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HomeMy WebLinkAboutOrdinance 7287 ORDINANCE NO. AN ORDINANCE MAKING CERTAIN FINDINGS ; ESTABLISHING CERTAIN RATES AND CHARGES FOR ELECTRIC SERVICE FURNISHED BY TEXAS ELECTRIC SERVICE COMPANY WITHIN THE CORPORATE LIMITS OF THE CITY OF FORT WORTH; PROVIDING AN EFFECTIVE DATE OF SUCH RATES AND CHARGES PROVIDING FOR THE RELOCATION OF TEXAS ELECTRIC SERVICE COMPANY LINES WHEN SUCH LINES ARE LOCATED IN, ON OR UNDER ANY PUBLIC RIGHT-OF-WAY OR EASEMENT; PROVIDING THAT THIS ORDINANCE SHALL. NOT REPEAL OR AMEND THE PROVISIONS OF CITY CONTRACT NUMBER 7230 ; PROVIDING THAT THIS ORDINANCE SHALL NOT REPEAL OR AMEND THE RIGHT, POWER AND AUTHORITY OF THE CITY OF FORT WORTH TO REGULATE THE RATES AND CHARGES FOR THAT LOCAL ELECTRIC SERVICE PROVIDED BY TEXAS ELECTRIC SERVICE COMPANY; PROVIDING FOR REPEAL OF .CONFLICTING ORDINANCES , RESOLUTIONS AND AGREEMENTS ; ALD` PROVIDING AN EFFECTIVE DATE. WHEREAS, Article 1175, Revised Civil Statutes of Texas, specifically empowers any home rule city to determine, fix, regulate and alter or change the rates and charges levied by any public utility enjoying a franchise in any such city for service within such city ' s corporate limits ; and WHEREAS, such power is also specifically set forth at Section 1 of Chapter XXVII of the home rule charter of the City of Fort Worth, such charter being adopted by the electorate in December 1924; and WHEREAS, the Texas Electric Service Company (hereinafter referred to as TESCO) filed an application on September 2, 1975, with the City Council of the City of Fort Worth to increase its electric service rates and charges within the City of Fort Worth; and WHEREAS, the City Council of the City of Fort Worth, after numerous and adequate public hearings at which all interested parties were given full opportunity to be heard, and after dili- gent deliberation and full consideration of all of the facts presented and involved in such rate increase application now finds that the proposed schedule of rates authorized by this ordinance will provide TESCO a Fair Rate of Return based upon the Fair Value of that TESCO property devoted to the service of the public, after the payment of all expenses, taxes, other charges and depreciation and shall make available sufficient revenues to enable TESCO to continue to provide for the expand- ing electric service requirements of the citizens of the 'City of Fort Worth; NOW, THEREFORE, BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF FORT WORTH, TEXAS : Section 1. That TESCO is hereby authorized to effect within the cor- porate limits of the City of Fort Worth a new schedule of Fourteen (14) separate rate classifications, summarized and indexed by general usage classifications as follows : Rate R Residential Rate RTE All Electric Homes Rider RWH Residential Water Heating Service Rate G Small General Service Rider CSH Space Heating Service Rate HV 6 High Voltage General Service Rider E Standby & Supplementary Service Rate GL Outdoor Mercury Vapor Lighting Guard-Lite Rate GL-1 Outdoor Mercury Vapor Lighting Guard-Lite Rate SD School Districts Rate RW Religious Worship Rider OP Off-Peak Service -2- ' Rider T Short Term, Temporary & Seasonal Service Rate CC Convention Center Service Three copies of each of such rate schedules are incorporated herein by reference and are filed in the office of the City Secretary for permanent record and inspection. Duplicate copies of such schedules are filed in the office of the Director of Consumer Affairs. Such rate schedules shall be- come effective on February 1, 1976 , or as soon thereafter as may be appropriate for billing purposes . Section 2. TESCO shall lay, erect, string, maintain and operate its lines and equipment so as to minimally interfere with traffic and shall promptly restore all thoroughfares and other surfaces which it may disturb to their original condition. At the City ' s request and for the City 's benefit, TESCO, at its own cost and expense and without claim for reimbursement, shall raise, lower, relocate or otherwise reposition any of its electric service lines (overhead or underground) located in, on or under any street, alley or any other public right-of-way or easement dedicated to public uses; but TESCO shall have no such obliga- tion where the request by the City is made for the purpose of enabling any other person, firm, corporation or governmental entity to use such streets, alleys , public ways or easements of the City or to use the land theretofore used for such street, alley, public way or easement purposes. Section 3 . Nothing in this ordinance contained shall be construed to repeal, restrict, limit, modify or amend those mutual _ covenants and agreements established by City Contract No. 7230 . -3- Section 4. Nothing in this ordinance contained shall be construed to repeal, restrict, limit, modify or amend in any manner the right, power and authority of the City under the Charter of the City of Fort Worth, the Constitution and the laws of the State of Texas and of the United States to regulate the rates and charges of TESCO for local electric service provided within the City of Fort Worth. Section 5 . This ordinance shall repeal, supersede and replace any and all conflicting ordinances, resolutions, .agreements and actions entered into between TESCO and the City. Section 6 . That any person, firm or corporation who refuses to comply with the terms and provisions of this ordinance shall be deemed guilty of a misdemeanor and, upon conviction, may be fined not to exceed Two Hundred Dollars ($200) , and each day' s violation shall constitute a separate offense. Section 7 . This ordinance shall be in full force and effect on February 1, 1976 , and from and after its publication as re- quired by law. APPROVED AS TO FORM AND LEGALITY: ,5, /r—, F,"Oewo, S . G. JOHNDROE, JR. , City Attorney ANALYSIS COMPANY RATE .JANUARY 1976 o� 0000°°°°R°1�- 00 0 00 1 ° �OZj°(,O� 0 0 � � TO o d ~� v 0.0 ° °°* City of Fort Worth Texas GENERAL INDEX PAGE INTRODUCTION RATE BASE DETERMINATION 4 (a) Original Cost (OCD) 5 (b) Reconstruction Cost New (RCN) 7 (c) Fair Value 8 REVENUES AND EXPENSES 8 DIFFERENCES IN VALUATION 12 STAFF vs TESCO RATE OF RETURN-DETERMINATION 15 TESCO EFFICIENCY AND PRODUCTIVITY 18 TRENDS IN FORT WORTH 20 GROWTH PROJECTIONS AND FUEL DIVERSIFICATION 21 PROPOSED RATE STRUCTURES 22 ADJUSTMENT CLAUSES 23 i OTHER LOCAL ELECTRIC RATE ACTIVITY 26 RECOMMENDATION 27 i it I I INDEX/TABLES OPPOSITE PAGE I EFFECT OF INCREASE BY CUSTOMER CLASSIFICATION 4 - - II ORIGINAL COST - PROPERTY IN FORT WORTH 5 III C.W. IN PROGRESS - WORKING CAPITAL 6 STAFF DISALLOWANCE IV DETAIL REV. AND EXP. - ADJ. OPERATING INCOME 9 V RATE OF RETURN STUDY 15 VI INTEREST COVERAGE RATIO STUDY 17 VII RATE OF RETURN - OTHER STATES 18 VIII Kwhr. , CUSTOMER AND MISC. STATISTICS 21 IX TYPICAL RESIDENTIAL AND ALL ELECTRIC INCREASE EFFECTS 22 X GRAPH, FUEL COST 25 J i INDEX TO APPENDIX Exhibit A PHYSICAL PROPERTY ALLOCATIONS r Exhibit A C.W.I. Progress, W. Capital, M&S ALLOCATIONS Exhibit B EXPENSE ALLOCATIONS Exhibit C PUBLIC UTILITIES FORTNIGHTLY REPRINT Exhibit D . RATE BRIEFS - Residential Exhibit E RATE BRIEFS - General Service Exhibit F DISCUSSION - ELECTRIC UTILITY ECONOMICS Exhibit G REPRINTS, WALL STREET JOURNAL ANALYSIS OF REQUEST FOR AN INCREASE IN ELECTRIC RATES The City Council of Fort Worth was presented with an application made by Texas Electric Service Company (hereinafter referred to as "TESCO") , on September 22, 1975, for an increase in its rate schedules. The City Staff has been assigned the responsibility for analyzing this request, and pre- senting recommendations to the City Council for action. In connection with the Staff's investigation and report in the current electric rate request case, much of the information previously provided relative to: (a) the utility regulation in Texas; (b) responsibilities of the City Council; (c) factors in rate making and (d) history of regulatory action in Fort Worth, will be omitted from this report, and the Council will be referred to the first 10 pages of the recent September 1975 Lone Star Gas Report for this information. A detailed discussion of Electric Utility Economics, for those who care to study it, will be found in Appendix Exhibit F. The Staff has been assisted in this investigation by the newly established and created Citizens Utilities Advisory Board, a seven member board estab- lished by City Council by approval of City Council policy proposal number CP-1, on July 28, 1975, and Ordinance No. 7203. The membership of the Board has been filled and it is now functioning effectively. THE UTILITIES ADVISORY BOARD One of the major contributions of the Board was the recommendation for public hearings in utility rate change matters. To date, a total of seven hearings in the electric rate