ML20038B216
| ML20038B216 | |
| Person / Time | |
|---|---|
| Site: | Comanche Peak  |
| Issue date: | 05/31/1980 |
| From: | Kalch D TEXAS ELECTRIC SERVICE CO. |
| To: | |
| Shared Package | |
| ML20038B200 | List: |
| References | |
| NUDOCS 8111240885 | |
| Download: ML20038B216 (23) | |
Text
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DIRECT TESTIMONY OF DAVID E. KELCH for TEXAS ELECTRIC SERVICE COMPANY MAY 1980 Nkl$$o! 0 000 I
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KELCH Page 1 o f 17 m
, 1 2 DIRECT TESTIMONY OF DAVID E. KELCH 3
4 ; Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
5 A. My name is David E. Kelch. My business address is 115 W.
6 Seventh Street, Fort Worth, Texas 76102.
7 I Q. BY WHOM ARE YOU EMPLOYED AN.D IN WHAT CAPACITY?
l 8 I am employed by Texas Electric Service Company and hold the l A.
9 positioh of Vice President and Treasurer.
10 Q. WOULD YOU PLEASE BRIEFLY OUTLINE YOUR EXPERIENCE AT TEXAS 11 ELECTRIC SERVICE COMPANY?
i 12 l A. I was employed by Texas Electric Service Company in March 13 1955 and have held various positions in the Financial Depart-14 ment. In 1966, I was elected Secretary and Assistant 15 Treasurer and held that positien until 1973 when I became 16 Secretary and Treasurer. In 1979 I was named Vice President 17 and Treasurer.
18 Q. WHAT ARE YOUR DUTIES AS VICE PRESIDENT AND TOEASURER?
19 A. I have responsibility for all financial and accounting mat-20 ters including determining capital requirements of the Com-21 pany and developing plans to obtain the necessary funds 22 , through long-term and short-term financial arrangements as 23 required to meet expenditures, to preserve the liquidity of 24 the Company and to maintain the Company's financial integrity.
25 O. TO WHAT EXTENT DO YOUR SUTIES BRING YOU INTO CONTACT WITH THE 26 FINANCIAL COMMUNITY?
27 A. My contacts with the financial community include meetings and 28 l discussions with underwriting firms, investment bankers, and TEXAS ELECTRIC SERVICE COMPANY
KELCH Page 2 o f 17 1 rating agencies and consultation with individual investors 2 and security analysts.
3 Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS PROCEEDING?
4 A. My testimony will discuss the following: (a) the Company's 5 need to attract capital to finance its construction program, 6 (b) the effeet that the inclusion of construction work in 7 progress in the rate base will have on cash flow and quality 8 l of earnings, (c) the Company's composite cost of capital, (d) 9 l the necessity of including all of the Company's assets in i
10 the rate base, (e) attrition - the effect of increased costs 11 on the Company's ability to earn whatever rate of return on 12 l common equity is authorized by this Commission, (f) the 13 Reserve for Insurance and Casualties and (g) the necessity 14 for a full and current recovery of fuel cost.
15 Q. WHY IS TESCO REQUESTING A RATE INCREASE?
16 A. Our construction program is necessary so we can continue I
17 to serve our customers reliably and economically, but the ,
18 burden of financing that program and the continuing effects I 1 l 19 ! of inflation on all costs of providing service are holding 20 earnings below a level that is adequate to maintain our 21 financial integrity. TESCO's construction expenditures for 22 the years 1980 through 1982 will be approximately $660 23 million. In 1980 record annual expenditures of $254 million 24 l are budgeted. The Consumer Price Index increased more than l 25 14% during the test year, and the annualized rate of increase 26 war 17% in the first quarter of 1980. The persistent in fla-27 tien has increased the costs of every aspect of the produc-i ,
28 ' tion of electric service -- operating costs for items such !
l TEXAS ELECTRIC SERVICE COMPANY l
KELCH Page 3 o f 17 1 as gasoline, stationery and payroll; construction costs 2 through prices paid for poles , transformers and new 3 , generating plants; and, in particular, the cost of captial.
