ML19308A400

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

ML19308A400
Person / Time
Site:	South Texas, Comanche Peak
Issue date:	11/30/1976
From:	Solomon J CAROLINA POWER & LIGHT CO.
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
ER76-495, NUDOCS 7909260131
Download: ML19308A400 (12)

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CAROLINA POWER & LIGHT COMPANY FPC DOCKET NO. ER76-495 ,

PREPARED TESTIMONY OF J. BERTRAM SOLOMON

( 1 O Q PLEASE STATE YOUR NAME AND ADDRESS.

2 3 A My name is J. Bertram Solomon. My business address is 1000 Crescant 4 Avenue, N.E., Atlanta, Georgia 30309.

5 6 Q PLEASE OUTLINE YOUR FORMAL EDUCATION.

7 8 A I received the degree of Faster of Business Administration from Georgia 9 State University in 1973. My area of concentration was Finance. I also 10 received the degree of Bachelor of Science in Industrial Managecent from 11 the Georgia Institute of Technology in 1972.

12 13 Q PLEASE STATE YOUR PROFESSIONAL EXPERIENCE.

14 15 A As a Cooperative student at Georgia Tech, I gained approximately two 16 years' work experience as an assistant engineer in an industrial pro-17 duction setting. After my graduation from Georgia Tech in 1972, I worked 18 approximately one and one-half years as a program manager for a management 19 consulting firm and for another one and one-half years as a project analyst 20 for a resort development firm. I was employed by the Southern Engineering 21 Company of Georgia, my present employer, in January 1975. Since that time, 22 I have had assignments in both the retail and wholesale rate departments of my Company, primarily in the area of electric utility rates. In the 23 24 retail area I have participated in the preparation of rate increase filings f r both G & T and distribution rural electric membership cooperatives as

/ 25 well as the determination of revenue requirements and the proper rate

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26 27 design for unregulated rural electric membership cooperatives. My 23 Primary activities, however, have been in the wholesale area where I have 29 participated in the analysis of approximately one dozen Federal Power Commission filings of private utilities operating in eight different 30 I have also participated in the preparation of testimony and states.

31 exhibits f r several of these rate filings. Additionally, I have 32 participated in the preparation of retail and wholesale allocated cost 33 f rvice studies and power cost projections.

34 35 HAVE YOU EVER TESTIFIED IN OTHER COMMESSION PRODEEDINGS?

Q

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37 A Yes, I have testified before the Public Service Commission of Kentucky.

33 I have also testified before the Federal Power Commission in proceedings 39 involving the Public Service Company of Indiana, FPC Docket No. ER76-149; O and Georgia Power Company, FPC Docket Nos. E-9091 and E-9521.

1 42 Q BY WHOM IS SOUTHERN ENGINEERING COMPANY OF GEORGIA RETAINED IN THIS 43 PROCEEDING?

44 45 A Southern Engineering is retained by North Carolina Electric Membership 40 Corporation and Four County Electric Membership Corporation (Cooperative 47 Intervenors). Witnesses Gross, Whigham, Evert, and I will be the 48 Cooperative Intervenors' Witnesses in this proceeding. Dr. Livingstone is 49 testifying for both the Cooperative and Municipal Intervenors.

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1 Q WAT WAS YOUR ASSIGNMENT IN TRIS PROCEEDING?

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! 3 A My assignment was twofold: First, I was to review the direct testimony 4 and exhibits and other available information of the Carolina Power &

5 Light Company (CP&L) concerning the cost to serve CP&L's wholesale

'6 Cooperative customers. Specifically, I was to consider whether the 7

methods employed by CP&L for Period II to develop and allocate the rate s base and operating expenses shown in the Company's cost of service study 9 were roper and in accord with Commission precedent and sound rate making 10 pro .ures. Secondly, I was to prepare an allocated cost of service 11 study which includes the adjustments to the Company's cost of service 12 found to be necessary by all of the Cooperative Intervenor Witnesses, and 13 which accurately reflects the rates of return which'would be carned under 14 the Company's wholesale electric tariff RS-10 during the Period II test period.

15 16 17 Q WOULD YOU PLEASE SUMMARIZE TIE TESTIMONY THAT WILL BE CIVEN BY THE OTIER l COOPERATIVE INTERVENOR UITNESSES IN THIS PROCEEDING.

