Ordinance No. 5,222ORDINANCE NO. 5222
AN ORDINANCE RELATING TO RATES TO BE CHARGED BY HOUSTON
LIGHTING AND POWER COMPANY FOR ELECTRIC UTILITY SERVICE
WITHIN THE CORPORATE LIMITS OF THE CITY OF BAYTOWN,
TEXAS; CONTAINING FINDINGS AND PROVISIONS RELATED TO THE
SUBJECT; PROVIDING FOR THE REPEAL OF INCONSISTENT
PROVISIONS; CONTAINING A SAVINGS CLAUSE; AND PROVIDING
FOR THE EFFECTIVE DATE THEREOF.
WHEREAS, on or about November 23, 1988, Houston Lighting and
Power Company (HL &P), filed with the City of Baytown (City) a
Statement of Intent and Petition for Authority to Change Rates
relating to electric utility service, and proper notice thereof
was duly given; and
WHEREAS, by Ordinance No. 5160, the City Council suspended
the effective date of such proposed rate increase until March 28,
19 89 ; and
WHEREAS, the City Council, having considered HL &P's rate
request 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 no increase in rates should be prescribed
for HL &P; 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, Texas,
hereby finds the requested rates of HL &P to be excessive and
unreasonable.
Section 2: The City Council hereby approves the
recommendations set out in Exhibit "A," attached hereto.
Section 3: The City has original jurisdiction over the case
pursuant to Section 43 of the Public Utility Regulatory Act.
Section 4: The City hereby denies HL &P's Petition for
Authority to Change Rates.
Section 5: The City Council hereby authorizes and directs
the City Clerk to serve HL &P with a certified copy of this
ordinance which is the final determination and order of the City.
Section 6: HL &P 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 Manager, file a complete schedule of rates
and tariffs with the City Clerk setting forth all of HL &P 's
rates and charges for utility service then in effect. The City
Manager is authorized to review, and approve and require
revisions to the tariff if he determines it not to be in
accordance with this ordinance.
890309 -2a
Section 7: Nothing contained in this ordinance shall be
construed now or hereafter as limiting or modifying, in any
manner, the right and power of the City under the law to regulate
the rates and charges of HL &P.
Section 8: In the event that HL &P appeals from this order
setting electric rates for HL &P, the City Council hereby
authorizes the City Attorney or his designees to vigorously
represent the City and its citizens in all matters relating to
such appeal, any and all matters in connection with STNP, and to
take any and all actions necessary and incidental thereto and to
the resolution of the matters subject to such appeal, all as may
be in the best interests of the City.
Section 9: 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 all other respects this
ordinance shall be cumulative of other ordinances regulating and
governing the subject matter covered by this ordinance.
Section 10: If any provisions, 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 11: This ordinance shall take effect immediately
from and after its passage by the City Council of the City of
Baytown.
INTRODUCED, READ and PASSED by the affirmative vote of the
City Council of the City of Baytown, this the 9th day of March,
1989.
a
EMMETT 0. HUTTO, Mayor
ATTEST:
n
EILEEN P. HALL, City Clerk
i
ANDALL B. STRONG, City rney
C:1:6:7
Exhibit "A"
Revenue i Regulatory Affairs Division
Finance & Administrations
Recommendation Concerning
Houston Lighting a Power Company's
Request for Increased Rates
On November 23, 1988, Houston Lighting & Power Company
(HL &P) filed a Statement of Intent to Change, Rates with the City
of Houston. The City exercises original jurisdiction over the
rates and services of HL&P under the Public Utility Regulatory
Act (PURA) . Based on test year adjusted expenses and revenue
figures for the test year ending September 30, 1988, HL &P
purports to have an annual revenue deficiency of $446,198,000 for
the first year of its proposed rate moderation plan. The
following report outlines the basis of Regulatory Affairs'
recommendations concerning HL &P's request for a rate increase.
MALAKOFF ELECTRIC GENERATING STATION
HL &P i-s requesting that $93.2 million related to the
Malakoff Generating Electric Station (Malakoff) be included in
invested capital as "Plant Held For Future Use." The Company's
rationale for this classification is predicated on in- service
dates for Unit I of 1997 and Unit II of 1999. The need for power
produced by these units is driven by the assumption that the
power presently provided by firm cogeneration contracts will not
1
be available in the years subsequent to 1993. This assumption is
not supported by evidence of any inquiries by HL &P concerning the
prospects of renegotiation of these contracts. Regulatory
Affairs does not agree with this assumption and is, therefore,
recommending that Malakoff not be included in invested capital.
HL &P is requesting current recovery of $61.3 million. over a
nine year period, of past expenditures related to Malakoff.
These expenditures are now deemed not to be useful when the
project is reactivated. The expenses are primarily for
engineering plans which are no longer viable, cancelled purchase
commitments and other expenditures which have no future value.
The Company claims that it is entitled to current recovery of
these expenditures since they were prudently incurred.
Since there has not been a Commission finding to support
this statement, nor has the Company provided any support for this
statement in its rate filing, Regulatory Affairs considers that
the request for current recovery of any of these amounts is
premature and, therefore, should be denied.
Based upon the foregoing, it is also recommended that the
unamortized balance related to these Malakoff expenditures which
HL &P has requested to be included in invested capital, be denied.
HL &P has also requested current recovery for a nine year
period of $123.5 million of expenditures for the Trinity Mine.
This asset was purchased by Utility Fuels, Inc. (UFI), the fuel
affiliate of HL &P, to supply lignite to Malakoff. At present
HL &P does not own the mine, but does have an agreement to
indemnify UFi for its costs. The Company indicated that the
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proposed purchase of this mine is contingent upon the granting of
recovery through rates. The justification provided by the
Company for seeking recovery at this point in time was the
facilitation of future planning.
