Ord. 0479 09-11-84ORDINANCE NO.
479
AN ORDINANCE RELATING TO RATES TO BE CHARGED BY HOUSTON LIGHTING
& POWER COMPANY FOR ELECTRIC UTILITY SERVICE WITHIN THE CORPORATE
LIMITS OF THE CITY OF PEARLAND, TEXAS; CONTAINING FINDINGS AND
OTHER PROVISIONS RELATED TO THE SUBJECT; PROVIDING FOR A REPEALER
AND FOR SEVERABILITY; AND DECLARING AN IMMEDIATE PUBLIC EMERGENCY.
WHEREAS, on or about June 15, 1984, Houston Lighting & Power
Company (the "Company"), filed with the City of Pearland 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 Resolution No. R84-17, 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
Statement of Intent and the report and recommendations of the
coalition of cities with original jurisdiction, 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 PEARLAND, TEXAS:
Section 1. The City Council of the City of Pearland hereby
finds the requested rates of the Company to be excessive,
unreasonable and not in the best interest of the rate payors of
the City of Pearland.
Section 2. The City Council hereby approves and adopts the
recommendations of the coalition of cities with original juris-
diction and the City of Houston as 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 & Maintenance, Fuel Expenses
and Purchased Power, Other Taxes, Federal Income Taxes and the
Return component.
a. Operations and Maintenance Expenses.
Adjustments to the Company's 0 & M expenses amounted to
$15,400,000.00. 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 in Storm Damage of
$318,000.00, a reduction in Self -Insurance of $485,000.00, a
reduction in Rate Case Expenses of $349,000.00, elimination of
EEI dues of $318,000.00, a reduction in Wheeling Cost of
$592,000.00, a reduction in Uncollectibles of $1,898,000.00, and
a reduction in Franchise Taxes of $4,566,000.00.
b. Fuel Expenses and Purchased Power.
The adjustment of Fuel Expenses is a reduction of
$59,196,000.00. 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 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-
2. Invested Capital.
The invested capital is determined to be $4,212,255,000.00.
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
$22,602,000.00
$12,498,000.00
in Storm Loss,
in Nuclear Fuel in Process, a reduction of
in Property Held for Future Use, a reduction of
in Fuel Oil Inventory, a reduction of $17,420,000.00
a reduction of $12,677,000.00 in Prepayments, an
increase of $1,211,000.00 in Insurance Reserve, and an increase
of $60,056,000.00 in deferred Federal Income Taxes.
4. Revenue Deficiency.
The overall revenue deficiency is $126,617,000.00.
III. 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 deficency that will be collected under its proposed rates
pursuant to Section 40 of the Public Utility Regulatory Act.
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.
-3-
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, equit-
able, 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 Pearland. 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
billing period is the interval between meter readings. The
Company shall be 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 Secretary 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 Manager, file a complete schedule
of rates and tariffs with the said Manager setting forth all of
the Company's rates and charges for utility services then in
effect. The City Manager is authorized to review, approve and
require revisions to the tariff if he determines it not to be in
accordance with this ordinance.
Section 6. 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 the Company.
Section 7. All ordinances or parts of ordinances in conflict
herewith are repealed to the extent of the confict only.
Section 8. 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
Commissin of Texas ("PUC") on such appeal.
With respect to any such 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 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. If any provision, section, subsection, sentence,
clause, or phrase of this ordinance, or the application of same
to any person or set of circumstances is for any reason held to
be unconstitutional, void or invalid, the validity of the remaining
portions of this ordinance or their application to other persons
or sets of circumstances shall not be affected thereby, it being
the intent of the City Council in adopting this ordinance that no
portion hereof or provision or regulation contained herein shall
become inoperative or fail by reason of any unconstitutionaity,
voidness or invalidity of any other portion hereof, and all
provisions of this ordinance are declared to be severable for
that purpose.
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
-5-
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 such written notice andthe
contents and posting thereof.
Section 11. The City Council hereby affirmatively declares
that a public emergency exists inasmuch as the unreasonable rates
sought by the Company would drastically affect property rights of
the rate payers of the City, therefore said public emergency
requires that this ordinance be passed finally on the date of its
introduction, and shall be a final order of the City Council upon
the subject matter thereof immediately upon its passage and
approval by the Mayor.
PASSED, APPROVED and ADOPTED this 11th day of September,
1984.
TOM REID, Mayor of the
City of Pearland, Texas
ATTEST:
/t 64 C,r /EC-'Lt-<'-€'J
ASST. CITY SECRETARY
APPROVED AS TO FORM:
WILLIAMS,
ATTORNEY
VOTING RECORD:
VOTING "AYE": COUNCILMAN BOST, COUNCILMAN FRAUENBERGER, COUNCIL-
MAN MACK AND COUNCILMAN LENTZ
VOTING "NO": COUNCILMAN GRAY
-6-
REQUEST FOR COUNCIL ACTION
TO: Mayor via City Secretary - : -
Agenda Item i
SUBJECT: HOUSTON LIGHTING & POWER. COMPANY'S Request for a Rate
Increase dated June 15, 1984... • ..
