ML19308A417

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Testimony in Response to Tx Utils Generating Co & Houston Lighting & Power First Set of Interrogatories
ML19308A417
Person / Time
Site: South Texas, Comanche Peak  Luminant icon.png
Issue date: 08/01/1979
From: Gross R
AFFILIATION NOT ASSIGNED
To:
Shared Package
ML19208C305 List:
References
1517, NUDOCS 7909260284
Download: ML19308A417 (15)
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DOCKET NO. 1517 f PREPARED TESTDiONY OF ROBERT M. GROSS, JR.

1 1Q PLEASE STATE YOUR.NAME AND ADDRESS.

I 2 A My name is Robert M. Gross, Jr. My business address is 1000 Crescent i

3 Avenue, N.E., Atlanta, Georgia 30309.

{ 4Q WAT IS YOUR EDUCATIONAL BACKGROUND?

5A I graduated from Georgia Institute of Technology in 1965, receiving i

6 the degree of Bachelor of Industrial Engineering. I also attended 7 Georgia State University and in 1971 received the degree of Master 8 of Business Administration, majoring in finance.

9Q PLEASE STATE YOUR PROFESSIONAL EXPERIENCE.

10 A I have been employed by Southern Engineering Company of Georgia for l 11 aPproximately ten years. During this time I have been involved in

! 12 the preparation of cost of service studies of Class A and B investor-t

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13 owned utilities, rural electric cooperatives and municipal electric 14 systems and have participated in wholesale and retail electric rrce i

15 consulting assignments in 23 states. I am a registered professional j

16 engineer in the State of Georgia.

f I 17 Q HAVE YOU EVER TESTIFIED IN OTHER COMMISSION PROCEEDING.S?

I I 18 A Yes, I have testified as a rate expert and cost of service witness h 19 before the State Commissions of Kentucky, Indiana, Michigan, Vermont

] 20 Virginia, and Arizona. I have also testified before the Federal Power 21 Commission (now Federal Energy Regulatory Cotmnission) in proceedings l 22 involving Mississippi Power Company, Appalachi'an Power Company, Duke I

23 P wer Company, Gulf States Utilities Company, Gulf Power Company, J

24 Virginia Electric & Power Company, Arizona Public Service Company,

' 25 Public Service Company of Indiana, Inc. , Carolina Power and Light,

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1 Southern California Edison Company.

2 Q WHAT WAS YOUR ASSIGNMENT IN THIS PROCEEDING?

3 A My assignment was in two areas. I was to determine if the 4 methods employed by Texas Power & Light Company to establish 5 the proposed wholesale rate design for the REA class of service 6 were just, reasonahic and consistant with sound rate making 7 procedures.

8 Secondly, I was to review the Company's adjustments to its 9 test year ending September 30, 1977, particularly the adjustments 10 for annualizing the anticipated costs of Martin Lake Unit #2 and 11 Monticello Unit #3 and for attrition, in order to determine the 12 overall validity of Texas Power and Light's system revenue require-13 ment. .

14 Q WITII RESPECT TO Tile FIRST ASPECT OF YOUR TESTIMONY WOULD YOU PLEASE 15 SUMMARIZE TEX-LA'S POSITION WITH REGARD TO TIIE PROPOSED REA -

16 Wil0LESALE RATE STRUCTURE FILED BY TP&L IN TilIS PROCEEDING?

17 A The rate design proposed by the Company in this proceeding with 18 respect to its service to REA wholesale customers appears reasonable 19 except for the Transmission Service Credit of 30 cents per kilowat,t 20 of demand. I find that the credit of 30 cents per kilowatt of 21 demand does not properly recognize the cost difference between 22 transmission service and service at distribution voltages for REA 23 Wholest.le Customers. The appropriate credit for transmission 24 service applicable to the REA class should be 70 cents per 25 kilowatt instead of the company's credit of 30 cents per kilowatt.

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, 1 Q WOULD YOU PLEASE EXPLAIN WiiY IT IS NECESSARY '10 INCLUDE A TRANSMISSION 2 CREDIT IN A WHOLESALE RATE STRUCTURE.

3 A Typically some whoicsale customers take service at transmission 4 voltages and others take service at distribution levels.