! gg 19 Hr. Gr ss is providing testimony on rate design. Mr. Whigham's testimony A

' 20 c neerns the cost burdens which historically have been placed upon the 21 Cooperatives by unilateral decisions made by CP&L in their system planning.

22 Dr. Livingstone testifies on the issue of comprehensive income tax 23 normalization, on the Company's inflation of the rate base due to current 3 an prior use of an hprop e AFUDC rate, on the syncronization of 25 n a st upense for income tax purposes and the debt component of the

{ (' 26 weighted cost of capital, and on the Company's improper method of g norm 311 zing the taxes related to interest during construction. Finallv, Dr. Evert provides testimony on the appropriate cost of capital for uP&L 4

29 and the Company's erroneous inclusion of minimum bank balances in its j 30 Period II rate base.

31 i 32 PLEASE PLACE TIE COMPANY'S FILING IN TIE INSTANT DOCKET IN PERSPECTIVE Q

33 WITH REGARD TO THE COMPANY'S PRIOR WHOLESALE RATES APPLICABLE TO THE

, 34 COOPERATIVE INTERVENORS.

I 35 l

36 A In July,1974, CP&L filed for an increase in its wholesale rate using the 37 calendar year 1974 as its Period II test period. The rate proposed in that l

38 filing (FPC Docket No. E-8884), RS-10, was placed into effect in January 39 of 1975 subject to refund. According to the data filed by the Company in 40 that docket, RS-10 produced an increase in Cooperative revenues of 97%

41 annually or approximately doubic the revenues collected under the 42 predecessor rate.

43 44 The Company's filing in the instant proceeding was made in January, 45 1976, using the calendar year 1976 as its Period II test period. The l

46 proposed rate, RS-ll, was estimated by the Company to produce a 34%

47 annual increase to its Cooperative customers. In plain language, this 48 means that within a period of less than two years this Company has i

49 requested rates which would produce more than one and one half times l (approximately 165%) the annual revenues received from its Cooperative 50

( customers from the rates which were in effect during 1974.

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1 Q WOULD YOU BRIEFLY SU>D!ARIZE TIE CONCLUSIONS WHICH YOU AND THE OTIER

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2 WITNESSES FOR TIE COOPERATIVE INTERVENORS IIAVE REACHED AS A PISULT OF 3 STUDYING CP&L'S COST OF SERVING iTS WHOLESALE CUSTOMERS.

4 5 A The cost of service study presented by the Company in this proceeding 6 significantly overstates the cost of providing service ta the Cooperative 7 customers. The following major errors have been cade by CP&L in its Period 8 II cos: of service study, necessitating adjustments:

9 10 1. CP&L's use of the average of beginning and end of year electric plant 11 in service account balances to determine the plant investment level 12 for the test year does not accurately reflect the overall average 13 investment in CP&L's plant in service for the Period II test period.

The most accurate method is the use of the thirteen month average 14 15 plant in service balances.

16 17 2. As testified to by Dr. Ewert and myself, CP&L improperly included 18 in its rate base amounts for compensating bank balance requirements 19 as a component of its cash working capital.

20 21 3. In calculating its cash working capital allowance, CP&L used the 22 standard formula of 12.5% of total O & M expenses less purchase power 23 in lieu of conduction a lead / lag study. I have conducted a lead / lag 24 study of the fuel component of 0 & M expenses which constitutes 25 66% of the total (0 & M less purchase power) and have found there to be k 26 a net lag of only sixteen rather than fortyfive days on this item. Thus 27 the Company's cash working capital has been greatly overstated.

28 29 4. The Company has improperly allocated adef r

• strative and general 30 expenses and general plant investment for Period II. This results 31 in excessive amounts of A & G expense and general plant investment 32 being assigned to the wholesale class.

33 34 5. A portion of sales expense has been allocated to the wholesale 35 class. The wholesale customers are not seeking any form of sales 36 promotion from CP&L and such expense is related only to retail sales.

37 Such sales expense, thus, should be deleted from the wholesale cost 38 f service.

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39 40 6. CP&L has been inconsistent in the allocation of its deferred income taxes and the income tax deductions giving rise to those taxes.

41 This error results in an excessive amount of taxes charged to the 42 43 wholesale customers.

44 45 7. CP&L has computed its power supply production and power supply transmission demand allocation factors using the four summer month 46 47 coincident peak demands. I have instead used the twelve month

! 48 allocators proposed by Municipal Intervenor Witness Saffer.