Since HL &P does not own the asset and there is no
justification for requesting current recovery -at this point in
time, it is recommended that the recovery be denied.
As with the expenditures related to Malakoff discussed
above, HL &P has also requested that the unamortized balance of
the Trinity Mine be included in invested capital. Since it is
recommended that recovery not be allowed, it is also recommended
that this inclusion in invested capital be disallowed.
PROPOSED RATE MODERATION PLAN
A rate moderation plan is a deviation from traditional
ratemaking which is considered when the results of traditional
ratemaking would be detrimental to the ratepayers. Consideration
should be given to the economic impact of the rate increase
requested and the impact to the utility of rate increase
denial. Within these constraints, rates are established by
deferring revenues which would be generated by using traditional
ratemaking methodology to a future period.
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The qualification standards for phase -in plans were
established by the Financial Accounting Standards Board. These
standards must be incorporated into a rate order if the deferred
costs can be recognized for financial reporting purposes. The
standards are specific in the requirements that the deferrals
must be allowed the carrying costs. The results of the treatment
would increase the ultimate costs to the consumer for the
additional capitalized costs.
HL&P has proposed a rate moderation plan which consists of
two components. The first component concerns the recovery of
amounts related to Limestone Unit II and STNP Unit I for which
the Company has requested deferral treatment in Docket No. 8230
(deferral docket). The second component of costs are related to
STNP Units I and II. As a part of the Company's request, they
are proposing that the Commission approve a qualified phase -in
plan for both units of STNP.
It is difficult at this time to make a recommendation on the
Company's proposed rate moderation plan because of the
assumptions which were incorporated to structure that plan. The
Company's proposal assumes that interim deferrals will be granted
in Docket No. 8230. Neither the examiner's report nor the final
order in the docket has been issued to date. The final order
will determine if deferrals are granted, in what amount and set
the recovery period for the deferrals. The Company has also
assumed that all dollars associated with STNP in excess of the
n
Brown and Root Settlement will be found prudent. The proposed
plan also assumes that the level of rates which the Company has
requested will be granted.
It is recommended that the issue of a rate moderation plan
be analyzed and addressed when the final results of applying
traditional ratemaking are known. Without the benefit of this
knowledge, it is impossible to determine if a rate moderation
plan is necessary and the ultimate costs to the consumer of
adopting such a plan.
REVENUE REQUIREMENT
Reconcilable Fuel Expense
Regulatory Affairs is recommending a number of adjustments
concerning the reasonably predictable fuel expense for the year
in which rates are expected to go into effect (the forecasted
rate year). The first adjustment discussed below concerns the
reassessment of the assumed generation mix that HL &P will
employ during the forecasted test year. A substantial portion
of the adjustments recommended stem directly from the
recommendation that none of the expenditures associated with
the construction and operation of STNP are considered at this
time. Therefore, the generation mix to provide the required
demand has been adjusted. The second set of adjustments
described below deals with the development of an alternative
set of natural gas prices from that given by HL &P.
5
Since the preliminary recommendation by the Regulatory
Affairs staff assumes that the cost associated with STNP is
zero, the same assumption must also be applied to the various
associated operating costs. A production simulation model was
employed to calculate total fuel expense. The megawatts of
generation from the nuclear units were replaced with capacity
from gas, lignite and coal, as well as purchased power. The
generation which has replaced output from STNP is the most
economical generation available given the constraints of the
operating system.
Regulatory Affairs has also recommended that a lower
natural gas price forecast be employed rather than the forecast
proposed by HL &P in the fuel filing. HL &P has consistently
maintained that the current "soft" market for natural gas is
about to end and that natural gas prices will soon begin to
increase. While gas prices have begun to stabilize, there is
considerable uncertainty as to when gas price increases will
occur on a regular basis. Much of the HL &P analysis is
predicated upon national and international events which,
heretofore, have been impossible to forecast with a reasonable
degree of -certainty. This ranges from the amount of gas which
regional and national producers appear to be willing to shut -in
to the ability of OPEC and non -OPEC oil producing countries to
achieve an accord which will effectively limit production,
thereby establishing a floor for energy prices. Instead,
Regulatory Affairs has assumed that because these variables
defy reasonably accurate prediction and there is nothing
6
definitive to indicate that energy prices are about to
increase, the "soft" gas and oil market will be maintained over
the near -term.
While both the "pure" cost of lignite and coal appear to
be reasonable, certain adjustments are recommended to fuel
expense. HL &P has indicated that it plans to use the proceeds
from the lawsuit settlement with several railroad companies as
an offset to the litigation costs that were incurred. It is
the opinion of Regulatory Affairs that this is not an
appropriate accounting entry since the litigation costs should
not be considered as a reconcilable fuel expense. Rather, it
is recommended that the litigation expenses should be recovered
in base rates and amortized over the life of the coal
contract. The entire settlement proceeds should flow back to
the ratepayers as a reduction of reconcilable fuel expenses.
HL &P has also inappropriately included the salary expenses
incurred by Utility Fuels, Inc. (UFI), their fuel affiliate, in
the cost of lignite. This has been reallocated to non -
reconcilable fuel expense, thereby reducing the commodity cost
of lignite.
7
Non- reconcilable Fuel
Non - reconcilable fuel represents expenditures for items not
related to "pure fuel expenses ". These non - reconcilable fuel
expenses have been reduced by $2,951,000. The rate base of UFI
was reduced by $230,000 for items included twice in the invested
capital. This reduction in the rate base and the lower return
accounted for a decrease in the non -fuel costs. The operating
expenses were increased by $593,000 for labor which was
classified as fuel expense and not as labor. , During the test
year, $472,000 of non - recurring expenses were billed to HL &P
which are not anticipated to be recurring in nature.