A 5 wholesale rate which is uniform for the wholesale classification 6 should recognize the cost differential between service off the 7 Power supply transmission system versus service at lower voltages 8 within the distribution system. Without an appropriately designed 9 transmission service credit, one group of wholes'lea customers, 10 taking service at a transmission voltage, would have to support part 11 of the distribution costs incurred in serving wholesale deliveries 12 at distribution voltages, s

13 Furthermore, in situations where wholesale customers can 14 upgrade their own distribution systems by building transmission 15 facilities and substations, a transmission credit in the wholesa16-16 rate provides an economic incentive for the, wholesale customer 17 to make an orderly transition from taking service at distribution 18 voltages by accommodating its system to the wholesale supplier's 19 transmission network. This of course, is beneficial to the ,

20 wholesale supplier since it would be relieved of the responsibility 21 of providing distribution service to its wholesale customers. The 22 wholesale supplier would thereby have additional distribution 23 capacity, or possibly capital, to apply to the cupplier's retail 24 customers requirements.

\ 25 Q DO TP&L'S REA WHOLESALE CUSTOMERS TAKE SERVICE AT PREDOMINANTLY l

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1 DISTRIBUTION OR TRANS>ESSION VOLTAGES?

2 A REA customers presently take service from the Company at predominantly 3 distribution voltages. In recent years several of the Company's 4 REA cooperative customers have begun to construct the necessary

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5 facilities to take service from the Company at transmission i

6 voltages. I believe presently the Company provides transmission

[ 7 service at approximately 8 REA delivery points. Also, I have been 8 advised that many of TP&L's REA whoicsale customers are planning to i

9 convert their systems to higher distribution, sub-trancmission, I 10 or even transmission voltages. During this transition the REA 11 Cooperatives plan to accommodate their systems to take service from s 12 the Company at negotiated transmission points of delivery and 13 gradually phase out the necessity of the Company having to provide la service to these customers at distribution voltages. I believe 15 this would be in the interest of both Texas Power & Light and the-16 wholesale customers. Of course, the Transmission Service Credit l

j 17 contained in the REA rate should be established at a icvel that -

18 properly reflects the difference in the cost of service to REA 19 delivery points at a transmission voltage versus service to REA .

20 points of delivery at a distribution voltage.

21 Q WOULD YOU PLEASE EXPLAIN HOW YOU DERIVED THE REA TRANSMISSION i

22 SERVICE CREDIT OF 70 CENTS ' PER KILOWATT AS COMPARED TO THE l

, 23 COMPANY'S FILED CREDIT OF 30 CENTS PER KILOWATT?

  • I l 24 A Volume IV of the Company's filing contains Texas Power & Light Company's t

25 calculated Cost of Service applicable'by class of customer. .This Cose t

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1 of Service Study shows TP&L's estimate of the cost of providing ,

2 service to the REA wholesale classification. A close review of 3 this Cost of Service Study shows that the Company presently 4 experiences a significant amount of distribution costs in

5 providing service to the REA classification since most REA

6 delivery points are at a distribution voltage and must support 7

an allocation of distribution costs. The Cost of Service Study f

8 reveals that the 30 ceat per kilowatt REA Transmission Service 9 Credit proposed by the Company does not reflect the level of the 10 distribution cost incurred by TP&L in serving the typical REA 11 distribution voltage delivery point. The Company has derived 12 the 30 cent per kilowatt Transmission Service Credit based upon 13 typical transformer investments for certain LP-10,000 customers 14 (See response to TEX-LA date of request #J-3). This method is i

15 incorrect because the LP-10,000 customers do not have the same -

! 16 service or cost characteristics as the REA class. LP-10,000 l 17 customers are required to take service at transmission (60,000 18 volts or higher) whereas REA customers take service at voltage 19 levels requiring a wide spectrum of distribution facilities. ,

. 1 20 Q llAVE YOU PREPARED AN EXHIB7T WHICH SHOWS THE CALCULATION OF THE 21 70 CENT TRANStRSSION CREDIT THAT YOU PROPOSE?  !

