ML20003E978
| ML20003E978 | |
| Person / Time | |
|---|---|
| Site: | Comanche Peak  |
| Issue date: | 03/31/1981 |
| From: | Mcdonough W TEXAS POWER & LIGHT CO. |
| To: | |
| Shared Package | |
| ML19240B984 | List:
|
| References | |
| 3780, NUDOCS 8104170624 | |
| Download: ML20003E978 (48) | |
Text
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7 Deckef A)e. 3780 O
1 O'O 2
3 4
5 6
7 8
9 10 W. M. MCDONOUGH, 3R.
g 12 13 FOR g
l 15 16 TEXAS POWER & LIGHT COMPANY 37 18 19 20 MARCH 1981 I
21 22 23 24 25 26 27
!s10.427oggy TEXAS POWER & l.lGIIT COMPANY
PAGE 1 of 23 DIRECT TESTIMONY OF W. M. MCDONOUGH, JR.
3 2
Q.
WOULD YOU STATE YOUR NAME AND BUSINESS ADDRESS PLEASE7 3
A.
W. M. McDonough, Jr.,1511 Bryan Street, Dallas, Texas.
4 Q.
WHAT ARE YOUR POSITION AND RESPONSIBILITIES WITH TEXAS POWER &
5 LIGHT COMPANY?
6 A.
I am Assistant Treasurer of the Company. My responsibilities include general 7
accounting, financial reporting, plant accounting, payroll and disbursing.
8 Q.
WOULD YOU BRIEFLY DESCRIBE YOUR EDUCATION, PROFESSIONAL 9
QUALIFICATIONS AND COMPANY EXPERIENCE?
10 A.
I graduated from Paris Junior College in 1968, and in May 1970, I received a 11 Bachelor of Business Administration degree in accounting from East Texas State 12 University. In February 1970, I began my career with Texas Power & Light 13 Company as a junior accountant in the Financial and Accounting Department.
- 3. i 14 1973, I became Supervisor of Budgets; in 1975, Manager of General Accounting; 15 in 1979, Manager of Audits and Financial Reports; and in November 1980, I was 16 elected Assistant Treasurer. Included in my eleven years with the Company are 17 appearances before city councils concerning rate applications of the Company 18 and participation in the preparation of the Company's previous filings before this 19 Commission.
20 I became a Certified Public Accountant in 1972, and I belong to the Texas 21 Society of Certified Public Accountants, the Dallas Chapter of Certified Public l
22 Accountants and the American Institute of Certified Public Accountants.
23 Q.
WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS RATE PROCEEDING?
24 A.
I will testify on the Company's Cost of Service and Rate Base and the related 25 adjustments thereto, and I will also present testimony as to the effects of 26 attrition on the Company and the Company's proposed solution to that problem.
27 in addition, I will be sponsoring Schedules A, B, C D, G, I (except I 4.5 and I-6),
28 3, K and L in the Company's rate filing package.
I EXAS POWER & LIGilT COMPANY
\\
PAGE 2 of 23 Q.
WAS EXHIBIT WMM-1 PREPARED BY YOU OR UNDER YOUR SUPERVISION?
j i
A.
Yes.
2 3
Q.
WOULD YOU PLEASE DESCRIBE EXHIBIT WMM-l?
A.
This Exhibit is the overall Cost of Service for Texas Power & Light Company for 4
the twelve months ended December 31, 1980, as adjusted. It is a summary of 5
6 Operation and Maintenance Expenses, Depreciation, Federal Income Taxes, Deferred Federal Income Taxes, Federal Investment Credit Adjustments, Taxes 7
Other Than Federa! Income Taxes, Interest on Customer Deposits, Gain on 8
9 Reacquisition of Debt and the Return on Invested Capital. The above items are 10 further detailed to present the amounts as recorded on the books of the Company (column b), the effect of the adjustments for known and measurable changes 11 12 (columns c and d) and the effect on the test year of the proposed rate increase 13 (columns e and f).
14 Q.
THY HAS THE TEST YEAR BEEN ADJUSTED?
15 A.
The test year data reflects operating conditions of the past. By adjusting the actual test year ' data for known and measurable changes, we have attempted to 16 17 bring the Cost of Sersice and Rate Base closer to the level which will be 18 experienced when the requested rates are in effect.
19 Q.
REFERRING TO EXHIBIT WMM-1, WOULD YOU PLEASE EXPLAIN THE 20 ADJUSTMENTS APPLICABLE TO OPERATION AND MAINTENANCE 21 EXPENSES?
22 A.
Yes. Fuel and purchased power were adjusted to reflect the changes in kilowatt 23 hour2.662037e-4 days <br />0.00639 hours <br />3.80291e-5 weeks <br />8.7515e-6 months <br /> sales for weather normalization and customer annualization as provided by 24 Mr. Don Simpson, to reflect the climination of Alcoa interruptible kilowatt hour 25 sales since these contractual sales will no longer be made by the time the 26 requested rates are placed in effect, and to recognize more representative unit 27 cost levels. In addition, an adjustment was made to fuel mix and to fuel cost to 28 recognize the generation from Sandow Unit #4 available for our utility TEXAS IOWER & LIGHT COMPANY
,9..
PAGE 3 of 23 customers. The effect of these adjustments was to decrease fuel and purchased I
Power $30,730,794.
2 The next adjustment is fut joint power plant labor. This adjustment of 3
$2,250,355 is necessary because the Company's portion of labor costs at the 4
5 jointly-owned lignite plants (Big Brown, Monticello and Martin Lake), as recorded in the test year, does not reflect current conditions. By adjusting the 6
labor costs at the jointly-owned plants to year end levels, the test year more 7
closely reflects the costs to be incurred when the new rates are placed in effect.
8 The next adjustment of $2,298,565 is for Sandow Unit #4 production 9
10 expense. In early 1981, the Company will place into commercial operation 11 Sandow Unit #4, a 545 MW lignite-fired generating unit. Since this Unit will be 12 in commercial operation at the time new rates go into effect, we have adjusted 13 Operation and maintenance expense to include 17.431% of Unit #4 production 14 expense plus a common facilities charge on Alcoa-owned facilities utilitized by 15 the Unit. We have reduced these expenses by any Unit #4 pre-operating or trial 16 operations costs incurred in the test year.
Since 82.569% of the Unit is 17 dedicated to Alcoa and since Alcoa will pay for that portion of the expenses of 18 Unit #4, we have included only the 17.431% of expenses applicable to that 19 Portion of the Unit to be utilized to serve TP&L's utility customers. This 20 adjustment is consistent with the treatment of Sandow Unit #4 by this 21 Commission in the Company's previous rate cases.
22 The next adjustment to operation and maintenance expenses of $8,998,148 23 is to adjust TP&L labor costs to reflect the level of employees and their wages 24 at the end of the test year and to adjust the result for known salary changes 25 which will occur before the proposed rates are in effect.
26 Employee benefits were adjusted $930,060.
Group life insurance and 27 accidental death and dismemberment insurance were adjusted for the latest 28 premium changes, test year end participation and the additional costs related to TEXAS LOWER & LIGitT COMPANY
PAGE 4 of 23 1
increased wages. Group hospitalization insurance, group dental insurance and i
2 workman's compensation insurance were adjusted to recognize the latest 3
Premium changes and/or test year end participation. Thrif t plan costs were 4
adjusted to reflect the increase in wages and test year end participation.
5 Pension costs were adjusted to reflect the latest actuarial costs for current and 6
Past service liabilities. These adjustments will bring expenses more closely to 7
those which will be incurred when the proposed rates go into effect.
8 The next two adjustments were made to comply with Substantive Rule 9
052.02.03.032(a)(6)(B). They eliminate from the test year the expenses incurred 10 for legislative advocacy and social membership dues of $18,096 and $98,037, 11 respectively. I might add at this point that the total of contributions, donations 12 and advertising does not exceed the three-tenths of one percent limit as 13 provided in Substantive Rule 052.02.03.032(a)(6)(A).
14 The next adjustment amounts to $18,138 and is based upon our application 15 for a rate increase. The Company is estimating $450,000 will be spent on this 16 rate filing and the adjustment is necessary to recognize the difference between.
17 this $450,000 and the amount expensed during the test year applicable to prior 18 rate cases. In addition, the Company is seeking to recoup its unrecovered costs 19 incurred because of Docket No.1903. To delay the recovery of these costs by 20 amortizing them over a period of years is inappropriate. These are actual costs 21 incorred in prior periods and should be recovered as soon as possible. In addition, 22 the Company will incur more costs in connection with Docket No.1903 since it is 23 currently under appeal, and in all probability there will be other hearings in 24 future periods.
25 The uncollectible accounts provision te or?cse has been adjusted by 1
26
$117,128 and the Utility Commission fee b > ec. educed by $22,515 to reflect 27 the adjustments made to revenues.
