ML19208C322

Testimony in Response to Tx Utils Generating Co & Houston Lighting & Power First Set of Interrogatories

ML19208C322
Person / Time
Site:	South Texas, Comanche Peak
Issue date:	05/24/1979
From:	Solomon J INDIANA MICHIGAN POWER CO. (FORMERLY INDIANA & MICHIG
To:
Shared Package
ML19208C305	List: ML19208C304 ML19208C306 ML19208C308 ML19208C310 ML19208C312 ML19208C314 ML19208C315 ML19208C322 ML19308A389 ML19308A390 ML19308A391 ML19308A392 ML19308A393 ML19308A398 ML19308A399 ML19308A400 ML19308A401 ML19308A402 ML19308A403 ML19308A404 ML19308A405 ML19308A406 ML19308A407 ML19308A409 ML19308A410 ML19308A412 ML19308A413 ML19308A414 ML19308A415 ML19308A416 ML19308A417 ML19308A418 ML19308A419 ML19308A420 ML19308A421 ML19308A422 ML19308A423 ML19308A424 ML19308A425 ML19308A426 ML19308A427 ML19308A428 ML19308A429
References
20106, NUDOCS 7909260062
Download: ML19208C322 (14)

Text

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STATE COPJ'CRATICS CCRIISSION TESTDONY OF J. BERTRUI SOLCf DN s

ON BEFALF OF TFE CITIES OF APPA1ACHIA, BIG STCNE GAP, WISE ,

CCEE'JRN, ST. PAUL., AND NCRTCN, VIRGINIA AND s

TEE ECA?d) CF SUPERVISORS CF WISF, CCU.NTi, VIRGINIA j

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APPLICATION OF OLD DCflINICN PCNER CCf&ANY CASE NO. 20106 jQ]} Q43 M\Y 21, 1979

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COMM0tDJEALTH OF VIRGINr A STATE CORPORATION CCMMISSION APPLICATION OF CLD DCMINION POWER CCMPANY , ,

CASE NO. 20106 PREPARED TESTIMONY OF J. BEPTRAM $0L 70N 1Q PLEASE STATE YOUR NAME AND ADDRESS.

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2A My name is J. Bertram Solomon. My business address is 1000 Crescent Avenue, N.E.,

3 Atlanta, Georgia, 30309.

4Q PL ASE OUTLINE YCUR FCRMAL EDUCATION.

5A I received the degree of Master of Business Administration from Georgia State 6 University in 1973. My area of concentration was Finance. I also received 7 the degree of Sachelor of Science in Industrial Management from the Georgia 8 Institute of Technology in t972.

9Q PLEASE STATE YOUR PROFESSIONAL EXPERIENCE.

10 A As a Cooperative scudent at Georgia Tech, I gained approximately two years' 11 work experience as an assistant engineer in an industrial p oduct?cn setting.

12 After my graduation frcm Georgia Tech in 1972, I worked approximately one 13 and one-half years as a program manager for a management consultirg firm and 14 for another one and one-half years as a project analyst for a resort deveicp-15 ment firm. I was employed by the Southern Engineering Ccmpany of Georgia, 16 my present employer, in January 1975. Since that time, I have had assignments 17 in both the retail and wholesale rate departments of my Company, primarily 18 in the area of electric utility rates. In the retail area I have participated 19 in the preparation of rate increase filings for both G&T and distribution rural 20 electric membership cooperatives as well as the determination of revenue re-21 quirements and the proper rate design for unregulated rural electric member-22 ship cooperatives. My primary activities, howeer, have been in the wholesale 23 area where I have participated in the analysis of approximately ene and one-24 half dozen Federal Energy Regulatory Commission and Federal Power Commission 25 filings of private utilities operating in eight different states. I also

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1 participated in the preparation of testimony and exhibits for several of

( 2 these rate filings. Additionally, I have participated in the preparation cf 3 retail ar.d wholesale allocated cost of service studies and pcwer cost pro-4 jections.

5Q HAVE YCU E'/ER TESTIFIED IN OTHER COMMISSICN PRCCEEDINGS?

6A I have testified before the Federal Energy Regulatory Commission in proceedings 7 involving the Public Service Company of Indiana, Cocket No. ER76-149; Georgia p 2 2 7 ?*. - / G4,.