22 A Yes, Exhibit No.__(RMG-1) shows the derivation of the 70 cent per

! 23 kilowatt credit. Line 1 shows a figure of $7,818,269 representing

24 the amount of distribution plant related rate base (less meter k- 25 inves tment) that TP&L has allocated to REA service through its 3

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l 1 Cost of Service Study contained in Volume IV of the filing. This 2 amount represents an average investment in distribution plant 3 required to serve the REA class amounting to $3.22 per kilowatt _

4 of billing demand. Applying the Company's derived fixed charge i

5 rate of 25.6% (which includes a component for return, taxes, 6 and other fixed charges) producce a potential credit o'f 82.5 i 7 cents per kilowatt of billing demand. I have reduced that figure 8 to 70 cents per kilowatt in order to establish a Transmission 9 Service Credit consistent with the over-all revenue requirement 10 established by TP&L for the REA class.

11 Q IS YOUR PROPOSED TRANSMISSION SERVICE CREDIT CALCULATED IN A MANNER s 12 COMPARABLE TO Tile DEVELOPMENT OF TIIE PROPOSED REA DEMAND CIIARGE?

l 13 A Yes, both the Demand Charge and tl}c Transmission Service Credit 1

14 are based on the Company Cost of Service Study and are products l 15 of average cost pricing.

16 Q MR. GROSS, IF TIIE TRANSMISSION CREDIT IS INCPEASED FROM 30 CENTS 17 PER KILOWATI TO 70 CENTS PER KILOWATT AS YOU llAVE PROPOSED, WOULD 18 TllERE BE A CORRESPONDING UPWARD ADJUSTMENT IN Tile DEMAND CIIARGE 19 REQUIRED IN ORDER TO SATISFY TIIE OVERALL REVENUE REQUIREMENT OF ,

20 Tile CLASS?

21 A Yes. The overall demand charge, as approved by the Commi'ssion 22 for the REA class, would have to be increased 7 cents per kilowatt 23 in order to off-set the revenue impact of an increase in the 24 -credit from 30 cents per kilowatt to 70 cents per kilowatt. This

' 25 calculation is shown on footnote 4 of E::hibit No._(RMG-1) page- 1.

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i 1Q WITil RESPECT TO Tile SECOND FIIASE OF YOUR TESTIMONY MR. GROSS, 2 W0lILD YOU PLEASE DESCRIBE YOUR ANALYSIS OF Tile COMPANY'S TEST 3 YEAR INCLUDING YOUR EVALUATION OF Tile ADJUSTMENTS MADE BY TP&L 4 TO ESTABLIS11 TilEIR OVERALL SYSTEM REVEIRJE REQUIREMENT?

5 A From Company's testimony it appears that TP&L is attempting to 6 set rates which will recover its cost of operations and produce

7 an allowed return on capital based on future operations. The 8 test year of 12 months ending September 30, 1977 has been adjusted 9 in numerous ways to accomplish this end. The Company has made t

10 adjustments to all of its expenses for year-end conditions and l 11 has annualized its labor expenses for the impact caused by labor g 12 contracts in effect subsequent to the end of the test year. The 13 largest adjustment, however, made by the Company concerns the 14 increase in test year investment and expenses caused by the 15 annualization of the Martin Lake Unit #2 and Monticello Unit #3 j' 16 which are estimated to be cqmmercial by the Spring of 1978. Even 17 with this substantial adjustment to the test year for units which j 18 will not be commercial until 6 to 8 months after the end of the i <

1 19 test year, the Company also inserts an attrition factor in its cost 20 of capital which it states is needed in order to prevent a decline l 21 in earnings that will likely occur in the immediate future due 22 to a whole myriad of different cost factors.

23 In reviewing the Company's testimony and exhibits concerning 24 the justification for the attrition factor, I can find no actual N 25 data showing that this Company is now experiencing attrition.

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1 Certainly if an attrition adjustment is necessary, then the l

2 burden of proof should be on the Company to show that it is 3 indeed experiencing attrition under the rates approved by the F

4 Comission last year. TP&L, as of June 1977, was allowed rates l

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5 to be placed in effect producing, on,a test year basis, 58.2 l 6 million dollars in increased revenues. Since actual evidence is 7 not availabic from TP&L's filing, I have prepared Exhibit _(pJiG-2) i 8 to determine if TP&L is suffering any decline in the level of its i

f 9 carnings under present rates.

l 10 Q WOULD YOU PLEASE DESCRIBE EXHIBIT "(RMG- 2) ?