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1 8. As shown by Staff Witness Craig, the Company has overstated its 2 depreciation expense for the test period. I have utilized Mr.

3 Craig's revised salvage value factor in recomputing the test period 4 depreciation expenses.

5 6 9. As shown by Mr. Gross, the Company has made errors of both omission

. 7 and comission in its rate design. First, while forcing its wholesale 8 Cooperative customers to take service at increasingly higher voltage 9 levels, CP&L has neg1ceted to reficct the differences in the cost of 10 serving transmission versus distribution voltage delivery points.

11 Secondly, the Company made an error in calculating the KW billing 12 determinants used in its rate design. Finally, CP&L has proposed an 13 exceptionaly high summer based ratchet which Mr. Gross shows is 14 unj ustified.

15 16 10. As further support of Mr. Gross' recommended voltage differential, 17 Mr. Whigham describes some of the ways in which the Company 18 has forced its Cooperative customers into investing in additional 19 facilities to enable them to obtain power which the Company would 20 nly make availabic at higher voltage levels.

21 22 11. As testified to by Dr. Livingstone, the Company has unjustly 23 inflated its rate base by using improperly calculated rates for 24 capitalizing Allowance For Funds Used During Construction.

( 25 In estimating its interest expense for tax purposes, the Company 26 12.

has been inconsistent with the weighted cost of debt used by its 27 rate of return witness. Dr. LLvingstone has revised this interest 28 expense to synchronize this expense with the debt component of Dr.

i 29 Ewert's cost of capital.

30 31 In justifying its use of comprehensive normalization, the Company 13.

32 has assumed a static environment with no additions to plant in 33 future years. Dr. Livingstone shows that, under more realistic circumstances, many of the items normalized by the Company would 35 constitute actual tax savings as opposed to a simple deferral of 36 taxes, and therefore, these savings should be passed alotg to the 37 wholesale customers.

38 39 14. The Company in its treatment of taxes reladng to interest during 40 construction, has "tried to have its cake and W. it tea". That 41 is, it has charged the wholesale customers the taxes telating to IDC 42 while not following the Commission's accounting ins *_ ructions by not 43 utilizing account 283 to accumulate these taxes r.ad has, therefore, 44 Dr.

not deducted this accumulation from its Period II rate base.

45 Livingstone has removed these accumulated deferred income taxes from 46 retained earnings for the years 1970 through 1976 pro forma and 47 placed them in account 283 for proper credit to the rate base.

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t 1 15. As testified by Dr. Ewert, CPEL has overestimated the return on 2 common equity necessary to allow it to maintain its coverage re-3 quirecents and to attract capital.

4 5 I have prepared an exhibit, Cooperative Intervencrs' Exhibit No.

6 (JBS-1), which shows the combined effect of the cost of service 7 adjustments listed above.

8 9Q WILL YOU PLEASE EXPLAIN WHY YOU USED THE AVEPAGE OF THE THIRTEEN 10 MONTHLY BALANCES INSTEAD OF TIE AVEPAGE OF TIE EEGINNING AND END OF 11 YEAR BALANCES IN DETERMINING TIE TOTAL RATE BASE FOR PERIOD II?

12 13 A In determining the rate base, CPEL has used the beginning and end of 14 year average for electric plant in service during the year. However, it 15 is generally recognized that the proper synchronication of revenues, 16 expenses and electric plant in service is best acco=plished through the use 17 of the thirteen month average method. Billing is done on a monthly basis.

18 Therefore, a monthly average is the cost accurate method for the synchroni-19 zation of expenses during the month, the energy produced during the month, 20 and the revenues collected during the month. The average of the thirteen 21 electric plant in service end of month balances acco=plishes this monthly 22 averaging, since the beginning balance and the ending balance for each 23 month during the test period are weighted equally in the cocputation. The 24 Company has estimated the other important ingredients in its Period II cost 25 of service on a monthly basis since the expenses are directly related to

(. 26 additions and retirements of property as well as the scheduling of maintenance.

27 The monthly gross plant balances were shown in the work papers in Volume V, 28 but they were not used in the Company's determination of its Period 11 rate 29 base.

30 31 FPC precedent dictates the use of the thirteen month average plant balance 32 method. The Concission has required the use of the thirteen month average 33 in United Fuel Gas Company, 12 FPC 251 (1953), Mississiopi Fuel Corooration, 34-11 FPC 288 (1952), and most recently in Connecticut Light a Power, FPC 35 D ch t No. E-7743, Opinion No. 761 (1976) and Appalachian Power Cocoany, 36 FPC Docket No. E-7775, 5 Federal P.ower Service 5-843 (1975).