28 The next adjustment, a credit to expense of $85,204,is to annualize certain TEXAS LOWER & l.IGilT COMPANY
PAGE 5 of 23 miscellaneous service revenues normally credited to operating expense. These 1
i include customer bill ngs for servicing of appliances, meter test fees, pole 2
in5Pection feet tic. The adjustment was furnished to me by Mr. Gene Lewis.
3 The next adjustment is in connection with the Provision for Insurance and 4
Casualties.
In 1971, the Company established a Reserve for Insurance and 5
Casualties to protect against major uninsured losses. Since that time, insurance 6
7 Premiums have continued to escalate rapidly; insurance companies have increased deductibles in major policies forcing the Company into a position of 8
9 being a self-insurer whether it desires to or not; and the Company's exposure to losses has increased tremendously due to major additions of units of plant and 10 11 equipment. With the proper regulatory approval, the Reserve for Insurance and 12 Casualties r.ifords the Company the ability to maintain some protection from 13 losses and to produce a savings to the customer. If Texas Power & Light -
14 Purchased insurance coverage with the lowest deductibles possible, annual 15 insurance premiums would be increased approximately $3,900,000.
These 16 additional premiums would be paid every year and rates would reflect this higher 17 level of Premiums. The customer would pay more, and the protection being 18
" purchased" would only be of benefit to the customer in the event a casualty loss 19 o% urred during the policy period. Additionally, through the use of a Reserve for 20 Insurance and Casualties, whatever amount the customer pays to create the 21 Reserve is deducted from the Rate Base, thus saving the customer the allowed 22 return on the amount deducted. The customer certainly benefits from this l
23 policy.
24 However, as the Company increases its deductibles in an effort to save 25 premium expense and as deductibles are mandatority increased by insurance 26 companies, the Company's relative exposure increases and its relative level of l
27 protection continues to diminish.
This circumstance is compounded as the l
28 Company's plant continues to increase as shown in the following chart:
i t
TEXAS IMER & LIGIIT CONil%NY l
f PAGE 6 of 23 Net Electric Plant Reserve for Insurance Ratio of 1
in Service And Casualties Reserve to Year at December 31 at December 31 Net Plant 2
1972
$ 732,580,483
$2,000,000
.0027 3
1973 783,487,774 2,000,000
.0026 1974 892,613,869 2,200,000
.0025 4
1975 1,043,463,056 2,420,000
.0023 1976 1,082,166,552 2,662,000
.0025 5
1977 1,257,407,760 2,662,000
.0021 6
1978 1,482,785,034 2,794,000
.0019 1979 1,608,504,982 1,702,634
.0011 7
1980 1,668,128,481 1,620,634
.0010 As can be seen, reserve as a percent of net plant has decreased to one-tenth 8
9 of one percent in 1980 from approximately.25% in the 1972-1976 period. This has come about by the regulator not recognizing accruals sufficient to afford the 10 Company additional protection to cover plant additions and increasing deduct-11 12 ibles, as well as not recognizing the level of losses incurred by the Company in the 13 last few years. Since 1977, the Company has experienced losses of the following 14 magnitude which were charged against the reserve:
15 Year Description of Loss Amount 16 1977-78 Big Brown Generator Winding
$ 307,516 Failure 17 1979 Ice Storm Damage 1,676,839 18 1980 Personal Injury Loss 500,000 In 1979 and 1980, the Company's reserve balance decreased $1,091,366 and 19 20
$32,000, respectively. In light of the increasing exposure of the Company and the 21 losses incurred over the last few years, a $528,000 per year accrual, as approved 22 by this Coinmission in Docket No. 3006, is not adequate to afford the Company I
23 proper protection. In fact, if the Company were to suffer another loss today 24 equivalent to that suffered during the ice storm in 1979, the entire reserve would 25 be wiped out. It should also be noted that in 1982 when Comanche Peak Unit #1 26 goes into commercial operation the Company's potential liability increases. One 27 of the requirements of the Price Anderson Act, which deals with nuclear liability 28 insurance, is a commitment by utilities with operating reactors to contribute up TEXAS 10WER & LIGIIT CO.\\lPANY
i PAGE 7 of 23 to $5,000,000 m reactor in the event of a nuclear accident anywhere in the 1
country up to two accidents per year. TP&L's obligation will be $3,150,000 when i
2 Unit #1 goes commercial and $6,300,000 when Unit #2 is added; this obligation 3
will need to be recognized in the Company's Reserve for Insurance and Casualties.
4 5
Taking all of the above into consideration, I am recommending an annual accrual to the Reserve of $1,200,000.
This computes to an adjustment of 6
7
$782,000 to the test year.
One must keep in mind that management has a fiduciary responsibility to 8
9 maintain adequate protection of the Company's assets.
Management is also 10 striving to provide dependable service at the lowest reasonable cost possible to its 11 customers.
Management could provide adequate insurance coverage on the 12 Company's assets by purchasing insurance with the lowest deductibles possible but 13 this would be very expensive. Through the use of a Reserve with adequate accruals, lower insurance premiums are realized (which benefits our customers) 14 15 while adequate coverage is maintained.
16 Q.
PLEASE EXPLAIN THE NEXT AD3USTMENT ON EXHIBIT WMM-1.
17 A.
I have adjusted the test year to reflect a known increase of $409,340 in our eel 18 research and development commitment. The amount is based upon the actual 19 sales of electricity for the year 1979 and is necessary to reflect the actual 20 amount due in the coming year.
By committing to the eel research and 21 development program, the Company is able to spread its research and develop-22 ment dollars over a much broader base of activity; instead of the companies in the 23 industry duplicating each other's efforts, such a program allows the companies to 24 pool their knowledge and resources to eliminate unnecessary expenditures. By 25 supporting this program, the Company and its customers will receive the benefit 26 of any breakthrough in technology resulting from this program.
27 Q.
WHY DID YOU MAKE AN ADJUSTMENT FOR THE COMPANY'S RCS AND 28 EXCELL PROGRAMS?
'I EXAS POWER & l.IGHT COMPANY
PAGE 8 of 23 A.
The Company is required by the Department of Energy to assist its customers in 1
an energy conservation effort. This required program obligates Texas Power &
i 2
Light to notify each one of its more than 623,000 residential customers of the 3
availability of energy audits that may be performed by the Company. In addition, 4
Texas Power & Light has developed its own conservation program with the 5
specific objective of minimizing the differential between summer and winter peak 6
7 loads. The adjustment of $1,971,310 includes the cost of mailing notices, training costs, printing expenses, consultant fees, the cost of supplies incurred in the 8
9 administration of these programs and incentive payments. The expense adjust-ments for these programs were furnished to me by Mr. Don Simpson.
10 Q. WHY WAS AN AD3USTMENT MADE FOR "OTHER OPERATION AND MAIN-11 12 TENANCE EXPENSES"?
13 A.
In order for the test year to more accurately reflect conditions as of 14 December 31, 1980, it was necessary to adjust the "other operation and 15 maintenance expenses" which have not been individually adjusted to reflect 16 changes in costs during the test year.
17 "Other operation and maintenance expenses" include such items as repairs, 18 maintenance on transportation equipment, parking expense, postal charges, 19 customer bill forms, subscriptions to professional and business publications, 20 repairs on office equipment and facilities, janitorial supplies, legal services, 21 technical consultant fees, rent, etc. Due to the number of items included in 22 "other operation and maintenance expenses", to adjust each item would be very l
23 expensive and time consuming. As an alternative to making literally hundreds of l
24 adjustments, these expenses have been adjusted to the December 31,1980 level 25 based on past experience and the number of customers served.
26 Q.
DOES THE ADJUSTMENT REQUESTED IN THIS CASE REFLECT ANY 27 INCREASED COSTS AFTER DECEMBER 31,1980?
28 A.
No.
TEXAS IOWER & LIGilT COMPANY
PAGE 9 of 23
~.
Q. HOW WAS THE ADJUSTMENT TO "OTHER OPERATION AND MAINTENANCE
)
EXPENSES" CALCULATED?
2 A.
Mr. Don Simpson performed a study to determine the relationship between 3
customers served and "other operation and maintenance expenses". Using this 4
relationship, his study established an expense level based upon test year-end 5
customers. The adjustment is $5,265,715.
6 Q.
MR. MCDONOUGH, WOULD YOU PLEASE DESCRIBE THE NEXT ADJUSTMENT 7
ON EXHIBIT WMM-l?
8 A.
The next adjustment is the dollars which should be recognized in the Cost of 9
Service to partially offset the effects of attrition and to enhance the Company's 10 PPortunity to ecrn its authorized return during the first full twelve month period 11 that the proposed rates are in effect.
12 Q. WOULD YOU DEFINE ATTRITION?
13 A.
Attrition is literally defined as "the act of wearing down." In the context of a 14 rate proceeding,it is the erosion of earnings with the passage of time due to unit 15 cost increases in al areas of Company activities. This, of course, would include 16 increases in the unit cost of plant investment, operating expenses and capital 17 costs. If the revenue / cost relationships of each of these areas are not properly 18 19 maintained, earnings will deteriorate. Unit cost increases in our Company are being experienced in all areas and customer growth and usage are not adequately 20 21 offsetting the adverse effect on earnings. The ultimate result of attrition is 22 reduced residual earnings available for the common shareholder.
