research Associates, Inc.
i 11 Q.
Please describe your education and employment h
i:
12 background.
[
[st-13 A.
I received a Bachelor of Science degree in Civil b
14 Engineering in 1957 from the Technion, Israel Institute i:
I 15 of Technology.
In 1958, I entered New York University 16 Graduate School of Engineering where I received, in 1959, 17 a Master of Science degree in Civil Engineering.
I have l
18 held a professional engineering license in New York state 19 since 1963 and in New Jersey since 1968.
Since 1966, o
20 I have been enrolled in New York University Graduate 21 School of Businese Administration and I received a Master 22 of Business A6 ministration degree from that institution 23 in 1967.
My major areas of concentration were Corporate 24 Finance and Quantitative Analysis.
In addition, I have 23 completed all courses and examination requirements for
)
26 a Ph.D. degree in Finance and Operations Research and 90027065 D 'O.1';Et
I 1
am currently working on my dissertation.
s_
2 From 1960 to 1968, I was employed by Alexander Potter Associates, a consulting engineering firm in New 3
4 York City.
In my capacity as a project engineer, I 5
directed engineering and economic studies of civil engi-
,)
1 6
neering projects related to public works improvements i'
7 in the United States and abroad.
These studies involved i
8 the areas of water pollution control, water resources, 9
land development and urban planning.
)
10 During the period 1968-1969, I served as an engi-11 neering economist with Public Service Electric and Gas i
12 Company in New Jersey.
In this capacity, I prepared i
I
~~
13 financial and economic analyses relating to utility 3
/
14 revenue requirements and studies dealing with profit-15 ability and economic choice as applied to public utilities.
16 During my employment at Public Se'rvice, I conducted cost-17 benefit analyses and empirical studies pertaining to 18 the measurement of the cost of capital.
19 Since joining National Economic Research Associates, 20 Inc., in 1969, I have concentrated on the financial anal-21 ysis of regulated industries.
I have prepared empirical 22 studies concerned with estimating the cost of capital 23 and the fair rate of return for regulated enterprises.
24 These studies included collection, statistical analysis 25 and interpretation of financial data and the construction haveparticipatedin3recrigg' 26 of econometric models.
I 90 2
60 n'e rin' I:
e
. 1 l
)
1 direct and rebuttal testimonies pertaining to the fair 2
rate of return to be allowed to regulated companies.
3 I am a member of the American Finance Association, 4
the Western Finance Association and the Operations Re-5 search Society of America.
6 Q.
Have you ever testified before a regulatory agency 7
in the past?
8 A.
Yes.
I have presented testimony before the Federal 9
Energy Regulatory Commission, the Federal Maritime Com-10 mission, and the regulatory agencies in the following 11 states:
Arkansas, Connecticut, Massachusetts, Michigan, 12 Minnesota, Nevada, New Hampshire, New Mexico, New York,
(%-
13 Rhode Island, Vermont, and Virginia.
This testimony 14 was presented on behalf of the following companies:
15 Boston Edison Company, Central Vermont Public Service 16 Company, Consolidated Edison Company, Consumers Power 17 Company, Long Island Lighting Company, subsidiaries of 18 Middle South Utilities, Minnesota Power & Light Company, 19 subsidiaries of New England Electric System, Niagara 20 Mohawk Power Corporation, subsidiaries of Northeast 21 Utilities, Northern States Power-Minn., Pacific Gas and 22 Electric Company, Public Service Company of New Hampshire, 23 Public Service Company of New Mexico, Sierra Pacific 24 Power Company, and Virginia Electric and Power Company.
25 Q.
What is the purpose of your testimony in the pre-26 sent proceeding?
90027067
~
nena:
1 A.
The purpose of my testimony in this proceeding is 2
to examine the cost of common equity capital for Long 3
Island Lighting Company (hereinafter referred to as 4
LILCO).
5 Q.
Have you prepared an exhibit in conjunction with 6
your testimony?
7 A.
Yes.
In support of my testimony, I have prepared 8
Exhibit 56, consisting of 2 Schedules and a Technical 9
Appendix.
10 Q.
Was this exhibit prepared by you or under your 11 supervision?
12 0.
Yes, it was.
13 Q.
Please define the term "the cost of equity capital."
~
14 A.
The cost of equity capital, in my view, is a market-15 oriented concept and, therefore, should be determined 16 wi. thin the context of the marketplace.
It is the minimum 17 current rate of return required by investors on their 18 investment in a firm's common shares for~them to be will-19 ing to buy or continue to hold those shares.
Based on 20 this minimum rate, investors determine the price they 21 are willing to pay for the firm's common shares and there-22 by they establish the terms at which a firm can acquire 23 new equity capital from the public.
This minimum rate 24 is, generally, referred to be economists as the firm's 25 "barebones" cost of equity capital, market capitalization 26 rate, or investor's discount rate.
J 90027068 L
n ecr.a'
i i
1 Since investors are the sole suppliers of equity i
2 capital funds to the firm, the firm must pay the going 3
rate for these funds in the marketplace in order to induce 4
investors to buy or to continue to hold the firm's shares.
l 5
Thus, the firm must hold out to investors the prospect 6
of ecrning at least the minimum return which they (the 7
investors) require.
This minimal return is the barebones 8
cost to the firm of obtaining equity capital.
9 The price which investors are willing to pay for 10 a firm's common stock depends upon the present value 11 of expected future earnings from an investment in the 12 stock.
The present value is determined by applying the 13 appropriate discount rate to investors' expected future J
14 returns--returns which are comprised of dividends and 15 proceeds from the sale price of the common stock.
As 16 is indicated in a subsequent part of the testimony, the i
17 discounted cash flow (DCF) method for estimating the 18 "barebones" cost of equity is predicted on this theoret-19 ical proposition.
The appropriate discount rate is the 20 same as the rate of return investors require on the price 21 they pay for the common stock.
Therefore, the terms 22 investors' discount rate, market-capitalization rate 23 of return, and "barebones" cost of equity capital are 24 all synonymous.
25 It is important to note here that the investors' 26 discount rate--the market-required rate of return--or, i
l 90027069 nie<ria'
,i
1 alternatively, the barebones cost of eqcity, is deter-s, 2
mined in the market by the relative riskiness of the 3
firm's common stock as perceived by investors.
The rate 4
of return investors require on their investment in a 5
particular common stock takes into account the return l
6 available from investments in other common stocks, bonds l
7 and other investment media, weighing these returns against 8
the relative risks involved.
In other words, a market-9 required rate of return for a particular firm is the same 10 as the returns investors require on their investment in 11 the common stock of other firms or enterprises of similar i
I 12 perceived risks.
13 The barebones cost of equity capital is alterna-
.J 14 tively defined as the minimum rate of return on equity 15 capital investment required by a firm to bring its market 16 price into equality with its book value.
If investors 17 expect that a firm will fail to earn a return on its 18 equity capital at least equal to its barebones cost of 19 equity, the market price of the firm's common stock will 20 decline to a level below its book value, thus effecting 21 the process of dilution whenever the firm has to issue 22 new common stock.
A mathematical demonstration of this 23 point is shown on the Technical Appendix in my exhibit.
24 The cost of equity ccpital (as distinguished from 25 the barebones cost of equity) is that minimum rate of 25 return which the firm must earn on its equity. investment 90027070 acx.a
. i 1
if it is to attract equity capital withcut diluting the 2
equity of existing shareholders.
It is equal to the 3
investors' discount rate or the barebones cost of equity 1
4 capital adjusted for the costs of issuance and market 5
pressure effects which are incurred when new common stock i
6 is issued.
7 The cost of equity capital reflects the capital 8
attraction rate.
If the capital attraction rate is 9
actually earned, the financial integrity of an enterprise 10 is preserved.
An allowed rate of return on common equity 11 which is, at least, equal to the cost of equity capital 12 affords the f.irm an opportunity to be able to issue new n
13 equity capital without diluting the equity investment (v;
14 of existing stockholders.
15 In summary, since it is my view that the cost 16 of equity capital is a market-oriented concept, my ap-17 proach to determining the cost of equity is based on 18 an assessment of current investors' requirements as re-19 flected in their behavior in the marketplace.
Such deter-
\\
20 mination embodies the evaluation of investors' expected 21 return and their perception of the risks attendant with 22 their investment.
23 0
Are you aware that, in this proceeding, the Company 24 is filing for rates based on a return on common equity 25 capital of 13.7 percent?
26 A.
Yes, I am.
It is my understanding that the Company, 90027071 ner.a
i ;
I I
1 in its effort to mitigate controversy surrounding this l
2 proceeding, is asking for'the same rate of return on com-3 mon equity capital which it was allowed by this Commission l
4 in its last rate case.
In that last case, the Commission 5
concluded that 13.7 percent is a fair return on LILCO's i
6 common equity (see Opinion 79-14, page 44).
According j
7 to the studies delineated in my present testimony, a return 8
on common equity capital of 13.7 percent is below the cur-9 rent barebones cost of equity for LILCO.
Moreover, it is 10 significantly below the rate of return required by LILCO 11 to attract equity capital without diluting the equity of i
12 existing shareholders.
13 Q.
What approach are you using in your present testi-
~
14 mony as to the cost of equity for LILCO?
15 A.
My approach as to LILCO's cost of equity capital 16 is based on the discounted cash flow (DCF) analysis.
I 17 should point out that in rate-of-return testimonies which 18 I present in other jurisdictions, I rely principally on 19 the price-book approach.
I have testified before this 20 Commission, in a number of cases, as to the cost of equity 21 capital, relying on the price-book approach.
The price-22 book approach attempts to identify the risk and other 23 f actors besides expected rates of return on equity which 24 affect the price-book ratios of electric utilities.
The 25 Commission, however, has found that this particular ap-
~~
)
26 Proach requires "further refinement" before it can be s
(
90027072 n/Ol' a'
i 9_
w 1
reliably used for estimating the cost of equity capital.
2 It is for this reason, therefore, that my testim 6ny in 3
this proceeding does not rely on the price-book approach.
4 However, it is_important to note here that the DCF method 5
for estimating the cost of equity capital and the price-6 book approach are based on the same theoretical principles.
7 Q.
Before proceeding with the presentation of your DCF 8
analysis of the cost of equity for LILCO, please describe 9
in general terms the DCF method.
10 A.
According to the DCF theory, and as demonstrated 11 on the Technical Appendix in my exhibit, the value which-investor will put on a share of stock is given by 12 an
~,
13 the following simplified formula:
14 D
~9 15 16 In this formula, P is the price of the stock.
It depends 17 on D, which is the expected dividend per share over the 18 coming year.
It also depends on k, a discount rate ap-19 plied by the investor to all future dividends; this dis-20 count rate is the rate of return the investor requires 21 on this stock in light of the cost of money and the rela-22-tive riskiness of the stock, and this discount rate k 1
23 is known as the barebones cost of equity capital.
P 24 also depends on g, which is the average long-term growth 25 rate in dividends which the investor expects.
26 What this formula tells us is that if the investor l
90027073 W CT;3' 1
l
l -
expects dividends of D per share in the first year, and 1
2 if he expects that dividends will grow at an annual rate 3
of g over the indefinite future, then the discounted 4
present worth (using k as the discount rate) of the entire 5
expected future flow of dividends will be P, the price 6
the investor is willing to pay for the stock, j
i 7
We can solve the above formula for k, the
{
8 barebones cost of equity, and we get:
9 D
k=p+g 10 11 Thus, in order to know k at any given point in time, 12 we need information about D, P and g at the same point 13 in time.
Information about P, the price of the stock, 14 is readily available for listed securities.
Information i.
15 about D, the dividend expected by investors over the i
l 16 coming year, can usually be estimated with 3 fair degree 17 of accuracy.
However, there is a problem in estimating 18 g, for g is the long-term growth rate in future dividends 19 which investors expect, on the basis of which they were 20 willing to pay the price P for the stock.
It should 21 be noted thet in estimating g, we are not forecasting 22 the future.
Rather, we are attempting to ascertain what 23 investors are forecasting.
This objective is fairly 24 difficult to obtain even in relatively normal times.
25 In past periods, prior to 'che emergence of the energy 26 crisis, it was possible to argue that investcrs were
(')
90027074 n!O:Via'
\\
1 probably forecacting a continuation of past trends.
I 2
Even so, there Ers often considerable disagreement among j
f 3
analysts as ta precisely what growth rate investors were 4
actually expecting; these differences often meant spreads j
i 5
of several percentage points among alternative estimates 1
6 of the cost of equity.
7 In present circumstances, the difficulties in 8
objectively estimating the growth rate which investors 9
are now forecasting are even greater due to the unsettled l
t' 10 state of money markets and utility finances over the 1
11 past several years.
It is possible, however, to make 12 certain reasonable assumptions about investor expecta-I 13 tions and, thus, arrive at an estimate of the growth i
14 factor to be included in the DCF method for estimating 15 the investors' discount rate.
16 Q.
Please indicate the approach you have taken in this 17 proceeding in implementing the DCF approach as to the 18 barebones cost of equity capital for LILCO.
19 A.
As indicated earlier, to examine the barebones cost 20 of equity according to the DCF method, it is necessary, 21 first, to measure the recent level of prices; second, to 22 estimate the reasonably expected dividends per share in 23 the next 12 months; and, third, to add an estimate of the 24 growth which investors are currently expecting.
25 Q.
How did you determine the apprcpriate dividend-26 price ratio for LILCO to be used in the DCF model?
90027075 nieT:a'
. l i
1 A.
It is generally agreed that in deriving the 2
dividend-price ratio component of the DCF formulation, 3
one should not analyze spot market data only, but rather 4
the yield component should be calculated based on recent 5
data, over a representative period of time.
6 During the first half of 1979, the price of LILCO 7
common stock fluctuated between $18.25 and $15.13.
The 8
average of the monthly high-low prices of LILCO common 9
stock in the first half of 1979 was about $17.
This aver-10 age price of LILCo's common stock during the first half 11 ef 1979 reflects the level of pricts at which LILCO's com-12 mon stock traded before the Three Mile Island incident,
^'
13 as well as the utility stock market reaction to the acci-l i
- w. -
14 dent and its recovery which has since taken place.
I 15 should also note that most recently the price of LILCO's f;
l 16 common stock has been about $17.5.
I.ccording to the DCF 17 theory as shown on the Technical Appendix in my exhibit, 18 the dividend-yield component of the DCF model is derived I'
19 on the basis of the indicated dividend rate over the coming 20 year, rather than on the past 12 months actual dividend 21 rate.
The indicated dividend rate for LILCO over the com-22 ing 12 months is $1.76.
The coming 12 months period is 23 taken starting at the second guarter of 1979.
Thus, the 24 dividend-price ratio for LILCO, based on the indicated 25 dividend for the 12 months period indicated.tbeve, is a 26 little over 10 percent even on the basis of a price of 90027076 rrera l
-. s 1
$17.5.
In my view, therefore, the proper level of the 2
dividend yield to be used in the DCF model in determining 3
the barebones cost of equity for LILCO is at least 10 4
percent.
5 Q.
Please address yourself to your estimation of in-6 vestors' expectations of future growth for LILCO.
7 A.
The growth component of the DCF model reflects 8
investors' expectations as to future long-term growth 9
in dividends per share.
For electric utilities having 10 a relatively stable payout ratio, growth in dividends 11 per share will, on. average, be the same as the growth 12 in earnings per chare.
Since earningn of electric utili-('
13 ties are regulated, future growth in earnings per share l
_/
14 will be derived from future growth in book value per l
i:
15 share.
An implicit assumption here is that investors 16 do not expect the rate of return earned by the regulated 17 company to increase continually into the indefinite future.
18 Growth in the book value per share and, consequently, 19 in dividends per share can arise from two basic sources:
'20 the retention of earnings and the sale of new common 21 stock at net procceds above book equity per share.
22 As I have indicated earlier, it is very difficult j
23 to objectively estimate the future growth rate investors 24 expset the company to experience.
A plausible assumption, 25 in toisy's circurstances with respect to LILCO, as to
{
2C the estimate of investors' expectations of future growth 90027077 l
n/e T,a' i
l
' 1 is that investors anticipate that growth will occur 2
through retained earnings.
3 It is a mistake to make a DCF calculation in LILCO's 4
case on the basis of a projection into the future-of past 5
net increases in book value for several reasons.
The first 6
of these is that growth from retained earnings in a partic-7 ular year can be distorted if the company engages in mas-1,
8 sive sales of new common stock at not proceeds either above i
9 or below book value per share.
However, focusing for the 10 moment on past sales of stock at less than book value, i
11 it is implausible to assume that investors expect LILCO 12 to incur significant dilution into.the indefinite future
. ('~
13 when issuing new common equity capital.
In order to assume j :
\\'
14 that investors expect LILCO to incur dilution in the future I
15 on a continuous basis when issuing new equity capital, 16 one must also assume that investors expect regulation to 17 be unable or unwilling to take measures to prevent repeated 18 economic confiscation of LILCO's stockholders' equity, 19 when the Company seeks to raise equity capital in order 20 to meet its public utility obligations.
Former Chairman 21 Kahn has pointed out how foolhardy and counter-productive 22 it would be for a Commission to persist too long in forcing 23 a utility to sell additional shares at a discount, below 24 boch value, and we must assume that a rational investor 25 will have confidence that a rational Commission will not 26 do it.
90027078 ner.a
e t
^
1 The same point is applicable when past sales of com-s 2
mon stock have been made at a substantial premium.
Since 3
the Commission avowedly now seeks to arrive at substantial 4
parity between price and book, it would be irrational for I
5 the investor to project continual sales at a premium over 6
the indefinite future and, thus, to estimate growth by l
7 projecting past ir. creases in book value derived from both 8
reinvested earnings and sales of stock at a premium.
9 It seems clear that predicating a future growth esti-10 mate on a projection into the indefinite future of sales 11 of stock at either a discount or a premium is to ignore 12 the pronounced goal of the New York Commission and build 13 in a distortion, whether on the upside or the downside.
^
14 It would be irrational.
I will assume, therefcre, that 15 investors, in formulating their expectations of future 16 growth for LILCO, will anticipate that growth will occur 17 through retained earnings.
18 Q.
Have recent past sales of LILCO stock resulted in 19 dilution?
20 A.
Yes.
Since 1974, LILCO experienced massive sales 21 of now common stock below book value.
These sales of LILCO's 22 common stock have resulted in substantial dilution.
With n
23 the exception of 1977, LILCO has issued each year new equity I
24 at net proceeds per share substantially below book value 25 since 1974.
For exa.Tple, when LILCO issued 6.4 million l[
26 shares on October 18, 1978, its book value per share was 4
90027079 L
nona
_ _ _ i 1
$19.58, while its net proceeds from the sale were about j
s-2
$16.81.
Considerably larger dilution was incurred by LILCO 3
as a result of the sales of new common equity in 1974 and 4
in 1975.
{
l 5
The substantial dilution suffered by LILCO in 1974 I
6 and in 1975 more than wiped out the growth from retained 1
7' earnings, thus, giving rise to a decline in total book 8
value per share.
Even in 1977, when LILCO was able to 9
sell new common equity capital without incurring dilution, i
10 not proceeds per share were only slightly above book value f:
11 per share.
(net proceeds per share were S18.47, while I
12 book value per share was S18.34.)
Each of the sales of 13 new common equity yielding net proceeds below book value 14 constituted economic confiscation of LILCO's existing 15 stockholders' equity--a phenomenon which investors will I.
16 not expect to repeat itself, on a continuous basis, into
-[
17 the indefinite future.
18 Q.
You said that there are several reasons why rational l:
19 investors would not calculate LILCO's long-term future 20 growth' rate in dividends per share based on historic net l;
21 increases in book value per share.
The first reason you 22 gave is that a reasonable investor would not assume that 23 the commission would, into the distant future, require 24 LILCO to market its shares on a confiscatory basis.
What 25 are the other reascns?
26 A.
The second reason is that LILCO's bacic method of i
90027080 rue r a I
. j 1
marketing its common shares--rights offerings--involves i
i 2
a distribution of value to its stockholders which is con-l 3
cealed by such an application of the DCF method.
The 4
easiest way to see this is to put yourself in the position 5
of a stockholder who, at intervals of about one year, is 6
given rights to buy additional shares at a discount below 7
market.
Those rights, under the rules of the NYSE, are 8
listed and immediately saleable and, indeed, a very large 9
volume of them are sold.
The investors pockets the pro-10 ceeds.
Of course, in the odd case, the market for the i
11 stock can go down so far that the rights een become worth-12 less, but this very rarely happens.
i 1
[~_.
13 It is easy to see, in the case of the stockholder i
\\ms l
14 who sells the rights that there is that extra value of 15 rights which is being distributed; in the case of those 16 stockhclders who exercise the rights there is exactly the 17 same value distributed to them but they realize it in the 18 form of additional shares of stock.
19 There are still other respects in which LILCO's.
20 method of marketing shares involves distribution of value 21 which does not show up in the traditional DCF calculations.