4 Primarily as a result of heightened inflationary expecta-5 tions, investors have demanded increased returns on committed 6 capital. At the end of March, 1980, there had been an in-7 crease over the past year of 342 basis points in yields on 8 electric utility common stocks and an increase of 444 basis 9 points in yields on utility bonds (Moody's Investor Services, 10 l Inc., " Moody's Public titility News Reports", Tuesday, April 11 1, 1980, Volume 51, No. 76). As a result of these pressures 12 earnings have not been adequate to compensate investors and 13 the market value of Texas Utilities Company's common stock 14 had declined to approximately 75% of book value at the end of 15 the test year. New common stock issues at less than book 16 value have resulted in the economic confiscation of the 17 property of existing shareholders. Unless earnings are re-18 stored to an adequate level, our ability to attract capital 19 at the lowest possible price will be impaired.
20 Q. '4MY IS _THE COMP ANY'S ABILITY TO ATTRACT CAPITAL IMPORTANT?
21 A. The Company is engaged in a substantial construction program 22 to build power plants that use lignite and nuclear fuel so 23 that the company will be able to meet anticipated growth in 24 demand for electricity by our customers and use the cheapest 25 l available fuels to make their electricity. Mr. Taylor, in l
26 his testimony, discusses the amount of construction expendi-27 tures in past years and expenditures required in the future.
28 l To successfully carry out this program at the lowest cost to TEXAS ELECTRIC SERVICE COMPANY
KELCH Page 4 o f 17 -
- 1 the people we serve will require the company to have sqcess 2 to the finarcial markets at all times and at the lowest 3 possible cost. Such access is possible only if our revenue 4 is adequate for the maintenance of a sound financial position.
5 Q. WOULD INCLUDING CONSTRUCTION WORK IN PROGRESS IN THE RATE 6 BASE ENHANCE THE COMPANY'S ABILITY TO ATTRACT CAPITAL?
7 l
A. Yes. Financing these major construction projects, which have 8 l lengthy construction periods, requires that the Company se-9 ! cure large sums of money from investors. During this extend-l 10 i _
ed construction period, the Company must be able to generate 11 sufficient cash earnings to cover the costs of providing ser-12 vice to customers and to compensate investors. Including 13 l CWIP in rate base eliminates non-cash AFUDC earnings and I
14 provides greater assurance that adequate cash earnings will l 15 l i be generated. On the other hand, the substitution of AFUDC 2
f 16 earnings for cash earnings will contribute to the impairment 17 of our ability to attract capital at costs which are 18 beneficial to our customers.
19 Q. PLEASE DESCRIBE THE PROBLEMS WITH AFUDC RELATIVE TO ATTRACT-20 ING CAPITAL.
21 A. AFUDC represents a deferral for later recovery of financing 22 costs which must be paid today. Due to the continuance of 23i inadequate earnings, an increased risk is associated with this promise for the future recovery of financing costs. Ac-24 l!
25 l cordingly, investors will require a greater price to be paid 26 for the use of their funds. Exhibit DEK-1 shows CWIP as a 27 percent of total plant investment over a period of years.
28i Over the past four years this percent has remained close TEXAS ELECTRIC SERVICE COMPANY
KELCH Page 5 of 17 1 to 25%. Because AFUDC is directly related to the level of 2 CWIP not included in the rate base the significance of AFUDC 3 in the Company's earnings can easily be seen. As shown on 4 Exhibit DEK-2, AFUDC currently represents 25 percent of l
5 balance to common, an amount higher than is consistent with 6 maintaining TESCO's financial integrity. When AFUDC con-7 stitutes a high percentage of balance to common, a company's 8 ,
earnings are suspect, and its ability to attract investors 9 is impaired. Such a circumstance increases the cost of 10 i capital available for investment in plant.
11 Q. WHY WOULD INCLUDING CWIP IN THE RATE BASE ELIMINATE THE 12 NEGATIVE IMPACT OF AFUDC?
13 A. By including CWIP in the rate base, non-cash earnings are re-14 placed with cash earnings. This improves the quality of the 15 company's earnings, increases internal generation of cash and 16 improves pretax interest coverage. With improvement in these 17 indicators of financial integrity, investor confidence will 18 be improved.