Page
t of 4
FROM (Department or other point of origin):
Origination Date
Agenda Date
Public Service Department ..
August 30, 1984
SEP 1/ -1984 -
DIRECTOR'S SIGNATURE: an_ Wi % -tn ctq r
Council District affected; All
`_.
Assistant Director
For additional information contactJane Wilton Cater
Date and Identification of prior authorizing • •
Phone658-0343 _-c ____T
Council action: Ordinance 84-1 66
_ -
RECOMMENDATION: Authorize an increase in revenues
to IHOUSTON LIGHTING & POWER
_. COMPANY in the amount'of
$126,617,000 and approve_ rate design to
effect increase. -- -
Amount and
•
Source o1 Funding:
On June 15, 1984, Houston Lighting & Power Company ("HL&P") filed a Petition for Author-
ity to Change Rates and a Statement of Intent with the City of Houston as well as the -Public
Utility Commission of Texas ("PUC"). The -case filed with the City proposes changes in rates
identical to those filed with the PUC. The proposed changes are expected to provide an increase
of $288 million, or 7.4%, over fully adjusted revenues for the test year ended March 31, 1984.
-. On June 26, 1984, Council authorized the City Attorney to represent the City of Houston
-. _before the Public Utility Commission in Docket No. 5779, the Application of Houston Lighting &
- -Power Company to Increase Rates, and to coordinate the City's efforts in this case with those of
other local regulatory authorities. Approximately 40 cities have now regrouped as the Coalition of
Cities with Original Jurisdiction.
On July 11,-1984,-the City Councilsuspended the proposed rate change for 90 days beyond
the originally proposed -effective date, such suspension to end on October 18, 1984.
Following -a thorough review of HL&P's rate filing package and additional information
requested from the Company, it is the opinion of the Public Service Department that HL&P's
request for a revenue increase is excessive. Rather than an additional$288,490,000 as requested
by HL&P, it is recommended that the City Council approve a $126,617,000, or 3.28% increase over
the test
period adjusted revenues. The analysis indicates that the additional revenues will provide HL&P with an opportunity to
earn a reasonable return on its invested capital, yet protect the public interest in just and reason-
able rates, operations and services. The recommendation is summarized below and explained more
fully in the attached letter ("Attachment A") from the consultants who assisted in our analysis.
08/30/84
Subject:
HL&P's Request fora Rate
Increase dated June 15, 1984
Originator's
Initials
Pap*
of 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 OP CAPITAL ;•.
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 construe-
• tionrbudget 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, and $17,297,000 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 Deficiency
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 I), HL&P has an additional revenue require-
ment of $126,617,000 over test period adjusted revenues.
)ate
09/04/84
!Subject:
HL&P's Request for a Rate
Increase dated June 15, 1984
RATE DESIGN
Origi�nator's
Initials
REV I�SEE D
age 4
01_
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 cost per kilo-
watt-hour increases with consumption during the on -peak summer season, thereby encouraging
conservation by providing a rate incentive to conserve. On the other hand, the rate recommended
for winter heating consumption in excess of 1,000 kilowatt-hours is low, recognizing the base load
usage characteristics of such consumption.
The present and proposed residential 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
Winter:
Customer Charge of $7.00 per month, which includes 30 kwh*
over 30 kwh: at 6.50 per kwh
Houston Lighting be Power Company Proposed Rate Structure
Summer:
Customer Charge of $9.00 per month, which includes 250 kwh*
over 250 kwh: at 9.60 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 $7.25 per month, which includes 30 kwh**
31-400 kwh: at 6.20 per kwh
401-1,000 kwh: at 9.10 per kwh
over 1,000 kwh: at 6.3$ per kwh
For each minimum, an additional charge will be made for fuel cost.
**For these minimums, an additional charge of 3.8714t kwh will be made
The cost of service allocation method proposed by Houston Lighting ck Power Company, the
Probability of Negative Margins Method, is recommended for adoption in this case. The revenue
requirement 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 HLIKP's
filing.
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16
ELECTRIC OPERATING REVENUE
REVENUE REDUCTIONS
NET INCOME FROM OPERATIONS
RELATIVE RATE OF RETURN
8/30/84
Subject:
HL&P's Requestfor a Rate
Increase dated June 15,•1984
Originator's
Initials
Pays
4 of 4
OTHER ISSUES
South Texas Nuclear Project
Pursuant to §16(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 & Light Company, and HL&P), are conducting a study to determine the
feasibility of converting the nuclear units to coal
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.- :; r:: •,
Conservation. Cogeneration and Competition
In meeting the growing power demands of the Houston area, Houston Lighting &"Power Com-
pany in all cases should pursue the most economic and reliable source of power, including enema- -
tives to power plant construction such as conservation and debottlenecking of existing power -
plants. There is a tremendous potenal for cogeneration in Houston, however, if a cogenerator is
- paid -based on -the full cost avoided by HL&P because the cogenerator 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 Departmentrecommends that Houston Lighting & 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.