request matter have been held, one before the 1 City Council and six general public hearings, two in Council 'Chambers, and four in neighborhood areas. Findings of these hearings w�Lll be discussed later in this report. In the electric case, at the suggestion of one of the Board members, TESCO agreed to and did provide notices of the electric rate increase request and the times and places of the hearing information in a bill insert " which was mailed out to all customers in the City of Fort Worth. The public hearings and board meetings have not been well attended by citi- zens, despite the great effort to notify all customers. Comments from citizens generally covered three broad categories - the impact of the pro- posed increase in rates on low and fixed-income classes; concern that the company's financial condition did not justify the requested increase; and, questions concerning operating expenses in the areas of advertising and sales promotion. Board members and the staff raised many questions directed to TESCO rele- vant to the rate request and these have been answered to the staff's satis- faction. The City Council has been appraised of the Board's activities by receiving minutes of these meetings soon thereafter. ANALYSIS OF TESCO RATE REQUEST In this section of the report the, financial records of TESCO are reviewed and analyzed. The complete analysis provides the basis for determining fair value, net operating results, and rate of return. 2 TESCO'S REQUEST To provide the net operating results required to support the level of ser- vice needed in Fort Worth, TESCQ has asked for an additional $7,243,200 of revenue on an annualized basis. They requested that the new rates become effective January 1, 1976. The task of analyzing the company's request has extended beyond the requested effective date; therefore, the figures in the pro-forma test year 1976 should be reduced accordingly. 3 TABLE I Texas Electric Service Company EFFECT OF INCREASE BY CUSTOMER CLASSIFICATION City of Fort Worth Pro-Forma 12 months ending 1976 with % 1976 with 6-3075 Present Rates Rate Increase Incr. New Rates OPERATING REVENUES Residential $29,292,689 $37,099,000 $3,342,000 9.010 $40,441,000 t, Commercial 23,860,885 30,868,000 2,253,000 7.3 33,121,000 Industrial 10,o82,492 12,636,000 1,474,000 11.7 14,110,000 Other 3431,344 2,219,300 174,200 7.8 223932500 Total Operating Revenues $66,667,410 $82,822,300 $7,243,200 8.75% $90,065,500 Table I shown on the facing page shows how the requested increase would be distributed among classes of customers. From Table I, it can be seen that both before and after the requested rate increase, the residential customer accounts for approximately 45% of the total operating revenues. While residential customers are 78% of the total customers, they use only 35% of the total energy sold. There are wide variations between individual residential rates in the proposed new schedule (discussed later in this report) but on the whole residential service will . maintain the same relative position to the other classes of service as at the present. RATE BASE DETERMINATION To determine fair value of the rate base it is necessary to determine the Original Cost ,Depreciated (OCD) and the Reconstruction Cost New (RCN) basis of the electric plant in service. From these two values a judgment as, to the proper mix of the two has to be made consistent with the requirements of the new Texas Public Utility Regulatory Act. This Act prescribes that Fair Value property valuations shall be between 75% OCD-25% RCN and 60% OCD-40% RCN. To this value additions are made for the value of Work in Progress, Working Capital, Material and Supplies and other allowable items. 4 O \O 00 CO t1r R W : co .* 091 N L� qtr ON M r-I i 1 O�L`-M N oO 't M L� r 1 rl N Ll- O\ NMr( O CO N NM MmM .:t w w w w w w w ep \,O r-I .* \O O -4 O\ \.O \O r-I O\N O UN`O u\ W U\OD M r-I M Q - -4 r-4 l� r 4 40 h O to r-1 M t-00 w pp pp �p OHO ti � ti tri tlO O� O� O O N� N M i�9 -69- -69- � ti M �4-\cy) 4 ti 1 u� O IMM UN\D O O y" (n pM tf�O Ll- L� L� O o0 �.* N � LI UN M O N C\j -4-1 � p8 8 M N H N NO N N-1 H A O .*0p0 \O N o0 N�O S �O ra 00 a0 \O O WH �O � ti -t � � M N M N aw r a r-I N +{} -69 -69- -69- E-4 ,9F �O ti 14 N O.f ti I N .* O\UN N r-I M 14 M M \O !�14 ti 14 I .-4 L� MOD O\�p O\ N N O\ M-4 O M O\ O\ QO N%D r(-t �O 14 pw� w w w U N � � N 8 to QO r 1 -t �M 114 � C\jti M r-I O\ � w w w t t. Q\ L, M M 'O k c l N M N M In t` N M M -4 -4 N -4 N N � � 4& 4& 409- N H r,4 O O N N al M &O\ p O M O NGO O O e SOa ppN �O r�1 �1�Mp N Ort ONO W �pM�N pCC •C Pq M UN OHO r4�O � w LI-L� O\ 00 LNN- r4 �O �N � � O Pea > M ra r-4 M ti M N cm r4 M .d ti\.O .? O\ U x N 42 ra F U a) h .7 N N ti M r4 M-4 N 14 N r-4 v pm F-I V? N N lfN t r4 N N C7\ CD fsa 4 O .4 U N ON M O M NO 008 I'D O\ .* O\ O\O �D M u 1 a) ,C uA N N UU u\. LR L-O L� Cid .� O L\.-4 �p M ,� Fa O F w Fera to 0p ti N ti ti O\ \O to r-1 00 00.t ti N 01 O� w w w w epi o 'dp 3 Q �� CN 2�UN a% O � .� N(�� � UN C °` c� a) H U ad N M 00 N D N..f -t M r4 r I .* r4 as U Z d) F0 N � � N M r1 N r4N 00 � r1 r1 Opp � Cd H W E9 -69 a) H CD a A ° CO 4-3 •r1 to a) a U *4" N 43 k 0 4-4 a •rl V1 •d +� f N •d wo cc is +3 cicc r� O V) C,' a) 1r La (D r4 () P4 O U r4 A � o ^°u ] rl =1 O 4• a1 S +- cc +� 4 O W A df CD W 4 u a) Cha rq ci 'i{N O Q do !2 N a) r4 'd rrll v) p w N a) w 0 H IZ V 4-3 r 4 .4 C 43 r( v) ci � �! � 0 C •r+ c) a) oa O a) d F C a) •`� o k kx Yy'' + k''a rd "' ,-a4 as +3 +3 •r1 0) +) +3 r-I Cn ',y C >~ 04 O •ri•✓ yr r4 U •r1 C. O .4 •-rl cc is $4 a a3 +� +3 U N Q r°1 V � E-� P4 c) •rl U a Oa ad +3 a) I-D Cd > ti r♦ + p >Q O Cd r- +3 ti o O td O w C 4-4 U pA dNO d P'L 7 O O N U 43 O a) 6o ad �3d rl 14 O O -4 -Ha) A a -4 ri 4�-14 V) � �' E3 44 V) p4 U UN r4 A Pa r4 PaV4 PL4 •rl is r-I V) P rq O V) td a) v) y v) r4 r-I of +� kto +) +) .sd () ad () O of +) a) A C cii a) a) of of v) u v ,-1 ¢3] A O tO O d C aa)0 � F Fl Z F F Uo o ca �N M ti CO O\ O PQ Cd id H M.* U�a NI A r-I r4 -4 ri (a) Original Cost Depreciated (OCD) y The books of the company, published annual reports, filings with The SEC and FPC, and federal income tax returns all provide reliable data as to the original cost of TESCO's electric plant, in service for the entire system. Allocations must be made from the total- system figures to arrive at values for the City of -� Fort Worth, because TESCO serves a large area of West Texas other than Fort Worth. The problem is to determine how much of the generating, transmission, and distribution facilities are properly chargeable to Fort Worth. On the facing page in Table II is a summary of the OCD basis for the net electric plant used and useful in serving customers in the City of Fort Worth. In total some 28% of the total company plant is devoted to service s in Fort Worth. The detailed basis for the allocations to Fort Worth is shown in Appendix "A". The allocation process is consistent with methods used by other regulatory bodies throughout the United States and the practices of the company in the past years. In developing a rate base calculated on Original Cost, some addi- tional elements of physical property are considered such as "Construction Work in Progress"; "Plant Held for Future Use",- .Working se";.Working Capital; and Material and Supplies. 5 808 i O � m cin 4 L-80 N L-p- pM LA N �O X10 N H X000 _:tJt O o0 M i � M co O M C- �O M CO ti k 4v O N N N N r-I �c �0�.� N 00 ti 000 � CT w WN C �1 CC) LA C8 4 N 01% t N \DO ONNS C •11 rl, _:t_:r CO -4 _zr _zr M r I 11N O •dM ppp� H �p W C� CO v N N b4 i3 f$ Ef} fA -69- t- 4ti O (T►n M to O M U.\ E-- O M H r-I N 00 l%O M _:t 00 O _:t M M w N ti tfl\N r-4 M �O b ti u� [%- t- N O N N N L� O •d O 00 � LA 000 ON � �O W\.O � N � � L%- N N \O r4 s U M N Odra N \10 \.O N \10 O\ O ti H \,O N O\M r4 -:t M \10 _zr O\ Lfl\ M 9 N r-I O O\ N N N N _zr O\ QpM CT oMp N .7 00 N & .6\ dPP -a-Cr-I W CO N O M CO 8 1-4 3 r I 000\,O -. CO N N to Lr t U H -69- +9- -69- -69- +9 -69- 0) 4N N O •Qf}r W U _$^ p- Mp NQ � _ pHO �O OO m � MHfiN � N ►nUaiN co N � Uri! O�iO .N* M �tfp1 .4 O\ r4 +) O r I Off / O N 00 IN r-4ti U H N CO N r-I 1�0 -4 rV-I W w O 0 ►n N N M N to N M Lf\ O\ O\ M cd H �O�O N QN r-I M In O� M N r-4 N N H M SOD L%-_:tM \1O LA M 0000 N L� H ca ¢ N- Q O(7 t r pr-4 N 0 N LA M r-4 Q �O N tr O� N L� M ONO v14 0 N 04 - LA rid � +9- -W -69- -69- .69- .69- +4 3 va 3 3 •� r� 4-3 43 43 +3 +3 O V O O O O O •� ) N N •d +3 CH +3 4.4 4.4 � a u o k o k O O •ri w r1 O O 44 V O P4N N � C •r1 +) }moi y to to O U •r1 v O U U N •r1 C td O A O W A O V O U CC." •rl •d rjer1 V O rl vyy U Id +) w O C Pa C O C N C +3 w PO Cd N +� 43 40 N W +) 00 v] bo +ear rrj -I-I U � p. 0 0 N to A cd •yrdj - •y PL' v o +) ¢ a, m ¢ 4, ¢ (D V C U k cd •r1 +3 U •r1 C +' +) +3 -H r-a boy +3 .c m ¢ o k r-I ¢ �0 a +3 O 4 4) O vi°o m 0 ae ¢ to m � Q C EO-+ W W m z Table III on the facing page, shows these additional elements included in the rate base calculated on Original Cost. Table III also shows the extent of the increased investment per customer year after year. In 1972, the investment per customer was in excess of $1,400 and will be in excess of $2,300 by the end of the pro-forma test year. In Appendix Exhibit "A", there is also included a detailed explanation of the allocations for Con- struction Work in Progress, Plant Held for Future Use, Working Capital, and Material and Supplies. 