19 Q. WHAT IS THE EFFECT ON THE CUSTOMER OF INCLUDING CWIP IN THE 20 RATE BASE?
21 A. Revenue requirements are less over the life of a project.
22 Th er e fo r e , the electric bills of the people we serve will be 23 less. Including CWIP in the rate base allows capital costs 24 to be recovered on a current basis rather than on a deferred 25 1 basis as is done by capitalizing AFUDC during the construc-26 tion period. When capital costs are recovered currently,
- 27 ! less external financing is required and the improved quality 28j of earnings reduces the cost of new capital. With reduced f TEXAS ELECTRIC SERVICE COMPANY
KELCH Page 6 o f 17
,' 1 financing at reduced cost, total capital costs are less.
2 Q. AN OBJECTION TO INCLUDING CWIP IN THE RATE BASE HAS BEEN THAT 3 .SUCH A PRACTICE FORCES PRESENT CUSTOMERS TO PAY FOR BENEFITS 4 ! TO BE RECEIVED BY FUTURE CUSTOMERS. DO YOU CONSIDER THAT TO 5 BE A VALID OBJECTION?
6 A. No. I have used U. S. Bureau of Census data on mortality 7 and migration in the TESCO service area to calculate the rate 8 i of loss of TESCO customers. This analysis shows that 96.2%
1 9 of our current customers will still be our customers one year 10 from now. This demonstrates that almost all customers who 11 pay capital costs on a current basis receive the benefit of 12 j that construction when it goes into service. Furthermore, I
13 I 97.9% of our current customers will continue to be customers i.
14 of an electric service company in Texas one year from now.
15 Q. HAS THIS COMMISSION RECOGNIZED THE BENEFITS OF INCLUDING CWI?
16 IN THE RATE BASE?
17 A. The Public Utility Commission has recognized the benefits to 18 consumers of including CWI? in the rate base in each previous 19 electric utility case. In our last rate order, acproximately 20 $217 million of CWI? was included in the rate base. It is as 21 important now as ever to mainthin the Company's financial 22 ; integrity. The Commission should allow all CWIP as of March 23ll 31, 1980 in the rate base to maintain the Company's credit-24 worthiness in view of our large construction program. Ex-25 1 hibit DEK-1 graphically demonstrates the importance of having 26 l CWI? in the rate base. As can be seen from this exhibit, the i
27 ! percentage of CWIP in total electric plant hasrisensubstan-l 2B ! tially in the years subsequent to the beginning of the fuel- I L_
TEXAS ELECTRIC SERVICE COMPANY
KELCH Page 7 o f 17 1 changing construction program. It should be understood that 4
2 the amount of CWIP requested to be allowed in the rate base I
3 is substantially less than will be invested in CWIP before 4 the proposed rates are in effect.
S l Q. IS THE COMPANY REQUESTING THAT ALL CWIP BE INCLUDED IN RATE l -
6 BASE?
7 ! A. Yes. The Company has included in the rate base 100% of the 8 adjusted CWI? balance at March 31, 1980.
9 Q. WOULD YOU DESCRIBE THE TYPES OF CAPITAL UTILIZED BY TEXAS 10 ELECTRIC SERVICE COMPANY?
11 A. The Company obtains capital through the sale of long-term 12 debt, preferred stock and common stock as detailed in the H i
13 schedules.
14 Q. WHAT BOND RATING HAS BEEN ASSIGNED TO THE COMPANY'S FIRST 15 MORTGAGE BONDS AND SINKING FUND DEBENTURES BY THE TWO MAJOR 16 RATING AGENCIES?
17 A. The Company's fir st mortgage bonds are currently rated tri-18 ple-A by both Moody's Investor Services, Inc. and Standard 19 & Poor's Corporation. The Company's sinking fund debentures 1
20 l have a double-A rating by both rating agencies, since those 21 obligations are not secured by property and are, therefore, 22 secondary to the first mortgage bonds.