I 11 A Using the Company's monthly operating statements for the period 1 ,

! ( 12 December 1976 through november 1977, I have calculated by month i

13 the 12 month net income amounts earned by TP&L adjusted fer the 14 rate increase effective July 1977. Line 3 of Exhibit _(Rl'a-2) 15 shows that the Company has experienced an increase in annualized -

16 earnings of a substantial amount during this period c E time. More I

l 17 importantly, the twelve month adjusted income carnin!;s when divided l

I 18 by the monthly capitalization balances of TP&L, show that the 19 carnings per dollar of invested capital increases during this ,

20 period from 8.77. in December 1976 to 9.27 by Novembri 1977.

21 This shows that under the present rates, TP&L's operations 22 produce a trend of increased earnings, both in magt.itude and in 23 percent of invested capital, rather than an carning decline.

24 Historically speaking then TP&L's recent operations show no l 25 evidence of attrition under the present rate structure.

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1 Q DO YOU 11 AVE AN OPINION AS TO WIIY TliE CO:fPANY 11AS NOT EXPERIENCED 2 ATTRITION DURING Tile PERIOD THAT YOU AN/sLYZED?

3 A Yes. I think first of all the Company's rate structure is so 4 designed that as system kWh sales increase, revenues are produced 5 which tend to offset the increase in the cost of providing service.

6 AlthoughduringthisperiodoftimeTP&Lbroughtonlikesubstantial 7 generating capacity, experienced increases in cost of operations, 8 and went to the capital market, the carnings of the Company continue 9 to increase because of increased monthly kWh sales.

10 Q UOULD THE COMPANY'S ARGUEMENTS CO:!CER\'ING UEATHER ABNORMALITIES 11 DURING TIIE SUMMER OF 1977 ilAVE AN IMPACT ON TIIE RESULT OF THE

( 12 ANALYSIS OF EARNINGS S110WN ON EXHIBIT (RMG-2)?

13 A As covered in the testimony of other TEX-LA witnesses, the weather 14 adjustment made by the Company is incorrect for a number of 15 different reasons. IIowever, even if we take the weather adjustment 16 at TP&L's computed value and appropriately adjust the earnings 17 shown on Exhibit NO (R'40-2) for the period studied, I find that 18 the resulting earnings per dollar of capitalization atill do not 19 decline. Attrition therefore is not evidenced during this period 20 even under the extreme assumption that the weather adjustment is 21 necessary and properly computed.

22 Q MR. GROSS, LOOI;ING INTO TIIE FLTURE DO YOU SEE ANY SIGNIFICANT CHANCES 23 IN THE COMPANY'S OPERATIONS THAT WOULD WARRANT THE IMPLEMENTATION 24 0F AN ATTRITION FACTOR?

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25 A The most substancial change in the Campany's operations in the 26 immediate future will occur with the co==creialization of the Martin 9

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l 1 Lake #2 and Monticello #3 units which the Company estimates to be 2 commercial prior to the 1978 stmmier peak. These units will indeed 1

j 3 change the operations of the Company by raising the cost of providing

! 4 service to the Company's customers. TP&L, however, in adjusting its 5 test year, includes most of the cost which will be experienced i .

r 6 once these units become commercial. Although I disagtce with the

! 7 manner in which the Company has made the Martin Lake and Monticello i

I 8 adjustment to the test year, I do believe that when the test l 9 year is properly adjusted for the addition of these units, TP&L 10 will have a most comprehensive hedge against future dilution in 11 the return carned on their invested capital. Other witnesses  :

( 12 for TEX-LA have additional comments concerning the appropriateness I 13 of this attrition adjustment given other factors of TP&L's operations.

