ML19308A406

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

ML19308A406
Person / Time
Site:	South Texas, Comanche Peak
Issue date:	08/01/1979
From:	Gross R AFFILIATION NOT ASSIGNED
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
E-8911, NUDOCS 7909260180
Download: ML19308A406 (9)

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GULF POWER COMPANY h FPC DOCKET E-8911 C

1Q PLEASE STATE YOUR NAME AND ADDRESS.

2 3A My name is Robert M. Gross, Jr. My business address is 1000

( Crescent Avenue, N.E., Atlanta, Georgia 30309.

5 6Q WillT IS YOUR EDUCATIONAL BACKGROUND?

7 8A I graduated from Georgia Institute of Technology in 1965, receiving 9 the degree of Bachelor of Industrial Engineering. I also attended 10 Georgia State University and in 1971 received the degree of Master 11 of Business Administration, majoring in finance.

12 13 Q PLEASE STATE YOUR PROFESSIONAL EXPERIENCE.

14 15 A I have been employed by Southern Engineering Company of Georgia for 16 approximately cight years. During this time I have been involved .

17 in the preparation of cost of service studies of investor-owned 18 utilitics, rural c1cceric cooperatives and municipal systems and have 19 participated in wholesale rate and retail cicetric consulting assign-20 ments in 23 states. I am a registered professional engineer in the 21 State of Georgia.

22 23 Q 'llAVE YOU EVER TESTIFIED IN OTilER COMMISSION PROCEEDINGS?

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25 A Yes, I have testified as a rate expert and cost of service witness 26 before the State Comissions of R,entucky, Indiana, Michigan, Vermont 27 and Virginia.

28 I have also testified before the Federal Power Commis-sion in proceedings involving the Mississippi Power Company, FPC 29 Docket No. E- 7623; Crntral Vermont Public Service Corporation, FPC 30 Docket No. E-7685; Appalachian Power Company, FPC Docket No. E-7775; '

31 _ Duke Power company, FPC Docket No. E-7994; and Gulf States Utilities.

32 Company, FPC Docket No. E-8121.

33 34 Q BY WHOM IS SOUfHERN ENGINEERING' COMPANY RETAINED IN TilIS PROCEEDING?

35 36A Ej the Cooperative Intervenorc.,

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38Q WHAT WAS YOUR ASSIGNMENT IN TilIS PROCEEDING?

39 40A My assignment was to review Gulf Power Company's direct testimony, 41 cxhibits and other available information concerning the cost to serve 42 Gulf's wholesale customers. Specifically, I was to consider whether 43 the methods employed by Gulf for Period I and Period II to develop 44 the overall Company cost of service and the allocation of cost of 45 service (in Statements "L" and "M" for Periods I and II, respectively) 46 are proper according to Commission precedents and sound rate making 47 procedures. In addition, based on the adjustments to Gulf's cost of 48 service which are found necessary by the Cooperatives' witnesses, I 49 was to preparc an overall cost of service study which accurately 50 reficcts the rates of return tLat are actually being carned by Gulf (s

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I under its present whoicsale cicetric tariff and that will actually 2 be earned by Culf under its proposed wholesale cicctric tariff.

3 Finally, using the rate base as adjusted by the Cooperatives' wit-4 nesses dnd the overall cost of capital recommended by Dr. Ewert, 5 I was to compute the amounts of wholesale cate increase which are u deemed just and reasonabic and accordingly are recommended to be 7 granted to Culf Power Company by this Commission.

8 9Q WilAT n\TA IIAVE YOU REVIEWED IN PREP.'. RING YOUR TESTIMONY AND RELATED 10 EX111 BITS?

11 12 A I have reviewed those portions of the Company's filing which relate 13 to its cost of service studies, including testimony and exhibits of 14 Gulf's witnesses and other information, such as Gulf's 1973 and 1974 15 Fo nn No. 1, which Gulf supplied in response to the FPC Staf f's and 16 the Cooperatives' requests for data.