23 i 0. HAVE THESE CREDIT RATINGS BEEN BENEFICIAL TO THE CUSTOMERS OF 1
24 TEXAS ELECTRIC?
25 l A. Definitely. Lower interest rates mean lower costs to our l
26 customers. These credit ratings have allowed the company to 27 l sell debt at lower interest rates than are available to com-28 ' panies with lesser ratings. It is especially apparent in TEXAS ELECTRIC SERVICE COMPANY
~
KELCH Page 8 o f 17
) 1 today's chaotic credit market conditions that the company's 2 triple-A ratings for first mortgage bonds are of great value 3 to the customer. In March 1980, TESCO sold 30-year, first 4 mortgage bonds at a yield of 14.32%. This yield is a 5 <
tremendous increa se in the cost of borrowed fu nd s , almost 500 J 6 basis points more than the company experienced in 1979.
7 However, if TESCO had been down-rated during the past year, 8 new issues of lesser-rated companies indicate the increase 9 would have been in the neighborhood of 600 basis points.
10 One hundred basis points represents a savings of more than 11 $2,000 per day on the $75 million of bonds sold in 1980.
- 12 And, a number of lesser-rated companies have found it 13 necessary to turn to shorter maturity bonds. In these days 14 of unprecedented yield requirements the company's triple-A
- 15 ratings are more essential than ever to secure continued i
16 electric service in the least-costly way to the residents of 17 our service area.
18 Q. '4 HAT HAS BEEN TEXAS ELECTRIC SERVICE COMPANY'S RATE OF RETURN 19 ON COMMON EQUITY DURING THE LAST TEN YEARS?
20 A. Exhibit DEK-3 shows that the trend of the Company's rate of 21 return on common equity during the last ten years has been 22 downward in spite of rate increases. In 1979 the Company's 23 return on equity was only 125 24 j The Exhibit also shows the return on common equity ex-t 25 l cluding AFUDC. This graphically demonstrates the steady ero-26 sion of the quality of earnings on common equity. Exhibit 27 DEK-2 shows AFUDC as a percentage of balance to common equity i
2B ! has more than doubled, rising from approximately 11% in TEXAS ELECTRIC SERVICE COMPANY
KEL"9 Page 9 o f 17
. 1 1972 to 25% during the test year. Such a significant change 2 over a reAatively short period of time is a danger signal, 3 and we must reverse that trend if the Company is to main-4 tain its position in the financial community so we can 5 continue providing electric service to our customers at 6 the most reasonable cost. The magnitude of our construction 7 pr.Jram and the external financing required for that program 8 I require us to have ready access to the capital market and at 9 reasona'ble costs.
10 C. MR. KELCH, YOU HAVE DISCUSSED THE NEED TO ATTRACT CAPITAL i
11 ( FROM EXTERNAL SOURCES AND THE SECURITIES USED TO PROVIDE THAT 1? CAPITAL. HAVE YOU CALCULATED THE COMPANY'S WEIGHTED COST OF l
13 l CAPITAL AT MARCH 31, 1980?
14 A. Yes, I have. Schedule H, page 2 of 2, of the Rate Filing 15 Package shows the outstanding capital at March 31, 1980, 16 as adjusted for the issuance of 350,000 shares of preferred I
17 ' stock in June, 1980. The long-term debt and embedded in-18 terest rates were taken from Schedule H-6 o f the Rate Filing 4
19 Package. Notes payable are detailed in Schedule H-5. The 20 preferred stock and embedded dividend rate are detailed in 21 ' Schedule H-4 of the Rate Filing Package. The common equity 22 and accumulated deferred investment tax credits wera taken 23 ; from Schedule J. The cost of common equity was determined i
24 l from Dr. Olson's recommended return on common equity of 17" l
25 to 18%. Schedule H, page 2 o f 2, column (c) shows the 26 j outstanding capital for the test year, column (d) is the 27 requested return, and column (e) is the cost of capital.