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l 14 Q IN TIIIS SAME RECARD IIAVE YOU REVIbWED Tile RESULT OF TP&L WITNESS i

! 15 SWIGER'S STUDY S110WN IN EX!!IBIT SSS-17 " COMPUTATION OF EXPECTED -

) 16 ATTRITION "

17 A Yes.

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18 Q DO YOU UELIEVE TIIAT TilIS IS A VALID STUDY?

f 19 A No I do not. ,

20 Q WOULD YOU PLEASE EXPLAIN WIIY?

l 21 A Mr. Swiger's study -in based entirely upon a forecast of the i

l 22 relationship between incremental revt.nues per customer and I incremental costs per customer as such are projected to increase 23 24 over the next two years. The study relies upon projections of

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l L 25 number of customers, customer sales, plant in service, invested f

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1 capital, operating expenses, depreciation expenses, other tax l

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2 expense, and finally capital cost including appropriate income 3 taxes. Mr. Swiger, in an attempt to justify an attrition factor, 4 has tried to project operations of TP&L through 1979. Of course, 5 these projections are not based upon known and measurable events 6 to the extent that such would satisfy the Commission's rules 7 and regulations.

8 Other than the fact that the whole study is pre'dicated 9 upon estimates, the one item that appears most questionabic in 10 Mr. Swiger's study is the projected Icvel of kWh sales per 11 customer for 1978 and 1979. In trying to come up with the 12 increase in the level of revenues per customer, Mr. Swiger uses 13 a compound annual growth factor of 1.987. to estimate kilowatt

[ 14 hour sales per customer in 1979. A quick review of TP&L ,

13 Exhibit SSS-13, page 2, shows that TP&L has been experiencing a -

16 considerably higher compound growth rate in this category covering 17 any period since 1971. The projection of kilowatt hour sales 18 per customer has a substantial impact on the results of the " Attrition 19 Study." I have prepared Exhibit No. (RMO-3) which shows both the 20 actual annual growth in kilowatt hour sales per customer from year 21 to year since 1971 (page 1) and the compound rate of growth in 22 kilowatt sales per customer for the period 1971 through 1977 (page 2). l 1

23 This exhibit shows that TP&L has experienced an average annual 24 rate of growth of 4.607, per year even with 1977 adjusted for TP&L's 25 weather adjustment. On a compound annual growth basis. TP&L's 26 kWh sales per customer have increased 4.567 from 1971 through

( 27 1977 also based upon the adjusted 1977 consumption per 28 customer. This points out that TP&L's use of

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1 of 1.987, as the growth factor in kilowatt hour sales per customer 2

is absurd. Furthennore a quick application of any growth percentage 3 in this category above approximately 3.757, to Mr. Swiger's attrition cafculation shcus that TP&L's attrition adjustment is reduced to 5 a negative value because the resulting incremental increase in 6 revenues per customer, as a result of the higher growth rate, 7 taore than execeds incremental cost including TP&L's claimed return 8 on invested capital.

9 MR. GROSS, YOU INDICATE Tl!AT YOU API IN DISAGPIEMENT WITil Tile Q

10 1W;NER IN WilICl! ' Tile COMPANY llAS ADJUSTED ' DIE TEST YEAR FOR Tile 11 boULD ADDITION OF TilESE TWO NEW UNITS TO BE CO:0!ERCI AL NEXT YEAR.

\ 12 YOU PLEASE EXPLAIN IN MORE DETAIL?

13 A Yes. If Texas Power and Light Company were essentially a static 1/' company uith the little expected growth in sales, I would be in 15 agreement with the manner in which the company has adjusted its 16 test year Plant in Service and expenses for the addition of these 17 two units. I find however, that TP&L is not in a static situation.

18 It will be experiencing, as evidenced by its own load projections, 19 considerable k!(n sales growth. With sales growth, TP&L under ,

20 properly designed rates, will be generating additional base revenues 21 substantially in excess of the icyc1 reflected in the test year.

22 The increase in base revenues will act to absorb much of the 23 additional expenses and return on investment that will be

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incurred when these two new units become cc:maercial.

25 TP&L !!AINTAINS TilAT MOST OF Tile CAPACITY TilAT TIIEY WILL BE ADDING Q

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s 1 IS FOR CONVERSION PURPOSES AND TilEREFORE IS NON-REVENUE PRODUCING.