17 18 Q WOULD YOU BRIEFLY Site!ARIZE Tile CONCLUSIONS WilIClt Y0U AND THE OTIIER 19 WITNESSES FOR Tile COOPERATIVES IIAVE REACIIED AS A RESULT OF STUDYING 20 GULF'S COST OF SERVING ITS W110LESALE CUSTOMERS?

21 22 A The cost of service studies presented by Gulf in this proceeding 1

23 significantly overstate the cost of serving Gulf's whoicsale custo-24 mers. The following major errors with substantial impact on the

( 25 overall revenue requirement have been made by Gulf in its Period II t

26 cost of service study, necessitat,ing adjustments by the Cooperative 27 intervenors:

28 29 1. Culf's use of the average of the beginning and end of year 30 electric plant in service account balances to determine the 31 production plant investment icyc1 for the test year does 32 not accurately reficct the overall average investment of 33 Gulf's production plant in service for the test period--

34 1.c., the twelve months ending December 1975.

35 36 2. Gulf does not properly allocate the administrative and general 37 cxpenses for Period II, since it specifically assigns without 38 cxplanation only a select feu administrative and' general ex-39 pense items, while it allocates to all customers the majority 40 of A&G (Administrative and Ceneral) expense items. '

41 42 3. Gulf has allocated $26,164 sales expense to Cooperatives.

43 Such customers are not seeking any form of sales promotion 44 from Gulf and such expense is related only to retail sales.

45 Such snics expense, therefore, should be deleted from the 46 cost of service to whoicsale customers.

47 48 4. As testified to by tir. Rogers, Gulf's method of accounting 49 for fuel expense and revenues derived fron application of 50 the Company's Fuel Cost Adjustment Clause does not properly

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match the revenues and expenses incurred during the test 3

period (Period II), upon which revenue requirements are being dete rmined and rates are being established.

4 5 5. As testified to by Dr. Livingstone, Gulf has inflated its 6

rate base by using capitalization rates for Allowance For 7 Funds Used During Construction that would result in an 8 excessive rate of return on the equity component of this 9 allowance. In addition, the company's capitalization rate 10 overstates the actual cost of debt source funds available 11 for construction purposes.

L2 13 6.

14 As testified to by Dr. Livingstone, Gulf has improperly computed the deduction from income taxes for interest 15 expense association with both long-term debt and notes 16 Payable for Period II.

17 18 7. As testified to by Dr. Livingstone, Gulf has normalized 19 20 its treatment of the income tax effect of Account 283.

21 The proper accour. ting of this tax item is a flow-through of benefits to the customer. ,

22 23 8. As testified to by Mr. Chayavadhanangkur, the demand allo-24 25 cation factors utilizing the average of the five daily

( 26 demands coincident with the Company's five-day annual peak 27 demand do not accurately reflect the actual demand imposed 28 on Gulf's facilities by c'ach class of customer. The use 29 of the average of the twelve-monthly coincident peak demands doca more accurately reficct the use by each customer class 30 of Gulf's facilities.

31 32 9.

33 As testified to by Mr. Chayavadhanangkur, Gulf has assigned 34 a disproportionately large amount of transmission plant and 35 associated expenses to its wholesnic customers. Moreover, 36 some transmission facilities were specifically assigned by 37 Gulf to wholesale customers on a basis that differs from that on which assignments were made to the retail class of 38 customers, even though there are transmission facilities 39 I 40 used to serve retail. customers that are functionally simi-41 lar to transmission facilities used to serve whoicsale cus tomers . I have adjusted for these inequities by using 42 the " rolled-in" method of transmission plant allocation.

43 44 45 In addition there are other errors included in Gulf's filed Cost of 46 Service for Period II, which when measured individually, have relatively 47 minor impact on the whoicsale class revenue requirement. Collectively ,

48 these errors, however, do have more than a minor impact, and therefore I am listing them also, as follows:

49 50 1.

Gulf incorrectly adds payroll taxes to its cash working k.

