ML20030B606
| ML20030B606 | |
| Person / Time | |
|---|---|
| Site: | Allens Creek File:Houston Lighting and Power Company icon.png |
| Issue date: | 07/31/1981 |
| From: | Letbetter R HOUSTON LIGHTING & POWER CO. |
| To: | |
| Shared Package | |
| ML20030B571 | List: |
| References | |
| NUDOCS 8108180347 | |
| Download: ML20030B606 (24) | |
Text
...
Y.
I 2
3 4
5 6
7 8
9 10 DIRECT TESTIMONY OF 11 12 R.
S.
LETBETTER 13 14 for 15 IIOUSTON LIGHTING & P0HER COMPANY 16 1
17 pg July, 1981 19 l
20 21 22 23 j'
24 25 26 27 8108180347 810812 '
28 PDR ADOCK 05000466 I
PDR.
HOUSTON LIGHTING & POWER COMPANY
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i 1
PAGE 1
OF 22 TESTIMONY OF STEVE LETBETTER 2
3 0
PLEASE STATE YOUR NAME, ADDRESS, AND OCCUPATION.
4 A.
My name is Steve Letbetter and my business address is 5
611 Walker Avenue, Houston, Texas.
I am Vice Fresident 6
and Comptroller of Houston Lighting & Power Company.
7 0
WOULD YOU PLEASE GIVE YOUR EDUCATIONAL BACKGROUND, 8
PROFESSIONAL QUALIFICATIONS, AND COMPANY EXPERIENCE?
9 A.
I graduated from Texas A&M University with a Bachelor 10 f Business Administration degree with a major in Accounting.
At that time, I began employment with g;
Deloitte Haskins & Sells, an international public 12 13 accounting firm.
While with the firm I progressed to 14 Senior Accountant with responsibility for the field 15 work on numerous audit engagements including Houston 16 Lighting & Power Company.
I joined HLGP in 1974 as an 17 Assistant Secretary and Assistant Treasurer.
In 1977 I 18 was named Assistant Comptroller with direct 39 responsibility for the Accounting Department.
In 1978 20 I was named Comptroller and in May of 1981 I was 33 promoted to my present position, Vice President and l
22 Comptroller.
I am a Certified Public Accountant and a member of the American Institute of Certified Public 23 24 Accountants and the Texas Society of Certified Public l
l 25 Accountants.
I
,6 0
MR. LEJBETTER, ARE YOU RESPONSIBLE FOR THE ACCOUNTING l
BOOKS AND RECORDS OF HOUSTON LIGHTING & POWER COMPANY?
27 28 HOUSTON LIGHTING & POWER COMPANY
- PAGE, 2
op 22 A.
Yes.
The financial and accounting records of HL&P are g
2 maintained by employees working under my control and supervision.
These personnel have been instructed by 3
me to provide the per books figures set forth on the 4
schedules of the rate filing packages.
5 6
Q.
HOW ARE THESE ACCOUNTING RECORDS !!AINTAINED7 A.
The records of HL&P are maintained in accordance with 7
8 the Federal Energy Regulatory Commission's Uniform 9
System of Accounts which has been adopted by the Public Utility Commission of Texas (the Commission).
10 Q.
WOULD YOU PLEASE SUti!!ARIZE YOUR TESTIMONY IN THIS jj PROCEEDING?
j7 A.
My testimony will address the following areas:
13 I.
Inadequate financial results.
34 II.
The Company's overall cost of capital.
15 III.
The rate relief necessary to produce revenues in 16 1982 sufficient to meet the financial objectives 37 specified by Mr. Dean as necessary to maintain our 18 financial integrity.
39 IV.
The effect of the Company's requested rate relief 20 n future operations as presented in Schedule P.
21 V.
Transactions between the Company and its g
affiliate, Utility Fuels, Inc.'(UFI).
23 VI.
Fuel Cost Adjustment.
74 25 26 27 28 HOUSTON LIGHTING & POWER COMPANY
I PAGE 3
OF 22
}
I.
Inadequate Financial Results 2
Q.