37 38 Clearly both logic and precedent, as well as sound ratemaking procedures 39 require the use of the thirteen month average net electric plant in service balances in CP&L's cost of service study.

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42 Q HAVE YOU PREPARED AN EXHIBIT WHICH SHOWS THE DEVELOPMENT OF THE THIRTEEN 43 MONTH AVERAGE PLANT THAT YOU EMPLOYED IN YOUR COST OF SERVICE STUDY?

44 45 A Yes, Cooperative Intervenors' Exhibit No. (JES-2) contains the monthly 46 account balances which have been used for gross plant in service and 47 accumulated reserve for depreciation is on Exhibit No. (JBS-5), page 7.

48 49 Q WHY DO YOU DISAGREE WITH THE COMPANY"S TREAIMENT OF' MINIMUM BANK BALANCES?

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A There are several reasons why there is disagreement with the Company's in-L clusion of minimum bank balances as a component of rate base. Dr. Ewert and I both will give reasons why minimum bank balances should not be included in CP&L's rate base.

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? 1 I have carefully reviewed the testimony and exhibits of the Company's

, 2 witnesses, and I find no justification presented by the Company for the

[ 3 inclusion of minimum bank balances. Witness Bradshaw states that the 4 propriety of including the Statement "F" working capital items in the 5 rate base would be testified to by Mr. Davis. In reviewing Mr. Davis' i 6 testimony, I find no mention of the necessity for the inclusion of 7

ninimum bank balances in the rate base. The Company has provided no 3

lead / lag study, or any other justification, yet it is including cash working 9

capital amounts over and above the 45-day allowance already included in 10 the rate base. The Co= mission has rejected the specific addition of 11 compensating bank balances in some cases because of the availability

12 of c unterbalancing amounts of cash routinely available through 13 certain accruals. Along this line, CP&L has not made a showing that' funds 14 generated from tax or other accruals were not continually available 15 during the test year for bank deposit and thus act to satisfy any requirements for compensating bank balances.

i yg 17 Q ARE CAROLINA POWER AND LIGHT COMPA'sY'S MONTHLY TAX ACCRUALS OF A 18 SUFFICIENT AMOUNT TO COUNTERACT THE APPROXDIATELY $9,000,000 CLADIED gg BANK BALANCE REQUIREMENT?

20 2 From the information provided by the Company in its monthly operating A

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reports, I find that the tax accrual balances for the 13 month period 23 ending August 1976 averaged $23,597,000 as I have shown on Cooperative 20 Intervenors' Exhibit No. QBS-3). These balances are the result of I ,

s 25 CP&L booking tax expense on a current basis but with the actual payment 20 to the taxing entity usually not due until a later date. Since rates 1 27 are based on current tax expensc, a cash leading situation develops as 23 cash inflows from revenues are received well prior to the actual cash 29 disbursement to the taxing entity.

30 31 It is obvious from this data that CP&L has a substantial amount of 32 interest free capital available which could be and which most probably 33 is deposited in bank accounts and which acts to fulfill any co=pensating 34 bank balance requirements.

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, 36 Q BESIDES DISCOVERING THE $23,597,000 IN AVERAGE TAX ACCRUALS WHICH 37 MORE THAN OFFSETS THE CLAIMED NEED FOR APPROXIMATELY $9,000,000 IN BANK 38 BALANCE REQUIREMENTS, WHAT STUDIES HAVE YOU CONDUCTED REGARDING CP&L'S 39 NEED FOR CASH WORKING CAPITAL?

40 41 A As shown in Cooperative Intervenors' Exhibit No. (JBS-4), I have 42 conducted a lead / lag study on the Company's fuel expense which constitutes 43 66% of total operation and maintenance expense less purchased power.

44 45 Q PLEASE EXPLAIN THIS EXHIBIT.