6 (b) Reconstruction Costs New (RCN) The Reconstruction Cost New of the electric plant in service is an estimate of what it would cost today- to replace the plant. The logic for such a number is that earnings of the company should enable the replacement of the plant at today's higher prices and not the lower original cost. This logic is quite subjective and is a source of much argument and disagreement among regulators. In some recent utility cases, some companies have attempted to weight as much as 80% of the Fair Value formula toward higher Reconstruction Cost New (RCN) and only 20% to Original Cost (OCD) . In Texas the legislature has established as law the limits of 75/25 and 60/40. After the RCN has been determined, another evaluation must be made as to the observed deterioration of the plant. This calculation is designed to make allowance for the fact that operating efficiencies are impaired by deterioration and the rate payer is already paying for this in higher operating costs. The Table below shows the RCN for the y period 1971 - 1974 as calculated by the company. The staff has reviewed these figures and methods used to develop them and finds them consistent with generally accepted regulatory practices. 1973 1974 1975 1976 Reconstruction Costs New $388,590,000 $411,819,828 $433,512,055 $552,042,219 Less Deterioration - Allowances 39,031,000 47,034,477 49,520,051 63,075,646 NET RCND $299,599,000 $364,785,351 $283,992,004 $488,966,573 7 (c) Fair Value In developing a Fair Value amount, a reasonable balance between Original Cost, Depreciated (OCD) and Reproduction Cost New less Deterioration (RCND) must be established. TESCO has used a 60% OCD/40% RCND balance in making its request. Since TESCO's debt is used to finance plant at original cost and equity is used to finance the balance, the staff recommends and uses a weighting of OCD/RCND that approximates the company's capitalization ratio. Both ratios are within the statuatory limit. NET OPERATING RESULTS To measure net operating results requires a determination of gross revenues produced and the allowable expenses incurred in producing the revenue. (a) Revenues and E enses Since the company knows which customers are in the city limits of Fort Worth, it is not necessary to allocate revenue to determine " operating results for the city. Some expenses do have to be allocated however, since the common facilities are used by all cities for generation and transmission. 8 Other expenses are exclusively used in Fort Worth and can be .� charged direct. Table IV on the facing page pro-%::`.des a summary of revenues and expenses for the City of Fort Worth since 1973 m and includes an estimate for 1976 pro-forma year with and without the requested increase, A somewhat different approach has been used by the staff in this investigation, as compared to the 1974 case, in that the interest s portion of construction, funds has been treated as an additional income figure (on Line 21, Table IV), to offset its inclusion as a "WIP" account as permitted by NARUC accounting principles. In Table Won the facing page, a complete detail of the expenses is shown, and Appendix Exhibit B describes the basis of the alloca- tions of expense. An analysis by the staff had determined that the allocations have been made in an appropriate manner and that the revenues and expenses as shown fairly represent the operating s results for the City of Fort Worth. The staff's study of the figures indicates that the company to a large degree has been able to cope with inflation through expense control and the fuel adjustment clause. However, even with the increase granted in 1972 and 1974, the operating results have not recovered to their prior level. If the present inflationary trends continue, this gradual deterioration in operating income will probably acceler- ate without rate relief. It should be noted that operating in- come is calculated before applying bond interest expense or pre- ferred dividends, and, thus increases in these costs are not re- flected in the deterioration, 9 O S N MMII� .* O MSO [O� ti ao r-I y LA O t ti r-I r-4 N N lf�\D S 0o S r-I M ti O O � N \D w w w w w w w w w w w w w w w w e. z 41 W \D 1n o0 0\-t OO N N(� O\M O N DO-t\D \D 00 [ DO M r I +� \D M N M\D LA\0 � O\ti N M \D O r-I lf\ .t r-I -t \D 4 W O 00 00 ti r-1 I`M [ _:t\D DO 00 to N N O\ LA lf\ N t- 4-3 94 ppft ftw w w t. M N V M r-I M r 1 N N 1 - c a0 C N N tG4 D V) O 41 O 1 I I 1 1 1 1 00 1 1 1 I Q r-I\O 1 l(\ LAlf1 (d N 1 1 1 1 I 1 I (\J 1 I I I S 00(y I N Lr\ i N � b � M � a-8 � N 4 � O. t� H as N M r-I r-I \D \D \D 0V\` +l w w w r--I v ad ti M M MCM }2 ri a O S S N M M Lr?)\ .� ti M lf�S [ S I�N N ti � \O lr\0 \0 -4 M M .� O ti t—r-I r-I N N lf\\D O o0 O N N DO O r-I rd N .� D D w w w w w w (�-i C6 cjgw td CO 00 00 ti� nl N r 1\LA 10 00 m DO� �N M O\ O\ (\! 1 ft �N N MN t11 rI MrI N N rI rI CO r�4 � N 3 � LA m b~\ r-I pp u1 a0 m�.1 \D o\D O\M �rn o 0 0 �' ti A O\N r4 lf�O N r-I \D\D ll\. �7 0 N fi�tp- O o0 O\O u�(� ��pO O\� M�-1 O r-� vC� oS OQ�� u� _I r-I U o C M \O ti N o\moo-t r-I N I�� OM\N W \O .7 M M N r-1 W D \� o O rM N '* N 111 r-I r 1 N r 1 r I � ti 10 %.D4 O HO rHO � O -69- U 17 z may+) H all 1gd c7 u1 O O\M OO t-M O r-I r-I 11100 0\N��pp M t- M Lr\ ., O H ti O OH\rH-I OC\OM\ r-4 tCY) ��'i ONO OM\ \D O 0\ C) 00 Q\ aC) OD r-I CO N w w w w w w w ft ft ftw w w N �pw U E- p�WW N r4 00_:tr4 M\O\D r♦ N t NH(\J-:ts M r-I O On O O O V O Pl \D \D M ti O 00 co N r-1 .* O\D_:tO N 00 \O \D .t N -:tt- 43 O \O M r� N \D r 4 r I N r I r 4 Lr \D t \HO - t- FI H 1 r-4 tf} 14 tl- $4 M 00 O z O\ O\C- O r•4 O um -4-4 O O M\OD oM0 r4 \O %.D SI (may � y+ (� � (p� 00 lf� M r44 H H Q\ � u01%.D\.O\HOW t- 7 ONO OHO MOig H\ti 4 cM- \.O M o Lr\ " WiA U I r-I ftCV r-I r-I M N 111 r I r I r I r I rM1 rI H r�I x �r9 E WPa y �' y I r�4 U C l a t` O H O 41 D r? r-I 'Cf -1D C 00 O\ v 'a +� iC Q U N W - 4-� -4-3, 0 y •Hi Q ri r4 . eg r-I W N Mei O fOr W y�4 reU l D O U D 0 +' 4) D rA H H r-4 Dg 4Egi +� D y pp pHp .QUI D C N 4 S 4i N N D •C C ■ ° 0 > } + 0 'd 4) O r-I Ma O +3 +3 O - 4) C7 0 0 v 4 w O D y -4 cd +1 w to CO w ad ad 41}J a •rq •rl Q V] ad N V] f." W 0 ad > W CO (1) (1) ty ty V O O 02 +) N N z H H 'J 41 O x K C N ay 4) +� .H p N gd)g m O r-I r-I 'd Q +' 0 cE to E-1 cd •H O O Com` Y � � v 8 ''� 0 6 ad fr cd D +� �7 z3 co co r I rl r I r I N W x W E�IAUU � EO-+ Ei fs, n0 [� 000co EO-1 P4 EO-1 E°-1 � u a r-I N M f1\6 N 00 0� . . . . .�. -4 � N . CZ r-I -4N (b) Allowable Expenses s In calculating the net operating income the gUesti.on must be faced as to the appropriate nature of some of the expenses for inclusion in rate making, The first category frequently questioned is that of advertising and sales promotion expenses. Included in the figures in Table IV are advertising and sales promotion expenses in Fort Worth. These include an allocation for general office salaries devoted to advertising, display materials, preparation and production expenses and media charges involved in the company's advertising program for the total system, as shown in the following tabulation: 10 Mo. Actual 2 Mo. Est. 1976 1974 1975 Est. Sales advertising (a Misleading designation, due to FPC accounting rules, proposed to be changed in near future) $476,418 $300,000 $305,000 Institutional Advertising 430,884 570,000 545,000 s Total $907,302 $870,000 $850,000 Percent of Revenues 0.39% 0.33% 0.26% The staff considers that this advertising expense is not exces- sive and has decreased as a matter of fact since the last case and should probably be allowed as an expense in calculation of returns. The company's sales promotion efforts have ceased and . the thrust of their advertisements is now directed more to custo- mer assistance in getting maximum values out of electric service. 