MR. LETBETTER, UHAT HAVE BEEN THE RECENT FINANCIAL 3
RESULTS EXPERIENCED BY THE COMPANY?
4 A.
The Company's recent financial results have been 5
inadequate.
The Company has been unable to earn the 6
percentage returns on common equity found reasonable by 7
the Commission in its rate orders.
The following table 8
compares the percentage returns on common equity and 9
test year financial indicators used in setting rates in 10 Dockets 2001, 2676 and 3320 to the actual results in II 1979 and 1980 and the projected results for 1981.
I Docket Actual Docket Actual Docket Project ed 13 2001 1979 2676 1990_
3320 1981 g4 Return 13.8%
13.1%
15.0%
13.4%
15.8%
13.4%
on common 15 equity Internal 50% or 16 cash gen-Less 38.0%
49.2%
40.0%
30-40%
40.0%
17 eration 18 Interest coverages g9 (Excluding AFUDC) 3.5-4.0 3.1 4.0 3.2 3.3-4.0 3.0 20 AFUDC as 21 a percent of net 20% or incomo Less 29.0%
13.6%
24.0%
30-50%
29.0%
22 23 NOTE:
Actual 1980 results include three months of Docket 3320 rates.
'4 Q.
HOW HAS THE !!ARKET RESPONSDED TO THE FINANCIAL RESULTS 95
~~
S!!OUN ABOVE?
26 27 28 HOUSTON LIGHTING & POWER COMPANY
PAGE 4
OF 22 i
A.
The market has indicated that the Company's actual financial results since 1977 have been inadequate.
The 3
foll wing table shows the relationship between the 4
Price of HII's common stock and the book value at the time stock was sold.
The table also shows the dilution 5
6 suffered by the common stockholders over the periods in which the Commiasion's rate orders have been in effect.
7 HII Number Book Value 8
Common of Shares Net Por 9
Stock Sold Proceeds Share Dilution Sales (Millions)
(S/ share)
(S/ share)
($ Millions) i0 February, 1979 2
$28.39
$32.80 8.8 October, 1979 2.5 26.76 34.84 20.2 3;
April, 1980 3
26.49 34.72 24.7 12 13 October, 1980 3
25.69 35.69 30.0
!! arch, 1981 3
24.39 34.97 31.7 14 Total 15 S115.4 The market still supports this as evidenced by the 16 market price as of this writing of $19 1/2 compared to 37 a book value of $22.84 (equivalent to $29 1/4 and 18
$34.26, respectively, before the 3 for 2 stock split in 39 une, 1981).
20 21 Q.
OTHER THAN THE PRICE OF cot!!!ON STOCK, ARE THERE OTHER INDICATIONS THAT FINANCIAL RESULTS HAVE BEEN
,, 7 INADEQUATE?
l 23 A.
Yes, on November 21, 1980 !!oody's Investor Service 24 1 wered the rating on HL&P's first mortgage bonds from 25 "Aa" t
"A" and on HL&P's preferred stock from "aa" to 26 "a".
The rating report is included in schedule H-9.
37 28 HOUSTON LIGHTING & POWER COMPANY
PAGE 5
OF 22 1
This action further demonstrates that the actual financial results have been inadequate and that HL&P's 3
large construction program and the financing pressure l
P aced on the company by such a program has increased 4
5 the risk of owning HL&P securities.
6 The institutional investors have indicated that 7
financial results have been inadequate through their 8
decreased purchases of new]y-issued HII common stock.
9 As indicated by Mr. Dean, at the March, 1981 sale only 10 30% of the shares were bought by institutions.
IIistorically, these same investors were a primary source of new equity as evidenced by HL&P's February 12 13 1973 sale where 70% of the stock was purchased by institutions.
i 34 15 Q.
WHAT ARL Tile IMPLICATIONS OF llL&P'S INADEQUATE FINANCIAL RESULTS?
16 A.
Primarily, the Company has been forced to completely 17 18 reassess its construction program.
As Mr. Dean indicated, the revised program was necessitated by an g9 20 inability to obtain the massive amount of external 3;
funds that the prior program required.