8 Power Corcany, Docket Nos. E-9091, E-9521,an(ER 3-537; A Carolina Power & Light

Concany, Cocket Nos. ER76-495.aerER77 a85; Kansas Gas & Electric Comoany, lo Occket No. ER77-573; and Louisiac.a Po..er & Light Coroany, . Docket No. ER77-533.

'l I have also testified before the Puolic Service Commission of Kentucky and 12 the Texas Public Utility Ccmmission in both wholesale and retail rate pro-13 ceedings.

14 Q BY WHOM IS SCUTHERN E.?.GINEERING CCMPANY OF GECRGIA RETAINED IN THIS PROCEEDING?

13 A Southern Engiceering is retained by the cities of Appalachia, Big Stone Gap, Cceburn, 16 Wise, St. Paul, and Norton, Virginia ar.d the Board of Supervisors of Wise County.

17 Q WHAT 'JAS YCUR ASSI3NMENT IN THIS PRCCEEDING?

18 A My assigr. ment was twofold: First, I was to review the direct testimony and 19 exhibits and other available information of Did Dcminion Power Company (OC) 20 concerning the cost to serve OD's Virginia jurisdictional customers. Specif-21 1cally I was to censider whether the methods employed by 00 to develop the 22 test year operating e genses, rate base, a:.d rat.e of return shown in the 23 Conpany's filing were proper and in accordance with Commission precedent 24 and sound ratemaking procedures. Secondly, I was to prepare cost of service 25 study .nich includes the adjustments to the Ccapany's filing which I found D O O d.) 6 o -

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1 to be necessary in the course of my analysis, C

2Q WOULD YOU BRIEFLY SUMMAf'IZE THE CCNCLUSIONS WHICH YOU REACHED AS A RESULT 3

0F STUDYING OD's COST OF SERVING ITS VIRGINIA JURISDICTICNAL CUSTCMERS?

4A The cost of service study presented by the Company in this proceeding signifi-

- 5 cantly oveestates the cost of providing service to the Virginia jurisdictional 6 customers. The following major errors have been made by OD in its filing, 7 necessitating adjustments:

8 1. The company improperly applied an equity return to a portion of its 9 accumulated deferred inccme tax balances rather than ;stng the proper 10 treatment of deducting the balances from rate base or assigning them

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a zero cost in the ccpital structure, 12 2; Old Dominion is much less risky than Kentucky Utilities and as a re-13 sult the allowed rate of return on equity should be 121 rather than 14 the 13% claimed by the company,

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15 3. The company erred in deducting an unexplained $1,244 in claimed 16 AFUCC from net operat ng inccme rather than adding the 549,303 i

17 shown in the filed inccme statement, 18 4. The test year purchased pcwer expense was improperly separated into 19 jurisdictional and non-jurisdictional amounts, 20 5. The company failed to properly assign the depreciation expense, federal 21 income taxes, and accumulated depreciation associated with the trans-22 mission line leased to its parent company, 23 6. In computing its required revenue increase, the company failed to 24 recognize the lower federal income tax rates for the first four (4) 25 S25,000 taxable income blocks.

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1 In addition to these errors for which adjustments have been made, Old 2 Cominion chose a test year which included the full period of the coal strike 3 during which tirre its revenues were substantially depressed due to curtailment 4 of its coal mine loads but it did not make an adjustment to normalize its sales

, 5 to those customers. Although the ccmpany did not supply enough information for 6 me to calculate the appropriate normalizing adjustn~nts, it should be required 7 to show the effect on jurisdictional and non-jurisdictional revenues, expenses, 8 and rate base of normalizing its sales to these custcmers with appropriate ad-9 justments to its rates prior to placing new rates into effect.

10 Q WHY SHOULD THE TOTAL AMOUNT OF ACCUMULATED DEFERRED INCCME TAXES BE INCLUDED 11 IN THE CAPITAL STRUCTURE AT ZERO COST IN DETERMINING THE APPRCPRIATE RATE OF 12 RETURN TO BE ALLOWED?

13 A Accumulated deferred inccme taxes are arounts which have been collected frcm 14 rate payers for taxes which the ccmpany itself has not paid. Thus, these

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15 amounts are customer contributed capital which have absolutely no cost to the 16 ccmpany. As such, they should either be included in the capital structure at 17 zero cost cr deducted frcm rate base. Since the ccrrpany did not deduct them 18 from rate base, but rather chose to include them in the capital structure, I 19 have simply assigned them a zero cost.

