ML20153F700
| ML20153F700 | |
| Person / Time | |
|---|---|
| Site: | Trojan File:Portland General Electric icon.png |
| Issue date: | 02/24/1988 |
| From: | Colby O UTAH POWER & LIGHT CO. |
| To: | |
| Shared Package | |
| ML20153F598 | List: |
| References | |
| NUDOCS 8805110027 | |
| Download: ML20153F700 (32) | |
Text
~
f Y
s Exhibit B UNITED STATES OF AMERICA BEFORE THE NUCLEAR REGULATORY COMMISSION 4
IN THE MATTER OF THE
)
EXHIBIT B to Facility APPLICATION OF PACIFICORP
)
Operating Licensa No. NPF-1 FOR CONSENT TO THE TRANSFER )
Indemnity Agreement No. B-78
'OF LICENSES
)
REBUTTAL TESTIMONY OF ORRIN T.
COLBY, JR.
i 8805110027 880509 PDR ADOCK 05000344 T
T..
Exhibit 203 g
I UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION Utah Power & Light Company
)
PacifiCorp
)
Docket No. EC88-2-000 PC/UP&L Merging Corp.
)
REBUTTAL TESTIMONY OF ORRIN T. COLBY, JR.
ON BEHALF OF UTAH POWER & LIGHT COMPANY PACIFICORP PC/UP&L MERGING CORP.
I I
i I
l February 24, 1988 I
w Ui
SUMMARY
OF REBUTTAL TESTIMONY OF ORRIN T. COLBY, JR.
Issues Addressed I.
Rate Discrimination between Wholesale & Retail A.
Issues Addressed by:
1.
FERC Staff witness Jonathan L.
Siems' Exhibit No. 102, pp. 21-26 2.
Sierra Pacific Power Company ~ (SPPC. witness George T.
Smith's Exhibit No. 16, pp. 11-17 3.
Nucer Steel witness Matthew I. Kahal's Enhibit No. 18, pp. 24-28 4.
CREDA witness David T.
Helsby's Exhibit No.
134, pp. 9-16 II.
UP&L Fuel Adjustment Clause A.
Issue Addressed by:
-1.
FERC Staff witness Jonathan L. Siems' Exhibit No. 102, pp. 11-19; 23-24 2.
Sierra Pacific Power Company (SPPC) witness George T. Smith's Exhibit No. 16, pp. 8-11 3.
Nucor Steel.
witness Matthew I.
Kahal's Exhibit No. 18, p. 6, 22-28 4.
CREDA witness David T.
Helsby's Exhibit No.
134, pp. 9-15 III. BPA Considerations A.
Issue Addressed by:
1.
FERC Staff witness Jonathan L. Siems' Exhibit No. 102, pp. 27-33 2.
Public Power Council (PPC) and Northwest PPA witness William K.
Drummond's Exhibit No. 27, pp. 10-16 l
~~
O. T.,Colby, Jr.
1 IV.
Scrutiny of-Certain Merger Benefits Quantified by UP&L A.
Issues Addressed by:
1.
CREDA witness Curtis K.
Winterfeld's Exhibit No. 125, pp. 10-13; 22-24 V.
Efficiency of Certain UP&L Coal Plants A.
Issue Raised by:
1.
CREDA witness Lon L.
Peters' Exhibit No. 36, pp. 14-15 VI.
Merger Cost Amortization A.
Issue Raised by:
1.
CREDA witness David T.
Helsby's Exhibit No.
134, pp. 8-9.
1..
_ _ _.. ~... _,
O. T. Colby', Jr.
CONTENT AND CONCLUSIONS Rate Discrimination The Applicants have offered to reduce UP&L wholesale rates by 24 effective 60 days after the consummation of the merger.
This represents a good faith effort to treat wholesale and retail customers' rates consistently with respect-to merger benefits.
This reduction, along with future cost of service
- filings, will assure-wholesale customers'of receiving their share of those merger benefits.
The Applicants are committed to rate stabilization and will not -decrease Utah Power rates at
- t. -
expense of increasing Pacific Power rates.
Therefore, the idea of rolled-in ratemaking, at this time, is not feasible.
Wholesale Fuel Adiustment Clause The applicants propose to freeze the UP&L Fuel Adjustment Clause (FAC) at 13 mills per kwh and implement a 21 base rate reduction that would initially reduce wholesale i
rates in excess of merger benefits and cost justified rate decreases.
This freezing of the FAC would insure UP&L's wholesale customers of an immediate rate reductions and allow the Applicants time to resolve allocation issues.