The inadequate financial results have also caused our common stock to 22 consistently sell below book value.
This, coupled with 23 24 the Moody's downgrading, has reduced the institutional market for our stock thus limiting the Company's access 25 to external funds.
Thus, a continuation of inadequate 26 financial results threatens to further reduce llL&P's 27 construction program.
28 HOUSTON LIGHTING & POWER COMPANY
PAGE 6
OF 22 g
Q.
MR. LETBETTER, liHY HAVE THE cot!PANY'S FINANCIAL 3
RESULTS BEEN INADEQUATE?
3 A.
Financial results have been inadequate because the 4
tate relief granted in the past has been insufficient 5
to cover the increasing cost of providing electric 6
service.
7 Q.
liHAT ARE THE MAJOR AREAS WHERE COSTS ARE INCREASING?
i 8
A.
Costs are increasing in all areas of the company's 9
operations.
However, there are three major areas where 10 costs are increasing, namely:
increased operating and maintenance costs, the increased costs of adding new y,
j.,
plant and the increased cost of capital.
13 Q.
IIHAT HAS CAUSED THE INCREASE IN OPERATION AND f1AINTENANCE COSTS?
- 4 15 The high rate of inflation and the rapid growth in A.
16 service requirements has caused significant increases 37 in the Company's operating and naintenance expenses as 18 evidenced by the sharp increases in fuel expense, purchased power, wages, employee benefits, materials 39 20 and supplies, maintenance and customer accounts expense 73 among others.
The following graph illustrates the 2,
peration and maintenance costs incurred by the company in 1979 and 1980 as compared to the level deemed 23 r asonable and used in setting rates by the Commission 24 in Dockets 2001 and 2676.
The indicated excess in g
costs incurred over costs recovered through rates is 26 the primary contributor to the insufficiency of the 27 rates set in these Dockets.
28 HOUSTON LIGHTING & POWER COMPANY
PAGE 7
OF 22 i
OPERATION AND HAINTENANCE EXPENSE (D 2
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i 15 (1) Encludes fuel but includes capacity charges for purchased power.
NOTE: Docket 2001 and 1979 include city franchise requirements, Docket 2676 i
and 1980 exclude it.
ig Q.
UHY HAS THE COST OF ADDING PLANT INCREASED?
A.
Current and past inflation as well as the addition of
- 9 coal-fired capability have caused the cost of new 20 facilities to increase dramatically over the embedded 3j cost of plant used in setting rates.
Rates designed to
,3 sustain the depreciation and carrying charges on the 23 embedded cost of plant will not sustain the costs of 34 n w facilities which are being added at cost levels 25 significantly above embedded cost.
The following 26 graphs show the Company's not plant in service and
., 7 28 HOUSTON LIGHTING & POWER COMPANY
PAGE 8
op 22 1
depreciation expense in 1979 and 1980 and the 2
corresponding levels used by the Commission in setting 3
rates in Dockets 2001 and 2676.
A major portion of the 4
increase in plant in service and depreciation in 1980 5
is attributable to the placing in service of W.
A.
6 Parish #7 in June, 1980, ii. A. Parish #7 cost $481 per 7
Kli while the embedded cost of the Company's production 8
plant at that time was $141 per KW.
As a result, the 9
Company suffered approximately $9.6 million of 10 attrition before rates were changed in October, 1980 to 33 reflect this addition to plan
- in service.
12 NET ELECTRIC PLANT IN SERVICE 13 BILLICh5 (F 01LARS
}4 18
- - - - ~ ~ - - - - - - - - - - - - - - -
15
- 2. 0 16 17 2.6 18
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$2.5 39 20
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i IIDET 2N!
1 719 (1)
!XDET 2576 135 (1) 27 (1) AVERAGE NET ELECTRIC PLANT IN SERVICE DURING THE YEAR 28 I
l HOUSTON LIGHTING & POWER COMPANY l
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DEPRECIATIONEXPENSE p!LLl36 7 IIllMS 118 sans 4
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IN N IE 16 Q.