46 47 A This exhibit was prepared from the information contained in CP&L's 43 feild Volume V and its responses to intervenor data requests (primarily i

49 Cooperative Intervenors' Data Request No. 1, Item B-5). The purpose of 50 this exhibit is to show the calculation of the average number of days

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• I working capital which is required by CP&L to carry its expenditures for fuel 2 from the time it renders payment until it receives revenues to cover those 3 payments. For purposes of this calculation, the expected purchases of fuel 4 during the test year from the Company's various suppliers have been grouped 5 according to terms of payment in column b. There are four groups of suppliers 6 and another subdivision for freight and other fuel costs. Column c lists 7 the total number of days lag between receiving (or burning) the fuel and 8 making payment for it. Since CP&L has included its fuel stock in its rate i 9 base for Period II, and thus, earns a return on it, I have assumed that fuel 10 is burned on a first-in-first-out basis for purposes of calculating the 11 payment lag time. I have also assumed that fuel is consuned relatively 12 evenly throughout the month. So for fuel received from the suppliers in Group i 13 A whose terms call for payment on the 25th of the month following the month of 14 shipment, I have used 34 days as the lag between the time the fuel is consumed 15 and the time payment is made. This 34 days is made up of a negative 6 days 16 for shipment, 15 days from average consumption date until the end of the month 17 and 25 days from the end of the month. The payment lag for the other 18 suppliers was determined in the same manner. The lag on freight charges 19 and other fuel costs has not yet been provided by CP&L, and thus, I nave made 20 a conservative assumption of only 5 days. Column d contains the Period II 21 CXpected dollar purchases from each sup; lier and the estimated cost of 22 freight and other fuel costs. The relo;ive expenditures are shown in column 23 e as percentages and then multiplied by the days lag in column c to obtain i 24 the weighted average number of days lag in the Company's payment as shown 25 in column f. The weighted average lag in payment enjoyed by the Company is

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26 24 days (column f, line 33) .

27 28 In order to obtain the requirement for working capital, I have subtracted the 29 24 days from the 40 ' day lag the Company experiences in receiving payment from 30 its customers. This yields the 16 days net lag on line 35 column f. The 40 31 day revenue lag includes 15 days from average rendition of service until the 32 end of the conth, 10 days to render a bill and 15 days for payment. This 33 lag period is admittedly liberal since CP&L intends to have installed magnetic 34 tape metering devices on all its wholesale delivery points by the end of 35 this year (1976). This added mechanization will surely trim the tir; 36 required to read meters and submit bills to well below the 10 days I have

37 allotted.

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39 Q HOW HAVE YOU ADJUSTED YCJR COST OF SERVICE TO REFLECT THIS WORKING 40 CAPITAL ADJUSTMENT?

41 42 A I have adjusted the ca sh working capital included in rate base on l 43 Schedule 2, sheet 1 to reflect the actual 16 days net lag on fossil l

44 fuel. This attributes the same lag to oil which is conservative since 45 oil contracts generally carry the same terms as gas which provides 46 roughly the same lag in payment as the lag in revenue receipts, or a 47 net lag of zero. Thus, as with gas and purchased power, there should 48 probably be no working capital provided for oil. I have also adjusted 49 rate base to totally eliminate cash working capital on nuclear fuel.

50 Unlike other fuel, nuclear fuel is treated as a plant investment.

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1 Uhen it is placed in service, the total investment in nuclear fuel 2 (including AFUDC) is added to rate base. It is then amortized, or 3 depreciated, just as any other piece of property. It is even subject 4 to accelerated amortization. Thus the Company is allowed to earn a return on the nuclear fuel over its useful life and certainly 5

6 should not be allowed to claim an additional return because of a 7 bookkeeping practice which is equivalent to depreciation.

8 9Q WHAT OTHER ADJUSIMENTS EWE YOU MADE TO THE COMPAhT'S CLAIMED CASH 10 WORKING CAPITAL?

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12 A On the basis of Municipal Intervenor Witness Saffer's complete lead /

- 13 lag study I have removed the remainder of the Company's claimed cash 14 working capital.

15 16 Q WOULD YOU PLEASE C0! MENT ON THE COMPAhT'S ALLOCATION OF ADMINISTRATIVE 17 AND GENERAL EXPEMSES AND GENERAL PLANT INVESTMENT.