22 One such distribution occurs under LILCO's dividend rein-23 vestment plan, under which a shareholder is able to pur-24 chase additional shares at market with no brokerage com-25 mission.
This is no small matter--in recent years, 500,000 26 and more shares have been distributed in that way annually, 90027081' Ile r 3'
- -.~
i 1 even though not all investors take advantage of it.
2 Another distribution takes place under the Employee l
1 3
Stock Purchase Plan, where shares are sold at a discount 4
of at least 10 percent below market to employees.
The 5
amounts per employee are limited, but the Company has been 11 i
6 selling between 80,000-100,000 shares per annum for several i
7 years.
The value of the discount goes to the employees 8
in the first instance as a kind of fringe benefit.
In l
9 other words, this dilution of the book value of the stock 10 is reflected in any calculation of net growth in book value, 11 but is really an employee benefit and should not be con-12 sidered a negative element with respect to expected growth.
Please continue with your estimation of investors' 13 Q.
14 expectations of future growth for LILCO.
15 A.
For the reasons I have given, a rational investor 16 would expect that future growth will be due to growth from 17 retained earnings.
The growth from retained earnings will 18 depend on the rate of return which investors expect the 19 company to earn on its equity capital.
It is, of course, 20 very difficult to ascertain directly what rate of return 21 on equity investors expect the company will be earning 22 over time.
23 LILCO carned over 13.2 percent return on average 24 book equity in 1975, and over 14 percent return in both 25 1975 and in 1977.
In 1978, earnings per share declined 26 to a level of S2.44 indicating a return on average book
)
l 90027082 n/e r.n'
= - _.
s 1
value per share of about 12.9 percent.
The decline in 2
earnings per share has continued during 1979 to a level 3
of $2.36 for the 12 months ended June.
This. level of 4
earnings reflects a return on average book value'of about 5
12.2 percent.
6 However, from the point of view of projected future 7
level of earnings, a reasonable investor in LILCO would 8
pay great attention to the 13.7 percent return on common i
i 9
equity allowed by this Commission in its most recent deci-
)
{
10 sion (April 27, 1979).
In recent months, value Line and 11 other financial analysts have been projecting 1979 earn-l 12 ings per share at the $2.60 to 52.65 level--a return on 13 common equity of about 13.3 percent.
l' 14 It would appear, therefore, that an acsumption that j;
i 15 investors expect LILCO to earn, on average, a return of 1
I 16 13 percent on its book equity is ultraconservative and 17 underestimates investors' expectations.
With an indicated 18 dividend per share of $1.76 and earnings of $2.51 (which 19 is 13 percent of the average book value of $19.34 in the 20 12 months ended June 1979), the retained earnings would 21 be S0.75, representing an expected growth rate from 22 retained earnings of about 3.9 percent.
23 As shown on Schedule 1 of my exhibit, such an esti-24 mate of expected foture growth ir quite conservative in 25 light of the actual growth in book value due to retained 26 earnings experienced by the Company.
In the period 90027083 Die;Y. a'
1 1965-1972, growth from retained earningr had been at the 2
rate of about 4.5 percent, except in the recession of 1970, 3
when LILCO's earnings per share experienced a decline.
4 In 1973 and 1974, when another decline in earnings had 5
been experienced, the growth from retained earnings was 6
no more than about 3.2 percent.
However, it is unreason-7 able to assume that investors are forming their expecta-8 tions as to future growth by confining themselves to the 9
dismal earnings picture experienced by LILCO and the elec-10 tric utility industry as a whole during the 1973-1974 11 period.
In 1975, the growth in LILCO's book value per 12 share due to retained earnings was about 4.7 percent, rising to a rate of growth of about 5.6 percent in 1976 i
13 14 and 5.4 percent in 1977.
In 1978, due to the depressed f
15 level of earnings, growth from retained earnings declined 16 to about 4 percent.
A 3.9 percent estimate of investors' 17 expected future growth in dividends per share for LILCO 18 is, likewise, on the conservative side when compared with 19
'the 5 percent growth in dividends p'er share currently pro-20 jected by value Line over the 1982-1984 period.
21 0
Are there any other factors which should be considered 22 in analyzing LILCO's cost of equity capital?
23 A.
It is generally agreed that it is desirable to have 24 the market price of the utility's stock at least moderately 25 above the book value so as to make it possible for the 26 utility to sell new shares without diluting the equity 90027084 n/O.T,n
\\
I 1
of its existing stockholders.
The issuance of new stock T
j 2
involves certain expenses, and often results in a temporary 3
downward market pressure on the price of the stock.
As 4
shown on Schedula 2 of my exhibit, costs of issuance and 5
market pressure for the last four issues of new common 6
stock by LILCO were, on average, about 7 percent.
7 There is a lot of dispute with respect to market 8
pressure and there is an especial controversy whether con-9 clusions drawn from companies with direct offerings are 10 applicable in cases of rights offerings.
But, in this 11 instance, it is not necessary to enter into that contro-12 versy because it is so clear from the data which I already 13 have introduced that 13.7 percent return is significantly
/
14 below the Company's cost of equity capital.
That conclu-15 sion is evident when we consider that the proper dividend 16 yield for LILCO i n a DCF formulation is at least 10 per-17 cent and that an ultraconservative estimate of future long-18 term growth is, at least, 3.9 percent.
19 Q.
Does this complete your testimony?
20-A.
Yes, it does.
21 22 23 24 25 26 90027085 TIC T,6 l:
9 m7-,
_-...r_
e
--.-,,.---,,,.-y.
I I
t Exhibit No. 56 j
P.S.C.
Case No.
Witness:
Benderly i
i i
i l
{
1 1
I LONG ISLAND LIGHTING COMPANY SCHEDULE 3 1 At1D 2 I
AND A TECHNICAL APPENDIX w'
I:
,\\
r u.
8 l
es,
!i 90027086 n'elr. a, u
w_,_
~
Schedule 1
(.
(A.
LONG ISLAND LIGHTING COMPANY 1965 - 1978 Growth from Dividends Average Retained Retained j
Earnings Paid Book Value Earnings Earnings t
Year per Share per Share oer Share __
per Share per Share
( D o ll a r s ) ------------------
(Percent)
(1)-(2)
(4) + (3)
(1)
(2)
(3)
(4)
(5) 1965
$1.56 S0.98
$12.62
$0.58 4.60%
1966
'l.67 1.06 13.18 0.61 4.63 1967 1.80 1.14 13.80 0.66 4.78 1968 1.86 1.22 14.42 0.64 4.44 1969 1.94 1.28 15.07 0.66 4.30 1970 1.91 1.33 15.74 0.58 3.68 1971 2.03 1.37 16.42 0.71 4.32 1972 2.18 1.41 17.24 0.77 4.47 1973 2.02 1.45 17.99 0.57 3.17.
1974 2.03 1.46 18.04 0.57 3.16 1975 2.31 1.49 17.50 0.82 4.69 1976 2.52 1.54 17.56 0.9E 5.58 1977 2.59 1.51 18.32 0.98 5.35 1978 2.44 1.68 18.91 0.76 4.02 1
i q
l Source:
Long I.: land Lighting Ccmpany, annual reports, variou:
(
l issues.
l l
t 90027087 I
D. C. Ni
..~.- :
L..
~ ~ ~ ~.
~
- 2 2.2 ;:- :z
.. = -...
. :.=... :.a.
Schedule 2
'LONG ISLAND LIGHTING COMPANY subscription offerings Total Flotation Costs Date of Number Flotation Market and Prospectus of Ghares Costs Pressure Market Pressure (3) + (4)
(1)
(2)
(3)
(4)
(5) 8/27/75 3,988,040 4.33%
3.03%
7.36%
7/28/76 4,633,104 2.26 6.95 9.21 7/20/77 5,443,72a 1.55 4.31 5.86 10/18/78 6,402,515 2.00 2.03 4.03 C..
f i
i 1-m l
90027088 l
1 n> Oil'a
__ =
Technical Aeoendix Page 1 of 4
)
x;,/
Mathematical Derivation of the Traditional Discounted Cash Flow (DCF) Model j,
and a Demonstration That When the Expected Rate of Return on Common Equity is Equal to the Investors' Discount Rate the Market Price Will Equal Book Value Per Share 1.'
i l!I Definitions:
Po = Current price of stock, or present value of expected future dividends.
Bo.= Current book value per share.
1 k
= Investors' discount rate or barebones cost of equity capital.
Do = Most recent cash dividend.
g
= Investors' expected future constant growth rate in dividends.
>\\
r
= Expected rate of return on common equity
- )
capital.
B
= Earnings per share, b
= Retention ratio.
t RB = Retained earnings.
t
= Time index.
(t = 11 2, J,...=)
4
.The following formulation assumes that investors expect dividends to increase at a constant rate ; into the 1
l indefinite future.
The current stock price is the present worth of all expected future dividends:
f 0
0 0
1 2
3 (1)
P* =
+
+
+
(1+k)
(1+k)
(1 +k) '
c 1
90027089 nie. /r.n_
~
Technical Appendix Page 2 of 4 OI,)
Assuming a constant expected growth rate in divi-dends, we can write:
l 0,(1+g)
(2) 9
=
3 D
= D (1+g)*
\\
2 a
}
D, = D,(1+g) etc.
Equaticn (1) becomes:
Do(1+g)
D o(1+g)*
D a(1+g)'
l (3)
P,=
+
+
+
i (1+k)
(1+k)*
(1+k)'
l i
i i
or D o (1+g)
- f' ,')
i (4)
P' =
E
'( ^,i t=1 (1+k)*
It can be shown that Equation (4) can be simplified as follows:
D 3 (5)
P,
=
k-g or D1 (6) k = -- + g 90027090 Equation (6) is, of course, the well-known and j
i most often used CCF formulation for estimating the barebones cost of equity capital.
Let un now assume that investers expect the firm to earn a constant rate of return en equity capital r and n/e/r/a
. y;,
'~
s
j Technical Accendix Page 3 of 4 s
(,)
that they expect the firm to retain a constant fraction b of its earnings as well.
The expected earnings per share in time t are equal to the product of the expected rate of return on equity capital r and the beginning-of-the-period book value per share:
(7)
E
= rB
,y The dividends per share in time t are expected to be:
(8)
D
= (1-b)E
= (1-b)rB _,
g
.(' 2:N The retained earnings during time t are, thus, equal to:
i (9)
RE
=Eg - D, = v3,_3 - (1-b)rB,_y g
RS
= br3 t
t-1 Assuming that investors expect growth to occur through retained earnings, we conclude that the investors' expected future growth rate g can be expressed as:
22 90027091 (10) g=
= be B _3 g
o l}
n/e/r/a
~
~
~~T
~~^~.:--
" " ~
-. -. -. ~: ::- :~ ~ ::: ~
-- TL..L: -. -
Technical Appendix Page 4 of 4 I f_(7/
Substituting Equations (8) and (10) into Equation (5), and letting t=1, we get:
I 1
(1-b)TB n (11)
P,=
k - br or P
(12)
_1 = (1-b)r B,
k-br
\\
l i
If investers expect the firm to earn a' rate of return on its common equity capital which is equal to their required rate of return or discount rate, then:
3 r=k l
')
-)
Equation (12) becomes:
(13)
L = '1~b)P = (1-b) r, y B,
? - br (1-b)r
~
Equation (13) indicates that, according to the traditional DCF theory and method for estir.ating the bare-bones cost of equity capital, if investors expech a company to earn on its equity capital the same rate of return as they require in the marketplace, then market price and book value will tend to be in equality.
90027092
/
s l
n/e/r/a
~. - -
Exhibit No. 56 P.S.C.
Case No.
Witness:
Benderly LONG ISLAND LIGHTING COMPANY SCHEDULES 1 A!1D 2 AND A TECHNICAL APPENDIX 90027093 n:C;1':n"
1 Schedule 1 t
I
\\
LONG ISLAND LIGHTING COMPANY s-1965 - 1978 Growth from Dividends Average Retained Retained l
Earnings Paid Book Value Earnings Earnings i
Year per Share per Share per Share _
per Share per Share
(Dollars)------------------
(Percent)
(1)-(2)
(4) + (3) l (1)
(2)
(3)
(4)
(5) l l
1965
$1.56
$0.98
$12.62
$0.58 4.60%
l l
1966 1.67 1.06 13.18 0.61 4.63 1967 1.80 1.14 13.80 0.66 4.78 1968 1.86 1.22 14.42 0.64 4.44 l
1969 1.04 1.28 15.07 0.66 4.33 i
1970 1.91 1.33 15.74 0.58 3.68 1971 2.03 1.37 16.42 0.71 4.32 1972 2.18 1.41 17.24 0.77 4.47 1973 2.02 1.45 17.99 0.57 3.17 1974 2.03 1.46 18.04 0.57 3.16 1975 2.31 1.49 17.50 0.82 4.69 1976 2.52 1.54 17.56 0.98 5.58 1977 2.59 1.51 18.32 0.98 5.35 1978 2.44 1.68 18.91 0.76 4.02
{
?;
i, Source:
Lcng Island Lighting Company, annual tr: ports, variouc 90027094 issues.
$)'O E k
Schedule 2 1
i LONG ISLAND LIGHTING COMPANY Subreription Offerings Total l
Flotation Costs Date of Number Flotation Market and Prospectus of Ghares Costs Pressurg Market Pressure (3) + (4)
(1)
(2)
(3)
(4)
(5) 8/27/75 3,928,040 4.333 3.03%
7.36%
7/28/76 4,633,104 2.26 6.95 9.21 7/20/77 5,443,729 1.55 4.31 5.86 10/18/78 6,402,515 2.00 2.03 4.03 (v.
I t
90027095 1
n,em.a
Technical Apoendix
.l Page 1 of 4 ll 1
Mathematical Derivation of the Traditional Discounted Cash Flow (DCF) Model and a Demonstration That When the Expected Rate of Return on Common Equity is Equal to the Investors' Discount Rate the Market Price Will Equal Book Value Per Share Definitions:
Po = Currert price of stock, or present value of expected future dividends.
Bo.= Current bcok value per share.
k
= Investors' discount rate or barebones cost of equity capital.
De = Most recent cash dividend.
g
= Investors' expected future constant growth rate in dividends.
r
= Expected rate of return on common equity capital.
F
= Earnings per share.
b
= Retention ratio.
RB = Retained earnings.
t
= Time index.
(t = ff 2, J,...m)
The following formulation assumes that investors expect dividends to increase at a constant rate g into the indefinite future.
The current stock price is the present worth of all expected future dividends:
l l
D D
D' 90027096 (1)
P,=
-+
+
+
(1+k)
(1+k)
(1 +k) '
n/e/r'a
Technical Aependix Page 2 of 4 x
Assuming a constant expected growth rate in divi-dends, we can write:
(2)
D,=Dn(1+g)
Dn(1+g)*
D
=
2 D,=Dn (1 +g) ', etc.
Equation (1) becomes:
Do(1+g)
D o(1+g)
D o(1+g)'
(3)
P' =
+
+
+....
(1+k)
(1+k)
(1+k) or D o (1+g) b
~'
a (4)
P, u E
f t=1 (1+k)b It can be shown that Equation (4) can be simplified as follows:
D 2
(5)
P,=
k-g or D 1 (6) k = -- + g 90027097 P a Equation (6) is, of course, the well-known and most often used DCF formulation for estimating the barebones
(
cost of equity capital.
i Let us now assume that investors expect the firm to earn a constant rate of return on equity capital r and
-~
F/M"!f1
Technical Appendix l
Page 3 of 4 a
that they expect the firm to retain a constant fraction b of its earnings as well.
The expected earnings per share in time t are l
f equal to the product of the expected rate of return on equity capital r and the beginning-of-the-period book value i
per share:
(7)
E
= TB The dividends per share in time c are expected to i
be:
(1-b)E, = (2-b)r3.
(8)
D
=
t c-1 6
a The retained earnings during time t are, thus, equal to:
g g_-
g = rB _y - (1-b)TB _,
D (9)
RE
=E g
g RS
= br5 t
t-1 Assuming that investors expect growth to occur through retained earnings, we conclude that the investors' expected future growth rate g can be expressed as:
R3, (10) g=
= br 90027098 s t-2 n!e/ Tin
l Technical Appendix.
Page 4 of 4 1
~.
(
Substituting Equations (8) and (10) into Equation (5), and letting t=1, we get:
(1-b)TBo j
(11)
P
=
o k - br j
i
}
or l
P 1
(12)
_1 = Il-blP i
B, k - br If investors expect the firm to earn a rate of i
return on its common equity capital which is equal to their i
required rate of return or discount rate, then:
I l
i r=h d
l Equation (12) becomes:
(13)
{L=(1-b)r= (1 b)r = y B
r - br (1-b)v o
Equation (13) indicates that, according to the traditional DCF theory and method for estimating the bare-bones cost of equity capital, if investors expech a company to earn on its equity capital the same rate of return as they require in the marketplace, then market price and book value will tend to be in equality.
S 90027099 l
l l
t' f
e' ATTACHMENT C to QUESTION 4.C I
STATE O!' UEW YORK FUBLIC SERVICE CO O'lSSION l
i OPINION NO. 79-14 CASE 27374 - LONG ISLMD LIGHTING CO!GANY - E.lectric Rates CASE 27375 - LOMO ISLAND LIGHTING CO!.1PAtIY - Gas Kates OPINION AND ORDi'R DE'AEP41Ili1NG REVENUE REQUITEXCST l
t i.
r Issued:
April 27, 1979 90027100 1
- l i
l Ie.
1
~
i CASES 27374 and 27375
"(ABLE OF CONTENTS j
Page i
APPEARANCES BACKGROUND OF THE CASE 2
CONSTRUCTION EXPEUDITURES 5
LILCO's Exceptions 6
Updated Forecast Issue 6
Revised CVR Issue 7
New llaven/Stuyvesant 9
OPERATING P2VEMUES 10 Sales Forecasts 10 Meter Tampering 10 Uncollectibles 11 OPERATING EXPENSES 12 Overhaul Expense 14 Major Maintenance Project Expense 15 Tree Trimming Expense 16 Administrative and General Expense 17 Customer Accounts Expense 18 Personnel 18 Equipment 19 Advertising and Public Affairs Expense 20 Research and Development Expense 21 Storm Damage Roscrve and Accrual 22 Injuries and Damages Reserve and Accrual 23 Amortization of Unfunded Pension Liability 24 Wage and Inflation Index 25 j
Labor Productivity 27
8 s
CASES'27374 and 27375 Pago DEPRECIATION
! 28 Gas Depreciation 28 Production Structures 28 Steel Transmission Mains
' 29 Cathodic Protection Devices 29 Electric Street and Parkway Lighting 30 Electric Production Structures 31 Environmental Control Equipment 32 PROPERTY TAXES 33 FEDERAL INCOME TAX 35 Trust Interest Deductions 35 TRASOP Tax Credits 36 Gas Department Tax Credits 37 Earned Vacation Deduction 38 Amortization of Deferred Taxes 39 Revised Computations 39 RATE BASE 39 Doferred Tax Credits 39 Shoreham Switchyard 41 Rate Base Capitalization Adjustments 42 i
ALLO *rTED RETUPN 43 I
CONCLUSION 45 ORDER 47 i
APPENDICES DISSENTS 90027102
- /,
CASNS 27,374 and 27375 STATE OF MEW YORK PUBLIC SET.VICE COMMISSION APPEARANCES Joel Blau, Jeri Eisenberg and Sam Laniado, Staff Counsel, Heward Read, Assistant General Counsel, Nelson A.
Rockefeller Empire State Plaza, Agency Buildino No.
3, Albany, New York 12223, for the Public Service Ccamission.
l l
Edward M.
Barrett, General Ccunsel (by Calvin E.
Rafuse, Jr.,
Jor.cs J.
Stoker,III, Edward J. Walsh, Jr..,
and David K.
Kadanc, of Counsel) 250 Old i
Country Road, Mineola, New York llS01,for the Long Island Lighting Ccmpany.
l l
'Reilly, Like & Schneider, Escs. (by Irving Like, Werner G.
Zumbrunn, and Richard Hand, of Counsel) l.
1 200 West Main Street, Babylon, New Ybrk, for the
!l Counties of Nassau and Suffolk.
il Rosemary Pooler, Executive Director (by James F.
Warden, Jr.,
David Schlitsel, and John Rosenberg, of Counscl) 99 Washington Avenue, Albany, New York, ll for the New York State Consumer Protection Board.
ij l
Bruce D. Alpert, Deputy Town Attorney, Town Hall, Main Street, Hempstead, New York ll550,for the Town of Hempstead.
William J.
Schickler, Sunrise Highway at Pond Road, Oakdale, New York ll768,for Suffolk County Water Authority.
Howard L.
Blau, Esq., 380 North Broadway, Jericho, New York 11753, for the Oil Heat Institute of Long Island, Inc.
Marcia Slatkin and Van Howell, P.O.
Box CO, Shoreham, New York, ll786,for Safo GrSound Ccmmunity Er.ergy Projects.