Firm Purchased Power Expenses
In HL &P's request, $12,006,000 was included for the
Applied Energy Systems (AES) cogeneration contract. This AES
contract has been assigned until mid -1990 to another electric
utility. The status of this renewal is not known at the
current time. Therefore, these 1990 costs have not been
included in the recommended cost of service. If the contract
is renewed in 1990, HL &P will be able to recover these costs
through a purchased power clause in its tariff.
Operations and Maintenance Cost
Wage and Salary Expense
HL &P proposed an increase of $4 million to recognize the
[7
current cost of non -STNP labor adjusted for a 3% contract
increase for union employees and an estimated 4% increase for
non -union employees. The 4% non -union increase which the
Company describes as "best estimate" is not known and
measurable. Therefore, Regulatory Affairs recommends a
disallowance of the requested 4% estimated increase in non-
union wages. The recommended level of wages also includes a
minor adjustment to recognize a more normalized overtime rate.
Employee Benefits
The major decreases to employee benefits are recommended in
the following areas:
Medical and Dental Insurance - $5 million
Life Insurance - $.5 million
Retirement - $1 million
HL &P's calculation of medical expense included a 15.87%
inflation factor, yet excluded $2 million of additional savings
related to changes in the medical and dental plans. The
Company's application of an inflation factor does not reflect a
known and measurable event. Therefore, the adjustment for
inflation has been eliminated from this recommendation.
HL &P requested life insurance expense at the test year
level. The insurance plan requires HL &P to pay any life
insurance costs which exceed the amount provided by employee
contributions. Analysis of this test year expense indicated that
9
employee contributions are fully covering the cost of life
insurance. The life insurance amount included in this
recommendation was increased because of the change in the
employees contribution level.
The recommended decrease to retirement expense is related
solely to the change in the expense factor which is discussed
below.
Each of these benefits was affected by an error made in
HL &P's development of an expense percentage. Correction of the
error resulted in a 6% decrease to the expense percentage.
Property Insurance Reserve Expense
Included in the revenue requirement is an expense to
estimate non - insured property losses. ' This request was
determined by averaging the seven years in which a non- insured
loss occurred. Based upon a ten year average, this requested
amount must be reduced by $381,000. This ten year average was
used to reflect the inclusion of years in which no non - insured
losses occurred. These ten years include both years before and
after the period selected by HL &P.
Factoring & Uncollectible Expense
HL &P requested test year effective factors of .5866% and
.27% for factoring and uncollectible expense, respectively.
Using current uncollectible experience, the Regulatory Affairs
recommended rate of return on equity and a twelve month average
10
interest cost results in a recommended decrease of .14% to the
Company's request.
Advertising, Contributions and Donations
The Company's requested advertising contributions and
donations have been reduced by $4.5 million in order to eliminate
$2.6 million related to the advertising program which was
determined to be promotional. Additionally $937,000 was removed
to eliminate all charitable contributions.
Non - Recurring Expenditures
In reviewing fluctuations in expenses, $2,435,000 of STNP
related expenses occurred during the test year. These expenses
occurred before the commercial operation of STNP. A major item
of these expenses was the overhead on litigation costs
associated with the Brown and Root lawsuit, which the other
owners of STNP refused to pay. HUP paid the entire amount.
The other item related to a re- allocation of operating expenses
at STNP. Both of these items are non - recurring and should not
be included in the determination of the revenue requirement.
DEPRECIATION i AMORTIZATION
The Company's request for depreciation and amortization was
reduced to eliminate depreciation associated with STNP,
decommissioning and the amortization of Malakoff expenditures, as
previously discussed.
11
FEDERAL INCOME TAXES
The Company requested that the excess deferred Federal
income tax reserve generated by the tax rate change of 1986 be
returned to the ratepayers over a nine year period. This excess
on the "unprotected piece" was $47,163,000. The Company chose
nine years to be consistent with the proposed phase -in plan.
Regulatory Affairs recommends a three year period to return the
excess to the ratepayers.
In the Company's original filing, an annual amount of
$2,001,000 related to the excess deferred taxes on the "protected
piece" was omitted. Regulatory Affairs is recommending that this
amount be incorporated in the tax calculation.
RETURN
The return component of revenue requirements is the product
of multiplying the invested capital (rate base) by the overall
rate of return. The following adjustments are recommended to
reduce HU P's proposed invested capital.
Accumulated Depreciation
As discussed earlier, the plant investment related to STNP
has been removed pending the determination of the prudence of
this project. Accordingly, the recorded accumulated depreciation
for STNP must be removed from the rate base.
12
Retirement Plan
In addition to HL &P's reduction for retirement plan costs,
$15,453,000 should also be removed from invested capital. This
reduction relates to additional costs which were expensed and not
expected to be paid in the current year. These amounts should be
removed from the rate base until the funding is made.
Prudence Review of STNP
HL &P requested $28,366,000 for the expenses related to the
prudence audit of the STNP project. This amount has been removed
in this presentation. The costs associated with the prudence of
STNP is similar to an engineering study to investigate an aspect
of the construction of the project or an environmental study
performed. These prudence costs should be capitalized to the
project and depreciated over the useful life of the unit.
Other Cost Free Capital
The Company should not be allowed a return on cost free
capital. At September 30, 1988, the Company has withheld
$10.648,000 from the contractors building the Limestone
generating units. This amount of money has been included in the
rate base but has yet to be paid to the contractors building the
units. This amount of money is cost free to HL &P until they pay
the contractors and should be removed from the rate base.
