Ordinance No. 3,935n
C.
w }
OP-DINANCE N0. 3935
AN ORDINANCE SETTING RATES TO BE CHARGED BY HOUSTON
LIOWING AND POWER COWIPANY FOR ELECTRIC UTILITY SERVICE
WITIlIiiN THE CORPORATE LIMITS OF THE CITY OF BAYTOWN,
TEXAS; CONVTAR04M FINDR�GS AND pROVIS"a RELATED TO THE
SUBJECT; PROVIDING FOR THE REPEAL OF INCONSISTENT
DROiNANCEx CONTAINING A SAVINGS CLAU!5E; AND PROVKR G
FOR THE EFFECTIVE DATE HEREOF.
WHEREAS, on or about June 15, 1984, Houston Lighting and Power Company
°�:`:
(the "Company*), filed with the City of Baytown a Statement of Intent and Petition
for Authority to Change Rates relating to electric utility service, an proper notice
thereof was duly given, and
WHEREAS, by Ordinance No.3891, the City Council suspended the effective
date of such proposed rate increase until October 18, 1984; and
WHEREAS, the City Council, having considered the Company's rate increase
at a public hearing for which proper notice was duly given, finds that such request
is excessive; and
WHEREAS, the City Council having original jurisdiction over the matter finds
that a lesser increase in rates should be prescribed for the Company, NOW
THEREFORE,
BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF BAYtOWN,
TEXAS:
Section 1: The City Council of the City of Baytown hereby finds the
requested rates of the Company to be excessive and unreasonable.
Section 2: The City Council hereby approves and adopts the recommendations
of the set out in Exhibit "A," attached hereto and incorporated herein for all
purposes, and additionally finds and determines the following:
I. Findings
1. Cost of Service
The revenue requirement of the Company is $3,984,671,000.00. Adjustments
were made to operations and Maintenance, Fuel Expenses and Purchased Power,
Other Taxes, Federal Income Taxes and the Return component.
a. Operations and Maintenance Expenses
r
LJ
Adjustments to the Company's O & M expenses amounted to $15,400,01,00.
�Y
the major adjustments include a reduction in Salaries and Wages expense of
$5,367,000.00, a reduction of Employee Benefits of $732,000.00, an increase :n Sianji
Damage of $318,000.00, a reduction in Self - insurance of $9850000.00, a reduction in
Y,
Rate Case Expenses of $349,000.00, elimination of EEI dues of $318,000.00, a
reduction in Wheeling Cost of 5592,000.00, a reduction in Uncollectibles of
;1,898;UOO.06 , and a reduction in Franchise Taxes of $4,566,OOi2.00.
b. Fuel Expenses and Purchased Power
The adjustment of Fuel Expenses is a reduction of $59,196,0011.00. The
adjustment to Purchased Power is a reduction of $4,535,000.00.
c. Other Taxes
The total adjustment for all Taxes Other than Federal Income Taxes is a net
s,
reduction of $3,985,000.00. The components of this adjustment are the Public
Utility Commission fee State gross receipts taxes ad valorem taxes, State franchise
taxes, State unemployment taxes, and payroll taxes
d. Federal Income Taxes
The adjustment to the Cost of Service for Federal Income Taxes is a
reduction of $58,526,000.00.
e. Return
The rate of return on equity is 16.00 percent. The rate of return on invested
capital is 12.42 percent.
2. Invested Capital
The invested capital is determined to be $4; 12,255,000.00.
3. Adjustments to Invested Capital
The adjustments to invested capital include an increase of $4,045,000.00 in
Accumulated Depreciation, a `reduction of $298,239,000.00 in Construction Work in
Progress, a reduction of $48,880,000.00 in Nuclear Fuel in Process, a reduction of
• $22,602,000.00 in Property Held for Future Use, a reduction of $12,498,000.00 in
Fuel Oil Inventory, a reduction of $17,420,000.00 in Storm Loss, a reduction of
$12,677,000.00 in Prepayments, an increase of $1,2119000.00 in Insurance Reserve,
and an increase of $60,056,000.00 in deferred Federal Income Taxes
4. Revenue Deficiency
isThe overall revenue deficiency is $126,617,000.00.
n
II. Conclusions
1. The City has original jurisdiction over this case pursuant to Section 43 of
the Public Utility Regulatory Act, TEX. REV. CIV. STAT. ANN.. art. 1446c (Vernon
Supp. 1984).