23 Q.
DOES THE USE OF A HISTORICAL TEST YEAR AGGRAVATE THE ATTRITION 24 PROBLEM?
25 A.
Yes, use of a historical test year captures the Company's Rate Base and Cost of 26 Service at a point in time in the past-December 31,1980, in this case. In our 27 last proceeding, for instance, it was almost eight months af ter the end of the test 28 year before we were able to begin billing increased rates, despite a commendable TEXAS POWER & LIGHT COMPANY
PAGE 10 of 23 j
job on the part of the Commission to dispose of our case quickly. During that 2
Period of time, the Company's costs continued to increase, making the test year 3
data out-of-date well before rates went into effect. This creates constraints 4
which make it practically impossible to earn the rate of return granted. While it 5
is true that some known and measurable adjustments have been made for post-test 6
year events, this is only a partial solution.
7 Q.
PLEASE DESCRIBE THE AREAS OF A COMPANY'S OPERATIONS WHERE 8
COST INCREASES RESULT IN ATTRITION OF EARNINGS.
9 A.
Attrition can result from cost increases in. every area of the Company's 10 operations. These iiclude the cost of adding new facilities (increased plant 11 investment), the increased costs of operating and maintaining facilities (increased 12 operating expenses), and the increased costs of obtaining funds with which to 13 finance the expansion or replacement of facilities (increased capital costs).
14 Therefore, attrition can be classified into the following categories for discussion 15 purposes:
16 a.
Investment attrition 17 b.
Espense attrition 18 c.
Capital attrition 19 If the revenue / cost relationships are not properly maintained in each of these 20 areas, earnings will deteriorate. The combination of attrition in each of the three 21 areas directly reduces the return accruing to the common stockholder.
l 22 Inflation in the Company's costs of doing business bears a unique relationship l
23 to attrition. And, this is not limited to just current inflation. In the investment 24 area, the combined inflation of past years would cause attrition even if today's l
25 inflation rate were zero. Today's prices reflect the sum of prior years' inflation 26 and result ii) the current cost of plant items being higher than the embedded cost 27 upon which rates are set.
28 In the operating expense area, current inflation is the culprit. I know of no TELS POWER & LIGilT COMPANY
PAGE 11 of 23 economic forecast today that does not include a continuation of a relatively high j
inflation rate. However, an even more fundamental problem regarding operating 2
expense exists in our business. The plants we will be putting into operation in the 3
future will cost much more to operate than the costs built into our rates, even if 4
inflation is not considered.
5 Capital attrition is created by having to pa3 interest and dividend rates on 6
new issues of debt and preferred stock higher than the Company's embedded costs.
7 Current inflation rates as well as investor's expectations of future inflation rates 8
have a strong bearing on the rates we must pay when we go to the market.
9 10 Q. DO YOU HAVE ANY EXAMPLES OF HOW INVESTMENT ATTRITION HAS IMPACTED TEXAS POWER & LIGHT?
11 12 A.
Yes. I have prepared Exhibit WMM-3 to illustrate how our costs have increased in 13 relation to sales. In 1971, total plant investment per customer was $1,686 and 14 investment in completed plant was $1,540. At December 31, 1980, total invest-15 ment had increased to $4,007 per customer, an increase of 137.7%. Investment in 16 completed plant had increased to $3,012 per customer, an increase of 95.6%
17 compared to 1971.
During the same time frame, kilowatt hour usage per 18 customer increased only 43.9%. Without an offsetting reduction in operating cost 19 or capital cost, which we have not experienced, the price charged per kwh has had 20 to increase through periodic rate adjustments.
21 Exhibit WMM-4 serves to further demonstrate the increasing investment 22 costs. Until 1973, the Company's embedded cost per KW of production plant was 23 relatively stable and increases were largely offset by increases in customer usage.
24 in 1974, with the placing of Monticello Unit #1 into service, the Company's 25 embedded cost per KW started to increase sharply and this increase is expected to 26 continue for as far as we can see into the future. At year-end 1973, embedded 27 cost per KW was $73.
By December 31, 1980, this had increased 79.5% to 28 approximately $131. This rising trend will continue as illustrated by the following TEXAS POWER & l.lGilT COMPANY
PAGE 12 of 23 1
generating unit data:
2 Year Estimated 3
Generating Unit in Service Cost per KW (a)
(b)
(c) 4 Sandow #4 1981
$448 5
Comanche 6
Peak #1 & 2 1982/1984
$959 7
8 Q.
DO YOU HAVE AN EXHIBIT TO DEMONSTRATE THE IMPACT OF ATTRITION 9
ON THE COMPANY DUE TO OPERATING EXPENSE INCREASES?
10 A.
Yes, Exhibit WMM-5 plots the increase in operation and maintenance expenses per 11 customer since the base year of 1971. I have excluded fuel and purchased power 12 from my analysis. Also, I have separated power production expenses from all 13 other expenses in order to emphasize where the bulk of the increase has been 14 experienced.
From the year 1971 to the year 1980, production expenses per 15 customer increased approximately 742% and other operation and maintenance 16 expenses increased approximately 126%.
At the same time, Kwh usage per 17 customer increased only 43.9%. As with investment-related attrition, without an 18 offsetting reduction in other costs, the price charged for electric service has to 19 increase through periodic rate increases.
20 Q. CAN YOU NOW DEMONSTRATE THE IMPACT OF CAPITAL ATTRITION UPON 21 TEXAS POWER & LIGHT?
22 A.
Yes, sir. Exhibit WMM-6 shows the delicate balance between interest costs and 23 preferred dividend costs as they relate to overall return and return on equity.
24 Exhibit WMM-6 illustrates that, when embedded costs of debt and preferred stock 25 increase, the overall return must also increase proportionately or the return on 26 common equity suffers. From 1971 to year-end 1980, embedded interest cost had 27 risen from 5.5% to 8.0%, a 45.5% increase. Embedded preferred dividend cost had 28 also risen to 3.0%, a 40.4% increase. Any additional issues of First Mortgage TEXAS LOWER & l.lGitT COMPANY
PAGE 13 of 23 Bonds or Preferred Stock that we sell in the 1981-82 time period, the period the 1
Proposed new rates will be in effect, will undoubtedly exceed these rates. Return 2
on net plant investment at year-end 1980 was only 7.3% over the 1971 level.
3 4
Despite the fact that the required returns for debt and preferred have continued to increase and even though the return to the common stockholder has 5
6 shown improvement in the last few years, the realized return to the common 7
stockholder has nevertheless failed to keep pace. Consequently, the price per share of common stock in the market place has declined to its present level which 8
9 is significantly below book value.
10 Q.
MR. MCDONOUGH, WOULD YOU BRIEFLY SUMMARIZE THE HISTORICAL TEST YEAR PROBLEM AND THE ATTRITIONAL EXPERIENCE OF TEXAS 11 12 POWER & LIGHT THAT YOU HAVE BEEN DESCRIBING?
13 A.
Yes, I believe it can be illustrated in graphic form as follows:
14 15 Cost of Service Test Year
=
18 New Rate Level r------
8 19 l
20 l
2I Old Rate Level O
22 Fuli Effect 23 Decision i,npi,,,,ni File Heanng New Rates f
24 u
H (Proraud) u
\\
n 25 jan.
oec.
var.
May July Aug.
Sept.
'80
'80
'81
'81
'81
'81
'82 26 27 28 l
TEXAS LOWER & LIGIIT COMPANY
PAGE 14 of 23 The slope of the cost of service line is illustrative and is not intended to be 1
2 exact. However the time frame is reasonably accurate based on our prior rate
(
cases. As can be deduced from the above, without some recognition by regulatory 3
4 authorities, the composite impact of the increasing costs, fixed rates and time 5
lags makes the new rates inadequate the day they go into effect and they continue 6
to become more inadequate as time passes.
7 As the conditions revealed in the exhibits indicate, the earnings of Texas 8
Power & Light have been and are continuing to be adversely affected from cost 9
increases in plant investments, operations and capital. In each of these areas, and 10 on a composite basis, the costs per customer have been increasing at a more rapid 11 pace than related kwh usage and related revenues per customer. Consequently, a 12 persistent downward pressure on earnings has been and is continuing to be 13 experienced.
14 Q. ARE THESE CONDITIONS IN EFFECT TODAY?
15 A.
Yes. There has been little or no recent change 1 the conditions which have 16 produced attrition in the past.
17 Q.
IS THERE ANY JUSTIFIABLE BASIS TO ASSUME THAT THERE WILL BE ANY 18 APPRECIABLE CHANGES IN THESE CONDITIONS THROUGH AUGUST 19S2?
19 A.
Absolutely none. These conditions are essentially locked ir.. Texas Pcwer & Light 20 is committed to plant additions whose present costs are well in excess of 21 embedded costs. These additions must be financed with capital at costs also well 22 in excess of embedded costs (as well as retirements of older low cost issues).