Kenneth J. Woos, Associate General Counsel, 245 Park Avenue, New York, N.Y.
10017,for Dooz-Allen & Hamilton, Inc.
Neil Noland, Co-Chairman and Ewa Reid, Co-Chairperson, Box 1977, Sag Harbor, N.Y.,
11963,for Long Island Ratepayers Association.
90027103
,ia.
STATE OF NEW YORK PUDLIC SERVICE CO" MISSION l
i COMMISSIONERS:
l i
Charles A.
Zielinski, Chairman i
i Edward P.
Ltrkin, dissenting Carmel Carrington Marr I
Harold A.
Jerry, Jr.
Anne F.
Mead, dissenting Karen S.
Burstein, dissenting Richard S.
Bower
~
CASE 27374 - LONG ISLAND LIGHTING COMPLUY - Electric Rates CASE 27375 - LONG ISLAND LIGHTING COMPANY - Gas Rates OPINION NO. 79-14 OPINION AND ORDER DETERMINING REVENUE REQUIPriENT (Issued April 27, 1979)
BY THE COMMISSION:
On May 31, 1978 Long Island Lighting Company' filed tariff revisions designed to increase its annual electric revenues by $147.1 million (18.5%) and its annual gas revenues by $23.9 million (13.1%).
By various orders, we suspended the effective date of the proposed revisions to April 28, I'
1979 in order to examine their propriety in public hearings.
Upon consideration of an extensive record compiled during 42 i
days of evidentiary hearings, Administrative Law Judge David Schechter issued a recommended decision on February 13, 1979.
The Judge found that the company had shown a need for rate increases designed to produce $52.3 million (6.6%)
i additional annual electric revenues, and $15.7 million (8.6%) additional annual gas revenues, in order to earn a 10.13% overall return on its investment.
90027104 P
me a..
4
,4
-,m
-m-...
+.
.~u e
+a+e 4a
~~--
A C.~.S.S 27T/4 and 27375 i
e LILCO, staff, Nassau and Suffolk counties, Long Island Concumer Action and the Town of Hempstead have sub-mitted briefs objecting to a variety of the Judge's recom-mended dispositions of revenue-issues.1/
BACEGROUND OF THE CASE In previous LILCO electric rate cases, we found it necessary to depart from our usual rate case standards to determine the revenues required by this company to provide relichie service in light of its massive construction program, dominated by the Shoreham nuclear generating rtation.2/ In those cases, we found that the company was plagued by extrema cash ficw problems that threatened its ability to borrow the funds necessary to finance its con-struction pregram.
In those circumstances, we found it necessary to adopt such special measures to improve cash flow as temporary rates, inclusion of construction work in I
i progress (CWIP) in rate base, and interperiod tax allocations.
As a result of these actions, LILCO no longer faces such severe financing problems.
Its indenture coverage ratio is no longer close to the limit of 2.0 times.
In fact, because 17some parties submitting briefs violated Section 2.7 of our
~
Rules of Procedure by excessive incorporations by reference to carlier briefs, serving us with an inadequate number of copics of their briefs, and exceeding authorized page limits.
Rule 2.7 (c) (3) clearly states that briefs to the Commission i
i.
should be self contained.
Given the circumstances of this case, some waiver of the 50-page limit would have been granted.
In the future, morcover, we will expect parties burdened by the recuirements of Section 2.7 to seek waivers of the page
~
1 i
limits as provided by Section 2.7 (f) of our Rules and not attempt to circumvent the rules by incorporation by reference.
Briefs not conforming to our rules are subject to rejection.
2/See Case 27136, Long Island Lightinc Company Electric Rates,
~
18 NY PSC (Opinion Mc. 78-1, issued January 9,'1978, i
~
mimeo p. 2-5); Case 26887, Long Island Lichting Company -
Electric Rates, 16 NY PSC 4 97~(1976) ; and Case 26552, t
l Long Island Lightiqc Company - Electric Rates, 15 NY PSC 15 l
(1f/S).
LILCO's last gas rate increase came in Case 27087, Lono Island Lichtinc Cemoany - Gas Rates August 5, 1977).
~
(Order issue 0027105....
il I
CASES 27374 and 27375 interest on trust financed construction is not considered for indenture coverage purposes, but is considered for SEC coverage purposes, LILCO's indenture coverage ratio has been higher than its SEC (or book) coverage ratio.
- Moreover, LILCO has, in recent years, earned returns on equity that have approximated those we have allowed in deciding its rate cases.
Nonetheless, the company chose to present and argue its case here in a manner similar to that employed in 1
previous cases.
A major portion of its proposed electric increases would result from inclusion of an additional $400 million of construction work in progress in rate base which the company seeks to justify on the basis of alleged necessity to improve its interest coverage, and the ratios of the allowance for funds used during construction (AFC) to not income, the market price to book value of its stock and internal funde to construction expenditures.
Staff has argued that the company's target ration are overly conservative; that existing ratios can be improved by alternative strategies; and that the rate increases sought by the company are greater than what is needed to achieve even LILCO's target ratios.
A key part of staff's argument relies on the relation-ship it found between the AFC to net income ratio (which can 1
be reduced by increasing the amount of CWIP in rate base) o and the cost of equity capital to the company.
Staff believes
- )
that if we included an additional $200 million of CWIP in I
rate base, we could reduce significantly the return on d
equity that we would otherwise have to allow in this case.
Finally, various intervenors took the position that LILCO's
. financial position was now strong enough to allow us to measure LILCO's revenue requirement by application of our usual rate case standards, and without cash flow allowances.
The principal cause of LILCO's financing problems l
in recent years has been its construction of the 820. megawatt Shoreham nuclear generating station at a cost of something l
90027106.
1 i
i
C <T3 27374 ent: "737S I
i like f1.3 1:,illion.
Staf f and the Countica of tr.ssnu and Suffolk raise several issues concerning the F,coz, Allcn &
Hamilton (BP.H) report on the Shoreham project.
By order issued July 11, 1970, we directed that the BAH report be evaluated in this proceeding to determine what rato impact, if any, would result from the consultant's findings.
The DAH project manager testified and was cross-examined on the report and two LILCO witnesses testified and were cross-examined on several aspects of the Shoreham project.
The subject is not discussed in the recommended decision.
Staff and the Counties call for a Cor. mission proceeding to address the issue of whether Shoreham costs have been incurred prudently and to determine to what extent LILCO's ratepayers should be asked to support Shoreham expenditures.
For rencons that will be set forth in more detail in a subsequent order, we have decided that an investigation of the Shorcham project, along the lines suggested by staff and the Counties is necessary.
We shall, therefore, institute a proceeding shortly for that purpose.
The scope of the investigation and the issues to be con -
sidered will be delineated in the order establishing the Case.
LILCO believes it will complete construction of the Shoreham plant and that it will be ready for service as early as September, 1980.
In view of shoreham's inninent completion, and our review of LILCO's financing opportunities, we have decided not to adopt the racemmendations of the company, our staff, and the Judge that we include additional CWIP in rate base.1/ We did add CWIP to rate base in LILCO's last electric rate case, but only after ue found that there was a i
" compelling need" to do so because the integrity of electric h
service on Long Island was at stake.2/ That need no longer exists.
1/The proximity of the Shoreham completion date leads us to
~
conclude that staff has also overestimated the extent to which investors discount Arc earnings and thus'the extent to which the equity return allowanca can be reduced when. cash flow allowances are provided.
Our allowed return does not assume any additional cash flow allowances.
2/ Case 27136, Long Island Lichting, supra, mimeo.p. 4.
9002710T
.dee e
- d 4 'u v
5 1
0 tvcn.ttc.mgh we do not prcviCc additional cc.ch flo/ allowances here, we will fix rates that will allow LILCO to generate earnings cuffinicnt to attract t h.; capital needed to finance planned construction, meet its nornal operating expenses, and provide its investors with a reasonable opportunity to earn a fair return in the period during which the neuly authorized rates will be in effect as we are obligated to do.1! With this background in mind, we turn to the parties' specific exceptions to the Muainistrative Law Judge's recon 2. ended decision.
-CON S.T.R.UCTIG:: E "P.:.I.d. O. 7 '1 UR.I'S.-
The amount of LILCO's const:ncticn expenditures in 1972, 1979 and 1980 will increase the ccmpany's revenco requirement directly, to the extent the expenditures relate to plant that will go into service by the end of the rate year, and indirectly, to the extent they affect its tax liability and the coct of capital.
There are three issues on exceptions:
1.
Will LILCO's actual construction expenditures through ti.e middic of 1990 vary fro:n its rate case estimates by the same percentage as its actual expenditures varied from its budget forecasts in the period 1973 to 1977?
2.
Should a revised construction expend 1-tures forecast, excluded frcm the record by the Judge, be relied on for ratemaking purposes?
3.
Should enpenditures for pursuing the licensing of the proposed New 11aven/Stuyvesant generating f acilities be considcred for ratemaking purposes?
~1/Tnis standard is emboa"1Ed in our f.tatement of Policy on Test Periods in "ajor Rate Procec Eras, issuee I;ovemcer 23, 19/7 (mimeo p.
3)
Accorc:
Case UU32, Central Hudson Gas
& Electric, Corp.
Electric Rates, 37 NY PSC 4U1 (1977);
Cases 2'/094-5, Oranac & Kocklana. - Utilities, Inc. - Flectric and Gas Pates, 17 2iY PSC (Opinica No. 77-14, issued October 7, 1977, mimeo. p'.-3-4); Cases 27108-9, Ecchester Gas & Electric Coro. - E]ectric and Gas Rates, 1*/ SY PSC l
(Opinion No., s - 18, 1Scuca : oven.3 cr i, 19..,//, mimco. p.
5);
Cases 27 215-7, M.i nnarn ::chawk Power Corn. - Electric, Street Lichtina, and Ccm Ha ws',~.G Nr PSC ___ (Opinion 1o.
'/F~14,.
issuec June /. 0,.Li?3, nir.co, p. 3). 4n077105
cf.STT. 27374 anci 2.7375 LILCO's Exegoticns The first two issucc are raised in LILCO's exception to Judge Schechter's adoption of staff adjustments to LILCO's construction expenditure forecact.
Staff argued that LILCO's actual construction expenditures thrcugh mid-1980 can be i
expected to vary from its forecast by the same ratio that i
LILCO's budget forecasts varied from the actual expenditures in 1973-77.1/ Per this reason, staff witness Edwardu testified that the company's forecast of itc construction expenditures should be reduced by about $110 million.
This tectimony resulted in rate base and depreciation accrual adjustments by staff that ucre accepted by the Judge.2/
LILCO encepts on two grounds.
First, it argues l
that staff's reliance upon the company's own original con-struction forecast is in error because that forecast has bcon Updated.
Second, it argues that the staff's CVR's are f
too large because conditions in 1978-80 are unlikely to result in the'same construction delays the company experienced j
l' in 1973-77.
i I
Updated Ferocast Insee.
Judge Schechter refused f,
to admit LILCO's updnted construction forecast when the company declined to extend the suspension period for the 45 additional days deemed necessary to give staff and interested members of the public an opportunity to review and rebut the evidence presented.
On exceptions, the company urges us to consider the excluded evidence.
While LILCO's arguments in support of its updated estimates may have some merit, we cannot ignore the fact that staff and other interested parties have not had en opportunity to review and rebut the i
1/The measure of the difference is the ratio cf the actual
~
expenditures to the forecast. expenditures and, in this
~
case, was called the "censtruction variance ratio," or CVR.
~2/In addition, staff's rate of return witness based his testimony on this revised forecast ef' construction 90027109 requirements..-
i v v u..
,CM ES 2 T; 7 4 and 27,75 basis for the neu firJurec.
We can give littic veig,ht to the raw, untcsted estinctes which are hefore us as an offer of proof.
The Judge's decision precluding adraission of the new estimates was proper and concistent with recent decisions we have made on the use of revised forecasts for ratemaking purposes.1/
Revised CVR Isnue.
LILCO's necond arc. tr. ant ic
= - - -
be: sed on evidence in the record.
Its witne.sc precented a revised electric conctruction expcnditure forecast, accepting aubstantial portions of staff witncas Eduards' forecast, but making adjustments based largely on revised ' long -term" (more than one year) CVR's, as shown below:
long -Term CVR Ccaparison
. Staff and ALJ_
LILCO 1:ew Prodtiction (mostly Shoreham) 10 M 122.0L Other Production 30%
64.9%
Transmissien 6 5 ?,
84.9B Distribution 800 106.44 LILCO contended that the 1973-77 CVR's will produce a more accurate forecast only if the 1978-80 period is com-parable to 1973-77.
It urged that the 122% ratio for new production properly reflects Shoreham cost overruns and that its other long-tcru CVR's are more accurate because they are adjusted to eliminate the effect of 1973-77 construction delays attributable to unforeseen declines in load growth and problems
_T7See Cases 27215-7, Niz:cara Mohauk, sucra, (mimeo p.
4-6),
where a sales forecast revision was exc.:.uded frca the record and not othe.r.eisc considered for ratemaking purposes, and Case 27296, National Fuel Gas - Pates, 18 NY PSC
~
(Opinion 78-29, issuea Decencer e.9, l978, mimeo p!~6) where concuruction expenditure forecast revislonc ucre not used to cstimate rate base.
See also Case 27136, Lonct Island Lightine, -. a. r a (mimeo p. 10-12) vhere an untesteu' sun sales Iorecant revis?on was not used to estimate operating revonue-90027110
l l
. w Casas 27374 and 27375 in obtaining regulatory permits.
The company's witness testified that these factors are not likely to delay con-struction scheduled for 1978-80.
We think it would be foolish to project that Shorcham expenditures will be less than 100% of LILCO's original forecast, as assumed by staff and the Judge.
LILCO's cost overruns at Shoreham; its past tendency to underestimtto Shorehan expenditures; and its inability to,
keep project expenses v.ithin forecasts are well documented in the record in this case, in previous cases, and in the Booz, Allen, & Hamilton study we ordered.
The record suggests that past.CVR's on production plant have rarely been loss than 100.0%, and have often substantially excccded 100.0%.
In light of the record, it seems sensible to us to adopt LILCO's 122.0L CVR.
He observe, however, that this issue concerns almost exclusively a project that will net be in rate base in the period for which we arc sotting rates.
Therefore, LILCO's new production CVR will be relevant for ratemaking purpcses only to our forecasts of rate year financial position and tax liability and not otherwise.1/
For the other categories, we are persuaded that the staff construction expenditure estimates, as modified by the Judge, are more accurate than LILCO's.
LILCO makes a plausible case for a somewhat higher transmission CVR on th.e ground that its Article VII cases were subject to delays i
during the 1973-77 period.
But staff correctly points out that the Judge had already allowed.100% of the Shoreham j
related transmission facilitieu expenditures, so the remaining U
amounts for transmission subject to a lower CVR are de minimis in any event.
With respect to distribution expendi-tures, LILCO's argument is, at best, tenuous.
It contends 1/As computed in Appenci:i A, Schedule 3, page 4, the increase in Shoreham investment, which accrues AFC not of tax, increases tax expense by $765,000.
This interperiod cax alloca+f pqbj } }
Shoreham was autheris ad in Case 26887, Long Island Ligh L-s,
supra, 16 NY PSC S17.,
CASES 27374 and 27375 l
l 1
that distribution expenditures will be higher than staff i
i expects because they vary with growth in-customers, rather than load, as staff assumes.
Even if LILCO were correct, we observe that the company has been revising downward the f'
expected numbcr of customers on its system.
Since load on I
its system is also declining, we can find no substance in LILCO's position here.
il New Havcn/Stuyvesant A major portion of staff's brief on exceptions is devoted to an argument that LILCO's planned licensing cxpenditures on the New I:avon/Stuyvesant generating project s 1 (including appro::imately $28 million already spent) should not be recognised for ratemaking purposes because there is "no necd" for the New Haven /Stuyvesant plants.
Various intervenors, and the Counties, which propose a similar adjustment for Jamesport, have endorsed the staff proposal.
The wisdom of the New Haven /Stuyvesant Article j
VIII application is certainly open to question.
LILCO's decision to spend $28 million on a second Article VIII application before a decision on its first one is even rendered is cause for justifiable concern.
Yet, this rate case clearly is not the prepar procedural vehicle to test i
the wisdom of those expenditurcs.
Our revenue requirement determination here does not reflect the New Havon/Stuyvesant expenditures as operating expenses or as part cf rate base.
And they have not affected our decisions on the cash flow issues in this case.
While it could be argued that these expenditures have caused a marginal increase in LILCO's cost I
of capital, that amount would be difficult to quantify precisely
[
l and, in any event, likely to be so small as to be relatively insignificant.
90027112
.'. o CJ.SES 27374 and 27075 The ultimate determination regarding the need for new electric generating facilitics is, under Article VIII of the Public Service Law, largely a natter for the Board on Electric Generation Siting and the Environment, rather than the Public Servica Commissic;.
The record necessary to determint. whether the Now Haven /Stuyvesant generating plants should be built is in Siting Board case 80000, and that proceeding has barely begun.
Our rejectio.1 of the staff adjustment in this caso should not be construed as a tacit approval of the expanditures for the New Haven /Stuyvesant application.
If the application in denied, the recovery of these expenditures in future rates would depend on a finding, in some future rate case, of the prudenca of scehing a certificate in the first instance.
OPERA. TING REVENU_ES Salen Forecents Staff, the Counties and the Judge have accepted the company's final electric and gas sales revenue forecasts.
On e::ceptions, LILCO proposed two adjustments, one increasing gas revenues by 0549,000 to reflect the changed temperature setting for S.C.
S temperature control customers, and a second reducing electric revenues by $2.2 million because of a recently discovered S.C.
2 MRP billing error.
We have reviewed these adjustments, which were not opposed by any party, and have found then to be proper.
They will be recognized in our revenue determination.
Meter Tamcering In order to reduce losses from meter tampering and theft of service, LILCO has instituted a regular meter tampering program with an estimated annual cost of $736,000, consisting largely of payroll expense.
The program is 90027113
_1g_
,C7..Y.2 2727' and 27373 l
1 expected to convert the cost of some amount of hii:vatt-I hours of electricity and cubic foot of gas that would otherwase be " lost and unaccounted for" into revenue.
LILCO conceded that the program therefore required some revenue offset to the costs it estimated.
The preciso amount of revenues that the progran might produce is somewhat speculativo, because the extent of reter tampering and the amount that will be recovered as a result of the program are ur.known.
LtLCO said it w-s wil. ling to assume that the progran would produce revenue equal to its cost.
However, staff, using company supplied revenue and c:: pense estimates frem its pilot meter tampering program in effect'~in 1977 and 1973, constructed a
" cost benefit index" indicating that LILCC has recovered 2.1 revenue dollars for every dollar previously spent on =cter tampering investigations.
Staff argued that a fully develcped program could be expected to bc even more productive and therefore proposed an adjustment contemplating recovery of 2.5 dellars in revenue for every dollar spent on the progrcm.
The Ju6ge adopted the staff adjustment and the company has c::cep t ed.
Staff's adjustment is correct in principle.
But its estimate of probable revenues is based on tenuous estimates of past expenditures.
LILCO developed a revised projection, reflecting its actual 1978 cxperience with the tampering program, that suggests a $1.1 million revenue recovery.
]
This ir approximately $350,000 more than its original estimate, and about $900,000 less than the staff estinate.
In light of the weaknces in the data staff relied upon here, we adopt the company's revised estimate.
Unco 11ec'tibles Judge Schechter estimated that.576% of the company's additional revenues would be uncollectible.
LILCO objects, 90027114
4
.G a ; $ 27274 n,d 27375 claining that the Judge hcs given no explanatica for his use of this ratio.
The company proposed a figure of.5942.
In 1978, its lowest ratio ras.571%, and recent ratios have been in excess of.600%.
It appears that the cenpany has been experiencing an increasing uncollectible ratio.
In Case 2713C, we used the.5360 ratio e::perienced for the 12 months cu.'ed June 30, 1976, and notcd that the previous ratio had been.5114.
Increasing uncollectibles are a matter of particular concern to us because they increase the cost of service for all customers.
The proble:a can and should be ameliorated through improved collection and customer relatior.s efforts by the company.
Ecccuse we are providing an additional expense allousnee for these functions, we beli<.ve that LILCO should be able to hold its future uncollectibles ratic to the.5945 figure assurnd in the original filing.
OPERATING m. PLUSES Large parts of the record in this procacding were devoted to analysis of the principles underlying the assertions l
by v:rious vitnesses that differing proposed operating expense allowances were reascnable.
Staff and the intervenors found that there was inadequate record support for expense allcwance increases in the amounts sought by the company.
LILCO objected to many of the adjustments they proposed on the ground that establishing proper expense levels is, s
u absent a showing of imprudence, a ratter of nanagement discretion and contrary proposals constitute an unwarranted intrusion upon managen.ent prerogatives.