JWC:dm
B-4037-16
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AUG 3Q1Q84s
CITY SECRETARY
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Schedule
CITY OF HOUSTON
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HOUSTON LIGHTING & POWER COMPANY
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2,340,662
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OPERATION AND MAINTENANCE
FUEL AND PURCHASED POWER
DEPRECIATION
123,586
OTHER TAXES
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INTEREST ON CUSTOMERS DEPOSITS
FEDERAL INCOME TAXES
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4,205,740
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ELECTRIC RASE REVENUE
3,858,054
3,917,250
TEST PERIOD REVENUES
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Schedule I
CITY OF HOUSTON
POWER COMPANY
HOUSTON LIGHTING &
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ADJUSTMENTS
4,583,698
4,583,•698
PLANT IN SERVICE
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PROPERTY HELD FOR FUTURE USE
NUCLEAR FUEL
WORKING CASH ALLOWANCE
MATERIALS AND SUPPLIES
PREPAYMENTS
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PRE-1971 INVESTMENT TAX CREDIT
CUSTOMERS DEPOSITS
OTHER DEDUCTIONS
INVESTED CAPITAL
RATE OF RETURN
James P. Jansen, C.P.A.
8610 Suliwood Lane
Austin, Texas 78758
512/458-8038
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 (HL&P 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 HL&P;
- 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
or 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
$4,212,255,000, which is a decrease of $479,377,000 from the $4,691,632,000 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 12.88% and
r
•
Mrs. Marsha R. Gardner
August 30, 1984
Page 2 of 8
James P. Jansen, C.P.A.
the 17.00% 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 increase filing and subsequent information
requested from HL&P, additional revenues of $126,617,000 are recommended.
OPERATING EXPENSES
In its application, HL&P requested $69,250,000 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, and $17,297,000 in additional taxes other than income taxes.
Operation and Maintenance Expenses
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 gross -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
HL&P's self-insurance reserve was depleted due to storm damages during the test year.
As recommended, the reserve will be accrued over a ten year period instead of -the seven
years requested by HL&P.
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.
Jaynes P. Jansen, C.P.A.
Mrs. Marsha R. Gardner
August 30, 1984
Page3of8
To eliminate EEI dues $ 318,000
Consistent with prior Public Utility Commission orders, these dues were removed.
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 $ 4,566,000
These expenses are revenue —related and are therefore reduced when the revenue require—
ment is reduced.
Fuel Expenses and Purchased Power
To reduce fuel expense $ 59,196,000
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 purchased power,
and include the expected 1984 cost of $101 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.
James P. Jansen, C.P.A.
Mrs. Marsha R. Gardner
August 30, 1984
Page 4 of 8
FEDERAL INCOME TAXES
To reduce Federal income taxes $ 58,527,000
This reduction results from normalized Federal income taxes being applied to the lower
recommended return.
RETURN
To reduce return $ 81,108,000
The recommended reduction in return is caused by the lower rate of return on 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 $ 4,045,000
The increase in depreciation expense must be reflected in the accumulated depreciation
account.
To reduce CWIP $298,239,000
To reduce nuclear fuel $ 48,880,000
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 $ 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 $ 12,498,000
This adjustment reduces fuel oil inventory to a level adequate to insure service
reliability.
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.
•
James P. Jansen, C.PA
Mrs. Marsha R. Gardner
August 30, 1984
Page5of8
To reduce 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 HL&P 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 STATLS TICS
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 year's 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 confused 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
•
•
Mrs. Marsha R. Gardner
August 30, 1984
Page 6 of 8
James P. Jansen, C.P.A.
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 8.3¢ per kwh
Winter:
Customer Charge of $7.00 per month, which includes 30 kwh
over 30 kwh: at 6.5¢ 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 9.6¢ per kwh
Winter:
Customer Charge of $9.00 per month, which includes 250 kwh
251-1,000 kwh at 9.6¢ per kwh
over 1,000 kwh at 6.2¢ per kwh
Public Service Department Recommended Rate Structure
Summer:
Customer Charge of $7.25 per month, which includes 30 kwh
31-400 kwh at 6.2¢ per kwh
over 400 kwh at 9.1¢ per kwh
Winter:
Customer Charge of $7.25 per month, which includes 30 kwh
31-400 kwh at 6.2¢ per kwh
401-1,000 kwh at 9.1¢ per kwh
over 1,000 kwh at 6.3¢ per kwh
dlo
•
Mrs. Marsha R. Gardner
August 30, 1984
Page 7 of 8
Jaynes P. Jansen, CPA
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) +7.80%
(c) Moderate summer peaking (2300 kwh peak month) +6.03%
(d) Summer/Winter peaking (2300 and 2800 kwh peaks) - . +5.55%
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 recognitior. 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 & 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.
•
Mrs. Marsha R. Gardner
August 30, 1984
Page 8 of 8
James P. Jansen, CPS -
RATE NEGOTIATIONS FOR THE CITY OF HOUSTON
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.
Very truly yours,
/ • 3` 1
' .' •
James P. Jansen, CPA
R. T. Sweatman, P.E.
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