. 23 Finally, operating costs show every indication of continuing on an upward spiral.
24 It is simply inconceivable that these conciitions can be avoided, and as I mentioned 25 earlier in my testimony, the adjustments made for some post-test year events are 26 only a partial solution.
27 Q.
ARE THERE ANY REMEDIES AVAILABLE TO TEXAS POWER & LIGHT WHICH 28 WILL NEUTRALIZE THESE PRESSURES?
TEXAS POWER & l.lGIIT COMPANY
PAGE 15 of 23 A.
Adequate recognition of the effects of attrition coupled with timely rate relief is 1
2 the only realistic solution.
3 Q.
WHAT IS THE COMPANY PROPOSING IN THIS CASE AS A SOLUTION TO THE 4
PROBLEM OF ATTRITION?
5 A.
The Company is requesting a $16,914,480 adjustment to the Cost of Service to 6
cover the effects of attrition to the extent that attrition can be expected for the 7
first year during which the proposed rates would be in effect (twelve months 8
ended August 31, 1982).
9 O.
HOW DID YOU QUANTIFY THE ATTRITION ALLOWANCE?
10 A.
Generally, tj extrapolating and costing out the same type data for the twelve 11 months ended August 31,1982 (first full twelve months rates will be in effect) 12 that I have already described in Exhibits WMM-3 through WMM-6,'vhich factually 13 express our past experiences with attrition.
14 Q. WHY WAS THE DATA FROM THESE EXHIBITS USED?
15 A.
As the exhibits indicate and as the character of our business substantiates, there 16 is no reasonable bas 4 on which to challenge the fact of attrition, either in the 17 past or as a present and on-going problem. I therefore concluded that the same 18 data would be useful in anticipating the extent to which the oroblem will 10 continue. Accordingly, I trended data for the twelve months ended August 31, 20 1982, as shown on Exhibit WMM-7. The resulting factors were used to quantify 21 the degree of attrition that can reasonably be expected in the twelve months 22 ended August 31,1982.
23 Q.
HOW WERE ATTRITION COSTS DEVELOPED FROM THE PROJECTED 24 FACTORS?
25 A.
The computation is shown in Exhibit WMM-8. As the exhibit shows, I utilized 26 incremental costs per customer for the twelve months ended August 31, 1982, 27 over that in the Cost of Service and Rate Base to develop operation and 28 maintenance expense attrition, investment attrition and capital attrition based on TEXAS POWER & l.lGIIT COMPANY
PAGE 16 of 23 test year customers.
1 Q.
HOW WERE THE INCREMENTAL REVENUES PER CUSTOMER DETERMINED?
2 A.
I calculated a base rate revenue per kwh at Decembo 31, 1980, after all 3
adjustments were made to the test year. This provided the average revenue per 4
kwh at December 31, 1980, priced at the new rates as requested.
I then 5
calculated a projected incremental revenue per customer for the twelve months 6
7 ended August 31, 1982, over the December 31,1980, level by applying the average revenue per kwh to the estimated growth in kwh usage per customer over the 8
December 31,1980 level. I might add that using an average revenue per kwh 9
tends to overstate the incremental revenue per customer, thereby making my 10 11 attrition adjustment conservative.
12 Q. DO YOUR COST INCREMENTS PER CUSTOMER GIVE EFFECT TO THE PRO FORMA TEST PERIOD AD3USTMENTS WHICH YOU MADE THAT HAVE 13 ATTRITIONAL OFFSETS?
14 15 A.
Yes. The adjustments to the test period become a part of the base from which the attrition impact is measured. If the unadjusted test year data had been used, 16 the resulting increments would have been larger but it would have been necessary 17 to reduce the increments by the pro forma adjustments. I developed the same 18 results by measuring the incremental factors from the adjusted test year level to 19 20 the twelve months ended August 31, 1982 level.
No further adjustment is 21 required.
22 Q.
15 IT YOUR OPINION THAT THE ATTRITION ALLOWANCE YOU HAVE 23 REQUESTED WILL BE ADEQUATE TO OFFSET ATTRITION AND ACTUALLY 24 ALLOW THE COMPANY TO EARN ITS AUTHORIZED RETURN?
25 A.
Not fully. I have not considered all Rate Base items in calculating the attrition 26 allowance. Only Electric Plant in Service and related Accumulated Depreciation and Accumulated Deferred Federal Income Taxes were considered in my calcula-27 28 tion. I think it is realistic to say that we can expect increases in fuel oil, TEXAS LOWER & LIGIIT COMPANY
PAGE 17 of 23 materials and supplies, prepayments and other working capital items during the 1
Period the new rates are in effect in excess of the level requested in Rate Base.
i 2
3 Q.
WOULD YOU DESCRIBE THE ADJUSTMENT TO DEPRECIATION EXPENSE?
4 A.
The Depreciation Expense recorded on the books of the Company has been 5
adjusted for two items. One, we are seeking approval of a change in certain depreciation rates as discussed by Mr. Dwight Cole and two, we have annualized 6
7 our depreciation expense for depreciable plant in service, as adjusted, at 8
December 31, 1980.
The total adjustment is $4,926,505 which results in an adjusted test year Depreciation Expense of $74,807,005.
9 10 Q.
PLEASE EXPLAIN THE CHANGE IN FEDERAL INCOME TAXES, DEFERRED FED,ERAL INCOME TAXES, AND FEDERAL INVESTMENT CREDIT ADJUST-11 12 MENTS.
13 A.
Federal Income Taxes, Deferred Federal Income Taxes, and Federal Investment 14 Credit Adjustments have been adjusted to recognize the tax effect of the 15 adjustrents rrade to the Cost of Service and Rate Base.
Q. WOULD YOU PLEASE DESCRIBE THE ADJUSTMENTS TO TAXES OTHER THAN 16 17 FEDERAL INCOME TAXES?
18 A.
The taxes which are revenue related (gross receipts and city franchise) have been 19 adjusted to reflect the changes in revenues. Social Security taxes have been 20 adjusted to reflect the known increase in wages and the known increase in the 21 taxable wage base and tax rate to the 1981 level to more closely reflect the level 22 of taxes which will be incurred when the Company's proposed new rates go into 23 effect. Ad valorem taxes have been adjusted by multiplying plant in service, as 24 adjusted, at the end of the test year by the current effective tax rates. The state 25 franchise tax has been computed using the adjusted capital of the Company at 26 December 31, 1980. The total adjustments to taxes other than Federal income 27 taxes is $2,555,151 and the adjusted test year amount is $52,373,133.
Q. WHAT IS THE TOTAL AMOUNT OF OPERATING EXPENSES, AS ADJUSTED?
28 TEXAS l'OWER & LIGilT COMI%NY i
PAGE 18 of 23 A.
Total operating expenses, as adjusted, on present rates amount to $799,417,351 3
f r the test year.
The total of $894,087,868 represents the total adjusted i
2 perating expenses for the test year including the adjustments due to the proposed 3
rate increase.
4 5
Q. WHAT ARE THE OTHER ITEMS ON EXHIBIT WMM-l?
6 A.
The next item is Interest on Customer Deposits which has been annualized based 7
upon the level of active customer deposits at December 31,1980. This amount, as 8
adjusted, of $425,943 is appropriate since customer deposits have been included as 9
a reduction to the Rate Base.
10 The amount of $433,707 shown as Gain on Reacquisition of Debt is the discount we received when we repurchased some of our Sinking Fund Debentures.
11 12 The next item, Return on Invested Capital, was furnished to me by Mr.
13 Price.
14 Total Cost of Service (Operating Revenues) has been adjusted to normalize 15 for weather during the test year, to annualize for year end customers, to 16 annualize the rate increase approved in Docket No. 3006, to eliminate inter-17 ruptible energy sold to Alcoa, to revise Off-Peak Interruptible energy sales for 18 contract changes and to recognize proposed changes to miscellaneous rervice 19 revenues and other misce,laneous operating revenues. The above adjustments to 20 base rate revenue were computed and furnished to me by Mr. Gene Lewis. In 21 addition, fuel cost factor revenues have been revised to reflect the revised fuel 22 cost as previously discussed. Finally, Total Cost of Service (Operating Revenues) 23 has been adjusted to reflect the proposed rate increase.
24 Q. WAS EXHIBIT WMM-2 PREPARED BY YOU OR UNDER YOUR SUPERVISION?
25 A.
Yes. I relied on Mr. Cole for certain items, but the Exhibit was prepared under 26 my supervision.
27 Q. WOULD YOU PLEASE EXPLAIN EXHIBIT WMM-2?
28 A.
This Exhibit shows the details of the Original Cost and Adjusted Value Rate Bases TEXAS POWER & LIGilT COMPANY
PAGE 19 of 23 1
for the Company. Some of the items have been adjusted to more appropriately reflect the Company's Rate Base which should be considered in this proceeding.
(
2 3
Q.