10 The advertising formerly used that was designed to sure business 3 away from the competitive gas industry, has been completely eliminated, as has the somewhat laudatory "What fine fellows we are"type of advertising. Another category of expenses frequently questioned is that of contributions. Estimated contribution expenses for 1975 and 1976 are: C/FW System Allocated s 1975 $408,000 $131,000 Percent of Revenue 0.16% 0.20% 1976 $366,000 $116,000 Percent of Revenue 0.11% 0.13% These, according to the Federal Power Commission classifications of accounts are considered "below the line" expenses, and as such are disallowed in the determination of net operating income in rate of return studies. One other category of expenses frequently questioned is that of club dues and membership. In 1975 the total civic, service and social club dues claimed in the City of Fort Worth amounted to _ $11,574. Such expenses are normally paid by an employer and are generally recognized as a legitimate business expense. The staff recommends that all of these items mentioned be allowed for rate- making purposes as they are appropriate expenses and in total amount an insignificant sum. 11 I DEPRECIATION EXPENSE As in all rate requests, inquiry is made into the practices and methods of the company concerning depreciation. Depreciation rates are based on the expected life of the facility. Current practices are related to the weigh- ted useful life of property used in serving the company's customers. The annual depreciation rate is currently 3.5% of electric plant in service. It was changed from 2.9% in July of 1974, after a comprehensive age-life (depreciation) study showed that the rate was too low. Although all pro- perty in service was considered in the study, the primary increase in the depreciation rate reflects a reduction in the estimated useful life of gas-fired units from 40 years to 25 years due to the rapidly diminishing supply of natural gas as a boiler fuel, and the anticipated Texas Railroad. Commission rulings on use of gas as a boiler fuel. Based upon staff analysis, this change in depreciation rate appears to be reasonable and con- sistent with good business judgment and IRS rulings. FAIR RATE OF RETURN There are several approaches to the determination of what is a fair rate of return. There are no rules as to which is best, and the section that des- cribes a Fair Rate of Return in the new Public Utility Regulatory Act appears to be ambiguous in that it sets neither upper or lower limits nor any specific percentage figures. A fair rate of return is one that permits the company enough earnings to attract ample capital for continued opera- tions but no more than that. DIFFERENCE BETWEEN STAFF AND TESCO (a) Disallowance-Rate Base Items The staff has spot checked and accepts the accuracy of the fig- 12 s' ures in these accounts, but does not agree that they are all pro- per inclusion in the rate base in the manner shown by TESCO. Plant Held for Future Use should be disallowed because it does not seem proper for today's rate payer to provide a return on an investment not dedicated to a specific use at this time. In the T account "Working Capital" and "Material and Supplies", the staff believes that it would be more appropriate to use conventional accounting practice here and allow an allocation of working capi- tal indicated on the balance sheet of the annual report. It would be calculated by taking the difference between current assets and current liabilities after appropriate adjustments for intra-company charges and allocating a proportionate amount to Fort Worth. These two changes would reduce the amounts claimed for these two accounts on the pto-forma year, Column E by $830,398 and $4,595,917. By eliminating these amounts the staff calculates tht total property on an original cost basis to be $301,085,429, representing the disallowances felt to be appro- priate by the staff which will be found on the lower section of Table III opposite page 6. (b) Difference in Rate Base Approach The company's figures are predicated on the use of "year-end" figures, but the staff would prefer to join with the majority of other regulators in the United States and use the "average-year" figures. In this report we have used an average of "beginning of year" and "end of year" balances, which produces a lower rate base figure than the "year-end" method used by TESCO. 13 � W N r O \�O OD . . . . . . . . . . . . . . 4 a co z - 7d - a a O �-3 t J �-3 O z D C+ m H. m `c+D DD m o a a H m c0+ b m < m 4 A) M r• w C � O 1-1 A) 4 m 1-1 (D r M ►i Oq ca P. r; P) r m ca P) O r O CD � r m r r r- 0 vii O w O P) a n a x P) ca 3• m � �w 0 r o o m 04 m w C m \-nW f) � - m - C] b O M FJ• 0 O RD "I mv Al - ca c+ �l n CD c+w X� f+• :t7 N• c+ 4 O (a N ::r 'Qm K A) 04 - c+ G M g w 00 0 rA 04 C (DD H. z ~ c0+ m c�+ P) m a � H bd r C o v i MP• O D m ca 0 m z ° r- 0 k ,. O 04 - m w w O � cca m 3 OD A) C+t� r C m CD a w w m Cl) r ca v �S M r m 04 (D v +sn N r r r N \In 4 v, r -p- VI w vi oo W W W V1 ��p O W Vt 0 r 11 H 0 F O� 0o OD � O� r W --4 O OD W Z H 0o w w r O 0:) w �n w r w 1 � o x HUOi ��-] (DD a n N N N O t'1 t+i '=J 4 \OQ rn r rn ON vri vNi w b i z' � 0 f O [C,) O� N - 'dry H m lQ\ O vi W pwr CD� � <. OD N r O I Opo 0:) Oro � JOD OD � W —1 d w w n W O �O V1 O w O %n •y3x �-3 M m ts] 0 tx] b — `i � xx N�1 f W F r r N O\ r C] r m �C Oo V� N 07 r O\ O � %n � O\ m N ��Wy \O y \n r ON N \O W W C\ r w O� � 9 a\70 LA.) au w � N OD --4 O a,\ \o a�u au a\ O a o cn z rn O r \-nn \o0 0-\ --4 " mm a txj co LA.)o N) pON - iW N r N 0 � F-j vri N -P, •-4 0:) vri O N ::r �-3 O� � X11 0:) --1 H W W O N 003 H N N ca m O r w ca t+y O W �" N �1 - N N r O Qu N W m �p W O N r O� V1 O� � --4N -P, O J 'r1 C �q F. O� � C71N O O -4 w O O + y q w N W Fj N N O\ r ou ou do O rn r rn r ' '- ° M (�7 r Or\ OD OD r r w OD --1 Oo O\ N \In ca No moo- -P, v, r rn -P, o �g F✓ R F I r O\ \X 11 Oo 0 0 The staff recommends a weighting of 65% OCD/35% RCND instead of the 60/40 weighting advocated by TESCO. The rationale for this is that the ratio approximates the capitalization ratio of the company. The capitalization ratio is one widely used by consultants in similar cases recently. (Stanford Research Institute FW&D, 1975, Touohe Ross and Co. , 1975 - Waco.) These rate-base figures will be found in Table V, opposite page, together with the Rates of Return as computed by the different methods; (a) pure Original Cost-line 10; (b) the Company's - line 12 and (c) the staff's adjusted recommendation - line 14, of 7.04%. RATE OF RETURN DETERMINATION s (a) Interest Cost Approach There are two methods used by the regulatory community in devel- oping rates of return. They are separate but still .interrelated. The first of these is calculation of theoretical fair rate of return based on the structure of the company's capitalization. T This is sometimes used as a guideline in developing a rate of return based on the fair value of the physical property used and useful in providing utility service. In the calculation of the theoretical fair rate of return applicable to capitalization, earnings by class of security holders are utilized. There are three types of investors in TESCO, each having a vested interest in the rate of return earned by the company, and as of June 30, 1975, the percentages were as follows: 14 i __ i Common stockholder, Texas Utilities Company - 33. 7% of the capital Preferred stockholders - 16.4% of the capital Bond Holders - 49.9% of the capital. At twelve months ending June 30, 1975, the company's preferred stockholders received an average of 7.54 percent on the invest- ment and the bondholders received an average of 6.72 percent. This is what is known as "embedded interest rate". At the same time the common stockholders of TESCO earned 14. 7 percent on their equity in the company, but their actual paid dividend rate was only 69%of this amount and the balance was invested in com- pany facilities. The staff believes that a range of 15 to 15.5 percent would be appropriate for the test period for common stockholders considering the availability of alternative invest- ments and the degree of risk involved. By applying these per- centage earnings to the capital structure, a theoretical fair rate of return could be developed by mathematical calculations as follows : Debt 49.9% x 6.72% = 3.3533% Preferred 16.4% x 7.54% = 1.2366% Common 33.7% x 15.0 = 5.0550 7, Composite rate 100.0% 9.6449% 15 n v v r m O r OR 'b v v C 'Jy' o fp i s p, i M row PI M m A C H "d 177aH H 1 1 9 Aw HIt yOO R R H m O W W W m p p H O P H w 1+ n to b 1+ I+ w ' p H B k as p n O O 70 p p n p k p w .0 m p p !�. p A 10 n n m p9 r A n m m n m 00. rt M M 00 00 Q m A ..m p. C wr Im0 10 n n n 9 M ro fni n M 70 n ,.. p. m M N H A p m m C0O w 10 C O N p N n r► 71 A Ol pOp N m n rt w7 It 7D < 7 0 H h n R O rw/ d A A m a n A M o 0 A w n p rha a w n w p p o m M by w A m f% fw'0 p h m� r 1�0 pgppgn o o w r N O� Imo ICO W' J' m O p < r~•n am ,y+•moo o• M O d 0r� Q, roy m m O y r R Op N A r N A A ro w R p m A 1+m O. C M O p G O a w n p A A m O w< n h.• W 00 M M p w M Rp p• 01 ro m W w w Io I0 p 00 n O w r► t: p 01 n m p 'i p 7 „ W C A At 1 00 R�• I~�• CO D H n I et M A p t CL 0 Q9n w m 10 A 0 0 W O M P• W O ® Op0 Ip m cnp IL m o .7H A Oro' A M 0 rt rt M m Ort n A ro rn C A ao ,w p IO /CI 7µC I�0 R m a I�0 •* 9 a m r+ r• w nn A o w # n nb n 04 c n m n w A .nr r r V V Orr V, a r A w 10 N r �o .1.1 V, r IV a Y• r w N Fo N FF o 0 0 �o FN0%o, r o v `S O W OD N O O�P W O P OD V O to N VI a W VO O% c r r V V T Orr•.