?!R. LETBETTER, lillAT'S TIIE REASON BE!!IND Tile I!JCREASI!JG COST OF CAPITAL?
19 A.
The cost of capital has increased as a result of the
O record high interest rates in response to inflation.
'l
~
This contributes to inadequate financial results in that the Company recovers currently through rates or defers recovery through AFUDC only the embedded cost of
'4
~
debt capital.
For example, the Company's embedded cost
'S
~
of long term debt as shown ci ' -hedule II, page 1, is 6
8.71%, while its most recent sale of First Mortgage 27 28 IlOUSTON LIGilTING & POWER COMPANY e
w
PAGE 10 OF 22 Bonds was at an effective rate of 14,02%.
The 2
following graph compares the cost of debt capital 3
incurred by the Company in 1979 and 1980 to the cost 4
recovered through rates and deferred through AFUDC.
INTEREST EXPENSE 5
6 mgg y 7
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9 friiiij 10 m
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00DET 29E1 ALT A 1 m 00DIT 2675 CTR 138 3;
Q.
?!R. a E T P P.T T E R, Ul:Y HAS THE RATE RELIEF GRANTED DEEN INSUFFICIENT TO RECOVEk SUCH INCREASES IN COSTS?
.' 2 A.
The rate relief granted in the past has been 73 insufficient because the Commission has not adequately
- 4 addressed the problem of setting rates to recover 25 rapidly increasing costs.
The Commission has adopted 26 tbn historical test year approach to setting rates and 77 28 HOUSTON LIGfil'ING & POWER COMPANY I
PAGE 11 OF 22
)
I while adjustments have been made to such historical
)
2 test year data, those adjustments have been limited.
3 This approach is very conservative and avoids much 4
controversy about the accuracy of such data, but the 5
price paid is the probability that the Commission's 6
rates are almost certainly outdated by the time they 7
are put into effect.
The graphs presented previously 8
serve as a confirmation of this occurrence.
9 Q.
HASN'T THE COMMISSION ALLOWED CONSTRUCTION WORK IN 10 PROGRESS (CWIP) IN RATE BASE TO ALLEVIATE THIS PROBLEM?
A.
Historically, the Commission has allowed some portion gg g3 of CWii in rate base.
However, CWIP in rate base does 13 not eliminate the problem of insufficient rates in that j4 the Company accrues AFUDC on the portion of CWIP not 15 included in rate base.
Furthermore, CWIP in rate base 16 pr vides no relief from the substantial increases in 17 perating and maintenance costs.
Notwithstanding the 18 above, the inclusion of CUIP in rate base provides 39 significant financial benefits by increasing the i
Company's cash flow through substitution of cash return 20 21 for AFUDC raturn.
This has the effect of improving both construction expenditures generated internally and 22 interest coverages.
The quality of earnings also 2,
24 improves as AFUDC decreases with the inclusion of CWIP in rate base.
Thus, rejardless of the methodology 25 adopted by the Commission in setting rates, an adegt: ate 26 level of CUIP in rate base is necessary for che Company 27 to maintain financial integrity.
28 HOUSTON LIGHTING & POWER COMPANY i
PAGE 12 op 22 Q.
MR. LETBETTER, HOW DOES THE CO!!PANY'S APPROACH TO 2
SETTING RATES DIFFER FROM THAT OF THE COMMISSION'S?
3 The concept used by the Company in preparing its A.
application utilizes adjustments to the test year data which build from historical data towards KUH sales and S
6 cost figures which are an appropriate test of proposed rates.
This differs from the Commission's conservative 7
g approach which arbitrarily limits adjustments.
9 Q.
HOW DO YOU RECO!! MEND THE COMMISSION DEAL WITH THE PROBLEM OF INSUFFICIENT RATES?
10 A.
As indicated at Schedule P, I feel that rates set based upon our application as filed adequately deals g;
13 with the problem.
The $248 million of rate relief should allow the Company to recover its cost of serving g,;
ur customers in 1982 and provide a reasonable return 15 n invested capital.