18 19 A CP&L has divided its administrative and general expense into two 20 categories - regulatory expense and other A & G expense. Approximately 21 98% of the total A & G expense has been classified as other and 22 allocated on the basis of the payroll allocation method. The remaining 23 2%, approximately $466,000, has been specifically assigned, $177,604 to 24 wholesale and $288,915 to retail. Such an arbitrary treatment can 25 certainly not be "just" and/or " reasonable". There can be no justifi-( 26 cation for specifically assigning one iten of A & G expense unless all 27 A & G items are evaluated individually and allocated in the manner most 28 appropriate for that item. Here, however, the Company has taken a 29 single A & G expense item and assigned it specifically whiele allocating 30 the vast majority on the basis of its allocated payroll. The Company 31 has not even specifically assigned those items which can be obviously so 32 assigned. As showa in the Company's response to Item No. 18 of the 33 Municipal Intervenors' Data Request No.1, CP&L has included approximately 34 $345,000 in contributions to the LMFBR demonstration project in its 35 A 6 G cxPenses. Contributions to this progrea were solicited on the 36 basis of kilowatthour s'les to ultimate consumers. Thus these contri-37 butions were not made on behalf of the Company's wholesale customers.

38 This is a voluntary program and the Company's wholesale customers have 39 the opportunity, which many have takaa, to participate in the program 40 directly. Thus, the total amount of this contribution obviously should 41 have been assigned to the retail class and this is what should be done if the Company is allowed to pluck out regulatory expenses for specific 42 43 assignment. In my cost of service, however, rather than specifically 44 assigning a selected few items, I have treated A & G cxpense items 45 equally by applying the wage and salary allocator to the total amount 46 of the administrative and general expense.

< 47 48 Turning now to allocation of general plant investment, the Company first j 49 made "an analysis" which functionalized the general plant primsry accounts

i. 50 into production, transmission, distribution, joint transmission and 1

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l distribution, customer accounts, and sales for Period I. The beginning 2 and end of the year average general plant for Period II was then prorated 3 into the functional categories according to this Period I analysis.

4 This " analysis" has not been shown or described in any detail by 5 the Company in its filing. Since the approximately $6,000,000 in 6 Period II additions to general plant could have changed the functional-7 ization significantly, and in order to he consistent with my allocation 8 cf administrative and general expenses, I have allocated the Company's 9 general plant investment with the labor allocator.

10 11 Q WHY HAVE YOU DELETED CP&L'S ASSIGNMENI 0F SALES INVESTMENT AND SALES 12 EXPENSE TO THE WHOLESAI.E CUSTOMERS IS YOUR COST OF SERVICE STUDY?

13 14 A CP&L has specifically assigned approximately $45,000 of sales expense 15 and approximately $10,000 of sales investment to the wholesale class.

16 The Uniform System of Accounts specifies that sales expenses cover 17 only activities such as demonstrating, selling, or advertising the 18 object of which is to promote or retain the use of'a utility service 19 by present and prospective customers. Clearly, these types of 20 ac.tivities are related 'to the retail class of service. Any sales 21 expenditures for programs initiated by Carolina Power and Light are 22 solely for the benefit of its retail jurisdictional loads, are not 23 requested by the wholesale customers, and are not desired by them. It 24 is no more proper for the Company to assign a component of sales 25 expense to its whoicsale customers than for it to ask an interconnected

( 26 company to share in CP&L's sales expenses. It is plainly the responsi-27 bility of the distributing utility to bear its burden of sti=ulating 28 its own retail loads through sales activities, if that is what it 29 desires to do. Ihe wholesale customer may have an entirely different 30 goal than Carolina Power and Light in regard to stimulating retail 31 loads. To ask the wholesale customer to subsidize the Company's l 32 sales activity would be improper and unreasonable, Therefore, sales 33 related expense and investment has been exclusively assigned to 34 the retail class in my cost of service study.

35 36 Q PLEASE EXPLAIN HOW CP&L ERRED IN ITS ALLOCATION OF DEFERRED INCOME 37 T/JES AND INCOME TAXES DEFERRED IN PRIOR YEARS.

38 39 A The total tax expense attributable to a particular class of customer i 40 includes that amount which is actually paid by the Company to the 41 taxing entity plus an amount for deferred taxes which arise from 42 utilizing deductions in the current period for tax purposes, but 1,3 capitalizing the same deductions for book or cost of service 44 purposes. In determining the first portion of tax expense; i.e. ,

45 that portion actually paid by the Company to the taxing entity, 46 CP&L has allocated its tax deductions on the basis of net rate 47 base. However, in allocating its deferred federal tax items, which 48 arist from the same tax deductions, CP&L has first functionalized 49 the amount into production, transmission, distribution, and general 50 plant related components and then used separate allocators to obtain

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1 the deferred taxes by customer group. Obviously, to achieve consis-2 tency it is necessary to catch the allocation of deferred income 3 taxes with the tax deductions from which they arise. Therefore, 4 deferred income taxes and income taxes deferrad in prior periods 5 have also been allocated on the basis of net rate base.