+ V r SMR I+1 N F N N W r V F V+ON W N (�O O p1o+ VC•' F F 1•,, V+ � OD p�N W ON OD T O O� N F w F W F W O O% OD OFD O V V p 1+o 7D 03 O M H m A O H O M r YA iA M n ['1 r r OD OD w M < O� V N r N ut N T OD V O OD �' M m H OD O� V O�r OOD O�r r N N ON w 0 tn OD 0-1 W F IN m p V+ V+ 1%-D r F r pq 00 on v O M 9 to m r r OD V W r N10r W fo OD V V V ut N �O r OD O w V W r r k OD V+ W W * * T O P r O W FOD 00 0 � fp r O r r VI W N r �O F V F r V+ OD V N P F N �O F OD W N F IF ON r I O V V N %O W aD W V V r W sp F OD P F OD N OD r O% r T tB a y O bd � r r r 0O V N co O O O F O% ut N OD O V N OD V W Ir N N r w T T V+ �O OD W 1 ZO F T I �o O V O O V N O co W F+ n O N U+ O VI F O W V ut N O W OD O Un W 0 R rt WC m r do a e w m �r r N r r-.1-! F � TrTNItrODW %O N OD OD N O ODID �O N C F V V I F O� �O OD OD W N r P11�O O• V�O N V P r O O r V H N F Op A r -D .( V O% W W W W r r R W [;-; NOD W V F OD W 10T V+ N 1 F V �O / F P r OD w V+ O OD a,V+ mWWWV T V%O V V T P a O P MNWNNWF i (b) Investor Attitude The ability to properly finance an electric utility requires bor- rowing large sums of money on a permanent basis. Before the energy crisis back 10 to 15 years ago, electric utilities were considered very popular stocks, and those that were well-managed had no difficulty in raising capital and borrowing money and issuing new stocks. Bond-rating agencies reviewed the earnings history of the company and measured their interest coverage ratio to determine their investment rating. The natural population growth of metropolitan areas and the rapid increase in consump- tion in energy produced a very healthy environment for the financing of plant extension. TESCO was one of the companies that enjoyed this period of prosperity. In the tabulation below, the trend of Interest Coverage Ratio calculated by the Moody's Formula for TESCO is shown: TIMES INTEREST EARNED 1970 1971 1972 1973* 1974 1975 1976** 6.23% 4.96% 4.82% 4.94% 4.93% 3.90% 2.94% * No new bonds were issued in 1973 **No increase '76 Pro-Forma Table VI on the facing page, is a complete analysis of the inter- est coverage since 1970. 16 TABLE VII G©I "T FROA INDEX-- DIGEST R:;TURN—Cont'el [FLA.] An 8 per, cent rate of return returns except for the exempt classes in was found fair and reasonable for an elee- addition to the average increase. Re Con- tric company to earn on interim rates. Re so;idated Edison Co, of New York, Inc. Tampa Electric Co. Docket No. 74597-EU, ,',975) 8 PU:24th 475, Opinion No. 75-"9. Order No. 6539, Feb. 28, 1975. [N. C.] The fair rate of return which [IDAHO] A rate of return of 8.4 per do an electric company should have the op. cent was considered reasonable to both an --'porrunity tol earn on its investment for re- e`ctric company and to its customers. Re tail operations was found to be 8.24 per Utah Power & Light Co. Case No. U- cent. Re Carolina Power & Light Co. 1009-62, Order No. 11736, Jan. 14, 1975. (1975% 8 PIT114th 449" [ILL.] A rate of return of 8.35 per [OR.] A rate of return within the range cent on an original cost rate base was ap- �of 8.44 r. 8.91 per cent was found fair and proved for the electric operations of a gas reas^nat,le for an electric company. Re and electric company. Re Central Illinois"' Portland General' Electric'Co. (1974) 8 Pub. Service Co. 58926, Jan. 16, 1975. PUR4th 393. '. [ILL.] A rate of return of approxi- [S. C.] A fair and reasonable overall mately 8.65 per cent on an original cost rate of return for an electric power com- rate base for electric operations was oun Pavy was found to be 9.06 per cent. Re rea=r,nable. Re Central Illinois Light Co. Lockhart Power Co. (1975) 8 PITR4th 333. 58925, 54179, Feb. 20, 1975. (WIS.]--A 9.25 per cent return on an (KAN.] A fair and reasonable overall electric company's average net investment rate of return for an electric company was rare lase was deeme,l to he lust and rea- in the range of 8.13 per cent to 8.43 per_ sonable. Re Lake Superior District Power cent. Re Kansas Power tar Light Co. Co. 2-1.T_-7866. Tan. 10, 1975._ (1975) 8 I ITR4th 337. urn foe a [ME.] An overall rate of return of 8.8 Tax [WiS.] An overall rate of ret FREt= municipal electric cr-mpany to earn on its nee cent :as considered reasonable for an net investment rate base was found to be electric company. Re Central :Maine Pow- 6 per cent Re City os Cuba City, 2r U- er Co. (197a'; b PUR4th 277. [ME.] A 9.398 per cent rate of return was found fair and reasonable for an elec- tric company. Re Woodland Water & Electric Co. F.C. No. 2080, Feb, 13, 1975. [MICH.] A rate of return of 7.86 per cent ryas found to be reasonable for an electric company providing electric and §87 stehm service to an indu.trial customer. Statement, in opinion dissenting in part, Re Detroit Edison Co. Case No. U-4295, that the majority's action of rounding off �Nnl25, .1.974.._ the rate of return figure will cost an elec- *[MICH.] A reasonable rate of return p}11`15 tric company's customers an additional for an electric cooperative company was set $203,370, 8 PUR4th p. 301. at 7.44 per cent. Re Southeastern Michi- jUo [ARK.] An overall rate of return of gan Rural Electric Co-op. Inc. Case No. FED, 9.3Q per cent was considered reasonable for U-4687, Feb. 10, 1975, ti,.4 L- -" } an electric company. Re Arkansas-Mis- ,*[MICH.] A 7.61 per cent rate of return souri Power Co. Docket No. U-2538, g was found fair and reasonable for an elec- } March 25, 1975. tris company. -Re Alger-Delta Co-op.. It r [FLA.] An 8.1: per cent rate of return Electric Asso. Case No. U-4697, Feb. 24, on an electric company's jurisdictional rate 1975. -- -.�-. base was found to he fair and reasonable. ° [N. Y.] A commission ordered a re- Re Florida Power Corp. (1975) 8 PITR4;h covery of 100 per cent of the deficiencies 95. from those classes of service with deficient X617 8 PUR 4th Pacckvci/ Average, this page - 137.44 y 16 = 8.5899% * Excluded from Average (c) Other Regulatory Rulings The other regulators in bodies throughout the United States use a similar system in establishing a fair rate of return. The ex- hibit in Table VIT on the facing page was reproduced from the most recent Public Utilities Reports Volume 8 and it described the most recent rates of return as prescribed by those listed states' regulatory bodies. The average of all the figures therein amounts of 8.5899 percent. It is not possible to make a direct comparison in these cases because of the differences in calculation of the rate base and the types of service offered. The majority of the regulatory jurisdictions are on prudent investment or net original cost basis but some are like Texas — fair value states. The figures do indicate a range in thinking in commission states that may serve as background material for analysis in the TESCO case. As an example of the constantly increasing trend in rates of return being authorized by the regulatory bodies throughout the country, an article on this subject has been reprinted in its entirety (9 pages) from the Public Utilities Fortnightly magazine of November 6, 1975, which will be found in Appendix exhibit "C". TESCO EFFICIENCY/PRODUCTIVITY As a part of the Staff's inquiry into this area in the investigation, the company has provided its answer in a rather voluminous collection of mater- ial. This material is not included herein, but is available for inspection upon request. The subject . matter included: construction expenditures, construction cost deferral, cost reduction program, transportation (company car use, etc. ) , increased productivity statistics, corporate self-examina- tion of productivity and overall efficiency. 