Therefore, I recommend that the 16 Commission change its approach to setting rates and 37 adopt a methodology more in line with the Company's 18 approach and thus contribute to solving the problem of g9 insufficient rates.
20 II.
OVERALL COST OF CAPITAL 3;
22 0
!!R. LETBETTER, BASED ON THE CAPITAL STRUCTURE SET 23 FORTH IN SCHEDULE H AND SUPPORTED BY 11R. DEAN, UHAT IS 24 HL&P'S OVERALL COST OF CAPITAL?
25 A.
As Schedule H indicates, the capital components with 26 their associat.1 individual costs result in a composite 27 28 i
HOUSTON LICHTING & POWER COMPANY
PAGE 13 OF 22 cost of capital of 12.32%.
This composite cost of 2
capital applied to the Company's rate base included in 3
Schedule B~ produces the required return on invested 4
capital of $431 million.
Mr. Campbell discusses the 5
invested capital, or rate base, in detail in his 6
testimony.
The return on common equity of 17% is 7
supported by Dr. Sherwin.
g Q.
!!OU DO THESE COSTS COMPARE TO HL&P'S CURRENT COST OF 9
CAPITAL?
10 As discussed by Mr. Dean in his testimony, today's A.
jy cost of capital is substantially higher.
Schedule 11 12 reflects only the contractual or embedded cost of debt 13 and preferred stock.
14 15 III. RATE RELIEF REQUIRED TO MEBT FINANCIAL OBJECTIVES 16 17 Q.
MR. LETBETTER, ilOW MUCli RATE RELIEF IS REQUIRED IN 18 ORDER TO MEET THE FINANCIAL OBJECTIVES SET FORTl! BY gg MR. DEAN IN HIS TESTIMONY?
20 A.
As indicated in Schedule A, we have determined that j
21 rates should be increased $248 million over adjusted f
test year revenues to recover the Company's total cost 22 f service of S2.8 billion.
Implicit in the increase 23 24 and included as a part of our cost of service is the S431 million of return referred to previously.
If this 25 1cvel of anticipated return is actually earned in 1982, 26 the year the rates will be in effect, the Company 27 28 l
HOUSTON LIGHTING & POWER CO'iPANY
PAGE 14 OF 22 should be able to maintain its financial integrity, 2
provide a reasonable return on common equity and be in a position to attract the capital needed to finance its i
3 revised construction program.
As shown on Schedule P, 4
this level of return would produce the following 5
financial indicators in 1982 which are within the 6
ranges discussed by Mr. Dean:
7 Schedule 8
P H.
R.
Dean 9
1)
Internally generated funds 44.6%(a) 40% minimum as a percent of construction 10 expenditures.
2)
Interest coverage excluding 3.84 3.5 minimum g,
I 3)
AFUDC as a percent of net Reasonable income available to common 24.6%
levels 13 shareholders.
4)
Return on average common 17.77%(b) 17.00%
15 equity.
16 (a)38.5% excluding the change in working capital.
(b) Includes approximately 1.7% of return attributable 17 to the Job Development Credits.
18 Q.
WHAT LEVEL OF CHIP AND NUCLEAR FUEL IN PROCESS (NFIP) 19 WAS INCLUDED IN RATE BASE TO ARRIVE AT THE $431 MILLION
~O RETURN AND HOW UAS THIS PERCE!'TAGE DETERf!INED?
'l A.
We have included approximately 73% of total CWIP and
~
NFIP in rate base in order to produce the required
'3 return.
!!r. Campbell discusses the methodology in
~
'4 detail in his testimony, but in general it is based on
~
'5 the amount required to produce the cash return needed
~
26 to generate the base revenues required in 1982.
27 4
28 HOUSTON LIGHTING & POWER COMPANY
PAGE 15 op 22 IV. TEST OF ADEQUACY OF REQUESTED RATE RELIEF 2
(
3 0
IN
SUMMARY
DO YOU BELIEVE THAT THE $248 MILLION OF 4
RATE RELIEF UHICH PRODUCES THE $2.8 BILLION REVENUE 5
REQUIREMENT IS ADEQUATE TO ALLOW HL&P TO RECOVER ITS 6
COST OF SERVING THE CUSTOMER AS WELL AS PROVIDE A 7
REASONABLE RETURN ON THE COMPANY'S INVESTED CAPITAL?