13
Cash Working Capital
The $104,975,000 negative cash working capital results from
changes in the fuel mix, elimination of items recognized in pre-
payments, and changes in the lead days associated with Federal
income tax, preferred dividends, interest on long term debt and
the overall reduction of the Regulatory Affairs' revenue re-
quirement.
Nuclear Fuel
Since STNP has been removed, the related nuclear fuel in-
vestment should also be removed.
Deferred Federal Income Tax
The Company has removed $16,829,000 million of accumulated
deferred Federal income tax from invested capital because the
deferred expenses giving rise to the deferred tax were not
included in invested capital. Regulatory Affairs recommends that
the Company's proposed treatment be rejected. While it is true
that the unamortized balances of these expense deferrals has not
been included in invested capital, recovery of these expenses has
been included in the cost of service. The Company was entitled
to a tax deduction during the year in which the expenses
occurred, thereby receiving cost free capital from the Federal
Government. Further, the ratepayer is providing recovery of this
expense through rates. This treatment is also consistent with
the treatment adopted by the Commission in Docket No. 6765.
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Rate of Return
An electric utility is allowed the opportunity to earn a
reasonable rate of return on its investment according to PURA.
This rate of return is expressed as a percentage and multiplied
by the rate base to calculate the return dollars included in the
cost of service. Specifically, the cost of each component of the
capital structure (generally debt, preferred stock, and common
equity) is multiplied by its percentage of the total capital
structure. The cost of debt and preferred stock generally can be
determined directly since there are stated interest rates and
dividend rates associated with each issue. However, there is no
stated interest or dividend rate associated with the cost of
equity. Therefore, the cost of equity must be estimated.
Finally, a representative capital structure must be chosen in
order to determine each component's percentage of the capital
structure.
In October 1988 HL &P issued $68.7 million in collateralized
revenue refunding bonds. Therefore, the September 1988 capital
structure was updated to October, 1988, to take this known and
measurable change into account. Using the October 1988 capital
structure of HL &P resulted in a 26 basis point decrease in the
percentage of long -term debt, a 4 basis point decrease in the
percentage of preferred stock and a 30 basis point increase to
the percentage of common equity. This capital structure consists
of 47.48 percent long -term debt, 6.52 percent preferred stock and
46.00 percent common equity.
15
HL &P has seven adjustable rate bond issues and two
adjustable rate preferred stock issues with new interest rates
set on a periodic basis. Average interest and dividend rates in
effect For the twelve month period ending October 31, 1988, have
been used as representative interest rates for the period this
rate recommendation is expected to be in effect. HL &P's
resulting cost of long -term debt and preferred stock are
estimated to be 8.61 percent and 8.19 percent, respectively.
Since the cost of equity cannot be measured directly, the
cost of equity has been estimated using a risk premium analysis,
a discounted cash flow analysis (DCF) and a comparable DCF
analysis. In a risk premium analysis the cost of equity is
estimated by determining the additional return required by
investors for holding a company's stock instead of its debt. A
risk premium of 200 -400 basis points has been added to the
December average single A utility bond yield of 10.06 percent
from Moody's Bond Survey, resulting in a range of 12.06 to 14.06
percent.
The discounted cash flow analysis is based upon the Gordon
dividend growth model which recognizes that the return to the
stockholder -consists of dividend yield and growth. Since HL &P is
a wholly owned subsidiary of HII and investors purchase shares of
HII, the model has been applied to HII. The resulting cost of
equity range is 15.26 to 15.76 percent. The proposed acquisition
of Rogers Cable, Inc., may be affecting how investors view HII.
Therefore, the discounted cash flow analysis also has been
applied to electric utilities of similar risk to HL &P.
16
The selection criteria for comparable companies of similar
risk are:
I. Electric utilities rated single A by Moody's and
Standard & Poor's
2. Investment in operating nuclear plants
3. No troubled operating nuclear plants
4. A minimum of 80% of revenues from electric service
5. Electric utilities which purchase less than 50% of their
electricity
Using these criteria four electric utilities were selected:
Carolina Power & Light, Dominion Resources, Pennsylvania Power &
Light and Union Electric. The resulting average cost of equity
for the four companies was 12.73 percent.
The recommended cost of equity is 12.73 percent, which is
supported by the results of the risk premium and comparable DCF
analyses. The results of the DCF analysis applied to HII have
not been used because it appears the acquisition of Rogers Cable,
Inc., may be affecting how investors view HII and ratepayers
should not subsidize non - utility businesses owned by HII.
Weighting HL &P's cost of debt, preferred stock and common
equity by their relative percentages of the capital structure
produces a recommended rate of return of 10.48 percent. This is
a reduction of .75 basis points to HL &P's requested rate of
return of 11.23 percent.
17
RATE DESIGN
General Overview of HL &P Cost of Service Study
The primary purpose of a cost of service study is to develop
a reasonable cost allocation methodology to assign the utility's
revenue requirement to its various customer classes and to
develop rates which track the cost of serving each class.
HL &P's Cost of Service is basically presented in the same
format as the one submitted before the Commission in the most
recent HL &P rate case, Docket No. 6765. The overall cost of
service procedure is acceptable. There is, however, a major
change in the development of capacity cost allocation factor for
production plant and its related expenses.