WHY WAS AN ADJUSTMENT MADE TO THE ACTUAL BALANCE OF PLANT IN
~
4 SERVICE?
5 A.
Early in 1981, Sandow Unit #4 will go into commercial operation. In order to 6
Properly classify this investment, I included 17.431% of the cost of this Unit at 7
December 31, 1980, in Plant in Service. Only 17.431% was included in Plant in 8
Service since 82.569% of the Unit is dedicated to Alcoa. CWIP was simultan-9 eously reduced by the total cost of this Unit.
10 Q. WOULD YOU EXPLAIN THE NEXT ADJUSTMENT ON EXHIBIT WMM-2?
11 A.
The next adjustment is to Accumulated Depreciation.
The adjustment is to 12 reflect one-half of the adjustment made to depreciation expense in the Cost of 13 Service.
This gives an adjusted Accumulated Provision for Depreciation of 14
$497,374,484.
15 Q.
MR. MCDONOUGH, WHY HAVE YOU ONLY CONSIDERED ONE-HALF THE 16 INCREASE IN DEPRECIATION EXPENSE AS AN ADJUSTMENT TO THE 17 RESERVE?
18 A.
To analyze this adjustment, an understanding of the definition of depreciation 19 expense is imperative. Depreciation expense, as defined in rate filings, is the 20 invested capital recovered from ratepayers through base rates. To deduct the full 21 amount of the additional depreciation expense from the Rate Base before it is 22 received from the ratepayer would cause an understatement of the invested 23 capital necessary to serve the customers, as demonstrated by the following 24 hypothetical examples:
25 26 27 Case A. Reserve Adjusted for Full Amount of 28 Depreciation (assuming 20 year lifeh TEXAS POWER & l.IGIIT CO. (PANY
\\
PAGE 20'of 23 1
$1,000,000
- invested capital (50,000)
- depreciation reserve adjustment i
2
$ 950,000
- adjusted invested capital 3
4 8%
- allowed rate of return 5
76,000
- required operating income 6
7 Results:
8
$1,000,000
- beginning invested capital 9
(50,000)
- depreciation expense recovered in base rates 10
$ 950,000
- ending invested capital 11
$ 975,000
- average invested capital ne.cessary to serve customers 12 76,000
- allowed operating income 13 7.79 %
- actual return earned 14 Case B. Reserve Adjusted for 1/2 of Depreciation (assuming 15 20 year life):
16
$1,000,000
- invested capital 17 (25,000)
- 1/2 of depreciation reserve adjustment 18
$ 975,000
- adjusted invested capital 19 8%
- allowed rate of return 20 78,000
- required operating income 21 22 Results:
23
$1,000,000
- beginning invested capital 24 (50,000)
- depreciation expense recovered in base rates 25
$ 950,000
- ending invested capital 26
$ 975,000
- average invested capital necessary to serve customers 27 78,000
- allowed operating income 28 8%
- actual return earned TEXAS POWER & LIGIIT COMPANY
PAGE 21 of 23 1
As is apparent in Case B, the method adopted by this Commission in Docket t
2 No. 3006, the customer is paying a return on the average dollars of invesced 3
capital necessary to provide service, whereas in Case A the customer gets the 4
benefit of the additional depreciation expense before he pays it. This penalizes 5
the investor through realization of a lower return than was allowed.
6 Q. WOULD YOU PLEASE CONTINUE YOUR EXPLANATION OF THE EXHIBIT?
7 A.
The Current Cost of Plant in Service, the respective weighting of RCN and Net 8
Original Cost, and the methodology of determining the allowance for age and 9
condition were supplied by Mr. Dwight Cole. By applying a 60 percent weighting 10 to Net Original Cost and 40 percent to Net Current Cost, the total adjusted value 11 of Net Plant in Service is $2,345,837,226.
12 As determined by Mr. Michael D. Spence, Electric Plant Held for Future Use 13 has been reduced by $1,426,760 to reflect only the dollars representing water 14 rights and lignite that are not dedicated to a specific power plant but which will 15 be dedicated in the future. I might add that this is the original cost of these 16 items and not an adjusted value.
17 Q. WHY SHOULD PLANT l. ELD FOR FUTURE USE BE INCLUDED IN THE RATE 18 BASE?
19 A.
The only way a utility can earn a return on these dollars is by inclusion in the 20 Rate Base. Under the Uniform System of Accounts, we are not allowed to 21 capitalize an Allowance for Funds Used During Construction on Plant Held for 22 Future Use. Therefore, if these items are not included in the Rate Base, the i
23 Company will forever lose the carrying costs on these investments made in the 24 customers' best interest and for their benefit, effectively removing any incentive 25 for the Company to continue with its time proven program. When one weighs the 26 cost of including water rights and lignite in the Rate Base against the potential 27 cost of waiting to purchase these items, the least costly approach would be to 28 encourage these timely purchases by including same in the Rate Base. In my TEXAS LOWER & LIGIIT COMi%NY
PAGE 22 of 23 opinion, to exclude entirely or to establish an arbitrary time frame for inclusion in 1
Rate Base of items which are vital in the production of electricity cripples the 2
Company's ability to save its customers money through long-term planning.
3 4
Q.
WHY WAS AN ADJUSTMENT MADE TO CONSTRUCTION WORK IN PROGRESS?
5 A.
The amount of CWIP on the books of the Company at December 31,1980, is 6
$938,997,509. I have reduced this amount by the applicable portion of Comanche 7
Peak being sold and to eliminate 82.569% of the expenditures for Sandow Unit #4 8
dedicated to Alcoa. As I explained earlier, I also reclassified 17.431% of Sandow 9
Unit #4 into Plant In Service so that none of this Unit remains in CWIP. In 10 accordance with Mr. Price's testimony, I have included the remaining portion of 11 CWIP in the Rate Base. The adjustments for Sandow Unit #4 are consistent with 12 the treatment by this Commission in the Company's previous rate cases.
13 Q.
PLEASE EXPLAIN THE REMAINING ITEMS ON EXHIBIT WMM-2.
14 A.
The next item, Nuclear Fuel in Process, represents money that has already been 15 spent by Texas Power & Light to provide for our customers' future electric power 16 needs. It includes the original cost of nuclear fuel materials in the process of 17 refinement, enrichment and fabrication into nuclear fuel assemblies and 18 components.
Accordingly, inclusion in the Rate Base is appropriate.
The 19 reduction of $4,214,657 is to eliminate the portion of Nuclear Fuel in Process 20 being sold in conjunction with the pending sale of an interest in Comanche Peak.
21 Working Capital represents one-eighth of adjusted operation & maintenance 22 expenses, less fuel and purchased power, plus the amount of materials and 23 supplies, fuel stock and a portion of the working funds on the Company's books at 24 December 31,1980, and a 13 month average of prepayments.
These items 25 represent investor supplied capital necessary to fund the operations of the 26 Company. Thus the investor should be allowed to earn the authorized return on 27 these items.
28 The remaining items, Accumulated Deferred Federal Income Taxes, the TEXAS IMER & LIGilT COMi%NY
PAGE 23 of 23 Reserve for Insurance and Casualties, Customer Deposits and Advances and Other j
Cost Free Capital have been deducted from the Rate Base because they represent i
2 customer-supplied sources of capital invested in utility plant. The reason I have 3
adjusted the amount for Accumulated Deferred Federal Income Taxes is to 4
eliminate the accumulated deferred taxes applicable to those items which have 5
been eliminated from the Rate Base. Since a portion of Comanche Peak and 6
Sandow Unit 4 have been removed from Rate Base, it follows that an adjustment 7
should also be made to Accumulated Deferred Federal Income Taxes.
8 9
An Original Cost Rate Base of $2,297,699,650 and an Adjusted Value Rate Base of $2,933,650,570 were calculated by simply adding the dollars in columns (d) 10 11 and (e), respectively. These figures were supplied to Mr. Gary Price to determine 12 the return on invested capital. Mr. 9 rim determined the return dollars to be 13
$280,778,897 which I included in the Cost of Service on Exhibit WMM-1.
14 Q. WHAT IS THE OVERALL COST OF SERVICE THAT YOU CALCULATED ON EXHIBIT WMM-1 AND WHAT DID YOU DO WITH THAT FIGURE?
15 16 A.
The overall Cost of Service (including fuel)is $1,174,859,001. I gave this figure to 17 Mr. Gene Lewis for his use in designing the appropriate rate schedules.
18 Q. DOES THIS CONCLUDE YOUR TESTIMONY?
i 19 A.
Yes.
20 21 22 23 24 25 26 27 l
28 l
l h TEXAS POWER & LIGHT COMPANY I
Exhibit WMWI i
TEXA5 POWER & LIGHT COMPANY Overall Cost of Service Test Year Ended December 31,1980, As Adjusted At Present Rates At Proposed Rates Line Amount Known As Rate increase As No.