Merger benefits that would have gone through the FAC in excess of the 2%
reduction, if any, would be refunded retroactively to the date of the merger.
In addition, the 3-
O. T. Colby, Jr.
+
Company offers to submit an allocated cost of service study equivalent to Statment BK each year which will allow the FERC staff and interested wholesale customers the opportunity to assu e themselves that merger benefits are properly reflected in wholesale rates and that the level of those rates arc appropriate.
Bonneville Power Administration The Applicants have made a commitment that there would not be rate decreases to Utah Power customers that would come at the expense of rate, increases to Pacific Power customers.
Allocation procedures will insure proportionate cost assignments will occur.
- Thus, the concerns of detrimental impact on Bonneville Power Administrative (BPA) should not exist.
Justification of Merger Benefits The management of the merged company has made a firm commitment to reduce construction expenditures in all facets of its operations.
These areas include Economic Development, Inventories, Transmission and Distribution, and the General Office addition.
The consolidation of Pacific Power's outside health insurance coverage into Utah Power's mutual insurance
.1 -
O. T. Colby, Jr.
7 companies will result in large savings due to the small incremental costs to service the additional claims.
The Utah low-cost insurance system has the capacity to handle the additional claims with a nominal variable cost.
Efficient Coal Plants The study used to make the analysis concerning the efficiency of certain Utah coal plant was based on a preliminary report prepared without sufficient knowledge of all circumstances involving Utah Power generation operation.
This section of the report has since been considered inaccurate by both companies.
Merger Cost Amortization The merger costs of sorae $18.5 million have not been included in the merger benefits study.
The amortization of these costs over 40-years and other financial impacts have, however, been included in the companies' 5-year forecast.
Therefore, merger benefits reflected in the 5-year forecast have been offset by an appropriate amount of cost amortization.
T 1
QUESTION
+
2 Please state your name.
3 ANSWER 4
Orrin T. Colby, Jr.
5 QUESTION 6
Are you the same Orrin T.
- Colby, Jr.. who 7
testified earlier in this case?
8 ANSWER 9
Yes.
10 QUESTION 11 Has there been any change in your 12 responsibilities since the filing of the direct case?
13 ANSWER 14 In addition to my duties as Controller and Chief 15 Accounting
- Officer, I
was elected Vice President on i
16 February 17, 1988.
17 QUESTION 18 Mr. Colby, what are the specific areas that you 19 will address in your rebuttal testimony.
20 ANSWER 21 I
am providing rebuttal testimony on the 22 following topics:
23 I.
Rate Discrimination between Wholesale & Retail 24 A.
Issue Addressed by:
25 1.
FERC Staff witness Jonathan L. Siems' Exhibit No.
26 102, pp. 21-26
l 1
2.
Sierra' Pacific Power Company (SPPC) witness 2
George 1. Smith's Exhibit No. 16, pp. 11-17 3
3.
Nucor Steel witness Matthew. I. Kahal's Exhibit i
4 No. 18, pp. 24-28 5
4.
CREDA witness David T.
Helsby's Exhibit No. 134, 6
pp. 9-16 7
II.
UP&L Fuel Adjustment Clause 8
A.-Issue Addressed by:
9 1.
FERC Staff witness Jonathan L.
Siems' Exhibit No.
10 102, pp. 11-19; 23-24 I
11 2.
Sierra Pacific Power Company (SPPC) witness George 12 T. Smith's Exhibit No. 16, pp. 8-11 13 3.
Nucor Steel witness Matthew I.
Kahal's Exhibit No.
14 18, p. 6, 22-28 15 4.
CREDA witness David T.
Helsby's Exhibit No. 134, 16 pp. 9-15 17 III. BPA Considerations 18 A. Issue $ddressed by:
19 1.
FERC Staff witness Jonathan L.
Siems' Exhibit No.
j 20 102, pp. 77-33 i
21 2.
Public Power Council (PPC) and Northwest PPA 22 witness William K.
Drummond's Exhibit No. 27, pp.
23 10-16 24 IV.
Scrutiny of Certain Merger Benefits Quantified by UP&L i
25 A.
Issues Addressed by:
26 1.
CREDA witness Curtis K.
Winterfeld's Exhibit No, i i
1
-12 5, pp. 10-13; 22-24 2
V.
Ef ficiency of Certain UP&L Coal Plants 3
A. Issue Raised by:
4 1.
CREDA witness Lon L.
Peters' Exhibic No. 36, pp.
5 14-15 6
VI.
Merger Cost Amortization 7
A.
Issue Raised by:
3 1.
