ML19345G866

Testimony of Hc Bhatia (PSC of Mi) Filed 800430 Before PSC of Mi.Exhibits Encl

ML19345G866
Person / Time
Site:	Fermi
Issue date:	10/31/1980
From:	Bhatia H MICHIGAN, STATE OF
To:
Shared Package
ML19345G856	List: ML19345G855 ML19345G858 ML19345G860 ML19345G862 ML19345G863 ML19345G864 ML19345G865 ML19345G866 ML19345G868 ML19345G869 ML19345G870
References
U-6488, NUDOCS 8104220560
Download: ML19345G866 (25)

Text

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O* 5 TATE OF MICHIGAN BEFORE Tite MICHIGAN PUBLIC SERVICE COM4ISSION ,

In the matter of the Application of )

DETROIT EDISON COWANY for authority )

to increase its rates for the sale of Case No. U-6488 electricity

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O DIRECT TESTIMONY & EXHIBIT l OF l

HASSO C. BHATIA l

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October.1980

1 DIRECT TESTIMONY OF Q'

'T DR. HASSO C. BHATIA Case U-6488 1

PART I - Oualifications Q. Please state your name, address and occupation.

A. I am Hasso C. Bhatia, g business address is 6545 Mercantile Way, Lansing, Michigan. I am the Director of the Office of Tariff Analysis in the Electric Division of the Michipan Public Service Comission. -

l Q. What are your responsibilities in your current position?

l A. I am responsible for the development of the Staff position on all tariff matters, including rate res: arch, cost of service studies, and rate structure studies such as marginal cost pricing, load management applications. My office also is responsible for O review and development of utility sales and load forecasting. ,

l Q. What is your education and work background?

l A. I have a M.S. degree in Operations Research and Statistics from J the I!niversity of Delhi. I have also a doctoral degree in Matne-matics from Michigan State University.

I began my work career as a shift supervisor in an industrial power plant in 1953. Here the work mainly involved chenical analysis of feed water to the boiler house, coal analysis and l monitoring of load charts. From 1960 to 1965 I was a senior technical assistant in the Indian Bureau of Mines in New Delhi, India. Tha duties involved economic analysis of mineral development l

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O projects in India. From 1965 to 1970 I was a teaching assistant and later an instructor in athentics at Michigan State Univer-sity, teaching undergraduate mthematics, including math for .

business applications.

From 1970 to 1972, I was egloyed by McGraw Edison Company in l

! their Albion Division, as a System Analyst. The Albion Divi-sion is a large nanufacturer of air-conditioning ar.d space heating ecuipment. W responsibilities included design and iglementation of coguterized production control system including demand fore-casting material planning system and inventory control. In this job I was in charge of demand forecasts using statistical tools such as regression analysis, trend analysis and factors such as

,O ta r <r cts, iacam and Pric <r ct - r > i== iavoiv.4 ita financial analysis for the credit department. From 1972 to 1974 I worked with Diamond Rao Trucks as a senior system analyst and a project leader to design and iglement comuterized product infor-mation and control data base systens. Here I supervised three other system analysts. In April,1974, I joined the Michigan Public Service Comission as a tariff analyst. In March 1977 I was pre.

moted to g present assignment.

In this position I have been intimately involved in various aspects of utility economics, including pricing principles, cest of service, and narginal cost considerations, supply and denand relationships O .

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and load and sales forecasting, fuel and purchased power clauses and fuel analysis. I was invited to become Chairman of ,

! the Energy Session at the Annual Conference of Amrican Insti-l tute of Decision Sciences in 'May of 1976.

l In October 1976. I was hired as a consultant by the Micaesota Energy Administration to evaluar.e the load forecasting method-ology bed by a large Minnesota utility in its application for construction of generating units. In that proceeding I presented testimony and staff report on the peak demand forecasting tech-nioues.

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OIRECT TESTIMONY OF DR. H. C. BHATIA Q. Please state the purpose of your testimony in this case.