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capital computation. It has been a long-standing require-2 3

ment of the Commission that detail lead / lag studies must 4

accompany and support any change to the Commission formula for cash working capital determinations. No such studies 5 were submitted by the Company here.

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7 2. Gulf has incorrectly allocated fuel stock balance associated 8

with working capital using a demand allocation factor. Fuel 9

10 stock requirements are based on prospective energy consump-11 tion and should be allocated using the Company's energy 1

allocation method.

12 13 3. Gulf has erred in computing its cash working capital allo-14 15 cation by functionalizing cash working capital based on plant in service balances. The proper allocation method, which 16 17 produces an accurate assignment of the cash working capital tg allowance by class, is simply to multiply 12.57. times allo-cated operation and maintenance expense less purchased 19 power for each class of service.

20 21 Q 22 llAVE YOU PREPARED COST OF SERVICE STUDIES WilICl! S110W Tile EFF 23 Tile COOPERATIVE IlirERVENORS' ADJUSE!ENTS ON Tile RATES OF RETUR 24 GULF EARNED UNDER TIIE PRESENT Wi!OLESALE TARIFF AND WOULD EA Tile PROPOSED Wil0LESALE TARIFF 7

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( 26 A I have prepared two exhibits which show the effects of th'c Cooperative 27 Intervenors' cost of service adjdstments. Cooperatives' Exhibit 28 29 (IGtG-1),

Year entitled " Cost of Electric Service Study, Gulf Power Company, Ending 30 12/31/75 (Period II) Adjusted Cost of Service", incor-31 porates all of the adjustments that must be made to Gulf's study to 32 reflect as shown accurately on Schedule theII-B, rates of return Sheet 1. carned under present tariffs, The 33 format of Cooperatives' Exhibit 34 (PJIG-1) is 'not the same as that 35 used by Culf. Accordingly, I have prepared Cooperatives' Exhibit 36 (IGIG-2),

Year entitled " Cost of Electric Service Study, Gulf Power Company, Ending 37 12/31/75 (Period II), Unadjus'ted Cost of Service", in i 38 which the format of Gulf's cost of service study for Period II is

[ 39 conformed to that uhich I have used, so that the results obtained by 40 the Company may be compared directly to the results which I have obtained.

419 42 WOULD YOU EXPLAIN Wi!Y YOU USED Tile AVERAGES OF Tile TilIRTEEN M 43 BALANCES INSTEAD OF Tile AVERAGES OF Tile BEGINNING AND END OF YE 44 BALANCES FOR PERIOD II? IN DETERMINING Tile TOTAL RATE BASE FOR GULF POWER COM 45 -

46A 47 In determining its rate base, Gulf has used the average of the begin-48 ning and end of year balances for cicctric plant in service, deprecia-49 tion reserve, plant held for future use and accumulative provision for deferred taxes. The averages of the beginning and end of year 50 balance yleids an approximation of the electric plant in service during l

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( l 2 ,the test year which in some cases may be adequate for rate raking 3 purposes. Generally, however, it is recognized that the proper 4 synchronization of revenues, expenses and electric plant in service 5

can be accomplished only by matching the plant in service with the 6

billing periods, which are the periods of metering for sales to whoicsale custome rs. Billing is done on a monthly basis. There-  !

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8 fore, a monthly average is a most finely tuned method for synchroni-9 zation of the expenses during the month, the energy produced during '

10 the month, and the revenues collected during the month. The average 11 of the thirteen months cicctric plant in service end of month account 12 balances accomplishes this monthly averaging, since the beginning 13 balance and the ending balance of each month during the test period

[ 14 is weighted equally in the computation. Moreover, the thirteen-15 month average method avoids the necessity of determining how to pro-16 'perly weigh large or irregular additions to plant which are placed 17 into service during the test period. The thirteen-month average 18 method, therefore, is a more accurate method for matching revenues 19 and expenses year. associated with the use of facilitics during the test