8 A.
Yes.
I would like to point out, however, that the 9
rate relief requested to cover our cost of service, as 10 supported by Schedule P, is adequate for approximately gj one year only.
j7 Q.
HAVE YOU DONE ANY STUDIES YOU CAN DESCRIBE IN MORE 13 DETAIL THAT SHOU THE EFFECT OF THE REQUESTED RATE j4 RELIEF ON HL&P'S FUTURE OPERATIONS?
15 A.
Yes.
Schedule P in our rate filing package summarizes 16 the effect of our request and is based on a detailed 17 financial forecast which takes into consideration gg increased revenues from KWH sales and increased costs 19 f providing service and the financing of new 20 construction.
Construction expenditures in 1982 will 21 be greater than the current 1cvel, but, with 73% of the 73 March 31, 1981 adjusted balance of CUIP and NFIP in 23 rate base, HL&P should have an opportunity to weather 24 the serious financial burdens placed on the Company by 25 ti.e customers' need for such a program.
26 27 28 HOUSTON LIGHTING & POWER COMPANY
PAGE.
16 op_
22 g
V.
TRANSACTIONS WITH UFI 2
3 Q.
!!R. LETBETTER, WHAT IS THE RELATIONSHIP BETWEEN HLLP 4
AND ITS COAL SUPPLY AFFILIATE, UFI?
1 5
The Company purchases coal fram UFI under a long-term A.
l 6
coal supply agreement necessary to meet the fuel 7
requirements of the Company's coal units No. 5, 6 and 7 8
of its W.
A.
Parish Plant.
Basically, UFI is obligated 9
to render all services necessary to assure the delivery 10 f the coal to the Company.
UFI takes title to the' coal at points in Wyoming and !!ontana.
The coal is loaded j,
in rail cars either owned or leased by UFI.
UFI 12 13 schedules and monitors the transportation of the coal, and monitors the arrival of the coal at its dumping ja facilities.
It oversees the dumping and transfer of 15 the coal to its storage facilities and, as the coal is 16 n eded, to its crushing facilities for ultimate deposit 17 into the silos of the units.
Of course, UFI must also jg
- 9 tend to more routine matters such as arranging for the 20 Periodic maintenance and repair of the rail cars and 3j its handling facilities, paying and submitting 33 invoices, and keeping adequata books and records.
23 Q.
WAS UII PRIMARILY FORT 1ED FOR THE PURPOSE OF RENDERING 24 THESE SERVICES TO THE CO!!PANY?
A.
Yes.
While several other electric utilities were 25 26 using or planning to use western sub-bituminous coal 27 when UFI was formed, no entity offering the capability 28 HOUSTON LIGHTING & POWER COMPANY
PAGE 17 OF 22 3-of rendering these services to the Company operated in 2
Since the value associated with the security of 3
having a stable, dependable, acng-term supply contract 4
f r its projected usage could not be discounted, the
~
5 Company had only two real choices:
form an affiliate 6
for the purpose of rendering these services or render these services itself.
7 8
Q.
WHY DID THE COMPANY DECIDE NOT TO RENDER THESE 9
SERVICES ITSELF?
10 The Company's capital requirements were already A.
burdensome.
In addition, UFI has the ability to jj 12 utilize highly leveraged financing while HL&P does 13 not.
HL&P is faced with significant legal and g4 financial constraints, namely:
15 1)
The Company's mortgage and deed of trust, as 16 supplemented as new bonds are issued, limits 17 bondable property to 60% of property additions and 18 further provides that additional bonds may not be gg issued unless a coverage of at least twice the annual interest requirements on all bonds is 20 maintained.
21 2)
Existing capital ratios designed to optimize 22 financial stability need to be maintained.