CREDA' witness David T.
Helsby's Exhibit No. 134, 9
pp. 8-9.
10 QUESTION 11 Mr. Siems' Exhibit No. 102, Page 22, Mr. Smith's 12 Exhibit No. 16, Page 11-12, and Mr. Helsby's Exhibit No.
~
13 134, Page 15-16 discuss concerns relative to discriminatory 14 rates between retail and wholesale customers because of 15 post-merger rate decreases being of fered to UP&L's retail 16 customers and the absence of such proposals to the 17 wholesale customers.
In addition, Mr. Siems' Exhibit No.
18 102 at Pages 11-12 and Mr. Smith's Exhibit No. 16 at Page 8 19 expressed concern over the Fuel Adjustment Clause (FAC) and 20 its administration relative to the realization of 21 merger-related power supply benefits.
Relative to these 22 concerns, what do the Applicants propose, in simple terms?
ANSWER 23 24 Although we believe cost assignments, allocations l
25 and related concerns could be worked out reasonably as 26 initially proposed, we are of the opinion that a better 1 I
Me 1
option exists to address this specific issue.
Therefore, 2
we propose the following approach:
3
- a. Freeze the UP&L FAC, as of the effeccive date 4
of the merger, at an average level.
5
- b. Reduce firm UP&L wholesale rates 2% affective 6
60 days after consummation of the merger.
7
- c. File an allocated cost of service study within g
.nine months after the merger occurs for the UP&L 9
FERC jurisdiction, including related merger 10
- benefits, equivalent to a
statement BK as 11 described in 18CFR Section 35.13.
12 d.
- File, if the Commission desires, annually 13 through 1991, an allocated cost of service study 14 and related merger benefits study.
15 In addition, relative to the freezing of the FAC, 16 in order to assure all parties that they will receive a 17 substantial and f air portion of the merger benefits, the 18 company also proposes:
19 1.
The frozen FAC will be subject to refund 20 during the period until resolution of allocation 21 issues between the Utah and Pacific Division.
22 2.
Once an agreed upon allocation methodology is 23 determined and implemented, Utah Power will 24 recalculate all FAC billings that would have been 25 rendered had the agreed upon allocation 26 methodology been in effect during the interim 4
x
.1 period.
2
- 3. To the extent such revised FAC billings would 3
have resulted in larger reductions in Utah's 4
wholesale customers' bills than afforded them 5
during the interim period with the 2 percent 6
general decrease, additional decreases will be 7
made to these customers retroactively, including g
interest at the applicable FERC regulated rates, 9
to the date the FAC was frozen.
10 We believe the foregoing proposal eliminates rate
'll discrimination, maintains present parity between retail and 12 wholesale rates, eliminates concerns relative to the FAC 13 administration, assures realization of merger benefits, 14 provides a verifiable procedure for quantifying and valuing 15 merger-related benefits, and provides assurance that rates 16 will be determined at cost of service-justified levels.
17 QUESTION 18 Mr. Colby, in order to eliminate any perceived 19 confusion relative to the 2% rate reduction and the related 20 freezing of the FAC, is the 2% rate reduction of fered the 21 floor or the ceiling related to decreases being offered to 22 wholesale customers of Utah Power?
23 ANSWER 24 The 2% general rate decrease is the floor.
By l
25 that, I mean, Utah Power's wholesale customers will fair no 26 worse than t
21 decrease.
To the extent that merger i
! L
I savings applied to retroactive FAC calculati'ons generate 2
additional rate -reductions that had not been included in 3
the 2% general rate decrease, such additional savings will 4
be refunded with interest.
5 QUESTION 6
Mr. Colby, with respect to concerns relative to 7
rate reductions and perceived inconsistencies in the 3
administration of the FAC, what other options have you 9
considered?
10 ANSWER 11 Messrs. Smith and Siems both recognize, and we 12 agree, that surplus sales, in part, are excluded from the 13 FAC under present FERC regulation (18 CFR Section 35.14).
14 Therefore, only a small portion of power supply benefits 15 would automatically flow-through the FAC.
Accordingly, the 15 majority of the savings could only be translated into rate 17 reductions upon filing a general rate case.
We had earlier 18 anticipated'a larger proportion of the savings would have 19 ficwed through the FAC.
20 one option would be to adjust the present FAC 21 such that some portion of the margin on surplus sales would 22 translate into additional reductions for wholesale 23 customers.
24 A temporary freeze of the FAC, without rate 25 adjustment, while allocation issues are being resolved, was 26 another option.