Description per Books Adiustments _
Adjusted Adjustments Adjusted (a)
(b)
(c)
(d)
(e)
(f)
Operating expenses:
1 Operation and Maintenance Expenses
$$87,823,048
$ 9,100,593
$596,923,641 982,618
$ 597,906,259 2
Fuel and purchased power (30,730,794) 3 Joint power plant labor 2,350,355 4
Sandow Unit #4 production expense 2,298,565 5
Wages 8,998,148 6
Benefits 930,060 7
Legislative advocacy (18,096) 8 Social dues (98,037) 9 Rate case expenses 18,138 10 Uncollectible accounts 117,128 690,883 Public Utility Commission fee (22,515) 291,735 12 Customer billings (85,204) 13 Provision for insurance and casualties 782,000 14 EE! research ard bvelopment support 409,340 15 RCS and ExCell proga.ms 1,971,310 16 Other operatbn and maintenance 5,265,715 17 Attrition allowance 16,914,480 18 Depreciation 69,880,500 4,926,505 74,807,005 74,807,005 19 Federal income taxes 18,509,946 (1,651,513) 16,858,433 87,988,052 104,846,485 20 Deferred FederalIncome taxes 31,835,593 (3,000,166) 28,835,427 28,835,427 21 Federal investment credit adjustments 34,062,340 (4,442,628) 29,619,712 29,619,712 22 Taxes other than Federal income taxes 49,817,982 2,555,151 52,373,133 5,699,847 58,072,980-23 Gross receipts 376,602 2,221,794 24 City franchise 589,580 3,478,053 25 Social security 619,302 26 Ad valorem 131,081 27 State franchise 838,586 28 Total operating expenses 791,929,409 799,417,351 894,087,868 29 Interest on customer deposits 412,480 13,463 425,943 425,943 30 Gain on reacquisition of debt (433,707)
(433,707)
(433,707) 31 Return on invested capital 200,246,352 177,488,575 280,778,897 32 Total Cost of Service (Operating Revenues)
$992,154.534
$976,898,162
$1,174,859,001
1 TEXAS POWER & LIGHT COMPANY l
Original Cost and Adjusted Value Rate Bases i
Test Year Ended December 31,1980, As Adjusted I
Original Cost Rate Base Line Actual December 31, 1980 Adjusted Value No.
Description December 31, 1980 Adjustments As Adjusted Rate Base (a)
(b)
(c)
(d)
(e) 1 Plant in Service
$2,163,039,712
$ 44,221,078
$2,207,260,790 2
Less: Accumulated Depreciation M4,911,231 2,463,253 497,374,484 3
Net Plant in Service 1,668,128,481 1,709,886,306 1,709,886,306 4
Adjusted Value Weighting 60 %
}
5 Net Original Cost in Adjusted Value Rate Base 1,025,931,784 6
Net Current Cost of Plant in Service 3,299,763,604 7
Adjusted Value Weighting 40 %
8 Net Current Cost in Adjusted Value Rate Base 1,319,905,442 9
Adjusted Value Plant in Service 2,345,837,226 10 Electric Plant Held for Future Use 3,319,699 (1,426,760) 1,892,939 1,892,939 11 Construction Work in Progress 938,997,509 (301,977,428) 637,020,081 637,020,081 12 Nuclear Fuel in Process 34,851,971 (4,214,657) 30,637,314 30,637,314 13 Working Capital 75,632,280 2,808,230 78,440,510 78,440,510 14 Accumulated Deferred Federal Income Taxes (141,848,790) 5,759,140 (136,089,650)
(136,089,650) 15 Reserve for Insurance & Casualties (l,620,634)
(l,620,634)
(l,620,634) 16 Customer Deposits & Advances (9,285,848)
(9,285,848)
(9,285,848) 17 Other Cost Free Capital (13,181,368)
(13,181,368)
(13,181,368) 18 Total
$2,554,993,300
$2,297,699,650
$2,933,650,570 i
19 Weighted Cost of Capital 12.22 %
T 20 Percent Return 9.57 %
- r 21 Total Return
$-280,778,897
$ 280,778,897 z!
is f
m
TEXAS POWER & LIGHT COMPANY 140-PLANT INVESTMENT Vs. KWH SALES (Excluding the 4'i,% Interest in Comanche Peak Sold 130 -
3 3,,,
and 82.569% of Sandow #4) 120 -
110 -
I 100 -
w
/ 'I ""
95.6 90 -
-g 78.9 p#
92.7 l
/(
~
80-TOTAL PLANT j 84.7 g
PER CUSTOMER j
h 70-
/
COMPLETED PLANT
/
PER CUSTOMER w
0:
d y
60-
/
65.2
~
/
H
/
m-
/
U 38.0 b
/
49.2
' 40 -
/ 46.8
,,f
,,,,,,,**',,4 3.9 j
,e#,,f,s#
/
41.6
/
38.6
/ j /- 29.2 30 -
20.2 34.2 s#,%
g,,,***f~____.T~~~~~~~T h
/
20 -
12.9 24.6 KWH SALES PER CUSTOMER 11.2 17.4 10 -
$5 16.0
,j gg 78 0
"G l
i I
I i
i I
l 8
og 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 Ti E N I YEAR ENDED
TEXAS POWER & LIGHT COMPANY Gross and Completed Plant Investment and KWH Sales Per Customer KWH Sales Total Plant Investment Completed Plant Per Customer (A)
Per Customer (B)
Per Customer Line Total
% increase
%Tncrease
% increase No.
Year End Customers (A)
Amount from 1971 Amount from 1971 Amount from 1971 (a)
(b)
(c)
(d)
(e)
(f)
(g) 4 1
1971 507,943 22,777
$1,686
$1,340 2
1972 528,162 25,709 12.9 1,817 7.8 1,712 11.2 3
1973 546,156 26,747 17.4 2,026 20.2 1,786 16.0 4
4 1974 559,983 27,344 20.1 2,327 38.0 1,990 29.2 5
1975 574,497 27,957 22.7 2,712 60.9 2,260 46.8 6
1976 597,437 28,369 24.6 3,017 78.9 1,298 49.2 7
1977 622,407 30,563 34.2 3,264 93.6 2,544 65.2 8
1978 654,096 32,250 41.6 3,454 104.9 2,844 84.7 j
9 1979 688,163 31,567 38.6 3,673 117.9 2,967 92.7 1
10 1980 718,237 32,787 43.9 4,007 137.7 3,012 95.6 i
rn (A)
Excludes Alcoa Interruptible.
?5 (B)
Excludes the 41/3% interest in Comanche Peak sold and 82.569% of Sandow Unit //4.
%4 u.g SY ww
\\
TEXAS POWER & LIGHT COMPANY i
EMBEDDED COST PER KW 0F PRODUCTION PLANT IN SERVICE
$170.
1 l
i l
150 _
l I
i
$130.96
$129.45 3
i J
u 130 _
$120.29 a.
o U
4 no -
$101.83 i
l
$ 84.53 90 -
$83.57 m
l
$ 82.56 x
b i
$73.30 "G
70 o E:
i i
i i
_", f I
1973 1974 1975 1976 1977 1978 1979 1980 YEAR END
800-TEXAS POWER & LIGHT COMPANY EXPENSE GROWTH Vs. KWH SALES
'l
700-
/
577.2 600-
/
co E 500-
/
x w>O
/
378.6 i
w 400-Ewa O
2.-
/
$ 300-26 '>.9 h
~
PER CUSTOMER PRODUCTION EXPENSES w
200-158 6 /
OTHER O & M 126.1 104.6 PER CUSTOMER l
f 93.3 100-38.1 60.9 ox f
40 4 45.0 KWH SALES PER CUSTOMER pp
[ '-- 4,,4-- 7,,,,
1~,))~~~I?4 6--
r_____4i3,I--_____i___----i 2a >
is 2 20.i i 3.,
gy 38 6 43.9 34 2 n i::
i x 1xg i
i i
3 7~y y'
1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 to YEAR ENDED m
Exhibit WMM-5 Page 2 of 2 TEXAS POWER & LIGHT COMPANY Operation & Maintenance Per Customer Production Expenses Other Operation Per Customer and Maintenance (Excl. Fuel & Purch. Power)
Per Customer Line
% increase
% Increase No.