Management prerogatives have their place--but it is not in the determination of what expense allowances are reasonable for ratemaking purposes.
That is our obligation.
I Management has the opportunity to prove to us that its 90027115.
'CAEES 27374 and 27375 propoced expense allawances are reasonable and not excessive.
Staff and intervenors have an opportunity to challenge those explanations and suggest alternctive allowances.
The ultimate decision as to what is reasonable is ours.
And the Public Service Law provides that a reasonable amount is that which will enable the company to provide safe and adequate service ut just and reasonable rates.
The al]owances we provide in these cases vill bc based on our an. lysis of the evidence presented by all of the parties and sufficient to enable LILCO to provide normal service.
He shall not proyido expense allowances for claimed abnormal, so-called " backlog," activities which may occur
{
in the rate year.
This decision is based on an irportant regulatory principle that is applicable to all companies under our jurisdiction:
when circumstances have allegedly required a utility to adopt an custerity program, we expect to see evidence that those circumstances havn diminished stockholders' returns before mana.gtment cuts back on expon-diturcs necessary to maintain safe and reliable service.
That evidence has not been presented here.
We expect LILCO, and all other companies, to follow this princip2e in their operations.
In our view moreover, it is not within management's prerogatives to avoid the statutory obligation to provide safe and adequate service in order to provide investors what management deems to be an adequate return.
In this opinion we will discuss only the expense items contested in the briefs on exceptions.1/ We adopt the allowances recom: rended by our staff for the other expense items because we believe staff approached the overall question of expense allowcnces by seeking conscientiously to balance the consumer's interest in good service with their interest in reasonable rates.
While the expense allowances recommended 90027116 1/our specific adjustments are set out in the Appendices. - -
CASUS 2727 ; cnd 27175 by varicue intervenors, nctrbly the Countics, vere oc:ccien-ally below those recommended by staff or the Judge, the basis'for their arguments was, in large part, the inadequacy of LILCO's proof.
The defect in this approach, and in the
" budget overestination factor" adjustments proposed by the Countics as well, is that both ignore the relationship of operating expense ellowances and the quality of consumer service.
The " budget overestimation factor" approach is furthur flawed by its sponscr's failure to establish the comparnbility of the historic period he used to develop the factor cnd the period for which we are actting rates.
The record as a whole, including service conplaints at the public statement hecrings, the testimony of our staff, our public files of consumer ccmplaints (of whieb we take official l
notice), and even the testimony of the Counties' own rate of return witnces, provide a:c.ple prcof that LILCO must improve j
its servi.cc performance.
It is the consumer who suffers from servic3 cutbacks, and it is the conenmer we must protect by oscuri:ig that the company's rates are suf ficient to produce the revenue necoschry to racct norm 1 operating e::penses.
Overhr.ul_E_xcen ce.
Judge Schechter adopted the major overhaul expenso allowance LILCO proposed on the ground that it was necessary to provide for the normal icyc1 of three generator overhauls por year.
But he rejected the company's request for an allowance sufficient to cover a second periodic overhaul for two specific units.
LILCO contended that the two units l
involved will roccive an extra periodic overhaul in the rato I
year because the first Shoreham overhaul will disrupt the ordinary maintenance schedule for the following year.
The Judge accepted LILCO's argument but concluded that it proved only that this was an abnormal expense.
He therefore adopted
. 90027117
CALES 27374 and 27375 i
staff's proposal to a:aortize it, as an unn.mnal expense, over five years.
LILCO,. staff, and the intervenors each except to aspects of the recommendation.
He will affirm the Judge's resolution of thoso issues.
LILCO's exception is unpersuasive because, in the I
end, it fails to show how a decision to allcw full recovery j
of all normal periodic overhauls, and amortice the two unusual periodic cvorhaulc is unfair.
The mero fact that the two unusual overhauls will occur f.n the rate year does not require their cost to be built permanently into LILCO's rates.
Staff and the Countics obscrve on exceptions that one of the three major overhaulo scheduled for the rate year i'
is cn Far Rockauay Unit No.
4, a job that was deferred frota L provicus year.
They contend, therefore, that this is a l;
" backlog" adjustment that should be disregarded for purposes l
of establishing a nornal rate year expense level.
Their argument '.gnores the undisputed fact, relied on by the Judge, that the normal activity level for LILCO is three major overhauls per year.
As the com.pany notes, if it were not overhauling Far Rockaway Unit No. 4 in the rate year, it would be overhauling some other unit.
Mai.or Maintenance Proi.ect Exo.cnse Judge Schechter rejected the company's request for a $500,000 allowanca for major maintenance projects.
He termed the projection " speculative" and a " contingency request without reasonabic basis or foundation."
In its brief on exceptions, the company argues that its exhibit listing a dozen planned major maintenance projects between 1978 and 1982, ranging in cost from $250,000 to $1,050,000, provides a reasonabic basis for its request.
We agree that the company has provided a reasonable basis for some contingency amount to cover the kinds of projects listed in i
! 90027118
I C7.EE.5 27374 and 27375 the exhibit.
What the company has failed to prove, however, i
is that these projects will increase its operating expenses by the $500,000 it claims.
If, for example, the work involved were to be performed by LILCO's own crews, without overtime, there would be no increase in total operating cxpenses.
In these circumstances, we must rely on what guidance the record gives as to the company's past experience.
The only l
czarple of actual major maintenanco expenditures LILCO has j
provided is the replacement of the turbine shaft at Port Jefferson No. 1 in 3973, which added about $200,000 to its I
annual operating expenses.
We will limit our allowance to i'
that amount.
Tree Trir.ninc Exrens Judge Schechter rejected LILCO's request for increases in its trae trimming expense allowance.
The i
company introduced evidence to prove that $2.3 million should be spent on tree trimming in order to keep service interruptions caused by untrimmed trees during the next tucive monthe at the normalized 1977 level, i. e_., 11.6 interrup-tions por 100 circuit miles per year.
The Judgc'found LILCO's evidence on the service interruption trend unpersuasive and concluded that there would be 11.5 iaterruptions per 100 circuit miles in the next twelve months without additional 4
expenditures for tree trimming.
Since this interruption rate was below the one the ccmpany had characterized as j
" normal," the Judge rejected LILCO's proposal.
On exceptions, LILCO denies that it characteri cd 11.6 interruptions as a " normal" level.
While its evidence showed that 11.6 was the 1977 normalized level of interruptions, 4
the company argues that the evidence used by the Judge to forecast the level of interruptions in the next twelve months implies a normalised 1977 level of 10.8 interruptions per year.
The company's point here is per' suasive.
There is a
, 90027119
i CASES 27374 and 27375 somewhat ucrsening trend which tends to shou that LILCO's past tree trimming efforts have been inadequnte.
As a result, consuncra have received less reliable service.
We will allcw the company enough to reverse the deteriorating trend.
The evidence relied on by the Judge shows a normalized 1977 cutage rato (10.3) that should be our target here if service is to be improved.
Using the assumptions in LILCO's original presentation, we estimate that an additional
$800,000 will be suffic5Ent to reach this target.
We will make no specific separate allowance, however, for emergency tree trimming, or to fill fequests for tree trimming by customern.
The increased preventivo tree trimming contemplated by cur allouance should reduce the need for emergency and request tree triming activitics, uhich tend to increase when t<
preventive trimming is deferred, i
Louin!..tra ti ve at:0 Ceneral D: pense Judga Schcchter adopted staff's cctinate of LILCO's rate year administrative and general expense, which was developed by multiplying LILCO's actual 1977 payroll by a 1.110 vage increase factor and other cxpenses by a 1.15 infantion factor.
LILCO objects to the recommended allowance because some 1978 actual figures are greater than the company's estimates for the rate year.
It suggests that this proves that its original forecast is reasonable.
LILCO made this same argument to the Judge.
He rejected it because the specific expense increases cited by the con.pany tended to bc j
offset by other spccific staff allouances that exceeded those sought by the company.
LILCO's exception ignores the Judge's reasoning, which we find to be basically sound, particularly in the absence of a showing that the specific expense increases are necessary.
LILCO's exception is therefore denied.
j 90027120
-xv-
1 l
CASFS 27374 and 27375 Customer J.ccounts Excense Personnel.
Judge Schechter rejected tr.ost of the company's request for a $2.8 million increase in its expenres for custcmer accounts personnel.
LILCO claimed that additional personnel were neede0 to improve its bil3ing, collection and consumer relations funct' ions.
The Judge adoptad staff adjustments climinating the requested allcuancas (except for the meter tampering program) on the ground t' ant the company did not moet its burden of proving the "fansibility" of these hirings and that the beneficial rasults of the hirings were " elusive."
LILCO has e::copted.
Our reading of the record indicates that staff
\\
and LILCO failed to Join this issuc properly.
The company introduaed substantial evidence to show that its past billing, collection, nator reading, and complaint-handling efforts have been inadequetc.
Evidence from cur comp 1rint files and the public ntatement hearings confirms LILCO's claims.
But tha company failed to show how the additional money it requested would be spent to in:provo its shortcomings.
Staff, on the other hand, focused on the reasonableness of past erpenditures as a mensure of what should be allowed here and ignored LILCO's poor service performance under previous budgets.
It is obvious to us that the company must take action to reduce the number of unread meters, unattended past due bills, and unanswered consumer complaints.
And it seems clear that such measures will not be costless.
But 4
the company's presentation gives us no r.ssurance that these prob 1 cmc will be attacked properly.
Providing an allowance g
so that more money can be spent for additional pecple does l
I not assure that available personnel will be properly trained and managed so they can be used productively.
Indeed, staff has argued that if the dollars spent in'the past for overtino and part-time help were used instead to finance a properly.
90027121 q
W M
CASES 27374 and 27375 trained and managed workforce, service could bc imprcved j
without additional cost.
We are left, therefore, with an important issue to resolve and insufficient guidance from the litigants on the costs and benefits of their respactive proposals.
If we edopt the full e:: pense allocance LILCO has r e qu e s tec'., it may involve more costa to consumers in rates than benefits in improved service.
Conversely, the allouances recoraended by staff provide tha benefit of somewhat lower ratea with the potential cost that thea rates vill be insufficient to improve service and end concur.or dissatisfaction.
In these circums.tances, our resolution of the i
difference between staff and LILCO must be a compromise.
LILCO requested an increase of about $2.8 million, including
$736,000 for the meter tampering program.
P.ccognizing that the s*:me personnel cr.n be used for varicus customer accounts functions, we will approve a total allowance equal to half the requested atacunt.
LILCO is frce to appi:opriate this sum for hiring, training or management in the meter reading, billing, collections, customer relations, and tzrapering investigations functions within this category as it sees fit.
But the co.ipany will be required to report to our consumer service staff regularly on its efforts to improve service and the program of expenditures it is undertaking to do so.
l Eguipment.
Judge Schechter found an $82,000 staft adjustment to eliminate the increase in the annual cost of payment processing equipment " inappropriate."
The $82,000 was originally described as the additional rent for new equipment, but the company witness provided no basis for his estimate of the rental cost of a new machine.
Not until its initial brief did LILCO indicate that it had purchased the equipment instead.
On exceptions, staff complains mostly about the manner in which LILCO's evidence in support of l
l -
- l 1
CASES 27374 and 27375
!l i1 l
this-allowance was presented.
According to staff, LILCO failed to recognise the trade-in value of the old machine or other savings the new purchase might produce.
In response, LILCO claims that the $82,000 reflects the trade-in value of i
the old machine, that its original rent expense estimate is approximately equal to the annual carrying charger en the purchased equipment, and that no savings are anticipateG as J.
a result cf the purchace because the new machine will do essentially the snme v.ork as the machine it has replaced.
In light of the arguments, we find that. the i;
Judge's conclusion is correct.
Advertising and Public Affnirn Expense t
l '
Judge Schechter determined that LILCO's advertising and public affairs allowance should be limited to.0750. of
~
its revenues, the same ratio we adopted in Case 27136, the last LILCO clectric rato casc.
Uc also rcccamondad additional allouances of $156,000 for area development, $90,000 for
{
internal communications and $18,000 for library matcrials.
L LILCO, staff, and the intervenors have all execpted to varicus aspects of the Judge's recommendation.
The company argues that the.075% allowance will not be enough to cover the cost of conveying all the information it would like to convey, and that it intends to spend more than the allowed amount in the rate year.
We considered and rejected this same argument in Case 27136 and do so again here.
Staff objects to the separate, additional allowance for area development advertising on the ground that this activity was intended to be covered by the percentage allowance limits specified in our Policy Statement.b! Staff is correct.
i n
i It also objects to the increased allowance for internal communications because of the company's alleged failure to demonstrate that improvement is needec and can be achieved 90027123 1
~
1/17 UY PSC 1-R. -.
CASES 27374 ano 27375
,i i
\\ \\
only through additional expenditures.
It claims the base year level of internal communications expense adequately provides for the cost of reasonable employee bulletins and mectings cs util cs union nsws letters.
We agree.
- Finally, staff argues that the increase in expense, freu $2,000 to l
$20,000, for materials and supplies given to libraries is unsupported.
He vice this final itcu as something closc to a chcritable contribution.
The amount involvad is so small that <c sea little point to requiring utilitics to provide
" support" for it so long as the total cr.ount for contributions of rhis nature is reasonable.
Staff has not attacked the 1
I allowance on this ground.
This staff exception is therefore I
\\ 1 denied.
Reucarch and Davolopnent Ennense I
Judge Schechter adopted two staff adjustments, one to j
eliminate estimz.tta payacats to the Dreeder neactor Corporation l 'j i
(for che Clinch River project) and the other to reduce the Y
estimated LILCO contribution to ESI:ZECO to reflect delays in j,
vcrious ESECRCO projects.
On exceptions, LILCO argues that l;
it is ji{theBreederReactorCorporationdemandspayment, j
contractually obligated to ranke the payment.
While this may be true, it offers no evidence that the BRC is likely to demand payment this year.
The Clinch niver project remains in suspension.
LILCO's exception is therefore denied.
Staff's ESEERCO adjustment was correct when it was made.
But in its brief opposing exceptions, staff concedes that recent changes in ESEERCO funding require a reduction of its
$220,000 original adjustment to $50,000.
With this modifica-tion, we adopt the Judge's resolution of this issue.b!
1/In accorcance with tne principles of multi-year planning and financing of research and development progrems we f
announced in Case 27154, 1977 Lono Rance Electric Plans, 18 NY PSC (Cpinion 78-3, issuec March 6, IViS) the company will ultimately bc reimbursed for these amounts if they c'2 properly spent.
j 90027124
~
cf.S C 27374 cnd 27375 Storm Damace Rec.erve and Accrual I
e----
The enormous expenditures LILCO incurred to effect restoration of service after the devastating 1978 ice storms are duly noted in the record.
LILCO requested that it be allowed to amortize over a three-year period the entra-ordinary $2. 8 million net cost of the ice storms.
.It also sougbr an increase in ita reserve for stor:a damage b cause its exposure ucs incteasc6 vhen the deductible cmount on its insurance was raised froru [a million to $5 millica last year.
Judge Schachter.pproved the amortization recuest but rejected the plea to increase storn danage reserve by
$500,000 on tha grcund that his special amortization allowance would serve the same purpose.
Both staff and the cc:Opany except-to the Judge's rcjection of the accounting change and the increana in the accrual.
Staff, joined by other parties, also excepts to the recommended special amortization.
Staff's position is that the scor:a damage reserve exista specifj cally to cover the cost of there entraordintry storms; therefore, no special additional amortization allowance is necessary.
It also points out that with the increase in the recorve accrual it is supporting in this case, the extraordinary loss of the 1970 storms will be absorbed by April, 1980--before the end of the rate year--
without a cpecial amortication.
The company responds that its territory is uniquely subject to pc tentially devastating weather.
The result of the staff position is that its
{
reserve will not reach the maximca level for at leact five years.
In the intervening period it will have to face the i
potential of storm damage with less than adequate protection.
)
Where it is difficult for us to anticipate expenses
- attributable to extraordinary storm losses, our usual procedure is to defer and amortize such losses.
Given the
'9002712-3,
l l
C;JES 27374 auf 273'i 5 frequency of LILCO rate cases in rccent years, we question whether this company needs to employ reserve accounting for storm damage expenses any longer.
The possible advantages of deferral accounting are worth investigating.
For now, we i
must agree with the company's position that the 1978 storms l
were beyond anything we contemplated when we modified its i
reserve and accrual in Case 2713G.
Some amortization allowance beyond the proposed incrcace in the reserve, which I
we vill approve, is therefore in order.
The entraordinary costs of the storm 1/ should be chargcd, in the first instance, i
to the ncw linit of the reserve, and the remsinder should be amortized over three years.
This proccdure will reduce the amount of the amortization by $166,667 ($500,000 e 3 years).
l Injuries and Dpr.aqan Reserve nnd J.ccrual i
LILCO estimated its rate yehr injuries and damages accrual on the basis of a three-year moving average and sought a $2.5 million al]owance.
The Judge fc>und that s ta f f 's estimato, based on a four-year average, was reasonable and adopted its $763,000 adjustment.
He noted that staff's method was ccuparab3e to the one we adopted in Case 27078, Long Island Lighting Company - Gas Rates.
On exceptions, the company complains that staff's method will produca
" deficiencies," i.e.; its injurics and damages expenses vill be recovered over nine years instead of three.
It also recomputes its estimate using staff's method to shcw that the adjustment should only have been $129,000.
Finally, it l
1 observes that the estimate should be made on the basis of i
the most recent th'ree years' enperience, as we did in Case 27078.
It complains that staff artificially reduced its estimate by using a four-year average.
In response, staff argues that its decision to use a four-year average was 90027126 1/We accept the staft's computation of this amount in Attachment C to staff's reply brief to the Judge.
~23-
ChSES 27374 and 27375 proper because the annual fluctuations in this account make an average over a greater number of years a more reliable estimate for ratemaking purposes.
Staff also relies on the record in Case 27078 which shows that the 1975 accrual was inflated by an accounting change in that year, and that our i
allouance in that case used a normalized 1975 accrual.
Both utaff and the company departed from the method we used in Case 27078--staff by using a four-year average and the company by using a moving average and failing to normaline the 1975 accrual.
Neither method gives any weight to actual claims, which during the 1975-77 period were $3.5 million, or $4.4 million less than the accruals.
l Cenparing the latess three years, including 1978, the average accrut.ls decline to $1.9 million while average claims increase to $1.6 million.
This latest experience indicates a con-i vergence of the averego accruala and claima which would justify an expense allowance midway between the two averages.
This Ir.ethod results in an expenso allowance which is essentially the same as the staff's.
LILCO's exception is denied.
Amortination of Unfunded Pension Liability Judge Schechter rejected LILCO's proposal to climinate its unfunded pension liability over a ten-year (rather than thirty-year) period on the ground that the company has not demonstrated either a need to reduce the amortization period or that the reduction proposed is
" realistic."
LILCO excepts on the ground that the unfunded pension reserve is increasing, implying that future customers will have to pay pension costs related to service provided by LILCO employees in the past.
It criticizes the recommended decision for its failure to consider this alleged inter-generational inequity.
LILCO's charactorination of this 90027127 i
i CASES 27374 and 27375 I
l i
issue is somewhat misicading.
This is not an issue of I
whether future ratep:.yers will be required to pay for the i
present cost of service.
It is an issue of whether presen' or future ratepayers should pay the cost of past service.
Uc can find no logical reason for requiring present rate-payers to pay all of this cost.
Ithsent a showing that the thirty-year amortization peried, which is also used by other utilities of this stato, is improper in some way, we will not approvo a changc.
_ Gene and Inflation Index c
LILCO applied wage and inflation f actors to base j
year expensos to estimate expenses for the year endcd June 30, l
I 1930.
Staff observed that the rate year in this case will cnd en April 30, 1950.
It therefore ar9ued that the company has, in offect, clatnad an allowance fer two extra months of inflation and proposed an adjustraent to climinate it.
The i
Judge adopted the staff adjustnent and LILCO has excepted.
On exceptions, LILCO mainly points out various reasons why its use of a rate year equal to four calendar quarters was reasone.ble.
More information was available and it made historic comparisons and analysis easier.
The company's reasons for adopting the year ended June 30, 1980 as a test period, while logical, are irrelevant, since neithcr staff nor the Judge objected to it as such.
Their adjustment is based on a strict application of the future rate year concept--rate case allowances should be designed to make the company whole for the first tuelve months that rates will be in effect, not the test period the company happens to select.
LILCO makes two additional points that i
are more compelling.
First, the probable lhg in our approval 90027128
i
, 1 a
.1 CASES-27374 and 27375
]
of its. compliance filings, and the practice of the industry to base revenue recognition for accounting purposes on meter readings during the accounting period, rather than on service estimated to have been rendered during the accounting period, means that the company will not recognise somc of its additional rate case revenue until July, 1979.
Second, the company's wage and inflation index assumed a 6-1/21 incrcaco through 1978 while the actual rate, c.s measured by the GNP deflator, was 7.4E.