1 In our review, the preferable option would be to 2
implement a _2% reduction,. freeze the FAC at a reasonable 3
level, and file further information as I just explained.
4 The merged company believes the 24 reduction, 5
similar to that being offered to state jurisdictional 4
6 customers, with the addition of freezing the FAC offers the 7
best position for wholesale customers in that it resolves, 3
on an interim basis, the FAC issues, the alloc'ation of 9
benefits issue and the concern over benefits being passed 10 on immediately.
11 QUESTION 12 Why freeze the FAC and offer retroactive 13 adjustments?
14 ANSWER 15 This procedure offers the wholesale customers a 16 largnr reduction than merger benefits which would normally 17 flow through the FAC would provide, yet protects the 18 company from passing on merger benefits twice (once through 19 the FAC and also through a general rate reduction).
This 20 procedure also eliminates the fears expressed on behalf of 21 some wholesale customers that they would not receive a full 22 share of merger benefits.
23 QUESTION 24 How and at what level would the Company propose 25 to freeze the FAC?
26 1
ANSWER 2
We recommend the FAC be frozen at 13 mills /kwh.
3 The Exhibit: No.
- 204, Schedule 1
is a summary of the 4
Company's computation and was prepared under my supervision 5
and direction.
Page 1 of the exhibit is a graphical 6
presentation which reflects actual monthly FAC energy cost 7
rates tor the years 1986 and 1987 and estimated annual FAC 8
energy cost rates for the years 1988 through 1992. For the 9
years 1986 and 1987 it shows the mean and median for the 10 period.
Because there are fluctuations on a monthly basis, 11 we believe it would be appropriate to employ some type -of 12 averaging mechanism.
Based upon this historical 13 information, a range of 12.9 to 13.2 mills appears to be 14 reasonable, with 13 mills as the company's recommendation.
15 Pages 2
and 3
of the schedule
- reflects, in 16 tabular
- form, the data employed in determining the 17 Company's recommendation discussed above.
i 18 QUESTION 19 You indicate the 2% decrease is greater than the 20 amount of merger benefits which would flow through the FAC 21 as presently exists.
Please explain.
22 ANSWER 23 We have made two comparisons to assure ourselves 24 of this.
The 21 decrease would be some
$503,000, 25 annualized, based on 1988 revenues.
This compares to our i
j 26 estimate of an increase of $7,000, annualized, based on
1 1988 revenues annualized via the present FAC which exclude 2
the margin on surplus sale.
A decrease of
$284,000 3
annualized, would be realized based on 1988 revenues 4
annualized, if such benefits were increased to include the 5
surplus sales margin.
These comparisons give a
fair 6
assessment.
7 OUESTION g
Mr. Siems has proposed (Exhibit No. 102, Pages 9
.1-18) that a detailed plan regarding implementation of the 10 FAC under the merger be filed within 30 days of Comission J1 approval.
Please respond.
12 ANSWER 13 we believe that Mr. Siems' interest expressed on 14 behalf of the customers has been met via the company's 15 proposal to unilaterally reduce general rates and freeze 16 the FAC with retroactive adjustment to the time of merger.
17 We understand his concern relative to this matter; however, 18 the 30-day time period would simply be too short to resolve 19 this matter.
In any event, any date should be tied to the 20 actual merger date, not the date of FERC approval.
The 21 proposal we have offered, in our opinion, reflects the good 22 faitt intentions of the
- company, at no risk to the 23 customer.
24 QUESTION 25 A concen was expressed by Mr. Siems (Exhibit No.
26 102, Pages 13-14) that there is incentive for allocation t
N y
r
.t 1
manipulation between Pacific and _ Utah relative to 2
interdivision power sales because Utah's FAC mechanism 3
could then result in a
purported "windfall to the
[
4 corporation."- What is the Company's position relative to j
5 this matter?
6 ANSWER 7
The company's proposal of general rate reduction 8
and' retroactive adjustment of the frozen FAC provides 9
interim assurance until the time that allocation principles 10 and procedures are adopted.
The process for approval of 11 allocation issues provides protection because all parties, f
12 including customers and FERC
- staff, will be able to
[
13 participate.
14 QUESTION 15 Mr.
- Colby, how do you respond to Mr.
Siem's 16 concerns (Exhibit No.
102, Pages 23-24) and Mr. Smith's 17 concerns (Exhibit No. 16, Page 8) that wholesale customers 18 are being discriminated against because they were not 19 offered rate reductions related to non-power supply related j
20 savings?