Year Ended Amount from 1971 Amount from 1971 (a)
(b)
(c)
.(d) 1 1971
$13.01
$ 59.95 2
1972 14.72 13.1 69.05 15.2 3
1973 18.27 40.4 65.71 9.6 4
1974 20.65 58.7 69.65 16.2 5
1975 26.62 104.6 76.91 28.3 6
1976 33.64 158.6 86.92 45.0 7
1977 47.60 265.9 96.48 60.9 8
1978 62.27 378.6 106.87 78.3 9
1979 88.11 577.2 118.91 98.3 10 1980 109.61 742.5 135.56 126.1
TEXAS POWER & LIGHT COMPANY COMPARATIVE CAPITAL RETURNS EMBEDDED INTEREST
+ 50 -
- } '
g_
36.4 9
32.7 s'p#
g 40 4 29 s a
+ 30 -
~
23 6
,y-
~7-~~~~
N EMBEDDED PREFERRED
$ + 20 -
2 DIVIDEND e,p g
9.1 f
~
,p#I 42 7.0
- '3 RETURN ON NET 18 0 PL NT INVESTMENT w
0-1N f_
2.1 3'I f%
2.5 1.0
- 2.1
-o6
_3, I - 6.1 N
- 7.3
- 6. 7 N'
g
- 1.7 g,
s RETURN ON AVERAGE E
COMMON EQUITY
- 23.9,
- 30.1
_ 40
- 6% RATE
- - 10% RATE
--9.6% R ATE
+-11.6% R ATE
~6.8% R ATE
.-10.05% R ATE m
INCREASE INCREASE INCREASE INCREASE INCREASE INCREASE oN (APRIL 1972)
(MARCH 1914)
(OC T. 1975)
(JUNE 1977)
(JUNE 1978)
(MAY 1980)
I 6
l i
4 I
i I
I 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 "5
[f YEAR ENDED p.
TEXAS POWER & LIGHT COMPANY Comparative Capital Returns Return on Net Embedded Embedded Return on Average Plant Investment Interest Preferred Dividend Common Equity Line
% inctcase
% increase
% Increase
% increase l
(a)
(b)
(c)
(d) '
Amour.t from 1971 Amount from 1971 No.
Year Amount from 1971 Amount from 1971 (c)
(f)
(g)
(h)
I i
1971 9.6 5.5 5.7 16.3 2
1972 10.0 4.2 5.7 3.6 6.1 7.0 16.7 2.5 3
1973 9.4 (2.1) 6.0 9.1 6.1 7.0 15.3 (6.1) 4 1974 9.7 1.0 6.8 23.6 6.5 14.0 14.4 (11.7) l 5
1975 8.9 (7.3) 7.3 32.7 7.0 22.8 11.4 (30.1) l l
6 1976 9.3 (3.1) 7.5 36.4 7.3 28.1 12.4 (23.9) 7 1977 9.8 2.I 7.6 38.2 7.4 29.8 14.0 (14.!)
8 1978 9.9 3.I 7.6 38.2 7.4 29.8 15.2 (6.7) 9 1979 9.4 (2.1) 7.8 41.8 7.6 33.3 14.3 (12.3) 10 1980 10.3 7.3 3.0 45.5 8.0 40.4 16.2 (0.6)
L"z 25
%e
~r gs n
I l
P TEXAS POWER & LIGHT COMPANY KWH Sales and Operation and Maintenance Expense Per Customer 13-Month Production Expenses Other Operation Average KWH Sales Per Customer (C) and Maintenance Customers (A)
Per Customer (B)
(Excl. Fuel & Purch. Power)
Per Customer (B)
Line Twelve Months
% Increase
% increase
% increase
% Increase No.
Ended 8-31 Amount Over Previous Year Amount Over Previous Yew Amount Over Previous Year Amount Over Previous Year (a)
(b)
(c)
(d)
(c)
(f)
(g)
(h) 1 1975
% 1,658 27,928
$ 23.74
$ 75.19 l
3 1976 577,871 2.89 29,622 6.07 32.44 36.65 85.33 13.49 l
3 1977 600,630 3.94 30,732 3.75 43.59 34.37 E 02 12.53 l
4 1978 627,179 4.42 32,570 5.98 56.50 29.62 103.33 7.61 5
1979 658,255 4.95 32,715
.45 78.80 39.47 119.67 15.81 6
1980 692,176 5.15 32,913
.61 104.98 33.22 132.19 10.66 7
+1981 721,732 4.27 33,087
.53 134.37 28.00 149.%
1).14 8
- 1982 752,550 4.27 33,262
.53 161.24 20.00 169.21 13.14 l
i
'Est Pnated l
(A) Trended for future years using 5-year average growth rate.
l (B) Trended for future years using 2-year average increase.
(C) Trended for future years at declining Otes of increase due to the variation in the m-transfer of generating units.
4 A. E
'o
.s I
~$
A?
f
s Exhibit WMM-7 Page 2 of 2 TEXAS POWER & LIGHT COMPANY Electric Plant in Service, Accumulated Depreciation, Accumulated Deferred Federal Income Taxes-Liberalized Depreciation and Depreciation Provisions Per Customer Twelve Months Ended 8-31-82 13-Month Line Average Amount per No.
Description
__ Amount (A)
Customers Customer (a)
(b)
(c) 1 13-Month Average Electric Plant in Service
$2,475,175,712 752,550
$ 3,289.05 2
13-Month Average Accumulated Depreciation 568,590,693 752,550 755.55 3
13-Month Average Accumulated Deferred Federal Income Taxes-Liberalized Depreciation 151,367,338 752,550 201.14 4
Depreciation Provisions 82,520,000 752,550 109.65 (A)
Estimated using Company construction budget described in the testimony of Mr. Spence.
t i
i 1
?.
s Exhibit WMM-8 Page 1 of 12 TEXAS POWER & LIGHT COMPANY Computation of Expected Attrition Twelve Months Ended 8-31-82 Over Test Year Ended 12-31 80, As Adjusted Line No.
Description Amount (a)
(b) 1 Operation and Maintenance Expense Attrition (Page 2)
$38,339,491 2
Investment Attrition (Page 3) 22,021,146 3
Capital Attrition (Page 10) 6,026,008 4
Incremental Operating Revenues (Page 12)
(49,472,165) 5 Total Attrition (Lines 1 thru 4)
$16,914,480
Exhibit WMM-8 Page 2 of 12 TEXAS POWER & LIGHT COMPANY Computation of Operation & Maintenance Expense Attrition Twelve Months Ended 8-31-82 Over Test Year Ended 12-31-80, As Adjusted Line No.
Description Amount (a)
(b)
Production Expense 1
Total Production Expense for the Test Year, As Adjusted (Rate Filing Package, Schedule 1-1)
$468,652,486 2
Less: Fuel and Purchased Power 381,006,635 3
Net Expense (Line 1 - Line 2)
$ 87,645,851 4
Customers at 12-31-80 (Per WMM-3) 718,237 5
Production Expense per Customer (Line 3 e Line 4) 122.03 6
Production Expense per Customer-Twelve Months Ended 8-31-82 (Per WMM-7) $
161.24 7
Less Amount at 12-31-80 (from Line 5) 122.03 8
Incremental Production Expense Per Customer (Line 6 - Line 7) 39.21 9
Customers at 12-31-80 (from Line 4) 718,237 10 Incremental Production Expense (Line 8 x Line 9)
$ 28,162,073 Other Operation and Maintenance Expense 11 Total Other Operation & Maintenance Expense for the Test Year, As Adjusted (Rate Filing Package, Schedule 1-1)
$111,356,675 12 Customers at 12-31-80 (from Line 4) 718,237 13 Expense Per Customer (Line 11, Line 12) 155.04 14 Other Operation & Maintenance Expense per Customer - Twelve Months Ended 8-31-82 (Per WMM-7) 169.21 15 Less Amount at 12-31-80 (from Line 13) 155.04 16 Incremental Other Operation & Maintenance Expense per Customer (Line 14 - Line 15) 14.17 17 Customers at 12-31-80 (from Line 4) 718,237 18 Incremental Other Operation & Maintenance Expense (Line 16 x Line 17)
$ 10,177,418 19 Total incremental Operation & Maintenance Expense (Line 10 + Line 18)
$ 38,339,491
e Exhibit WMM-8 Page 3 of 12 t
TEXAS POWER & LIGHT COMPANY Computation of Investment Attrition Twelve Months Endcd 8-31-82 Over Test Year Ended 12-31-80, As Adjusted Line No.
Descriation Amount (al (b)
Incremental Amounts Per Customer For:
1 Depreciation (Page 5) 5.50 2
State Franchise Tax (Page 9)
.29 3
Ad Valorem Tax (Page 9) 1.59 4
Federal Income Taxes (Line 6 + Line 7 x 46/54) 8.93 5
Interest Expense (Page 8) 3.87 6
Preferred Dividends (Page 8) 1.07 7
Return on Common Equity and Unamortized Investment Credits (Page 8) 9.41 4
8 Total Attrition per Customer (Lines 1 thru 7) 30.66 9
Customers at 12-31-80 (Per WMM-3) 718,237_
10 Total Investment Attrition (Line 8 x Line 9)
[22,021,146 a
Exhibit WMM-8 Page 4 of 12 TEXAS POWER & LIGHT COMPANY Incremental Electric Plant In Service Per Customer For Attrition Study Line No.
Descriation Amount (a?
(b)
Electric Plant in Service 1
Plant in Service at 12-31-80, As Adjusted (Rate Filing Package, Schedule B)
$2,207,260,790
- 2 Customers at 12-31-80 (Per WMM-3) 718,237 3
Plant in Service Per Customer (Line 1 e Line 2) 3,073.16 4
Average Plant in Service Per Customer at 8-31-82 (Per WMM-7) 3,289.05 5
Less Amount at 12-31-80 (from Line 3) 3,073.16 6
Incremental Plant in Service per Customer (Line 4 - Line 5) 215.89 l
l h
Exhibit OMM-8 Page 5 of 12 TEXAS POWER & LIGHT COMPANY Incremental Depreciation Per Customer for Attrition Study Line No.