20 Q ARE YOU AWARE CF THE TREATMENT NCRMALLY ACCCRDED THE ACCUMULATED DEFERRED IN-21 VESTMENT TAX CRECIT BY THIS CCMMISSICN?

22 A It is my understar; ding that it has been the practice of this Commission in the 23 past to segregate the accumulated deferred investment tax credit (ADITC) into 24 pre-1972 amcunts and amcunts for 1972 and later. The pre-1972 amounts have 25 been assigned a zero cost and those for 1972 and later have been assigned an

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1 equity cost.

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2Q ARE YOU FAMILIAR WITH THE CONTR0'/ERSY REGARDING THE TREATMENT OF ADITC BEFCRE 3 MANY REGULATCRY CCMMISSIONS?

4A The controversy surrounding the treate.ent of ADITC in the determination of a

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5 just and reasonable rate of return has been over the interpretation of the 6 Internal Revenue Code, section 46 (f) (2) (Option 2). Under an C'ption 2 7 election, a utility's rate base cannot be reduced by reason of the ITC for 8 rate making purposes; however, the cost of service can be reduced by an amor-9 tization of ITC provided that the amortization is calculated over a period not 10 more rapidly than ratably over the life of the property. The central issued 11 has been the interpretation of what constitutes a rate base reduction.

12 Q HAS THE IRS ISSUED FINAL REGULATIONS CLARIFYIt'G ITS POSITICN WITH RESPECT TO 13 THE PROPER RATE TREATMENT FOR ITC?

14 A Yes, the regulations finalized the proposed regulations issued February 17, 1972

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15 and permit the use et the overall rate of return as opposed to an equity return 16 in computing the allowed rate of return. Of course, the same effect is~obtained 17 by simply leaving the ADITC out of the capital structure and computing the 18 allowed rate of return.

19 Q WHAT TREATMENT DO YCU PROPOSE 3E ACCCRDED THE AD1TC IN THIS RATE PROCEEDING?

20 A in accordance with the regulations issued by IRS earlier tnis year, as dis-21 cussed above, the ADITC should be eliminated from the capital structure in 22 determining the appropriate rate of return to be applied to the company's rate 23 base thus, effectively assigning it the overall rate of return.

24 Q ARE THERE ANY OTHER REASONS WHY VCU RECCMMEND THIS TREATMENT FOR THE ADITC?

UA Yes, as with the case of accumulated deferred incore taxes, these amounts D D

\ hi' U !? P 1013 048-fA 1 represent customer contributed capital which bear absolutely no cost whatsoever

( 2 to the utility. To assign any return at all to these amounts in excess of that 3 absolutely required by law would, in my opinion, constitute a severe injustice 4 to rate payers.

50 HAVE YOU PREPARED AN EXHIBIT WHICH SHCWS THE CALCULATION OF YOUR RECCMMENDED 6 RATE OF RETURN?

7A Exhibit (JBS-3) shows the calculation of my recommended rate of return 8 based upon the amounts of capital cutstanding and costs of such capital for

? Kentucky Utilities Company as of December 31, 1978. The only difference be-10 tween ny figures and those shown by Mr. Newton on his Exhibit 4 are that I 11 assigned a zero cost to all deferred taxes and that I have used a 12", cost 12 of equity rather than the 13'; requested by Old Ceminion. My resuiting rec-13 cmmended rate of return to be applied to Old Dcminion's rate base investment 14 is 8.334.

15 Q WHY ARE YCU RECCMMENDING A 12S RATHER TPAN 13f; RATE OF RETURN ON EQUITY?

16 A The company has presented no solid justification for the allowance of a' 13S 17 return on equity. The corpany simply assumed a 13.4 cost for common stock 18 equity and devoted only one (1) paragraph at page 7 of Mr. Newton's testimony, 19 lines 17 through 27 to presenting the rationale for this assumption. The 20 reason pecvided in this paragraph for the assumed 13'; cost of equity capital 21 is that the Kentucky Public Service Commission allowed Kentucky Utilities a 22 135 return on equity in a 1978 order and a 13; cost for common equity was 23 used in determining KU's cost of capital in a recent FERC proceeding. No 24 studies whatsoever are presented to justify a 13S return on equity for either 25 Kentucky Utilities or Old Dominion. No reason is given for why the Virginia O '

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1 represant customer contributed capital which bear absolutely no cost whatsoever

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O 2 to the utility. To assign any return at all to these amounts in excess of that 3 absolutely required by law would, in my opinion, constitute a severe injustice 4 to rate payers.