28 The Company's weighted cost of capital is 12.195%.
TEXAS ELECTRIC SERVICE COMPANY
\
KELCH Page 10 of 17
2 OLSON'S RECOMMENDED RETURN ON COMMON EQUITY?
3 A. Yes, I did. I considered the recommended return on common 4 equity of 17% to 18% in light of financing new projects with 5
l new capital and also considered our earnings record. The 6 dowrvard trend in equity earnings shown on Exhibit DEK-3 will 7 1 not be accepted by investors indefinitely. If this trend is i
8 not stopped, the people who invest their savings in our Com-9 pany will turn to other investments that pay them more for 10 i the use of their money. If we can't keep these people in-l 11 ' terested in Texas Electric Service Company, we will no longer >
12 be able to raise the money we need to keep our construction 13 program on schedule. Within this framework, I selected l
14 17.5%, for return on common equity. In my opinion, this 15 level of earnings is' sufficient to provide a minimum return 16 to investors and to maintain the Company's triple-A bond 17 rating.
18 Q. IS THE DETERMINATION OF THE PROPER AMOUNT OF FUEL OIL INVEN-19 TORY A FINANCIAL DECISION?
20 A. No. In my opinion, that is an engineering decision.
21 0. IS IT A FINANCIAL DECISION TO DETERMINE THAT LAND, WATER 22 RIGHTS, CR FUEL RESERVES ARE NEEDED FOR FUTURE USE?
23 A. No. Those, too, are engineering decisions.
24 i Q. DO YOU, THEN, HAVE ANY INTEREST IN THESE MATTERS?
25 A. Yes. It is true that the need to invest in such items is an i 26 i engineering decision. However, when these items become a I
27 i part of the assets of the Company, they also become a matter l
28 j of interest from a financial standpoint. These assets, like TEXAS ELECTRH: SERVh:E COMPANY
KELCH Page 11 of 17 1 any other, have a current cost, and this cost must be pro-2 vided for in rates.
3 Q. HOW SHOULD THE COST OF OWNING THESE ASSETS BE RECOVERED 7 4 A. This cost should be recovered by including these assets in 5 the rate base. The failure to include these assets in che 6 rate base would mean that not all capital costs would be 7 l recovered. The existence of such a situation would obviously 8 diminish the financial integrity of the company. The common 9 shareho'lder would not earn his required return with the 10 l result being that the price of the stock would be bid down 11 until he was earning his required return. As a consequence 12 of this lowered stock price, more shares would have to be
'3, issued in future stock sales in order to realize a given 14 amount of proceeds from the sale than would have been the i
15 I case in the absence of the reduction in stock price. From 16 l this circumstance it follows that more cash earnings would 1
17 be "equired to support a given level of earnings per share 18 and dividends per share for this increased number of shares 19 than would have been the case at the original, higher stock 20 price.
21 The bondholder and the preferred shareholder would be 22 ! affected, as well. The reduction in earnings available to i
23 l the common stockholder reduces coverage, and the bondholder i
24 and preferred shareholder htve smaller margins of safety and 25 l w:.ll, consequently, require higher returns.
26 Q. DOES THE FAILURE TO INCLUDE THESE ASSETS IN THE RATE BASE
- 27 HA*lE ANY AFFECT ON THE CUSTOMER?
28 ! A. Quite obviously, the short-term effect will be lower electric TEXAS ELECTRIC SERVICE COMPANY
KELC9 Page 12 of 17 1 bills. However, we cannot stop with the short-term perspec-2 tive. We must also view the effect over a longer period, and 3 that effect will be contrary to the best interests of the 4 customer. This is so, because investors will require a 5 l higher return for bearing the risk of investing in a company 6 that is not allowed to earn on all of its assets. The result 7 will be a higher cost of capital for all assets and will lead 8 ,
to higher electric bills for cur customers.
9 j Q. WOULD YOU PROVIDE US WITH A DEFINITION OF ATTRITION?
10 ; A. Attrition may be defined in its broadest sense as 'an erosion 11 of earnings. More specifically, I am referring to attrition 12 as the failure to earn the allowed rate of return on common 13 equity during the first year subsequent to new rates being 14 placed in effect.
15 Q. WHY ARE YOU ADDRESSING ONLY THE FIRST YEAR AFTER A NEW SET OF 16 RATES HAS BEEN EFFECTIVE?
17 ' A. Quite clearly, the earned rate of return on common equity 18 will erode over time under the pressures of inflation and the 19 financial burden of a large construction program. However, 20 the failure to earn the allowed rate of return at least dur-21 ing the first year of new rates is an entirely different mat-22 ter and points to the fact that the rates were inadequate 23 from the outset.