A. My testimony is in two major areas. One I am testifying as to the level of 'Other 0 & M' expenses which is appropriate for the 1981 test year. Two, I am addressing the larger cuestion of the more comprehensive adjustment clauses, including amendments to the exist-ing clauses.

Q. What is your position on the appropriate level of 'Other 0 & M' expense?

A. Mr. Grove, on behalf of the Applicant, has testified that 'Other 0 & M' expense level should be vastly increased from the levels l allowable under the existing provision. Mr. Grove indicates two basic reasons for his proposal. One that the base set originally by the Cocatission in Case U-5502 was considerably understated and two, that numerous major new prorims have been undertaken by the Applicant. Many of these programs mandated by various regulatory agencies.

As regards its contention that original base was uncerstated, I would .Tarely say that this issue was also raised by the Applicant 1 in its last rate case U-6006. Comission had in effect granted a rehearing in the last Case and dealt with the issue. It is my posi-tion that Staff considers this issue mpetitious anfexhausted. '

As regards the inclusion of new major programs, one should remember that in adopting the 'Other 0 & M' indexing system, the Comission O

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was very particular to point out that the purpose of the 'O & M' clause was two-fold; (a) timely recovery for a sizeable portion of expenses and (b) an incentive for the Applicant to contain its costs within the general level of inflation. Any revision of the 'O & M' l base must be heavily supported by the Applicant.

It is Staff understanding that changes in the authorized base would be considered in exceptional ci.rcunstances. I have carefully reviewed each item of ma,jor program listed by Mr. Grove. Mr. Grove seens to have taken a ' kitchen sink' approach by including every conceivable pro-gram in my opinion these fall into five (not necessarily mutually exclusive) categories:

1. Programs which should more than pay for itself into cost savings through productivity gains.

2. Programs from which primarily the Applicant's stock-holders would benefit.

3. Programs which are adeouately covered in the existing clause.

4. Miscellaneous trivial items which should not have been raised in the first place.

5. Truly new programs which merit consideration.

Let me now deal with each of these categories. Under the first catspry, Applicant has listed prograns such as Mater 1al Management I System (17), Automated Mapping System (18), Employee Infonnation System (19), Accounting Sudgeting and Cost Reporting System (20),

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Q-Relay Data Base (23), Remittance Processing System (26), Envelope Billing (28), etc. (Nuders in parenthesis refer to Exhibits ELG-7 of Mr. Grove). Explanations of these programs provided by the Applicant clearly indicates that these are the programs which way1d ultimately lead to cost savings, otherwise they thould not be imple-mented in the first placa.

For exagle, by Company's own admission, Materials Management System wca!d *.-aplace an inefficient outdated system and cope with the in-creased volume of transa:.tions, increased nuder of sterials and supplies and increased inventory values' (Work paper ELG-7 Wpp line 17). In this particular case a successful Materials Manageant Sys-tem would not only save in manpower but hopefully igrove the inven-O tory of storials and supplies from levels that existed at the time of setting the 0 & M base. Clearly therefom since the 'O & M' clause presently does not account for productivity gains, no further allowance for items such as new Materials Management System is warranted. Fur-ther Staff considers these kinds of ite:* to be one time expenditures' and thus could not be included in an 'O & M base'. Finally it appears to me that the same physical resource has been allocated and costed in more than one program thereby overstating the total costs. My recommendation is that this category of programs be rejected by the Commission.

The second set of new programs, include those from which primarily 1

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the stockholders and management would benefit. Notably these in-clude Area Development (15), Space Conditioning Program (34). In g definition these are promotional programs. While I ouestion the need for such programs in todays energy environant I strongly reconnend that these be paid for by the Applicant's stockholders.

The third set of programs include Monthly Meter reading (4), Environ-mental Protection (7 & 8), Customer Information (24), Lon)-tenn Disability (27), Public Liability Claims (31), Rental of Office (36),

Interest on Leased Vehicles (37), etc. All these expenditures wert allowed for in setting the original base. The Comission had speci-fically allowed $4.2 million for monthly meter reading program.