17 A recent study on electric utility efficiency has been publisied and pre- pared by the National Association of Regulatory Utility Commissioners (NARUC) , which is made up of members of state agencies that regulate utili- ties. The Association expects its report to be meaningful to the increas- ing number of consumers who are contesting utility rate increases. The report examines variables that reflect both general characteristics and performance of electric power companies. Ratings are derived from compari- sons of company performances including such things as labor productivity, plant efficiency, and production expense. Texas Electric Service Company received four favorable marks of efficiency, as follows: 1) Ratio of productivity as to labor costs; 2) Number of employees per KWff; 3) Cost of electrical generation (cents per KWH) ; 4) Service and freedom from outages (unplanned power failures) . They also received one unfavorable, and perhaps unfair mark: 1) Heat-rate Heat-rate is the number of BTU's of fuel required to produce one KWH of electricity and is a measure of the overall power plant efficiency. This study does not compare the heat-rate of plants using the same type fuel: for example, a plant using bituminous coal will have a greater efficiency than that of a lignite or gas-fueled plant by the very nature of the fuel. It is to be noted that the unfavorable flag is not due to an inefficiency in management or operation, but is due to the fact that the heat-rate of gas and 18 lignite fuel plants was not as high compared to the heat-rate of bituminous coal-fired plants in the utility companies of the North and East. The report is an assurance that TESCO's operations and management are and have been conducted with great efficiency, and accounts for the high TESCO ranking achieved in the study of the 213 utilities in the United States. r� TREND IN FORT. WORTH Another way of approaching determination of rate of return is to review what has happened in the past. In 1972 the Council approved a rate of return for TESCO of 5.8 percent and in the most recent case in February, 1974 approved a 6.08 percent rate of return on a fair value composed of 45 percent original cost and 55 percent RCN. Early in 1975 the Texas Railroad Commission approved an increase in the Lone Star Gas Company's gate rate based on a finding of an 8 percent rate of return on the company's fair value. In June, 1974 at the completion of an investigation by the City's consultants, Stanford Research Institute, the Council granted the South- western Bell Telephone Company a rate of return of 7.2 percent on its fair value rate base determined by its capitalization ratio. These variances in numbers actually add emphasis to the concept that rate making is highly subjective and must be based on sound business judgment. At the same time, it is recognized that a broad guideline for the Council in establishing rates is that the trend should not be downward in rate of return. 19 Fl o~D� rn vH, w {Jvr o FOOC)—Irn v, wN ' �. clF •i•rm 0 ° ;:% (D n ron ° a � u m C as r En • ^ ~ m N• W N• G m w y P+ N• 0 m N H P) N• 0 m +•• � a 7 + ' n K H n W K a H m 03 " P' O H n m 4 W co �y ?a 9: P) m P. C+ {n mC+ m P+ N• C+ po m 9 r .,.w H 0 trl A b 4 H 0 M w n b 4 H 0 � 7C b 4H � CC+]! C+ C+ q H. C+ �i C PD 1- CF ,d � P) P. C+ Q C/) P. m H P+ En +' ti H P+ Un F'• co � H f' P) Cn • Cn pH m P+ K Hm P+ C+ H (D P) H P O 3 m 4 H P+ I'1 H O 4 H0 C H O �' n m K n a n O En mm m (Dti m m vcn rEnH H N N O 110 \,-A W H w --4m -PN N HW� O - n OD ON N O Vi N OD W �7 � ON O� �7 W H O\� En • rr --apppp O 0 0 0 A O�N�7 N ham-' H a\-P 0 N W O� w H N>roL3oD H HORN {Jv wrnCN' P, oI�° � WwN � Zvo \ �no o OD ()DD \,n kwo o OD OOO -e. W o.\,n OD P- v \0 OO H ON F3 � w NH � kW I! H ►H' w Hr oO �Hp w� m �p tai H ORN —7 ►v~•iN � v,np-N �] N 0 Cn F' �vOi a\ � IF, N � W IH N ON VNi %Q F' Fff N oo h H C+ W\.n O A as � \O W P-OD ON \In\0�7\.n 0 H }i 03r- " H n c+ H 0 co w NH m 4 H H H -P' �p H r O H ONNN\0 H OHN -4 � N OODD �]�ON w CO � ►-33IH r Q \ � W O, C W0 0 \.n N) O - C+.�O OVW VVO DW\O rC C] 0 \ b W N H V V N) -P, F � HI-�' N' H F'0W H a\-=,\,O H 11HHHN OD N w wvwir49 O\W OD 1 O O�W N H O��O N C\�O O�Qpnpp YaW llLA)\ows � O�rW OODHH r w NH a\ N c rn�\O H HHHN \0 -p-Lo o rn\0o o � 0 H �w N Oo 10 W ODD 0 \,n ON�0 � rn F-j � W � O O H ca W OD\.O N r r. H �' W N N a\H H H � w rnr O Op\,n H NN OD N��Op -P'O p 0 v7 O ON W N W N OD A N O O LO�O�0 H m Ili OOH H I� HHOD N -JW Oo W H W m v F-3 :4 O O O' FF-' r 1 � \.DH - I N H O%.0N I n --7 W N \O 1 N%.0N w W m F, m GROWTH PROJECTIONS AND FUEL DIVERSIFICATION In light of energy conservation efforts, the staff deemed it proper to in- — quire whether or not the company needs to be building all of the new gener- ating units that are planned. At the present time, the company's reserve generating capability approaches 30%, that is to say, already installed is a KW generating capacity 30% in excess of the highest recorded peak day. In normal times, a reserve capability of 15% to 20% was felt to be ample by all experts; however, this 30% reserve may well be necessary in the future. This high reserve capability has occurred due to conservation efforts �. coupled together with other factors such as unusually mild heating and cooling seasons, and a slight economic downturn as well. A reversal in these conditions would have reduced the reserve capability, and it would be much closer to the range heretofore felt to be adequate. Future reserve capability can be expected to be higher than normal because the gas fired plants will still be available even though gas may not be available to fire them. The record indicates that load growth has been provided for as well as the construction for a transition from scarce fuels to more abundant fuels. The study in Table VIII on the facing page, sets out the statistical infor- mation for 1970 through 1974, and it reflects in part the starting effects of the energy conservation program coupled together with the other factors. RATE STRUCTURE - PROPOSED RATE "^ The rates charged by TESCO vary with the type of customer. There are four broad classifications of service: Residential, General Service, Indus- trial, and Municipal. Each of these classifications contains sub-classes of users, and each pays a different rate based on the cost of providing service. Rates also vary as between summer and winter because of differ- 20 C+i H r0 m c+ 0 p C+ o 8 O o r b ::rc µ w r r �b Aw opp 9 02 \.nO \.nO \.n O \.n y � (DD 4 r � !� a c+ 10mm 4 m N r ip 00 Q\ ON \.n 0 4 � r 0 W W OD N N �p N fD 1 o °v m C+ 1'b m n � w m m W OD� ra r \.n o \.n m o •fid. \.n N O cc cc+ w� t fD ::r N � 0 UH] � C 4 O 'l9. +i Cii H r_ t'' m C+0 0+ Fes-' td -6+ C+ v H a o 8 8 0 o �' 8 0 H 0 W p rr r tair r H tD A cf r, a w -6+ m tzj O � O � O \.n O \.nso � A H w F+ a H b � N O O 1%0 \O OD OD --40 A c+ = cD N as war 02 C 1 cD w eD OBD H \.n \D W OD N ON H O OO C\ C\ �.n N c C+ r i ences in load and costs during these two periods. Rates on all classes are proportionally to be increased a larger percentage for larger uses and I users. RESIDENTIAL There are two basic types of residential customers - conventional and total electric. Under the proposed rate schedules, 56.9% of the conventional residential customers will pay from 4 to 8% more. 41.4% will pay between 8% and 14% more. Table IX on the facing page compares average annual percentage increases for both the straight residential and total electric residential classes. The total electric rate has been redesigned also to insure that the custo- mers receiving the total electric rate use electricity the way the rate design intended that class of customers should: i.e. , with a higher than average usage in the winter months. While over 80% of all total electric customers will have increases of less than 14%, a few will experience in- creases of more than 20%, because their 12-months load pattern is not that of the total electric home. The newly designed rate will compensate for (1) non-total electric homes that were erroneously placed on the all elec- tric rate, (2) summer cottages, lake homes or other non-year round resi- dences, (3) homes that are vacant during the winter months, and in some instances for homes that are kept unusually cool in both winter and summer., A description for the present and the proposed residential and"total elec- tric" rates will be found in Appendix exhibit "D". 21 (a) Commodity Clause The commodity clause as outlined in the schedule can be applied at an index point of 180. The prior point was fixed in 1967 at 140. This clause is intended to protect TESCO from sudden and severe cost increases over which they have no control and serves to enhance the image of TESCO in the eyes of the financial com- munity. Commodity clauses are common in construction contracts (concerning labor rates) , large bank loans (concerning the prime rate), etc. The staff recognizes the value of this clause to TESCO in securing low interest rates and to maintain the high AAA -� rating. The All-Commodities Index as of May, 1975 was 168.7. The company has had this clause in for many years, and has never exercised it, nor probably never will within the City of Fort Worth. (b) Fuel Adjustment Clause TESCO also proposes to raise the point at which the fuel adjust- ment is applied from 21.0 to 40.00 per million BTU. In 1965, the base price of 21(,% per million BTU was fixed with adjustments that added or subtracted .00330 per KWH for each 1/4 the cost of fuel varied above or below that 21(,% base price. In 1972 the adjustment was lowered to .0030, per KWH. In the present request, this adjustment is raised from the 21(,% level to a 400, base price which more nearly reflects current costs. The current adjusted fuel price is now running 38.84 and if the change is approved the variance under will be applied to all bills. 