5Q HA'!E YCU PREPARED AN EXHIBIT WHICH SHCWS THE CALCULATION OF YCUR RECCMMENDED

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6 RATE OF RETURN?

7A Exhibit (JBS-3) shows the calculation of my recommended rate of return 8 based upon the amounts of capital cutstanding and costs of such capital for 3

9 Kentucky Utilities Company as of Cecember ll,1978. The only difference be-10 tween my figures and those shown by Mr. tiewton on his Exhibit 4 are that I 11 assigned a zero cost to all deferred taxes and that I have used a 12" cost

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12 of equity rather than the 135 requested by Old Dominion. My resulting rec-13 cmmended rate of return to be applied to Old Dominion's rate base investment 14 is 8.335.

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15 Q WHY ARE YOU RECCMMENDING A 12S RATHER THAN 13:; RATE OF RETURN ON EQUITY?

16 A The company has presented no solid justification for the allcwance of a' 13';

17 return on equity. The company simply assumed a 13'; cost for common stock 18 equity and de/oted only one (1) paragraph at page 7 of Mr. Newton's testimony, 19 lines 17 through 27 to presenting the rationale for this assumption. The 20 reason provided in this paragraph for the assumed 13; cost of equity capital O

21 is that the Kentucky Public Service Commission allowed Kentucky Utilities a 22 13'; return on equity in a 1978 order and a 13'; cost for common equity was 23 used in determining KU's cost of capital in a recent FERC proceeding. No 3

24 studies whatsoever are presented to justify a 139 return on equity for either 25 Kentucky Utilities or Old Cominion. No reason is given for why the Virginia a

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1 State Corporation Commission should rely upon a return on equity alicwed by

(.- 2 another commission especially without having the opportunity to scrutinize 3 the record upon which the other cc=issicn based its decision and without 4 providing its staff and the intervenors in the instant prcceeding the oppor-5 tunity to analyse that commission's ceder, to analyse the record in that 6 proceeding, or to cross-examine the witnesses in that proceeding, No ccm-7 parison was provided to show that the methods used by the Kentucky Public 8 Service Ccmmissicn in determining cost of service items such as rate base, 9 income taxes, or capital structure are the same as, similar to, or vastly 10 different frcm the metheds used by the Virginia State Corporations Cermission 11 in determining those cost of service items, Nor was it mentioned that the 12 refe enced 131 cost for commen equity used in the FERC proceeding was that 13 recomnended by Kentucky Utilities and not what was determined to be just and 14 reasonable by the FERC, 15 Even if 13'; is assumed to be the cost of equity for the Kentucky "tilities 16 Ccmpany, the cost of equity used in detemining the rate of return allet,w I Old 17 Ccminion Power Ccmpany should be less than 13', since the operational risk of 18 Old Cominion is significantly less than that of Kentucky Utilities, For in-19 stance, the major operating risks of ros: utilities arise from the necessity 20 to undertake huge construction projects for generating units which require very 21 lengthy construction times prior to their becoming useful for providing service 22 to consumers, uncertainty of fuel surplies for increasingly larger and larger 23 generating units, and the regulatory lag encountered in instituting rate in-24 creases, These major sources of risks to most utilities are either very minor 25 or non-existent for Old Dominien, As a distribution utility, Cid Dcainien does D**0 ear n2gmyar.

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I not have to beccre involved in massive construction projects for generating 2 facilities lasting anywhere from 7 to 12 or more years. Old Cominion does no:

3 have to worry about acquiring fuel since it nas no generating facilities of its 4 own and it enjoys a secure power supply arrangement with its parent company.

5 Finally, Old Dcminicn is proposing to institate a purchase power adjustment 6 clause : ich would allow it to automatically collect over 70S of its total 7 cost ,ith no regulatory lag v.hatsoever.