2. The Company has the burden of establishing its revenue deficiency under
Its present rates and of establishing the amount of such deficiency that will be
collected under its proposed rates pursuant to Section 40 of the Public Utility
k Regulatory AcL
3 '-The rates prescribed herein will allow the Company to recover its
operating expenses together with a reasonable return on its invested capital,
Pursuant to provisions of Section 39 of the Public Utility Regulatory Act.
4. The rates prescribed herein will permit the Company a reasonable
opportunity to earn a reasonable return upon the invested capital used and useful in
rendering service to the public over and above its reasonably necessary operating
expenses as provided by Section 39(a) of the Public Utility Regulatory Act.
5. The rates ..for electric service set forth in Exhibit "A" provide just and
reasonable and not unreasonably preferential, prejudicial, or discriminatory rates, and
are sufficient, .equitable, and consistent in application to each class of consumer, as
provided by Section 38 of the Public Utility Regulatory Act.
Section 3: The City Council hereby determines prescribes, establishes and
authorizes increased rates for sale or supply of electric service by the Company
within the corporate limits of the City of Baytown. Such increased rates are
_ hereby fixed as set out in "Exhibit A," which is attached hereto, incorporated herein
by this reference and made a part hereof for all purposes. Such increased rates
shall become effective as to each customer for all of such customer's regular billing
periods for electric utility service which begin on or after October 18, 1984. A
j: billing period is the interval between meter readings. The Company shall be
;r-
authorized to collect such rates until such time as they may be changed, modified,
amended or withdrawn in accordance with applicable statutes and ordinances.
Section 4: The City Council hereby authorizes and directs the City Clerk to
serve the company with a certified copy of this ordinance which is the final
determination and order of the City.
Section 5: The Company shall, within ten days following the final passage
and approval of this ordinance and thereafter whenever required by applicable
statutes and ordinances and whenever requested by the City, file a complete
F
-1
U
U
v
v
40913 -1c
scheduls of rates and tariffs with the City setting forth all of the Company's rates
and charges for utility service then in effect. The City Manager is authorized to
a review, approve and require revisions to the tariff if hP determines it not t. be in
accordance with this ordinance.
Section 6: Nothing contained in this ordinance shall be construed now or
i ..heraafter as limiting or modifying, in any manner, the right and power of the city
under the law to regulate the rates and charges of the Company.
Section 7: In the event that the Company appeals from this order setting
_ electric rates for the Company, the City hereby waives written notice of the
hearing before the Public Utility Commission of Texas ("PUC ") on such appeal.
With an such respect to
p y appeal, the City Council hereby authorizes the City
Attorney or his designees to represent the City and its citizens in any and all
matters in connection with such appeal and to take any and all actions necessary
s V and incidental thereto and to the resolution of the matters subject to such appeal,
y5
all as may be in the best interests of the City.
Section 8: All ordinances or parts of ordinances inconsistent with the terms
of this ordinance are hereby repealed, provided however, that such repeal shall be
only to the extent of such inconsistency and in dli other respects this ordinance
shall be cumulative of other ordinances regulating and governing the subject matter
covered by this ordinance.
Section 9: if any provision, section, exception, subsection, paragraph,
sentence, clause or phrase of this ordinance or the application of same to any
person or set of circumstances, shall for any reason be held unconstitutional, void or
invalid, such invalidity shall not affect the validity of the remaining provisions of
this ordinance or their application to other persons or sets of circumstances and to
this end all provisions of this ordinance are declared to be severable.
Section 10: The City Council officially finds, determines, recites and
® declares that a sufficient written notice of the date, hour, place and subject of this
meeting of the City Council was posted at a place convenient to the public at the
City Hall of the City for the time required by law preceding this meeting, as
required by the Open Meetings Law, Article 6252 -17, Texas Revised Civil Statutes
Annotated; and that this meeting has been open to the public as required by law at
all times during which this ordinance and the subject matter thereof has been
discussed, considered and formally acted upon. The City Council further ratifies,
approves and confirms surh written notice and the. contents and posting thereof.
n
v 40913 -1d
1 > Section 11: This ordinance shall take effect immediately from and after its
{� Paee by the City Cowzcil of the City of Baytown.
N INTRODUCED, READ, and PASSED by the affirmative vote of th..- City
Council of the City of Baytown, this the 13th day of September, 1984.
mayor
S " ATT�STs
C7
Ll
mm
i
F,.