According to LILCO, this would require additional allowancos of $457,000 for its Electric Department and $102,000 for its Gas Department.
The staff adjuatments ref1cct our usual practice and they were properly adopted by the Judge.
17hile we see merit in the two relevant points made by the company, we will not provido any additional allowances on account of them.
The tuaount of the revenue increase not accounted for in the rato year because of regulatory deleyn, and delay in their recognition for accounting purposes is not quantifiable from this record.
LILCO's argument that it offsets, and is l
b thus equal to, the staff adjustment is speculative.
We would have been willing to provide LILCO with additional allowances to the extent it demonstrated its actual 1970 unit cost increases exceeded the 6.5% assumed in its presentation.
But it has not done so.
It did not use the GMP deflator to develop its original estimate, so the Gt:P deflator cannot be used properly and reliably to revise that estimate.
LILCO's exception is, therefore, denied.
9 l
!1 -
90027129
o i
CASLS 27374 and 27375 i
Labor Productivity i-LILCO'a original case included a productivity adjustment that nasumed it would achieve it annual force I
reductions through the rate year.
The co:.1pany offered no evidence that thcsc gains could be achic"ed, nor did it l
suggest '.zhere the force reductions m.ight take place.
In fact, LILCO's evidcnce nhowed probabic negative productivity through the rate year.
No.nethclcss, Judge Schachter adopted the LILCO productivity adjustment.
The Counties have called the it productivity adjustuont " arbitrary" and have excepted to the Judge's failure to adopt their productivity adjustment, based on LILCO's historic 2.3t rate.
In opposing the Counties' cxception, L7LCO points to studies which show that its productivity 'cill probably decline in the rate year and that much of its past productivity has been capital-related.
The Countics' mechanical application of historical productivity rates to adjust forecasted expenses in a forward-looking rate year is not a reliable measure of cxpected productivity.
At best it could be used only for some guidance, in the absence of more specific analysis.
Specific adjustments to various operating expenses are a more accurate way to reflect futuro productivity.
The i
- l reduction in labor expense inherent in the adjustments to LILCO's estimates we have adopted is about 10%.
He H
- 1 consider the productivity reflected in those adjustments reasonabic, and therefore make no further productivity adjustment.
90027130 CASES'27374 and 27375 DEP RECIATI.ON--
Gas Depreciatig P_roduction Structures.
The recent retirenent of LILCO's Bay Shore g&s plant has led the company to seek a change in the deprcciation rate on all its gas production structures.
The rc2ative position of LILCO, staf f ar.d the Judge on this issuc are shown balou:
Currer.t LILCO
.A._L.J a n d S t a f f Average Service Life 35 years 20 years 30 yecrs Salvage Value (100)
(50)
(100)
Judge Schechter, relying en testimony trem staff, concluded that the recent Bay Shore. Plant retirement dis-torted average service life calculations; that the " full band" indicated average service life was about 30 years; and that a more modest average service life reduction to 30 years and retention of a 100 negative calvage rate would produce a reasonable depreciation accrual.
On exceptions, the company argues that the accrual rate for gas production structurec should be the same as the rate for other gas production accounts because (1) gas plants will henceforth be rctired in their entirety and (2) the trend in the gas production plant account is toward a shorter average service life.
The company's first point is irrelevant because no LILCO gas plants will be retired in the forcseeabic future.
Its second argument fails because it has not demonstrated that the modest reduction in the average service life recommanded by the Judge is unsatisfactory, particularly in light of his provision for negative salvage, which is greater
.than the company's.
LILCO's exception is denied.
i 90027131
'e CASES 27374 and 27375 Steel Transmission Mains.
At various times, gas I
transmission and distribution mains have been studied as similar and different property classes for depreciation purposes.
When distribution and transmission mains were studied as a single class, the assumed negative salvage was 15%.
Distribution mains are now studied separately, and the accrual provides for 200 negative salvage.
Although the neighted average negative salvage for the two plant accounts has been 21.4%, the Judge concluded that 15% negative salvage was fair for the transmission account because the salvage study in the record indicated that actual negative salvage has been only 12%.
On exceptiens, the company complains that because tranmission and distribution mains were in a single account until 1968, the data on which the 12% negative i
salvage factor wan detcrmined is quite limited.
It therefore i:
argues that the two accounts should be treated on the same l3 basis and, since the weighted cumulative average negative Il salvage of the tuo accounts is negative' 21.4%, a negative 20% allowance for each is fair.
The actual studies, although
[
based on somewhat limited current data, are the best evidence j
available.
They shew tha't transmission negative salvage is
{
12%, less than the 15% now allowed, and far less than the h
20% sought by the company.
We therefore conclude that the Judge's allowance is reasonable.
t Cathodic Protection Devices.
LILCO has been depreciating cathodic protection devices at the same rate it uses for all distribution plant, a rate reflecting a 75-year average service life and 15% negative salvage.
In this case, LILCO requested that a special subaccount for cathodic protection devices be established to reflect a 15-year average service life and scro net salvage.
The Judge rejected the company's request and found that cathodic protection 90027132 !
.CALi',', 27374 and 2737b Oevices pay increasa the average service life of the associc:sd mains, as evidenced by LILCO's actual crperience between 1971 and 1977.
Although it is true, as LILCO points out on exceptions, that these devices probably vill not last 75 years and that thcy are attached to many mains with short life e::pectancies, they do not necessarily reduce the average serv.!ce life of the account as a whole.
Fcr thin reason, we rejected a similar request to establish a special separate account f!ar cathodic pr*:,tection devices in Ccce 27296, Nationn3 Fuel Gas - Rates, 10 NY PSC (Opinion No. 78-29, issucd December 29, 1978, mimeo p.
30).
We will adopt the Judgc's resolution of this issue.
E3cetric Street an/l Pe.rjggy Lichtino As L11.C3's stnut lighting plant is gradually turned over to municircl and state agencies, prcmature retircmants are producing unforescon losses which the company nov socks to recover in rates.
The company proposed to depreciate the value of the remaining stract lighting plant on the assenption that it would retire approximately 30,000 units per year for tuo years and a lesser amount in each of the nent eight years with sero net scIvage.
The company also proposed remaining life treatment of its parkway lighting plant, with a five-year remaining life and 62% net salvage for 1-1/2 years and zero thereafter.
Judge Schechter found that the street lighting retirements were taking place much nore slowly than assumed by the company and that an amortization assuming 10% salvage and a fifteen-year remaining life was more reasonable.
Since the recommended decision, however, LILCO has effected several transfers of its street lighting plant.
On exceptions, the company points to its sale of 33,777 units to the Town of Oyster Bay resulting in about $10 million of unrecovered not plant.
In light of this experience, it believes its
,\\
90027133
. - =
CASCS 27374 and 27375 original remaining service life assumption was reasonable.
I Staff responds that the actual salvage value of the street lighting plant involved in the sales to five other municipalities we-approved on March 6, 1979, as uell as the Oyster Day sale, was about 400, and that this demonstrates that its amortisation rate is more reasonable than the company's.
It appears that municipalities are no longer interested in obtaining street lighting service from LILCO, so we accept the proposition that the company sl.ould recover its investment over a relatively short period.
Decause it seems likely that the systems with higher salvage values will be sold first, the 404 salvage realized from the recent transfers is probably too high to erpoct in the future.
Our allowance will thereforc assume a ten-year amortization period an a 250 salvage value to reflect both the evidence of quickening sales and recent salvage values.
We 1 cave the issue of how and from when LILCO should recover these costs for resolution in the rate design phase of this proceeding.
In view of the uncertainties regarding projected parkway lighting retirements and the absence of retirement experience, the Judge adopted staff's recommendation that the accrual reflect a ten-year remaining life and a 10% salvage value.
The difference between this accrual and the one recommended by the company is about $200,000; it would be greater, but the company assumed that its current suit against the State would be successful and has reduced its plant in servico estimato to reflect the anticipated award.
Such speculation about the outcome of the suit could result in an under accrual.
We therefore adopt the Judge's recommendation.
Electric Production Structures Judge Schechter rejected LILCO's proposal to increase its depreciation allowance to reflect a decline in 90027134.
-.n.....,---
CAELS 2 */ 3 7,; and 273'i5 the averayo service li'fc of its electric production structures from the current 45 years to 35 yocrs.
Instcad, he odopted the 40-year average service life recommended by staff.
On exceptions, the corpany argues that a reduction of the average service life from 45 to 35 yeers will (1) help c1cre I
the $7.2 million gap between beoh and theoretical depreciation and (2) give all production plant the same average service life.
The Judge focused on the second justification and found it insufficient beccuse, in one case, LILCO was able to turn a production structure into a training facility after the gcnerating unit was retired.
LILCO clains that such recycling is unlikely..in the future be.cause mar.y of its
, remaining structures are the semi-outdoor type and useful only as c2ectric production structures.
In reply, staff argued that a change in theoretical rosarve resulting from a chs.nge in life table does not warrant the large reduction in the average scrvice life estimate rought.
The results of the mortality otudy for this account are of limited value because of the large discontinuitics in the observed life table.
Uc agree with staff and accept the more gradual reduction to 40 years rather thtui to 35 years, i
Environmental Control Equicmont i
Judge Schochter adopted LILCO's proposal to nuo; tine the environmental con' trol equipment at Morthport Units 1 and 2 over the remaining lives of those units.
On exceptions, i
staff argues that use of remaining service life depreciation I
should be discouraged because it results in a proliferaticn of subaccounts, each with its own rate, and makes review of i
property accounts virtually impossible.
In reply, LILCO argues that late additions to existing plant are usually replacement parts that extend the plant's useful life, but these pollution control facilitica vill not have the same effect.
It therefore supports the Judge's resolution of this issue.
90027135 !l
CASES 27374 and 27375 i
l We have e:wnined the question of the impact of i
pollution control equipacnt on depreciation allouances in l
three succescive Niagara Mohawk electric rate cases.1/
There l
we decided not to depreciate the equipment over the remaining i
life of the related generating plant, in part because we had previously recognised that the expected average cervice life l
of Ringara Mohawk's generating plant was reduced because of the added equipment.
Adopting a nimilar cpproach here, we reach the same result as the Judge without ascuming that the l
usefulnces of the Northport. units will suddenly come to an end in 2007.
A good average service life estimnto, properly I
reflecting pact and anticipated eventa, vill, if reviewed i
and updated periodically, avoid the deficiencies LILCO clainn it will experience if the rvmaining. life technique is not uced for this property.
Ua therefore accept the Judge's allouance, and authorice LIICO to modify its depreciation accounting to reflect the implicit reduction in the average scrsico lives of its facilities.
We will also expect the company to andyze the effect of cnvircnmentally inposed plant additions en average service life in its next rate procceding and ref3 cat its analysis in the determination for the affected CCCo un ts.
PROPERTY TAXES Judge Schechter rejected LILCO's estimate of its rate year property taxes und adopted instead a considerably lower figura that reflected historic enpense levels, plus allowances for known asnessment and rato changes.
His adjuntments reduced electric expenne by $5 million and gas l
expense by $1.3 million.
He suggested that these allowances I
be revised to reflect known changen up to the time of final decision and that the company be permitted a second-stage filing to recover further increases during the rato year.
90027136 1/ Case 20068, 11 NY PSC 1475, 1486-8 (1971); Caso 26594,
~
15 NY PSC 268, 275-6 (1975); and Case 27943, 16 NY PSC 908, 918 (1976).
l
o
' CASES 27374 and 27375 l
l On enceptions, LILCO and the Counties complain that it is " inconsistent" to treat property taxes differently from other expenso itcms.
LILCO further claims that since its forecast was the "only" forecast of rate year property tanos in the record it must be adopted.
Property tanes are annual paya.ents set by government decision and are certainly He have distinguishabic from most other rato year expenses.
regularly allowed the second-stage filings to permit utilities.
to recover prcperty tan increases.1/
LILCO's forecast of property taxes was not the only one in the record--staff and the Counties both sucmitted forecasts--and inforriation in staff's brief opposing execptions indicates that even the most current esticates may turn out to be inaccurate.
Accordingly, we will authorize a second-stage tariff revision in January, 1900 to reflect actual property tax changes through that month.
Wo do so with two caveats:
first, as in the other cases cited in the margin, we will permit LILCO to j
i' recover only 903 of the increases related to higher estimated
{l assessments, and second, if LILCO should file another major l,
rate case in the next year, we will make.such offsets as may
'l be necessary to provent un overrecovery of these expenses resulting from overlapping rate periods.
_1/See Case 270297 Conso.lidated Ed.ison Concany - Electric Rates, 17 NY PSC 241, 263 (1977); cases 27094-5, Orang.c; 5 F.ockland Uti3ition, Inc., suora, ninco, p.
26; Cases 27108-9, Rochester Gas and Electric Cerroration, supra, mimeo
- p. 15;
~
Case 27100, New York l'elernone Comuanv, 17 tiY PSC (Opinion no. T7-22, issued Leccr.ber 1, 1978, mimeo. p.
7);
~
Caso 27209, Jamaica Water Sunolv Comnanz, 18 HY PSC (Opinion No. 78-24, issuec October 6, 1978, mimeo p. 11) ;
Cases 27215-7, Niacara Mohawk Power Corcoration, supra, mimco
- p. 28; Case 27275, Brooklyn Union Gas company, 18 NY PSC (Opinion No. 78-28, issucc November 28, 1978, mimeo p.
19; Case 27296, Katicnal Fucl Gas Cerroration, 18 SY PSC (Opinion 30. 78-29, issued December 29, 1978, mimeo. p. 26).
90027137
~34-I
~
i CAEES 27374 and 27375 i1
- 1 FEDERAL IUCOME ??2 Trust' Interest Deductions A substantial part of LILCO's investm..nt in Nine Mile Point no. 2'and its future nuclear fuel requirements
.are being financed by the debt of LILCO's construction and resources trusts.
After determining that LILCO would bc deducting the interest on the debt of the trusts on its own i
current tcn returns, Judge Schechter dec.ided that these deductions should be recognised for ratemaking purposes.
i The Judge uns convinced that the deductions cou3d properly be used to reduce the ccmpany's taxes by a memo from LILCO's own tax counsel.
His recoEmendation that these deductions be used to reduce the income tax expense horne by current consumers is consistent with our general policy in favor of flowing through tax benefits to custcmers.
On onceptions, LILCO attackn the Judge's action on the ground that its right to tche the deductions fcr the trust interest on its tax return is too uncertain without a conclusive IRS ruling on this matter.
Mc believe that the Judge properly relica on the menorandum of LILCO's tax counrel, as we did when we approved the trust financing
~
arrangements, an persuasive evidence that the interest is deductibic for income tax purposes.
Flowing through the deductions arising fr,om construction of future plant to reduce today's rates gives today's ratepayers the benefit of tax deductions that could be reserved for tomorrow's rate-payern.
Tomorrow's ratepayers wil] have to pay the cash returns on the investment in the plants involved, but we continue to believa this policy is reasonable, as we did in the last LILCO electric rate case.
In that case, when the company sought extension of this interperiod tax allocation to the deductions related to the Nine Mile Point 2 and Jamesport generating facilitics, we said:
90027138 N
. O
O CASES 27374'and 27375 It has long been our policy that current tax deductionc should be reflected in current rates.
We have cado exceptionc only in cases where utilities demonstrated that deferral was necessary to protect their ability to raise necessary capital on reasonable tcras.
LILCO has failed to demonstrate that the cash flow allovre.nces authorized in Opinion 1:o.
78-1 are incdaquate, so ua continue to draw the line on interpericd ta:s allocations at the Shorehe;n related ir.tcrest deductiona.]/
In this decision we have not rcdeced tha cash flow allowances un approved in Opinion No. 78-1.
I RCO has again failed to show that those allowances arc ina. quate.
Its exception is therefore denied.
TRnrgP Tax Credito Judge Schtchter, in his tax calculation, used all l
avai3able tan credits to reduce tanes to the 10% ntatutory l
limit without recognining any of the 11 "TFASOP" tax credits. /
I 9
l-LILCO is generating more tax credits than it can use on its current tax returns, so the unused credits are carried forward or inventoried for use in future years on a first-in, first-out basis.
Thus, 19 TRASOP credits generated in l
1977 uill be used before 4% or 64 credits generated in 1978.
i On caceptions, LILCO' argued that Judge Schechter's failure to recognice the It credits gives the benefit of those credits to consumers, rather than employces as Congress intended..
LILCO reasons that if it is to continue to be 1/ Case 27136, suora, vracr issued April 17, 1978, mimco p. 5.
Insofar as the relative burdens between today's and tomorrow's ratepayers are concerned, we observe that plant being financed today for the use of future ratepayers tends to cause current ratepayers to have to pay for higher returns on investment.
2/TRASOP is the acronym for Tax Reduction Act Stock Ownership Plan, a tan program designed to encourage corporate cmployers to buy stock for the benefit of their employees with funds the employer would otherwise pay in taxes.
90027139
=
'E-CASES 27374 and 27375 i
+
1 eligible for the investment tax credit, it must invest the entire tax savings produced for the benefit of employees; and if.all savings are instead used to reduce consumer rates, there will be nothing.left for its employces unless LILCO spends its own money, something it says it is unwilling to do.
It concludes that the Judge's approach will force it to terminate the program.
We approved LILCO's TRASOP program on the assumption that it would benefit employees at no cost to consumers.
It now appears that there is a cost to consumers since the existence of the TRASOP carry.-forward credits bars our j
recognition of other credits we could otherwise use to hold down rates.
In these circumstances, we are compelled to adept staff's approach.
At the same time, we must forbid i
further TRASOP investments by the company until it reaches a tax position that will enable it to use the TRASOP credits without imposing costs on consumers.
We therefore expect jl that there will be no unused TRASOP tax credits available in l[
the rato year.
Gas Department Tax Credits On exceptions, LILCO complains that the Judge, O
without discussion, accepted staff's proposal to reduce its Gas Department's ruvenuo requirement by subtracting tax j
credits equal to the sum of all the 1978 and 1979, and one-half of the 1980 credits..
The company argues that no more than 12 nonths' worth of tax credits can be used in determining the revenue requirement.
It is our policy to minimise Federal income tax expense to be funded by consumers by accounting for use of all available tax credits and 4
deductions.1/
These credits, adopted by the Judge, although i
1/Sec Case 26538, Consolidated Eclison Company - Electric Rates, 14 NY P2C 1503, 1534 (1974) Aff'd on appeal, consoliaatad.
Edison Comoany of Mew York, Inc. v. Public Service Commission, 385 HYS2d 209 (1976).
[
ll d
90027140
-3,-
i
~
4 CAS?:S 27374 and 27375 l
generated in prior periods, can and should be properly used to reduca the part of LILCO's tax liability attributable to its Gas Departcent in the rate year.
Its exccption is therefore denied.
Earned Vacation Deduction The Judge resolved a dispute between LILCO and staff regarding the amount of earned, but unpaid, vacauion pay that would available in the rate ycar,as a deduction to LILCO's tax licbility by adopting a ctaff adjustment that reduced the proposed electric expense allowance by S266,000 and gas expense by S75,000.
The company e. stimate of the deduction was SC00,000, equal to the 1974-1978 average, plus
$72,000.
The str.ff estimate adopted by the Judge was equal to the 1977 actual figure ($328,000) tines its 1.118 unge increase factor.
The actual vacation deductions taken in recent years, shown below, exhibit the kind of volatility i l that nr.ually justifies normalization:
1978
$593,003 1977 828,212 1976 588,742 1975 35'0,396 1974
- 69,590 On the basis of these figures, LILCO's estimate, which includes the very low 1974 and 1975 figures, seems low, while staff.'s estimate, based on the very high 1977 figure, seems high.
Uc judge that a total deduction of
$760,000, equal to the most recent three-years experience, times the staff's wage increase factor, is a reasonabic estimate.
I l
90027141 i.
ChSES 27374 and 27375
.I Amortir,ation of Deferred Taxes The Counties, in their brief on exceptions, urge us to require a three-year amortization of the
- excess" deferred taxes on LILCO's books that-result from the reduction of the corporate tax rate frca 48% to 46%.
Staff and LILCO agree that whatever the merit of the Counties' position, the ratemaking probicas created by the tax reduction are generic and nhuuld be resolved in the context of our investigation of thic matter.
We agree.
The Countiec' exception will therefore be dond ed.
Revised Computations Our substantial revisions to the operating revenue, expense, rate bacc and return allowancec recommend 2d by the Judge have required substantial revisions to the income tax computations he nade.
Our computations are set out in tho' appendices.
RATE EASE Deferred Tax Credits Judge Schechter adopted a staff proposal to reduce the rate year rate base by:
(1) the shareholder half of the 4% flow-through tax credits generated by the Shorehan ecn-struction; and (2) the difference between the rate year actual flow-through c'rodits and the three-year average we used to determine the " normal" 1cvel in the last LILCO electric rato case.
LILCO excepts.
The company makes a number of arguments with respect to the first item.