24 j Q. HAVE YOU ANY EVIDENCE THAT TESCO'S RATE OF RETURN HAS SUF-l 25 I FERED FROM ATTRITION?
26 A. Yes. Exhibit DEK-4 illustrates authorized rate of return on I
l 27 ) common equity as compared to the rate of return actually l i 23 ' earned. The authorized return has increased from 13.5% in ,
TEXAS ELECTRIC SERVICE COMPANY
KELCH Page 13 o f 17
)
s
-- 1 Docket 527 to 13.75% in Docket 1903 and to 14.5% in Docket 2 2606. The return actually eirned has continued to fall below 3 authorized return. Furthermore, there has been a trend to-4 , ward an increasing deficiency of earned return. relative to I
5 authorized return. It is apparent that the rates ordered in 6 each of these dockets have been inadequate. The Public 7 Utility Commission has erred consistently, to the detriment 8 l of the investor, in the revenues allowed in previous dockets i
9 for this comoany. This trend indicates the need for a re-10 l appraisal by the Commission of the way they formulate their 11 view of current economic conditions.
12 Q. DO YOU EXPECT ATTRITION TO AFFECT THE RETURN ON COMMON 13 EQUITY EARNED SUBSEQUENT TO THE FINAL ORDER IN THIS PROCEED-14 ING?
15 A. Yes. The rate of inflation is not only at a level that is 16 high relative to historical levels, it is accelerating, and
, 17 the construction program is continuing at a rapid pace. If 18 this final order reflects the analysis of current economic 19 conditions inherent in previous orders, there is no reason to 20 believe that TESCO's experience subsequent to this rate case 21 will be significantly different than that subsequent to the 22 previous three rate cases. There is now a vivid history of a 23 , persistence of inadequate returns when the attrition process 24l 1s ignored by this Commission. If least cost financing for i
25 1 facilities to serve our customers is to be obtained in the 26 future it is imperative that the order authorizes electric 27 l service rates sufficient for the company to earn the allowed 23 rate of return.
l TEXA5 ELECTRIC SERVICE COMPANY
KELCH Page 14 of 17
) 1 Q. WHY DOES THE COMPANY HAVE A RESERVE FOR INSURANCE AND CASUAL-2 TIES?
3 A. The reserve was established to provide a measure of protec-4 tion against significant uninsured losses resulting from 5 l casualties and damage claims.
i 6 Q. WHY DOES THE COMPANY NOT PROVIDE INSURANCE COVERAGE FOR THESE l
7 LOSSES?
8 : A. Because the Company cannot economically justify the premiums.
9 I For example, the Company has a $2,000,000 deductible for tur-i 10 bine insurance and cannot obtain a lower one at a reasonable 11 premium. The Company also assumes the total risk when insur-12 ance is unavailable at attractive rates.
13 Q. IN YOUR OPINION, IS THE RESERVE FOR INSURANCE AND CASUALTIES 14 THE MOST APPROPRIATE METHOD FOR HANDLING THIS TYPE OF COST?
15 A. Yes. The use of the reserve provides for the exclusion from 16 operating expenses and cost of service those unusual losses 17 whicn, because of amount and infrequent occurrence, would 18 distort earnings. Large casualty losses are spread over a 19 period of time in order to reduce the impact on the rate-20 payer. The reserve provides the best means for spreading 21 those costs and avoids the problems involved with after-the-22 fact amortization.
23 Q. HOW DOES THE COMPANY CALCULATE THE MONTHLY PROVISIONS TO THE 24 l RESERVE FOR INSURANCE AND CASUALTY?
25 A. Monthly provisions to the reserve are in the amount necessary 26 to achieve a target reserve balance of $5,000,000 in three 27 l year.3 provided there are no further major losses to be i
28 l charged o the reserve during the period. At the first of TEXAS ELECTRIC SERVICE COMPANY
KELCH Page 15 of 17
[ 1 each year, the reserve balance is observed and the monthly 2 provision increased or decreased accordingly.