Production - Capacity Cost Allocation Factor
HL &P's major change in its cost of service study is the
manner in which the "allocation factor for production - capacity
related cost" is developed. In the two most recent rate cases,
Dockets Nos. 5779 and 6765, the production - capacity related cost
was allocated on the basis of a method called the Probability
Peak Method; also referred to as the Probability of Negative
Mar in (PONM) . In general terms, PONM is the probability of
being unable to supply a particular margin between capacity in
service and system load. This method is accomplished by
calculating the probability of being unable to serve the load in
each hour. The PONM value is summed for all hours of the year to
determine the total PONM. Each hourly PONM value is divided by
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the total PONM to yield a weighted hourly value. These weighted
hourly values are multiplied by the classes' load for each hour
relative to total system load for that hour. The resulting
factors are summed over all hours by rate class to yield
Probability Peak allocation factors. The probability function is
inversely related to reserve margin.
The method proposed by HL &P is Average and Excess with 4 Non
Coincidental Peak (A &E -4 NCP). According to the Company's
testimony, the A &E -4 NCP is chosen because it tends, indirectly,
to result in satisfying the various criteria set forth in the
selection of the cost allocation methodology. These criteria are
established in order that allocation be apportioned accurately:
- track cost
- recognize off -peak usage
- recognize demand diversity
- provide stable results over time
- allocate cost to time periods
The same criteria were also suggested by the same company
witness in Docket No. 6765, in which he advocated the application
Of PONM as- the basis for developing allocation factors for
production plant and its various related costs.
It appears that the main reason HL &P rejected this capacity
cost allocation basis in this rate request is that HL &P has a
reserve margin of approximately 36 %.
19
The reserve margin calculation provided by HL &P for 1989 is
37.80 %, and includes STNP Unit II capacity addition of 385 MW.
If this capacity is eliminated from the total system capability,
the expected reserve would be only 34.15% instead of 37.80 %.
Within this range of reserve margin, there is no absolute
certainty that the utility system will not experience forced
outages. In the last docket, HL &P recommended the PONM
methodology when the reserve margin for 1988 was calculated to be
31.8 %.
The changing of cost allocation methodology would have a
substantial impact on the revenue associated with each individual
customer class. As depicted in Schedule - Special /RCS, the low
load factor classes such as Residential, Miscellaneous General
Services and Street & Protective Lighting classes will experience
a significant difference in their allocation factors in
comparison to the HL &P's proposed A &E -4 NCP.
PONM is a reasonable method of allocation because it relies
on both "on- peak" and "off- peak" demands, and for the reasons
given above the PONM model as previously adopted by the
Commission is recommended.
Transmission- Capacity Allocation Factor
HL &P applied the A &E -4 CP to develop the allocation of
transmission - capacity related cost. This method was also
approved by the PUC in the last HL &P rate case. The City does
not object to the application of this method, because it
recognizes both the on -peak and the off -peak capacity users.
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Development of Uncollectible Account Allocation Factor
HL &P has allocated the Uncollectible Account (Account 904)
on the basis of delinquency records which are maintained by its
credit department. This method of allocation was rejected by the
PUC in Docket No. 6765 on the basis that bad debt expense is not
caused by the current customers. Those who caused this expense
to be incurred are no longer connected to the system. The PUC
order recognizes that a customer who remains on the system should
not be penalized by somebody else who left the system just
because they all belong to the same rate class. Since the source
of this expense is from previous time periods, it is reasonable
to characterize an uncollectible expense as cost which is
external to the system. It should be treated as cost to be
shared by all customers currently connected to the system.
Therefore, revenue from each customer class should be used as the
allocation factor for this cost component.
Class Revenue Increase Recommendation
HL &P has proposed a total system revenue increase of
15.5 %. Base revenues by class vary from 6.60% to 83.40 %.
The proposed revenue increase is mainly based on the cost of
service result and revenue impact consideration of the current
relative rate of return index. It appears that HL &P has limited
the revenue increase recommendation to the PUC's policy guideline
which fixes a cap equal to 1.50 times the system average increase
for any class.
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Special note should be taken of the application of the
relative rate of return index as one of the criteria in the
revenue increase recommendation. HL &P has used the present
revenue as the basis for the recommendation for the proposed
increase. Present revenue results from the revenue collection
made according to the rates developed by PONM method. Thus, it
is inappropriate to use the current rate of return derived from
the allocated rate base developed under A &E -4 NCP, as proposed by
HL &P, as a criterion in the class increase recommendation. The
comparison is valid only if the same costing methodology is used
to determine the proposed rate base.
Customer Service Charge
The customer service charge for each customer class should
reflect only the minimum charge associated with the facility
plant, i.e. service drops and meter, and other operations which
directly support the customer service.
Customer Silting
It is proposed that, at least for Residential and
Miscellaneous General Services billing, HL &P incorporate all rate
component units somewhere on the customer's bill so as to enable
the verification of the amount due.
6- x425 /FDX
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Houston Lighting i Power
Docket 8425
Base Rate Deficiency Calculation
Revenue Requirements
with staff recommendations:
less:
Other Revenues
€ueL Revenues
Franchises Revenues
Base Rate Requirements
Less:
Adjusted test year
base revenues
Deficiency, base rate
Percent increase to base rates
Revenue Requirements with fuel
Adjusted Reverxas
excluding franchise revenues
Deficiency, excluding franchise ii other
Percent increase
to adjusted revanuee, excluding
franchise and other revenues
Deficiency, total revenues
Adjusted revw%as, including
franchise and other revenues
Percent increase
to adjusted revenues,
including franchise
and other revenues
Exhibit i
Compsny Request *Staff Recommendation
65 percent SUP 0 STMP
$3,321,192 $2,908,498
$32,244
$32,244
$952,634
$1,013,810
$83.730
$68,553
12,252,584
$1,793,891
$1,820,112
$1,820,112
$432,472
($26,221)
23.76%
-1.44%
:3,205,218
S2,807,701
$2,772,746
$2,772,746
$432,472
: $4,95#
15.60% 1.26%
$446,197 533,503
$2,074,995 $2,874,995
15.52% 1.17%
* Recognizes that insufficient information is available to make a responsible recommendation regarding SUP.