First, it notes that we did not make this rato base adjustment for the reallocated flou-I through credits in case 27136 and that, allegedly in accordance with the accounting procedure it negotiated with staff, the reallocated credits are " deferred credits" rather than
" deferred tan credits" that can be deducted from rate base.
90027142
~39-
i CASES 27374 ano 27375 Second, it argues that capturing the stockholder share of the 40 credits to reduce revenue requirerr.ont is unf air because it would not have adopted flow through accounting if we had not adopted a sharing policy.
Finally, it argues that using there credits both to reduce rate base nou and to reduce incomo later would be unf air.
It even suggests that this approach may be against Internal Revenue Service regulations.
The ccmpany says the second adjustment is also unfair because in Case 27136 ve used an averaging approach, including credits estimated to be available in the rato year, to increase the nominal amount of flow-through credits when the actual amount of test period flow-through credits available was below average.
Now staff wants to use the actual arr.ount availabic when it is above average.
We believe the staff adjustments are fair and consistent with our decision in Case 27136, where we said:
The cost of financing the Shoreham CWIP is imposing a severe burden on current ratepayers while, at the same time, abnormally high ITC benefits generated by Shorchan progress payuents are providing stockholders with an abnormally high return on cquity.
But LILCO's cash flow requirements prevent us from reducing the above-the-lino tax expense by allocating all of the ficw through credits to the ratepayer at this time.
Instead, we hold that the portion of all future Shoreham flou through credita that would be allocated to the stockholdcrs under our general policy, should be allocated to the ratepayers.
This should be done by deferring them now, for accounting purposes, and amorticing them later, as an offset to the attrition produced when Shorcham is fully included in rate base.
(Opinion Ho. 78-1, nimeo p.
20)
We have made an equitable determination that the 4% credits from Shoreham construction should be allocated entirely to the ratepayers.
There is no reason why they 90027143.
-~
CASES-27374 and 27375 should not be considered customer-contributed capiuc1 and an offset to rate base, regardless of the canner in which they are accounted for on the books of the company.
Otherwise, the company would have free use of t.he customer's money.
i It should be understood that we are not reducing rate base by any part of the stockholders' credits which are not i
related to Shorcham.
Indeed, the staff estimate of the accumulated rate year Shoreham credits is conservative.
Also, wo see no violation of IRS regulations since the tax l;
I credits in question are Option 3 (flow-through) credits to which ratemaking restrictions do not apply.
The second staff adjustment is similar; like the rate base deduction for the shoreham tax credits described I;
above, they represent funds available for use by the company because of credits which normally would reduce revenue requirement.
In Case 27136, the three-year average was expected to be the actual amount of flow-through ta:: credits utili zed over the period.
The sarue average used in this case is M s than the expected utilication.
As a result, a rate base deduction is required to reflect the expected excess credits available to the company.
Since our revenue requirement is considerably less than that recommended by staff and the Judge, the impact of this treatment is relatively small--a rate base reduction of less than $2 million.
LILCO's exceptions are, therefore, denied.
S_horcham Switchyard Judge Schechter adopted staff's $4 million rate base deduction to exclude the Shoreham switchyard from plant in service and to include it in construction work in progress, where it would accrue AFC.
He concluded that there was "no specificity" to the company claims that the facility will be in service in April, 1979, a year before the related Shoreham generating facility is in service.
The company excepts.
90027144 1 1 u
\\
CASES 27374 and 27375 j
i I
The Judgc incorrectly frtned this issue.
Staff did not dispute the company's claim that the Shoreham i
l switchyard would bc in service before the Shoreham generating facility.
It argued, however, that since the switchyard was constructed primarily to conr.ect the Shoreham generating unit >nd the Shoreham trenrmission line, it should not bc placed !n service until the Shoreham generating station is 1
in service.
While there is merit to staff's position, and its reco:mendation may be consistent with past LILCO practa.ce, it is not consistent with Part 168.3 of our Uniform System l
of Accounts, which requires that the completed portions of l
larger projects be included in plant in servirte.
While we would, for adequar.c cause, diverge from the policy of Part
,j lI 160.3 for ratcmaking purposes, we would be viiling to do so only-in cases where a major distortion in rates would occur if we failed to act.
This is not such a case.
LILCO's exception is granted.
Rate Base Canitalization Ad-iustments The company, staff, and the Judge computed LILCO's working capital requirements using the standard FPC formula.
The Counties' witness decided, on the basis of his " balance sheet" analysis, that the FPC formula resulted in an excessive working capital allowance.
For this reason, the Counties except both to Judge Schechter's failure to adopt their $39 million adjustment to working capital, and a similar rate base adjustment to recognize the $6.3 million injuries and damages reserve.
Staff and the company agree that the Counties have essentially proposed a rate base / capitalization adjustment without adequate support.
Staff's analysis indicated that there is a $1 million difference between the two, an amount too small to justify an adjustment.
- Further, LILCO and staff criticize the computation since the adjustment was based en a comparisen of the average balance shoot working 90027145 i
I I
CASES 27374 and 27375 I
i I
capital for the twelve months onded August, 1978 with the rate year working capital derived using the FPC formula.
When the balance sheet working capital calculation for the 1977 bace year is compared to FPC formula working capital for the sare period, the difference is eliminated.
The Countics' piccomeal working capital adjustments arc incon-sistent with the rationale of the FPC formula.
We believe the LILCO and staff-capitalization compariscns provide an accurate measure of LILCO's rate base and working capital rcquirements.
The Counties'" exception is denied.
ALLOWED. RETUR_S.
Judge Schechter recommended that LILCO be allowed a 10.13% overall return; a figure that recognizes his use of a pro forma rate year capital structure, staff's estimates of the cost of long-term debt and preferred stock; and a rcturn on equity of 13.40.
LILCO, which sought a 10.4% to 10.5% overall return allowance, and the Counties, whose witness recom:nended a 9.6% overcll return, have orcepted to his recommendation.
At this point in the proceeding, the differences among the parties have largely narrowed to the issue of what j
a fair return en LILCO's common equity would be.
The 12.25%'
allowance supported by the Counties' witness was the lowest recommended and the 14.3% allowance sought by LILCO Vas tho l
1 highest.
Staff recommended 13.45..
Because staff and the j
Judge predicated their recommendations on the incorrect
!l 9
assumption that we would add $200 million CUIP to rate base, and since there have been substantial changes in the financial markets and in LILCO's earnings since the rate of return testimony was developed, it would serve no useful purpose to review in detail the positions of each of the parties.
They are fully described in the reconmended decision and based on somcwhat stale data.
90027146
'1 1
t l
dASES 27374 and 27375 Our own rate of return analysis, using the same l
discounted. cash flow approach used by witnesses in the caso, leads us to conclude that 13.7t is a fair allowed return on equity for LILCO.
Over the past several months the yield on LILCO's common stock has' averaged 9.50-9.75%.
This is substantially higher than the yields assumed by any witness in the case.
But it does reflect the change in interest ratos that has occurred since the receipt of testimony in the case.
This yield would be consistent with a growth estimate based on LILCO's recent enperdonce, for it is likc3y that there have been changes in investor growth expectations as well.1!
Witnesses in the case provided growth estimates that ranged from 3.5% to 5.0%.
LILCO's 1978 return and rotention rateu make current growth expectations in excess of 4% seem too high.
The staff's figures on historic growth in book va3ue per share, a proper indicator of growth and onc which reflects the impact of new issues as well as the offect of return and rete.ntions, demonstrate that 3. 5% is a better estimate.
Investor growth expectations are thus in the 3.5%
to 4.0% range.
Combining these figures for yield and growth produces a " bare bones cost of equity in the 13.00 to 13.75S range.
From this, we conclude that 13.71, which includes an allowance for issuance costs, is a fair return on LILCO's common equity.
An allowed return of 13.7% cc:apares with the 13.3%
allowed in LILCO's last electric rate case, and the 13.5% we allowed in its last gas rate case.
A higher return is now justified by.the general increase in interest rates since (I
then, and our decision not to add more electric CWIP to rate base.
While it is true, as Suffolk County observed, that 1/We belicyc une very recent increase in yield above this range relates to a downward revision in growth expectations
~
attributable to circumstances other 'than the change in market interest rates.
Thus, any further increase in yield assumptions would be matched by an offsetting red.uction in growth expectations.
90027147 l -
.i CASES 27374 and 27375 13.7% is a higher return than those carned by most energy utilities in past years, it recognizes the concerns of the 1979 investor, and sono of the unusual circumstances that make the risk of investing in LILCO stoch different from the risk inherent in other securities.
Our overall return allcwance, reficcting a 13.7%
return on equity and minor changes in LILCO's cost of debt and financing plans since the close of the record, is 10.26t as derived from the following table:
i 1
Amount 1
Cost Return Long-Term Dobt
$1,275,375 4G.0t 7,88%
3.62%
Freferred Stock 337,710 14.0 8.35 1.17 Customer Deposits 8,300
.3 9.00
.03 Common Equity 1,103,450 39.7 13.70
- 5. {,f Total
$2,774,C35 100.0%
10.26%
CONCLUSIGM Our estimates of LILCO's probable revenues, expenses, rate base and cost of capital for the next twelve months indicate a nood to increane its electric rates by 3.3%
to produce about $26.0 nillion in additional revenue and its gas rates by S.1% to prcduce about $16.6 nillion.
Our computation of these rever.ne requirements is detailed in Appendices A and B.
The clectric rate increases are substantially less than those sought by the company, or even those recommended by our staff and the Judge, primarily because we have concluded the company does not need cash flow allowances to finance its construction program.
Where our expense allowances c;;cced those recommended by staff and the Judge, we found they were necessary to enable LILCO to provide the service to which its customers are entitled under the Public Service Law.
We have also recognized that LILCO's cost of 90027148
-4s-
i CASES 27374 and 27375 4
capital vill be somewhat more then either the Judge or staff expected, because general inflation--a phe:.omenon over;which neither we nor LILCO's management has much control-~in the past six months has driven interest rates much' higher than they assumed.
LILCO has, in accordance with our November 3, 1978 Statement of Policy cn Federal Anti-Inflation Guidelines _,
demonstrated that an electric rate increase of less than 7.0% ($87.7 million) would comply with the primary Federal
" price deceleration" standard.
It also claimed that a gas j;
rate increase as high'as 13.lt ($23.9 million) would comply f
with the Federal " profit margin standard.
The authorized electric rate increase is far--less than the increase allowed under the Fedcral price deceleration guideline.
By our own computation, the authorized gas increase will exceed the i
allowable increase under both the Federal " price deceleration
and " profit margin" anti-inflation standards.
We believe, however, that the indicated gas rate increase is not in violation of the Federal Anti-Inflation program because the company's gas operations qualify for an exception under the guidelines.
Here, as in the recently decided nochector Gas and Electric Corocration gas rate case,1/ gas rates held within the limits set by the Federal standards would result in a gas department return on equity that would be substantially less than the current yield on LILCO's long-term bonds.
Also, LILCO's common stock is selling at less than 90% of book value, just as RGEE's was.
This fact is attributable in part to the depressed earnings of its gas department in the past.
These considerations lead us to conclude that the company's gas department should be granted an exception to the Federal guidelines in this case for extreme hardship and gross inequity.
We are satisfied that these increases will not hamper the nation's effort to control inflation.
9 1/Ca'Ye 27372, Rocnester Gas and Electric Corcoration, 19 NY PSC (Opinion No. 79-12, issued April f3, 1979, mimeo
~
- p. 50).
CASES 27374 and 27375 i
Finally, we are investigating the propriety of LILCO's electric and gas rate design in a second phase of.
this procacding to dctormine how and from whom the company should receive the revenue it requires.
During the pendency i
of that investigation, across-the-board increases to obtain the additional recuired revenue, as proposed by staff and recommended by the Judge, will be acceptable.
The Comission orders:
1.
Long Island Lighting Company is directed to cancel immediately the suspended tariff leaves and supplements enumerated in Appendix C.
2.
The company is authorised to file amendments to its cicatric cnd gas tariff schedules designed to produce an increase in revenue.s in an alaount cnd manner consistent with the findings and conclusions contained in the foregoing decision.
The company shall serve copies of its compliance fili g on all parties listing appearances in this proceeding.
Comments of interested parties may be filed with the Secretary to the Com:aission within-three (3) days of service of the company's propcacd revisions, if personally served, and within five (5) days if served by mail.
The revisions shall not take effect until approved by the Commission.
[
3.
The company is directed to report all changes
[.[
in its property tax expenses through January, 1978 to the j
Secretary on or before January 31, 1980 and is authorized to-L file tariff revisions for second-stage rate increases at L
that time if necessary to recover property tax expense increases.
The company shall servo copies of the report, and notice of any proposed tariff revisions on all parties listing appearances in thic proceeding.
Comments of interested parties may be filed with the Secretary to the Commission within three (3) days of service of the. company's proposed 90027150.
~
CASI'S 27 T/ 4 and 2 7373 revisions, if personally served, and within five (5) days if served by mail.
The revisions shall not take effect until approved by the Corrnission.
4.
The company is directed to file with the staff of the Consumer Service Sections of the Power and Gas Divisions a quarterly report containing the. information described in Appandix D in a form and nanner approved by stoff.
5.
Except as granted herein, all exceptions to the Administrative L w Judge's recommended decision are denicd.
~-
6.
Except as raodified herein, the findings and conclusions of the 2.cco:= ended decision are adopted as part of this Opinion c.nd 07: der.
7.
Thic proceeding is continued.
By the Cor=ission, i
i (SEI.L)
(SIGNED)
SAMUEL R.
MADISON l
Secretary n
i l
+
6 6
4 90027151
[ -
a C.
27374 Appendix A Schedule 1 LC"G TSIJ.ND LICi:TI::G CO" PAN'l Commir.si6ii Revenue Requirc::.ent i
Electric Department (000)
Revenue Requirc:r.ont per Schedule 2, Page 1 26,000 Less: Revenue Taxes 4.02%
$1,005 7.dvertising 0.075%
19 I
Uncollectibics 0.594%
195 (1,219) l Operating Income 24,781 Less: l'oderal Incomo Taxes 8,155 i
l.
Dalance Availabic for Return 16,626 Adjusted Balance Available at Present natos 143,340 Total Available for Return 159,966 Adjusted Rute Base per Schedule 2, Page 1
$1,558,728 Rate of Return 10.261 I
i i
e i
i 90027152
-~
A t.D N
N O
O Os C. 27374
- y. : ; IS'J.PD ?.T Crig: Cm.'t W A; pen.31x A Str.te:::nt 4,f Cpac4Lis.J Inuw s, F tc 1:sso, i<ato of Deturn Schedule 2 rr.,r t.hc 12 th.th.s 1M1.:; June 30, 19 0 t' age 1 1.luctric
.'k
.nrtr. <-r.L t
(%0)
.% Fis. ally A;}u tca 1y AI.3 As Atjust-d Cc,m:mi es ten As Adjusted Cor ai s aic,rn Aftur Itate c..ep.my
- ge. runt s ny M.p '
2.djur.t rmnt s Dy m nlusion Pates i nc rea r.
(1)
(2)
(M (4)
(3)
(b)
(7)
(:. c a.t I ng Povenu.- e 2 les of Esco:ricity 5 734,471 1,212
$ 735,601 (1) $ (3,0%)
$ 7J2,$91
$20,0co
$ ant,wl 4 <:11 4 c1 4 vil
.t.561 s' t t.o r Opu s :.t is.g Huvunue s
_7:,9,172 1,212 7.> %. M (3,012) 707, 6 2 Jacq sjilg a
r Total rp a at t ms i w..ws g r.at h a
- 4. fultatsr..an. o Expenses 40s,221 (17,0 U.)
4'21,275, (2) 3,104 454,459 174 454,L13 (1..titelle Co..tcibutiana 270 210 210 270 tsprecistroa 50,925 (1,072) 44,25.
(3) 377 49,631 49,611 122 h )
(4) 1,CC9 12.1,519 1,CIS 12 5, % ',
's
- e. 5 u-hsr than Incc.ano Taxos
- 17- ~G7 W 477) 6.' 1, t. 'c '>
S, 2.a 6?a rips 1,219 (129,t.Rs g
?nal h.t ;' d
(?4,
- Q g: a_t h.g Y o.mv 141,34u 2'2,307 166, %'.,
(3,342) 128,Cl 3 24,701 lut,394
- r. 0u 41 Intus e Taxes-Ac Allocateed 20,73
(? thi) 13,740 (S)
( 3,46 /)
15,273 U,155 2J,4]
a t: A 6.w ro t t u r t o. ome
!?3. 3%
C 2 7,.J.O O 1 12 t '.
(4,ii7$1
$ ! !3,310
$ 16,e224 3
IW.W.
It at n b., u t.s t 1laut
$1.190,770
$ (17,01,1)
$1,179,L39 (C) $
3,5G3 51,181,19d
$1,103,19 u s.u k in.; c r_,it al 132,401
( 3,1u t) 12C.217 G) 46 128,696 123,696 t'
a t a n.;t is.a.lotk in hugcass 7.',c, 0 ~,,
(2C3,000)
%3,004 (G)
(200,000) 3CC,000 300,000 l e:.u s lwsts c 1 e e<!cral Inam Taxes G.s,7 / 3) 2,130 (its.c41)
(9)
{369)
'19,512)
(19,S12) t o., t. t r ed t..vea t. tax crudits
(;y,y.2) ta)
( mu t)
(10) 1.409
( 2's,1 r.0 )
$ (1,494 )
_(1Lg g Tout
,01/ ag,r/c
$(2 m.t.c2)
Oi,r go;.
$(1.5,4s?)
st,ct. 4,: 22 s(4,498)
- 1,'.,3,73 I.. ? cot e 1 11at n of Peturn 6.cils G. cit 9.176 10.20s
- t cr Exhibit 240, Sche.d alo 1. Column 3.
- ca r A1.1, 6 D, Apt.endLx C, Pagu 2.
e a
- c. ~2?374 -
Appenpix A Schedule '
i LONG ISLAt!D LIG*ITIJG COMPANY Page 2 l,
Explanation or Conmission Acjubtnents 3 :
To Electric Operating Incema For the 12 Months Ending June 30, 1980 (000)
Effect On i
Operating Adjustment, Fyxolanation Incore t
Oceratinn P.evenues I.
l(a)-
Dec ce.no revenue to reflect reduction of meter i'
tampering recovories to cc:apany revised level.
Incrcase Per ALJ
$1,212 I
I Increase P' r Co:=1ission 339 e
~
Com.nission Adjustment (873)
(b)
To adjust operating revenues to correct S.C.
2 MRP billing error.
(2,219)
M2,092)
Effect On Operating Excense 1
Operation and Maintenance Excenses 2(a)
Pr ducticn Exocnsoc (1) Allowance for Maintenanca Project contingencias.
Per ALJ Per Conraission 200 p
Commission Adjustment 200 (200) li (2) Roversal of ALJ reduction of Doiler p
Maintenance Projects, p
$ Per AI,J
' Per Coramission
- 28_3, Commission Adjustnent 283 (283)
(b)
Transmission and Dictribution Expenseg (1) Cor:Jnission allowance for tree trimming expenses.
Per ALJ
$ 'Per Commission 880 Commission Adjustment S80 (880)
(2) Reversal of ItLJ reduction of Public Works expenses.
Por ALJ
$ Per Commission 173 Commission Adjustment 173 (173) 90027154
[ -
1.
i 27374 Appendix A Schedule 2
_LONG ISLA"D LIGH_TT'G COMP.'OIY Page.3 i
Explanntion of Commission Adjustments To Electric Operating Income For the 12 Months Ending June 30, 1980 (000)
(Cont'd)
Effect On Effect On Operating Operating jidj us trent.
Enolanation Exuense Income eration and Maintenance N:renses 2(c)
Customer Accounts Excensos Commission allowance for increase in Customer Relations expenses.
Per ALJ ($2,193 - $1,137)
$1,056 Per Commission
( 5 0 % o f $,2,19 3 )
- 1,09_6 Co:amission Adj ustment -
40 (4 0)
(d)
Administrative and General Excensos Commission reverral of ALJ adjustment to ESEERCO costs resulting from PAS"Y withdrawal.
Per EJ 220 Per Commission 50 Commission Adjustment 170 (170)
(e)
Advertiainc and Public Affairs Expense Adjustmant to ALJ disallowance.
Area Development 156 Emoloyee,Com wnication 90 Ch'ange in Revenue 2
Commisnion Adjustment 2 41T Electric Portion @ 90%
(223) 223 i
(f)
Storm Damano P.eserve and Accrual Adjustment to increase reserve limit and reflect resultant lower amorti::ation.
Per ALJ 601 ji Por Commission 434 Conmiission Adjustment (167) 167 (g)'
Labor Productivity h:
Reversal of company's productivity adjustment.
1,730 (1,730)
- Company Adjustment - Exhibit 38A
$2,811 Electric 0 78%
2,193 Gas @ 22%
618 90027155
t.