23 24 3)
A substantial shift toward higher debt ratios w uld reduce coverage and further jeopardize the 25 Company's bond ratings and ability to issue 26 additional bonds.
27 28 HOUSTON LIGHTING & POWER COMPANY l
PAGE 18 op 22 3
See Schednle H-8 for a detailed description of the 2
above restrictiont.
3 0
UHY IS IT IMPORTANT THAT UFI AND NOT HL&P UNDERTAKE 4
THE FINANCING OF THE COAL HANDLING OPERATION?
5 As discussed in the testimonies of several Company A.
6 witnesses in this case, the Company recently made a 7
major reassessment of its construction program.
The 8
decision to reassess the program was made primarily as 9
a result of the financial considerations of supporting 10 the previous program.
As it is, HL&P has drastically reduced the construction budget over the next several 12 years and faces a severe challange to meet the needs of its customers in the 1980's.
Should it be required to 13 14 finance the coal handling operation UFI now finances, 15 the problem would be compounded.
In other words if the 16 capital requirements now being financed by UFI were placed on HL&P, a further reassessment wou?d be j7 18 required.
Included as a part of the reassessment would 39 be a possibility of a further reduction in HL&P's 20 construction program.
This is not a desirable 21 alternative in light of our need for generating capacity to serve customer needs.
22 Q.
DOES UFI SELL COAL OR RENDER ANY SERVICES IN 23 34 CONNECTION WITH COAL TO ENTITIES OTHER THAh HL&P?
A.
No.
25 0
MR. LETBETTER, WHAT HAS THE COMPANY DONE TO DETERMINE 26 THE REASONABLENESS OF THE CCST OF COAL SUPPLIED BY UFi?
27 28 HOUSTON LIGHTING & POWER COMPANY
PAGE 19 OF 22 g
A.
We searched for a utility procuring coal under 2
circumstances similar to HL&P.
Most utilities either 3
(1) own their coal handling facilities and rail cars 4
and thus reflect the cost of such facilities in their 5
base rates and not in the cost of their coal or (2) the 6
coal itself is a different type.
Thus, for purposes of comparing costs of coal, there are'very few utilities 7
8 similal to HL&P.
However, as a resuls of our search, 9
we found a utility which is purchasing coal under an agreement very similar to our agreement with UFI.
The 10 utility is Southwestern Public Service Company (SPS) jg and is based in Amarillo, Texas.
SPS purchaser Uyoming 37 13 coal from TUCO Inc., an independent third party.
Both agreements are long-term and provide supplies of coal 14 and coal handling services to the two utilities' 15 respective coal plants.
The pricing provisions of the 16 agreements are much alike.
17 18 0
HAVING FO'JND A UTILITY IN TEXAS WHICH IS PROCURING COAL UNDER CIRCUMSTANCES SIMIITR TO HL&P, WHAT D13 YOU 39 DO TO COMPARE COSTS?
20 A.
We compared HL&P's cost of coal per MMBTU to that of gg SPS for the twelve months ended March 31, 1981 after 37 giving effect solely to the difference in the rail 23 tariffs.
The coal HL&P purchases comes from mines in 24 both upper Wyoming and lower Montana.
The upper 25 Uyoming-lower M ntana region is aproximately 1,000 26 miles from Amarillo and 1,700 miles from Houston.
27 28 HOU3 TON LIGHTING & POWER COMPANY
PAGE 20 OF 22 3
Consequently, the rail charge included in HL&P's cost 2
of coal is nearly twice that of SPS.
Therefore, after 3
giving effect to the difference in the rail charges, l
both of which are Burlington Northern tariffs, we 4
recomputed our cost of coal using SPS's tariff and 3
6 compared the result to SPS's actual cost of coal.
The result was that HL&P's recomputed cost of coal per 7
!!MBTU was $1.54 ca compared to $1.50 for SPS, or a 8
difference of less than three percent.
9 Q.
TO YOUR FNOWLEDGE, DOES ANY OTHER ELECTRIC UTILITY IN gp TEXAS, OTHER THAN SPS, PURCHASE WESTERN SUB-BITUMINOUS y;
COAL FROM ANY INDEPENDENT COMPANY OR AFFILIATE?
g A.