0
DHIBIT "A"
�� 5� �t+a� r` - rt+ 4 "1
.. rE7'9Y''� 5�. ¢��i'jr.•+�'N���
4b93 le
_
)Lc
xM
3�
mm
i
F,.
0
DHIBIT "A"
Ll
n
.7
�v ••
a z a n z m r m T a E o c
7D o m n r
m -1 x n O z -r n a
m N D M am N '0 m 7C m r T N C z
m m -� D 3 -I
�1 m 0 m V m 3 D � a �aq -af c D r .,
0 m 7v •- 0 m r N < n z a z
7D v N z N n N 'll -1 -f -1
C 'a0 1 m z x N Z tall 1 m m o o m
D .. -1 m m m z x N r r z x
v o c
z D z N N D m ." m .4
Z n
r N N m v 0 a 10 m m
-f r D m o ."
" z c 0 a
n N m C m •�•
x a N O
n
m N z
m fn
o m
M
1 m O
q 1 1
r W 1 ►' d 1 3 Z N
p A 1
m
10, 1 0 f O
mI .p 1 ! ID Z m t Z
-4 ' A W -1 1 A r
I -0 -NJ - - -
m g P I m m N
TI O P a a r m 0. I mw 0 Ag N 1 N d a V 1 8 0 N V U u O N O P. 1 N 0 -C 2 -1
3)
0Om Z
w i ► r. ... " . a► i i �c °o a 0
N i C O ui r r
d V! P ►
A
� 1 2 •Z O /. 0 1 1 0
E
A 11 C4 I N O V .�+ fb P N O I O
`? 11 V 1 r
u
tt p V 1 r O O P V O �0 m O N• tr�Jl Ln O
m
I � a
C4 p
r� %rN+1 A N rte+ •0 O
• p - ! • - � - r � r�j ! • f co K t N l u A N W W fit tN+ O d r+ i 14 m i vtl1 a
c
IP
I
v
C
•
r�
L_ J
JUM P Jam. C.P.A.
8614 Soliwood Lane
Avg Tcta mu
• su��stt.ae3a
August 30, 1984
Mrs. Marsha R. Gardner, Director
Public Service Department
City of Houston
612 Gray
Houston, Texas 77002
Dear Mrs. Gardner:
This letter summarizes the results of the analysis and presents the recommenda-
tions pertaining to the rate application of Houston Lighting & Power Company (HUP or
Company) filed June 15, 1984. The scope, recommendations, and results of the analysis
are summarized below.
SCOPE
The scope of the engagement included the following tasks:
- Review the rate application;
- Prepare additional information requests;
- Review the records and supporting documentation of HUP;
- Make recommendations as to the proper level of revenues and the design of
residential and municipal rates.
RECOMMENDATIONS
Based on the review of the information filed, and as a result of the work per-
formed, the following conclusions are appropriate:
The Company should be allowed a total revenue requirement of $3,984,671,000
Fr a rate increase of $126,617,000 or 3.28% over the test period adjusted revenues. This
is a reduction of $161,873,000 from the additional $288,490,000 requested by HL&P.
- The Company should be allowed an invested capital or rate base of
$4,212,255,00, which is a decrease of $479, ".77,000 from the $4,691,6312,000 requested.
- The Company should be allowed an overall rate of return of 12.42%, which
reflects a return on equity of 16.00% as compared to the overall return of 12.8895 and
C]
11,
Mss. Marsha R. Gardner
August 30, 1984
Page 2 of 8
x the 17.0096 return on equity requested by HL&P.
REVENUE REQUIREMENT
HL&P requested additional revenues of $288,490,000 based on a March 31, 1984,
test year end. Through a review of the rate Inerease filing and subsequent information
requested from HL&P, additional revenues of $126,617,000 are recommended.
OPERATING EXPENSES
In Its application, HL&P
requested $69,250,$$00 in additional operation and
maintenance expenses, $311,008,000 for increased fuel expenses, a $$19167,000 decrease
in purchased power expenses, $5,385,000 for increases in depreciation and amortization
expenses, and $17,297,000 in additional taxes other than income taxes.
2eration and Maintenance Expenses
i
Operations and maintenance expenses should be decreased $15,400,000 from the
amount requested. The following summarize the adjustments to the requested expenses:
® To reduce salaries $ 5,367,000
By applying the wage increase terms of the new union contract, and deleting the effects
of additional employees projected by the Company beyond the test year end, salaries
have been reduced from the amount requested.