23 n Fuel Price* — Cents MMBtu o —► N w A U1 o� m o 0 0 0 0 0 m Cno � . O V m A , O z ; m , J 1 m ° „F A x � 1 � 1 ° m ° z v 1 rl V/ fit ; n pop 1 O � i 'J 1 tv Cn y 1 n Joe CD LI to 1 cn , o ' 1 o ' CDG ° 1 � M 1 m 0 y U1i 1 tD 1 1 � 1 o N A m CD m (D o N N Fr 9 M i 9 m i Im I k C � � i It is the opinion of the staff that the adjustment clause is nec- essary for continued operation due to the rapidly changing costs of fuel. It is noted there is no provision proposed for profit on fuel or between TESCO and affiliated or subsidiary companies. All transactions between these companies are being handled on a strictly cost basis. To remove the adjustment clause might be inviting continuous litigation and rate increase requests. As compared with TESCO's proposed 40�- MMIBTU (Million BTU) , Texas Power and Light Company's recent approval in Waco and other cities is set at 70 /1-MTU, and looks forward in allowing esti- mated "next months" fuel costs billed in that month. The current Dallas Power and Light Company rate request proposes a 76(, MMBTU fuel cost, so Fort Worth and TESCO customers are in a favorable position with respect to fuel costs. Table/Graph X on the facing page shows fuel costs through 1975. (c) Tax Adjustment Clauses The tax adjustment clause provides protection to the Company in the event of the levy of unusually burdensome and unpredictable taxes other than ad valorem or income taxes. This clause was y used beginning in 1940 to offset a Federal Energy Tax. After this tax was repealed the Company reduced rates accordingly. It is recommended that this clause be left in the rate order at this time due to the uncertainty of the actions of state and federal lawmaking bodies in the energy field. Without such a clause the Company would have to file a full rate case in the event' of a major tax change. 24 OTHER LOCAL AREA RATE ACTIVITIES The two sister Texas Utilities Companies, Texas Power and Light and Dallas Power and Light, have rate increase activity going on presently. Dallas Power and Light has requested a much larger percentage increase in rates than was asked by either of the other two companies. The case is still pending. (Residential increase - 16-19%) Texas Power and Light had requested, and had received approval of in many of its cities, a 10.6% increase. The City of Waco employed a consultant, Touche Ross and Company, and their study done on a system wide basis indi- cated a need for a 7.8% increase. Because much time had been consumed in the study, and in recognition that the full test-year revenues could not be developed as a result, an increase of 9.6% was approved by the Waco City Council, and most of the other Texas Power and Light cities. The increase is now in effect. _ I As a test of reasonability of pro-forma revenues, expenses, .physical pro- perty, and Rate of Return methods and findings made in this TESCO request, the staff applied the Waco's consultant "Touche Ross" methods, to the Fort Worth numbers, and the results were substantially the same as previously discussed. The trend of Rate of Return and the Coverage ration was downward without the increase, and upward towards and slightly above the 1973 levels with the increase. 25 RECOMMENDATION Continued large financing is necessary to build the more expensive plants to utilize cheaper and available fuels. This construction will permit rates generally lower than most of the United States for a reasonably long time into the future. Presently TESCO rates for service are among the low- est in the nation, and even if the proposed increased rates are approved and placed into effect, they will still be among the lowest. More impor- tantly, an assurance of a dependable, continuing supply of energy is depen- dent upon construction of these new plants. For these long-term reasons, the staff would recommend the request be granted. Under normal times and circumstances, perhaps a smaller increase than was requested would suffice to maintain the healthy financial condition of the company. These, however, are not normal times, but probably crucial to the -� long-term future of all consumers served by the company. The staff believes that to grant a reduced rate increase would merely accelerate the inevitable return of TESCO seeking additional rate relief and delay the construction of necessary plants. i i 26 I� 1 -;WE-LVE- %MNIMS ENDED June 30, 1975 Texas Electric Service Company } CITY OF FORT WORTH FAIR VALUE EXPLANATION OF BASES OF ALLOCATIONS _ RCN Values represent present day replacement cost arrived at by the use of industry _,. recognized methods of trending and valuation: 1. Plant in Service a. Production Plant Allocated to the City on the ratio of the City' maximum annual hourly demand to the sum of such demands for all power divisions, excluding transmission losses System Production Plant at Original Cost of $ 411 156 766 --x 29.0D% $ 119 235 463 -2 RCN Value System Production Plant of $ 757 868 258 x 29.00% $ 219 781 795 b. Transmission Plant (1) System Transmission Plant (comprised of the extra high voltage lines between plants and other major distribution centers and the associated substations and switching stations) is allocated to the City on the same basis as production plant (a. above). r� System Transmission Plant at Original Cost of $ 61 980 966 X29.00% $ 17 974 480 RCN Value System Transmission Plant of $ 128 777 657 x 29.0ff• $ 37 345 520 (2) Eastern Area Transmission Plant (comprised. of all transmission property in the eastern power divisions except system transmission property) is allocated to the City .on the ratio of City maximum annual hourly demand to the sum of such demands for eastern area power divisions, exclud- ing transmission losses. Eastern Area Transmission Plant at Original Cost of $ 53 265 993 x 41.72% $ 22 222 572 RCN Value Eastern Area Transmission Plant of $ 111 384 002 x 41.72 % $ 46 469 406 Total Transmission Plant at Original Cost $ 40 197 052 Total RCN Value Transmission Plant $ 83 81.4 926 Aditigfed value of nronerty used and useful in proved-ing service in Citv of Fort Worth. EXHIBIT A-2 a , i C. Distribution Plant Direct Assignment at Original Cost $ 74 440 872 RCN Value Distribution Plant Assigned Direct $ 123 563 287 d. General Plant (1) Power Department -� Allocated to the City same as l.a. above System Power Department General Plant at Original Cost of $4 000 478 x 29.00% $ 1 160 139 RCN Value System Power Department General Plant of $5 556 667 x 29.00% $ 1 611 433 (2) Region General Plant in the Fort Worth Region is allocated to the City on the ratio of distribution plant allocated to the City to the total distribution plant in the Fort Worth Region. Fort Worth Region General Plant at Original Cost of $4 754 558 x 47.86% $ 2 275531 RCN Value Fort Worth Region General Plant of $6 282 307 x 47.96% $ 3 012 994 ,3 (3) General Office General Office General Plant is allocated to the .� City on the ratio of the sum of production, transmission and distribution plant allocated .to the City to the sum of such plant for the System. / General Office General. Plant at Original Cost of $4 073 097 x 27 .53% $ '1 121 323 RCN Value General Office General Plant of $ 6 356 217 x 27 .18% $ 1 727 620 Total General Plant at Original Cost $ 4 556 993 Total RCN Value of General Plant $ 6 352 047 Total Plant in Service at Original Cost $ 238 430 380 Total RCN Value Plant in Service $ 433512 055 i I ErJ-IBIT A-3 2 . Reserve for Depreciation and Adjustment for Age and Condition A portion of the Reserve for Depreciation is allocated to the City on ratio of total property in service at Original Cast allocated to the City to the total property in service for the System. Total System Reserve for Depreciation of $221 502 503 x 27.45"/. $ 60 802 437 Adjustment for Age and Condition is calculated on the RCN Value of depreciable property allocated to the City of $ 412 667 088x 12.007. $ 49 520 051 l 4. Construction Work in Progress (at Cost) a. Production Plant Allocated to City same as l.a. above System Production Plant Construction Work in Progress 6f $ 133 255 803x 29.007. $ 38 644 183 b. Transmission Plant Transmission Plant Construction Work in Progress is allocated to the City on the ratio of transmission plant in service allocated to the City to the total transmission plant in service for the System. System Transmission Plant Construction Work in Progress of $12 224 828 x 25.95 $ 3 172 342 ' c. Distribution Plant Direct Assignment of Distribution Plant Construction Work $ Progress 2 702 645 in Pro g i d. General Plant Direct Assignment of General Plant Construction Work $ 771 222 in Progress 45 290 392 Total Construction Work in Progress $ 5. Plant Held for Future_ Use (at Cost) Allocated to City same as l.a. above. Total System Plant Held for Future Use $ 820 775 of $ 2 830 260 x 29.00% _ _ I EXHIBIT A-4 6. Working Capital a. One and one-half months of annual operating and maintenance expenses (excluding purchased and interchange