DESCRIPTION
PURCHASED POWER
FUEL
OPERATIONS AMD MAINTENANCE
DEPRECIATION
AMORTIZATION
INTEREST ON CUSTOMERS DEPOSITS
TAXES OTHER THAN INCOME TAXES
FEDERAL INCOME TAXES
RETURN
REVENUE REQUIREMENT
OTHER REVENUES
FUEL REVENUES
CITY OF HOUSTON
• rrrr *wwtrwrrrrrrw *r *wrrrrwrrrrrww
NOUSTOk L[GHTikG i POKIER - DOCKET 8425
(COLUMN 1)
TEST YEAR
PER BOOKS
=
371,732 11
991,763
629,502
227,690
8,982
0
152,078
143,88S
479,786
= 3,005,398 S
sssassaassasssa
i
29,768 S
952,634
REVENUE REQUIREMENT
wrrrrrrwrtrrrrrrrrw
(COLUMN 2)
COMPANY
ADJUSTMENTS
TO TEST YEAR
40,557 S
(154,190)
47,615
36,686
18,763
0
22,449
66,393
235,321
315,794 S
wnuwmraa.ss =as.
2,476 S
0
STAFFS ADJUSTMENT TO TEST YEAR PER BOOKS IS DERIVED BY ADDING
THE AMOUNT IN COLUMN 2 TO THE AMOUNT IN COLLMN 4
(COLUMN 3)
COMPANY
REQUESTED
TEST YEAR
412,289 t
837,573
677,117
264,576
27,745
0
174,527
212,278
715,087
3,321,192 S
a *t.ssa.assaas
32,244 S
952,634
(COLUMN 4)
STAFF
ADJUSTMENTS
TO REQUEST
(3,028) S
57,427
(82,260)
(31,990)
(20,533)
2,328
(11,352)
(91,495)
(231,791)
(412,694) S
ssasasasasesaaa
0 i
61,167
SCHEDULE I
(COLUMN 5)
STAFF
RECOMMENDED
TEST YEAR
409,261
895,000
594,857
232,586
7,212
2,328
163,175
120,763
483,296
2,908,498
assasssasassass
32,244
1,013,801
DESCRIPTION
O&M NOT ADJUSTED
WAGE AND SALARY EXPENSES
EMPLOYEE BENEFITS
STP ANNUALIZED OW
PROPERTY INSURANCE RESERVE
FACTORING COSTS
FRANCHISE REQUIREMENTS
RATE CASE EXPENSES
EEI DUES
LEGISLATIVE ADVOCACY
SOCIAL DUES
RESEARCH AND DEVELOPMENT
LEASE AND RENTAL CHARGES
INTEREST ON CUSTOMER DEPOSITS
ADV., CONTRIBUTIONS & DONATIONS
POWER WHEELING COSTS
SALES TAX INCREASE
MALAKOFF LIGNITE COSTS
NONRECURRING EXPENDITURES
UNCOLLECTIBLE EXPENSE
TOTAL OPERATIONS AND MAINTENANCE
CITY OF HOUSTON
r*► wfrf�tfrkt,efritr *rfrf�tfrf*rrf
HOUSTON LIGHTING & POWER • DOCKET 8425
OPERATIONS AND MAINTENANCE (EXCLUDING FUEL AND PURCHASED POWER)
frfrffttrrrffftrtrrfftfffffrrftwftftt frrffrrtfftttttftrffftffff
(COLUMN 1)
TEST YEA&
PER BOOKS
S 191,203 1
259,299
53,514
2,447
0
17,630
70,181
1,205
477
9
35
11,753
7,467
0
3,820
733
0
0
1,533
8,196
S 629,502 f
zzzz :szaazzzzz■
(COLUMN 2)
COMPANY
ADJUSTMENTS
TO TEST YEAR
0 S
4,010
(10,326)
27,190
1,269
1,852
11,760
3,216
(81)
(9)
(35)
(25)
(192)
2,200
937
(733)
362
6,823
(1,533)
930
47,615 S
zazaazzazzzaaa
STAFFS ADJUSTMENT TO TEST YEAR PER BOOKS IS DERIVED BY ADDING
THE AMOUNT IN COLUMN 2 TO THE AMOUNT IN COLUMN 4
(COLUMN 3)
COMPANY
REQUESTED
TEST YEAR
191,203 S
263,309
43,188
29,637
1,269
19,482
81,941
4,421
3%
0
0
11,728
7,275
2,200
4,757
0
362
6,823
0
9,126
677,117 S
aaazzzzszazzzss
(COLUMN 4)
STAFF
ADJUSTMENTS
TO REQUEST
(2,435) S
(5,385)
(6,504)
(29,637)
(381)
(5,743)
(13,388)
(3,152)
0
0
0
0
0
(2,200)
(4,467)
0
0
(6,823)
0
(2,146)
(82,260) S
azzzzzsazzzzzaa
SCHEDULE 11
( COLUMN 5 )
STAFF
RECOMMENDED
TEST YEAR
188,768
257,924
36,684
0
888
13,739
68,553
1,269
396
0
0
11,728
7,275
0
290
0
362
0
0
6,980
594,857
zzzszzazzzazzza
CITY OF HOUSTON SCHEDULE III
+ w* wriwwwr�rrtriirr*iw * *wrww *rwrw *r
HOUSTON LIGHTING L POWER - DOCKET 8425
SUMMARY OF OTHER TAXES AND FEES
rrrrrrriirrwrrrrrr *rrrrrwrrrrrrrrirrrwrr
(COLUMN 1)
(COLUMN 2)
(COLUMN 3)
(COLUMN 4)
(COLUMN 5)
TEST YEAR
COMPANY
COMPANY
STAFF
STAFF
DESCRIPTION
PER 900K5
ADJUSTMENTS
REQUESTED
ADJUSTMENTS
RECOMMENDED
............