21 ANSWER 22 The offer presented herein was not formally a 23 part of the application because the Company assumed these
[
t 24 savings would be reflected through the normal rate process
}
25 before this jurisdiction.
That is, when merger savings I
26 justified rate adjastments, appropriate applications would
wn,
I
.e
't 1
be filed.
2 The proposal presented herein regarding the 24
-3 rate reduction demonstrates the Company's good faith effort j
4 to reduce ra'tes for cost reductions relative to all merger
~
5 benefits. Sixty days subsequent to the consummation of the 6
merger, a 24 reduction may not be cost justified.
- However, 7
this exact procedure has been offered to Utah Power's 8
retail customers and now to its wholesale customers.
i 9
QUESTION l
10 How does the company propose to providt 11 information regarding ongoing merger benefits and whether 12 further rate reductions are justified?
13 ANSWER 14 The company has currently committed to the Utah 15 Division of Public Utilities to file a 1989 jurisdictional i
16 cost allocation study within the first quarter of 1989.
2 I
17 This would enable determination of what additional benefits f
18 of the :nerger should be passed on to Utah ratepayers in the i-19 form of rate reductions in 1989.
The Company suggests l
20 providing similar information, basically equivalent to a 21 Statement BK based on a Period II of 1989, as described in 22 18CFR Section 35.13, to FERC Staff and wholesale customers 23 within nine months of the date the merger occurs.
This i
24 information would allow all parties the opportunity to l
l 25 review the Company's earning level along with the i.
26 associated merger benefits and determine what levn1 of rate i,
u
t I
reduction is justified for the wholesale customers at that 2
time.
Exhibit No.
204, Schedule 2,
which was prepared 3
under my direction and supervision, is a copy of the letter 4
filed with the Utah Division of Public Utilities committing 5
UP&L to file a co.tpliance interjurisdictional allocation in 6
the first quarter of 1989.
The purpose is to demonstrate 7
the company's commitment to allow regulators in the Utah g
jurisdiction to monitor cost of service under the merger.
9 QUESTION 10 How does this letter to the Utah Division of 11 Public Utilities relate to Mr. Smith's concern that the 12 burden to initiate a
rate filing for decreases in 13 subsequent years will be upon the FERC staff or wholesale 14 customers?
15 ANSWER 16 Providing the same information to FERC Staf f and 17 wholesale customers as we have offered in
- Utah, as 18 indicated, should allay concerns related to rate 19 discrimination. The Company is willing to submit this same 20' jurisdictional allocation data on an annual basis during 21 the next four or five years for review and determination 22 that there is an appropriate flow-through of merger 23 benefits to wholesale customers and to serve as the basis 24 for additional rate adjustments.
Should such informational 25 filings indicate a rate reduction adjustment is justified, 26 we would file accordingly in the appropriate manner.
j l
}
QUESTION 2
As a result of the 24 rate decrease, is the 3
Company then flowing through a portion, if not all, of the 4
margin on surplus sales?
5 ANSWER 6
Yes.
7 QUESTION g
Mr. Colby, what is your response to the request 9
by Mr. Smith, Exhibit 16, pp. 16-17, for the Company to 10 file a four year future test period which would allow the 11 FERC to set rates through 1992?
12 ANSWER 13 Se'etion 35:13(d) of Title 18 of the Code of 14 Federal Regulations contains the parameters which the FERC 15 allows concerning general rate proceedings.
This section 16 providen for a single forward test period.
The proposed 17 four year test period is therefore inconsistent with these 18 FERC regulations.
As stated previously in my rebuttal 19 testimony, the Company is prepared to file annually the 20 equivalent of a Statement BK, which may translate into 21 additional rate decreases if the respective cost of service 22 justifies.
This procedure should be even more reassuring 23 than Mr. Smith's "condition".
24 QUESTION 25 Mr. Siems (Exhibit No. 102, Page 10) recognized 26 the impact of cost allocation on both whole. sale base rates.
I and the corresponding FAC charge and recommended that a 2
plan should be filed within 90 days after the merger 3
becomes effective.
Do you have any comments relative to 4
these concerns?
5 ANSWER 6
Ye.m.
Mr.
Reed has indicated that within six 7
weeks subsequent to the consummation of the merger that 8
allocation discussions will commence with the various 9
regulatory bodies.
This, coupled with the company's offer 10 of a general rate decrease and retroactive adjustment of 11 the FAC following the determination of allocation 12 Procedures, should settle any dispute relative to this 13 matter.
Again, however, any deadlines should be measured 14 from when the merger is effected, not from the date of any 15 Commission's order.