The stated purpose of 0 & M Clause is to automatically cogensate O for tacreased wases, friases etc. Yet the APPitcant considers ion -

term disability as outside of the 0 & M base. It appears that Mr.

Grove has only highlighted those items which are expected to increase more than CPI and labeled them as major new programs, while staying silent about ones which have been either reduced or increased less than CPI levels. When the base was set in U-5502, the Comission did not specifically list every item of expense, but rather used the overall level at that time. I also get the impression from the Appli-cant's work papers that several expense estimtes have iieen arrived by taking a wild guess. These includa Pelic Liability Claims, Consumer Education Programs, etc. For instance, the Public Liability claims decreased from $958,000 in 1978 to 5846,000 in 1979. Yet Applicant I

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proje:ts these to increase to $2.44 million and $2.47 million in )

1980 and 1981 respectively implying threefold negligence on the part of Cogany agloyees. Finally, as for Rental and Leased Vehicle Interest Costs. Ehe Company itself has estimated these to increase at the level' of CPI between 1978 ~1981.

In sumary, the Staff reconnends that currently authorized levels are adecuate for these class of ites and not be revised.

The fourth category includes collection of miscellaneous sell item such as Relay Data Base (23), Load Analysis Modeling System (24),

Instituta of Nuclear Operations (30), etc. There are perhaps hun-dreds of such programs going on within the Detroit Edison at all Q times. Some of them are being constantly phased out while others are brought in. Applicant is expected to cunage these types of pro-gram such that they are properly distributed over the years and within budget limits. It is my opinion,th~at the' basle"piirVdse of the O't. M clause Ys to prov'ide the flexitillity to 'tfie Ditroft EdisonTanagemen't-in scheduling these types of expenditures. No, I would not recorrinend any programs of this size and nature as candidates for revisions to the base.

i l Q. You mention the fifth category. What types of program are they and what is your reconnendation?

l A. There are two item on Mr. Grove's list which I believe deserve on-l sideration. Oae is the Operations Expense of Greenwood I Unit. In O

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l O~ the inst case this item was re3ected 3, the Co.4ssion. It was Staff position in U-6006 to redesign the clause by expressing the ,

base in Unit Cost. Had the Cosmission adopted the Staff position the Greenwood I operations expense would have been a nonissue. Since that did not happen, I am now reconnending that an amour.t of $2 nrillion should be added to the current base.

Q. Why $2 mijlion when the Applicant has recuested $3.3 million?

A. It is g undentanding that Greenwood generation has resulted in two things, reduced level of purchased power and placing of a nunber of Units in econog reserve. While the former does not reduce the Opera-ting Expense, some savings of material and manpower should result from mughly 1000.nN idled capacity. Therefore, I am reconnending roughly half the estimated GWI operations cost be added to the present

'Other 0 & M' base.

Q. What is the other major item in your fifth category?

A. This is the Energy Conservation Program comprising of several sub-programs such as energy audits, insulation and energy conservation financing, etc., also called RCS program.

I have discussed this at some length with the MPSC Staff involved in RCS. It is g understanding that separate hearings will be held to arrive at the inplementation and costs of the RCS Program. In my view Applicant is legally and morally entitled to recovery of these costs.

I reconnend that the annunt Nermined appropriate in that proceeding O -

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I should be added to the 0 & M base. In the event those proceedings are not completed before completion of this case, then the amount reauested by the Applicant be included subject to revision after the RCS proceeding <. The amount determined by me per Company re-ouest (lines 11,12 and 14) is $3,340,000 for 1981.

Q. Are there any other adjustments to 'Other 0 & M' base?

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A. Yes. I have s'ubtracts'd thE"fdel' hindlTng~expen's'e~ frWt'.he currsInt"O & M base amounting to $6,011,000. The appropriate level of expense for this item will be provided by Mr. MacGregor.

The second adjustment is a reduction of $2,240,000 due to Beacon plant. Mr. Jim Padgett will address this' adjustment.