To reduce employee benefits $ 732,000
As a result of the decrease in salaries, the related employee benefits are decreased.
To increase the amortization of storm damages $ 318,000
The increase in "storm damages" is recommended In order to amortize the uninsured
amount of damages due to Hurricane Alicia and tornadoes which occurred during the test
year. This adjustment is made to amortize total storm damages on a grass -tax basis
rather than the net-of- -tax basis as requested by HL&P. This adjustment is offset by a
corresponding reduction to Federal income tax expense which has an overall effect of
reducing revenue requirement.
To reduce self - insurance $ 485,000
j HL&P's self - insurance reserve was depleted due to storm damages during the test year.
As recommended, tie reserve will be accrued over a ten year period instead of the seven
years requested by HL &P.
U
To reduce rate case expenses $ 349,000
Since HL&P has not filed a rate application for two years, the expenses associated with
HL &P's last rate case have been fully recovered through rates.
r1
�J
® WER F
Nl�s. Marshall. Gardner
AugustO, :e84
Page 3'oI g
To eliminate EEI dues $ 318,000
Consistent with prior Public Utility Commission orders, these dues were remove&
To reduce wheeling cost : 592,000 -
This cost was reduced to reflect the cost associated with new wheeling contracts,
To reduce uncollectibles $ 1,898,000
To reduce franchise taxes 9 45600
These expenses are revenue - related and are therefore reduced when the revenue require -
ment is reduced.
F=
Fuel Expenses and Purchased Power
To reduce fuel expense
$ $9,196,000
To reduce purchased power and affiliated fuel
costs recovered through base rates $ 4,535,000
These changes are the result of using the June 1984 rates for fuel and purhased power,
and include the expected 1984 cost of 9101 million for the new Diamond Shamrock
cogeneration contract.
Other Taxes
To reduce payroll taxes $ 854,000
This adjustment is again made as a result of the recommended decrease in salaries.
To reduce ad valorem taxes $ 303,000
The recommended reduction in ad valorem taxes is related to the reduction in plant held
for future use.
To reduce state franchise taxes $ 299,000
The recommended state franchise tax was based on the actual 1983 state franchise taxes
paid in June 1984.
To increase state unemployment taxes $ 120,000
The increase in the recommended tax was computed based on the end of test period level
of employees.
To reduce PUC assessment $ 355,000
To reduce gross receipts taxes $ 2,294,000
These taxes are reduced as a result of the lower recommended revenue requirement.
v
C
El
Mes.- ;Marsha R. Gardner
August .30; 1984
rage 4 of 8
FEDERAL INCOME TAXES
To reduce Federal income taxes 1 58,527,000
This reduction results from normalized Federal Income taxes being applied to the lower
recommended return.
RETURN
To reduce return 1 81,108,000
The recommended reduction in return is caused by the lower rate of return an equity and
reductions to the rate base.
RATE BASE
In the Company's application, the rate base requested was the adjusted rate base at
March 31, 1984. In reviewing the requested rate base the following adjustments are
recommended:
To increase accumulated depreciation = 4
The Increase in ,045,000
depreciation expense must be reflected in the accumulated depreciation
account.
To reduce CWIP 1298,239,000
To reduce nuclear fuel 148,880,000
CWIP and NFIP were reduced to reflect 50% of the balance in these accounts at test
year end. This level of CWIP and NFIP is recommended to maintain the financial
integrity of HL&P.
To reduce future use property 1 22,602,000
This adjustment is made to exclude all property not expected to be in service in the next
ten years.
To reduce fuel oil inventory 1 12,498,000
This adjustment reduces fuel oil inventory to a level adequate to insure service
reliabliity.
k!
is
To reduce storm loss $ 17,420,000
The Company requested the unamortized balance of storm losses to be included in the
rate base. Consistent with the PUC s accounting treatment of extraordinary losses, this
adjustment has been reversed.
L`
U
r:
v
Mrs. Marsha R. Gardner
August 30, 1984
Page !$ of 8
To red-ace prepayments $ 12,677,000
Prepayments are adjusted to reflect the proper balance of sales tax payments.
To increase the insurance reserve $ 1,211,000
Consistent with the recommendation to fund the property insurance reserve, the rate
base must be reduced to reflect this cost free capital to the company.
To increase deferred Federal income taxes = 60,056,000
This adjustment reduces the rate base for tax benefits realized by HL&P.
RATE OF RETURN
An overall rate of return on invested capital for HUP of 12.42% is appropriate.