3 Q. WHAT IS THE BASIS FOR THE $5,000,000 TARGET RESERVE BALANCE?
I 4 A. The target reserve of $5,000,000 was established in January, 5 1978, based on a review of property in service and insurance 6 coverages in effec; at that time. There have been no major 7 changes in our insurance program since that time. However, 8 i since January, 1978, the value of the dollac has decreased i
9 l by abou't one-fifth and we have made substantial additions to 10 plant-in-service. Also, no consideration has been included 11 ; in the target reserve for liabilities relative to the Comanche 12 ' Peak Nuclear Units. We are not requesting an increase in the 13 i target reserve at this time. A common method in the utility 1
14 industry for determination of a reserve limit is to take 150%
15 of the total of (1) the sum of all deductibles for insurance 16 coverages purchased and (2) the sum of all deductibles that-17 would reasonably apply to coverages not purchased. Applica-18 tion of this rule also indicates the company currently needs 19 a reserve of approximately $5,000,000. Rather than prov *s 20 for that current need instantly, the company only seeks to 21 achieve it within three years and with the assumption that no 22 further losses are forthcoming during those three years.
23; Q. HOW DOES TESCO PRESENTLY RECOVER ITS FUEL COST?
24 A. Our rates contain a fuel cost rider that allows for the full 1
25 i and current recovery of all fuel costs through the use of a 1
26 ; fuel cost factor.
27 ' O. DOES THE EXISTENCE GF A FUEL COST FACTOR HAVE ANY EFFECT ON '
28 ; TESCO'S FINANCIAL STABILITY?
TEXAS ELECTRIC SERVICE COMPANY
KELCH Page 16 of 17 1 A. Yes. The results are a decreased cost of capital (relative 2 to the cost that would exist without the fuel cost factor) 3 and lower electric bills to the customer. A fuel cost factor 4 that allows for full and current recovery of fuel cost gives 5 assurance to potential investors that we will be allowed to -
6 recover all' fuel costs, and it provides an element of sta-7 bility to TESCO's financial condition. This reduction in 8 ;
earnings variability decreases the risk that the investor 9 would face in the absence of the stabilizing influence of the fuel cost factor and, consequently, decreases the return 10 l 11 required by the investor.
12 Q. IN THE PRESENCE OF A FUEL COST FACTOR WHAT INCENTIVE DOES 13 TESCO HAVE TO OBTAIN ITS FUEL SUPPLIES AT A REASONABLE COST?
14 A. Keeping costs to the people we serve at the lowest possible 15 level consistent with providing reliable service has always 16 been among our most important goals. The relatively low l
l 17 l electric service rates charged to consumers by TESCO are 18 evidence of the fact that we have been successful in that 19 effort. In addition, any cost incurred in providing service 20 to customers is subject to scrutiny by the Public Utility 21 Commission, and the Commission will decide whether the cost 22 can be charged to customers. The discipline inherent in such 23 a process is a powerful incentive for TESCO to obtain its 24 ; fuel supplies at a reasonable cost.
25 Further, the manner in which revenue-related taxes are l
26 recovered provides an incentive to minimize fuel cost. Since 27 l revenue-related taxes are included in base rates, an increase 28 in the fuel cost per kwh compared to the test year level j TEXAS ELECTRIC SERVICE COMPANY
1
^
KELCH Page 17 of 17
- 1 means tha3 the Company does not recover all of its revenue-2 related taxes. Therefore, TESCO suffers a direct loss 3 by not doing everything possible to keep fuel cost down.
4 Q. IS IT YOUR TESTIMONY THAT A $122,904,361 RATE INCREASE IS S REQUIRED IN ORDER TO MAINTAIN TESCO'S FINANCIAL INTEGRITY?
6 A. Yes.
1 7 i Q. DOES THAT COMPLETE YOUR TESTIMONY?
8 A. Yes, it does.
9 l 10 11 12 13 l 14 15 16 17 18 19 20 21 22 23 24 \
25 26 27 '
1 1 i l
l TEXAS ELECTRIC SERVI'CE COMPANY
~
l
i CWIP as a Percent of Total Electric Plant Texas Electric Service Company and Subsidiary l
i 1970 -1980 l
t i -
l
! 35- .
l l
30-
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Year-end (est.)