( 20 21 22 The relative superiority for rate-making purposes of the thirt'cen-23 month rate base.average method is demonstrated by its use in calculating Gulf's 24 Applying the method to the latest data availabic from 25 Gulf on its estimated monthly gross plant balances for Period II produces the following average plant amounts:

( 26 27 Production Transmission - Distribution 23 Ggneral 29 $221,473,235 $98,784,247 30 $100,835,739 $10,398,358 31 32 These figures compare with the Company's beginning and end of year gross plant balance averages as follows:

33 34 Production Transmission Distribution General 35 _

36 $228,333,003 $99,032,395 37 S100,848,537 $10,640,561

( 38 39 My calculations thus show that the Corpany's method appears to be 40 adequate for production all functional plant in service balances except for plant.

4L 42 43 The $6,859,773 difference between Gulf's figure for production plant

( 44 and of my figure several is due to substantial a shift plant in the estimated in-service availability additions.

45 Gulf, in response to coopera-46 tive. Data Request I-1(a) and (b), initially estimated that certain pol-lution control equipment in the approximate amount of $16,318,000 would

' 47 be placed in service by June 1975.

.48 In a later response (given in April 49 1975) to FPC Staff Data Request Power-2, however, Gulf revissd its 50 estimate of the in-service date for this equipment to December 1975.

F Under the thirteen-month average method which I used, this plant

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(' I 2 addition is calculated as having gone into service as of the most 3 recent estimated date--December 1975. (Moreover, there are indi-4 cations that even further slippage is to be expected.) But under 5 the Company's method of averaging the beginning and end of year 6 balances, this plant addition would be calculated as having gone 7

into service in July 1,1975 (i.e., at midyear). Particularly

[ 8 since this pollution control equipment represents most (about 84%)

9 of the production plant increase budgeted by the Company for 1975, 10 Culf's method substantially overstates the actual icvel and cost of 11 production investment during the test year. Furthermore, Gulf's 12 method if adopted would require the wholesale class to compensate 13 the Company for these pollution control expenditures well before the costs were incurred.

14 15 16 FPC precedents dictate the use of a method for time-weighting 17 electric plant in-service during the test year. For example, the 18 commission required the use of the thirt' cen-month average in Missis-19 .sippi 46 FPC Fuel 384,Corporation,11 420 (1971). FPC 288 (1952), and Idaho Power Company, 20 More recently, presiding Administrative 21 Law Judges have imposed the same requirement in Connecticut Light and Power, FPC Docket No. E-7743, 22 (Judge Lande, July 29, 1974), and 23 Florida Power and Light Kaplan, July 29, 1974). Company, FPC Docket No. E-8008, (Judge 24 25 C1carly, both logic and precedent, as well as good rate-making

( 26 27 procedures, require the use of thirteen-month average net cicctric 28 plant in-service in Gulf's cost of service for production plant balances.

29 30 Q 31 11 AVE YOU PREPARED AN EX111 BIT WHICl! SHOWS TIIE DEVEWP 32 TilIRTEEM-MONTH SERVICE STUDY? ACCOUNT BALANCES THAT YOU EMPLOYED IN Y 33 34 A Yes, Cooperatives' Exhibit 35 _( RMG-3) contains the development of 36 the production service, account balances which I used for gross plant in-accumulated 37 expense. reserve for depreci'ation, and depreciation 38 This Exhibit was prepared under my supervision.

39Q 40 WHY llAVE YOU USED AN OPERATION AND MAINTENANCE PAYROLL

. 41 FOR ALLOCATING METHOD EMPLOYED BY GULF?ADMINISTRATIVE AND GENERAL EXPENSES INST 42 43A 44 Gulf Pcwer Company allocates approximately 84% of its administra-45 tive and general expense on the basis of the payroll allocation method.