16 OUESTION 17 Mr. Siems infers (Exhibit No. 102, Pages 7-10) 18 that the Applicants are not requesting threshold approval 19 by FERC of a particular concept of cost separation.
Do you 2c agree?
21 ANSWER 22 Yes.
It should be made perfectly clear that this 23 proceeding is not dealing with the establishment of rates 24 but rather whether the merger is in the public interest and 25 should be approved.
To the extent there are rate concerns, we believe that the 2% general rate decrease and the 26 l
1 retroactive application of the FAC sets aside the issue of 2
rates yet assures customers both rate protection and 3
appropriate rate adjustments afforded by the merger 4
benefits.
5 QUESTION 6
Mr.
Siems (Exhibit No.
- 102, Pages 16-17) has 7
expressed concerns related to auditing power supply 8
benefits in the FAC.
Please describe the audit records 9
that are in place or will be developed to assure proper 10 allocation of merger-related power supply benefits?
11 ANSWER 12 Since the parties and FERC staff will be able to 13 participate in the development of allocation procedures, a 14 standard which can be audited will be established and the 15 parties will have an opportunity for input into such audit 16 records as are deemed necessary to satisfy concerns for 17 both accounting and ratemaking.
18 Th'e management information and accounting and 19 responsibility reporting systems currently in place at both 20 Pacific Power and Utah Pcwor will be the basis for auditing 21 merger benefits.
The accounting, operations, and customer 22 records are supported by payroll systers, procurement and 23 warehousing
- systems, cash
- vouchers, journal
- entries, l
24 revenue systems, power accounting systems, generation and l
interchange logs, metering systems, work in progress job 25 rder
- systems, contract tracking and a full array of 26 i
l l l
w,-
y
'1 identified costing and aged asset records.
These systems 2
provide the ability to isolate transactions by account, 3
category of cost, and type of activity, location, etc. with 4
the ability to separate and report joint operational 5
benefits in any needed detail.
6 QUESTION 7
Mr. Colby, is Mr. Smith'a argument (Exhibit No.
g 16, pp. 4-7), that the two divisions should be combined for 9
ratemaking purposes because of this Commission's preference 10 for rolled-in pricing persuasive?
11 ANSWER 12 As Mr.
Reed demonstrates in his rebuttal 13 testimony, an imnodiate consolidation of the companies for 14 ratemaking purposes would result in a price increase for 15 Pacific Power's customers, an unacceptable alternative.
16 The merged company is firmly committed to stabilization of 17 prices and does not want to have the reduction in price 18 disparity come at the expense of an increase to Pacific 19 Power customers.
This is a ratemaking not a merger issue 20 and should be treated in the proper forum.
21 QUESTION 22 Mr. Smith (Exhibit No. 16, p. 4) asserts that the 23 Applicants' pricing proposals would result in haphazard 24 ratemaking policies that are unfair to UP&L's wholesale l
25 customers.
Please respond.
26 _.
- G ANSWER 1
2 Mr. Smith is referring to the proposal not to 3
roll-in the two divisions for allocation purposes.
He 4
views this as a departure from the commission's past 5
practice of rolled-in ratemaking and considers it haphazard 6
ratemaking.
His ratemaking argument has no bearing on 7
whether the merger should be approved so his company and 8
all our other customers can benefit.
This Commission has generally required the 9
10 rolled-in approach only for generation and transmission 11 plant.
To my knowledge, the Commission has not addressed 12 whether two divisions need to be rolled together in the 13 context of a merger.
14 QUESTION 15 Mr. Smith attempts to compare Utah Power's retail 16 fuel adjustment and wholesale fuel adjustment clauses 17 stating that because there are differences in these 18
- clauses, they create unequal and unjustified treatment.
19 Would you please comment?
20 ANSWER 21 It is true that the state and federal fuel 22 adjustment clauses are different, as are many other 23 ratemaking practices at the state and federal level, and 24 they should be for they to involve different classes, kinds 25 and categories of customers and different needs and 26 preferences of regulatory commissions.
That, however, does l
17 -
9 1
not cause "unjustified treatment" but simply different 2
treatmen/.
At
- FERC, revenue from surplus sales are 3
included in base tariffs where in Utah they are included in-4 the energy clause.
Therefore, when base and energy clause 5
tariffs are considered together, there is both equal and 6
justified treatment for retail and wholesale customers with 7
regard to pricing policies.
g II.
BPA Considerations 9
QUESTION 10 Regarding the possible exception discussed by Mr.