TO TEST YEAR
...............
TEST YEAR
TO REQUEST
TEST YEAR
TEXAS AD VALOREM TAXES
PAYROLL
f 74,113
S 14,281
...............
f 88,394
S
......---...---
(6,067) S
82,327
TAXES
16,588
(549)
16,039
0
OTHER NON REVENUE RELATED TAXES
22,892
4,671
16,039
............
........
27,563
0
27,563
NOW REVENUE RELATED TAXES
f 113,593
',
f 18,403
...............
f 131,996
S
�
(6,067) f
125,929
ssa!!slaislis :!
sisisai!lifiiii
issaasisasiliii
saiisas= iaasasa
saaisiiasaZz"a
TEXAS PUC ASSESSMENT
S 4,835
f 509
S 5,344
f
TEXAS STATE GROSS RECEIPTS
33,650
3,537
(664) S
4,680
...........
...............
37,187
(4,621)
32,566
REVENUE RELATED TAXES OTHER
..........--- -•
...............
...............
THAN INCOME TAXES
It 38,485
S 4,046
f 42,531
S
(5,285) f
37,246
SUMMARY OF OTHER TAXES
liialiisliiiisa
liiisiiaiisliii
sssli!liaiaiia!
iliaiisiisai ; *!
!s!liisaaiil ;sa
OTHER THAN INCOME TAXES
==== ssgssissassisseassi
NON REVENUE RELATED TAXES
f 113,593
'
f 13,403
S 131,996
f
REVENUE RELATED TAXES
33,485
4,046
(6,0 67) S
125,929
..............
...............
42,531
(5,285)
37,246
TOTAL TAXES OTHER
._.......,.....
...............
...............
THAN INCOME TAXES
f 152,073
f 22,449
f 174,527
f
(11.352) !
163,175
slissasaissssss
sssiiissssiisss
iesaiia"waiili
ssisssssslsssss sssaslaslssissa
STAFF'S ADJUSTMENT TO TEST YEAR PER BOOKS IS DERIVED BY ADDING
THE AMOUNT IN COLUMN 2 TO THE AMOUNT IN COLUMN 4
DESCRIPTION
PLANT IN SERVICE
ACCUMULATED DEPRECIATION
NET PLANT IN SERVICE
NUCLEAR FUEL
PROPERTY HELD FOR FUTURE USE
WORKING CASH ALLOWANCE
MATERIALS AND SUPPLIES
PREPAYMENTS
FUEL INVENTORY
STP PHASE -IN
UNAMORTIZED BALANCE OF MALAKOFF IN
UNAMORTIZED BALANCE OF TRINITY MIN
PUC PRUCENCE REVIEW OF STP
DEFERRED FEDERAL INCOME TAXES
PRE 1971 INVESTMENT TAX CREDITS
CUSTOMERS DEPOSITS
INJURIES AND DAMAGES RESERVE
RETIREMENT PLAN
CUSTOMER ADVANCES FOR CONTRUCTION
OTHER COST FREE CAPITAL
TOTAL INVESTED CAPITAL s
RATE OF RETURN
RETURN
CITY OF HOUSTON
♦ rerrtrrrrtftrrrrrrrrrrwrrrrr *rrrr
HOUSTON LIGHTING L POWER . DOCKET 8425
(COLUMN 1)
TEST YEAR
PER BOOKS
8,889,257
(1,610,139)
7,279,118
147,882
180,416
9,484
96,700
18,939 86
17,8
1,149,101
Y 61,280
E 123,514
28,366
(831,688)
(4,900)
(37,803)
(1,773)
(35,443)
(2,054)
0
8,199,025 f
s:sssassswswsww
(COLUMN 2)
COMPANY
ADJUSTMENTS
TO TEST YEAR
S
INVESTED CAPITAL
•rrwrrrrrtrrrrrr
(1,760,860)
(157)
(1,761,017)
0
(87,190)
0
0
0
0
a
0
0
0
16,829
0
0
0
0
0
0
(1,831,378) f ws
wsswwsswssssw
(COLUMN 3)
COMPANY
REQUESTED
TEST YEAR
S
f
STAFFS ADJUSTMENTS TO TEST YEAR PER BOOKS IS DERIVED BY ADDING
THE AMOUNT IN COLUMN 2 TO THE AMOUNT IN COLUMN 4
7,128,397
(1,610,2%)
5,518,101
147,882
93,226
9,484
96, 700
18,939
17,886
1,149,101
61,280
123,514
28,366
(814,859)
(4,900)
(37,803)
(1,773)
(35,443)
(2,054)
0
6,367,647 f
ssswwassswsssws
0.112300
wwssssswsswwwss
715,087 S
wws = *aswsessass
(COLUMN 4)
STAFF
ADJUSTMENTS
TO REQUEST
S 0 IS
4,713
4,713
(147,882)
(93,226)
(114,458)
0
0
0
(1,149,101)
(61,280)
(123,514)
(28,366)
(16,829)
0
0
0
(15,453)
0
(10,648)
(1,756,044) S
wwssiswwiwsswws
- 0.007500
wwswsswwssssses
(231, 791) s
swswwwassewss:s
SCHEDULE IV
(COLUMN 5)
STAFF
RECOMMENDED
TEST YEAR
7,128,397
(1,605,583)
5,522,814
0
0
(104,974)
96,700
18,939
17,886
0
0
0
0
(831,688)
(4,900)
(37,803)
(1,773)
(50,8 %)
(2,054)
(10,648)
4,611,603
swssssssswsssss
0.104800
essssswsswsswss
483,296
Ywwsssswssis iww
DESCRIPTION
RETURN -.