46 Its remaining administrative and general expense (16%)

47 is either specifically allocated or functionally distributed and then allocated by voltage level. Gulf has arbitrarily assigned to 48 49 the whoicsale class $59,000 of federal regulatory expenses. In 50 addition it has assigned $106,000 of State regulatory expenses

-/ specifically to the retail class. Gulf does not indicete whether

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I these expenses are the total amounts to be incurred in 1975 for regulatory purposes or whether these amounts are the amortized ,

3 levels associated with average regulatory expense to be incurred 4 over a period of years. In any event, arbitrary assignments of a 5 limited number of administre,tive and general expense items is

' 6 certainly not proper unless all Administrative and General items 7 are handled in such a manner. Ilere Gulf takes a selected few 8 administrative and general expense items and allocates them speci-4 9 fically while treating the vast majority of A&G items on an average 10 allocation basis. Rather than arbitrarily assigning a selected few 11 items, I believe it would be more appropriate to treat all adminis-12 trative and general expense items equally by applying the wage and 13 salary allocation method to total administrative and general expense.

14 15 My revision to Gulf's treatment of administrative and general 16 expense is shown on Sheet 1, Schedule IV of Cooperatives' Exhibit 17 (pJ1G-1) and is based on the wage and salary functionalization shown 18 in Gulf Statement "M", Period II, Page 18 of 22.

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, 20 Q WlIY IIAVE YOU DELETED GULF'S ALLOCATION OF SALES EXPENSE TO THE 21 Wi!OLESALE CUSTOMERS?

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, 23 A The Uniform System of Accounts specifies that sales expenses cover i

24 only activities, such as demonstrating, selling, or advertising, the

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25 object of which is to promote or retain the use of utility service 26 by present and prospective custom,ers. C1 carl; . these types of acti-27 vities are related to the retail class of service. Any sales expen-28 ditures for programs initiated by Gulf are solely for the benefi,t of 29 Guli's retail jusridictional loads. It is no more proper for Gulf 30 to assign a component of sales expense to its wholesale customers 31 than for Gulf to ask an interconnected company, such as Alabama Power 32 Company or Florida Power Corporation, to share in Gulf Power Company's 33 sales expenses. It is plainly.the responsibility of the distributing 34 utility to bear this burden of stimulating its own retail loads 35 through sales activities. The wholesale customer may have an entirely 36 different saics goal than Gulf Power Company in regard to stimulating 37 retail loads. To ask the wholesale customer to subsidize the Company's 38 sales activities would therefore be improper and unreasonabic. Accord-39 ingly I have allocated sales related expense exclusively to the retail 40 class of service.

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42Q WilAT CIIANGES IIAVE YOU MADE TO GULF'S WORKING CAPITAL COMPUTATION AND

, 43 ALIDCATION AND Wily IIAVE YOU MADE TIIEM?

44 l 45A I have made these changes: I have removed payroll tax expenses from j 46 the 45 day cash working capital allowance, I have allocated fuci stock j

47 balances using Gulf's energy allocation factor, and I have allocated 48 cash working capital allowance based upon 12.5% of allocated O&M l 49 expense less purchased power.

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( 1 Commission practices have standardized the cash working capital 2 allowance based on 12.5% (45 days) of total operations and 4

3 maintenance less purchase power expense (Account 555). The FPC 4 han required that any deviation from this formula be accompanied 5 by detailed Icad/ lag studies supporting the claimed deviations; 6 Sierra Pacific Power Company, Docket No. E-8224, Slip Opinion No.

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' 7 Gulf has not filed such material and therefore I have cor-a rected the cash working capital computation.to meet FPC requirements.

9 10 The two additional adjustments to working capital allocation--these 11 being the proper allocation of fuel stock balances and cash working 12 capital--arc obvious corrections that I believe Culf simply over-13 looked in the preparation of the case.

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15 Q WOULD YOU PLEASE DESCRIBE COOPERATIVES' EXIIIBIT (RMG-4)?

16 17 A 18 This Exhibit shows the detailed adjustments to Cooperatives' Exhibit (RMG-1) necessary to reficct the testimony and exhibits

. 19 of Dr. Livingstone.