11 Siems (Exhibit No. 102, pp. 27-33) under which BPA's costs 12 would not be reduced under the merger, is it likely that 13 the circumstances assumed by Mr. Siems could occur?
14 ANSWER 15 It is very unlikely.
His Exhibit Nos. 111, 112 16 and 113,. assume rates will be set based on consolidating 17 costs of the two divisions.
This is not the strecture 18 proposed by the applicants.
Pacific's jurisdictions would 19 not consent to higher rates based or, blending the higher 20 costs of the UP&L system with the lower costs of the PP&L 21 system, nor would the Applicants propose such.
This is not 22 how the merger is intended to produce benefits.
- Also, 23 under the ASC Methodology, Bonneville has authority to 24 conduct an independent review of and deny an exchanging 25 utility's costs.
This procedure protects Bonneville from 26 any allocation procedures it deems inequitable, even if 18 -
i i
l
I such procedures are approved bi state regulators.
2 QUESTION 3
Has Mr Siems himself recognized the 4
implausibility of these scenarios?
5 ANSWER 6
ies.
He states that such detrimental effects to 7
BPA would not occur so long as PP&L honors its commitment a
not to increase its retail rates in any jurisdiction.
9 Overall Mr. Siems correctly expects cost savings from the 10 merger will serve to reduce Bonneville's costs.
11 QUESTION 12 Mr. Drummond (Exhibit No.
27, p.
- 12) discusses 13 two scenarios under which Bonneville's costs may be greatly 14-affected.
His scenarios consist of allocating merger 15 benefits entirely to Pacific Power and entirely to Utah 16 Power.
Do you agree with his analysis?
17 ANSWER 18 No.
While Bonneville's costs are somewhat 19 sensitive to the methods ultimately adopted to allocate 20 merger benefits, reasonable allocation methods will be 21 used.
The regional exchange impacts will be a by-product 22 of, not a determining factor in, the choice of allocation 23 methods.
State commission orders are the starting point 24 for BPA's Average System Cos,t review in accordance with the l
25 Average System cost methodology.
We do not expect state 26 commissions to authorize bizarre allocation schemes to l
l 19 -
t l
i.
4 1
shift savings away from their state's customers simply to 2
increase BPA's costs.
Should they do so,
- however, BPA 3
still has the right to conduct an independent evaluation.
4 III. Merger Benefits 5
QUESTION 6
On Page 11, Lines 15-18 of Exhibit No. 125, Mr.
7 Winterfeld claims there is a
lack of evidence for g
transmission and distribution-related construction 9
reductions shown for the Utah division.
Do you have 10 additional information related to these construction 11 savings?
12 ANSWER 13 To date, specific projects have not been targeted 14 for reductions other than the overall functional area 15 targets shown.
As time allows us to preparly examine 16 construction costs, there will be opportunity to actually 17 isolate specific projects.
We are confident the end result 1g will be gr' eater, not
- lesser, construction reductions 19 occasioned by the merger.
In evaluating the estimates of 20 construction savings for Utah Power, we see no reason that 21 the merger will not reduce capital expenditures in all 22 functional areas at UP&L.
Some of the reasons include:
1) l 23 UP&L staff in Wyoming can stock lesc materials and supplies 24 due to their access to inventories in Pacific's Wyoming service area,
- 2) Plant expanditures in other fuactional 25 26 areas can be delayed, modified, or cancelled as a result of l..
3 e
the addition of backbone transmission, 3)
Economic I
2 development may cause load shifting so that construction in 3
functional areas can be delayed or
- modified, 4) 4 Construction costs associated with economic development 5
were included in determining those savings and affected 6
items are eliminated here to avoid duplication and proper 7
recognition, and 5) Volume purchasing contracts will reduce g
the level of capital expenditures.
9 The
$35 million referred to represents gross 10 construction expenditures as opposed to the annual revenue 11 requirement.
Therefore the impact of this amount on merger 12 benefits is the revenue requirement for this amount of 13 plant of some $5 million annually by 1992.
Total UP&L 14 construction savings in 1988 produce annual revenue 15 reductions of $2 million or 4% of total merger savings 16 expected in that year.
17 I would also assure the Commission there is no 18 "double-counting" as alleged by Mr. Winterfeld at Page 11 19 of Exhibit No. 125..
20 QUESTION 21 On Page 16, Lines 25 through Page 17, Line 1 of 22 Exhibit No. 125, Mr. Winterfeld states, 23 "The dif ference between per unit fees multiplied 24 by PP&L's base would then yield a reasonable if any for PP&L 25 estimate of savings 26 adopting the mutual insurance program approach.
q c
4 1
Of course, this approach is available to PP&L 2
regardless of the merger with UP&L."