O Q. In sunnary then, what is your final recomendation cn the reasonable level of 'Other 0 & M' base?

A. I reconnend 1981 total Jurisdictional expense of7MT,656',Y0'0.' Th~is is based on 12.7% change in CPI between August 1979 to August 1980. It is also my recomandation that remaining expense itens such as Pro-duction Maintenan:e and fuel handling, scrubber oil, etc., should also be included in the 'O & M' clause. The normalized ievels of these expenses are being provided by other Staff witnesses.The combined 0 & M base for 1982 February hearings will be $464,666,000 as shown in Exhibit S- (HCB-1).

Q. Please discuss the second part of your testimony.

A. In recent years the Consission and the Staff has been concerned about ]

two main problems of regulation. Excessive regulatory delays in grant-ing rate relief and creating incentives for efficient management of I t.h? utility. Historically, the two have tended to compliment aach l

11 O- 1 other thereby maintaining a rough balance. In acre recent periods however, rate cases have extended out too long'thereby' adversely affecting utility f.inancial conditions. ..On the other hand the need for hard incentives was never greater than tofay.

In addressing these issues, the Comission has taken several steps such as forecasted test years, availability incentive clause. 0 & M indexing system, fuel and purchased power adjustment clauses, etc.

In a recent Michigan Bell Order, the Comission adopi.ad a more com-prehensive clause by indexing the total revenues to the Consumers Price Index. Mrfous foms of automatic adjustnant clauses are also being considered by several other states.

h Although in ry opinion, the existing clauses for Detroit Edison are working satisfactorily, the Comission may wish to consider other alternatives or improvement in these clauses. In the following pages I shall outline alternate approaches and connent on each.

Q. Before outlining your alternatives, can you briefly describe what you hope to achieve through your proposals?

A. My purpose is two-fold. First, although Detroit Edison is a regu-lated utility whose prices are set by the Public Service Comission, i l it is nevertheless a private enterprise providing essential service. ,

i On the one hand it aust compete in the free market to acouire re-sources such as capital, labor and fuel necessary for its production.

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O- In this respect it is nc different than any other unregulated enterprise. On the other hand it has been allowed moncpoly rights in its service area. A right not availaole to unregulated industries. This right.of course also obligates the utility to provide service or, demand with assurance of ouality The role of the Comission therefore is to act as a substitute for competition.

In ny view, while the stility is entitled to and should be granted timely recovery of legitimate costs of doing business, just as any other business, it should however not be allowed to unload I

upon its ratepayers costs imprudently incurred or those resulting from lack of efficient management. Further costs incurred by the '

utility in acouiring 'ts resources must be comparable with a frame O of reference such as senerai infiation inveis, cost chanses in simi-lar other services, etc.

An ideal regulatory approach in ny opinion therefore would be to simulate the caregulated snterprise. This in offect means timely rate relief with strong pressures to contain costs.

Q. Proceed with your alternatives.

A. First, of course, the Comission may decide to maintain existing clauses and no more. In that case I recomend the 'Other 0 & M base'in the first part of tha testimony.

A3ernateI The Comission may consider the 'New Mexico' type cost of service O .

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. . O-clause. This involves automtic resetting of rates to achieve the predetermined level of rate of return. For instance if i

Detroit Edison's authorized range of return is sot between 13.0 -

14.0%, then annual hearings would be held to detemine the actual level of retum realized by the Company. The rates will be adjusted if necessary to bring the return within the range.

Based on g review and other reports, it is, in y opinion, not an effective clause. Essentially it removes all incentives what-soever from the management to reduce costs. Indeed the experience of New Mexico reportedly has been a widespread abuse of the clause.

Even the expected benefits such as stable earnings, better bond ratings, etc., have not been realized after initial enthusiaan by O the financial comunity. Although this type of clause might be con-sidered for small Cooperatives, I would not in good faith recone nd it for Detroit Edison.