6 7 Q HOW HAVE YOU ALLOCATED THE DEMAND AND ENERGY RELATED COSTS IN YOUR 8 COST OF SERVICE STUDY? j 9

I have used the Company's energy allocation factor for allocating the

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10 A 11 energy related costs. To allocate demand related costs, I have used 12 the twelve conth average demand allocation factors developed by 13 Municipal Intervenor Witness Saffer. The twelve month average method 14 is backed by sound federal Power Cc= mission precedent and was used by 15 the Staff also. Mr. Saffer has developed allocation factors which 16 differ from those used by the Staff only because he has reestimated the 17 coincident peak demands of the wholesale customers to reflect actual 18 1975 coincident peak load factors.

19 20 Q HAVE YOU USED THE RESULTS OF STAFF WITNESS CRAIG'S DEPRECIATION STUDY 21 TO ADJUST THE COMDANY'S ESTIMATED PERIOD II DEPRECIATION EXPENSE?

22 23 A Yes, and I have also recalculated the Period II depreciation expense 24 to reflect the Company's estimated monthly depreciable plant balances.

( 25 26 Q HOW DOES YOUR APPLICATION OF MR. CRAIG'S ADJUSTED SALVAGE RATIO DIFFER 27 FROM THAT OF THE STAFF?

28 29 A My treatment is different from that of the Staff in two respects. First, 30 I have applied Mr. Craig's methodology and his salvage ratio to the 31 composite depreciation rate I calculated using the Company's proposed 32 rates and the thirteen monthly depreciable plant balances. To obtain 33 the total company depreciation expense adjsutment, I applied the adjust-34 ment rate as shown on Cooperative Intervenors' Exhibit No. (JBS-5) ,

35 page 1 to the average of the Period II thirteen monthly depreciable 36 plant balances rather than the 1974 year end amount used by Staff.

37 The other area of difference is in the functionalization of the adjustment 38 amount. Mr. Craig has assumed that positive salvage value vill result 39 from plant retirements in three functions: transmirsion, distribution, 40 and general plant. I have functionalized my adjustment accordingly; 41 however, I have used depreciabic plant ratios rather than the total 42 gross plant ratios used by Mr. Shu1=an.

43 j- 44 Q IN COMPLETING THE SECOND PART OF YOUR ASSIGNMENT IN THIS PROCEEDING

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45 HOW HAVE YOU INCLUDED THE ADJUSTMENTS RECOMMENDED BY THE OTHER 46 COOPERATIVE INTERVENORS' WITNESSES IN A COST OF SERVICE STUDY?

47 48 A I have prepared a revised cost of service study which I have 49 attached as Cooperative Intervenors' Exhibit No. (JBS-1). This 50 exhibit is made up of two summaries and seven schedules. The first k

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l summary page shows the results of my cost of service study under 2 Present rates, the Company's proposed rates, and the rates found to be 3 just and reasonable by the Cooperative Intervenors' Witnesses using 4 comprehensive "interperiod" income tax normalization. The second 5 su= mary page (on page 11 of 26) shows the same thing using a flow-6 through treatment of the "interperiod" income tax items. Moving to 7

the end of this exhibit, Schedule 5 contains the demand allocation g factors, the energy allocation factor, and labor allocation factors 9

used in this cost of service study. Schedule 4 shows the allocation 10 of original cost of plant in service and the accumulated provision for 11 depreciation. Schedule 3 contains the allocated operating expenses.

12 The remaining rate base items are shown on Schedules 2A and 2B.

13 Schedules lA and 1B, rate of return under normalization and flow-14 through respectively, utilize the computations made in the other 15 schedules,' compute the allocated income taxes, and summarize the 16 foregoing showing the adjusted rate of return under the Company's 17 Present rate (RS-10) at the bottom of the page on line 26.

18 19 Q HOW DID YOU INCORPORATE THE TWELVE MONTH AVERAGE ALLOCATION FACTOR 20 PROPOSED BY MR. SAFFER?

21 22 A I replaced the Company's power supply production and power supply tramsnission demand allocation factors with those recommended by 23 Mr. Saffer. I also used these allocation factors to recompute 24 25 the labor allocator. These ccmputations are shown on Cooperative 26 Intervenors' Exhibit No. (JBS-6) .