2 DO YOU llAVE A RESPONSE TO TIIIS POSITION?

3 A Yes. I find that TP&L has and will be adding generating plant 4 capability for both load growth and conversion purposes. It 5

  • seems, however, that for the next three to four years, TP&L 6 will be experiencing load growth equal to the amount of' capacity 7 that it adds to its system. I have prepared Exhibit,__(RMG-4) which B shows TP&L expects its System peak load to grow by approximately 9 800 megawatts during the three year period 1978 through 1980. If 10 a 20% reserve criteria is assigned to each kilowatt of load growth, .

11 then approximately 1000 megawatts of additional generating capacity g 12 is necessary to match load growth. TP&L is adding 924 (net) 13 megawatts of generating capability or slightly less than the amount 14 required for load grouth. TP&L Exhibit (RKC-8) shows reserves 15 of the Company to decrease from 1978 through 1980 from 50% down -

I 16 to 37.4%.

17 All of this indicates that TP&L seems to be reversing the trend 18 that it has experienced in the past which has been to add more U

3 19 generating capability than load growth. The present rates approved 20 by f he Commission in the last TP&L rate filing are based upon a i

j 21 test year including system reserves of approximately 45%. TP&L's

, 22 projections show that its reserves will decline signficantly to l 23 a level in the lower to mid 30's in the early 1980's. l l

24 I believe that ,for rate making purposes if an adjustment can s 25 be made to the current test year for the higher unit cost that will .

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I be attendant with the new generating unit additions coming on line 2 in the immediate future, then growth in TP&L's sales coupled with 3 the proper rate design should offset TP&L's cost of operations 4 ~

during the next several years. I have approached the Martin Lake 5 and Monticello adjustments to the test year on this basis.

0 WOOLD YOU PLEASE EXPLAIN 110W YOU IIAVE ADJUSTED TIIE TEST YEAR FOR Q

7 Tile MARTIN LEE AND MONTICELID ADDITIONS?

8 A Exhibit No._(RMG-5) Schedule 1, su=narizes the adjustments that 9 I have made to the test year for Martin Lake Unit #2, Monticello 10 Unit #3 and also Martin Lake Unit 43, in those areas where I 11 differed with the Company's approach. I have included Martin

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12 Lake #3 in r calculation so as to be sure to include, as fully 13 as possibic, the impact that all new generating unit additions will 14 have on the average unit cost of Texas Power and Light during the 15 immediately forseeabic future. These are the only generating 16 additions that TP&L projects to be coemercial during the next 17 three years.

18 As shown on Exhibit _(RMG-5) Schedule 1, I have changed the 19 adjustment for Electric Plant in Service, depreciation expense and ,

20 production operations and maintenance expense less fuel from the 21 amount derived by TP&L. The method I have used to calculate the 22 adjustment is comparabic for all three cost ;'tegories. I have 23 first detemined the unit cost per kilowatt of procaction capability 1

( 24 experienced during the test year and then compared that value with

! 25 the unit cost resulting af ter the addition of the Martin Lake #2, l

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1 Martin Lake #3, and Monticello #3 units. For instance, on 2 Schedule 2 of Exhibit : o.__(IUC-4), I show that presently TP&L's 3 cabedded investment cost per kilowatt of production capability 4 is -$98.14 per kilowatt. With the addition of Martin Lake #2 & 3 5 and Monticello #3 the average investment cost per hilowatt will 6 increase to $125.87. I have taken the difference betwebn these 7 two unit cost figures and multiplied that times the generating 8 capability of the Company during the test year in order to 9 derive a Plant in Service adjustment of $169,358,607. Once this 10 amount is added to Production Plant in Service, the test year is 11 then adjusted for the higher unit investment cost that TP&L f

( 12 will be experiencing through 1980. With this component built 13 into the test year rate base, the additional growth in sales 14 coupled with an appropriate rate design will produce revenues _

15 for the Company that should match its cost of providing service -

16 since the unit cost that goes into the base rates will be at Icasc 17 equal to the unit cost experienced by the Company over this 18 period of time.

19 The adjustment to depreciation expense and production operation 20 and maintenance expense is made on the same basis.

21 I should add that the mechanics of this series of adjustments 22 are canparable to TP&L's Plant in Service adjustment for Martin 23 Lake Unit #1 allowed by the Commission in the last rate case.

/ 24 Q DOES TilAT CO !CLUDE YOUll TESTIMO::Y?

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25 A Yes.

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