W 20 21 Q j

22 PLEASE EXPLAIN WilAT YOU llAVE DONE WITil Tile Tl!REE ITEMS REIATED TO 23 COST OF SERVICE TO WilICII DR. LIVINGSTONE TESTIFIES.

24 A 1 have incorporated the results obtained by Dr. Livingstone on 25

(- 26 the three issues on which he testifies into the cost of service study that I have prepared, as fo,11ows:

27 28 1.

29 I have excluded from the rate base the cicctric plant 30 balance amounts which Dr. Livingstone says must be excluded 31 in a proper recognition of the allowance for funds used 32 during construction by Gulf Power Company since 1969.

33 2.

34 I have flowed through the tax effect of Account 283 as determined by Dr. Livingstone.

35 36 3.

37 I have inserted into the income tax calculation the Icvel I- 38 of long-term debt interest expense and other interest expense as indicated by Dr. Livingstone.

39 40Q IIAVE YOU MADE ANY.0 titer CHANGES IN GULF'S COST OF SERVICE STUDY?

41 42A Yes. I have increased revenues for the Cooperative class in the 43 amount provided by Witness Rogers (Cooperatives' Exhibit 44 (OFR-2) )

concerning the fuel clause adjustment revenue lag. This amount 45 represents the two month lag in revenues associated with current 46 fuel expense arising through utilization of the Company's fuct cost 47 adjustment as applied to the Cooperative class in Period II. I 48 have similarly adopted the comparable FPC Staff adjustment for 49 Florida Public Utilities, l i

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( l In addition, I have incorporated in Exhibit (RMG-1) the two 2

allocation method changes advocated by Witness Chayavadhanangkur.

3 Demand allocation factors based on the average of the twelve-4 monthly coincident peak demands have been used to allocate power 5 supply production and power supply transmission costs (voltage 6 1cvels A through D). These allocators are taken from Exhibit 7 (JC-1). I have also " rolled-in" and allocated uniformly all 8 transmission plant in-service amounts and functionally related 9 costs as described in Witness Chayavadhanangkur's direct testimony.

10 In effect, this means that the Company's invectment and costs in 11 voltage levels B-2 through D are uniformly allocated based upoa 12 Mr. Chayavadhananagkur's power supply transmission allocators.

13 14 Q WilAT. IESULTS DID YOU OBTAIN WlEN TilESE ADJUSTMEtTfS FOUND IECESSARY 15 BY TllE COOPERATIVES' WITNESSES WERE MADE 10 GULF'S COST OF SERVICE 16 TO ITS WlIOLESALE CUSIDMERS?

17 18 A As a result of making the required adjustments in Gulf's cost of 19 service study for Period II, the rates of return that Gulf carns 20 under its present tariff for wholesale customers increases from 21 3.17% and 3.79% for cooperatives and Florida Public Utilities re-22 spectively to 4.58% and 5.38%. Likewise, the rates of return that 23 Gulf would earn from its wholesale customers under its proposed 24 tariff increase from 8.7%, as shown in Gulf's study, to 10.22% for 25 cooper,a 'ves, and from 9.22%, as shown in Gulf's study, to 11.04%

(+ 26 for Floris2 Public Utilities.

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28 Q WIIAT AMOUNTS OF Wi!0LESALE RATE INCREASE FOR GULF POWER COMPANY DO 29 Tile COOPEPATIVES IECOMMEND AS JUST AND REASONABLE 7 30 31 A 32 Using the proper rate of return (or overall cost of capital) of 33 8.12%, as testified to by Dr. Ewert, and the rate base as adjusted by the Cooperatives' witnesses, the amount of the wholesale rate 34 increase that would be paid to Gulf by the Cooperatives is reduced 35 from the requested $1,995,802 to $1,253,563; the wholesale rate 36 amount that would be paid to Gulf by Florida Public Utilities is 37 reduced from $985,250 to $476,903. These amounts as reduced are s 38 just and reasonable, and provide Gulf Power Company with fair re-39 turns on the wholesale portion of its business.

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