27374 A p p e;' ' _;. 7.
Schedule 2 LC"G T SI.M D b1G!!TIBIG CO.NnAtiY Page 4 Expla na tion o r Cor. a ris an Ac] uc =.cnt:
To Electric Oparating Inec.~.e For the 12 ?'onths Ending June 30, 1980 (000)
(Cont'd)
Effect On Effect C.m Operating Operating Adiustment Exclanction Exnense Income Coeration and Maintenance I?:censcs, 2(h)
Wage Increar:o Indev.ing Adjustmenb to reflect restoration of indexing due to revisions caused by Co:r:niscion cetjustments to labor base.
Adj us tment r; to lahor base ($1,L7G X 68.36%)
$1,077 j
Waae incre:tse factor 13.3%
1 Co:r;nission Adj ustmont 145 (145)
(i)
Inflation Inde::inc Adjuutment t;o raficct restoration of inde::ing duc to revi.sions caused by Corv.ic:sion adiuctments to in:"stion ba r.s e.
Adjustments, to inflation base ($1,576 X 31.64%)
499 Inflat. ion factor 17.5%
Commission Adjustment 86 (86)
(j) ljage Increase - " Proper Period" Recalculation of elimination of two extra ::.ont.hs Wage Increase conipounding resulting from Corriscion adjustments.
Per ALJ 234 Per Cor.nission 313 Commission Adjustment (79) 79 l
l (h)
Inflation increasa "Procer Period" Recalculation of cli*nination of two extra conths Inflation Increase compcunding resulting from Co.mrission adjust =cnts.
Por AI,J 265 Per Cor:nission 319~
(54) 34 Commission Adjustment Total Operation and Maintenance Adjustments
$ 3,lM l_
3,184 90027156 w
l
Appen.iix A C.
27374 Sched'.le 2 LONG ICL7J D LIGMT1:!G CO:OL'.:Y Page 5 Explanation oZ Conmission..t,'jEETments I
To Electric Operating Income For the 12 Months Ending Juna 30, 1980 (000) f (Cont'd)
Effect On E f fec t C:'
Operating Ooeratirc 4djuntnent
, Explanation Expense income _
gpreciation Eqpense 3(a)
Conmiccion revicion of ALJ'c change in Depreciation rates on Street Lighting Plant to ten-year life and 25% calvage.
Convaission Adjustment 245 5
(242 (b)
Allowance for Depreciation Expenne related to placing Shoreham Switchyard.in Rate Base (per Exhibit 212).
132
(.' 2 2 Total Depreciation 7.djustments 3
377, ~
S
({,
faxes Othe_r..Tha..n Tnc.onn Taxes 4 (a)
Adjuaternt to update Property Taxes to later.t known tax bills.
Por ALJ
$4,977 Per Co. letter 3/29/79 3,199
~
Commission Adj ustment 1,778 (1,77:
(b)
Adjuatment to reduce P.evenue Taacs related i
to Adj ust:.ent 1(b) above.
($2,219 X 4.021)
(89)
.@i Total Taxes Other Than Income ' Tax Adjustrc.ents 1,689 (1,60_.
1 Federal Incor.to Taxes 5
Per Appendix A, Schedule 3, Page 1.
S ( 3, 4 6 7_)
3,4 6~
.~ ~
e.
~
~
~
90027157
b.27374 Append x A Schedule 2 LONG ISL7.:JD,JdG!j2['jG CO"PA*;Y Page 6 Explanation of Com-is:a.on Adjustments To Electric Rate Base For the 12 P.onths I:nding June 30, 1980 (000)
(Cont'd)
Effect On Adjustment Explanation Pgte Base Net Plant 6(a)
Reverse ALJ cdlustment related to Shortham Switchyard in Rate Lose (per Exh. 112).
4,113 (b)
Modification of Rate Base allowance for deferred Sto? m Dar' age expenses.
Chango in reserve 500 Less one-half of first year's change
'.n amorti:'ation 84 Comnir,sion Adjustment (416)
(c)
Adjuotmer.t to Depreciation Reserve to reficct changes in Depreciation expense (Adjustment 3).
Commission Adjustment ($377 X 1/2)
(188) mWm8 Total Adjustment to Net Plant S
3,5M Pforhina Capital 7
Adjustmont to reflect changes resulting from Commiss ion adj ustments.
Correain' bio [ Adjustment ($3,184 +.$167 X 1/7) 479 Construction Wo:-k in Procress 8
Disallo'.rance of Shoreham CWIP from Rate Base.
$(200,00:
I i
90027158
7-Aprendi: ;
C.
27.374 S c h e <.' a l a 2 LO!!G ISLA'!D LIGHT.TNG CO!'.P;.W Page 7 Exp1hnaticn o. Cor.miTO:.cn 'l>.dt u'c tmento
~
i To Electric Rcte Base For the 12 Months Ending June 30, 1980 (000) j (Cont'd) l Effect C7 Sdjustacnt Exclanation Rate Ense peferred Federal Income Tcxon 9
Change in hverage Accumulated Deferred Taxes due to Commission adjuntnants to current Deferred Taxes ('.acCore rate increase).
Current Daferred por ALJ
$ 16,709 Current Dcferred per Commicslon 18,446*
Additional Defdrrea Taxes S
1,737 Rato Dase effect (1/2)
(96{,i geferred Iracstr.ent Tax Credits 10 Change in Average Accamulcted Deferred Invectment Tax Credits due L3 Commiccion adjuctments (be' ore rate increase).
Current Deterred end Stockholder ITC par ALJ 2,817 Current Ccferred and Stockholder ITC par Commission Reduction (2,817)
Rato Bace effect (1/2)
S 1,409 l
- Per Appendix A, Schodule 3, Page 4.
1 90027159
m-C. 27374 10aC FSfMD f.tenri sc cortt'sY Ccryutation ot Fedetal It cume T.:w - Per Cotwission Alpendia A 1.1.-et r! e t t c r t :e-rat Stbudule 3 ror the 12.% nth Lnding June 30, 1903 p 9, 1 (w)
As Adjusted As 1.djusted Cet;:-j se lon As Adjusted Comission For Coccelssion JLA!J grit snen t 's Ry Cru~nt.sion It_a te f rscre.*me R.e t e t ue rnssi l
(1)
(2)
(3)
(4)
(5)
Total Operating Income M,yS5
$ (3,3 42) 51% 613
$24,701 gtt!,Jtt, Other Inenec - Att
- 64. WO f.1 )
29,N4
'J),U"4 9J 034 Taust Interest Charges
(?2,7eO)
(2)
(0C0),
(2 ),600)
(23.@0)
Other Interest Charges
(' '),7 3 '1)
(3) d l,629)
(93 3GI)
M e)f-})
2 Etnistot.nl jfMM)
- 21. C IS (23.070)
_ 2 I 'U9)
(
e Incows t$efore Incomo Taxes 31**,"O1 l e l li I IS, Sj 24 7E'I I'3 3IS rwhmt Non-Taa' ale It ms Allowance for Funds Used During Construction Jt g 29.201
- )1,0d4 91,934 y
Add-flack of It en tht Tax-De ds*ctible Accrual for Injuries and Darwjes Reserve Accraial for Dad th.lete Iteserve Acciual for storm Darsge beserve 1,601 (4)
(167) 1,434 1,434 l
Sntt e,r.cutal 1*rovision 1,4r,s 1,4cs 1,4cp As. nt itat ion of n>rtga*;e Iteccrding Taxes 275 275 275 t'AC Costa - Deferred (2,27.t)
(2,274)
(2,274)
Subtotal 1,070 (157)
SS3 903 Ded xt Adi!!tional Tau Deductions Tax tepreciation in 1;xcess of Dook Depreciation 15,506 (5) 1,0c6 16,672 16,672 Iasses Charg.*d t<> Itetuerve s In',uries sert tuma p s Stom tenweg ILvl f e4s* 8
- 4 Co
- t ut F s:oving h t arod Property 1,005 1,O'.15 1,0J5
!O Co-ats (targed to Construction
.Q 1%yro11 Taxes 1,1G1 1,151 1,161 1
Is n':: lores 2,013 2,013 2,013 g
S.les Tawen 2,546 2,546 2,545 Pe ! rr<me:-ty Tamos 36,731 16,731 16,731 t%se ch and Ivyclopmer t Conts 517 517 S '.7 C.
Pretert y Tases - Lien Date 3,272 3,272 3,272 O
ttino ttito 8 2 - Cor.m*_ruction Charges 1,267 1,261 1,2b7 5
ILut he) Vahat tois Adjustnie nt 734 (5)
(141)
'5*73 59i Subteto)
J4g>17 05 4 's, u5I
- 45. tU Tax hte In curse (t/>se)
$ 10,t,79
$(l?gG31)
$ f 3. 311)
$2p6 L
$ 21,471 Foteret f ucciae Tax at 4%
$ 4,912
$ (G,432) 1 (1,529)
$11,399
$ 9.072 teass Investm.et Tax Credit
(* c45) 4.045 (12,232)
(12,212) l'eJeral In &.o Tax - Current UG7 (2 J37)
( 1,'.20)
(u3J)
( 2. 35M D.sferreil Fe bral Iracme Tat - Current IG.IG?
(7) 1,737 10.4'.6 16,446 tatferrrul Fester 1 Inc9ao Tax - ?.nortization (1,653)
(i,653)
(1,fc 3)
Istented Investmeit Tam Credit 1,5 tPJ (0)
(1.509) 5,744 5,744 T todloolder Investent Tax Credit j,22ft (3)
(1,27rt) 3,214 1,211 trut redenal Incotao Taxos (AJ)uctment 5)
$ 10,740
$ ( 3. 4' 7)
$ 15,273 (10) $ n,155
$ 23,120
I i
C.
27374 Appendi:: A Schedule 3 LONG ISLAND LIGMI::C COMPAtIY Page 2 Explanation of Com:aission Acjustments To Electric Department Federal Income Taxes For the 12 Mpnths Ending June 30, 1980 (000)
Effect On Taxable Adjustment Explanation Income Other Income - AFC l
1(a)
Reversal of ALJ reduction of AFC rel~ated to additional Shoreham in Rate Base.
($200,000 X 7.63t).
$ 15,260 (b)
Additional AFC on revised Shoreham construction expenditures allowed by Commission. ($4 3,000 X 7. 63%).
3,281 (c)
Revision of AFC to allow use of the FERC 10,663, method to compute ATC rate.
_$ 29,204 0
Adjustnant to Other Income - AFC punt _ Interest Charyca 2
Recalculation of Trefit Interest to update interest rate to 10.~5% estimate of prime rate.
Commission Adjustment (,5% over ALJ rato)
( 9 0_0 )
Other Interest Charces 3
Revision of interest deduction to change Long-Term Dcbt cost rate.
~
Cost Amount Rate Interest Long Term Debt $1,2757375 7.87%
S100,372 Customer Deposits B,300 9.00 747 S101,119 Electric portion at 92.33%
$ 93,363 89,734 Interest Per ALJ Commission Adjustment
$(3,629) i 90027161 I
L
4 l
C.
27374 Appendix A Schedule 3 LONG ISLAND LICHTI"G COMPANY Page 3 Explananlon ot Co=nission Adjustments To Electric Department Federal Incomo Tancs
'For the 12 Months Ending June 30, 1980 il (000)
(Cont'd) 1 EfEcct on Taxable Adgustment Explc:intion Incor.e Accrual-for. Storm Demage Ecserve_
i 4-Adjuctment to reviue add-back of Storm Damage accrual to level allowed by Commission.
t Accrual per ALJ 1,601 Accrual per Cc:caission 1,434 3
Commission Adjustment S
(161)
Tax Decrecia tion in Execes of Book Decreciation
~
5 Additional ta:: depreciation related to I
chance in book deprcciation rates (per'Adj. 3).
$(1,096)
{ '-
Earned Vacation Adiustment 6
Revirion of Earned Vacation deduction to three year averago inflated for Wcge Increase.
Per ALJ
.. ~ S 941 Per Commission 760 Consission Adjust =cnd 181 Electric portion at 78%
141 il 1
l I
i r
90027162 F
T C.
27374 Appendix A Schedule 3 i
LO::G ISIyj D LIGHT _ DIG COMPAN'l Page 4 Explanat on of Corrnss.cn Ac;ustuents 1
To E3ectric Department Federal Incor.e Taxes For the 12 Months Ending June 30, 1980 (000)
(Cont'd)
Effect On Incomo Adiustmen_t_
Exclanation Taxes I
7 Recalculation of Leferred Taxes - Current under the APB #11 method.
48% Deferral 46% Deferral 1979-E0 Avertec As Pacegruted Asset Depreciation Range
$ 6,223
$ 5,969 Cost of Ece. oval 527 505 Mortgago Taxe:;
310 297 Puel Coct Adjtstr.cnt (922)
(884)
Gas Cost Adju:t::e:it 2GB 757 Def cIred Th::cs S 6,411 S G,144
- 46%
r Originating Th.ing Differences
_$13,356 Tax tst 4Gt 0 6,144 Additional IOC at 70% linit S(4,301)
Resulting Deferred Tax
$ 1,043 Deferred Tax computation Total Electric At Gas At Deferrals E6.87%
13.13%
APD #11 Iter.s
$ 1,843 S 1,001 5242 Shorcha:a AFC Net of Tax 16,845*
16,845
.$ 1_8., 6 8 8 S13,446 S242 l
- R Met of Tax Revision i
Deferred Per ALJ
$13,122 l
Cc=11ssion reversal of CWIP in Rate Base 3,771 4
Deferral at 1.87t 16,893 L
Percentage Reduction to 1.78% TERC Rate
(.0481)%
Reduction (813)
Net 16,080 Plus: Deferral related to additional 90027163 Shorehan expenditures $55,000 X 1/2 =
S43,000 X 1.75%
765 Revised Deferral S16,S_45 Deferred Taxes Per 11J (Electric Portion)
$16,709 Deferred Taxes Per Cor.nission (Electric Portion)18,446
~~~
Commission Adiustment
$1,737
r C.
27374 Appendix A Schedule 3 IONC ISL'J:D LIGHJiNG COS'.PANY Page 5 Explanation of Co:=ission Ad]ustments To Electric Department Federal Income Taxes For the 12 Months Ending June 30, 1980 (000)
(Cont'd)
Effect On Adjustment Income Exclanation Ta x e s ____.
Deferred Investment Tax Credits S
Eliraination of Deferred ITC bec;use of negntive current income tax before rate incrcase.
$ ( 1_, 5_8 9 )
Stockholder Investmnt Tax Credits 9
Elimination of Stockholder ITC because of negative cura:ent incomo tax before rato increase.
S (1, 2.?. G )
l e
fi t
i i
i 90027164 b
o
y I
I Cs. 27374 Ispper. dix A j
27375 Schedule 3 Page 6 LONG ISLAND LIGHTING CC".PANY Explanation of Conuncsion id uctmentc j
E-10 and C-5 to Electric and Gas Income Taxes After Rato Increase For the 12 Months Ending June 30, 1980 (000)
Total Electric Gas (1)
Federal Incomo Ta:: @ 46's
$ 20,601 9,879
$ 10,722 (2)
ITC utilization @ 70%
14,421 12,232 2,139*
(3)
Federal Income Tax - Current 6,180 (2,353) 8,533 (4)
Flou-through 7,364 6,488 876 (5)
Lars: Stockholder portion - 50%
3,682 3,244 438 (6)
Deferred ITC
_7,057 5,744**
1,313
- Maximum allocable based on generated credits.
- Maximum flow-through allcwabic
$10,300 Actual flow-through - line 4 7,364 Difference - Option 3 - Electric - deferred 2,936 Total Electric deferred - line 6 5,744 Electric deferred - Option 1 5 2, 8 0 3_
Summ*ary of ITC Total Electric Gas Option 3 - flow-through 7,364 6,488 876 Option 3 - deferred 2,936 2,936 Option 1 - deferred 4,121 2,302 1,313
$ 14,42f q 1Y,232 2,189 90027165
i l
f C.
27375 Appendix 3 Schedule 1 LONC ISLAND LIGHTII;G COMPANY Commission Revenue Requirement Gas Department (000)
Revenue Requircment per Schedulo 2, Page 1 S lf,,5EO Lecs: Revenue Taxes 4.02%
$ 666 Advertising 0.0750 12 Uncollectibico 0.594%
98 (776)
Ope' rating Income
~"
15,804 Less: Federal Income Taxes 7,271 Balance tivailable for Return 8,533 Adjusted Dalance Available at Present Rates 15,.074 Total Available for Return
$ 24,507 Adjusted Rate Base per Schedula 2, Page 1 s238,lel
_g Rate of Return 10.26%
90027166 h
1 1
uw' T t?m !.rc t-!Mc CwmY A;rendix B C. 27375 rehedule 2 Steterent of Operating Incow, ste Disc, P.ite of Retum For ti.e 12 !unths P.n.'Ing Jone 30, 1909 Page 1 Gas D parts nt (N'0)
As Finally Aap.ctej By AtJ As.*.d'usted Coreissien As Adjusted Comission After PJte cc:- s sy*
313-t-vc.ts sv s t, "
rdi u N nts sy Ce,,tsalen cat es increese (1)
(2)
(3)
(4)
(5)
(6)
(7) sales of Gas
$100,201 5
$100,203 (1) $ 545
$100,754
$10.560
$197,3?4 g retin y P svenues 1,516 Ctl.er Operating Revenues 1,516 1.5?G 3,53G 19'1, H 70 54 1:e2,290 16,919 Total 1H1.739 5
If't.714 0;wratio & Maintenanco Erpenses 133.644 (3,126) 139,51
(1) 902 131,500 110 131,610 g=erattn]3'rpenses 20 30 30 0.aa ltabic Contrit,utions 30 twrecciation 6,870 (511) 6,329 6,329 6,329 Tauea Other ' han Income Tamos 26,le9 (1,306) 24,Er3 (3) 2t3 25,131 06G 25,797 Arwrtization of Prol.crty lasces Sie Sic 51ft Sto Total 167,2',1 (4,971)
! 62,77't 1,230 161,tou 776 I tA,2*3 3 14,403 4.978 19.4%
(GCC) 18,792 15,001 34,53G gging Inmwn Federal.Iscomo Taxes - As Allocated (225)
IM 3. MO (4) f 542) 2,00'l 7,2{
10.079 Not Operating income
$ 14,713
. $ I do)
$ 16,116
$ f142)
U 15,974
$ n,513
$ 24,*.07
$215,014 S
Patan D.nse - Avern Je
$214,744 270 0215,014
$215.014 i
4 i
l Pism).!ng Capital 24.090 (203) 24.407 (5) $
122 24,609 24.609 1:et Plant g
O Chasistruction Work in Progross 4,120 4,320 4,120 4,120 N
tosa: Deferred rederal Incomo Taxes (3,254)
(20)
(3,274)
(3,274)
(3,274)
(1,70.1)
N Deferred Investment Tax Credits (nll)
(ft6S)
(1,70';)
(6) 419
'1,209)
$ (419)
~ 02ie,761 Total
$219.457 5
(8 151) s2 39,f.19 541 5219. i nt)
S (419 ) - '
- 6. 6*n 10.2 %
}
6.751 Yndicated P. ate of hturn 6.14%
q
'.f
- Por Exhlt.it 2'su, Schedulo 1, Onlumn 3.
1
- I*cr AIJ, ItD, Apt.emlix C, Page 2, t
i i
~ -~
i 1
- p. 21,375 A p p m--.._.: H Schadule 2 LONG ISIAND LIGHTI"G CO:9AN'l Page 2 E>:planation of Commissa.on Ac;us ments To Gas Operating Income 4
For the 12 Months Ending June 30, 1980 (000)
Effect On j
Operating Adjustment Explanation Incer.e t
1 b_peratino Revenues 1(a)
Adjustment to increase revenues to reflect change in S.C.
5 temperature setting.
549 I
(b)
Decrease in revenues to reflect reduction of meter tampering revenues to company revised level.
Increase Fer ALJ 5
Increase Per Commission 2
Commission Adjustment (3 )
546 i
Effect On Operating Expense Doeration and Maintenance Ennenscs 2 (a)
Transmission and Distribution Exnnnses (1) Elimination oi normalicing adjustment to servicing customer ecuipment expense.
277 (277)
(2) Elimination of adjustment to normalize routine operations expense.
120 (120)
(b)
Customer Accounts Expense i
~
Commission allowance for increase in Customar Relations expenses.
Per ALJ 297 Per Commission (1/2 X $618)
- 309 Commission Adjustment 12 (12)
(c)
Advertising and Public Affairs Expense
.j 1:
Adjustment to ALJ disallowance.
Per Commission ($248 X 10%)
(25) 25 0 See Appendix A, Schedule 2, Page 3.
90027168 n
L 1
l
m l
C.