Descriation Amount (a?
(b)
Depreciation 1
Depreciation for the Test Year, as Adjusted (Rate Filing Package, Schedule A)
$74,807,005 2
Customers at 12-31-80 (Per WMM-3) 718,237 3
Depreciation Per Customer (Line 1 e Line 2) 104.15 4
Depreciation Per Customer for the twelve months ended 8-31-82 (Per WMM-7) 109.65
.5 Less Amount at 12-31-80 (from Line 3) 104.15 6
Incremental Depreciation per Customer (Line 4 - Line 5) 5.50
Exhibit WMM-8 Page 6 of 12 TEXA5 POWER & LIGHT COMPANY Incremental Accumulated Depreciation Per Customer For Attrition Study Line No.
Descriation Amount (a?
(b)
Accumulated Depreciation 1
Accumulated Depreciation at 12-31-80, as Adjusted (Rate Filing Package, Schedule B)
$497,374,484 2
Customers at 12-31-80 (Per WMM-3) 718,237 3
Accumulated Depreciation Per Customer (Line 1 + Line 2) 692.49 4
Average Accumulated Depreciation Per Customer at 8-31-82 (Per WMM-7) 755.55 5
Less Amount at 12-31-80 (from Line 3) 692.49 6
Incremental Accumulated Depreciation per Customer (Line 4 - Line 5) 63.06
?.
Exhibit WMM-8 Page 7 of 12 TEXAS POWER & LIGHT COMPANY Incremental Accumulated Deferred Federal Income Taxes-Liberalized Deprec~ation Per Customer For Attrition Study Line No.
Description Amount (a)
(b)
Accumulated Deferred Federal Income Taxes-Liberalized Depreciation 1
Accumulated Deferred F.I.T. at 12-31-80, as Adjusted (Rate Filing Package, Schedule 1-7.4)
$119,069,643 2
Customers at 12-31-80 (Per WMM-3) 718,237 3
Accumulated Deferred F.1.T. per Customer (Line 1 e Line 2) 165.78 4
Average Accumulated Deferred F.I.T. per Customer at 8-31-82 (Per WMM-7) 201.14 5
Less Amount at 12-31-80 (from Line 3) 165.78 6
Incremental Accumulated Deferred F.I.T. per Customer (Line 4 - Line 5) 35.36
o Exhibit WMM-8 Page 8 of 12 t
TEXAS POWER & LIGHT COMPANY Cost Of Capital on incremental investment For Attrition Study Line Amount at No.
Descriotion 8-31-82 (a;>
(b)
I incremental Plant in Service (Page 4) 215.89 2
Less: Incremental Accumulated Depreciation (Page 6) 63.06 3
Incremental Deferred Taxes (Page 7) 35.36 4
Amount to be Financed 117.47 incremental Weighted Amount Cost of Cost of Financed Capital Capital 5
Debt @ 41.25%
48.46 7.99 %
3.37 6
Preferred Stock @ll.54%
13.55 7.86 1.07 7
Common Equity @ 40.63%
47.73 17.75 8.47 8
Unamortized Investment Credits @ 6.58%
7.73 12.22
.94 9
Total 117.47
$ 14.35 Note:
Incremental investment is assumed to be financed with the same capital mix as existed at end of test year, as adjusted. Cost of capital assumed is that requested in this rate request.
Exhibit WMM-8 Page 9 of 12
(
TEXAS POWER & LIGHT COMPANY Incremental Ad Valorem & State Franchise Taxes For Attrition Study Amount AD VALOREM TAX:
1 Ad Valorem Tax for the test year, as adjusted (Rate Filing Package - Schedule 1-8) 16.206.792 2
Plant in Service at 12-31-80, as adjusted (Rate Filing Package - Schedule B)
$2,207,260,790
.734259t!
3 Average Rate (Line 1 e Llae 2) 4 Incremental Plant in Service per Customer at 8-31-82 (Page 4) 215.89 5
incremental ad valorem tax per customer (Line 3 x Line 4) 1.59 STATE FRANCHISE TAX,:
6 Incremental preferred stock, common equity and unamortized investment credits (Page 8) 69.01
.00425 7
State franchise tax rate 8
Incremental franchise tax per customer
.29
Exhibit WMM-8 Page 10 of 12 i
TEXAS POWER & LIGHT COMPANY Computation of Capital Attrition Twelve Months Ended 8-31-82 Over Test Year Ended 12-31-80, As Adjusted INCREMENTAL AMOUNTS PER CUSTOMER FOR Amount 1
Federal Income Taxes (Line 3 + Line 4 x 46/54) 1.58 4.95 2
Interest Expense (Page 11, Line 1 + Line 6) 3 Preferred Dividends (Page 11, Line 2 + Line 7) 1.42 4
Return on Common Equity and Unamortized
.44 Investment Credits (Page 11, Line 3 + 4 + 8 +9) 5 Total Capital Attrition Per Customer 8.39 6
Customers at 12-31-80 (per WMM-3) 718,237 7
Total Capital Attrition (Line 5 x Line 6)
$6,026,008 i
Exhibit WMM-8 Page 11 of 12 TEXAS POWER & LIGHT COMPANY Incremental Cost of Capital For Attrition Study (1)
(2)
(3)
Weighted Amount incremental Incremental Line Financed Cost of Cost of No.
Incremental Investment (Page 8)
Capital Capit31 1
Debt
$ 48.46 5.51 %
$ 2.67 2
Preferred Stock 13.55 5.64
.76 3
Common Equity 47.73 4
Unamortized Investment Credits 7.73 3.13
.24 5
Total 117.47
$ 3.67 i
Note:
Cost of incremental debt and preferred stock is assumed to be 13.5%. Embedded cost of capital at the end of the test year, as adjusted was 7.99% for debt and 7.86% for preferred stock. The cost of capital in column 2 is the difference between the incre-mental and embedded rates.
Embedded Investment 6
Debt @ 41.25%
$ 913.64
.25%
$ 2.28 7
Preferred Stock @ll.54%
255.60
.26
.66 l
8 Common Equity @40.63%
899.91 9
Unamortized Investment Credits @6.58%
145.74
.14
.20 10 Total
$2,214.89
$ 3.14
(
l Note:
Cost of incremental debt and preferred stock is the increase in embedded cost of capital at the end of the test year, as adjusted, i
assuming additional plant in the twelve months ended 8-31-82 was l
added at embedded plant cost but at an incremental cost of capital in excess of embedded cost of capital. New debt and preferred i
stock assumed to be 13.5%
l I
i
"J.
Exhibit WMM-8 Page 12 of 12 t
TEXAS POWER & LIGHT COMPANY Incremental Operating Revenue For Attrition Study Line No.
Descriation Amount (a;l (b) 1 M-KWH sales for the test year, as adjusted (Rate Filing Package, Schedule N)*
22,476,848 2
Customers at 12-31-80 (per WMM-3) 718,237_
3 KWH usage per customer (Line 1 + Liv 2) 31,294 4
KWH usage per average customer-twelve months ended 8-31-82 (per WMM-7) 33,262 5
Less amount at 12-31-80 (from Line 3) 31,294 6
Incremental usage per customer (Line 4 - Line 5) 1,968 7
Average price per KWH+
.035 8
Incremental operating revenue per customer (Line 6 x Line 7) 68.88 9
Customers at 12-31-80 (from Line 2) 718,237 10 Incremental Operating Revenue (Line 8 x Line 9)
$49,472,165
- Per Schedule N of Rate Filing Package:
Average Base Rate Price M-KWH Revenues Per KWF Total from energy sales 22,856,976 $798,847,481 Less: SPA 61,466 530,630 DP&L, TESCO & OPI 318,662 6,441,574 Net 22,476,848 $791,875,277
.03:
Average price was used in determining incremental revenues although the use of an average price likely overstates incremental revenues per customer.
o THE STATE OF TEX AS I
COUNTY OF DALLAS I
BEFORE the undersigned authority on this day personally appeared W. M.
MCDONOUGH, JR., who, having been placed under oath by me, did depose as follows:
"My name is W. M. McDonough, Jr. I am of legal age and a resident of the State of Texas. The foregoing testimony, and exhibits, offered by me on behalf of Texas Power & Light Company, are true and correct, and the opinions state J therein are, to the best of my knowledge and belief, accurate, true, and correct."
3d. M. MED W. M. MCDONOUGH, JR.
SUBSCRIBED AND SWORN TO BEFORE ME by the said W. M. McDonough, Jr. this M day of February, A. D.1981.
b f
Robert D. Daniels
[4,fi.
l.
Notary Public in and E of; '-
for the State of Texas
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S W. ?
Qv '.;&*%
R My Commission expires M8/-8ft
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