Alternate II BELL TYPE CLAUSE In this case, the total Detroit Edison revenues would be subjected to an automatic adjustrant for change in Consumers Price Index, annually. The Bell Clause has a productivity offset of 40% and a further 10% offset for removal of regulatory lag.

l Before considering this clause for Detroit Edison, I must note that there are essential differences between the present day telephone and electric utility which must be born in mind. While I am no O

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O-expert on comunication industry, rqy understanding is that it is a growing industry with enormous potential for automation, new service applications and economies of scale. It is well established now that the electric industry growth has been arrested from historic levels and fewer economies of scale are preesent.

A second major difference,is that the telephone industry is labor intensive. Worker productivity therefore is measurable and a major cost factor. The electric industry on the other hand is fuel and I capital intensive. A more desirable objective for this industry tnerefore is fuel and capital efficiencies.

A third difference is that while telephone industry invest:nents are O 'ars but scadu i ta r i= = 'uraia == ia 1 ctric aiaat iav st-ments. A fourtn important distinction is the fact that while the Communications industry is gradually being freed from regulation, the electric industry is being subjected to tighter regulation on environment, conservatien, nuclear saf6ty, etc. l Because of these distinctions I would suggest that the Comission i l

if it adopts the Bell type comprehensive clause, two exceptions ,

I must be made. One, fuel and purchased power expenses not be sub-feet to the clause. Second, new generating units be considered outside of the clause.

Q. If the Comission adopts the Bell type clause, what productivity offsets be used?

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A. The offset I would propose is a 10% reduction in CPI. As I indicated above most of the efficiency gains are realized through the fuel clause application. However, in light of re-duced regulatory lag and small growth in the ocsind, a 10% offset l

would be reasonable in y cainion. A ten percent factor also roughly represents about one year worth of time saved in the regulacory process. It also acts as a further management in-centive.

Q. What is your Alternate III?

A. This proposal is what I call ' Partial Rate Base Adjustment Clause.'

It covers,three fixed cost coreponents.

1. Plant-in-service comoonent O In any given year Detroit Edison adds as much as $200 million worth of distribution, transmission and other general. plant, beyond the major production plant. This plant-in-service in-l cludes such things as sub-stations, tran , formers, p' oles, meter- .

ing eouipment, etc. For inclusion of these items in the rate base, Detroit Edison must wait until a rate case to recover 1

l this fixed cost item. These items are being continuously i

added to the plant and are generally not controverted in the rate case. In g opinion a outcker than rate case recovery l

l should be granted on these costs.

2. Change in Fixed Charoe Rate l As a result of issuing new securities, the Detroit Edison's l

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O capital structure and cost of money are constantly changing.

A once a year adjustment in the cost of capital from the levels authorized in the case could be made. No change in return on ecuity shall be allowed. In effect, the adjustment will reflect the change in cost of borrowing.

The changes in overall return shall be used to compute the net operating income and taxes. This additional revenue re- )

ouirement will be recovered through the clause.

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3. A third component of this clause will be the Polluticg Control Related CWIP.

Detmit Edison is adding a considerable amount of soutpment to comply with various pollution control laws. In 1980 the estimated investments in this equipment exceeds $125 million.

None of this investment enhances the productive capacity of the plants. In a recent CWIP order the Comission had authori-

ed inclusion of this type of CWIP in the rate base without an AFUDC offset.

My recommendation is that only CWIP for pollution control eculpment on existing plants be included. In other words CWIP related to generating facilities under construction should not be allowed automatically.

Q. How shall this ' Partial Rate Base Adjustment' clause operate?

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A. Each year, coincident with hearings on 'Other 0 & M' clause, the Company shall file the information and cogute the additional jurisdictional revenue requirements. Hearings will be held on the clause to datemine changes in the rate base, cost of capital, and CWIP, from the levels authorized in the case. The Staff my have the opportunity to audit the books.

The Unit Cc!t Adjustment shall be computed using actual juris-dictienal sales for previous calendar year. I reconnend that only 90% of the adjustment thus coquted should be applied to the custo-mer bills.