No.
13 Q.
MR. LETBETTER, BASED UPON UHAT YOU'VE SAID ABOVE, DOES 14 IT APPEAR THAT THE FOR!!ATION OF UPI IN 1977 WAS A 15 i
"^"^
16 A.
Yes.
The Company has secured a dependable source of
- 7 fuel at a cost which is comparable to that which could 18 be obtained from an independent third party on the open 39 market.
Furthermore, HL&P has avoided the problem of 20 having to finance the coal handling operation during 73 times when financing just the power plants is a g
difficult task.
23 VI.
Fuel Cost Adjustment 24 Q.
MR.
ETBETTER, UHY IS A FUCL COST ADJUSTMENT 25 NECESSARY?
26 27 28 HOUSTON LIGHTING & POWER COMPANY
. ~..
~
PAGE 21 OF 22 A.
It is essential that the Company be allowed to recover 2
its fuel costs on a current basis.
Considering the 3
current economic environment with its extremely 4
volatile fuel prices, current recovery of fuel costs is 5
the only logical approach.
6 0
WHAT INCENTIVE IS THERE FOR THE COMPANY TO KEEP ITS 7
FUEL COSTS TO A MINIMUM IF THE FUEL COST ADJUSTMENT g
ALLOWS TOTAL CURRENT RECOVERY OF COSTS?
9 A.
First of all, just as the Company must justify the reasonableness of the costs it recovers through base 10 rates, so must fuel costs be proven reasonable before the regulatory authorities will allow recovery of fuel 12 costs.
Therefore, the review process itself is an 13 incentive for the Company to keep fuel costs as low as 34 15 p ssible.
Second, the survival of our Company and industry as a free enterprise depends upon serving our 16 customers a reliable product at a reasonaole price.
17 18 Thirdly, competition from natural gas for a portion of our market provides an incentive.
Another incentive is 39 fuel related taxes and expenses which the Company 20 stands to lose if actuc1 fuel costs exceed that which 21 is allowed by the Conuission in designing base rates.
37 Finally, the fuel type is a major consideration in the 23 Company's plans for future power plants.
Thus, since 24 these plants must be approved by various regulatory 25 agencies, obtaining a dependable fuel source at the 26 1 west possible cost is certainly an incentive.
27 28 HOUSTON LIGHTING & POWER COMPANY
PAGE 22 op 22 Q.
MR. LETBETTER, DOES THE COMPANY'S FUEL COST ADJUSTMENT 2
AS PROPOSED IN THIS APPLICATION CONTAIN ANY LIMITATIONS 3
ON THE RECOVERY OF SUCH COSTS?
4 A.
No, it does not.
In past proceedings before this 5
Commission the Company has been ordered to impose 6
limitations on the recovery of the cost of coal purchased from UFI.
In my opinion, we have proven 7
8 through my testimony in this application that the cost 9
of coal purchased from UFI is competitive and reasonable, 10 Q.
DOES THIS CONCLUDE YOUR TESTIMONY?
y; A.
Yes it does.
12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 HOUSTON LIGHTING & POWER COMPANY
'lHE STATE OF TEXAS 3 COUNTY OF HARRIS S
Before me, the undersigned authority, on this day personally ap-peared Steve Letbetter, havirg been duly sworn, upon oath says:
"My name is Steve Letbetter, I am of legal a3e and a resident of the State of Texas. 'Ibe foregoirg testimony, and exhibits, offered by me on behalf of Ebuston Lightirg & Power m mpany, are true and correct, and the opinions stated therein are, in my judgment and based upon my professional experience, true and correct."
l Steve Istbetter Subscribed and sworn to before me by the said Steve tatbetter this (GN day of TUNE
,1981.
\\unu tIIIrg
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Notary Public in and for 8 Of hU i Harris D unty, Texas 1
5 x
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JOHN P. STERNER T
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i 8 tbtary Pubhc, State gf}exas gp 4
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My Commission Dpires i
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