3 Mr.
- Colby, coula you please explain the 4
philosophy behind the mutual insurance companies and why 5
bringing the Pacific Power program into the mutual 6
insurance company would result in substantial savings for 7
the merging companies?
g ANSWER 9
Mr. Winterfeld does not understand some of the 10 special aspects associated with the mutual insurance 11 company arrangement referred to.
This is not a savings 12 PacifiCorp could have accomplished without the merger 13 simply by forming their own mutual insurance company, as 14 Utah Power did.
Utah Power, over a decade ago, was able to 15 acquire a
shell insurance company formed under an 16 antiquated section of the Utah Insurance Code which 17 Provided for the establishment of mutual benefit ig associations commonly called voluntary Employee Benefit 19 Associations (VEBA) today.
This mutual benefit 20 association, pursuant to law, was exempt from Federal and 21 State income taxes.
This approach offered a number of 22 advantages not available through traditional insurance 23 programs, insurance companies or VEBA trusts.
Among "hose 24 advantages were the tax exemption of earnings, the ability 23
'to actuarially determine reserves for
- losses, and the 26 ability to perform in other aspects as a
bona fide _ -._
4.
1 insurance company with protections under.the law to 2
employer and employees.
These protections are greater than 3
those offered through traditional VEBA trusts.
4 It is not appropriate to determine what th_
i 5
savings would be by comparing the mutual insurance 6
companies cost per claim processed with that of the 7
independent Third Party Administration (TPA) used or g
available to PacifiCorp.
The appropriate way is to c.ompare 9
the incremental costs the mutual insurance company would 10 incur, which are small enough that the savings in Mr.
11 Reed',s exhibit are understated by a substantial amount.
12 This savings is available only with the merger.
13 IV.
UP&L Coal Plant Operations 14 QUESTION 15 Mr.
Peters claims (Exhibit No.
36, p.
14-15) 16 there are operational inefficiencies in UP&L's coal plant 17 operations.
Please comment.
13 ANSWER 19 Mr. Pecers' point seems to be that efficiencies 20 of operation claimed for the merger can be disproved if he 21 can establish inefficiencies in current operations.
The 22 basis of his claim resulted from a comment in Exhibit No.
p,3 41.
This internal preliminary report was prepared by 24 Pacific Power in advance of the merger agreement and prior 25 to a full analysis and investigation of the UP&L system 26 operations.
Both companies are in agreement that that.
r e-
9 1
particular statement was inaccurate.
- Further, the four 2
commissionn which regulate UP&L have not disallowed UP&L 3
coal plants from "used and useful" plant based on 4
considerations of inefficiency.
5 V. AMORTIZATION OF MERGER-RELATED COSTS 6
QUESTION 7
Mr.
- Helsby, in Exhibit No.
- 134, pp.
7-9, g
criticizes the Applicants for not including amortization of 9
the $18 million merger-related costs as an offset to the 10 benefits quantified in Mr. Reed's~ Exhibit No.
4, Schedule 11 3.
Will you please respond to this criticism?
12 ANSWER 13 Mr.
Reed did not include amortization of the 14 merger-related costs referred to when he q'uantified merger 15 benefits in his Exhibit No.
4, Schedule 3.
This 16 approximate $450,000 per year amortization charge referred 17 to was, however, along with Mr. Reed's merger benefits and 18 all other financial
- impacts, included in my five-year 19 forecast submitted in Exhibit 6, Schedule 2.
The $450,000 20 was based on a 40-year amortization period, which period 21 was deemed reasonable as merger benefits will occur for 22 many years beyond the initial five-year period and is 23 appropriate as that is the approximate life of the 24 depreciable assets of the companies.
25 OUESTION 26 Does this conclude your rebuttal testimony?
ANSWER Yes, it does. -.-
SITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION Utah Power & Light Company
)
PacifiCorp
)
Docket No. EC88-2-000 PC/UP&L Merging Corp.
)
)
ss.
COUNTY OF SALT LAKE
)
Orrin T. Colby, Jr., being first duly sworn, deposes and says:
that he has read and is familiar with the contents of the foregoing testimony of Orrin T. Colby, Jr.;
that if asked the questions contained in said Testimony, the answers and response hereto would be as shown in said Testimony; that the facts contained in said answers are true to the best of his knowledge, information and belief; and that he adopts these answers as his own.
l Orriri T.
, Jr.
l nd l
SUBSCRIB2D AND SWORN to before me this 2d day of February, 1988.
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