25- / 3-31-80*
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E 20-o 8
E 15-i l 10 -
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0 ,
e , . a e i e i . s i E
1970 71 72 73 74 75 76 77 78 79 80 x, Years
- Test Year-hal
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AFUDC as a Percent of Balance to Common Texas Electric Service Company and Subsidiary 1970 -1980 40- .
35-30-25-3-31-8 0*
E e
20-i 2
$ 15-4 l 10-1 i
, 5- 0' o
o i i , i , , , , , ,, ;
i 1970 71 72 73 74 75 76 77 78 79 h Years '
- Test Year-Actual
\. }
Returh on Year End Common Equity Texas Electric Service Company and Subsidiary 1970 -1980 20-Return on Common Equit/
- - . - Return on Common Equity jg. Excluding AFUDC .
16-
\.
N 14- -
g ,./*s,
- N*
E N (D
y 12- *%.%.
1 s, 3-31-8 0*
N
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s
\, ,/ . 3-31-80*
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8-
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- r Ti 01
=
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1970 72 73 74 75 76 78 79 71 77
{
e rs
- Test Year-Actual
, /
i .
l Comparison of PUC Authorized Returns on Common Equity with Actual Returns Texas Electric Service Company and Subsidiary 1977 -1980 l
j 16 - ,
Authorized Docket #2606 14.5 AuthorizW '
g4 Authorized Docket #527 13 7 13.5 fleturn on Equity 1 12 - (year ended) g 3-31 80
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CL 10 -
i 8-L" i 5
x I I I I I I I I I I I I I I I I I I I I I I l 1 l l l 1 0 D J F M A M J J A S O N D J F M A M J J A S O N D J F M 5 1977 l 1978 l 1979 l 1980 1
Years
r
,- m r
m THE STATE OF TEXAS X COUNTY C'F TARRANT X BEFORE the undersigned authority on this day personally appeared DAVID E. K2LCH, who, having been placed ur. der oath by me, did depose as follows:
"My name is David E. Kelch. I am of legal age and a resident of the State of Texas. 'Ihe foregoing testimony, and exhibits, offered by me on behalf of Texas Electric Service Company, are true and ccrrect, and the opinions stated therein are, to the best of my knowledge and belief, accurate, true, and correct."
_ 0 s -
David E. K616 L SUBSCRIBED AND SWORN TO BEFCRE ME by the said David E. Kelch this g day of May, A. D. 1980.
Lbv . 44t'iO Notary Public in and for dLM -
, LL0rt M My comission expires Am nki.i,17 fff()
SEAL
l
. . , P 0'.XE T ED
- m;nac
'81 NOV 19 P4:12 STATE OF TEXAS )
.: i EECRETARY
. e .i GG & SERVICE Philip K. Brown, being duly sworn, deposes and says:sEAJCH
- 1. That he is the Assistant Director of the Public Utilities Department of the City of Dallas, Texas;
- 2. That his department has intervened on behalf of the City of Dallas, Texas, in hearings held in Austin, Texas before the Texas Public Utility Commission on the request of Dallas Power and Light Company for permission to increase rates;
- 3. That as an Intervenor in said Dallas Power and Light rate hearings, the Pallas Public Utilities Department has obtained copies of in-formation and documents relating to said hearings; and
- 4. That the attached pages cre true and correct copies of said infor-mation and documents relating to said hearings as obtained by the Dallas Public Utilities Department, specifically:
age.s i 4 '2_ o.a Swo,w ha t .4 Ma.x H . Touwwey Jr u T<eAs bd cbve.d 44 54tmos . .E doe I). Ka.vwq t w.d u dq PRie I 'Z o M e x. 6 b i TDx t - to h4 S wo.w siede % t SetAs A ex \9s a Y.
PhTIip K. (Brown N SWORN TO and Subscribed before me on this /m & day of November, 1981
. M/%L Notary Public My Commission expires: 6 37 k (SEAL)
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