PLUS (MINUS)
INTEREST EXPENSE
AMORTIZATION OF ITC
DEFERRED TAX AMORTIZATION IN EXCESS OF 347.
ADDITIONAL DEPRECIATION
NET ADDITIONS TO RESERVES
SPECIAL DIVIDEND DEDUCTION
TAXABLE COMPONENT OF RETURN
TAX FACTOR
TOTAL FEDERAL INCOME TAXES BEFORE ADJUSTMENTS
PLUS (MINUS):
AMORTIZATION OF ITC
DEFERRED TAX AMORTIZATION IN EXCESS OF 34%
TOTAL FEDERAL INCOME TAXES
CITY OF HOUSTON
wwwrrrwwwrrwrwwrwrrrwwrrrrrrrwrrrs
HOUSTON LIGNTING i POWER - DOCKET 6425
FEDERAL INCOME TAXES
wrrrrrrrwyrwrrskwrrww
STAFF
RECOMMENDED
TEST YEAR
f 483,E
(166,615)
(17,975)
(12,481)
27,603
1,800
(46)
293,582
0.515151515
151,239
(17,975)
(12,481)
= 120,783
o�esssaaa:sssaaasss
SCHEDULE V
CITY OF HOUSTON EXHIBIT A
HOUSTON LIGHTING ; POWER - DOCKET 8425
WORKING CASH ALLOWANCE
(COL. 1) (
(COL. 2) (COL. 3) (
(COL. 4) (
(COL. 5)
DESCRIPTION STAFF A
ADJUSTMENTS WORKING (
(LEAD) W
WORKING
RECOMMENDED C
CASH L
LAG C
CASH
REVENUE C
CALCULATION D
DAYS A
AMOUNT
REQUIREMENT A
AMOUNT (
((COL. 3
...... .
...........•... .
COL. 4)/365)
WORKING CAPITAL USES:
............... .
........ .
...............
WORKING CAPITAL SOURCES:
PURCHASED POWER
FUEL:
GAS
COAL i LIGNITE
0 AND M EXCLUDING UNCOLLECTIBLES:
PAYROLL
CITY FRANCHISE FEE
FACTORING
REMAINING 0 AND M
UNCOLLECTIBLE ACCOUNTS EXPENSE
DEPRECIATION
AMORTIZATION EXPENSE
NOW REVENUE RELATED TAXES:
PAYROLL TAXES
AD VALOREM TAXES
OTHER NON REVENUE RELATED TAXES
REVENUE RELATED TAXES OTHER
THAN INCOME TAXES:
TEXAS GROSS RECEIPTS
TEXAS PUC ASSESSMENT
OTHER REVENUE RELATED TAXES
OTHER THAN INCOME TAXES
INTEREST ON CUSTOMER DEPOSITS
FEDERAL INCOME TAXES
RETURN:
INTEREST ON LT DEBT
PREFERRED DIVIDENDS
COMMON DIVIDENDS
TOTAL WORKING CAPITAL 5018ICE8
NET (LEAD) LAG IN RECOVERY
OF COST OF SERVICE ITEMS
2,908,498 ! 0 f 2,908,498 23.59 S 187,961
liii!liiiii!!!m iiii!!!!!!iilif iiisiilliiiiii!
S 409,261 S 0 S 409,261 -29.62 (33,212)
34S,026 0 345,028 -39.68 (37 509)
549,974 0 549,974 -17.46 (26,308)
263,309 0 263,309 -13.45 (9,703)
68,553 0 68,553 - 221.50 (41,602)
13,739 0 13,739 0.00 0
242,275 0 242,275 -17.35 (11,516)
6,980 G 6.980 0.00 0
232,586 a 232,586 0.00 0
7,212 0 7,212 0.00 0
16,039 0 16,039 -20.36 (895)
88,394 0 88,394 - 199.57 (48,331)
21,496 0 21,4% 0.00 0
32,566 0 32,566 0.00 0
4,680 0 4,680 -230.00 (2,949)
(0) 0 (0) - 221.50 0
2,32E 0 2,326 0.00 0
120,783 0 120,783 - 105.65 (34,961)
188,615 0 188,615 -84.76 (43,800)
24,441 0 24,441 -46.13 (3,089)
270,240 0 270,240 0.00 0
... .. ............... •..............
S 2,908,498 S 0 S 2,908,49E (293,874)
liii!liiii!!i!! !i!!liiiiiiiii! !!!!iliiliiili!
(105,912)
NON COST OF SERVICE ITEMS:
AVERAGE BAL OF CASH * WORKING FUNDS S 938 S 0 S 938 365.00
_ 938
.. _
-• ...........
TOTAL NON CAST OF SERVICE ITEMS t 93E : 0 S q38 938
lifitslssiiiis■ ■ii!!liiii!!!ii ii!liiii!!!iili
WORKING CASH ALLOWANCE
S (104,974)
!iilsiiaiisaiii
(105,912)
NON COST OF SERVICE ITEMS:
AVERAGE BAL OF CASH * WORKING FUNDS S 938 S 0 S 938 365.00
_ 938
.. _
-• ...........
TOTAL NON CAST OF SERVICE ITEMS t 93E : 0 S q38 938
lifitslssiiiis■ ■ii!!liiii!!!ii ii!liiii!!!iili
WORKING CASH ALLOWANCE
S (104,974)
!iilsiiaiisaiii
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