27 28 Q HOW DID YOU FLAKE THE ADJUSDENTS RECOSDENDED BY DR. EWERT?

29 30 A As Dr. Ewert suggested I removed bank balances from the Company's 31 w rking capital. I also utilized Dr. Ewert's suggested 9.262% rate 32 f return in determining the Company's allowable revenues as shown 33 in the tuo summaries of Cooperative Intervenors' Exhibit No. (JBS-1) .

34 35 Q PLEASE EXPLAIN HOW YOU INCORPOPATED THE ADJUSDENTS REC 01DENDED BY 36 DR. LIVINGSTONE.

37 33 A I replaced the Company's $96,498,000 interest e>.;>ense with the $86,615,142 39 recommended by Dr. Livingstone in my cost of serv: :e reflecting the 40 fl wthrough approach on "interperiod" income tax it ems. I used 41

$56,723,821, rather than the Company's $63,643,000.. in my cost of 42 s rvice reflecting the normalization of "interperiod" income tax items.

43 Dr. Livingstone's AFUDC adjustments entail reducing the original cost 44 of Plant, reducing accumulated provision for depreciation, increasing 45 the provision for deferred income taxes, and reducing the current year's 46 depreciation expense. The first three of these are rate base adjustments 47 and are reflected as such on sheet 4 of both Schedule 1A and 1B.

48 The current year's depreciation expenses were adjusted as shown on Schedule 3, sheet 3. Of course, as a result of the reduced current 49 50 year's depreciation, there is an increase in current year's income

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1 tax expense. This increase is automatically acco=plisned in the 4 2 calculation of the income taxes. The remaining adjustment reco== ended l .3 by Dr. Livingstone is an increase in acccunt 283, accumulated deferred 4 income taxes, used as a credit to rate base. I have included this 5 adjustment on sheet 2 of Schedule 2A as an additional deduction from

) 6 rate base. The $70,263,710 is made up of $62,022,710 from prior years L 7 and one half of the $16,482,000 from 1976. The total company amount l 8 was functionalized on the basis of classified gross plant and then 9 allocated to the customer groupes.

10 i 11 Q WHAT WAS THE EFFECT ON THE COOPERATIVE INTERVENORS OF MARING THESE i 12 CHANGES TO THE COMPANY'S COST OF SERVICE?

. 13

! 14 A As can be seen on page 2 of Cooperative Intervenorc' Exhibit No.

l 15 (JBS-1), using comprehensive income tax normalization, the adjusted

. 16 rate of return under the present rates (RS-10) during Period II i 17 (calendar year 1976) would be 6.550%. Before the corrections reco=m-18 ended by the Cooperative Intervenors' witnesses, the Company showed 19 an carned rate of return of 4.75%. Using the rate of return recommended l 20 by Dr. Ewert, my adjusted cost of service shows an allowable increase 1 21 in revenues of $5,278,439 (14.14%) for the Cooperative Intervenors as l 22 opposed to the Company's requested increase of $12,847,732 or 34.1%.

. 23

,- 24 The comparable figures using the flowthrough of income tax savings l

( 25 on "interperiod" income tax items rather than " normalizing" these

! 26 savings are shown on page 11, Su= mary With Flowthrough. The adjusted l 27 rate of return under present rates is 7.820% and the allowable increase 28 in revenues is $2,950,377.

! 29

30 Q HOW HAVE YOU SEPARATED DISTRIBUTION COSTS IN YOUR COST OF SERVICE FOR

} 31 USE IN FR. GROSS' RATE DESIGN?

32 33 A The Company separated most items of investment and expense into the

! 34 individual functions; however, there were a few items for. which a 35 broad allocator was used including several functions and in some i 36 cases transmission and distribution was lumped together. In these 37 instances I have separated the distributton portion from the other l 38 functions. In this manner I have been a)le to obtain the expense and j 39 return portions of revenue requirement. To get'the remaining ingredient, 40 income and gross receipts taxes, I have 2 sed the formula shown on 41 Cooperative Intervenors Erhibit No. (JBS-7) which assigns tax

! 42 deductions on the basis of rate base thus allowing the calculation of l 43 taxes on a functiona'l basis. My calculation of-revenue requirements 44 for distribution service under my " normalization" cost of service are

! 45 also shown on this exhibit.

i 46 l 47 Q DOES THIS CONCLUDE YOUR TESTIMONY?

48 49 A Yes, it does. ,

50 .

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