Q. Why 90% factor?

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not been fully verified and reviewed as would be the case in a full rate hearing. Also, it recognizes the ouicker recovery of these investments.

Q. Would subseouent adjustment be made in the rate case?

A. Yes. In the following rato case, or the subseouent adjustment hearings, nurters utilized in the previous adjustment clause shall be verified. In the event of over-recovery a suitable refund with interest my be made to the customers. A new base will be set after each adjustment clause.

Q. What do you see as mjor advantages and disadvantages?

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A. From Applicant's view major benefit is the faster recovery of l the miscellaneous plant-in-service and changes in interest costs.

As I indicated earlier these investment components are generally non-controversial in nature. The 90% feature also corrpensates for ad-vanced timing in recovering these expenses. Therefore the custo-mer is not adversely affected in sy opinion. In the event the Applicant recovers au iost which was subsequently disallowed. l a refund with penalty would be made.

A major drawback of this clause nay be lack of specific incentives l

to the Applicant, to bargain for best financing, efficient in-vestment decisions and unnecessary pollution control investments.In my opinion this is a workable clause and should be seriously co.nsidered.

If authorized this clause shall be effective February 1982.

Q. What is your Alternate IV?

A. This alternate is somewhat similar to the Bell type clause. It will operate in addition to present 'O & M' and fuel clauses.

The clause which I cal.1 ' Fixed Component Clause' will operate on the basis of difference between the revenue requirements less the i

fuel, purchased power and other 0 & M expenses.

The remaining fixed cost component will be increased at the rate of CPI every year. The base costs shall be datemined in the rate order. As an incentive only 90% of charge in CPI shall be con-sidered.

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l O l In effect then this clause assumes that rate base related itens l such as depreciation, general taxes, interest charges, etc., are increasing at the rate of CPI. The mjor rate base item such as a generating unit shall not be subject to this clause.

Q. What are the advantages or disadvantages of this type of clause?

A. A major advantage of course is that Applicant has incentive to main-P tain expense and fixed investment levels within the level of CPI.

It also allows the Applicant to plan its investments in such a man-ner as to levelize the expenditures.

From the customers viewpoint, assuming that fuel and purchased power expenses change at the level of CPI, then.he would experience some-Q what of a reduction in real price of electric service. Staff con-siders this to be a reasonable regulatory objective. This clause also provides incentive to keep the rate base low.

Q. But how about the additional cost of new generating units?

A. It is conceivable that new generating units when placed in service would add to the rates above the rate of CPI. However, major units under construction by Detmit Edison are likely to have signifi-cant fuel and purchased power offsets, which shall be passed onto the customers.

l Q. Do you mconnend this clause in the interest of Detroit Edison and l its customers?

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A. Yes. In g opinion it is a fair clause. The customer would know that his electric prices would remain reasonably within level prices of other goods and services.

On the otherhand, Detroit Edison gets a timely rate relief with incentives to plan and manage efficiently.

The adjustment factor shall be applied similar to 'Other 0 & M' surcharge using the most recent calendar year sales. I also re-commend that the adjustment clause should operate for three years.

At that time it my be extended, revised or discontinued based on its performance.

Q. Do you have any other alternate proposals?

A. Yes. $ Alternate V is that the rate cases be treated similar to the negotiated wage settlements.

In essence, instead of one-year as test period, one could use three future test years. In this instance for exagle use 1981, 1982 and l 1983. Based on the record, three-tier rate order will be issued

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effective, let's say January 1981, January 1982 and January 1983.

i In order to obtain rate increase in 1984 and beyond, the Applicant i

shall have to file sufficiently in advance.

Q. What are the benefits or di, advantages of this plan?

A. A major benefit to the Applicant is that it removes uncertainty as to timing and size of rate increases.

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i O-The inemases are based on Company specific costs and therefore not subject to volatility in inflation rates. This of course l could work both ways. The result, therefore, would be more stable earnings, provided that Company's budgeting system is so~urid. ~ Fihan-cial connunity nay view such a pmgram as positive.

l Q. Under this method how will existing clauses be treate17 i

A. Fuel and Purchased power clauses shall be retained in their existing fom. The 0 & M clause could be eliminated. Major generating units i

of course would be treated separately.