8 For these reasons I recommend lowering the company's proposed 13T rate 9 o' return on equity to 125.

10 Q WAY SHOULD AFUCC BE ADDED TO NET INCCME 'JiEN CONSTRUCTION WORK IN PROGRESS IS 11 ALLOWED IN THE RATE BASE?

12 A It is necessary to add AFUDC to net inccme in order to prevent the utility frcm 13 collecting the cost of financing its construction program twice - once through 14 current rates and again through future rates in the form of higher depreciation 15 and a higher return.

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16 Q ECW HAS CLO CGMINION ERRED IN ITS ADDITICN OF AFUCC TO NET INCCME?

17 A While Mr. Davis shows total AFUCC ir. his inccre statement of $49,303, Mr. Newton, 13 without explanation, actually reduced net inccme by S1,244 claiming this re-19 duction to be attributable to AFUCC. I have corrected this error by replacing 20 the negative S1,204 with the positive 549,303 reflected in the income state-21 ment.

22 WHY DIO YOU FIND IT NECESSARY TO ADJUST ThE COMPANY'S SEPARATIUN OF PURCHASED Q

23 P0hER EXPENSE BETWEEN JURISDICTIONAL AND NON-JURISDICTIONAL SERVICE?

24 In making its separation, the company attempted to mix apples and oranges. Sim-A 25 ply stated, the company assigned a portion of the total purchased power expense O D J .) o

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to its non-jurisdictional cust:mers Dy dividing its total kWh sales to non-s 2 jurisd ctional custcTers by the total kilowatt hcurs it purchased and multiplying i

3 this ratio by the total purchased power costs. The company is attempting to 4 mix sales (apples) with purchases (cranges) in an allocation factor. Of course, 5 these two are distinctly different since the company incurrs losses in trans-6 mitting the powe- from the point of purchese to the point of sale. This prob-7 lem is somewhat tbscured by the company's explanation of its allocation of 8 purchase power r.osts in footnote no.1 on Newton Exhibit 1, sheet I which sim-9 ply says the aserage cost of pur;. nase power is multiplyed by non-jurisdictional 10 sales. A closer scrutiny of the method involved helps to clarify the problem 11 nich arises from this allocation method. In effect, the company has used:

\ 3) ictional hc s c . p cnased X Non-Jurisdictional Sales =Non-Ju 14 This statement may be rearranged in the ic110 wing manner:

'r c. c o e .h or n d chased Pcwer Cost In M on du d onal 16 17 :f this method were applied to jurisdictional sales, the amount of purcnased 18 power expense allocated to such sales would be determined in the follcwing manner:

19 (c) J ional k'. o Sa e$

pr asea X Purchased Power Cost In 5= Jurisdictional Cost 20 21 Cbviously, the sum of non-jurisdictional cost plus jurisdictional cost must 22 recover the total cost of purchased power. However, since the sum of the num-23 erators in formulas (b) and (c) above, non-jurisdictional and jurisdictional 24 sales, must obviously be less than the k'.lh purchased, the use of these formulas 25 ^ould not recover the total cost of purchased po'..er. Since it is necessary to D pol m

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I subtract the amount allocated to one service group from the total cost in order

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2 to be sure that the total cost is recovered, the use of either of these formulas 3 would result in an inequitable assignment of cost to botn groups. The company 4 chose to apply formula (b) above,thus, understating the cost associated with 5 non-jurisdictional service and overstating the cost associated with jurisdic-6 tional ser. ice. On the other hand, if formula (c) above were applied, the re-7 sult wou, be an understatement of jurisdictional cost and an overstatement of 8 non-jurisdictional cost. To equitably assign purchased power cost, the denom-9 inator in tee 'ormulas should be changed to total sales. This use of apples 10 and apples will assure that the company will collect the total amount of pur-11 chased power and that it is collected from the proper class of service.

12 Applying the appropriate allocation formula for non-jurisdictional ser-13 vice we get: non-jurisdictional sales of $20,475,50% divided by total sales 14 of $540,073,431 multiplied by the total purchased power of $14,603,006 for a

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15 corrected ncn-jurisdictional assignment of 3553,636. This adjustment amount is 16 shown on my Exhibit (JBS-1), page 1, line 2, column h. This adjustme't n results 17 in an increase in purchased power cost assigned to ncn-jurisdictional service of 18 341,853 and a decrease in that assigned to jurisdictional service of the same 19 amount.