The Company proposed a rate of return of 12.88%. The difference in the rates is the
return on equity. In its application, HL&P requested a return on equity of 17.00%, while
the proper rate has been found to be 16.00%.
FINANCIAL STATISTICS
The most important factor in the determination of the adequacy of the recom-
mended revenue requirement to maintain the financial integrity of the utility is cash
flow. The recommended revenues are expected to generate 36.27% of next years con-
struction budget from internal sources. This level is sufficient to maintain the financial
integrity of the utility.
RATE DESIGN
The residential class of customers as a whole will receive a 4.1% increase in rates.
It is recommended that the design of the residential rates be revised because of deficien-
cies in the current design. The Company addresses the shortcomings in its application,
but some refinements are needed. Presently, the first 750 kilowatt -hours are priced at a
discount. However, the discount disappears after the 750th kilowatt -hour, causing the
bill to jump $12.44 for the 751st kilowatt -hour. This creates a'eonfused price signal.
Furthermore, 750 kilowatt -hours exceeds the usage level of that group of customers
whose monthly usage is relatively low. From "cluster analyses" studies, the minimum
usage level appears to be 400 kilowatt-hours per month. Therefore, a rate block has been
established at this level to recognize the high load factor or constant usage level of this
group, allowing the utility to utilize its power production facilities more efficiently.
Unlike the current rate structure, the billing for the first 400 kilowatt -hours would be at
this lower rate regardless of the amount consumed. The next block, for consumption
over 400 kilowatt - hours, recognizes the peak demand placed on the system and is
structured so that as consumption increases, the average cost per kilowatt -hour increases
during the on -peak summer season. It is also recommended that the minimum bill
v
C1
C]
•
Mrs. Marsha R. Gardner
August j60994
PsgeOf 8
increase slightly from $7.00 to $7.25, and that a lower rate for winter heating con -
sumption above 1000 kilowatt -hours be included to recognize the base load usage
characteristics of these customers.
The present and proposed rate structures are as follows:
Present Rate Structure
Summer:
Customer Charge of $7.00 per month, which includes 30 kwh
31 -750 kwh at 6.50 per kwh
over 750 kwh: all kwh at 8.30 per kwh
wintee:
Customer Charge of $7.00 per month, which includes 30 kwh
over 30 kwh: at 6.5d per kwh
Houston Lighting do Power Company Proposed Rate Structure
Summer:
Customer Charge of $9.00 per month, which includes 250 kwh
over 250 kwh at 9.6d per kwh
Winter.
Customer Charge of $9.00 per month, which includes 250 kwh
251 -1,000 kwh at 9.60 per kwh
over 1,000 kwh at 6.20 per kwh
Public Service Department Recommended Rate Structure
Summer:
Customer Charge of $7.25 per month, which includes 30 kwh
31 -400 kwh at 6.20 per kwh
over 400 kwh at 9.10 per kwh ,
Winter:
Customer Charge of $7.25 per month, which includes 30 kwh
31 -400 kwh at 6.20 per kwh
401 -1,000 kwh at 9.10 per kwh
over 1,000 kwh at 6.30 per kwh
•
r1
LJ
•
Mrs. Marsha R. Gardner
August 30, 1984
Page 7 of 8
Because of the change in the basic design of the rate, the percent increase varies
with usage. However, on an annualized basis, the four different types of residential
customers will typically experience the following average increases:
(a) Small user (400 kwh winter and 900 kwh summer) -0.74%
(b) Strong summer peaking (4000 kwh peak month) +7.8096
(c) Moderate summer peaking (2300 kwh peak month) +6.0396
(d) Summer/Winter peaking (2300 and 2800 kwh peaks) +5155%
The Company should add an optional time -of -use feature to the small commercial
rate to recognize off peak usage. Time-of -use rates are available to most other rate
classes, but not for the MGS customers. The City in particular will benefit from such a
rate through proper recognition of the off -peak use by freeway lighting and parks. It is
recommended that the new time -of- -use rate be initially experimental in nature by
limiting its application to 500 MGS customers.
SOUTH TEXAS NUCLEAR PROJECT
Pursuant to 516(h) of the Public Utility Regulatory Act, the Utility Evaluation
Division of the PUC has enlisted a firm to perform a management audit of HL&P.