Q. Are there any incentives present in this method?

A. Yes. To my mind, a utility always has incentives when a ' ::ed level O arrvau=a v 6 aar utaarizd- ta <r et thi= ai a $= aat too different from CPI type indexes because as a practical atter when projecting future costs a forecaster quite heavily relies on cpi or a similar inflation index. Indeed it is ny feeling that analysts are generally optimistic about future rates of inflation.

This bias nay work to the advantage of rate payers.

This approach also provides greater opportunity to Staff and inter-

• venors to review costs more closely since timing pressures in a rate case are reduced.

Q. Do you have any other schemes in mind?

A. Yes. My last proposal is what I consider an ' Ultimate Incentive Clause'.

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This is the New Mexico type clause in reverse.

Under this method, the Detroit Management will be held responsible for maintaining the authorized level of earnings. If the earnings level drops below a certain range then the Comission shall further order a cut in rates as a penalty. Conversely, if earnings increase above the range, a further increase in rate of return would be the efficiency reward.

Q. Do you reconnend this type of clause?

A. Quite frankly, no. Inflationary pressures are too great on the econog and on utilities in particular to operate in this kind of regulatory approach. If adopted this system would induce utility to O overstate their revenue needs dur4as rate f414nss.

Q. Does this corrplete your testimony on automatic adjustment proposals?

A. Yes.

Q. Do you have any further testimony?

A. In his testimony Mr. Grove reconnended that test generation of Fermi II Unit be considered for accounting and ratemaking purposes.

Mr. Tom Smith for the Staff is dealing with the accounting issue.

As for ratemaking, if a surcharge results due to test generation, then I reconnend that fuel adjustment clause is an appropriate method to utilize. The principal reason being that the timing of fuel off-sets and surcharge will match.

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Finally, I am also reconnending that at the time of annual recon-ciliation, fuel and purchased power bases should be reset by rolling in the adjustment factors in the base rate. .

Q. What is the reason for last adjustment ?

A. Given the uncertain length of the rate cases, large adjustments are created. A 10% penalty would still operate for 12 months between resetting the bases. It does not seem fair to have in-definite 10% cost disallowance. Such an approach would amount to 10% recovery of total fuel expense. Clearly this is not the intent of the clause. .%reever, if any of g indexing proposals are adopted the opportunity for resetting the fuel bases is not there.

O I shouid aiso ,oint out that the custom., benefits r- this gro-posal to the extent that when bases are reset in rata orders, the applicant's revenue deficiency is increased to the tune of 10% loss ,

in fuel clauses.

Q. Is this the end of your direct testimony?

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l Casa No.: U-6488 Exhibit No.: S- (HCS-1)

Witness: Hasso C. Bhatia .

, Date: October,1980 DETROIT EDISON COMPANY l

'Other 0 & M' Base Computation 1981 Total Jurisdictional Electric

$(000) Steam Jurisdictional ,

A. Casa Authority in U-6006 $ 272,075 Mon'thly meter reading 4,281 Total 1979 level 276,356 .

Additional 12.04% 33,273 (Authorized Feb.1980)

Total 1980 Base 0 & M 309,629 $ 305.812 Additional 1981 (Est.) 12.7% 34,8952 $ 4,302 $ 344,650

8. Adjustments (Expressed in 1981 leval)

Greenwood Oper. Expense $ 2,000 (50% of Company Estimate)

Fuel handling exclusion (6,011) i Beacon Adjustment (2,240)

C. Estimated 1981 Level $342,701

0. Additions Fuel Handling 24,861 (Incl. scrubber oil, etc)

Production Maintenance 93,864 RCS Program $ 3.240 E. Total for 1982 Base $464,666 O

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