20 Q .4 HAT ERRORS DID THE COMPANY MAKE IN ALLOCATING THE ELEMElTS OF THE COST TO 21 SERVE THE KENTUCKY UTILITIES TRANSMISSION LINE LEASE?

22 A Tne ccmpany made a number of errors the corrections for which are shown on 23 Exhibit (J3S-2).

• The first error made by the company was in its calculation 24 of depreciation expense allocable to this transmission line lease, It computed 25 Its depreciation expense by adding 11 months of depreciation expense on the portion oAQ t & mj $j , 1013 054 m

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1 of the line leased to Kentucky Utilities to one month of depreciation expense

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related to the entire line. The prope. annualized depreciatico expense is 2

3 calculated in item 1 on Exhibit (JBS-2) and cco;ains a full 12 month's 4 depreciation on that PCrtien of the line leased to KU. This is a reduction

. 5 frca the depreciatian e: cense shown by the company of 52,465.

6 ilot only must the federal income tax be recomputed as a result of the 7 adjustment noted above, but the company also made an err ^r in calculating a the inccme tax it assigned to the leased transmission line. In making its 9 calculation, the company used an unexplained revenue figure which was not 10 equal to the revenue it assigned to the lease as being booked during the 11 year and not equal to the annualized revenue as shown en iewton Exhibit 6.

12 The correctly adjusted federal income tax calculation is shown cn Exhibit 13 (JBS-2) under item 2. The proper adjusted federal income tax is 5107,120 14 cr S76,a01 acre than that shaun by the c:rpany.

13 The final adjustment I fcund necessary with regard to the leased trans-16 mission line is to the accumulated provision for depreciation assigned'by the 17 company. As shown on ;ewton Exhibit 2, the company assigned one years worth is of depreciation expense on the entire transmission line along with 11 months 19 of depreciatice expense on tne 1/3 which as leased to KU. This computation 20 must be corrected to reflect only the accumulated depreciation related to the 21 portion of the transmission line leased to Kentucky Utilities. This calcula-22 tion is shown as item 3 on Exhibit (JSS-2) and results in a reduction in 23 accumulated provision for depreciation assigned to the leased transmission line 24 of $29,950.

23 Q HOW DID THE CCMPA?lY I?;CCRRECTLY APPLY THE FEDERAL I:CCVE TAX RATE IN CALCULATITIG o

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1 ITS ADDITICNAL REVENUE REQUIRED?

( The error is shcwn on Newtcn Exhibit 5 '..here Mr. Newton .ent from the deficiency 2A 3 in return to the deficiency in revenue by dividing .5a or 1 minus the 46',

4 federal inccme tax rate for all taxable inccme over $100,0CO. This is in-correct because in going from the negative taxes shcwn en the ccmpany's cost 6 cf service under present rates to the positive level of taxes proposed, the 7 company wculd move through the first four $25,000 biccks ..hich have lower 8 income tax rates of 174, 20", 30',, and 401. These lower rates produce a

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9 tax savings of $19,250 on the first 5100,000 of taxable inccme. The ccmpany 10 also failed to reccgnize that the additional reve"Jes required to pay the 11 additional gross receipts tax would themsclves generate additional gross re-12 cepits taxes. I corrected both of these errors in my calculation Of the pro-13 posed increase in revenues shcwn in column g of Exhibit _ k'BS-1), page 2.

1- ; PLEASE E/?LA:N tee RESULTS JF '<AK!NG TFE AD;USENTS YCU HAVE DESCRIBED TO 15 THE CCMPA.T/'S TEST YEAR COST OF SERVICE.

16 A As shown en Exhibit (JBS-1), page 2, line 21, columns d and f, these ad-17 justments result in an increre of Slaa,770 in net operating inccme under 18 present rates for Virginia jurisdiction'l custcmers c- an increase in rate 19 of return of 0.65i. Column g on this s3me page at line 1 shows revenue in-20 crease of 54,079,334 required tn produce my reccmrended 8.33S rate of return.

21 This is a reduction belcw the ccmpany's pecposed increase of 573;,201.

22 g COES THIS CONCLUCE YOUR TESTIMONY AT THIS TIME 7 23 A Yes, it does.

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