Arthur Young is currently is the process of completing such an audit. In addition, the
Engineering Division of the PUC is evaluating the cost and benefits of continuing or
cancelling one or both units of the STNP. Further, the participants of STNP (the City of
Austin, the City Public Service Board of San Antonio, Central Power do Light Company,
and HL&P), are conducting a study to determine the feasibility of converting the nuclear
units to coal units.
Concern over the expenditures on the South Texas Nuclear Project continue to
grow, yet the immensity and complexity of the project make it extremely difficult to
make rational and educated decisions regarding rate treatment. For this reason, it is
recommended the City of Houston review ongoing studies intended to evaluate the
Company's performance in managing the construction of STNP, and if necessary, conduct
its own study to determine whether STNP is the most economic and reliable source of
electric power to meet the needs of the Houston area. Such a study should likely be
conducted outside the context of a general rate case.
•
El
is
.7
RATE NEGOTIATIONS FOR THE CITY OF HOUSTON
JUM P Jam. C.P.A.
The consultant is assisting in negotiating changes in contracts for various City of
Houston electric service accounts, which will enable many of the City installations to be
more properly classified on more favorable rates. It is estimated that the resulting
savings to the City will exceed $250,000 per year.
JPJsmmd
B- 4037rptA
Very truly yours,
q J es P. Jansen,
XT.S tme ny P.E.
r�
LJ
L-.j
1
W
ICI
;t
�J
Qt
W
J
i_i
1�1
.J
1�1
al IMI 1 =1 1m1 a# ai 1m1 1 =4
ly/ a' Iy1 Iy1 1,r1 1=1
17•., -XI �'', 1:1� ••7'
I: • I. • A CA I. ti, C,4 .--o .--1
W
coo
Z O�q rq
J > y
'k2
i IL
A
t
CS A
s
J
1
�a
i
av
loss
sommosomw
mommoloall
t
■
■
►1
■11�1��
mmommomm
-M
1�1
.J
1�1
al IMI 1 =1 1m1 a# ai 1m1 1 =4
ly/ a' Iy1 Iy1 1,r1 1=1
17•., -XI �'', 1:1� ••7'
I: • I. • A CA I. ti, C,4 .--o .--1
W
coo
Z O�q rq
J > y
'k2
i IL
A
t
CS A
s
J
1
�a
i
av
c:
Oate08/3 0184 Subject: HL &P1:s ReQuest for a Rate - Odglnatora ra. -
Increase dated June 15, 1984 initlals 2 a 4
RATE BASE
HL&P has requested an invested capital rate base of $4,691,632,000. The Public Service
Department recommends a rate base of $4, 212, 255,000. The recommended decrease of $479 mil-
lion is primarily due to the following: in its application, HL&P requested a rate base amount which
included 65% of test year end construction work in progress and 100% of test year end nuclear
fuel. This has been adjusted to reflect 50% of the balance recorded in the CWIP and nuclear fuel
accounts at test year end. This level of CWIP and nuclear fuel is recommended in order to main-
tain the utility's financial integrity.
Additionally, adjustments to the rate base include adjustments to the balance of accumulated
depreciation, plant held for future use, fuel oil inventory, unamortized storm losses, prepayments,
property insurance reserve, and deferred Federal income taxes. These adjustments are explained
in detail in Attachment A.
COST OF CAPirAL
An overall rate of return on invested capital of 12.42% is recommended for HL&p. HL&P
proposed a rate of return of 12.88%; the difference in the rates is solely due to the difference
between the recommended return on equity of 16.00% and the 17.00% return on equity requested
by HL &P.
FINANCIAL INTEGRITY
Houston Lighting & Power Company's first mortgage bonds are rated A+ by Standard and
Poor's Corporation and were recently downrated to A2 by Moody's Investor Service. Duff &
® Phelps, Inc. has recently placed HL &P on its "Watch List ". These rating agencies have expressed
concern over HL &P's massive construction commitments, large external financing program and
regulatory uncertainty in Texas. Further downgrading would lead to higher interest cost and would
limit available financial markets. Therefore, it is important to generate sufficient cash internally
to enable to Company to finance the majority of its capital needs through the sale of stocks and
bonds. Our recommendation to include 50% of CWIP and nuclear fuel in rate base, combined with
a 16% return on equity, allows the Company to recover approximately 36% of next year's construc-
tion budget through rates, a level sufficient to maintain current bond ratings.