27375 Appendix B
{
Schedule 2 LONG ISL.3.ND LICT'1MG CO"2 ANY Page 3 l
Explanation at Co:5:tission EJJustments To Gas Operating Income For the 12 Months Ending June 30, 1980 (000)
(Cont'd)
Effeat On Effect On Operating Operating Adjustment Explanation Expense Income
\\
Operation and Maintenance Exocnses 2(d)
Lujlor Produetivg Reversal of company's productivity adjustment.
577 (577)
(e)
Wage Increase Indexing
'i Adjustment to reflect reatoration of indexing due to revision: caused by Comission adjustments to labor base.
Change in labor base (S'09 x 76.77t) S 314.-
Wage increase factor 13.3%
Commission adj ustn.cnt 42 (42)
(f)
I'nflation Inde::ina Adjustment to reflect restoration of indexing due to revisions caused by Commission adjustments to inflation base.
Change in inflation base ($409 X 23.23%)
.~
95 Inflat' ion factor 17.5%
Commission adjustment 16 (16)
(g)
Wage Increase - "Procer Period" i=
l~
Recalculation of climination of two extra I
months wage increase compounding resulting from Commission adjustments.
Per ALJ
~
147 Per Commission 171 Commission Adjust' ment (24) 24 (h)
Inflation Increase "Proner Period" Recalculation cf climination of two extra months inflation increase compounding resulting frca Commission adjustments.
90027169 Per ALJ 127 Per Commission 140 Commission Adjustment (13) 13 l!
Total Operation and Maintenance Adjustment S
982 S
(982) e
-.y
, ~---
,.-r-
--m-i
- g. 27 75 Appendix B Schedule 2 LONG ISLAND LIGHTIMG CO."PA:?
Page 4 Explanat2on 5f Co=Ession ;.djustments To Gas Operating Income For the 12 Months Ending June 30, 1980 (000)
(Cont'c)
Effect On Effect On Operating Cperating idjustment Explanation Expense Income Paxes Other Then Incon.e Taxes _
3(a)
Adjustment to update Property Taxes to
~
later.t known tax bills.
Per ALJ
$ 1,306 Per Co. ltr.3/29/79 1,080 Commission Adjustment 226 (226)
(b)
Adjustment to reflect Revenue Taxes related to Adjuntment 1(a)
($549 X 4.02%)
22 (22)
Total Taxer Other Than Income Tax Adjustnent S
248 (248)
'ederal Income Taxes 4
Per Appandi:: D, Schedulo 3, Page 1.
5 (542) 542 i
i, L
L al i-
'90027170
L 27375 Appendi:: D Schedule 2 LO!73 ISI@::D LIGHTI:iG CC"P;s!7Y Page 5 Explanation of Co=aission />d]ustracnts To Gas Rate Dase I'or the 12 Months Ending June 30, 1980 (000) l (Cont'd)
Effect On idjustment Expla n a t _i_on_
Rate Barr I
'7orking Capital j
i 5
Adjustment to reflect changes resulting from Co=aissicn adjustments.
Co:r. mission Adjustment (5982 X 1/8) 122 i
s
- eferred Invnstm3nt Tax Credits 6
Reduction in Average Accumulated Deferred Investment Tax Credits due to Commission adjustments.
Change in Deferred ITC par Co.TJaission 838 Rate Base effect (1/2) 419 9
90027171
r
.y
!+
l:
C. 27375 L
re:c rstne ?.rr:re w: ev:r Atw ndin a Computation of f*cderal Ir.c w Tawes - Per Comrsission ScheJule 3 Cec Depar*e=at Page i For the 12 M mth.* rnlin3 Juna 30, 1930 i
{0M)
As Adjusted Aa AJ)uat*;d Cem icslon As Adjusted Commission For Censaission Rw RI.T btJ.istaent s g "<wstsnion Rote Increase F.ste.nete..s _e (1)
(2)
(3)
(4)
(Si Total 0:erating income
$ 19,4c6 (cre)
$ in.7c2
$15, sos
$ 34.5m Other Inco:ne - Arc 1btal Interest Charges
_~
(7,764)
(1)
R
]7]5 f.)
(7,75f-)
Subtotal Incomo tofone Incoce Texes J,7w4) 0 (7 J G)
(7,7%)
11.101 (67c) 11,026
- 15. T t 2i.,9 10 Deduct Note-Taxatste Items Allowance for Ibnds t'ced During Construction pat-tM*-k of f te ns Mnt Tn-fwductit:1st Accrual for Insjuries and Lamages P.es.rve Accrital for 13ad tw!sts iteserve Surt.lem.mtal Provielor 332 332 f.roortizatio*s of Property rose 312 514 514 A.-v2rti.ation of Ibatgage Recording Taxes 514 31 CAC Costs 1.eferred 31 31 755 756 Subtotal 7'C 1.6 13 1,53_3 1,515 Deduct Asl.11t ional Teu thad' set teng T.ex Det.reciation in Excess of Booit 1)epreciation 3,261 (2) 541 3D02-Insses Cliarged te herve 3,602 Injusles a.nI t)amages 2.sd twt,t s Cost of Perseving Hetired Propertf r
288 283 Cost s Chatyed to Constructions 2t'6 r..y r of 1 T. sues 175 Pensfors 175 175 300 Sales Taxes 300 300 100 100 100 Prnperty Tames - Lien Date 243 243 EerivJ v.scation Adjustment 243 207 (3)
(40) 167 subtot.nl C
107 4.04 501 5d55 5.15
}
Temable income (loss)
C
$ 0 4111 M i l77)
$ 7,504
$ 15,00 4
_$ 2 3, l'rt j
j Faderal Inctw Tar at 464 N
$ 3,9?)
(541)
$ 3,452 3 7,270
$ 10,722 foams Inventwnt.T.ex Credit rederal ines Tau - Curre-nt j2MI:0) 837 (1,3S2)
( t137)
(2,l er))
q 1,004 hts 2,300 t>,4 3 3 0,L35 Infereed rederal inconnu Tau - Cincrent 6
242 tbf 9 red reJeral Ittsonne Taz - Pmortiration 242 242 (143) twferred !s.vesternt Tax credit (419)
(4 4 t')
1,314 (4)
(033) 476 03tt 1.314 Stoelholder Inve Jtenent Credit 4 )ft A irl 439
- Iet Federa.1 Incomm Tares (Adjustment 4)
$_ h 159 6 42) 2.ft Od (5) Q
$ 10,Ol}
t l
1 h
l J
m.m
n 4
27'375 Appendix B Schedule 3 LONG ISTJCID LIGHTI:!G_CO OAH Page 2 Explanation of Commission Adjustments To Gas Dapartment Federal Income Taxes For the 12 :bnths Ending June 30, 1980 (000)
Effect On Taxable Ndjustment Explanation Income i
Total Interest Charcos 1
Revision of interest deduction to reflect i
change in Long-Term Debt cost rate.
Interest per ALJ 7,764 Commission Interest 7.67% of total shown on Appendix A, Schedulo 3, Page 2 7,756 Commission Adjustment S
8 i
Tax Depreciaticn in E,: cess of Book Depreciation 2
Additional tax depreciation related to change in boo): depreciation rates.
S
( 541_)
Earned Vace. tion Adinstnent
'3 Revision of Earned vacation deduction to three year average inflated for Wage Increase.
Por ALJ 941 Per Commission 76,0 Commission Adjustment 181 Gas portion at 22%
40 90027173 1
! Appendix B I
D. 2737.5 Schedule 3 LO!!G ISLT.!!D LIGHTI::G CO:'.P A::Y Page 3 Explanation of Conunission zu 3 ustnients l
To Gas Department Federal Income Taxes For the 12 Months Ending Jure 30, 1980 (000)
(Cont'd)
Effect On Incom hd j urtr.ont Explanation
_ Taxes oferred Investment Tnz Credits 4
necalculation of Investmcent Tax Credit ut.ili::abion using the APD fill method (before rate increase).
Reduction of Doferred ITC to lovel indicated from Cormtission adjustments.
{jB32) 4 i
I l
I<
!li l
- 1 i
!)
l i
il 90027174 0
9 u
CASE 3 27374 and 27375 APP' NDIX C d
LOIIG ISLAND LIGHTING C0!!PANY I
Amendments to Schednic P.S.C.
No. 7 - Electricity
,ll i
First Revised Lear No. 31C r
Sixth Revised Leaves I!os. 33I and 47
~
i
- i Tenth Revised. Leaf fio. 42A
!I j;
Fourteenth Revised Lear :;o. 38 Sixteenth Revisea Leaf.No. 42 l
Seventeenth Revised Leaves Nos. 31A and 33H l
Eighteenth Revised Leaf No. 43 Twenty rirst Revised Leaf rio. 45 Twenty-sevcnth Revised Leaf !!c. 33F Twenty-eighth Reviscd Leaf I;o. 33G Thirty-second Revised Leaf :.'o, 34 Thirty-third Revised Lear.!!c. 30 Thirty-fourth Revised Leaf No. 28 Suppplement !!o. 42 Supplement No. 47 Amendpents to Schedule P.S.C. No. 4 - Gas Pourteenth Revised Leaf !!c. 34 Sixtecntn Revised Leaf i;c. 30 Seventeenth Revised Leaf !!c. 32 flineteenth Revised Laaf :Jo. 27 Twentieth Revised Leaf No. 25 Supplement ?!o. 29 Supplcment flo. 28 1
~
9002717-3
i STATE OF UL'W YCRK PUBLIC SERVICE COMMISSION CASE 27374 - LONG ISLAMD LIGHTING COMPAliY - Electric Rates EDWARD P. LARKIN, Commissioner, dissenting:
I discent from the majority's electric revenue requirement determination on the basis of a fundamental regulatory precept.
The electric rate increase authorized by the majority does not, in my opinion, provide the company with enough internally generated cash to guarantee its ability to meet its financial and service commitments.
I cannot sanction a rate award that will require a public service corporation to rely heavily on short-term borrowings, or elaborate trust financing schemes and sales of stock at substantially less than book valua to meet its service and financial obligations.
The interest coverage, dividend coverage, and AFC ration implicit in the majority's revenue requirement will make it difficult for LILCO's management to attract the capital the majority concedes the company will need to complete the Shoreham project.
There is no margin for error in the majority's revenue requirement calculation:
its sales revenue estimate is optimistic, its expense allouances are minimal, its tax estimates reflect a flow-through of almost every conceivable credit and dedu cion, and its return allowance is at the extreme low end of the i
range of reasonableness.
l I have no objection to tough-minded regulation, but I believe we have an obligation to look beyond the immediate result to see who will be hurt if our determinations I
i are urong.
It is naive to think LILCO's stockholders will l
be the primary, or even the major, victims if the majority's 90027176
CASE 27374 i
rate award proves insufficient.
Experience shows it is consumers who ultimately pay when rates are kept at artifi-l cially low levels.
Consumers can be exploited just as j
offectively by poor service as by high rates.1!
In this case, I see a real possibility that financing delays could result in slippage of the Shoreham in-service date, an event that would be most unfortunate for LILCO consumers, for they will continue to pay the high cost of electricity generated mostly with oil purchased at OPEC-dictated prices, until Shoreham comes on line.
Thus', consumers face the double jeopardy of high fuel adjustment charges and poorer service.
The tragic part of the majority's decision is that i
it is so unnecessary.
In LILCO's last electric rate case, this Commission had the will to approve the cash flow l-I allowances the company needed to provide service and finance j
cons truc tion.
It could have done so again here by adopting I
the cash flow and return recommendations of the Staff and l
the Judge.
In its rush to keep this electric rate increase to the minimum, the majority has found it necessary to allow LILCO's stockholders a higher return than either the Staff 3
or the Judge recommended.
It would have been better to follow Staff and the Judge and provide LILCO with more i
cash while reducing its paper profits.
For what does the majority risk service degradations, delay in Shoreham's completion, impairment of capital, and excess profits?
As far as I can see, the only reason is to give consumers a few more months of relatively low base rates before the addition of $1 billion of Shoreham investment to rate base requires an extraordinarily large increase in base 1
electric rates.
When Long Island consumers find their i
household budgets stretched by that increase, there will be no thanks or remembrance for the majority's decision to 90027177 1/ Cases 26522 and 26523, Rochester Gas and Electric Corcoration -
i Rates, 14 NY PSC 1064, 1068 (Chairman Hahn, concurring).
j I
i CASE 2737s reduce the modest electric rate increase recommended by the Judge here, because the necessary result is that what promises to be a large increase in the next LILCO electric rate case will be even larger.
I therefore dissent frcm the electric rate increase authorized by the majority.
I would have accepted their determinations, if cash flow allowances from inclusion of CiiIP in rate base or interperiod tax allocations had been recognized to produce additional revenues in the $60-S75 million range.
4 O
I i
STATE OF NEW YCEK PUBLIC SERVICE COMMISSION I
i CASE 27374 - IONG ISLJd:D LIGHTING COMPANY - Electric Rates CI6SE 21375 - LONG ISLN;D LIGHTING COMPANY - Gas Eates A!C E F. MEAD, KAPIN S. BURSTEIII, Co ::nissioners, dissenting:
We dissent from various portions of the opinion of the majority.
Before teaching the issues on which we dissent, we believe it is nececcary to put into perspective the conditions which obtain in the franchise area served by the Company and the impact that increased rates will have on business and industry es well as 3
residential ratepayers.
The decision of the majority decs not, nor did the Administrative Law Judge's Recommended Decision, discuss the public outcry that occurred at the outset of this case.
There were four public statement hearings held in Nassau and Suf folk Counties at its inception.
Some 115 persons spoke at these hearings during July 1978.
In addition no less than 10,000 protests and petitions were received by the Public Service Conctission f rom ratepayers objecting to the proposed rate increase. With few exceptions, 9
people at the hearings voiced opposition to the rate increase.
They pointed out the difficulty that the ciderly and the poor, who aircady face severe financial hardships, will have if rates are increased.
In addition middle class f a:dlies plagued by high taxes,
i l
s sewer essessments, inflatien and unemployment argued that hardship will result from higher utility prices.
In addition to those who wrote to the Commission or appeared at public statement hearings, several witnesses presented by the Counties of Na sau and Suffolk testified to the irnpact increased rates would have on residential ratepayers as well as upon industry and business, thus exacerbcting the serious economic prchlems which beset Long Irland at this time..
I't is important to note that this rate increcse application is the fourth rade by the Company since 1974.
In 1975 in Ce.se 26552 this Com.m.ission granted an increase of $64.3 million.
On May 22, 1976 in Case 26837 this Commission granted an increase of $33.2 millien and on January 9, 1978 thin Connicsion granted an increare of 553.7 million--a total increase in three years of $157.2 million.
In addition, in two of these cases, temporary rates were allowed prier to the decisien in the permanent rate case and second stage rate increases totalling over $11 millien were authorized by this Cornission.
Although the Company was granted an increase on Janusr/ 9, 1978, barely five acnths later the Company was once again at our doorstep with a request for $171,000,000!
A review of the company's presentation clearly indicates that this request is based on an overstated budget designed to inflate its rate request.
While it is true that the rate of return earned by the Company in 1978 fell below its allowed rate of return of 13.3%,
nevertheless the Comcany has achieved an average return of 13.61
~
90027180 for the years 1975-78.
e e
i t'
i 4
I l
,1 lI While there is some continued cash flow problem, this is the res ult of a large construction program and AFC accruals.
This problem should be reduccd considerably by the ccmpletion and inclusion Il I!
in rate base of the Shoreham plant in 1930.
No conclude, as we did in Case 27370/1/2, Rochester Gas and j
Electric Corporation, and in Cases 27361/2, Nc'./ York State Electric and Gah Corporatien, that the economic conditions in a utility franchise area should be considered in arriving at an appropriate cost of equity capital and establishing rates so that the impact on consumers is i
minimized to the greatest extent possible, while at the same time allowing the company sufficient funds to provide safe and relichle service and raise necessary capital in the financial narket.
k*e turn now to those areas in the majority opinien frem which we dissent:
1.
Rate of Paturn.
The analysis used by the najority in determining the rate of return on common equity indicates that a
" bare bones" cost of equity in the 13.25 - 13.75% range is preper.
Because of the impact of these rates on consumers of service as discussed above this Commission should adopt the Jower end of the 4
range of reasonableness.
This would equate to a return of 13.5%
including issuance costs--a fair return on common equity under the circumstances that prevail.
2.
Meter Tr.n.perina Recoveries.
We disagree with the majority in the revenue estimate adopted with respect to revenue 90027181 protection activities preposed by die Company.
Initially the
a
~
4 Company request was based upon the premise that LILCO was willing to asstetc that the progre would produce revenue equal to its cost.
Staf f used a test year benefit / cost ratio to project revenues attributable to the program and determined that revenues of $1,112,700 over and above the cost of the program would be a reasonable, even conse rvative, estimate.
The Coinpany then recomputed its figures and agreed that additional revenues of $350,000.00 could be imputed on the basis of 1973 data.
Since the 1978 data are derived from a six month period when the program was being developed, they do not properly reflect all the revenues to be expected in the test year.
The corr.niswion should instead at:cpt the revenue figure as recermended by the Adr.inistrative L&V Judy.
In all other respects we concur with the opinien of the majority.
90027182 e
l
i QUESTION 4.d.
Complete the enclosed form entitled, " Financial Statistics,"
for the most recently available period and the calendar years 1977, 1976 and 1975.
RESPONSE
See the attached form entitled " Financial Statistics," for the calendar years 1975 through 1978.
\\
l l
04.d-1 90027183
y FIta"CIAL STATISTICS LONG ISLA::D LIGHTIiG C0:7ANY
~
1978 1977 19~6 1c'75
! ? 2CO 'u
$111,305
$104,593
$ 66,73T
$ 66,95h Earnings available to ec =on equity 884,918 75b,6h2 615,192 512,557 Average ec=en equity Rate of return en average co=on equity 12 585 13.865 14.115 13.065 j
Times total interest earned before FIT:
Gross incone (both includin, and encluding (1) 2.62 2.62 2.62 2 53
>)
AFC) + current and deferred FIT + total interest charges + enortication of debt (2) 1 91 1.85 1 92 1 95 discount and expense 1i Times long-term interest earned before FIT:
Gross inecte (both including and excluding (1) 2 74 2 76 2.80 2.67 l
AFC ) + current and deferred FIT + leng-term interest charces + enortization of (2) 2.01 1 95 2.05 2.20 debt discount and expense l)
Bond ratings (end of period) (3)
A-/A A-/A A-/A A-/A-1 Standard and Poor's A/AA A/AA A/AA
.A/AA Moody's Times interest and preferred dividends carned Gross incone (both including and excluding (1) 1.86 1 92 1.89 1.82 after FIT:
AFC).
total interes; charges +
amortization of debt discount and expense (2) 1.32 1.3h 1.37 1 37
+ preferred dividends AFc.(all) (b)
$ 69,739
$ 65,801
$ 50,631
$ 36,255 Het incone after preferred dividends 111.305 104,593 56,757 66,95h 62 75 62 95 58.h5 5h.35
$ 17-1/h
$ 18-5/8
$ 18-1/h
$ 15-7/3 Market price of co=on
$ 19 12
$ 18.70
$ 17 93 3 17 19 Book value of co=on Market-book ratio (end of period)"
90.25 99.65 101.65
- 92. s l
Earnings avail. for ec=o'n less AFC +
depreciation and acortization, deferred taxes, and invest, ax cr. adjust.-deferred $107,h70
$ 87,h97
$ 87,750
$ 76,6f6 Common dividends Th,759 63.h73 51,336 bl,936 Ratio of Earnincs to Dividends lh3.85 137 85 169 35 152.75 Short-term debt (5)
Bank loans i
l Corrercial paper O If subsidiary co:pany, use parent's data.
90027184
~
04.d-2 l
l 7~,a
<=
(Continued) 1978 1977 1976 1975 Capitalization ( Arcunt & Percent):
Long-tern debt (6)
$1,175,751
$1,102,003
$1,017,977
$892,L75 Preferred stoct-390,hh9 394.h36 331,h 31 304,95:
il
- Common equity 982,942 823,483 674,828 551,3;l 1
Long-term debt 46.1%
47 5%
50 3%
51.c5 Preferred stock 15 3%
17 0%
16.h%
17 5.;
Co::non equity 38.6%
35 5%
33.3%
31 53
-l 1
\\
Notes:
(1) Gross income includes c.11 AFC (2) Gross income excludes all AFC (3) The ratings are listed for the Co pany's two mortgages as follows:
General and Refunding Bonds /First Mortgage Bonds.
(h) Includes AFC applicabic to Trust financings in 1978 of $3.6 million.
(5) No short-term debt was outstanding at c.ny one of the four years
~
ended December 31, 1975, 1976, 1977, or 1978.
(6)
Includes lens-term debt (and current maturities of $25 million at 12/31/75) and unamortized pre:ium and discount on debt, but excludins;
$30.0 million of Trust Oblications-the company's promissory note,
/
due 1982, to Tri-Counties Resources Trust (at 12/31/77 and at 3/31/78).
s 90027185 o4 6-3 L
^
~