power) allocated to the City. Annual City Expenses of $ 27 165 763 ,x 12.50% $ 3 395 721 b. System monthly average working funds are allocated to the City on the ratio of the annual operating and maintenance expenses allocated to the City to the total of such expenses for the System. Total System Monthly Average Working Funds �. of $1 273 091 x 26.02% $ 331 258 c. System Monthly average prepayments (excluding street rentals) are allocated to the City on the ratio of property in service allocated to the City to total property in service for the System. System Monthly Average Prepayments (excluding street rentals) of $1 787 020 x 27.45% $ 490 537 Total Working Capital $ 4 217 516 7. Materials and Supplies a. The System monthly average balance in fuel stock is allocated to the City on ratio of total kwh input allocated to the City to System kwh input, excluding transmission losses. Total System Monthly Balance of $ 11 798 986 x 24.10 $ 2 843 556 b. The monthly average balance in other power department materials and supplies is allocated to the City on basis of l.a. above. Total System Monthly Balance of $ 3 072 143 x 29.00 % $ 890 921 c. The monthly average balance in Fort Worth Region materials and supplies is allocated to the City on ratio of distribution plant allocated to the City to total Fort Worth Region dis- tribution plant. Fort Worth Region Monthly. Balance of $ 1 973 672 x 47.86 % $ 944 599 Total Materials and Supplies $ 4 679. 076 i . I I i I'� //� �� r. EXHIBIT B-1 TWELVE MONTHS ENDED June 30, 1975 Texas Electric Service Company CITY OF FORT WORTH ADJUSTED OPERATING INCOME EXPLANATION OF ALLOCATIONS 8. Operating Revenues a. Operating revenues from customers located in the City. Direct Assignment $ 64 954 172 , b. General Office miscellaneous revenues are allocated to the City on the ratio of revenue from energy sales to ultimate consumers in the City to the total of such revenues for the System. General Office miscellaneous revenues of $ 6 202 888 x 27.62 % $ 1 713 238 Total Operating Revenues $ 66 667 410 OPERATING & MAINTENANCE EXPENSES 9. Production a. Fuel and Interchange Allocated to City on the ratio of kwh input to the City to total System kwh input, excluding transmission losses. Kwh input to City = Region input x Sales in Cites Sales in Region Total System Expenses $51 442 243 x 24.10% $ 12 397 581 b. Other Production Expenses i i Allocated to City on the ratio of City maximum annual hourly demand to the sum of such demands. for all power divisions, excluding transmission losses. Total System Expenses of $12 563 170 x 29.00% $ 3 643 3191 Total Production $ 16 046 900 ' 10. Transmission 7 a. System transmission expenses, including a proportionate part of General Office transmission expenses, are allocated to the City on the ratio of City maximum annual hourly demand to the sum of such demands for all power divisions, EXHIBIT B-2 excluding transmission losses. = Total System Transmission Expenses of $1 165 032 x 29.00% $ 337 859` b. Eastern area transmission expenses, including a pro portionate part of General Office transmission expenses, are allocated to the City on the ratio of City maximum annual hourly demand to the sum of ouch demands for eastern area power divisions, excluding transmission losses. I Total Eastern Area Transmission Expenses of $ 983 688 x 41.72% $ 410 395 Total Transmission $ 748 254 11. Distribution I a. Fort Worth Region distribution expenses, by accounts, are allocated to the City either on the basis of plant investment or number of customers in the City, which- ever is appropriate. . I Total Fort Worth Region Expenses of $ 6 424 211 _ Allocated to City $3 183 35'6 1. f_PnAral Office distribution exvenses are allocated to _ the City on the ratio of distribution plant allocated to the City to the System total distribution plant. I i Total General Office Expenses of $136,483 x 26.25%, $ 35. 827 1 Total Distribution $3 219 183 12. Customer Accounts a. Fort Worth Region customer accounts expenses are allocated to the City on the ratio of the number of customers in the City to the number of customers in the Region. = Total Fort Worth Region Expenses of $ 2 976 986 x 51.63% $1 537 017 b. General Office customer. accounts expenses are allocated _ to the City on the ratio of the number of customers in the City to the total number of System customers. Total General Office- Expenses of $ 1 561 72.0 x 30.32 % $ 473 514 Total Customer Accounts $2 010 531 EXHIBIT B-3 13. Customer Service & Utilization a. Fort Worth Region customer service & utilization expenses are allocated to the City using the same allocation as 12 .a. Total Fort Worth Region Expenses of $ 927 836 x 51.63% $ 479 042 b. General Office customer service & utilization expenses are allocated to the City using the same allocation as 12.b. Total General Office Expenses of $ 646 475 x 30.32 % $ 196 011 Total Customer Service & Utilization $ 675 053 14. Administrative & General a,. Fort Worth Region administrative & general expenses are allocated to the City on the ratio of the number of customers in the City to the number of customers in the Region. Region Administrative & General Expenses of $ 1 235 480 X. 51.63% $ 637 878 b. Pcuer Department ad-Inisrrative & general expenses are allocated to the City on the ratio of City . maximum annual hourly demand to the sum of such demands for all power divisions, excluding trans- mission losses. Power Department Administrative & General Expenses of $ 130 939 x 29.00% $ 37 972 c. General Office administrative & general expenses are allocated to the City on the ratio of total .produc- tion (excluding fuel, purchased and interchange power), transmission, distribution, customer accounts and .customer service and utilization expenses allocated to the City to the sum of such expenses for the System. General Office Administrative & General Expenses of $ 13 414 377 x 28.45% $ 3 816 391 Total Administrative & General $ 4 492 241 ® 16. Total Operating & Maintenance Expenses $27 186 162 EXHIBIT B-4 TAXES 17. Federal Income Taxes Income taxes applicable to the City are computed on the same basis as for the Company, allocating tax credits on an appropriate. basis, Total Income Tax for Company $24 440 632 Applicable to City $ 5 789 607 18. Deferred Federal Income Taxes - Net Allocated to the City on the ratio of property in service allocated to the City to the total property in service for the System. Total System of $4 425 020 x 27.45% $ 1 214 668 19. Federal Investment Credit Adjustments Federal investment credit adjustments are allocated to the City on the ratio of property in service allocated to the City to the total property in service for the System. Total Federal Investment Credit Adjustments of $ 3 302 708 x 27.45% $ 906 593 20. Ad Valorem Taxes a. Ad Valorem Tax to City of Fort Worth Direct Assignment $ 1 523 434 b. Other Ad Valorem Taxes A portion of other ad valorem taxes, including all such taxes assessed by the state, counties, school districts, water districts, hospital districts, and all other state and local agencies except the ad valorem taxes assessed by ,incorporated cites and towns in which the Company provides electric service, is allocated to the City on appropriate ratio's of City customers and allocated property in service to respective System totals. (1) School Taxes + of $4 509 626 x 30.32% $ 1 367 319 (2) Other Ad Valorem Taxes of $2 894 310 x 27.457. $ 794 488 Total Ad Valorem Taxes $ 3 685 241 ]EXHIBIT B-5 21. Street Rentals - City of Fort Worth Direct Assignment $ 1 930 632 I 22. State Gross Receipts Tax Direct Assignment $ 1 281 399 23. Other Taxes a. State Franchise tax is allocated to the City on the ratio of property in service allocatedto the City to total property in service for the System. . Total State Franchise Tax of $ 1 514 147 x 27.457e $ 415 633 b. All other taxes are allocated to the City on the ratio of total production (excluding fuel, purchased and interchange power), transmission, distribution, customer accounts and customer service and utiliza- tion expenses allocated to the City to the sum of such expenses for the System . All Other Taxes of $ 1 603 758 x 28.45% $ 456 269 =1 Total Other Taxes $ 871 902 24. Total Taxes $ 15 680 042 25. Depreciation Provisions Depreciation provisions are allocated to the City on the ratio of property in service allocated to the City to the total property in service for the System. Total Depreciation Provisions of $ 27 320 600 x 27.45'/, $ 7 499 505 26. Total Operating Expenses $50 365 709 27. derating Income $ 16 301 701 Allowance for Funds Used During Construction (AFDC) AFDC is allocated to the City on the ratio of + property in service allocated to the City to the total property in service for the System. Total System AFDC of $ 7 212 283 x 27.45% $ 1 979 772 Adjusted Operating Income $ 18 281 473