REVENUE REQUIREMENT
Operating Expenses
In its application, HL &P requested $69,250,000 in additional operation and maintenance
expenses, $311,008,000 for increased fuel expenses, a $21,167,000 decrease in purchased power
expenses, $5,385,000 for.increases in depreciation and amortization expenses, andOU7,297,000 in"
additional taxes other than income taxes. As a result of our analysis, it is recommended that the
requested operation and maintenance expenses be decreased $15,400,000, fuel expenses decreased
by $63,731,000, and taxes other than income taxes be decreased by $3,985,000. These
recommended adjustments are explained in detail in Attachment A.
Revenue Deficient
Based on an invested capital rate base of $4,212,255,000, a rate of return of 12.42%, and
revenue requirements of $3,984,671,000 (see Schedule 1), HL&P has an additional revenue require-
ment of $126,617,000 over test period adjusted revenues.
n
date Subject:
09/04184 HL&P's Request for a Rate
Increase datvb June 1 S. 1984
RATE DESIGN
Ort nators _ REVISED
Isis 3 a
As recommended, the residential class of customers as a whole will receive a 4.1% increase
in rates. From "cluster analyses" studies, the minimum usage level appears to be 400 kilowatt -
hours per month. Therefore, a rate block has-been established at this level to recognize the high
load factor or constant usage level of this group, resulting in more efficient usage of the utility's
power production facilities. Under the recommended rate structure, the average cast per kilo-
watt-hour Increases with consumption during'the on -peak summer season, thereby encouraging
conservation * providing a rate incentive to'consetwe. On the other hand, the rate recommended
for winter heating consumption in excess of 1,000 kilowatt-hours is low, recognizing the base lead
usage characteristics of such consumption.
The present and proposed residential rate structures are as follows:
Present Rate Structure
bummer:
Customer Charge of $7.00 per month, which includes 30 kwh*
31 -750 kwh at 6.5d per kwh
over 750 kwh: all kwh at 8.3E per kwh
Winter:
Customer Charge of $7.00 per month,, which includes 30 kwh*
over 30 kwh: at 6.Sd per kwh
Houston Lighting & Power Company Proposed Rate Structure_
Summer: _
Customer Charge of $9.00 per month, which includes 250 kwh
over 250 kwh: at 9.6d per kwh
Winter:
Customer Charge of $9.00 per month, which includes 250 kwh
251 -1,000 kwh: at 9.6d per kwh
over 1,000 kwh: at 6.2d per kwh
Public Service Department Recommended Rate Structure
Summer:
Customer Charge of $7.25 per month, which includes 30 kwh "#
31 -400 kwh: at 6.2d per kwh
over 400 kwh: at 9.1d per kwh
Wi nter:
Customer Charge of $7.25 per month, which includes 30 kwh "s
31 -400 kwh: at 6.2d per kwh
401 -1,000 kwh: at 9.1 d per kwh
over 1,000 kwh: at 6.36 per kwh
For each minimum, an additional charge will be made for fuel cost.
**For these minimums, an additional charge of 3.87146 kwh will be made
The cost of service allocation method proposed by Houston Lighting & Power Company, the
Probability of Negative Margins Method, is recommended for adoption in this case. The revenue
reggiirement by class is to be established in accordance with relative rates of return which move
each class toward its own cost of service. The rate design for each class, with the exception of
•the residential class which is discussed above, shall be in the same manner as proposed in HL&P%
f ilrng.
Ll
r
L_J
1-1
Ll
E
-
-
.
-
-
-
■■
e
�
■
s
k
k
■
�
K
�
.
.
:;
§
,
m
§
■
�
■
�
§
■
-
�
§
■
_
�
■
E
�
E §_
■
;
-
'
■
■
■
§
- -
�
. §
.
�
�
�
:a
' '
� -� ■
B
/
�,
■
■
k
� � � � �
'
$kgh
§
k
-
§
■
�
■
§
s
■
--
'� �
p
t
■
§
��
§
§
■
�
�
�
r
■
�
#
£s
■
2
■
■
@
■
§
B
E
-
.
■
{ ��
r
•
n
C
Datb8 /30E64 SublecC q
HL
dcp's R � --- '— Grlginsta�s
euest for a Rate In1Ueb 4 4
Increase dated June 15, 1984 a
OTHER ISSUM
South Texas Nuclear Project
n.e,
- Pursuant to 516(h) of the Public Utility Regulatory Act, the Utility Evaluation Division of
the PUC has enlisted a firm to perform a management audit of HL&P. Arthur Young is currently
is the process of completing such an audit. In addition, the Engineering Division of the PUC is
evaluating the cost and benefits of continuing or cancelling one or both units of the STNP.
Further, the participants of STNP (the City of Austin, the City Public Service Board of San
Antonio, Central Power do Light Company, and HL&P), are conducting a study to determine the
feasibility of converting the nuclear units to coal units.
It is recommended that the City of Houston review ongoing studies of the South Texas
Nuclear Project, and if necessary, conduct its own study to determine whether STNP is the most
economic and reliable source of electric power to meet the needs of the Houston area. This study
should be conducted outside the context of a general rate case.
Conservation. Cogeneration and Competition
In meeting the growing power demands of the Houston area, Houston Lighting do Power Com-
pany in all cases should pursue the most economic and reliable source of power, including alterna-
tives to power plant construction such as conservation and debottleneckbW of existing power
plants. There is a tremendous potential for cogeneration in Houston, however, if a cogenerator is
paid based on the full cost avoided by HL&P because the cogeneraor is on -line, cogeneration will
be the most expensive power available to HL&P.
We recommend that the utility seek out the least - costly, yet reliable power supply
alternatives, and urge that price competition be used to select among potential power suppliers.
The Public Service Department has completed a study "A Methodology for Comparative Risk
Analysis: Introducing Competition Into Avoided Cost Pricing", which was funded by a grant from
the Department of Energy. Our findings indicate that competition can be effectively used to
select the most economic power sources thereby producing the potential for substantial savings to
ratepayers.
SUMMARY
The Public Service Department recommends that Houston Lighting do Power Company be
permitted to produce additional revenues in the amount of $126,617,000 over test period adjusted
revenues. The recommended rate design is intended to provide a price incentive to encourage con-
servation during summer peak periods, and to recognize the efficient use of power production
facilities through a lower rate during the winter off -peak period. The typical residential customer
receiving an increase of 4.1% would average 1800 kwh in the summer and 600 kwh in the winter.
The monthly increase would average $4.30.
JW C:d'm
B- 4037 -16
C]
C
n
z to r mmm m
m
z
°
m°
c
Z°+
i m°
n N m cw< -,
m u'NZ X
o
z
-4
T
In
m
10
•
-1
z
m
x
m
a
i s
m
m M n
�
In
-a
D
.. o
0
-1
D
D
0
w Z D
o w 0xfn
..
z
o
x
m
w
Z
1 .,
10
z o
mz+c
o
z
N
Z
uu)
z
m
z
i
m m m al p+
m
e
z°
< < N m m m
N
D
3
1
z z c
a
«•mm
o
m
m m z Z C-z,
m
m
°
Z
1
N N m
N
m
m DD
o
z
I
m
°
n
D
I
1
o
m
N
N
-1
=
m
o
n 1 1
c
I
m m
N
If •0 1 W CA I A
a r 4J V 1 V.
N
N
r
N
�.
�.
m
1 '�
D m
p
Z
I
u V -0 V; P
V
r,J
()I
m
r
A
V
•N1
I@
71 <
('
W
N 1 P
m
C
N
'=
I p IT!
m z
G]
q •.0 1
q G l AGP 1 G
P
0
G
P
O
N
.WO
! U)X
p„m
I D
G z�
z
A I 1
I °
�
m
aaO
p
q N I P I r
r
tJ
I N n
M p w
P +� 1 07 I v
.0
V
Lq
`0
.PD
1 33
x
O
r
�J
N
LJ
tD
hJ
I z Mb
W v m
m
O I
q G 1 O A 1 0
r
G
V
N
r
N
1 -i Z
Z
D
O
I N <
••1
O
A
T
h I W A I A I
tJ
1
D
z
N 1 •0 IJ I N I P
W
r
r
p
cA
I m
1 N n
O O
1 a
P
-to
*4 CO
p l
O
1A
-b
P
1
g 1 I
N V V 1
A
.A
1 A D
O
If -0 f N A 1 V
g f G G I OG 1 0
V
O
m��
•
O hJ 1 N!
1 N
01 tl r I rJ
t0
1 3
N V
.0
P g 0 1
111
n
q I 1 1
W I
� m i m l
V
~
JI m
c
w
p q N Q 1 f 0) d l A I JiJ
m
W
P
e
-4
�
q r I V I 1
r
r
0'
I ..
Con raj 0,
.N.
NO
hJ
N
m
to
N
.0
1 71 <
Ll
•
c: